SPS BONROSTRO vs.
SPS LUNA
Questioned in this case is the Court of Appeals'
(CA) disquisition on the matter of interest.
Petitioners spouses Nameal and Lourdes
Bonrostro (spouses Bonrostro) assail through this
Petition for Review on Certiorari 1 the April 15,
2005 Decision2 of the CA in CA-G.R. CV No. 56414
which affirmed with modifications the April 4,
1997 Decision3 of the Regional Trial Court (RTC) of
Quezon City, Branch 104 in Civil Case No. Q-94-
18895. They likewise question the CA April17,
2006 Resolution4 denying their motion for partial
reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna
(Constancia), as buyer, entered into a Contract to
Sell5 with Bliss Development Corporation (Bliss)
involving a house and lot identified as Lot 19,
Block 26 of New Capitol Estates in Diliman,
Quezon City. Barely a year after, Constancia, this
time as the seller, entered into another Contract
to Sell6 with petitioner Lourdes Bonrostro
(Lourdes) concerning the same property under
the following terms and conditions:
1. The stipulated price of P1,250,000.00
shall be paid by the VENDEE to the
VENDOR in the following manner:
(a) P200,000.00 upon signing x x x
the Contract To Sell,
(b) P300,000.00 payable on or
before April 30, 1993,
(c) P330,000.00 payable on or
before July 31, 1993,
(d) P417,000.00 payable to the
New Capitol Estate, for 15 years
at P6,867.12 a month,
2. x x x In the event the VENDEE fails to
pay the second installment on time, the
VENDEE will pay starting May 1, 1993 a
2% interest on the P300,000.00 monthly.
Likewise, in the event the VENDEE fails to
pay the amount of P630,000.00 on the
stipulated time, this CONTRACT TO SELL
1
shall likewise be deemed cancelled and
Page
rescinded and x x x 5% of the total
contract price of P1,250,000.00 shall be
deemed forfeited in favor of the VENDOR.
Unpaid monthly amortization shall likewise
be deducted from the initial down
payment in favor of the VENDOR.7
Immediately after the execution of the said
second contract, the spouses Bonrostro took
possession of the property. However, except for
the P200,000.00 down payment, Lourdes failed to
pay any of the stipulated subsequent
amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her
husband, respondent Juan Luna (spouses Luna),
filed before the RTC a Complaint 8 for Rescission of
Contract and Damages against the spouses
Bonrostro praying for the rescission of the
contract, delivery of possession of the subject
property, payment by the latter of their unpaid
obligation, and awards of actual, moral and
exemplary damages, litigation expenses and
attorneys fees.
In their Answer with Compulsory
9
Counterclaim, the spouses Bonrostro averred
that they were willing to pay their total balance
of P630,000.00 to the spouses Luna after they
sought from them a 60-day extension to pay the
same.10 However, during the time that they were
ready to pay the said amount in the last week of
October 1993, Constancia and her lawyer, Atty.
Arlene Carbon (Atty. Carbon), did not show up at
their rendezvous. On November 24, 1993,
Lourdes sent Atty. Carbon a letter 11 expressing
her desire to pay the balance, but received no
response from the latter. Claiming that they are
still willing to settle their obligation, the spouses
Bonrostro prayed that the court fix the period
within which they can pay the spouses Luna.
The spouses Bonrostro likewise belied that they
were not paying the monthly amortization to New
Capitol Estates and asserted that on November
18, 1993, they paid Bliss, the developer of New
Capitol Estates, the amount ofP46,303.44. Later
during trial, Lourdes testified that Constancia
instructed Bliss not to accept amortization
2
payments from anyone as evidenced by her
Page
March 4, 1993 letter12 to Bliss.
On April 4, 1997, the RTC rendered its
Decision13 focusing on the sole issue of whether
the spouses Bonrostros delay in their payment of
the installments constitutes a substantial breach
of their obligation under the contract warranting
rescission. The RTC ruled that the delay could not
be considered a substantial breach considering
that Lourdes (1) requested for an extension within
which to pay; (2) was willing and ready to pay as
early as the last week of October 1993 and even
wrote Atty. Carbon about this on November 24,
1993; (3) gave Constancia a down payment
of P200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:
WHEREFORE, in view of the foregoing, judgment
is hereby rendered as follows:
1.) Declaring the Contract to Sell executed
by the plaintiff Constancia and defendant
Lourdes with respect to the house and lot
located at Blk. 26, Lot 19, New Capitol
Estates, Diliman, Quezon City to be in
force and effect. And that Lourdes
Bonrostro must remain in the possession
of the premises.
2.) Ordering the defendants to pay
plaintiffs within 60 days from receipt of
this decision the sum ofP300,000.00 plus
an interest of 2% per month from April
1993 to November 1993.
3.) Ordering the defendants to pay
plaintiffs within sixty (60) days from
receipt of this decision the sum
ofP330,000.00 plus an interest of 2% per
month from July 1993 to November 1993.
4.) Ordering the defendants to reimburse
plaintiffs the sum of P214,492.62 which
plaintiffs paid to Bliss Development
Corporation.
No pronouncement as to Cost.
SO ORDERED.14
As their Motion for Reconsideration15 was likewise
denied in an Order16 dated July 15, 1997, the
spouses Luna appealed to the CA.17
Ruling of the Court of Appeals
In its Decision18 of April 15, 2005, the CA
concluded that since the contract entered into by
and between the parties is a Contract to Sell,
rescission is not the proper remedy. Moreover, the
subject contract being specifically a contract to
sell a real property on installment basis, it is
governed by Republic Act No. 6552 19 or the
Maceda Law, Section 4 of which states:
Sec. 4. In case where less than two years of
installment were paid, the seller shall give the
buyer a grace period of not less than sixty days
from the date the installment became due.
If the buyer fails to pay the installments due at
the expiration of the grace period, the seller may
cancel the contract after thirty days from receipt
by the buyer of the notice of cancellation or the
demand for rescission of the contract by a
notarial act. (Emphases supplied)
The CA held that while the spouses Luna sent the
spouses Bonrostro letters20 rescinding the
contract for non-payment of the sum
of P630,000.00, the same could not be
considered as valid and effective cancellation
under the Maceda Law since they were made
within the 60-day grace period and were not
notarized. The CA concluded that there being no
cancellation effected in accordance with the
procedure prescribed by law, the contract
therefore remains valid and subsisting.
The CA also affirmed the RTCs finding that
Lourdes was ready to pay her obligation on
November 24, 1993.
However, the CA modified the RTC Decision with
respect to interest, viz:
Nevertheless, there is a need to modify the
appealed decision insofar as (i) the interest
imposed on the sum ofP300,000.00 is only for the
period April 1993 to November 1993; (ii) the
interest imposed on the sum ofP330,000.00 is 2%
per month and is only for the period July 1993 to
November 1993; (iii) it does not impose interest
3
on the amount of P214,492.62 which was paid by
Page
Constancia to BLISS in behalf of Lourdes x x x
The rule is that no interest shall be due unless it
has been expressly stipulated in writing (Art.
1956, Civil Code). However, the contract does not
provide for interest in case of default in payment
of the sum of P330,000.00 to Constancia and the
monthly amortizations to BLISS.
Considering that Lourdes had incurred x x x delay
in the performance of her obligations, she should
pay (i) interest at the rate of 2% per month on
the sum of P300,000.00 from May 1, 1993 until
fully paid and (ii) interest at the legal rate on the
amounts of P330,000.00 and P214,492.62 from
the date of default (August 1, 1993 and April 4,
1997 date of the appealed decision, respectively)
until the same are fully paid x x x21
Hence, the dispositive portion of the said
Decision:
WHEREFORE, the appealed decision is AFFIRMED
with the MODIFICATIONS that paragraphs 2, 3,
and 4 of its dispositive portion shall now read:
2.) Ordering the defendants to pay
plaintiffs the sum of P300,000.00 plus
interest thereon at the rate of 2% per
month from May 1, 1993 until fully paid;
3.) Ordering the defendants to pay
plaintiffs the sum of P330,000.00 plus
interest thereon at the legal rate from
August 1, 1993 until fully paid; and
4.) Ordering the defendants to reimburse
plaintiffs the sum of P214,492.62, which
plaintiffs paid to Bliss Development
Corporation, plus interest thereon at the
legal rate from filing of the complaint until
fully reimbursed.
SO ORDERED. 22
The spouses Luna no longer assailed the ruling.
On the other hand, the spouses Bonrostro filed a
Partial Motion for Reconsideration23 questioning
the above-mentioned modifications. The CA,
however, denied for lack of merit the said motion
in a Resolution24 dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA
correctly modified the RTC Decision with respect
to interests.
The Parties Arguments
As may be recalled, the RTC under paragraphs 2
and 3 of the dispositive portion of its Decision
ordered the spouses Bonrostro to pay the
spouses Luna the sums of P300,000.00 plus
interest of 2% per month from April 1993 to
November 1993 and P330,000.00 plus interest of
2% per month from July 1993 to November 1993,
respectively. The CA modified these by reckoning
the payment of the 2% interest on
the P300,000.00 from May 1, 1993 until fully paid
and by imposing interest at the legal rate on
the P330,000.00 reckoned from August 1, 1993
until fully paid.
The spouses Bonrostro harp on the factual finding
of the RTC, as affirmed by the CA, that Lourdes
was willing and ready to pay her obligation as
evidenced by her November 24, 1993 letter to
Atty. Carbon. They also assert that the sending of
the said letter constitutes a valid tender of
payment on their part. Hence, they argue that
they should not be assessed any interest
subsequent to the date of the said letter. Neither
should they be ordered to pay interest on the
amount of P214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss.
They point out that it was Constancia who
prevented them from fulfilling their obligation to
pay the amortizations when she instructed Bliss
not to accept payment from them.25
The spouses Luna, on the other hand, aver that
the November 24, 1993 letter of Lourdes is not
equivalent to tender of payment since the mere
sending of a letter expressing the intention to
pay, without the accompanying payment, cannot
be considered a valid tender of payment. Also, if
the spouses Bonrostro were really willing and
ready to pay at that time and assuming that the
spouses Luna indeed refused to accept payment,
4
the former should have resorted to consignation.
Page
Anent the payment of amortization, the spouses
Luna explain that under the parties Contract to
Sell, Lourdes was to assume Constancias balance
to Bliss by paying the monthly amortization in
order to avoid the cancellation of the earlier
Contract to Sell entered into by Constancia with
Bliss.26 However, since Lourdes was remiss in
paying the same, the spouses Luna were
constrained to pay the amortization. They thus
assert that reimbursement to them of the said
amount with interest is proper considering that by
reason of such payment, the spouses Bonrostro
were spared from the interests and penalties
which would have been imposed by Bliss if the
amortizations remained unpaid.
Our Ruling
The Petition lacks merit.
The spouses Bonrostros reliance on the RTCs
factual finding that Lourdes was willing and ready
to pay on November 24, 1993 is misplaced.
As mentioned, the RTC in resolving the Complaint
focused on the sole issue of whether the failure of
spouses Bonrostro to pay the installments
of P300,000.00 on April 30, 1993
and P330,000.00 on July 31, 1993 is a substantial
breach of their obligation under the contract as to
warrant the rescission of the same.27 The said
court ratiocinated, viz:
After careful evaluation of the evidence
testimonial and documentary, the Court believes
that the defendants delay in the payment of the
two installments is not so substantial as to
warrant rescission of contract. Although, the
defendant failed to pay the two installments in
due time, she was able to communicate with the
plaintiffs through letters requesting for an
extension of two months within which to pay the
installments. In fact, on November 24, 1993
defendant informed Atty. Arlene Carbon that she
was ready to pay the installments and the money
is ready for pick-up. However, plaintiff did not
bother to get or pick-up the money without any
valid reason. It would be very prejudicial on the
part of the defendant if the contract to sell be
rescinded considering that she made a
downpayment of P200,000.00 and made partial
amortization to the Bliss Development
Corporation. In fact, the defendant testified that
she is willing and ready to pay the balance
including the interest on November 24, 1993.
The Court is of the opinion that the delay in the
payment of the balance of the purchase price of
the house and lot is not so substantial as to
warrant the rescission of the contract to sell. The
question of whether a breach of contract is
substantial depends upon the attendant
circumstance. x x x28
Clearly, the RTC arrived at the above-quoted
conclusion based on its mistaken premise that
rescission is applicable to the case. Hence, its
determination of whether there was substantial
breach. As may be recalled, however, the CA, in
its assailed Decision, found the contract between
the parties as a contract to sell, specifically of a
real property on installment basis, and as such
categorically declared rescission to be not the
proper remedy. This is considering that in a
contract to sell, payment of the price is a positive
suspensive condition, failure of which is not a
breach of contract warranting rescission under
Article 119129 of the Civil Code but rather just an
event that prevents the supposed seller from
being bound to convey title to the supposed
buyer.30 Also, and as correctly ruled by the CA,
Article 1191 cannot be applied to sales of real
property on installment since they are governed
by the Maceda Law.31
There being no breach to speak of in case of non-
payment of the purchase price in a contract to
sell, as in this case, the RTCs factual finding that
Lourdes was willing and able to pay her obligation
a conclusion arrived at in connection with the
said courts determination of whether the non-
payment of the purchase price in accordance with
the terms of the contract was a substantial
breach warranting rescission therefore loses
significance. The spouses Bonrostros reliance on
the said factual finding is thus misplaced. They
cannot invoke their readiness and willingness to
pay their obligation on November 24, 1993 as an
excuse from being made liable for interest
beyond the said date.
The spouses Bonrostro are liable for interest on
5
the installments due from the date of default until
Page
fully paid.
The spouses Bonrostro assert that Lourdes letter
of November 24, 1993 amounts to tender of
payment of the remaining balance amounting
to P630,000.00. Accordingly, thenceforth, accrual
of interest should be suspended.
Tender of payment "is the manifestation by the
debtor of a desire to comply with or pay an
obligation. If refused without just cause, the
tender of payment will discharge the debtor of
the obligation to pay but only after a valid
consignation of the sum due shall have been
made with the proper court."32 "Consignation is
the deposit of the proper amount with a judicial
authority in accordance with rules prescribed by
law, after the tender of payment has been
refused or because of circumstances which
render direct payment to the creditor impossible
or inadvisable."33
"Tender of payment, without more, produces no
effect."34 "To have the effect of payment and the
consequent extinguishment of the obligation to
pay, the law requires the companion acts of
tender of payment and consignation."35
As to the effect of tender of payment on interest,
noted civilist Arturo M. Tolentino explained as
follows:
When a tender of payment is made in such a
form that the creditor could have immediately
realized payment if he had accepted the tender,
followed by a prompt attempt of the debtor to
deposit the means of payment in court by way of
consignation, the accrual of interest on the
obligation will be suspended from the date of
such tender. But when the tender of payment is
not accompanied by the means of payment, and
the debtor did not take any immediate step to
make a consignation, then interest is not
suspended from the time of such tender. x x x
x36(Emphasis supplied)
Here, the subject letter merely states Lourdes
willingness and readiness to pay but it was not
accompanied by payment. She claimed that she
made numerous telephone calls to Atty. Carbon
reminding the latter to collect her payment, but,
neither said lawyer nor Constancia came to
collect the payment. After that, the spouses
Bonrostro took no further steps to effect
payment. They did not resort to consignation of
the payment with the proper court despite
knowledge that under the contract, non-payment
of the installments on the agreed date would
make them liable for interest thereon. The
spouses Bonrostro erroneously assumed that
their notice to pay would excuse them from
paying interest. Their claimed tender of payment
did not produce any effect whatsoever because it
was not accompanied by actual payment or
followed by consignation. Hence, it did not
suspend the running of interest. The spouses
Bonrostro are therefore liable for interest on the
subject installments from the date of default until
full payment of the sums of P300,000.00
and P330,000.00.
The spouses Bonrostro are likewise liable for
interest on the amount paid by the spouses Luna
to Bliss as amortization.
The spouses Bonrostro want to be relieved from
paying interest on the amount of P214,492.62
which the spouses Luna paid to Bliss as
amortizations by asserting that they were
prevented by the latter from fulfilling such
obligation. They invoke Art. 1186 of the Civil Code
which provides that "the condition shall be
deemed fulfilled when the obligor voluntarily
prevents its fulfillment."
However, the Court finds Art. 1186 inapplicable to
this case. The said provision explicitly speaks of a
situation where it is the obligor who voluntarily
prevents fulfillment of the condition. Here,
Constancia is not the obligor but the obligee.
Moreover, even if this significant detail is to be
ignored, the mere intention to prevent the
happening of the condition or the mere placing of
ineffective obstacles to its compliance, without
actually preventing fulfillment is not sufficient for
the application of Art. 1186.37 Two requisites must
concur for its application, to wit: (1) intent to
prevent fulfillment of the condition; and, (2)
actual prevention of compliance.38
In this case, while it is undisputed that Constancia
indeed instructed Bliss on March 4, 1994 not to
accept payment from anyone but her, there is
6
nothing on record to show that Bliss heeded the
Page
instruction of Constancia as to actually prevent
the spouses Bonrostro from making payments to
Bliss. There is no showing that subsequent to the
said letter, the spouses Bonrostro attempted to
make payment to and was refused by Bliss.
Neither was there a witness presented to prove
that Bliss indeed gave effect to the instruction
contained in Constancias letter. While Bliss
Project Development Officer, Mr. Ariel Cordero,
testified during trial, nothing could be gathered
from his testimony regarding this except for the
fact that Bliss received the said letter.39 In view of
these, the spouses Luna could not be said to have
placed an effective obstacle as to actually
prevent the spouses Bonrostro from making
amortization payments to Bliss.
On the other hand, there are telling
circumstances which militate against the spouses
Bonrostros claimed keenness to comply with
their obligation to pay the monthly amortization.
After the execution of the contract in January
1993, they immediately took possession of the
property but failed to make amortization
payments. It was only after seven months or on
November 18, 1993 that they made payments to
Bliss in the amount ofP46,303.44.40 Whether the
same covers previous unpaid amortizations is
also not clear as the receipt does not indicate the
same41 and per Statement of Account 42 as of
March 8, 1994 issued by Bliss, the unpaid
monthly amortizations for February to November
1993 in the total amount of P78,271.69 remained
outstanding. There was also no payment made of
the amortizations due on December 4, 1993 and
January 4, 199443 before the filing of the
Complaint on January 11, 1994.
On the part of the spouses Luna, it is
understandable that they paid the amortizations
due.1wphi1 The assumption of payment of the
monthly amortization to Bliss was made part of
the obligations of the spouses Bonrostro under
their contract with the spouses Luna precisely to
avoid the cancellation of the earlier contract
entered into by Constancia with Bliss. But as the
spouses Bonrostro failed in this obligation, the
spouses Luna were constrained to pay Bliss to
avoid the adverse effect of such failure. This act
of the spouses Luna proved to be even more
beneficial to the spouses Bonrostro as the
cancellation of the Contract to Sell between
Constancia and Bliss would result in the
cancellation of the subsequent Contract to Sell
between Constancia and Lourdes. Also, the
spouses Bonrostro were relieved from paying the
penalties that would have been imposed by Bliss
if the monthly amortizations covered by the said
payment remained unpaid. The Statements of
Account44 issued by Bliss clearly state that each
monthly amortization is due on or before the
fourth day of every month and a penalty
equivalent to 1/10th of 1% per day of delay shall
be imposed for all payments made after due
date. That translates to 3% monthly or 36% per
annum rate of interest, three times higher than
the 12% per annum rate of interest correctly
imposed by the CA.
Hence, the resulting situation is that the spouses
Luna are constrained to part with their money
while the spouses Bonrostro, despite being remiss
in their obligation to pay the monthly
amortization, are relieved from paying higher
penalties at the expense of the former. This is
aside from the fact that the spouses Bonrostro
are in continued possession of the subject
property and are enjoying the beneficial use
thereof. Under the circumstances and considering
that the spouses Bonrostro are obviously in delay
in complying with their obligation to pay the
amortizations due from February 1993 to January
1995 for which the spouses Luna
paid P214,492.62,45 the CA correctly ordered the
reimbursement to the latter of the said amount
with interest. "Delay in the performance of an
obligation is looked upon with disfavor because,
when a party to a contract incurs delay, the other
party who performs his part of the contract
suffers damages thereby."46 As discussed, the
spouses Luna obviously suffered damages
brought about by the failure of the spouses
Bonrostro to comply with their obligation on time.
"And, sans elaboration of the matter at hand,
damages take the form of interest x x x."47
Under Article 2209 of the Civil Code, "if the
obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the
interest agreed upon, and in the absence of
stipulation, the legal interest x x x." There being
no stipulation on interest in case of delay in the
payment of amortization, the CA thus correctly
7
imposed interest at the legal rate which is now
Page
12% per annum.
WHEREFORE, the Petition for Review on Certiorari
is DENIED and the assailed Decision dated April
15, 2005 and the Resolution dated April 17, 2006
of the Court of Appeals in CA-G.R. CV No. 56414
are AFFIRMED.
INTERNATIONAL HOTEL CORP, vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL
SUAREZ
To avoid unjust enrichment to a party from
resulting out of a substantially performed
contract, the principle of quantum meruit may be
used to determine his compensation in the
absence of a written agreement for that purpose.
The principle of quantum meruit justifies the
payment of the reasonable value of the services
rendered by him.
The Case
Under review is the decision the Court of Appeals
(CA) promulgated on November 8,
1
2002, disposing:
WHEREFORE, premises considered, the decision
dated August 26, 1993 of the Regional Trial Court,
Branch 13, Manila in Civil Case No. R-82-2434 is
AFFIRMED with Modification as to the amounts
awarded as follows: defendant-appellant IHC is
ordered to pay plaintiff-appellant
Joaquin P700,000.00 and plaintiff-appellant
SuarezP200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B.
Joaquin, Jr. submitted a proposal to the Board of
Directors of the International Hotel Corporation
(IHC) for him to render technical assistance in
securing a foreign loan for the construction of a
hotel, to be guaranteed by the Development
Bank of the Philippines (DBP).2 The proposal
encompassed nine phases, namely: (1) the
preparation of a new project study; (2) the
settlement of the unregistered mortgage prior to
the submission of the application for guaranty for
processing by DBP; (3) the preparation of papers
necessary to the application for guaranty; (4) the
securing of a foreign financier for the project; (5)
the securing of the approval of the DBP Board of
Governors; (6) the actual follow up of the
application with DBP3; (7) the overall coordination
in implementing the projections of the project
study; (8) the preparation of the staff for actual
hotel operations; and (9) the actual hotel
operations.4
The IHC Board of Directors approved phase one to
phase six of the proposal during the special board
meeting on February 11, 1969, and
earmarked P2,000,000.00 for the project.5 Anent
the financing, IHC applied with DBP for a foreign
loan guaranty. DBP processed the
application,6 and approved it on October 24, 1969
subject to several conditions.7
On July 11, 1969, shortly after submitting the
application to DBP, Joaquin wrote to IHC to
request the payment of his fees in the amount
of P500,000.00 for the services that he had
provided and would be providing to IHC in relation
to the hotel project that were outside the scope of
the technical proposal. Joaquin intimated his
amenability to receive shares of stock instead of
cash in view of IHCs financial situation.8
On July 11, 1969, the stockholders of IHC met and
granted Joaquins request, allowing the payment
for both Joaquin and Rafael Suarez for their
services in implementing the proposal.9
On June 20, 1970, Joaquin presented to the IHC
Board of Directors the results of his negotiations
with potential foreign financiers. He narrowed the
financiers to Roger Dunn & Company and
Materials Handling Corporation. He recommended
that the Board of Directors consider Materials
Handling Corporation based on the more
beneficial terms it had offered. His
recommendation was accepted. 10
Negotiations with Materials Handling Corporation
and, later on, with its principal, Barnes
International (Barnes), ensued. While the
negotiations with Barnes were ongoing, Joaquin
and Jose Valero, the Executive Director of IHC,
met with another financier, the Weston
International Corporation (Weston), to explore
8
possible financing.11When Barnes failed to deliver
Page
the needed loan, IHC informed DBP that it would
submit Weston for DBPs consideration.12 As a
result, DBP cancelled its previous guaranty
through a letter dated December 6, 1971.13
On December 13, 1971, IHC entered into an
agreement with Weston, and communicated this
development to DBP on June 26, 1972. However,
DBP denied the application for guaranty for
failure to comply with the conditions contained in
its November 12, 1971 letter.14
Due to Joaquins failure to secure the needed
loan, IHC, through its President Bautista, canceled
the 17,000 shares of stock previously issued to
Joaquin and Suarez as payment for their services.
The latter requested a reconsideration of the
cancellation, but their request was rejected.
Consequently, Joaquin and Suarez commenced
this action for specific performance, annulment,
damages and injunction by a complaint dated
December 6, 1973 in the Regional Trial Court in
Manila (RTC), impleading IHC and the members of
its Board of Directors, namely, Felix Angelo
Bautista, Sergio O. Rustia, Ephraim G. Gochangco,
Mario B. Julian, Benjamin J. Bautista, Basilio L.
Lirag, Danilo R. Lacerna and Hermenegildo R.
Reyes.15 The complaint alleged that the
cancellation of the shares had been illegal, and
had deprived them of their right to participate in
the meetings and elections held by IHC; that
Barnes had been recommended by IHC President
Bautista, not by Joaquin; that they had failed to
meet their obligation because President Bautista
and his son had intervened and negotiated with
Barnes instead of Weston; that DBP had canceled
the guaranty because Barnes had failed to
release the loan; and that IHC had agreed to
compensate their services with 17,000 shares of
the common stock plus cash of P1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O.
Rustia, Mario B. Julian and Benjamin J. Bautista,
filed an answer claiming that the shares issued to
Joaquin and Suarez as compensation for their
"past and future services" had been issued in
violation of Section 16 of the Corporation Code;
that Joaquin and Suarez had not provided a
foreign financier acceptable to DBP; and that they
had already received P96,350.00 as payment for
their services.17
On their part, Lirag and Lacerna denied any
knowledge of or participation in the cancellation
of the shares.18
Similarly, Gochangco and Reyes denied any
knowledge of or participation in the cancellation
of the shares, and clarified that they were not
directors of IHC.19 In the course of the
proceedings, Reyes died and was substituted by
Consorcia P. Reyes, the administratrix of his
estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993,
the RTC held IHC liable pursuant to the second
paragraph of Article 1284 of the Civil Code,
disposing thusly:
WHEREFORE, in the light of the above facts, law
and jurisprudence, the Court hereby orders the
defendant International Hotel Corporation to pay
plaintiff Francisco B. Joaquin, the amount of Two
Hundred Thousand Pesos (P200,000.00) and to
pay plaintiff Rafael Suarez the amount of Fifty
Thousand Pesos (P50,000.00); that the said
defendant IHC likewise pay the co-plaintiffs,
attorneys fees of P20,000.00, and costs of suit.
IT IS SO ORDERED.21
The RTC found that Joaquin and Suarez had failed
to meet their obligations when IHC had chosen to
negotiate with Barnes rather than with Weston,
the financier that Joaquin had recommended; and
that the cancellation of the shares of stock had
been proper under Section 68 of the Corporation
Code, which allowed such transfer of shares to
compensate only past services, not future ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors,
to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED
THAT PLAINTIFFS-APPELLANTS FULLY PERFORMED
ALL THAT WAS INCUMBENT UPON THEM, THE This Court does not subscribe to plaintiffs-

9
HONORABLE JUDGE ERRED IN NOT ORDERING appellants view that defendant-appellant IHC

Page
THAT: agreed to pay themP2,000,000.00. Plaintiff-
appellant Joaquins letter to defendant-appellee
A. DEFENDANTS WERE UNJUSTIFIED IN F.A. Bautista, quoting defendant-appellant IHCs
CANCELLING THE SHARES OF STOCK board resolutions which supposedly authorized
PREVIOUSLY ISSUED TO PLAINTIFFS- the payment of such amount cannot be
APPELLANTS; AND sustained. The resolutions are quite clear and
when taken together show that said amount was
B. DEFENDANTS PAY PLAINTIFFS- only the "estimated maximum expenses" which
APPELLANTS TWO MILLION SEVEN defendant-appellant IHC expected to incur in
HUNDRED PESOS (sic) (P2,700,000.00), accomplishing phases 1 to 6, not exclusively to
INCLUDING INTEREST THEREON FROM plaintiffs-appellants compensation.This
1973, REPRESENTING THE TOTAL conclusion finds support in an unnumbered board
OBLIGATION DUE PLAINTIFFS- resolution of defendant-appellant IHC dated July
APPELLANTS.23 11, 1969:

On the other hand, IHC attributed errors to the
RTC, as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFFS-APPELLANTS HAVE NOTBEEN
COMPLETELY PAID FOR THEIR SERVICES, AND IN
ORDERING THE DEFENDANT-APPELLANT TO PAY
TWO HUNDRED THOUSAND PESOS (P200,000.00)
AND FIFTY THOUSAND PESOS (P50,000.00) TO
PLAINTIFFS-APPELLANTS FRANCISCO B. JOAQUIN
AND RAFAEL SUAREZ, RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING
PLAINTIFFS-APPELLANTS ATTORNEYS FEES AND
COSTS OF SUIT.24
In its questioned decision promulgated on
November 8, 2002, the CA concurred with the
RTC, upholding IHCs liability under Article 1186
of the Civil Code. It ruled that in the context of
Article 1234 of the Civil Code, Joaquin had
substantially performed his obligations and had
become entitled to be paid for his services; and
that the issuance of the shares of stock was ultra
vires for having been issued as consideration for
future services.
Anent how much was due to Joaquin and Suarez,
the CA explained thusly:
"Incidentally, it was also taken up the necessity of
giving the Technical Group a portion of the
compensation that was authorized by this
corporation in its Resolution of February 11, 1969
considering that the assistance so far given the
corporation by said Technical Group in continuing
our project with the DBP and its request for
guaranty for a foreign loan is 70% completed
leaving only some details which are now being
processed. It is estimated thatP400,000.00 worth
of Common Stock would be reasonable for the
present accomplishments and to this effect, the
President is authorized to issue the same in the
name of the Technical Group, as follows:
P200,000.00 in common stock to Rafael Suarez,
as associate in the Technical Group,
and P200,000.00 in common stock to Francisco G.
Joaquin, Jr., also a member of the Technical
Group.
It is apparent that not all of the P2,000,000.00
was allocated exclusively to compensate
plaintiffs-appellants. Rather, it was intended to
fund the whole undertaking including their
compensation. On the same date, defendant-
appellant IHC also authorized its president to pay-
appellant Joaquin P500,000.00 either in cash or in
stock or both.
The amount awarded by the lower court was
therefore less than what defendant-appellant IHC
agreed to pay plaintiffs-appellants. While this
Court cannot decree that the cancelled shares be
restored, for they are without a doubt null and
void, still and all, defendant-appellant IHC cannot
10
now put up its own ultra vires act as an excuse to
escape obligation to plaintiffs-appellants. Instead
Page
of shares of stock, defendant-appellant IHC is
ordered to pay plaintiff-appellant Joaquin a total
of P700,000.00 and plaintiff-appellant
Suarez P200,000.00, both to be paid in cash.
Although the lower court failed to explain why it
was granting the attorneys fees, this Court
nonetheless finds its award proper given
defendant-appellant IHCs actions.25
Issues
In this appeal, the IHC raises as issues for our
consideration and resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS
CORRECT IN AWARDING COMPENSATION AND
EVEN MODIFYING THE PAYMENT TO HEREIN
RESPONDENTS DESPITE NON-FULFILLMENT OF
THEIR OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS
CORRECT IN AWARDING ATTORNEYS FEES TO
RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code
was erroneously applied; that it had no intention
of preventing Joaquin from complying with his
obligations when it adopted his recommendation
to negotiate with Barnes; that Article 1234 of the
Civil Code applied only if there was a merely
slight deviation from the obligation, and the
omission or defect was technical and
unimportant; that substantial compliance was
unacceptable because the foreign loan was
material and was, in fact, the ultimate goal of its
contract with Joaquin and Suarez; that because
the obligation was indivisible and subject to a
suspensive condition, Article 1181 of the Civil
Code27 applied, under which a partial
performance was equivalent to non-performance;
and that the award of attorneys fees should be
deleted for lack of legal and factual bases.
On the part of respondents, only Joaquin filed a
comment,28 arguing that the petition was fatally
defective for raising questions of fact; that the
obligation was divisible and capable of partial
performance; and that the suspensive condition
was deemed fulfilled through IHCs own actions.29
Ruling
We deny the petition for review on certiorari
subject to the ensuing disquisitions.
1.
IHC raises questions of law
We first consider and resolve whether IHCs
petition improperly raised questions of fact.
A question of law exists when there is doubt as to
what the law is on a certain state of facts, but, in
contrast, a question of fact exists when the doubt
arises as to the truth or falsity of the facts
alleged. A question of law does not involve an
examination of the probative value of the
evidence presented by the litigants or by any of
them; the resolution of the issue must rest solely
on what the law provides on the given set of
circumstances.30 When there is no dispute as to
the facts, the question of whether or not the
conclusion drawn from the facts is correct is a
question of law.31
Considering that what IHC seeks to review is the
CAs application of the law on the facts presented
therein, there is no doubt that IHC raises
questions of law. The basic issue posed here is
whether the conclusions drawn by the CA were
correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code
cannot be the source of IHCs obligation to pay
respondents IHC argues that it should not be held
liable because: (a) it was Joaquin who had
recommended Barnes; and (b) IHCs negotiation
with Barnes had been neither intentional nor
willfully intended to prevent Joaquin from
complying with his obligations.
IHCs argument is meritorious.
Article 1186 of the Civil Code reads:
11
Article 1186. The condition shall be deemed
Page
fulfilled when the obligor voluntarily prevents its
fulfillment.
This provision refers to the constructive
fulfillment of a suspensive condition, 32 whose
application calls for two requisites, namely: (a)
the intent of the obligor to prevent the fulfillment
of the condition, and (b) the actual prevention of
the fulfillment. Mere intention of the debtor to
prevent the happening of the condition, or to
place ineffective obstacles to its compliance,
without actually preventing the fulfillment, is
insufficient.33
The error lies in the CAs failure to determine
IHCs intent to pre-empt Joaquin from meeting his
obligations. The June 20, 1970 minutes of IHCs
special board meeting discloses that Joaquin
impressed upon the members of the Board that
Materials Handling was offering more favorable
terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of
Directors of the International Hotel Corporation
were present with the exception of Directors
Benjamin J. Bautista and Sergio O. Rustia who
asked to be excused because of previous
engagements. In that meeting, the President
called on Mr. Francisco G. Joaquin, Jr. to explain
the different negotiations he had conducted
relative to obtaining the needed financing for the
hotel project in keeping with the authority given
to him in a resolution approved by the Board of
Directors.
Mr. Joaquin presently explained that he contacted
several local and foreign financiers through
different brokers and after examining the
different offers he narrowed down his choice to
two (2), to wit: the foreign financier
recommended by George Wright of the Roger
Dunn & Company and the offer made by the
Materials Handling Corporation.
After explaining the advantages and
disadvantages to our corporation of the two (2)
offers specifically with regard to the terms and
repayment of the loan and the rate of interest
requested by them, he concluded that the offer
made by the Materials Handling Corporation is
much more advantageous because the terms and
conditions of payment as well as the rate of
interest are much more reasonable and would be
much less onerous to our corporation. However,
he explained that the corporation accepted, in
principle, the offer of Roger Dunn, per the
corporations telegrams to Mr. Rudolph Meir of
the Private Bank of Zurich, Switzerland, and until
such time as the corporations negotiations with
Roger Dunn is terminated, we are committed, on
one way or the other, to their financing.
It was decided by the Directors that, should the
negotiations with Roger Dunn materialize, at the
same time as the offer of Materials Handling
Corporation, that the funds committed by Roger
Dunn may be diverted to other borrowers of the
Development Bank of the Philippines. With this
condition, Director Joaquin showed the
advantages of the offer of Materials Handling
Corporation. Mr. Joaquin also informed the
corporation that, as of this date, the bank
confirmation of Roger Dunn & Company has not
been received. In view of the fact that the
corporation is racing against time in securing its
financing, he recommended that the corporation
entertain other offers.
After a brief exchange of views on the part of the
Directors present and after hearing the
clarification and explanation made by Mr. C. M.
Javier who was present and who represented the
Materials Handling Corporation, the Directors
present approved unanimously the
recommendation of Mr. Joaquin to entertain the
offer of Materials Handling Corporation.34
Evidently, IHC only relied on the opinion of its
consultant in deciding to transact with Materials
Handling and, later on, with Barnes. In
negotiating with Barnes, IHC had no intention,
willful or otherwise, to prevent Joaquin and
Suarez from meeting their undertaking. Such
absence of any intention negated the basis for
the CAs reliance on Article 1186 of the Civil
Code.
Nor do we agree with the CAs upholding of IHCs
liability by virtue of Joaquin and Suarezs
substantial performance. In so ruling, the CA
12
applied Article 1234 of the Civil Code, which
states:
Page
Article 1234. If the obligation has been
substantially performed in good faith, the obligor
may recover as though there had been a strict
and complete fulfillment, less damages suffered
by the obligee.
It is well to note that Article 1234 applies only
when an obligor admits breaching the
contract35 after honestly and faithfully performing
all the material elements thereof except for some
technical aspects that cause no serious harm to
the obligee.36 IHC correctly submits that the
provision refers to an omission or deviation that is
slight, or technical and unimportant, and does not
affect the real purpose of the contract.
Tolentino explains the character of the obligors
breach under Article 1234 in the following
manner, to wit:
In order that there may be substantial
performance of an obligation, there must have
been an attempt in good faith to perform, without
any willful or intentional departure therefrom. The
deviation from the obligation must be slight, and
the omission or defect must be technical and
unimportant, and must not pervade the whole or
be so material that the object which the parties
intended to accomplish in a particular manner is
not attained. The non-performance of a material
part of a contract will prevent the performance
from amounting to a substantial compliance.
The party claiming substantial performance must
show that he has attempted in good faith to
perform his contract, but has through oversight,
misunderstanding or any excusable neglect failed
to completely perform in certain negligible
respects, for which the other party may be
adequately indemnified by an allowance and
deduction from the contract price or by an award
of damages. But a party who knowingly and
wilfully fails to perform his contract in any
respect, or omits to perform a material part of it,
cannot be permitted, under the protection of this
rule, to compel the other party, and the trend of
the more recent decisions is to hold that the
percentage of omitted or irregular performance
may in and of itself be sufficient to show that
there had not been a substantial performance.37
By reason of the inconsequential nature of the
breach or omission, the law deems the
performance as substantial, making it the
obligees duty to pay.38 The compulsion of
payment is predicated on the substantial benefit
derived by the obligee from the partial
performance. Although compelled to pay, the
obligee is nonetheless entitled to an allowance
for the sum required to remedy omissions or
defects and to complete the work agreed upon. 39
Conversely, the principle of substantial
performance is inappropriate when the
incomplete performance constitutes a material
breach of the contract. A contractual breach is
material if it will adversely affect the nature of
the obligation that the obligor promised to
deliver, the benefits that the obligee expects to
receive after full compliance, and the extent that
the non-performance defeated the purposes of
the contract.40 Accordingly, for the principle
embodied in Article 1234 to apply, the failure of
Joaquin and Suarez to comply with their
commitment should not defeat the ultimate
purpose of the contract.
The primary objective of the parties in entering
into the services agreement was to obtain a
foreign loan to finance the construction of IHCs
hotel project. This objective could be inferred
from IHCs approval of phase 1 to phase 6 of the
proposal. Phase 1 and phase 2, respectively the
preparation of a new project study and the
settlement of the unregistered mortgage, would
pave the way for Joaquin and Suarez to render
assistance to IHC in applying for the DBP
guaranty and thereafter to look for an able and
willing foreign financial institution acceptable to
DBP. All the steps that Joaquin and Suarez
undertook to accomplish had a single objective
to secure a loan to fund the construction and
eventual operations of the hotel of IHC. In that
regard, Joaquin himself admitted that his
assistance was specifically sought to seek
financing for IHCs hotel project.41
Needless to say, finding the foreign financier that
DBP would guarantee was the essence of the
parties contract, so that the failure to completely
satisfy such obligation could not be characterized
13
as slight and unimportant as to have resulted in
Joaquin and Suarezs substantial performance
Page
that consequentially benefitted IHC. Whatever
benefits IHC gained from their services could only
be minimal, and were even probably outweighed
by whatever losses IHC suffered from the delayed
construction of its hotel. Consequently, Article
1234 did not apply.
3.
IHC is nonetheless liable to pay under the
rule on constructive fulfillment of a mixed
conditional obligation
Notwithstanding the inapplicability of Article 1186
and Article 1234 of the Civil Code, IHC was liable
based on the nature of the obligation.
Considering that the agreement between the
parties was not circumscribed by a definite
period, its termination was subject to a condition
the happening of a future and uncertain
event.42 The prevailing rule in conditional
obligations is that the acquisition of rights, as well
as the extinguishment or loss of those already
acquired, shall depend upon the happening of the
event that constitutes the condition.43
To recall, both the RTC and the CA held that
Joaquin and Suarezs obligation was subject to
the suspensive condition of successfully securing
a foreign loan guaranteed by DBP. IHC agrees
with both lower courts, and even argues that the
obligation with a suspensive condition did not
arise when the event or occurrence did not
happen. In that instance, partial performance of
the contract subject to the suspensive condition
was tantamount to no performance at all. As
such, the respondents were not entitled to any
compensation.
We have to disagree with IHCs argument.
To secure a DBP-guaranteed foreign loan did not
solely depend on the diligence or the sole will of
the respondents because it required the action
and discretion of third persons an able and
willing foreign financial institution to provide the
needed funds, and the DBP Board of Governors to
guarantee the loan. Such third persons could not
be legally compelled to act in a manner favorable
to IHC. There is no question that when the
fulfillment of a condition is dependent partly on
the will of one of the contracting parties, 44 or of
the obligor, and partly on chance, hazard or the
will of a third person, the obligation is
mixed.45 The existing rule in a mixed conditional
obligation is that when the condition was not
fulfilled but the obligor did all in his power to
comply with the obligation, the condition should
be deemed satisfied.46
Considering that the respondents were able to
secure an agreement with Weston, and
subsequently tried to reverse the prior
cancellation of the guaranty by DBP, we rule that
they thereby constructively fulfilled their
obligation.
4.
Quantum meruit should apply in the absence of
an express agreement on the fees
The next issue to resolve is the amount of the
fees that IHC should pay to Joaquin and Suarez.
Joaquin claimed that aside from the
approved P2,000,000.00 fee to implement phase
1 to phase 6, the IHC Board of Directors had
approved an additional P500,000.00 as payment
for his services. The RTC declared that he and
Suarez were entitled to P200,000.00 each, but
the CA revised the amounts to P700,000.00 for
Joaquin andP200,000.00 for Suarez.
Anent the P2,000,000.00, the CA rightly
concluded that the full amount of P2,000,000.00
could not be awarded to respondents because
such amount was not allocated exclusively to
compensate respondents, but was intended to be
the estimated maximum to fund the expenses in
undertaking phase 6 of the scope of services. Its
conclusion was unquestionably borne out by the
minutes of the February 11, 1969 meeting, viz:
xxxx
II
The preparation of the necessary papers for the
DBP including the preparation of the application,
the presentation of the mechanics of financing,
14
the actual follow up with the different
departments of the DBP which includes the
Page
explanation of the feasibility studies up to the
approval of the loan, conditioned on the DBPs
acceptance of the project as feasible. The
estimated expenses for this particular phase
would be contingent, i.e. upon DBPs approval of
the plan now being studied and prepared, is
somewhere around P2,000,000.00.
After a brief discussion on the matter, the Board
on motion duly made and seconded, unanimously
adopted a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the
Reparations allocation and the plan being
negotiated with the DBP is realized the estimated
maximum expenses of P2,000,000.00 for this
phase is hereby authorized subject to the sound
discretion of the committee composed of Justice
Felix Angelo Bautista, Jose N. Valero and Ephraim
G. Gochangco."47 (Emphasis supplied)
Joaquins claim for the additional sum
of P500,000.00 was similarly without factual and
legal bases. He had requested the payment of
that amount to cover services rendered and still
to be rendered to IHC separately from those
covered by the first six phases of the scope of
work. However, there is no reason to hold IHC
liable for that amount due to his failure to present
sufficient proof of the services rendered towards
that end. Furthermore, his July 11, 1969 letter
revealed that the additional services that he had
supposedly rendered were identical to those
enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista President &
Chairman of the Board
Gentlemen:
I have the honor to request this Body for its
deliberation and action on the fees for my
services rendered and to be rendered to the hotel
project and to the corporation. These fees are
separate from the fees you have approved in your
previous Board Resolution, since my fees are
separate. I realize the position of the corporation
at present, in that it is not in a financial position
to pay my services in cash, therefore, I am
requesting this Body to consider payment of my
fees even in the form of shares of stock, as you
have done to the other technical men and for
other services rendered to the corporation by
other people.
Inasmuch as my fees are contingent on the
successful implementation of this project, I
request that my fees be based on a percentage of
the total project cost. The fees which I consider
reasonable for the services that I have rendered
to the project up to the completion of its
construction isP500,000.00. I believe said amount
is reasonable since this is approximately only
of 1% of the total project cost.
So far, I have accomplished Phases 1-5 of my
report dated February 1, 1969 and which you
authorized us to do under Board Resolution of
February 11, 1969. It is only Phase 6 which now
remains to be implemented. For my appointment
as Consultant dated May 12, 1969 and the Board
Resolution dated June 23, 1969 wherein I was
appointed to the Technical Committee, it now
follows that I have been also authorized to
implement part of Phases 7 & 8.
A brief summary of my accomplished work has
been as follows:
1. I have revised and made the new
Project Study of your hotel project, making
it bankable and feasible.
2. I have reduced the total cost of your
project by approximately P24,735,000.00.
3. I have seen to it that a registered
mortgage with the Reparations
Commission did not affect the application
with the IBP for approval to processing.
4. I have prepared the application papers
acceptable to the DBP by means of an
advance analysis and the presentation of
 the financial mechanics, which was
15
accepted by the DBP.
Page
5. I have presented the financial
mechanics of the loan wherein the
requirement of the DBP for an
additional P19,000,000.00 in equity from
the corporation became unnecessary.
6. The explanation of the financial
mechanics and the justification of this
project was instrumental in changing the
original recommendation of the
Investment Banking Department of the
DBP, which recommended disapproval of
this application, to the present
recommendation of the Real Estate
Department which is for the approval of
this project for proceeding.
7. I have submitted to you several offers
already of foreign financiers which are in
your files. We are presently arranging the
said financiers to confirm their funds to
the DBP for our project,
8. We have secured the approval of the
DBP to process the loan application of this
corporation as per its letter July 2, 1969.
9. We have performed other services for
the corporation which led to the
cooperation and understanding of the
different factions of this corporation.
I have rendered services to your corporation for
the past 6 months with no clear understanding as
to the compensation of my services. All I have
drawn from the corporation is the amount
of P500.00 dated May 12, 1969 and personal
payment advanced by Justice Felix Angelo
Bautista in the amount of P1,000.00.
I am, therefore, requesting this Body for their
approval of my fees. I have shown my good faith
and willingness to render services to your
corporation which is evidenced by my continued
services in the past 6 months as well as the
accomplishments above mentioned. I believe that
the final completion of this hotel, at least for the
processing of the DBP up to the completion of the
construction, will take approximately another 2
years. In view of the above, I again reiterate my
request for your approval of my fees. When the
corporation is in a better financial position, I will
request for a withdrawal of a monthly allowance,
said amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48
Joaquin could not even rest his claim on the
approval by IHCs Board of Directors. The
approval apparently arose from the confusion
between the supposedly separate services that
Joaquin had rendered and those to be done under
the technical proposal. The minutes of the July
11, 1969 board meeting (when the Board of
Directors allowed the payment for Joaquins past
services and for the 70% project completion by
the technical group) showed as follows:
III
The Third order of business is the compensation
of Mr. Francisco G. Joaquin, Jr. for his services in
the corporation.
After a brief discussion that ensued, upon motion
duly made and seconded, the stockholders
unanimously approved a resolution of the
following tenor:
RESOLUTION NO. ___(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be
granted a compensation in the amount of Five
Hundred Thousand (P500,000.00) Pesos for his
past services and services still to be rendered in
the future to the corporation up to the completion
of the Project.1wphi1 The President is given full
discretion to discuss with Mr. Joaquin the manner
of payment of said compensation, authorizing
him to pay part in stock and part in cash."
Incidentally, it was also taken up the necessity of
giving the Technical Group a portion of the
compensation that was authorized by this
corporation in its Resolution of February 11, 1969
considering that the assistance so far given the
corporation by said Technical Group in continuing
16
our project with the DBP and its request for
guaranty for a foreign loan is 70% completed
Page
leaving only some details which are now being
processed. It is estimated thatP400,000.00 worth
of Common Stock would be reasonable for the
present accomplishments and to this effect, the
President is authorized to issue the same in the
name of the Technical Group, as follows:
P200,000.00 in Common Stock to Rafael Suarez,
an associate in the Technical Group,
and P200,000.00 in Common stock to Francisco
G. Joaquin, Jr., also a member of the Technical
Group.49
Lastly, the amount purportedly included services
still to be rendered that supposedly extended
until the completion of the construction of the
hotel. It is basic, however, that in obligations to
do, there can be no payment unless the
obligation has been completely rendered.50
It is notable that the confusion on the amounts of
compensation arose from the parties inability to
agree on the fees that respondents should
receive. Considering the absence of an
agreement, and in view of respondents
constructive fulfillment of their obligation, the
Court has to apply the principle of quantum
meruit in determining how much was still due and
owing to respondents. Under the principle of
quantum meruit, a contractor is allowed to
recover the reasonable value of the services
rendered despite the lack of a written
contract.51 The measure of recovery under the
principle should relate to the reasonable value of
the services performed.52 The principle prevents
undue enrichment based on the equitable
postulate that it is unjust for a person to retain
any benefit without paying for it. Being
predicated on equity, the principle should only be
applied if no express contract was entered into,
and no specific statutory provision was
applicable.53
Under the established circumstances, we deem
the total amount of P200,000.00 to be reasonable
compensation for respondents services under
the principle of quantum meruit.
Finally, we sustain IHCs position that the grant of
attorneys fees lacked factual or legal basis.
Attorneys fees are not awarded every time a
party prevails in a suit because of the policy that
no premium should be placed on the right to
litigate. There should be factual or legal support
in the records before the award of such fees is
sustained. It is not enough justification for the
award simply because respondents were
compelled to protect their rights.54
ACCORDINGLY, the Court DENIES the petition for
review on certiorari; and AFFIRMS the decision of
the Court of Appeals promulgated on November
8, 2002 in C.A.-G.R. No. 47094 subject to the
MODIFICATIONS that: (a) International Hotel
Corporation is ordered to. pay Francisco G.
Joaquin, Jr. and Rafael Suarez P100,000.00 each
as compensation for their services, and (b) the
award of P20,000.00 as attorney's fees is deleted.
No costs of suit.
THE WELLEX GROUP, INC. v. U-LAND
AIRLINES, CO., LTD.
This is a Petition1 for Review on Certiorari under
Rule 45 of the Rules of Court. The Wellex Group,
Inc. (Wellex) prays that the Decision2 dated July
30, 2004 of the Court of Appeals in CA-G.R. CV
No. 74850 be reversed and set aside.3
The Court of Appeals affirmed the Decision4 of the
Regional Trial Court, Branch 62 of Makati City in
Civil Case No. 99-1407. The Regional Trial Court
rendered judgment in favor of U-Land Airlines,
Co., Ltd. (U-Land) and ordered the rescission of
the Memorandum of Agreement5 between Wellex
and U-Land.6
Wellex is a corporation established under
Philippine law and it maintains airline operations
in the Philippines.7 It owns shares of stock in
several corporations including Air Philippines
International Corporation (APIC), Philippine
Estates Corporation (PEC), and Express Savings
Bank (ESB).8 Wellex alleges that it owns all shares
of stock of Air Philippines Corporation (APC). 9
U-Land Airlines Co. Ltd. (U-Land) is a corporation
duly organized and existing under the laws of
Taiwan, registered to do business . . . in the
Philippines.10 It is engaged in the business of air
transportation in Taiwan and in other Asian
countries.11
On May 16, 1998, Wellex and U-Land entered into
17
a Memorandum of Agreement12 (First
Memorandum of Agreement) to expand their
Page
respective airline operations in Asia.13
Terms of the First Memorandum of
Agreement
The preambular clauses of the First Memorandum
of Agreement state:
WHEREAS, U-LAND is engaged in the business of
airline transportation in Taiwan, Philippines and/or
in other countries in the Asian region, and desires
to expand its operation and increase its market
share by, among others, pursuing a long-term
involvement in the growing Philippine airline
industry;
WHEREAS, WELLEX, on the other hand, has
current airline operation in the Philippines
through its majority-owned subsidiary Air
Philippines International Corporation and the
latters subsidiary, Air Philippines Corporation,
and in like manner also desires to expand its
operation in the Asian regional markets, a
Memorandum of Agreement on ______, a certified
copy of which is attached hereto as Annex A
and is hereby made an integral part hereof, which
sets forth, among others, the basis for WELLEXs
present ownership of shares in Air Philippines
International Corporation.
WHEREAS, the parties recognize the opportunity
to develop a long-term profitable relationship by
combining such of their respective resources in
an expanded airline operation as well as in
property development and in other allied
business activities in the Philippines, and desire
to set forth herein the basic premises and their
understanding with respect to their joint
cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex
and U-Land agreed to develop a long-term
business relationship through the creation of joint
interest in airline operations and property
development projects in the Philippines.15 This
long-term business relationship would be
implemented through the following transactions,
stated in Section 1 of the First Memorandum of
Agreement:
(a) U-LAND shall acquire from WELLEX, shares of
stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION (APIC) equivalent to at least 35%
of the outstanding capital stock of APIC, but in
any case, not less than 1,050,000,000 shares . . .
[;]
(b) U-LAND shall acquire from WELLEX, shares of
stock of PHILIPPINE ESTATES CORPORATION
(PEC) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case,
not less than 490,000,000 shares . . . [;
(c) U-LAND shall enter into a joint development
agreement with PEC . . . [; and
(d) U-LAND shall be given the option to acquire
from WELLEX shares of stock of EXPRESS
SAVINGS BANK (ESB) up to 40% of the
outstanding capital stock of ESB . . . under terms
to be mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that
within 40 days from its execution date, Wellex
and U-Land would execute a share purchase
agreement covering U-Lands acquisition of the
shares of stock of both APIC (APIC shares) and
PEC (PEC shares).17 In this share purchase
agreement, U-Land would purchase from Wellex
its APIC shares and PEC shares. 18
Wellex and U-Land agreed to an initial purchase
price of P0.30 per share of APIC and P0.65 per
share of PEC. However, they likewise agreed that
the final price of the shares of stock would be
reflected in the actual share purchase
agreement.19
Both parties agreed that the purchase price of
APIC shares and PEC shares would be paid upon
the execution of the share purchase agreement
and Wellexs delivery of the stock certificates
covering the shares of stock. The transfer of APIC
shares and PEC shares to U-Land was conditioned
on the full remittance of the final purchase price
as reflected in the share purchase agreement.
Further, the transfer was conditioned on the
approval of the Securities and Exchange
Commission of the issuance of the shares of stock
and the approval by the Taiwanese government of
U-Lands acquisition of these shares of stock.
Thus, Section 2 of the First Memorandum of
Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within
forty (40) days from date hereof (unless extended
by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement (SHPA)
covering the acquisition by U-LAND of the APIC
Shares and PEC Shares (collectively, the Subject
Shares). Without prejudice to any subsequent
agreement between the parties, the purchase
price for the APIC Shares to be reflected in the
SHPA shall be THIRTY CENTAVOS (P0.30) per
18
share and that for the PEC Shares at SIXTY FIVE
CENTAVOS (P0.65) per share
Page
The purchase price for the Subject Shares as
reflected in the SHPA shall be paid in full upon
execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such
other terms and conditions governing the
acquisition of the Subject Shares to be provided
in a separate instrument.
The transfer of the Subject Shares shall be
effected to U-LAND provided that: (i) the
purchase price reflected in the SHPA has been
fully paid; (ii) the Philippine Securities &
Exchange Commission (SEC) shall have approved
the issuance of the Subject Shares; and (iii) any
required approval by the Taiwanese government
of the acquisition by U-LAND of the Subject
Shares shall likewise have been obtained. 21
II. Operation and management of
APIC/PEC/APC
U-Land was entitled to a proportionate
representation in the Board of Directors of APIC
and PEC in accordance with Philippine
law.22 Operational control of APIC and APC would
be exercised jointly by Wellex and U-Land on the
basis of mutual agreement and
consultations.23 The parties intended that U-Land
would gain primary control and responsibility for
the international operations of APC.24 Wellex
manifested that APC is a subsidiary of APIC in the
second preambular clause of the First
Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement
reads:
3. Operation/Management of APIC/APC. - U-LAND
shall be entitled to a proportionate representation
in the Board of Directors of APIC and PEC in
accordance with Philippine law. For this purpose,
WELLEX shall cause the resignation of its
nominated Directors in APIC and PEC to
accommodate U-LANDs pro rata number of
Directors. Subject to applicable Philippine law and
regulations, operational control of APIC and Air
Philippines Corporation (APC) shall be lodged
jointly to WELLEX and U-LAND on the basis of
mutual agreement and consultations. Further, U-
LAND may second technical and other
consultants into APIC and/or APC with the view to
increasing service, productivity and efficiency,
identifying and implementing profit-service
opportunities, developing technical capability and
resources, and installing adequate safety systems
and procedures. In addition, U-LAND shall arrange
for the lease by APC of at least three (3) aircrafts
owned by U-LAND under such terms as the
parties shall mutually agree upon. It is the intent
of the parties that U-LAND shall have primary
control and responsibility for APCs international
operations.26
III. Entering into and funding a joint
development agreement
Wellex and U-Land also agreed to enter into a
joint development agreement simultaneous with
the execution of the share purchase agreement.
The joint development agreement shall cover
housing and other real estate development
projects.27
U-Land agreed to remit the sum of US$3 million
not later than May 22, 1998. This sum was to
serve as initial funding for the development
projects that Wellex and U-Land were to
undertake pursuant to the joint development
agreement. In exchange for the US$3 million,
Wellex would deliver stock certificates covering
57,000,000 PEC shares to U-Land. 28
The execution of a joint development agreement
was also conditioned on the execution of a share
purchase agreement.29
Section 4 of the First Memorandum of Agreement
reads:
4. Joint Development Agreement with PEC.
Simultaneous with the execution of the SHPA, U-
LAND and PEC shall execute a joint development
agreement (JDA) to pursue property
development projects in the Philippines. The JDA
shall cover specific housing and other real estate
development projects as the parties shall agree.
All profits derived from the projects covered by
the JDA shall be shared equally between U-LAND
and PEC. U-LAND shall, not later than May 22,
1998, remit the sum of US$3.0 million as initial
funding for the aforesaid development projects
against delivery by WELLEX of 57,000,000 shares
of PEC as security for said amount in accordance
with Section 9 below.30
In case of conflict between the provisions of the
First Memorandum of Agreement and the
provisions of the share purchase agreement or its
implementing agreements, the terms of the First
Memorandum of Agreement would prevail, unless
the parties specifically stated otherwise or the
context of any agreement between the parties
would reveal a different intent.31 Thus, in Section
6 of the First Memorandum of Agreement:
6. Primacy of Agreement. It is agreed that in
19
case of conflict between the provisions of this
Agreement and those of the SHPA and the
Page
implementing agreements of the SHPA, the
provisions of this Agreement shall prevail, unless
the parties specifically state otherwise, or the
context clearly reveal a contrary intent.32
Finally, Wellex and U-Land agreed that if they
were unable to agree on the terms of the share
purchase agreement and the joint development
agreement within 40 days from signing, then the
First Memorandum of Agreement would cease to
be effective.33
In case no agreements were executed, the parties
would be released from their respective
undertakings, except that Wellex would be
required to refund within three (3) days the US$3
million given as initial funding by U-Land for the
development projects. If Wellex was unable to
refund the US$3 million to U-Land, U-Land would
have the right to recover on the 57,000,000 PEC
shares that would be delivered to it. 34 Section 9 of
the First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to
agree on the terms of the SHPA and/or the JDA
within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be
effective and the parties released from their
respective undertakings herein, except that
WELLEX shall refund the US$3.0 million provided
under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover
on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.35
The First Memorandum of Agreement was signed
by Wellex Chairman and President William T.
Gatchalian (Mr. Gatchalian) and U-Land Chairman
Ker Gee Wang (Mr. Wang) on May 16, 1998.36
Annex A or the Second Memorandum of
Agreement
Attached and made an integral part of the First
Memorandum of Agreement was Annex A, as
stated in the second preambular clause. It is a
document denoted as a Memorandum of
Agreement entered into by Wellex, APIC, and
APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and
executed this ___th day of ______ at Makati City,
by and between:
THE WELLEX GROUP, INC., a corporation duly
organized and existing under the laws of the
Philippines, with offices at 22F Citibank Tower,
8741 Paseo de Roxas, Makati City (hereinafter
referred to as TWGI),
AIR PHILIPPINES INTERNATIONAL
CORPORATION (formerly FORUM PACIFIC,
INC.), likewise a corporation duly organized and
existing under the laws of the Philippines, with
offices at 8F Rufino Towers, Ayala Avenue, Makati
City (hereinafter referred to as APIC),
- and -
AIR PHILIPPINES CORPORATION, corporation
duly organized and existing under the laws of the
Philippines, with offices at Multinational Building,
Ayala Avenue, Makati City (hereinafter referred to
as APC).
W I T N E S S E T H: That -
WHEREAS, TWGI is the registered and beneficial
owner, or has otherwise acquired_____ (illegible
in rollo) rights to the entire issued and
outstanding capital stock (the APC SHARES) of
AIR PHILIPPINES CORPORATION (APC) and has
made stockholder advances to APC for the _____
(illegible in rollo) of aircraft, equipment and for
working capital used in the latters
operations (the _____ (illegible
in rollo) ADVANCES).
WHEREAS, APIC desires to obtain full ownership
and control of APC, including all of_____ (illegible
in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to
acquire the _____ (illegible in rollo) SHARES of
TWGI in APC, including the APC ADVANCES due to
TWGI from APC, with _____ (illegible in rollo) of
acquiring all the assets, franchise, goodwill and
operations of APC; and TWGI has _____ (illegible
inrollo) to the same in consideration of the
conveyance by APIC to TWGI of certain
investments, _____ (illegible in rollo) issuance of
TWGI of shares of stock of APIC in exchange for
said APC SHARES and the _____ (illegible
in rollo) ADVANCES, as more particularly
described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in
APIC in exchange for the _____ (illegible in rollo)
by APIC to TWGI of investment shares of APIC in
Express Bank, PetroChemical _____ (illegible
in rollo) of Asia Pacific, Republic Resources &
Development Corporation and Philippine _____
(illegible in rollo) Corporation (the APIC
INVESTMENTS). The 40-day period lapsed on June 25,

20
1998.45 Wellex and U-Land were not able to enter
2. TWGI likewise agrees to transfer the APC into any share purchase agreement although

Page
SHARES to APIC in exchange solely _____ (illegible drafts were exchanged between the two.
in rollo) the issuance by APIC of One Billion Seven
Hundred Ninety Seven Million Eight Hundred Fifty Despite the absence of a share purchase
Seven Thousand Three Hundred Sixty Four agreement, U-Land remitted to Wellex a total of
(1,797,857,364) shares of its capital stock of a US$7,499,945.00.46 These were made in varying
_____ (illegible in rollo) value of P1.00 per share amounts and through the issuance of post-dated
(the APIC SHARES), taken from the currently checks.47 The dates of remittances were the
authorized but _____ (illegible in rollo) shares of following:
the capital stock of APIC, as well as from the
increase in the authorized capital _____ (illegible Date Amount (in US$)
in rollo) of APIC from P2.0 billion to P3.5 billion.
June 30, 1998 990,000.00
3. It is the basic understanding of the parties July 2, 1998 990,000.00
hereto that the transfer of the APC _____ (illegible 20,000.00
in rollo) as well as the APC ADVANCES to APIC July 30, 1998 990,000.00
shall be intended to enable APIC to obtain _____
490,000.00
(illegible in rollo) and control of APC, including all
of APCs assets, franchise, goodwill and _____ 490,000.00
(illegible in rollo). August 1, 1998 990,000.00
490,000.00
4. Unless the parties agree otherwise, the
effectivity of this Agreement and transfers _____ 490,000.00
(illegible in rollo) APC ADVANCES in exchange for August 3, 1998 990,000.00
the APIC INVESTMENTS, and the transfer of the 70,000.00
_____ (illegible in rollo) SHARES in exchange for September 25, 399,972.50
the issuance of new APIC SHARES, shall be 1998
subject to _____ (illegible in rollo) due diligence as
the parties shall see fit, and the condition 99, 972.50
subsequent that the _____ (illegible in rollo) for Total US$7,499,945.0048
increase in the authorized capital stock of the
APIC from P2.0 billion to P3.5 _____ (illegible Wellex acknowledged the receipt of these
inrollo) shall have been approved by the remittances in a confirmation letter addressed to
Securities and Exchange Commission. U-Land dated September 30, 1998. 49

IN WITNESS WHEREOF, the parties have caused
these presents to be signed on the date _____
(illegible in rollo) first above written.38 (Emphasis
supplied)
This Second Memorandum of Agreement was
allegedly incorporated into the First Memorandum
of Agreement as a disclosure to [U-Land]
[that] . . . [Wellex] was still in the process of
acquiring and consolidating its title to shares of
stock of APIC.39 It included the terms of a share
swap whereby [Wellex] agreed to transfer to APIC
its shareholdings and advances to APC in
exchange for the issuance by APIC of shares of
stock to [Wellex].40
The Second Memorandum of Agreement was
signed by Mr. Gatchalian, APIC President
Salud,41 and APC President Augustus C. Paiso. 42 It
was not dated, and no place was indicated as the
place of signing.43 It was not notarized either, and
no other witnesses signed the document. 44
According to Wellex, the parties agreed to enter
into a security arrangement. If the sale of the
shares of stock failed to push through, the partial
payments or remittances U-Land made were to
be secured by these shares of stock and parcels
of land.50 This meant that U-Land could recover
the amount it paid to Wellex by selling these
shares of stock and land titles or using them to
generate income.
Thus, after the receipt of US$7,499,945.00,
Wellex delivered to U-Land stock certificates
representing 60,770,000 PEC shares and
72,601,000 APIC shares.51 These were delivered
to U-Land on July 1, 1998, September 1, 1998,
and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer
Certificates of Title (TCT) Nos. T-216769, T-
216771, T-228231, T-228227, T-211250, and T-
216775 covering properties owned by Westland
Pacific Properties Corporation in Bulacan; and TCT
Nos. T-107306, T-115667, T-105910, T-120250, T-
1114398, and T-120772 covering properties
21
owned by Rexlon Realty Group, Inc. 53 On October
1, 1998,54 U-Land received a letter from Wellex,
Page
indicating a list of stock certificates that the latter
was giving to the former by way of security. 55
Despite these transactions, Wellex and U-Land
still failed to enter into the share purchase
agreement and the joint development agreement.
In the letter56 dated July 22, 1999, 10
months57 after the last formal communication
between the two parties, U-Land, through
counsel, demanded the return of the
US$7,499,945.00.58 This letter was sent 14
months after the signing of the First
Memorandum of Agreement.
Counsel for U-Land claimed that [Wellex] ha[d]
unjustifiably refused to enter into the. . . Share
Purchase Agreement.59 As far as U-Land was
concerned, the First Memorandum of Agreement
was no longer in effect, pursuant to Section
9.60 As such, U-Land offered to return all the stock
certificates covering APIC shares and PEC shares
as well as the titles to real property given by
Wellex as security for the amount remitted by U-
Land.61
Wellex sent U-Land a letter62 dated August 2,
1999, which refuted U-Lands claims. Counsel for
Wellex stated that the two parties carried out
several negotiations that included finalizing the
terms of the share purchase agreement and the
terms of the joint development agreement.
Wellex asserted that under the joint development
agreement, U-Land agreed to remit the sum of
US$3 million by May 22, 1998 as initial funding
for the development projects.63
Wellex further asserted that it conducted
extended discussions with U-Land in the hope of
arriving at the final terms of the agreement
despite the failure of the remittance of the US$3
million on May 22, 1998.64 That remittance
pursuant to the joint development agreement
would have demonstrated [U-Lands] good faith
in finalizing the agreements.65
Wellex averred that, [s]ave for a few items,
[Wellex and U-Land] virtually agreed on the terms
of both [the share purchase agreement and the
joint development agreement.]66 Wellex believed
that the parties had already gone beyond the
intent stage of the [First Memorandum of
Agreement] and [had already] effected partial
implementation of an over-all agreement. 67 U-
Land even delivered a total of 12 post-dated
checks to Wellex as payment for the APIC shares
and PEC shares.68 [Wellex] on the other hand,
had [already] delivered to [U-Land] certificates of
stock of APEC [sic] and PEC as well as various
land titles to cover actual remittances. 69 Wellex
alleged that the agreements were not finalized
because U-Land was forced to suspend
operations because of financial problems
spawned by the regional economic turmoil. 70
Thus, Wellex maintained that the inability of the
parties to execute the [share purchase
agreement] and the [joint development
agreement] principally arose from problems at [U-
Lands] side, and not due to [Wellexs] unjustified
refusal to enter into [the] [share purchase
agreement][.]71
On July 30, 1999, U-Land filed a
Complaint72 praying for rescission of the First
Memorandum of Agreement and damages
against Wellex and for the issuance of a Writ of
Preliminary Attachment.73From U-Lands point of
view, its primary reason for purchasing APIC
shares from Wellex was APICs majority ownership
of shares of stock in APC (APC shares). 74 After
verification with the Securities and Exchange
Commission, U-Land discovered that APIC did not
own a single share of stock in APC.75 U-Land
alleged that it repeatedly requested that the
parties enter into the share purchase
agreement.76U-Land attached the demand letter
dated July 22, 1999 to the Complaint. 77 However,
the 40-day period lapsed, and no share purchase
agreement was finalized.78
U-Land alleged that, as of the date of filing of the
Complaint, Wellex still refused to return the
amount of US$7,499,945.00 while refusing to
enter into the share purchase agreement.79 U-
Land stated that it was induced by Wellex to
enter into and execute the First Memorandum of
Agreement, as well as release the amount of
US$7,499,945.00.80
In its Answer with Compulsory
Counterclaim,81 Wellex countered that U-Land had
no cause of action.82 Wellex maintained that
under the First Memorandum of Agreement, the
parties agreed to enter into a share purchase
agreement and a joint development
agreement.83 Wellex alleged that to bring the
share purchase agreement to fruition, it would
have to acquire the corresponding shares in
APIC.84 It claimed that U-Land was fully aware
that the former still ha[d] to consolidate its title
over these shares.85 This was the reason for
Wellexs attachment of the Second Memorandum
of Agreement to the First Memorandum of
Agreement. Wellex attached the Second
Memorandum of Agreement as evidence to refute
U-Lands claim of misrepresentation.86

22
Wellex further alleged that U-Land breached the
First Memorandum of Agreement since the
Page
payment for the shares was to begin during the
40-day period, which began on May 16, 1998.87 In
addition, U-Land failed to remit the US$3 million
by May 22, 1998 that would serve as initial
funding for the development projects. 88 Wellex
claimed that the remittance of the US$3 million
on May 22, 1998 was a mandatory obligation on
the part of U-Land.89
Wellex averred that it presented draft versions of
the share purchase agreement, which were never
finalized.90 Thus, it believed that there was an
implied extension of the 40-day period within
which to enter into the share purchase
agreement and the joint development agreement
since U-Land began remitting sums of money in
partial payment for the purchase of the shares of
stock.91
In its counterclaim against U-Land, Wellex alleged
that it had already set in motion building and
development of real estate projects on four (4)
major sites in Cavite, Iloilo, and Davao. It started
initial construction on the basis of its agreement
with U-Land to pursue real estate development
projects.92
Wellex claims that, had the development projects
pushed through, the parties would have shared
equally in the profits of these projects. 93 These
projects would have yielded an income of
P2,404,948,000.00, as per the study Wellex
conducted, which was duly recognized by U-
Land.94 Half of that amount, P1,202,474,000.00,
would have redounded to Wellex.95 Wellex, thus,
prayed for the rescission of the First
Memorandum of Agreement and the payment of
P1,202,474,000 in damages for loss of profit.96 It
prayed for the payment of moral damages,
exemplary damages, attorneys fees, and costs of
suit.97
In its Reply,98 U-Land denied that there was an
extension of the 40-day period within which to
enter into the share purchase agreement and the
joint development agreement. It also denied
requesting for an extension of the 40-day period.
It further raised that there was no provision in the
First Memorandum of Agreement that required it
to remit payments for Wellexs shares of stock in
APIC and PEC within the 40-day period. Rather,
the remittances were supposed to begin upon the
execution of the share purchase agreement. 99
As for the remittance of the US$3 million, U-Land
stated that the issuance of this amount on May
22, 1998 was supposed to be simultaneously
made with Wellexs delivery of the stock
certificates for 57,000,000 PEC shares. These
stock certificates were not delivered on that
date.100
With regard to the drafting of the share purchase
agreement, U-Land denied that it was Wellex that
presented versions of the agreement. U-Land
averred that it was its own counsel who drafted
versions of the share purchase agreement and
the joint development agreement, which Wellex
refused to sign.101
U-Land specifically denied that it had any
knowledge prior to or during the execution of the
First Memorandum of Agreement that Wellex still
had to consolidate its title over its shares in
APIC. U-Land averred that it relied on Wellexs
representation that it was a majority owner of
APIC shares and that APIC owned a majority of
APC shares.102
Moreover, U-Land denied any knowledge of the
initial steps that Wellex undertook to pursue the
development projects and denied any awareness
of a study conducted by Wellex regarding the
potential profit of these projects.103
The case proceeded to trial
U-Land presented Mr. David Tseng (Mr. Tseng), its
President and Chief Executive Officer, as its sole
witness.104 Mr. Tseng testified that [s]ometime in
1997, Mr. William Gatchalian who was in Taiwan
invited [U-Land] to join in the operation of his
airline company[.]105 U-Land did not accept the
offer at that time.106 During the first quarter of
1998, Mr. Gatchalian went to Taiwan and invited
[U-Land] to invest in Air Philippines[.]107 This
time, U-Land alleged that subsequent meetings
were held where Mr. Gatchalian, representing
Wellex, claimed ownership of a majority of the
shares of APIC and ownership by APIC of a
majority of the shares of [APC,] a domestic carrier
in the Philippines.108Wellex, through Mr.
Gatchalian, offered to sell to U-Land PEC shares
as well.109
According to Mr. Tseng, the parties agreed to
enter into the First Memorandum of Agreement
after their second meeting.110 Mr. Tseng testified
that under this memorandum of agreement, the
parties would enter into a share purchase
agreement within forty (40) days from its
execution which [would] put into effect the sale of
the shares [of stock] of APIC and
PEC[.]111 However, the [s]hare [p]urchase
[a]greement was not executed within the forty-
day period despite the draft . . . given [by U-Land
to Wellex].112

23
Mr. Tseng further testified that it was only after
the lapse of the 40-day period that U-Land
Page
discovered that Wellex needed money for the
transfer of APC shares to APIC. This allegedly
shocked U-Land since under the First
Memorandum of Agreement, APIC was supposed
to own a majority of APC shares. Thus, U-Land
remitted to Wellex a total of US$7,499,945.00
because of its intent to become involved in the
aviation business in the Philippines. These
remittances were confirmed by Wellex through a
confirmation letter. Despite the remittance of this
amount, no share purchase agreement was
entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting
(Ms. Ting), Vice President of Wellex. She admitted
her knowledge of the First Memorandum of
Agreement as she was involved in its drafting.
She testified that the First Memorandum of
Agreement made reference, under its second
preambular clause, to the Second Memorandum
of Agreement entered into by Wellex, APIC, and
APC. She testified that under the First
Memorandum of Agreement, U-Lands purchase
of APIC shares and PEC shares from Wellex would
take place within 40 days, with the execution of a
share purchase agreement.114
According to Ms. Ting, after the 40-day period
lapsed, U-Land Chairman Mr. Wang requested
sometime in June of 1998 for an extension for the
execution of the share purchase agreement and
the remittance of the US$3 million. As proof that
Mr. Wang made this request, Ms. Ting testified
that Mr. Wang sent several post-dated checks to
cover the payment of the APIC shares and PEC
shares and the initial funding of US$3 million for
the joint development agreement. She testified
that Mr. Wang presented a draft of the share
purchase agreement, which Wellex rejected.
Wellex drafted a new version of the share
purchase agreement.115 However, the share
purchase agreement was not executed because
during the period of negotiation, Wellex learned
from other sources that U-Land encountered
difficulties starting October of 1998. 116 Ms. Ting
admitted that U-Land made the remittances to
Wellex in the amount of US$7,499,945.00.117
Ms. Ting testified that U-Land was supposed to
make an initial payment of US$19 million under
the First Memorandum of Agreement. However,
U-Land only paid US$7,499,945.00. The total
payments should have amounted to US$41
million.118
Finally, Ms. Ting testified that Wellex tried to
contact U-Land to have a meeting to thresh out
the problems of the First Memorandum of
Agreement, but U-Land did not reply. Instead,
Wellex only received communication from U-Land
regarding their subsequent negotiations through
the latters demand letter dated July 22, 1999. In
response, Wellex wrote to U-Land requesting
another meeting to discuss the demands.
However, U-Land already filed the Complaint for
rescission and caused the attachment against the
properties of Wellex, causing embarrassment to
Wellex.119
In the Decision dated April 10, 2001, the Regional
Trial Court of Makati City held that rescission of
the First Memorandum of Agreement was proper:
The first issue must be resolved in the negative.
Preponderance of evidence leans in favor of
plaintiff that it is entitled to the issuance of the
writ of preliminary attachment. Plaintiffs
evidence establishes the facts that it is engaged
in the airline business in Taiwan, was approached
by defendant, through its Chairman William
Gatchalian, and was invited by the latter to invest
in an airline business in the Philippines, Air
Philippines Corporation (APC); that plaintiff
became interested in the invitation of defendant;
that during the negotiations between plaintiff and
defendant, defendant induced plaintiff to buy
shares in Air Philippines International Corporation
(APIC) since it owns majority of the shares of APC;
that defendant also induced plaintiff to buy
shares of APIC in Philippine Estates Corporation
(PEC); that the negotiations between plaintiff and
defendant culminated into the parties executing a
MOA (Exhs. C to C-3, also Exh. 1); that in
the second Whereas clause of the MOA,
defendant represented that it has a current airline
operation through its majority-owned subsidiary
APIC, that under the MOA, the parties were
supposed to enter into a Share Purchase
Agreement (SPA) within forty (40) days from May
16, 1998, the date the MOA in order to effect the
transfer of APIC and PEC shares of defendant to
plaintiff; that plaintiff learned from defendant that
APIC does not actually own a single share in APC;
that plaintiff verified with the Securities and
Exchange Commission (SEC), by obtaining a
General Information Sheet therefrom (Exh. C-
Attachment); that APIC does not in fact own APC;
that defendant induced plaintiff to still remit its
investment to defendant, which plaintiff did as
admitted by defendant per its Confirmation Letter
(Exh. D) in order that APC shares could be
transferred to APIC; that plaintiff remitted a total
of US$7,499,945.00 to defendant; and that during
the forty-day period stipulated in the MOA and
even after the lapse of the said period, defendant
has not entered into the SPA, nor has defendant
caused the transfer of APC shares to APIC.
In the second Whereas clause of the MOA (Exh.
24
C), defendants misrepresentation that APIC
owns APC is made clear, as follows:
Page
WHEREAS, WELLEX, on the other hand, has
current airline operation in the Philippines
through its majority-owned subsidiary Air
Philippines International Corporation (Exh. C)
and the latters subsidiary, Air Philippines
Corporation, and in like manner also desires to
expand its operation in the Asian regional
markets; x x x (Second Whereas of Exh. C)
On the other hand, defendants evidence failed to
disprove plaintiffs evidence. The testimony of
defendants sole witness Elvira Ting, that plaintiff
knew at the time of the signing of the MOA that
APIC does not own a majority of the shares of APC
because another Memorandum of Agreement was
attached to the MOA (Exh 1) pertaining to the
purchase of APC shares by APIC is unavailing. The
second Whereas clause of the MOA leaves no
room for interpretation. . . . The second MOA
purportedly attached as Annex A of this MOA
merely enlightens the parties on the manner by
which APIC acquired the shares of APC.
Besides, . . . the second MOA was not a certified
copy and did not contain a marking that it is an
Annex A when it was supposed to be an Annex
A and a certified copy per the MOA between
plaintiff and defendant. As can be also gathered
from her testimony, Ms. Ting does not have
personal knowledge that plaintiff was not
informed that APIC did not own shares of APC
during the negotiations as she was not present
during the negotiations between plaintiff and
defendants William Gatchalian. Her participation
in the agreement between the parties [was]
merely limited to the preparation of the
documents to be signed. Ms. Ting testified, as
follows:
Q During the negotiation, you did not know
anything about that?
A I was not involved in the negotiation, sir.
Q And you are just making your statement that
U-Land knew about the intended transfer of
shares from APC to APIC because of this
WHEREAS CLAUSE and the Annex to this
Memorandum of Agreement?
A Yes, it was part of the contract.
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendants fraud in the performance of its
obligation under the MOA is further revealed
when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff
in the total amountn [sic] of US$7,499, 945.00 to
partially defray the cost of transferring APC
shares to APIC even as of the year 2000, as
follows:
Q Ms. Ting, can you please tell the Court if you
know who owns shares of Air Philippines
Corporation at this time?
A Air Philippines Corporation right now is own
[sic] by Wellex Group and certain individual.
Q How much shares of Air Philippines
Corporation is owned by Wellex Group?
A Around twenty...at this moment around twenty
five percent (25%).
Q Can you tell us if you know who are the other
owners of the shares of Air Philippines?
A There are several individual owners, I cannot
recall the names.
Q Could [sic] you know if Air Philippines Intl.
Corporation is one of the owners?
A As of this moment, no sir.
(lbid, p. 16)
That defendant represented to plaintiff that it
needed the remittances of plaintiff, even if no SPA
was executed yet between the parties, to effect
the transfer of APC shares to APIC is admitted by
its same witness also in this wise:
Q You said that remittances were made to the
Wellex Group, Incorporated by plaintiff for the
period from June 1998 to September 1998[,] is
that correct?
A Yes, Sir.
Q During all these times, that remittances were
made in the total amount of more than seven
million dollars, did you ever know if plaintiff asked
for evidence from your company that AIR
PHILIPPINES INTERNATIONAL CORPORATION has
already acquired shares of AIR PHILIPPINES
CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries,
Madam Witness?
A We informed them that the decision was still in
the process.
Q Even up to the time that plaintiff U-Land
stopped the remittances sometime in September
1998 you have not effected the transfer of shares
of AIR PHILIPPINES CORPORATION to AIR
PHILIPPINES INTERNATIONCAL [sic]
CORPORATION[,] am I correct?
A APC to APIC, well at that time its still in the
process.
Q In fact, Madam Witness, is it not correct for me
to say that one of the reasons why U-Land
Incorporated was convinced to remit the amounts
of money totalling seven million dollars plus, was
that your company said that it needed funds to
effect these transfers, is that correct?
A Yes, sir.
(lbid, pp. 25-29)
As the evidence adduced by the parties stand,
plaintiff has established the fact that it had made
remittances in the total amount of
US$7,499,945.00 to defendant in order that
defendant will make good its representation that
APC is a subsidiary of APIC. The said remittances
are admitted by defendant.
Notwithstanding the said remittances, APIC does
not own a single share of APC. On the other hand,
defendant could not even satisfactorily
substantiate its claim that at least it had the
intention to cause the transfer of APC shares to
APIC. [D]efendant obviously did not enter into the
stipulated SPA because it did not have the shares
of APC transferred to APIC despite its
representations. Under the circumstances, it is
clear that defendant fraudulently violated the
provisions of the MOA.120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed
ruling of the Regional Trial Court. 121 In its July
2004 Decision, the Court of Appeals held that
Regional Trial Court did not err in granting
rescission:
Records show that in the answer filed by
defendant-appellant, the latter itself asked for the
rescission of the MOA. Thus, in effect, it prays for
the return of what has been given or paid under
the MOA, as the law creates said obligation to
return the things which were the object of the
contract, and the same could be carried out only
when he who demands rescission can return
whatever he may be obliged to restore. The law
says:
Rescission creates the obligation to return the
things which were the object of the contract,
together with their fruits, and the price with its
interest; consequently, it can be carried out only
when he who demands rescission can return
whatever he may be obliged to restore.
Appellant, therefore, cannot ask for rescission of
25
the MOA and yet refuse to return what has been
paid to it. Further, appellants claim that the
Page
lower court erred in ruling for the rescission of the
MOA is absurd and ridiculous because rescission
thereof is prayed for by the former. . . .
This Court agrees with the lower court that
appellee is the injured party in this case, and
therefore is entitled to rescission, because the
rescission referred to here is predicated on the
breach of faith by the appellant which breach is
violative of the reciprocity between the parties. It
is noted that appellee has partly complied with its
own obligation, while the appellant has not. It is,
therefore, the right of the injured party to ask for
rescission because the guilty party cannot ask for
rescission.
The lower court . . . correctly ruled that:
. . . This Court agrees with plaintiff that
defendants misrepresentations regarding APICs
not owning shares in APC vitiates its consent to
the MOA. Defendants continued
misrepresentation that it will cause the transfer of
APC shares in APIC inducing plaintiff to remit
money despite the lapse of the stipulated forty
day period, further establishes plaintiffs right to
have the MOA rescinded.
Section 9 of the MOA itself provides that in the
event of the non-execution of an SPA within the
40 day period, or within the extensions thereof,
the payments made by plaintiff shall be returned
to it, to wit:
9 Validity.- In the event that the parties are
the unable to agree on the terms of the SHPA and/or
30, JDA within forty (40) days from the date hereof
the (or such period as the parties shall mutually
the agree), this Memorandum of Agreement shall
cease to be effective and the parties released
from their respective undertakings herein, except
that WELLEX shall refund the US$3.0 million
under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover
the 57,000,000 PEC shares delivered to U-LAND
under Section 4.
Clearly, the parties were not able to agree on the
terms of the SPA within and even after the lapse
of the stipulated 40 day period. There being no
SPA entered into by and between the plaintiff and
defendant, defendants return of the remittances
[of] plaintiff in the total amount of US$7,499,945
is only proper, in the same vein, plaintiff should
return to defendant the titles and certificates of
stock given to it by defendant.122(Citations
omitted)

26
Hence, this Petition was filed.
Page
Petitioners Arguments
Petitioner Wellex argues that contrary to the
finding of the Court of Appeals, respondent U-
Land was not entitled to rescission because the
latter itself violated the First Memorandum of
Agreement. Petitioner Wellex states that
respondent U-Land was actually bound to pay
US$17.5 million for all of APIC shares and PEC
shares under the First Memorandum of
Agreement and the US$3 million to pursue the
development projects under the joint
development agreement. In sum, respondent U-
Land was liable to petitioner Wellex for the total
amount of US$20.5 million. Neither the Court of
Appeals nor the Regional Trial Court made any
mention of the legal effect of respondent U-
Lands failure to pay the full purchase price.123
On the share purchase agreement, petitioner
Wellex asserts that its obligation to deliver the
totality of the shares of stock would become
demandable only upon remittance of the full
purchase price of US$17.5 million. 124 The full
remittance of the purchase price of the shares of
stock was a suspensive condition for the
execution of the share purchase agreement and
delivery of the shares of stock. Petitioner Wellex
argues that the use of the term upon in Section
2 of the First Memorandum of Agreement clearly
provides that the full payment of the purchase
price must be given simultaneously or
concurrent with the execution of the share
purchase agreement.125
Petitioner Wellex raises that the Court of Appeals
erred in saying that the rescission of the First
Memorandum of Agreement was proper because
petitioner Wellex itself asked for this in its Answer
before the trial court.126 It asserts that there can
be no rescission of a non-existent obligation, such
as [one] whose suspensive condition has not yet
happened[,]127 as held in Padilla v. Spouses
Paredes.128 Citing Villaflor v. Court of
Appeals129 and Spouses Agustin v. Court of
Appeals,130 it argues that the vendor. . . has no
obligation to deliver the thing sold. . . if the buyer.
. . fails to fully pay the price as required by the
contract.131 In this case, petitioner Wellex
maintains that respondent U-Lands remittance of
US$7,499,945.00 constituted mere partial
performance of a reciprocal obligation.132 Thus,
respondent U-Land was not entitled to rescission.
The nature of this reciprocal obligation requires
both parties simultaneous fulfillment of the
totality of their reciprocal obligations and not only
partial performance on the part of the allegedly
injured party
As to the finding of misrepresentations, petitioner
Wellex raises that a seller may sell a thing not yet
belonging to him at the time of the transaction,
provided that he will become the owner at the
time of delivery so that he can transfer ownership
to the buyer. Contrary to the finding of the lower
courts, petitioner Wellex was obliged to be the
owner of the shares only when the time came to
deliver these to respondent U-Land and not
during the perfection of the contract itself.
Finally, petitioner Wellex argues that respondent
U-Land could have recovered through the
securities given to the latter.134 Petitioner Wellex
invokes Suria v. Intermediate Appellate
Court,135 which held that an action for rescission
is not a principal action that is retaliatory in
character [under Article 1191 of the Civil Code,
but] a subsidiary one which. . . is available only in
the absence of any other legal remedy [under
Article 1384 of the Civil Code].136
Respondents Arguments
Respondent U-Land argues that it was the
execution of the share purchase agreement that
would result in its purchase of the APIC shares
and PEC shares.137 It was not the full remittance
of the purchase price of the shares of stock as
indicated in the First Memorandum of Agreement,
as alleged by petitioner Wellex.138 Respondent U-
Land asserts that the First Memorandum of
Agreement provides that the exact number of
APIC shares and PEC shares to be purchased
under the share purchase agreement and the
final price of these shares were not yet
determined by the parties.139
Respondent U-Land reiterates that it was
petitioner Wellex that requested for the
remittances amounting to US$7,499,945.00 to
facilitate APICs purchase of APC shares. 140 Thus,
it was petitioner Wellexs refusal to enter into the
share purchase agreement that led to respondent
U-Land demanding rescission of the First
Memorandum of Agreement and the return of the
US$7,499,945.00.141Respondent U-Land further
argues before this court that petitioner Wellex
failed to present evidence as to how the money
was spent, stating that Ms. Ting admitted that the
Second Memorandum of Agreement was not
consummated at any time.142
Respondent U-Land raises that petitioner Wellex
was guilty of fraud by making it appear that APC
was a subsidiary of APIC.143 It reiterates that, as
an airline company, its primary reason for
entering into the First Memorandum of
Agreement was to acquire management of APC,
27
another airline company.144Under Article 1191 of
the Civil Code, respondent U-Land, as the injured
Page
party, was entitled to rescission due to the fatal
misrepresentations committed by petitioner
Wellex.145
Respondent U-Land further asserts that the
shareholdings in APIC and APC were never in
question.146 Rather, it was petitioner Wellexs
misrepresentation that APIC was a majority
shareholder of APC that compelled it to enter into
the agreement.147
As for Suria, respondent U-land avers that this
case was inapplicable because the pertinent
provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil
Code.148 The rescission referred to in Article
1191 referred to resolution of a contract due to
a breach of a mutual obligation, while Article
1384 spoke of rescission because of lesion and
damage.149 Thus, the rescission that is relevant to
the present case is that of Article 1191, which
involves breach in a reciprocal obligation. It is, in
fact, resolution, and not rescission as a result of
fraud or lesion, as found in Articles 1381, 1383,
and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether
the Court of Appeals erred in affirming the
Decision of the Regional Trial Court that granted
the rescission of the First Memorandum of
Agreement prayed for by U-Land.
The Petition must be denied.
I provision on its face will be read as it is written
The requirement of a share purchase
agreement
The Civil Code provisions on the interpretation of
contracts are
controlling to this case, particularly Article 1370,
which reads:
ART. 1370. If the terms of a contract are clear and
leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail
over the former.
In Norton Resources and Development
Corporation v. All Asia Bank Corporation:151
The cardinal rule in the interpretation of contracts
is embodied in the first paragraph of Article 1370
of the Civil Code: [i]f the terms of a contract are
clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its
stipulations shall control. This provision is akin to
the plain meaning rule applied by Pennsylvania
courts, which assumes that the intent of the
parties to an instrument is embodied in the
writing itself, and when the words are clear and
unambiguous the intent is to be discovered only
from the express language of the agreement. It
also resembles the four corners rule, a principle
which allows courts in some cases to search
beneath the semantic surface for clues to
meaning. A court's purpose in examining a
contract is to interpret the intent of the
contracting parties, as objectively manifested by
them. The process of interpreting a contract
requires the court to make a preliminary inquiry
as to whether the contract before it is
ambiguous. A contract provision is ambiguous if
it is susceptible of two reasonable alternative
interpretations. Where the written terms of the
contract are not ambiguous and can only be read
one way, the court will interpret the contract as a
matter of law. If the contract is determined to be
ambiguous, then the interpretation of the
contract is left to the court, to resolve the
ambiguity in the light of the intrinsic
evidence.152 (Emphasis supplied)
As held in Norton, this court must first determine
whether a provision or stipulation contained in a
contract is ambiguous. Absent any ambiguity, the
and treated as the binding law of the parties to
the contract.
The parties have differing interpretations of the
terms of the First Memorandum of Agreement.
Petitioner Wellex even admits that the facts of
the case are fairly undisputed [and that] [i]t is
only the parties respective [understanding] of
these facts that are not in harmony.153
The second preambular clause of the First
Memorandum of Agreement reads:
WHEREAS, WELLEX, on the other hand, has
current airline operation in the Philippines
through its majority-owned subsidiary Air
Philippines International Corporation and the
latters subsidiary, Air Philippines Corporation,
and in like manner also desires to expand its
operation in the Asian regional markets; a
Memorandum of Agreement on ______, a certified
28
copy of which is attached hereto as Annex A
and is hereby made an integral part hereof,
Page
which sets forth, among others, the basis for
WELLEXs present ownership of shares in Air
Philippines International
Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement
reads:
I. Basic Agreement. - The parties agree to
develop a long-term business relationship initially
through the creation of joint interest in airline
operations as well as in property development
projects in the Philippines to be implemented as
follows:
(a) U-LAND shall acquire from WELLEX, shares of
stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION (APIC) equivalent to at least 35%
of the outstanding capital stock of APIC, but in
any case, not less than 1,050,000,000 shares (the
APIC Shares).
(b) U-LAND shall acquire from WELLEX, shares of
stock of PHILIPPINE ESTATES CORPORATION
(PEC) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case,
not less than 490,000,000 shares (the PEC
Shares).
(c) U-LAND shall enter into a joint development
agreement with PEC to jointly pursue property
development projects in the Philippines.
(d) U-LAND shall be given the option to acquire
from WELLEX shares of stock of EXPRESS
SAVINGS BANK (ESB) up to 40% of the
outstanding capital stock of ESB (the ESB
Shares) under terms to be mutually agreed.155
The First Memorandum of Agreement contained
the following stipulations regarding the share
purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within
forty (40) days from date hereof (unless
extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase
Agreement (SHPA) covering the acquisition by
U-LAND of the APIC Shares and PEC Shares
(collectively, the Subject Shares). Without
prejudice to any subsequent agreement between
the parties, the purchase price for the APIC
Shares to be reflected in the SHPA shall be
THIRTY CENTAVOS (P0.30) per share and that for
the PEC Shares at SIXTY FIVE CENTAVOS (P0.65)
per share.
The purchase price for the Subject Shares as
reflected in the SHPA shall be paid in full upon
execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such
other terms and conditions governing the
acquisition of the Subject Shares to be provided
in a separate instrument.
The transfer of the Subject Shares shall be
effected to U-LAND provided that: (i) the
purchase price reflected in the SHPA has been
fully paid; (ii) the Philippine Securities &
Exchange Commission (SEC) shall have approved
the issuance of the Subject Shares; and (iii) any
required approval by the Taiwanese government
of the acquisition by U-LAND of the Subject
Shares shall likewise have been
obtained.156 (Emphasis supplied)
As for the joint development agreement, the First
Memorandum of Agreement contained the
following stipulation:
4. Joint Development Agreement with PEC.
Simultaneous with the execution of the SHPA,
U-LAND and PEC shall execute a joint
development agreement (JDA) to pursue
property development projects in the
Philippines. The JDA shall cover specific housing
and other real estate development projects as the
parties shall agree. All profits derived from the
projects covered by the JDA shall be shared
equally between U-LAND and PEC.U-LAND shall,
not later than May 22, 1998, remit the sum of
US$3.0 million as initial funding for the aforesaid
development projects against delivery by
WELLEX of 57,000,000 shares of PEC as security
for said amount in accordance with Section 9
below.157 (Emphasis provided)
Finally, the parties included the following
stipulation in case of a failure to agree on the
terms of the share purchase agreement or the
joint development agreement:
9. Validity. - In the event the parties are unable to
agree on the terms of the SHPA and/or the JDA
within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be
effective and the parties released from their
respective undertakings herein, except that
WELLEX shall refund the US$3.0 million provided
under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover
on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.158
Section 2 of the First Memorandum of Agreement
clearly provides that the execution of a share
purchase agreement containing mutually
29
agreeable terms and conditions must first be
accomplished by the parties before respondent U-
Page
Land purchases any of the shares owned by
petitioner Wellex. A perusal of the stipulation on
its face allows for no other interpretation.
The need for a share purchase agreement to be
entered into before payment of the full purchase
price can further be discerned from the other
stipulations of the First Memorandum of
Agreement.
In Section 1, the parties agreed to enter into a
joint business venture, through entering into two
(2) agreements: a share purchase agreement and
a joint development agreement. However,
Section 1 provides that in the share purchase
agreement, U-LAND shall acquire from WELLEX,
shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION (APIC)
equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less
than 1,050,000,000 shares (the APIC Shares).159
As for the PEC shares, Section 1 provides that
respondent U-Land shall purchase from petitioner
Wellex shares of stock of PHILIPPINE ESTATES
CORPORATION (PEC) equivalent to at least 35%
of the outstanding capital stock of PEC, but in any
case, not less than 490,000,000 shares (the PEC
Shares).160
The use of the terms at least 35% of the
outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares and at least
35% of the outstanding capital stock of PEC, but
in any case, not less than 490,000,000 shares
means that the parties had yet to agree on the
number of shares of stock to be purchased.
The need to execute a share purchase
agreement before payment of the purchase price
of the shares is further shown by the clause,
[w]ithout prejudice to any subsequent
agreement between the parties, the purchase
price for the APIC Shares to be reflected in the
[share purchase agreement]shall be... P0.30 per
share and that for the PEC Shares at... P0.65 per
share.161 This phrase clearly shows that the final
price of the shares of stock was to be reflected in
the share purchase agreement. There being no
share purchase agreement executed, respondent
U-Land was under no obligation to begin payment
or remittance of the purchase price of the shares
of stock.
Petitioner Wellex argues that the use of upon in
Section 2162 of the First Memorandum of
Agreement means that respondent U-Land must
pay the purchase price of the shares of stock in
its entirety when they are transferred. This
argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract
should admit of several meanings, it shall be
understood as bearing that import which is most
adequate to render it effectual.
It is necessary for the parties to first agree on the
final purchase price and the number of shares of
stock to be purchased before respondent U-Land
is obligated to pay or remit the entirety of the
purchase price. Thus, petitioner Wellexs
argument cannot be sustained since the parties
to the First Memorandum of Agreement were
clearly unable to agree on all the terms
concerning the share purchase agreement. It
would be absurd for petitioner Wellex to expect
payment when respondent U-Land did not yet
agree to the final amount to be paid for the
totality of an indeterminate number of shares of
stock.
The third paragraph of Section 2163 provides that
the transfer of the Subject Shares shall take
place upon the fulfillment of certain conditions,
such as full payment of the purchase price as
reflected in the [share purchase agreement].
The transfer of the shares of stock is different
from the execution of the share purchase
agreement. The transfer of the shares of stock
requires full payment of the final purchase price.
However, that final purchase price must
be reflected in the share purchase
agreement. The execution of the share purchase
agreement will require the existence of
a finalagreement.
In its Answer with counterclaim before the trial
court, petitioner Wellex argued that the payment
of the shares of stock was to begin within the 40-
day period. Petitioner Wellexs claim is not in any
of the stipulations of the contract. Its subsequent
claim that respondent U-Land was actually
required to remit a total of US$20.5 million is
likewise bereft of basis since there was no final
purchase price of the shares of stock that was
agreed upon, due to the failure of the parties to
execute a share purchase agreement. In addition,
the parties had yet to agree on the final number
of APIC shares and PEC shares that respondent U-
Land would acquire from petitioner Wellex.
Therefore, the understanding of the parties
captured in the First Memorandum of Agreement
was to continue their negotiation to determine
the price and number of the shares to be
purchased. Had it been otherwise, the specific
30
number or percentage of shares and its price
should already have been provided clearly and
Page
unambiguously. Thus, they agreed to a 40-day
period of negotiation.
Section 9 of the First Memorandum of Agreement
explicitly provides that:
In the event the parties are unable to agree on
the terms of the SHPA and/or the JDA within forty
(40) days from date hereof (or such period as the
parties shall mutually agree), this Memorandum
of Agreement shall cease to be effective and the
parties released from their respective
undertakings herein . . .164
The First Memorandum of Agreement was, thus,
an agreement to enter into a share purchase
agreement. The share purchase agreement
should have been executed by the parties within
40 days from May 16, 1998, the date of the
signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9
lapsed, the efficacy of the First Memorandum of
Agreement ceased. The parties were released
from their respective undertakings. Thus, from
June 25, 1998, the date when the 40-day period
lapsed, the parties were no longer obliged to
negotiate with each other in order to enter into a
share purchase agreement.
However, Section 9 provides for another period
within which the parties could still be required to
negotiate. The clause or such period as the
parties shall mutually agree means that the
parties should agree on a period within which to
continue negotiations for the execution of an
agreement. This means that after the 40-day
period, the parties were still allowed to
negotiate, provided that they could mutually
agree on a new period of negotiation.
Based on the records and the findings of the
lower courts, the parties were never able to arrive
at a specific period within which they would bind
themselves to enter into an agreement. There
being no other period specified, the parties were
no longer under any obligation to negotiate and
enter into a share purchase agreement. Section 9
clearly freed them from this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-
day period were, therefore, independent of the
First Memorandum of Agreement.
In its Appellants Brief before the Court of
Appeals, petitioner Wellex mentioned that there
was an implied partial objective or real
novation165 of the First Memorandum of
Agreement. Petititoner did not raise this
argument of novation before this court. In Gayos
v. Gayos,166 this court held that it is a cherished
rule of procedure that a court should always
strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the
seeds of future litigation[.]167
Articles 1291 and 1292 of the Civil Code provides
how obligations may be modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor.
Article 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other.
In Arco Pulp and Paper Co. v. Lim,168 this court
discussed the concept of novation:
Novation extinguishes an obligation between two
parties when there is a substitution of objects or
debtors or when there is subrogation of the
creditor. It occurs only when the new contract
declares so in unequivocal terms or that the
old and the new obligations be on every point
incompatible with each other.
. . . .
For novation to take place, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new
contract.
3) The old contract must be extinguished
4) There must be a valid new contract.
Novation may also be express or implied. It is
31
express when the new obligation declares in
unequivocal terms that the old obligation is
Page
extinguished. It is implied when the new
obligation is incompatible with the old one on
every point. The test of incompatibility is whether
the two obligations can stand together, each one
with its own independent existence. (Emphasis
from the original omitted)
Because novation requires that it be clear and
unequivocal, it is never presumed, thus:
I
n the civil law setting, novatio is literally
construed as to make new. So it is deeply rooted
in the Roman Law jurisprudence, the principle
novatio non praesumitur that novation is
never presumed. At bottom, for novation to be a
jural reality, its animus must be ever
present, debitum pro debito basically
extinguishing the old obligation for the new
one.169(Emphasis from the original omitted,
citations omitted)
Applying Arco, it is clear that there was no
novation of the original obligation.
After the 40-day period, the parties did not enter
into any subsequent written agreement that was
couched in unequivocal terms. The transaction of
the First Memorandum of Agreement involved
large amounts of money from both parties. The
parties sought to participate in the air travel
industry, which has always been highly regulated
and subject to the strictest commercial scrutiny.
Both parties admitted that their counsels
participated in the crafting and execution of the
First Memorandum of Agreement as well as in the
efforts to enter into the share purchase
agreement. Any subsequent agreement would be
expected to be clearly agreed upon with their
counsels assistance and in writing, as well.
Given these circumstances, there was no express
novation.
There was also no implied novation of the original
obligation. In Quinto v. People:170
[N]o specific form is required for an implied
novation, and all that is prescribed by law would
be an incompatibility between the two contracts.
While there is really no hard and fast rule to
determine what might constitute to be a
sufficient change that can bring about novation,
the touchstone for contrariety, however, would be
an irreconcilable incompatibility between the old
and the new obligations.
. . . The test of incompatibility is whether or not
the two obligations can stand together, each one
having its independent existence. If they cannot,
they are incompatible and the latter obligation
novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and
not merely accidental. The incompatibility must
take place in any of the essential elements of the
obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient
to extinguish the original obligation.171 (Citations
omitted)
There was no incompatibility between the original
terms of the First Memorandum of Agreement and
the remittances made by respondent U-Land for
the shares of stock. These remittances were
actually made with the view that both parties
would subsequently enter into a share purchase
agreement. It is clear that there was no
subsequent agreement inconsistent with the
provisions of the First Memorandum of
Agreement.
Thus, no implied novation took place. In previous
cases,172 this court has consistently ruled that
presumed novation or implied novation is not
deemed favorable. In United Pulp and Paper Co.,
Inc. v. Acropolis Central Guaranty Corporation:173
Neither can novation be presumed in this case.
As explained in Dugo v. Lopena:
Novation by presumption has never been
favored. To be sustained, it need be established
that the old and new contracts are incompatible
in all points, or that the will to novate appears by
express agreement of the parties or in acts of
similar import.174 (Emphasis supplied)
There being no novation of the First Memorandum
of Agreement, respondent U-Land is entitled to
the return of the amount it remitted to petitioner
Wellex. Petitioner Wellex is likewise entitled to the
return of the certificates of shares of stock and
titles of land it delivered to respondent U-Land.
This is simply an enforcement of Section 9 of the
First Memorandum of Agreement. Pursuant to
Section 9, only the execution of a final share
purchase agreement within either of the periods
contemplated by this stipulation will justify the
parties retention of what they received or would
receive from each other.
III
Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
32
received
Page
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not
happen at a determinate time shall render the
obligation effective from the moment the time
indicated has elapsed, or if it has become evident
that the event cannot occur.
If no time has been fixed, the condition shall be
deemed fulfilled at such time as may have
probably been contemplated, bearing in mind the
nature of the obligation.
Article 1185 provides that if an obligation is
conditioned on the non-occurrence of a particular
event at a determinate time, that obligation
arises (a) at the lapse of the indicated time, or (b)
if it has become evident that the event cannot
occur.
Petitioner Wellex and respondent U-Land bound
themselves to negotiate with each other within a
40-day period to enter into a share purchase
agreement. If no share purchase agreement was
entered into, both parties would be freed from
their respective undertakings.
It is the non-occurrence or non-execution of the
share purchase agreement that would give rise to
the obligation to both parties to free each other
from their respective undertakings. This includes
returning to each other all that they received in
pursuit of entering into the share purchase
agreement.
At the lapse of the 40-day period, the parties
failed to enter into a share purchase agreement.
This lapse is the first circumstance provided for in
Article 1185 that gives rise to the obligation.
Applying Article 1185, the parties were then
obligated to return to each other all that they had
received in order to be freed from their respective
undertakings.
However, the parties continued their negotiations
after the lapse of the 40-day period. They made
subsequent transactions with the intention to
enter into the share purchase agreement. Despite
that, they still failed to enter into a share
purchase agreement. Communication between
the parties ceased, and no further transactions
took place.
It became evident that, once again, the parties
would not enter into the share purchase
agreement. This is the second circumstance
provided for in Article 1185. Thus, the obligation
to free each other from their respective
undertakings remained.
As such, petitioner Wellex is obligated to return
the remittances made by respondent U-Land, in
the same way that respondent U-Land is
obligated to return the certificates of shares of
stock and the land titles to petitioner Wellex.
IV
Respondent U-Land is praying for
rescission or resolution under Article
1191, and not rescission under Article
1381
The arguments of the parties generally rest on
the propriety of the rescission of the First
Memorandum of Agreement. This requires a
clarification of rescission under Article 1191, and
rescission under Article 1381 of the Civil Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period
This is understood to be without prejudice to the
rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
Articles 1380 and 1381, on the other hand,
provide an enumeration of rescissible contracts:
ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law
ART. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians
whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the
things which are the object thereof;
(2) Those agreed upon in representation of
absentees, if the latter suffer the lesion stated in
the preceding number;
33
(3) Those undertaken in fraud of creditors when
Page
the latter cannot in any other manner collect the
claims due them;
(4) Those which refer to things under litigation if
they have been entered into by the defendant
without the knowledge and approval of the
litigants or of competent judicial authority;
(5) All other contracts specially declared by law to
be subject to rescission.
Article 1383 expressly provides for the subsidiary
nature of rescission:
ART. 1383. The action for rescission is subsidiary;
it cannot be instituted except when the party
suffering damage has no other legal means to
obtain reparation for the same.
Rescission itself, however, is defined by Article
1385:
ART. 1385. Rescission creates the obligation to
return the things which were the object of the
contract, together with their fruits, and the price
with its interest; consequently, it can be carried
out only when he who demands rescission can
return whatever he may be obliged to restore.
Neither shall rescission take place when the
things which are the object of the contract are
legally in the possession of third persons who did
not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
Gotesco Properties v. Fajardo175 categorically
stated that Article 1385 is applicable to Article
1191:
At this juncture, it is noteworthy to point out that
rescission does not merely terminate the contract
and release the parties from further obligations to
each other, but abrogates the contract from its
inception and restores the parties to their original
positions as if no contract has been made.
Consequently, mutual restitution, which entails
the return of the benefits that each party may
have received as a result of the contract, is thus
required. To be sure, it has been settled that the
effects of rescission as provided for in Article
1385 of the Code are equally applicable to cases
under Article 1191, to wit:
x x x x
Mutual restitution is required in cases
involving rescission under Article 1191.This
means bringing the parties back to their original
status prior to the inception of the contract.
Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation
to return the things which were the object
of the contract, together with their fruits,
and the price with its interest;
consequently, it can be carried out only
when he who demands rescission can return
whatever he may be obligated to restore.
Neither shall rescission take place when the
things which are the object of the contract are
legally in the possession of third persons who did
not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
This Court has consistently ruled that this
provision applies to rescission under Article
1191:
[S]ince Article 1385 of the Civil Code expressly
and clearly states that rescission creates the
obligation to return the things which were the
object of the contract, together with their fruits,
and the price with its interest, the Court finds no
justification to sustain petitioners position that
said Article 1385 does not apply to rescission
under Article 1191. x x x176(Emphasis from the
original, citations omitted)
Rescission, as defined by Article 1385, mandates
that the parties must return to each other
everything that they may have received as a
result of the contract. This pertains to rescission
or resolution under Article 1191, as well as the
provisions governing all forms of rescissible
contracts.
For Article 1191 to be applicable, however, there
must be reciprocal prestations as distinguished
frommutual obligations between or among the
parties. A prestation is the object of an obligation,
and it is the conduct required by the parties to do
or not to do, or to give.177 Parties may be mutually
obligated to each other, but the prestations of
these obligations are not necessarily reciprocal.
The reciprocal prestations must necessarily
emanate from the same cause that gave rise to
the existence of the contract. This distinction is
best illustrated by an established authority in civil
law, the late Arturo Tolentino:
This article applies only to reciprocal obligations.
It has no application to every case where two
persons are mutually debtor and creditor of each
other. There must be reciprocity between them.
34
Both relations must arise from the same cause,
such that one obligation is correlative to the
Page
other. Thus, a person may be the debtor of
another by reason of an agency, and his creditor
by reason of a loan. They are mutually obligated,
but the obligations are not reciprocal. Reciprocity
arises from identity of cause, and necessarily the
two obligations are created at the same
time.178 (Citation omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a
clear necessity of the cause in perfecting the
existence of an obligation:
An obligation is a juridical necessity to give, to do
or not to do (Art. 1156, Civil Code). The obligation
is constituted upon the concurrence of the
essential elements thereof, viz: (a) The vinculum
juris orjuridical tie which is the efficient cause
established by the various sources of obligations
(law, contracts, quasi-contracts, delicts and
quasi-delicts); (b) the object which is the
prestation or conduct, required to be observed (to
give, to do or not to do); and (c) the subject-
persons who, viewed from the demandability of
the obligation, are the active (obligee) and the
passive (obligor) subjects.180
The cause is the vinculum juris or juridical tie that
essentially binds the parties to the obligation.
This linkage between the parties is a binding
relation that is the result of their bilateral actions,
which gave rise to the existence of the contract.
The failure of one of the parties to comply with its
reciprocal prestation allows the wronged party to
seek the remedy of Article 1191. The wronged
party is entitled to rescission or resolution under
Article 1191, and even the payment of damages.
It is a principal action precisely because it is a
violation of the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand,
pertain to rescission where creditors or even third
persons not privy to the contract can file an
action due to lesion or damage as a result of the
contract. In Ong v. Court of Appeals,181 this court
defined rescission:
Rescission, as contemplated in Articles 1380, et
seq., of the New Civil Code, is a remedy granted
by law to the contracting parties and even to
third persons, to secure the reparation of
damages caused to them by a contract, even if
this should be valid, by restoration of things to
their condition at the moment prior to the
celebration of the contract. It implies a contract,
which even if initially valid, produces a lesion or a
pecuniary damage to someone.182 (Citations
omitted)
Ong elaborated on the confusion between
rescission or resolution under Article 1191 and
rescission under Article 1381:
On the other hand, Article 1191 of the New Civil
Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those
which arise from the same cause, and in which
each party is a debtor and a creditor of the other,
such that the obligation of one is dependent upon
the obligation of the other. They are to be
performed simultaneously such that the
performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission
of reciprocal obligations under Article 1191 of the
New Civil Code should be distinguished from
rescission of contracts under Article 1383.
Although both presuppose contracts validly
entered into and subsisting and both require
mutual restitution when proper, they are not
entirely identical.
While Article 1191 uses the term rescission, the
original term which was used in the old Civil
Code, from which the article was based, was
resolution. Resolution is a principal action which
is based on breach of a party, while rescission
under Article 1383 is a subsidiary action limited
to cases of rescission for lesion under Article
1381 of the New Civil Code, which expressly
enumerates the following rescissible contracts:
1. Those which are entered into by guardians
whenever the wards whom they represent
suffer lesion by more than one fourth of
the value of the things which are the
object thereof;
2. Those agreed upon in representation of
absentees, if the latter suffer the lesion
stated in the preceding number;
3. Those undertaken in fraud of creditors
when the latter cannot in any manner
collect the claims due them;
4. Those which refer to things under
litigation if they have been entered into by
the defendant without the knowledge and
approval of the litigants or of competent
judicial authority; [and]
5. All other contracts specially declared by
law to be subject to
rescission.183 (Citations omitted)

35
When a party seeks the relief of rescission as
provided in Article 1381, there is no need for
Page
reciprocal prestations to exist between or among
the parties. All that is required is that the contract
should be among those enumerated in Article
1381 for the contract to be considered rescissible.
Unlike Article 1191, rescission under Article 1381
must be a subsidiary action because of Article
1383.
Contrary to petitioner Wellexs argument, this is
not rescission under Article 1381 of the Civil
Code. This case does not involve prejudicial
transactions affecting guardians, absentees, or
fraud of creditors. Article 1381(3) pertains in
particular to a series of fraudulent actions on the
part of the debtor who is in the process of
transferring or alienating property that can be
used to satisfy the obligation of the debtor to the
creditor. There is no allegation of fraud for
purposes of evading obligations to other
creditors. The actions of the parties involving the
terms of the First Memorandum of Agreement do
not fall under any of the enumerated contracts
that may be subject of rescission.
Further, respondent U-Land is pursuing rescission
or resolution under Article 1191, which is a
principal action. Justice J.B.L. Reyes concurring
opinion in the landmark case of Universal Food
Corporation v. Court of Appeals184 gave a
definitive explanation on the principal character
of resolution under Article 1191 and the
subsidiary nature of actions under Article 1381:
The rescission on account of breach of
stipulations is not predicated on injury to
economic interests of the party plaintiff but on
the breach of faith by the defendant, that violates
the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be
scanned without disclosing anywhere that the
action for rescission thereunder is subordinated
to anything other than the culpable breach of his
obligations by the defendant. This rescission is a
principal action retaliatory in character, it being
unjust that a party be held bound to fulfill his
promises when the other violates his. As
expressed in the old Latin aphorism: Non
servanti fidem, non est fides servanda. Hence,
the reparation of damages for the breach is
purely secondary.
On the contrary, in the rescission by reason
of lesion or economic prejudice, the cause of
action is subordinated to the existence of that
prejudice, because it is the raison detreas well as
the measure of the right to rescind. Hence, where
the defendant makes good the damages caused,
the action cannot be maintained or continued, as
expressly provided in Articles 1383 and 1384. But
the operation of these two articles is limited to
the cases of rescission for lesin enumerated in
Article 1381 of the Civil Code of the Philippines,
and does not apply to cases under Article 1191.185
Rescission or resolution under Article 1191,
therefore, is a principal action that is immediately
available to the party at the time that the
reciprocal prestation was breached. Article 1383
mandating that rescission be deemed a
subsidiary action cannot be applicable to
rescission or resolution under Article 1191.
Thus, respondent U-Land correctly sought the
principal relief of rescission or resolution under
Article 1191. The obligations of the parties gave
rise to reciprocal prestations, which arose from
the same cause: the desire of both parties to
enter into a share purchase agreement that
would allow both parties to expand their
respective airline operations in the Philippines
and other neighboring countries.
V
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance
its arguments against respondent U-Lands right
to rescission are not in point.
Suria v. Intermediate Appellate Court is not
applicable. In that case, this court specifically
stated that the parties entered into a contract of
sale, and their reciprocal obligations had already
been fulfilled:186
There is no dispute that the parties entered into a
contract of sale as distinguished from a contract
to sell.
By the contract of sale, the vendor obligates
himself to transfer the ownership of and to
deliver a determinate thing to the buyer, who in
turn, is obligated to pay a price certain in money
or its equivalent (Art. 1458, Civil Code). From
the respondents own arguments, we note
that they have fully complied with their part
of the reciprocal obligation. As a matter of
fact, they have already parted with the title
as evidenced by the transfer certificate of
title in the petitioners name as of June 27,
1975.
The buyer, in turn, fulfilled his end of the bargain
when he executed the deed of mortgage. The
payments on an installment basis secured by the
execution of a mortgage took the place of a cash
36
payment. In other words, the relationship
between the parties is no longer one of buyer and
Page
seller because the contract of sale has been
perfected and consummated. It is already one of
a mortgagor and a mortgagee. In consideration of
the petitioners promise to pay on installment
basis the sum they owe the respondents, the
latter have accepted the mortgage as security for
the obligation.
The situation in this case is, therefore, different
from that envisioned in the cited opinion of
Justice J.B.L. Reyes. The petitioners breach of
obligations is not with respect to the perfected
contract of sale but in the obligations created by
the mortgage contract. The remedy of rescission
is not a principal action retaliatory in character
but becomes a subsidiary one which by law is
available only in the absence of any other legal
remedy. (Art. 1384, Civil Code).
Foreclosure here is not only a remedy accorded
by law but, as earlier stated, is a specific
provision found in the contract between the
parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission
under Article 1384 and not rescission or
resolution under Article 1191. In addition, the
First Memorandum of Agreement is not a contract
to sell shares of stock. It is an agreement to
negotiate with the view of entering into a share
purchase agreement.
Villaflor v. Court of Appeals is not applicable
either. In Villaflor, this court held that non-
payment of consideration of contracts only gave
rise to the right to sue for collection, but this non-
payment cannot serve as proof of a simulated
contract.188 The case did not rule that the vendor
has no obligation to deliver the thing sold if the
buyer fails to fully pay the price required by the
contract. In Villaflor:
Petitioner insists that nonpayment of the
consideration in the contracts proves their
simulation. We disagree. Nonpayment, at most,
gives him only the right to sue for collection.
Generally, in a contract of sale, payment of the
price is a resolutory condition and the remedy of
the seller is to exact fulfillment or, in case of a
substantial breach, to rescind the contract under
Article 1191 of the Civil Code. However, failure to
pay is not even a breach, but merely an event
which prevents the vendors obligation to convey
title from acquiring binding force. 189 (Citations
omitted)
This courts statement in Villaflor regarding
rescission under Article 1191 was a mere obiter
dictum. InLand Bank of the Philippines v.
Suntay,190 this court discussed the nature of
an obiter dictum:
An obiter dictum has been defined as an opinion
expressed by a court upon some question of law
that is not necessary in the determination of the
case before the court. It is a remark made, or
opinion expressed, by a judge, in his decision
upon a cause by the way, that is, incidentally or
collaterally, and not directly upon the question
before him, or upon a point not necessarily
involved in the determination of the cause, or
introduced by way of illustration, or analogy or
argument. It does not embody the resolution or
determination of the court, and is made without
argument, or full consideration of the point. It
lacks the force of an adjudication, being a mere
expression of an opinion with no binding force for
purposes of res judicata.191 (Citations omitted)
Petitioner Wellexs reliance on Padilla v. Spouses
Paredes and Spouses Agustin v. Court of
Appeals is also misplaced. In these cases, this
court held that there can be no rescission for an
obligation that is non-existent, considering that
the suspensive condition that will give rise to the
obligation has not yet happened. This is based on
an allegation that the contract involved is a
contract to sell. In a contract to sell, the failure of
the buyer to pay renders the contract without
effect. A suspensive condition is one whose non-
fulfillment prevents the existence of the
obligation.192 Payment of the purchase price,
therefore, constitutes a suspensive condition in a
contract to sell. Thus, this court held that non-
remittance of the full price allowed the seller to
withhold the transfer of the thing to be sold.
In this case, the First Memorandum of Agreement
is not a contract to sell. Entering into the share
purchase agreement or the joint development
agreement remained a stipulation that the parties
themselves agreed to pursue in the First
Memorandum of Agreement.
Based on the First Memorandum of Agreement,
the execution of the share purchase agreement
was necessary to put into effect respondent U-
Lands purchase of the shares of stock. This is the
stipulation indicated in this memorandum of
agreement. There was no suspensive condition of
full payment of the purchase price needed to
execute either the share purchase agreement or
the joint development agreement. Upon the
execution of the share purchase, the obligation of
petitioner Wellex to transfer the shares of stock
and of respondent U-Land to pay the price of
these shares would have arisen.
 37
Enforcement of Section 9 of the First
Memorandum of Agreement has the same effect
Page
as rescission or resolution under Article 1191 of
the Civil Code. The parties are obligated to return
to each other all that they may have received as
a result of the breach by petitioner Wellex of the
reciprocal obligation. Therefore, the Court of
Appeals did not err in affirming the rescission
granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary
Attachment, the lower court found that petitioner
Wellex committed fraud by inducing respondent
U-Land to purchase APIC shares and PEC shares
and by leading the latter to believe that APC was
a subsidiary of APIC.
Determining the existence of fraud is not
necessary in an action for rescission or resolution
under Article 1191. The existence of fraud must
be established if the rescission prayed for is the
rescission under Article 1381.
However, the existence of fraud is a question that
the parties have raised before this court. To settle
this question with finality, this court will examine
the established facts and determine whether
petitioner Wellex indeed defrauded respondent U-
Land.
In Tankeh v. Development Bank of the
Philippines,193 this court enumerated the relevant
provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code
as:
x x x fraud when, through insidious words or
machinations of one of the contracting parties,
the other is induced to enter into a contract
which, without them, he would not have agreed
to.
This is followed by the articles which provide legal
examples and illustrations of fraud.
. . . .
Art. 1340. The usual exaggerations in trade, when
the other party had an opportunity to know the
facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does
not signify fraud, unless made by an expert and
the other party has relied on the formers special
knowledge. (n)
Art. 1342. Misrepresentation by a third person
does not vitiate consent, unless such
misrepresentation has created substantial
mistake and the same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is
not fraudulent but may constitute error. (n)
The distinction between fraud as a ground for
rendering a contract voidable or as basis for an
award of damages is provided in Article 1344:
In order that fraud may make a contract voidable,
it should be serious and should not have been
employed by both contracting parties.
Incidental fraud only obliges the person
employing it to pay damages. (1270)194
Tankeh further discussed the degree of evidence
needed to prove the existence of fraud:
[T]he standard of proof required is clear and
convincing evidence. This standard of proof is
derived from American common law. It is less
than proof beyond reasonable doubt (for criminal
cases) but greater than preponderance of
evidence (for civil cases). The degree of
believability is higher than that of an ordinary
civil case. Civil cases only require a
preponderance of evidence to meet the required
burden of proof. However, when fraud is alleged
in an ordinary civil case involving contractual
relations, an entirely different standard of proof
needs to be satisfied. The imputation of fraud in a
civil case requires the presentation of clear and
convincing evidence. Mere allegations will not
suffice to sustain the existence of fraud. The
burden of evidence rests on the part of the
plaintiff or the party alleging fraud. The quantum
of evidence is such that fraud must be clearly and
convincingly shown.195
To support its allegation of fraud, Mr. Tseng,
respondent U-Lands witness before the trial
court, testified that Mr. Gatchalian approached
respondent U-Land on two (2) separate meetings
to propose entering into an agreement for joint
airline operations in the Philippines. Thus, the
parties entered into the First Memorandum of
Agreement. Respondent U-Land primarily anchors
its allegation of fraud against petitioner Wellex on
the existence of the second preambular clause of
the First Memorandum of Agreement.
In its Appellants Brief before the Court of
Appeals, petitioner Wellex admitted that [t]he
amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares. 196 In that brief,
it argued that the parties were already in the
38
process of partially executing the First
Memorandum of Agreement.
Page
As held in Tankeh, there must be clear and
convincing evidence of fraud. Based on the
established facts, respondent U-Land was unable
to clearly convince this court of the existence of
fraud.
Respondent U-Land had every reasonable
opportunity to ascertain whether APC was indeed
a subsidiary of APIC. This is a multimillion dollar
transaction, and both parties admitted that the
share purchase agreement underwent several
draft creations. Both parties admitted the
participation of their respective counsels in the
drafting of the First Memorandum of Agreement.
Respondent U-Land had every opportunity to
ascertain the ownership of the shares of stock.
Respondent U-Land itself admitted that it was not
contesting petitioner Wellexs ownership of the
APIC shares or APC shares; hence, it was not
contesting the existence of the Second
Memorandum of Agreement. Upon becoming
aware of petitioner Wellexs representations
concerning APICs ownership or control of APC as
a subsidiary, respondent U-Land continued to
make remittances totalling the amount sought to
be rescinded. It had the option to opt out of
negotiations after the lapse of the 40-day period.
However, it proceeded to make the remittances
to petitioner Wellex and proceed with
negotiations.
Respondent U-Land was not defrauded by
petitioner Wellex to agree to the First
Memorandum of Agreement. To constitute fraud
under Article 1338, the words and machinations
must have been so insidious or deceptive that the
party induced to enter into the contract would not
have agreed to be bound by its terms if that party
had an opportunity to be aware of the truth.197
Respondent U-Land was already aware that APC
was not a subsidiary of APIC after the 40-day
period. Still, it agreed to be bound by the First
Memorandum of Agreement by making the
remittances from June 30 to September 25,
1998.198 Thus, petitioner Wellexs failure to inform
respondent U-Land that APC was not a subsidiary
of APIC when the First Memorandum of
Agreement was being executed did not constitute
fraud.
However, the absence of fraud does not mean
that petitioner Wellex is free of culpability. By
failing to inform respondent U-Land that APC was
not yet a subsidiary of APIC at the time of the
execution of the First Memorandum of
Agreement, petitioner Wellex violated Article
1159 of the Civil Code. Article 1159 reads:
ART. 1159. Obligations arising from contracts
have the force of law between the contracting
parties and should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality
with no technical meaning or statutory definition,
and it encompasses, among other things, an
honest belief, the absence of malice and the
absence of design to defraud or to seek an
unconscionable advantage. It implies honesty of
intention, and freedom from knowledge of
circumstances which ought to put the holder
upon inquiry. The essence of good faith lies in an
honest belief in the validity of ones right,
ignorance of a superior claim and absence of
intention to overreach another.200 (Citations
omitted)
It was incumbent upon petitioner Wellex to
negotiate the terms of the pending share
purchase agreement in good faith. This duty
included providing a full disclosure of the nature
of the ownership of APIC in APC. Unilaterally
compelling respondent U-Land to remit money to
finalize the transactions indicated in the Second
Memorandum of Agreement cannot constitute
good faith.
The absence of fraud in a transaction does not
mean that rescission under Article 1191 is not
proper. This case is not an action to declare the
First Memorandum of Agreement null and void
due to fraud at the inception of the contract
or dolo causante. This case is not an action for
fraud based on Article 1381 of the Civil Code.
Rescission or resolution under Article 1191 is
predicated on the failure of one of the parties in a
reciprocal obligation to fulfill the prestation as
required by that obligation. It is not based on
vitiation of consent through fraudulent
misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay
the amount of US$3 million to petitioner Wellex
does not justify the actions of the latter in
refusing to return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract
39
shall be interpreted together, attributing to the
doubtful ones that sense which may result from
Page
all of them taken jointly.
The execution of the joint development
agreement was contingent on the execution of
the share purchase agreement. This is provided
for in Section 4 of the First Memorandum of
Agreement, which stated that the execution of
the two agreements is [s]imultaneous.201 Thus,
the failure of the share purchase agreements
execution would necessarily mean the failure of
the joint development agreements execution
Section 9 of the First Memorandum of Agreement
provides that should the parties fail to execute
the agreement, they would be released from their
mutual obligations. Had respondent U-Land paid
the US$3 million and petitioner Wellex delivered
the 57,000,000 PEC shares for the purpose of the
joint development agreement, they would have
been obligated to return these to each other.
Section 4 and Section 9 of the First Memorandum
of Agreement must be interpreted together. Since
the parties were unable to agree on a final share
purchase agreement and there was no exchange
of money or shares of stock due to the continuing
negotiations, respondent U-Land was no longer
obliged to provide the money for the real estate
development projects. The payment of the US$3
million was for pursuing the real estate
development projects under the joint
development agreement. There being no joint
development agreement, the obligation to deliver
the US$3 million and the delivery of the PEC
shares for that purpose were no longer incumbent
upon the parties.
VIII
Respondent U-Land was not
obligated to exhaust the securities
given by petitioner Wellex
Contrary to petitioner Wellexs assertion, there is
no obligation on the part of respondent U-Land to
exhaust the securities given by petitioner
Wellex. No such meeting of the minds to create a
guarantee or surety or any other form of security
exists. The principal obligation is not a loan or an
obligation subject to the conditions of sureties or
guarantors under the Civil Code. Thus, there is no
need to exhaust the securities given to
respondent U-Land, and there is no need for a
legal condition where respondent U-Land should
pursue other remedies.
Neither petitioner Wellex nor respondent U-Land
stated that there was already a transfer of
ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the
delivery of the shares of stock and the land titles
were not in the nature of a pledge or
mortgage.202 It received the certificates of shares
of stock and the land titles with an understanding
that the parties would subsequently enter a share
purchase agreement. There being no share
purchase agreement, respondent U-Land is
obligated to return the certificates of shares of
stock and the land titles to petitioner Wellex.
The parties are bound by the 40-day period
provided for in the First Memorandum of
Agreement. Adherence by the parties to Section 9
of the First Memorandum of Agreement has the
same effect as the rescission or resolution prayed
for and granted by the trial court.
Informal acts are prone to ambiguous legal
interpretation. This will be based on the say-so of
each party and is a fragile setting for good
business transactions. It will contribute to the
unpredictability of the market as it would provide
courts with extraordinary expectations to
determine the business actors intentions. The
parties appear to be responsible businessmen
who know that their expectations and obligations
should be clearly articulated between them. They
have the resources to engage legal
representation. Indeed, they have reduced their
agreement in writing.
Petitioner Wellex now wants this court to define
obligations that do not appear in these
instruments. We cannot do so. This court cannot
interfere in the bargains, good or bad, entered
into by the parties. Our duty is to affirm legal
expectations, not to guarantee good business
judgments.
WHEREFORE, the petition is DENIED. The
Decision of the Regional Trial Court in Civil Case
No. 99-1407 and the Decision of the Court of
Appeals in CA-G.R. CV No. 74850
are AFFIRMED. Costs against petitioner The
Wellex Group, Inc.

40
SALONTE, vs. COMMISSION ON AUDIT
Page
The Case
This is a petition for review filed under Rule 64
assailing the February 15, 2008 Decision 1 and
November 5, 2012 Resolution,2 denominated as
Decision Nos. 2008-018 and 2012-190,
respectively, of the Commission on Audit (COA).
The assailed issuances affirmed the Notice of
Disallowance No. (ND) 2000-002-101(97) dated
November 14, 2001 issued by Rexy M. Ramos,
COA State Auditor IV, pursuant to COA
Assignment Order No. 2000-63.3
The Facts
On April 26, 1989, the City of Mandaue and F.F.
Cruz and Co., Inc. (F.F. Cruz) entered into a
Contract of Reclamation4 in which F.F. Cruz, in
consideration of a defined land sharing formula
thus stipulated, agreed to undertake, at its own
expense, the reclamation of 180 hectares, more
or less, of foreshore and submerged lands
fromthe Cabahug Causeway in that city. The
timetables, i.e., commencement of the contract
and project completion, are provided in
paragraphs 2 and 15 of the Contract which state:
2. COMMENCEMENT. Work on the reclamation
shall commence not later than [July 1989], after
thiscontract shall be ratified by the Sanggunian
Panlungsod;
xxxx
15. CONTRACT DURATION. The project is
estimated to be completed in six (6) years: (3
years for the dredge-filling and seawall
construction and 3 years for the infrastructures
completion). However, if all the infrastructures
within the OWNERS share of the project are
already completed within the six (6) year period
agreed upon, any extension of time for works to
bedone within the share of the DEVELOPERS,
shall be at the discretion of the DEVELOPERS, as
a growing city, changes in requirements of the lot
buyers are inevitable.
On a best effort basis, the construction of
roadways, drainage system and open spaces in
the area designated as share of the City of
Mandaue, shall be completed not later than
December 31, 1991. (emphasis supplied)
Subsequently, the parties inked inrelation to the
above project a Memorandum of Agreement
(MOA) dated October 24, 19895 whereby the City
of Mandaue allowed F.F. Cruz to put up structures
on a portion of a parcel of land owned by the city
for the use of and to house F.F. Cruz personnel
assigned at the project site, subject to terms
particularly provided in paragraphs 3, 4 and 5 of
the MOA:
3) That [F.F. Cruz] desires to use a portion
of a parcel of land of the [City of Mandaue]
described under paragraph 1 hereof to the
extent of 495 square meters x x x to be
used by them in the construction of their
offices to house its personnel to supervise
the Mandaue City Reclamation Project x x
x.
xxxx
4) That the [City of Mandaue] agrees to
the desire of [F.F. Cruz] to use a portion of
the parcel of land described under
paragraph 1 by [F.F. Cruz] for the latter to
use for the construction of their offices to
house its personnel to supervise the said
Mandaue City Reclamation Project with no
rental to be paid by [F.F. Cruz] to the [City
of Mandaue].
5) That the [City of Mandaue] and [F.F.
Cruz] have agreed that upon the
completion of the Mandaue City
Reclamation Project, all improvements
introduced by [F.F. Cruz] to the portion of
the parcel of land owned by the [City of
Mandaue]as described under paragraph 3
hereof existing upon the completion of the
said Mandaue City Reclamation Project
shall ipso facto belong to the [City of
Mandaue] in ownershipas compensation
for the use of said parcel of land by [F.F.
Cruz] without any rental whatsoever.
(emphasis supplied)
Pursuant to the MOA, F.F. Cruz proceeded to
construct the contemplated housing units and
other facilities which included a canteen and a
septic tank.
Later developments saw the City of Mandaue
undertaking the Metro Cebu Development Project
II (MCDP II), part of which required the widening
of the Plaridel Extension Mandaue Causeway.
However, the structures and facilities built by F.F.
Cruz subject of the MOA stood in the direct path
of the road widening project. Thus, the
Department of Public Works and Highways
(DPWH) and Samuel B. Darza, MCDP II project
41
director, entered into an Agreement to Demolish,
Remove and Reconstruct Improvement dated July
Page
23, 19976 with F.F. Cruz whereby the latter would
demolish the improvements outside of the
boundary of the road widening project and, in
return, receive the total amount of PhP
1,084,836.42 in compensation.
Accordingly, petitioner Rowena B.Rances (now
Rowena RancesSolante), Human Resource
Management Officer III, prepared and, with the
approval of Samuel B. Darza (Darza), then issued
Disbursement Voucher (DV) No. 102-07-88-97
dated July 24, 19977 for PhP 1,084,836.42 in favor
of F.F. Cruz. In the voucher, Solante certified that
the expense covered by it was "necessary, lawful
and incurred under my direct supervision."
Thereafter, Darza addressed a letter-complaint to
the Office of the Ombudsman, Visayas, inviting
attention to several irregularities regarding the
implementation of MCDP II. The letter was
referred to the COA which then issued
Assignment Order No. 2000-063 for a team to
audit the accounts of MCDP II. Following an audit,
the audit team issued Special Audit Office (SAO)
Report No. 2000-28, par. 5 of which states:
F.F. Cruz and Company, Inc. was
paid P1,084,836.42 for the cost of the property
affected by the widening of Plaridel Extension,
Mandaue Causeway. However, under Section 5 of
its MOA with Mandaue City, the former was no
longer the lawful owner of the properties at the
time the payment was made.8
Based on the above findings, the SAO audit team,
through Rexy Ramos, issued the adverted ND
2000-002-101-(97)9 disallowing the payment of
PhP 1,084,836.42 to F.F. Cruz and naming that
company, Darza and Solante liable for the
transaction. Therefrom, Solante sought
reconsideration, while F.F. Cruz appealed, but the
motion for reconsideration and the appeal were
jointly denied in Legal and Adjudication Office
(LAO) Local Decision No. 2004-040 dated March
5, 2004, which F.F. Cruz in time appealed to COA
Central.
In the meantime, the adverted letter-complaint of
Darza was upgraded as an Ombudsman case,
docketed as OMB-V-C-03-0173-C, against Solante,
et al., albeit the Ombudsman, by Resolution of
June 29, 2006,10 would subsequently dismiss the
same for lack of merit.
The Ruling of the Commission on Audit
In its February 15, 2008 Decision, 11 the COA, as
indicated at the outset, affirmed ND 2000-002-
101-97 on the strength of the following premises:
From the above provision of the MOA, it is clear
that the improvements introduced by F.F. Cruz x x
x would be owned by the City upon completion of
the project which under the Contract of
reclamation should have been in 1995. However,
the project was not completed in 1995 and even
in 1997 when MDCP paid for these improvements.
The fact that the reclamation project had not yet
been completed or turned over to the City of
Mandaue by F.F. Cruz in 1997 or two years after it
should have been completed, does not negate
the right over such improvements by the City x x
x. Clearly, the intention of the stipulation is for F.F.
Cruz x x x to compensate the government for the
use of the land on which the office, pavement,
canteen, extension shed, house and septic tank
were erected. Thus, to make the government pay
for the cost of the demolished improvements will
defeat the intention of parties as regards
compensation due from the contractor for its use
of [the] subject land. Under Article 1315 of the
Civil Code, from the moment a contract is
perfected, the parties are bound to the fulfillment
to what has been expressly stipulated and all the
consequences which according to their nature,
may be in keeping with good faith, usage and law.
Thus, even if the contractual stipulations may
turn out to be financially disadvantageous to any
party, such will not relieve any or both parties
fromtheir contractual obligations.12(emphasis
supplied)
From such decision, Solante filed a Motion for
Reconsideration dated June 28, 2010 purportedly
with Audit Team Leader, Leila Socorro P.
Domantay. This motion was denied by the COA in
a Resolution dated November 5, 2012 13wherein
the commission held:
x x x The arguments of Ms. Solante that as long
as the Project has not yet been turned over, the
ownership of the said improvements would not be
acquired yet by the City would put the entire
contract at the mercy of F.F. Cruz & Co., Inc., thus,
negating the mutuality of contracts principle
expressed in Article 1308 ofthe New Civil Code,
which states:
Art. 1308. The contracts must bindboth
contracting parties; its validity or compliance
cannot be leftto the will of one of them.
On February 15, 2013, Solante received a Notice
of Finality of Decision (NFD)14 stating that the COA
Decision dated February 15, 2008 and Resolution
dated November 5, 2012 have become final and
42
executory, a copy of the Resolution having been
served on the parties on November 9, 2012 by
Page
registered mail. Notably, Solante never received a
copy of the COA Resolution. She came to get one
only on May 8, 2013 after inquiring from the Cebu
Central Post Office, which, in a Certification of
Deliverydated May 8, 2013,15 stated that the
registered mail containing said copy was in fact
not delivered.
Hence, the instant petition.
The Issue
The resolution of the present controversy rests on
the determination of a sole issue: who between
the City ofMandaue and F.F. Cruz owned during
the period material the properties that were
demolished.
The Courts Ruling
The petition is meritorious. The COA and its audit
team obviously misread the relevant stipulations
of the MOA in relation to the provisions on project
completion and termination of contract of the
Mandaue-F.F. Cruz reclamation contract.
Essentially, the COA is alleging that the Contract
of Reclamation establishes an obligation on the
part of F.F. Cruz to finish the project within the
allotted period of six (6) years from contract
execution in August 1989. Prescinding from this
premise, the COA would conclude that after the
six (6)-year period, F.F. Cruz is automatically
deemed to be in delay, the contract considered
as completed, and the ownership of the
structures built in accordance with the MOA
transferred to the City of Mandaue.
COAs basic position and the arguments holding it
together is untenable.
On this point, the Civil Code provision on
obligations with a period is relevant. Article 1193
thereof provides:
Article 1193. Obligations for whose fulfillment a
day certain has been fixed, shall be demandable
only when that day comes.
Obligations with a resolutory period take effect at
once, but terminate upon arrival of the day
certain.
A day certain is understood to bethat which must
necessarily come, although it may not be known
when.
If the uncertainty consists in whether the day will
come or not, the obligation is conditional, and it
shall be regulated by the rules of the preceding
Section. (emphasis supplied)
A plain reading of the Contract ofReclamation
reveals that the six (6)-year period provided for
projectcompletion, or, with like effect, termination
of the contract was a mere estimateand cannot
be considered a period or a "day certain" inthe
context of the aforequoted Art. 1193. To be clear,
par. 15 of the Contract of Reclamation states:
"[T]he project is estimated to be completed in six
(6) years." As such, the lapse of six (6) years from
the perfection of the contract did not, by itself,
make the obligation to finish the reclamation
project demandable, such as to put the obligor in
a state of actionable delay for its inability to
finish. Thus, F.F. Cruz cannot be deemed to be in
delay. Parenthetically, the Ombudsman, in a
Resolution of June 29, 2006 in OMB-V-C-03-0173-
C, espoused a similar view in dismissing the
complaint against Solante, thus:
A careful reading of the pertinent section of the
Contract of Reclamation between F.F. Cruz and
Mandaue City, however, would confirm
respondents Rances-Solante[s]and Sungahids
view that herein respondent Cruz was still the
owner of the subject properties at the time these
were demolished. Indeed, the Contract specifies
that the six (6)-year period was no more than an
estimate of the project completion. It was not a
fixed period agreed upon. Being so, the mere
lapse of six (6) years from the execution of the
Contract, did not by itself deem the reclamation
project completed, muchless bring about the
fulfillment of the condition stipulated in the MOA
(on the shift of ownership over the demolished
properties). Herein respondent Cruz, and/or his
company, at least on this particular regard, can
be said to be still the owner of the structures
along Plaridel Extension x x x, when these were
demolished to give way to road widening. It was
nothing but equitable that they get compensated
for the damages caused by the
demolition.16 (emphasis supplied)
Put a bit differently, the lapse of six (6) years
from the perfection of the subject reclamation
contract, withoutmore, could not have
automatically vested Mandaue City, under the
MOA, with ownership of the structures.
Moreover, even if we consider the allotted six (6)
43
years within which F.F. Cruz was supposed to
completethe reclamation project, the lapse
Page
thereof does not automatically mean thatF.F. Cruz
was in delay. As may be noted, the City of
Mandaue never madea demand for the fulfillment
of its obligation under the Contract of
Reclamation. Article 1169 of the Civil Code on the
interaction of demand and delay and the
exceptions to the requirement of demand
relevantly states:
Article 1169. Those obliged to deliver orto do
something incur in delay from the time the
obligeejudicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the law
expressly so declares; or
(2) When from the nature and the
circumstances of the obligation it appears
that the designation of the time when the
thing is to be delivered or the service is to
be rendered was a controlling motive for
the establishment of the contract; or
(3) When demand would be useless, as
when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready
to comply in a proper manner with what is
incumbent upon him. From the momentone of the
parties fulfills his obligation, delay by the other
begins.
Thus, in J Plus Asia Development Corporation v.
Utility Assurance Corporation,17 the Court has
held:
In this jurisdiction, the following requisites must
be present in order that the debtor may be in
default: (1) that the obligation be demandable
and already liquidated;(2) that the debtor delays
performance; and (3) that the creditor requires
the performance judicially or extrajudicially.
(emphasis supplied)
In the instant case, the records are bereft of any
document whence to deduce that the City of
Mandaue exactedfrom F.F. Cruz the fulfillment of
its obligation under the reclamation contract. And
to be sure, not one of the exceptions to the
requisite demand under Art. 1169 is established,
let alone asserted. On the contrary, the then city
mayor of Mandaue, no less, absolved F.F. Cruz
from incurring under the premises in delay. In his
affidavit dated July 9, 2004,18 then Mayor Ouano
stated:
That although x x x the reclamation
wasestimatedto be completed in six years ending
in 1995, the said project however, was not fully
completed when the demolition of the mentioned
improvements of [F.F. Cruz] was made x x x [and
in fact] up to now the said Mandaue Reclamation
Project has not yet been fully completed and
turned over to the City of Mandaue.
x x x [S]ince at the time of the demolition the
said improvements actually belonged to [F.F.
Cruz] and the City of Mandaue has no claim
whatsoever on the said payment x x x for the
demolished improvements. (emphasis supplied)
As it were, the Mandaue-F.F.Cruz MOA states that
the structures built by F .F. Cruz on the property
of the city will belong to the latter only upon the
completion of the project. Clearly, the completion
of the project is a suspensive condition that has
yet to be fulfilled.1wphi1 Until the condition
arises, ownership of the structures properly
pertains to F .F. Cruz.
To be clear, the MOA does not state that the
structures shall inure in ownership to the City of
Mandaue after the lapse of six ( 6) years from the
execution of the Contract of Reclamation. What
the MOA does provide is that ownership of the
structures shall vest upon, or ipso facto belong to,
the City of Mandaue when the Contract of
Reclamation shall have been completed.
Logically, before such time, or until the agreed
reclamation project is actually finished, F.F. Cruz
owns the structures. The payment of
compensation for the demolition thereof is
justified. The disallowance of the payment is
without factual and legal basis. COA then gravely
abused its discretion when it decreed the
disallowance.
WHEREFORE, the instant petition is GRANTED.
Accordingly, the assailed February 15, 2008
Decision, November 5, 2012 Resolution, and
Notice of Disallowance No. 2000-002-101 (97)
dated November 14, 2001 issued by the
Commission on Audit are hereby REVERSED and
SET ASIDE.
No costs.
 latter would then pay, subject to stipulated

44
deductions, within 30 days from receipt thereof.

Page
The parties agreed that the requests of
HRCC for payment should include progress
accomplishment of its completed works as
approved by FFCCI. Additionally, they agreed to
conduct a joint measurement of the completed
works of HRCC together with the representative
of DPWH and consultants to arrive at a common
quantity.

Thereafter, HRCC commenced the

construction of the works pursuant to the
Subcontract Agreement.
F.F. CRUZ & CO., INC., G.R. No.
Petitioner, 187521 On September 17, 2004, HRCC submitted
to FFCCI its first progress billing in the amount
Present: of P2,029,081.59 covering the construction works
it completed from August 16 to September 15,
- versus - CARPIO, J., 2004.[4] However, FFCCI asserted that the DPWH
Chairperson, was then able to evaluate the completed works of
BRION, HRCC only until July 25, 2004. Thus, FFCCI only
PEREZ, approved the gross amount of P423,502.88 for
HR CONSTRUCTION SERENO, and payment. Pursuant to the Subcontract
CORP., REYES, JJ. Agreement, FFCCI deducted from the said gross
Respondent. amount P42,350.29 for retention and P7,700.05
Promulgated: for expanded withholding tax leaving a net
payment in the amount of P373,452.54. This
March 14, 2012 amount was paid by FFCCI to HRCC on December
3, 2004.[5]
This is a petition for review
on certiorari under Rule 45 of the Rules of Court FFCCI and the DPWH then jointly
filed by petitioner F.F. Cruz & Co., Inc. (FFCCI) evaluated the completed works of HRCC for the
assailing the Decision[1] dated February 6, 2009 period of July 26 to September 25, 2004. FFCCI
and Resolution[2] dated April 13, 2009 issued by claimed that the gross amount due for the
the Court of Appeals (CA) in CA-G.R. SP No. completed works during the said period
91860. was P2,008,837.52. From the said gross amount
due, FFCCI deducted therefrom P200,883.75 for
The Antecedent Facts retention and P36,524.07 for expanded
withholding tax leaving amount of P1,771,429.45
Sometime in 2004, FFCCI entered into a as the approved net payment for the said
contract with the Department of Public Works and period. FFCCI paid this amount on December 21,
Highways (DPWH) for the construction of the 2004.[6]
Magsaysay Viaduct, known as the Lower Agusan
Development Project. On August 9, 2004, FFCCI, On October 29, 2004, HRCC submitted to
in turn, entered into a Subcontract FFCCI its second progress billing in the amount
Agreement[3] with HR Construction Corporation of P1,587,760.23 covering its completed works
(HRCC) for the supply of materials, labor, from September 18 to 25, 2004.[7] FFCCI did not
equipment, tools and supervision for the pay the amount stated in the second progress
construction of a portion of the said project called billing, claiming that it had already paid HRCC for
the East Bank Levee and Cut-Off Channel in the completed works for the period stated
accordance with the specifications of the main therein.
contract.
On even date, HRCC submitted its third
The subcontract price agreed upon by the progress billing in the amount of P2,569,543.57
parties amounted to P31,293,532.72. Pursuant to for its completed works from September 26 to
the Subcontract Agreement, HRCC would submit October 25, 2004.[8] FFCCI did not immediately
to FFCCI a monthly progress billing which the pay the amount stated in the third progress
billing, claiming that it still had to evaluate the

45
works accomplished by HRCC. On June 16, 2005, an Arbitral Tribunal was
created composed of Engineer Ricardo B. San

Page
On November 25, 2004, HRCC submitted Juan, Joven B. Joaquin and Attorney Alfredo F.
to FFCCI its fourth progress billing in the amount Tadiar, with the latter being appointed as the
of P1,527,112.95 for the works it had completed Chairman.
from October 26 to November 25, 2004.
In a Preliminary Conference held on July 5,
Subsequently, FFCCI, after it had 2005, the parties defined the issues to be
evaluated the completed works of HRCC from resolved in the proceedings before the CIAC as
September 26 to November 25, 2004, approved follows:
the payment of the gross amount
of P1,505,570.99 to HRCC. FFCCI deducted 1. What is the correct amount of
therefrom P150,557.10 for retention [HRCCs] unpaid progress
and P27,374.02 for expanded withholding tax billing?
leaving a net payment of P1,327,639.87, which
amount was paid to HRCC on March 11, 2005.[9] 2. Did [HRCC] comply with the
conditions set forth in
Meanwhile, HRCC sent FFCCI a subparagraph 4.3 of the
letter[10] dated December 13, 2004 demanding Subcontract Agreement for the
the payment of its progress billings in the total submission,
amount of P7,340,046.09, plus interests, within evaluation/processing and
three days from receipt thereof. Subsequently, release of payment of its
HRCC completely halted the construction of the progress billings?
subcontracted project after taking its Christmas
break on December 18, 2004. 3. Did [HRCC] stop work on the
project?
On March 7, 2005, HRCC, pursuant to the
arbitration clause in the Subcontract Agreement, 3.1 If so, is the work
filed with the Construction Industry Arbitration stoppage justified?
Commission (CIAC) a Complaint [11] against FFCCI
praying for the payment of the following: (1) 3.2 If so, what was the
overdue obligation in the reduced amount percentage and value of
of P4,096,656.53 as of December 15, 2004 plus [HRCCs] work
legal interest; (2) P1,500,000.00 as attorneys accomplishment at the
fees; (3)P80,000.00 as acceptance fee and time it stopped work on
representation expenses; and (4) costs of the project?
litigation.
4. Who between the parties
In its Answer,[12] FFCCI claimed that it no should bear the cost of
longer has any liability on the Subcontract arbitration or in what proportion
Agreement as the three payments it made to should it be shared by the
HRCC, which amounted to P3,472,521.86, already parties?[13]
represented the amount due to the latter in view
of the works actually completed by HRCC as
shown by the survey it conducted jointly with the Likewise, during the said Preliminary
DPWH. FFCCI further asserted that the delay in Conference, HRCC further reduced the amount of
the payment processing was primarily overdue obligation it claimed from FFCCI
attributable to HRCC inasmuch as it presented to P2,768,916.66. During the course of the
unverified work accomplishments contrary to the proceedings before the CIAC, HRCC further
stipulation in the Subcontract Agreement reduced the said amount to P2,635,397.77 the
regarding requests for payment. exact difference between the total amount of
HRCCs progress billings (P6,107,919.63) and
Likewise, FFCCI maintained that HRCC FFCCIs total payments in favor of the latter
failed to comply with the condition stated under (P3,472,521.86).
the Subcontract Agreement for the payment of
the latters progress billings, i.e. joint The CIAC Decision
measurement of the completed works, and,
hence, it was justified in not paying the amount On September 6, 2005, after due
stated in HRCCs progress billings. proceedings, the CIAC rendered a Decision [14] in
favor of HRCC, the decretal portion of which that there is no back-to-

46
reads: back provision in the sub-contract
as basis for this sequential

Page
WHEREFORE, judgment is payment arrangement and,
hereby rendered in favor of the therefore, [FFCCIs] imposition
Claimant HR CONSTRUCTION thereof by withholding payment to
CORPORATION and AWARD made [HRCC] until it is first paid by the
on its monetary claim against project owner on the Main
Respondent F.F. CRUZ & CO., Contract, clearly violates said sub-
INC., as follows: contract. It [is] this unauthorized
implementation of a back-to-back
[P]2,239,452.63 as the payment scheme that is seen to be
balance of its unpaid billings and the reason for [FFCCIs] non-
payment of the third progress
101,161.57 as billings.
reimbursement of the arbitration
costs. It is accordingly
the holding of this Arbitral Tribunal
[P]2,340,614.20 Total that [FFCCI] is not justified in
due the Claimant withholding payment of [HRCCs]
third progress billing for this
Interest on the foregoing scheme that [HRCC] has not
amount [P]2,239,452.63 shall be agreed to in the sub-contract
paid at the rate of 6% per annum agreement x x x.
from the date of this Decision. After
finality of this Decision, interest at xxx
the rate of 12% per annum shall be
paid thereon until full payment of The total retention money
the awarded amount shall have deducted by [FFCCI] from [HRCCs]
been made x x x. three progress billings, amounts
to [P]395,945.14 x x x. The
SO ORDERED.[15] retention money is part of [HRCCs]
progress billings and must,
therefore, be credited to this
The CIAC held that the payment method account. The two amounts
adopted by FFCCI is actually what is known as the (deductions and net payments)
back-to-back payment scheme which was not total [P]3,868,467.00 x x x. This
agreed upon under the Subcontract Agreement. represents the total gross
As such, the CIAC ruled that FFCCI could not payments that should be credited
impose upon HRCC its valuation of the works and deducted from the total gross
completed by the latter. The CIAC gave credence billings to arrive at what has not
to HRCCs valuation of its completed works as been paid to the [HRCC]. This
stated in its progress billings. Thus: results in the amount
of [P]2,239,452.63 ([P]6,107,919.
During the trial, [FFCCIs] 63 - [P]3,868,467.00) as the correct
Aganon admitted that [HRCCs] balance of [HRCCs] unpaid billings.
accomplishments are included in [16]

its own billings to the DPWH

together with a substantial mark-
up to cover overhead costs and
profit. He further admitted that it is
only when DPWH approves its
(Respondents) billings covering
[HRCCs] scope of work and pays for
them, that [FFCCI] will in turn pay
[HRCC] for its billings on the sub-
contracted works.
On clarificatory questioning
by the Tribunal, [FFCCI] admitted
Further, the CIAC ruled that FFCCI had
already waived its right under the Subcontract
Agreement to require a joint measurement of
HRCCs completed works as a condition precedent
to the payment of the latters progress billings.
Hence:
[FFCCI] admits that in all
three instances where it paid
[HRCC] for its progress billings, it
never required compliance with the
 aforequoted contractual provision construction works on the project as the failure of

47
of a prior joint quantification. FFCCI to pay its progress billings gave the former
Such repeated omission may the right to rescind the Subcontract Agreement.

Page
reasonably be construed as
a waiver by [FFCCI] of its FFCCI sought a reconsideration[19] of the
contractual right to require said February 6, 2009 Decision but it was denied
compliance of said condition and it by the CA in its Resolution[20] dated April 13,
is now too late in the day to so 2009.
impose it. Article 6 of the Civil Code
expressly provides that rights may Issues
be waived unless the waiver is
contrary to law, public order, public In the instant petition, FFCCI submits the
policy, morals or good customs. following issues for this Courts resolution:
The tribunal cannot see any such
violation in this case. [I.]

xxx x x x First, [d]oes the act of

[FFCCI] in conducting a verification
[FFCCIs] omission to enforce survey of [HRCCs] billings in the
the contractually required condition latters presence amount to a
of payment, has led [HRCC] to waiver of the right of [FFCCI] to
believe it to be true that indeed verify and approve said billings?
[FFCCI] has waived the condition of What, if any, is the legal
joint quantification and, therefore, significance of said act?
[FFCCI] may not be permitted to
falsify such resulting position.[17] [II.]

x x x Second, [d]oes the

Likewise, the CIAC held that FFCCIs non- payment of [FFCCI] to [HRCC]
payment of the progress billings submitted by based on the results of the above
HRCC gave the latter the right to rescind the mentioned verification survey
Subcontract Agreement and, accordingly, HRCCs result in the former being obliged
work stoppage was justified. It further opined to accept whatever
that, in effect, FFCCI had ratified the right of accomplishment was reported by
HRCC to stop the construction works as it did not the latter?
file any counterclaim against HRCC for liquidated
damages arising therefrom. [III.]

FFCCI then filed a petition for review with x x x Third, [d]oes the mere
CA assailing the foregoing disposition by the comparison of the payments made
CIAC. by [FFCCI] with the contested
progress billings of [HRCC] amount
The CA Decision to an adjudication of the
controversy between the parties?
On February 6, 2009, the CA rendered the
herein assailed Decision[18] denying the petition [IV.]
for review filed by FFCCI. The CA agreed with the
CIAC that FFCCI had waived its right under the x x x Fourth, [d]oes the
Subcontract Agreement to require a joint failure of [FFCCI] to interpose a
quantification of HRCCs completed works. counterclaim against [HRCC] for
liquidated damages due to the
The CA further held that the amount due latters work stoppage, amount to a
to HRCC as claimed by FFCCI could not be given ratification of such work stoppage?
credence since the same was based on a survey
of the completed works conducted without the [V.]
participation of HRCC. Likewise, being the main
contractor, it ruled that it was the responsibility of x x x Fifth, [d]id the [CA]
FFCCI to include HRCC in the joint measurement disregard or overlook significant
of the completed works. Furthermore, the CA held and material facts which would
that HRCC was justified in stopping its affect the result of the litigation?[21]

48
In sum, the crucial issues for this Courts
Page
resolution are: first, what is the effect of FFCCIs
non-compliance with the stipulation in the
Subcontract Agreement requiring a joint
quantification of the works completed by HRCC
on the payment of the progress billings submitted
by the latter; and second, whether there was a
valid rescission of the Subcontract Agreement by
HRCC.
The Courts Ruling
The petition is not meritorious.
Procedural Issue:
Finality and Conclusiveness of the CIACs
Factual Findings
Before we delve into the substantial issues raised
by FFCCI, we shall first address the procedural
issue raised by HRCC. According to HRCC, the
instant petition merely assails the factual findings
of the CIAC as affirmed by the CA and,
accordingly, not proper subjects of an appeal
under Rule 45 of the Rules of Court. It likewise
pointed out that factual findings of the CIAC,
when affirmed by the CA, are final and conclusive
upon this Court.
Generally, the arbitral award of CIAC is final
and may not be appealed except on
questions of law.
Executive Order (E.O.) No. 1008 [22] vests upon the
CIAC original and exclusive jurisdiction over
disputes arising from, or connected with,
contracts entered into by parties involved in
construction in the Philippines. Under Section 19
of E.O. No. 1008, the arbitral award of CIAC "shall
be final and inappealable except on questions of
law which shall be appealable to the Supreme
Court."[23]
In Hi-Precision Steel Center, Inc. v. Lim Kim Steel
Builders, Inc.,[24] we explained raison d etre for
the rule on finality of the CIACs arbitral award in
this wise:
Voluntary arbitration
involves the reference of a dispute
to an impartial body, the members
of which are chosen by the parties
themselves, which parties freely
consent in advance to abide by the
arbitral award issued after
proceedings where both parties
had the opportunity to be heard.
The basic objective is to provide a
speedy and inexpensive method of
settling disputes by allowing the
parties to avoid the formalities,
delay, expense and aggravation
which commonly accompany
ordinary litigation, especially
litigation which goes through the
entire hierarchy of courts.
Executive Order No. 1008 created
an arbitration facility to which the
construction industry in
the Philippines can have recourse.
The Executive Order was enacted
to encourage the early and
expeditious settlement of disputes
in the construction industry, a
public policy the implementation of
which is necessary and important
for the realization of national
development goals.
Aware of the objective of
voluntary arbitration in the labor
field, in the construction industry,
and in any other area for that
matter, the Court will not assist
one or the other or even both
parties in any effort to subvert or
defeat that objective for their
private purposes. The Court will not
review the factual findings of an
arbitral tribunal upon the artful
allegation that such body had
"misapprehended the facts" and
will not pass upon issues which are,
at bottom, issues of fact, no matter
how cleverly disguised they might
be as "legal questions." The parties
here had recourse to arbitration
and chose the arbitrators
themselves; they must have had
confidence in such arbitrators. x x
x[25] (Citation omitted)
Thus, in cases assailing the arbitral award
rendered by the CIAC, this Court may only pass
upon questions of law. Factual findings of
construction arbitrators are final and conclusive
and not reviewable by this Court on appeal. This
rule, however, admits of certain exceptions.
In Spouses David v. Construction Industry and
Arbitration Commission,[26] we laid down the
instances when this Court may pass upon the
factual findings of the CIAC, thus:
We reiterate the rule that factual
findings of construction arbitrators
are final and conclusive and not
 reviewable by this Court on appeal,
49
except when the petitioner proves
affirmatively that: (1) the award
Page
was procured by corruption, fraud
or other undue means; (2) there
was evident partiality or corruption
of the arbitrators or of any of them;
(3) the arbitrators were guilty of
misconduct in refusing to postpone
the hearing upon sufficient cause
shown, or in refusing to hear
evidence pertinent and material to
the controversy; (4) one or more of
the arbitrators were disqualified to
act as such under section nine of
Republic Act No. 876 and willfully
refrained from disclosing such
disqualifications or of any other
misbehavior by which the rights of
any party have been materially
prejudiced; or (5) the arbitrators
exceeded their powers, or so
imperfectly executed them, that a
mutual, final and definite award
upon the subject matter submitted
to them was not made. x x
x[27] (Citation omitted)
Issues on the proper interpretation of the
terms of the Subcontract Agreement involve
questions of law.
A question of law arises when there is doubt as
to what the law is on a certain state of facts,
while there is a question of fact when the doubt
arises as to the truth or falsity of the alleged
facts. For a question to be one of law, the same
must not involve an examination of the
probative value of the evidence presented by
the litigants or any of them. The resolution of the
issue must rest solely on what the law provides
on the given set of circumstances. Once it is
clear that the issue invites a review of the
evidence presented, the question posed is one of
fact.[28]
On the surface, the instant petition
appears to merely raise factual questions as it
mainly puts in issue the appropriate amount that
is due to HRCC. However, a more thorough
analysis of the issues raised by FFCCI would show
that it actually asserts questions of law.
FFCCI primarily seeks from this Court a
determination of whether amount claimed by
HRCC in its progress billing may be enforced
against it in the absence of a joint measurement
of the formers completed works. Otherwise
stated, the main question advanced by FFCCI is
this: in the absence of the joint measurement
agreed upon in the Subcontract Agreement, how
will the completed works of HRCC be verified and
the amount due thereon be computed?
The determination of the foregoing
question entails an interpretation of the terms of
the Subcontract Agreement vis--vis the respective
rights of the parties herein. On this point, it
should be stressed that where an interpretation of
the true agreement between the parties is
involved in an appeal, the appeal is in effect an
inquiry of the law between the parties, its
interpretation necessarily involves a question of
law.[29]
Moreover, we are not called upon to
examine the probative value of the evidence
presented before the CIAC. Rather, what is
actually sought from this Court is an
interpretation of the terms of the Subcontract
Agreement as it relates to the dispute between
the parties.
First Substantive Issue: Effect of Non-
compliance with the Joint Quantification
Requirement on the Progress Billings of
HRCC
Basically, the instant issue calls for a
determination as to which of the parties
respective valuation of accomplished works
should be given credence. FFCCI claims that its
valuation should be upheld since the same was
the result of a measurement of the completed
works conducted by it and the DPWH. On the
other hand, HRCC maintains that its valuation
should be upheld on account of FFCCIs failure to
observe the joint measurement requirement in
ascertaining the extent of its completed works.
The terms of the Subcontract Agreement
should prevail.
In resolving the dispute as to the proper valuation
of the works accomplished by HRCC, the
primordial consideration should be the terms of
the Subcontract Agreement. It is basic that if the
terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.[30]
In Abad v. Goldloop Properties, Inc.,[31] we
stressed that:
A courts purpose in examining
a contract is to interpret the
intent of the contracting
 parties, as objectively Requests for the payment

50
manifested by them. The by the [HRCC] shall
process of interpreting a contract include progress

Page
requires the court to make a accomplishment of
preliminary inquiry as to whether completed works (unit of
the contract before it is ambiguous. work accomplished x unit
A contract provision is ambiguous if cost) as approved by
it is susceptible of two reasonable [FFCCI]. Cut-off date of
alternative interpretations. Where monthly billings shall be
the written terms of the every 25th of the month and
contract are not ambiguous joint measurement shall
and can only be read one way, be conducted with the
the court will interpret the DPWHs representative,
contract as a matter of law. If Consultants, FFCCI and
the contract is determined to be [HRCC] to arrive at a
ambiguous, then the interpretation common/agreed quantity.
of the contract is left to the court, [33]
(Emphasis supplied)
to resolve the ambiguity in the light
of the intrinsic evidence.
[32]
(Emphasis supplied and citation Pursuant to the terms of payment agreed
omitted) upon by the parties, FFCCI obliged itself to pay
the monthly progress billings of HRCC within 30
days from receipt of the same. Additionally, the
Article 4 of the Subcontract Agreement, in part, monthly progress billings of HRCC should indicate
contained the following stipulations: the extent of the works completed by it, the same
being essential to the valuation of the amount
ARTICLE 4 that FFCCI would pay to HRCC.

SUBCONTRACT PRICE The parties further agreed that the extent

4.1 The total SUBCONTRACT Price of HRCCs completed works that would be
shall be THIRTY ONE MILLION indicated in the monthly progress billings should
TWO HUNDRED NINETY be determined through a joint measurement
THREE THOUSAND FIVE conducted by FFCCI and HRCC together with the
HUNDRED THIRTY TWO PESOS representative of DPWH and the consultants.
& 72/100 ONLY
([P]31,293,532.72) inclusive It is the responsibility of FFCCI to call for
of Value Added Tax x x x. the joint measurement of HRCCs completed
works.
xxx

4.3 Terms of Payment It bears stressing that the joint measurement

contemplated under the Subcontract Agreement
FFCCI shall pay [HRCC] should be conducted by the parties herein
within thirty (30) days together with the representative of the DPWH and
upon receipt of the the consultants. Indubitably, FFCCI, being the
[HRCCs] Monthly Progress main contractor of DPWH, has the responsibility
Billings subject to deductions to request the representative of DPWH to conduct
due to ten percent (10%) the said joint measurement.
retention, and any other sums
that may be due and On this score, the testimony of Engineer
recoverable by FFCCI from Antonio M. Aganon, Jr., project manager of FFCCI,
[HRCC] under this during the reception of evidence before the CIAC
SUBCONTRACT. In all cases, is telling, thus:
however, two percent (2%)
expanded withholding tax on MR. J. B. JOAQUIN:
the [HRCCs] income will be
deducted from the monthly Engr. Aganon, earlier there was a
payments. stipulation that in all the four
billings, there never was a joint
quantification.

51
PROF. A. F. TADIAR:
Page
He admitted that earlier. Pinabasa
ko sa kanya.
ENGR. R. B. SAN JUAN:
The joint quantification was done
only between them and DPWH.
xxxx
ENGR. AGANON:
Puwede ko po bang i-explain
sandali lang po regarding lang po
doon sa quantification na iyon?
Basically po as main contractor
of DPWH, we are the ones who
[are] requesting for joint
survey quantification with the
owner, DPWH. Ngayon po,
although wala sa papel na nag-
witness and [HRCC] still the same
po, nandoon din po sila during that
time, kaya lang ho . . .
MR. J. B. JOAQUIN:
Hindi pumirma?
ENGR. AGANON:
Hindi sila puwede pumirma kasi ho
kami po ang contractor ng DPWH
hindi sila.[34] (Emphasis supplied)
FFCCI had waived its right to demand for a
joint measurement of HRCCs completed
works under the Subcontract Agreement.
The CIAC held that FFCCI, on account of its failure
to demand the joint measurement of HRCCs
completed works, had effectively waived its right
to ask for the conduct of the same as a
conditionsine qua non to HRCCs submission of its
monthly progress billings.
We agree.
In People of the Philippines v. Donato,[35] this
Court explained the doctrine of waiver in this
wise:
Waiver is defined as "a
voluntary and intentional
relinquishment or abandonment of
a known existing legal right,
advantage, benefit, claim or
privilege, which except for such
waiver the party would have
enjoyed; the voluntary
abandonment or surrender, by a
capable person, of a right known
by him to exist, with the intent that
such right shall be surrendered and
such person forever deprived of its
benefit; or such conduct as
warrants an inference of the
relinquishment of such right;
or the intentional doing of an
act inconsistent with claiming
it."
As to what rights and
privileges may be waived, the
authority is settled:
x x x the doctrine of waiver extends to rights
and privileges of any character, and, since the
word waiver covers every conceivable right, it
is the general rule that a person may
waive any matter which affects his
property, and any alienable right or
privilege of which he is the owner or
which belongs to him or to which he is
legally entitled, whether secured by
contract, conferred with statute, or
guaranteed by constitution, provided such
rights and privileges rest in the
individual, are intended for his sole
benefit, do not infringe on the rights of
others, and further provided the waiver
of the right or privilege is not forbidden
by law, and does not contravene public
policy; and the principle is recognized that
everyone has a right to waive, and agree to
waive, the advantage of a law or rule made
solely for the benefit and protection of the
individual in his private capacity, if it can be
dispensed with and relinquished without
infringing on any public right, and without
detriment to the community at large. x x
x[36] (Emphasis supplied and citations omitted)
Here, it is undisputed that the joint measurement
of HRCCs completed works contemplated by the
parties in the Subcontract Agreement never
materialized. Indeed, HRCC, on separate
occasions, submitted its monthly progress billings
indicating the extent of the works it had
completed sans prior joint measurement. Thus:
Progress Billing Period Covered
1st Progress Billing dated August 16 to September
September 17, 2004[37] 2004
 2nd Progress Billing dated participation. As a consequence,

52
September 18 to 25, 2004
October 29, 2004[38] [FFCCIs] claim of full payment
3rd Progress Billing dated September 26 to October cannot be upheld as this is a result

Page
October 29, 2004[39] 25, 2004 of a quantification that was made
4th Progress Billing dated October 26 to November 25, contrary to the express provisions
November 25, 2004 2004 of the Subcontract Agreement.

FFCCI did not contest the said progress billings The Court is aware that by
submitted by HRCC despite the lack of a joint ruling so, [FFCCI] would seem to be
measurement of the latters completed works as placed at a disadvantage because
required under the Subcontract Agreement. it would result in [FFCCI] having to
Instead, FFCCI proceeded to conduct its own pay exactly what [HRCC] was
verification of the works actually completed by billing the former. If, on the other
HRCC and, on separate dates, made the following hand, the Court were to rule
payments to HRCC: otherwise[,] then [HRCC] would be
the one at a disadvantage because
Date of Payment Period Covered it would be made to accept
payment that is less than what it
December 3, 2004[40] April 2 to July 25, 2004 was billing.
December 21, 2004 [41]
July 26 to September 25, 2004 Circumstances considered,
September 26 to November 25, however, the Court deems it proper
March 11, 2005 [42]
2004 to rule in favor of [HRCC] because
of the explicit provision of the
FFCCIs voluntary payment in favor of HRCC, albeit Subcontract Agreement that
in amounts substantially different from those requires the participation of the
claimed by the latter, is a glaring indication that it latter in the joint measurement. If
had effectively waived its right to demand for the the Court were to rule otherwise,
joint measurement of the completed works. then the Court would, in effect, be
FFCCIs failure to demand a joint measurement of disregarding the explicit agreement
HRCCs completed works reasonably justified the of the parties in their contract.[43]
inference that it had already relinquished its right
to do so. Indeed, not once did FFCCI insist on the
conduct of a joint measurement to verify the Essentially, the question that should be resolved
extent of HRCCs completed works despite its is this: In view of FFCCIs waiver of its right to
receipt of the four monthly progress billings demand a joint measurement of HRCCs
submitted by the latter. completed works, is FFCCI now barred from
disputing the claim of HRCC in its monthly
FFCCI is already barred from contesting progress billings?
HRCCs valuation of the completed works
having waived its right to demand the joint We rule in the affirmative.
measurement requirement.
As intimated earlier, the joint measurement
In view of FFCCIs waiver of the joint requirement is a mechanism essentially granting
measurement requirement, the CA, essentially FFCCI the opportunity to verify and, if necessary,
echoing the CIACs disposition, found that FFCCI is contest HRCCs valuation of its completed works
obliged to pay the amount claimed by HRCC in its prior to the submission of the latters monthly
monthly progress billings. The CA reasoned thus: progress billings.

Verily, the joint In the final analysis, the joint

measurement that [FFCCI] claims it measurement requirement seeks to limit the
conducted without the participation dispute between the parties with regard to the
of [HRCC], to which [FFCCI] anchors valuation of HRCCs completed works.
its claim of full payment of its Accordingly, any issue which FFCCI may have
obligations to [HRCC], cannot be with regard to HRCCs valuation of the works it
applied, nor imposed, on [HRCC]. In had completed should be raised and resolved
other words, [HRCC] cannot be during the said joint measurement instead of
made to accept a quantification of raising the same after HRCC had submitted its
its works when the said monthly progress billings. Thus, having
quantification was made without its relinquished its right to ask for a joint
measurement of HRCCs completed works, FFCCI just cause authorizing the fixing of

53
had necessarily waived its right to dispute HRCCs a period.
valuation of the works it had accomplished.

Second Substantive Issue:
Validity of HRCCs Rescission
Subcontract Agreement
Page
This is understood to be
without prejudice to the rights of
third persons who have acquired
the thing, in accordance with
of the Articles 1385 and 1388 and the
Mortgage Law.

Both the CA and the CIAC held that the work

stoppage of HRCC was justified as the same is but The rescission referred to in this article, more
an exercise of its right to rescind the Subcontract appropriately referred to as resolution is on the
Agreement in view of FFCCIs failure to pay the breach of faith by the defendant which is violative
formers monthly progress billings. Further, the of the reciprocity between the parties. [44] The
CIAC stated that FFCCI could no longer assail the right to rescind, however, may be waived,
work stoppage of HRCC as it failed to file any expressly or impliedly.[45]
counterclaim against HRCC pursuant to the terms
of the Subcontract Agreement. While the right to rescind reciprocal obligations is
implied, that is, that such right need not be
For its part, FFCCI asserted that the work expressly provided in the contract, nevertheless
stoppage of HRCC was not justified and, in any the contracting parties may waive the same.[46]
case, its failure to raise a counterclaim against
HRCC for liquidated damages before the CIAC Contrary to the respective dispositions of the
does not amount to a ratification of the latters CIAC and the CA, we find that HRCC had no right
work stoppage. to rescind the Subcontract Agreement in the
guise of a work stoppage, the latter having
The determination of the validity of HRCCs work waived such right. Apropos is Article 11.2 of the
stoppage depends on a determination of the Subcontract Agreement, which reads:
following: first, whether HRCC has the right to
extrajudicially rescind the Subcontract 11.2 Effects of Disputes and
Agreement; andsecond, whether FFCCI is already Continuing Obligations
barred from disputing the work stoppage of
HRCC. Notwithstanding any
dispute, controversy,
HRCC had waived its right to rescind the differences or arbitration
Subcontract Agreement. proceedings relating
directly or indirectly to
this SUBCONTRACT
The right of rescission is statutorily Agreement and without
recognized in reciprocal obligations. Article 1191 prejudice to the eventual
of the Civil Code pertinently reads: outcome thereof, [HRCC]
shall at all times proceed
Art. 1191. The power to with the prompt
rescind obligations is implied in performance of the
reciprocal ones, in case one of the Works in accordance
obligors should not comply with with the directives of
what is incumbent upon him. FFCCI and this
SUBCONTRACT
The injured party may Agreement.[47] (Emphasis
choose between the fulfillment and supplied)
the rescission of the obligation,
with the payment of damages in
either case. He may also seek Hence, in spite of the existence of dispute
rescission, even after he has or controversy between the parties during the
chosen fulfillment, if the latter course of the Subcontract Agreement, HRCC had
should become impossible. agreed to continue the performance of its
obligations pursuant to the Subcontract
The court shall decree the Agreement. In view of the provision of the
rescission claimed, unless there be Subcontract Agreement quoted above, HRCC is
deemed to have effectively waived its right to SUBIC BAY G.R. No. 192885

54
effect extrajudicial rescission of its contract with METROPOLITAN
FFCCI. Accordingly, HRCC, in the guise of AUTHORITY,

Page
rescinding the Subcontract Agreement, was not
justified in implementing a work stoppage. Petitioner, Present:

The costs of arbitration should be shared

by the parties equally. VELASCO, JR., J.,
Chairperson,
- versus -
Section 1, Rule 142 of the Rules of Court PERALTA,
provides:
MENDOZA,
Section 1. Costs ordinarily
follow results of REYES,* and
suit. Unless otherwise provided in HONORABLE
these rules, costs shall be allowed COURT OF PERLAS-BERNABE, JJ.
to the prevailing party as a matter APPEALS and
of course, but the court shall have SUBIC
power, for special reasons, to INTERNATION
adjudge that either party shall pay AL HOTEL Promulgated:
the costs of an action, or that CORPORATIO
the same be divided, as may be N,
equitable. No costs shall be July 4, 2012
allowed against the Republic of Respondents.
the Philippines unless otherwise
provided by law. (Emphasis
supplied)
This is to resolve the petition for certiorari under
Rule 65 of the Rules of Court, dated August 2,
Although, generally, costs are adjudged 2010, of petitioner Subic Bay Metropolitan
against the losing party, courts nevertheless have Authority (SBMA), seeking to reverse and set
discretion, for special reasons, to decree aside the Decision[1] dated January 21, 2010 of
otherwise. the Court of Appeals (CA), which affirmed the
Decision[2] dated March 22, 2006 of the Regional
Here, considering that the work stoppage Trial Court (RTC), Branch 74, Olongapo City.
of HRCC is not justified, it is only fitting that both
The antecedent facts, as found by the RTC
parties should share in the burden of the cost of
and the CA follow.
arbitration equally. HRCC had a valid reason to
institute the complaint against FFCCI in view of Petitioner SBMA is a government agency
the latters failure to pay the full amount of its organized and established under Republic Act
monthly progress billings. However, we disagree (R.A.) No. 7227 to develop the Subic Special
with the CIAC and the CA that only FFCCI should Economic and Freeport Zone into a self-sustaining
shoulder the arbitration costs. The arbitration industrial, commercial and investment center. On
costs should be shared equally by FFCCI and the other hand, private respondent Subic
HRCC in view of the latters unjustified work International Hotel, Corporation (private
stoppage. respondent) is one of the locators of the Freeport
Zone.[3]
WHEREFORE, in consideration of the
foregoing disquisitions, the Decision dated On December 1, 1992 and June 8, 1993,
February 6, 2009 and Resolution dated April 13, petitioner and private respondent entered into
2009 of the Court of Appeals in CA-G.R. SP No. two separate lease agreements whereby the
91860 are private respondent undertook to help petitioner in
hereby AFFIRMED with MODIFICATION that the the development and rehabilitation of the Subic
arbitration costs shall be shared equally by the Naval Base by taking over abandoned barracks
parties herein. and constructing hotel and restaurant facilities
that will accommodate the needs of the growing
number of businessmen and tourists in the
SO ORDERED. Freeport Zone. The two agreements were later
consolidated into a Lease and Development
Agreement.[4] Section 6.1 of the said Agreement WHEREFORE, in view of the

55
stipulated for the payment of service fees, which foregoing considerations, the
pertain to the proportionate share of the private instant Motion for Summary

Page
respondent in the costs that the petitioner may
incur in the provision of services, maintenance
and operation of common facilities computed at
$0.10 per square meter of the gross land area of
the leased property.
Subsequently, upon a conduct of lease
compliance audit, the SBMA Internal Audit
Department found out that private respondent
and other Freeport locators have not been
charged for service fees.Thus, on August 25,
2005, petitioner issued private respondent a
billing statement for accrued service fees in the
amount of Two Hundred Sixty-Five Thousand Fifty-
Three Dollars and Fifty Cents ($265,053.50). This
led to a series of conciliation and clarificatory
meetings between the parties. Consequently, the
SBMA Board decided to waive the payment of
future service fees and advised private
respondent to lodge its protest for the payment of
accumulated service fees to the accounting
department.
Private respondent then formally requested for
the reconsideration of the billing for accumulated
service fees alleging that the services for which
the billing was supposed to be based were not
actually provided by petitioner but by
independent contractors.
On the other hand, petitioner clarified that
service fees also include other services which
indirectly redound to the benefit of the
tenants. Petitioner reasoned that it has a clear
legal right to impose service fees under Section
13 (a) (3) of R.A. No. 7227, which does not
specifically pertain to garbage collection,
electricity, telephone, and water service alone
but to other services such as fire protection,
maintenance of common areas, police protection,
and other services of similar nature.
Thus, private respondent filed a Petition for
Declaratory Relief with the RTC, Branch 74,
Olongapo City, praying for the determination by
the Court whether petitioner has the right to
collect for the accumulated service fees from the
private respondent. The parties submitted a Joint
Stipulation of Facts and filed a Motion for
Summary Judgment.[5]
The RTC rendered its Decision dated March 22,
2006 in favor of the private respondent and
declared that petitioner has no legal right under
Section 6.3 of the Lease and Development
Agreement to enforce the collection of previous
billings for fixed service fees. The dispositive
portion of the decision is as follows:
Judgment is granted and this
Decision is hereby rendered on the
basis of the Joint Stipulation of
Facts and applicable laws and
jurisprudence declaring that
respondent Subic Bay Metropolitan
Authority has no legal right under
Section 6.3 of the Lease and
Development Agreement dated 24
November 1996, to enforce the
collection of previous billings for
Fixed Service Fees at the rate of
US$0.10 per square meter per
month of the leased property
covering the period from 01
December 1996 up to 08 February
2001 in the total amount of
US$307,874.04.
SO DECIDED.[6]
The motion for reconsideration was denied in an
Order[7] dated May 31, 2006. Aggrieved,
petitioner appealed to the CA, however, the
latter, in its Decision dated January 21, 2010,
affirmed the March 22, 2006 decision of the RTC,
thus:
WHEREFORE, the appeal is
DISMISSED. The Decision dated
March 22, 2006 of the RTC, Branch
74, Olongapo City, in Civil Case
No. 137-0-04, is AFFIRMED.
SO ORDERED.[8]
According to the CA, the records show that
petitioner did not actually provide most of the
services enumerated in the Lease and
Development Agreement and that the obligation
involved in the agreement was reciprocal in
nature; therefore, private respondent's obligation
to pay was dependent upon petitioner's
performance of its reciprocal duty to provide the
agreed service, and since petitioner failed to
perform its part of the deal, it cannot exact
compliance from private respondent of its duty to
pay.
A motion for reconsideration was filed, but it was
denied. Hence, the present petition.
This Court finds this petition unmeritorious.
The core of the issue is the entitlement of SBMA
to Service Fees as contained in the Lease and
Development Agreement. Sections 6.1, 6.2 and
6.3 of the said Agreement provide that:
SECTION 6. SERVICE FEES
56
6.1 Definition. Tenan
Page
t, its Subsidiaries, assignees,
transferees or operators shall, for
the entire Term of this Lease, and
without any set-off, counterclaim or
deduction therefrom, pay or cause
to be paid, to Landlord as
Additional Rent, its proportional
share (based on the Gross Land
Area of the Property) of (i) all costs
which Landlord may incur in
providing services or in maintaining
and operating facilities which
directly or indirectly benefit or
serve the Property or Tenant or any
of its Subsidiaries, assignees,
transferees or operators, and (ii)
any other similar fees or charges
assessed on a non-discriminatory
basis. Said costs shall be referred
herein as Service Fees and are
hereby defined to include but not
be limited to a proportional share of
the following costs incurred by
Landlord: water, electricity, gas and
telephone service; garbage
removal; security; police
protection; fire protection;
insurance; landscaping; cost of
maintaining common areas; public
services befitting SBF investors
generally; janitorial, sanitation and
cleaning services; fees for
professional services; charges
under maintenance and service
contracts; all maintenance and
repair costs; any equipment rental;
depreciation of the cost of capital
improvements made to reduce
Service Fees or limit increases
therein; and any and all other costs
of operation, whether ordinary or
extraordinary. An invoice or
certificate for service fees or other
charges delivered by Landlord to
Tenant shall be conclusive as to the
amount of any such fees or charges
payable by Tenant if no protest
challenging the basis or amount
thereof is filed with Landlord within
five (5) days from receipt of such
invoice or
certificate. Notwithstanding any
such protest, Tenant shall pay the
amount reflected on such invoice or
certificate pending resolution of
such protest.
6.2 Estimated Service
Fees. As frequently as Landlord
shall deem appropriate, Landlord
may give Tenant notice of
Landlord's estimate of Service Fees
for the then current fiscal year
(Estimated Service Fees).Tenant
shall pay throughout the Term, as
Additional Rent hereunder, together
with any Base Rent payment due,
such instalments of Estimated
Service Fees as and when Landlord
may reasonably require. The
amount by which Estimated Service
Fees actually paid to Landlord for
any year exceed actual Service
Fees for such year shall be applied
by Landlord to the cost of services
to be rendered in future
periods. The amount by which
Estimated Service Fees actually
paid to Landlord for any year are
less than actual Service Fees for
such year shall be paid by Tenant
to Landlord within ten (10) days of
notice thereof from Landlord.
6.3 Service Fees Fixed for
Five Years. Notwithstanding the
foregoing, Landlord and Tenant
agree that Service Fees (excluding
electricity, water, gas, sewer and
telephone services) shall be (i)
US$0.10 per square meter per
month of the Gross Land Area of
the Property on or prior to
December 31, 1998, and (ii)
US$0.1242 per square meter per
month of the Gross Land Area of
the Property between January 1,
1999 and December 31, 2000.
Payment of Service Fees shall
commence on 1 December 1996.
In assailing the decision of the CA, petitioner
alleges that the same was made with grave
abuse of discretion amounting to lack of and/or
excess of jurisdiction because the payment of
Service Fees is not dependent on the actual
rendition of the services enumerated therein as
the said fees comprise of the tenant's
proportionate share for all the costs which
petitioner as landlord may incur in providing,
maintaining or operating the facilities. This is
misleading.
The Lease and Development Agreement entered
into by petitioner and private respondent
contains a definition of service fees and in that
provision, the CA was correct in ruling that
service fees pertain to the proportionate share of
the tenant in the costs of the enumerated
57
services which include the maintenance and
operation of facilities which directly or indirectly
Page
benefit or serve the leased property or the
tenant, or any of its subsidiaries, assignees,
transferees or operators. Clearly, if the intention
is the contrary, there would have been no need
to enumerate what would constitute services
covered by the service fees. Even logic dictates
that before anyone is entitled to collect service
fees, one must have actually rendered a service.
As correctly pointed out by the CA, petitioner did
not provide most of the services enumerated in
the Lease and Development Agreement, thus:
A close scrutiny of the records
shows that respondent-appellant
did not actually provide most of
the services enumerated in the
lease agreement. In the case of
water, electricity, telephone and
cable television services in the
leased property, petitioner-
appellee engaged the services of
private service providers to furnish
the mentioned necessities. The
same holds true with other
services like janitorial, security,
ground maintenance and garbage
collection services. Petitioner-
appellee contracted a private
security agency for its security
needs, hired employees to take
charge of ground maintenance
and engaged a contractor to haul
its scrap materials. For fire
protection services, petitioner-
appellee is billed accordingly
whenever said service is
extended. Thus, the concerned
departments of SBMA issued
certifications, attesting to the fact
that no security, janitorial and
garbage collection services were
extended to petitioner-appellee.[9]
As such, petitioner, not having rendered actual
service cannot demand from private respondent
its proportionate share of costs which were not
really incurred. Petitioner's claim that the nature
of service fees is that of an additional rent for the
property or a separate consideration aside from
the regular base rent, as shown by the fact that it
is based on the gross land area of the property
and the obligation to pay this amount arises upon
the actual use, occupancy and enjoyment of the
leased property is illogical. If that is the case,
why would the contracting parties assign the
term service fees to replace additional rent if the
latter is the real intention? In its
Comment[10] dated November 5, 2010, private
respondent properly observed the flawed
reasoning of petitioner by stating that the very
reason why the amount is called service fees is
that it is a fee imposed by the government for
services actually rendered.
Petitioner also raises the argument that the CA
seriously erred in rendering the decision which
virtually nullified and/or struck down the
provision of the Lease and Development
Agreement pertaining to service fees, hence,
resulting to the alteration or amendment of the
Lease and Development Agreement. The CA did
no such thing. The said court merely interpreted
the questioned provisions of the contract. In
doing so, the CA thus ruled:
Finally, it is well settled that the
decisive factor in evaluating an
agreement is the intention of the
parties, as shown not necessarily
by the terminology used in the
contract but by their conduct,
words, actions and deeds prior to,
during and immediately after
executing the agreement. For this
reason, documentary and parole
evidence may be submitted and
admitted to prove such intention.
Here, the attendant circumstances
suggest that respondent-appellant
is not entitled to service fees. It
acknowledged its failure to furnish
the agreed services and impliedly
admitted that it is not in the
position to demand for the
payment of service fees when it
approved the proposal for the
waiver of future service fees and
advised petitioner-appellee to
contest the charges for
accumulated service
fees. Thereafter, respondent-
appellant moved for the
amendment of the contract,
inserting a provision for the waiver
of future service fees. Prior to that,
the concerned departments of
SBMA issued their respective
certifications that they did not
extend any service to petitioner-
appellee.[11]
From the above findings of the CA, it is apparent
that the questioned provisions of the contract are
reciprocal in nature. Reciprocal obligations are
those which arise from the same cause, and in
58
which each party is a debtor and a creditor of the
other, such that the obligation of one is
Page
dependent upon the obligation of the other.
[12]
They are to be performed simultaneously such
that the performance of one is conditioned upon
the simultaneous fulfillment of the other. [13] For
one party to demand the performance of the
obligation of the other party, the former must
also perform its own obligation. Accordingly,
petitioner, not having provided the services that
would require the payment of service fees as
stipulated in the Lease Development Agreement,
is not entitled to collect the same.
Based on all of the above disquisitions, it is
therefore clear that the CA did not commit any
grave abuse of discretion in affirming the decision
of the RTC. The term grave abuse of discretion is
defined as a capricious and whimsical exercise of
judgment as patent and gross as to amount to an
evasion of a positive duty or a virtual refusal to
perform a duty enjoined by law, as where the
power is exercised in an arbitrary and despotic
manner because of passion or hostility.[14]
WHEREFORE, the petition for certiorari dated
August 2, 2010 of petitioner Subic Bay
Metropolitan Authority is hereby DISMISSED for
lack of merit.
FIL-ESTATE PROPERTIES, INC. AND FIL-
ESTATE NETWORK INC., vs. SPS RONQUILLO
Before the Court is a petition for review on
certiorari under Rule 45 of the 1997 Rules .of Civil
Procedure assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 100450 which affirmed
the Decision of the Office of the President in O.P.
Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner
and developer of the Central Park Place Tower
while co-petitioner Fil-Estate Network, Inc. is its
authorized marketing agent. Respondent Spouses
Conrado and Maria Victoria Ronquillo purchased
from petitioners an 82-square meter
condominium unit at Central Park Place Tower in
Mandaluyong City for a pre-selling contract price
of FIVE MILLION ONE HUNDRED SEVENTY-FOUR
THOUSAND ONLY (P5,174,000.00). On 29 August
1997, respondents executed and signed a
Reservation Application Agreement wherein they
deposited P200,000.00 as reservation fee. As
agreed upon, respondents paid the full
downpayment of P1,552,200.00 and had been
paying the P63,363.33 monthly amortizations
until September 1998.
Upon learning that construction works had
stopped, respondents likewise stopped paying
their monthly amortization. Claiming to have paid
a total of P2,198,949.96 to petitioners,
respondents through two (2) successive letters,
demanded a full refund of their payment with
interest. When their demands went unheeded,
respondents were constrained to file a Complaint
for Refund and Damages before the Housing and
Land Use Regulatory Board (HLURB). Respondents
prayed for reimbursement/refund
of P2,198,949.96 representing the total
amortization payments, P200,000.00 as and by
way of moral damages, attorneys fees and other
litigation expenses.
On 21 October 2000, the HLURB issued an Order
of Default against petitioners for failing to file
their Answer within the reglementary period
despite service of summons.2
Petitioners filed a motion to lift order of default
and attached their position paper attributing the
delay in construction to the 1997 Asian financial
crisis. Petitioners denied committing fraud or
misrepresentation which could entitle
respondents to an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty.
Joselito F. Melchor, rendered judgment ordering
petitioners to jointly and severally pay
respondents the following amount:
a) The amount of TWO MILLION ONE
HUNDRED NINETY-EIGHT THOUSAND NINE
HUNDRED FORTY NINE PESOS & 96/100
(P2,198,949.96) with interest thereon at
twelve percent (12%) per annum to be
computed from the time of the
complainants demand for refund on
October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS
(P100,000.00) as moral damages,
c) FIFTY THOUSAND PESOS (P50,000.00)
as attorneys fees,
d) The costs of suit, and
e) An administrative fine of TEN
THOUSAND PESOS (P10,000.00) payable
to this Office fifteen (15) days upon receipt
of this decision, for violation of Section 20
in relation to Section 38 of PD 957.3
The Arbiter considered petitioners failure to
59
develop the condominium project as a substantial
breach of their obligation which entitles
Page
respondents to seek for rescission with payment
of damages. The Arbiter also stated that mere
economic hardship is not an excuse for
contractual and legal delay.
Petitioners appealed the Arbiters Decision
through a petition for review pursuant to Rule XII
of the 1996 Rules of Procedure of HLURB. On 17
February 2005, the Board of Commissioners of
the HLURB denied4 the petition and affirmed the
Arbiters Decision. The HLURB reiterated that the
depreciation of the peso as a result of the Asian
financial crisis is not a fortuitous event which will
exempt petitioners from the performance of their
contractual obligation.
Petitioners filed a motion for reconsideration but
it was denied5 on 8 May 2006. Thereafter,
petitioners filed a Notice of Appeal with the Office
of the President. On 18 April 2007, petitioners
appeal was dismissed6 by the Office of the
President for lack of merit. Petitioners moved for
a reconsideration but their motion was denied 7 on
26 July 2007.
Petitioners sought relief from the Court of Appeals
through a petition for review under Rule 43
containing the same arguments they raised
before the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT
ERRED IN AFFIRMING THE DECISION OF THE
HONORABLE HOUSING AND LAND USE
REGULATORY BOARD AND ORDERING
PETITIONERS-APPELLANTS TO REFUND
RESPONDENTS-APPELLEES THE SUM
OF P2,198,949.96 WITH 12% INTEREST FROM 8
OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING
THAT THE COMPLAINT STATES NO CAUSE OF
ACTION AGAINST PETITIONERS-APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT
ERRED IN AFFIRMING THE DECISION OF THE
OFFICE BELOW ORDERING PETITIONERS-
APPELLANTS TO PAY RESPONDENTS-APPELLEES
THE SUM OF P100,000.00 AS MORAL DAMAGES
AND P50,000.00 AS ATTORNEYS FEES
CONSIDERING THE ABSENCE OF ANY FACTUAL OR
LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT
ERRED IN AFFIRMING THE DECISION OF THE
HOUSING AND LAND USE REGULATORY BOARD
ORDERING PETITIONERS-APPELLANTS TO
PAY P10,000.00 AS ADMINISTRATIVE FINE IN THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO
SUPPORT SUCH FINDING.8
On 30 July 2008, the Court of Appeals denied the
petition for review for lack of merit. The appellate
court echoed the HLURB Arbiters ruling that "a
buyer for a condominium/subdivision unit/lot unit
which has not been developed in accordance with
the approved condominium/subdivision plan
within the time limit for complying with said
developmental requirement may opt for
reimbursement under Section 20 in relation to
Section 23 of Presidential Decree (P.D.) 957 x x
x."9 The appellate court supported the HLURB
Arbiters conclusion, which was affirmed by the
HLURB Board of Commission and the Office of the
President, that petitioners failure to develop the
condominium project is tantamount to a
substantial breach which warrants a refund of the
total amount paid, including interest. The
appellate court pointed out that petitioners failed
to prove that the Asian financial crisis constitutes
a fortuitous event which could excuse them from
the performance of their contractual and
statutory obligations. The appellate court also
affirmed the award of moral damages in light of
petitioners unjustified refusal to satisfy
respondents claim and the legality of the
administrative fine, as provided in Section 20 of
Presidential Decree No. 957.
Petitioners sought reconsideration but it was
denied in a Resolution10 dated 11 December 2008
by the Court of Appeals.
Aggrieved, petitioners filed the instant petition
advancing substantially the same grounds for
review:
A.
THE HONORABLE COURT OF APPEALS ERRED
WHEN IT AFFIRMED IN TOTO THE DECISION OF
THE OFFICE OF THE PRESIDENT WHICH
SUSTAINED RESCISSION AND REFUND IN FAVOR
OF THE RESPONDENTS DESPITE LACK OF CAUSE
OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT
THE PETITIONERS ARE LIABLE UNDER THE
PREMISES, THE HONORABLE COURT OF APPEALS
ERRED WHEN IT AFFIRMED THE HUGE AMOUNT
60
OF INTEREST OF TWELVE PERCENT (12%).
Page
C.
THE HONORABLE COURT OF APPEALS LIKEWISE
ERRED WHEN IT AFFIRMED IN TOTO THE
DECISION OF THE OFFICE OF THE PRESIDENT
INCLUDING THE PAYMENT OF P100,000.00 AS
MORAL DAMAGES, P50,000.00 AS ATTORNEYS
FEES AND P10,000.00 AS ADMINISTRATIVE FINE
IN THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS TO SUPPORT SUCH CONCLUSIONS. 11
Petitioners insist that the complaint states no
cause of action because they allegedly have not
committed any act of misrepresentation
amounting to bad faith which could entitle
respondents to a refund. Petitioners claim that
there was a mere delay in the completion of the
project and that they only resorted to
"suspension and reformatting as a testament to
their commitment to their buyers." Petitioners
attribute the delay to the 1997 Asian financial
crisis that befell the real estate industry. Invoking
Article 1174 of the New Civil Code, petitioners
maintain that they cannot be held liable for a
fortuitous event.
Petitioners contest the payment of a huge
amount of interest on account of suspension of
development on a project. They liken their
situation to a bank which this Court, in Overseas
Bank v. Court of Appeals,12 adjudged as not liable
to pay interest on deposits during the period that
its operations are ordered suspended by the
Monetary Board of the Central Bank.
Lastly, petitioners aver that they should not be
ordered to pay moral damages because they
never intended to cause delay, and again blamed
the Asian economic crisis as the direct, proximate
and only cause of their failure to complete the
project. Petitioners submit that moral damages
should not be awarded unless so stipulated
except under the instances enumerated in Article
2208 of the New Civil Code. Lastly, petitioners
refuse to pay the administrative fine because the
delay in the project was caused not by their own
deceptive intent to defraud their buyers, but due
to unforeseen circumstances beyond their
control.
Three issues are presented for our resolution: 1)
whether or not the Asian financial crisis constitute
a fortuitous event which would justify delay by
petitioners in the performance of their
contractual obligation; 2) assuming that
petitioners are liable, whether or not 12% interest
was correctly imposed on the judgment award,
and 3) whether the award of moral damages,
attorneys fees and administrative fine was
proper.
It is apparent that these issues were repeatedly
raised by petitioners in all the legal fora. The
rulings were consistent that first, the Asian
financial crisis is not a fortuitous event that would
excuse petitioners from performing their
contractual obligation; second, as a result of the
breach committed by petitioners, respondents are
entitled to rescind the contract and to be
refunded the amount of amortizations paid
including interest and damages; and third,
petitioners are likewise obligated to pay
attorneys fees and the administrative fine.
This petition did not present any justification for
us to deviate from the rulings of the HLURB, the
Office of the President and the Court of Appeals.
Indeed, the non-performance of petitioners
obligation entitles respondents to rescission
under Article 1191 of the New Civil Code which
states:
Article 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with payment of damages in either case. He may
also seek rescission, even after he has chosen
fulfillment, if the latter should become
impossible.
More in point is Section 23 of Presidential Decree
No. 957, the rule governing the sale of
condominiums, which provides:
Section 23. Non-Forfeiture of
Payments.1wphi1 No installment payment made
by a buyer in a subdivision or condominium
project for the lot or unit he contracted to buy
shall be forfeited in favor of the owner or
developer when the buyer, after due notice to the
owner or developer, desists from further payment
due to the failure of the owner or developer to
develop the subdivision or condominium project
according to the approved plans and within the
time limit for complying with the same. Such
buyer may, at his option, be reimbursed the total
amount paid including amortization interests but
excluding delinquency interests, with interest
thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law,
61
respondents are entitled to rescind the contract
and demand reimbursement for the payments
Page
they had made to petitioners.
Notably, the issues had already been settled by
the Court in the case of Fil-Estate Properties, Inc.
v. Spouses Go13 promulgated on 17 August 2007,
where the Court stated that the Asian financial
crisis is not an instance of caso fortuito. Bearing
the same factual milieu as the instant case, G.R.
No. 165164 involves the same company, Fil-
Estate, albeit about a different condominium
property. The company likewise reneged on its
obligation to respondents therein by failing to
develop the condominium project despite
substantial payment of the contract price. Fil-
Estate advanced the same argument that the
1997 Asian financial crisis is a fortuitous event
which justifies the delay of the construction
project. First off, the Court classified the issue as
a question of fact which may not be raised in a
petition for review considering that there was no
variance in the factual findings of the HLURB, the
Office of the President and the Court of Appeals.
Second, the Court cited the previous rulings of
Asian Construction and Development Corporation
v. Philippine Commercial International Bank 14 and
Mondragon Leisure and Resorts Corporation v.
Court of Appeals15 holding that the 1997 Asian
financial crisis did not constitute a valid
justification to renege on obligations. The Court
expounded:
Also, we cannot generalize that the Asian
financial crisis in 1997 was unforeseeable and
beyond the control of a business corporation. It is
unfortunate that petitioner apparently met with
considerable difficulty e.g. increase cost of
materials and labor, even before the scheduled
commencement of its real estate project as early
as 1995. However, a real estate enterprise
engaged in the pre-selling of condominium units
is concededly a master in projections on
commodities and currency movements and
business risks. The fluctuating movement of the
Philippine peso in the foreign exchange market is
an everyday occurrence, and fluctuations in
currency exchange rates happen everyday, thus,
not an instance of caso fortuito.16
The aforementioned decision becomes a SIX PERCENT (6%) on the amount due computed
precedent to future cases in which the facts are
substantially the same, as in this case. The
principle of stare decisis, which means adherence
to judicial precedents, applies.
In said case, the Court ordered the refund of the
total amortizations paid by respondents plus 6%
legal interest computed from the date of demand.
The Court also awarded attorneys fees. We follow
that ruling in the case before us.
The resulting modification of the award of legal
interest is, also, in line with our recent ruling in
Nacar v. Gallery Frames,17 embodying the
amendment introduced by the Bangko Sentral ng
Pilipinas Monetary Board in BSP-MB Circular No.
799 which pegged the interest rate at 6%
regardless of the source of obligation.
We likewise affirm the award of attorneys fees
because respondents were forced to litigate for
14 years and incur expenses to protect their
rights and interest by reason of the unjustified act
on the part of petitioners.18 The imposition
of P10,000.00 administrative fine is correct
pursuant to Section 38 of Presidential Decree No.
957 which reads:
Section 38. Administrative Fines. The Authority
may prescribe and impose fines not exceeding
ten thousand pesos for violations of the
provisions of this Decree or of any rule or
regulation thereunder. Fines shall be payable to
the Authority and enforceable through writs of
execution in accordance with the provisions of
the Rules of Court.
Finally, we sustain the award of moral damages.
In order that moral damages may be awarded in
breach of contract cases, the defendant must
have acted in bad faith, must be found guilty of
gross negligence amounting to bad faith, or must
have acted in wanton disregard of contractual
obligations.19 The Arbiter found petitioners to
have acted in bad faith when they breached their
contract, when they failed to address
respondents grievances and when they
adamantly refused to refund respondents'
payment.
In fine, we find no reversible error on the merits
in the impugned Court of Appeals' Decision and
Resolution.
WHEREFORE, the petition is PARTLY GRANTED.
The appealed Decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is
from the time of respondents' demand for refund
on 8 October 1998.
SO ORDERED.

62
Page
GOLDEN VALLEY EXPLORATION, INC., vs.
PINKIAN MINING COMPANY and COPPER
VALLEY, INC.,
Assailed in this petition for review on
certiorari1 are the Decision2 dated July 23, 2009
and the Resolution3 dated October 23, 2009 of
the Court of Appeals (CA) in CA-G.R. CV. No.
90682 which reversed the Decision4 dated August
18, 2006 of the Regional Trial Court of Makati
City, Branch 145 (RTC) in Civil Case No. 01-324
and, consequently, affirmed the validity of the
rescission of the Operating Agreement between
petitioner Golden Valley Exploration, Inc. (GVEI)
and respondent Pinkian Mining Company (PMC)
covering various mining claims in Kayapa, Nueva
Vizcaya, as well as the Memorandum of
Agreement between PMC and respondent Copper
Valley, Inc. (CVI).
The Facts
PMC is the owner of 81 mining claims located in
Kayapa, Nueva Vizcaya, 15 of which were covered
by Mining Lease Contract (MLC) No. MRD-
56,5 while the remaining 66 had pending
applications for lease.6 On October 30, 1987, PMC
entered into an Operating Agreement7 (OA) with
GVEI, granting the latter "full, exclusive and
irrevocable possession, use, occupancy , and
control over the [mining claims], and every
matter pertaining to the examination,
exploration, development and mining of the
[mining claims] and the processing and
marketing of the products x x x ," 8 for a period of
25 years.9
In a Letter10 dated June 8, 1999, PMC extra-
judicially rescinded the OA upon GVEIs violation
of Section 5.01,11Article V thereof. Cited as further
justification for its action were reasons such as:
(a) violation of Section 2.03, Article II of the OA,
or the failure of GVEI to advance the actual cost
for the perfection of the mining claims or for the
acquisition of mining rights, cost of lease
applications, lease surveys and legal expenses
incidental thereto; (b) GVEIs non-reimbursement
of the expenses incurred by PMC General
Manager Benjamin Saguid in connection with the
visit of a financier to the mineral property in
1996; (c) its non-remittance of the
US$300,000.00 received from Excelsior
Resources, Ltd.; (d) its nondisclosure of contracts
entered into with other mining companies with
respect to the mining claims; (e) its being a mere
"promoter/broker" of PMCs mining claims instead
of being the operator thereof; and (f) its
nonperformance of the necessary works on the
mining claims.12
GVEI contested PMCs extra-judicial rescission of
the OA through a Letter dated December 7, 1999,
averring therein that its obligation to pay
royalties to PMC arises only when the mining
claims are placed in commercial production which
condition has not yet taken place. It also
reminded PMC of its prior payment of the amount
ofP185,000.00 as future royalties in exchange for
PMCs express waiver of any breach or default on
the part of GVEI.13
PMC no longer responded to GVEIs letter.
Instead, it entered into a Memorandum of
Agreement dated May 2, 2000 (MOA) with CVI,
whereby the latter was granted the right to
"enter, possess, occupy and control the mining
claims" and "to explore and develop the mining
claims, mine or extract the ores, mill, process and
beneficiate and/or dispose the mineral products
in any method or process," among others, for a
period of 25 years.14
Due to the foregoing, GVEI filed a Complaint 15 for
Specific Performance, Annulment of Contract and
Damages against PMC and CVI before the RTC,
docketed as Civil Case No. 01-324.
The RTC Ruling
On August 18, 2006, the RTC rendered a
Decision16 in favor of GVEI, holding that since the
mining claims have not been placed in
commercial production, there is no demandable
obligation yet for GVEI to pay royalties to PMC. It
further declared that no fault or negligence may
be attributed to GVEI for the delay in the
commercial production of the mining claims
because the non-issuance of the requisite Mineral
Production Sharing Agreement (MPSA) and other
government permits, licenses, and consent were
all affected by factors beyond GVEIs control. 17The
RTC, thus, declared the rescission of the OA void
and the execution of the MOA between PMC and
CVI without force and effect. In this relation, it
ordered PMC to comply with the terms and
conditions of the OA until the expiration of its
period.18
At odds with the RTCs ruling, PMC elevated the
case on appeal to the CA.
The CA Ruling
In a Decision19 dated July 23, 2009, the CA
63
reversed the RTC ruling, finding that while the OA
gives PMC the right to rescind only on the ground
Page
of (GVEIs) failure to pay the stipulated royalties,
Article 1191 of the Civil Code allows PMC the right
to rescind the agreement based on a breach of
any of its provisions.20 It further held that the
inaction of GVEI for a period of more than seven
(7) years to operate the areas that were already
covered by a perfected mining lease contract and
to acquire the necessary permits and licenses
amounted to a substantial breach of the OA, the
very purpose of which was the mining and
commercial distribution of derivative products
that may be recovered from the mining
property.21 For the foregoing reasons, the CA
upheld the validity of PMCs rescission of the OA
and its subsequent execution of the MOA with
CVI.22
Dissatisfied with the CAs ruling, GVEI filed a
motion for reconsideration which was, however,
denied by the CA in a Resolution 23 dated October
23, 2009, hence, this petition.
The Issue Before the Court
The central issue for the Courts resolution is
whether or not there was a valid rescission of the
OA.
The Courts Ruling
The Court resolves the issue in the affirmative.
In reciprocal obligations, either party may rescind
the contract upon the others substantial breach
of the obligation/s he had assumed thereunder.
The basis therefor is Article 1191 of the Civil Code
which states as follows:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
More accurately referred to as resolution, the
right of rescission under Article 1191 is
predicated on a breach of faith that violates the
reciprocity between parties to the contract.24 This
retaliatory remedy is given to the contracting
party who suffers the injurious breach on the
premise that it is "unjust that a party be held
bound to fulfill his promises when the other
violates his."25
As a general rule, the power to rescind an
obligation must be invoked judicially and cannot
be exercised solely on a partys own judgment
that the other has committed a breach of the
obligation.26 This is so because rescission of a
contract will not be permitted for a slight or
casual breach, but only for such substantial and
fundamental violations as would defeat the very
object of the parties in making the
agreement.27 As a well-established exception,
however, an injured party need not resort to court
action in order to rescind a contract when the
contract itself provides that it may be revoked or
cancelled upon violation of its terms and
conditions.28 As elucidated in Froilan v. Pan
Oriental Shipping Co.,29 "there is x x x nothing in
the law that prohibits the parties from entering
into agreement that violation of the terms of the
contract would cause cancellation thereof, even
without court intervention."30 Similarly, in Dela
Rama Steamship Co., Inc. v. Tan, 31 it was held that
judicial permission to rescind an obligation is not
necessary if a contract contains a special
provision granting the power of cancellation to a
party.32
With this in mind, the Court therefore affirms the
correctness of the CAs Decision upholding PMCs
unilateral rescission of the OA due to GVEIs non-
payment of royalties considering the parties
express stipulation in the OA that said agreement
may be cancelled on such ground. This is found in
Section 8.01, Article VIII 33 in relation to Section
5.01, Article V34 of the OA which provides:
ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT
8.01 This Agreement may be cancelled or
terminated prior to the expiration of the period,
original or renewal mentioned in the next
preceding Section only in either of the following
ways:
 a. By written advance notice of sixty (60)
64
days from OPERATOR to PINKIAN with or
without cause by registered mail or
Page
personal delivery of the notice to PINKIAN.
b. By written notice from PINKIAN by
registered or personal deliver of the notice
to OPERATOR based on the failure to
OPERATOR to make any payments
determined to be due PINKIAN under
Section 5.01 hereof after written demand
for payment has been made on
OPERATOR: Provided that OPERATOR shall
have a grace period of ninety (90) days
from receipt of such written demand
within which to make the said payments to
PINKIAN.
ARTICLE V
ROYALTIES
5.01 Should the PROPERTIES be placed in
commercial production the PINKIAN shall be
entitled to a Royalty computed as follows:
(a) For gold 3.0 percent of net realizable
value of gold
(b) For copper and others 2.0 percent of
net realizable value
"Net REALIZABLE Value" is gross value less the
sum of the following:
(1) marketing expenses including freight
and insurance;
(2) all smelter charges and deductions;
(3) royalty payments to the government;
(4) ad valorem and export taxes, if any,
paid to the government.
The aforesaid royalties shall be paid to PINKIAN
within five (5) days after receipt of the smelter or
refinery returns. (Emphases and underscoring
supplied)
By expressly stipulating in the OA that GVEIs
non-payment of royalties would give PMC
sufficient cause to cancel or rescind the OA, the
parties clearly had considered such violation to
be a substantial breach of their agreement. Thus,
in view of the above-stated jurisprudence on the
matter, PMCs extra-judicial rescission of the OA
based on the said ground was valid.
In this relation, the Court finds it apt to clarify
that the following defenses raised by GVEI in its
petition would not impel a different conclusion:
First, GVEI cannot excuse its non-payment of
royalties on the argument that no commercial
mining was yet in place. This is precisely because
the obligation to develop the mining areas and
put them in commercial operation also belonged
to GVEI as it expressly undertook "to explore,
develop, and equip the Claims to mine and
beneficiate the ore thereof by any method or
process"35 and "to enter into contract, agreement,
assignments, conveyances and understandings of
any kind whatsoever with reference to the
exploration, development, equipping and
operation of the Claims, and the mining and
beneficiation of the ore derived therefrom, and
marketing the resulting marketable products."36
Records reveal that when the OA was signed on
October 30, 1987, 15 mining claims were already
covered by a perfected mining lease contract,
i.e., MLC No. MRD-56, granting to the holder
thereof "the right to extract all mineral deposits
found on or underneath the surface of his mining
claims x x x; to remove, process and otherwise
utilize the mineral deposits for his own
benefit."37 This meant that GVEI could have
immediately extracted mineral deposits from the
covered mineral land and carried out commercial
mining operations from the very start. However,
despite earlier demands made by PMC, no
meaningful steps were taken by GVEI towards the
commercial production of the 15 perfected
mining claims and the beneficial exploration of
those remaining. Consequently, seven years into
the life of the OA, no royalties were paid to PMC.
Compounding its breach, GVEI not only failed to
pay royalties to PMC but also did not carry out its
obligation to conduct operations on and/or
commercialize the mining claims already covered
by MLC No. MRD-56. Truth be told, GVEIs non-
performance of the latter obligation under the OA
actually made the payment of royalties to PMC
virtually impossible. Hence, GVEI cannot blame
anyone but itself for its breach of the OA, which,
in turn, gave PMC the right to unilaterally rescind
the same.
Second, neither can GVEI successfully oppose
PMCs rescission of the OA on the argument that
the ground to rescind the OA was only limited to
its non-payment of royalties precisely because
said ground was actually among the reasons for
PMCs rescission thereof. Considering the
stipulations above-cited, the ground for non-
payment of royalties was in itself sufficient for
PMC to extra-judicially rescind the OA.
In any event, even discounting the ground of non-
65
payment of royalties, PMC still had the right to
rescind the OA based on the other grounds it had
Page
invoked therefor, namely, (a) violation of Section
2.03, Article II of the OA, or the failure of GVEI to
advance the actual cost for the perfection of the
mining claims or for the acquisition of mining
rights, cost of lease applications, lease surveys
and legal expenses incidental thereto, (b) GVEIs
non-reimbursement of the expenses incurred by
PMC General Manager Benjamin Saguid in
connection with the visit of a financier to the
mineral property in 1996, (c) its non-remittance
of the US$300,000.00 received from Excelsior
Resources, Ltd., (d) its non-disclosure of contracts
entered into with other mining companies with
respect to the mining claims, (e) its being a mere
"promoter/broker" of PMCs mining claims instead
of being the operator thereof, and (f) its non-
performance of the necessary works on the
mining claims, albeit the said grounds should
have been invoked judicially since the court
would still need to determine if the same would
constitute substantial breach and not merely a
slight or casual breach of the contract. While
Section 8.01, Article VIII of the OA as above-cited
appears to expressly restrict the availability of an
extra-judicial rescission only to the grounds
stated thereunder, the Court finds that the said
stipulation does not negate PMCs implied
statutory right to judicially rescind the contract
for other unspecified acts that may actually
amount to a substantial breach of the contract.
This is based on Article 1191 of the Civil Code
(also above-cited) which pertinently provides that
the "power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him"
and that "[t]he court shall decree the rescission
claimed, unless there be just cause authorizing
the fixing of a period."
While it remains apparent that PMC had not
judicially invoked the other grounds to rescind in
this case, the only recognizable effect, however,
is with respect to the reckoning point as to when
the contract would be formally regarded as
rescinded. Where parties agree to a stipulation
allowing extra-judicial rescission, no judicial
decree is necessary for rescission to take place;
the extra-judicial rescission immediately releases
the party from its obligation under the contract,
subject only to court reversal if found
improper.1wphi1 On the other hand, without a
stipulation allowing extra-judicial rescission, it is
the judicial decree that rescinds, and not the will
of the rescinding party. This may be gathered
from previous Court rulings on the matter.
For instance, in Ocejo, Perez & Co. v. International
Banking Corporation,38 where the seller, without
having reserved title to the thing sold, sought to
re-possess the subject matter of the sale through
an action for replevin after the buyer failed to pay
its purchase price, the Court ruled that the action
of replevin (which operates on the assumption
that the plaintiff is the owner of the thing subject
of the suit) "will not lie upon the theory that the
rescission has already taken place and that the
seller has recovered title to the thing sold." It held
that the title which had already passed by
delivery to the buyer is not ipso facto re-vested in
the seller upon the latters own determination to
rescind the sale because it is the judgment of the
court that produces the rescission.
On the other hand, in De Luna v. Abrigo 39 (De
Luna), the Court upheld the validity of a
stipulation providing for the automatic reversion
of donated property to the donor upon non-
compliance of certain conditions therefor as the
same was akin to an agreement granting a party
the right to extra-judicially rescind the contract in
case of breach. The Court ruled, in effect, that a
subsequent court judgment does not rescind the
contract but merely declares the fact that the
same has been rescinded, viz.:
[J]udicial intervention is necessary not for
purposes of obtaining a judicial declaration
rescinding a contract already deemed rescinded
by virtue of an agreement providing for rescission
even without judicial intervention, but in order to
determine whether or not the rescission was
proper.40 (Emphases and underscoring supplied)
A similar agreement in Roman Catholic
Archbishop of Manila v. CA 41 allowing the ipso
facto reversion of the donated property upon
noncompliance with the conditions was likewise
upheld, with the Court reiterating De Luna and
declaring in unmistakable terms that:42
Where [the propriety of the automatic rescission]
is sustained, the decision of the court will be
merely declaratory of the revocation, but it is not
in itself the revocatory act. (Emphasis and
underscoring supplied)
This notwithstanding, jurisprudence still indicates
that an extra-judicial rescission based on grounds
not specified in the contract would not preclude a
party to treat the same as rescinded. The
rescinding party, however, by such course of
action, subjects himself to the risk of being held
liable for damages when the extra-judicial
rescission is questioned by the opposing party in
court. This was made clear in the case of U.P. v.
De Los Angeles,43 wherein the Court held as
66
follows:
Page
Of course, it must be understood that the act of a
party in treating a contract as cancelled or
resolved on account of infractions by the other
contracting party must be made known to the
other and is always provisional, being ever
subject to scrutiny and review by the proper
court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its
own behalf, and bring the matter to court. Then,
should the court, after due hearing, decide that
the resolution of the contract was not warranted,
the responsible party will be sentenced to
damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity
awarded to the party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded,
and act accordingly, without previous court
action, but it proceeds at its own risk. For it is
only the final judgment of the corresponding
court that will conclusively and finally settle
whether the action taken was or was not correct
in law. x x x.44 (Emphases and underscoring
supplied)
The pronouncement, which was also reiterated in
the case of Angeles v. Calasanz, 45 sought to
explain various rulings that continued to require
judicial confirmation even in cases when the
rescinding party has a proven contractual right to
extra-judicially rescind the contract. The
observation then was mainly on the practical
effect of a stipulation allowing extra-judicial
rescission being merely "to transfer to the
defaulter the initiative on instituting suit, instead
of the rescinder."46
Proceeding from the foregoing, the Court has
determined that the other grounds raised by PMC
in its Letter dated June 8, 1999 to GVEI (the
existence of which had not been convincingly
disputed herein) amounts to the latter's
substantial breach of the OA. To the Court's mind,
said infractions, when taken together, ultimately
resulted in GVEI's failure to faithfully perform its
primordial obligation under the OA to explore and
develop PMC's mining claims as well as to put the
same into commercial operation. Accordingly,
PMC's rescission of the OA on the foregoing
grounds, in addition to the ground of non-
payment of royalties, is equally valid.
Finally, the Court cannot lend credence to GVEI's
contention that when PMC entered into an
agreement with CVI covering the mining claims, it
was committing a violation of the terms and
conditions of the OA. As above-explained, the
invocation of a stipulation allowing extra-judicial
rescission effectively puts an end to the contract
and, thus, releases the parties from the
obligations thereunder, notwithstanding the lack
of a judicial decree for the purpose. In the case at
bar, PMC, through its Letter dated June 8, 1999 to
GVEI, invoked Section 8.01, Article VIII in relation
to Section 5.01, Article V of the OA which allows it
to extra-judicially rescind the contract for GVEI's
non-payment of royalties. Thus, at that point in
time, PMC had effectively rescinded the OA and
was then considered to have been released from
its legal effects. Accordingly, there stood no legal
impediment so as to hinder PMC from entering
into a contract with CVI covering the same mining
claims subject of this case.
In fine, the Court denies the instant petition and
affirms the assailed CA Decision and Resolution.
WHEREFORE, the petition is DENIED. The Decision
dated July 23, 2009 and the Resolution dated
October 23, 2009 of the Court of Appeals in CA-
G.R. CV. No. 90682 are hereby AFFIRMED.
SO ORDERED.
SWIRE REALTY DEVELOPMENT CORP v. JAYNE
YU
This is a Petition for Review on Certiorari under
Rule 45 of the 1997 Rules of Civil Procedure which
seeks to reverse and set aside the
Decision 1 dated January 24, 2013 and
Resolution 2 dated April 30, 2013 of the Court of
Appeals (CA) in CA-G.R. SP No. 121175
The facts follow.
Respondent Jayne Yu and petitioner Swire Realty
Development Corporation entered into a Contract
to Sell on July 25, 1995 covering one residential
condominium unit, specifically Unit 3007 of the
Palace of Makati, located at P. Burgos corner
Caceres Sts., Makati City, with an area of 137.30
square meters for the total contract price of
P7,519,371.80, payable in equal monthly
installments until September 24, 1997.
Respondent likewise purchased a parking slot in
the same condominium building for P600,000.00.
On September 24, 1997, respondent paid the full
purchase price of P7,519,371.80 for the unit while
making a down payment of P20,000.00 for the
parking lot. However, notwithstanding full
payment of the contract price, petitioner failed to
complete and deliver the subject unit on time.
67
This prompted respondent to file a Complaint for
Rescission of Contract with Damages before the
Page
Housing and Land Use Regulatory Board (HLURB)
Expanded National Capital Region Field Office
(ENCRFO).
On October 19, 2004, the HLURB ENCRFO
rendered a Decision 3 dismissing respondents
complaint. It ruled that rescission is not permitted
for slight or casual breach of the contract but only
for such breaches as are substantial and
fundamental as to defeat the object of the parties
in making the agreement. It disposed of the case
as follows:
WHEREFORE, PREMISES CONSIDERED, judgment
is hereby rendered ordering [petitioner] the
following:
1. To finish the subject unit as pointed
out in the inspection Report
2. To pay [respondent] the following:
a. the amount of P100,000 as
compensatory damages for
the minor irreversible
defects in her unit
[respondent], or, in the
alternative, conduct the
necessary repairs on the
subject unit to conform to
the intended specifications;
b. moral damages of
P20,000.00
c. Attorneys fees of
P20,000.00
On the other hand, [respondent] is hereby
directed to immediately update her account
insofar as the parking slot is concerned, without
interest, surcharges or penalties charged therein.
All other claims and counterclaims are hereby
dismissed for lack of merit.
IT IS SO ORDERED. 4cralawlawlibrary
Respondent then elevated the matter to the
HLURB Board of Commissioners.
In a Decision 5 dated March 30, 2006, the HLURB
Board of Commissioners reversed and set aside
the ruling of the HLURB ENCRFO and ordered the
rescission of the Contract to Sell, ratiocinating:
We find merit in the appeal. The report on the
ocular inspection conducted on the subject
condominium project and subject unit shows that
the amenities under the approved plan have not
yet been provided as of May 3, 2002, and that the
subject unit has not been delivered to
[respondent] as of August 28, 2002, which is
beyond the period of development of December
1999 under the license to sell. The delay in the
completion of the project as well as of the delay
in the delivery of the unit are breaches of
statutory and contractual obligations which
entitles [respondent] to rescind the contract,
demand a refund and payment of damages.
The delay in the completion of the project in
accordance with the license to sell also renders
[petitioner] liable for the payment of
administrative fine.
Wherefore, the decision of the Office below is set
aside and a new decision is rendered as follows:
1. Declaring the contract to sell as rescinded
and directing [petitioner] to refund to
[respondent] the amount of P7,519,371.80
at 6% per annum from the time of
extrajudicial demand on January 05, 2001:
subject to computation and payment of
the correct filing fee;
2. Directing [petitioner] to pay respondent
attorneys fees in the amount of
P20,000.00;
3. Directing [petitioner] to pay an
administrative fine of P10,000.00 for
violation of Section 20, in relation to
Section 38 of P.D. 957:
Petitioner moved for reconsideration, but
the same was denied by the HLURB Board
of Commissioners in a Resolution 7 dated
June 14, 2007.
Unfazed, petitioner appealed to the Office
of the President (OP) on August 7, 2007.
In a Decision 8 dated November 21, 2007,
the OP, through then Deputy Executive
Secretary Manuel Gaite, dismissed
petitioners appeal on the ground that it
failed to promptly file its appeal before the
OP. It held:
Records show that [petitioner] received its copy
of the 30 March 2006 HLURB Decision on 17 April
2006 and instead of filing an appeal, it opted first and study of the records of the case, the OP was

68
to file a Motion for Reconsideration on 28 April more inclined to agree with the earlier decision of
2006 or eleven (11) days thereafter. The said the HLURB ENCRFO as it was more in accord with

Page
motion interrupted the 15-day period to appeal. facts, law and jurisprudence relevant to the case.
Thus:
On 23 July 2007, [petitioner] received the HLURB
Resolution dated 14 June 2007 denying the WHEREFORE, premises considered, the instant
Motion for Reconsideration. Motion for Reconsideration is herebyGRANTED.
The Decision and Resolution of the HLURB Third
Based on the ruling in United Overseas Bank Division Board of Commissioners, dated March
Philippines, Inc. v. Ching (486 SCRA 655), the 30, 2006 and June 14, 2007, respectively, are
period to appeal decisions of the HLURB Board of hereby SET ASIDE, and the HLURB
Commissioners to the Office of the President is 15 ENCRFO Decision dated October 19, 2004 is
days from receipt thereof pursuant to Section 15 hereby REINSTATED.
of P.D. No. 957 and Section 2 of P.D. No. 1344
which are special laws that provide an exception
to Section 1 of Administrative Order No. 18. Respondent sought reconsideration of said
resolution, however, the same was denied by the
Corollary thereto, par. 2, Section 1 of OP in a Resolution 12 dated August 18, 2011.
Administrative Order No. 18, Series of
1987provides that:
The time during which a motion for Consequently, respondent filed an appeal to the
reconsideration has been pending with the CA.
Ministry/Agency concerned shall
be deducted from the period of appeal. But In a Decision dated January 24, 2013, the CA
where such a motion for reconsideration has been granted respondents appeal and reversed and
filed during office hours of the last day of the set aside the Order of the OP. The fallo of its
period herein provided, the appeal must be made decision reads:
within the day following receipt of the denial of
said motion by the appealing party. WHEREFORE, the Petition is hereby GRANTED.
(Underscoring supplied) The assailed Resolution dated 17 February 2009
and Order dated 18 August 2011 of the Office of
xxxx the President, in O.P. Case No. 07-H-283, are
Accordingly, the [petitioner] had only four (4) hereby REVERSED and SET ASIDE. Accordingly,
days from receipt on 23 July 2007 of HLURB the Decision dated 30 March 2006
Resolution dated 14 June 2007, or until 27 July and Resolution dated 14 June 2007 of the HLURB
2007 to file the Notice of Appeal before this Board of Commissioners in HLURB Case No. REM-
Office. However, [petitioner] filed its appeal only A-050127-0014, are REINSTATED.
on 7 August 2007 or eleven (11) days late.
SO ORDERED.
Thus, this Office need not delve on the merits of
the appeal filed as the records clearly show that Petitioner moved for reconsideration, however,
the said appeal was filed out of time. the CA denied the same in a Resolution dated
April 30, 2013.
WHEREFORE, premises considered,
[petitioner]s appeal is hereby DISMISSED, and Hence, the present petition wherein petitioner
the HLURB Decision dated 30 March 2006 and raises the following grounds to support its
HLURB Resolution dated 14 June 2007 are petition:
hereby AFFIRMED.
THE COURT OF APPEALS GRAVELY ERRED IN
SO ORDERED. IGNORING THE LEGAL PRECEPTS THAT:

Immediately thereafter, petitioner filed a motion
for reconsideration against said decision.
In a Resolution 10 dated February 17, 2009, the
OP, through then Executive Secretary Eduardo
Ermita, granted petitioners motion and set aside
Deputy Executive Secretary Gaites decision. It
held that after a careful and thorough evaluation
1. TECHNICAL RULES ARE NOT BINDING
UPON ADMINISTRATIVE AGENCIES; and
2. RESCISSION WILL BE ORDERED ONLY
WHERE THE BREACH COMPLAINED OF IS
SUBSTANTIAL AS TO DEFEAT THE OBJECT
OF THE PARTIES IN ENTERING INTO THE
AGREEMENT. 14

69
In essence, the issues are: (1) whether
petitioners appeal was timely filed before the
Page
OP; and (2) whether rescission of the contract
is proper in the instant case.
We shall resolve the issues in seriatim.
First, the period to appeal the decision of the
HLURB Board of Commissioners to the Office of
the President has long been settled in the case
of SGMC Realty Corporation v. Office of the
President, 15as reiterated in the cases of Maxima
Realty Management and Development
Corporation v. Parkway Real Estate Development
Corporation 16 and United Overseas Bank
Philippines, Inc. v. Ching.
In the aforementioned cases, we ruled that the
period to appeal decisions of the HLURB Board of
Commissioners is fifteen (15) days from receipt
thereof pursuant to Section 15 18 of PD No.
957 19and Section 2 20 of PD No. 1344 21 which are
special laws that provide an exception to Section
1 of Administrative Order No. 18. Thus, in
the SGMC Realty Corporation v. Office of the
President case, the Court explained:
As pointed out by public respondent, the
aforecited administrative order allows aggrieved
party to file its appeal with the Office of the
President within thirty (30) days from receipt of
the decision complained of. Nonetheless, such
thirty-day period is subject to the qualification
that there are no other statutory periods of
appeal applicable. If there are special laws
governing particular cases which provide for a
shorter or longer reglementary period, the same
shall prevail over the thirty-day period provided
for in the administrative order. This is in line with
the rule in statutory construction that an
administrative rule or regulation, in order to be
valid, must not contradict but conform to the
provisions of the enabling law.
We note that indeed there are special laws that
mandate a shorter period of fifteen (15) days
within which to appeal a case to public
respondent. First, Section 15 of Presidential
Decree No. 957 provides that the decisions of the
National Housing Authority (NHA) shall become
final and executory after the lapse of fifteen (15)
days from the date of receipt of the decision.
Second, Section 2 of Presidential Decree No. 1344
states that decisions of the National Housing
Authority shall become final and executory after
the lapse of fifteen (15) days from the date of its
receipt. The latter decree provides that the
decisions of the NHA is appealable only to the
Office of the President. Further, we note that the
regulatory functions of NHA relating to housing
and land development has been transferred to
Human Settlements Regulatory Commission, now
known as HLURB. x x x 22cralawlawlibrary
Records show that petitioner received a copy of
the HLURB Board of Commissioners decision on
April 17, 2006. Correspondingly, it had fifteen
days from April 17, 2006 within which to file its
appeal or until May 2, 2006. However, on April
28, 2006, or eleven days after receipt of the
HLURB Board of Commissioners decision, it filed
a Motion for Reconsideration, instead of an
appeal.
Concomitantly, Section 1 of Administrative Order
No. 18 23 provides that the time during which a
motion for reconsideration has been pending with
the ministry or agency concerned shall be
deducted from the period for appeal. Petitioner
received the HLURB Board Resolution denying its
Motion for Reconsideration on July 23, 2007 and
filed its appeal only on August 7, 2007.
Consequently therefore, petitioner had only four
days from July 23, 2007, or until July 27, 2007,
within which to file its appeal to the OP as the
filing of the motion for reconsideration merely
suspended the running of the 15-day period.
However, records reveal that petitioner only
appealed to the OP on August 7, 2007, or eleven
days late. Ergo, the HLURB Board of
Commissioners decision had become final and
executory on account of the fact that petitioner
did not promptly appeal with the OP.
In like manner, we find no cogent reason to
exempt petitioner from the effects of its failure to
comply with the rules.
In an avuncular case, we have held that while the
dismissal of an appeal on purely technical
grounds is concededly frowned upon, it bears
emphasizing that the procedural requirements of
the rules on appeal are not harmless and trivial
technicalities that litigants can just discard and
disregard at will. Neither being a natural right nor
a part of due process, the rule is settled that the
right to appeal is merely a statutory privilege
which may be exercised only in the manner and
in accordance with the provisions of the
law. 24cralawred
Time and again, we have held that rules of
procedure exist for a noble purpose, and to
disregard such rules, in the guise of liberal
construction, would be to defeat such purpose.
Procedural rules are not to be disdained as mere
technicalities. They may not be ignored to suit
the convenience of a party. 25 The reason for the
70
liberal application of the rules before quasi-
judicial agencies cannot be used to perpetuate
Page
injustice and hamper the just resolution of the
case. Neither is the rule on liberal construction a
license to disregard the rules of
procedure. 26cralawred
Thus, while there may be exceptions for the
relaxation of technical rules principally geared to
attain the ends of justice, petitioners fatuous
belief that it had a fresh 15-day period to elevate
an appeal with the OP is not the kind of
exceptional circumstance that merits relaxation.
Second, Article 1191 of the Civil Code sanctions
the right to rescind the obligation in the event
that specific performance becomes impossible, to
wit:chanRoblesvirtualLawlibrary
Article 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.cralawlawlibrary
Basic is the rule that the right of rescission of a
party to an obligation under Article 1191 of the
Civil Code is predicated on a breach of faith by
the other party who violates the reciprocity
between them. The breach contemplated in the
said provision is the obligors failure to comply
with an existing obligation. When the obligor
cannot comply with what is incumbent upon it,
the obligee may seek rescission and, in the
absence of any just cause for the court to
determine the period of compliance, the court
shall decree the rescission. 27
In the instant case, the CA aptly found that the
completion date of the condominium unit was
November 1998 pursuant to License No. 97-12-
3202 dated November 2, 1997 but was extended
to December 1999 as per License to Sell No. 99-
05-3401 dated May 8, 1999. However, at the time
of the ocular inspection conducted by the HLURB
ENCRFO, the unit was not yet completely finished
as the kitchen cabinets and fixtures were not yet
installed and the agreed amenities were not yet
available. Said inspection report states:
1. The unit of the [respondent] is Unit 3007,
which was labeled as P2-07, at the Palace
of Makati, located at the corner of P.
Burgos Street and Caceres Street,
Poblacion, Makati City. Based on the
approved plans, the said unit is at the
26thFloor.
2. During the time of inspection, the said unit
appears to be completed except for the
installation of kitchen cabinets and
fixtures.
3. Complainant pinpointed to the
undersigned the deficiencies as follows:
a. The delivered unit has high density
fiber (HDF) floorings instead of
narra wood parquet.
b. The [petitioners] have also
installed baseboards as borders
instead of pink porrino granite
boarders.
c. Walls are newly painted by the
respondent and the alleged
obvious signs of cladding could not
be determined.
d. Window opening at the master
bedroom conforms to the approved
plans. As a result it leaves a 3
inches (sic) gap between the glass
window and partitioning of the
masters bedroom.
e. It was verified and confirmed that a
square column replaced the round
column, based on the approved
plans.
f. At the time of inspection, amenities
such as swimming pool and change
room are seen at the 31st floor only.
These amenities are reflected on
the 27th floor plan of the approved
condominium plans. Health spa for
men and women, Shiatsu Massage
Room, Two-Level Sky Palace
Restaurant and Hall for games and
 entertainments, replete with
71
billiard tables, a bar, indoor golf
with spectacular deck and karaoke
Page
rooms were not yet provided by the
[petitioner].
g. The [masters] bedroom door bore
sign of poor quality of workmanship
as seen below.
h. The stairs have been installed in
such manner acceptable to the
undersigned.
i. Bathrooms and powder room have
been installed in such manner
acceptable to the undersigned. 28
From the foregoing, it is evident that the report
on the ocular inspection conducted on the subject
condominium project and subject unit shows that
the amenities under the approved plan have not
yet been provided as of May 3, 2002, and that the
subject unit has not been delivered to respondent
as of August 28, 2002, which is beyond the period
of development of December 1999 under the
license to sell. Incontrovertibly, petitioner had
incurred delay in the performance of its obligation
amounting to breach of contract as it failed to
finish and deliver the unit to respondent within
the stipulated period. The delay in the completion
of the project as well as of the delay in the
delivery of the unit are breaches of statutory and
contractual obligations which entitle respondent
to rescind the contract, demand a refund and
payment of damages.
WHEREFORE, premises considered, the instant
petition is DENIED. The Decision dated January
24, 2013 and Resolution dated April 30, 2013 of
the Court of Appeals in CA-G.R. SP No. 121175
are hereby AFFIRMED, with MODIFICATION
that moral damages be awarded in the
amount of P20,000.00
SO ORDERED.
SANGGUNIANG PANLUNGSOD NG BAGUIO
CITY, vs.
JADEWELL PARKING SYSTEMS CORPORATION
Before this Court are nine (9) Petitions involving
essentially the same parties - officials of the City
Government of Baguio and Jadewell Parking
Systems Corporation (Jadewell). The only party
here that is neither an official of the City
Government of Baguio nor an officer of Jadewell is
former Judge Fernando Vil Pamintuan.
The two principal parties executed a
Memorandum of Agreement (MOA) on 26 June
2000, whereby the City of Baguio authorized
Jadewell to regulate and collect parking fees for
on-street parking in the city, as well as to
implement the installation of modern parking
meters.
The legal disputes embodied in the nine Petitions
began when the Sangguniang Panlungsod of
Baguio City (Sanggunian) revoked the MOA
through City Resolution No. 037, Series of 2002
(Resolution 37), alleging substantial breach of the
MOA on the part of Jadewell. Then Mayor Alfredo
Vergara vetoed the Resolution. The Sanggunian
Panlungsod overrode the veto through an
unnumbered Resolution dated 17 April 2002.
These twin Resolutions constitute what we call
here as the first act of Rescission 1 of the MOA by
the city officials of Baguio. Jadewell denied the
breach and commenced an action before the
Regional Trial Court (RTC) of Baguio, 2questioning
the validity of the MOAs revocation and the
Sanggunians capacity to pass a resolution
revoking the MOA.
There was a second act of rescission that the city
officials of Baguio performed in 2006, the
circumstances of which will be narrated later on.
While the main case was under litigation, and
then under appeal, the parties filed contempt
charges against each other. Six of these cases are
part of the consolidated Petitions before us.
These nine highly-voluminous cases, however, all
boil down essentially to just these five sets of
legal questions requiring resolution:
(a) The validity or invalidity and legal
efficacy of Saggunians two distinct acts of
rescission of the MOA;
(b) The duty of a trial judge to dismiss a
case assailing the validity of the MOA and
the city resolution approving it in view of
the pendency of the various petitions
before this Court;
(c) the liability of : (i) respondent city
officials of Baguio, for various counts of
indirect contempt of this court, (ii) some
respondents, who are lawyers at the same
time, for acts that require the disciplinary
action of disbarment, (iii) respondent
Judge Pamintuan, for taking cognizance of
 a civil case allegedly in defiance of this
72
Courts authority;
Page
(d) the validity of the administrative
suspension of one of the respondents
herein, former Mayor Braulio Yaranon, by
the Office of the President in relation to his
acts of non-recognition of the MOA; and
(e) the nullification of certain acts of
officials of Baguio City directed against
Jadewell pursuant to their belief that the
latter had no authority to continue
implementing the terms of the MOA.
THE ANTECEDENT FACTS
On 1 March 1999, Jadewell proposed the
privatization3 of the administration of on-street
parking in Baguio City using Schlumbergers
DG4S Pay and Display Parking Meter (hereinafter
"DG4S P&D"), which it touted as "technologically
advanced, up to the level of more progressive
countries and which would make the city as the
first and only city in the Philippines, if not in Asia,
to have metered parking as an important part of
its traffic and parking system."4
Respondent Sanggunian acted favorably on the
proposal.5 On 31 May 2000, it passed Resolution
No. 159, Series of 1999, authorizing the City
Mayor of Baguio to negotiate and enter into a
Memorandum of Agreement with Jadewell for the
installation of its proposed DG4S parking
technology.6
On 16 July 1999, the City Mayor of Baguio wrote
to Jadewell, transmitting to it the finalized draft of
the MOA, with amendments emanating from his
office. The City Mayor informed Jadewell that the
finalization of the MOA would be subject to the
appropriate action of the Sanggunian and the
passage of an enabling ordinance.7
On 27 March 2000, respondent Sanggunian
enacted City Ordinance No. 003, Series of 2000
(Ordinance No. 003-2000) amending Ordinance
No. 13, Series of 1983, outlining the rules and
policy on the privatization of the administration of
on-street parking in the city streets of
Baguio.8 For this purpose, the City of Baguio
authorized the intervention of a private operator
for the regulation, charging and collection of
parking fees and the installation of modern
parking meters, among others.
On 10 April 2000, the City Legal Officer of Baguio
City advised the City Mayor that the project for
the regulation of on-street parking and
installation of parking meters was not an
infrastructure. Hence, the project was not
covered by the Build-Operate-Transfer Law 9 and
did not require publication of a notice for its
validity.10
Nevertheless, for the sake of transparency, the
City Legal Officer recommended the publication
of the appropriate notice on the project and an
invitation to bid. An invitation to bid for the
proposed regulation of on-street parking and
installation of parking meters on Baguio Citys
streets was published in the Philippine Daily
Inquirer on 8, 9 and 10 May 2000. Four interested
bidders submitted their proposals, but three were
disqualified. The bid of Jadewell was the only one
not disqualified; hence, it was awarded the
project.11
On 26 June 2000, the MOA was finally executed
between Jadewell and the City of Baguio
through its then City Mayor, Mauricio G. Domogan
for the installation, management and operation
of the DG4S P&D parking meters.12
On 17 July 2000, the Sanggunian confirmed the
MOA through its Resolution No. 205-2000.13
On 31 August 2000, the parties executed a
supplemental MOA to include the Ganza/Burnham
parking space, owned by the Philippine Tourism
Authority and managed by the City of Baguio, in
the project.14 This supplemental agreement was
neither confirmed nor ratified by the Sanggunian.
In September of 2000, Jadewell began to mobilize
and take over the parking facilities at the
Ganza/Burnham Park area.15 Around this time,
questions arose regarding the compliance by
Jadewell with the provisions of the MOA, notably
on matters such as obtaining the
recommendation from the Department of Public
Works and Highways (DPWH) for the installation
of the parking meters and the legality of the
collection of parking fees being done by its
parking attendants prior to the installation of the
parking meters at Burnham Park.16
On 20 December 2000, Jadewell wrote then Vice-
Mayor Daniel T. Farias to inform him of the
progress of the deputization by the Department
of Transportation and CommunicationsLand
Transportation Office (DOTC-LTO) of parking
attendants required for the implementation of the
MOA. Jadewell explained that they were still
working on the required deputization of Jadewells
parking attendants. Nevertheless, it claimed that
its parking attendants were authorized to collect
parking fees pending the actual installation of the
parking meters. It also claimed that the parking
73
meters had not yet been installed because the
necessary civil works were yet to be completed.17
Page
Shortly thereafter, a case was filed by Edgar M.
Avila, et al. with the RTC-Baguio City (Branch 61),
assailing Ordinance No. 003-2000 as
unconstitutional and seeking to restrain the City
Government of Baguio from implementing the
provisions of the MOA. It further alleged that the
City Government could not delegate the
designation of pay parking zones to Jadewell, that
the parking attendants deployed by Jadewell were
not deputized, and that the questioned ordinance
creates class legislation as the designated taxi
and jeepney stands were discriminatorily
removed. The case was docketed as Civil Case
No. 4892-R.18 This was dismissed on motion by
Jadewell joined by the City Government of
Baguio. The lower court declared that Ordinance
No. 003-2000 is constitutional and that all acts
emanating from it are deemed "reasonable and
non-discriminatory...having been enacted in
accordance with the powers granted to Baguio
City by law."19 Complainants Motion for
Reconsideration (MR) was denied.
On 24 August 2001, Edgar Avila, et al., filed a
Rule 65 Petition for Certiorari, Prohibition and
Mandamus with the Supreme Court assailing the
RTCs dismissal of their Complaint. The case was
docketed as G.R. No. 149642. On 10 October
2001, this Court issued a Resolution dismissing
the petition of Avila, et al. for failure to state in
their petition the material dates when they
received the appealed resolution and order, and
to append the original or certified true copies of
the questioned resolution and order subject of
their petition.20 There was no resolution on the
merits. The Resolution became final and
executory on 2 April 2002.21
A case was also filed by Nelia G. Cid against then
Mayor Bernardo Vergara, et al. when her vehicle
was clamped, towed away, and impounded by
Jadewell after the latter found her car to be
illegally parked. She refused to pay the
corresponding fees to Jadewell and as a result,
the latter refused to release her vehicle.22 Cid
filed a case for replevin and questioned the
validity of Ordinance No. 003-2000 and the MOA,
as well as the authority of Jadewell to clamp
down/tow away vehicles whose owners refuse to
pay parking fees. The case was docketed as Civil
Case No. 5165-R and was assigned to Branch 7 of
RTC-Baguio. On 24 May 2002, an Omnibus Order
was issued by this RTC that addressed several
pending incidents related to the authority of
Jadewell to clamp down/tow away vehicles. The
Omnibus Order upheld Jadewells authority to
retain the vehicle of petitioner Nelia G. Cid
pending her payment of the parking and towage
fees to Jadewell, and held that the authority of
Jadewell was lawfully provided in Ordinance No.
003-2000 and the MOA. Also, the RTC-Baguio took
cognizance of the ruling by this Court in G.R. No.
149642 which, in its mistaken view, upheld the
validity of the questioned ordinance and the
MOA.23
Ultimately, Jadewell was able to install no more
than 14 parking meters in three (3) areas of
Baguio City: six (6) on Session Road, five (5) on
Harrison Road and three (3) on Lake Drive. 24 At
the time that these meters were installed, there
were already verbal complaints being raised
against Jadewell by the Sanggunian for the
following alleged violations:
a. Failure to install parking meters for each
parking space as specified in Section 3-F
of Ordinance No. 003-2000;25
b. Failure to install a convenient and
technologically advanced parking device
that is solar-powered and can measure the
time a vehicle stays in a parking slot;26
c. Failure to give the City of Baguio the
latter's share of the collected parking
fee;27
d. Failure to post a performance bond in
the amount of P1 million after its previous
bond expired.28
The Sanggunian passed Resolution No. 395,
Series of 2000, directing Jadewell to comply with
its obligations under the MOA for the installation
of the necessary number of parking meters.29
On 15 March 2001, Jadewell wrote to the City
Mayor in response to the mentioned Resolution,
informing the said office that the former had
started operation of the off-street parking on 2
December 2000 and of the on-street parking on
15 December 2000.30 On 27 January 2001,
Jadewell also wrote the City Treasurer that the
former had completed installation of the parking
meters.31
In response to the letter of Jadewell, the City
Treasurer demanded the remittance of Baguios
share of the parking fees collected by Jadewell
since it started operations. Jadewell responded by
saying that it had complied with this obligation. 32
On 19 February 2002, the Sanggunian passed
74
Resolution 37,33 expressing its intent to rescind
the MOA with Jadewell. The said Resolution
Page
enumerated in the "Whereas" clauses the alleged
violations of Jadewell prompting it to rescind the
MOA. It reads:
xxxx
WHEREAS, it now appears from verified facts
that:
1. contrary to its commitment to install a
technologically based P & D parking
system, at no cost to the City, including
"such equipment and paraphernalia to
meter the length of usage of the affected
parking spaces for purposes of payment of
the parking fees", Jadewell has installed
only fourteen (14) parking meters (only 12
of which are working) in only three (3)
streets, and Jadewell does not intend to
install anymore [sic]; instead it has
resorted as a rule to an exceptional
circumstance of manual collection of
parking fees by parking attendants who,
despite express provisions of the
Ordinance, are not duly deputized by the
DOTC-LTO. Despite assurances to the
Honorable City Mayor that Jadewell would
stop collection of parking fees until the
parking meters have been duly installed,
Jadewell continues to collect parking fees
manually by using undeputized parking
attendants to do the collection;
2. contrary to its commitment to install a
technologically based P & D parking
system, at no cost to the City, Jadewell
has charged the cost of such and similar
equipment as direct costs, thus
substantially eroding the share of the City
in the parking fees;
3. contrary to its obligation to post a
performance bond, Jadewell has not fully
complied, and when required to update its
performance bond Jadewell refused to do
so rationalizing its non-compliance by the
assertion that they are already performing
and therefore are no longer obligated to
post a performance bond;
4. contrary to its obligation to remit the
share of the City within the first ten (10)
days of the following month, Jadewell had
initially resisted making payments to the
City on the pretext that the profits cannot
be determined until after the end of the
fiscal year and initially failed to have their
tickets pre-numbered and registered with
the Office of the City Treasurer;
5. contrary to its promise that the City
would derive substantial revenue from the
on-street pay parking system, Jadewell has
not paid a single centavo of the City share
in on-street parking operation; whatever
Jadewell has remitted to the City are
properly chargeable against the share of
the City in the MOA on off-street parking
(the Burnham Parking Area near Ganza),
and it appears less than what the City is
entitled thereto; and
6. contrary to its representations that the
P & D System which it proposed would
eliminate fraud in the collection of parking
fees, Jadewell has perpetrated fraud on
the City by, according to the affidavit of its
former bookkeeper, Mr. Adonis Cabungan,
doctoring the financial statements before
the same are submitted to City
authorities.34
WHEREAS, there has been no substantial
improvement of the traffic situation in the City
even with the introduction of the P & D Parking
System and thus it increasingly appears that the
system introduced by Jadewell is more for
revenue raising than for regulatory purposes. As
a consequence the legal principle applies that the
collection of taxes cannot be let to any person. In
other words, government cannot allow private
persons to collect public funds for themselves
with the agreement that part thereof or as it
turned out in this case no part thereof is shared
with the City;
WHEREAS, in its financial reports to the City
showing substantial loses [sic] and in its
statement to other persons that it is losing money
on the project, the kindest thing that the City can
do for Jadewell is to prevent Jadewell from
incurring anymore [sic] loses.
NOW THEREFORE, on motion of Hon. Bautista,
and Hon. Cario, seconded by Hon. Yaranon, Hon.
Weygan and Hon. Tabora, be it RESOLVED, as it is
hereby resolved, to rescind the Memorandum of
Agreement (MOA) executed between the City of
Baguio and Jadewell Parking System Corporation
dated 26 June 2000 on the basis of the foregoing
premises and exercising its rights under Section
12 of the MOA on the subject of On-Street Parking
executed between the City of Baguio and Jadewell
Parking Systems Corporation dated 26 June 2000
and, more importantly, performing its duty to
protect and promote the general welfare of the
75
people of Baguio City.
Page
RESOLVED FURTHER, to direct the City Legal
Officer to cause the proper notice of rescission to
Jadewell Parking Systems Corporation forthwith
and to take all appropriate steps to implement
and enforce the intent of this Resolution.
RESOLVED FURTHERMORE, to inform all City
officials and employees and all other persons
concerned to be guided accordingly.35
On 1 March 2002, the then City Mayor of Baguio,
Bernardo M. Vergara, vetoed Resolution 37,
through a letter dated 1 March 2002 addressed to
the Vice-Mayor, as Presiding Officer of the
Sanggunian, and its members. Mayor Vergara
reasoned that it was premature for the
Sangguniang Panlungsod to rescind the MOA,
because the latter provides for a minimum period
of five years before the right of rescission can be
exercised; and, that the right of Jadewell to due
process was violated due to the lack of
opportunity to hear the latters side. The City
Mayor proposed a re-negotiation of the MOA with
Jadewell as a solution to the problem.36
Meanwhile, on 13 March 2002, the DOTC
Cordillera Autonomous Region (DOTC-CAR) issued
a cease and desist order to Jadewell prohibiting it
from clamping down and/or towing away vehicles
in Baguio City for violation of traffic rules and
regulations.37
On 17 April 2002, the Sanggunian resolved
through a Resolution of the same date, to
override the veto of the City Mayor, worded thus:
NOW THEREFORE, the Sangguniang Panlungsod
(City Council) in Regular Session assembled, by
twelve affirmative votes constituting more that
[sic] a two-thirds vote of all its Members, has
resolved to override, as it hereby overrides, the
veto of His Honor, Mayor Bernardo M. Vergara, of
City Resolution Numbered 037, Series of 2002,
entitled "Rescinding the Memorandum of
Agreement (MOA) Executed Between the City of
Baguio and Jadewell Parking Systems Corporation
Dated 26 June 2000."38
Also at this time, Braulio D. Yaranon, who was
then a member of the Sanggunian, requested a
special audit from the Commission on Audit
Cordillera Autonomous Region (COA-CAR) on the
operations of Jadewell as regards the pay parking
project embodied in the MOA.
On 27 May 2002, Jadewell filed with the RTC of
Baguio City a Rule 65 Petition for Certiorari,
Prohibition and Mandamus with Prayer for the
Issuance of a Writ of Preliminary Injunction,
assailing the validity of Resolution No. 037-2002,
which rescinded the MOA between the
Sangguniang Panlungsod and Jadewell.39 The case
was docketed as Civil Case No. 5285-R and was
raffled off to RTC-Baguio (Branch 61).
On 8 October 2002, the RTC Br. 61 promulgated
its Decision40 finding the Sanggunians rescission
of the MOA unlawful. The Sanggunian then filed
an appeal assailing the RTCs decision with the
Court of Appeals; the case was docketed as CA-
G.R. SP No. 74756.
Meanwhile, pending resolution of CA-G.R. SP No.
74756 before the CA, the Sanggunian passed
Resolution No. 089, Series of 2003. The resolution
sought the assistance of the DOTC-CAR
specifically, for it to take immediate action
against the officers and personnel of Jadewell for
defying the 13 March 2002 cease-and-desist
Order it issued prohibiting the latter from
clamping down and/or towing away vehicles.41 On
27 May 2003, City Mayor Vergara approved and
signed Resolution No. 089-2003. In response,
Jadewell filed a Petition for Indirect Contempt with
the CA against Mayor Vergara, the Sanggunian
and other local government officers. The case
was docketed as CA-G.R. SP No. 77341. The
original petition was followed by three (3)
supplemental petitions filed by Jadewell in the
same case.
On 7 July 2003, the CA rendered a Decision 42 in
CA G.R. SP No. 74756, affirming the assailed
Decision of the trial court which declared as
invalid the Sanggunians rescission of the MOA.
The Sanggunian filed a Motion For
Reconsideration, but this was denied by the CA
through a Resolution dated 4 September
2003.43 Aggrieved by the denial of their appeal,
the Sanggunian filed a Rule 45 Petition for Review
on Certiorari with this Court, seeking to reverse
and set aside the 7 July 2003 Decision and its
Resolution dated 04 September 2003 of the CA.
The petition was docketed as G.R. No. 160025,
the first of the consolidated petitions herein.44
In CA-G.R. SP No. 77341, the CA dismissed in a
Decision45 promulgated on 28 July 2004 the
contempt petitions filed by Jadewell for lack of
merit. The latters Motion For Reconsideration
was likewise denied by the CA. 46Jadewell elevated
the dismissal of its contempt petitions to this
Court on 8 December 2004 by filing a Rule 45
Petition for Review on Certiorari. The case was
docketed as G.R. No. 166094. This is not among
76
the consolidated petitions herein.
Page
On 13 July 2003, the COA-CAR promulgated the
requested Report.47 The Reports objective was to
ascertain compliance by the contracting parties
the City of Baguio and Jadewell with Ordinance
No. 003-2000 and the MOA. The COA-CAR Report
has 12 findings, essentially as follows:
1) The provisions of the MOA and its
Supplement as regards the sharing of the
fees are contradicting, hence the share of
the City Government cannot be
determined;48
2) There was no proper segregation by
area of the parking fees collected, hence
the proper share of Baguio City cannot be
determined;49
3) The City Government did not strictly
implement the collection of penalties
arising from the late remittances of
Jadewell, hence additional revenues were
not collected;50
4) The City Treasurer did not conduct an
audit of the books and accounts of
Jadewell, thus the City Governments
share from parking fees cannot be
ascertained;51
5) The use of the P&D parking meters
were [sic] not maximized due to Jadewells
non-compliance with Ordinance No. 003-
2000 and the MOA, resulting in the
collection of meager income from its use;52
6) The MOA does not specify the
guidelines for determining the economic
viability of installing the parking meters
and the period within which to install it
[sic];53
7) The Supplemental MOA was not
confirmed by the City Council of Baguio in
violation of R.A. No. 7160 (the Local
Government Code);54
8) The coverage of the parking operations
contained in Annex "A" of the MOA was
not confirmed by the City Council in
violation of R.A. No. 7160;55
9) The City Government failed to ensure
proper compliance by Jadewell with the
MOA provisions;56
10) The pay parking project was awarded
to a bidder who did not have all the
qualifications as stated in the "Invitation
to Bid" in violation of R.A. No. 7160 and
Audit Circular No. 92-386;57
11) The provisions on deputization in
Ordinance No. 003-2000 and the MOA are
contrary to R.A. No. 4136 (the Land
Transportation and Traffic Code), thus
rendering it invalid;58
12) The monthly minimum amount to be
remitted to the City Government is
doubtful due to the discrepancy in the
amounts collected and expenses for the
year 1999 provided by the City
Government to Jadewell as against the
amount certified by the Office of the City
Architect and Parks Superintendent-
Burnham Parks Office for the City
Government overseeing the Ganza-
Burnham parking spaces.59
On 11 February 2004, after G.R. No. 160025 was
filed and pending resolution by this Court, the
Sangguniang Panlungsod adopted Resolution No.
056, Series of 2004. The said Resolution informs
the general public that Jadewell had neither the
authority nor the police power to clamp, tow, or
impound vehicles at any place in the City of
Baguio.60 Also, on the same date, the
Sangguniang Panlungsod passed Resolution No.
059, Series of 2004, in which it made a formal
demand upon Jadewell to restore to it possession
of the Ganza Parking Area.61
With these developments, Jadewell filed directly
with this Court its first indirect contempt case
against Bernardo M. Vergara (then City Mayor of
Baguio), its Vice-Mayor, and the entire City
Council for enacting Resolution Nos. 056 & 059,
Series of 2004 pending resolution by this Court of
G.R. 160025. The case was docketed as G.R. No.
163052.
On 23 June 2004, this Court through its First
Division, ordered G.R. No. 163052 consolidated
with G.R. No. 160025.62
On 1 July 2004, then Baguio City Mayor Braulio D.
Yaranon issued Executive Order No. 001-04,63 the
decretal portion of which reads:
NOW, THEREFORE, the undersigned City Mayor,
pursuant to his authority to enforce all laws and
ordinances relative to the governance of the City,
and to issue executive orders for the faithful and
appropriate enforcement and execution of such
laws and ordinances (Sec. 455 (b) (2) and (iii),
77
R.A. 7160) hereby affirms and gives protection to
the right of the citizenry, particularly affected
Page
motor vehicle owners, operators, and drivers, to
refuse to submit to the enforcement of Ordinance
003-2000, by the Jadewell Parking Systems
Corporation, and further to refuse to pay public
revenue in the form of fees, charges, impositions,
fines, and penalties provided for in the said
ordinance, to the said entity, such acts being
patently illegal and prohibited by law; this
Executive Order shall be in force and effect until
the City Council, as the legislative arm of the City
of Baguio, shall have adopted appropriate
remedial or corrective measures on the matters
and concerns specified hereinabove.
On 8 July 2004, Mayor Yaranon issued a
Memorandum64 to the City Director of the Baguio
City Police Department, directing the department
to stop and prevent Jadewell from clamping,
towing, and impounding vehicles; to arrest and
file criminal charges against Jadewell personnel
who would execute the proscribed acts specified
in the said Memorandum; and to confiscate the
equipment used by Jadewell to clamp, tow, or
impound vehicles under the authority of the
rescinded MOA.
On 12 July 2004, Jadewell filed its second Petition
for indirect contempt again with this Court, this
time against Mayor Yaranon for having issued the
above-cited Order also for the same reasons
given in its first contempt petition with this Court.
The Petition was docketed as G.R. No. 164107.
Furthermore, on 15 July 2004, Jadewell filed an
administrative case against Mayor Yaranon before
the Office of the President (OP). Docketed as Case
No. OP 04-G-294, it sought the mayors
suspension and removal from office. The case
against Mayor Yaranon was for his issuance of the
following: (1) Executive Order No. 001-04 dated 1
July 2004; (2) the Memorandum dated 7 July 2004
limiting the pay parking business of Jadewell to
certain parts of Baguio City;; and (3)
Memorandum dated 8 July 2004 directing the
Baguio City Police Department to prevent
Jadewell from apprehending, towing and
impounding vehicles. A supplemental petition
filed by Jadewell on 19 January 2005, complaining
of Executive Order No. 005-2004, which was
issued on 15 October 2004, was also included in
administrative case OP 04-G-294.
On the following day, 16 July 2004, Jadewell filed
a Supplemental Petition with Motion for Leave of
this Court65 in the second contempt petition
before this Court, G.R. No. 164107, alleging as a
supplemental fact, Mayor Yaranons Memorandum
of 08 July 2004.
On 15 October 2004, Mayor Yaranon issued
Executive Order No. 005-2004.66 This was a cease
and desist order against Jadewell to prevent it
from performing the following acts: (1) charging
and collecting from motorists, parking fees
without their consent;67 (2) seizing and detaining
vehicles of motorists who refuse to pay parking
fees to Jadewell;68 and (3) using yellow-colored
heavy wreckers or tow trucks bearing the name
"City of Baguio".69
In addition to Executive Order No. 005-2004,
Mayor Yaranon issued Executive Order No. 005-
2004-A, which is essentially a rehash of Executive
Order No. 005-2004.70
On 25 October 2004, Jadewell filed a third Petition
with this Court, praying that Mayor Yaranon be
cited for contempt and that Executive Order No.
005-2004 be nullified.71 This case was docketed
as G.R. No. 165564. On 16 November 2004,
Jadewell filed a Supplemental Petition to this
Petition alleging as a supplemental ground the
issuance of Executive Order No. 005-2004-A.72
On 20 December 2004, Mayor Yaranon issued
Administrative Order No. 622, Series of 2004,
which declared that Jadewell exceeded its area of
operations for the administration of on-street
parking and was thus required to show lawful
cause why its business permit should not be
revoked. In response to this Order, Jadewell filed
a Second Supplemental Petition for contempt
against Mayor Yaranon in G.R. No. 165564 on 25
January 2005.
On 10 January 2005, this Court through a
Resolution73 ordered the consolidation of G.R. No.
160025 with G.R. Nos. 163052, 164107, and
165564.
On 17 January 2005, this Court denied Jadewells
petition in G.R. No. 166094 for failure to show any
reversible error on the part of the CA in
dismissing its petition for contempt in CA-G.R. SP
No. 77341.74 Its Motion For Reconsideration was
likewise denied with finality.75
In the beginning of the year 2005, Jadewell
attempted to renew its business permit from the
City of Baguio and tendered the fees required.
However, the Office of the City Mayor refused to
renew the business permit and returned the
amount tendered.76 Because of these actions of
Mayor Yaranon, Jadewell filed on 15 April 2005 its
Third Supplemental Petition in G.R. No. 164107,
which had been consolidated with G.R. Nos.
78
160025, 163052, and 165564. Aside from its
main prayer to cite the mayor for contempt,
Page
Jadewell also prayed that Mayor Yaranon, a
lawyer, be disbarred.77 On 25 April 2005, this
Court, through its Third Division, admitted the
Third Supplemental Petition of Jadewell.78
On 9 February 2005, this Court, in G.R. No.
160025, issued a Writ of preliminary mandatory
injunction ordering Mayor Yaranon to immediately
reopen the streets and premises occupied and/or
operated by Jadewell. The Court also required
Jadewell to post a cash or surety bond in the
amount of P100,000 within five days from receipt
of the order.79
The order, in part, reads:
Acting on the urgent motion dated January 26,
2005 of respondent Jadewell Parking Systems
Corporation for the issuance of a temporary
mandatory/preventive order and/or for writ of
preliminary mandatory/prohibitory injunction
pending appeal in G.R. No. 160025, alleging that
the effects of the acts of City Mayor Yaranon,
unless stayed, would also make effective what
the petitioner Sangguniang Panglungsod ng
Baguio failed to obtain in the instant case, the net
effect of which would not only be grave damage
and injury to the respondent but also to the City
of Baguio, the Court further Resolved:
(a) to ISSUE, the WRIT OF PRELIMINARY
MANDATORY INJUNCTION prayed for,
effective immediately, commanding City
Mayor Yaranon to immediately reopen the
streets and/or premises operated and/or
occupied by the respondent and to let
them remain open, until further orders of
this Court; and
(b) to require petitioner to POST a CASH
BOND or a SURETY BOND from a reputable
bonding company of indubitable solvency
in the amount of ONE HUNDRED
THOUSAND PESOS (P100,000.00), with
terms and conditions to be approved by
the Court, within five (5) days from notice,
otherwise, the writ of preliminary
mandatory injunction herein issued shall
AUTOMATICALLY be lifted.
NOW THEREFORE, You, [City Mayor Braulio D.
Yaranon], your agents, representatives and/or any
person or persons acting upon your orders or in
your place or stead, are hereby DIRECTED to
IMMEDIATELY REOPEN the streets and/or premises
operated and/or occupied by the respondents and
to let the said streets and premises remain OPEN,
until further orders from this Court.
On 8 April 2005, Mayor Yaranon issued a
Memorandum80 directing Col. Isagani Nerez,
Director of the Baguio City Police District, to
create a special task force to stop Jadewell from
clamping, towing, and impounding vehicles in
violation of parking rules in Baguio City; to
impound the wrecker/tow trucks used by
Jadewell.
On 20 April 2005, this Court promulgated a
Resolution in G.R. No. 160025, finding Mayor
Yaranon guilty of direct and indirect contempt. He
was cited for direct contempt when it was proven
that he had submitted pleadings before this Court
containing falsehoods. Mayor Yaranon had stated
in his Compliance that the streets were opened
for Jadewell to resume operations, but upon
inspection these were found to be closed.81 He
was also cited for indirect contempt, for having
continuously refused to carry out the writ issued
by this Court to reopen the streets so Jadewell
could resume operations.82 This Court likewise
fined Mayor Yaranon the amount of P10,000,
which he paid. The Court further ordered the
National Bureau of Investigation (NBI) to
immediately arrest and detain Mayor Yaranon
pending his compliance with the 9 February 2005
writ of preliminary mandatory injunction issued
by this Court, which ordered the reopening of
some streets so Jadewell could continue its
operations.83
On 10 August 2005, Benedicto Balajadia, et al.
filed Civil Case No. 6089-R against Jadewell
before the RTCBaguio City. The case was
subsequently raffled to Branch 3 of the RTC
presided by Judge Fernando Vil
Pamintuan.84 Balajadia, et al. sought to nullify the
MOA between Jadewell and the City Government
of Baguio and its enabling ordinance, Ordinance
No. 003-2000. The complainants also prayed for
the issuance of a Temporary Restraining Order
(TRO) and for a writ of preliminary injunction
against Jadewell.
On 19 April 2006, Judge Pamintuan issued an
Order in Civil Case No. 6089-R granting the
prayer of complainants Balajadia et al. for the
issuance of a Writ of Preliminary Prohibitory
Injunction. The injunction was meant to restrain
Jadewell from proceeding with the supervision
and collection of parking, towing, and impounding
fees on the streets of Baguio City. Further, Judge
Pamintuan ordered the holding in abeyance of the
implementation of City Ordinance No. 003-2000
and the MOA.85
On 27 April 2006, Jadewell filed with this Court a
79
Rule 65 Petition for Certiorari, Prohibition, and
Mandamus against Judge Pamintuan86 for refusing
Page
to dismiss Civil Case No. 6089-R. The case was
docketed as G.R. No. 172215. On the same day,
Jadewell filed a Petition asking this Court to cite
Judge Pamintuan for contempt. This fourth
contempt case, albeit primarily against a member
of the judiciary, was docketed as G.R. No.
172216.
On 19 June 2006, G.R. No. 172215 was ordered
consolidated with G.R. Nos. 160025, 163052,
164107, and 165564.87
On 23 June 2006, Mayor Yaranon wrote Jadewell a
letter demanding that it desist from operating the
pay parking system in Baguio City.
Simultaneously, he wrote the Sanggunian,
requesting it to cancel Ordinance No. 003-2000,
the enabling ordinance for the MOA.
On 26 June 2006, Jadewell filed a Supplemental
Petition88 in G.R. No. 172215 complaining of Judge
Pamintuans issuance of the following Orders in
Civil Case No. 6089-R: (a) Order dated 24 April
200689 directing the parties to file a pre-trial brief
and setting the pre-trial of the case; (b) Order
dated 01 June 200690 informing Jadewell that
public respondent was not suspending the
proceedings, because he believed he was not
covered by the writ issued by this Court; (c) Order
dated 14 June 200691 upholding the writ he issued
in the civil case despite his receipt of a copy of
the writ of preliminary injunction issued by this
Court; and (d) Order dated 16 June
200692directing Jadewell to comply with the writ
of preliminary prohibitory injunction under pain of
direct contempt.
On the same day, 26 June 2006, the Office of the
President (OP) rendered a Decision in OP 04-G-
294, the administrative case Jadewell had filed
against Mayor Yaranon, finding him guilty of
grave misconduct, abuse of authority, and
oppression. Mayor Yaranon was meted out a
penalty totalling 12 months suspension from
office.93This suspension was implemented by the
Department of Interior and Local Government
(DILG). Aggrieved by his suspension, Mayor
Yaranon filed his Motion For Reconsideration,
which was denied on 22 August 2006 by the OP.
On 29 June 2006, in response to Mayor Yaranons
letters of 23 June 2006, Jadewell filed before this
Court yet another case for contempt its fifth
contempt case, and the third one specifically
against Mayor Yaranon. In addition to its prayer to
cite the mayor for contempt, Jadewell also prayed
that Mayor Yaranon, a lawyer, be disbarred.94 The
case was docketed as G.R. No. 173043.
On 31 July 2006, G.R. No. 173043 was ordered
consolidated with G.R. Nos. 160025, 163052,
164107, 165564, and 172215. 95 On 27 September
2006, G.R. No. 172216 was consolidated with G.R.
Nos. 160025, 163052, 164107, 165564.96
On 23 August 2006, while the consolidated cases
were pending resolution before this Court, the
Sangguniang Panlungsod enacted Resolution No.
204, Series of 2006. The Resolution directed the
City Legal Officer to notify Jadewell of the Baguio
City Governments intention to rescind the MOA,
and to inform Jadewell to stop its operations
under the MOA 60 days after receipt of the
Notice.97
On 28 August 2006, the legal counsel for Jadewell
wrote to Baguio City Vice-Mayor Bautista, Jr.,
informing him that the OP had denied the Motion
for Reconsideration of Mayor Yaranon assailing
the OP resolution ordering the latters suspension
as City Mayor of Baguio City.98 The counsel for
Jadewell likewise stated in his letter that they
were aware that the Sanggunian was planning to
issue a resolution to repeal Ordinance No. 003-
2000 and rescind the MOA. The letter requested
the Vice-Mayor to veto the measure in light of the
pending petitions with the Supreme Court.99 The
said counsel likewise sent a similar letter to the
Sanggunian, urging it to desist from
implementing the repeal of Ordinance No. 003-
2000 and the rescission of the MOA pending the
resolution of the cases with the Supreme Court.100
On 13 September 2006, Mayor Yaranon appealed
to the CA, in a case docketed as CA G.R. CV SP
No. 96116, praying for the lifting of the penalty of
suspension meted him in OP 04-G-294, but this
appeal was denied. Mayor Yaranon moved for
reconsideration.101
On 22 September 2006, City Legal Officer
Rabanes wrote a letter to Jadewell, through its
President, Mr. Rogelio Tan, informing Jadewell of
Resolution No. 204, Series of 2006, which
rescinded the MOA, and ordering it to stop
operations within 60 days from notice.102 This
letter was received on the same day it was
issued;103 hence, the 60-day period lapsed on 22
November 2006. This notice, together with the
resolution, constitute the second act of rescission
of the MOA by the city officials of Baguio.
On 19 October 2006, Jadewell filed the sixth
contempt case with this Court against the acting
City Mayor of Baguio, Reinaldo A. Bautista, Jr., and
the members of the Sanggunian, including City
80
Legal Officer Melchor Carlos R. Rabanes, for the
second act of rescission of the MOA. 104 The case
Page
was docketed as G.R. No. 174879.
On 9 October 2007, the CA dismissed Mayor
Yaranons Petition in CA G.R. CV SP No. 96116 on
the ground that it had become moot and
academic due to Mayor Yaranons failure to be re-
elected in the 17 May 2007 elections. Mayor
Yaranon filed a Motion for Reconsideration on 07
November 2007, but this was also denied by the
CA on 24 January 2008. Thus, on 17 March 2008,
Mayor Yaranon filed a Rule 45 Petition before this
Court seeking to reverse and set aside the CA
Decision and Resolution. It was docketed as G.R.
No. 181488.
On 12 November 2008, G.R. No. 181488 was
ordered consolidated with the cases already
mentioned.105
THE ISSUES
1. On G.R. No. 160025 and on the
claim in G.R. No. 174879 that the second
act of rescission was a valid act of
rescission.
Whilst the issues are spread out among the nine
cases, we have grouped these according to what
are common to the specific cases.
In our effort to simplify the issues and provide
forms of relief to the parties that are not purely
academic, it is necessary to examine the
operative effects that may result from any
resolution of this Court. Such examination may
also help guide the parties in their future actions,
and perhaps the overly-litigated matters brought
before us in the consolidated petitions may finally
be put to rest.
We note at the outset that on 22 November 2006,
60 days had lapsed from receipt of the letter
dated 22 September 2006, informing Jadewell of
the decision of the City of Baguio to rescind the
MOA under Section 12 thereof. It may be recalled
that Section 12 requires that notice of the
intention to rescind be given 60 days prior to the
effectivity of the rescission. Jadewell has not
questioned the legal efficacy of this notice. It has
brought this matter of a second rescission to the
Courts attention only as a matter of
contumacious behavior on the part of the
respondents in G.R. No. 174879, in the same way
that it brought various actions of the public
respondents before the Court in its other
contempt petitions. Since the legal efficacy of the
rescission in 2006 has not been contested by
Jadewell in any of the petitions before us, we thus
consider this notice of rescission to have taken
legal effect and therefore, at the latest, the MOA
between the City of Baguio and Jadewell has
ceased to legally exist as of 22 November 2006.
Parenthetically, we note that while the validity of
the second act of rescission described in G.R. No.
174879 is not principally determinative of the
respondents liability for indirect contempt
therein, a conclusion that the second act of
rescission was undertaken competently and
appropriately will to a certain degree impact our
appreciation of such possible liability. We will
discuss this issue in our subsequent discussion on
the charges of contempt.
Inasmuch as there is no longer any existing MOA,
no order of this Court can have the effect of
directing the City of Baguio to enforce any of the
terms of the MOA, which brings us to the matter
of G.R. No. 160025. In whatever direction we rule
on the question of the validity of the first act of
rescission, such ruling will only have the effect of
either providing Jadewell a basis to seek damages
from the City of Baguio for the wrongful
termination of the MOA, should we find wrongful
termination to have taken place, or, deny
Jadewell that right. The possible susceptibility of
the City of Baguio and its officials to an action for
damages on a finding of wrongful termination is
why we do not consider G.R. No. 160025 as
having been rendered moot by the lawful
rescission of the MOA on 22 November 2006.
Thus, we will proceed to rule on the issues in G.R.
No. 160025.
The fallo of the RTC Decision upheld by the CA,
which affirmance is the lis mota in G.R. No.
160025, reads as follows:
WHEREFORE, judgment is rendered declaring
both Sangguniang Panlungsod Resolution No.
037, Series of 2002 and the April 17, 2002
Resolution overriding the Mayors veto as NULL
and VOID. The Writ of Preliminary Injunction
earlier issued by this Court is made PERMANENT,
with costs against respondents.106
The RTC did not order the respondents therein to
comply with the MOA. An order to perform a
contract is not necessarily subsumed in an order
not to terminate the same.
Contrast this legal point with the fact that the
prayer of Jadewell in its original petition asked the
RTC, in relevant part:
...that the writ of preliminary injunction be made
81
permanent and the writs applied for be issued
against the respondents nullifying and voiding
Page
Resolution No. 037, series of 2002 and the
resolution over-riding the veto and instead,
directing them to perform what the memorandum
of agreement requires them to do. (Emphasis
supplied)107
This latter part, which is effectively a prayer for a
permanent mandatory injunction against
respondents therein to perform the terms of the
MOA, are not in the fallo of the RTC decision. We
consider therefore that the RTC deliberately
withheld granting the specific prayer to order
Baguio City to perform the MOA. No motion to
correct or clarify the said fallo having been filed
by Jadewell, the prayer to order the city officials
of Baguio to perform the MOA is hereby deemed
abandoned.
We further note three things:
1. Jadewell has not questioned - in its
Petition, Reply to Comment, and
Memorandum before this Court - the
implication of the RTC and CA Decisions to
the effect that the Sanggunian had the
authority to perform acts of contractual
rescission on behalf of the City of Baguio
when both these courts ignored the issue
raised by Jadewell in its Petition before the
RTC, and we therefore do not consider this
to be a genuine issue in this Petition
before us;
2. While the Sangguniang Panlungsod has
insinuated that there was fraud and
excess of authority on the part of the
mayor in the execution108 of the MOA -
because the latter provided for a smaller
sharing of "20 % from the gross profit of
the operation or 50% of the net profit
whichever is higher" instead of the
intended "20% of gross receipts," 109-
petitioners in G.R. No. 160025 conceded
even at the RTC level that they are not
assailing the MOA for being defective but
for having been breached in the
performance. We thus disregard all
arguments in G.R. No. 160025 regarding
the validity of the execution of the MOA,
for being a non-issue in this case;110
3. We also immediately set aside claims of
Jadewell in its Petition before the RTC that
an alternative relief should be provided by
the courts in the form of compensation for
terminated Build-Operate-Transfer (BOT)
contracts under the BOT Law (Republic Act
No. 6957) as there is not the slightest
basis on record that the administration of
on-street parking can be classified as an
infrastructure contract, a basic element
that must be present for any contract to
come within the terms of the BOT Law.
Having preliminarily screened out the non-issues
in this case, we proceed to examine the rulings of
the courts a quo in G.R. 160025.
The CA affirmed the RTC Decision in toto, along
the following points:
1. On the sole procedural issue. - The RTC
was correct in treating the Petition as one
for permanent injunction with a prayer for
a preliminary injunction, instead of
treating it by its formal title: "Petition for
Certiorari, Prohibition and Mandamus with
a Prayer for a Writ of Preliminary
Injunction." It was correct in holding that if
the Petition had been treated by its formal
denomination, then it would have been
dismissed for failing to satisfy the
requirement that the act sought to be
nullified was rendered in a judicial or
quasi-judicial capacity by the respondents,
but then this formal denomination could
be disregarded and the nature of the
Petition should be determined by its
allegations and prayers. Since there was a
prayer to permanently enjoin respondents
from enforcing the questioned resolutions,
the RTC was correct in treating it as one
for permanent injunction.
2. On the substantive issues:
a. On the lack of due process
afforded Jadewell. The RTC was
correct in ruling that Jadewell was
denied the right to be heard before
the Sanggunian rescinded the MOA.
There is no evidence on record that
the Sanggunian afforded Jadewell
an opportunity to present its side
or refute the charges of the latters
violation committed under the
MOA.111
b. On the authority of the RTC to
consider the effect of Section 9 of
the MOA112 when Jadewell never
raised the matter of Section 9 in
any of its pleadings. The RTC
correctly considered Jadewells
letter dated 24 November 2001,
 addressed to the Sanggunian and
82
offered during the trial, which
introduced the subject matter of
Page
the five (5) year guarantee against
rescission provided in Section 9 of
the MOA. The CA regarded the
RTCs consideration of said letter as
judicious and added that even
without it, the MOA, and its
provisions, form part of the case
records.113
c. On the failure to observe the 60-
day notice requirement. The RTC
correctly found that the
Sanggunian cannot validly and
unilaterally rescind the MOA
without observing the provisions in
Section 12 of the MOA requiring
that a 60-day notice be given
before rescission can take place. To
allow the Sanggunian to
unilaterally rescind the MOA
without giving Jadewell an
opportunity to present its side is to
render the right to rescission
provided in the MOA legally
vulnerable.114
d. On the lack of substantiveness of
the alleged breach of performance
of the MOA by Jadewell. The CA
reviewed the records of the case
and upheld the findings of the RTC
that the violations of Jadewell were
not substantial to merit the
consequence of rescission under
the MOA.115
We elucidate on the arguments of the parties, the
RTC, and the CA.
In its Petition before the RTC, Jadewell argues that
the rescission of the MOA was not valid, on due
process grounds, and also because there was no
substantial breach on its part to justify a
rescission of the MOA.116 It also asserts that the
Sanggunian had no authority to rescind the MOA,
because the latter was not a party thereto.117
Jadewell sought a writ of preliminary injunction to
prevent the implementation of the questioned
Resolution, and prayed that after hearing, the
preliminary injunction be made permanent. It
further prayed for the issuance of a writ of
certiorari to nullify the assailed Resolution; and
for a mandatory injunction to compel the City
Government to perform the latters obligations
under the MOA.118 Jadewell alternatively invoked
the provisions of Section 18 of the Implementing
Rules and Regulations (IRR) of the BOT Law, 119 in
the event the RTC would uphold the validity of the
questioned Resolution.
The trial court ruled that the rescission violated
the due process clause of the Constitution and
failed to meet the requirements for rescission
under the Civil Code and the MOA itself. In the
Sanggunians Memorandum, on appeal before the
CA, the Sanggunian assigned three errors to the
Decision of the trial court: (1) the RTC ignored the
evidence on record and the requirements of Rule
65 when it declared the subject Resolution void;
(2) Jadewell was not denied due process when the
MOA was rescinded; and (3) by ruling that the
Sangguniang Panlungsod had no right of
rescission for the first 5 years of the MOA an
issue not raised in the pleadings the trial court
improperly took up the cudgels for Jadewell in the
case.120
As earlier stated, the CA upheld the RTCs
Decision in toto.
The Sanggunian filed its Motion for
Reconsideration arguing that the CA had erred as
follows: (1) treating Jadewells petition as an
original action for injunction;121 (2) ruling that
Jadewell was deprived of due process 122when it
rescinded the MOA; and (3) finding that the MOA
stipulated for a five-year minimum guarantee
against rescission.123 This was denied, and this
denial and the CA Decision are the subjects of G.
R. 160025.
2. G.R. No. 172215 Certiorari,
Prohibition and Mandamus, filed by
Jadewell against Judge Pamintuan
for not dismissing Civil Case No. 6089-R
Jadewell directly filed the instant Rule 65 Petition
for Certiorari before this Court to nullify the denial
by the trial court of its Motion to Dismiss and its
Motion for Reconsideration of the same
order,124 and for ordering Jadewell to cease
collecting parking fees, and from towing and
impounding vehicles on the streets of Baguio City.
It also seeks to nullify the proceedings in Civil
Case No. 6089-R, invoking both res judicata and
litis pendentia.125 It contends that, since the issue
on the validity of the questioned city ordinance
and the MOA was favorably ruled upon previously
by RTC Branches 7 and 61 of Baguio City in
separate cases, Branch 3 of the same RTC
presided by Judge Pamintuan is bound by the
rulings of the other branches.126 Litis pendentia is
being invoked in relation to the petitions already
before this Court.
Mayor Yaranon is impleaded in this case on the
83
basis of the order of Judge Pamintuan to the city
mayor to perform his duty to supervise the roads,
Page
streets and park of Baguio City, in coordination
with the police and the LTO during the validity of
the Writ of Injunction that Judge Pamintuan
issued.127
The main issue to be resolved in Jadewells
Petition for certiorari is whether Judge
Pamintuans rulings in Civil Case No. 6089-R
violated the res judicata/litis pendentia doctrines.
3. G.R. No. 181488 The
Certiorari petition filed by Yaranon
seeking to reverse Resolutions dated
9 October 2008 and 24 January 2008
in CA-G.R. SP No. 96116 which
upheld the validity of his suspension
as City Mayor of Baguio.
Mayor Yaranons instant Petition before this Court
raises the following issues: (1) that his failed re-
election bid was not a supervening event in the
final determination by the CA of whether he was
guilty of grave misconduct, abuse of authority,
and oppression; and (2) that the CA should rule
on the substantive validity of his suspension.
4. The Petitions for Contempt
a. G.R. No. 163052 This is the first contempt
petition filed by Jadewell directly with this Court
against City Mayor Vergara, the Vice Mayor, and
the entire Sanggunian, for enacting Resolution
Nos. 056 & 059, Series of 2004. To recall,
Resolution No. 056, Series of 2004 informs the
general public that Jadewell had neither the
authority nor the police power to clamp, tow or
impound vehicles at any place in the City of
Baguio.128 In Resolution No. 059, Series of 2004,
the City of Baguio made a formal demand upon
Jadewell to surrender the Ganza and Burnham
Park Parking Areas within thirty days. In the same
Resolution, the City of Baguio also directed the
City Legal Officer to file the appropriate legal
actions necessary to recover the said parking
areas and to ask for damages against Jadewell.129
The core issue to be resolved in this case is
whether the Sanggunian Panlungsod is guilty of
indirect contempt for enacting the above
resolutions, pending resolution of G.R. No.
160025.
b. G.R. No. 164107 This contempt petition was
filed directly with this Court against then Baguio
City Mayor Braulio D. Yaranon after he issued
Executive Order No. 001-04 announcing that, as
City Mayor, he would give protection to motor
vehicle owners, operators, and drivers who would
refuse to submit to the enforcement of traffic
rules by Jadewell such as by refusing to pay the
parking fees or fines the latter imposes.
Yaranon also issued a Memorandum dated 8 July
2004, ordering the arrest and filing of criminal
charges against Jadewell personnel who would
clamp, tow, or impound motor vehicles in
defiance of Executive Order No. 001-04. This was
followed by a Memorandum on 8 April 2005
directing the Baguio City Police District to create
a special task force to prevent Jadewell from
clamping, towing, and impounding vehicles found
to be in violation of the parking rules in Baguio
City.
The issue to be resolved in this petition is
whether Mayor Yaranon could be cited for
contempt for the above, pending resolution of the
issue of the validity of the rescission of the MOA
in G.R. Nos. 160025 and 163052.
c. G.R. No. 165564 Jadewell filed this third
contempt petition against Mayor Yaranon for
issuing Executive Order No. 005-2004 dated 15
October 2004. The order directs Jadewell to cease
and desist from: (a) charging and collecting
parking fees on the streets of Baguio City without
the consent of the City Government; 130 (b) seizing
and detaining vehicles of motorists who refuse to
pay the parking fees to Jadewell131 and (c) using
yellow-colored tow trucks bearing the name "City
of Baguio".132 Jadewells petition also seeks to
nullify Executive Order No. 005-2004.
On 16 November 2004, Jadewell filed a
Supplemental Petition. The act complained of this
time was the issuance of Executive Order No.
005-2004-A which is a mere rehash of Executive
Order No. 005-2004.133 On 25 January 2005,
Jadewell filed a Second Supplemental Petition in
connection with Mayor Yaranons issuance of
Administrative Order No. 622, Series of 2004. The
said administrative order declared that Jadewell
exceeded its area of operations for the
administration of on-street parking and it required
to show lawful cause why its business permit
should not be revoked.
Like in the earlier contempt petitions, Jadewell
alleges that these issuances by Mayor Yaranon
are contumacious because they were made while
the main petition, G.R. No. 160025 questioning
the rescission of the MOA by the Sanggunian, is
still pending resolution with this Court.
d. G.R. No. 172216 On 27 April 2006, Jadewell
84
filed a petition for contempt against Judge
Fernando Vil Pamintuan, Presiding Judge of RTC-
Page
Branch 3 of Baguio City, in relation to Civil Case
No. 6089-R pending before his sala. 134 In the said
civil case, Judge Pamintuan issued an Order
directing Jadewell to desist from the collection of
parking fees, from towing and impounding
vehicles on the streets of Baguio City and to hold
in abeyance the implementation of City
Ordinance 003-2000 and the MOA. The validity of
the Order of Judge Pamintuan is the subject of a
Petition for Certiorari, Prohibition, and Mandamus
instituted by Jadewell in G.R. No. 172215.
The main issue to be resolved in this case is
whether Judge Pamintuan should be cited for
indirect contempt by this Court for issuing the
assailed Orders.
e. G.R. No. 173043 On 29 June 2006, Jadewell
filed yet another contempt case against Mayor
Yaranon. In addition to its prayer to cite him for
contempt, Jadewell also prays that Mayor
Yaranon, as a lawyer, be disbarred. 135 Jadewell
instituted this fifth contempt case after it
received a letter from Mayor Yaranon demanding
that it stop its business operations in Baguio City,
at the same time directing the Sangguniang
Panlungsod to cancel Ordinance 003-2000.
The issue to be resolved in this case is whether
Mayor Yaranon was guilty of indirect contempt
and professional misconduct for the above acts
pending resolution of G.R. Nos. 160025,
163052,164107, 165564 and 172215.136
f. G.R. No. 174879 - On 19 October 2006, Jadewell
filed a contempt case against the acting City
Mayor of Baguio, Reinaldo A. Bautista, Jr., and the
members of the Sangguniang Panlungsod,
including City Legal Officer Melchor Carlos R.
Rabanes, in connection with the second act of
rescission.137 Jadewell also asks that the
respondents who are lawyers, namely: Rocky
Thomas A. Balisong, Edilberto B. Tenefrancia,
Faustino A. Olowan, Federico J. Mandapat, Perlita
L. Chan-Rondez, and Jose M. Molintas, be
disbarred.
These acts, in Jadewells view, are contumacious
in light of the pending G.R. No. 160025 before
this Court.
OUR RULINGS
1. On G.R. No. 160025
a. On the Treatment of
Jadewells Petition as one for
Permanent Injunction.
The CA sustained the position of the Sanggunian
that certiorari could not prosper because when
the latter enacted Resolution 37, the Sanggunian
was exercising its legislative function and not its
judicial or quasi-judicial function. The writ of
certiorari under Rule 65 requires: (a) that it is
directed against a tribunal, a board or an officer
exercising judicial or quasi-judicial functions; (b)
that such tribunal, board, or officer has acted
without or in excess of jurisdiction or with grave
abuse of discretion; and (c) that there is no
appeal nor any plain, speedy and adequate
remedy in the ordinary course of law.138
The CA nevertheless proceeded to treat the
Petition as an original action for injunction, ruling
in this wise:
xxxx
Although in the trial court, Jadewell filed said
petition for Certiorari, Prohibition and Mandamus
under Rule 65, it is essentially one for Injunction
under Rule 58. Said petitions form and substance
satisfied all the requirements of a civil action for
Injunction, which is the proper remedy under the
attendant circumstances.
The rules of procedure ought not to be applied in
a very rigid technical sense, rules of procedure
are used only to help secure, not override
substantial justice. If a technical and rigid
enforcement of the rules is made, their aim would
be defeated.
Considering the clear and patent denial of due
process committed by the Sanggunian in
precipitately rescinding the MOA and in the
interest of substantial justice, WE deem it more
prudent to treat the petition filed below as an
action for Injunction under Rule 58, which is well
within the jurisdiction of the trial court.
Consequently, the present appeal shall be
considered as an appeal from the permanent
injunction ordered by the trial court, which is
properly appealable to this Court, as held in
Casilan vs. Ybaez.139
xxxx
We sustain the ruling of the appellate court
treating Jadewells original action for certiorari as
one for injunction based on the allegations in the
latters pleadings.
In Ramon Jimenez, Jr. v. Juan Jose Jordana, 140 the
85
issue to be resolved was whether the nature of
the action was one for specific performance or for
Page
recovery of real property. In determining that the
case was one for the recovery of real property,
the Court characterized the suit on the basis of
the allegations in the Complaint. We restated the
rule that the nature of an action is determined by
the material averments in the complaint and the
character of the relief sought. In the recent case
of Reyes v. Alsons Development and Investment
Corporation,141 we likewise ruled that the nature
of an action is determined by the allegations in
the pleadings.
In Lee, Jr. v. Court of Appeals, 142 the controversy
to be resolved was whether the appeal filed by
the petitioner was one under Rule 65 or Rule 42.
The determination of the issue was crucial,
because the appellate court had dismissed the
appeal of the petitioner, saying that the wrong
mode of appeal had been used. The CA had ruled
that petitioner should have filed a certiorari
petition under Rule 65 instead of a petition
under Rule 42 to appeal the assailed decision
rendered by the RTC in the exercise of its
appellate jurisdiction.
We held:
Our perusal of the petition filed before the Court
of Appeals clearly shows that it is a petition for
review under Rule 42, and not a special civil
action for certiorari under Rule 65. We note that
in the Court of Appeals petition, under the
heading "Nature of the Petition," petitioner stated
that it was a "petition for review on certiorari to
set aside, invalidate and reverse the Decision
dated December 14, 2001 of public respondent
Judge Victor T. Llamas, Jr." Also, the reversal
sought was premised on the ground that the
decision was issued in gross error. The statement
under the heading "Nature of the Petition" that
the trial courts decisions were issued with grave
abuse of discretion amounting to lack of
jurisdiction, and even the caption impleading the
lower courts, would not automatically bring the
petition within the coverage of Rule 65. It is
hornbook doctrine that it is not the caption of the
pleading but the allegations therein that
determine the nature of the action. (Emphasis
supplied)
In the original action filed by Jadewell before the
RTC of Baguio City, although the action was
clearly denominated as a Petition for Certiorari,
Prohibition and Mandamus against the
Sangguniang Panlungsod, the allegations actually
supported an action for injunction under Rule 58
of the Revised Rules on Civil Procedure. As can be
gleaned from its allegations and especially in its
prayers, Jadewell filed the case with the trial
court with the ultimate end of restraining the
implementation of Resolution No. 037, Series of
2002.
We agree with the CA when it ruled that Jadewell
sought permanent injunction aside from the
auxiliary remedy of preliminary injunction, thus:
An action for injunction is a recognized remedy in
this jurisdiction. It is a suit for the purpose of
enjoining the defendant, perpetually or for a
particular time, from committing or continuing to
commit a specific act, or compelling the
defendant to continue performing a particular
act. It has an independent existence. The action
for injunction is distinct from the ancillary remedy
of preliminary injunction, which cannot exist
except only as part or an incident of an
independent action or proceeding.143 xxxx...
In Garcia v. Adeva,144 this Court had the
opportunity to clarify that while injunction can be
a provisional remedy, it can also be a main case.
The Court had to make this preliminary distinction
in order to find out whether the SEC had the
jurisdiction to prevent, on a permanent basis, the
commission of certain acts by the respondents.
Thus, the necessity to make the distinction
between injunction as a provisional remedy and
injunction as a main case. It found guidance from
Garayblas v. Atienza, Jr.,145 and quoting from the
latter:
Injunction is a judicial writ, process or proceeding
whereby a party is ordered to do or refrain from
doing a certain act. It may be the main action or
merely a provisional remedy for and as an
incident in the main action. The Court has
distinguished the main action for injunction from
the provisional or ancillary remedy of preliminary
injunction, thus:
The main action for injunction is distinct from the
provisional or ancillary remedy of preliminary
injunction which cannot exist except only as part
or an incident of an independent action or
proceeding. As a matter of course, in an action
for injunction, the auxiliary remedy of preliminary
injunction, whether prohibitory or mandatory,
may issue. Under the law, the main action for
injunction seeks a judgment embodying a final
injunction which is distinct from, and should not
be confused with, the provisional remedy of
preliminary injunction, the sole object of which is
to preserve the status quo until the merits can be
heard. A preliminary injunction is granted at any
stage of an action or proceeding prior to the
86
judgment or final order. It persists until it is
dissolved or until the termination of the action
Page
without the court issuing a final injunction.
We, therefore, rule that the CA did not commit
any error in treating Jadewells Petition for
Certiorari as an original action for injunction.
b. On the denial of due process.
The second issue in this Petition is the
correctness of the CAs ruling that Jadewell was
deprived of due process when the Sangguniang
Panlungsod rescinded the MOA. The findings of
the CA are as follows:
In the instant case, evidence on record does not
show that before the Sanggunian passed the
disputed Resolution it gave Jadewell an
opportunity to present its side. Neither did the
Sanggunian convene an investigatory body to
inquire into Jadewells alleged violations nor at
least invite Jadewell to a conference to discuss
the alleged violations, if only to give Jadewell the
chance to refute any evidence gathered by it
against the latter. As it is, the Sanggunian
arrogated upon itself the role of a prosecutor,
judge and executioner in rescinding the MOA, all
in clear violation of Jadewells constitutionally
embedded right to due process.146
x x x.
Both courts held that Jadewell was denied due
process. When the denial of due process
argument is raised, it is directed primarily against
the exercise of governmental authority that
"deprives life, liberty and property" without
observance what is, in the circumstances, the
applicable standards of "due process." It is not an
argument that is relevant in situations of
contractual breach between two purely private
entities, nor is it available against the
government when the latter is not discharging a
governmental function, but merely pursuing a
purely commercial activity in a proprietary
capacity. In order to consider the due process
argument, this Court must first determine
whether the MOA was entered into by the City of
Baguio in a governmental capacity, or in a purely
proprietary capacity.
The regulation of on-street and off-street parking
is a governmental function that can be exercised
by local governments. It is important to
understand the objective of the Baguio City
Government in: (1) privatizing the administration
of on-street and off-street parking; and (2) its
execution of a MOA with Jadewell. This can be
gleaned from the Explanatory Note and other
provisions of the agreement, to wit:
The City of Baguio has earned the reputation of
the CLEANEST AND GREENEST HIGHLY
URBANIZED CITY for the previous years. This has
become possible due to the collective effort of
both the Citizens of Baguio and the City
Government. However, the increase in
population, volume of vehicles and the absence
of a regulatory measure to address this concern
gradually tainted what used to be a reputation we
were proud of.
The ever increasing problems, specifically those
relevant to the Traffic situation is at this point the
biggest contributor to environmental degradation.
Other Salient points we must consider relevant to
this matter are the problems on OBSTRUCTION
AND DOUBLE PARKING which are very rampant.
We further add to these the problems on
DISORGANIZED PARKING, LACK OF DEPUTIZED
AGENTS to monitor, supervise and enforce traffic
rules and regulations.
At this point in time, we feel the immediate need
of focusing on these problems. There is an urgent
need to adopt measures that would alleviate
these matters. This we recommend that PARKING
SPACES should be REGULATED in such a manner
that it would bring advantage both to the City
Government and the Citizens of Baguio. We
further propose the collection of REGULATORY
FEES that would be used in maintaining our roads
and to hire people that would de deputized to
help ease the problems as stated above.
Finally, we believe that our roads are beyond the
Commerce of Man. To convert our roads into PAY
PARKING SPACES, would be violative of this
principle. However to REGULATE its use and its
eventual effect would redound to the GENERAL
WELFARE will be an appreciated gesture to help
preserve our image as the CLEANEST AND
GREENEST HIGHLY URBANIZED CITY.
xxxx
SECTION 4. Parking spaces. A parking place may
be divided into parking spaces and for the
purposes of this Ordinance, each space or for a
number of spaces as determined by the private
parking operator in consultation with the
concerned Official of the City of Baguio.
xxxx
SECTION 5. Prohibitions against parking outside
87
the parking spaces. No spaces shall park any
motor vehicle on the sidewalk or cause or permit
Page
any motor vehicle to wait to any road or length of
road on which in any place in which or adjacent
to or in close proximity to which there is a parking
place.
xxxx
SECTION 7. Payment of Prescribed Charges. (1)
No person shall park any motor vehicle in a
parking place or parking space during the times
specified in this Ordinance without paying the
prescribed charge for the required parking period;
(2) The prescribed charge payable in respect to
the parking of a motor vehicle in a parking space
shall be paid by the insertion into the parking
meter provided for that parking space a
coin/coins of Philippine Currency or by using
cards in order to obtain the payment ticket to
evidence the payment of the prescribed charge;
(3) The payment ticket shall be displayed at a
conspicuous part of a motor vehicle in a parking
place or parking space; (4) The payment ticket
shall be valid to be used on any parking space
within the authorized period indicated in the
payment ticket.
xxxx
SECTION 22. Rules. The Memorandum of
Agreement (MOA) to be entered into by the City
Mayor shall be governed by this Ordinance.
From the above, the following are clear: (1) that
the City of Baguio decided on the privatization of
the administration of parking for environmental
and peace and safety reasons, both of which are
within its powers under Section 458(A)(5)(v) and
(vi) of the Local Government Code; and (2) that
the terms of agreement between the City of
Baguio and Jadewell involve the delegation of
governmental functions in terms of regulating the
designation and use of parking spaces as well as
the collection of fees for such use. These are
indicators that any privatization contract
pursuant to the above Resolution takes the
essential character of a franchise because what is
being privatized is a government-monopolized
function.
It would thus be relevant to ask if there is a
provision in the applicable laws or the franchise
(MOA) that grants the City of Baguio the right to
revoke the latter either at will, or upon the
satisfaction of certain conditions, such that
ordinary due process protection can be
considered to have been waived by the
franchisee. We must caution that when we refer
to revocation at will here, we are referring to the
revocation of resolutory, not suspensive,
obligations.147
We have looked closely at Resolution No. 003-
2000 and the MOA and have additionally
reflected on the applicable provision under the
Civil Code. We have come to the conclusion that:
(a) There is only one provision that allows
for unilateral revocation of the MOA, which
can be found in Section 9 thereof:
9. Minimum Guaranty The FIRST PARTY
guaranties (sic) a minimum period of five
(5) years against rescission; provided that
after such period, the parties may agree to
increase to a reasonable rate the parking
fees and the share of the city from the
parking fees collected as provided for in
the guidelines, (Annex "B");
(b) This Section 9 requires that five years
must have lapsed presumably from the
date of execution of the MOA before the
unilateral right to revoke the MOA can be
exercised;
(c) Therefore, before the five year period
has lapsed, the right to revoke the MOA
arises only under Article 1191 of the Civil
Code, which reads:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
From the above, it appears that in order to effect
a valid revocation of the MOA prior to the lapse of
the 5-year period provided for in Section 9, the
City of Baguio had to approach the problem from
88
one or both of two perspectives: one, negotiate
the termination of the MOA with Jadewell, or two,
Page
exercise its option under Article 1191 of the Civil
Code.
The first option, a negotiated pretermination of
the contract, is an inherent right of every party in
a contract. This can be inferred from the freedom
of the parties to contract and modify their
previous covenants provided it would not be
contrary to law, morals, good customs, public
order or public policy.148 Despite the provision on
the minimum warranty against rescission
stipulated in the MOA, the parties were not
constrained to mutually modify such restriction.
The Sanggunian could have proposed to Jadewell
the possibility of lifting the warranty against
rescission subject to the condition that the latter
will comply with its obligations under the MOA.
This scenario could have impressed upon Jadewell
that its contractual relations with the city
government of Baguio were less than ideal. The
suggested approach for the Sanggunian could
have been legally sound and practical. Obviously,
this was not done in this case; thus, Jadewells
Complaint before the RTC of Baguio City.
The second option is the exercise of the unilateral
right to rescind a bilateral contract on the part of
a party who believes that it has been injured by a
breach substantial enough to warrant revocation.
Where one party allegedly failed to comply with
his obligations under a contract, the injured party
may rescind the obligation if the other does not
perform or is not ready and willing to
perform.149 We will examine the acts of Baguio
City in relation to what is allowed under Article
1191.
Rescission under Article 1191 takes place through
either of two modes: (1) through an extrajudicial
declaration of rescission; or (2) upon the grant of
a judicial decree of rescission.
Extrajudicial declaration of rescission is
recognized as a power which does not require
judicial intervention.150 If the rescission is not
opposed, extrajudicial declaration of rescission
produces legal effect151 such that the injured
party is already relieved from performing the
undertaking.152
However, the power of declaring extrajudicial
rescission conferred upon the injured party is
regulated by the Civil Code. If the extrajudicial
rescission is impugned by the other party, it shall
be subject to a judicial determination 153where
court action must be taken, and the function of
the court is to declare the rescission as having
been properly or improperly made, or to give a
period within which the debtor must perform the
obligation alleged to be breached. 154 A unilateral
cancellation of a contract may be questioned in
courts by the affected party to determine
whether or not cancellation is warranted. 155 Thus,
in an extrajudicial decree of rescission, revocation
cannot be completely exercised solely on a
partys own judgment that the other has
committed a breach of the obligation 156but always
subject to the right of the other party to judicially
impugn such decision.
It is important to contextualize that the
agreement entered into by the City of Baguio
with Jadewell is the embodiment of a grant of
franchise imbued with public interest and is not
merely an agreement between two private
parties.
It is our view that the first act of rescission by the
City of Baguio may be valid even if there is a
stipulation against it within the first five years of
the MOAs existence. Article 1191 of the New Civil
Code provides a party the right to rescind the
agreement and clearly overrides any stipulation
to the contrary. However, the grounds that would
serve as basis to the application of the said
article must be clearly established.
In the exercise of this option under Article 1191,
was it necessary for the City of Baguio to provide
Jadewell an opportunity to air its side on the
matter before the former implemented the
rescission of the MOA? In the instant case, was
Jadewell deprived of procedural due process?
We answer in the negative. We disagree with the
rulings of the RTC and the CA that Jadewell was
deprived of due process. In Taxicab Operators of
Metro Manila v. The Board of Transportation, 157 we
confronted the issue of whether the petitioners
were denied procedural due process when the
respondent Board of Transportation issued a
circular ordering the phasing out of old vehicles
to be used as taxicabs. In the said case, the
phase-out was embodied in a circular that was
promulgated without holding a public hearing or
at least requiring those affected to submit their
position papers on the policy to be implemented.
We held for the respondent Board, and ruled in
this wise:
Dispensing with a public hearing prior to the
issuance of the Circulars is neither violative of
procedural due process. As held in Central Bank
vs. Hon. Cloribel and Banco Filipino, 44 SCRA 307
89
(1972):
Page
Previous notice and hearing as elements of due
process, are constitutionally required for the
protection of life or vested property rights, as well
as of liberty, when its limitation or loss takes
place in consequence of a judicial or quasi-judicial
proceeding, generally dependent upon a past act
or event which has to be established or
ascertained. It is not essential to the validity of
general rules or regulations promulgated to
govern future conduct of a class or persons or
enterprises, unless the law provides otherwise.
In the instant case, the assailed act by the
Sanggunian Panlungsod in rescinding the MOA
be it first or second act of rescission was clearly
in the exercise of its legislative or administrative
functions and was not an exercise of a judicial or
quasi-judicial function. The Sanggunian
Panlungsod does not possess any judicial or
quasi-judicial functions. The preamble of the MOA
lends support to this view. Evidently, the foremost
reason why the agreement was entered into by
the parties was to provide order, given Baguio
Citys parking problems in identified areas, as
well as to generate income.
The objectives of the Sanggunian Panlungsod, as
well as its intention to rescind the MOA; because
it deems to no longer serve the interest of the
City of Baguio, are clearly an exercise of its
legislative or administrative function. However, it
is another matter as to whether the City of
Baguio was able to clearly establish the grounds
as basis for the exercise of its right to rescind.
c. On the allegation of Jadewells
substantial breach of the MOA.
The Baguio City government has repeatedly
mentioned that Jadewell had so far installed only
14 parking meters, with only 12 functioning. The
COA-CAR Report dated 13 July 2003 enumerated
12 findings,158 a majority of which indicates that
Jadewell was remiss in the fulfilment of its
obligations under the MOA. While Finding Nos.
(1), (2), (3), (4), (5), (8) and (12) of the COA-CAR
Report state that Jadewell collected parking fees,
Jadewell failed to properly remit the same.
Finding No. (11) of the COA-CAR Report states
that Jadewell failed to have its parking attendants
deputized,159 a condition under the MOA that is
also important to the overall objective of the
endeavor.
The MOA does not specifically provide for the
exact number of parking meters to be installed by
Jadewell pursuant to the parties objective in
regulating parking in the city. Nevertheless, 100
parking spaces were allotted as mentioned in
Annex A of the MOA.160 The agreement also
obligates Jadewell to have its parking attendants
deputized by the DOTC-LTO so that they shall
have the authority to enforce traffic rules and
regulations in the regulated areas. 161 To the
Courts mind, these are two of the most
important obligations that Jadewell had to comply
with, considering the nature and objective of the
agreement it had entered into.
Despite the enumeration of the above-mentioned
faults of Jadewell, we do not make a categorical
finding that there was substantial breach
committed by Jadewell to justify a unilateral
rescission of the MOA. We find, however, that the
RTC had not properly received evidence that
would allow it to determine the extent of the
claimed violations of the MOA. Had these
violations by Jadewell been proven in a proper
hearing, the finding of a substantial breach of the
MOA would have been a distinct probability.
Unfortunately, neither the RTC nor the CA
provided a clear basis for their rulings on the
extent of the breach of the MOA by Jadewell. Save
from reiterating the Sanggunians litany of
violations said to be committed by Jadewell, there
was no testimony on record to prove such facts
and no indication as to whether the RTC or CA
dismissed them or took them at face value.
Whatever the extent of breach of contract that
Jadewell may have committed and the
enumeration of Jadewells alleged faults in
Resolution 37 is quite extensive the City of
Baguio was still duty-bound to establish the
alleged breach.
Matters became complicated when the RTC and
the CA lumped the issues on the due process
violation of Baguio City with Jadewells alleged
substantial breaches under the MOA, instead of
making a clear finding on the existence and
extent of such breach. The facts and legal issues
were thus muddled.
We find fault in the lower and appellate courts
lapse in examining the issue on Jadewells alleged
substantial breach. Evidence-taking had to be
undertaken by these courts before they could
arrive at a judicial conclusion on the presence of
substantial breach.
We thus DENY the Petition of the Sanggunian
Panlungsod in G.R. No. 160025 and AFFIRM the
questioned CA Decision. However, we reject the
ruling made by the appellate court that the
90
violations of Jadewell under the MOA were not
substantial. We hold that there is no sufficient
Page
evidence on record to make such determination.
While Jadewell prays for damages against the
public respondent, and while ordinarily we could
grant the same, the context of this case prevents
us from giving any form of recompense to
Jadewell even if the rescission of the MOA did not
follow the required legal procedure. This is
because it would be appalling to grant Jadewell
any award of damages, considering (1) it installed
only 14 out of the apparently 100 contemplated
parking meters; (2) its employees, private
citizens who did not possess any authority from
the LTO, were manually collecting parking fees
from the public, and (3) it did not, apparently
properly remit any significant amount of money
to the City of Baguio. These three facts are
uncontested, these omissions are offensive to the
concept of public service that the residents of
Baguio were promised through Jadewell. From its
ambiguous responses extant in the records, it is
clear that Jadewell does not appear to be an
investor who has lost in its investments in the
Baguio City project. Thus, we do not award any
damages to Jadewell.
2. On G.R. Nos. 163052, 164107,
165564, 172216, 173043 and 174879
(The Contempt Petitions)
Section 3 of Rule 71 of the Revised Rules of Civil
Procedure enumerates the acts constituting
indirect contempt, thus:
(a) Misbehavior of an officer of a court in
the performance of his official duties or in
his official transactions;
(b) Disobedience of or resistance to a
lawful writ, process, order, or judgment of
a court, including the act of a person who,
after being dispossessed or ejected from
any real property by the judgment or
process of any court of competent
jurisdiction, enters or attempts or induces
another to enter into or upon such real
property, for the purpose of executing acts
of ownership or possession, or in any
manner disturbs the possession given to
the person adjudged to be entitled
thereto;
(c) Any abuse of or any unlawful
interference with the processes or
proceedings of a court not constituting
direct contempt under Section 1 of this
Rule;
(d) Any improper conduct tending, directly
or indirectly, to impede, obstruct, or
degrade the administration of justice;
(e) Assuming to be an attorney or an
officer of a court, and acting as such
without authority;
(f) Failure to obey a subpoena duly served;
(g) The rescue, or attempted rescue, of a
person or property in the custody of an
officer by virtue of an order or process of a
court held by him.
But nothing in this section shall be so construed
as to prevent the court from issuing process to
bring the respondent into court, or from holding
him in custody pending such proceedings.
The rule alerts us to three possible situations,
wherein, in the context of the facts of these
petitions, contumacious behaviour could have
been committed by public respondents. First,
disobedience or resistance to a lawful order of
this Court under paragraph (b). Second, unlawful
interference with the proceedings of this Court
under paragraph (c). Third, improper conduct
tending, directly or indirectly, to impeded,
obstruct, or degrade the administration of justice
by this Court under paragraph (d).
Jadewell, in G.R. Nos. 163052, 164107, 165564,
172216, 173043, and 174879, bases its charges
of indirect contempt against public respondents
on a claim that any action that tends to stop the
implementation of the MOA is contumacious.
Such actions include desistance orders to desist
against Jadewell itself, the second act of
unilateral rescission of the MOA; orders to other
public officers to prevent Jadewell from exercising
its authority under the MOA; and the official
encouragement for motorists to resist attempts of
Jadewell to collect parking fees or clamp/tow
vehicles that do not observe the parking
regulations.
We find scant jurisprudence to guide us on this
matter. The closest situation is that presented in
Southern Broadcasting Network v. Davao Light
and Power,162 penned by Justice Felix Makasiar. In
that case, petitioners representative, Carmen
Pacquing, wrote a letter to President Marcos
asking for his intervention so that her Motion for
Reconsideration (MR) of the resolution of this
Court denying her Petition could be favorably
granted. Respondent Davao Light asked that
91
petitioner Pacquing be cited for contempt,
arguing that her act in writing to the President
Page
asking him to intervene in the case showed
disrespect to and disregard for the authority of
this Court as the final arbiter of all cases. We
found petitioner Pacquing guilty of contempt,
thus:
x x x. WE hold that such actuation of herein
petitioners representative only bespeaks more of
her contumacious attempt to trifle with the
orderly administration of justice because if she
know that this Court will ultimately decide the
case "regardless of the Presidents intervention,"
then she should have desisted from writing to the
President.
In the light of the foregoing, there is no doubt
that Mrs. Pacquing committed an "improper
conduct tending, directly or indirectly, to impede,
obstruct, or degrade the administration of justice"
(Section 3, par. [d] Rule 71, Rules of Court) and
impair the respect due to the courts of justice in
general, and the Supreme Court, in particular.
In the above case, respondent Carmen Pacquing
was clearly asking the President to commit an
improper act to influence the Supreme Court
that obstructs the orderly administration of
justice, as the Court is constitutionally required to
act independently free from the promptings of
the President. Pacquing clearly violated both
Sections (c) and (d) of Section 3, Rule 71.
No such similar situation occurred here. Public
respondents never asked anyone to employ
pressure or influence on this Court for the
formers benefit.
Instead, the acts that have been allegedly
committed by public respondents are acts done
pursuant to their belief that: (a) the MOA has
been validly voided, and more importantly, (b)
that Jadewells personnel do not have the legal
authority to perform the governmental function of
administering the regulation of on-street and off-
street parking, of towing or clamping vehicles
that violate such regulation, and of collecting
parking fees from motorists.
It is important to note that the Court never gave
a mandatory injunction that is couched in a way
that requires public respondents to fully comply
with the terms of the MOA. The writ of preliminary
mandatory injunction (WPMI) issued on 9
February 2005 is directed to Mayor Yaranon only,
and it directs him to perform only one specific
act: to reopen, and maintain open, the street and
premises then being occupied and operated by
Jadewell.
Mayor Yaranon did not immediately comply with
this WPMI. Thus, this Court fined him P10,000 on
20 April 2005, and ordered the NBI to arrest him if
he further failed to comply with the WPMI.
Subsequently, Mayor Yaranon paid the fine, and
there is nothing on record to show that he has,
since April of 2005, further defied this Court on
that score.
The Court did not issue a WPMI specifically
ordering the parties to observe the terms of the
MOA. Thus, public respondents were not
expressly prohibited to act on their beliefs
regarding the validity or invalidity of the MOA, or,
the authority or lack of authority of Jadewell
personnel to perform governmental functions in
the streets of Baguio.
This is an important result, because to hold
otherwise is to effectively grant one of the parties
a mandatory injunction even without an express
resolution to this effect from the Court. Without
an express order, the pendency of a suit before
the Supreme Court is not a prima facie
entitlement of provisional relief to either party.
Public respondents therefore were, at liberty to
question and inform the public of their belief
regarding the lack of authority of Jadewell and its
personnel to regulate public parking in Baguio.
They were certainly free to formally write Jadewell
on their beliefs and pass the corresponding
resolutions to this effect. The mayor was also not
under legal compulsion to renew Jadewells
business permit in view of his opinion that
Jadewell was exceeding its allowable area of
operation, which Jadewell was not able to fully
disprove. This is especially true for two important
reasons: (1) there is an uncontested cease and
desist order that was issued by the DOTC-CAR on
13 March 2002 which Jadewell defied well into
2005, and (2) public respondents are city officials
of Baguio who have the legal duty to ensure the
laws are being followed, including laws that
define who may enforce regulations on public
parking.
That Jadewell personnel do not have the legal
authority to enforce regulations on public parking
is categorical from the Letter dated 1 February
2001 by the Regional Director of the DOTC-CAR
denying the request of Jadewell for the
deputation of its personnel.163
We therefore do not find any of the public
respondents who were then officials of the City of
Baguio, liable for indirect contempt, and thereby
92
dismiss G.R. Nos. 163052, 164107, 165564,
173043 and 174879. In G.R. 174879, we have
Page
already pronounced that the Sanggunian was
within its full right to perform the second act of
rescission, and thus, it is even with more reason,
that its members and the City Legal Officer
cannot be held in contempt therefor. We deny the
prayer in the petitions to disbar the respondents
therein who are lawyers.
We also do not find Judge Fernando Vil Pamintuan
liable for contempt in G.R. No. 172216.
Jadewell wants this Court to cite Judge Pamintuan
for contempt for issuing a writ of preliminary
prohibitory injunction ordering Jadewell to stop
collecting parking fees; to refrain from
supervising the parking in Baguio City; as well as
to hold in abeyance the implementation of the
MOA and its enabling ordinance.164
It was only on 5 June 2006 that this Court, in G.R.
No. 172215, issued a Temporary Restraining
Order (TRO)165directing the trial court to
discontinue the proceedings in Civil Case No.
6089-R. Upon receipt by Judge Pamintuan of the
TRO, he immediately ordered the cancellation of
the 29 June 2006 hearing.166
We do not consider the promulgation of the
assailed writ of preliminary prohibitory injunction
against Jadewell as a defiance of our writ issued
on 9 February 2005, considering, it was directed
against Mayor Yaranon only. We have held in
Leonidas v. Supnet that "a party cannot be held in
indirect contempt for disobeying a court order
which is not addressed to him."167 We note that
Judge Pamintuan observed deference to the
Orders of this Court when he immediately
suspended the proceedings in Civil Case No.
6089-R upon receipt of the TRO.
G.R. No. 172215
In this Petition for certiorari, prohibition, and
mandamus under Rule 65 of the Rules of Civil
Procedure, Jadewell assails the Orders of RTC-
Branch 3 (Baguio City) denying its motion to
dismiss and motion for reconsideration in Civil
Case No. 6089-R.
We deny the petition of Jadewell in this case.
In Manuel Camacho v. Atty. Jovito Coresis,
Jr.,168 we described the nature of special civil
action for certiorari under Rule 65, as follows:
A special civil action for certiorari under Rule 65
of the Rules of Court is an extraordinary remedy
for the correction of errors of jurisdiction. To
invoke the Courts power of judicial review under
this Rule, it must first be shown that respondent
tribunal, board or officer exercising judicial or
quasi- judicial functions has indeed acted without
or in excess of its or his jurisdiction, and that
there is no appeal, or any plain, speedy and
adequate remedy in the ordinary course of law.
Conversely, absent a showing of lack or excess of
jurisdiction or grave abuse of discretion
amounting to lack or excess of jurisdiction, the
acts of the respondents may not be subjected to
our review under Rule 65.
In Indiana Aerospace University v. Commission on
Higher Education,169 this Court ruled thus:
An order denying a motion to dismiss is
interlocutory, and so the proper remedy in such a
case is to appeal after a decision has been
rendered. A writ of certiorari is not intended to
correct every controversial interlocutory ruling; it
is resorted to only to correct a grave abuse of
discretion or a whimsical exercise of judgment
equivalent to lack of jurisdiction. Its function is
limited to keeping an inferior court within its
jurisdiction and to relieve persons from arbitrary
acts -- acts which courts or judges have no power
or authority in law to perform. It is not designed
to correct erroneous findings and conclusions
made by the court.
In East Asia Traders, Inc. v. Republic of the
Philippines, et al.,170 we decreed:
The petition for certiorari and prohibition filed by
petitioner with the Court of Appeals is not the
proper remedy to assail the denial by the RTC of
the motion to dismiss. The Order of the RTC
denying the motion to dismiss is merely
interlocutory. An interlocutory order does not
terminate nor finally dispose of the case, but
leaves something to be done by the court before
the case is finally decided on the merits. It is
always under the control of the court and may be
modified or rescinded upon sufficient grounds
shown at any time before final judgment. This
proceeds from the courts inherent power to
control its process and orders so as to make them
conformable to law and justice. The only
limitation is that the judge cannot act with grave
abuse of discretion, or that no injustice results
thereby.
East Asia Trader also reiterated our ruling in
Indiana Aerospace. Further, in Bonifacio
Construction Management Corporation v. Hon.
Perlas Bernabe,171 we reiterated our rulings in
93
East Asia Traders and Indiana Aerospace. We had
ruled in these earlier cases that an order of the
Page
trial court denying a motion to dismiss is an
interlocutory order, and to use a writ of certiorari
to assail it is improper.
The procedural policy in the cited cases was
again referred to in Bernas v. Sovereign Ventures,
Inc.,172 highlighting the following:
Let it be stressed at this point the basic rule that
when a motion to dismiss is denied by the trial
court, the remedy is not to file a petition for
certiorari, but to appeal after a decision has been
rendered. (Emphasis supplied)
G.R. No. 181488
The question of law raised by petitioner Yaranon
in this Petition for Review on Certiorari is whether
the CA correctly dismissed his appeal questioning
the validity of his suspension from office as City
Mayor, on the ground that his suit had become
moot and academic due to his non-re-election to
office. The CA cited Crespo v. Provincial Board of
Nueva Ecija173 as basis for the dismissal.
For his part, Mayor Yaranon contends that the
appellate court should have ruled on the validity
of his suspension from office despite his failure to
get re-elected as City Mayor. He argues that he
has the right to know whether his suspension was
valid or not and, in the event his suspension is
declared invalid, Mayor Yaranon believes he is
entitled to the salaries and benefits accruing
during the period he was suspended.
We deny the Petition of Mayor Yaranon.
The appeal of Mayor Yaranon has been rendered
moot and academic. We hold that the resolution
of the issue raised herein would serve no
practical purpose.
In Miriam College v. Court of Appeals,174 we ruled
that a case becomes moot and academic when
there is no more actual controversy between the
parties, or when no useful purpose can be served
in passing upon the merits. Further, courts will
not determine a moot question in which no
practical relief can be granted.175
Mayor Yaranon has already served his
suspension. We find no practical value in
remanding his case to the appellate court for the
determination of the factual basis and legal
issues of his appeal pertaining to the validity of
his suspension as then City Mayor of Baguio City.
We have held in Nicart, Jr. v. Sandiganbayan
(Third Division),176 that an issue becomes moot
when a petitioner is not entitled to substantial
relief:
x x x [T]he propriety of the preventive suspension
of petitioner effected through the assailed
Resolution of February 15, 2001 has become a
moot issue, it appearing that he has already
served his suspension. An issue becomes moot
and academic when it ceases to present a
justifiable controversy so that a determination
thereof would be of no practical use and value. In
such cases, there is no actual substantial relief to
which petitioner would be entitled to and which
would be negated by the dismissal of the petition.
We cannot sustain Mayor Yaranons argument
that his appeal should not have been dismissed
because, in the event that the finding of the
Office of the President to suspend him is
reversed, he is still entitled to the salaries
accruing during the period he was suspended. We
take note of the cases cited by Mayor Yaranon
such as Crespo v. Provincial Board of Nueva
Ecija,177 Baquerfo v. Sanchez178 and Reyes v.
Cristi,179 among others. These cases involve
substantial issues such as denial of due process
and procedural irregularities other than a mere
claim for entitlement to salaries. The factual
background and the legal issues for resolution in
the cases mentioned are not similar to the case
at bar.
In Triste v. Leyte State College Board of
Trustees180 the Court elucidated on the nature of
the salary of a public official:
Mechem states that "(l)ike the requirement of an
oath, the fact of the payment of a salary and/or
fees may aid in determining the nature of a
position, but it is not conclusive, for while a salary
or fees are usually annexed to the office, it is not
necessarily so. As in the case of the oath, the
salary or fees are mere incidents and form no
part of the office. Where a salary or fees are
annexed, the office is often said to be coupled
with an interest; where neither is provided for it
is a naked or honorary office, and is supposed to
be accepted merely for the public good."
(Emphasis supplied)
Given the circumstances of this case, we find that
Mayor Yaranons claim for unpaid salaries, in case
of exoneration, does not constitute such
substantial relief that would justify the revival of
his appeal. Even if we did sustain his Petition, we
94
nevertheless find that it has been mooted by our
resolution in the main petition.
Page
WHEREFORE, we hereby rule as follows:
a.) In G.R. No. 160025, the Petition of the
Sangguniang Panlungsod of Baguio City is
DENIED. The CA Decision dated 7 July
2003 in CA G.R. SP No. 74756 is hereby
AFFIRMED with modification. There is not
enough evidence on record to conclude
that Jadewells violations were sufficient to
justify the unilateral cancellation of the
MOA by the Sangguniang Panlungsod of
Baguio City; at the same time, neither the
RTC nor the CA provided a clear finding
whether the breach of the MOA by
Jadewell was substantial. We affirm the CA
as to the rest of its dispositions in its
assailed Decision. Nevertheless, no award
of damages is hereby made in favour of
Jadewell and neither is there any
pronouncement as to costs.
b.) G.R. Nos. 163052, 164107, 165564,
172216, 173043 and 174879, the Petitions
of Jadewell to cite Mayor Braulio D.
Yaranon, Mayor Bernardo M. Vergara,
Acting City Mayor Reinaldo A. Bautista,
Vice Mayor Betty Lourdes F. Tabanda, the
members of the Sangguniang Panlungsod
of Baguio City namely: Elmer O. Datuin,
Antonio R. Tabora, Edilberto B.
Tenefrancia, Federico J. Mandapat, Jr.,
Richard A. Carino, Faustino A. Olowan,
Rufino M. Panagan, Leonardo B. Yangot, Jr.,
Rocky Thomas A. Balisong, Galo P.
Weygan, Perlita L. Chan-Rondez, Jose M.
Molintas, and Judge Fernando Vil
Pamintuan for indirect contempt and to
disbar Sangguniang Panlungsod members
Rocky Thomas A. Balisong, Edilberto B.
Tenefrancia, Faustino A. Olowan, Federico
J. Mandapat, Perlita L. Chan-Rondez, Jose
M. Molintas, Melchor Carlos B. Rabanes
and Mayor Braulio D. Yaranon are all
hereby DISMISSED for lack of merit. No
pronouncement as to costs.
c.) We DENY the Petition of Jadewell for
lack of merit in G.R. No. 172215. We
likewise DENY its prayer for the issuance
of a temporary restraining order and/or
writ of preliminary injunction for being
moot and academic. No pronouncement
as to costs.
d.) We DENY the Petition of Mayor Braulio
D. Yaranon in G.R. No. 181488, for lack of
merit and AFFIRM the CA Decision CA-G.R.
SP No. 96116. No pronouncement as to
costs.
SO ORDERED.
METROPOLITAN BANK AND TRUST
COMPANY
vs. WILFRED N. CHIOK
The three consolidated petitions herein all assail
the Decision1 of the Court of Appeals in CA-G.R.
CV No. 77508 dated May 5, 2006, and the
Resolution2 in the same case dated November 6,
2006.
Respondent Wilfred N. Chiok (Chiok) had been
engaged in dollar trading for several years. He
usually buys dollars from Gonzalo B. Nuguid
(Nuguid) at the exchange rate prevailing on the
date of the sale. Chiok pays Nuguid either in cash
or managers check, to be picked up by the latter
or deposited in the latters bank account. Nuguid
delivers the dollars either on the same day or on
a later date as may be agreed upon between
them, up to a week later. Chiok and Nuguid had
been dealing in this manner for about six to eight
years, with their transactions running into
millions of pesos. For this purpose, Chiok
maintained accounts with petitioners
Metropolitan Bank and Trust Company
(Metrobank) and Global Business Bank, Inc.
(Global Bank), the latter being then referred to as
the Asian Banking Corporation (Asian Bank).
Chiok likewise entered into a Bills Purchase Line
Agreement (BPLA) with Asian Bank. Under the
BPLA, checks drawn in favor of, or negotiated to,
Chiok may be purchased by Asian Bank. Upon
such purchase, Chiok receives a discounted cash
equivalent of the amount of the check earlier
than the normal clearing period.
On July 5, 1995, pursuant to the BPLA, Asian Bank
"bills purchased" Security Bank & Trust Company
(SBTC) Managers Check (MC) No. 037364 in the
amount of P25,500,000.00 issued in the name of
Chiok, and credited the same amount to the
latters Savings Account No. 2-007-03-00201-3.
On the same day, July 5, 1995, Asian Bank issued
MC No. 025935 in the amount of P7,550,000.00
and MC No. 025939 in the amount
of P10,905,350.00 to Gonzalo Bernardo, who is
the same person as Gonzalo B. Nuguid. The two
Asian Bank managers checks, with a total value
of P18,455,350.00 were issued pursuant Branch 96. The complaint was later amended 5 to

95
toChioks instruction and was debited from his include the prayer of Chiok to be declared the
account. Likewise upon Chioks application, legal owner of the proceeds of the subject checks

Page
Metrobank issued Cashiers Check (CC) No. and to be allowed to withdraw the entire
003380 in the amount of P7,613,000.00 in the proceeds thereof.
name of Gonzalo Bernardo. The same was
debited from Chioks Savings Account No. 154- On the same day, July 6, 1995, the RTC issued a
42504955. The checks bought by Chiok for payee temporary restraining order (TRO) directing the
Gonzalo Bernardo are therefore summarized as spouses Nuguid to refrain from presenting the
follows: said checks for payment and the depositary
banks from honoring the sameuntil further orders
Drawee from the court.6
Bank/Ch Amount (P) Source of fund
eck No. Asian Bank refused to honor MC Nos. 025935 and
025939 in deference to the TRO. Metrobank
Asian 7,550,000. Chioks Asian Bank claimed that when it received the TRO on July 6,
Bank MC 00 Savings 1995, it refused to honor CC No. 003380 and
No. Account No. 2-007- stopped payment thereon. However, in a letter
025935 03-00201-3, also dated July 6, 1995, Ms. Jocelyn T. Paz of
Asian 10,905,350 which had been credited FEBTC, Cubao-Araneta Branch informed
Bank MC .00 with the Metrobank that the TRO was issued a day after
No. value of SBTC MC No. the check was presented for payment. Thus,
025939 (aggregate 037364 according to Paz, the transaction was already
value of (P25,500,000.00) when consummated and FEBTC had already validly
Asian Bank the latter was accepted the same. In another letter, FEBTC
MCs: purchased by Asian informed Metrobank that "the restraining order
18,455,350 Bank from Chiok indicates the name of the payee of the check as
.00) pursuant to their BPLA. GONZALO NUGUID, but the check isin fact
payable to GONZALO BERNARDO. We believe
Metroba 7,613,000. Chioks Metrobank there is a defect in the restraining order and as
nk CC 00 Savings such should not bind your bank." 7 Alice Rivera of
No. Account No. 154- Metrobank replied to said letters, reiterating
003380 425049553 Metrobanks position tocomply with the TRO lest
it be cited for contempt by the trial court.
TOTAL 26,068,350 However, as would later be alleged in
.00 Metrobanks Answer before the trial court,
Metrobank eventually acknowledged the check
Chiok then deposited the three checks (Asian when it became clear that nothing more can be
Bank MC Nos. 025935 and 025939, and done to retrieve the proceeds of the check.
Metrobank CC No. 003380), with an aggregate Metrobank furthermore claimed that since it is
value of P26,068,350.00 in Nuguids account with the issuer of CC No. 003380, the check is its
Far East Bank & Trust Company (FEBTC), the primary obligation and should not be affected by
predecessor-in-interest of petitioner Bank of the any prior transaction between the purchaser
Philippine Islands (BPI). Nuguid was supposed to (Chiok) and the payee (Nuguid).
deliver US$1,022,288.50,4 the dollar equivalent of
the three checks as agreed upon, in the afternoon In the meantime, FEBTC, as the collecting bank,
of the same day. Nuguid, however, failed to do so, filed a complaint against Asian Bank before the
prompting Chiok to request that payment on the Philippine Clearing House Corporation (PCHC)
three checks be stopped. Chiok was allegedly Arbitration Committee for the collection of the
advised to secure a court order within the 24- value of Asian Bank MC No. 025935 and 025939,
hour clearing period. On the following day, July 6, which FEBTC had allegedly allowed Nuguid to
1995, Chiok filed a Complaint for damages with withdraw on July 5, 1995, the same day the
application for ex parte restraining order and/or checks were deposited. The case was docketed
preliminary injunction with the Regional Trial as Arbicom Case No. 95-082. The PCHC
Court (RTC) of Quezon City against the spouses Arbitration Committee later relayed, in a letter
Gonzalo and Marinella Nuguid, and the depositary dated August 4, 1995, its refusal to assume
banks, Asian Bank and Metrobank, represented jurisdiction over the case on the ground that any
by their respective managers, Julius de la Fuente step it may take might be misinterpreted as
and Alice Rivera. The complaint was docketed as undermining the jurisdiction of the RTC over the
Civil Case No. Q-95-24299 and was raffled to case or a violation of the July 6, 1995 TRO.
On July 25, 1995, the RTC issued an Order
96
directing the issuance of a writ of preliminary
prohibitory injunction:
Page
WHEREFORE, upon filing by the plaintiff of a
sufficient bond in the amount of P26,068,350.00,
to be executed in favor of the defendants under
the condition that the same shall answer for
whatever damages they may sustain by reason of
this injunction should the Court ultimately
determine that he was not entitled thereto, let a
writ of preliminary prohibitory injunction issue
restraining and preventing during the pendency
of the case:
a) Defendant Asian Bank frompaying
Managers Checks No. 025935 in the
amount of P7,550,000.00 and No. 025939
in the amount of P10,905,350.00; and
b) Defendant Metro Bank frompaying
Cashiers Check No. 003380 in the amount
of P7,613,000.00.
The application for preliminary mandatory
injunctionis hereby denied and the order issued
on July 7, 1995 directing defendant Metro Bank
(Annapolis, Greenhills Branch) to allow the
plaintiff to withdraw the proceeds of Cashiers
Check No. 003380 in the amount
of P7,613,000.00 is hereby set aside.
The plaintiffs urgent motion todeclare
defendants Asian Bank and Metro Bank in
contempt of court filed last July 13, 1995 is
hereby denied for lack of legal basis.
The writ of preliminary prohibitory injunction and
a copy of this order shall be served on the
defendants by Deputy Sheriff Jose Martinez of this
Branch.8
Upon the filing by Chiok of the requisite bond, the
Writ was subsequently issued on July 26, 1995.
Before the RTC, Asian Bank pointed out that SBTC
returned and issued a Stop Payment Order on
SBTC MC No. 037364 (payable to Chiok in the
amount of P25,500,000.00) on the basis of an
Affidavit of Loss & Undertaking executed by a
certain Helen Tan. Under said Affidavit of Loss &
Undertaking, Tan claims that she purchased SBTC
MC No. 037364 from SBTC, but the managers
check got lost on that day. Asian Bank argued
that Chiok would therefore be liable for the
dishonor of the managers check under the terms
of the BPLA, which provides for recourse against
the seller (Chiok) of the check when it is
dishonored by the drawee (SBTC) for any reason,
whether valid or not.
On October 18, 1995, FEBTC filed a Complaint-in-
Intervention in Civil Case No. Q-95-24299. On
February6, 1996, the RTC initially denied FEBTCs
intervention in the case. On Motion for
Reconsideration, however, the RTC, on April 15,
1996, reversed itself and allowed the same.
In the Complaint-in-Intervention, FEBTC claimed
that it allowed the immediate withdrawal of the
proceeds of Asian Bank MC Nos. 025935 and
025939 on the ground that, as managerschecks,
they were the direct obligations of Asian Bank
and were accepted in advance by Asian Bank by
the mere issuance thereof. FEBTC presented the
checks for payment on July 5, 1995 through the
PCHC. Asian Bank, as admitted in its Answer
before the RTC, received the same on that day.
Consequently, Asian Bank was deemed to have
confirmed and booked payment of the subject
checks in favor of FEBTC or, at the latest, during
the first banking hour of July 6, 1995, when
payment should have been made. FEBTC claimed
that Asian Bank exhibited bad faith when, in
anticipation of the TRO, it opted to float the
checks until it received the TRO at 12:00 noon of
July 6, 1995 to justify the nonpayment thereof.
In their own Answer, the spouses Nuguid claimed
that Gonzalo Nuguid had delivered much more
dollars than what was required for the three
checks at the time of payment. By way of special
affirmative defense, the spouses Nuguid also
claims that since the subject checks had already
been paid to him, Chiok is no longer entitled to an
injunction (to hold the payment of the subject
checks), and Civil Case No. Q-95-24299 has
already become moot.
On August 29, 2002, the RTC rendered its
Decision, the dispositive portion of which states:
WHEREFORE, judgment is rendered:
1. Declaring as permanent the writ of
preliminary injunction issued under the
Order of July 25, 1995;
2. Ordering Global Business Bank, Inc.to
pay the plaintiff [Chiok]:
a.) The amount of P34,691,876.71
(less the attorneys fees
of P255,000.00 which shall remain
with Global Business Bank, Inc.),
plus interest at the legal rate of
 12%/p.a. from September 30, 1999
97
until fully paid;
Page
b.) The amount of P215,000.00,
representing the excess amount
debited from the plaintiffs deposit
in his account with Global Business
Bank, Inc. on July 7, 1995, plus
interest of 12%/p.a. from July 7,
1995, until fully paid;
c.) Attorneys fees equivalentof 5%
of the total amount due; and
3. Ordering Metropolitan Bank & Trust
Companyto pay the plaintiff:
a. The amount of his deposit
of P7,613,000.00, plus interest of
12%/p.a. from July 5, 1995 until
said amount is fully paid; and
b. Attorneys fees of 5%of the total
amount due;
4. Ordering Spouses Gonzalo B. Nuguid
and Marinella O. Nuguid liable jointly and
severally with Global Business Bank, Inc.
and Metropolitan Bank & Trust Company,
Inc. for the respective attorneys fees;
5. Dismissing the complaint-in-
interventionof BPI for lack of merit;
6. Ordering the defendantsand the
intervenorto pay, jointly and severally, the
costs of suit.9
(Emphases supplied.)
The RTC held that Nuguid failed to prove the
delivery of dollars to Chiok. According to the RTC,
Nuguids claim that Chiok was still liable for
seven dishonored China Banking Corporation
(CBC) checks with a total worth ofP72,984,020.00
is highly doubtful since such claim was not
presented as a counterclaim in the case.
Furthermore, the court ruled that the certification
of CBC stating the reasons10 for the stop payment
order "are indicative of Chioks non-liability to
Nuguid." The RTC further noted that there was a
criminal case filed by Chiok against Nuguid on
March 29, 1996 for estafa and other deceit on
account of Nuguids alleged failure to return the
originals of the seven CBC checks.11
The RTC went on to rule that managers checks
and cashiers checks may be the subject of a Stop
Payment Order from the purchaser on the basis of
the payees contractual breach. As explanation
for this ruling, the RTC adopted its
pronouncements when it issued the July 25, 1995
Order:
Defendant Nuguids argument that the injunction
could render managers and cashierschecks
unworthy of the faith they should have and could
impair their nature as independent undertakings
of the issuing banks is probably an
undistinguished simplification. While the
argument may be applicable to such checks in
general, it does not adequately address the
situation, as here, when specific managers and
cashiers checks are already covered by
reciprocal undertakings between their purchaser
and their payee, in which the latter allegedly
failed to perform. The agreement herein was
supposedly one in which Nuguid would deliver the
equivalent amount in US dollars ($1,022,288.23)
"on the same date" that the plaintiff purchased
and delivered the managers and cashiers
checks (P26,068,350.00). Assuming that such a
reciprocity was true, the purchaser should have
the legal protection of the injunctive writ (which,
after all, the legal departments of the issuing
banks themselves allegedly advised the plaintiff
to obtain), since the usual order or instruction to
stop payment available in case of ordinary checks
did not avail. This was probably the reason that
Asian Bank has expressly announced in its own
comment/opposition of July 14, 1995 that it was
not opposing the application for the prohibitory
injunction.
The dedication of such checks pursuantto specific
reciprocal undertakings between their purchasers
and payees authorizes rescission by the former to
prevent substantial and material damage to
themselves, which authority includes stopping
the payment of the checks.12 According to the
RTC, both managers and cashiers checks are still
subject to regular clearing under the regulations
of the Bangko Sentral ng Pilipinas. Since
managers and cashiers checks are the subject of
regular clearing, they may consequently be
refused for cause by the drawee, which refusal is
in fact provided for in the PCHC Rule Book.
The RTC found the argument by BPI that the
managers and cashiers checks are pre-cleared
untenable under Section 60 of the New Central
Bank Act and Article 1249 of the Civil Code, which
respectively provides:
Section 60. Legal Character. Checks
representing demand deposits do not have legal
tender power and their acceptance in the
payment of debts, both public and private, is at
98
the option of the creditor; Provided, however, that
a check which has been cleared and credited to
Page
the account of the creditor shall be equivalent to
a delivery to the creditor of cash in an amount
equal to the amount credited to his account.
Art. 1249. The payment of debts inmoney shall be
made in the currency stipulated, and if it is not
possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment
only when they have been cashed, or when
through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the
original obligation shall be held in the abeyance.
The RTC went on to rule that due to the timely
service of the TRO and the injunction, the value
of the three checks remained with Global Bank
and Metrobank.13 The RTC concluded that since
Nuguid did not have a valid title to the proceeds
of the managers and cashiers checks, Chiok is
entitled to be paid back everything he had paid to
the drawees for the checks.14
With respect to Global Bank, the RTC ruled that
the entire amount of P34,691,876.71 it recovered
from SBTC from the September 15, 1997 PCHC
Decision, as reflected in the September 29, 1999
Charge Slip No. 114977, less the sum
of P225,000.00 awarded by the arbitration
committees decision as attorneys fees, should
be paidto Chiok, with interest at 12% per annum
from September 30, 1999 until full payment. The
RTC likewise ordered Global Bank to pay Chiok
the amount of P215,390.00, an amount debited
from Chioks account as payment for outstanding
bills purchase.15
With respect to Metrobank, the RTC ruled that it
should pay Chiok P7,613,000.00, the amount paid
by Chiok to purchase the CC, plus interest of 12
percent per annum from July 5,1995 until full
payment. The RTC explained this finding as
follows:
The same conclusion is true with respect to Metro
Bank, with whom the funds amounting
to P7,613,000.00 for the purchase of CC No.
003380 has remained. According to Chiok, Metro
Bank used such funds in its operations.
In the hearing on May 17, 2001, Lita Salonga Tan
was offered as a witness for Metro Bank, but in
lieu ofher testimony, the parties agreed to
stipulate on the following as her testimony, to
wit:
1. That Metro Bank paid the amount of CC
No. 003280;
2. That the payment on July 12, 1995 was
made while the TRO of July 5, 1995 was in
force;
3. [That] the payment on July 12, 1995
was on the third clearing of CC No.
003380; and
4. That the PCHC Rule book was the
authority on the rules and regulations on
the clearing operations of banks.
The payment to FEBTC by Metro Bank of CC No.
003380 on July 12, 1995 was an open defiance of
the TRO of July 6, 1995. Metro Banks Branch
Manager Alice Rivera, through her letter of July
10, 1995 to FEBTC as the collecting bank,
returned the CC to FEBTC in compliance with the
TRO which was received about 12:10 noon of July
6, 1999. Hence, Metro Bank should not have paid
because the TRO was served within the 24-hour
period to clear checks. Moreover, the payment,
being made on third clearing, was unjustified for
violating existing regulations, particularly
paragraph 1 of the Clearing House Operating
Memo (CHOM), effective September 1, 1984,
which prohibited the reclearing of a check after
its first presentation if it was returned for the
reason of "stop payment" or "closed account."
It also seems that Metro Bank paid the CC without
first checking whether, in fact, any actual
payment of the 3 checks had been made on July
5, 1995 to the payee when the checks were
deposited in payees account with FEBTC on July
5, 1995. The records show no such payment was
ever made to render the TRO of July 6, 1995 or
the writ of preliminary injunction applied for moot
and academic.
Jessy A. Degaos adopted by Metro Bank as its
own witness in injunction hearing of July 24, 1995
stated that the payment of the 3 checks
consisted of the accounting entry made at the
PCHC during the presenting process by debiting
the respective accounts of the drawees and
crediting the account of collecting bank FEBTC.
Yet, as already found hereinabove, such process
was reversed due to the return by the drawees of
the checks which they dishonored on account of
the TRO.
Also, Degaos, testifying on January 17, 2002 for
99
intervenor BPI, was asked in what form was the
withdrawal of the amounts of the checks made by
Page
Nuguid on July 5, 1995, that is, whether:- 1) cash
withdrawal; or 2) credit to Nuguids account; or 3)
draft issued to Nuguid. His reply was that only the
banks branch which serviced the payees
account could provide the answer. Yet, BPI did not
present any competent personnel from the
branch concerned to enlighten the Court on this
material point.
This amount of P7,613,000.00, having remained
with Metro Bank since the service of the TRO of
July 6, 1995 and the writ of preliminary injunction
issued under the Order of July 25, 1998, should
be returned to Chiok with interest of 12%/p.a.
from July 7, 1995 until full payment.16
(Citations omitted.)
The RTC likewise denied BPIs complaint-in-
intervention to recover the value of the three
checks from drawees Global Bank and Metrobank
for lack of merit. The RTC, after reprimanding
Global Bank and Metrobank for siding with BPI on
this issue, held that BPI, as a mere collecting
bank of the payee with a void title to the checks,
had no valid claim as to the amounts of such
checks. The RTC explained:
Firstly: BPI, being a collecting bankin relation to
the 3 checks, was merely performing collection
services as an agent of Nuguid, the payee. If, as
found hereinbefore, Nuguid could not have legal
title to the 3 checks, it follows that BPI could not
stake any claim for title better than Nuguids own
void title. Consequently, BPI has no right to claim
the amounts of the 3 checks from the drawee-
banks.
Secondly: The purpose of the delivery of the 3
checks to BPI which was not even accompanied
by Nuguids endorsement was solely for deposit
in the account of payee Nuguid. Assuming, for
the sake of argument, that BPI as the collecting
bank paid the value of the checks of which fact
there has been no proof whatsoever BPI was
nonetheless, at best, a mere transferee whose
title was no better than the void title of the
transferor, payee Nuguid. Under such
circumstance, BPI has no legal basis to demand
payment of the amounts of the 3 checks from the
draweebanks.
Thirdly: Under Sec. 49, Negotiable Instruments
Law, BPI, as transferee without indorsement, was
not considered a holder of the instrument since it
was neither a payee nor an indorsee. It would
become so only when and if the indorsement is
actually made, and only as of then, but not
before, is the issue whether BPI was a holder in
due course or not is determined.
Consequently, any alleged payment by BPI as the
collecting bank, through the supposed though
unproved withdrawal of the amounts of the 3
checks by Nuguid upon the deposit of the checks
on July 5, 1995, is not the payment which
discharges liability under the 3 checks because
BPI is neither the party primarily liable northe
drawee.
Such a payment, if true, is akin to, if it is not,
drawing against uncollected deposits (DAUD). In
such a case, BPI was in duty bound to send the 3
checks to the PCHC for clearing pursuant to
Section 1603.c.1 of the BSP Manual of
Regulations and Sec. 60, R.A. No. 7653. It serves
well to note herein that Global Bank and Metro
Bank returned the checks through the PCHC on
July 6, 1995, well within the 24-hour clearing
period, in compliance with the TRO of July 6,
1995. Finally: As earlier noted and discussed,
there is no evidence of any prior valid payment
by the collecting bank to support its claim of the
amounts of the 3 checks against the defendant
banks.17 (Citation omitted.)
The RTC held Global Bank and Metrobank liable
for attorneys fees equivalent to 5% of the total
amountdue them, while the spouses Nuguid were
held solidarily liable for said fees.
Defendants Global Bank, Metrobank, and the
spouses Nuguid, and intervenor BPI filed separate
notices of appeal, which were approved in the
Order18 dated April 3, 2003. Chiok filed a Motion
to Dismiss against the appeal of Global Bank, on
the ground that the latter had ceased to operate
as a banking institution.
On May 26, 2004, the Court of Appeals dismissed
the appeal of the spouses Nuguid pursuant to
Section 1(e), Rule 50 of the Rules of Court, on
account of their failure to file their appellants
brief. In the same Resolution, the Court of
Appeals denied Chioks Motion to Dismiss.
On May 5, 2006, the Court of Appeals rendered
the assailed Decision affirming the RTC Decision
with modifications. The fallo of the Decision
reads:
WHEREFORE, premises considered, the Decision
dated August 29, 2000 of the RTC, Branch 96,
Quezon City is AFFIRMED with the following
MODIFICATIONS:
 1.) The contract to buy foreign currency in
100
the amount of $1,022,288.50 between
plaintiff-appellee Wilfred N. Chiok and
defendant Gonzalo B. Nuguid is hereby
Page
rescinded. Corollarily, Managers Check
Nos. 025935 and 025939 and Cashiers
Check No. 003380 are ordered cancelled.
2.) Global Business Holdings, Inc. is
ordered to credit Savings Account No. 2-
007-03-00201-3 with:
a) The amount of P25,500,000.00,
plus interest at 4% from September
29, 1999 until withdrawn by
plaintiff-appellee;
b) The amount of P215,390.00,
plus interest at 4% from July 7,
1995 until withdrawn by plaintiff-
appellee.
3.) Metropolitan Bank & Trust Company is
ordered to credit Savings Account No. 154-
42504955 the amount of P7,613,000.00,
with interest at 6% [per annum] from July
12, 1995 until the same is withdrawn;
4.) The Spouses Gonzalo B. Nuguid and
Marinella O. Nuguid are ordered to pay
attorneys fees equivalent to 5% of the
total amount due to plaintiff-appellee from
both depository banks, as well as the costs
of suit.19
According to the Court of Appeals, Article 1191 of
the Civil Code provides a legal basis of the right
of purchasers of MCs and CCs to make a stop
payment order on the ground of the failure of the
payee to perform his obligation to the purchaser.
The appellate court ruled that such claim was
impliedly incorporated in Chioks complaint. The
Court of Appeals held:
By depositing the subject checks to the account
of Nuguid, Chiok had already performed his
obligation under the contract, and the
subsequent failure of Nuguid to comply with what
was incumbent upon him gave rise to an action
for rescission pursuant to Article 1191 of the Civil
Code, which states:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
xxxx
Although the complaint a quowas entitled
"DAMAGES, W/ EX PARTE RESTRAINING
ORDER/INJUNCTION" when the action was really
one for rescission and damages, it is an
elementary rule of procedure that what controls
or determines the nature of the action is not the
caption of the complaint but the allegations
contained therein. And even without the prayer
for a specific remedy, proper relief may
nevertheless be granted by the court if the facts
alleged in the complaint and the evidence
introduced so warrant.
That Chiok had intended rescission isevident from
his prayer to be declared the legal owner of the
proceeds of the subject checks and to be allowed
to withdraw the same. Therefore, the argument of
BPI that the obligation on the part of Nuguid to
deliver the dollars still subsists is untenable.
Article 1385 of the same Code provides that
rescission creates the obligation to return the
things which were the object of the contract,
together with their fruits, and the price with its
interest. The object of the contract herein to buy
foreign currency is the peso-value of the dollars
bought but in the form of negotiable instruments
Managers Check/Cashiers Check. Hence,
respecting the negotiation thereof, and in order
to afford complete relief to Chiok, there arose the
necessity for the issuance of the injunction
restraining the payment of the subject checks
with the end in view of the eventual return of the
proceeds to give effect to Article 1385. In other
words, the injunctive relief was necessary in order
not to render ineffectual the judgment in the
instant case. We quote with approval the
following disquisition of the trial court, to wit:
xxxx
There is no question about the nature of
managers and cashiers checks being as good as
cash, being primary obligations of the issuing
bank and accepted in advanceby their mere
issuance. But even as such nature of
unconditional commitment to pay on the part of
the issuing bank may be conceded, the Court
101
opines that the injunctive relief cannot be denied
to a party who purchased the managers or
cashiers check to stop its payment to the payee
Page
in a suit against the payee and the issuing banks
upon a claim that the payee himself had not
performed his reciprocal obligation for which the
issuance and delivery of the self-same
managersor cashiers check were, in the first
place, made x x x.
It bears stressing that the subject checks would
not have been issued were it not for the contract
between Chiok and Nuguid. Therefore, they
cannot be disassociated from the contract and
given a distinct and exclusive signification, as the
purchase thereof is part and parcel of the series
of transactions necessary to consummate the
contract. Taken in this light, it cannot be argued
that the issuing banks are bound to honor only
their unconditional undertakings on the subject
checks vis--vis the payee thereof regardless of
the failed transaction between the purchaser of
the checks and the payee on the ground that the
banks were not privy to the said transaction.
Lest it be forgotten, the purchase of the checks
was funded by the account of Chiok with the
banks. As such, the banks were equally obligated
to treat the account of their depositor with
meticulous care bearing in mind the fiduciary
nature of their relationship with the depositor.
Surely, the banks would not allow their depositor
to sit idly by and watch the dissipation of his
livelihood considering that the business of foreign
currency exchange is a highly volatile
undertaking where the probability of losing or
gaining is counted by the ticking of the clock.
With the millions of money involved in this
transaction, Chiok could not afford to be
complacent and his vigilance for his rights could
not have been more opportune under the
circumstances.20 (Citations omitted.)
The Court of Appeals proceeded to sustain the
dismissal of BPIs complaint-in-intervention, which
sought to recover from Global Bank the amounts
allegedly paid to Nuguid. The Court of Appeals
pointed out that BPI failed to prove the alleged
withdrawal by Nuguid of the proceeds of the two
managers checks, as BPIs representative, Jessy
A. Degaos, failed to answer the question on the
form of the alleged withdrawal. Furthermore, BPI
failed to prove that it was a holder in due course
of the subject managers checks, for two reasons:
(1) the checks were not indorsed to it by Nuguid;
and (2) BPI never presented its alleged bills
purchase agreement with Nuguid.21
The Court of Appeals likewise modified the order
by the RTC for Global Bank and Metrobank to pay
Chiok. The Court of Appeals held that Chioks
cause of action against Global Bank is limited to
the proceeds of the two managers checks.
Hence, Global Bank was ordered to credit Chioks
Savings Account No. 2-007-03-00201-3 with the
amount of P25,500,000.00, the aggregate value
of the two managers checks, instead of the
entireP34,691,876.71 recovered from SBTC from
the September 15, 1997 PCHC Decision. The
interest was also reduced from 12% per annum to
that imposed upon savings deposits, which was
established during the trial as 4% per annum. 22
As regards Metrobank, the appellate court noted
that there was no evidence as to the interest rate
imposed upon savings deposits at Metrobank.
Metrobank was ordered to credit the amount
of P7,613,000.00 to Chioks Savings Account No.
154-42504955, with interest at 6% per annum. 23
Global Bank and BPI filed separate Motions for
Reconsideration of the May 5, 2006 Court of
Appeals Decision. On November 6, 2006, the
Court of Appeals denied the Motions for
Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No.
175302), and Global Bank (G.R. No. 175394) filed
with this Court separate Petitions for Review on
Certiorari. In Resolutions dated February 21,
200724 and March 12, 2007,25 this Court resolved
to consolidate the three petitions. Metrobank
submitted the following issues for the
consideration of this Court:
(A) WHETHER OR NOT THE HONORABLE
COURT OF APPEALS ERRED IN RULING
THAT "IT IS LEGALLY POSSIBLE FOR A
PURCHASER OF A MANAGERS CHECK OR
CASHIERS CHECK TO STOP PAYMENT
THEREON THROUGH A COURT ORDER ON
THE GROUND OF THE PAYEES ALLEGED
BREACH OF CONTRACTUAL OBLIGATION
AMOUNTING TO AN ABSENCE OF
CONSIDERATION THEREFOR."
(B) GRANTING ARGUENDO THAT A
MANAGERS CHECK OR CASHIERS CHECK,
"IN VIEW OF THE PECULIAR
CIRCUMSTANCES OF THIS CASE" MAY BE
SUBJECT TO A STOP PAYMENT ORDER BY
THE PURCHASER THEREOF THROUGH A
COURT ORDER, WHETHER OR NOT THE
HONORABLE COURT OF APPEALS ERRED IN
CONCLUDING THAT PETITIONER HEREIN
"HAD KNOWLEDGE OF CIRCUMSTANCES
THAT WOULD DEFEAT THE TITLE OF THE
 PAYEE TO THE CHECKS" WITHOUT, Finally, Global Bank rely upon the following

102
HOWEVER, CITING ANY SPECIFIC grounds in its petition with this Court:
EVIDENCE WHICH WOULD PROVE THE
EXISTENCE OF SUCH KNOWLEDGE. (C) A.

Page
WHETHER OR NOT THE HONORABLE
COURT OF APPEALS ERRED IN SUSTAINING THE COURT OF APPEALS GRAVELY ERRED IN
THE TRIAL COURTS ORDER FOR RULING THAT PETITIONER GLOBAL BANK HAD NO
PETITIONER HEREIN "TO PAY (TO CHIOK) JUSTIFICATION FOR ITS RIGHT OF RECOURSE
THE VALUE OF CASHIERS CHECK NO. AGAINST RESPONDENT CHIOK
003380 IN THE AMOUNT NOTWITHSTANDING THE CLEAR AND
OF P7,613,000.00, WHICH WAS DEBITED UNMISTAKABLE PROVISIONS OF THE BILLS
AGAINST CHIOKS SAVINGS ACCOUNT # PURCHASE AGREEMENT.
154-42504955 ON THE OBSERVATION
THAT THE PAYMENT TO FEBTC BY
METROBANK OF CC NO. 003380ON JULY B.
12, 1995 WAS AN OPEN DEFIANCE OF THE
TRO OF JULY 6, 1995."26 THE COURT OF APPEALS GRAVELY ERRED IN
MAKING PETITIONER GLOBAL BANK LIABLE FOR
BPI, on the other hand, presented the following INTEREST OF 4% PER ANNUM DESPITE THE FACT
issues: THAT:

I. 1. RESPONDENT DID NOT ASK FOR SUCH

Whether or not the Court of Appeals detracted
from well-settled concepts and principles in
commercial law regarding the nature, causes, and
effects of a managers check and cashiers
checkin ruling that [the] power of the court can
be invoked by the purchaser [Chiok] in a proper
action, which the Court su[b]stantially construed
as a rescissory action or the power to rescind
obligations under Article 1191 of the Civil Code.
II.
Whether or not the Honorable Court of Appeals
erred in ruling that where a purchaser invokes
rescission due to an alleged breach of the
payees contractual obligation, it is deemed as
"peculiar circumstance" which justifies a stop
payment order issued by the purchaser or a
temporary restraining order/injunction from a
Court to prevent payment of a Managers Check
or a Cashiers Check.
III.
Whether or not the Honorable Court of Appeals
erred in ruling that judicial admissions in the
pleadings of Nuguid, BPI, Asian Bank, Metrobank
and even Chiok himself that Nuguid had
withdrawn the proceeds of the checks will not
defeat Chioks "substantial right" to restrain the
drawee bank from paying BPI, the collecting bank
or presenting bank in this case who paid the
value of the Cashiers/Managers Checks to the
payee.27
RELIEF IN HIS COMPLAINT;
2. RESPONDENT HAD WAIVED HIS RIGHT
TO ANY INTEREST; AND
3. THERE IS NO EVIDENCE ON RECORD AS
THE BASIS FOR ANY INTEREST.28
Before delving into the merits of these cases, we
shall first dispose of a procedural development
during their pendency with the Court.
Joint Manifestation and Motion allegedly
filed by Metrobank, Global Bank and
respondent Chiok
On May 28, 2013, this Court received a Joint
Manifestation and Motion allegedly filed by
petitioners Metrobank, Global Bank, and
respondent Chiok, which reads:
PETITIONERS METROPOLITAN BANK & TRUST
COMPANY & GLOBAL BUSINESS BANK, INC., and
RESPONDENT WILFRED N. CHIOK, by their
respective counsels, unto this Honorable Court,
respectfully state that after a thorough
consideration, the parties herein have decided to
forego their respective claims against each other,
including, past, present and/or contingent, in
relation to the above referenced cases.
PRAYER
WHEREFORE, it is respectfully prayed that no
further action be taken by this Honorable Court
on the foregoing petitions, that the instant
proceedings be declared CLOSED and
TERMINATED, and that an Order be rendered
103
dismissing the above-referenced cases with
prejudice.
Page
In the above Joint Manifestation and Motion,
respondent Chiok was not represented by his
counsel of record, Cruz Durian Alday and Cruz-
Matters, but was assisted by Espiritu Vitales
Espiritu Law Office, with Atty. Cesar D. Vitales as
signatory, by way of special appearance and
assistance.
On June 19, 2013, this Court issued a Resolution
requiring petitioner BPI to comment on the Joint
Manifestation and Motion filed by its copetitioners
Metrobank, Global Bank, and respondent Chiok.
The Resolution reads:
Considering the joint manifestation and motion of
petitioners Metropolitan Bank and Trust Company
and Global Business Bank, Inc., and respondent,
that after a thorough consideration, they have
decided to forego their respective claims against
each other, including past, present and/or
contingent, in these cases and praying that the
instant proceedings in G.R. Nos. 172652 and
175394 be declared closed and terminated, the
Court resolves to require petitioner Bank of the
Philippine Islands to COMMENT thereon within ten
(10) days from notice thereof x x x.
On September 12, 2013, respondent Chiok, this
time assisted by his counsel of record, Cruz
Durian Alday & Cruz-Matters, filed a Motion for
Reconsideration of our Resolution dated June 19,
2013. The signatory to the Motion for
Reconsideration, Atty. Angel Cruz, grossly misread
our Resolution requiring BPI to comment on the
Joint Manifestation and Motion, and apparently
contemplated that we are already granting said
Motion. Atty. Cruz objected to the Joint
Manifestation and Motion, labeling the same as
tainted with fraud. According to Atty. Cruz,
Espiritu Vitales and Espiritus failure to give prior
notice to him is in violation of Canon 8 of the
Code of Professional Responsibility. Atty. Cruz
prays that Metrobank and Global Bank be ordered
to submit a document of their settlement showing
the amounts paid to Chiok, and for the June19,
2013 Resolution of this Court be reconsidered and
set aside.
On October 9, 2013, BPI filed its comment to the
Joint Manifestation and Motion, opposing the
samefor being an implied procedural shortcut to a
Compromise Agreement. It averred that while the
courts encourage parties to amicably settle
cases, such settlements are strictly scrutinized by
the courts for approval. BPI also pointed out that
the Joint Manifestation and Motion was not
supported by any required appropriate Board
Resolution of Metrobank and Global Bank
granting the supposed signatories the authority
to enter into a compromise. BPI prayed that the
Joint Manifestation and Motion of Metrobank,
Global Bank, and Chiok be denied, and to render
a full Decision on the merits reversing the
Decision of the Court of Appeals.
On January 20, 2014, Global Bank filed a
Comment to Atty. Cruzs Motion for
Reconsideration on behalf of Chiok, praying that
said Motion be expunged from the records for
failure of Atty. Cruz to indicate the number and
date of issue of his MCLE Certificate of
Compliance or Certificate of Exemption for the
immediately preceding compliance period.
As far as this Court is concerned, the counsel of
record of respondent Chiok is still Cruz Durian
Alday & Cruz-Matters. The requisites of a proper
substitution of counsel of record are stated and
settled in jurisprudence:
No substitution of counsel of record is allowed
unless the following essential requisites of a valid
substitution of counsel concur: (1) there must be
a written request for substitution; (2) it must be
filed with the written consent of the client; (3) it
must be with the written consent of the attorney
to be substituted; and (4) in case the consent of
the attorney to be substituted cannot be
obtained, there must be at least a proof of notice
that the motion for substitution was served on
him in the manner prescribed by the Rules of
Court.29 (Citation omitted.)
Therefore, while we should indeed require Atty.
Cruz to indicate the number and date of issue of
his MCLE Certificate of Compliance or Certificate
of Exemption for the immediately preceding
compliance period, he is justified in pointing out
the violation of Canon 830 of the Code of
Professional Responsibility, Rule 8.02 of which
provides:
Rule 8.02. A lawyer shall not, directly or
indirectly, encroach upon the professional
employment of another lawyer; however, it is the
right of any lawyer, without fear or favor, to give
proper advice and assistance to those seeking
relief against unfaithful or neglectful counsel.
We should also give weight to the opposition of
BPI to the supposed compromise agreement. As
stated above, the consolidated petitions filed by
Metrobank, BPI, and Global Bank all assail the
Decision of the Court of Appeals in CA-G.R. CV No.
77508 dated May 5, 2006, and the Resolution on
104
the same case dated November 6, 2006. BPI itself
has a claim against Global Bank, which appear to
be intimately related to issues brought forth in
Page
the other consolidated petitions.
Furthermore, the failure of the parties to the Joint
Manifestation and Motion to declare with
particularity the terms of their agreement
prevents us from approving the same so as to
allow it to attain the effect of res judicata. A
judicial compromise is not a mere contract
between the parties. Thus, we have held that:
A compromise agreement intended to resolve a
matter already under litigation is a judicial
compromise. Having judicial mandate and
entered as its determination of the controversy,
such judicial compromise has the force and effect
of a judgment. It transcends its identity as a mere
contract between the parties, as it becomes a
judgment that is subject to execution in
accordance with the Rules of Court. Thus, a
compromise agreement that has been made and
duly approved by the court attains the effect and
authority of res judicata, although no execution
may be issued unless the agreement receives the
approval of the court where the litigation is
pending and compliance with the terms of the
agreement is decreed.31 (Citation omitted.)
We are therefore constrained to deny the Joint
Manifestation and Motion filed with this Court on
May 28, 2013 and to hereby decide the
consolidated petitions on their merits.
The Courts ruling on the merits of these
consolidated petitions
Whether or not payment of managers
and cashiers checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks
The legal effects of a managers check and a
cashiers check are the same. A managers check,
like a cashiers check, is an order of the bank to
pay, drawn upon itself, committing in effect its
total resources, integrity, and honor behind its
issuance. By its peculiar character and general
use in commerce, a managers check or a
cashiers check is regarded substantially to be as
good as the money it represents. 32 Thus, the
succeeding discussions and jurisprudence on
managers checks, unless stated otherwise, are
applicable to cashiers checks, and vice versa.
The RTC effectively ruled that payment of
managers and cashiers checks are subject to
the condition that the payee thereof complies
with his obligations to the purchaser of the
checks:
The dedication of such checks pursuant to
specific reciprocal undertakings between their
purchasers and payees authorizes rescission by
the former to prevent substantial and material
damage to themselves, which authority includes
stopping the payment of the checks.
Moreover, it seems to be fallacious to hold that
the unconditional payment of managers and
cashiers checks is the rule. To begin with, both
managersand cashiers checks are still subject to
regular clearing under the regulations of the
Bangko Sentral ng Pilipinas, a fact borne out by
the BSP manual for banks and intermediaries,
which provides, among others, in its Section
1603.1, c, as follows:
xxxx
c. Items for clearing. All checks and documents
payable on demand and drawn against a
bank/branch, institution or entity allowed to clear
may be exchanged through the Clearing Office
inManila and the Regional Clearing Units in
regional clearing centers designated by the
Central Bank x x x.33
The RTC added that since managers and
cashiers checks are the subject of regular
clearing, they may consequently be refused for
cause by the drawee, which refusal is in fact
provided for in Section 20 of the Rule Book of the
PCHC:
Sec. 20 REGULAR RETURN ITEM PROCEDURE
20.1 Any check/item sent for clearing through the
PCHC on which payment should be refused by the
Drawee Bank in accordance with long standing
and accepted banking practices, such as but not
limited to the fact that:
(a) it bears the forged or unauthorized
signature of the drawer(s); or
(b) it is drawn against a closed account; or
(c) it is drawn against insufficient funds; or
(d) payment thereof has been stopped; or
(e) it is post-dated or stale-dated; and
 (f) it is a cashiers/managers/treasurers
105
check of the drawee which has been
materially altered;
Page
shall be returned through the PCHC not later than
the next regular clearing for local exchanges and
the acceptance of said return by the Sending
Bank shall be mandatory.
It goes without saying that under the aforecited
clearing rule[,] the enumeration of causes to
return checks is not exclusive but may include
other causes which are consistent with long
standing and accepted banking practices. The
reason of plaintiffs can well constitute such a
justifiable cause to enjoin payment.34
The RTC made an error at this point. While
indeed, it cannot be said that managers and
cashiers checks are pre-cleared, clearing should
not be confused with acceptance. Managers and
cashiers checks are still the subject of clearing to
ensure that the same have not been materially
altered or otherwise completely counterfeited.
However, managers and cashiers checks are
pre-accepted by the mere issuance thereof by the
bank, which is both its drawer and drawee. Thus,
while managers and cashiers checks are still
subject to clearing, they cannot be
countermanded for being drawn against a closed
account, for being drawn against insufficient
funds, or for similar reasons such as a condition
not appearing on the face of the check. Long
standing and accepted banking practicesdo not
countenance the countermanding of managers
and cashiers checks on the basis of a mere
allegation of failure of the payee to comply with
its obligations towards the purchaser. On the
contrary, the accepted banking practice is that
such checks are as good as cash. Thus, in New
Pacific Timber & Supply Company, Inc. v. Hon.
Seneris,35 we held:
It is a well-known and accepted practice in the
business sector that a Cashier's Check is deemed
as cash. Moreover, since the said check had been
certified by the drawee bank, by the certification,
the funds represented by the check are
transferred from the credit of the maker to that of
the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the
drawee bank, with rights and duties of one in
such situation. Where a check is certified by the
bank on which it is drawn, the certification is
equivalent to acceptance. Said certification
"implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have
been set apart for its satisfaction, and that they
shall be so applied whenever the check is
presented for payment. It is an understanding
that the check is good then, and shall continue
good, and this agreement is as binding on the
bank as its notes in circulation, a certificate of
deposit payable to the order of the depositor, or
any other obligation it can assume. The object of
certifying a check, as regards both parties, is to
enable the holder to use it as money." When the
holder procures the check to be certified, "the
check operates as an assignment of a part of the
funds to the creditors." Hence, the exception to
the rule enunciated under Section 63 of the
Central Bank Act to the effect "that a check which
has been cleared and credited to the account of
the creditor shall be equivalent to a delivery to
the creditor in cash in an amount equal to the
amount credited to his account" shall apply in this
case. x x x. (Emphases supplied, citations
omitted.)
Even more telling is the Courts pronouncement
in Tan v. Court of Appeals,36 which unequivocally
settled the unconditional nature of the credit
created by the issuance of managers or cashiers
checks:
A cashiers check is a primary obligation of the
issuing bank and accepted in advanceby its mere
issuance. By its very nature, a cashiers check is
the banks order to pay drawn upon itself,
committing in effect its total resources, integrity
and honor behind the check. A cashiers check by
its peculiar character and general use in the
commercial world is regarded substantially to be
as good asthe money which it represents. In this
case, therefore, PCIB by issuing the check created
an unconditional creditin favor of any collecting
bank. (Emphases supplied, citations omitted.)
Furthermore, under the principle of ejusdem
generis, where a statute describes things of a
particular class or kind accompanied by words of
a generic character, the generic word willusually
be limited to things of a similar nature with those
particularly enumerated, unless there be
something in the context of the statute which
would repel such inference.37 Thus, any long
standing and accepted banking practice which
can be considered as a valid cause to return
managers or cashiers checks should be of a
similar nature to the enumerated cause
applicable to managers or cashiers checks:
material alteration. As stated above, an example
ofa similar cause is the presentation of a
counterfeit check.
Whether or not the purchaser of
managers and cashiers checks has the
right to have the checks cancelled by
filing an action for rescission of its
106
contract with the payee
The Court of Appeals affirmed the order of the
Page
RTC for Global Bank and Metrobank to pay Chiok
for the amounts of the subject managers and
cashiers checks. However, since it isclear to the
appellate court that the payment of managers
and cashiers checks cannot be considered to be
subject to the condition the payee thereof
complies with his obligations to the purchaser of
the checks, the Court of Appeals provided
another legal basis for such liability rescission
under Article 1191 of the Civil Code:
WHEREFORE, premises considered, the Decision
dated August 29, 2000 of the RTC, Branch 96,
Quezon City is AFFIRMED with the following
MODIFICATIONS:
1.) The contract to buy foreign currency in the
amount of $1,022,288.50 between plaintiff-
appellee Wilfred N. Chiok and defendant Gonzalo
B. Nuguid is hereby rescinded. Corollarily,
Managers Check Nos. 025935 and 025939 and
Cashiers Check No. 003380 are ordered
cancelled.38
According to the Court of Appeals, while such
rescission was not mentioned in Chioks Amended
Complaint, the same was evident from his prayer
to be declared the legal owner of the proceeds of
the subject checks and to be allowed to withdraw
the same. Since rescission creates the obligation
to return the things which are the object of the
contract, together with the fruits, the price and
the interest,39 injunctive relief was necessary to
restrain the payment of the subject checks with
the end in view of the return of the proceeds to
Chiok.40
Thus, as it was construed by the Court of
Appeals, the Amended Complaint of Chiok was in
reality an action for rescission of the contract to
buy foreign currency between Chiok and Nuguid.
The Court of Appeals then proceeded to cancel
the managers and cashiers checks as a
consequence of the granting of the action for
rescission, explaining that "the subject checks
would not have been issued were it not for the
contract between Chiok and Nuguid. Therefore,
they cannot be disassociated from the contract
and given a distinct and exclusive signification, as
the purchase thereof is part and parcel of the
series of transactions necessary to consummate
the contract."41
We disagree with the above ruling.
The right to rescind invoked by the Court of
Appeals is provided by Article 1191 of the Civil
Code, which reads:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
The cause of action supplied by the above article,
however, is clearly predicated upon the
reciprocity of the obligations of the injured party
and the guilty party. Reciprocal obligations are
those which arise from the same cause, and in
which each party is a debtor and a creditor of the
other, such that the obligation of one is
dependent upon the obligation of the other. They
are to be performed simultaneously such that the
performance of one is conditioned upon the
simultaneous fulfillment of the other. 42 When
Nuguid failed to deliver the agreed amount to
Chiok, the latter had a cause of action against
Nuguid to ask for the rescission of their contract.
On the other hand, Chiok did not have a cause of
action against Metrobank and Global Bank that
would allow him to rescind the contracts of sale
of the managers or cashiers checks, which
would have resulted in the crediting of the
amounts thereof back to his accounts.
Otherwise stated, the right of rescission43 under
Article 1191 of the Civil Code can only be
exercised in accordance with the principle of
relativity of contracts under Article 1131 of the
same code, which provides:
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. x x x.
In several cases, this Court has ruled that under
107
the civil law principle of relativity of contracts
under Article 1131, contracts can only bind the
parties who entered into it, and it cannot favor or
Page
prejudice a third person, even if he is aware of
such contract and has acted with knowledge
thereof.44 Metrobank and Global Bank are not
parties to the contract to buy foreign currency
between Chiok and Nuguid. Therefore, they are
not bound by such contract and cannot be
prejudiced by the failure of Nuguid to comply with
the terms thereof.
Neither could Chiok be validly granted a writ of
injunction against Metrobank and Global Bank to
enjoin said banks from honoring the subject
managers and cashiers checks. It is elementary
that "(a)n injunction should never issue when an
action for damages would adequately
compensate the injuries caused. The very
foundation of the jurisdiction to issue the writ of
injunction rests in the fact that the damages
caused are irreparable and that damages would
not adequately compensate."45 Chiok could have
and should have proceeded directly against
Nuguid to claim damages for breach of contract
and to have the very account where he deposited
the subject checks garnished under Section
7(d)46 and Section 8,47 Rule 57 of the Rules of
Court. Instead, Chiok filed an action to enjoin
Metrobank and Global Bank from complying with
their primary obligation under checks in which
they are liable as both drawer and drawee.
It is undisputed that Chiok personally deposited
the subject managers and cashiers checks to
Nuguids account.1wphi1If the intention of Chiok
was for Nuguid to be allowed to withdraw the
proceeds of the checks after clearing, he could
have easily deposited personal checks, instead of
going through the trouble of purchasing
managers and cashiers checks. Chiok therefore
knew, and actually intended, that Nuguid will be
allowed to immediately withdraw the proceeds of
the subject checks. The deposit of the checks
which were practically as good as cash was
willingly and voluntarily made by Chiok, without
any assurance that Nuguid will comply with his
end of the bargain on the same day. The
explanation for such apparently reckless action
was admitted by Chiok in the Amended Complaint
itself:
That plaintiff [Chiok] due to the numberof years
(five to seven years) of business transactions with
defendant [Nuguid] has reposed utmost trust and
confidence on the latterthat their transactions as
of June 1995 reaches millions of pesos. x x
x.48 (Emphases supplied.)
As between two innocent persons, one of whom
must suffer the consequences of a breach of
trust, the one who made it possible by his act of
confidence must bear the loss.49 Evidently, it was
the utmost trust and confidence reposed by Chiok
to Nuguid that caused this entire debacle,
dragging three banks into the controversy, and
having their resources threatened because of an
alleged default in a contract they were not privy
to.
Whether or not the peculiar
circumstances of this case justify the
deviation from the general principles on
causes and effects of managers and
cashiers checks
The Court of Appeals, while admitting that the
general principles on the causes and effects of
managers and cashiers checks do not allow the
countermanding of such checks on the basis of an
alleged failure of consideration of the payee to
the purchaser, nevertheless held that the peculiar
circumstances of this case justify a deviation from
said general principles, applying the
aforementioned case of Mesina. The Court of
Appeals held:
At the core of the appeal interposed by the
intervenor BPI, as well as the depository banks,
Global Bank and Metrobank, is the issue of
whether or not it is legally possible for a
purchaser of a Managers Check or Cashiers
Check to stop payment thereon through a court
order on the ground of the payees alleged
breach of contractual obligation amounting to an
absence of consideration therefor.
In view of the peculiar circumstances of this case,
and in the interest of substantial justice, We are
constrained to rule in the affirmative.
xxxx
In the case of Mesina v. Intermediate Appellate
Court, cited by BPI in its appeal brief, the
Supreme Court had the occasion to rule that
general principles on causes and effects of a
cashiers check, i.e., that it cannot be
countermanded in the hands of a holder in due
course and that it is a bill of exchange drawn by
the bank against itself, cannot be applied without
considering that the bank was aware of facts (in
this case, the cashiers check was stolen) that
would not entitle the payee thereof to collect on
the check and, consequently, the bank has the
right to refuse payment when the check is
presented by the payee.
While the factual milieu of the Mesinacase is
108
different from the case at bench, the inference
drawn therein by the High Court is nevertheless
applicable. The refusal of Nuguid to deliver the
Page
dollar equivalent of the three checks in the
amount of $1,022,288.50 in the afternoon of July
5, 1995 amounted to a failure of consideration
that would not entitle Nuguid to collect on the
subject checks.
xxxx
Let it be emphasized that in resolving the matter
before Us, We do not detract from well-settled
concepts and principles in commercial law
regarding the nature, causes and effects of a
managers check and cashiers check. Such
checks are primary obligations of the issuing
bank and accepted in advance by the mere
issuance thereof. They are a banks order to pay
drawn upon itself, committing in effect its total
resources, integrity, and honor. By their peculiar
character and general use in the commercial
world, they are regarded substantially as good as
the money they represent. However, in view of
the peculiar circumstances of the case at bench,
We are constrained to set aside the foregoing
concepts and principles in favor of the exercise of
the right to rescind a contract upon the failure of
consideration thereof.50 (Emphases ours, citations
omitted.)
In deviating from general banking principles and
disposing the case on the basis of equity, the
courts a quo should have at least ensured that
their dispositions were indeed equitable. This
Court observes that equity was not served in the
dispositions below wherein Nuguid, the very
person found to have violated his contract by not
delivering his dollar obligation, was absolved from
his liability, leaving the banks who are not parties
to the contract to suffer the losses of millions of
pesos.
The Court of Appeals reliance in the 1986 case of
Mesina was likewise inappropriate. In Mesina,
respondent Jose Go purchased from Associated
Bank a cashiers check for P800,000.00, payable
to bearer.51 Jose Go inadvertently left the check
on the top desk of the bank manager
when he left the bank. The bank manager
entrusted the check for safekeeping to a certain
bank official named Albert Uy, who then had a
certain Alexander Lim as visitor. Uy left his deskto
answer a phone call and to go to the mens room.
When Uy returned to his desk, Lim was gone. Jose
Go inquired for his check from Uy, but the check
was nowhereto be found. At the advice of Uy, Jose
Go accomplished a Stop Payment Order and
executed an affidavit of loss. Uy reported the loss
to the police. Petitioner Marcelo Mesina tried to
encash the check with Prudential Bank, but the
check was dishonored by Associated Bank by
sending it back to Prudential Bank with the words
"Payment Stopped" stamped on it. When the
police asked Mesina how he came to possess the
check, he said it was paid to him by Alexander
Lim in a "certain transaction"but refused to
elucidate further. Associated Bank filed an action
for Interpleader against Jose Go and Mesina to
determine which of them is entitled to the
proceeds of the check. It was in the appeal on
said interpleader case that this Court allowed the
deviation from the general principles on cashiers
checks on account of the banks awareness of
certain facts that would prevent the payee to
collect on the check.
There is no arguing that the peculiar
circumstances in Mesina indeed called for such
deviation on account of the drawee banks
awareness of certain relevant facts. There is,
however, no comparable peculiar circumstance in
the case at bar that would justify applying the
Mesina disposition. In Mesina, the cashiers check
was stolen while it was in the possession of the
drawee bank. In the case at bar, the managers
and cashiers checks were personally deposited
by Chiok in the account of Nuguid. The only
knowledge that can be attributed to the drawee
banks is whatever was relayed by Chiok himself
when he asked for a Stop Payment Order. Chiok
testified on this matter, to wit:
Q: Now, Mr. witness, since according to
you the defendant failed to deliver [this]
amount of P1,023,288.23 what action
have you undertaken to protect
yourinterest Mr. witness?
A: I immediately call my lawyer, Atty.
Espiritu to seek his legal advise in this
matter.
Q: Prior to that matter that you soughtthe
advise of your lawyer, Atty. Espiritu insofar
as the issuing bank is concerned, namely,
Asian Bank, what did you do in order to
protect your interest? A: I immediately call
the bank asking them if what is the
procedure for stop payment and the bank
told me that you have to secure a court
order as soon as possible before the
clearing of these checks.52 (Emphasis
supplied.)
Asian Bank, which is now Global Bank, obeyed
109
the TRO and denied the clearing of the managers
checks. As such, Global Bank may not be held
liable on account of the knowledge of whatever
Page
else Chiok told them when he asked for the
procedure to secure a Stop Payment Order. On
the other hand, there was no mention that
Metrobank was ever notified of the alleged failure
of consideration. Only Asian Bank was notified of
such fact. Furthermore, the mere allegation of
breach on the part of the payee of his personal
contract with the purchaser should not be
considered a sufficient cause to immediately
nullify such checks, thereby eroding their
integrity and honor as being as good as cash.
In view of all the foregoing, we resolve that
Chioks complaint should be denied insofar as it
prayed for the withdrawal of the proceeds of the
subject managers and cashiers checks.
Accordingly, the writ of preliminary prohibitory
injunction enjoining Metrobank and Global Bank
from honoring the subject managers and
cashiers checks should be lifted.
Since we have ruled that Chiok cannot claim the
amounts of the checks from Metrobank and
Global Bank, the issue concerning the setting off
of Global Banks judgment debt to Chiok with the
outstanding obligations of Chiok is hereby
mooted. We furthermore note that Global Bank
had not presented53 such issue as a counterclaim
in the case at bar, preventing us from ruling on
the same.
BPIs right to the proceeds of the
managers checks from Global Bank
While our ruling in Mesinais inapplicable to the
case at bar, a much more relevant case as
regards the effect of a Stop Payment Order upon
a managers check would be Security Bank and
Trust Company v. Rizal Commercial Banking
Corporation,54 which was decided by this Court in
2009. In said case, SBTC issued a managers
check forP8 million, payable to "CASH," as
proceeds of the loan granted to Guidon
Construction and Development Corporation
(GCDC). On the same day, the managers check
was deposited by Continental Manufacturing
Corporation (CMC) in its current account with
Rizal Commercial Banking Corporation (RCBC).
RCBC immediately honored the managers check
and allowed CMC to withdraw the same. GCDC
issued a Stop Payment Order to SBTC on the next
day, claiming that the check was released to a
third party by mistake. SBTC dishonored and
returned the managers check to RCBC. The
check was returned back and forth between the
two banks, resulting in automatic debits and
credits in each banks clearing balance. RCBC
filed a complaint for damages against SBTC.
When the case reached this Court, we held:
At the outset, it must be noted that the
questioned check issued by SBTC is not just an
ordinary check but a managers check. A
managers check is one drawn by a banks
manager upon the bank itself. It stands on the
same footing as a certified check, which is
deemed to have been accepted by the bank that
certified it. As the banks own check, a managers
check becomes the primary obligation of the
bank and is accepted in advance by the act of its
issuance.
In this case, RCBC, in immediately crediting the
amount of P8 million to CMCs account, relied on
the integrity and honor of the check as it is
regarded in commercial transactions. Where the
questioned check, which was payable to"Cash,"
appeared regular on its face, and the bank found
nothing unusual in the transaction, as the drawer
usually issued checks in big amounts made
payable to cash, RCBC cannot be faulted in
paying the value of the questioned check.
In our considered view, SBTC cannot escape
liability by invoking Monetary Board Resolution
No. 2202 dated December 21, 1979, prohibiting
drawings against uncollected deposits. For we
must point out that the Central Bank at that
timeissued a Memorandum dated July 9, 1980,
which interpreted said Monetary Board Resolution
No. 2202. In its pertinent portion,
saidMemorandum reads:
MEMORANDUM TO ALL BANKS
July 9, 1980
For the guidance of all concerned, Monetary
Board Resolution No. 2202 dated December 31,
1979 prohibiting, as a matter of policy, drawing
against uncollected deposit effective July 1, 1980,
uncollected deposits representing
managers/cashiers/treasurerschecks, treasury
warrants, postal money orders and duly funded
"on us" checks which may be permitted at the
discretion of each bank, covers drawings against
demand deposits as well as withdrawals from
savings deposits.
Thus, it is clear from the July 9, 1980
Memorandum that banks were given the
discretion to allow immediate drawings on
uncollected deposits of managers checks, among
others. Consequently, RCBC, in allowing the
immediate withdrawal against the subject
110
managers check, only exercised a prerogative
expressly granted to it bythe Monetary Board.
Page
Moreover, neither Monetary Board Resolution No.
2202 nor the July 9, 1980 Memorandum alters the
extraordinary nature of the managers check and
the relativerights of the parties thereto. SBTCs
liability as drawer remains the same by drawing
the instrument, it admits the existence of the
payee and his then capacity to indorse; and
engages that on due presentment, the instrument
will be accepted, or paid, or both, according to its
tenor.55(Emphases supplied, citations omitted.)
As in SBTC, BPI in the case at bar relied on the
integrity and honor of the managers and
cashiers checks asthey are regarded in
commercial transactions when it immediately
credited their amounts to Nuguids account.
The Court of Appeals, however, sustained the
dismissal of BPIs complaint-in-intervention to
recover the amounts of the managers checks
from Global Bank on account of BPIs failure to
prove the supposed withdrawal by Nuguid of the
value of the checks:
BPIs cause of action against Asian Bank (now
Global Bank) is derived from the supposed
withdrawal by Nuguid of the proceeds of the two
Managers Checks it issued and the refusal of
Asian Bank to make good the same. That the
admissions in the pleadings to the effect that
Nuguid had withdrawn the said proceeds failed to
satisfy the trial court is understandable. Such
withdrawal is anessential fact that, if properly
substantiated, would have defeated Chioks right
toan injunction. BPI could so easily have
presented withdrawal slips or, with Nuguids
consent, statements of account orthe passbook
itself, which would indubitably show that money
actually changed hands at the crucial period
before the issuance of the TRO. But it did not.56
We disagree with this ruling. As provided for in
Section 4, Rule 129 of the Rules of Court,
admissions in pleadings are judicial admissions
and do not require proof:
Section 4. Judicial admissions. An admission,
verbal or written, made by a party in the course
of the proceedings in the same case, does not
require proof. The admission may be contradicted
only by showing that it was made through
palpable mistake or that no such admission was
made.
Nuguid has admitted that FEBTC (now BPI) has
paid him the value of the subject checks. 57 This
statement by Nuguid is certainly against his own
interest as he can be held liable for said amounts.
Unfortunately, Nuguid allowed his appeal with the
Court of Appeals to lapse, without taking steps to
have it reinstated. This course of action, which is
highly unlikely if Nuguid had not withdrawn the
value of the managers and cashiers checks
deposited into his account, likewise prevents us
from ordering Nuguid to deliver the amounts of
the checks to Chiok. Parties who did not appeal
will not be affected by the decision of an
appellate court rendered to appealing parties.58
Another reason given by the Court of Appeals for
sustaining the dismissal of BPIs complaint-in-
intervention was that BPI failed to prove that it
was a holder in due course with respect to the
managers checks.59
We agree with the finding of the Court of Appeals
that BPI is not a holder in due course with respect
to managers checks. Said checks were never
indorsed by Nuguid to FEBTC, the predecessor-in-
interest of BPI, for the reason that they were
deposited by Chiok directly to Nuguids account
with FEBTC. However, inview of our ruling that
Nuguid has withdrawn the value of the checks
from his account, BPI has the rights of an
equitable assignee for value under Section 49 of
the Negotiable Instruments Law, which provides:
Section 49. Transfer without indorsement; effect
of. Where the holder of an instrument payable
to his order transfers it for value without
indorsing it, the transfer vests in the transferee
suchtitle as the transferor had therein, and the
transferee acquires in addition, the right to have
the indorsement of the transferor. But for the
purpose of determining whether the transferee is
a holder in due course, the negotiation takes
effect as of the time when the indorsement is
actually made.
As an equitable assignee, BPI acquires the
instrument subject to defenses and equities
available among prior parties60 and, in addition,
the right to have the indorsement of Nuguid.
Since the checks in question are managers
checks, the drawer and the drawee thereof are
both Global Bank. Respondent Chiok cannot be
considered a prior party as he is not the checks
drawer, drawee, indorser, payee or indorsee.
Global Bank is consequently primarily liable upon
the instrument, and cannot hide behind
respondent Chioks defenses. As discussed
above, managers checks are pre-accepted. By
issuing the managers check, therefore, Global
Bank committed in effect its total resources,
111
integrity and honor towards its payment.61
Resultantly, Global Bank should pay BPI the
Page
amount of P18,455,350.00, representing the
aggregate face value ofMC No. 025935 and MC
No. 025939. Since Global Bank was merely
following the TRO and preliminary injunction
issued by the RTC, it cannot be held liable for
legal interest during the time said amounts are in
its possession. Instead, we are adopting the
formulation of the Court of Appeals that the
amounts be treated as savings deposits in Global
Bank. The interest rate, however, should not be
fixed at 4% as determined by the Court of
Appeals, since said rates have fluctuated since
July 7, 1995, the date Global Bank refused to
honor the subject managers checks. Thus, Global
Bank should pay BPI interest based on the rates it
actually paid its depositors from July 7, 1995 until
the finality of this Decision, in accordance with
the same compounding rules it applies to its
depositors. The legal rate of6% per annum shall
apply after the finality of this Decision.62
We have to stress that respondent Chiok is not
left without recourse. Respondent Chioks cause
of action to recover the value of the checks is
against Nuguid. Unfortunately, Nuguid allowed
his appeal with the Court of Appeals to lapse,
without taking steps tohave it reinstated. As
stated above, parties who did not appeal will not
be affected by the decision of the appellate court
rendered to appealing parties.63 Moreover, since
Nuguid was not impleaded as a party to the
present consolidated cases, he cannot be bound
by our judgment herein. Respondent Chiok should
therefore pursue his remedy against Nuguid in a
separate action to recover the amounts of the
checks.
Despite the reversal of the Court of Appeals
Decision, the liability of Nuguid therein to
respondent Chiok for attorneys fees equivalent
to 5% of the total amount due remains valid,
computed from the amounts stated in said
Decision. This is a consequence of the finality of
the Decision of the Court of Appeals with respect
to him.
WHEREFORE, the Court resolves to DENY the Joint
Manifestation and Motion filed with this Court on
May 28, 2013.
The petitions in G.R. No. 172652 and G.R. No.
175302 are GRANTED. The Decision of the Court
of Appeals in CA-G.R. CV No. 77508 dated May 5,
2006, and the Resolution on the same case dated
November 6, 2006 are hereby REVERSED AND
SET ASIDE, and a new one is issued ordering the
DENIAL of the Amended Complaint in Civil Case
No. Q-95-24299 in Branch 96 of the Regional Trial
Court of Quezon City for lack of merit. The Writ of
Preliminary Prohibitory Injunction enjoining Asian
Banking Corporation (now Global Business Bank,
Inc.) from honoring MC No. 025935 and MC No.
025939, and Metropolitan Bank & Trust Company
from honoring CC No. 003380, is hereby LIFTED
and SET ASIDE.
Global Business Bank, Inc. is ORDERED TO PAY
the Bank of the Philippine Islands, as successor-
in-interest of Far East Bank & Trust Company, the
amount of P18,455,350.00, representing the
aggregate face value of MC No. 025935 and MC
No. 025939, with interest based on the rates it
actually paid its depositors from July 7, 1995 until
the finality of this Decision, in accordance with
the same compounding rules it applies to its
depositors.
The petition in G.R. No. 175394 is hereby
rendered MOOT.
The liabilities of spouses Gonzalo B. Nuguid and
Marinella O. Nuguid under the Decision and
Resolution of the Court of Appeals in CAG.R. CV
No. 77508 remain VALID and SUBSISTING,
computed from the amounts adjudged by the
Court of Appeals, without prejudice to any further
action that may be filed by Wilfred N. Chiok.
SO ORDERED.
SPOUSES BEROT vs. FELIPE C. SIAPNO
Before us is a Petition for Review on Certiorari
under Rule 45 of the 1997 Revised Rules on Civil
Procedure assailing the Court of Appeals (CA)
Decision dated 29 January 2009 in CA-G.R. CV No.
87995.1 The assailed CA Decision affirmed with
modification the Decision2 in Civil Case No. 2004-
0246-D issued by the Regional Trial Court (RTC),
First Judicial Region of Dagupan City, Branch 42.
The RTC Decision allowed the foreclosure of a
mortgaged property despite the objections of
petitioners claiming, among others, that its
registered owner was impleaded in the suit
despite being deceased.
THE FACTS
Considering that there are no factual issues in
this case, we adopt the findings of fact of the CA,
as follows:
On May 23, 2002, Macaria Berot (or "Macaria")
112
and spouses Rodolfo A. Berot (or "appellant") and
Lilia P. Berot (or "Lilia") obtained a loan from
Felipe C. Siapno (or "appellee") in the sum
Page
of P250,000.00, payable within one year together
with interest thereon at the rate of 2% per annum
from that date until fully paid.
As security for the loan, Macaria, appellant and
Lilia (or "mortgagors", when
collectively)mortgaged to appellee a portion,
consisting of 147 square meters (or "contested
property"), of that parcel of land with an area of
718 square meters, situated in Banaoang,
Calasiao, Pangasinan and covered by Tax
Declaration No. 1123 in the names of Macaria and
her husband Pedro Berot (or "Pedro"), deceased.
On June 23, 2003, Macaria died.
Because of the mortgagors default,appellee filed
an action against them for foreclosure of
mortgageand damages on July 15, 2004 in the
Regional Trial Court of Dagupan City (Branch 42).
The action was anchored on the averment that
the mortgagors failed and refused to pay the
abovementioned sum of P250,000.00 plus the
stipulated interest of 2% per month despite lapse
of one year from May 23, 2002.
In answer, appellant and Lilia (or "Berot spouses",
when collectively [referred to]) alleged that the
contested property was the inheritance of the
former from his deceased father, Pedro; that on
said property is their family home; that the
mortgage is void as it was constituted over the
family home without the consent of their children,
who are the beneficiaries thereof; thattheir
obligation is only joint; and that the lower court
has no jurisdiction over Macaria for the reason
that no summons was served on her as she was
already dead.
With leave of court, the complaint was amended
by substituting the estate of Macaria in her stead.
Thus, the defendants named in the amended
complaint are now the "ESTATE OF MACARIA
BEROT, represented by Rodolfo A. Berot,
RODOLFO A. BEROT and LILIA P. BEROT".
After trial, the lower court rendered a decision
dated June 30, 2006, the decretal portion of
which reads:
WHEREFORE, the Court hereby renders judgment
allowing the foreclosure of the subject mortgage.
Accordingly, the defendants are hereby ordered
to pay to the plaintiff within ninety (90) days from
notice of thisDecision the amount of P250,000.00
representing the principal loan, with interest at
two (2%) percent monthly from February, 2004
the month when they stopped paying the agreed
interest up to satisfaction of the claim and 30% of
the amount to be collected as and for attorneys
fees. Defendants are also assessed to pay the
sum of P20,000.00 as litigation expenses and
another sum of P10,000.00 as exemplary
damages for their refusal to pay their aforestated
loan obligation. If within the aforestated 90-day
period the defendants fail to pay plaintiff the
above-mentioned amounts, the sale of the
property subject of the mortgage shall be made
and the proceeds of the sale to be delivered to
the plaintiff to cover the debt and charges
mentioned above, and after such payments the
excess, if any shall be delivered to the
defendants.
SO ORDERED.
Appellant filed a motion for reconsideration of the
decision but it was denied per order dated
September 8, 2006. Hence, this appeal
interposed by appellant imputing errors to the
lower court in
1. SUBSTITUTING AS DEFENDANT THE ESTATE OF
MACARIA BEROT WHICH HAS NO PERSONALITY
TO SUE AND TO BE SUED;
2. APPOINTING RODOLFO BEROT AS A
REPRESENTATIVE OF THE ESTATE OF THE
DECEASED MACARIA BEROT TO THE PREJUDICE
OF THE OTHER HEIRS, GRANTING FOR THE SAKE
OF ARGUMENT THAT THE ESTATE OF MACARIA
BEROT HAS A PERSONALITY TO SUE AND BE
SUED;
3. NOT FINDING THE MORTGAGE NULL AND VOID,
WHICH WAS ENTERED INTOWITHOUT THE
WRITTEN CONSENT OF THE BENEFICIARIES OF
THE FAMILY HOME WHO WERE OF LEGAL AGE;
4. MAKING DEFENDANTS LIABLE FOR THE ENTIRE
OBLIGATION OF PH250,000.00, WHEN THE
OBLIGATION IS ONLY JOINT;
5. IMPOSING ATTORNEYS FEE(S) IN THE
DISPOSITIVE PORTION WITHOUT MAKING A
FINDING OF THE BASIS THEREOF IN THE BODY;
and
6. IMPOSING EXEMPLARY DAMAGES AND
LITIGATION EXPENSES.
Appellant contends that the substitution of the
estate of Macaria for her is improper as the
estate has no legal personality to be sued.3
On 29 January 2009, the CA, through its Seventh
113
Division, promulgated a Decision that affirmed
the RTC Decision but with modification where it
deleted the award of exemplary damages,
Page
attorneys fees and expenses of litigation. The
appellate court explained in its ruling that
petitioners correctly argued that a decedents
estate is not a legal entity and thus, cannot sue
or be sued. However,it noted that petitioners
failed to object to the trial courts exercise of
jurisdiction over the estate of Macaria when the
latter was impleaded by respondents by
amending the original complaint.4 Adopting the
rationale of the trial court on this matter, the CA
held:
As aptly observed by the trial court:
It may be recalled that when the plaintiff filed his
Amended Complaint substituting the estate of
Macaria Berot in place of Macaria Berot as party
defendant, defendants made no objection
thereto. Not even an amended answer was filed
by the defendants questioning the substitution of
the estate of Macaria Berot. For these reasons,
the defendants are deemed to have waivedany
objection on the personality of the estate of
Macaria Berot. Section 1, Rule 9 of the Rules of
Court provides that, Defenses and objections not
pleaded either in a motion to dismiss or in the
answer are deemed waived. (Order dated
September 8, 2006)5 [Underscoring supplied]
The CA also found the action of respondent to be
procedurally correct under Section 7, Rule 86 of
the Rules ofCourt, when it decided to foreclose on
the mortgage of petitioner and prove his
deficiency as an ordinary claim. 6The CA did not
make a categorical finding that the nature of the
obligation was joint or solidary on the part of
petitioners.7 It neither sustained their argument
that the mortgage was invalidfor having
beenconstituted over a family home without the
written consent of the beneficiaries who were of
legal age.8 However, it upheld their argument
that the award of exemplary damages and
attorneys fees in favor ofrespondent was
improper for lack of basis,9 when it ruled thus:
WHEREFORE, the appealed decision is AFFIRMED
with MODIFICATION in that the award of
exemplary damages, attorneys fees and
expenses of litigation is DELETED.
SO ORDERED.10
Petitioners moved for the reconsideration of the
CA Decision, but their motion was denied through
a Resolution dated 9 July 2009.11 Aggrieved by
the denial of their Motion for Reconsideration,
they now come to us through a Petition for
Review on Certiorari under Rule 45, proffering
purely questions of law.
THE ISSUES
The following are the issues presented by
petitioners for resolution by this Court:
The Court of Appeals erred in:
1. Holding that the intestate estate of Macaria
Berot could be a proper party by waiver expressly
or impliedly by voluntary appearance;
2. In not holding that the obligation is joint 12
THE COURTS RULING
We DENYthe Petition for lack of merit.
Petitioners were correct when they argued that
upon Macaria Berots death on 23 June 2003, her
legal personality ceased, and she could no longer
be impleaded as respondent in the foreclosure
suit. It is also true that her death opened to her
heirs the succession of her estate, which in this
case was an intestate succession. The CA, in fact,
sustained petitioners position that a deceased
persons estate has no legal personality to be
sued. Citing the Courts ruling in Ventura v.
Militante,13 it correctly ruled that a decedent does
not have the capacity to be sued and may not be
madea defendant in a case:
A deceased person does not have suchlegal
entity asis necessary to bring action so much so
that a motion to substitute cannot lie and should
be denied by the court. An action begun by a
decedents estate cannot be said to have been
begun by a legal person, since an estate is not a
legal entity; such an action is a nullity and a
motion to amend the party plaintiff will not,
likewise, lie, there being nothing before the court
to amend. Considering that capacity to be sued
isa correlative of the capacity to sue, to the same
extent, a decedent does not have the capacity to
be sued and may not be named a party
defendant in a court action.
When respondent filed the foreclosure case on 15
June 2004 and impleaded Macaria Berot as
respondent, the latter had already passed away
the previous year, on 23 June 2003. In their
Answer14 to the Complaint, petitioners countered
among others, that the trial court did not have
jurisdiction over Macaria, because no summons
was served on her, precisely for the reason that
114
she had already died. Respondent then amended
his Complaint with leave of court and substituted
the deceased Macaria by impleading her intestate
Page
estate and identified Rodolfo Berot as the estates
representative. Thereafter, the case proceeded
on the merits at the trial, where this case
originated and where the Decision was
promulgated.
It can be gleaned from the records ofthe case
that petitioners did not object when the estate of
Macaria was impleaded as respondent in the
foreclosure case. Petitioner Rodolfo Berot did not
object either when the original Complaint was
amended and respondent impleaded him as the
administrator of Macarias estate, in addition to
his being impleaded as an individual respondent
in the case. Thus, the trial and appellate courts
were correct in ruling that, indeed,
petitionersimpliedly waived any objection to the
trial courts exercise of jurisdiction over their
persons at the inception of the case. In resolving
the Motion for Reconsideration of petitioners as
defendants in Civil Case No. 2004-0246-D, the
RTC was in point when it ruled:
It may be recalled that when the plaintiff filed his
Amended Complaint substituting the estate of
Macaria Berot in place of Macaria Berot as party
defendant, defendants made no objections
thereto. Not even an amended answer was filed
by the defendants questioning the substitution of
the estate of Macaria Berot. For these reasons,
the defendants are deemed to have waivedany
objection on the personality of the estate of
Macaria Berot. Section 1, Rule 9 of the Rules of
Court provides that, "Defenses and objections not
pleaded either in a motion to dismiss or in the
answer are deemed waived. x x x. (Underscoring
ours)15
Indeed, the defense of lack of jurisdiction over
the person of the defendant is one that may
bewaived by a party to a case. In order to avail of
that defense, one must timely raise an objection
before the court.16
The records of the case show that on 9 November
2004, a hearing was held on the Motion for Leave
to Filefiled by respondent to have her amended
Complaint admitted. During the said hearing, the
counsel for petitioners did not interpose an
objection to the said Motion for Leave. 17 On 18
March 2005, a hearing was held on respondents
Motion to Admit Amended Complaint, wherein
counselfor petitioners again failed to interpose
any objection.18Thus, the trial court admitted
respondents Amended Complaint and ordered
thata copy and a summons be served anew on
petitioners.19
In an Order20 dated 14 April 2005, the RTC noted
that petitioners received the summons and the
copy of the amended Complaint on 3 February
2005 and yet they did not file an Answer. During
the trial on the merits that followed, petitioners
failed to interpose any objection to the trial
courts exercise of jurisdiction over the estate of
Macaria Berot. Clearly, their full participation in
the proceedings of the case can only be
construed as a waiver of any objection to or
defense of the trial courts supposed lack of
jurisdiction over the estate.
In Gonzales v. Balikatan Kilusang Bayan sa
Panlalapi, Inc.,21 we held that a partys
appearance in a case is equivalent to a service of
summons and that objections must be timely
raised:
In this regard, petitioners should be reminded of
the provision in the Rules of Court that a
defendantsvoluntary appearance in an action
shall be equivalent to service of summons.
Further, the lack of jurisdiction over the person of
the defendant may be waived either expressly or
impliedly. When a defendant voluntarily appears,
he is deemed to have submitted himself to the
jurisdiction of the court. If he does not wish to
waive this defense, he must do so seasonably by
motion, and object thereto.
It should be noted that Rodolfo Berot is the son of
the deceased Macaria22 and as such, he is a
compulsory heir of his mother. His substitution is
mandated by Section 16, Rule 3 of the Revised
Rules of Court. Notably, there is no indication
inthe records of the case that he had other
siblings who would have been his co-heirs. The
lower and appellate courts veered from the real
issue whether the proper parties have been
impleaded. They instead focused on the issue
whether there was need for a formal substitution
when the deceasedMacaria, and later its estate,
was impleaded. As the compulsory heir of the
estate of Macaria, Rodolfo is the real party in
interest in accordance with Section 2, Rule 3 of
the Revised Rules of Court. At the time of the
filing of the complaint for foreclosure, as well as
the time it was amended to implead the estate of
Macaria, it is Rodolfo as heir who is the real
party in interest. He stands to be benefitted or
injured by the judgment in the suit.
Rodolfo is also Macarias co-defendant in the
foreclosure proceedings in his own capacity as
co-borrower ofthe loan. He participated in the
proceedings of the case, from the initial hearing
115
of the case, and most particularly when
respondent filed his amended complaint
impleading the estate of Macaria. When
Page
respondent amended his complaint, Rodolfo did
not file an amended Answer nor raise any
objection, even if he was also identified therein as
the representative ofthe estate of the deceased
Macaria. The lower court noted this omission by
Rodolfo in its Order dated 8 September 2006
ruling on his Motionfor Reconsideration to the
said courts Decision dated 30 June 2006. Thus,
his continued participation in the proceedings
clearly shows that the lower court acquired
jurisdiction over the heir of Macaria.
In Regional Agrarian Reform Adjudication Board v.
Court of Appeals,23 we ruled that:
[W]e have to point out that the confusion in this
case was brought about by respondents
themselves when they included in their complaint
two defendants who were already dead. Instead
of impleading the decedents heirs and current
occupants of the landholding, respondents filed
their complaint against the decedents, contrary
to the following provision of the 1994 DARAB
Rules of Procedure:
RULE V
PARTIES, CAPTION AND SERVICE OF PLEADINGS
SECTION 1. Parties in Interest. Every agrarian
case must be initiated and defended inthe name
of the real party in interest. x x x.
A real party in interest is defined as "the party
who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the
avails of a suit." The real parties in interest, at the
time the complaint was filed, were no longer the
decedents Avelino and Pedro, but rather their
respective heirs who are entitled to succeed to
their rights (whether as agricultural lessees or as
farmers-beneficiaries) under our agrarian laws.
They are the ones who, as heirs of the decedents
and actualtillers, stand to be removed from the
landholding and made to pay back rentals to
respondents if the complaint is sustained.
Since respondents failed to correcttheir error
(they did not amend the erroneous caption of
their complaint to include the real parties-
ininterest), they cannot be insulated from the
confusion which it engendered in the proceedings
below. But at any rate, notwithstanding the
erroneous caption and the absence of a formal
substitution of parties, jurisdiction was acquired
over the heirs of Avelino and Pedro who
voluntarily participated in the proceedings below.
This Court has ruled that formal substitution of
parties is not necessary when the heirs
themselves voluntarily appeared, participated,
and presented evidence during the proceedings.
As such, formal substitution of the parties in this
case is not necessary.
In Vda. De Salazar v. Court of Appeals 24 we ruled
that a formal substitution of the heirs in place of
the deceased is no longer necessary if the heirs
continued to appear and participated in the
proceedings of the case. In the cited case, we
explained the rationale of our ruling and related it
to the due process issue, to wit:
We are not unaware of several cases where we
have ruled that a party having died in an action
that survives, the trial held by the court without
appearance of the deceased's legal
representative or substitution of heirs and the
judgment rendered after such trial, are null and
void because the court acquired no jurisdiction
over the persons of the legal representatives or of
the heirs upon whom the trial and the judgment
would be binding. This general rule
notwithstanding, in denying petitioner's motion
for reconsideration, the Court of Appeals correctly
ruled that formal substitution of heirs is not
necessary when the heirs themselves voluntarily
appeared, participated in the case and presented
evidence in defense of deceased defendant.
Attending the case at bench, after all, are these
particular circumstances which negate
petitioner's belated and seemingly ostensible
claim of violation of her rights to due process. We
should not lose sight of the principle underlying
the general rule that formal substitution of heirs
must be effectuated for them to be bound by a
subsequent judgment. Such had been the general
rule established not because the rule on
substitution of heirs and that on appointment of a
legal representative are jurisdictional
requirements per se but because non-compliance
therewith results in the undeniable violation of
the right to due process of those who, though not
duly notified of the proceedings, are substantially
affected by the decision rendered therein.
Viewing the rule on substitution of heirs in this
light, the Court of Appeals,in the resolution
denying petitioner's motion for reconsideration,
thus expounded:
Although the jurisprudential rule is that failure to
make the substitution is a jurisdictional defect, it
should be noted that the purpose of this
procedural rule is to comply with due process
requirements. The original party having died, he
116
could not continue, to defend himself in court
despite the fact that the action survived him. For
the case to continue, the real party in interest
Page
must be substituted for the deceased. The real
party in interest is the one who would beaffected
by the judgment. It could be the administrator or
executor or the heirs. In the instant case, the
heirs are the proper substitutes. Substitution
gives them the opportunity to continue the
defense for the deceased. Substitution is
important because such opportunity to defend is
a requirement to comply with due process. Such
substitution consists of making the proper
changes in the caption of the case which may be
called the formal aspect of it. Such substitution
also includes the process of letting the
substitutes know that they shall be bound by any
judgment in the case and that they should
therefore actively participate in the defense of
the deceased. This part may be called the
substantive aspect. This is the heart of the
procedural rule because this substantive aspect is
the one that truly embodies and gives effect to
the purpose of the rule. It is this court's view that
compliance with the substantive aspect of the
rule despite failure to comply with the formal
aspect may he considered substantial
compliance.Such is the situation in the case at
bench because the only inference that could be
deduced from the following facts was that there
was active participation of the heirs in the
defense ofthe deceased after his death:
1. The original lawyer did not stop representing
the deceased. It would be absurd to think that the
lawyer would continue to represent somebody if
nobody is paying him his fees. The lawyer
continued to represent him in the litigation before
the trial court which lasted for about two more
years. A dead party cannot pay him any fee. With
or without payment of fees, the fact remains that
the said counsel was allowed by the petitioner
who was well aware of the instant litigation to
continue appearing as counsel until August 23,
1993 when the challenged decision was
rendered;
2. After the death of the defendant, his wife, who
is the petitioner in the instant case, even testified
in the court and declared that her husband is
already deceased. She knew therefore that there
was a litigation against her husband and that
somehow her interest and those of her children
were involved;
3. This petition for annulmentof judgment was
filed only after the appeal was decided against
the defendant on April 3, 1995, more than one
and a half year (sic) after the decision was
rendered (even if we were to give credence to
petitioner's manifestation that she was notaware
that an appeal had been made);
4. The Supreme Court has already established
that there is such a thing as jurisdiction
byestoppel. This principle was established even in
cases where jurisdiction over the subject matter
was being questioned. In the instant case, only
jurisdiction over the person of the heirs is in
issue. Jurisdiction over the person may be
acquired by the court more easily than
jurisdiction over the subject matter. Jurisdiction
over the person may be acquired by the simple
appearance of the person in court as did herein
petitioner appear;
5. The case cited by the herein petitioner
(Ferreria et al. vs. Manuela Ibarra vda. de
Gonzales, etal.) cannot be availed of to support
the said petitioner's contention relative to
nonacquisition of jurisdiction by the court. In that
case, Manolita Gonzales was not served notice
and, more importantly, she never appeared in
court, unlike herein petitioner who appeared and
even testified regarding the death of her
husband.
In this case, Rodolfos continued appearance and
participation in the proceedings of the case
dispensed with the formal substitution of the
heirs in place of the deceased Macaria. The
failure of petitioners to timely object to the trial
courts exercise of jurisdiction over the estate of
Macaria Berot amounted to a waiver on their part.
Consequently, it would be too late for them at
this point to raise that defense to merit the
reversal of the assailed decision of the trial court.
We are left with no option other than to sustain
the CAs affirmation of the trial courts Decision
on this matter.
On the second issue of whether the nature of the
loan obligation contracted by petitioners is joint
or solidary, we rule that it is joint.
Under Article 1207 of the Civil Code of the
Philippines, the general rule is that when there is
a concurrence of two or more debtors under a
single obligation, the obligation is presumed to be
joint:
Art. 1207. The concurrence of two or more
creditors or of two or more debtors in one and the
same obligation does not imply that each one of
the former has a right to demand, orthat each
one of the latter is bound to render, entire
compliance with the prestations. There is a
solidary liability only when the obligation
expressly so states, or when the law or the nature
117
of the obligation requires solidarity.
The law further provides that to consider the
Page
obligation as solidary in nature, it must expressly
be stated as such, or the law or the nature of the
obligation itself must require solidarity. In PH
Credit Corporation v. Court of Appeals, 25 we held
that:
A solidaryobligation is one in which each of the
debtors is liable for the entire obligation, and
each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all
of the debtors. On the other hand, a
jointobligation is one in which each debtors is
liable only for a proportionate part of the debt,
and the creditor is entitled to demand only a
proportionate part of the credit from each debtor.
The wellentrenched rule is that solidary
obligations cannot be inferred lightly. They must
be positively and clearly expressed. A liability is
solidary "only when the obligation expressly so
states, when the law so provides or when the
nature of the obligation so requires."
In the instant case, the trial court expressly ruled
that the nature of petitioners obligation to
respondent was solidary.26 It scrutinized the real
estate mortgage and arrived at the conclusion
that petitioners had bound themselves to secure
their loan obligation by way of a realestate
mortgage in the event that they failed to settle
it.27 But such pronouncement was not expressly
stated in its 30 June 2006 Decision. This was
probably the reason why, when the trial court
Decision was appealed to it, the CA did not
squarely address the issue when the latter ruled
that:
It is noteworthy that the appealed decision makes
no pronouncement that the obligation of the
mortgagors is solidary; and that said decision has
not been modifiedby the trial court. Hence, it is
unnecessary for US to make a declaration on the
nature of the obligation of the
mortgagors.28 However, a closer scrutiny of the
records would reveal that the RTC expressly
pronounced that the obligation of petitioners to
the respondent was solidary. In resolving
petitioners Motion for Reconsideration to its 30
June 2006 Decision, the trial court categorically
ruled that:
Defendants [sic] obligation with plaintiff is
solidary. A careful scrutiny of the Real Estate
Mortgage(Exh. "A") will show that all the
defendants, for a single loan, bind themselves to
cede, transfer, and convey by way of real estate
mortgage all their rights, interest and
participation in the subject parcelof land including
the improvements thereon in favor of the plaintiff,
and warrant the same to be free from liens and
encumbrances, and that should theyfail to
perform their obligation the mortgage will be
foreclosed. From this it can be gleaned that each
of the defendants obligated himself/herself to
perform the said solidary obligation with the
plaintiff.29 We do not agree with this finding by
the trial court.
We have scoured the records of the case, but
found no record of the principal loan instrument,
except an evidence that the realestate mortgage
was executed by Macaria and petitioners. When
petitioner Rodolfo Berot testified in court, he
admitted that heand his mother, Macaria had
contracted the loan for their benefit:
Q: On the Real Estate Mortgage, you and your
mother obtained a loan from Mr. Siapno in the
amountofP250,000.00, now as between you and
your mother whose loan is that?
A: It is the loan of my mother and myself, sir. 30
The testimony of petitioner Rodolfo only
established that there was that existing loan to
respondent, and that the subject property was
mortgaged as security for the said obligation. His
admission of the existence of the loan made him
and his late mother liable to respondent. We have
examined the contents of the real estate
mortgagebut found no indication in the plain
wordings of the instrument that the debtors the
late Macaria and herein petitioners had
expressly intended to make their obligation to
respondent solidary in nature. Absent from the
mortgage are the express and indubitable terms
characterizing the obligation as solidary.
Respondent was not able to prove by a
preponderance of evidence that petitioners'
obligation to him was solidary. Hence, applicable
to this case is the presumption under the law that
the nature of the obligation herein can only be
considered as joint. It is incumbent upon the
party alleging otherwise to prove with a
preponderance of evidence that petitioners'
obligation under the loan contract is indeed
solidary in character.31
The CA properly upheld respondent's course of
action as an availment of the second remedy
provided under Section 7, Rule 86 of the 1997
Revised Rules of Court.32 Under the said provision
for claims against an estate, a mortgagee has the
legal option to institute a foreclosure suit and to
recover upon the security, which is the
118
mortgaged property.
During her lifetime, Macaria was the registered
Page
owner of the mortgaged property, subject of the
assailed foreclosure. Considering that she had
validly mortgaged the property to secure a loan
obligation, and given our ruling in this case that
the obligation is joint, her intestate estate is
liable to a third of the loan contracted during her
lifetime. Thus, the foreclosure of the property
may proceed, but would be answerable only to
the extent of the liability of Macaria to
respondent. WHEREFORE, the CA Decision in CA-
G.R. CV No. 87995 sustaining the RTC Decision in
Civil Case No. 2004-0246-D is hereby AFFIRMED
with the MODIFICATION that the obligation of
petitioners and the estate of Macaria Berot is
declared as joint in nature.
SO ORDERED.
ARCO PULP AND PAPER CO., INC. and
CANDIDA A. SANTOS vs. DAN T. LIM, doing
business under the name and style of
QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES
Novation must be stated in clear and unequivocal
terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and
new contracts are incompatible on every point.
Before us is a petition for review on
certiorari1 assailing the Court of Appeals
decision2 in CA-G.R. CV No. 95709, which
stemmed from a complaint3 filed in the Regional
Trial Court of Valenzuela City, Branch 171, for
collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying
scrap papers, cartons, and other raw materials,
under the name Quality Paper and Plastic
Products, Enterprises, to factories engaged in the
paper mill business.4 From February 2007 to
March 2007, he delivered scrap papers worth
7,220,968.31 to Arco Pulp and Paper Company,
Inc. (Arco Pulp and Paper) through its Chief
Executive Officer and President, Candida A.
Santos.5 The parties allegedly agreed that Arco
Pulp and Paper would either pay Dan T. Lim the
value of the raw materials or deliver to him their
finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the
raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 2007 7 in the amount
of 1,487,766.68 as partial payment, with the
assurance that the check would not
bounce.8 When he deposited the check on April
18, 2007, it was dishonored for being drawn
against a closed account.9
On the same day, Arco Pulp and Paper and a
certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound
themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric
Sy, for his account. According to the
memorandum, the raw materials would be
supplied by Dan T. Lim, through his company,
Quality Paper and Plastic Products. The
memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has
been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600
tons Test Liner 150/175 GSM, full width 76 inches
at the price of P18.50 per kg. to Megapack
Container for Mr. Eric Sys account. Schedule of
deliveries are as follows:
....
It has been agreed further that the Local OCC
materials to be used for the production of the
above Test Liners will be supplied by Quality
Paper & Plastic Products Ent., total of 600 Metric
Tons at P6.50 per kg. (price subject to change per
advance notice). Quantity of Local OCC delivery
will be based on the quantity of Test Liner
delivered to Megapack Container Corp. based on
the above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco
Pulp and Paper demanding payment of the
amount of 7,220,968.31, but no payment was
made to him.13
Dan T. Lim filed a complaint14 for collection of
sum of money with prayer for attachment with
the Regional Trial Court, Branch 171, Valenzuela
City, on May 28, 2007. Arco Pulp and Paper filed
its answer15 but failed to have its representatives
attend the pre-trial hearing. Hence, the trial court
allowed Dan T. Lim to present his evidence ex
parte.16
On September 19, 2008, the trial court rendered
a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco
Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place,
which extinguished Arco Pulp and Papers
obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the
Court of Appeals. According to him, novation did
not take place since the memorandum of
agreement between Arco Pulp and Paper and Eric
Sy was an exclusive and private agreement
between them. He argued that if his name was
mentioned in the contract, it was only for
supplying the parties their required scrap papers,
where his conformity through a separate contract
was indispensable.19
On January 11, 2013, the Court of
Appeals20 rendered a decision21 reversing and
setting aside the judgment dated September 19,
2008 and ordering Arco Pulp and Paper to jointly
and severally pay Dan T. Lim the amount
ofP7,220,968.31 with interest at 12% per annum
from the time of demand; P50,000.00 moral
damages; P50,000.00 exemplary damages;
and P50,000.00 attorneys fees.22
The appellate court ruled that the facts and
circumstances in this case clearly showed the
existence of an alternative obligation. 23 It also
ruled that Dan T. Lim was entitled to damages
and attorneys fees due to the bad faith exhibited
by Arco Pulp and Paper in not honoring its
undertaking.24
Its motion for reconsideration25 having been
denied,26 Arco Pulp and Paper and its President
and Chief Executive Officer, Candida A. Santos,
bring this petition for review on certiorari.
On one hand, petitioners argue that the execution
of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy
became the new debtor of respondent. They also
argue that there is no legal basis to hold
petitioner Candida A. Santos personally liable for
the transaction that petitioner corporation
entered into with respondent. The Court of
Appeals, they allege, also erred in awarding moral
and exemplary damages and attorneys fees to
respondent who did not show proof that he was
entitled to damages.27
Respondent, on the other hand, argues that the
Court of Appeals was correct in ruling that there
was no proper novation in this case. He argues
that the Court of Appeals was correct in ordering
the payment of 7,220,968.31 with damages since
the debt of petitioners remains unpaid.28 He also
argues that the Court of Appeals was correct in
holding petitioners solidarily liable
petitioner Candida A. Santos was "the prime
mover for such outstanding corporate
liability."29 In their reply, petitioners reiterate that
novation took place since there was nothing in
the memorandum of agreement showing that the
119
obligation was alternative. They also argue that
when respondent allowed them to deliver the
finished products to Eric Sy, the original
Page
obligation was novated.30
A rejoinder was submitted by respondent, but it
was noted without action in view of A.M. No. 99-2-
04-SC dated November 21, 2000.31
The issues to be resolved by this court are as
follows:
1. Whether the obligation between the
parties was extinguished by novation
2. Whether Candida A. Santos was
solidarily liable with Arco Pulp and Paper
Co., Inc.
3. Whether moral damages, exemplary
damages, and attorneys fees can be
awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by
Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by
different prestations shall completely perform one
of them.
The creditor cannot be compelled to receive part
of one and part of the other undertaking.
"In an alternative obligation, there is more than
one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who
generally has the right of election."32 The right of
election is extinguished when the party who may
exercise that option categorically and
unequivocally makes his or her choice known.33
The choice of the debtor must also be
communicated to the creditor who must receive
notice of it since: The object of this notice is to
give the creditor . . . opportunity to express his
consent, or to impugn the election made by the
since debtor, and only after said notice shall the
election take legal effect when consented by the
creditor, or if impugned by the latter, when
declared proper by a competent court.34
According to the factual findings of the trial court
120
and the appellate court, the original contract
between the parties was for respondent to deliver
scrap papers worth P7,220,968.31 to petitioner
Page
Arco Pulp and Paper. The payment for this
delivery became petitioner Arco Pulp and Papers
obligation. By agreement, petitioner Arco Pulp
and Paper, as the debtor, had the option to either
(1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35
The appellate court, therefore, correctly identified
the obligation between the parties as an
alternative obligation, whereby petitioner Arco
Pulp and Paper, after receiving the raw materials
from respondent, would either pay him the price
of the raw materials or, in the alternative, deliver
to him the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a
check to respondent in partial payment for the
scrap papers, they exercised their option to pay
the price. Respondents receipt of the check and
his subsequent act of depositing it constituted his
notice of petitioner Arco Pulp and Papers option
to pay.
This choice was also shown by the terms of the
memorandum of agreement, which was executed
on the same day. The memorandum declared in
clear terms that the delivery of petitioner Arco
Pulp and Papers finished products would be to a
third person, thereby extinguishing the option to
deliver the finished products of equivalent value
to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the
execution of the memorandum of agreement
constituted a novation of the contract between
the parties. When petitioner Arco Pulp and Paper
opted instead to deliver the finished products to a
third person, it did not novate the original
obligation between the parties.
The rules on novation are outlined in the Civil
Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal
conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights
of the creditor. (1203)
Article 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other. (1204)
Article 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by
the new debtor gives him the rights mentioned in
Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two
parties when there is a substitution of objects or
debtors or when there is subrogation of the
creditor. It occurs only when the new contract
declares so "in unequivocal terms" or that "the
old and the new obligations be on every point
incompatible with each other."36
Novation was extensively discussed by this court
in Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation
by changing its objects or principal obligations,
by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights
of the creditor. Article 1293 of the Civil Code
defines novation as follows:
"Art. 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by
the new debtor gives him rights mentioned in
articles 1236 and 1237."
In general, there are two modes of substituting
the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the
change does not come from and may even be
made without the knowledge of the debtor,
since it consists of a third persons assumption of
the obligation. As such, it logically requires the
consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the
substitution and assumes the obligation; thus, the
consent of these three persons are necessary.
Both modes of substitution by the debtor require
the consent of the creditor.
Novation may also be extinctive or modificatory.
121
It is extinctive when an old obligation is
terminated by the creation of a new one that
takes the place of the former. It is merely
Page
modificatory when the old obligation subsists to
the extent that it remains compatible with the
amendatory agreement. Whether extinctive or
modificatory, novation is made either by
changing the object or the principal conditions,
referred to as objective or real novation; or by
substituting the person of the debtor or
subrogating a third person to the rights of the
creditor, an act known as subjective or personal
novation. For novation to take place, the following
requisites must concur:
1) There must be a previous valid
obligation.
2) The parties concerned must agree to a
new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is
express when the new obligation declares in
unequivocal terms that the old obligation is
extinguished. It is implied when the new
obligation is incompatible with the old one on
every point. The test of incompatibility is whether
the two obligations can stand together, each one
with its own independent existence. 38 (Emphasis
supplied)
Because novation requires that it be clear and
unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally
construed as to make new. So it is deeply rooted
in the Roman Law jurisprudence, the principle
novatio non praesumitur that novation is never
presumed.At bottom, for novation tobe a jural
reality, its animus must be ever present, debitum
pro debito basically extinguishing the old
obligation for the new one.39 (Emphasis supplied)
There is nothing in the memorandum of
agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to
respondent would be extinguished. It also does
not state that Eric Sy somehow substituted
petitioner Arco Pulp and Paper as respondents
debtor. It merely shows that petitioner Arco Pulp
and Paper opted to deliver the finished products
to a third person instead.
The consent of the creditor must also be secured
for the novation to be valid:
Novation must be expressly consented to.
Moreover, the conflicting intention and acts of the
parties underscore the absence of any express
disclosure or circumstances with which to deduce
a clear and unequivocal intent by the parties to
novate the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the
memorandum of agreement, thus, his conformity
to the contract need not be secured. This is clear
from the first line of the memorandum, which
states:
Per meeting held at ARCO, April 18, 2007, it has
been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended
to novate the original agreement between the
parties, respondent must have first agreed to the
substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in
clear and unequivocal terms that it has replaced
the original obligation of petitioner Arco Pulp and
Paper to respondent. Neither of these
circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering
partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to
Eric Sy. When respondent sent his letter of
demand to petitioner Arco Pulp and Paper, and
not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his
new debtor. These acts, when taken together,
clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp
and Papers obligation to respondent remains
valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full
amount of P7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral
damages may be awarded in case of breach of
contract where the breach is due to fraud or bad
faith:
Art. 2220. Willfull injury to property may be a
legal ground for awarding moral damages if the
court should find that, under the circumstances,
such damages are justly due. The same rule
applies to breaches of contract where the
defendant acted fraudulently or in bad faith.
(Emphasis supplied)
Moral damages are not awarded as a matter of
122
right but only after the party claiming it proved
that the breach was due to fraud or bad faith. As
this court stated:
Page
Moral damages are not recoverable simply
because a contract has been breached. They are
recoverable only if the party from whom it is
claimed acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations.
The breach must be wanton, reckless, malicious
or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven
for the recovery of moral damages:
An award of moral damages would require certain
conditions to be met, to wit: (1)first, there must
be an injury, whether physical, mental or
psychological, clearly sustained by the claimant;
(2) second, there must be culpable act or
omission factually established; (3) third, the
wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the
claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article
2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss
of P7,220,968.31 from his business. This has
remained unpaid since 2007. This injury
undoubtedly was caused by petitioner Arco Pulp
and Papers act of refusing to pay its obligations.
When the obligation became due and
demandable, petitioner Arco Pulp and Paper not
only issued an unfunded check but also entered
into a contract with a third person in an effort to
evade its liability. This proves the third
requirement.
As to the fourth requisite, Article 2219 of the Civil
Code provides that moral damages may be
awarded in the following instances:
Article 2219. Moral damages may be recovered in
the following and analogous cases:
(1) A criminal offense resulting in physical
injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other
lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of
defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles
21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however,
are not specified within this enumeration. When a
party breaches a contract, he or she goes against
Article 19 of the Civil Code, which states: Article
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.
Persons who have the right to enter into
contractual relations must exercise that right with
honesty and good faith. Failure to do so results in
an abuse of that right, which may become the
basis of an action for damages. Article 19,
however, cannot be its sole basis:
Article 19 is the general rule which governs the
conduct of human relations. By itself, it is not the
basis of an actionable tort. Article 19 describes
the degree of care required so that an actionable
tort may arise when it is alleged together with
Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law,
wilfully or negligently causes damage to another,
shall indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or
injury to another in a manner that is contrary to
morals, good customs or public policy shall
compensate the latter for the damage.
To be actionable, Article 20 requires a violation of
law, while Article 21 only concerns with lawful
acts that are contrary to morals, good customs,
and public policy:
Article 20 concerns violations of existing law as
basis for an injury. It allows recovery should the
act have been willful or negligent. Willful may
refer to the intention to do the act and the desire
to achieve the outcome which is considered by
the plaintiff in tort action as injurious. Negligence
may refer to a situation where the act was
consciously done but without intending the result
which the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries
that may be caused by acts which are not
necessarily proscribed by law. This article
requires that the act be willful, that is, that there
was an intention to do the act and a desire to
achieve the outcome. In cases under Article 21,
123
the legal issues revolve around whether such
outcome should be considered a legal injury on
the part of the plaintiff or whether the
Page
commission of the act was done in violation of
the standards of care required in Article 19.45
When parties act in bad faith and do not faithfully
comply with their obligations under contract, they
run the risk of violating Article 1159 of the Civil
Code:
Article 1159. Obligations arising from contracts
have the force of law between the contracting
parties and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of
the instances where moral damages may be
recovered since it only specifies, among others,
Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the
act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article
1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but
also under Articles 19 and 20 in relation to Article
1159.
Moral damages, however, are not recoverable on
the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or
in bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach
of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive,
or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing
evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a
wrong, a breach of known duty through some
motive or interest or ill will that partakes of the
nature of fraud. It is, therefore, a question of
intention, which can be inferred from ones
conduct and/or contemporaneous
statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised
on the intent of the doer, it requires an
examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a
check in partial payment of its obligation to
respondent, it was presumably with the
knowledge that it was being drawn against a
closed account. Worse, it attempted to shift their
obligations to a third person without the consent
of respondent.
Petitioner Arco Pulp and Papers actions clearly
show "a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a
breach of known duty through some motive or
interest or ill will that partakes of the nature of
fraud."48 Moral damages may, therefore, be
awarded.
Exemplary damages may also be awarded. Under
the Civil Code, exemplary damages are due in the
following circumstances:
Article 2232. In contracts and quasi-contracts, the
court may award exemplary damages if the
defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be
recovered as a matter of right; the court will
decide whether or not they should be
adjudicated.
Article 2234. While the amount of the exemplary
damages need not be proven, the plaintiff must
show that he is entitled to moral, temperate or
compensatory damages before the court may
consider the question of whether or not
exemplary damages should be awarded.
In Tankeh v. Development Bank of the
Philippines,49 we stated that:
The purpose of exemplary damages is to serve as
a deterrent to future and subsequent parties from
the commission of a similar offense. The case of
People v. Ranteciting People v. Dalisay held that:
Also known as punitive or vindictive damages,
exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and
as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a
punishment for those guilty of outrageous
conduct. These terms are generally, but not
always, used interchangeably. In common law,
there is preference in the use of exemplary
damages when the award is to account for injury
to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an
injury that has been maliciously and wantonly
inflicted, the theory being that there should be
compensation for the hurt caused by the highly
reprehensible conduct of the defendant
associated with such circumstances as
willfulness, wantonness, malice, gross negligence
or recklessness, oppression, insult or fraud or
gross fraudthat intensifies the injury. The terms
124
punitive or vindictive damages are often used to
refer to those species of damages that may be
awarded against a person to punish him for his
Page
outrageous conduct. In either case, these
damages are intended in good measure to deter
the wrongdoer and others like him from similar
conduct in the future.50 (Emphasis supplied;
citations omitted)
The requisites for the award of exemplary
damages are as follows:
(1) they may be imposed by way of
example in addition to compensatory
damages, and only after the claimant's
right to them has been established;
(2) that they cannot be recovered as a
matter of right, their determination
depending upon the amount of
compensatory damages that may be
awarded to the claimant; and
(3) the act must be accompanied by bad
faith or done in a wanton, fraudulent,
oppressive or malevolent manner.51
Business owners must always be forthright in
their dealings. They cannot be allowed to renege
on their obligations, considering that these
obligations were freely entered into by them.
Exemplary damages may also be awarded in this
case to serve as a deterrent to those who use
fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper,
attorneys fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation,
attorney's fees and expenses of litigation, other
than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary
liability was erroneous since no evidence was
adduced to prove that the transaction was also a
personal undertaking of petitioner Santos. We
disagree.
In Heirs of Fe Tan Uy v. International Exchange
Bank,52 we stated that:
Basic is the rule in corporation law that a
corporation is a juridical entity which is vested
with a legal personality separate and distinct
from those acting for and in its behalf and, in
general, from the people comprising it. Following
this principle, obligations incurred by the
corporation, acting through its directors, officers
and employees, are its sole liabilities. A director,
officer or employee of a corporation is generally
not held personally liable for obligations incurred
by the corporation. Nevertheless, this legal fiction
may be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the
circumvention of statutes, or to confuse
legitimate issues.
....
Before a director or officer of a corporation can be
held personally liable for corporate obligations,
however, the following requisites must concur: (1)
the complainant must allege in the complaint that
the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad faith;
and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence
or bad faith.
While it is true that the determination of the
existence of any of the circumstances that would
warrant the piercing of the veil of corporate
fiction is a question of fact which cannot be the
subject of a petition for review on certiorari under
Rule 45, this Court can take cognizance of factual
issues if the findings of the lower court are not
supported by the evidence on record or are based
on a misapprehension of facts.53 (Emphasis
supplied)
As a general rule, directors, officers, or
employees of a corporation cannot be held
personally liable for obligations incurred by the
corporation. However, this veil of corporate
fiction may be pierced if complainant is able to
prove, as in this case, that (1) the officer is guilty
of negligence or bad faith, and (2) such
negligence or bad faith was clearly and
convincingly proven.
Here, petitioner Santos entered into a contract
with respondent in her capacity as the President
and Chief Executive Officer of Arco Pulp and
Paper. She also issued the check in partial
payment of petitioner corporations obligations to
respondent on behalf of petitioner Arco Pulp and
125
Paper. This is clear on the face of the check
bearing the account name, "Arco Pulp & Paper,
Co., Inc."54 Any obligation arising from these acts
Page
would not, ordinarily, be petitioner Santos
personal undertaking for which she would be
solidarily liable with petitioner Arco Pulp and
Paper.
We find, however, that the corporate veil must be
pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an
equitable doctrine developed to address
situations where the separate corporate
personality of a corporation is abused or used for
wrongful purposes. Under the doctrine, the
corporate existence may be disregarded where
the entity is formed or used for non-legitimate
purposes, such as to evade a just and due
obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction will
be disregarded and the individuals composing it
and the two corporations will be treated as
identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner
Santos was solidarily liable with petitioner Arco
Pulp and Paper, stating that:
In the present case, We find bad faith on the part
of the [petitioners] when they unjustifiably
refused to honor their undertaking in favor of the
[respondent]. After the check in the amount of
1,487,766.68 issued by [petitioner] Santos was
dishonored for being drawn against a closed
account, [petitioner] corporation denied any
privity with [respondent]. These acts prompted
the [respondent] to avail of the remedies
provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner
Santos cannot be allowed to hide behind the
corporate veil.1wphi1When petitioner Arco Pulp
and Papers obligation to respondent became due
and demandable, she not only issued an
unfunded check but also contracted with a third
party in an effort to shift petitioner Arco Pulp and
Papers liability. She unjustifiably refused to honor
petitioner corporations obligations to
respondent. These acts clearly amount to bad
faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held
solidarily liable with petitioner Arco Pulp and
Paper.
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this
court of the decision dated August 13, 2013 in
Nacar v. Gallery Frames,59 the rate of interest due
on the obligation must be modified from 12% per
annum to 6% per annum from the time of
demand.
Nacar effectively amended the guidelines stated
in Eastern Shipping v. Court of Appeals, 60 and we
have laid down the following guidelines with
regard to the rate of legal interest:
To recapitulate and for future guidance, the
guidelines laid down in the case of Eastern
Shipping Linesare accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source,
i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be
held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern
in determining the measure of recoverable
damages.
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 6%
per annum to be computed from default,
i.e., from judicial or extrajudicial demand
under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a
loan or forbearance of money, is
breached, an interest on the amount of
damages awarded may be imposed at the
discretion of the court at the rate of 6%
per annum. 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

126
PETRON G.R. No.
certainty, the interest shall begin to run
CORPORATION, 151038
from the time the claim is made judicially
Petitioner,
or extrajudicially (Art. 1169, Civil Code),

Page
but when such certainty cannot be so
Present:
reasonably established at the time the
- versus -
demand is made, the interest shall begin
CARPIO, J.,
to run only from the date the judgment of
Chairperson,
the court is made (at which time the
Spouses Cesar PEREZ,
quantification of damages may be deemed
Jovero and Erma F. SERENO,
to have been reasonably ascertained). The
Cudilla, Spouses REYES, and
actual base for the computation of legal
Lonito Tan and PERLAS-
interest shall, in any case, be on the
Luzvilla Samson, BERNABE, JJ.
amount finally adjudged.
and Spouses
Rogelio Limpoco
3. When the judgment of the court and Lucia Josue,
awarding a sum of money becomes final being represented
and executory, the rate of legal interest, by Pio Josue,
whether the case falls under paragraph 1 Respondents.
or paragraph 2, above, shall be 6% per
annum from such finality until its
satisfaction, this interim period being The present case is a Petition for Review 1 under
deemed to be by then an equivalent to a Rule 45 filed by petitioner Petron Corporation.
forbearance of credit. Petitioner assails the Decision2 of the Court of
Appeals (CA), which affirmed the Decision of the
And, in addition to the above, judgments that Regional Trial Court (RTC) of Iloilo City in
have become final and executory prior to July 1, consolidated Civil Case Nos. 19633, 19684,
2013, shall not be disturbed and shall continue to 20122, respectively filed by herein respondents.
be implemented applying the rate of interest
fixed therein.61 (Emphasis supplied; citations The facts of the case are as follows:
omitted.)
On 25 April 1984, Rubin Uy entered into a
According to these guidelines, the interest due on Contract of Lease with Cesar J. Jovero over a
the obligation of P7,220,968.31 should now be at property located at E. Reyes Ave., Estancia, Iloilo
6% per annum, computed from May 5, 2007, for the purpose of operating a gasoline station for
when respondent sent his letter of demand to a period of five (5) years.
petitioners. This interest shall continue to be due
from the finality of this decision until its full
satisfaction. On 30 April 1984, petitioner, a domestic
corporation engaged in the importation and
distribution of gasoline and other petroleum
WHEREFORE, the petition is DENIED in part. The products, entered into a Retail Dealer
decision in CA-G.R. CV No. 95709 is AFFIRMED. Contract3 with Rubin Uy for the period 1 May
1984 to 30 April 1989. Under the dealership
Petitioners Arco Pulp & Paper Co., Inc. and contract, petitioner sold its products in quantities
Candida A. Santos are hereby ordered solidarily as ordered by the dealer. It likewise obligated
to pay respondent Dan T. Lim the amount itself to deliver the products to the dealer at the
of P7,220,968.31 with interest of 6% per annum places agreed upon by the parties. The dealer,
at the time of demand until finality of judgment meanwhile, obligated himself to exclusively
and its full satisfaction, with moral damages in maintain petitioners trademarks and brand
the amount of P50,000.00, exemplary damages in names in his gasoline station. The parties also
the amount of P50,000.00, and attorney's fees in agreed that the dealer shall make good, settle
the amount of P50,000.00. and pay, and hold petitioner harmless against all
losses and claims including those of the parties,
SO ORDERED. their agents and employees for death, personal
injury or property damage arising out of any use
or condition of the dealers premises or the
equipment and facilities thereon, regardless of
any defects therein; the dealers non-
performance of the contract; or the storage and
127
handling of products on the premises.
In order to comply with its obligation to
Page
deliver the petroleum products to the dealer,
petitioner contracted the hauling services of Jose
Villaruz, who did business under the name Gale
Freight Services. The hauling contract4 was
executed in March 1988 for a period of three
years, renewable for another three upon
agreement of the parties.
Under the hauling contract, Villaruz
specifically assigned three (3) units of tank trucks
exclusively for the hauling requirements of
petitioner for the delivery of the latters products,
namely tank trucks with the plate numbers FVG
605, FVG 581 and FVG 583. Delivery includes
not only transportation but also proper loading
and unloading and delivery.5 The parties also
agreed that Villaruz shall save petitioner from any
and all claims of third persons arising out of, but
not necessarily limited to, his performance of the
terms and conditions of the contract.
Furthermore, Villaruz obligated himself to be
answerable to petitioner for damage to its plant,
equipment and facilities, including those of its
employees, dealers and customers, resulting from
his negligence and/or lack of diligence.
Meanwhile, on 27 October 1988, Rubin Uy
executed a Special Power of Attorney (SPA) in
favor of Chiong Uy authorizing the latter to
manage and administer the gasoline station.
Chiong Uy and his wife, Dortina M. Uy, operated
the gasoline station as agents of Rubin Uy.
However, on 27 November 1990, Chiong Uy left
for Hong Kong, leaving Dortina Uy to manage the
gasoline station.
On 3 January 1991, around ten oclock in
the morning, Ronnie Allanaraiz, an employee of
the gasoline station, ordered from petitioner
various petroleum products. Petitioner then
requested the services of Villaruz for the delivery
of the products to the gasoline station in
Estancia, Iloilo. He, however, used a tank truck
different from the trucks specifically enumerated
in the hauling contract executed with petitioner.
Petitioner nevertheless allowed the transport and
delivery of its products to Estancia in the tank
truck driven by Pepito Igdanis.
During the unloading of the petroleum
from the tank truck into the fill pipe that led to
the gasoline stations underground tank, for
reasons unknown, a fire started in the fill pipe
and spread to the rubber hose connected to the
tank truck. During this time, driver Pepito Igdanis
was nowhere to be found. Bystanders then tried
to put out the flames. It was then that Igdanis
returned to the gasoline station with a bag of
dried fish in hand. Seeing the fire, he got into the
truck without detaching the rubber hose from the
fill pipe and drove in reverse, dragging the
burning fuel hose along the way. As a result, a
conflagration started and consumed the nearby
properties of herein defendants, spouses Cesar J.
Jovero and Erma Cudilla-Jovero, amounting
to P1,500,000; of spouses Leonito Tan and
Luzvilla Samson, amounting to P800,000; and of
spouses Rogelio Limpoco and Lucia Josue
Limpoco, amounting to P4,112,000.
Herein respondents thereafter filed
separate actions for damages against petitioner,
Villaruz, Rubin Uy, and Dortina Uy, docketed as
Civil Case Nos. 19633, 19684 and 20122 at the
Regional Trial Court (RTC) of Iloilo City. The cases,
having arisen from the same set of facts, were
subsequently consolidated. Respondents alleged
that the negligence of petitioner and its co-
defendants in the conduct of their businesses
caused the fire that destroyed the formers
properties.
In its separate Answer, petitioner Petron
alleged that the petroleum products were already
paid for and owned by Rubin Uy and Dortina Uy.
Moreover, it alleged that Villaruz was responsible
for the safe delivery of the products by virtue of
the hauling contract. Thus, petitioner asserted,
liability for the damages caused by the fire rested
on Rubin Uy and Villaruz. Petitioner likewise filed
a cross-claim against its co-defendants for
contribution, indemnity, subrogation, or other
reliefs for all expenses and damages that it may
have suffered by virtue of the incident. It also
filed a counterclaim against respondents herein.
On 27 April 1998, after trial on the merits,
the RTC rendered its Decision in favor of
respondents and found petitioner and its co-
defendants solidarily liable for damages. The
dispositive portion of the Decision states:
WHEREFORE, in view of the
foregoing, DECISION is hereby
rendered:
1. Declaring defendants Petron
Corporation, Jose Villaruz, Pepito
Igdanis, Rubin Uy and Dortina Uy
as being negligent in the conduct
of their business activities, which
led to the conflagration of January
3, 1991 at E. Reyes Avenue,
Estancia, Iloilo, which resulted to
 (sic) the damages suffered by all specifically enumerated under the hauling

128
the plaintiffs; contract.

2. Ordering all the aforenamed Finally, the court ruled that the gasoline

Page
defendants to pay solidarily all the station was owned and operated by Rubin Uy and
plaintiffs as follows: Dortina Uy at the time of the incident.

1. In Civil Case No. 19633, plaintiffs- Petitioner and co-defendants Dortina Uy

spouses Cesar J. Jovero and Erma and Rubin Uy thereafter filed their separate
Cudilla-Jovero the amount Notices of Appeal.
of P1,500,00.00 as actual
damages; P2,000.00 as litigation Petitioner, in its appeal, insisted that it had
expenses; P4,000.00 as attorneys already sold and transferred ownership of its
fees, and to pay the costs; petroleum products to the dealer, Rubin Uy, upon
payment and receipt of these products at its
2. In Civil Case No. 19684, to pay depot. Thus, it asserted, it ceased to own the
plaintiffs-spouses Leonito Tan and products even during transit and while being
Luzvilla Samson the sum unloaded at the gasoline station. It also stated
of P800,000.00 as actual that the transportation, delivery, receipt and
damages, P2,000.00 as litigation storage of the petroleum products were solely the
expenses; P4,000.00 as attorneys responsibility of hauler Villaruz, who was neither
fees and to pay the costs; an employee nor an agent of petitioner. It
reiterated that liability rested on Rubin Uy and
3. In Civil Case No. 20122, to pay the Villaruz pursuant to the respective contracts it
plaintiffs-spouses Rogelio C. had executed with them.
Limpoco and Lucia Josue Limpoco
the amount of P4,112,000.00 as Petitioner also alleged that the RTC erred
actual damages; P2,000.00 as in ruling that the former was negligent in allowing
litigation expenses; P5,000.00 as the use of a tank truck not specified in the
attorneys fees, and to pay the hauling contract. Petitioner thus insisted that it
costs. had examined the tank truck and found it to be in
good condition. It added that, since the fire did
The counter-claims of the not originate from the tank truck, the proximate
defendants against all the plaintiffs cause of the fire was not attributable to any
are hereby dismissed. defect in the truck.

The cross-claims of the Finally, petitioner alleged that respondents

defendants against each other are failed to prove that the damages they suffered
likewise dismissed as they are all in were the direct result of any culpable act or
pari delicto. omission on its part.

SO ORDERED.6 Meanwhile, defendant Villaruz allegedly

The RTC held that Igdanis, as the driver of
the tank truck, was negligent in the performance
of his work when he left the tank truck while it
was in the process of unloading the petroleum.
He was also negligent when he drove the truck in
reverse without detaching the burning fuel hose.
The trial court stated that defendant Villaruz
failed to convince the court that he had exercised
due diligence in the hiring and supervision of his
employees.
proved during trial that he had exercised
diligence in the selection and supervision of his
employees and, thus, he was not responsible for
the damages caused by the fire. In addition, he
alleged that Igdanis, whom respondents failed to
implead as a defendant in the lower court, did not
have a chance to defend himself. Since there was
no showing that any act or omission of Igdanis
was the proximate cause of the fire, Villaruz
insisted that the latter himself could not be held
liable for the acts of his employee, who was not
even impleaded or proven to be negligent.

The RTC likewise held that petitioner was Dortina Uy, in her appeal, alleged that she
negligent in allowing Villaruz to use a tank truck had no direct participation in the management or
that was not included among the trucks administration of the gasoline station. She also
alleged that she was not the employer of Igdanis,
the driver of the tank truck who had caused the
129
fire to spread in the vicinity.
Since defendant Rubin Uy failed to file his
Page
Appellants Brief within the reglementary period,
the CA dismissed his appeal.7
Respondents, meanwhile, maintained that
petitioner Petron was negligent in selling and
storing its products in a gasoline station without
an existing dealers contract from May 1989 up to
the time of the incident on 3 January 1991. They
contended that petitioner, in effect, was itself
operating the gasoline station, with the dealer as
mere agent of the former. Respondents also
insisted that petitioner had the obligation to
ensure that the gasoline station was safe and
properly maintained, considering the products
stored and sold there. Likewise, they asserted
that petitioner was responsible for the safe
delivery and proper storage of its goods in the
gasoline station, and that this responsibility
would cease only when the goods had been sold
to the end consumer.
Additionally, respondents contended that
petitioner Petron was also negligent when the
latter allowed the use of an unaccredited truck in
violation of its hauling contract with Villaruz.
On 12 December 2001, the CA
promulgated its Decision affirming that of the trial
court, to wit:
WHEREFORE, premises
considered, the instant appeals
are DISMISSED and the assailed
consolidated Decision of the
court a quo dated 27 April 1998 in
Civil Case Nos. 19633, 19684 and
20122 isAFFIRMED in all respects.
Costs against appellants.
SO ORDERED.8
The appellate court upheld the findings of
the RTC that petitioner Petron was negligent for
having allowed the operation of the gasoline
station absent a valid dealership contract. Thus,
the CA considered the gasoline station as one run
by petitioner itself, and the persons managing the
gasoline station as petitioners mere agents. Even
if a valid dealership contract existed, petitioner
was still liable for damages, because there was as
yet no complete delivery of its products. The fire
had broken out while petroleum was being
unloaded from the tank truck to the storage tank.
The CA further held that petitioner was
also negligent in allowing Villaruz to use an
unaccredited tank truck for the transport and
delivery of the petroleum at the time of the
incident.
With regard to the liability of Villaruz, the
appellate court found him to be negligent in the
conduct of his business. Thus, he was made liable
for the damages caused by his employee in
accordance with Article 2180 in relation to Article
2176 of the Civil Code.
Finally, with regard to Dortina Uy, the CA
held that, as one of the operators of the gasoline
station, she failed to submit evidence that she
had exercised due diligence in the operation
thereof.
Dissatisfied with the CAs ruling, petitioner
is now before us with the present Petition for
Review.
Petitioner presents the following issues for
the resolution of this Court:
1. Whether or not Petron may be considered
at fault for continuing to do business with
Rubin Uy, an independent petroleum
dealer, without renewing or extending
their expired dealership agreement;
2. Whether or not a causal connection exists
between Petrons failure to renew or
extend its dealership contract with Rubin
Uy and the fire that inflicted damages on
the buildings surrounding the latters gas
station;
3. Whether or not Petron is liable for the fire
that occurred during the unloading by an
independent hauler of the fuel it sold to an
equally independent dealer at the latters
gas station; and
4. Whether or not a supplier of fuel can be
held liable for the neglect of others in
distributing and storing such fuel. 9
In the present case, petitioner does not
implead its co-defendants Villaruz, Rubin Uy and
Dortina Uy. Neither does it assail the dismissal by
the lower courts of the cross-claim or
counterclaim it filed against its co-defendants and
herein respondents, respectively. Nor is there any
question on respondents right to claim damages.
Petitioner merely prays for absolution from
liability resulting from the fire by claiming that it
130
had no direct participation in the incident.
In support of the issues raised above,
Page
petitioner contends that, first, there was an
implied renewal of the dealership contract Rubin
Uy remained as the operator of the gasoline
station. It further contends that there is no law
supporting the conclusion of the CA that, upon
expiration of the contract, the dealer
automatically became the suppliers agent.
Second, petitioner asserts that there was
no rational link between its alleged neglect in
renewing the dealership agreement and the act
that caused the fire.
Third, petitioner insists that ownership of
the petroleum products was transferred when the
dealers representative, Ronnie Allanaraiz, went
to petitioners oil depot, bought and paid for the
gasoline, and had Villaruzs tank truck receive the
products for delivery.
Moreover, petitioner points out, neither
Igdanis nor Villaruz was its employee and, thus, it
cannot be held vicariously liable for the damages
to respondents caused by Igdanis. Furthermore, it
asserted that the tank truck transporting the
petroleum though not included in the
enumeration in the hauling contract had
complied with the standards required of Villaruz.
Petitioner also alleges that there was no
evidence that the fire was attributable to its
distribution and storage safety measures.
Finally, petitioner states that both hauler
and dealer must bear the costs of their acts and
those of their employees, considering that this
was an explicit provision in their respective
contracts with it.
The Petition has some merit.
We first discuss the liability of petitioner in
relation to the dealership contract.
Petitioner, as an importer and a distributer
of gasoline and other petroleum product,
executed with a dealer of these products an
exclusive dealership agreement for mutual
benefit and gain. On one hand, petitioner benefits
from the sale of its products, as well as the
advertisement it gains when it broadens its
geographical coverage in contracting with
independent dealers in different areas. The
products sold and the services rendered by the
dealer also contribute to its goodwill. Thus,
despite the transfer of ownership upon the sale
and delivery of its products, petitioner still
imposes the obligation on the dealer to
exclusively carry its products.
The dealer also benefits from the
dealership agreement, not only from the resale of
the products of petitioner, but also from the
latters goodwill.
However, with the use of its trade name
and trademark, petitioner and the dealer inform
and guarantee to the public that the products and
services are of a particular standard or quality.
More importantly, the public, which is not privy to
the dealership contract, assumes that the
gasoline station is owned or operated by
petitioner. Thus, respondents, who suffered
damages from the act or omission that occurred
in the gasoline station and that caused the fire,
may file an action against petitioner based on the
representations it made to the public. As far as
the public is concerned, it is enough that the
establishment carries exclusively the name and
products of petitioner to assume that the latter is
liable for acts done within the premises.
Second, respondents have a claim against
petitioner based on the dealership agreement.
The RTC and the CA ruled that, by virtue of
the expiration of the dealership contract, the
dealer was relegated to being petitioners agent.
On this point, we agree with petitioner that the
expiration or nonexistence of a dealership
contract did not ipso facto transform the
relationship of the dealer and petitioner into one
of agency. As far as the parties to the dealership
contract were concerned, the rights and
obligations as to them still subsisted, since they
continued to mutually benefit from the
agreement. Thus, neither party can claim that it
is no longer bound by the terms of the contract
and the expiration thereof.
We then judiciously reviewed the terms of
the contract and found that petitioner is liable to
respondents for the damages caused by the fire.
As petitioner itself points out, it owns the
equipment relevant to the handling and storage
of gasoline, including the gasoline pumps and the
underground tank.10 It is also responsible for the
delivery of the petroleum to the dealer. The
incident occurred at the time the petroleum was
being unloaded to the underground tank
petitioner owned. Aside from failing to show the
actual cause of the fire, it also failed to rebut the
presumption that it was negligent in the
131
maintenance of its properties and in the conduct
of its business.
Page
Petitioner contends that under paragraph
8 of the dealership contract, the dealers liability
is as follows:
LOSSES AND
CLAIMS. BUYER shall make good,
settle and pay, and hold SELLER
harmless against all losses and
claims (including those of the
parties, their agents and
employees) for death, personal
injury or property arising out of (1)
any use or condition of BUYERs
premises or the equipment and
facilities thereon, regardless of any
defects therein (2) BUYERs non-
performance of this contract, or (3)
the storage and handling of
products on the premises.
While both parties to the contract have
the right to provide a clause for non-liability,
petitioner admits that they both share the
maintenance of its equipment. Petitioner states
that its responsibility extended to the operating
condition of the gasoline station, e.g. whether the
fuel pumps were functioning properly.11
Moreover, it cannot be denied that
petitioner likewise obligated itself to deliver the
products to the dealer. When the incident
occurred, petitioner, through Gale Freight
Services, was still in the process of fulfilling its
obligation to the dealer. We disagree with its
contention that delivery was perfected upon
payment of the goods at its depot. There was yet
no complete delivery of the goods as evidenced
by the aforementioned hauling contract petitioner
executed with Villaruz. That contract made it
clear that delivery would only be perfected upon
the complete unloading of the gasoline.
Thus, with regard to the delivery of the
petroleum, Villaruz was acting as the agent of
petitioner Petron. For a fee, he delivered the
petroleum products on its behalf. Notably,
petitioner even imposed a penalty clause in
instances when there was a violation of the
hauling contract, wherein it may impose a
penalty ranging from a written warning to the
termination of the contract. Therefore, as far as
the dealer was concerned with regard to the
terms of the dealership contract, acts of Villaruz
and his employees are also acts of petitioner.
Both the RTC and the CA held that Villaruz failed
to rebut the presumption that the employer was
negligent in the supervision of an employee who
caused damages to another; and, thus, petitioner
should likewise be held accountable for the
negligence of Villaruz and Igdanis.
To reiterate, petitioner, the dealer Rubin
Uy acting through his agent, Dortina Uy
shared the responsibility for the maintenance of
the equipment used in the gasoline station and
for making sure that the unloading and the
storage of highly flammable products were
without incident. As both were equally negligent
in those aspects, petitioner cannot pursue a claim
against the dealer for the incident. Therefore,
both are solidarily liable to respondents for
damages caused by the fire.
Petitioner was likewise negligent in
allowing a tank truck different from that
specifically provided under its hauling contract
with Villaruz. The enumeration and specification
of particular tank trucks in the contract serve a
purpose to ensure the safe transportation,
storage and delivery of highly flammable
products. Under the hauling contract, these
requirements are as follows:12
1. Duly registered under the
hired truck (TH) classification and subject
to the rules and regulations of Land
Transportation Commission (LTC) and
Board of Transportation (BOT).
2. Properly sealed and
calibrated in accordance with the
requirements of NSTA.
3. Equipped with safety and
other auxiliary equipment as specified by
PETROPHIL (Petron) as per attached Annex
8.13
4. Provided with fire permits
and other permits required by the
government authorities.
5. In good working condition
and in good appearance at all times,
6. Fully complying with the
tank truck color scheme, standard truck
number, bumper stripes, haulers name on
cab door, and such other similar
requirements for good appearance as may
be required by PETROPHIL.
 Annex B attached to the contract, which
132
refers to the tank truck safety and accessories
equipment, likewise provides that the following
are the specified safety equipment and other
Page
accessories for tank truck operations:14
1. Fire extinguisher, Type B & C
2. Manhole covers
3. Manhole cover gasket
4. Product level markers
5. Manhole cover pins
6. NIST Calibration and scale
7. Discharge valves (quick closing)
8. Front Fenders
9. Door glasses
10. ________ (illegible) glasses
11. Windshield
12. Wipers
13. Horn
14. Floor matting
15. Ceiling
16. Seats
17. (Illegible)
18. Air hose connector
With respect to the claims of third
persons, it is not enough for petitioner to allege
that the tank truck met the same requirements
provided under the contract; it must duly prove
its allegations. This, petitioner failed to do. To
reiterate, it was not able to prove the proximate
cause of the fire, only the involvement of the tank
truck and the underground storage tank. Notably,
both pieces of equipment were under its
responsibility. Absent any positive determination
of the cause of the fire, a presumption exists that
there was something wrong with the truck or the
underground storage tank, or both. Petitioner,
which had the obligation to ensure that the truck
was safe, is likewise liable for the operation of
that truck.
Petitioner maintains that by virtue of the
hauling contract, Villaruz must be held
responsible for the acts of Igdanis, the driver of
the tank truck. In this aspect, petitioner is correct.
While it may be vicariously liable to third persons
for damages caused by Villaruz, the latter is
nevertheless liable to petitioner by virtue of the
non-liability clause in the hauling contract. Under
this provision, he saved petitioner from any and
all claims of third persons arising out of, but not
necessarily limited to, his performance of the
terms and conditions of this agreement.
Petitioner even obligated him to maintain an
acceptable Merchandise Floater Policy to provide
insurance coverage for the products entrusted to
him; and a Comprehensive General Liability
Insurance to cover any and all claims for
damages for personal injury, including death or
damages to property, which may arise from
operations under the contract.15
Thus, Villaruz is also liable to petitioner
based on the hauling contract. Under Rule 6, Sec.
8 of the Rules of Court, petitioner may enforce
the terms of the hauling contract against him.
However, considering that it did not implead
Villaruz in the present case, nor did it assail the
Decision of the CA in dismissing the cross-claim,
petitioner can no longer go after him based on
that cross-claim.
Nonetheless, this is not the same as
saying that Villaruz is no longer solidarily liable to
respondents.
As the employer of Igdanis, Villaruz was
impleaded by herein respondents in the lower
court and was found to be solidarily liable with his
other co-defendants. Absent an appeal before
this Court assailing the ruling of the lower court
and the CA, Villaruz remains to be solidarily liable
with petitioner and co-defendants Rubin Uy and
Dortina Uy. Thus, petitioner may only claim
contribution from him in accordance with Article
1217 of the Civil Code, and not by virtue of its
hauling contract, in the event that respondents
decide to proceed against petitioner alone for the
satisfaction of judgment. Art. 1217 states:
Payment made by one of
the solidary debtors extinguishes
the obligation. If two or more
 solidary debtors offer to pay, the who were innocent bystanders, have not been

133
creditor may choose which offer to compensated for the loss of their homes,
accept. properties and livelihood. Notably, neither the
RTC nor the CA imposed legal interest on the

Page
He who made the actual damages that it awarded respondents.
payment may claim from his co- In Eastern Shipping Lines v. Court of
debtors only the share which Appeals,16 enunciated in PCI Leasing & Finance
corresponds to each, with the Inc. v. Trojan Metal Industries, Inc., 17 we laid down
interest for the payment already the rules for the imposition of legal interest as
made. If the payment is made follows:
before the debt is due, no interest
for the intervening period may be I. When an obligation, regardless
demanded. (Emphasis supplied) of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-
delicts is breached, the
The share, meanwhile, of solidary debtors contravenor can be held liable for
is contained in Art. 1208, to wit: damages. The provisions under
Title XVIII on Damages of the
If from the law, or the Civil Code govern in determining
nature of the wording of the the measure of recoverable
obligations to which the preceding damages.
article refers the contrary does not
appear, the credit of debt shall II. With regard particularly to an
be presumed to be divided into award of interest in the concept of
as many equal shares as there actual and compensatory damages,
are creditors or debtors, the the rate of interest, as well as the
credits or debts being accrual thereof, is imposed, as
considered distinct from one follows:
another, subject to the Rules of
Court governing the
multiplicity of suits. (Emphasis 1. When the obligation is
supplied) breached, and it consists in the
payment of a sum of money, i.e., a
loan or forbearance of money, the
To put it simply, based on the ruling of the interest due should be that which
lower courts, there are four (4) persons who are may have been stipulated in
liable to pay damages to respondents. The latter writing. Furthermore, the interest
may proceed against any one of the solidary due shall itself earn legal interest
debtors or some or all of them simultaneously, from the time it is judicially
pursuant to Article 1216 of the Civil Code. These demanded. In the absence of
solidary debtors are petitioner Petron, the hauler stipulation, the rate of interest
Villaruz, the operator Dortina Uy and the dealer shall be 12% per annum to be
Rubin Uy. To determine the liability of each computed from default, i.e., from
defendant to one another, the amount of judicial or extrajudicial demand
damages shall be divided by four, representing under and subject to the
the share of each defendant. Supposedly, under provisions of Article 1169 of the
the hauling contract, petitioner may require Civil Code.
Villaruz to indemnify it for its share. However,
because it was not able to maintain the cross- 2. When an obligation, not
claim filed against him, it shall be liable for its constituting a loan or forbearance
own share under Article 1208 and can no longer of money, is breached, an interest
seek indemnification or subrogation from him on the amount of damages
under its dismissed cross-claim. Petitioner may awarded may be imposed at
not pursue its cross-claim against Rubin Uy and the discretion of the court at the
Dortina Uy, because the cross-claims against rate of 6% per annum. No interest,
them were also dismissed; moreover, they were however, shall be adjudged on
all equally liable for the conflagration as unliquidated claims or damages
discussed herein. except when or until the demand
can be established with
Finally, the incident occurred in 1992. reasonable certainty. Accordingly,
Almost 20 years have passed; yet, respondents, where the demand is established
 with reasonable certainty, the
134
interest shall begin to run from the
time the claim is made judicially
or extrajudicially (Art. 1169, Civil
Page
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.
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.
In the interest of substantial justice, we
deem it necessary to impose legal interest on the
awarded actual damages at the rate of 6% per
annum from the time the cases were filed with
the lower court; and 12% from the time the
judgment herein becomes final and executory up
to the satisfaction of such judgment.
WHEREFORE, in view of the foregoing,
we AFFIRM the Decision of the Court of Appeals
in Civil Case No. 60845 insofar as herein
petitioner has been held solidarily liable to pay
damages to respondents. The CA Decision is,
however, MODIFIED and the actual damages
awarded to respondents shall be subject to the
rate of legal interest of 6% per annum from the
time of filing of Civil Case Nos. 19633, 19684 and
20122 with the Regional Trial Court of Iloilo City
up to the time this judgment becomes final and
executory. Henceforth, the rate of legal interest
shall be 12% until the satisfaction of judgment.
OLONGAPO CITY vs. SUBIC WATER AND
SEWERAGE CO., INC.
We resolve in this petition for certiorari 1 under
Rule 65 the challenge to the July 6, 2005
decision2 and the January 3, 2006
resolution3 (assailed CA rulings) of the Court of
Appeals (CA) in CAG.R. SP No. 80947.
These assailed CA rulings annulled and set aside:
a) the July 29, 2003 order4 of the Regional Trial
Court of Olongapo, Br. 75 (RTC Olongapo ), which
directed the issuance of a writ of execution in
Civil Case No. 582-0-90, against respondent Subic
Water and Sewerage Co., Inc. (Subic Water); b)
the July 31, 2003 writ of execution 5subsequently
issued by the same court; and c) the October 7,
2003 order6 of R TC Olongapo, denying Subic
Water's special appearance with motion to
reconsider order dated July 29, 2003 and to
quash writ of execution dated July 31, 2003.7
Factual Antecedents
On May 25, 1973, Presidential Decree No.
1988 (PD 198) took effect. This law authorized the
creation of local water districts which may
acquire, install, maintain and operate water
supply and distribution systems for domestic,
industrial, municipal and agricultural uses.9
Pursuant to PD 198, petitioner Olongapo City
(petitioner) passed Resolution No. 161, which
transferred all itsexisting water facilities and
assets under the Olongapo City Public Utilities
Department Waterworks Division, to the
jurisdiction and ownership of the Olongapo City
Water District (OCWD).10
PD 198, as amended,11 allows local water districts
(LWDs)which have acquired an existing water
system of a localgovernment unit (LGU) to enter
into a contract to pay the concerned LGU. In lieu
of the LGUs share in the acquired water utility
plant, it shall be paid by the LWD an amount not
exceeding three percent (3%) of the LWDs gross
receipts from water sales in any year.12
On October 24, 1990, petitioner filed a complaint
for sum of money and damages against OCWD.
Among others, petitioner alleged that OCWD
failed to pay its electricity bills to petitioner and
remit its payment under the contract to pay,
pursuant to OCWDs acquisition of petitioners
water system. In its complaint, petitioner prayed
for the following reliefs:
"WHEREOF, it is respectfully prayed of this
Honorable Court that after due hearing and
notice, judgment be rendered in favor of plaintiff
ordering the defendant to:
 (a) pay the amount of P26,798,223.70 plus
135
legal interests from the filing of the
Complaint to actual full payment;
Page
(b) pay the amount of its in lieu share
representing three percent of the
defendants gross receipts from water
sales starting 1981 up to present;
(c) pay the amount of P1,000,000 as moral
damages; and
(d) pay the cost of suit and other litigation
expenses."13
In its answer,14 OCWD posed a counterclaim
against petitioner for unpaid water bills
amounting toP3,080,357.00.15
In the interim, OCWD entered into a Joint Venture
Agreement16 (JVA) with Subic Bay Metropolitan
Authority (SBMA), Biwater International Limited
(Biwater), and D.M. Consunji, Inc. (DMCI) on
November 24, 1996. Pursuant to this agreement,
Subic Water a new corporate entity was
incorporated, withthe following equity
participation from its shareholders:
SBMA 19.99% or 20%
OCWD 9.99% or 10%
Biwater 29.99% or 30%
DMCI 39.99% or 40%17
On November 24, 1996, Subic Water was granted
the franchise to operate and to carry on the
businessof providing water and sewerage
services in the Subic BayFree Port Zone, as well
as in Olongapo City.18 Hence, Subic Water took
over OCWDs water operations in Olongapo City.19
To finally settle their money claims against each
other, petitioner and OCWD entered into a
compromise agreement20 on June 4, 1997. In this
agreement, petitioner and OCWD offset their
respective claims and counterclaims. OCWD also
undertook to pay to petitioner its net obligation
amounting to P135,909,467.09, to be amortized
for a period of not exceeding twenty-five (25)
years at twenty-fourpercent (24%) per annum.21
The compromise agreement also contained a
provision regarding the parties requestthat Subic
Water, Philippines,which took over the operations
of the defendant Olongapo City Water District be
made the co-makerfor OCWDs obligations. Mr.
Noli Aldip, then chairman of Subic Water, acted as
its representative and signed the agreement on
behalf of Subic Water.
Subsequently, the parties submitted the
compromise agreement to RTC Olongapo for
approval. In its decision dated June 13,
1997,22 the trial court approved the
compromiseagreement and adopted it as its
judgment in Civil Case No. 580-0-90.
Pursuant to the compromise agreement and in
payment of OCWDs obligations to
petitioner,petitioner and OCWD executed a Deed
of Assignment onNovember 24, 1997.23 OCWD
assigned all of its rights in the JVA in favor of the
petitioner, including but not limited to the
assignment of its shares, lease payments,
regulatory assistance fees and other receivables
arising out of or related to the Joint Venture
Agreement and the Lease Agreement. 24 On
December 15,1998, OCWD was judicially
dissolved.25
On May 7, 1999, to enforce the compromise
agreement, the petitioner filed a motion for the
issuance of a writ of execution 26 with the trial
court. In its July 23, 1999 order,27 the trial court
granted the motion, but did not issue the
corresponding writ of execution.
Almost four years later, on May 30, 2003, the
petitioner, through its new counsel, filed a notice
of appearance with urgent
motion/manifestation28 and prayed again for the
issuance of a writ of execution against OCWD. A
certain Atty. Segundo Mangohig, claiming to be
OCWDs former counsel, filed a manifestation
alleging that OCWD had already been dissolved
and that Subic Water is now the former OCWD.29
Because of this assertion, Subic Water also filed a
manifestation informing the trial court that as
borne out by the articles of incorporation and
general information sheet of Subic Water x x x
defendant OCWD is not Subic Water.30The
manifestation also indicated that OCWD was only
a ten percent (10%) shareholder of Subic Water;
and that its 10% share was already inthe process
of being transferred to petitioner pursuant to the
Deed of Assignment dated November 24, 1997.31
The trial court granted the motion for execution
and directed its issuance against OCWD and/or
Subic Water. Because of this unfavorable order,
Subic Water filed a special appearance with
motion to: (1) reconsider order dated July29,
2003; and (2) quash writ of execution dated July
31, 2003.32
The trial court denied Subic Waters special
136
appearance, motion for reconsideration, and its
motion to quash. Subic Water then filed a petition
for certiorari33 with the CA, imputing grave abuse
Page
of discretion amounting to lack or excess of
jurisdiction to RTC Olongapo for issuing its July 29,
2003 and October 7, 2003 orders aswell as the
writ of execution dated July 31, 2003. The CAs
Ruling
In its decision dated July 6, 2005, 34 the CA
granted Subic Waters petition for certiorariand
reversed the trial courts rulings.
The CA found that the writ ofexecution dated July
31, 200335 did not comply with Section 6, Rule 39
of the Rules of Court, to wit:
Section 6. Execution by motion orby independent
action. A final and executory judgment or order
may be executed on motion within five (5) years
from the date of its entry. After the lapse of such
time, and before it is barred by the statute of
limitations, a judgment may be enforced by
action. The revived judgment may also be
enforced by motion within five (5) years from the
date of its entry and thereafter by action before it
is barred by the statute of limitations. (6a)
[emphasis ours]
A judgment on a compromiseagreement is
immediately executory and is considered to have
been entered on the date it was approved by the
trial court.36 Since the compromise agreement
was approved and adoptedby the trial court on
June 13, 1997, this should be the reckoning date
for the counting of the period for the filing of a
valid motion for issuance of a writ of execution.
Petitioner thus had until June 13, 2002, to file its
motion.
The CA further remarked that whileit was true
that a motion for execution was filed by petitioner
on May 7, 1999, and the same was granted by
the trial court in its July 23, 1999 order, 37 no writ
of execution was actually issued.
As the CA looked at the case, petitioner, instead
of following up with the trial court the issuance
ofthe writ of execution, did not do anything to
secure its prompt issuance. It waitedanother four
years to file a second motion for execution on
May 30, 2003.38 By this time, the allowed period
for the filing of a motion for the issuance of the
writ had already lapsed. Hence, the trial courts
July 29, 2003 order granting the issuance of the
writ was null and void for having been issued by a
court without jurisdiction.
The CA denied petitioners subsequentmotion for
reconsideration. Petitioner is now before us on a
petition for certiorari under Rule 65.
The Petition
The petitioner acknowledged the rule that the
execution of a judgment could no longer be made
by mere motion after the prescribed five-year
period had already lapsed. However, it argued
that the delay for the issuance of the writ of
execution was caused by OCWD and Subic Water.
The petitioner submitted that this Court had
allowed execution by mere motion even after the
lapse ofthe five-year period, when the delay was
caused or occasioned by the actions of the
judgment debtor.39
Also, the petitioner asserted that although Subic
Water was not a party in the case, it could still be
subjected to a writ of execution, since it was
identified as OCWDs co-maker and successor-in-
interest in the compromise agreement.40
Lastly, the petitioner contended that the
compromise agreement was signed by Mr. Noli R.
Aldip,then Subic Waters chairman, signifying
Subic Waters consent to the agreement.
The Courts Ruling
We DISMISSthe petition for being the wrong
remedy and, in any case, for lack of merit; what
we have before us is a final judgment that we can
no longer touch unless there is grave abuse of
discretion.
A. Procedural Law Aspect
Certiorari is not a substitute for a lost appeal.
At the outset, we emphasize thatthe present
petition, brought under Rule 65, merits outright
dismissal for having availed an improper remedy.
The instant petition should havebeen brought
under Rule 45 in a petition for review on
certiorari. Section 1 of this Rule mandates:
Section 1. Filing of petition with Supreme Court.
A party desiring to appeal by certiorari from a
judgment or final order or resolution of the Court
of Appeals, the Sandiganbayan, the Regional Trial
Court or other courts whenever authorized by
law, may file with the Supreme Court a verified
petition for review on certiorari. The petition shall
raise only questions of law which must be
distinctly set forth. (1a, 2a) [emphasis supplied]
Supplementing Rule 45 are Sections 3 41 and 442 of
137
Rule 56 which govern the applicable procedure in
the Supreme Court.
Page
Appeals from judgmentsor final orders or
resolutions of the CA should be made through a
verified petition for review on certiorari under
Rule 45.43 In this case, petitioner questioned the
July 6, 2005 decision44 and the January 3, 2006
resolution45 of the CA which declared as null and
void the writ of execution issued by the trial
court. Since the CAs pronouncement completely
disposed of the case and the issues raised by the
parties, it was the proper subject of a Rule 45
petition. It was already a final order that resolved
the subject matter in its entirety, leaving nothing
else to be done.
A petition for certiorari under Rule 65 is
appropriate only if there is no appeal, or any
plain, speedy, and adequate remedy in the
ordinary course of law available tothe aggrieved
party. As we have distinctly explained in the case
of Pasiona v. Court of Appeals:46
The aggrieved party is proscribed from assailing a
decision or final order of the CA viaRule 65
because such recourse is proper only if the party
has no plain,speedy and adequate remedy in the
course of law. In this case, petitioner had an
adequate remedy, namely, a petition for review
on certiorari under Rule 45 ofthe Rules of Court.A
petition for review on certiorari, not a special civil
action for certiorari was, therefore, the correct
remedy.
xxxx
Settled is the rule that where appeal is available
to the aggrieved party, the special civil actionfor
certiorari will not be entertained remedies of
appealand certiorari are mutually exclusive, not
alternative or successive. Hence, certiorari is not
and cannot be a substitute for a lost
appeal,especially if one's own negligence or error
in one's choice of remedy occasioned such loss or
lapse.47 [emphasis ours]
The petitioner received the CAs assailed
resolution denying its motion for reconsideration
on January 9, 2006. Following Rule 45, Section 2
of the Rules of Court, 48 the petitioner had until
January 24, 2006 to file its petition for review. It
could have even filed a motion for a 30-day
extension of time, a motion that this Court grants
for justifiable reasons.49 But all of these, it failed
to do. Thus, the assailed CA rulings became final
and executory and could no longer be the subject
of an appeal.
Apparently, to revive its lost appeal, petitioner
filed the present petition for certiorari that
under Rule 65 may be filed within sixty days
from the promulgation of the assailed CA
resolution (on January 3, 2006). A Rule 65 petition
for certiorari, however, cannot be a substitute for
a lost appeal. With the lapse of the prescribed
period for appeal without an action from the
petitioner, the present petition for certiorari a
mere replacement must be dismissed.
But even without the procedural infirmity, the
present recourse to us has no basis on the merits
and must be denied.
Execution by motion is only available within the
five-year period from entry of judgment.
Under Rule 39, Section 6,50 a judgment creditor
has two modes in enforcing the courts judgment.
Execution may be either through motion or an
independent action.
These two modes of execution are available
depending on the timing when the
judgmentcreditor invoked its right to enforce the
courts judgment. Execution by motion is only
available if the enforcement of the judgment was
sought within five (5) years from the date of its
entry. On the other hand, execution by
independent action is mandatory if the five-year
prescriptive period for execution by motion had
already elapsed.51 However, for execution by
independent action to prosper the Rules impose
another limitation the action must be filed
before it is barred by the statute of limitations
which, under the Civil Code, is ten (10) years
from the finality of the judgment.52
On May 7, 1999, within the five-year period from
the trial courts judgment, petitioner filed its
motion for the issuance of a writ of execution.
However, despite the grant of the motion, the
court did not issue an actual writ. It was only
onMay 30, 2003 that petitioner filed a second
motion to ask again for the writs issuance. By
this time, the allowed five-year period for
execution by motion had already lapsed.
As will be discussed below, since the second
motion was filed beyond the five-year prescriptive
period set by the Rules, then the writ of execution
issued by the trial court on July 31, 2003 was null
and void for having been issued by a court
already ousted ofits jurisdiction.
In Arambulo v. Court of First Instance of
Laguna,53 we explained the rule that the
jurisdiction of a court to issue a writ of execution
by motion is only effective within the five-year
138
period from the entry of judgment. Outside this
five-year period, any writ of execution issued
pursuant to a motion filed by the judgment
Page
creditor, is null and void. If no writ of execution
was issued by the court within the five-year
period, even a motion filed within such
prescriptive period would not suffice. A writ
issued by the court after the lapse of the five-
year period is already null and void.54 The
judgment creditors only recourse then is to file
an independent action, which must also be within
the prescriptive period set by law for the
enforcement of judgments.
This Court subsequently reiterated its
Arambuloruling in Ramos v. Garciano, 55 where we
said:
There seems to be no serious dispute that the 4th
alias writ of execution was issued eight (8)
daysafter the lapse of the five (5) year period
from the dateof the entry of judgment in Civil
Case No. 367. As a general rule, after the lapse of
such period a judgment may be enforced only by
ordinary action, not by mere motion (Section 6,
Rule 39, Rules of Court).
xxxx
The limitation that a judgment beenforced by
execution within five years, otherwise itloses
efficacy, goes tothe very jurisdiction of the
Court.A writ issued after such period is void, and
the failure to object thereto does notvalidate it,
for the reason that jurisdiction of courts is solely
conferred by law and not by express or implied
will of the parties.56 [emphasis supplied]
To clearly restate these rulings, for execution by
motion to be valid, the judgment creditor
mustensure the accomplishment of two acts
within the five-year prescriptive period. These
are:a) the filing of the motion for the issuance of
the writ of execution; and b) the courts actual
issuance of the writ.In the instanceswhen the
Court allowed execution by motion even after the
lapse of five years, we only recognized one
exception, i.e., when the delay is caused or
occasioned by actions of the judgment debtor
and/or is incurred for his benefit or
advantage.57However, petitioner failed toshow or
cite circumstances showing how OCWD or Subic
Water caused it to belatedly file its second motion
for execution.
Strictly speaking, the issuance of the writ should
have been a ministerial duty on the partof the
trial court after it gave its July 23, 1999 order,
approving the first motion and directing the
issuance of such writ. The petitioner could have
easily compelled the court to actually issue the
writ by filing a manifestation onthe existence of
the July 23, 1999 order. However, petitioner idly
sat and waited for the five-year period to lapse
before it filed its second motion. Having slept on
its rights, petitioner had no one to blame but
itself.
A writ of execution cannot affect a non- party to a
case.
Strangers to a case are not bound by the
judgment rendered in it. Thus, a writ of execution
can only beissued against a party and not against
one who did not have his day in court.58
Subic Water never participated in the proceedings
in Civil Case No. 580-0-90, where OCWD and
petitioner were the contending parties. Subic
Water only came into the picture when one Atty.
Segundo Mangohig, claiming to beOCWDs former
counsel, manifested before the trial court that
OCWD had already been judicially dissolved and
thatSubic Water assumed OCWDs personality.
In the present case, the compromise agreement,
although signed by Mr. Noli Aldip, did not carry
the express conformity of Subic Water. Mr. Aldip
was never given any authorization to conform to
or bind Subic Water in the
compromiseagreement. Also, the agreement
merely labeled Subic Water as a co-maker. It did
not contain any provision where Subic Water
acknowledged its solidary liability with OCWD.
Lastly, Subic Water did not voluntarily submit
tothe courts jurisdiction. In fact, the motion it
filed was only made as a special appearance,
precisely toavoid the courts acquisition of
jurisdiction over its person. Without any
participation inthe proceedings below, it cannot
be made liable on the writ ofexecution issuedby
the court a quo.
B. Substantive Law Aspect
Solidary liability mustbe expressly stated.
The petitioner also argued that Subic Water could
be held solidarily liable under the writ of
execution since it was identified as OCWDs co-
maker in the compromise agreement.The
petitioners basis for this is the following provision
of the agreement:
4. Both parties also requestthat Subic
139
Water,Philippines which took over the operations
of the defendant Olongapo City Water District be
made as co-makerfor the obligation herein
Page
abovecited.59 [emphasis supplied]
As the rule stands, solidary liability is not
presumed. This stems from Art. 1207 of the Civil
Code, which provides:
Art. 1207. x x x There is a solidary liability only
when the obligation expressly so states, or when
the law orthe nature of the obligation
requiressolidarity. [emphasis supplied]
In Palmares v. Court of Appeals,60 the Court did
not hesitate to rule that although a party to a
promissory note was onlylabeled as a comaker,
his liability was that ofa surety, since the
instrument expressly provided for his joint and
several liabilitywith the principal.
In the present case, the joint and several liability
of Subic Water and OCWD was nowhere clear in
the agreement. The agreement simply and plainly
stated that petitioner and OCWD were only
requestingSubic Water to be a co-maker, in view
of its assumption of OCWDs water operations. No
evidence was presented to show that such
request was ever approved by Subic Waters
board of directors.
Under these circumstances, petitioner cannot
proceed after Subic Water for OCWDs unpaid
obligations. The law explicitly states that solidary
liability is not presumed and must be expressly
provided for. Not being a surety, Subic Water is
not an insurer of OCWDs obligations under the
compromise agreement. At best, Subic Water was
merely a guarantor against whom petitioner can
claim, provided it was first shown that: a)
petitioner had already proceeded after the
properties of OCWD, the principal debtor; b) and
despite this, the obligation under the compromise
agreement, remains to be not fully satisfied. 61 But
as will be discussed next, Subic Water could not
also be recognized as a guarantorof OCWDs
obligations.
An officers actions can only bind the corporation
ifhe had been authorized to do so.
An examination of the compromise agreement
reveals that it was not accompanied by any
document showing a grant of authority to Mr. Noli
Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a
juridical entity, primarily acts through its board
ofdirectors, which exercises its corporate powers.
In this capacity, the general rule is that, in the
absence of authority from the board ofdirectors,
no person, not even its officers, can validly bind a
corporation.62 Section 23 of the Corporation Code
provides:
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trusteesto be elected from among the holders of
stocks, or where there is no stock, from among
the members of the corporation, who shall hold
office for one (1) year until their successors are
elected and qualified. (28a) [emphasis supplied]
In Peoples Aircargo and Warehousing Co., Inc. v.
Court of Appeals,63 we held that under Section 23
of the Corporation Code, the power and
responsibility to decide whether a corporation can
enter into a binding contract is lodged with the
board of directors, subject to the articles of
incorporation, by-laws, or relevant provisions of
law. As we have clearly explained in another
case:
A corporate officer or agent may represent and
bind the corporation in transactions with third
persons to the extent that [the] authority to do so
has been conferred upon him, and this includes
powers which have been intentionally conferred,
and also such powers as, in the usual courseof
the particular business, are incidental to, or may
be implied from, the powers intentionally
conferred, powers added bycustom and usage, as
usually pertaining to the particular officer or
agent,and such apparent powers as the
corporation has caused persons dealing with the
officer oragent to believe that ithas
conferred.64 [emphasis ours]
Mr. Noli Aldip signedthe compromise agreement
purely in his own capacity. Moreover, the
compromise agreement did not expressly provide
that Subic Water consented to become OCWDs
co-maker. As worded, the compromise agreement
merely provided that both parties
[also]requestSubic Water, Philippines, which took
over the operations of Olongapo City Water
District be made asco-maker [for the obligations
above-cited].This request was never forwarded to
Subic Waters board of directors. Even if due
notification had been made (which does not
appearin the records), Subic Waters board does
not appear to have given any approval tosuch
request. Nodocument such as the minutes of
Subic Waters board of directors meeting or a
140
secretarys certificate, purporting to be an
authorization to Mr. Aldip to conform to the
compromise agreement, was everpresented. In
Page
effect, Mr. Aldips act of signing the compromise
agreement was outside of his authority to
undertake.
Since Mr. Aldip was never authorized and there
was no showing that Subic Waters articles of
incorporation or by-laws granted him such
authority, then the compromise agreement he
signed cannot bind Subic Water. Subic Water
cannot likewise be made a surety or even a
guarantor for OCWDs obligations. OCWDs debts
under the compromise agreement are its own
corporate obligations to petitioner.
OCWD and Subic Water are two separate and
different entities.
Petitioner practically suggests that since Subic
Water took over OCWDs water operations in
OlongapoCity, it also acquired OCWDs juridical
personality, making the two entities one and the
same.
This is an interpretation that we cannot make or
adopt under the facts and the evidence of this
case. Subic Water clearly demonstrated that it
was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of
Subic Water. As a mere shareholder, OCWDs
juridical personality cannot be equated nor
confused with that ofSubic Water. It is basic in
corporation law that a corporation is a juridical
entity vested with a legal personality separate
and distinct from those acting for and in its behalf
and, in general, from the people comprising
it.65 Under this corporate reality, Subic Water
cannot be held liable for OCWDs corporate
obligations in the same manner that OCWD
cannot be held liable for the obligations incurred
by Subic Water as a separate entity. The
corporate veilshould not and cannot be pierced
unless it is clearly established that the separate
and distinct personality of the corporation was
used to justify a wrong, protect fraud, or
perpetrate a deception.66
67
In Concept Builders, Inc. v. NLRC, the Court
enumerated the possible probative factors of
identity which could justify the application of the
doctrine of piercing the corporate veil. These are:
(1) Stock ownership by one or common
ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate
books and records; and
(4) Methods of conducting the business.68
The burden of proving the presence of any of
these probative factors lies with the one alleging
it. Unfortunately, petitioner simply claimed that
Subic Water took over OCWD's water operations
in Olongapo City. Apart from this allegation,
petitioner failed to demonstrate any link to justify
the construction that Subic Water and OCWD are
one and the same.
Under this evidentiary situation, our duty is to
respect the separate and distinct personalities of
these two juridical entities.1wphi1
We thus deny the present petition. The writ of
execution issued by RTC Olongapo, Br. 75, in
favor of Olongapo City, is hereby confirmed to be
null and void. Accordingly, respondent Subic
Water cannot be made liable under this writ.
WHEREFORE, premises considered, we hereby
DISMISS the petition. The Court of Appeals'
decision dated July 6, 2005 and resolution dated
January 3, 2006, annulling and setting aside the
orders of the Regional Trial Court of Olongapo,
Branch 75 dated July 29, 2003 and October 7,
2003, and the writ of execution dated July 31,
2003, are hereby AFFIRMED. Costs against the
City of Olongapo.
SO ORDERED.
ESTANISLAO AND AFRICA SINAMBAN,
v. CHINA BANKING CORPORATION
Before this Court is a Petition for Review
on Certiorari1 of the Decision2 dated May 19,
2010 of the Court of Appeals (CA) in CA-G.R. CV.
No. 66274 modifying the Decision 3 dated July 30,
1999 of the Regional Trial Court (RTC) of San
Fernando City, Pampanga, Branch 45 for Sum of
Money in Civil Case No.
11708.chanRoblesvirtualLawlibrary
Factual Antecedents
On Februaiy 19, 1990, the spouses Danilo and
Magdalena Manalastas (spouses Manalastas)
executed a Real Estate Mortgage (REM)4 in favor
of respondent China Banking Corporation
(Chinabank) over two real estate properties
covered by Transfer Certificate of Title Nos.
173532-R and 173533-R, Registry of Deeds of
Pampanga, to secure a loan from Chinabank of
P700,000.00 intended as working capital in their All of the three promissory notes carried an

141
rice milling business. During the next few years, acceleration clause stating that if the borrowers
they executed several amendments to the failed to pay any stipulated interest, installment
mortgage contract progressively increasing their or loan amortization as they accrued, the notes

Page
credit line secured by the aforesaid mortgage. shall, at the option of Chinabank and without
Thus, from P700,000.00 in 1990, their loan limit need of notice, immediately become due and
was increased to P1,140,000.00 on October 31, demandable. A penalty clause also provides that
1990, then to P1,300,000.00 on March 4, 1991, an additional amount shall be paid equivalent to
and then to P2,450,000.00 on March 23, 1/10 of 1% per day of the total amount due from
1994.5 The spouses Manalastas executed several date of default until fully paid, and the further
promissory notes (PNs) in favor of Chinabank. In sum of 10% of the total amount due, inclusive of
two of the PNs, petitioners Estanislao and Africa interests, charges and penalties, as and for
Sinamban (spouses Sinamban) signed as co- attorney's fees and costs.10
makers.
In Chinabank's Statement of Account11 dated May
On November 18, 1998, Chinabank filed a 18, 1998, reproduced below, the outstanding
Complaint6 for sum of money, docketed as Civil balances of the three loans are broken down, as
Case No. 11708, against the spouses Manalastas follows:chanroblesvirtuallawlibrary
and the spouses Sinamban (collectively called the (a) PN No. OACL 636-95 has an outstanding
defendants) before the RTC. The complaint principal of P325,000.00, cumulative interest of
alleged that they reneged on their loan P184,679.00, and cumulative penalties of
obligations under the PNs which the spouses P258,050.00, or a total amount due
Manalastas executed in favor of Chinabank on of P767,729.00;
different dates,
namely:chanroblesvirtuallawlibrary (b) PN No. OACL 634-95 has an outstanding
principal of P1,800,000.00, cumulative interest of
1. PN No. OACL 634-95, dated April 24, 1995, P1,035,787.50, and cumulative penalties of
for a loan principal of P1,800,000.00, with P1,429,200.00, or a total amount due
interest at 23% per annum; the spouses of P4,264,987.50; and
Manalastas signed alone as makers.7
(c) PN No. CLF 5-93 has an outstanding principal
2. PN No. OACL 636-95, dated May 23, 1995, of P148,255.08, cumulative interest of
for a loan principal of P325,000.00, with P64,461.84, and cumulative penalties of
interest at 21% per annum; the spouses P156,541.58, or a total amount due
Sinamban signed as solidary co-makers;8 ofP369,258.50. Note that from the original
amount of P1,300,000.00, the loan principal had
been reduced to only P148,255.08 as of May 18,
3. PN No. CLF 5-93, dated February 26, 1991, 1998.12cralawlawlibrary
for a loan principal of P1,300,000.00, with CHINA BANKING CORPORATION
interest at 22.5% per annum; only San Fernando, Pampanga
Estanislao Sinamban signed as solidary SPS. DANILO & MAGDALENA MANALASTAS
co-maker.9 STATEMENT OF ACCOUNT
As of May 18, 1998
36%
PN PRINCIPA PENALTY
NUMBER L INTEREST FEE TOTAL

OACL 325,000. 184,679. 258,050. 767,729.

636-95 00 00 00 00
OACL 1,800,00 1,035,78 1,429,20 4,264,98
634-95 0.00 7.50 0.00 7.50
CLF 005-148,255. 64,461.8 156,541. 369,258.
93 08 4 58 50
------------- ------------- ------------- ---------------
---- ---- ---- --
P
1.284.92 1.843.79 5,401,97
TOTAL 2.273.25
8.34 1.58 5.00
5.08
---------------
--
TOTAL AMOUNT5,401,975. deficiency, plus 12% interest per annum after

142
DUE----------------------------------------- 00 May 18, 1998,15 the date of the auction sale.16

PLUS 10% ATTORNEY'S540,197.5 The spouses Sinamban, in their Answer 17 dated

Page
FEE-------------------------------- 0 February 26, 1999, averred that they do not recall
--------------- having executed PN No. OACL 636-95 for
-- P325,000.00 on May 23, 1995, or PN No. CLF 5-93
5,942,172. for P1,300,000.00 on February 26, 1991, and had
50 no participation in the execution of PN No. OACL
634-95 for P1,800,000.00 on April 24, 1995. They
ADD: OTHER EXPENSES however admitted that they signed some PN
INSURANCE PREMIUM 22,618.37 forms as co-makers upon the request of the
POSTING OF NOTICE OF SALE 700.00 spouses Manalastas who are their relatives;
PUBLICATION FEE 17,500.00 although they insisted that they derived no
REGISTRATION OF CERTIFICATE OF money or other benefits from the loans. They
1,000.00
SALE (MISC.) denied knowing about the mortgage security
REGISTRATION OF CERTIFICATE OF provided by the spouses Manalastas, or that the
SALE (REGISTER OF DEEDS) latter defaulted on their loans. They also refused
to acknowledge the loan deficiency of
Registrat 10,923.0 P1,758,427.87 on the PNs, insisting that the
ion fee 0 mortgage collateral was worth more than
Entry P10,000,000.00, enough to answer for all the
30.00
fee loans, interests and penalties. They also claimed
Legal that they were not notified of the auction sale,
20.00
fund and denied that they knew about the Certificate
BIR of Sale18 and the Statement of Account dated May
certificat 60.00 18, 1998, and insisted that Chinabank
ion manipulated the foreclosure sale to exclude them
Doc. therefrom. By way of counterclaim, the Spouses
69,000.0
stamps Sinamban prayed for damages and attorney's
0
tax fees of 25%, plus litigation expenses and costs of
Capital suit.
276,000. 356,033.0
Gains
00 0
tax The spouses Manalastas were declared in default
------------- in the RTC Order19 dated April 6, 1999, and
EXPENSES INCURRED ON OCULAR Chinabank was allowed to present evidence ex
404.00
INSPECTION MADE ON parte as against them, but at the pre-trial
TCT#173532-R & TCT#173533-R conference held on July 5, 1999, the spouses
ATTORNEY'S FEE 18,000.00 Sinamban and their counsel also did not
416,255. appear;20 hence, in the Order21 dated July 5, 1999,
37 the RTC allowed Chinabank to present
4,600,00 evidence ex parte against the defendants before
LESS: BID PRICE
0.00 the Branch Clerk of Court. During the testimony
--------------- of Rosario D. Yabut, Branch Manager of
---- Chinabank-San Fernando Branch, all the
GRAND TOTAL1,758,42 foregoing facts were adduced and confirmed,
------------------------------------------------ 7.8713 particularly the identity of the pertinent loan
On the basis of the above statement of account, documents and the signatures of the defendants.
and pursuant to the promissory notes, Chinabank On July 21, 1999, the court admitted the exhibits
instituted extrajudicial foreclosure proceedings of Chinabank and declared the case submitted for
against the mortgage security. The foreclosure decision.22
sale was held on May 18, 1998, with Chinabank
offering the highest bid of P4,600,000.00, but by Ruling of the RTC
then the defendants' total obligations on the
three promissory notes had risen to On July 30, 1999, the RTC rendered its
P5,401,975.00, before attorney's fees of 10% and Decision23 with the following dispositive
auction expenses, leaving a loan deficiency of portion:chanroblesvirtuallawlibrary
P1,758,427.87.14 Thus, in the complaint before WHEREFORE, premises considered, judgment is
the RTC, Chinabank prayed to direct the hereby rendered in favor of plaintiff China
defendants to jointly and severally settle the said Banking Corporation and against defendant Sps.
Danilo and Magdalena Manalastas and defendant
143
Sps. Estanislao and Africa Sinamban to jointly and
severally pay [Chinabank] the amount of
P1,758,427.87, representing the deficiency
Page
between the acquisition cost of the foreclosed
real estate properties and the outstanding
obligation of defendants at the time of the
foreclosure sale; interest at the legal rate of 12%
per annum from and after May 18, 1998;
attorney's fees equivalent to 10% of the aforesaid
deficiency amount and the litigation and costs of
suit.
SO ORDERED.24cralawlawlibrary
On Motion for Reconsideration25 of the spouses
Sinamban dated August 27, 1999, to which
Chinabank filed an Opposition26 dated September
14, 1999, the RTC in its Order 27 dated October 22,
1999 set aside the Decision dated July 30, 1999
with respect to the spouses Sinamban, in this
wise:chanroblesvirtuallawlibrary
As it is undisputed that Exhibit "B" (Promissory
Note dated April 24, 1995 in the amount of
P1,800,000.00), was not signed by the Spouses
Sinamban it would not be equitable that the said
defendants be made solidarity liable for the
payment of the said note as co-makers of their
co-defendants Spouses Manalastas who are the
one[s] principally liable thereto. Prescinding from
this premise, the movant spouses could only be
held liable for the two (2) promissory notes they
have signed, Promissory Notes dated May 23,
1995 in the amount of P325,000.00 and February
26, 1991 in the amount of P1,300,000.00,
Exhibits "A" and "C", respectively. As the total
amount of the said notes is only
P1,625,000.00, so even if we would add the
interests due thereon, there is no way that
the said outstanding loan exceed[s] the
acquisition cost of the foreclosed real
estate properties subject hereof in the
amount of P4,600,000.00. It would appear
then that the Spouses Sinamban could not be
held liable for the deficiency in the amount of
P1,758,427.87 which should justly be borne alone
by the defendant Spouses Manalastas. Guided by
law and equity on the matter, the court will not
hesitate to amend a portion of its assailed
decision to serve the interest of justice.cralawred
WHEREFORE, premises considered, the
decision dated July 30, 1999 is hereby
Reconsidered and Set Aside with respect to
the Spouses Estanislao and Africa Sinamban
hereby Relieving them from any liability
arising from the said Decision which is
affirmed in toto with respect to Spouses
Manalastas.
SO ORDERED.28 (Emphases ours)
The RTC ruled that the proceeds of the auction
were sufficient to answer for the two PNs co-
signed by the spouses Sinamban, including
interest and penalties thereon, and therefore the
spouses Manalastas should solely assume the
deficiency of P1,758,427.87. Chinabank moved
for reconsideration on November 11, 1999, 29 to
which the spouses Sinamban filed their
comment/opposition on November 23, 1999.30
On December 8, 1999, the RTC set aside its Order
dated October 22, 1999 and reinstated its
Decision dated July 30, 1999, with modification,
as follows:31ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the instant
Motion for Reconsideration of plaintiff is Granted.
Order dated October 22, 1999 is hereby Set
Aside.
Accordingly, the dispositive portion of the
Decision dated July 30, 1999 is hereby Modified to
read as follows:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, judgment [is]
hereby rendered in favor of plaintiff China
Banking Corporation and against the defendant
Sps. Danilo and Magdalena Manalastas and
defendant Sps. Estanislao and Africa Sinamban,
ordering them to pay as follows:
1. For defendant Sps. Danilo and Magdalena
Manalastas, the amount of P1,758,427.87, the
deficiency between the acquisition cost of the
foreclosed real properties and their outstanding
obligation;
2. For defendant Sps. Sinamban a percentage of
P1,758,427.87, jointly and severally with the
defendant Sps. [Manalastas] only on two (2)
promissory notes;
3. The corresponding interests thereon at legal
rate:
4. Attorney's fees; and
5. Costs of suit.
SO ORDERED.
This time the RTC held that the spouses
Sinamban must, solidarity with the spouses
Manalastas, proportionately answer for the loan
deficiency pertaining to the two PNs they co-
signed, since the mortgage security provided by
the spouses Manalastas secured all three PNs and
thus also benefited them as co-makers. But since
they did not co-sign PN No. OACL 634-95, the
deficiency judgment pertaining thereto will be the
sole liability of the spouses
Manalastas.chanRoblesvirtualLawlibrary
Ruling of the CA
144
From the Order dated December 8, 1999 of the
RTC, the spouses Sinamban appealed to the CA
Page
on January 4, 2000, docketed as CA-G.R. CV. No.
66274, interposing the following errors of the
RTC,viz:chanroblesvirtuallawlibrary
I In this petition for review, the spouses Sinamban
THE LOWER COURT ERRED WHEN IT HELD
DEFENDANTS-APPELLANTS SPS. SINAMBAN
LIABLE TO PAY A PERCENTAGE OF P1,758,427.87,
JOINTLY AND SEVERALLY WITH THE DEFENDANTS
SPS. MANALASTAS ON THE TWO PROMISSORY
NOTES (EXHIBITS 'C' AND 'A').
II
THE LOWER COURT ERRED WHEN IT
RECONSIDERED AND SET ASIDE ITS PREVIOUS
ORDER DATED 22 OCTOBER 1999 RELIEVING
DEFENDANTS-APPELLANTS SPS. SINAMBAN FROM
ANY LIABILITY ARISING FROM THE DECISION
DATED 30 JULY 1999.
III
THE LOWER COURT ERRED WHEN IT RENDERED
THE VAGUE ORDER OF 8 DECEMBER 1999
(ANNEX 'B' HEREOF).33cralawlawlibrary
On May 19, 2010, the CA rendered judgment
denying the appeal, the fallo of which
reads:chanroblesvirtuallawlibrary
WHEREFORE, considering the foregoing
disquisition, the appeal is DENIED. The Decision
dated 30 July 1999 and the Order dated 08
December 1999 of the Regional Trial Court of San
Fernando, Pampanga, Branch 45 in Civil Case No.
11708 are
herebyAFFIRMED with MODIFICATION in that:
1. Sps. Danilo and Magdalena Manalastas are
solidarily liable for the deficiency amount
of Php507,741.62 (inclusive of 10%
attorney's fees) on Promissory Note No.
OACL 634-95 dated 24 April 1995;
2. Sps. Estanislao and Africa Sinamban are
solidarily liable with Sps. Danilo and
Magdalena Manalastas for the amount
of Php844,501.90 (inclusive of 10%
attorney's fees) on Promissory Note No.
OACL00636-95 dated 23 May 1995;
3. Estanislao Sinamban and Sps. Danilo and
Magdalena Manalastas are solidarity
liable for the amount
of Php406,184.35 (inclusive of 10%
attorney's fees) on Promissory Note No.
CLF 5-93 dated 26 February 1991; and
4. The foregoing amounts shall bear interest
at the rate of 12% per annum from 18
November 1998 until fully paid.
SO ORDERED.34 (Some emphasis ours)
Petition for Review to the Supreme Court
seek to be completely relieved of any liability on
the PNs, solidary or otherwise, by interposing the
following issues:chanroblesvirtuallawlibrary
5.1 Whether or not the Honorable Court of
Appeals erred in not considering that the Sps.
Sinamban's obligations under PN# OACL 636-95
dated May 23, 1995 in the principal sum of
Php325,000.00 and PN# CLF 5-93 dated February
26, 1991 in the principal sum of Php
1,300,000.00 are more onerous and burdensome
on their part as mere sureties (co-makers) of their
co-defendants-spouses Danilo and Magdalena
Manalastas' (hereinafter referred to as the "Sps.
Manalastas") obligations over the same,
compared to the Sps. Manalastas' sole obligation
under PN# OACL 634-95 dated 24 April 1995 in
the principal amount of Php1,800,000.00, such
that the proceeds of the auction sale of the
properties securing all the three (3) promissory
notes should first be applied to satisfy the
promissory notes signed by the Sps. Sinamban;
and
5.2 Whether or not the Honorable Court of
Appeals erred in not considering the facts
indubitably showing that it is the Sps. Sinamban,
as the debtors, and not the respondent bank, who
are given the choice under Article 1252 of the
Civil Code to have the proceeds of the auction
sale applied as payments to their obligations
under PN# OACL 636-95 dated 23 May 1995 and
PN# CLF 5-93 dated 26 February
1991.35cralawlawlibrary
Ruling of the Court
The Court modifies the CA decision.
A co-maker of a PN who binds himself with
the maker "jointly and severally" renders
himself directly and primarily liable with the
maker on the debt, without reference to his
solvency.
"A promissory note is a solemn acknowledgment
of a debt and a formal commitment to repay it on
the date and under the conditions agreed upon
by the borrower and the lender. A person who
signs such an instrument is bound to honor it as a
legitimate obligation duly assumed by him
through the signature he affixes thereto as a
token of his good faith. If he reneges on his
promise without cause, he forfeits the sympathy
and assistance of this Court and deserves instead
145
its sharp repudiation."36
Employing words of common commercial usage
Page
and well-accepted legal significance, the three
subject PNs uniformly describe the solidary
nature and extent of the obligation assumed by
each of the defendants in Civil Case No. 11708, to
wit:
"FOR VALUE RECEIVED, I/We jointly and
severally promise to pay to the CHINA BANKING
CORPORATION or its order the sum of PESOS x x
x[.]"37 (Emphasis ours)
According to Article 2047 of the Civil Code,38 if a
person binds himself solidarily with the principal
debtor, the provisions of Articles 1207 to 1222 of
the Civil Code (Section 4, Chapter 3, Title I, Book
IV) on joint and solidary obligations shall be
observed. Thus, where there is a concurrence of
two or more creditors or of two or more debtors in
one and the same obligation, Article 1207
provides that among them, "[t]here is a solidary
liability only when the obligation expressly so
states, or when the law or the nature of the
obligation requires solidarity." It is settled that
when the obligor or obligors undertake to be
"jointly and severally" liable, it means that the
obligation is solidary.39 In this case, the spouses
Sinamban expressly bound themselves to be
jointly and severally, or solidarily, liable with the
principal makers of the PNs, the spouses
Manalastas.
Moreover, as the CA pointed out, in Paragraph 5
of the PNs, the borrowers and their co-makers
expressly authorized Chinabank, as
follows:chanroblesvirtuallawlibrary
[T]o apply to the payment of this note and/or any
other particular obligation or obligations of all or
any one of us to the CHINA BANKING
CORPORATION as the said Corporation may
select, irrespective of the dates of maturity,
whether or not said obligations are then due, any
or all moneys, securities and things of value
which are now or which may hereafter be in its
hands on deposit or otherwise to the credit of, or
belonging to, all or any one of us, and the CHINA
BANKING CORPORATION is hereby authorized to
sell at public or private sale such securities or
things of value for the purpose of applying their
proceeds to such payments.40cralawlawlibrary
Pursuant to Article 1216 of the Civil Code,
as well as Paragraph 5 of the PNs,
Chinabank opted to proceed against the co-
debtors simultaneously, as implied in its
May 18, 1998 statement of account when it
applied the entire amount of its auction bid
to the aggregate amount of the loan
obligations.
The PNs were executed to acknowledge each loan
obtained from the credit line extended by
Chinabank, which the principal makers and true
beneficiaries, the spouses Manalastas, secured
with a REM they executed over their properties.
As the RTC noted in its Order dated December 8,
1999, "the real estate mortgage was constituted
to secure all the three (3) promissory notes,"
concluding that "[j]ust as the liability of the
[spouses] Sinamban was lessened by the
foreclosure proceedings, so must they also share
in the deficiency judgment, in proportion to the
PNs they co-signed with the [spouses]
Manalastas, but not the entire deficiency
judgment of P1,758,427.87."41
Significantly, in modifying the RTC's second
amended decision, which provides for the pro
ratadistribution of the loan deficiency of
P1,758,427.87, the C A first applied the entire net
proceeds of the auction sale of P4,183,744.63
(after auction expenses of P416,255.37), to PN
No. OACL 634-95, which on May 18, 1998 had an
outstanding balance of P4,264,987.50, inclusive
of interest and penalties, plus 10% attorney's
fees, or a total of P4,691,486.25. Thus,
P4,691,486.25 less P4,183,744.63 leaves a
deficiency on PN No. OACL 634-95
of P507/741.62, which is due solely from the
spouses Manalastas.
As for PN No. OACL 636-95, the CA ordered the
spouses Sinamban to pay, solidarity with the
spouses Manalastas, the entire amount due
thereon, P844,501.90, consisting of the loan
principal of P767,729.00 plus accrued interest,
penalties and 10% attorney's fees; concerning PN
No. CLF 5-93, the CA ordered the spouses
Sinamban to pay, solidarity with the spouses
Manalastas, the amount ofP406,184.35,
consisting of the balance of the loan principal of
P369,258.50 plus accrued interest, penalties and
10% attorney's fees. The CA further ordered the
payment of 12% interest per annumfrom
November 18, 1998, the date of judicial demand,
until fully paid, on the above deficiencies.
Article 1216 of the Civil Code provides that "[t]he
creditor may proceed against any one of the
solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so
long as the debt has not been fully collected."
Article 125242 of the Civil Code does not apply, as
urged by the petitioners, because in the said
article the situation contemplated is that of a
debtor with several debts due, whereas the
reverse is true, with each solidary debt imputable
to several debtors.
146
While the CA correctly noted that the choice is
given to the solidary creditor to determine
Page
against whom he wishes to enforce payment, the
CA stated that Chinabank, in the exercise of the
aforesaid option, chose to apply the net proceeds
of the extrajudicial foreclosure sale first to the PN
solely signed by spouses Manalastas.43 Thus, the
net proceeds were applied first to PN No. OACL
634-95 in the principal amount of P1,800,000.00,
instead of pro rata to all three PNs due.
The Court finds this factual conclusion of the CA
not supported by any evidence or any previous
arrangement. To the contrary, as clearly shown in
its Statement of Account dated May 18, 1998,
Chinabank opted to apply the entire auction
proceeds to the aggregate amount of the three
PNs due, P5,401,975.00 (before attorney's fees
and auction expenses). Had it chosen to enforce
the debts as ruled by the CA, the Statement of
Account would have shown that the loan due on
PN No. OACL 634-95 which is P4,691,486.25,
should have been deducted first from the net
auction proceeds of P4,183,744.63, arriving at a
deficiency of P507,741.62 on PN No. OACL 634-
95 alone; thereby, leaving no remainder of the
proceeds available to partially settle the other
two PNs. As it appears, the auction proceeds are
not even sufficient to cover just PN No. OACL 634-
95 alone.
But as the Court has noted, by deducting the
auction proceeds from the aggregate amount of
the three loans due, Chinabank in effect opted to
apply the entire proceeds of the auction
simultaneously to all the three loans. This implies
that each PN will assume a pro rata portion of the
resulting deficiency on the total indebtedness as
bears upon each PN's outstanding balance.
Contrary to the spouses Sinamban's insistence,
none of the three PNs is more onerous than the
others to justify applying the proceeds according
to Article 1254 of the Civil Code, in relation to
Articles 1252 and 1253.44 Since each loan,
represented by each PN, was obtained under a
single credit line extended by Chinabank for the
working capital requirements of the spouses
Manalastas' rice milling business, which credit
line was secured also by a single REM over their
properties, then each PN is simultaneously
covered by the same mortgage security, the
foreclosure of which will also benefit them
proportionately. No PN enjoys any priority or
preference in payment over the others, with the
only difference being that the spouses Sinamban
are solidarity liable for the deficiency on two of
them.
Pursuant, then, to the order or manner of
application of the auction proceeds chosen by
Chinabank, the solidary liability of the defendants
pertaining to each PN shall be as
follows:chanroblesvirtuallawlibrary
a) PN No. OACL 634-95, with a balance as of May
18, 1998 of P4,264,987.50: its share in the total
deficiency is computed as the ratio of
P4,264,987.50 to P5,401,975.00, multiplied by
P1,758,427.87, or P1,388,320.55, (not
P507,741.62 as found by the CA);
b) PN No. OACL 636-95, with a balance of
P767.729.00 as of May 18, 1998: its share in the
deficiency is computed as the ratio of
P767,729.00 to P5,401,975.00, multiplied by
P1,758,427.87, or P249,907.87, (not
P844,501.90 as computed by the CA);
c) PN No. CLF 5-93, with an outstanding balance
of P369,258.50 as of May 18, 1998: its share in
the deficiency is computed as the ratio of
P369,258.50 to P5,401,975.00, multiplied by
P1,758,427.87, or P120,199.45, (not
P406,184.35 as found by the CA).
In short, in the CA decision, the spouses
Manalastas would be solely liable on PN No. OACL
634-95 for only P507,741.62 (instead of the
much bigger amount of P1,388,320.55 which
this Court found), whereas the spouses Sinamban
would be solidarily liable with the spouses
Manalastas for a total deficiency
of P1,250,686.25 on PN No. OACL 636-95 and
PN No. CLF 5-93. But under the Court's
interpretation, the spouses Sinamban are
solidarily liable with the spouses Manalastas for
onlyP370,107.32 on the said two PNs, for a
significant difference of P880,578.93.
Pursuant to Monetary Board Circular No.
799, effective July 1, 2013, the rate of
interest for the loan or forbearance of any
money, goods or credits and the rate
allowed in judgments, in the absence of an
express contract as to such rate of interest,
has been reduced to six percent (6%) per
annum.
The subject three PNs bear interests ranging from
21% to 23% per annum, exclusive of penalty of
1% on the overdue amount per month of delay,
whereas in its complaint, Chinabank prayed to
recover only the legal rate of 12% on whatever
judgment it could obtain. Meanwhile, the
Monetary Board of the Bangko Sentral ng Pilipinas
in its Resolution No. 796 dated May 16, 2013, and
now embodied in Monetary Board Circular No.
799, has effective July 1, 2013 reduced to 6%,
from 12%, the legal rate of interest for the loan or
forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of
147
stipulation.45 Since Chinabank demanded only the
legal, not the stipulated, interest rate on the
deficiency and attorney's fees due, the
Page
defendants will solidarily pay interest on their
shares in the deficiency at the rate of 12% from
November 18, 1998 to June 30, 2013, and 6%
from July 1, 2013 until fully paid.cralawred
WHEREFORE, the Decision of the Court of
Appeals dated May 19, 2010 in CA-G.R. CV No.
66274 isMODIFIED. The Decision dated July 30,
1999 and the Order dated December 8, 1999 of
the Regional Trial Court of San Fernando City,
Pampanga, Branch 45 in Civil Case No. 11708 are
herebyAFFIRMED with MODIFICATIONS as
follows:
1. Spouses Danilo and Magdalena Manalastas are
solidarily liable for the deficiency amount
ofP1,388,320.55 (inclusive of 10% attorney's
fees) on Promissory Note No. OACL 634-95 dated
April 24, 1995;
2. Spouses Estanislao and Africa Sinamban are
solidarily liable with spouses Danilo and
Magdalena Manalastas for the deficiency amount
of P249,907.87 (inclusive of 10% attorney's
fees) on Promissory Note No. OACL 636-95 dated
May 23, 1995;
3. Estanislao Sinamban and spouses Danilo and
Magdalena Manalastas are solidarily liable for the
deficiency amount of P120,199.45 (inclusive of
10% attorney's fees) on Promissory Note No. CLF
5-93 dated February 26, 1991; and
4. The foregoing amounts shall bear interest at
the rate of twelve percent (12%) per annum from
November 18, 1998 to June 30, 2013, and six
percent (6%) per annum from July 1, 2013 until
fully paid.
SO ORDERED.
J PLUS ASIA DEVELOPMENT CORPORATION
vs. UTILITY ASSURANCE CORPORATIO.
Before the Court is a petition for review on
certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the
Decision1 dated January 27,2011 and
Resolution2 dated December 8, 2011 of the Court
of Appeals (CA) in CA-G.R. SP No. 112808.
The Facts
On December 24, 2007, petitioner J Plus Asia
Development Corporation represented by its
Chairman, Joo Han Lee, and Martin E. Mabunay,
doing business under the name and style of
Seven Shades of Blue Trading and Services,
entered into a Construction Agreement3 whereby
the latter undertook to build the former's 72-room
condominium/hotel (Condotel Building 25)
located at the Fairways & Bluewaters Golf &
Resort in Boracay Island, Malay, Aklan. The
project, costing P42,000,000.00, was to be
completed within one year or 365 days reckoned
from the first calendar day after signing of the
Notice of Award and Notice to Proceed and
receipt of down payment (20% of contract price).
The P8,400,000.00 down payment was fully paid
on January 14, 2008.4 Payment of the balance of
the contract price will be based on actual work
finished within 15 days from receipt of the
monthly progress billings. Per the agreed work
schedule, the completion date of the project was
December 2008.5Mabuhay also submitted the
required Performance Bond6 issued by respondent
Utility Assurance Corporation (UTASSCO) in the
amount equivalent to 20% down payment or P8.4
million.
Mabunay commenced work at the project site on
January 7, 2008. Petitioner paid up to the 7th
monthly progress billing sent by Mabunay. As of
September 16, 2008, petitioner had paid the total
amount of P15,979,472.03 inclusive of the 20%
down payment. However, as of said date,
Mabunay had accomplished only 27.5% of the
project.7
In the Joint Construction Evaluation Result and
Status Report8 signed by Mabunay assisted by
Arch. Elwin Olavario, and Joo Han Lee assisted by
Roy V. Movido, the following findings were
accepted as true, accurate and correct:
III STATUS OF PROJECT AS OF 14 NOVEMBER 2008
1) After conducting a joint inspection and
evaluation of the project to determine the
actual percentage of accomplishment, the
contracting parties, assisted by their
respective technical groups, SSB assisted
by Arch. Elwin Olavario and JPLUS assisted
by Engrs. Joey Rojas and Shiela Botardo,
concluded and agreed that as of 14
November 2008, the project is only Thirty
One point Thirty Nine Percent (31.39%)
complete.
2) Furthermore, the value of construction
materials allocated for the completion of
the project and currently on site has been
 determined and agreed to be ONE MILLION
148
FORTY NINE THOUSAND THREE HUNDRED
SIXTY FOUR PESOS AND FORTY FIVE
CENTAVOS (P1,049,364.45)
Page
3) The additional accomplishment of SSB,
reflected in its reconciled and consolidated
8th and 9th billings, is Three point Eighty
Five Percent (3.85%) with a gross value
of P1,563,553.34 amount creditable to
SSB after deducting the withholding tax
is P1,538,424.84
4) The unrecouped amount of the down
payment is P2,379,441.53 after deducting
the cost of materials on site and the net
billable amount reflected in the reconciled
and consolidated 8th and 9th billings. The
uncompleted portion of the project is
68.61% with an estimated value per
construction agreement signed
isP27,880,419.52.9 (Emphasis supplied.)
On November 19, 2008, petitioner terminated the
contract and sent demand letters to Mabunay
and respondent surety. As its demands went
unheeded, petitioner filed a Request for
Arbitration10 before the Construction Industry
Arbitration Commission (CIAC). Petitioner prayed
that Mabunay and respondent be ordered to pay
the sums of P8,980,575.89 as liquidated damages
and P2,379,441.53 corresponding to the
unrecouped down payment or overpayment
petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay
was caused by retrofitting and other revision
works ordered by Joo Han Lee. He asserted that
he actually had until April 30, 2009 to finish the
project since the 365 days period of completion
started only on May 2, 2008 after clearing the
retrofitted old structure. Hence, the termination
of the contract by petitioner was premature and
the filing of the complaint against him was
baseless, malicious and in bad faith.
Respondent, on the other hand, filed a motion to
dismiss on the ground that petitioner has no
cause of action and the complaint states no
cause of action against it. The CIAC denied the
motion to dismiss. Respondents motion for
reconsideration was likewise denied.13
In its Answer Ex Abundante Ad Cautelam With
Compulsory Counterclaims and Cross-
claims,14 respondent argued that the performance
bond merely guaranteed the 20% down payment
and not the entire obligation of Mabunay under
the Construction Agreement. Since the value of
the projects accomplishment already exceeded
the said amount, respondents obligation under
the performance bond had been fully
extinguished. As to the claim for alleged
overpayment to Mabunay, respondent contended
that it should not be credited against the 20%
down payment which was already exhausted and
such application by petitioner is tantamount to
reviving an obligation that had been legally
extinguished by payment. Respondent also set up
a cross-claim against Mabunay who executed in
its favor an Indemnity Agreement whereby
Mabunay undertook to indemnify respondent for
whatever amounts it may be adjudged liable to
pay petitioner under the surety bond.
Both petitioner and respondent submitted their
respective documentary and testimonial
evidence. Mabunay failed to appear in the
scheduled hearings and to present his evidence
despite due notice to his counsel of record. The
CIAC thus declared that Mabunay is deemed to
have waived his right to present evidence.15
On February 2, 2010, the CIAC rendered its
Decision16 and made the following award:
Accordingly, in view of our foregoing discussions
and dispositions, the Tribunal hereby adjudges,
orders and directs:
1. Respondents Mabunay and Utassco to
jointly and severally pay claimant the
following:
a) P4,469,969.90, as liquidated
damages, plus legal interest
thereon at the rate of 6% per
annum computed from the date of
this decision up to the time this
decision becomes final, and 12%
per annum computed from the
date this decision becomes final
until fully paid, and
b) P2,379,441.53 as unrecouped
down payment plus interest
thereon at the rate of 6% per
annum computed from the date of
this decision up to the time this
decision becomes final, and 12%
per annum computed from the
date this decision becomes final
until fully paid.
It being understood that respondent
Utasscos liability shall in no case
exceed P8.4 million.
 2. Respondent Mabunay to pay to claimant
149
the amount of P98,435.89, which is
respondent Mabunays share in the
arbitration cost claimant had advanced,
Page
with legal interest thereon from January 8,
2010 until fully paid.
3. Respondent Mabunay to indemnify
respondent Utassco of the amounts
respondent Utassco will have paid to
claimant under this decision, plus interest
thereon at the rate of 12% per annum
computed from the date he is notified of
such payment made by respondent
Utassco to claimant until fully paid, and to
pay Utassco P100,000.00 as attorneys
fees.
SO ORDERED.17
Dissatisfied, respondent filed in the CA a petition
for review under Rule 43 of the 1997 Rules of Civil
Procedure, as amended.
In the assailed decision, the CA agreed with the
CIAC that the specific condition in the
Performance Bond did not clearly state the
limitation of the suretys liability. Pursuant to
Article 137718 of the Civil Code, the CA said that
the provision should be construed in favor of
petitioner considering that the obscurely phrased
provision was drawn up by respondent and
Mabunay. Further, the appellate court stated that
respondent could not possibly guarantee the
down payment because it is not Mabunay who
owed the down payment to petitioner but the
other way around. Consequently, the completion
by Mabunay of 31.39% of the construction would
not lead to the extinguishment of respondents
liability. The P8.4 million was a limit on the
amount of respondents liability and not a
limitation as to the obligation or undertaking it
guaranteed.
However, the CA reversed the CIACs ruling that
Mabunay had incurred delay which entitled
petitioner to the stipulated liquidated damages
and unrecouped down payment. Citing Aerospace
Chemical Industries, Inc. v. Court of Appeals,19 the
appellate court said that not all requisites in order
to consider the obligor or debtor in default were
present in this case. It held that it is only from
December 24, 2008 (completion date) that we
should reckon default because the Construction
Agreement provided only for delay in the
completion of the project and not delay on a
monthly basis using the work schedule approved
by petitioner as the reference point. Hence,
petitioners termination of the contract was
premature since the delay in this case was
merely speculative; the obligation was not yet
demandable.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the instant
petition for review is GRANTED. The assailed
Decision dated 13 January 2010 rendered by the
CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is
hereby REVERSED and SET ASIDE. Accordingly,
the Writ of Execution dated 24 November 2010
issued by the same tribunal is hereby ANNULLED
and SET ASIDE.
SO ORDERED.20
Petitioner moved for reconsideration of the CA
decision while respondent filed a motion for
partial reconsideration. Both motions were
denied.
The Issues
Before this Court petitioner seeks to reverse the
CA insofar as it denied petitioners claims under
the Performance Bond and to reinstate in its
entirety the February 2, 2010 CIAC Decision.
Specifically, petitioner alleged that
A. THE COURT OF APPEALS SERIOUSLY
ERRED IN NOT HOLDING THAT THE
ALTERNATIVE DISPUTE RESOLUTION ACT
AND THE SPECIAL RULES ON ALTERNATIVE
DISPUTE RESOLUTION HAVE STRIPPED THE
COURT OF APPEALS OF JURISDICTION TO
REVIEW ARBITRAL AWARDS.
B. THE COURT OF APPEALS SERIOUSLY
ERRED IN REVERSING THE ARBITRAL
AWARD ON AN ISSUE THAT WAS NOT
RAISED IN THE ANSWER. NOT IDENTIFIED
IN THE TERMS OF REFERENCE, NOT
ASSIGNED AS ANERROR, AND NOT
ARGUED IN ANY OF THE PLEADINGS FILED
BEFORE THE COURT.
C. THE COURT OF APPEALS SERIOUSLY
ERRED IN RELYING ON THE CASE OF
AEROSPACE CHEMICAL INDUSTRIES, INC.
v. COURT OF APPEALS, 315 SCRA 94,
WHICH HAS NOTHING TO DO WITH
CONSTRUCTION AGREEMENTS.21
Our Ruling
On the procedural issues raised, we find no merit
in petitioners contention that with the
institutionalization of alternative dispute
150
resolution under Republic Act (R.A.) No.
9285,22 otherwise known as the Alternative
Dispute Resolution Act of 2004, the CA was
Page
divested of jurisdiction to review the decisions or
awards of the CIAC. Petitioner erroneously relied
on the provision in said law allowing any party to
a domestic arbitration to file in the Regional Trial
Court (RTC) a petition either to confirm, correct or
vacate a domestic arbitral award.
We hold that R.A. No. 9285 did not confer on
regional trial courts jurisdiction to review awards
or decisions of the CIAC in construction disputes.
On the contrary, Section 40 thereof expressly
declares that confirmation by the RTC is not
required, thus:
SEC. 40. Confirmation of Award. The
confirmation of a domestic arbitral award shall be
governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall
be enforced in the same manner as final and
executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be
made by the regional trial court in accordance
with the Rules of Procedure to be promulgated by
the Supreme Court.
A CIAC arbitral award need not be confirmed by
the regional trial court to be executory as
provided under E.O. No. 1008. (Emphasis
supplied.)
Executive Order (EO) No. 1008 vests upon the
CIAC original and exclusive jurisdiction over
disputes arising from, or connected with,
contracts entered into by parties involved in
construction in the Philippines, whether the
dispute arises before or after the completion of
the contract, or after the abandonment or breach
thereof. By express provision of Section 19
thereof, the arbitral award of the CIAC is final and
unappealable, except on questions of law, which
are appealable to the Supreme Court. With the
amendments introduced by R.A. No. 7902 and
promulgation of the 1997 Rules of Civil Procedure,
as amended, the CIAC was included in the
enumeration of quasijudicial agencies whose
decisions or awards may be appealed to the CA in
a petition for review under Rule 43. Such review
of the CIAC award may involve either questions of
fact, of law, or of fact and law.23
Petitioner misread the provisions of A.M. No. 07-
11-08-SC (Special ADR Rules) promulgated by this
Court and which took effect on October 30, 2009.
Since R.A. No. 9285 explicitly excluded CIAC
awards from domestic arbitration awards that
need to be confirmed to be executory, said
awards are therefore not covered by Rule 11 of
the Special ADR Rules,24 as they continue to be
governed by EO No. 1008, as amended and the
rules of procedure of the CIAC. The CIAC Revised
Rules of Procedure Governing Construction
Arbitration25 provide for the manner and mode of
appeal from CIAC decisions or awards in Section
18 thereof, which reads:
SECTION 18.2 Petition for review. A petition for
review from a final award may be taken by any of
the parties within fifteen (15) days from receipt
thereof in accordance with the provisions of Rule
43 of the Rules of Court.
As to the alleged error committed by the CA in
deciding the case upon an issue not raised or
litigated before the CIAC, this assertion has no
basis. Whether or not Mabunay had incurred
delay in the performance of his obligations under
the Construction Agreement was the very first
issue stipulated in the Terms of Reference 26(TOR),
which is distinct from the issue of the extent of
respondents liability under the Performance
Bond.
Indeed, resolution of the issue of delay was
crucial upon which depends petitioners right to
the liquidated damages pursuant to the
Construction Agreement. Contrary to the CIACs
findings, the CA opined that delay should be
reckoned only after the lapse of the one-year
contract period, and consequently Mabunays
liability for liquidated damages arises only upon
the happening of such condition.
We reverse the CA.
Default or mora on the part of the debtor is the
delay in the fulfillment of the prestation by reason
of a cause imputable to the former. It is the non-
fulfillment of an obligation with respect to time.27
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do
something incur in delay from the time the
obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to
complete certain work within a certain time is
liable for the damage for not completing it within
such time, unless the delay is excused or
151
waived.28
The Construction Agreement provides in Article
Page
10 thereof the following conditions as to
completion time for the project
1. The CONTRACTOR shall complete the
works called for under this Agreement
within ONE (1) YEAR or 365 Days reckoned
from the 1st calendar day after signing of
the Notice of Award and Notice to Proceed
and receipt of down payment.
2. In this regard the CONTRACTOR shall
submit a detailed work schedule for
approval by OWNER within Seven (7) days
after signing of this Agreement and full
payment of 20% of the agreed contract
price. Said detailed work schedule shall
follow the general schedule of activities
and shall serve as basis for the evaluation
of the progress of work by CONTRACTOR. 29
In this jurisdiction, the following requisites must
be present in order that the debtor may be in
default: (1) that the obligation be demandable
and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires
the performance judicially or extrajudicially.30
In holding that Mabunay has not at all incurred
delay, the CA pointed out that the obligation to
perform or complete the project was not yet
demandable as of November 19, 2008 when
petitioner terminated the contract, because the
agreed completion date was still more than one
month away (December 24, 2008). Since the
parties contemplated delay in the completion of
the entire project, the CA concluded that the
failure of the contractor to catch up with schedule
of work activities did not constitute delay giving
rise to the contractors liability for damages.
We cannot sustain the appellate courts
interpretation as it is inconsistent with the terms
of the Construction Agreement. Article 1374 of
the Civil Code requires that the various
stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that
sense which may result from all of them taken
jointly. Here, the work schedule approved by
petitioner was intended, not only to serve as its
basis for the payment of monthly progress
billings, but also for evaluation of the progress of
work by the contractor. Article 13.01 (g) (iii) of
the Construction Agreement provides that the
contractor shall be deemed in default if, among
others, it had delayed without justifiable cause
the completion of the project "by more than thirty
(30) calendar days based on official work
schedule duly approved by the OWNER."31
Records showed that as early as April 2008, or
within four months after Mabunay commenced
work activities, the project was already behind
schedule for reasons not attributable to
petitioner. In the succeeding months, Mabunay
was still unable to catch up with his
accomplishment even as petitioner constantly
advised him of the delays, as can be gleaned
from the following notices of delay sent by
petitioners engineer and construction manager,
Engr. Sheila N. Botardo:
April 30, 2008
Seven Shades of Blue
Boracay Island
Malay, Aklan
Attention : Mr. Martin Mabunay
General Manager
Thru : Engr. Reynaldo Gapasin
Project : Villa Beatriz
Subject : Notice of Delay
Dear Mr. Mabunay:
This is to formalize our discussion with your
Engineers during our meeting last April 23, 2008
regarding the delay in the implementation of
major activities based on your submitted
construction schedule. Substantial delay was
noted in concreting works that affects your roof
framing that should have been 40% completed as
of this date. This delay will create major impact
on your over-all schedule as the finishing works
will all be dependent on the enclosure of the
building.
In this regard, we recommend that you prepare a
catch-up schedule and expedite the delivery of
critical materials on site. We would highly
appreciate if you could attend our next regular
meeting so we could immediately address this
matter. Thank you.
Very truly yours,
Engr. Sheila N. Botardo
Construction Manager LMI/FEPI32
October 15, 2008
152
xxxx
Page
Dear Mr. Mabunay,
We have noticed continuous absence of all the
Engineers that you have assigned on-site to
administer and supervise your contracted work.
For the past two (2) weeks, your company does
not have a Technical Representative manning the
jobsite considering the critical activities that are
in progress and the delays in schedule that you
have already incurred. In this regard, we would
highly recommend the immediate replacement of
your Project Engineer within the week.
We would highly appreciate your usual attention
on this matter.
x x x x33
November 5, 2008
xxxx
Dear Mr. Mabunay,
This is in reference to your discussion during the
meeting with Mr. Joohan Lee last October 30,
2008 regarding the construction of the Field
Office and Stock Room for Materials intended for
Villa Beatriz use only. We understand that you
have committed to complete it November 5, 2008
but as of this date there is no improvement or
any ongoing construction activity on the said field
office and stockroom.
We are expecting deliveries of Owner Supplied
Materials very soon, therefore, this stockroom is
badly needed. We will highly appreciate if this
matter will be given your immediate attention.
Thank you.
x x x x34
November 6, 2008
xxxx
Dear Mr. Mabunay,
We would like to call your attention regarding the
decrease in your manpower assigned on site. We
have observed that for the past three (3) weeks
instead of increasing your manpower to catch up
with the delay it was reduced to only 8 workers
today from an average of 35 workers in the
previous months.
Please note that based on your submitted revised
schedule you are already delayed by
approximately 57% and this will worsen should
you not address this matter properly.
We are looking forward for [sic] your cooperation
and continuous commitment in delivering this
project as per contract agreement.
x x x x35
Subsequently, a joint inspection and evaluation
was conducted with the assistance of the
architects and engineers of petitioner and
Mabunay and it was found that as of November
14, 2008, the project was only 31.39% complete
and that the uncompleted portion was 68.61%
with an estimated value per Construction
Agreement asP27,880,419.52. Instead of doubling
his efforts as the scheduled completion date
approached, Mabunay did nothing to remedy the
delays and even reduced the deployment of
workers at the project site. Neither did Mabunay,
at anytime, ask for an extension to complete the
project. Thus, on November 19, 2008, petitioner
advised Mabunay of its decision to terminate the
contract on account of the tremendous delay the
latter incurred. This was followed by the claim
against the Performance Bond upon the
respondent on December 18, 2008.
Petitioners claim against the Performance Bond
included the liquidated damages provided in the
Construction Agreement, as follows:
ARTICLE 12 LIQUIDATED DAMAGES:
12.01 Time is of the essence in this Agreement.
Should the CONTRACTOR fail to complete the
PROJECT within the period stipulated herein or
within the period of extension granted by the
OWNER, plus One (1) Week grace period, without
any justifiable reason, the CONTRACTOR hereby
agrees
a. The CONTRACTOR shall pay the OWNER
liquidated damages equivalent to One
Tenth of One Percent (1/10 of 1%) of the
Contract Amount for each day of delay
after any and all extensions and the One
(1) week Grace Period until completed by
the CONTRACTOR.
 b. The CONTRACTOR, even after paying for
153
the liquidated damages due to unexecuted
works and/or delays shall not relieve it of
the obligation to complete and finish the
Page
construction.
Any sum which maybe payable to the OWNER for
such loss may be deducted from the amounts
retained under Article 9 or retained by the
OWNER when the works called for under this
Agreement have been finished and completed.
Liquidated Damage[s] payable to the OWNER
shall be automatically deducted from the
contractors collectibles without prior consent and
concurrence by the CONTRACTOR.
12.02 To give full force and effect to the
foregoing, the CONTRACTOR hereby, without
necessity of any further act and deed, authorizes
the OWNER to deduct any amount that may be
due under Item (a) above, from any and all
money or amounts due or which will become due
to the CONTRACTOR by virtue of this Agreement
and/or to collect such amounts from the
Performance Bond filed by the CONTRACTOR in
this Agreement.36 (Emphasis supplied.)
Liability for liquidated damages is governed by
Articles 2226 to 2228 of the Civil Code, which
provide:
ART. 2226. Liquidated damages are those agreed
upon by the parties to a contract, to be paid in
case of breach thereof.
ART. 2227. Liquidated damages, whether
intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or
unconscionable.
ART. 2228. When the breach of the contract
committed by the defendant is not the one
contemplated by the parties in agreeing upon the
liquidated damages, the law shall determine the
measure of damages, and not the stipulation.
A stipulation for liquidated damages is attached
to an obligation in order to ensure performance
and has a double function: (1) to provide for
liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of
greater responsibility in the event of
breach.37 The amount agreed upon answers for
damages suffered by the owner due to delays in
the completion of the project.38 As a precondition
to such award, however, there must be proof of
the fact of delay in the performance of the
obligation.39
Concededly, Article 12.01 of the Construction
Agreement mentioned only the failure of the
contractor to complete the project within the
stipulated period or the extension granted by the
owner. However, this will not defeat petitioners
claim for damages nor respondents liability
under the Performance Bond. Mabunay was
clearly in default considering the dismal
percentage of his accomplishment (32.38%) of
the work he contracted on account of delays in
executing the scheduled work activities and
repeated failure to provide sufficient manpower
to expedite construction works. The events of
default and remedies of the Owner are set forth
in Article 13, which reads:
ARTICLE 13 DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an
Event of Default on the part of the CONTRACTOR.
xxxx
g. In case the CONTRACTOR has done any of the
following:
(i.) has abandoned the Project
(ii.) without reasonable cause, has failed
to commence the construction or has
suspended the progress of the Project for
twenty-eight days
(iii.) without justifiable cause, has delayed
the completion of the Project by more than
thirty (30) calendar days based on official
work schedule duly approved by the
OWNER
(iv.) despite previous written warning by
the OWNER, is not executing the
construction works in accordance with the
Agreement or is persistently or flagrantly
neglecting to carry out its obligations
under the Agreement.
(v.) has, to the detriment of good
workmanship or in defiance of the Owners
instructions to the contrary, sublet any
part of the Agreement.
13.02 If the CONTRACTOR has committed any of
the above reasons cited in Item 13.01, the
OWNER may after giving fourteen (14) calendar
days notice in writing to the CONTRACTOR, enter
upon the site and expel the CONTRACTOR
therefrom without voiding this Agreement, or
releasing the CONTRACTOR from any of its
obligations, and liabilities under this Agreement.
154
Also without diminishing or affecting the rights
and powers conferred on the OWNER by this
Agreement and the OWNER may himself
Page
complete the work or may employ any other
contractor to complete the work. If the OWNER
shall enter and expel the CONTRACTOR under this
clause, the OWNER shall be entitled to confiscate
the performance bond of the CONTRACTOR to
compensate for all kinds of damages the OWNER
may suffer. All expenses incurred to finish the
Project shall be charged to the CONTRACTOR
and/or his bond. Further, the OWNER shall not be
liable to pay the CONTRACTOR until the cost of
execution, damages for the delay in the
completion, if any, and all; other expenses
incurred by the OWNER have been ascertained
which amount shall be deducted from any money
due to the CONTRACTOR on account of this
Agreement. The CONTRACTOR will not be
compensated for any loss of profit, loss of
goodwill, loss of use of any equipment or
property, loss of business opportunity, additional
financing cost or overhead or opportunity losses
related to the unaccomplished portions of the
work.40 (Emphasis supplied.)
As already demonstrated, the contractors default
in this case pertains to his failure to substantially
perform the work on account of tremendous
delays in executing the scheduled work activities.
Where a party to a building construction contract
fails to comply with the duty imposed by the
terms of the contract, a breach results for which
an action may be maintained to recover the
damages sustained thereby, and of course, a
breach occurs where the contractor inexcusably
fails to perform substantially in accordance with
the terms of the contract.41
The plain and unambiguous terms of the
Construction Agreement authorize petitioner to
confiscate the Performance Bond to answer for all
kinds of damages it may suffer as a result of the
contractors failure to complete the building.
Having elected to terminate the contract and
expel the contractor from the project site under
Article 13 of the said Agreement, petitioner is
clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to
the breach committed by Mabunay. Such
stipulation allowing the confiscation of the
contractors performance bond partakes of the
nature of a penalty clause. A penalty clause,
expressly recognized by law, is an accessory
undertaking to assume greater liability on the
part of the obligor in case of breach of an
obligation. It functions to strengthen the coercive
force of obligation and to provide, in effect, for
what could be the liquidated damages resulting
from such a breach. The obligor would then be
bound to pay the stipulated indemnity without
the necessity of proof on the existence and on
the measure of damages caused by the breach. It
is well-settled that so long as such stipulation
does not contravene law, morals, or public order,
it is strictly binding upon the obligor. 42
Respondent, however, insists that it is not liable
for the breach committed by Mabunay because
by the terms of the surety bond it issued, its
liability is limited to the performance by said
contractor to the extent equivalent to 20% of the
down payment. It stresses that with the 32.38%
completion of the project by Mabunay, its liability
was extinguished because the value of such
accomplishment already exceeded the sum
equivalent to 20% down payment (P8.4 million).
The appellate court correctly rejected this theory
of respondent when it ruled that the Performance
Bond guaranteed the full and faithful compliance
of Mabunays obligations under the Construction
Agreement, and that nowhere in law or
jurisprudence does it state that the obligation or
undertaking by a surety may be apportioned.
The pertinent portions of the Performance Bond
provide:
The conditions of this obligation are as follows:
Whereas the JPLUS ASIA, requires the principal
SEVEN SHADES OF BLUE CONSTRUCTION AND
DEVELOPMENT, INC. to post a bond of the
abovestated sum to guarantee 20% down
payment for the construction of Building 25 (Villa
Beatriz) 72-Room Condotel, The Lodgings inside
Fairways and Bluewater, Boracay Island, Malay,
Aklan.
Whereas, said contract required said Principal to
give a good and sufficient bond in the above-
stated sum to secure the full and faithful
performance on his part of said contract.
It is a special provision of this undertaking that
the liability of the surety under this bond shall in
no case exceed the sum of P8,400,000.00
Philippine Currency.
Now, Therefore, if the Principal shall well and
truly perform and fulfill all the undertakings,
covenants, terms, conditions and agreements
stipulated in said contract, then this obligation
shall be null and void; otherwise to remain in full
force and effect.43 (Emphasis supplied.)
While the above condition or specific guarantee is
155
unclear, the rest of the recitals in the bond
unequivocally declare that it secures the full and
faithful performance of Mabunays obligations
Page
under the Construction Agreement with
petitioner. By its nature, a performance bond
guarantees that the contractor will perform the
contract, and usually provides that if the
contractor defaults and fails to complete the
contract, the surety can itself complete the
contract or pay damages up to the limit of the
bond.44 Moreover, the rule is that if the language
of the bond is ambiguous or uncertain, it will be
construed most strongly against a compensated
surety and in favor of the obligees or
beneficiaries under the bond, in this case
petitioner as the Project Owner, for whose benefit
it was ostensibly executed.45
The imposition of interest on the claims of
petitioner is likewise in order. As we held in
Commonwealth Insurance Corporation v. Court of
Appeals46
Petitioner argues that it should not be made to
pay interest because its issuance of the surety
bonds was made on the condition that its liability
shall in no case exceed the amount of the said
bonds.
We are not persuaded. Petitioners argument is
misplaced.
Jurisprudence is clear on this matter. As early as
Tagawa vs. Aldanese and Union Gurantee Co. and
reiterated in Plaridel Surety & Insurance Co., Inc.
vs. P.L. Galang Machinery Co., Inc., and more
recently, in Republic vs. Court of Appeals and R &
B Surety and Insurance Company, Inc., we have
sustained the principle that if a surety upon
demand fails to pay, he can be held liable for
interest, even if in thus paying, its liability
becomes more than the principal obligation. The
increased liability is not because of the contract
but because of the default and the necessity of
judicial collection.
Petitioners liability under the suretyship contract
is different from its liability under the
law.1wphi1 There is no question that as a surety,
petitioner should not be made to pay more than
its assumed obligation under the surety bonds.
However, it is clear from the above-cited
jurisprudence that petitioners liability for the
payment of interest is not by reason of the
suretyship agreement itself but because of the
delay in the payment of its obligation under the
said agreement.47 (Emphasis supplied; citations
omitted.)
WHEREFORE, the petition for review on certiorari
is GRANTED. The Decision dated January 27, 2011
and Resolution dated December 8, 2011 of the
Court of Appeals in CA-G.R. SP No. 112808 are
hereby REVERSED and SET ASIDE.
The Award made in the Decision dated February
2, 2010 of the Construction Industry Arbitration
Commission Is hereby REINSTATED with the
following MODIFICATIONS:
"Accordingly, in view of our foregoing discussions
and dispositions, the Tribunal hereby adjudges,
orders and directs:
1) Respondent Utassco to pay to petitioner
J Plus Asia Development Corporation the
full amount of the Performance
Bond, P8,400,000.00, pursuant to Art. 13
of the Construction Agreement dated
December 24, 2007, with interest at the
rate of 6% per annum computed from the
date of the filing of the complaint until the
finality of this decision, and 12% per
annum computed from the date this
decision becomes final until fully paid; and
2) Respondent Mabunay to indemnify
respondent Utassco of the amounts
respondent Utassco will have paid to
claimant under this decision, plus interest
thereon at the rate of 12% per annum
computed from the date he is notified of
such payment made by respondent
Utassco to claimant until fully paid, and to
pay Utassco P100,000.00 as attorney's
fees.
SO ORDERED.
With the above modifications, the Writ of
Execution dated November 24, 2010 issued by
the CIAC Arbitral Tribunal in CIAC Case No. 03-
2009 is hereby REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 175863, February 18, 2015
NATIONAL POWER
CORPORATION, Petitioner, v. LUCMAN M.
IBRAHIM, ATTY. OMAR G. MARUHOM, ELIAS
G. MARUHOM, BUCAY G. MARUHOM, MAMOD
G. MARUHOM, FAROUK G. MARUHOM,
HIDJARA G. MARUHOM, ROCANIA G.
MARUHOM, POTRISAM G. MARUHOM,
LUMBA G. MARUHOM, SINAB G. MARUHOM,
156
ACMAD G. MARUHOM, SOLAYMAN G.
MARUHOM, MOHAMAD M. IBRAHIM,
CAIRONESA M. IBRAHIM AND MACAPANTON
Page
K. MANGONDATO,Respondents.
DECISION
PEREZ, J.:
At bench is a petition for review
on certiorari1 assailing the Decision2 dated 24
June 2005 and Resolution3 dated 5 December
2006 of the Court of Appeals in CA-G.R. CV No.
68061.
The facts:
The Subject Land
In 1978, petitioner took possession of a 21,995
square meter parcel of land in Marawi City
(subject land) for the purpose of building thereon
a hydroelectric power plant pursuant to its Agus
1 project. The subject land, while in truth a
portion of a private estate registered under
Transfer Certificate of Title (TCT) No. 378-A 4 in the
name of herein respondent Macapanton K.
Mangondato (Mangondato),5was occupied by
petitioner under the mistaken belief that such
land is part of the vast tract of public land
reserved for its use by the government
under Proclamation No. 1354, s. 1974.6cralawred
Mangondato first discovered petitioners
occupation of the subject land in 1979the year
that petitioner started its construction of
the Agus 1 plant. Shortly after such discovery,
Mangondato began demanding compensation for
the subject land from petitioner.
In support of his demand for compensation,
Mangondato sent to petitioner a letter7 dated 28
September 1981 wherein the former detailed the
origins of his ownership over the lands covered
by TCT No. 378-A, including the subject land. The
relevant portions of the letter
read:chanRoblesvirtualLawlibrary
Now let me trace the basis of the title to the land
adverted to for particularity. The land titled in my
name was originally consisting of seven (7)
hectares. This piece of land was particularly set
aside by the Patriarch Maruhom, a fact
recognized by all royal datus of Guimba, to
belong to his eldest son, Datu Magayo-ong
Maruhom. This is the very foundation of the right
and ownership over the land in question which
was titled in my name because as the son-in-law
of Hadji Ali Maruhom the eldest son of, and only
lawyer among the descendants of Datu Magayo-
ong Maruhom, the authority and right to apply for
the title to the land was given to me by said heirs
after mutual agreement among themselves
besides the fact that I have already bought a
substantial portion of the original seven (7)
hectares.
The original title of this seven (7) hectares has
been subdivided into several TCTs for the other
children of Datu Magayo-ong Maruhom with
whom I have executed a quit claim. Presently,
only three (3) hectares is left to me out of the
original seven (7) hectares representing those
portion [sic] belonging to my wife and those I
have bought previously from other heirs. This is
now the subject of this case.8cralawlawlibrary
Petitioner, at first, rejected Mangondatos claim of
ownership over the subject land; the former then
adamant in its belief that the said land is public
land covered by Proclamation No. 1354, s. 1974.
But, after more than a decade, petitioner finally
acquiesced to the fact that the subject land is
private land covered by TCT No. 378-A and
consequently acknowledged Mangondatos right,
as registered owner, to receive compensation
therefor.
Thus, during the early 1990s, petitioner and
Mangondato partook in a series of
communications aimed at settling the amount of
compensation that the former ought to pay the
latter in exchange for the subject land.
Ultimately, however, the communications failed
to yield a genuine consensus between petitioner
and Mangondato as to the fair market value of
the subject land.chanroblesvirtuallawlibrary
Civil Case No. 605-92 and Civil Case No. 610-92
With an agreement basically out of reach,
Mangondato filed a complaint for reconveyance
against petitioner before the Regional Trial Court
(RTC) of Marawi City in July 1992. In his
complaint, Mangondato asked for, among others,
the recovery of the subject land and the payment
by petitioner of a monthly rental from 1978 until
the return of such land. Mangondatos complaint
was docketed asCivil Case No. 605-92.
For its part, petitioner filed an expropriation
complaint9 before the RTC on 27 July 1992.
Petitioners complaint was docketed as Civil
Case No. 610-92.
Later, Civil Case No. 605-92 and Civil Case No.
610-92 were consolidated before Branch 8 of the
Marawi City RTC.
On 21 August 1992, Branch 8 of the Marawi City
157
RTC rendered a Decision10 in Civil Case No. 605-
92 and Civil Case No. 610-92. The decision upheld
petitioners right to expropriate the subject land:
Page
it denied Mangondatos claim for reconveyance
and decreed the subject land condemned in favor
of the petitioner, effective July of 1992, subject to
payment by the latter of just compensation in the
amount of P21,995,000.00. Anent petitioners
occupation of the subject land from 1978 to July
of 1992, on the other hand, the decision required
the former to pay rentals therefor at the rate of
P15,000.00 per month with 12% interest per
annum. The
decisions fallo reads:chanRoblesvirtualLawlibrary
WHEREFORE, the prayer in the recovery case for
[petitioners] surrender of the property is denied
but [petitioner] is ordered to pay monthly rentals
in the amount of P15,000.00 from 1978 up to July
1992 with 12% interest per annum xxx and the
property is condemned in favor of [petitioner]
effective July 1992 upon payment of the fair
market value of the property at One Thousand
(P1,000.00) Pesos per square meter or a total of
Twenty-One Million Nine Hundred Ninety-Five
Thousand (P21,995,000.00) [P]esos.11cralawred
cralawlawlibrary
Disagreeing with the amount of just
compensation that it was adjudged to pay under
the said decision, petitioner filed an appeal with
the Court of Appeals. This appeal was docketed in
the Court of Appeals as CA-G.R. CV No. 39353.
Respondents Ibrahims and Maruhoms and Civil
Case No. 967-93
During the pendency of CA-G.R. CV No. 39353, or
on 29 March 1993, herein respondents the
Ibrahims and Maruhoms12 filed before the RTC of
Marawi City a complaint 13 against Mangondato
and petitioner. This complaint was docketed
as Civil Case No. 967-93 and was raffled to
Branch 10 of the Marawi City RTC.
In their complaint, the Ibrahims and Maruhoms
disputed Mangondatos ownership of the lands
covered by TCT No. 378-A, including the subject
land. The Ibrahims and Maruhoms asseverate
that they are the real owners of the lands covered
by TCT No. 378-A; they being the lawful heirs of
the late Datu Magayo-ong Maruhom, who was the
original proprietor of the said lands. 14 They also
claimed that Mangondato actually holds no claim
or right over the lands covered by TCT No. 378-A
except that of a trustee who merely holds the
said lands in trust for them.15cralawred
The Ibrahims and Maruhoms submit that since
they are the real owners of the lands covered by
TCT No. 378-A, they should be the ones entitled
to any rental fees or expropriation indemnity that
may be found due for the subject land.
Hence, the Ibrahims and Maruhoms prayed for
the following reliefs in their complaint: 16cralawred
1. That Mangondato be ordered to execute
a Deed of Conveyance transferring to
them the ownership of the lands covered
by TCT No. 378-
A;ChanRoblesVirtualawlibrary
2. That petitioner be ordered to pay to them
whatever indemnity for the subject land it
is later on adjudged to pay in Civil Case
No. 605-92 and Civil Case No. 610-
92;ChanRoblesVirtualawlibrary
3. That Mangondato be ordered to pay to
them any amount that the former may
have received from the petitioner by way
of indemnity for the subject
land;ChanRoblesVirtualawlibrary
4. That petitioner and Mangondato be
ordered jointly and severally liable to pay
attorneys fees in the sum of P200,000.00.
In the same complaint, the Ibrahims and
Maruhoms also prayed for the issuance of a
temporary restraining order (TRO) and a writ of
preliminary injunction to enjoin petitioner, during
the pendency of the suit, from making any
payments to Mangondato concerning
expropriation indemnity for the subject
land.17cralawred
On 30 March 1993, Branch 10 of the Marawi City
RTC granted the prayer of the Ibrahims and
Maruhoms for the issuance of a TRO. 18 On 29 May
1993, after conducting an appropriate hearing for
the purpose, the same court likewise granted the
prayer for the issuance of a writ of preliminary
injunction.19cralawred
In due course, trial then ensued in Civil Case No.
967-93.chanroblesvirtuallawlibrary
The Decision of the Court of Appeals in CA-G.R.
CV No. 39353
and the Decision of this Court in G.R. No. 113194
On 21 December 1993, the Court of Appeals
rendered a Decision in CA-G.R. CV No. 39353
denying the appeal of petitioner and affirming in
toto the 21 August 1992 Decision in Civil Case
No. 605-92 and Civil Case No. 610-92.
158
Undeterred, petitioner next filed a petition for
review on certiorari with this Court that was
docketed herein as G.R. No. 113194.20cralawred
Page
On 11 March 1996, we rendered our Decision in
G.R. No. 113194 wherein we upheld the Court of
Appeals denial of petitioners appeal.21 In the
same decision, we likewise sustained the
appellate courts affirmance of the decision in
Civil Case No. 605-92 and Civil Case No. 610-92
subject only to a reduction of the rate of interest
on the monthly rental fees from 12% to 6% per
annum.22cralawred
Our decision in G.R. No. 113194 eventually
became final and executory on 13 May
1996.23cralawred
Execution of the 21 August 1992 Decision in Civil
Case No. 605-92 and
Civil Case No. 610-92, as Modified
In view of the finality of this Courts decision in
G.R. No. 113194, Mangondato filed a motion for
execution of the decision in Civil Case No. 605-92
and Civil Case No. 610-92.24 Against this motion,
however, petitioner filed an
opposition.25cralawred
In its opposition, petitioner adverted to the
existence of the writ of preliminary injunction
earlier issued in Civil Case No. 967-93 that
enjoins it from making any payment of
expropriation indemnity over the subject land in
favor of Mangondato.26 Petitioner, in sum, posits
that such writ of preliminary injunction
constitutes a legal impediment that effectively
bars any meaningful execution of the decision in
Civil Case No. 605-92 and Civil Case No. 610-92.
Finding no merit in petitioners opposition,
however, Branch 8 of the Marawi City RTC
rendered a Resolution27 dated 4 June 1996
ordering the issuance of a writ of execution in
favor of Mangondato in Civil Case No. 605-92 and
Civil Case No. 610-92. Likewise, in the same
resolution, the trial court ordered the issuance of
a notice of garnishment against several of
petitioners bank accounts28 for the amount
of P21,801,951.00the figure representing the
total amount of judgment debt due from
petitioner in Civil Case No. 605-92 and Civil Case
No. 610-92 less the amount then already settled
by the latter. The dispositive portion of the
resolution reads:chanRoblesvirtualLawlibrary
WHEREFORE, let a Writ of Execution and the
corresponding order or notice of garnishment be
immediately issued against [petitioner] and in
favor of [Mangondato] for the amount of Twenty
One Million Eight Hundred One Thousand and
Nine Hundred Fifty One (P21,801,951.00)
Pesos.chanrobleslaw
x x x.29cralawlawlibrary
Pursuant to the above resolution, a notice of
garnishment30 dated 5 June 1996 for the amount
of P21,801,951.00 was promptly served upon the
Philippine National Bank (PNB)the authorized
depositary of petitioner. Consequently, the
amount thereby garnished was paid to
Mangondato in full satisfaction of petitioners
judgment debt in Civil Case No. 605-92 and Civil
Case No. 610-92.chanroblesvirtuallawlibrary
Decision in Civil Case No. 967-93
Upon the other hand, on 16 April 1998, Branch 10
of the Marawi City RTC decided Civil Case No.
967-93.31 In its decision, Branch 10 of the Marawi
City RTC made the following relevant
findings:32cralawred
1. The Ibrahims and Maruhomsnot
Mangondatoare the true owners of the
lands covered by TCT No. 378-A, which
includes the subject land.
2. The subject land, however, could no
longer be reconveyed to the Ibrahims and
Maruhoms since the same was already
expropriated and paid for by the petitioner
under Civil Case No. 605-92 and Civil Case
No. 610-92.
3. Be that as it may, the Ibrahims and
Maruhoms, as true owners of the subject
land, are the rightful recipients of
whatever rental fees and indemnity that
may be due for the subject land as a result
of its expropriation.
Consistent with the foregoing findings, Branch 10
of the Marawi City RTC thus required payment of
all the rental fees and expropriation indemnity
due for the subject land, as previously adjudged
in Civil Case No. 605-92 and Civil Case No. 610-
92, to the Ibrahims and Maruhoms.
Notable in the trial courts decision,
however, was that it held both Mangondato
and the petitioner solidarily liable to the
Ibrahims and Maruhoms for the rental fees
and expropriation indemnity adjudged in
Civil Case No. 605-92 and Civil Case No.
610-92.33cralawred

159
In addition, Mangondato and petitioner were also
decreed solidarily liable to the Ibrahims and
Maruhoms for attorneys fees in the amount of
Page
P200,000.00.34cralawred
The pertinent dispositions in the decision
read:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is
hereby rendered in favor of [the Ibrahims and
Maruhoms] and against [Mangondato and
petitioner] as follows:
1. x x x
2. Ordering [Mangondato and petitioner] to
pay jointly and severally [the Ibrahims and
Maruhoms] all forms of expropriation
indemnity as adjudged for [the subject
land] consisting of 21,995 square meters
in the amount of P21,801,051.00 plus
other forms of indemnity such as rentals
and interests;ChanRoblesVirtualawlibrary
3. Ordering [Mangondato and petitioner] to
pay [the Ibrahims and Maruhoms] jointly
and severally the sum of P200,000.00 as
attorneys
fees;ChanRoblesVirtualawlibrary
4. x x x
5. x x x
6. x x x
SO ORDERED.35cralawred
cralawlawlibrary
Petitioners Appeal to the Court of Appeals and
the Execution
Pending Appeal of the Decision in Civil Case No.
967-93
Petitioner appealed the decision in Civil Case No.
967-93 with the Court of Appeals: contesting
mainly the holding in the said decision that it
ought to be solidarily liable with Mangondato to
pay to the Ibrahims and Maruhoms the rental fees
and expropriation indemnity adjudged due for the
subject land. This appeal was docketed as CA-
G.R. CV No. 68061.
While the foregoing appeal was still pending
decision by the Court of Appeals, however, the
Ibrahims and Maruhoms were able to secure with
the court a quo a writ of execution pending
appeal36 of the decision in Civil Case No. 967-93.
The enforcement of such writ led to the
garnishment of Mangondatos moneys in the
possession of the Social Security System (SSS) in
the amount of P2,700,000.00 on 18 September
1998.37 Eventually, the amount thereby garnished
was paid to the Ibrahims and Mangondato in
partial satisfaction of the decision in Civil Case
No. 967-93.
On 24 June 2005, the Court of Appeals rendered
its Decision38 in CA-G.R. CV No. 68061 denying
petitioners appeal. The appellate court denied
petitioners appeal and affirmed the decision in
Civil Case No. 967-93, subject to the right of
petitioner to deduct the amount of P2,700,000.00
from its liability as a consequence of the partial
execution of the decision in Civil Case No. 967-
93.39cralawred
Hence, the present appeal by
petitioner.chanroblesvirtuallawlibrary
The Present Appeal
The present appeal poses the question of
whether it is correct, in view of the facts and
circumstances in this case, to hold petitioner
liable in favor of the Ibrahims and Maruhoms for
the rental fees and expropriation indemnity
adjudged due for the subject land.
In their respective decisions, both Branch 10 of
the Marawi City RTC and the Court of Appeals had
answered the foregoing question in the
affirmative. The two tribunals postulated that,
notwithstanding petitioners previous payment to
Mangondato of the rental fees and expropriation
indemnity as a consequence of the execution of
the decision in Civil Case No. 605-92 and 610-92,
petitioner may still be held liable to the Ibrahims
and Maruhoms for such fees and indemnity
because its previous payment to Mangondato
was tainted with bad faith.40 As proof of such
bad faith, both courts cite the following
considerations:41cralawred
1. Petitioner allowed payment to
Mangondato despite its prior knowledge,
which dates back as early as 28
September 1981, by virtue of
Mangondatos letter of even date, that the
subject land was owned by a certain Datu
Magayo-ong Maruhom and not by
Mangondato; and
2. Petitioner allowed such payment despite
the issuance of a TRO and a writ of
preliminary injunction in Civil Case No.
967-93 that precisely enjoins it from doing
so.

160
For the two tribunals, the bad faith on the part of
petitioner rendered its previous payment to
Mangondato invalid insofar as the Ibrahims and
Page
Maruhoms are concerned. Hence, both courts
concluded that petitioner may still be held liable
to the Ibrahims and Maruhoms for the rental fees
and expropriation indemnity previously paid to
Mangondato.42cralawred
Petitioner, however, argues otherwise. It submits
that a finding of bad faith against it would have
no basis in fact and law, given that it merely
complied with the final and executory decision in
Civil Case No. 605-92 and Civil Case No. 610-92
when it paid the rental fees and expropriation
indemnity due the subject to
Mangondato.43 Petitioner thus insists that it
should be absolved from any liability to pay the
rental fees and expropriation indemnity to the
Ibrahims and Maruhoms and prays for the
dismissal of Civil Case No. 967-93 against
it.chanroblesvirtuallawlibrary
OUR RULING
We grant the appeal.
No Bad Faith On The Part
of Petitioner
Petitioner is correct. No bad faith may be taken
against it in paying Mangondato the rental fees
and expropriation indemnity due the subject land.
Our case law is not new to the concept of bad
faith. Decisions of this Court, both old and new,
had been teeming with various pronouncements
that illuminate the concept amidst differing legal
contexts. In any attempt to understand the basics
of bad faith, it is mandatory to take a look at
some of these pronouncements:
In Lopez, et al. v. Pan American World
Airways,44 a 1966 landmark tort case, we defined
the concept of bad faith
as:chanRoblesvirtualLawlibrary
a breach of a known duty through some
motive of interest or ill will.45cralawlawlibrary
Just months after the promulgation of Lopez,
however, came the case of Air France v.
Carrascoso, et al.,46 In Air France, we expounded
on Lopezs definition by describing bad faith
as:chanRoblesvirtualLawlibrary
xxx a state of mind affirmatively operating with
furtive design or with some motive of self-interest
or will or for ulterior purpose.47cralawlawlibrary
Air Frances articulation of the meaning of bad
faith was, in turn, echoed in a number
subsequent cases,48 one of which, is the 2009
case of Balbuena, et al. v. Sabay, et al.49cralawred
In the 1967 case of Board of Liquidators v. Heirs
of M. Kalaw,50 on the other hand, we enunciated
one of the more oft-repeated formulations of bad
faith in our case law:chanRoblesvirtualLawlibrary
xxx bad faith does not simply connote bad
judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known duty
thru some motive or interest of ill will; it partakes
of the nature of fraud.51cralawlawlibrary
As a testament to its enduring quality, the
foregoing pronouncement in Board of
Liquidators had been reiterated in a slew of later
cases,52 more recently, in the 2009 case
of Nazareno, et al. v. City of Dumaguete53 and the
2012 case of Aliling v. Feliciano.54cralawred
Still, in 1995, the case of Far East Bank and Trust
Company v. Court of Appeals55 contributed the
following description of bad faith in our
jurisprudence:chanRoblesvirtualLawlibrary
Malice or bad faith implies a conscious and
intentional design to do a wrongful act for a
dishonest purpose or moral
obliquity;xxx.56cralawlawlibrary
The description of bad faith in Far East Bank and
Trust Company then went on to be repeated in
subsequent cases such as 1995s Ortega v. Court
of Appeals,57 1997s Laureano Investment and
Development Corporation v. Court of
Appeals,58 2010s Lambert Pawnbrokers v.
Binamira59 and 2013s California Clothing, Inc., v.
Quiones,60 to name a few.
Verily, the clear denominator in all of the
foregoing judicial pronouncements is that the
essence of bad faith consists in
the deliberate commission of a wrong. Indeed,
the concept has often been equated with
malicious or fraudulent motives, yet distinguished
from the mere unintentional wrongs resulting
from mere simple negligence or
oversight.61cralawred
A finding of bad faith, thus, usually assumes the
presence of two (2) elements: first, that the actor
knew or should have known that a particular
course of action is wrong or illegal,
161
and second, that despite such actual or
imputable knowledge, the actor, voluntarily,
consciously and out of his own free will, proceeds
Page
with such course of action. Only with the
concurrence of these two elements can we begin
to consider that the wrong committed had been
done deliberately and, thus, in bad faith.
In this case, both Branch 10 of the Marawi City
RTC and the Court of Appeals held that petitioner
was in bad faith when it paid to Mangondato the
rental fees and expropriation indemnity due the
subject land. The two tribunals, in substance,
fault petitioner when it allowed such payment
to take place despite the latters alleged
knowledge of the existing claim of the Ibrahims
and Maruhoms upon the subject land and the
issuance of a TRO in Civil Case No. 967-93.
Hence, the two tribunals claim that petitioners
payment to Mangondato is ineffective as to the
Ibrahims and Maruhoms, whom they found to be
the real owners of the subject land.
We do not agree.
Branch 10 of the Marawi City RTC and the Court
of Appeals erred in their finding of bad faith
because they have overlooked the utter
significance of one important fact: that
petitioners payment to Mangondato of the
rental fees and expropriation
indemnity adjudged due for the subject land in
Civil Case No. 605-92 and Civil Case No. 610-
92, was required by the final and executory
decision in the said two cases and was
compelled thru a writ of garnishment issued
by the court that rendered such decision. In
other words, the payment to Mangondato
was not a product of a deliberate choice on
the part of the petitioner but was made only in
compliance to the lawful orders of a court with
jurisdiction.
Contrary then to the view of Branch 10 of the
Marawi City RTC and of the Court of Appeals, it
was not the petitioner that allowed the
payment of the rental fees and expropriation
indemnity to Mangondato. Indeed, given the
circumstances, the more accurate rumination
would be that it was the trial court in Civil Case
No. 605-92 and Civil Case No. 610-92 that
ordered or allowed the payment to Mangondato
and that petitioner merely complied with the
order or allowance by the trial court. Since
petitioner was only acting under the lawful orders
of a court in paying Mangondato, we find that no
bad faith can be taken against it,
even assuming that petitioner may have had
prior knowledge about the claims of the Ibrahims
and Maruhoms upon the subject land and the
TRO issued in Civil Case No. 967-93.
Sans Bad Faith, Petitioner
Cannot Be Held Liable to the
Ibrahims and Maruhoms
Without the existence of bad faith, the ruling of
the RTC and of the Court of Appeals apropos
petitioners remaining liability to the Ibrahims and
Maruhoms becomes devoid of legal basis. In fact,
petitioners previous payment to Mangondato of
the rental fees and expropriation indemnity due
the subject land pursuant to the final judgment in
Civil Case No. 605-92 and Civil Case No. 610-92
may be considered to have extinguished the
formers obligation regardless of who between
Mangondato, on one hand, and the Ibrahims
and Maruhoms, on the other, turns out to be
the real owner of the subject land. 62 Either
way, petitioner cannot be made liable to the
Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the
subject land, then the obligation by petitioner to
pay for the rental fees and expropriation
indemnity due the subject land is already deemed
extinguished by the latters previous payment
under the final judgment in Civil Case No. 605-92
and Civil Case No. 610-92. This would be a simple
case of an obligation being extinguished through
payment by the debtor to its creditor.63 Under this
scenario, the Ibrahims and Maruhoms would not
even be entitled to receive anything from anyone
for the subject land. Hence, petitioner cannot be
held liable to the Ibrahims and Maruhoms.
Second. We, however, can reach the same
conclusion even if the Ibrahims and Maruhoms
turn out to be the real owners of the subject land.
Should the Ibrahims and Maruhoms turn out to be
the real owners of the subject land, petitioners
previous payment to Mangondato pursuant to
Civil Case No. 605-92 and Civil Case No. 610-92
given the absence of bad faith on petitioners
part as previously discussedmay nonetheless
be considered as akin to a payment made in
good faith to a person in possession of
credit per Article 1242 of the Civil
Code that, just the same, extinguishes its
obligation to pay for the rental fees and
expropriation indemnity due for the subject land.
Article 1242 of the Civil Code
reads:chanRoblesvirtualLawlibrary
Payment made in good faith to any person in
possession of the credit shall release the
debtor. cralawlawlibrary

162
Article 1242 of the Civil Code is an exception to
the rule that a valid payment of an obligation can
only be made to the person to whom such
Page
obligation is rightfully owed.64 It contemplates a
situation where a debtor pays a possessor of
credit i.e., someone who is not the real creditor
but appears, under the circumstances, to be the
real creditor.65 In such scenario, the law considers
the payment to the possessor of credit as valid
even as against the real creditor taking into
account the good faith of the debtor.
Borrowing the principles behind Article 1242 of
the Civil Code, we find that Mangondatobeing
the judgment creditor in Civil Case No. 605-92
and Civil Case No. 610-92 as well as the
registered owner of the subject land at the time66
may be considered as a possessor of credit
with respect to the rental fees and expropriation
indemnity adjudged due for the subject land in
the two cases, if the Ibrahims and Maruhoms turn
out to be the real owners of the subject land.
Hence, petitioners payment to Mangondato of
the fees and indemnity due for the subject land
as a consequence of the execution of Civil Case
No. 605-92 and Civil Case No. 610-92 could still
validly extinguish its obligation to pay for the
same even as against the Ibrahims and
Maruhoms.
Effect of Extinguishment of
Petitioners Obligation
The extinguishment of petitioners obligation to
pay for the rental fees and expropriation
indemnity due the subject land carries with it
certain legal effects:
First. If Mangondato turns out to be the real
owner of the subject land, the Ibrahims and
Maruhoms would not be entitled to recover
anything from anyone for the subject land.
Consequently, the partial execution of the
decision in Civil Case No. 967-93 that had led to
the garnishment of Mangondatos moneys in the
possession of the Social Security System (SSS) in
the amount of P2,700,000.00 in favor of the
Ibrahims and Maruhoms, becomes improper and
unjustified. In this event, therefore, the Ibrahims
and Maruhoms may be ordered to return the
amount so garnished to Mangondato.
Otherwise, i.e. if the Ibrahims and Maruhoms
really are the true owners of the subject land,
they may only recover the rental fees and
expropriation indemnity due the subject land
against Mangondato but only up to whatever
payments the latter had previously received from
petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-92.
Second. At any rate, the extinguishment of
petitioners obligation to pay for the rental fees
and expropriation indemnity due the subject land
negates whatever cause of action the Ibrahims
and Maruhoms might have had against the
former in Civil Case No. 967-93. Hence,
regardless of who between Mangondato, on
one hand, and the Ibrahims and Maruhoms,
on the other, turns out to be the real owner
of the subject land, the dismissal of Civil
Case No. 967-93 insofar as petitioner is
concerned is called for.
Re: Attorneys Fees
The dismissal of Civil Case No. 967-93 as against
petitioner necessarily absolves the latter from
paying attorneys fees to the Ibrahims and
Maruhoms arising from that case.
WHEREFORE, premises considered, the instant
petition is GRANTED. The Decision dated 24 June
2005 and Resolution dated 5 December 2006 of
the Court of Appeals in CA-G.R. CV No. 68061 is
hereby SET ASIDE. The Decision dated 16 April
1998 of the Regional Trial Court in Civil Case No.
967-93 is MODIFIED in that petitioner is
absolved from any liability in that case in favor of
the respondents Lucman M. Ibrahim, Atty. Omar
G. Maruhom, Elias G. Maruhom, Bucay G.
Maruhom, Mamod G. Maruhom, Farouk G.
Maruhom, Hidjara G. Maruhom, Rocania G.
Maruhom, Potrisam G. Maruhom, Lumba G.
Maruhom, Sinab G. Maruhom, Acmad G.
Maruhom, Solayman G. Maruhom, Mohamad M.
Ibrahim and Caironesa M. Ibrahim. Civil Case No.
967-93 is DISMISSED as against petitioner.
NETLINK COMPUTER INC. vs. ERIC DELMO.
In the absence of a written agreement between
the employer and the employee that sales
commissions shall be paid in a foreign currency,
the latter has the right to be paid in such foreign
currency once the same has become an
established practice of the former. The rate of
exchange at the time of payment, not the rate of
exchange at the time of the sales, controls.
Antecedents
On November 3, 1991, Netlink Computer, Inc.
Products and Services (Netlink) hired Eric S.
Delmo (Delmo) as account manager tasked to
canvass and source clients and convince them to
purchase the products and services of Netlink.
Delmo worked in the field most of the time. He backwages and other benefits and respondents

163
and his fellow account managers were not are hereby ordered to pay complainant as
required to accomplish time cards to record their follows:
personal presence in the office of Netlink.1 He

Page
was able to generate sales worth P35,000,000.00,
P161,000.00 - Backwages, basic pay and
more or less, from which he earned commissions
allowances from Nov. 1996 to
amounting to P993,558.89 and US$7,588.30. He
Sept. 1998
then requested payment of his commissions, but
Netlink refused and only gave him partial cash 15,000.00 - 13th month pay for 1996 to
advances chargeable to his commissions. Later 1998
on, Netlink began to nitpick and fault find, like
stressing his supposed absences and tardiness. In 993,558.89 - unpaid commissions
order to force him to resign, Netlink issued
P1,169,558. - Total
several memoranda detailing his supposed
89
infractions of the companys attendance policy.
Despite the memoranda, Delmo continued to
generate huge sales for Netlink.2 plus - unpaid commissions
US$7,588.3
On November 28, 1996, Delmo was shocked 0
when he was refused entry into the company
premises by the security guard pursuant to a plus 10% attorneys fees
memorandum to that effect. His personal
belongings were still inside the company The reinstatement aspect is immediately
premises and he sought their return to him. This executory even pending appeal. In case
incident prompted Delmo to file a complaint for reinstatement is no longer feasible, complainant
illegal dismissal.3 shall be paid separation pay of one-month pay for
every year of service. All other claims are hereby
In its answer to Delmos complaint,Netlink dismissed.
countered that there were guidelines regarding
company working time and its utilization and how SO ORDERED.5
the employees time would be recorded.
Allegedly, all personnel were required to use the Decision of the NLRC
bundy clock to punch in and out in the morning,
and in and out in the afternoon. Excepted from
On appeal, the National Labor Relations
the rules were the company officers, and the
Commission (NLRC) modified the decision of the
authorized personnel in the field project
Labor Arbiter by setting aside the backwages and
assignments. Netlink claimed that it would be
reinstatement decreed by the Labor Arbiter due
losing on the business transactions closed by
to the existence of valid and just causes for the
Delmo due to the high costs of equipment, and in
termination of Delmos employment, to wit:
fact his biggest client had not yet paid. Netlink
WHEREFORE, premises considered, the decision
pointed out that Delmo had becomevery lax in his
of the Labor Arbiter a quo is hereby SET
obligations, with the other account managers
ASIDEand a new one ENTERED, ordering the
eventually having outperformed him. Netlink
respondents-appellantsto pay the following:
asserted that warning, reprimand, and
suspension memoranda were given to employees
who violated company rules and regulations, but 1. TWO THOUSAND PESOS (P2,000.00) as
such actions were considered as a necessary indemnity for failure to observe procedural
management tool to instill discipline.4 due process;

Ruling of the Labor Arbiter 2. Unpaid commission in the amount

of P993,558.89;
On September 23, 1998, the Labor Arbiter ruled
against Netlink and in favor of Delmo, to wit: 3. US$7,588.30 as unpaid commission;

WHEREFORE, judgment is hereby rendered 4. P15,000.00 representing the 13th

declaring complainant as illegally and unjustly month pay for 1996, 1997, and 1998;
dismissed and respondents are ordered to
reinstate complainant to his former position 5. 10% attorneys fees of the total amount
without loss of seniority rights with full awarded.
SO ORDERED.6
164
The NLRC denied the motion for reconsideration,
after which Netlink filed a petition for certiorariin
Page
the CA.
Judgment of the CA
On May 9, 2003, the CA promulgated its assailed
decision upholding the NLRCs ruling subject to
modifications,7viz:
In the present case, since the payment of the
commission is made to depend on the future and
uncertain event which is the payment of the
accounts by the persons who have transacted
business with the petitioner, without payment by
the former to the latter, the obligation to pay the
commission has not yet arisen.
The evidence on record shows that the ALCATEL,
private respondents biggest client has not paid
fully the amount it owes to the petitioner as of
March 10, 1998. (Rollo, pp. 101, 397, 398) The
obligation therefore, on the part of the petitioner
to pay the private respondent for his commission
for the said unpaid account has not yet arisen.
Thus it is a grave abuse of discretion on the part
of the public respondent to make petitioner liable
to the private respondent for the payment of the
said commission, when it is clear on the record,
as We have discussed above, that the obligation
therefor has not yet arisen.
Perusal of the records, likewise, show that
petitioner failed to refute by evidence that the
private respondent is not entitled to the P993,
558.89 commission. Petitioner however claimed
that since the amounts out of which the
commission will be taken has not yet been paid
fully, petitioner must, likewise, not be made liable
for the said commission. However, public
respondent committed grave abuse of discretion
when it disregard the evidence on record which is
not disputed by the private respondent that out
of the total commissions of the private
respondent, petitioner has paid the petitioner in
the amount of P216,799.45 in the form of
advance payment. (Rollo, p. 12)
In view of the foregoing discussions, therefore,
the advance payment made by the petitioner in
favorof the private respondent in the amount
of P216, 799.45 must be deducted to the P993,
558.89 unpaid commission of the private
respondent. The difference amounting to P776,
779.44 must likewise be deducted to the amount
of P4, 066.19 which represents the amount which
the petitioner had admitted as the net
commission payable to private respondent. The
difference thereof amounting to P772, 713.25
shall represent the unpaid commission which
shall be payable to the private respondent by the
petitioner upon payment of the accounts out of
which such commission shall be taken.
We, likewise, agree with the petitioner that the
private respondent is not entitled to 13th month
pay in the years 1997 and 1998. The order of the
public respondent making the petitioner liable to
the private respondent for the 13th month pay of
the latter in the years 1997 and 1998 is contrary
to its findings that there are valid and just cause
for the termination of the private respondent from
employment, although private respondent was
not given his right to due process. (Rollo, pp. 32-
33) The rule applicable in the present case is the
decision of the Supreme Court in the case of
Sebuguero vs National Labor Relations
Commission [248 SCRA 532, 547 (1995)] where it
was ruled that "where the dismissal of an
employee is in fact for a just and valid cause and
is so proven to be but he is not accorded his right
to due process,i.e., he was not furnished the twin
requirements of notice and the opportunityto be
heard, the dismissal shall be upheld but the
employer must be sanctioned for non-compliance
with the requirements of or for failureto observe
due process." Hence, petitioner should not be
made to pay the 13th month pay to private
respondent whose employment was terminated
for cause but without due process in 1996.
xxxx
Thus, private respondent is entitled only to a 13th
month pay computed pro-rata from January 1996
to November 1996 which as properly computed
by the petitioner amounts to P4, 584.00. (Rollo, p.
11)
With respect to the other arguments of the
petitioner, this Court is not persuaded. Petitioner
failed to refute by evidence that private
respondent is not entitled to the commissions
payable in US dollars. Neither is there any reason
for us to agree with the petitioner that the
computation of these commissions must be
based on the value of [the] Peso in relation to a
Dollar at the time of sale. As properly observed
by the Labor Arbiter a quo, viz: "Likewise the
devaluation of the peso cannot be used as a
shield against the complainant because that
should have been the lookout of the respondent
company in providing for such a clause that in
case of devaluation, the price agreed upon should
be at the exchange rate when the contract of sale
had been consummated. For the lack of foresight
and inefficiency of the respondent company and
165
as regards its contracts or agreements with its
clientele, the complainant should not be made to
suffer." (Labor Arbiter Ricardo Olairez Decision,
Page
September 23, 1998, pp. 11-12, Rollo,pp. 328-
329) In this regardtherefore, We uphold the well
settled rule that "the findings of facts of the
NLRC, particularly where the NLRC and the Labor
Arbiter are in agreement, are deemed binding
and conclusive upon the Court." (Permex, Inc. vs
National Labor Relations Commission, 323 SCRA
121, 126).
xxxx
WHEREFORE, premises considered, the assailed
Resolutions are hereby AFFIRMED with
MODIFICATION, ordering the petitioner to pay the
private respondent the following:
1. TWO-THOUSAND PESOS (P2,000.00) as
indemnity for failure to observe procedural
due process;
2. P4,066.19 representing the unpaid
commissions that have accrued in favor of
the private respondent;
3. P776,779.44 payable to the private
respondent upon payment of the accounts
out of which the said amount will be
taken;
4. P4,584.00 representing the unpaid 13th
month pay of the private respondent;
5. US$7,588.30 as unpaid commission;
6. 10% attorneys fees of the total amount
awarded excluding the amount contained
in the No.3 of this Order.
SO ORDERED.
Issues
Hence, this appeal.
Netlink submits that the CA committed a palpable
and reversible error of law in not holding that the
applicable exchange rate for computing the US
dollar commissions of Delmo should be the rates
prevailing at the time when the sales were
actually generated, not the rates prevailing at the
time of the payment; and in awarding attorneys
fees.
In his comment,8 Delmo counters that because he
had earned in US dollars it was only fair that his
commissions be paid in US dollars; that Netlink
should not be allowed to flip-flop after it had paid
commissions in US dollar on the sales generated
by its sales agents on US-dollar denominated
transactions; and that attorneys fees were
warranted because of the unanimous finding that
there was violation of procedural due process.
In its reply,9 Netlink maintains that the
commissions of Delmo should be based on sales
generated, actually paid by and collected from
the customers; that commissions must be paid on
the basis of the conversion of the US dollar to the
Philippine peso at the time of sale; and that no
cogent and justifiable reason existed for the
award of attorneys fees.
To be considered for resolution are,therefore, the
following, namely: (1) whether or not the
payment of the commissions should be in US
dollars; and (2) whether or not the award
ofattorneys fees was warranted.
Ruling of the Court
The appeal lacks merit.
As a general rule, all obligations shall be paid in
Philippine currency. However, the contracting
parties may stipulate that foreign currencies may
be used for settling obligations. This is pursuant
to Republic Act No. 8183,10which provides as
follows:
Section 1. All monetary obligations shall be
settled in the Philippine currency which is legal
tender in the Philippines. However, the parties
may agree that the obligation ortransaction shall
be settled in any other currency at the time of
payment.
We remarked in C.F. Sharp & Co. v. Northwest
Airlines, Inc.11 that the repeal of Republic Act No.
529 had the effect of removing the prohibition on
the stipulation of currency other than Philippine
currency, such that obligations or transactions
could already be paid in the currency agreed
upon by the parties. However, both Republic Act
No. 529 and Republic Act No. 8183 did not
stipulate the applicable rate of exchange for the
conversion of foreign currency-incurred
obligations to their peso equivalent. It follows,
therefore, that the jurisprudence established
under Republic Act No. 529 with regard to the
rate of conversion remains applicable. In C.F.
Sharp, the Court cited Asia World
Recruitment,Inc. v. NLRC,12 to the effect that the
real value of the foreign exchange-incurred
166
obligation up to the date of itspayment should be
preserved.
Page
There was no written contract between Netlink
and Delmo stipulating that the latters
commissions would be paid in US
dollars.1wphi1 The absence of the contractual
stipulation notwithstanding, Netlink was still liable
to pay Delmo in US dollars because the practice
of paying its sales agents in US dollars for their
US dollar-denominatedsales had become a
company policy. This was impliedly admitted by
Netlink when it did not refute the allegation that
the commissions earned by Delmo and its other
sales agents had been paid in US dollars. Instead
of denying the allegation, Netlink only sought a
declaration that the US dollar commissions be
paid using the exchange rate at the time of sale.
The principle of non-diminution of benefits, which
has been incorporated in Article 10013 of the
Labor Code, forbade Netlink from unilaterally
reducing, diminishing, discontinuing or
eliminating the practice. Verily, the phrase
"supplements, or other employee benefits" in
Article 100 is construed to mean the
compensation and privileges received by an
employee aside from regular salaries or wages.
With regard to the length of timethe company
practice should have been observed to constitute
a voluntary employer practice that cannot be
unilaterally reduced, diminished, discontinued or
eliminated by the employer, we find that
jurisprudence has not laid down any rule
requiring a specific mmimum number of years. In
Davao Fruits Corporation v. Associated Labor
Unions,14 the company practice lasted for six
years. In Davao Integrated Port Stevedoring
Services v. Abarquez,15 the employer, for three
years and nine months, approved the
commutation to cash of the unenjoyed portion of
the sick leave with pay benefits of its intermittent
workers. In Tiangco v. Leogardo, Jr., 16 the
employer carried on the practice of giving a fixed
monthly emergency allowance from November
1976 to February 1980, or three years and four
months. In Sevilla Trading Company v.
Semana, 17 the employer kept the practice of
including non-basic benefits such as paid leaves
for unused sick leave and vacation in the
computation of their 13th-month pay for at least
two years.
With the payment of US dollar commissions
having ripened into a company practice, there is
no way that the commissions due to Delmo were
to be paid in US dollars or their equivalent in
Philippine currency determined at the time of the
sales. To rule otherwise would be to cause an
unjust diminution of the commissions due and
owing to Delmo.
Finally, we affirm the following justification of the
CA in granting attorney's fees to Delmo, viz: The
award of attorney's fees must, likewise, be upheld
in line of (sic) the decision of the Supreme Court
in the case of Consolidated Rural Bank (Cagayan
Valley), Inc. vs. National Labor Relations
Commission, 301 SCRA 223, 235, where it was
held that "in actions for recovery of wages or
where an employee was forced to litigate and
thus incur expenses to protect her rights and
interests, even if not so claimed, an award of
attorney's fees equivalent to ten percent (10%) of
the total award is legally and morally justifiable.
There is no doubt that in the present case, the
private respondent has incurred expenses for the
protection and enforcement of his right to his
commissions.18
WHEREFORE, the Court DENIES the petition for
review on certiorari; AFFIRMS the decision
promulgated on May 9, 2003; and ORDERS the
petitioner to pay the costs of suit.
SO ORDERED
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK (now BDO UNIBANK, INC.), vs.
ARTURO P. FRANCO
Assailed in this petition for review on certiorari
under Rule 45 of the Rules of Court are the July
31, 2007 Decision2and October 4, 2007
Resolution3 of the Court of Appeals (CA) in CA-
G.R. CV No. 82340, which affirmed the October
21, 2003 Decision4 of the Makati City Regional
Trial Court (RTC), Branch 61.
The pertinent facts, as narrated by the trial court
and as adopted both by the CA, as well as
petitioner Philippine Commercial International
Bank (Bank),5 are as follows:
This is an action for damages filed [on September
5, 2000] by plaintiff Arturo P. Franco against
Philippine Commercial International Bank (PCIB),
now known as Equitable-PCIBank, and Equitable
Banking Corp.
The complaint essentially alleges, among others,
that plaintiff secured from defendant PCIB the
following Trust Indenture Certificates:
Number Intere
Issued Maturity Amount
st

167
094846 Dec. 8, Jan. 7, P100,000 8.75
(Exh. "B") 1986 1987 .00 % Plaintiff prays for the payment of the amounts
p.a.
Page
135928 Jan. 19, Feb. 18, P850,594 7.75
(Exh. "C") 1987 1987 .54 %
p.a.
205007 May 13, June 15, P500,000 8.50
(Exh. "D") 1987 1987 .00 % Certificates subject matter of the complaint, but
p.a.
205146 July 15, Aug 14, P502,958 9.25
(Exh. "E") 1987 1987 .90 % have their own fixed term and maturity date, and
p.a.
that despite demands, defendants refused and
still refuses to return to plaintiff the trust
amounts, plus the stipulated interest[;] that in all
of the trust transactions that defendant PCIB had
entered into with the plaintiff, defendant PCIB
represented to plaintiff that[,] in making the trust
investment, plaintiff was actually providing for his
future since the money invested was going to be
managed and administered by their PCIB-Trust
Services Group and will be commingled, pooled
and automatically rolled- over for better
investment return; that believing the
representation of the bank, the plaintiff invested
his lifetime savings in the hope that the
defendant bank will actually provide for their
future by reinvesting and rolling-over their
investment automatically, without any need for
the plaintiff to take any further action; that on the
few occasions that plaintiff had visited the
defendant bank to request for a status on his
investments, bank officers would normally pull
out his (sic) ledger card and show plaintiff the
updated amount due him; that sometime in 1995,
plaintiff discovered that one of his children had
leukemia and[,] in the ensuing hospitalization and
treatment, plaintiff spent a lot of money; that
because his funds were already exhausted,
plaintiff then turned to his Trust Indenture
Certificates and started inquiring as to how he
could liquidate the trust; that in the beginning,
defendant bank constantly asked for time to look
for his records, at one time [on June 18, 1998],
promising to have an answer before July 15,
1998, then writing plaintiff on May 18, 2000
saying that the bank [had] coordinated with their
Branch and Trust Department but that it might
take [some time] to retrieve their records; [and]
that to plaintiffs surprise, on June 22, 2000, he
received a letter signed by defendants counsel,
Curato Divina & Partners, in effect denying
plaintiffs request for payment by stating that due
to the conversion of all outstanding PCIBank trust
indenture accounts into common trust
certificates, all such PCIBank trust indenture
certificates have been rendered "null and void."
under the Trust Indenture Certificates, plus
interest, moral and exemplary damages and
attorneys fees.
In their Answer, defendants admit the issuance
by defendant PCIB of the Trust Indenture
deny the allegation that the investments subject
of the Trust Indenture Certificates are
automatically rolled-over as such certificates
that the present action had already prescribed.
As stated in the Pre-Trial Order issued by this
court on 15 February 2002, the following issues
were defined and agreed upon by the parties, to
wit:
1. Whether or not the plaintiff is entitled to
the relief he seeks; and
2. Whether or not the cause of action as
exerted (sic) by the defendant has already
prescribed.
Plaintiff presented as its witness plaintiff Arturo P.
Franco himself [who] testified, among others[:]
that he is the proprietor of Fair Marketing Freight
Services[,] which is the investor named in Trust
Indenture Certificate 094846; that[,] in 1986, he
decided to save up for his retirement and to
invest his hard earned money; that he was then
51 years old and his choice was to deposit his
funds with defendant PCIB which later on merged
with defendant Equitable Banking Corp. and is
now known as Equitable PCIBank; that he chose
defendant PCIB for the latters representation
that by making such investment, he was actually
providing for his future since his investment
would be commingled, pooled and automatically
rolled-over for better investment return and
which will provide for his needs upon retirement,
without need for him to take any further action;
that he was a loyal client of the defendants from
1986 up to 1997; that he entered into a trust
agreement with defendant PCIB for which the
latter issued subject Trust Indenture Certificates
([TICs], for brevity); that sometime in 1997, when
he was then 62 years old, he [tried] to encash the
trust indenture certificates only to be given a run-
around by the defendants; that sometime in
1995, his son, Arthur, was diagnosed to be
afflicted with leukemia and eventually died on
October 24, 1997; that because of his sons
illness, he was forced to go to defendants and try
to encash his trust indenture certificates but was
denied by defendant bank; that in a letter dated
June 22, 2000, defendants, through their counsel,
168
informed plaintiff that the subject [TICs] are "null
and void"; that when he received the letter of
June 22, 2000, he was at first speechless and
Page
totally defeated and at a loss; that he and his
wife begun to experience sleepless nights,
became anxious because their hope to secure
their life in their old age had fallen apart[;] that
instead of just enjoying a secured life with his
wife and enjoying his grandchildren and spending
more time with the Lord, he was now in debt and
burdened with the fact that his lifetime savings
just disappeared before his very eyes without a
trace; [and] that plaintiff was constrained to file
this case and [spend] P22,117.80 in filing fees, to
engage the services of counsel for the amount
of P50,000.00 with appearance fee of P3,000.00
per hearing, and that he suffered moral damages
in the amount of P200,000.00.
The foregoing facts were not rebutted by
defendants. The court finds the witness and his
testimony credible as the witness testified in a
simple and straightforward manner. Upon
admission of plaintiffs exhibits, plaintiff rested
his case.
The defendants presented Cecilia P. Soriano and
Antonio M. Fortuno as their witnesses.
Cecilia P. Soriano, Operations Officer of defendant
Equitable-PCIBank, testified that she came to
know plaintiff in 1987 when she was assigned at
PCIB Gil Puyat Branch; that plaintiff was one of
the banks valued clients[;] and that plaintiff
secured the [TICs] subject matter of the
complaint. On cross-examination, the witness
admitted that she has seen only the photocopies
of plaintiffs [TICs]; that she had no direct dealing
with plaintiff regarding the [TICs] and she had no
idea what happened to plaintiffs [TICs] after their
respective maturity dates; [and] that valued
clients of the bank were given special privileges,
such as allowing these clients to withdraw or
encash [TICs] or investments over the phone[,]
but she did not receive any call from plaintiff
withdrawing or encashing the plaintiffs [TICs].
The testimony of their next witness, Antonio
Martin S. Fortuno, was offered to prove, among
others, that [TICs] expired upon maturity and
after which, they were automatically rolled-over.
Antonio Martin S. Fortuno, Operations Officer of
defendant Equitable-PCIBank, testified that he is
familiar with the Trust Indenture Certificates
issued by defendant bank; that when a client
would like to secure a Trust Indenture Certificate
from the bank, they would ask the client, among
others, to sign [roll-over] agreement/rules and
regulations; that when a client would like to
withdraw his proceeds from the certificate upon
maturity, they follow the following steps: (1) they
retrieve the old certificates from client, (2) they
have [the] client sign on the back portion of the
certificate, (3) they prepare mode of payment
MC or credit to other accounts, and (4) they file
the paid certificate to paid/roll-over file; that if
the holder of a certificate does not withdraw the
placement upon maturity, they replace the old
certificate with a new one; that if the client is at
the branch, the old certificate is replaced with a
new certificate, have the client sign at the
register copy, then stamp the old certificate as
Old Certificate-Stamp rolled-over/replaced; that if
the client is not at the branch, they replace the
old certificate with a new certificate and stamped
with rolled-over; that certificates have fixed
maturity dates; that interest rates stated in the
certificates vary as they go either up or down
depending on the prevailing bank rates as
provided by the Trust Department; that[,] in
1992[,] all existing Trust Indenture Certificates
were converted into Common Trust Funds; [and]
that he is not aware of any Trust Indenture
Certificate belonging to plaintiff which were
converted into Common Trust Funds in 1992.
On cross-examination, the witness admitted that
he is familiar with Trust Indenture Certificates;
that Trust Indenture Certificates have been
converted into Common Trust Funds; that the
change is only in name because they have the
same features and that the only difference is that
Common Trust Funds are classified into several
product types depending on the limit of the
amount of investment; that there is nothing in the
certificate that says it has a roll-over feature;
that, however, if the certificate expires and the
client does not claim or withdraw his funds or
surrender the certificate, they roll-over the funds
of the client; that if a guest comes with the
original Trust Indenture Certificate without any
stamp as being taken or cancelled, the bank
should verify with the outstanding copy because
the bank should have an outstanding copy of
that Trust Indenture Certificate; that he is not
aware that the Trust Indenture Certificates of the
plaintiff were verified with their records; and that
he does not know whether plaintiffs Trust
Indenture Certificates were actually paid out by
the bank to plaintiff.
Defendants did not conduct any re-direct.6
On October 21, 2003, the RTC rendered a
Decision, the dispositive portion of which reads:
WHEREFORE, all the foregoing premises
169
considered, judgment is hereby rendered in favor
of plaintiff and ordering defendant Philippine
Commercial International Bank, now known as
Page
Equitable-PCIBank, to pay plaintiff the following:
1. On the First Cause of Action, the sum
of P100,000.00, plus the stipulated
interest of 8.75% per annum for the period
December 8, 1986 to January 7, 1987, plus
interest of 6% per annum from January 8,
1987 until fully paid;
2. On the Second Cause of Action, the sum
of P840,594.54, plus the stipulated
interest of 7.75% per annum for the period
January 19, 1987 to February 18, 1987,
plus interest of 6% per annum from
February 19, 1987 until fully paid;
3. On the Third Cause of Action, the sum
of P500,000.00, plus the stipulated
interest of 8.50% per annum for the period
May 13, 1987 to June 15, 1987, plus
interest of 6% per annum from June 16,
1987 until fully paid;
4. On the Fourth Cause of Action, the sum
of P502,958.90, plus the stipulated
interest of 9.25% per annum for the period
July 15, 1987 to August 14, 1987, plus
interest of 6% per annum from August 15,
1987 until fully paid;
5. P50,000.00 as moral damages;
6. P200,000.00 as exemplary damages;
7. Attorneys fees in the amount
of P50,000.00, plus P3,000.00 for every
hearing attended; and
8. P22,117.80 as reimbursement for filing
fees.
The case against Equitable Banking Corporation
is dismissed for insufficiency of evidence.
SO ORDERED.7
Considering that the four TICs have not been
replaced or cancelled, the RTC held that the
relationship of express trust between petitioner
Bank and respondent still subsists at the time the
latter demanded the withdrawal of his funds
under them. While the TICs contain a maturity
date, the court opined that the same refers only
to the gross income expectation or the applicable
interest rate because the funds are automatically
rolled-over with varying interest rates depending
on the prevailing interest rates as determined by
petitioners Trust Department. With respect,
however, to the interest rate applicable after the
stipulated maturity dates, the court deemed it
fair and reasonable to impose the legal rate of
interest for want of evidence on the prevailing
rate at the time of roll-over. Finally, the court
found that petitioner Bank is in bad faith in its
dealings with respondent when it unilaterally
declared despite claiming that respondent was
one of its valued clients the TICs as null and
void by reason of their conversion to Common
Trust Funds in 1991. The absence of good faith
was made more manifest when Fortuno testified
that the trust indenture certificate and common
trust fund have the same features and the only
difference is in the name and classification of the
amount of investment.
On appeal, the CA affirmed the RTC ruling.
According to the appellate court, Soriano could
not have possibly known if respondent indeed
withdrew any or all of his participation in the
subject TICS, because by her very own admission
during the cross-examination, she did not have
any direct dealing with him with respect to the
TICs at the time they matured or even thereafter.
Likewise, petitioner Bank failed to adduce any
documentary evidence to establish the alleged
fact that the four TICs were already paid or
cancelled, or that respondents participation
therein was already withdrawn. Further,
respondents testimony that he gave verbal
instructions to petitioner Bank to roll-over his
investment upon their maturity was bolstered by
Fortunos admission in open court that it has
been petitioner Banks practice to roll-over
investments which remain unclaimed after their
maturity even without instruction from their
owners. With all these findings, the CA concluded
that the claim of respondent is not yet barred by
prescription, since the maturity dates of the four
TICs did not terminate the express trust created
between the parties.
A motion for reconsideration was filed by
petitioner, but the CA acted unfavorably; hence,
this petition.
We deny.
Upon perusal of the entire case records, the Court
finds no reversible error committed by the CA in
sustaining the RTC Decision. Considering the
evidence at hand, both courts have applied the
law in accordance with the facts of the case.
A quick point, however, on the issue of alleged
170
payment by petitioner Bank on the subject trust
certificate indentures.
Page
Jurisprudence abounds that, in civil cases, one
who pleads payment has the burden of proving
it.8 Even where the plaintiff must allege non-
payment, the general rule is that the burden rests
on the defendant to prove payment, rather than
on the plaintiff to prove non-payment.9 When the
creditor is in possession of the document of
credit, he need not prove non-payment for it is
presumed.10 The creditor's possession of the
evidence of debt is proof that the debt has not
been discharged by payment.11
In this case, respondent's possession of the
original copies of the subject TICs strongly
supports his claim that petitioner Bank's
obligation to return the principal plus interest of
the money placement has not been extinguished.
The TICs in the hands of respondent is a proof of
indebtedness and a prima facie evidence that
they have not been paid. Petitioner Bank could
have easily presented documentary evidence to
dispute the claim, but it did not. In its omission, it
may be reasonably deduced that no evidence to
that effect really exist. Worse, the testimonies of
petitioner Bank's own witnesses, reinforce, rather
than belie, respondent's allegations of non-
payment.
WHEREFORE, premises considered, the instant
Petition is DENIED. The July 31, 2007 Decision and
October 4, 2007 Resolution of the Court of
Appeals in CA-G.R. CV No. 82340, which affirmed
the October 21, 2003 Decision of the Makati City
Regional Trial Court, Branch 61, are AFFIRMED.
SO ORDERED.
LEONARDO BOGNOT vs. RRI LENDING
CORPORATION, represented by its General
Manager, DARIO J. BERNARDEZ
Before the Court is the petition for review on
certiorari1 filed by Leonardo Bognot (petitioner)
assailing the March 28, 2007 decision2 and the
October 15, 2007 resolution3 of the Court of
Appeals (CA) in CA-G.R. CV No. 66915.
Background Facts
RRI Lending Corporation (respondent) is an entity
engaged in the business of lending money to its
borrowers within Metro Manila. It is duly
represented by its General Manager, Mr. Dario J.
Bernardez (Bernardez).
Sometime in September 1996, the petitioner and
his younger brother, Rolando A. Bognot
(collectively referred to as the "Bognot siblings"),
applied for and obtained a loan of Five Hundred
Thousand Pesos (P500,000.00) from the
respondent, payable on November 30, 1996. 4 The
loan was evidenced by a promissory note and
was secured by a post dated check5 dated
November 30, 1996.
Evidence on record shows that the petitioner
renewed the loan several times on a monthly
basis. He paid a renewal fee of P54,600.00 for
each renewal, issued a new post-dated checkas
security, and executed and/or renewed the
promissory note previouslyissued. The
respondent on the other hand, cancelled and
returned to the petitioner the post-dated checks
issued prior to their renewal.
Sometime in March 1997, the petitioner applied
for another loan renewal. He again executed as
principal and signed Promissory Note No. 97-
0356 payable on April 1, 1997; his co-maker was
again Rolando. As security for the loan, the
petitioner also issued BPI Check No.
0595236,7 post dated to April 1, 1997.8
Subsequently, the loan was again renewed on a
monthly basis (until June 30, 1997), as shown by
the Official Receipt No. 797 9 dated May 5, 1997,
and the Disclosure Statement dated May 30,
1997 duly signed by Bernardez. The petitioner
purportedly paid the renewal fees and issued a
post-dated check dated June 30, 1997 as security.
As had been done in the past, the respondent
superimposed the date "June 30, 1997" on the
upper right portion of Promissory Note No. 97-035
to make it appear that it would mature on the
said date.
Several days before the loans maturity,
Rolandos wife, Julieta Bognot (Mrs. Bognot), went
to the respondents office and applied for another
renewal of the loan. She issued in favor of the
respondent Promissory Note No. 97-051, and
International Bank Exchange (IBE) Check No.
00012522, dated July 30, 1997, in the amount
ofP54,600.00 as renewal fee.
On the excuse that she needs to bring home the
loan documents for the Bognot siblings
signatures and replacement, Mrs. Bognot asked
the respondents clerk to release to her the
promissory note, the disclosure statement, and
the check dated July 30, 1997. Mrs. Bognot,
however, never returned these documents nor
issued a new post-dated check. Consequently,
the respondent sent the petitioner follow-up
letters demanding payment of the loan, plus
171
interest and penalty charges. These demands
went unheeded.
Page
On November 27, 1997, the respondent, through
Bernardez, filed a complaint for sum of money
before the Regional Trial Court (RTC) against the
Bognot siblings. The respondent mainly alleged
that the loan renewal payable on June 30, 1997
which the Bognot siblings applied for remained
unpaid; that before June30, 1997, Mrs. Bognot
applied for another loan extension and issued IBE
Check No. 00012522 as payment for the renewal
fee; that Mrs. Bognot convinced the respondents
clerk to release to her the promissory note and
the other loan documents; that since Mrs. Bognot
never issued any replacement check, no
loanextension took place and the loan, originally
payable on June 30, 1997, became due on this
date; and despite repeated demands, the Bognot
siblings failed to pay their joint and solidary
obligation.
Summons were served on the Bognotsiblings.
However, only the petitioner filed his answer.
In his Answer,10 the petitioner claimed that the
complaint states no cause of action because the
respondents claim had been paid, waived,
abandoned or otherwise extinguished. He denied
being a party to any loan application and/or
renewal in May 1997. He also denied having
issued the BPI check post-dated to June 30, 1997,
as well as the promissory note dated June 30,
1997, claiming that this note had been tampered.
He claimed that the one (1) month loan
contracted by Rolando and his wife in November
1996 which was lastly renewed in March 1997
had already been fully paid and extinguished in
April 1997.11
Trial on the merits thereafter ensued.
The Regional Trial Court Ruling
In a decision12 dated January 17, 2000,the RTC
ruled in the respondents favor and ordered the
Bognot siblings to pay the amount of the loan,
plus interest and penalty charges. It considered
the wordings of the promissory note and found
that the loan they contracted was joint and
solidary. It also noted that the petitioner signed
the promissory note as a principal (and not
merely as a guarantor), while Rolando was the co-
maker. It brushed the petitioners defense of full
payment aside, ruling that the respondent had
successfully proven, by preponderance of
evidence, the nonpayment of the loan. The trial
court said:
Records likewise reveal that while he claims that
the obligation had been fully paid in his Answer,
he did not, in order to protect his right filed (sic) a
cross-claim against his co-defendant Rolando
Bognot despite the fact that the latter did not file
any responsive pleading.
In fine, defendants are liable solidarily to plaintiff
and must pay the loan of P500,000.00 plus 5%
interest monthly as well as 10% monthly penalty
charges from the filing of the complaint on
December 3, 1997 until fully paid. As plaintiff was
constrained to engage the services of counsel in
order to protect his right,defendants are directed
to pay the former jointly and severally the
amount of P50,000.00 as and by way of
attorneys fee.
The petitioner appealed the decision to the Court
of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA
affirmed the RTCs findings. It found the
petitioners defense of payment untenable and
unsupported by clear and convincing evidence. It
observed that the petitioner did not present any
evidence showing that the check dated June 30,
1997 had, in fact, been encashed by the
respondent and the proceeds applied to the loan,
or any official receipt evidencing the payment of
the loan. It further stated that the only document
relied uponby the petitioner to substantiate his
defense was the April 1, 1997 checkhe issued
which was cancelled and returned to him by the
respondent.
The CA, however, noted the respondents
established policy of cancelling and returning the
post-dated checks previously issued, as well as
the subsequent loan renewals applied for by the
petitioner, as manifested by the official receipts
under his name. The CA thus ruled that the
petitioner failed to discharge the burden of
proving payment.
The petitioner moved for the reconsideration of
the decision, but the CA denied his motion in its
resolution of October 15, 2007, hence, the
present recourse to us pursuant toRule 45 of the
Rules of Court.
The Petition
The petitioner submits that the CA erred in
holding him solidarily liable with Rolando and his
wife. Heclaimed that based on the legal
presumption provided by Article 1271 of the Civil
Code,13 his obligation had been discharged by
172
virtue of his possession of the post-dated check
(stamped "CANCELLED") that evidenced his
indebtedness. He argued that it was Mrs. Bognot
Page
who subsequently assumed the obligation by
renewing the loan, paying the fees and charges,
and issuing a check. Thus, there is an entirely
new obligation whose payment is her sole
responsibility.
The petitioner also argued that as a result of the
alteration of the promissory note without his
consent (e.g., the superimposition of the date
"June 30, 1997" on the upper right portion of
Promissory Note No. 97-035 to make it appear
that it would mature on this date), the respondent
can no longer collect on the tampered note, let
alone, hold him solidarily liable with Rolando for
the payment of the loan. He maintained that
even without the proof of payment, the material
alteration of the promissory note is sufficient to
extinguish his liability.
Lastly, he claimed that he had been released
from his indebtedness by novation when Mrs.
Bognot renewed the loan and assumed the
indebtedness.
The Case for the Respondents
The respondent submits that the issues the
petitioner raised hinge on the appreciation of the
adduced evidence and of the factual lower courts
findings that, as a rule, are notreviewable by this
Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible
error in holding the petitioner solidarily
liable with Rolando;
2. Whether the petitioner is relieved from
liability by reason of the material
alteration in the promissory note; and
3. Whether the parties obligation was
extinguished by: (i) payment; and (ii)
novation by substitution of debtors.
Our Ruling
We find the petition partly meritorious.
As a rule, the Courts jurisdiction in a Rule 45
petition is limited to the review of pure questions
of law.14Appreciation of evidence and inquiry on
the correctness of the appellate court's factual
findings are not the functions of this Court; we
are not a trier of facts.15
A question of law exists when the doubt or
dispute relates to the application of the law on
given facts. On the other hand, a question of fact
exists when the doubt or dispute relates to the
truth or falsity of the parties factual allegations.16
As the respondent correctly pointedout, the
petitioners allegations are factual issuesthat are
not proper for the petition he filed. In the absence
of compelling reasons, the Court cannot re-
examine, review or re-evaluate the evidence and
the lower courts factual conclusions. This is
especially true when the CA affirmed the lower
courts findings, as in this case. Since the CAs
findings of facts affirmed those of the trial court,
they are binding on this Court, rendering any
further factual review unnecessary.
If only to lay the issues raised - both factual and
legal to rest, we shall proceed to discuss their
merits and demerits.
No Evidence Was Presented to Establish the Fact
of Payment
Jurisprudence tells us that one who pleads
payment has the burden of proving it; 17 the
burden rests on the defendant to prove payment,
rather than on the plaintiff to prove non-
payment.18 Indeed, once the existence of an
indebtedness is duly established by evidence, the
burden of showing with legal certainty that the
obligation has been discharged by payment rests
on the debtor.19
In the present case, the petitioner failed to
satisfactorily prove that his obligation had already
been extinguished by payment. As the CA
correctly noted, the petitioner failed to present
any evidence that the respondent had in fact
encashed his check and applied the proceeds to
the payment of the loan. Neither did he present
official receipts evidencing payment, nor any
proof that the check had been dishonored.
We note that the petitioner merely relied on the
respondents cancellation and return to him of
the check dated April 1, 1997. The evidence
shows that this check was issued to secure the
indebtedness. The acts imputed on the
respondent, standing alone, do not constitute
sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code
173
provides:
xxxx
Page
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment
only when they have been cashed, or when
through the fault of the creditor they have been
impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v.
Spouses Royeca:20
Settled is the rule that payment must be made in
legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery
of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The
obligation is not extinguished and remains
suspended until the payment by commercial
document is actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides
for a legal presumption of renunciation of action
(in cases where a private document evidencing a
credit was voluntarily returned by the creditor to
the debtor), this presumption is merely prima
facieand is not conclusive; the presumption loses
efficacy when faced with evidence to the
contrary.
Moreover, the cited provision merely raises a
presumption, not of payment, but of the
renunciation of the credit where more convincing
evidence would be required than what normally
would be called for to prove payment. 21Thus,
reliance by the petitioner on the legal
presumption to prove payment is misplaced.
To reiterate, no cash payment was proven by the
petitioner. The cancellation and return of the
check dated April 1, 1997, simply established his
renewal of the loan not the fact of payment.
Furthermore, it has been established during trial,
through repeated acts, that the respondent
cancelled and surrendered the post-dated check
previously issued whenever the loan is renewed.
We trace whatwould amount to a practice under
the facts of this case, to the following testimonial
exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you
admitted that a renewal fee is charged to the
debtor which he or she must pay before a
renewal is allowed. I show you Exhibit "3" official
receipt of plaintiff dated July 3, 1997, would this
be your official receipt which you issued to your
client which they make renewal of the loan?
A: Yes, sir.
xxx xxx xxx
Q: And naturally when a loan has been renewed,
the old one which is replaced by the renewal has
already been cancelled, is that correct?
A: Yes, sir.
Q: It is also true to say that all promissory notes
and all postdated checks covered by the old loan
which have been the subject of the renewal are
deemed cancelled and replaced is that correct?
A: Yes, sir. xxx22
Civil Case No. 97-0572
TSN November 27, 1998, Page 27.
Q: What happened to the check that Mr. Bognot
issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a
new check, sir.
Q: Do you have a copy of the checks?
A: We returned the check upon renewing the
loan.23
In light of these exchanges, wefind that the
petitioner failed to discharge his burden ofproving
payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration.
174
The petitioner raised as defense the alleged
material alteration of Promissory Note No. 97-035
as basis to claim release from his loan. He alleged
Page
that the respondents superimposition of the due
date "June 30, 1997" on the promissory note
without his consent effectively relieved him of
liability.
We find this defense untenable.
Although the respondent did not dispute the fact
of alteration, he nevertheless denied that the
alteration was done without the petitioners
consent. The parties Pre-Trial Order dated
November 3, 199824 states that:
xxx There being no possibility of a possible
compromise agreement, stipulations, admissions,
and denials were made, to wit:
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case
marked as Annex "A" of the complaint was
originally dated April 1, 1997 with a had been obtained from the respondent; third,
superimposed rubber stamp mark "June 30,
1997" to which the plaintiff admitted the
superimposition.
14. The superimposition was done without the
knowledge, consent or prior consultation with
Leonardo Bognot which was denied by
plaintiff."25 (Emphasis supplied)
Significantly, the respondent also admitted in the
Pre-Trial Order that part of its company practice is
to rubber stamp, or make a superimposition
through a rubber stamp, the old promissory note
which has been renewed to make it appear that
there is a new loan obligation. The petitioner did
not rebut this statement. To our mind, the failure
to rebut is tantamount to an admission of the
respondents allegations:
"22. That it is the practice of plaintiff to just
rubber stamp or make superimposition through a
rubber stamp on old promissory note which has
been renewed to make it appear that there is a
new loan obligation to which the plaintiff
admitted." (Emphasis Supplied).26
Even assuming that the note had indeed been
tampered without the petitioners consent, the
latter cannot totally avoid payment of his
obligation to the respondent based on the
contract of loan.
Based on the records, the Bognot Siblings had
applied for and were granted a loan
of P500,000.00 by the respondent. The loan was
evidenced by a promissory note and secured by a
post-dated check27 dated November 30, 1996. In
fact, the petitioner himself admitted his loan
application was evidenced by the Promissory
Note dated April 1, 1997.28 This loan was renewed
several times by the petitioner, after paying the
renewal fees, as shown by the Official Receipt
Nos. 79729 and 58730 dated May 5 and July 3,
1997, respectively. These official receipts were
issued in the name of the petitioner. Although the
petitioner had insisted that the loan had been
extinguished, no other evidence was presented to
prove payment other than the cancelled and
returnedpost-dated check.
Under this evidentiary situation, the petitioner
cannot validly deny his obligation and liability to
the respondent solely on the ground that the
Promissory Note in question was tampered.
Notably, the existence of the obligation, as well
as its subsequent renewals, have been duly
established by: first, the petitioners application
for the loan; second, his admission that the loan
the post-dated checks issued by the petitioner to
secure the loan; fourth, the testimony of Mr.
Bernardez on the grant, renewal and non-
payment of the loan; fifth, proof of non-payment
of the loan; sixth, the loan renewals; and seventh,
the approval and receipt of the loan renewals.
In Guinsatao v. Court of Appeals,31 this Court
pointed out that while a promissory note is
evidence of an indebtedness, it is not the only
evidence, for the existence of the obligation can
be proven by other documentary evidence such
as a written memorandum signed by the parties.
In Pacheco v. Court of Appeals, 32 this Court
likewise expressly recognized that a check
constitutes anevidence of indebtedness and is a
veritable proof of an obligation. It canbe used in
lieu of and for the same purpose as a promissory
note and can therefore be presented to establish
the existence of indebtedness.33
In the present petition, we find that the totality of
the evidence on record sufficiently established
the existence of the petitioners indebtedness
(and liability) based on the contract ofloan. Even
with the tampered promissory note, we hold that
the petitioner can still be held liable for the
unpaid loan.
The Petitioners BelatedClaim of Novation by
Substitution May no Longer be Entertained
It has not escaped the Courts attention that the
175
petitioner raised the argument that the obligation
had been extinguished by novation. The
petitioner never raised this issue before the lower
Page
courts.
It is a settled principle of law thatno issue may be
raised on appeal unless it has been brought
before the lower tribunal for its
consideration.34 Matters neither alleged in the
pleadingsnor raised during the proceedings below
cannot be ventilated for the first time on appeal
before the Supreme Court.35
In any event, we find no merit in the defense of
novation as we discuss at length below. Novation
cannot be presumed and must be clearly and
unequivocably proven.
Novation is a mode of extinguishing an obligation
by changing its objects or principal obligations,
by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights
of the creditor.36
Article 1293 of the Civil Code defines novation as
follows:
"Art. 1293. Novation which consists insubstituting
a new debtor in the place of the originalone, may
be made even without the knowledge or against
the will of the latter, but not without the consent
of the creditor. Payment by the new debtor gives
him rights mentioned in Articles 1236 and 1237."
To give novation legal effect, the original debtor
must be expressly released from the obligation,
and the new debtor must assume the original
debtors place in the contractual relationship.
Depending on who took the initiative, novation by
substitution of debtor has two forms
substitution by expromision and substitution by
delegacion. The difference between these two
was explained in Garcia v. Llamas:37
"In expromision, the initiative for the change does
not come from -- and may even be made without
the knowledge of -- the debtor, since it consists of
a third persons assumption of the obligation. As
such, it logically requires the consent of the third
person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person
who consents to the substitution and assumes
the obligation; thus, the consent of these three
persons are necessary."
In both cases, the original debtor must be
released from the obligation; otherwise, there can
be no valid novation.38 Furthermore, novation by
substitution of debtor must alwaysbe made with
the consent of the creditor.39
The petitioner contends thatnovation took place
through a substitution of debtors when Mrs.
Bognot renewed the loan and assumed the debt.
He alleged that Mrs. Bognot assumed the
obligation by paying the renewal fees and
charges, and by executing a new promissory
note. He further claimed that she issued her own
check40 to cover the renewal fees, which fact,
according to the petitioner, was done with the
respondents consent.
Contrary to the petitioners contention, Mrs.
Bognot did not substitute the petitioner as debtor.
She merely attempted to renew the original loan
by executing a new promissory note41 and check.
The purported one month renewal of the loan,
however, did not push through, as Mrs. Bognot
did not return the documents or issue a new post
dated check. Since the loan was not renewed for
another month, the originaldue date, June
30,1997, continued to stand.
More importantly, the respondent never agreed
to release the petitioner from his obligation. That
the respondent initially allowed Mrs. Bognot to
bring home the promissory note, disclosure
statement and the petitioners previous check
dated June 30, 1997, does not ipso factoresult in
novation. Neither will this acquiescence
constitute an implied acceptance of the
substitution of the debtor.
In order to give novation legal effect, the creditor
should consent to the substitution of a new
debtor. Novation must be clearly and
unequivocally shown, and cannot be presumed.
Since the petitioner failed to show thatthe
respondent assented to the substitution, no valid
novation took place with the effect of releasing
the petitioner from his obligation to the
respondent.
Moreover, in the absence of showing that Mrs.
Bognot and the respondent had agreed to release
the petitioner, the respondent can still enforce
the payment of the obligation against the original
debtor. Mere acquiescence to the renewal of the
loan, when there is clearly no agreement to
release the petitioner from his responsibility, does
not constitute novation.
The Nature of the Petitioners Liability
On the nature of the petitioners liability, we rule
176
however, that the CA erred in holding the
petitioner solidarily liable with Rolando.
Page
A solidary obligation is one in which each of the
debtors is liable for the entire obligation, and
each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all
of the debtors.42 There is solidary liability when
the obligation expressly so states, when the law
so provides, or when the nature of the obligation
so requires.43 Thus, when the obligor undertakes
to be "jointly and severally" liable, the obligation
is solidary,
In this case, both the RTC and the CA found the
petitioner solidarily liable with Rolando based on
Promissory Note No. 97-035 dated June 30, 1997.
Under the promissory note, the Bognot Siblings
defined the parameters of their obligation as
follows:
"FOR VALUE RECEIVED, I/WE, jointly and
severally, promise to pay to READY RESOURCES
INVESTORS RRI LENDING CORPO. or Order, its
office at Paranaque, M.M. the principal sum of
Five Hundred Thousand PESOS (P500,000.00),
PhilippineCurrency, with interest thereon at the
rate of Five percent (5%) per month/annum,
payable in One Installment (01) equal
daily/weekly/semi-monthly/monthly of PESOS Five
Hundred Thousand Pesos (P500,000.00), first
installment to become due on June 30, 1997.
xxx"44 (Emphasis Ours).
Although the phrase "jointly and severally" in the
promissory note clearly and unmistakably
provided for the solidary liability of the parties,
we note and stress that the promissory note is
merely a photocopyof the original, which was
never produced.
Under the best evidence rule, whenthe subject of
inquiry is the contents of a document, no
evidence isadmissible other than the original
document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised
Rules of Court.45
The records show that the respondenthad the
custody of the original promissory note dated
April 1, 1997, with a superimposed rubber stamp
mark "June 30, 1997", and that it had been given
every opportunity to present it. The respondent
even admitted during pre-trial that it could not
present the original promissory note because it is
in the custody of its cashier who is stranded in
Bicol.46 Since the respondent never produced the
original of the promissory note, much less offered
to produce it, the photocopy of the promissory
note cannot be admitted as evidence. Other than
the promissory note in question, the respondent
has not presented any other evidence to support
a finding of solidary liability. As we earlier noted,
both lower courts completely relied on the note
when they found the Bognot siblingssolidarily
liable.
The well-entrenched rule is that solidary
obligation cannot be inferred lightly. It must be
positively and clearly expressed and cannot be
presumed.47
In view of the inadmissibility of the promissory
note, and in the absence of evidence showing
that the petitioner had bound himself solidarily
with Rolando for the payment of the loan, we
cannot but conclude that the obligation to pay is
only joint.48
The 5% Monthly Interest Stipulated in the
Promissory Note is Unconscionable and Should be
Equitably Reduced
Finally, on the issue of interest, while we agree
with the CA that the petitioner is liable to the
respondentfor the unpaid loan, we find the
imposition of the 5% monthly interest to be
excessive, iniquitous, unconscionable and
exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan
agreement have wide latitude to stipulate on the
applicable interest rate under Central Bank
Circular No. 905 s. 1982 (which suspended the
Usury Law ceiling on interest effective January 1,
1983), we stress that unconscionable interest
rates may still be declared illegal.49
In several cases, we haveruled that stipulations
authorizing iniquitous or unconscionable interests
are contrary to morals and are illegal. In Medel v.
Court of Appeals,50 we annulled a stipulated 5.5%
per month or 66% per annum interest on
a P500,000.00 loan, and a 6% per month or 72%
per annum interest on a P60,000.00 loan,
respectively, for being excessive, iniquitous,
unconscionableand exorbitant.1wphi1
We reiterated this ruling in Chua v.
Timan,51 where we held that the stipulated
interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and
exorbitant, and must therefore be reduced to
12% per annum.
Applying these cited rulings, we now accordingly
hold that the stipulated interest rate of 5% per
month, (or 60% per annum) in the promissory
note is excessive, unconscionable, contrary to Petitioner Tan Shuy is engaged in the business of

177
morals and is thus illegal. It is void ab initiofor buying copra and corn in the Fourth District of
violating Article 130652 of the Civil Quezon Province. According to Vicente Tan
Code.1wphi1 We accordingly find it equitable to (Vicente), son of petitioner, whenever they would

Page
reduce the interest rate from 5% per month to
1% per month or 12% per annum in line with the
prevailing jurisprudence.
WHEREFORE, premises considered, the Decision
dated March 28, 2007 of the Court of Appeals in
CA-G.R. CV No. 66915 is hereby AFFIRMED with
MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand
his brother, Rolando A. Bognot are JOINTLY
LIABLE to pay the sum of P500,000.00
plus 12% interest per annum from
December 3, 1997 until fully paid.
2. The rest of the Court of Appeals'
dispositions are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
buy copra or corn from crop sellers, they would
prepare and issue a pesada in their favor.
A pesada is a document containing details of the
transaction, including the date of sale, the weight
of the crop delivered, the trucking cost, and the
net price of the crop. He then explained that
when a pesada contained the annotation pd on
the total amount of the purchase price, it meant
that the crop delivered had already been paid for
by petitioner.[2]
Guillermo Maulawin (Guillermo),
respondent in this case, is a farmer-businessman
engaged in the buying and selling of copra and
corn. On 10 July 1997, Tan Shuy extended a loan
to Guillermo in the amount of 420,000. In
consideration thereof, Guillermo obligated himself
to pay the loan and to sell lucad or copra to
petitioner. Below is a reproduction of the contract:
[3]

SO ORDERED.
No 2567 Lopez, Que

Tinanggap ko kay G. TAN SHUY ang halagang . (P

Filipino. Inaako ko na isusulit sa kanya ang aking
TAN SHUY, G.R. No. 190375
ko ang nasabing halaga. Kung hindi ako ma
Petitioner,
makabayad bago sumapit ang ., 19 maaari niya
kapangyarihan. Kung angpagsisingilan ay makaka
Present:
sinasagutan ko ang lahat ng kaniyang gugol.
CARPIO, J.,
P................ [Sgd. by res
- versus - Chairperson,
.
BRION,
Lagda
PEREZ,
SERENO, and
REYES, JJ.
SPOUSES Most of the transactions involving Tan
GUILLERMO Promulgated: Shuy and Guillermo were coursed through Elena
MAULAWIN and PARI Tan, daughter of petitioner. She served as cashier
NG CARIO- February 8, 2012 in the business of Tan Shuy, who primarily
MAULAWIN, prepared and issued the pesada. In case of her
Respondents. absence, Vicente would issue the pesada. He also
helped his father in buying copra and granting
loans to customers (copra sellers). According to
Vicente, part of their agreement with Guillermo
was that they would put the annotation sulong on
Before the Court is a Petition for Review the pesada when partial payment for the loan
on Certiorari filed under Rule 45 of the Rules of was made.
Court, assailing the 31 July 2009 Decision and 13
November 2009 Resolution of the Court of Petitioner alleged that despite repeated
Appeals (CA).[1] demands, Guillermo remitted only 23,000 in
August 1998 and 5,500 in October 1998, or a
total of 28,500.[4] He claimed that respondent
had an outstanding balance of 391,500. Thus,
Facts convinced that Guillermo no longer had the
intention to pay the loan, petitioner brought the
controversy to the Lupon Tagapamayapa. When
178
no settlement was reached, petitioner filed a
Complaint before the Regional Trial Court (RTC).
Page
Respondent Guillermo countered that he
had already paid the subject loan in full.
According to him, he continuously delivered and
sold copra to petitioner from April 1998 to April
1999. Respondent said they had an oral
arrangement that the net proceeds thereof shall
be applied as installment payments for the loan.
He alleged that his deliveries amounted to
420,537.68 worth of copra. To bolster his claim,
he presented copies of pesadas issued by Elena
and Vicente. He pointed out that the pesadas did
not contain the notation pd, which meant that
actual payment of the net proceeds from copra
deliveries was not given to him, but was instead
applied as loan payment. He averred that Tan
Shuy filed a case against him, because petitioner
got mad at him for selling copra to other copra
buyers.
On 27 July 2007, the trial court issued a
Decision, ruling that the net proceeds from
Guillermos copra deliveries represented in
the pesadas, which did not bear the notation pd
should be applied as installment payments for
the loan. It gave weight and credence to
the pesadas, as their due execution and
authenticity was established by Elena and
Vicente, children of petitioner. [5]However, the
court did not credit the net proceeds from
12 pesadas, as they were deliveries for corn and
not copra. According to the RTC, Guillermo
himself testified that it was the net proceeds from
the copra deliveries that were to be applied as
installment payments for the loan. Thus, it ruled
that the total amount of 41,585.25, which
corresponded to the net proceeds from corn
deliveries, should be deducted from the amount
of 420,537.68 claimed by Guillermo to be the
total value of his copra deliveries. Accordingly,
the trial court found that respondent had not
made a full payment for the loan, as the total
creditable copra deliveries merely amounted to
378,952.43, leaving a balance of 41,047.57 in
his loan.[6]
On 31 July 2009, the CA issued its assailed
Decision, which affirmed the finding of the trial
court. According to the appellate court, petitioner
could have easily belied the existence of
thepesadas and the purpose for which they were
offered in evidence by presenting his daughter
Elena as witness; however, he failed to do so.
Thus, it gave credence to the testimony of
respondent Guillermo in that the net proceeds
from the copra deliveries were applied as
installment payments for the loan.[7] On 13
November 2009, the CA issued its assailed
Resolution, which denied the Motion for
Reconsideration of petitioner.
Petitioner now assails before this Court the
aforementioned Decision and Resolution of the
CA and presents the following issues:
Issues
1. Whether the pesadas require
authentication before they can be
admitted in evidence, and
2. Whether the delivery of copra
amounted to installment payments for the
loan obtained by respondents from
petitioner.
Discussion
As regards the first issue, petitioner
asserts that the pesadas should not have been
admitted in evidence, since they were private
documents that were not duly authenticated.
[8]
He further contends that the pesadas were
fabricated in order to show that the goods
delivered were copra and not corn. Finally, he
argues that five of the pesadas mentioned in the
Formal Offer of Evidence of respondent were not
actually offered.[9]
With regard to the second issue, petitioner
argues that respondent undertook two separate
obligations (1) to pay for the loan in cash and (2)
to sell the latters lucad or copra. Since their
written agreement did not specifically provide for
the application of the net proceeds from the
deliveries of copra for the loan, petitioner
contends that he cannot be compelled to accept
copra as payment for the loan. He emphasizes
that the pesadas did not specifically indicate that
the net proceeds from the copra deliveries were
to be used as installment payments for the loan.
He also claims that respondents copra deliveries
were duly paid for in cash, and that
the pesadas were in fact documentary receipts
for those payments.
We reiterate our ruling in a line of cases
that the jurisdiction of this Court, in cases
brought before it from the CA, is limited to
reviewing or revising errors of law.[10] Factual
findings of courts, when adopted and confirmed
by the CA, are final and conclusive on this Court
except if unsupported by the evidence on record.
[11]
There is a question of fact when doubt arises
as to the truth or falsehood of facts; or when
there is a need to calibrate the whole evidence,
considering mainly the credibility of the witnesses
and the probative weight thereof, the existence by the plaintiffs daughter Elena

179
and relevancy of specific surrounding Tan and sometimes by plaintiffs
circumstances, as well as their relation to one son Vicente Tan. x x x.
another and to the whole, and the probability of [14]
(Emphasis supplied)

Page
the situation.[12]
In affirming the finding of the RTC,
Here, a finding of fact is required in the
the CA reasoned thus:
ascertainment of the due execution and
authenticity of the pesadas, as well as the
In his last assigned error, plaintiff-
determination of the true intention behind the
appellant herein impugns the
parties oral agreement on the application of the
conclusion arrived at by the
net proceeds from the copra deliveries as
trial court, particularly with
installment payments for the loan. [13] This
respect to the giving of
function was already exercised by the trial court
evidentiary value to Exhs. 3 to
and affirmed by the CA. Below is a reproduction
64 by the latter in order to prove
of the relevant portion of the trial courts Decision:
the claim of defendant-
appellee Guillermo that he had
x x x The defendant further
fully paid the subject loan already.
averred that if in the receipts or
pesadas issued by the plaintiff to
The foregoing deserves
those who delivered copras to
scant consideration.
them there is a notation pd on the
total amount of purchase price of
Here, plaintiff-appellant
the copras, it means that said
amount was actually paid or given could have easily belied the
existence of Exhs. 3 to 64,
by the plaintiff or his daughter
Elena Tan Shuy to the seller of the the pesadas or receipts, and
the purposes for which they
copras. To prove his averments the
defendant presented as evidence were offered in evidence by
simply presenting his
two (2) receipts or pesadas issued
by the plaintiff to a certain Cario daughter,Elena Tan Shuy, but
no effort to do so was actually
(Exhibits 1 and 2 defendant)
showing the notation pd on the done by the former given that
scenario.[15] (Emphasis supplied)
total amount of the purchase price
for the copras. Such claim of the
defendant was further bolstered by We found no clear showing that the trial
the testimony of Apolinario Cario court and the CA committed reversible errors of
which affirmed that he also sell law in giving credence and according weight to
copras to the plaintiff Tan Shuy. He the pesadas presented by respondents. According
also added that he incurred to Rule 132, Section 20 of the Rules of Court,
indebtedness to the plaintiff and there are two ways of proving the due execution
whenever he delivered copras the and authenticity of a private document, to wit:
amount of the copras sold were
applied as payments to his loan. SEC. 20. Proof of private
The witness also pointed out that document. Before any private
the plaintiff did not give any official document offered as authentic is
receipts to those who transact received in evidence, its due
business with him (plaintiff). This execution and authenticity must be
Court gave weight and proved either:
credence to the documents
receipts (pesadas) (Exhibits 3 (a) By anyone who
to 64) offered as evidence by saw the
the defendant which does not document
bear the notation pd or paid on executed or
the total amount of the written; or
purchase price of copras
appearing therein. Although (b) By evidence of the
said pesadas were private genuineness of the
instrument their execution and signature or handwriting of
authenticity were established the maker.
 proceeds from the copra deliveries were used as

180
Any other private document installment payments for the debts of
need only be identified as that respondents.[19]
which it is claimed to be. (21a)

Page
Indeed, pursuant to Article 1232 of the
Civil Code, an obligation is extinguished by
As reproduced above, the trial court found
payment or performance. There is payment when
that the due execution and authenticity of
there is delivery of money or performance of an
the pesadas were established by the plaintiffs
obligation.[20] Article 1245 of the Civil Code
daughter Elena Tan and sometimes by plaintiffs
provides for a special mode of payment called
son Vicente Tan.[16] The RTC said:
dation in payment (dacin en pago). There is
dation in payment when property is alienated to
On cross-examination, [Vicente]
the creditor in satisfaction of a debt in money.
reiterated that he and her [sic] sister Elena [21]
Here, the debtor delivers and transmits to the
Tan who acted as their cashier are helping
creditor the formers ownership over a thing as an
their father in their business of buying
accepted equivalent of the payment or
copras and mais. That witness agreed that
performance of an outstanding debt.[22] In such
in the business of buying copra and mais of
cases, Article 1245 provides that the law on sales
their father, if a seller is selling copra, a
shall apply, since the undertaking really partakes
pesada is being issued by his sister. The
in one sense of the nature of sale; that is, the
pesada that she is preparing consists of the
creditor is really buying the thing or property of
date when the copra is being sold to the
the debtor, the payment for which is to be
seller. Being familiar with the penmanship of
charged against the debtors obligation. [23] Dation
Elena Tan, the witness was shown a sample
in payment extinguishes the obligation to the
of the pesada issued by his sister Elena Tan.
extent of the value of the thing delivered, either
xxx
as agreed upon by the parties or as may be
proved, unless the parties by agreement express
xxxxxxxxx or implied, or by their silence consider the thing
as equivalent to the obligation, in which case the
x x x. He clarified that in the pesada obligation is totally extinguished.[24]
(Exh. 1) prepared by Elena and also in Exh
2, there appears on the lower right hand
portion of the said pesadas the letter pd, the
meaning of which is to the effect that the The trial court found thus:
seller of the copra has already been paid
during that day. He also confirmed the x x x [T]he preponderance of evidence
penmanship and handwriting of his is on the side of the defendant. x x x The
sister Ate Elena who acted as a cashier defendant explained that for the receipts
in the pesada being shown to him. He (pesadas) from April 1998 to April 1999 he
was even made to compare the xerox only gets the payments for trucking while
copies of the pesadas with the original the total amount which represent the total
copies presented to him and affirmed purchase price for the copras that he
that they are faithful reproduction of delivered to the plaintiff were all given to
the originals.[17] (Emphasis supplied) Elena Tan Shuy as installments for the loan
he owed to plaintiff. The defendant further
averred that if in the receipts or pesadas issued
In any event, petitioner is already
by the plaintiff to those who delivered copras to
estopped from questioning the due execution and
them there is a notation pd on the total amount
authenticity of the pesadas. As found by the CA,
of purchase price of the copras, it means that
Tan Shuy could have easily belied the existence
said amount was actually paid or given by the
of x x x the pesadas or receipts, and the purposes
plaintiff or his daughter Elena Tan Shuy to the
for which they were offered in evidence by simply
seller of the copras. To prove his averments the
presenting his daughter, Elena Tan Shuy, but no
defendant presented as evidence two (2) receipts
effort to do so was actually done by the former
or pesadas issued by the plaintiff to a certain
given that scenario. The pesadas having been
Cario (Exhibits 1 and 2 defendant) showing the
admitted in evidence, with petitioner failing to
notation pd on the total amount of the purchase
timely object thereto, these documents are
price for the copras. Such claim of the
already deemed sufficient proof of the facts
defendant was further bolstered by the
contained therein.[18] We hereby uphold the
testimony of Apolinario Cario which
factual findings of the RTC, as affirmed by the CA,
affirmed that he also sell [sic] copras to the
in that the pesadas served as proof that the net
plaintiff Tan Shuy. He also added that he
incurred indebtedness to the plaintiff and
whenever he delivered copras the amount
of the copras sold were applied as
payments to his loan. The witness also pointed
out that the plaintiff did not give any official
receipts to those who transact business with him
(plaintiff). x x x
Be that it may, this Court cannot however
subscribe to the averments of the defendant that
he has fully paid the amount of his loan to the
plaintiff from the proceeds of the copras he
delivered to the plaintiff as shown in the pesadas
(Exhibits 3 to 64). Defendant claimed that based
on the said pesadas he has paid the total amount
of P420,537.68 to the plaintiff. However, this
Court keenly noted that some of the pesadas
offered in evidence by the defendant were
not for copras that he delivered to the
plaintiff but for mais (corn). The said pesadas
for mais or corn were the following, to wit:
xxxxxxxxx
To the mind of this Court the aforestated
amount (P41,585.25) which the above listed
pesadas show as payment for mais or corn
delivered by the defendant to the plaintiff
cannot be claimed by the defendant to have
been applied also as payment to his
loan with the plaintiff because he does not testify
on such fact. He even stressed during his
testimony that it was the proceeds from the
copras that he delivered to the plaintiff which will
be applied as payments to his loan. x x x Thus,
equity dictates that the total amount of
P41,585.25 which corresponds to the
payment for mais (corn) delivered by the
plaintiff shall be deducted from the total
amount of P420,537.68 which according to
the defendant based on the pesadas
(Exhibits 3 to 64) that he presented as
evidence, is the total amount of the
payment that he made for his loan to the
plaintiff. x x x
xxxxxxxxx
Clearly from the foregoing, since the total
amount of defendants loan to the plaintiff is
P420,000.00 and the evidence on record
shows that the actual amount of payment
made by the defendant from the proceeds
of the copras he delivered to the plaintiff is
P378,952.43, the defendant is still indebted
to the plaintiff in the amount
P41,047.53 (sic) (P420,000.00-P378,952.43).
[25]
(Emphasis supplied)
In affirming this finding of fact by the trial
181
court, the CA cited the above-quoted portion of
the RTCs Decision and stated the following:
Page
In fact, as borne by the records on hand,
herein defendant-appellee Guillermo was able to
describe and spell out the contents of Exhs. 3 to
64 which were then prepared by Elena Tan
Shuy or sometimes by witnessVicente Tan. Herein
defendant-appellee Guillermo professed that
since the release of the subject loan was subject
to the condition that he shall sell his copras to the
plaintiff-appellant, the former did not already
receive any money for the copras he delivered to
the latter starting April 1998 to April 1999.
Hence, this Court can only express its approval to
the apt observation of the trial court on this
matter[.]
xxxxxxxxx
Notwithstanding the above, however, this
Court fully agrees with the pronouncement
of the trial court that not all amounts
indicated in Exhs. 3 to 64 should be applied
as payments to the subject loan since
several of which clearly indicated mais
deliveries on the part of defendant-
appellee Guillermo instead of copras[.]
[26]
(Emphasis supplied)
The subsequent arrangement between Tan
Shuy and Guillermo can thus be considered as
one in the nature of dation in payment. There was
partial payment every time Guillermo delivered
copra to petitioner, chose not to collect the net
proceeds of his copra deliveries, and instead
applied the collectible as installment payments
for his loan from Tan Shuy. We therefore uphold
the findings of the trial court, as affirmed by the
CA, that the net proceeds from Guillermos copra
deliveries amounted to 378,952.43. With this
partial payment, respondent remains liable for
the balance totaling 41,047.57.[27]
WHEREFORE the Petition is DENIED. The
31 July 2009 Decision and 13 November 2009
Resolution of the Court of Appeals in CA-G.R. CV
No. 90070 are hereby AFFIRMED.
SPOUSES CACAYORIN vs. ARMED FORCES
AND POLICE MUTUAL BENEFIT ASSOCIATION,
of INC.,
Consignation is necessarily judicial. Article 1258
of the Civil Code specifically provides that
consignation shall be made by depositing the
thing or things due at the disposal of judicial
182
authority. The said provision clearly precludes
consignation in venues other than the courts.
Page
Assailed in this Petition for Review on
Certiorari1 are the September 29, 2005
Decision2 of the Court of Appeals (CA) which
granted the Petition for Certiorari in CA-G.R. SP
No. 84446 and its January 12, 2006
Resolution3denying petitioners' Motion for
Reconsideration.4
Factual Antecedents
Petitioner Oscar Cacayorin (Oscar) is a member of
respondent Armed Forces and Police Mutual
Benefit Association, Inc. (AFPMBAI), a mutual
benefit association duly organized and existing
under Philippine laws and engaged in the
business of developing low-cost housing projects
for personnel of the Armed Forces of the
Philippines, Philippine National Police, Bureau of
Fire Protection, Bureau of Jail Management and
Penology, and Philippine Coast Guard. He filed an
application with AFPMBAI to purchase a piece of
property which the latter owned, specifically Lot
5, Block 8, Phase I, Kalikasan Mutual Homes, San
Pedro, Puerto Princesa City (the property),
through a loan facility.
On July 4, 1994, Oscar and his wife and co-
petitioner herein, Thelma, on one hand, and the
Rural Bank of San Teodoro (the Rural Bank) on the
other, executed a Loan and Mortgage
Agreement5 with the former as borrowers and the
Rural Bank as lender, under the auspices of Pag-
IBIG or Home Development Mutual Funds Home
Financing Program.
The Rural Bank issued an August 22, 1994 letter
of guaranty6 informing AFPMBAI that the proceeds
of petitioners approved loan in the amount
of P77,418.00 shall be released to AFPMBAI after
title to the property is transferred in petitioners
name and after the registration and annotation of
the parties mortgage agreement.
On the basis of the Rural Banks letter of
guaranty, AFPMBAI executed in petitioners favor
a Deed of Absolute Sale,7 and a new title
Transfer Certificate of Title No. 37017 8 (TCT No.
37017) was issued in their name, with the
corresponding annotation of their mortgage
agreement with the Rural Bank, under Entry No.
3364.9
Unfortunately, the Pag-IBIG loan facility did not
push through and the Rural Bank closed and was
placed under receivership by the Philippine
Deposit Insurance Corporation (PDIC). Meanwhile,
AFPMBAI somehow was able to take possession of
petitioners loan documents and TCT No. 37017,
while petitioners were unable to pay the
loan/consideration for the property.
AFPMBAI made oral and written demands for
petitioners to pay the loan/ consideration for the
property.10
In July 2003, petitioners filed a Complaint11 for
consignation of loan payment, recovery of title
and cancellation of mortgage annotation against
AFPMBAI, PDIC and the Register of Deeds of
Puerto Princesa City. The case was docketed as
Civil Case No. 3812 and raffled to Branch 47 of
the Regional Trial Court (RTC) of Puerto Princesa
City (Puerto Princesa RTC). Petitioners alleged in
their Complaint that as a result of the Rural
Banks closure and PDICs claim that their loan
papers could not be located, they were left in a
quandary as to where they should tender full
payment of the loan and how to secure
cancellation of the mortgage annotation on TCT
No. 37017. Petitioners prayed, thus:
a. That after the filing of this complaint an
order be made allowing the consignation x
x x of Php77,418.00.
b. For the court to compute and declare
the amount of interest to be paid by the
plaintiffs and thereafter to allow the
consignation of the interest payments in
order to give way for the full discharge of
the loan.
c. To order the AFPMBAI to turn over to the
custody of the court the loan records and
title (T.C.T. No. 37017) of the plaintiffs if
the same are in their possession.
d. To declare the full payment of the
principal loan and interest and ordering
the full discharge from mortgage of the
property covered by T.C.T. No. 37017.
e. To order the Register of Deeds of Puerto
Princesa City to cancel the annotation of
real estate mortgage under Entry No.
3364 at the back of T.C.T. No. 37017.
f. Thereafter, to turn over to the plaintiffs
their title free from the aforesaid
mortgage loan.12
AFPMBAI filed a Motion to Dismiss13 claiming that
petitioners Complaint falls within the jurisdiction
of the Housing and Land Use Regulatory Board
183
(HLURB) and not the Puerto Princesa RTC, as it
was filed by petitioners in their capacity as
buyers of a subdivision lot and it prays for
Page
specific performance of contractual and legal
obligations decreed under Presidential Decree No.
95714 (PD 957). It added that since no prior valid
tender of payment was made by petitioners, the
consignation case was fatally defective and
susceptible to dismissal.
Ruling of the Regional Trial Court
In an October 16, 2003 Order,15 the trial court
denied AFPMBAIs Motion to Dismiss, declaring
that since title has been transferred in the name
of petitioners and the action involves
consignation of loan payments, it possessed
jurisdiction to continue with the case. It further
held that the only remaining unsettled
transaction is between petitioners and PDIC as
the appointed receiver of the Rural Bank.
AFPMBAI filed a Motion for
Reconsideration,16 which the trial court denied in
its March 19, 2004 Order.17
Ruling of the Court of Appeals
AFPMBAI thus instituted CA-G.R. SP No. 84446,
which is a Petition for Certiorari 18 raising the issue
of jurisdiction. On September 29, 2005, the CA
rendered the assailed Decision decreeing as
follows:
WHEREFORE, premises considered, this Petition is
GRANTED. The Assailed 16 October 2003 and 19
March 2004 Orders of the public respondent
judge are hereby ordered VACATED and SET
ASIDE.
SO ORDERED.19
The CA held that Civil Case No. 3812 is a case for
specific performance of AFPMBAIs contractual
and statutory obligations as owner/developer of
Kalikasan Mutual Homes, which makes PD 957
applicable and thus places the case within the
jurisdiction of the HLURB. It said that since one of
the remedies prayed for is the delivery to
petitioners of TCT No. 37017, the case is
cognizable exclusively by the HLURB.
Petitioners moved for reconsideration which was
denied by the CA in its January 12, 2006
Resolution.
Hence, the instant Petition.
Issue
The sole issue that must be resolved in this
Petition is: Does the Complaint in Civil Case No.
3812 fall within the exclusive jurisdiction of the
HLURB?
Petitioners Arguments
Petitioners assert that the elements which make
up a valid case for consignation are present in
their Complaint. They add that since a deed of
absolute sale has been issued in their favor, and
possession of the property has been surrendered
to them, not to mention that title has been placed
in their name, the HLURB lost jurisdiction over
their case. And for this same reason, petitioners
argue that their case may not be said to be one
for specific performance of contractual and legal
obligations under PD 957 as nothing more was
left to be done in order to perfect or consolidate
their title.
Petitioners thus pray that the herein assailed
Decision and Resolution of the CA be set aside,
and that the trial court be ordered to continue
with the proceedings in Civil Case No. 3812.
Respondent's Arguments
Respondent, on the other hand, insists in its
Comment20 that jurisdiction over petitioners case
lies with the HLURB, as it springs from their
contractual relation as seller and buyer,
respectively, of a subdivision lot. The prayer in
petitioners Complaint involves the surrender or
delivery of the title after full payment of the
purchase price, which respondent claims are
reciprocal obligations in a sale transaction
covered by PD 957. Respondent adds that in
effect, petitioners are exacting specific
performance from it, which places their case
within the jurisdiction of the HLURB.
Our Ruling
The Court grants the Petition.
The Complaint makes out a case for consignation.
The settled principle is that "the allegations of the
Complaint determine the nature of the action and
consequently the jurisdiction of the courts. This
rule applies whether or not the plaintiff is entitled
to recover upon all or some of the claims
asserted therein as this is a matter that can be
resolved only after and as a result of the trial."21
Does the Complaint in Civil Case No. 3812 make
184
out a case for consignation? It alleges that:
6.0 Not long after however,
Page
RBST22 closed shop and defendant
Philippine Deposit Insurance Corporation
(PDIC) was appointed as its receiver. The
plaintiffs, through a representative, made
a verbal inquiry to the PDIC regarding the
payment of their loan but were told that it
has no information or record of the said
loan. This made [sic] the plaintiffs in
quandary as to where or whom they will
pay their loan, which they intend to pay in
full, so as to cancel the annotation of
mortgage in their title.
7.0 It was discovered that the loan
papers of the plaintiffs, including the
duplicate original of their title, were in the
possession of defendant AFPMBAI. It was
unclear though why the said documents
including the title were in the possession
of AFPMBAI. These papers should have
been in RBSTs possession and given to
PDIC after its closure in the latters
capacity as receiver.
8.0 Plaintiffs are now intending to pay in
full their real estate loan but could not
decide where to pay the same because of
RBST [sic] closure and PDICs failure to
locate the loan records and title. This
courts intervention is now needed in
order to determine to [sic] where or whom
the loan should be paid.
9.0 Plaintiffs hereby respectfully prays
[sic] for this court to allow the deposit of
the amount of Php77,418.00 as full
payment of their principal loan, excluding
interest, pursuant to the Loan and
Mortgage Agreement on 4 July 1994.23
From the above allegations, it appears that the
petitioners debt is outstanding; that the Rural
Banks receiver, PDIC, informed petitioners that it
has no record of their loan even as it took over
the affairs of the Rural Bank, which on record is
the petitioners creditor as per the July 4, 1994
Loan and Mortgage Agreement; that one way or
another, AFPMBAI came into possession of the
loan documents as well as TCT No. 37017; that
petitioners are ready to pay the loan in full;
however, under the circumstances, they do not
know which of the two the Rural Bank or
AFPMBAI should receive full payment of the
purchase price, or to whom tender of payment
must validly be made.
Under Article 1256 of the Civil Code,24 the debtor
shall be released from responsibility by the
consignation of the thing or sum due, without
need of prior tender of payment, when the
creditor is absent or unknown, or when he is
incapacitated to receive the payment at the time
it is due, or when two or more persons claim the
same right to collect, or when the title to the
obligation has been lost. Applying Article 1256 to
the petitioners case as shaped by the allegations
in their Complaint, the Court finds that a case for
consignation has been made out, as it now
appears that there are two entities which
petitioners must deal with in order to fully secure
their title to the property: 1) the Rural Bank
(through PDIC), which is the apparent creditor
under the July 4, 1994 Loan and Mortgage
Agreement; and 2) AFPMBAI, which is currently in
possession of the loan documents and the
certificate of title, and the one making demands
upon petitioners to pay. Clearly, the allegations in
the Complaint present a situation where the
creditor is unknown, or that two or more entities
appear to possess the same right to collect from
petitioners. Whatever transpired between the
Rural Bank or PDIC and AFPMBAI in respect of
petitioners loan account, if any, such that
AFPMBAI came into possession of the loan
documents and TCT No. 37017, it appears that
petitioners were not informed thereof, nor made
privy thereto.
Indeed, the instant case presents a unique
situation where the buyer, through no fault of his
own, was able to obtain title to real property in
his name even before he could pay the purchase
price in full. There appears to be no vitiated
consent, nor is there any other impediment to the
consummation of their agreement, just as it
appears that it would be to the best interests of
all parties to the sale that it be once and for all
completed and terminated. For this reason, Civil
Case No. 3812 should at this juncture be allowed
to proceed.
Moreover, petitioners position is buttressed by
AFPMBAIs own admission in its Comment 25 that it
made oral and written demands upon the former,
which naturally aggravated their confusion as to
who was their rightful creditor to whom payment
should be made the Rural Bank or AFPMBAI. Its
subsequent filing of the Motion to Dismiss runs
counter to its demands to pay. If it wanted to be
paid with alacrity, then it should not have moved
to dismiss Civil Case No. 3812, which was brought
precisely by the petitioners in order to be able to
finally settle their obligation in full.
Finally, the lack of prior tender of payment by the
petitioners is not fatal to their consignation case.
They filed the case for the exact reason that they
185
were at a loss as to which between the two the
Rural Bank or AFPMBAI was entitled to such a
tender of payment. Besides, as earlier stated,
Page
Article 1256 authorizes consignation alone,
without need of prior tender of payment, where
the ground for consignation is that the creditor is
unknown, or does not appear at the place of
payment; or is incapacitated to receive the
payment at the time it is due; or when, without
just cause, he refuses to give a receipt; or when
two or more persons claim the same right to
collect; or when the title of the obligation has
been lost.
Consignation is necessarily judicial; hence,
jurisdiction lies with the RTC, not with the HLURB.
On the question of jurisdiction, petitioners case
should be tried in the Puerto Princesa RTC, and
not the HLURB. Consignation is necessarily
judicial,26 as the Civil Code itself provides that
consignation shall be made by depositing the
thing or things due at the disposal of judicial
authority, thus:
Art. 1258. Consignation shall be made by
depositing the things due at the disposal of
judicial authority, before whom the tender of
payment shall be proved, in a proper case, and
the announcement of the consignation in other
cases.
The consignation having been made, the
interested parties shall also be notified thereof.
(Emphasis and underscoring supplied)
The above provision clearly precludes
consignation in venues other than the
courts.1wphi1 Elsewhere, what may be made is
a valid tender of payment, but not consignation.
The two, however, are to be distinguished.
Tender of payment must be distinguished from
consignation. Tender is the antecedent of
consignation, that is, an act preparatory to the
consignation, which is the principal, and from
which are derived the immediate consequences
which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the
priority of the first is the attempt to make a
private settlement before proceeding to the
solemnities of consignation. (8 Manresa 325).27
While it may be true that petitioners claim
relates to the terms and conditions of the sale of
AFPMBAIs subdivision lot, this is overshadowed
by the fact that since the Complaint in Civil Case
No. 3812 pleads a case for consignation, the
HLURB is without jurisdiction to try it, as such
case may only be tried by the regular courts.
WHEREFORE, premises considered, the Petition is
GRANTED. The September 29, 2005 Decision and
January 12, 2006 Resolution of the Court of
Appeals in CA-G.R. SP No. 84446 are ANNULLED
and SET ASIDE. The October 16, 2003 and March
19, 2004 Orders of the Regional Trial Court of
Puerto Princesa City, Branch 47, are REINSTATED,
and the case is REMANDED to the said court for
continuation of the proceedings.
SO ORDERED.
ELIZABETH DEL CARMEN v. SPOUSES
RESTITUTO SABORDO AND MIMA MAHILUM-
SABORDO
This treats of the petition for review
on certiorari assailing the Decision1 and
Resolution2 of the Court of Appeals (CA), dated
May 25, 2007 and January 24, 2008, respectively,
in CA-G.R. CV No. 75013.
The factual and procedural antecedents of the
case are as follows:cralawlawlibrary
Sometime in 1961, the spouses Toribio and
Eufrocina Suico (Suico spouses), along with
several business partners, entered into a
business venture by establishing a rice and corn
mill at Mandaue City, Cebu. As part of their
capital, they obtained a loan from the
Development Bank of the Philippines (DBP), and
to secure the said loan, four parcels of land
owned by the Suico spouses, denominated as
Lots 506, 512, 513 and 514, and another lot
owned by their business partner, Juliana Del
Rosario, were mortgaged. Subsequently, the
Suico spouses and their business partners failed
to pay their loan obligations forcing DBP to
foreclose the mortgage. After the Suico spouses
and their partners failed to redeem the foreclosed
properties, DBP consolidated its ownership over
the same. Nonetheless, DBP later allowed the
Suico spouses and Reginald and Beatriz Flores
(Flores spouses), as substitutes for Juliana Del
Rosario, to repurchase the subject lots by way of
a conditional sale for the sum of P240,571.00.
The Suico and Flores spouses were able to pay
the downpayment and the first monthly
amortization, but no monthly installments were
186
made thereafter. Threatened with the
cancellation of the conditional sale, the Suico and
Flores spouses sold their rights over the said
Page
properties to herein respondents Restituto and
Mima Sabordo, subject to the condition that the
latter shall pay the balance of the sale price. On
September 3, 1974, respondents and the Suico
and Flores spouses executed a supplemental
agreement whereby they affirmed that what was
actually sold to respondents were Lots 512 and
513, while Lots 506 and 514 were given to them
as usufructuaries. DBP approved the sale of rights
of the Suico and Flores spouses in favor of herein
respondents. Subsequently, respondents were
able to repurchase the foreclosed properties of
the Suico and Flores spouses.
On September 13, 1976, respondent Restituto
Sabordo (Restituto) filed with the then Court of
First Instance of Negros Occidental an original
action for declaratory relief with damages and
prayer for a writ of preliminary injunction raising
the issue of whether or not the Suico spouses
have the right to recover from respondents Lots
506 and 514.
In its Decision dated December 17, 1986, the
Regional Trial Court (RTC) of San Carlos City,
Negros Occidental, ruled in favor of the Suico
spouses directing that the latter have until
August 31, 1987 within which to redeem or buy
back from respondents Lots 506 and 514.
On appeal, the CA, in its Decision 3 in CA-G.R. CV
No. 13785, dated April 24, 1990, modified the
RTC decision by giving the Suico spouses until
October 31, 1990 within which to exercise their
option to purchase or redeem the subject lots
from respondents by paying the sum of
P127,500.00. The dispositive portion of the CA
Decision reads as
follows:chanRoblesvirtualLawlibrary
x x x x
For reasons given, judgment is hereby rendered
modifying the dispositive portion of [the] decision
of the lower court to
read:chanRoblesvirtualLawlibrary
1) The defendants-appellees are granted up to
October 31, 1990 within which to exercise their
option to purchase from the plaintiff-appellant
Restituto Sabordo and Mima Mahilum Lot No. 506,
covered by Transfer Certificate of Title No. T-
102598 and Lot No. 514, covered by Transfer
Certificate of Title No. T-102599, both of
Escalante Cadastre, Negros Occidental by
reimbursing or paying to the plaintiff the sum of
ONE HUNDRED TWENTY-SEVEN THOUSAND FIVE
HUNDRED PESOS
(P127,500.00);chanroblesvirtuallawlibrary
2) Within said period, the defendants-appellees
shall continue to have usufructuary rights on the
coconut trees on Lots Nos. 506 and 514,
Escalante Cadastre, Negros
Occidental;chanroblesvirtuallawlibrary
3) The Writ of Preliminary Injunction dated August
12, 1977 shall be effective until defendants-
appellees shall have exercised their option to
purchase within said period by paying or
reimbursing to the plaintiff-appellant the
aforesaid amount.
No pronouncement as to costs.
SO ORDERED.4
In a Resolution5 dated February 13, 1991, the CA
granted the Suico spouses an additional period of
90 days from notice within which to exercise their
option to purchase or redeem the disputed lots.
In the meantime, Toribio Suico (Toribio) died
leaving his widow, Eufrocina, and several others,
including herein petitioner, as legal heirs. Later,
they discovered that respondents mortgaged Lots
506 and 514 with Republic Planters Bank (RPB) as
security for a loan which, subsequently, became
delinquent.
Thereafter, claiming that they are ready with the
payment of P127,500.00, but alleging that they
cannot determine as to whom such payment shall
be made, petitioner and her co-heirs filed a
Complaint6 with the RTC of San Carlos City,
Negros Occidental seeking to compel herein
respondents and RPB to interplead and litigate
between themselves their respective interests on
the abovementioned sum of money. The
Complaint also prayed that respondents be
directed to substitute Lots 506 and 514 with
other real estate properties as collateral for their
outstanding obligation with RPB and that the
latter be ordered to accept the substitute
collateral and release the mortgage on Lots 506
and 514. Upon filing of their complaint, the heirs
of Toribio deposited the amount of P127,500.00
with the RTC of San Carlos City, Branch 59.
Respondents filed their Answer7 with
Counterclaim praying for the dismissal of the
above Complaint on the grounds that (1) the
action for interpleader was improper since RPB is
not laying any claim on the sum of P127,500.00;
(2) that the period within which the complainants
are allowed to purchase Lots 506 and 514 had
already expired; (3) that there was no valid
187
consignation, and (4) that the case is barred
by litis pendencia or res judicata.
Page
On the other hand, RPB filed a Motion to Dismiss
the subject Complaint on the ground that
petitioner and her co-heirs had no valid cause of
action and that they have no primary legal right
which is enforceable and binding against RPB.
On December 5, 2001, the RTC rendered
judgment, dismissing the Complaint of petitioner
and her co-heirs for lack of merit. 8 Respondents'
Counterclaim was likewise dismissed.
Petitioner and her co-heirs filed an appeal with
the CA contending that the judicial deposit or
consignation of the amount of P127,500.00 was
valid and binding and produced the effect of
payment of the purchase price of the subject lots.
In its assailed Decision, the CA denied the above
appeal for lack of merit and affirmed the disputed
RTC Decision.
Petitioner and her co-heirs filed a Motion for
Reconsideration,9 but it was likewise denied by
the CA.
Hence, the present petition for review
on certiorari with a lone Assignment of Error, to
wit:chanRoblesvirtualLawlibrary
THE COURT OF APPEALS ERRED IN AFFIRMING
THE DECISION OF THE LOWER COURT WHICH
HELD THAT THE JUDICIAL DEPOSIT OF
P127,500.00 MADE BY THE SUICOS WITH THE
CLERK OF COURT OF THE RTC, SAN CARLOS CITY,
IN COMPLIANCE WITH THE FINAL AND
EXECUTORY DECISION OF THE COURT OF
APPEALS IN CA-G.R. CV-13785 WAS NOT VALID.10
Petitioner's main contention is that the
consignation which she and her co-heirs made
was a judicial deposit based on a final judgment
and, as such, does not require compliance with
the requirements of Articles 125611 and 125712 of
the Civil Code.
The petition lacks merit.
At the outset, the Court quotes with approval the
discussion of the CA regarding the definition and
nature of consignation, to
wit:chanRoblesvirtualLawlibrary
consignation [is] the act of depositing the thing
due with the court or judicial authorities
whenever the creditor cannot accept or refuses to
accept payment, and itgenerally requires a
prior tender of payment. It should be
distinguished from tender of payment which
is the manifestation by the debtor to the
creditor of his desire to comply with his
obligation, with the offer of immediate
performance. Tender is the antecedent of
consignation, that is, an act preparatory to the
consignation, which is the principal, and from
which are derived the immediate consequences
which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the
priority of the first is the attempt to make a
private settlement before proceeding to the
solemnities of consignation. Tender and
consignation, where validly made, produces the
effect of payment and extinguishes the
obligation.13
In the case of Arzaga v. Rumbaoa,14 which was
cited by petitioner in support of his contention,
this Court ruled that the deposit made with the
court by the plaintiff-appellee in the said case is
considered a valid payment of the amount
adjudged, even without a prior tender of payment
thereof to the defendants-appellants, because
the plaintiff-appellee, upon making such deposit,
expressly petitioned the court that the
defendants-appellees be notified to receive the
tender of payment. This Court held that while
[t]he deposit, by itself alone, may not have been
sufficient, but with the express terms of the
petition, there was full and complete offer of
payment made directly to defendants-
appellants.15 In the instant case, however,
petitioner and her co-heirs, upon making the
deposit with the RTC, did not ask the trial court
that respondents be notified to receive the
amount that they have deposited. In fact, there
was no tender of payment. Instead, what
petitioner and her co-heirs prayed for is that
respondents and RPB be directed to interplead
with one another to determine their alleged
respective rights over the consigned amount; that
respondents be likewise directed to substitute
the subject lots with other real properties as
collateral for their loan with RPB and that RPB be
also directed to accept the substitute real
properties as collateral for the said loan.
Nonetheless, the trial court correctly ruled that
interpleader is not the proper remedy because
RPB did not make any claim whatsoever over the
amount consigned by petitioner and her co-heirs
with the court.
In the cases of Del Rosario v.
Sandico16 and Salvante v. Cruz,17 likewise cited as
authority by petitioner, this Court held that, for a
consignation or deposit with the court of an
amount due on a judgment to be considered as
payment, there must be prior tender to the
188
judgment creditor who refuses to accept it. The
same principle was reiterated in the later case
of Pabugais v. Sahijwani.[18 As stated above,
Page
tender of payment involves a positive and
unconditional act by the obligor of offering legal
tender currency as payment to the obligee for the
formers obligation and demanding that the latter
accept the same.19 In the instant case, the Court
finds no cogent reason to depart from the
findings of the CA and the RTC that petitioner and
her co-heirs failed to make a prior valid tender of
payment to respondents.
It is settled that compliance with the requisites of
a valid consignation is mandatory. 20 Failure to
comply strictly with any of the requisites will
render the consignation void. One of these
requisites is a valid prior tender of
payment.21cralawred
Under Article 1256, the only instances where
prior tender of payment is excused are: (1) when
the creditor is absent or unknown, or does not
appear at the place of payment; (2) when the
creditor is incapacitated to receive the payment
at the time it is due; (3) when, without just cause,
the creditor refuses to give a receipt; (4) when
two or more persons claim the same right to
collect; and (5) when the title of the obligation
has been lost. None of these instances are
present in the instant case. Hence, the fact that
the subject lots are in danger of being foreclosed
does not excuse petitioner and her co-heirs from
tendering payment to respondents, as directed
by the court.
WHEREFORE, the instant petition is DENIED.
The Decision of the Court of Appeals, dated May
25, 2007, and its Resolution dated January 24,
2008, both in CA-G.R. CV No. 75013,
are AFFIRMED.
________________________________________________
COMGLASCO CORPORATION/AGUILA GLASS
v. SANTOS CAR CHECK CENTER
CORPORATION
On August 16, 2000, respondent Santos Car
Check Center Corporation (Santos), owner of a
showroom located at 75 Delgado Street, in Iloilo
City, leased out the said space to petitioner
Comglasco Corporation (Comglasco), an entity
engaged in the sale, replacement and repair of
automobile windshields, for a period of five years
at a monthly rental of P60,000.00 for the first
year, P66,000.00 on the second year, and
P72,600.00 on the third through fifth years.1
On October 4, 2001, Comglasco advised Santos
through a letter2 that it was pre-terminating their
lease contract effective December 1, 2001.
Santos refused to accede to the pre-termination,
reminding Comglasco that their contract was for
five years. On January 15, 2002, Comglasco
vacated the leased premises and stopped paying
any further rentals. Santos sent several demand
letters, which Comglasco completely ignored. On
September 15, 2003, Santos sent its final
demand letter,3 which Comglasco again ignored.
On October 20, 2003, Santos filed suit for breach
of contract.4
Summons and a copy of the complaint, along with
the annexes, were served on Comglasco on
January 21, 2004, but it moved to dismiss the
complaint for improper service. The Regional
Trial Court (RTC) of Iloilo City, Branch 37,
dismissed the motion and ordered the summons
served anew. On June 28, 2004, Comglasco filed
its Answer.5 Santos moved for a judgment on the
pleadings, which the RTC granted. On August 18,
2004, the trial court rendered its judgment, 6 the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in
favor of [Santos] and against [Comglasco]:
1. Ordering [Comglasco] to faithfully comply with
[its] obligation under the Contract of Lease and
pay its unpaid rentals starting January 16, 2002
to August 15, 2003 in the total amount of
Php1,333,200.00, plus 12% interest per annum
until fully paid;
2. To pay [Santos]:
a) Php200,000.00 as attorneys fees;
b) [Php]50,000.00 as litigation expenses;
c) [Php]400,000.00 as exemplary damages.
3. Costs of the suit.
SO ORDERED.7
On February 14, 2005, Santos moved for
execution pending Comglascos appeal, which the
trial court granted on May 12, 2005. In its
appeal, Comglasco interposed the following
issues for resolution:
1. Whether or not judgment on the pleadings
was properly invoked by the trial court as
basis for rendering its decision;
2. Whether or not material issues were
raised in [Comglascos] Answer;
 3. Whether or not damages may be granted
189
by the trial court without proof and legal
basis.8
Page
In its Decision9 dated August 10, 2011, the Court
of Appeals (CA) affirmed the judgment of the RTC
but reduced the award of attorneys fees to
P100,000.00 and deleted the award of litigation
expenses and exemplary damages.
Petition for Review to the Supreme Court
In this petition, Comglasco raises the following
issues:
1. Whether or not judgment on the pleadings
was properly invoked by the trial court as
basis for rendering its decision?
2. Whether or not material issues were
raised in [Comglascos] answer?
3. Whether or not summary judgment or
judgment on the pleadings is the proper
remedy for [Santos] under the
circumstances of the present case?
4. Whether or not the amount deposited for
advance rental and deposit should be
credited to [Comglascos] account?
5. Whether or not attorneys fees may be
granted by the trial court without proof
and legal basis?10
Paragraph 15 of the parties lease
contract11 permits pre-termination with cause in
the first three years and without cause after the
third year. Citing business reverses which it
ascribed to the 1997 Asian financial crisis,
Comglasco insists that under Article 1267 of the
Civil Code it is exempted from its obligation under
the contract, because its business setback is the
cause contemplated in their lease which
authorized it to pre-terminate the same. Article
1267 provides:
Art. 1267. When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.
Comglasco argues that it cannot be said to have
admitted in its Answer the material allegations of
the complaint precisely because it invoked
therein a valid cause for its decision to pre-
terminate the lease before the lapse of three
years; that therefore, in view of its pleaded
cause for reneging on its rentals (the 1997
Asian financial crisis), the RTC should have
ordered the reception of evidence for this
purpose, after which a summary judgment would
then have been proper, not a judgment on the
pleadings. After all, Santos has claimed in its
Motion for Summary Judgment that Comglascos
cited cause for pre-termination was fictitious or
a sham, whereas in truth the prevailing business
climate which ensued after the 1997 currency
crisis resulted in great difficulty on its part to
comply with the terms of the lease as to be
manifestly beyond the contemplation of the
parties; thus, Comglasco should be deemed
released from the lease.
Next, Comglasco insists that its advance rentals
and deposit totaling P309,000.00 should be
deducted from any sum awarded to Santos while
it also insists that there is no factual and legal
basis for the award of damages.
Ruling of the Court
The petition is denied.
The first three issues being related will be
discussed together.
Comglasco maintains that the RTC was wrong to
rule that its answer to Santos complaint
tendered no issue, or admitted the material
allegations therein; that the court should have
heard it out on the reason it invoked to justify its
action to pre-terminate the parties lease; that
therefore a summary judgment would have been
the proper recourse, after a hearing.
In Philippine National Construction Corporation v.
CA12 (PNCC), which also involves the termination
of a lease of property by the lessee due to
financial, as well as technical, difficulties,13 the
Court ruled:
The obligation to pay rentals or deliver the thing
in a contract of lease falls within the prestation
to give; hence, it is not covered within the
scope of Article 1266. At any rate, the
unforeseen event and causes mentioned by
petitioner are not the legal or physical
impossibilities contemplated in said article.
Besides, petitioner failed to state specifically the
circumstances brought about by the abrupt
change in the political climate in the country
except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus neither fits in
with the facts of the case. Under this theory, the
parties stipulate in the light of certain prevailing
190
conditions, and once these conditions cease to
exist, the contract also ceases to exist. This
theory is said to be the basis of Article 1267 of
Page
the Civil Code, which provides:
Art. 1267. When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.
This article, which enunciates the doctrine of
unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus,
which would endanger the security of contractual
relations. The parties to the contract must be
presumed to have assumed the risks of
unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances
that equity demands assistance for the debtor.
In this case, petitioner wants this Court to believe
that the abrupt change in the political climate of
the country after the EDSA Revolution and its
poor financial condition rendered the
performance of the lease contract impractical and
inimical to the corporate survival of the
petitioner.
This Court cannot subscribe to this argument. As
pointed out by private respondents:
x x x x
Anent petitioners alleged poor financial
condition, the same will neither release petitioner
from the binding effect of the contract of lease.
As held in Central Bank v. Court of Appeals, cited
by private respondents, mere pecuniary inability
to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a
defense to an action for specific performance.14
Relying on Article 1267 of the Civil Code to
justify its decision to pre-terminate its lease with
Santos, Comglasco invokes the 1997 Asian
currency crisis as causing it much difficulty in
meeting its obligations. But in PNCC,15 the Court
held that the payment of lease rentals does not
involve a prestation to do envisaged in Articles
1266 and 1267 which has been rendered legally
or physically impossible without the fault of
the obligor-lessor. Article 1267 speaks of a
prestation involving service which has been
rendered so difficult by unforeseen subsequent
events as to be manifestly beyond the
contemplation of the parties. To be sure, the
Asian currency crisis befell the region from July
1997 and for sometime thereafter, but Comglasco
cannot be permitted to blame its difficulties on
the said regional economic phenomenon because
it entered into the subject lease only on August
16, 2000, more than three years after it began,
and by then Comglasco had known what business
risks it assumed when it opened a new shop in
Iloilo City.
This situation is no different from the Courts
finding in PNCC wherein PNCC cited the
assassination of Senator Benigno Aquino Jr.
(Senator Aquino) on August 21, 1983 and the
ensuing national political and economic crises as
putting it in such a difficult business climate that
it should be deemed released from its lease
contract. The Court held that the political
upheavals, turmoils, almost daily mass
demonstrations, unprecedented inflation, and
peace and order deterioration which followed
Senator Aquinos death were a matter of judicial
notice, yet despite this business climate, PNCC
knowingly entered into a lease with therein
respondents on November 18, 1985, doing so
with open eyes of the deteriorating conditions of
the country. The Court rules now, as in PNCC,
that there are no absolutely exceptional changes
of circumstances that equity demands assistance
for the debtor.16
As found by the CA, Comglascos Answer
admitted the material allegations in the
complaint, to wit: a) that Santos holds absolute
title to a showroom space; b) that Comglasco
leased the said showroom from Santos; c) that
after a little over a year, Comglasco pre-
terminated the lease; d) that, disregarding
Santos rejection of the pre-termination of their
lease, Comglasco vacated the leased premises on
January 15, 2002; e) that Comglasco never
denied the existence and validity of the parties
lease contract. Specifically, the CA noted that
Paragraph 2 of the Answer admitted the
allegations in Paragraphs 2, 3 and 4 of the
complaint that the lease was for five years,
starting on August 16, 2000 and to expire on
August 15, 2005, at a monthly rental of
P60,000.00 on the first year, P66,000.00 on the
second year, and P72,600.00 on the third up to
the fifth year.
The RTC acted correctly in resorting to Section 1
of Rule 34, on Judgment on the Pleadings, to cut
short a needless trial. This Court agrees with the
CA that Comglasco cannot cite Article 1267 of the
Civil Code, and that it must be deemed to have
admitted the material allegations in the
complaint. Section 1, Rule 34 reads:
Sec. 1. Judgment on the pleadings. - Where an
answer fails to tender an issue, or otherwise
admits the material allegations of the adverse
partys pleading, the court may, on motion of that
party, direct judgment on such pleading.
However, in actions for declaration of nullity or WHEREFORE, premises considered, the petition

191
annulment of marriage or for legal separation, is DENIED for lack of merit.
the material facts alleged in the complaint shall
always be proved. SO ORDERED.

Page
A judgment on the pleadings is a judgment on the
facts as pleaded,17 and is based exclusively upon
the allegations appearing in the pleadings of the
parties and the accompanying annexes.18 It is
settled that the trial court has the discretion to
grant a motion for judgment on the pleadings
filed by a party if there is no controverted matter INSULAR G.R. No. 183308
in the case after the answer is filed. 19 A genuine INVESTMENT AND
issue of fact is that which requires the TRUST CORPORATI
presentation of evidence, as distinguished from a ON,
sham, fictitious, contrived or false issue. 20 Come
to think of it, under Rule 35, on Summary Present:
Petitioner,
Judgments, Comglasco had recourse to move for
summary judgment, wherein it could have
adduced supporting evidence to justify its action
on the parties lease, but it did not do so. Section VELASCO,
2 of Rule 35 provides: JR., J., Chairperson,

Sec. 2. Summary judgment for defending party. - PERALTA,

A party against whom a claim, counterclaim, or
cross-claim is asserted or a declaratory relief is - versus - ABAD,
sought may, at any time, move with supporting
affidavits, depositions or admissions for a
summary judgment in his favor as to all or any MENDOZA, and
part thereof.
PERLAS-BERNABE, JJ.
Concerning, now, whether Comglascos alleged
rental deposit and advance rentals of
P309,000.00 should be credited to Comglascos
account, let it suffice to state that it never raised CAPITAL ONE
this matter in its answer to the complaint, nor in EQUITIES CORP.
its appeal to the CA. Certainly, it cannot do so (now known as
now. CAPITAL ONE
HOLDINGS CORP.)
Finally, as to whether attorneys fees may be and PLANTERS
recovered by Santos, Article 2208(2) of the Civil DEVELOPMENT
Code justifies the award thereof, in the absence BANK,
of stipulation, where the defendants act or
omission has compelled the plaintiff to incur
expenses to protect his interest. The pre-
termination of the lease by Comglasco was not
due to any fault of Santos, and Comglasco This is a petition for review on certiorari
completely ignored all four demands of Santos to under Rule 45 of the 1997 Revised Rules of Civil
pay the rentals due from January 16, 2002 to Procedure assailing the June 6, 2008 Decision [1] of
August 15, 2003, thereby compelling Santos to the Court of Appeals (CA) in C.A.-G.R. CV No.
sue to obtain relief. It is true that the policy of 79320 entitled Insular Investment and Trust
the Court is that no premium should be placed on Corporation v. Capital One Equities Corporation
the right to litigate,21 but it is also true that (now known as Capital One Holdings Corporation)
attorneys fees are in the nature of actual and Planters Development Bank.
damages, the reason being that litigation costs
money.22 But the Court agrees with the CA that THE FACTS
the lesser amount of P100,000.00 it awarded to
Santos instead of P200,000.00 adjudged by the Based on the records of the case and on
RTC, is more reasonable. the September 2, 1999 Partial Stipulation of Facts
 and Documents[2] (the Partial Stipulation) agreed
upon by the parties, the facts are as follows:
Petitioner Insular Investment and Trust
Corporation (IITC) and respondents Capital One
Equities Corporation (COEC) and Planters
Development Bank (PDB) are regularly engaged
in the trading, sale and purchase of Philippine
treasury bills.
On various dates in 1994, IITC purchased
from COEC treasury bills with an aggregate face
value of P260,683,392.51 (the IITC T-Bills), as
evidenced by the confirmations of purchase
issued by IITC. The purchase price for the said
treasury bills were fully paid by IITC to COEC
which was able to deliver P121,050,000.00 worth
of treasury bills to IITC.
On May 2, 1994, COEC purchased treasury
bills with a face value of P186,774,739.49 (the
COEC T-Bills). IITC issued confirmations of sale in
favor of COEC covering the said transaction.COEC
paid the purchase price by issuing the following
checks:
No. Payee Amount
y Trust Managers Planters Development P154,802,341.59 formally demanded the delivery of the treasury
No. 001180 Bank
UCPB-Ayala Planters Development P16,975,883.89 lost
ers Check No. Bank
3841
UCPB-Ayala Planters Development P10,413,043.78 delivery of treasury bills, COEC proposed that a
ers Check No. Bank
3840
CPB-Ayala Check Insular Investment and P24,116.11
L213346 Trust Corporation
Both IITC and PDB received the proceeds
of the checks.
On May 2, 1994, PDB issued confirmations
of sale in favor of IITC for the sale of treasury bills
and IITC, in turn, issued confirmations of purchase
in favor of PDB over treasury bills with a total
face value of P186,790,000.00.
Thereafter, PDB sent a letter [3] dated May
4, 1994 to IITC undertaking to deliver treasury
bills worth P186,790,000.00, which IITC
purchased from PDB on May 2, 1994, as soon as
they would be available.
On May 10, 1994, COEC wrote a letter to
IITC demanding the physical delivery of the
treasury bills which the former purchased from
the latter on May 2, 1994.
192
In its May 18, 1994 Letter[4] to PDB, IITC
requested, on behalf of COEC, the delivery to IITC
of treasury bills worth P186,790,000.00 which
Page
had been paid in full by COEC. COEC was
furnished with a copy of the said letter.
On May 30, 1994, COEC protested the
tenor of IITCs letter to PDB and took exception to
IITCs assertion that it merely acted as a facilitator
with regard to the sale of the treasury bills.
IITC sent COEC a letter[5] dated June 3,
1994, demanding that COEC deliver to it (IITC)
the P139,833,392.00 worth of treasury bills or
return the full purchase price. In either case, it
also demanded that COEC (1) pay IITC the
amount of P1,729,069.50 representing business
opportunity lost due to the non-delivery of the
treasury bills, and (2) deliver treasury bills
worth P121,050,000 with the same maturity
dates originally purchased by IITC.
COEC sent a letter-reply[6] dated June 9,
1994 to IITC in which it acknowledged its
obligation to deliver the treasury bills
worth P139,833,392.00[7] which it sold to IITC and
bills worth P186,774,739.49 which it purchased
from IITC. COEC also demanded the payment of
profits in the amount
of P3,253,250.00. Considering that COEC and IITC
both have claims against each other for the
legal set-off be effected, which would result in
IITC owing COEC the difference ofP46,941,446.49.
In its June 13, 1994 letter to COEC, IITC
rejected the suggestion for a legal setting-off of
obligations, alleging that it merely acted as a
facilitator between PDB and COEC.
On June 27, 1994, COEC replied to IITCs
letter, reiterating its demand and its position
stated in its June 9, 1994 letter.
On July 1, 1994, IITC, COEC and PDB
entered into a Tripartite Agreement[8] (the
Tripartite Agreement) wherein PDB assigned to
IITC, which in turn assigned to COEC, Central
Bank Bills with a total face value
of P50,000,000.00. These assignments were
made in consideration of (a) IITC relinquishing all
its rights to claim delivery under the confirmation
of sale issued by PDB to IITC to the extent
of P50,000,000.00 (face value) and (b) COEC
relinquishing all its rights to claim delivery of the
COEC T-Bills under the IITC confirmations of sale
to COEC to the extent ofP50,000,000.00 (face
193
value).
On the same day, COEC and IITC entered
Page
into an Agreement[9] (the COEC-IITC
Agreement) whereby COEC reassigned to IITC the
Central Bank bills subject of the Tripartite
Agreement to the extent of P20,000,000.00 in
consideration of which IITC relinquished all its
rights to claim from COEC the IITC T-Bills covered
by the COEC confirmation of sale to the extent of
an aggregateP20,000,000.00 face value.
Despite repeated demands, however, PDB failed
to deliver the balance of P136,790,000.00 worth
of treasury bills which IITC purchased from PDB
allegedly for COEC. COEC was likewise unable to
deliver the remaining IITC T-Bills amounting
to P119,633,392.00. Neither PDB and COEC
returned the purchase price for the duly paid
treasury bills.[10]
This prompted IITC to file the Amended
Complaint[11] dated March 20, 1995 before the
Regional Trial Court, Branch 138, Makati
City (RTC), praying that COEC be ordered to
deliver treasury bills worth P119,633,392.00 to
IITC or pay the monetary equivalent plus legal
interests; and, in the alternative, that PDB be
ordered to comply with its obligations under the
conduit transaction involving treasury bills
worth P136,790,000.00 by delivering the treasury
bills to IITC, in addition to actual and exemplary
damages and attorneys fees.
COEC filed its Answer to Amended
Complaint[12] dated April 10, 1995, admitting that
it owed IITC treasury bills
worth P119,633,392.00. It countered, however,
that IITC had an outstanding obligation to deliver
to COEC treasury bills worth P136,774,739.49.
[13]
COEC prayed that IITC be required to
deliver P17,141,347.49 (the amount IITC still
owed COEC after a legal off-setting of their debts
against each other) to COEC in addition to moral
and exemplary damages and attorneys fees.[14]
PDB, for its part, insisted in its Answer Ad
Cautelam[15] that it had no knowledge or
participation in the sale by IITC of treasury bills to
COEC. It admitted that it sent a letter dated May
4, 1994 to IITC, undertaking to deliver treasury
bills worth P186,790,000.00 which IITC purchased
from PDB. PDB posited, however, that IITC was
not entitled to the delivery of the said treasury
bills because IITC did not remit payment to
PDB. Neither did the subject securities become
available to PDB.
In its Judgment[16] dated June 16, 2003, the
RTC found that COEC still owed
IITC P119,633,392.00 worth of treasury bills,
pursuant to their transaction in early 1994. As
regards the sale of treasury bills by IITC to COEC,
however, the RTC determined that IITC was not
merely a conduit in the purchase a sale of
treasury bills between PDB and COEC. Rather,
IITC acted as a principal in two transactions: as a
buyer of treasury bills from PDB and as a seller to
COEC. Taking into consideration the Tripartite
Agreement, IITC was still liable to pay COEC the
sum ofP136,790,000.00. Since IITC and COEC
were both debtors and creditors of each other,
the RTC off-set their debts, resulting in a
difference of 17,056,608.00 in favor of COEC. As
to PDBs liability, it ruled that PDB had the
obligation to pay P136,790,000.00 to IITC. Thus,
the trial court ordered (a) IITC to pay
COEC P17,056,608.00 with interest at the rate of
6% from June 10, 1994until full payment and (b)
PDB to pay IITC P136,790,000.00 with interest at
the rate of 6% from March 21, 1995 until full
payment.
Aggrieved, all parties appealed to the CA which
promulgated its decision on June 6, 2008. The CA
affirmed the RTC finding that IITC was not a mere
conduit but rather a direct seller to COEC of the
treasury bills.[17] The CA, however, absolved PDB
from any liability, ruling that because PDB was
not involved in the transactions between IITC and
COEC, IITC should have alleged and proved that
PDB sold treasury bills to IITC. [18] Moreover, PDB
only undertook to deliver treasury bills
worth P186,790,000.00 to IITC as soon as they
are available.[19] But, the said treasury bills did
not become available. Neither did IITC remit
payment to PDB. As such, PDB incurred no
obligation to deliver P186,790,000.00 worth of
treasury bills to IITC.
Hence, this petition.
THE ISSUES
IITC raises the following grounds for the
grant of its petition:
A. The petition is not
dismissible. The issue of whether
IITC acted as a conduit is a
question of law. Assuming for the
sake of argument that the petition
involves questions of fact, the
Supreme Court may take
cognizance of the petition under
exceptional circumstances.
B. The Court of Appeals gravely
erred and acted contrary to law
and jurisprudence and the
194
evidence on record in holding that
IITC did not act as a conduit of
Capital One and Plantersbank in
Page
the 2 May 1994 sale of COEC T-
bills.
C. The Court of Appeals erred and
acted contrary to law and the
evidence on record in ruling that
Plantersbank did not have any
obligation to delivery the COEC T-
Bills to IITC under IITCs alternative
cause of action.
D. The Court of Appeals erred and
acted contrary to law in holding
that Capital One could validly set
off its claims for the undelivered
COEC T-Bills against the fully paid
IITC T-Bills.
E. The Court of Appeals further
erred and acted contrary to law in
holding that Capital One and
Plantersbank were not guilty of
fraud.
F. The Court of Appeals violated
IITCs right to due process in
affirming, without citing any basis
whatsoever, the erroneous holding
of the trial court that there was
insufficient evidence to prove the
actual and consequential damages
sustained by IITC.[20]
COEC puts forth the following issues:
Whether the Court of Appeals
correctly held that IITC did not act
as a conduit of Capital One and
Plantersbank in the May 2,
1994 sale of the COEC T-Bills by
IITC to Capital One.
Whether the Court of Appeals
correctly held that Capital One
may validly set off its claim for the
undelivered COEC T-Bills against
the balance of the IITC T-Bills.
Whether the Court of Appeals
correctly affirmed the holding of
the trial court that Capital One and
Plantersbank are not guilty of
fraud.
Whether the Petition raises
questions of fact, and whether it is
defective.
Whether Capital One is entitled to
the correction of the mathematical
error in the computation of the
money judgment in its favor.[21]
For its part, PDB identifies the principal
issue to be whether it was obliged to deliver to
petitioner Insular the treasury bills which the
latter sold, as principal, to Capital One, and/or
pay the value thereof.[22] The following are stated
as corollary issues:
Whether petitioner Insular was
acting as facilitator or conduit in
the May 2, 1994 sales of the
treasury bills;
Whether petitioner Insular may
raise in this petition the issue of it
being merely as facilitator or
conduit after the Trial Court and
Court of Appeals found that
petitioner Insular was not a
facilitator or conduit.
Whether respondents Plantersbank
and Capital One were guilty of
fraud in their transactions with
petitioner Insular.
Whether petitioner Insular was
entitled to actual and
consequential damages.[23]
The numerous issues can be simplified as
follows:
(1) Whether IITC acted as a
conduit in the transaction
between COEC and PDB;
(2) Whether COEC can set-off
its obligation to IITC as against
the latters obligation to it; and
(3) Whether PDB has the
obligation to deliver treasury
bills to IITC.
THE COURTS RULING
The petition is partly meritorious.
Question of fact;
IITC did not act as conduit
 It is a settled rule that in the

195
Petitioner IITC insists that the issue of whether it exercise of the Supreme Courts
acted as a conduit is a question of law which can power of review, the Court is not a
properly be the subject of a petition for review trier of facts and does not normally

Page
before this Court. Because the parties already undertake the re-examination of
entered into a stipulation of facts and documents, the evidence presented by the
the facts are no longer at issue; rather, the court contending parties during the trial
must now determine the applicable law based on of the case considering that the
the admitted facts, thereby making it a question findings of facts of the CA are
of law. Even assuming that the determination of conclusive and binding on the
IITCs role in the two transactions is a pure Court. However, the Court had
question of fact, it falls under the exceptions recognized several exceptions to
when the Court may decide to review a question this rule, to wit: (1) when the
of fact.[24] findings are grounded entirely on
speculation, surmises or
Respondent COEC, on the other hand, argues that conjectures; (2) when the
IITC raises questions of fact. An issue is one of inference made is manifestly
fact when: (a) there is a doubt or difference as to mistaken, absurd or impossible; (3)
the truth or falsehood of the alleged facts, (b) the when there is grave abuse of
issues raised invite a calibration, assessment, re- discretion; (4) when the judgment
examination and re-evaluation of the evidence is based on a misapprehension of
presented, (c) it questions the probative value of facts; (5) when the findings of
evidence presented or the proofs presented by facts are conflicting; (6) when in
one party are clear, convincing and making its findings the Court of
adequate. Because the question of whether IITC Appeals went beyond the issues of
was merely a conduit satisfies all the conditions the case, or its findings are
enumerated, then it is a question of fact which contrary to the admissions of both
this Court cannot pass upon. In addition, COEC the appellant and the appellee; (7)
calls attention to the principle that findings of fact when the findings are contrary to
of the trial court, especially when approved by the trial court; (8) when the
the Court of Appeals, are binding and conclusive findings are conclusions without
on the Supreme Court.[25] citation of specific evidence on
which they are based; (9) when
PDB also maintains that the finding of the RTC the facts set forth in the petition as
that IITC did not act as a conduit between PDB well as in the petitioners main and
and COEC was supported by substantial evidence reply briefs are not disputed by the
and was sustained by the CA. Thus, it is already respondent; (10) when the findings
binding and conclusive upon this Court, whose of fact are premised on the
jurisdiction is limited to reviewing only errors of supposed absence of evidence and
law and not of fact.[26] contradicted by the evidence on
record; and (11) when the Court of
Respondents are correct. Appeals manifestly overlooked
certain relevant facts not disputed
The issue raised by IITC is factual in nature by the parties, which, if properly
as it requires the Court to delve into the records considered, would justify a
and review the evidence presented by the parties different conclusion.[30]
to determine the validity of the findings of both
the RTC and the CA as to IITCs role in the Contrary to IITCs claim, the circumstances
transactions in question. These are purely factual surrounding the case at bench do not justify the
issues which this Court cannot review. [27] Well- application of any of the exceptions. At any rate,
established is the principle that factual findings of even if the Court would be willing to disregard
the trial court, when adopted and confirmed by this time-honored principle, the inevitable
the Court of Appeals, are binding and conclusion would be the same as that made by
conclusive on this Court and will generally not be the RTC and the CA that IITC did not act as a
reviewed on appeal.[28] conduit but rather as a principal in two separate
transactions, one as the purchaser of treasury
As discussed in The Insular Life Assurance bills from PDB and, in another, as the seller of
Company, Ltd. v. Court of Appeals:[29] treasury bills to COEC.

The evidence against IITC cannot be denied.

 interpretation or construction thereof.[34] This was

196
The confirmations of sale issued by IITC to COEC emphasized in the case of Pichel v. Alonzo:[35]
unmistakably show that the former, as principal,
sold the treasury bills to the latter:[31] Xxx. To begin with, We agree with

Page
petitioner that construction or
Gentlemen: interpretation of the document in
question is not called for. A
As principal, we perusal of the deed fails to
confirm having sold to you on a disclose any ambiguity or
without recourse basis the obscurity in its provisions, nor
following securities against which is there doubt as to the real
you shall pay us clearing funds on intention of the contracting
value date. parties. The terms of the
agreement are clear and
unequivocal, hence the literal
IITCs confirmations of purchase to PDB and plain meaning thereof
likewise reflect that it acted as the principal in the should be observed.Such is the
transaction:[32] mandate of the Civil Code of
the Philippines which provides
Gentlemen: that:

As principal, we confirm having Art. 1370. If the

purchased from you on a without terms of a contract
recourse basis the following are clear and leave
securities against which we shall no doubt upon the
pay you clearing funds on value intention of the
date. contracting parties,
the literal meaning
of its stipulation
There is nothing in these documents which shall control
mentions that IITC merely acted as a conduit in
the sale and purchase of treasury bills between Pursuant to the aforequoted
PDB and COEC. On the contrary, the legal provision, the first and
confirmations of sale and of purchase all clearly fundamental duty of the courts
and expressly indicate that IITC acted as a is the application of the
principal seller to COEC and as a principal buyer contract according to its
from PDB. express terms, interpretation
being resorted to only when
IITC then tries to shift the blame to PDB and COEC such literal application is
by alleging that it was the two parties which impossible.[36] (Emphases
conceptualized the two-step or conduit supplied)
transaction and dictated the documents to be
used. As such, they cannot be allowed to take COEC and PDB did not take advantage of any
advantage of the ambiguity created by the vagueness in the documents in question. They
documentation which it, in conspiracy with only seek to enforce the intention of the parties,
Plantersbank, concocted to render IITC, an in accordance with the terms of the confirmations
innocent party, liable.[33] of sale and purchase voluntarily entered into by
the parties.
This argument is far-fetched and borders on the
incredible. At the outset, it should be pointed out The Court also finds it hard to believe that
that there is no ambiguity whatsoever in the an entity would carelessly and imprudently
language of the documents used. The expose itself to liability in the amount of millions
confirmations of sale and purchase unequivocally of pesos by failing to ensure that the documents
state that IITC acted as a principal buyer and used in the transaction would be a faithful
seller of treasury bills. The language used is as account of its true nature. It is important to note
clear as day and cannot be more explicit. Thus, that the confirmations of sale were issued by IITC
because the words of the documents in question itself using its own documents. Therefore, it
are clear and readily understandable by any defies imagination how COEC and PDB could have
ordinary reader, there is no need for the foisted off these forms on IITC against its will.
 In addition, a comparison of the
197
confirmations of sale issued by IITC in favor of
COEC as against the confirmations of sale issued
by PDB in favor of IITC indicates that there is a
Page
difference in the interest rates of the treasury
bills and in the face values:
PDB Confirmations of Sale to IITC[37]
ity Yield Face Value Total Price
13, 17.150% P44,170,000.00 P42,998,169.00 disprove the findings of both the RTC and the CA
1994 17.150% 142,620,000.00 139,193,100.56 transactions the purchase of treasury bills from
P186,790,000.00 P182,191,269.56PDB and the subsequent sale thereof to
IITC Confirmations of Sale to COEC[38]
ity Yield Face Value Total Price
3, 1994 17.0% P 44,161,700.44 P 43,000,000.00
1994 17.0% 142,613,039.05 139,215,385.70
P186,774,739.49 P182,215,385.70
IITC offered a lower interest rate of 17% to
COEC, in contrast to the 17.15% interest rate
given to it by PDB. There is also a notable
difference in the face value of the treasury bills
and in the total price paid for each set. If, as IITC
insists, it only acted as a conduit to the sale
between PDB and COEC, then there should be no
disparity in the terms (the interest rate, the face
value and the total price) of the sale of the
treasury bills. Obviously, this is not the case. The
figures lead to no other conclusion but that there
were two separate transactions in both of which
IITC played a principal role as a buyer from PDB of
treasury bills with an aggregate face value
of P186,790,000.00 at an interest rate of 17.15%
and as a seller to COEC of treasury bills with an
aggregate face value of P186,774,739.49 at an
interest rate of 17%.
Again, IITC attempts to hold PDB and COEC
responsible for this questionable variation,
alleging that it was PDB and COEC which dictated
the details of the purchase and sale of the
treasury bills.IITC heavily relies on the fact that
COEC directly paid PDB the amount
of P182,191,269.26 representing the amount
covered in the confirmations of sale issued by
PDB to strengthen its position that it merely acted
as a conduit between PDB and COEC.[39] This was
further supported by the internal trading sheets
of IITC where the following handwritten notations
were made: (1) in Purchase Trading Sheet No.
10856 covering the purchase of treasury bills by
IITC from PDB: dont prepare any check; payment
will come from Capital One (See STS 10811), and
(2) in Sale Trading Sheet No. 10811 covering the
sale of treasury bills by IITC to COEC: for STS
10810 and 10811 will receive 2 checks payable to
the ff: 1. Planters Devt Bank - P182,191,269.59 2.
IITC - 24,116.11
The Court is not convinced. That COEC
directly paid PDB is of no moment and does not
necessarily mean that COEC recognized IITCs
conduit role in the transaction. Neither does it
that IITC acted as principal in the two
COEC. The Court agrees with the explanation of
the RTC:
The Court is aware that in
the trading business, agreements
are concluded even before the
goods being traded are received
by the would be seller. Buyers in
turn conclude their transactions
even before they are paid. For this
reason, the mere fact that in
document for internal use, the
instruction that payment will come
from Capital One will not, by itself,
prove that plaintiff was a mere
conduit. Neither could it be
considered as circumstantial to
establish the fact in issue. At most,
the instructions merely identified
the source of funds but whether
those funds are to be received by
the plaintiff as purchase price or
for remittance to whoever is
entitled to it, none was
indicated. The Court may look at
the instruction differently if the
entries were no payment required;
COEC to pay PDB directly or this is
a conduit transaction; servicing to
be done by COEC or COEC to pay
PDB directly.[40]
IITC also insists that the fact that
the P24,116.11 which it claims to be a facilitation
fee is exactly the difference between the principal
amounts of the treasury bills purchased from PDB
and the treasury bills sold to COEC constitutes
the smoking gun or the veritable elephant in the
living room.[41] To IITC, it is apparent that the
amount is a facilitation fee, adding credence to
its contention that it only acted as a conduit.
The Court cannot sustain that view. There
is nothing to prove that the amount of P24,116.11
received by IITC from COEC was a facilitation Plaintiff failed to explain the

198
fee. As explained by COEC, the amount could reason for demanding delivery of
easily have been the margin or spread earned by the treasury bills when it was not
IITC in the buy-and-sell transaction.[42] This is, the buyer as it so claims. It also

Page
however, not for the Court to determine. As such, failed to object to the use by PDB
the Court relies on the findings of the RTC on this of the words purchase[d] from us,
matter: something which it could easily do
or should do considering the
Plaintiffs other evidence to amount involved.
prove its conduit role was the
delivery to it by COEC by way of its The conduct of the plaintiff
corporate check of P24,116.11 in after concluding the May 2,
payment of plaintiffs conduit 1994 transaction [was] [that] of a
fee. The Court is hesitant to give buyer.[44]
probative value to this proof
because nowhere does it appear in
the trading sheets or any other From the foregoing, it is clear that IITC acted as
document that it was collected by principal purchaser from PDB and principal seller
plaintiff and received by it from to COEC, and not simply as a conduit between
COEC in that concept. Business PDB and COEC.
practice is to issue an official
receipt because it is an income, Set-off allowed
but none was presented. The
testimonial evidence was IITC argues that the RTC and the CA erred
refuted. COEC presented in holding that COEC can validly set off its claims
controverting evidence on the for the undelivered IITC T-Bills against the COEC T-
original mode of payment which Bills.[45] IITC reiterates that COEC did not become
was requested to be changed by a creditor of IITC because the former did not pay
witness Bombaes. COEC presented the latter for the purchased treasury bills. Rather,
the unsigned check and it was PDB which received the proceeds of the
voucher. The latter was duly payment from COEC.[46] In addition, their
accomplished and bears the obligations do not consist of a sum or
signatures or initials of the money. Neither are they of the same kind
approving officers. On this because the obligations call for the delivery of
particular issue, COECs evidence specific determinate things treasury bills with
deserves more weight.[43] specific maturity dates and various interest
rates. Thus, legal compensation cannot take
place.[47]
Finally, as correctly observed by the RTC, the
actions of IITC after the transaction were not COEC, on the other hand, points out that it has
those of a conduit but of a principal: already unquestionably proven that IITC acted as
The Court notes with a principal, and not as a conduit, in the sale of
particular interest the events treasury bills to COEC.[48] Furthermore, it asserts
which transpired on May 4, 1994, that the treasury bills in question are generic in
two (2) days after plaintiff through nature because the confirmations of sale and
witness Mendoza learned of the purchase do not mention specific treasury bills
non-delivery by PDB of the with serial numbers.[49] The securities were sold
treasury as indeterminate objects which have a monetary
bills. Witness Mendoza went to the equivalent, as acknowledged by the parties in the
office of PDB and secured the Tripartite Agreement.[50] As such, because both
letter, Exhibit E, which contains IITC and COEC are principal creditors of the other
the undertaking of PDB to deliver over debts which consist of consumable things or
the treasury bills. This was a sum of money, the RTC correctly ruled that
procured by plaintiff and COEC may validly set-off its claims for
addressed to the plaintiff. The undelivered treasury bills against that of IITCs
language used by PDB was claims.[51]
purchase[d] from us and plaintiff
accepted it. The Court finds in favor of respondent
COEC.
 The applicable provisions of law are lower courts have already determined, to which

199
Articles 1278, 1279 and 1290 of the Civil Code of this Court concurs, that IITC acted as a principal
the Philippines: in the purchase of treasury bills from PDB and in
the subsequent sale to COEC of the COEC T-

Page
Art. 1278. Compensation shall take Bills. Thus, COEC and IITC are principal creditors
place when two persons, in their of each other in relation to the sale of the COEC T-
own right, are creditors and Bills and IITC T-Bills, respectively.
debtors of each other.
IITC also claims that the COEC T-Bills cannot be
Art. 1279. In order that set-off against the IITC T-Bills because the latter
compensation may be proper, it is are specific determinate things which consist of
necessary: treasury bills with specific maturity dates and
various interest rates.[52] IITCs actions belie its
(1) That each one of the own assertion. The fact that IITC accepted the
obligors be bound assignment by COEC of Central Bank Bills with an
principally, and that he aggregate face value of P20,000,000.00 as
be at the same time a payment of part of the IITC T-Bills is evidence of
principal creditor of the IITCs willingness to accept other forms of security
other; as satisfaction of COECs obligation. It should be
noted that the second requisite only requires that
(2) That both debts consist the thing be of the same kind and quality. The
in a sum of money, or if COEC T-Bills and the IITC T-Bills are both
the things due are government securities which, while having
consumable, they be of differing interest rates and dates of maturity,
the same kind, and also have each been assigned a certain face value to
of the same quality if determine their monetary equivalent. In fact, in
the latter has been the Tripartite Agreement, the COEC-IITC
stated; Agreement and in the memoranda of the parties,
the parties recognized the monetary value of the
(3) That the two debts be treasury bills in question, and, in some instances,
due; treated them as sums of money.[53] Thus, they are
of the same kind and are capable of being subject
(4) That they be liquidated to compensation.
and demandable;
The third, fourth and fifth requirements are
(5) That over neither of clearly present and are not denied by the
them there be any parties. Both debts are due and demandable
retention or because both remain unsatisfied, despite
controversy, payment made by IITC for the IITC T-Bills and by
commenced by third COEC for the COEC T-Bills. Moreover, COEC
persons and readily admits that it has an outstanding balance
communicated in due in favor of IITC.[54] Conversely, IITC has been
time to the debtor. found by the lower courts to be liable, as principal
seller, for the delivery of the COEC T-Bills. [55] The
xxx debts are also liquidated because their existence
and amount are determined.[56] Finally, there
Art. 1290. When all the requisites exists no retention or controversy over the COEC
mentioned in Article 1279 are T-Bills and the IITC T-Bills.
present, compensation takes effect
by operation of law, and Because all the stipulations under Article 1279
extinguishes both debts to the are present in this case, compensation can take
concurrent amount, even though place. COEC is allowed to set-off its obligation to
the creditors and debtors are not deliver the IITC T-Bills against IITCs obligation to
aware of the compensation. deliver the COEC T-Bills.

Correction of the amount due

Based on the foregoing, in order for
compensation to be valid, the five requisites Having established that compensation or
mentioned in the abovequoted Article 1279 set-off is allowed between COEC and IITC, the
should be present, as in the case at bench. The
Court will now delve into the proper amount of evidenced by the Confirmations of Sale issued by

200
the award and the applicable interest rates. IITC. If this figure is used in computing COECs
award, the resulting amount would
The RTC, in its Judgment, ordered IITC to beP17,141,347.49, which is consistent with

Page
pay COEC the amount of P17,056,608 with COECs counterclaim.
interest at the rate of 6% per annum until full
The revised
payment. In arriving at the said amount, the trial
computation
court used, as its basis, COECs claim against IITC
for P186,790,000 worth of treasury
COECs bills counterclaim
P186,774,739.49
less P50,000,000 which it received under the
Tripartite Agreement. Then it deducted Amount
from this assigned by
(50,000,000.00)
theP139,633,392.00 face value of the undelivered
IITC to COEC
treasury bills by COEC to IITC less
the P20,000,000 which COEC assigned to IITC P136,774,739.49
pursuant to the COEC-IITC Agreement.[57] IITCs claim against
P139,633,392.00
As correctly pointed out by COEC, there reassigned by
Amount
was a mistake in the arithmetic subtraction made (20,000,000.00)
COEC to IITC
by the RTC. Using the figures provided by the
lower court, the correct result should have P119,633,392.00
beenP17,156,608.00, P100,000.00 more than
what was adjudged in favor of COEC. To illustrate: P17,141,347.49

The trial Lastly, as regards the legal interest which

courts should be imposed on the award, the Court
computation directs the attention of the parties to the case
COECs of Eastern Shipping Lines v. Court of Appeals,[58]
P186,790,000.
counterclaim
00
against IITC 1. When the obligation is
Amount breached, and it consists in the
(50,000,000.00
assigned by payment of a sum of money, i.e., a
)
IITC to COEC loan or forbearance of money, the
P136,790,000. interest due should be that which
Subtotal
00 may have been stipulated in
IITCs claim writing.Furthermore, the interest
P139,633,392.
against due shall itself earn legal interest
00
COEC from the time it is judicially
Amount demanded. In the absence of
reassigned (20,000,000.00 stipulation, the rate of interest
by COEC to ) shall be 12% per annum to be
IITC computed from default, i.e., from
P119,633,392. judicial or extrajudicial demand
Subtotal
00 under and subject to the provisions
P17,156,608 of Article 1169 of the Civil Code.
TOTAL
.00
2. When an obligation, not
Aside from the error in the RTCs constituting a loan or
mathematical computation, a review of the forbearance of money, is
records, particularly the March 20, 1995 breached, an interest on the
Amended Complaint filed by IITC, the April 10, amount of damages awarded
1995 Answer to Amended Complaint (With may be imposed at the
Counterclaim) filed by COEC and the September discretion of the court at the
2, 1999 Partial Stipulation of Facts and rate of 6% per annum. No
Documents submitted by IITC, COEC and PDB to interest, however, shall be
the trial court, reveals that there was some adjudged on unliquidated claims or
confusion as to the correct basis to be used for damages except when or until the
calculating the amount due to COEC. In COECs demand can be established with
Answer and in the Partial Stipulation, it explicitly reasonable certainty. Accordingly,
stated that it purchased from IITC treasury bills where the demand is established
with a face value of P186,774,739.49, as with reasonable certainty, the
 interest shall begin to run from the
201
time the claim is made judicially or
extrajudicially (Art. 1169, Civil
Code) but when such certainty
Page
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.
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.
[59]
(Emphases supplied)
Because the obligation arose from a contract of
sale and purchase of government securities, and
not from a loan or forbearance of money, the
applicable interest rate is 6% from June 10, 1994,
when IITC received the demand letter from COEC.
[60]
After the judgment becomes final and
executory, the legal interest rate increases to
12% until the obligation is satisfied.
In sum, the Court finds that after compensation is
effected, IITC still owes COEC P17,141,347.49
worth of treasury bills, subject to the interest rate
of 6% per annum from June 10, 1994, then
subsequently to the increased interest rate of
12% from the date of finality of this decision until
full payment.
PDB has an obligation to deliver
the treasury bills to IITC
The CA, in absolving PDB from all liability,
reasoned that: (1) PDB was not involved in the
transactions for the purchase and sale of treasury
bills between IITC and COEC; (2) IITC failed to
allege in its Amended Complaint and prove
during the trial that PDB directly and principally
sold to IITC P186,790,000 worth of treasury bills;
(3) while PDB undertook, in its May 4, 1994 letter
to deliver to IITC the said treasury bills, the
obligation did not ripen because the bills did not
become available to PDB and IITC did not remit
any payment to PDB; (4) IITC did not demand
delivery of the treasury bills; (5) IITC merely sued
PDB as an alternative defendant, implying that
IITC did not have a principal and direct cause of
action against PDB on the treasury bills; and (6)
there was nothing in the records to support the
trial courts finding that PDB owed
IITC P186,790,000 worth of treasury bills.[61]
PDB essentially echoes the reasons set forth by
the CA and reiterated that because IITC did not
pay for the treasury bills subject of its (PDB) May
4 undertaking, then IITC had no right to demand
delivery of the said securities from
PDB. Moreover, the check payments made by
COEC to PDB were not in payment of the treasury
bills purchased by IITC from PDB, but for COECs
other obligations with PDB. The total amount of
the checks P182,191,269.26 did not correspond
to the treasury bills worth P186,790,000 which
COEC allegedly purchased from PDB with IITC
acting as conduit. PDB also points out that COEC
did not interpose a cross-claim against it
precisely because COEC was aware that it had no
claim against PDB.[62] Also, the checks clearly
indicated that they were made in payment for the
account of COEC.[63]
IITC insists that it alleged in its Amended
Complaint (by way of alternative cause of action)
that PDB directly and principally sold to IITC
treasury bills worth P186,790,000.00. By suing
PDB as an alternative defendant, IITC did not
acknowledge that PDB could not be held
principally liable. On the contrary, by bringing
suit against PDB under an alternative cause of
action, IITC set forth a claim against PDB as the
principal seller of the treasury bills. In addition,
IITC categorically refuted PDBs allegation that the
former did not pay for the treasury bills
purchased from the latter. The judicial admissions
of PDB during the course of the trial and in the
Partial Stipulation, that PDB received the
proceeds of the managers checks issued by COEC
as payment for COECs purchase of treasury bills
from IITC, contradict PDBs defense that no
payment was made by IITC for the said treasury
bills. Payment by COEC to PDB, upon IITCs
instructions, should be treated as a payment by a
third person with the knowledge of the debtor,
under Article 1236 of the Civil Code. Thus, when
PDB accepted COECs checks, it became duty
bound to deliver the treasury bills sold to IITC as
the principal buyer.[64]
Lastly, IITC points out the absurdity of the
CA decision in allowing COEC to offset its liability
to IITC against its liability to deliver the treasury
bills purchased by COEC. The parties do not deny Rule 13, Section 13: Alternative

202
that COEC paid for the purchase price of the defendants. Where the plaintiff is
subject treasury bills by issuing managers checks uncertain against who of several
in the name of PDB and IITC. As such, unless persons he is entitled to relief, he

Page
COECs payment to PDB is credited as payment by may join any or all of them as
IITC to PDB for the securities purchased by IITC, defendants in the alternative,
under that theory that IITC acted as a principal although a right to relief against
buyer, there would be no obligation on the part of one may be inconsistent with a
IITC against which a set-off can be effected by right of relief against the other.
COEC.[65] (13a)

On this point, the Court agrees with IITC. Rule 8, Section 2: Alternative
causes of action or defenses. A
First, while it is true that PDB was not involved in party may set forth two or more
the sale of the COEC T-Bills, it is irrelevant to the statements of a claim or defense
issue because it is IITC which interposed a claim, alternatively or hypothetically,
albeit an alternative one, against PDB for having either in one cause of action or
sold to IITC treasury bills defense or in separate causes of
worth P186,790,000.00. This was alleged in IITCs action or defenses. When two or
Amended Complaint and was deemed by the RTC more statements are made in the
to have been successfully proven.[66] The findings alternative and one of them if
of the RTC are supported by the confirmations of made independently would be
sale issued by PDB in favor of IITC and PDBs letter sufficient, the pleading is not made
dated May 4, 1994 undertaking to deliver the insufficient by the insufficiency of
treasury bills worth P186,790,000.00 to IITC. one or more of the alternative
[67]
The due execution and the veracity of the statements.
contents of the aforesaid documents have been
admitted by the parties.[68] As discussed earlier, the Court is not granting
IITCs primary cause of action against COEC
Second, it is erroneous to say that IITC never because IITC acted, not as a mere conduit for the
made any demand upon PDB. IITCs letter sale of shares by PDB to COEC as alleged by IITC,
dated May 18, 1994 addressed to PDB confirms but rather as a principal purchaser of securities
that it demanded delivery by PDB of the treasury from PDB and then later as a principal seller to
bills covered by the confirmations of sale issued COEC. By reason of this determination, COEC is
by PDB in its favor. Although the demand was allowed to offset its outstanding obligation to
made on behalf of COEC, which allegedly deliver the remaining IITC T-Bills against the
purchased the treasury bills from PDB, consistent latters obligation to deliver the COEC T-
with IITCs assertion that it only facilitated the Bills. Consequently, IITCs alternative action
sale, it was nevertheless a demand for against the alternative defendant PDB should be
delivery. Even if this were to be considered an considered in order for IITC to be able to recover
invalid demand because it was not made by IITC from PDB the P186,790,000.00 worth of treasury
as the principal party to the transaction with PDB, bills which had already been fully paid for.
the filing of the Amended Complaint by IITC is
equivalent to demand, in keeping with the rule To ascertain whether IITC was able to
that the filing of a complaint constitutes judicial adequately state an alternative cause of action
demand.[69] against PDB in its Amended Complaint, the Court
refers to Perpetual Savings Bank v.
Third, the CA ruling that IITC impliedly did not Fajardo[70] where the test for determining the
have a principal cause of action because it existence of a cause of action was extensively
merely sued PDB as an alternative defendant is discussed:
an extremely flawed and baseless supposition
which runs counter to established law and The familiar test for
jurisprudence. The filing of a suit against an determining whether a
alternative defendant and under an alternative complaint did or did not state
cause of action should not be taken against a cause of action against the
IITC. Section 13, Rule 3 and Section 2, Rule 8 of defendants is whether or not,
the Rules of Civil Procedure explicitly allows such admitting hypothetically the
filing: truth of the allegations of fact
made in the complaint, a judge
may validly grant the relief
demanded in the
203
complaint. In Rava Development
Corporation v. Court of Appeals,
the Court elaborated on this
Page
established standard in the
following manner:
The rule is that a
defendant moving to
dismiss a complaint on the
ground of lack of cause of
action is regarded as having
hypothetically admitted all
the averments thereof. The
test of the sufficiency of the
facts found in a petition as
constituting a cause of
action is whether or not,
admitting the facts alleged,
the court can render a valid
judgment upon the same in
accordance with the prayer
thereof (Consolidated Bank
and Trust Corp. v. Court of
Appeals, 197 SCRA 663
[1991]).
In determining the
existence of a cause of
action, only the
statements in the
complaint may properly
be considered. It is error
for the court to take
cognizance of external facts
or hold preliminary hearings
to determine their
existence. If the allegation
in a complaint furnish
sufficient basis by which the
complaint may be
maintained, the same
should not be dismissed
regardless of the defenses
that may be assessed by
the defendants (supra).
A careful review of
the records of this case
reveals that the allegations
set forth in the complaint
sufficiently establish a cause
of action. The following
are the requisites for the
existence of a cause of
action: (1) a right in
favor of the plaintiff by
whatever means and
under whatever law it
arises or is created; (2)
an obligation on the part
of the named defendant
to respect, or not to
violate such right; and
(3) an act or omission on
the part of the said
defendants constituting
a violation of the
plaintiff's right or a
breach of the obligation
of the defendant to the
plaintiff (Heirs of Ildefonso
Coscolluela, Sr., Inc. v. Rico
General Insurance
Corporation, 179 SCRA 511
[1989]).[71] (Emphases
supplied)
Following the disquisition above, IITCs
Amended Complaint, while not a model of superb
draftsmanship in its struggle to maintain IITCs
conduit theory, adequately sets forth a cause of
action against PDB. Under its claim against PDB
as alternative defendant, IITC alleged that, even if
it acted as a direct buyer from PDB, (1) IITC is
entitled to the delivery of the treasury bills
worthP186,790,000.00 covered by the
confirmations of sale issued by PDB, (2) PDB has
an obligation to deliver the same to IITC, and (3)
PDB failed to deliver the said securities to IITC.[72]
It would be the height of injustice to hold
IITC accountable for the delivery of the COEC T-
Bills to COEC without similarly holding PDB liable
for the release of the treasury bills
worthP186,790,000.00 to IITC, which cannot be
accomplished without allowing IITCs alternative
cause of action against PDB to prosper.
The Court now tackles the main argument of PDB
for sustaining the ruling of the CA absolving it
from liability that IITC allegedly failed to make the
required payment for the purchase. PDB claims
that the managers checks which it received from
COEC were payment by the latter for its other
obligations to the former. Conspicuously, PDB
failed to elaborate on the supposed obligations of
COEC.
This flimsy allegation is patently untrue. In its
Memorandum,[73] COEC denied that the checks
were payment for an account which it had with
PDB, as PDB so desperately alleges. COEC
clarified that the managers checks payable to
PDB were issued by COEC upon the instructions
of IITC in payment for the COEC T-Bills. PDBs
theory was negated by COEC itself as the issuer
of the checks.Moreover, PDB already judicially
admitted, through the Partial Stipulation, that the
checks were given by COEC as payment for the
COEC T-Bills. Section 4, Rule 129 of the Revised
Rules of Evidence provides that:
Sec. 4. Judicial admissions. An
admission, verbal or written, made
by a party in the course of the
proceedings in the same case,
does not require proof. The
admission may be contradicted
only by showing that it was made
through palpable mistake or that
no such admission was made.
As such, PDB cannot now gainsay itself by
claiming that the checks were payment by COEC
for certain unidentified obligations to PDB. It is
well-settled that judicial admissions cannot be
contradicted by the admitter who is the party
himself and binds the person who makes the
same, and absent any showing that this was
made thru palpable mistake, no amount of
rationalization can offset it.[74]
Since it has been sufficiently established
that it was IITC which instructed that payment be
made to PDB, it is apparent that the said checks
were delivered to PDB in consideration of a
transaction between PDB and IITC. On May 2,
1994, the same date the checks were issued, IITC
purchased treasury bills with a combined face
value of P186,790,000.00 from PDB for the total
price of P182,191,269.56. The Court notes that
the P182,191,269.26 aggregate amount of the
checks issued by COEC to PDB is almost exactly
equal to the total price of the treasury bills which
IITC purchased from PDB.[75] The payment by
COEC on behalf of IITC can be considered as
payment made by a third-party to the transaction
between IITC and PDB which is allowed under
Article 1236 of the Civil Code of the Philippines.[76]
The Court finds no logical reason either for PDB to
execute the May 4, 1994 Letter to IITC
undertaking to deliver treasury bills PDBs Liability
worth P186,790,000.00 if it had not Amount of treasury bills purchased by
received the payment from IITC
IITC.Especially so because there is
nothing in the letter to indicate that PDB Amount assigned by PDB to IITC
was still awaiting payment for the said
securities. There is no other reasonable TOTAL
conclusion but that PDB received
payment, in the form of three managers checks
issued by COEC, for the treasury bills purchased
by IITC, and that having failed to promptly deliver
the treasury bills despite having encashed the
checks, PDB then executed the foregoing letter of
undertaking.
Also telling is PDBs participation in the Tripartite
Agreement with IITC and COEC where it
assigned P50,000,000 worth of Central Bank Bills
204
to IITC, in consideration of which, IITC
relinquished its right to claim delivery under the
confirmations of sale issued by PDB to the extent
Page
of P50,000,000. While the agreement stipulated
that it was not in any way an admission of any
liability by any one of them against another, the
fact that PDB agreed to execute such an
agreement is indicative of the existence of its
obligation to IITC. In its Answer Ad Cautelam filed
before the RTC, PDB explained that it gave
up P50,000,000 worth of Central Bank Bills simply
to assist COEC and IITC meet their financial
difficulties. The Court finds this allegation highly
inconceivable, preposterous and even ludicrous
because no company in its right mind would
willingly part with such a huge amount of bank
bills for no consideration whatsoever except for
solely altruistic reasons.
Finally, PDBs argument that it had no obligation
to deliver the treasury bills purchased by IITC
because the same did not become available to
PDB is evidently a frantic last ditch attempt to
evade liability. That the subject securities did not
become available to PDB should not be the
concern of IITC. For as long as payment was
made, PDB was obliged to deliver the securities
subject of its confirmations of sale.
PDBs adroit maneuvering coupled with IITCs
poorly conceived conduit theory led the CA to
reach an erroneous conclusion. This Court,
however, will not be similarly blinded. There is
simply an incongruity in the CA
decision. Accordingly, this Court rules that PDB
should be liable for the delivery
of P186,790,000.00 worth of treasury bills to IITC,
or payment of the same, reduced
byP50,000,000.00 which the former assigned to
the latter under the Tripartite Agreement. The
total liability of PDB is P136,790,000.00,
P186,790,000.00
50,000,000.00
P136,790,000.00
computed as follows:
This shall be subject to interest at the rate of 6%
per annum from the date of the filing of the
Amended Complaint on March 21, 1995,
considered as the date of judicial demand, then
to 12% per annum from the date of finality of this
205
decision until full payment.
To rule otherwise would be to allow unjust
Page
enrichment on the part of PDB to the detriment of
IITC. Article 22 of the Civil Code of
the Philippines provides that:
Art. 22. Every person who through
an act of performance by another,
or any other means, acquires or
comes into possession of
something at the expense of the
latter without just or legal ground,
shall return the same to him.
In the recent case of Flores v. Spouses Lindo,
[77]
this Court expounded on the subject matter:
There is unjust enrichment when a
person unjustly retains a benefit to
the loss of another, or when a
person retains money or property
of another against the
fundamental principles of justice,
equity and good conscience. The
principle of unjust enrichment
requires two conditions: (1) that a
person is benefited without a valid
basis or justification, and (2) that
such benefit is derived at the
expense of another.
The main objective of the principle
against unjust enrichment is to
prevent one from enriching himself
at the expense of another without
just cause or consideration.[78]
The Court cannot condone a decision which is
manifestly partial. Neither shall the Court be a
party to the perpetration of injustice. As the last
bastion of justice, this Court shall always rule
pursuant to the precepts of fairness and equity in
order to dispel any doubt in the integrity and
competence of the Judiciary.
WHEREFORE, the petition is PARTIALLY
GRANTED. The June 6, 2008 Decision of the
Court of Appeals in C.A.-G.R. CV No. 79320 is SET
ASIDE. Accordingly, the June 16, 2003RTC
Decision is REINSTATED though MODIFIED to
read as follows:
FOR THE REASONS GIVEN,
judgment is hereby rendered -
a] ordering Planters
Development Bank to pay plaintiff
136,790,000.00 with interest at
the rate of six (6%) percent per
annum from March 21, 1995 until
full payment;
b] ordering Insular and Trust
Investment Corporation to pay
Capital One Equities Corporation
17,156,608.00 with legal interest
at the rate of six (6%) percent per
annum from June 10, 1994 until
full payment; and
c] dismissing the
counterclaim of Planters
Development Bank.
Any amount not paid upon the
finality of this decision shall be
subject to interest at the increased
rate of twelve (12%) percent per
annum reckoned from the date of
finality of this decision until full
payment thereof.
No pronouncement as to
costs.
SO ORDERED.
_____________________________________________
UNION BANK OF THE PHILIPPINES vs.
DEVELOPMENT BANK OF THE PHILIPPINES
Assailed in this petition for review on
Certiorari1 are the Decision2 dated November 3,
2009 and Resolution3 dated February 26, 2010 of
the Court of Appeals (CA) in CA-G.R. SP No. 93833
which affirmed the Orders4 dated November 9,
2005 and January 30, 2006 of the Regional Trial
Court of Makati, Branch 585 (RTC) in Civil Case No.
7648 denying the motion to affirm legal
compensation6 filed by petitioner Union Bank of
the Philippines (Union Bank) against respondent
Development Bank of the Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan
obligations to both Union Banks predecessor-in-
interest, Bancom Development Corporation
(Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others,
entered into a Deed of Cession of Property In
Payment of Debt7(dacion en pago) whereby the
former ceded in favor of the latter certain
properties (including a processing plant in
206
Marilao, Bulacan [processing plant]) in
consideration of the following: (a) the full and
complete satisfaction of FIs loan obligations to
Page
DBP; and (b) the direct assumption by DBP of FIs
obligations to Bancom in the amount
ofP17,000,000.00 (assumed obligations).8
On the same day, DBP, as the new owner of the
processing plant, leased back9 for 20 years the
said property to FI (Lease Agreement) which was,
in turn, obliged to pay monthly rentals to be
shared by DBP and Bancom.
DBP also entered into a separate
agreement10 with Bancom (Assumption
Agreement) whereby the former: (a) confirmed its
assumption of FIs obligations to Bancom; and (b)
undertook to remit up to 30% of any and all
rentals due from FI to Bancom (subject rentals)
which would serve as payment of the assumed
obligations, to be paid in monthly installments.
The pertinent portions of the Assumption
Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed
in favor of Bancom that the above obligations to
Bancom which DBP has assumed shall be settled,
paid and/or liquidated by DBP out of a portion of
the lease rentals or part of the proceeds of sale of
those properties of the Assignors conveyed to
DBP pursuant to the [Deed of Cession of Property
in Payment of Debt dated May 21, 1979] and
which are the subject of [the Lease Agreement]
made and executed by and between DBP and [FI],
the last hereafter referred to as the "Lessee" to
be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the
amount up to 30% of any and all rentals due from
the Lessee pursuant to the Lease Agreement shall
be remitted by DBP to Bancom at the latters
offices at Pasay Road, Makati, Metro Manila within
five (5) days from due dates thereof, and applied
in payment of the Assumed Obligations. Likewise,
the amount up to 30% of the proceeds from any
sale of the Leased Properties shall within the
same period above, be remitted by DBP to
Bancom and applied in payment or prepayment
of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after
application of the entire rentals and or the entire
sales proceeds actually received by Bancom on
the Leased Properties shall be paid by DBP to
Bancom not later than December 29, 1998.
(Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its
leasehold rights under the Lease Agreement to
Foodmasters Worldwide, Inc. (FW);11 while on May
9, 1984, Bancom conveyed all its receivables,
including, among others, DBPs assumed
obligations, to Union Bank.12
Claiming that the subject rentals have not been
duly remitted despite its repeated demands,
Union Bank filed, on June 20, 1984, a collection
case against DBP before the RTC, docketed as
Civil Case No. 7648.13 In opposition, DBP
countered, among others, that the obligations it
assumed were payable only out of the rental
payments made by FI. Thus, since FI had yet to
pay the same, DBPs obligation to Union Bank
had not arisen.14 In addition, DBP sought to
implead FW as third party-defendant in its
capacity as FIs assignee and, thus, should be
held liable to Union Bank.15
In the interim, or on May 6, 1988, DBP filed a
motion to dismiss on the ground that it had
ceased to be a real-party-in-interest due to the
supervening transfer of its rights, title and
interests over the subject matter to the Asset
Privatization Trust (APT). Said motion was,
however, denied by the RTC in an Order dated
May 27, 1988.16
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC,
in a Decision17 dated May 8, 1990, ordered: (a)
DBP to pay Union Bank the sum of P4,019,033.59,
representing the amount of the subject rentals
(which, again, constitutes 30% of FIs [now FWs]
total rental debt), including interest until fully
paid; and (b) FW, as third-party defendant, to
indemnify DBP, as third- party plaintiff, for its
payments of the subject rentals to Union Bank. It
ruled that there lies no evidence which would
show that DBPs receipt of the rental payments
from FW is a condition precedent to the formers
obligation to remit the subject rentals under the
Lease Agreement. Thus, when DBP failed to remit
the subject rentals to Union Bank, it defaulted on
its assumed obligations.18 DBP then elevated the
case on appeal before the CA, docketed as CA-
G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994
Decision), the CA set aside the RTCs ruling, and
consequently ordered: (a) FW to pay DBP the
amount of P32,441,401.85 representing the total
rental debt incurred under the Lease Agreement,
including P10,000.00 as attorneys fees; and (b)
DBP, after having been paid by FW its unpaid
207
rentals, to remit 30% thereof (i.e., the subject
rentals) to Union Bank.20
Page
It rejected Union Banks claim that DBP has the
direct obligation to remit the subject rentals not
only from FWs rental payments but also out of its
own resources since said claim contravened the
"plain meaning" of the Assumption Agreement
which specifies that the payment of the assumed
obligations shall be made "out of the portion of
the lease rentals or part of the proceeds of the
sale of those properties of [FI] conveyed to
DBP."21 It also construed the phrase under the
Assumption Agreement that DBP is obligated to
"pay any balance of the Assumed Obligations
after application of the entire rentals and/or the
entire sales proceeds actually received by [Union
Bank] on the Leased Properties . . . not later than
December 29, 1998" to mean that the lease
rentals must first be applied to the payment of
the assumed obligations in the amount
of P17,000,000.00, and that DBP would have to
pay out of its own money only in case the lease
rentals were insufficient, having only until
December 29, 1998 to do so. Nevertheless, the
monthly installments in satisfaction of the
assumed obligations would still have to be first
sourced from said lease rentals as stipulated in
the assumption agreement.22 In view of the
foregoing, the CA ruled that DBP did not default
in its obligations to remit the subject rentals to
Union Bank precisely because it had yet to
receive the rental payments of FW.23
Separately, the CA upheld the RTCs denial of
DBPs motion to dismiss for the reason that the
transfer of its rights, title and interests over the
subject matter to the APT occurred pendente lite,
and, as such, the substitution of parties is largely
discretionary on the part of the court.
At odds with the CAs ruling, Union Bank and DBP
filed separate petitions for review on certiorari
before the Court, respectively docketed as G.R.
Nos. 115963 and 119112, which were thereafter
consolidated.
The Courts Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a
Resolution24 dated December 13, 1995. First, it
upheld the CAs finding that while DBP directly
assumed FIs obligations to Union Bank, DBP was
only obliged to remit to the latter 30% of the
lease rentals collected from FW, from which any
deficiency was to be settled by DBP not later than
December 29, 1998.25 Similarly, the Court agreed
with the CA that the denial of DBPs motion to
dismiss was proper since substitution of parties,
in case of transfers pendente lite, is merely
discretionary on the part of the court, adding
further that the proposed substitution of APT will
amount to a novation of debtor which cannot be
done without the consent of the creditor.26
On August 2, 2000, the Courts resolution became
final and executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for
execution28 before the RTC, praying that DBP be
directed to pay the amount of P9,732,420.555
which represents the amount of the subject
rentals (i.e., 30% of the FWs total rental debt in
the amount of P32,441,401.85). DBP
opposed29 Union Banks motion, contending that
it sought to effectively vary the dispositive
portion of the CAs May 27, 1994 Decision in CA-
G.R. CV No. 35866. Also, on September 12, 2001,
DBP filed its own motion for execution against
FW, citing the same CA decision as its basis.
In a Consolidated Order30 dated October 15, 2001
(Order of Execution), the RTC granted both
motions for execution. Anent Union Banks
motion, the RTC opined that the CAs ruling that
DBPs payment to Union Bank shall be
demandable only upon payment of FW must be
viewed in light of the date when the same was
rendered. It noted that the CA decision was
promulgated only on May 27, 1994, which was
before the December 29, 1998 due date within
which DBP had to fully pay its obligation to Union
Bank under the Assumption Agreement. Since the
latter period had already lapsed, "[i]t would, thus,
be too strained to argue that payment by DBP of
its assumed obligation[s] shall be dependent on
[FWs] ability, if not availability, to pay."31 In
similar regard, the RTC granted DBPs motion for
execution against FW since its liability to Union
Bank and DBP remained undisputed.
As a result, a writ of execution32 dated October
15, 2001 (October 15, 2001 Writ of Execution)
and, thereafter, a notice of garnishment 33 against
DBP were issued. Records, however, do not show
that the same writ was implemented against FW.
DBP filed a motion for reconsideration34 from the
Execution Order, averring that the latter issuance
varied the import of the CAs May 27, 1994
Decision in CA-G.R. CV No. 35866 in that it
prematurely ordered DBP to pay the assumed
obligations to Union Bank before FWs payment.
The motion was, however, denied on December
5, 2001.35 Thus, DBPs deposits were eventually
garnished.36 Aggrieved, DBP filed a petition for
208
certiorari37 before the CA, docketed as CA-G.R. SP
No. 68300.
Page
The CA Ruling in CA-G.R. SP No. 68300
In a Decision38 dated July 26, 2002, the CA
dismissed DBPs petition, finding that the RTC did
not abuse its discretion when it issued the
October 15, 2001 Writ of Execution. It upheld the
RTCs observation that there was "nothing wrong
in the manner how [said writ] was implemented,"
as well as "in the zealousness and promptitude
exhibited by Union Bank" in moving for the same.
DBP appealed the CAs ruling before the Court,
which was docketed as G.R. No. 155838.
The Courts Ruling in G.R. No. 155838
In a Decision39 dated January 13, 2004 (January
13, 2004 Decision), the Court granted DBPs
appeal, and thereby reversed and set aside the
CAs ruling in CA-G.R. SP No. 68300. It found
significant points of variance between the CAs
May 27, 1994 Decision in CA-G.R. CV No. 35866,
and the RTCs Order of Execution/October 15,
2001 Writ of Execution. It ruled that both the
body and the dispositive portion of the same
decision acknowledged that DBPs obligation to
Union Bank for remittance of the lease payments
is contingent on FWs prior payment to DBP, and
that any deficiency DBP had to pay by December
29, 1998 as per the Assumption Agreement
cannot be determined until after the satisfaction
of FWs own rental obligations to DBP.
Accordingly, the Court: (a) nullified the October
15, 2001 Writ of Execution and all related
issuances thereto; and (b) ordered Union Bank to
return to DBP the amounts it received pursuant to
the said writ.40 Dissatisfied, Union Bank moved for
reconsideration which was, however, denied by
the Court in a Resolution dated March 24, 2004
with finality. Thus, the January 13, 2004 Decision
attained finality on April 30, 2004. 41 Thereafter,
DBP moved for the execution of the said decision
before the RTC. After numerous efforts on the part
of Union Bank proved futile, the RTC issued a writ
of execution (September 6, 2005 Writ of
Execution), ordering Union Bank to return to DBP
all funds it received pursuant to the October 15,
2001 Writ of Execution.42
Union Banks Motion to Affirm Legal
Compensation
On September 13, 2005, Union Bank filed a
Manifestation and Motion to Affirm Legal
Compensation,43 praying that the RTC apply legal
compensation between itself and DBP in order to
offset the return of the funds it previously
received from DBP. Union Bank anchored its
motion on two grounds which were allegedly not
in existence prior to or during trial, namely: (a) on
December 29, 1998, DBPs assumed obligations
became due and demandable;44 and (b)
considering that FWI became non-operational and
non-existent, DBP became primarily liable to the
balance of its assumed obligation, which as of
Union Banks computation after its claimed set-
off, amounted to P1,849,391.87.45
On November 9, 2005, the RTC issued an
Order46 denying the above-mentioned motion for
lack of merit, holding that Union Banks stated
grounds were already addressed by the Court in
the January 13, 2004 Decision in G.R. No. 155838.
With Union Banks motion for reconsideration
therefrom having been denied, it filed a petition
for certiorari47 with the CA, docketed as CA-G.R.
SP No. 93833.
Pending resolution, Union Bank issued Managers
Check48 No. 099-0003192363 dated April 21,
2006 amounting toP52,427,250.00 in favor of
DBP, in satisfaction of the Writ of Execution dated
September 6, 2005 Writ of Execution. DBP,
however, averred that Union Bank still has a
balance of P756,372.39 representing a portion of
the garnished funds of DBP,49 which means that
said obligation had not been completely
extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision50 dated November 3, 2009, the CA
dismissed Union Banks petition, finding no grave
abuse of discretion on the RTCs part. It affirmed
the denial of its motion to affirm legal
compensation considering that: (a) the RTC only
implemented the Courts January 13, 2004
Decision in G.R. No. 155838 which by then had
already attained finality; (b) DBP is not a debtor
of Union Bank; and (c) there is neither a
demandable nor liquidated debt from DBP to
Union Bank.51
Undaunted, Union Bank moved for
reconsideration which was, however, denied in a
Resolution52 dated February 26, 2010; hence, the
instant petition.
The Issue Before the Court
The sole issue for the Courts resolution is
whether or not the CA correctly upheld the denial
of Union Banks motion to affirm legal
compensation.
The Courts Ruling
209
The petition is bereft of merit. Compensation is
defined as a mode of extinguishing obligations
Page
whereby two persons in their capacity as
principals are mutual debtors and creditors of
each other with respect to equally liquidated and
demandable obligations to which no retention or
controversy has been timely commenced and
communicated by third parties.53 The requisites
therefor are provided under Article 1279 of the
Civil Code which reads as follows:
Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of
money, or if the things due are
consumable, they be of the same kind,
and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due
time to the debtor.1awp++i1 (Emphases
and underscoring supplied)
The rule on legal54 compensation is stated in
Article 1290 of the Civil Code which provides that
"[w]hen all the requisites mentioned in Article
1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to
the concurrent amount, even though the creditors
and debtors are not aware of the compensation."
In this case, Union Bank filed a motion to seek
affirmation that legal compensation had taken
place in order to effectively offset (a) its own
obligation to return the funds it previously
received from DBP as directed under the
September 6, 2005 Writ of Execution with (b)
DBPs assumed obligations under the Assumption
Agreement. However, legal compensation could
not have taken place between these debts for the
apparent reason that requisites 3 and 4 under
Article 1279 of the Civil Code are not present.
Since DBPs assumed obligations to Union Bank
for remittance of the lease payments are in the
Courts words in its Decision dated January 13,
2004 in G.R. No. 155838 " contingent on the
prior payment thereof by [FW] to DBP," it cannot
be said that both debts are due (requisite 3 of
Article 1279 of the Civil Code). Also, in the same
ruling, the Court observed that any deficiency
that DBP had to make up (by December 29, 1998
as per the Assumption Agreement) for the full
satisfaction of the assumed obligations " cannot
be determined until after the satisfaction of
Foodmasters obligation to DBP." In this regard, it
cannot be concluded that the same debt had
already been liquidated, and thereby became
demandable (requisite 4 of Article 1279 of the
Civil Code).
The aforementioned Court decision had already
attained finality on April 30, 200455 and, hence,
pursuant to the doctrine of conclusiveness of
judgment, the facts and issues actually and
directly resolved therein may not be raised in any
future case between the same parties, even if the
latter suit may involve a different cause of
action.56Its pertinent portions are hereunder
quoted for ready reference:57
Both the body and the dispositive portion of the
[CAs May 27, 1994 Decision in CA-G.R. CV No.
35866] correctly construed the nature of DBPs
liability for the lease payments under the various
contracts, to wit:
x x x Construing these three contracts, especially
the "Agreement" x x x between DBP and Bancom
as providing for the payment of DBPs assumed
obligation out of the rentals to be paid to it does
not mean negating DBPs assumption "for its own
account" of the P17.0 million debt x x x. It only
means that they provide a mechanism for
discharging [DBPs] liability. This liability subsists,
since under the "Agreement" x x x, DBP is
obligated to pay "any balance of the Assumed
Obligations after application of the entire rentals
and or the entire sales proceeds actually received
by [Union Bank] on the Leased Properties not
later than December 29, 1998." x x x It only
means that the lease rentals must first be applied
to the payment of the P17 million debt and that
[DBP] would have to pay out of its money only in
case of insufficiency of the lease rentals having
until December 29, 1998 to do so. In this sense, it
is correct to say that the means of repayment of
the assumed obligation is not limited to the lease
rentals. The monthly installments, however,
would still have to come from the lease rentals
since this was stipulated in the "Agreement."
xxxx
Since, as already stated, the monthly installments In fine, since requisites 3 and 4 of Article 1279 of

210
for the payment of the P17 million debt are to be the Civil Code have not concurred in this case, no
funded from the lease rentals, it follows that if the legal compensation could have taken place
lease rentals are not paid, there is nothing for between the above-stated debts pursuant to

Page
DBP to remit to [Union Bank], and thus [DBP]
should not be considered in default. It is
noteworthy that, as stated in the appealed
decision, "as regards plaintiffs claim for damages
against defendant for its alleged negligence in
failing and refusing to enforce a lessors remedies
against Foodmasters Worldwide, Inc., the Court
finds no competent and reliable evidence of such
claim."
Article 1290 of the Civil Code. Perforce, the
petition must be denied, and the denial of Union
Bank s motion to affirm legal compensation
sustained.
WHEREFORE, the petition is DENIED. The Decision
dated November 3, 2009 and Resolution dated
February 26, 2010 of the Court of Appeals in CA-
G.R. SP No. 93833 are hereby AFFIRMED.

xxxx SO ORDERED.

WHEREFORE, the decision appealed from is SET FIRST UNITED CONSTRUCTORS

ASIDE and another one is RENDERED, CORPORATION and BLUE STAR
CONSTRUCTION CORPORATION vs.
(i) Ordering third-party defendant-appellee BAYANIHAN AUTOMOTIVE CORPORATION
Foodmasters Worldwide, Inc. to pay
defendant and third-party plaintiff- This case concerns the applicability of the legal
appellant Development Bank of the principles of recoupment and compensation.
Philippines the sum of P32,441,401.85,
representing the unpaid rentals from
August 1981 to June 30, 1987, as well The Case
as P10,000.00 for attorneys fees; and
Under review is the decision promulgated on July
(ii) Ordering defendant and third-party 26, 2004,1 whereby the Court of Appeals CA)
plaintiff-appellant Development Bank of affirmed the judgment rendered on May 14 1996
the Philippines after having been paid by by the Regional Trial Court, Branch 107, in
third-party defendant-appellee the sum Quezon City adjudging the petitioners
of P32,441,401.85, to remit 30% thereof to defendants) liable to pay to the respondent
plaintiff-appellee Union Bank of the plaintiff) various sums of money and damages.2
Philippines.
Antecedents
SO ORDERED.
Petitioner First United Constructors Corporation
In other words, both the body and the dispositive (FUCC) and petitioner Blue Star Construction
portion of the aforequoted decision Corporation (Blue Star) were associate
acknowledged that DBPs obligation to Union construction firms sharing financial resources,
Bank for remittance of the lease payments is equipment and technical personnel on a case-to-
contingent on the prior payment thereof by case basis. From May 27, 1992 to July 8, 1992,
Foodmasters to DBP. they ordered six units of dump trucks from the
respondent, a domestic corporation engaged in
the business of importing and reconditioning used
A careful reading of the decision shows that the Japan-made trucks, and of selling the trucks to
Court of Appeals, which was affirmed by the interested buyers who were mostly engaged in
Supreme Court, found that only the balance or the construction business, to wit:
the deficiency of the P17 million principal
obligation, if any, would be due and demandable
as of December 29, 1998. Naturally, this TO WHOM DATE OF
UNIT
deficiency cannot be determined until after the DELIVERY DELIVERY
satisfaction of Foodmasters obligation to DBP, for
remittance to Union Bank in the proportion set Isuzu Dump
FUCC 27 May 1992
out in the 1994 Decision. (Emphases and Truck
underscoring supplied; citations omitted) Isuzu Dump
FUCC 27 May 1992
Truck
xxxx
Isuzu Dump FUCC 10 June 1992
 they had informed the respondent of the defects

211
Truck
in that unit but the respondent had refused to
Isuzu Dump comply with its warranty, compelling them to
FUCC 18 June 1992
Truck incur expenses for the repair and spare parts.

Page
Isuzu Dump
Blue Star 4 July 1992
Truck
Isuzu Dump
FUCC 8 July 1992
Truck
The parties established a good business
relationship, with the respondent extending
service and repair work to the units purchased by
the petitioners. The respondent also practiced
liberality towards the petitioners in the latters
manner of payment by later on agreeing to
payment on terms for subsequent purchases.
On September 19, 1992, FUCC ordered from the
respondent one unit of Hino Prime Mover that the
respondent delivered on the same date. On
September 29, 1992, FUCC again ordered from
the respondent one unit of Isuzu Transit Mixer
that was also delivered to the petitioners. For the
two purchases, FUCC partially paid in cash, and
the balance through post-dated checks, as
follows:
BANK/CHECK NO. DATE AMOUNT
Pilipinas Bank 23 November P360,000.
18027379 1992 00
Pilipinas Bank 1 December P375,000.
18027384 1992 00
Upon presentment of the checks for payment, the
respondent learned that FUCC had ordered the
payment stopped. The respondent immediately
demanded the full settlement of their obligation
from the petitioners, but to no avail. Instead, the
petitioners informed the respondent that they
were withholding payment of the checks due to
the breakdown of one of the dump trucks they
had earlier purchased from respondent,
specifically the second dump truck delivered on
May 27, 1992.
Due to the refusal to pay, the respondent
commenced this action for collection on April 29,
1993, seeking payment of the unpaid balance in
the amount of P735,000.00 represented by the
two checks.
In their answer, the petitioners averred that they
had stopped the payment on the two checks
worth P735,000.00 because of the respondents
refusal to repair the second dump truck; and that
They prayed that the respondent return the price
of the defective dump truck worth P830,000.00
minus the amounts of their two checks
worth P735,000.00, with 12% per annum interest
on the difference of P90,000.00 from May 1993
until the same is fully paid; that the respondent
should also reimburse them the sum
of P247,950.00 as their expenses for the repair of
the dump truck, with 12% per annum interest
from December 16, 1992, the date of demand,
until fully paid; and that the respondent pay
exemplary damages as determined to be just and
reasonable but not less than P500,000, and
attorneys fees of P50,000 plus P1,000.00 per
court appearance and other litigation expenses.
It was the position of the respondent that the
petitioners were not legally justified in
withholding payment of the unpaid balance of the
purchase price of the Hino Prime Mover and the
Isuzu Transit Mixer due the alleged defects in
second dump truck because the purchase of the
two units was an entirely different transaction
from the sale of the dump trucks, the warranties
for which having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its
judgment,3 finding the petitioners liable to pay for
the unpaid balance of the purchase price of the
Hino Prime Mover and the Isuzu Transit Mixer
totaling P735,000.00 with legal interest and
attorneys fees; and declaring the respondent
liable to pay to the petitioners the sum
of P71,350.00 as costs of the repairs incurred by
the petitioners. The RTC held that the petitioners
could not avail themselves of legal compensation
because the claims they had set up in the
counterclaim were not liquidated and
demandable. The fallo of the judgment states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants, jointly and
severally to pay plaintiff the sum
of P360,000.00 and P375,000.00 with
interest at the legal rate of 12% per
annum computed from February 11, 1993,
which is the date of the first extrajudicial
demand, until fully paid;
2. Ordering the defendants, jointly and
severally, to pay plaintiff the sum
 equivalent to 10% of the principal amount
212
due, for attorneys fees;
3. On the counterclaim, ordering plaintiff
Page
to pay defendants the sum of P71,350.00
with interest at the legal rate of 12% per
annum computed from the date of this
decision until fully paid;
4. Ordering plaintiff to pay the defendants
attorneys fees equivalent to 10% of the
amount due;
5. No pronouncement as to costs.
SO ORDERED.4
Decision of the CA
The petitioners appealed, stating that they could
justifiably stop the payment of the checks in the
exercise of their right of recoupment because of
the respondents refusal to settle their claim for
breach of warranty as to the purchase of the
second dump truck.
In its decision promulgated on July 26,
2004,5 however, the CA affirmed the judgment of
the RTC. It held that the remedy of recoupment
could not be properly invoked by the petitioners
because the transactions were different; that the
expenses incurred for the repair and spare parts
of the second dump truck were not a proper
subject of recoupment because they did not arise
out of the purchase of the Hino Prime Mover and
the Isuzu Transit Mixer; and that the petitioners
claim could not also be the subject of legal
compensation or set-off, because the debts in a
set-off should be liquidated and demandable.
Issues
The petitioners are now before the Court
asserting in their petition for review on certiorari
that the CA erred in:
I
x x x NOT UPHOLDING THE RIGHT OF
PETITIONER[S] TO RECOUPMENT UNDER
PAR. (1) OF ART. 1599 OF THE CIVIL CODE,
WHICH PROVIDES [FOR] THE RIGHTS AND
REMEDIES AVAILABLE TO A BUYER
AGAINST A SELLERS BREACH OF
WARRANTY.
II
x x x RULING THAT PETITIONERS CANNOT
AVAIL OF COMPENSATION ALLEGEDLY
BECAUSE THEIR CLAIMS AGAINST
RESPONDENT ARE NOT LIQUIDATED AND
DEMANDABLE.
III
x x x NOT HOLDING RESPONDENT LIABLE
TO PETITIONERS FOR LEGAL INTEREST
COMPUTED FROM THE FIRST
EXTRAJUDICIAL DEMAND, AND FOR
ACTUAL EXEMPLARY DAMAGES.6
The petitioners submit that they were justified in
stopping the payment of the two checks due to
the respondents breach of warranty by refusing
to repair or replace the defective second dump
truck earlier purchased; that the withholding of
payments was an effective exercise of their right
of recoupment as allowed by Article 1599(1) of
the Civil Code; due to the sellers breach of
warranty that the CAs interpretation (that
recoupment in diminution or extinction of price in
case of breach of warranty by the seller should
refer to the reduction or extinction of the price of
the same item or unit sold and not to a different
transaction or contract of sale) was not supported
by jurisprudence; that recoupment should not be
restrictively interpreted but should include the
concept of compensation or set-off between two
parties who had claims arising from different
transactions; and that the series of purchases and
the obligations arising therefrom, being inter-
related, could be considered as a single and
ongoing transaction for all intents and purposes.
The respondent counters that the petitioners
could not refuse to pay the balance of the
purchase price of the Hino Prime Mover and the
Isuzu Transit Mixer on the basis of the right of
recoupment under Article 1599 of the Civil Code;
that the buyers remedy of recoupment related
only to the same transaction; and that
compensation was not proper because the claims
of the petitioners as alleged in their counterclaim
were not liquidated and demandable.
There is no longer any question that the
petitioners were liable to the respondent for the
unpaid balance of the purchase price of the Hino
Prime Mover and the Isuzu Transit Mixer. What
remain to be resolved are strictly legal, namely:
one, whether or not the petitioners validly
exercised the right of recoupment through the
withholding of payment of the unpaid balance of
the purchase price of the Hino Prime Mover and
the Isuzu Transit Mixer; and, two, whether or not
the costs of the repairs and spare parts for the
second dump truck delivered to FUCC on May 27,
213
1992 could be offset for the petitioners
obligations to the respondent.
Page
Ruling
We affirm the decision of the CA with
modification.
1.
Petitioners could not validly resort to recoupment
against respondent
Recoupment (reconvencion) is the act of rebating
or recouping a part of a claim upon which one is
sued by means of a legal or equitable right
resulting from a counterclaim arising out of the
same transaction.7 It is the setting up of a
demand arising from the same transaction as the
plaintiffs claim, to abate or reduce that claim.
The legal basis for recoupment by the buyer is
the first paragraph of Article 1599 of the Civil
Code, viz:
Article 1599. Where there is a breach of warranty
by the seller, the buyer may, at his election:
(1) Accept or keep the goods and set up
against the seller, the breach of warranty
by way of recoupment in diminution or
extinction of the price;
(2) Accept or keep the goods and maintain
an action against the seller for damages
for the breach of warranty;
(3) Refuse to accept the goods, and
maintain an action against the seller for
damages for the breach of warranty;
(4) Rescind the contract of sale and refuse
to receive the goods or if the goods have
already been received, return them or
offer to return them to the seller and
recover the price or any part thereof which
has been paid.
When the buyer has claimed and been granted a
remedy in anyone of these ways, no other
remedy can thereafter be granted, without
prejudice to the provisions of the second
paragraph of article 1191. (Emphasis supplied)
xxxx
In its decision, the CA applied the first paragraph
of Article 1599 of the Civil Code to this case,
explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code
which provides for the remedy of recoupment in
diminution or extinction of price in case of breach
of warranty by the seller should therefore be
interpreted as referring to the reduction or
extinction of the price of the same item or unit
sold and not to a different transaction or contract
of sale. This is more logical interpretation of the
said article considering that it talks of breach of
warranty with respect to a particular item sold by
the seller. Necessarily, therefore, the buyers
remedy should relate to the same transaction and
not to another.
Defendants-appellants act of ordering the
payment on the prime mover and transit mixer
stopped was improper considering that the said
sale was a different contract from that of the
dump trucks earlier purchased by defendants-
appellants.
The claim of defendants-appellants for breach of
warranty, i.e. the expenses paid for the repair
and spare parts of dump truck no. 2 is therefore
not a proper subject of recoupment since it does
not arise out of the contract or transaction sued
on or the claim of plaintiff-appellee for unpaid
balances on the last two (2) purchases, i. e. the
prime mover and the transit mixer.8
The CA was correct. It was improper for
petitioners to set up their claim for repair
expenses and other spare parts of the dump
truck against their remaining balance on the price
of the prime mover and the transit mixer they
owed to respondent.1avvphi1 Recoupment must
arise out of the contract or transaction upon
which the plaintiffs claim is founded. 9 To be
entitled to recoupment, therefore, the claim must
arise from the same transaction, i.e., the
purchase of the prime mover and the transit
mixer and not to a previous contract involving the
purchase of the dump truck. That there was a
series of purchases made by petitioners could not
be considered as a single transaction, for the
records show that the earlier purchase of the six
dump trucks was a separate and distinct
transaction from the subsequent purchase of the
Hino Prime Mover and the Isuzu Transit Mixer.
Consequently, the breakdown of one of the dump
trucks did not grant to petitioners the right to
stop and withhold payment of their remaining
balance on the last two purchases.
2.
214
Legal compensation was permissible
Legal compensation takes place when the
Page
requirements set forth in Article 1278 and Article
1279 of the Civil Code are present, to wit:
Article 1278. Compensation shall take place when
two persons, in their own right, are creditors and
debtors of each other."
Article 1279. In order that compensation may be
proper, it is necessary:
(1) That each of the obligors be bound
principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consists in a sum of
money, or if the things due are
consumable, they be of the same kind,
and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due
time to the debtor.
As to whether petitioners could avail themselves
of compensation, both the RTC and CA ruled that
they could not because the claims of petitioners
against respondent were not liquidated and
demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were
entitled to the amount of P71,350.00 stated in
their counterclaim, and the CA concurred in the
finding, stating thusly:
It is noteworthy that in the letter of December 16,
1992 (Exh. "1") defendants were charging
plaintiff only for the following items of repair:
1. Cost of repair and spare parts - P46,800.00
2. Cost of repair and spare parts - 24,550.00
P71,350.00
Said amounts may be considered to have been
spent for repairs covered by the warranty period
of three (3) months. While the invoices (Exhs. "2-
B" and "3-A") dated September 26, 1992 and
September 18, 1992, this delay in repairs is
attributable to the fact that when defects were
brought to the attention of the plaintiff in the
letter of August 14, 1992 (Exh. "8") which was
within the warranty period, the plaintiff did not
respond with the required repairs and actual
repairs were undertaken by defendants.
Thereafter, the spare parts covered by Exhibits
"2-B" and "3-A" pertain to the engine, which was
covered by the warranty.
x x x. Defendants in their letter of August 14,
1992 (Exhb. "8") demanded correction of defects.
In their letter of August 22, 1992 (Exh. "9") they
demanded replacement. In their letter of August
27, 1992 (Exh. "10"), they demanded
replacement/repair. In September, 1992, they
undertook repairs themselves (Exhs. "2-B" and
"3-A") and demanded payment for the expenses
in their letter of December 16, 1992 (Exh. "1"). All
other items of expenses connected with
subsequent breakdowns are no longer chargeable
to plaintiff which granted only a 3-month
warranty. x x x10
Considering that preponderant evidence showing
that petitioners had spent the amount
of P71,350.00 for the repairs and spare parts of
the second dump truck within the warranty period
of three months supported the finding of the two
lower courts, the Court accepts their finding.
Verily, factual findings of the trial court, when
affirmed by the CA, are conclusive on the Court
when supported by the evidence on record. 11
A debt is liquidated when its existence and
amount are determined.12 Accordingly, an
unliquidated claim set up as a counterclaim by a
defendant can be set off against the plaintiffs
claim from the moment it is liquidated by
judgment.13 Article 1290 of the Civil Code
provides that when all the requisites mentioned
in Article 1279 of the Civil Code are present,
compensation takes effect by operation of law,
and extinguishes both debts to the concurrent
amount. With petitioners expenses for the repair
of the dump truck being already established and
determined with certainty by the lower courts, it
follows that legal compensation could take place
because all the requirements were present.
Hence, the amount of P71,350.00 should be set
off against petitioners unpaid obligation
of P735,000.00, leaving a balance
of P663,650.00, the amount petitioners still owed
to respondent.
We deem it necessary to modify the interest rate
215
imposed by the trial and appellate
courts.1wphi1 The legal interest rate to be
imposed from February 11, 1993, the time of the
Page
extrajudicial demand by respondent, should be
6% per annum in the absence of any stipulation
in writing in accordance with Article 2209 of the
Civil Code, which provides:
Article 2209. If the obligation consists in the
payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is
six per cent per annum.
WHEREFORE, the Court AFFIRMS the decision
promulgated on July 26, 2004 in all respects
subject to the MODIFICATION that petitioners are
ordered, jointly and severally, to pay to
respondent the sum of 1 663,650.00, plus
interest of 6% per annum computed from
February
11, 1993, the date of the first extrajudicial
demand, until fully paid; and ORDERS the
petitioners to pay the costs of suit.
CESAR V. AREZA and LOLITA B. AREZA, vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL
POTENCIANO
Before this Court is a Petition for Review on
Certiorari under Ruic 45 of the Rules of Court,
which seeks to reverse the Decision1 and
Resolution2 dated 29 June 2006 and 12 February
2007 of the Court of Appeals in CAG.R. CV No.
83192. The Court of Appeals affirmed with
modification the 22 April 2004 Resolution 3 of the
Regional Trial Court (RTC) of Calamba, Laguna,
Branch 92, in Civil Case No. B-5886.
The factual antecedents follow.
Petitioners Cesar V. Areza and LolitaB. Areza
maintained two bank deposits with respondent
Express Savings Banks Bian branch: 1) Savings
Account No. 004-01-000185-5 and 2) Special
Savings Account No. 004-02-000092-3.
They were engaged in the business of "buy and
sell" of brand new and second-hand motor
vehicles. On 2 May 2000, they received an order
from a certain Gerry Mambuay (Mambuay) for the
purchase of a second-hand Mitsubishi Pajero and
a brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine
(9) Philippine Veterans Affairs Office (PVAO)
checks payable to different payees and drawn
against the Philippine Veterans Bank (drawee),
each valued at Two Hundred Thousand Pesos
(P200,000.00) for a total of One Million Eight
Hundred Thousand Pesos (P1,800,000.00).
About this occasion, petitioners claimed that
Michael Potenciano (Potenciano), the branch
manager of respondent Express Savings Bank
(the Bank) was present during the transaction
and immediately offered the services of the Bank
for the processing and eventual crediting of the
said checks to petitioners account. 4 On the other
hand,Potenciano countered that he was prevailed
upon to accept the checks by way of
accommodation of petitioners who were valued
clients of the Bank.5
On 3 May 2000, petitioners deposited the said
checks in their savings account with the Bank.
The Bank, inturn, deposited the checks with its
depositary bank, Equitable-PCI Bank, in
Bian,Laguna. Equitable-PCI Bank presented the
checks to the drawee, the Philippine Veterans
Bank, which honored the checks.
On 6 May 2000, Potenciano informedpetitioners
that the checks they deposited with the Bank
werehonored. He allegedly warned petitioners
that the clearing of the checks pertained only to
the availability of funds and did not mean that
the checks were not infirmed.6 Thus, the entire
amount of P1,800,000.00 was credited to
petitioners savings account. Based on this
information, petitioners released the two cars to
the buyer.
Sometime in July 2000, the subjectchecks were
returned by PVAO to the drawee on the ground
that the amount on the face of the checks was
altered from the original amount of P4,000.00
to P200,000.00. The drawee returned the checks
to Equitable-PCI Bank by way of Special Clearing
Receipts. In August 2000, the Bank was informed
by Equitable-PCI Bank that the drawee
dishonored the checks onthe ground of material
alterations. Equitable-PCI Bank initially filed a
protest with the Philippine Clearing House. In
February 2001, the latter ruled in favor of the
drawee Philippine Veterans Bank. Equitable-PCI
Bank, in turn, debited the deposit account of the
Bank in the amount of P1,800,000.00.
The Bank insisted that they informed petitioners
of said development in August 2000 by furnishing
them copies of the documents given by its
depositary bank.7 On the other hand, petitioners
maintained that the Bank never informed them of
216
these developments.
On 9 March 2001, petitioners issued a check in
Page
the amount of P500,000.00. Said check was
dishonored by the Bank for the reason "Deposit
Under Hold." According topetitioners, the Bank
unilaterally and unlawfully put their account with
the Bank on hold. On 22 March 2001, petitioners
counsel sent a demand letter asking the Bank to
honor their check. The Bank refused to heed their
request and instead, closed the Special Savings
Account of the petitioners with a balance
of P1,179,659.69 and transferred said amount to
their savings account. The Bank then withdrew
the amount of P1,800,000.00representing the
returned checks from petitioners savings
account.
Acting on the alleged arbitrary and groundless
dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account,
petitioners filed a Complaint for Sum of Money
with Damages against the Bank and Potenciano
with the RTC of Calamba.
On 15 January 2004, the RTC, through Judge
Antonio S. Pozas, ruled in favor of petitioners. The
dispositive portion of the Decision reads:
WHEREFORE, the foregoing considered, the Court
orders that judgment be rendered in favor of
plaintiffs and against the defendants jointly and
severally to pay plaintiffs as follows, to wit:
1. P1,800,000.00 representing the amount
unlawfully withdrawn by the defendants
from the account of plaintiffs;
2. P500,000.00 as moral damages; and
3. P300,000.00 as attorneys fees.8
The trial court reduced the issue to whether or
not the rights of petitioners were violated by
respondents when the deposits of the former
were debited by respondents without any court
order and without their knowledge and consent.
According to the trial court, it is the depositary
bank which should safeguard the right ofthe
depositors over their money. Invoking Article
1977 of the Civil Code, the trial court stated that
the depositary cannot make use of the thing
deposited without the express permission of the
depositor. The trial court also held that
respondents should have observed the 24-hour
clearing house rule that checks should be
returned within 24-hours after discovery of the
forgery but in no event beyond the period fixed
by law for filing a legal action. In this case,
petitioners deposited the checks in May 2000,
and respondents notified them of the problems
on the check three months later or in August
2000. In sum, the trial court characterized said
acts of respondents as attended with bad faith
when they debited the amount of P1,800,000.00
from the account of petitioners.
Respondents filed a motion for reconsideration
while petitioners filed a motion for execution from
the Decision of the RTC on the ground that
respondents motion for reconsideration did not
conform with Section 5, Rule 16 of the Rules of
Court; hence, it was a mere scrap of paper that
did not toll the running of the period to appeal.
On 22 April 2004, the RTC, through Pairing Judge
Romeo C. De Leon granted the motion for
reconsideration, set aside the Pozas Decision, and
dismissed the complaint. The trial court awarded
respondents their counterclaim of moral and
exemplary damages of P100,000.00 each. The
trial court first applied the principle of liberality
when it disregarded the alleged absence of a
notice of hearing in respondents motion for
reconsideration. On the merits, the trial court
considered the relationship of the Bank and
petitioners with respect to their savings account
deposits as a contract of loan with the bank as
the debtor and petitioners as creditors. As such,
Article 1977 of the Civil Code prohibiting the
depository from making use of the thing
deposited without the express permission of the
depositor is not applicable. Instead, the trial court
applied Article 1980 which provides that fixed,
savings and current deposits ofmoney in banks
and similar institutions shall be governed by the
provisions governing simple loan. The trial court
then opined thatthe Bank had all the right to set-
off against petitioners savings deposits the value
of their nine checks that were returned.
On appeal, the Court of Appeals affirmed the
ruling of the trial court but deleted the award of
damages. The appellate court made the following
ratiocination:
Any argument as to the notice of hearing has
been resolved when the pairing judge issued the
order on February 24, 2004 setting the hearing on
March 26, 2004. A perusal of the notice of
hearing shows that request was addressed to the
Clerk of Court and plaintiffs counsel for hearing
to be set on March 26, 2004.
The core issues in this case revolve on whether
the appellee bank had the right to debit the
amount ofP1,800,000.00 from the appellants
accounts and whether the banks act of debiting
217
was done "without the plaintiffs knowledge."
We find that the elements of legal compensation
Page
are all present in the case at bar. Hence, applying
the case of the Bank of the Philippine Islands v.
Court of Appeals, the obligors bound principally
are at the same time creditors of each other.
Appellee bank stands as a debtor of appellant, a
depositor. At the same time, said bank is the
creditor of the appellant with respect to the
dishonored treasury warrant checks which
amount were already credited to the account of
appellants. When the appellants had withdrawn
the amount of the checks they deposited and
later on said checks were returned, they became
indebted to the appellee bank for the
corresponding amount.
It should be noted that [G]erry Mambuay was the
appellants walkin buyer. As sellers, appellants
oughtto have exercised due diligence in assessing
his credit or personal background. The 24-hour
clearing house rule is not the one that governs in
this case since the nine checks were discovered
by the drawee bank to contain material
alterations.
Appellants merely allege that they were not
informed of any development on the checks
returned. However, this Court believes that the
bank and appellants had opportunities to
communicate about the checks considering that
several transactions occurred from the time of
alleged return of the checks to the date of the
debit.
However, this Court agrees withappellants that
they should not pay moral and exemplary
damages to each of the appellees for lack of
basis. The appellants were not shown to have
acted in bad faith.9
Petitioners filed the present petition for review on
certiorariraising both procedural and substantive
issues, to wit:
1. Whether or not the Honorable Court of
Appeals committed a reversible error of
law and grave abuse of discretion in
upholding the legality and/or propriety of
the Motion for Reconsideration filed in
violation of Section 5, Rule 15 ofthe Rules
on Civil Procedure;
2. Whether or not the Honorable Court of
Appeals committed a grave abuse of
discretion in declaring that the private
respondents "had the right to debit the
amount of P1,800,000.00 from the
appellants accounts" and the banks act
of debiting was done with the plaintiffs
knowledge.10
Before proceeding to the substantive issue, we
first resolve the procedural issue raised by
petitioners.
Sections 5, Rule 15 of the Rules of Court states:
Section 5. Notice of hearing. The notice of
hearing shall be addressed to all parties
concerned, and shall specify the time and date of
the hearing which must not be later than ten (10)
days after the filing of the motion.
Petitioners claim that the notice of hearing was
addressed to the Clerk of Court and not to the
adverse party as the rules require. Petitioners add
that the hearing on the motion for
reconsideration was scheduled beyond 10 days
from the date of filing.
As held in Maturan v. Araula,11 the rule requiring
that the notice be addressed to the adverse party
has beensubstantially complied with when a copy
of the motion for reconsideration was furnished to
the counsel of the adverse party, coupled with
the fact that the trial court acted on said notice of
hearing and, as prayed for, issued an
order12 setting the hearing of the motion on 26
March 2004.
We would reiterate later that there is substantial
compliance with the foregoing Rule if a copy of
the said motion for reconsideration was furnished
to the counsel of the adverse party.13
Now to the substantive issues to which
procedural imperfection must, in this case, give
way.
The central issue is whether the Bank had the
right to debit P1,800,000.00 from petitioners
accounts.
On 6 May 2000, the Bank informed petitioners
that the subject checks had been honored. Thus,
the amountofP1,800,000.00 was accordingly
credited to petitioners accounts, prompting them
to release the purchased cars to the buyer.
Unknown to petitioners, the Bank deposited the
checks in its depositary bank, Equitable-PCI Bank.
Three months had passed when the Bank was
informed by its depositary bank that the drawee
had dishonored the checks on the ground of
218
material alterations.
The return of the checks created a chain of
Page
debiting of accounts, the last loss eventually
falling upon the savings account of petitioners
with respondent bank. The trial court inits
reconsidered decision and the appellate court
were one in declaring that petitioners should bear
the loss.
We reverse.
The fact that material alteration caused the
eventual dishonor of the checks issued by PVAO
is undisputed. In this case, before the alteration
was discovered, the checks were already cleared
by the drawee bank, the Philippine Veterans
Bank. Three months had lapsed before the
drawee dishonored the checks and returned them
to Equitable-PCI Bank, the respondents
depositary bank. And itwas not until 10 months
later when petitioners accounts were debited. A
question thus arises: What are the liabilities of
the drawee, the intermediary banks, and the
petitioners for the altered checks?
LIABILITY OF THE DRAWEE
Section 63 of Act No. 2031 orthe Negotiable
Instruments Law provides that the acceptor, by
accepting the instrument, engages that he will
pay it according to the tenor of his acceptance.
The acceptor is a drawee who accepts the bill. In
Philippine National Bank v. Court of Appeals,14 the
payment of the amount of a check implies not
only acceptance but also compliance with the
drawees obligation.
In case the negotiable instrument isaltered before
acceptance, is the drawee liable for the original
or the altered tenor of acceptance? There are two
divergent intepretations proffered by legal
analysts.15 The first view is supported by the
leading case of National City Bank ofChicago v.
Bank of the Republic.16 In said case, a certain
Andrew Manning stole a draft and substituted his
name for that of the original payee. He offered it
as payment to a jeweler in exchange for certain
jewelry. The jeweler deposited the draft to the
defendant bank which collectedthe equivalent
amount from the drawee. Upon learning of the
alteration, the drawee sought to recover from the
defendant bank the amount of the draft, as
money paid by mistake. The court denied
recovery on the ground that the drawee by
accepting admitted the existence of the payee
and his capacity to endorse.17 Still, in Wells Fargo
Bank & Union Trust Co. v. Bank of Italy, 18 the court
echoed the courts interpretation in National City
Bank of Chicago, in this wise:
We think the construction placed upon the
section by the Illinois court is correct and that it
was not the legislative intent that the obligation
of the acceptor should be limited to the tenorof
the instrument as drawn by the maker, as was
the rule at common law,but that it should be
enforceable in favor of a holder in due course
against the acceptor according to its tenor at the
time of its acceptance or certification.
The foregoing opinion and the Illinois decision
which it follows give effect to the literal words of
the Negotiable Instruments Law. As stated in the
Illinois case: "The court must take the act as it is
written and should give to the words their natural
and common meaning . . . ifthe language of the
act conflicts with statutes or decisions in force
before its enactment the courts should not give
the act a strained construction in order to make it
harmonize with earlier statutes or decisions." The
wording of the act suggests that a change in the
common law was intended. A careful reading
thereof, independent of any common-law
influence, requires that the words "according to
the tenor of his acceptance" be construed as
referring to the instrument as it was at the time it
came into the hands of the acceptor for
acceptance, for he accepts no other instrument
than the one presented to him the altered form
and it alone he engages to pay. This conclusion
is in harmony with the law of England and the
continental countries. It makes for the usefulness
and currency of negotiable paper without
seriously endangering accepted banking
practices, for banking institutions can readily
protect themselves against liability on altered
instruments either by qualifying their acceptance
or certification or by relying on forgery insurance
and specialpaper which will make alterations
obvious. All of the arguments advanced against
the conclusion herein announced seem highly
technical in the face of the practical facts that the
drawee bank has authenticated an instrument in
a certain form, and that commercial policy favors
the protection of anyone who, in due course,
changes his position on the faith of that
authentication.19
The second view is that the acceptor/drawee
despite the tenor of his acceptance is liable only
to the extent of the bill prior to alteration. 20 This
view appears to be in consonance with Section
124 of the Negotiable Instruments Law which
statesthat a material alteration avoids an
instrument except as against an assenting party
and subsequent indorsers, but a holder in due
course may enforce payment according to its
original tenor. Thus, when the drawee bank pays
219
a materially altered check, it violates the terms of
the check, as well as its duty tocharge its clients
account only for bona fide disbursements he had
Page
made. If the drawee did not pay according to the
original tenor of the instrument, as directed by
the drawer, then it has no right to claim
reimbursement from the drawer, much less, the
right to deduct the erroneous payment it made
from the drawers account which it was expected
to treat with utmost fidelity.21 The drawee,
however, still has recourse to recover its loss. It
may pass the liability back to the collecting bank
which is what the drawee bank exactly did in this
case. It debited the account of Equitable-PCI Bank
for the altered amount of the checks.
LIABILITY OF DEPOSITARY BANK AND COLLECTING
BANK
A depositary bank is the first bank to take an item
even though it is also the payor bank, unless the
item is presented for immediate payment over
the counter.22 It is also the bank to which a check
is transferred for deposit in an account at such
bank, evenif the check is physically received and
indorsed first by another bank.23 A collecting bank
is defined as any bank handling an item for
collection except the bank on which the check is
drawn.24
When petitioners deposited the check with the
Bank, they were designating the latter as the
collecting bank. This is in consonance with the
rule that a negotiable instrument, such as a
check, whether a manager's check or ordinary
check, is not legal tender. As such, after receiving
the deposit, under its own rules, the Bank shall
credit the amount in petitioners account or
infuse value thereon only after the drawee bank
shall have paid the amount of the check or the
check has been cleared for deposit.25
The Bank and Equitable-PCI Bank are both
depositary and collecting banks.
A depositary/collecting bank where a check is
deposited, and which endorses the check upon
presentment with the drawee bank, is an
endorser. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants "that the
instrument is genuine and in all respects what it
purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that
the instrument is at the time of his endorsement
valid and subsisting." It has been repeatedly held
that in check transactions, the
depositary/collecting bank or last endorser
generally suffers the loss because it has the duty
to ascertain the genuineness of all prior
endorsements considering that the act of
presenting the check for payment to the drawee
is an assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the endorsements.26 If any of the
warranties made by the depositary/collecting
bank turns out to be false, then the drawee bank
may recover from it up to the amount of the
check.27
The law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited
with it for the purpose of determining their
genuineness and regularity. The collecting bank
being primarily engaged in banking holds itself
out to the public as the expert and the law holds
it to a high standard of conduct.28
As collecting banks, the Bank and Equitable-PCI
Bank are both liable for the amount of the
materially altered checks. Since Equitable-PCI
Bank is not a party to this case and the Bank
allowed its account with EquitablePCI Bank to be
debited, it has the option toseek recourse against
the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not
following the 24-hour clearing period because it
was only in August 2000 that the drawee bank
notified Equitable-PCI that there were material
alterations in the checks.
We do not subscribe to the position taken by
petitioners that the drawee bank was at fault
because it did not follow the 24-hour clearing
period which provides that when a drawee bank
fails to return a forged or altered check to the
collecting bank within the 24-hour clearing
period, the collecting bank is absolved from
liability.
Section 21 of the Philippine Clearing House Rules
and Regulations provides: Sec. 21. Special Return
Items Beyond The Reglementary Clearing Period.-
Items which have been the subject of material
alteration or items bearing forged endorsement
when such endorsement is necessary for
negotiation shall be returned by direct
presentation or demand to the Presenting Bank
and not through the regular clearing house
facilities within the period prescribed by law for
the filing of a legal action by the returning
bank/branch, institution or entity sending the
same.
Antonio Viray, in his book Handbook on Bank
220
Deposits, elucidated:
It is clear that the so-called "24-hour" rule has
Page
been modified. In the case of Hongkong &
Shanghai vs. Peoples Bank reiterated in
Metropolitan Bank and Trust Co. vs. FNCB, the
Supreme Court strictly enforced the 24-hour rule
under which the drawee bank forever loses the
right to claim against presenting/collecting bank
if the check is not returned at the next clearing
day orwithin 24 hours. Apparently, the
commercial banks felt strict enforcement of the
24-hour rule is too harsh and therefore made
representations and obtained modification of the
rule, which modification is now incorporated in
the Manual of Regulations. Since the same
commercial banks controlled the Philippine
Clearing House Corporation, incorporating the
amended rule in the PCHC Rules naturally
followed.
As the rule now stands, the 24-hour rule is still in
force, that is, any check which should be refused
by the drawee bank in accordance with long
standing and accepted banking practices shall be
returned through the PCHC/local clearing office,
as the case may be, not later than the next
regular clearing (24-hour). The modification,
however, is that items which have been the
subject of material alteration or bearing forged
endorsement may be returned even beyond 24
hours so long that the same is returned within the
prescriptive period fixed by law. The consensus
among lawyers is that the prescriptiveperiod is
ten (10)years because a check or the
endorsement thereon is a written contract.
Moreover, the item need not be returned through
the clearing house but by direct presentation to
the presenting bank.29
In short, the 24-hour clearing ruledoes not apply
to altered checks.
LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust Company
v. Gold Palace Jewellery Co.30 is in point. A
foreigner purchased several pieces of jewelry
from Gold Palace Jewellery using a United
Overseas Bank (Malaysia) issued draft addressed
to the Land Bank of the Philippines (LBP). Gold
Palace Jewellery deposited the draft in the
companys account with Far East Bank. Far East
Bank presented the draft for clearing to LBP. The
latter cleared the same and Gold Palace
Jewellerys account was credited with the amount
stated in the draft. Consequently, Gold Palace
Jewellery released the pieces of jewelries to the
foreigner. Three weeks later, LBP informed Far
East Bank that the amount in the foreign draft
had been materially altered from P300,000.00
to P380,000.00. LBP returnedthe check to Far
East Bank. Far East Bank refunded LBP
the P380,000.00 paid by LBP. Far East Bank
initially debited P168,053.36 from Gold Palace
Jewellerys account and demanded the payment
of the difference between the amount in the
altered draft and the amount debited from Gold
Palace Jewellery.
However, for the reasons already discussed
above, our pronouncement in the Far East Bank
and Trust Companycase that "the drawee is liable
on its payment of the check according to the
tenor of the check at the time of payment, which
was the raised amount"31 is inapplicable to the
factual milieu obtaining herein.
We only adopt said decision in so far as it
adjudged liability on the part of the collecting
bank, thus:
Thus, considering that, in this case, Gold Palace is
protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the
money paid by the drawee bank from respondent
company's account. When Gold Palace deposited
the check with Far East, the latter, under the
terms of the deposit and the provisions of the NIL,
became an agent of the former for the collection
of the amount in the draft. The subsequent
payment by the drawee bank and the collection
of the amount by the collecting bank closed the
transaction insofar as the drawee and the holder
of the check or his agent are concerned,
converted the check into a mere voucher, and, as
already discussed, foreclosed the recovery by the
drawee of the amount paid. This closure of the
transaction is a matter of course; otherwise,
uncertainty in commercial transactions, delay and
annoyance will arise if a bank at some future time
will call on the payee for the return of the money
paid to him on the check.
As the transaction in this case had been closed
and the principalagent relationship between the
payee and the collecting bank had already
ceased, the latter in returning the amount to the
drawee bank was already acting on its own and
should now be responsible for its own actions. x x
x Likewise, Far East cannot invoke the warranty of
the payee/depositor who indorsed the instrument
for collection to shift the burden it brought upon
itself. This is precisely because the said
indorsement is only for purposes of collection
which, under Section 36 of the NIL, is a restrictive
indorsement. It did not in any way transfer the
title of the instrument to the collecting bank. Far
221
East did not own the draft, it merely presented it
for payment. Considering that the warranties of a
general indorser as provided in Section 66 of the
Page
NIL are based upon a transfer of title and are
available only to holders in due course, these
warranties did not attach to the indorsement for
deposit and collection made by Gold Palace to Far
East. Without any legal right to do so, the
collecting bank, therefore, could not debit
respondent's account for the amount it refunded
to the drawee bank.
The foregoing considered, we affirm the ruling of
the appellate court to the extent that Far East
could not debit the account of Gold Palace, and
for doing so, it must return what it had
erroneously taken.32
Applying the foregoing ratiocination, the Bank
cannot debit the savings account of petitioners. A
depositary/collecting bank may resist or defend
against a claim for breach of warranty if the
drawer, the payee, or either the drawee bank or
depositary bank was negligent and such
negligence substantially contributed tothe loss
from alteration. In the instant case, no negligence
can be attributed to petitioners. We lend
credence to their claim that at the time of the
sales transaction, the Banks branch manager
was present and even offered the Banks services
for the processing and eventual crediting of the
checks. True to the branch managers words, the
checks were cleared three days later when
deposited by petitioners and the entire amount
ofthe checks was credited to their savings
account.
ON LEGAL COMPENSATION
Petitioners insist that the Bank cannotbe
considered a creditor of the petitioners because it
should have made a claim of the amount
of P1,800,000.00 from Equitable-PCI Bank, its
own depositary bank and the collecting bank in
this case and not from them.
The Bank cannot set-off the amount it paid to
Equitable-PCI Bank with petitioners savings
account. Under Art. 1278 of the New Civil Code,
compensation shall take place when two persons,
in their own right, are creditors and debtors of
each other. And the requisites for legal
compensation are:
Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of
money, or if the things due are
consumable, they be of the same kind,
and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due
time to the debtor.
It is well-settled that the relationship of the
depositors and the Bank or similar institution is
that of creditor-debtor. Article 1980 of the New
Civil Code provides that fixed, savings and
current deposits of money in banks and similar
institutions shall be governed by the provisions
concerning simple loans. The bank is the
debtorand the depositor is the creditor. The
depositor lends the bank money and the bank
agrees to pay the depositor on demand. The
savings deposit agreement between the bank and
the depositor is the contract that determines the
rights and obligations of the parties.33
But as previously discussed, petitioners are not
liable for the deposit of the altered checks. The
Bank, asthe depositary and collecting bank
ultimately bears the loss. Thus, there being no
indebtedness to the Bank on the part of
petitioners, legal compensation cannot take
place. DAMAGES
The Bank incurred a delay in informing petitioners
of the checks dishonor. The Bank was informed
of the dishonor by Equitable-PCI Bank as early as
August 2000 but it was only on 7 March 2001
when the Bank informed petitioners that it will
debit from their account the altered amount. This
delay is tantamount to negligence on the part of
the collecting bank which would entitle
petitioners to an award for damages under Article
1170 of the New Civil Code which reads:
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
The damages in the form of actual or
222
compensatory damages represent the amount
debited by the Bank from petitioners account.
Page
We delete the award of moral damages. Contrary
to the lower courts finding, there was no showing
that the Bank acted fraudulently or in bad faith. It
may have been remiss in its duty to diligently
protect the account of its depositors but its
honest but mistaken belief that petitioners
account should be debited is not tantamount to
bad faith. We also delete the award of attorneys
fees for it is not a sound public policy to place a
premium on the right to litigate. No damages can
becharged to those who exercise such precious
right in good faith, even if done erroneously.34
To recap, the drawee bank, Philippine Veterans
Bank in this case, is only liable to the extent of
the check prior to alteration.1wphi1 Since
Philippine Veterans Bank paid the altered amount
of the check, it may pass the liability back as it
did, to Equitable-PCI Bank,the collecting bank.
The collecting banks, Equitable-PCI Bank and the
Bank, are ultimately liable for the amount of the
materially altered check. It cannot further pass
the liability back to the petitioners absent any
showing in the negligence on the part of the
petitioners which substantially contributed to the
loss from alteration.
Based on the foregoing, we affirm the
Pozasdecision only insofar as it ordered
respondents to jointly and severally pay
petitioners P1,800,000.00, representing the
amount withdrawn from the latters account. We
do not conform with said ruling regarding the
finding of bad faith on the part of respondents, as
well as its failure toobserve the 24-hour clearing
rule.
WHEREFORE, the petition is GRANTED. The
Decision and Resolution dated 29 June 2006 and
12 February 2007 respectively of the Court of
Appeals in CA-G.R. CV No. 83192 are REVERSED
and SET ASIDE. The 15 January 2004 Decision of
the Regional Trial Court of Calamba City, Branch
92 in Civil Case No. B-5886 rendered by Judge
Antonio S. Pozas is REINSTATEDonly insofar as it
ordered respondents to jointly and severally pay
petitionersP1,800,000.00 representing the
amount withdrawn from the latters account. The
award of moral damages and attorneys fees are
DELETED.
_______________________________________________
ACE FOODS, INC. vs. MICRO PACIFIC
TECHNOLOGIES CO., LTD.
Assailed in this petition for review
on certiorari2are the Decision3 dated October 21,
2011 and Resolution4 dated February 8, 2012 of
the Court of Appeals (CA) in CA-G.R. CV No.
89426 which reversed and set aside the
Decision5 dated February 28, 2007 of the
Regional Trial Court of Makati, Branch 148 (RTC)
in Civil Case No. 02-1248, holding petitioner ACE
Foods, Inc. (ACE Foods) liable to respondent Micro
Pacific Technologies Co., Ltd. (MTCL) for the
payment of Cisco Routers and Frame Relay
Products (subject products) amounting
to P646,464.00 pursuant to a perfected contract
of sale.
The Facts
ACE Foods is a domestic corporation engaged in
the trading and distribution of consumer goods in
wholesale and retail bases,6 while MTCL is one
engaged in the supply of computer hardware and
equipment.7
On September 26, 2001, MTCL sent a letter-
proposal8 for the delivery and sale of the subject
products to be installed at various offices of ACE
Foods. Aside from the itemization of the products
offered for sale, the said proposal further provides
for the following terms, viz.:9
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate
and subject to changes without prior notice.
DELIVERY : Immediate delivery for items on
stock, otherwise thirty (30) to forty-five days
upon receipt of [Purchase Order]
WARRANTY : One (1) year on parts and services.
Accessories not included in warranty.
On October 29, 2001, ACE Foods accepted MTCLs
proposal and accordingly issued Purchase Order
No. 10002310(Purchase Order) for the subject
products amounting to P646,464.00 (purchase
price). Thereafter, or on March 4, 2002, MTCL
delivered the said products to ACE Foods as
reflected in Invoice No. 7733 11 (Invoice Receipt).
The fine print of the invoice states, inter alia, that
"[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above
and payment of the price" 12(title reservation
stipulation). After delivery, the subject products
were then installed and configured in ACE Foodss
premises. MTCLs demands against ACE Foods to
pay the purchase price, however, remained
unheeded.13 Instead of paying the purchase price,
ACE Foods sent MTCL a Letter 14 dated September
223
19, 2002, stating that it "ha[s] been returning the
[subject products] to [MTCL] thru [its] sales
representative Mr. Mark Anteola who has agreed
Page
to pull out the said [products] but had failed to do
so up to now."
Eventually, or on October 16, 2002, ACE Foods
lodged a Complaint15 against MTCL before the
RTC, praying that the latter pull out from its
premises the subject products since MTCL
breached its "after delivery services" obligations
to it, particularly, to: (a) install and configure the
subject products; (b) submit a cost benefit study
to justify the purchase of the subject products;
and (c) train ACE Foodss technicians on how to
use and maintain the subject products. 16 ACE
Foods likewise claimed that the subject products
MTCL delivered are defective and not working.17
For its part, MTCL, in its Answer with
Counterclaim,18 maintained that it had duly
complied with its obligations to ACE Foods and
that the subject products were in good working
condition when they were delivered, installed and
configured in ACE Foodss premises. Thereafter,
MTCL even conducted a training course for ACE
Foodss representatives/employees; MTCL,
however, alleged that there was actually no
agreement as to the purported "after delivery
services." Further, MTCL posited that ACE Foods
refused and failed to pay the purchase price for
the subject products despite the latters use of
the same for a period of nine (9) months. As such,
MTCL prayed that ACE Foods be compelled to pay
the purchase price, as well as damages related to
the transaction.19
The RTC Ruling
On February 28, 2007, the RTC rendered a
Decision, 20 directing MTCL to remove the subject
products from ACE Foodss premises and pay
actual damages and attorney fees in the amounts
of P200,000.00 and P100,000.00, respectively.21
At the outset, it observed that the agreement
between ACE Foods and MTCL is in the nature of a
contract to sell. Its conclusion was based on the
fine print of the Invoice Receipt which expressly
indicated that "title to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above
and payment of the price," noting further that in
a contract to sell, the prospective seller explicitly
reserves the transfer of title to the prospective
buyer, and said transfer is conditioned upon the
full payment of the purchase price. 22 Thus,
notwithstanding the execution of the Purchase
Order and the delivery and installation of the
subject products at the offices of ACE Foods, by
express stipulation stated in the Invoice Receipt
issued by MTCL and signed by ACE Foods, i.e., the
title reservation stipulation, it is still the former
who holds title to the products until full payment
of the purchase price therefor. In this relation, it
noted that the full payment of the price is a
positive suspensive condition, the non-payment
of which prevents the obligation to sell on the
part of the seller/vendor from materializing at
all.23 Since title remained with MTCL, the RTC
therefore directed it to withdraw the subject
products from ACE Foodss premises. Also, in view
of the foregoing, the RTC found it unnecessary to
delve into the allegations of breach since the non-
happening of the aforesaid suspensive
condition ipso jure prevented the obligation to
sell from arising.24
Dissatisfied, MTCL elevated the matter on
appeal.25
The CA Ruling
In a Decision26 dated October 21, 2011, the CA
reversed and set aside the RTCs ruling, ordering
ACE Foods to pay MTCL the amount
of P646,464.00, plus legal interest at the rate of
6% per annum to be computed from April 4,
2002, and attorneys fees amounting
to P50,000.00.27
It found that the agreement between the parties
is in the nature of a contract of sale, observing
that the said contract had been perfected from
the time ACE Foods sent the Purchase Order to
MTCL which, in turn, delivered the subject
products covered by the Invoice Receipt and
subsequently installed and configured them in
ACE Foodss premises.28 Thus, considering that
MTCL had already complied with its obligation,
ACE Foodss corresponding obligation arose and
was then duty bound to pay the agreed purchase
price within thirty (30) days from March 5,
2002.29 In this light, the CA concluded that it was
erroneous for ACE Foods not to pay the purchase
price therefor, despite its receipt of the subject
products, because its refusal to pay disregards
the very essence of reciprocity in a contract of
sale.30 The CA also dismissed ACE Foodss claim
regarding MTCLs failure to perform its "after
delivery services" obligations since the letter-
proposal, Purchase Order and Invoice Receipt do
not reflect any agreement to that effect.31
Aggrieved, ACE Foods moved for reconsideration
which was, however, denied in a
Resolution 32
dated February 8, 2012, hence, this
224
petition.
The Issue Before the Court
Page
The essential issue in this case is whether ACE
Foods should pay MTCL the purchase price for the
subject products.
The Courts Ruling
The petition lacks merit.
A contract is what the law defines it to be, taking
into consideration its essential elements, and not
what the contracting parties call it.33 The real
nature of a contract may be determined from the
express terms of the written agreement and from
the contemporaneous and subsequent acts of the
contracting parties. However, in the construction
or interpretation of an instrument, the intention
of the parties is primordial and is to be
pursued. The denomination or title given by the
parties in their contract is not conclusive of the
nature of its contents.34
The very essence of a contract of sale is the
transfer of ownership in exchange for a
price paid or promised.35 This may be gleaned
from Article 1458 of the Civil Code which defines
a contract of sale as follows:
Art. 1458. By the contract of sale one of the
contracting parties obligates himself to transfer
the ownership and to deliver a determinate thing,
and the other to pay therefor a price certain
in money or its equivalent.
A contract of sale may be absolute or conditional.
(Emphasis supplied)
Corollary thereto, a contract of sale is classified
as a consensual contract, which means that
the sale is perfected by mere consent. No
particular form is required for its validity. Upon
perfection of the contract, the parties may
reciprocally demand performance, i.e., the
vendee may compel transfer of ownership of the
object of the sale, and the vendor may require
the vendee to pay the thing sold.36
In contrast, a contract to sell is defined as a
bilateral contract whereby the prospective seller,
while expressly reserving the ownership of the
property despite delivery thereof to the
prospective buyer, binds himself to sell the
property exclusively to the prospective buyer
upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price.
A contract to sell may not even be considered as
a conditional contract of sale where the seller
may likewise reserve title to the property subject
of the sale until the fulfillment of a suspensive
condition, because in a conditional contract of
sale, the first element of consent is present,
although it is conditioned upon the happening of
a contingent event which may or may not occur.37
In this case, the Court concurs with the CA that
the parties have agreed to a contract of sale and
not to a contract to sell as adjudged by the RTC.
Bearing in mind its consensual nature, a contract
of sale had been perfected at the precise moment
ACE Foods, as evinced by its act of sending MTCL
the Purchase Order, accepted the latters
proposal to sell the subject products in
consideration of the purchase price
of P646,464.00. From that point in time, the
reciprocal obligations of the parties i.e., on the
one hand, of MTCL to deliver the said products to
ACE Foods, and, on the other hand, of ACE Foods
to pay the purchase price therefor within thirty
(30) days from delivery already arose and
consequently may be demanded. Article 1475 of
the Civil Code makes this clear:
Art. 1475. The contract of sale is perfected at the
moment there is a meeting of minds upon the
thing which is the object of the contract and upon
the price.
From that moment, the parties may reciprocally
demand performance, subject to the provisions of
the law governing the form of contracts.
At this juncture, the Court must dispel the notion
that the stipulation anent MTCLs reservation of
ownership of the subject products as reflected in
the Invoice Receipt, i.e., the title reservation
stipulation, changed the complexion of the
transaction from a contract of sale into a contract
to sell. Records are bereft of any showing that the
said stipulation novated the contract of sale
between the parties which, to repeat, already
existed at the precise moment ACE Foods
accepted MTCLs proposal. To be sure, novation,
in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old
obligation is terminated by the creation of a new
obligation that takes the place of the former; it is
merely modificatory when the old obligation
subsists to the extent it remains compatible with
the amendatory agreement. In either case,
however, novation is never presumed, and
theanimus novandi, whether totally or partially,
must appear by express agreement of the
parties, or by their acts that are too clear and

225
G.R. No. 177498
unequivocal to be mistaken.38 STOLT-NIELSEN
TRANSPORTATION
Present:
In the present case, it has not been shown that GROUP, INC. AND
CHUNG GAI SHIP

Page
the title reservation stipulation appearing in the
Invoice Receipt had been included or had
subsequently modified or superseded the original
agreement of the parties. The fact that the
Invoice Receipt was signed by a representative of
ACE Foods does not, by and of itself,
prove animus novandi since: (a) it was not shown
that the signatory was authorized by ACE Foods
(the actual party to the transaction) to novate the
original agreement; (b) the signature only proves
that the Invoice Receipt was received by a
representative of ACE Foods to show the fact of
delivery; and (c) as matter of judicial notice,
invoices are generally issued at the
consummation stage of the contract and not its
perfection, and have been even treated as
documents which are not actionable per se,
although they may prove sufficient
delivery. 39 Thus, absent any clear indication that
the title reservation stipulation was actually
agreed upon, the Court must deem the same to
be a mere unilateral imposition on the part of
MTCL which has no effect on the nature of the
parties original agreement as a contract of sale.
Perforce, the obligations arising thereto, among
others, ACE Foodss obligationto pay the
purchase price as well as to accept the
delivery of the goods,40 remain enforceable
and subsisting.1wphi1
As a final point, it may not be amiss to state that
the return of the subject products pursuant to a
rescissory action41 is neither warranted by ACE
Foodss claims of breach either with respect to
MTCLs breach of its purported "after delivery
services" obligations or the defective condition of
the products - since such claims were not
adequately proven in this case. The rule is clear:
each party must prove his own affirmative
allegation; one who asserts the affirmative of the
issue has the burden of presenting at the trial
such amount of evidence required by law to
obtain a favorable judgment, which in civil cases,
is by preponderance of evidence. 42 This,
however, ACE Foods failed to observe as regards
its allegations of breach. Hence, the same cannot
be sustained.
CARPIO, J.,
MANAGEMENT,
Chairperson,
Petitioners,
PEREZ,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.
-versus-
Promulgated:
January 18, 2012
SULPECIO
MEDEQUILLO, JR.,
Respondent.
Before the Court is a Petition for Review
on Certiorari1 of the Decision2 of the First Division
of the Court of Appeals in CA-G.R. SP No. 91632
dated 31 January 2007, denying the petition
forcertiorari filed by Stolt-Nielsen Transportation
Group, Inc. and Chung Gai Ship Management
(petitioners) and affirming the Resolution of the
National Labor Relations Commission (NLRC). The
dispositive portion of the assailed decision reads:
WHEREFORE, the petition
is hereby DENIED. Accordingly, the
assailed Decision promulgated on
February 28, 2003 and the
Resolution dated July 27, 2005
are AFFIRMED.3
The facts as gathered by this Court follow:
On 6 March 1995, Sulpecio Madequillo
(respondent) filed a complaint before the
Adjudication Office of the Philippine Overseas
Employment Administration (POEA) against the
petitioners for illegal dismissal under a first
contract and for failure to deploy under a second
contract. In his complaint-affidavit, 4 respondent
alleged that:

1. On 6 November 1991(First
WHEREFORE, the petition
Contract), he was hired by Stolt-
is DENIED. Accordingly, the Decision dated
Nielsen Marine Services, Inc on
October 21, 2011 and Resolution dated February
behalf of its principal Chung-Gai
8, 2012 of the Court of Appeals in CA-G.R. CV No.
Ship Management of Panama as
89426 are hereby AFFIRMED.
Third Assistant Engineer on board
the vessel Stolt Aspiration for a
SO ORDERED. period of nine (9) months;
2. He would be paid with a monthly 11. He was constrained to sign the

226
basic salary of $808.00 and a fixed document involuntarily because
overtime pay of $404.00 or a total without these documents, he could
of $1,212.00 per month during the not seek employment from other

Page
employment period commencing
on 6 November 1991;
3. On 8 November 1991, he joined the
vessel MV Stolt Aspiration;
4. On February 1992 or for nearly
three (3) months of rendering
service and while the vessel was at
Batangas, he was ordered by the
ships master to disembark the
vessel and repatriated back to
Manila for no reason or
explanation;
5. Upon his return to Manila, he
immediately proceeded to the
petitioners office where he was
transferred employment with
another vessel named MV Stolt
Pride under the same terms and
conditions of the First Contract;
agencies.
He prayed for actual, moral and exemplary
damages as well as attorneys fees for his illegal
dismissal and in view of the Petitioners bad faith
in not complying with the Second Contract.
The case was transferred to the Labor
Arbiter of the DOLE upon the effectivity of the
Migrant Workers and Overseas Filipinos Act of
1995.
The parties were required to submit their
respective position papers before the Labor
Arbiter. However, petitioners failed to submit
their respective pleadings despite the opportunity
given to them.5
On 21 July 2000, Labor Arbiter Vicente R.
Layawen rendered a judgment6 finding that the
respondent was constructively dismissed by the
petitioners. The dispositive portion reads:

6. On 23 April 1992, the Second WHEREFORE, premises

Contract was noted and approved considered, judgment is hereby
by the POEA; rendered, declaring the
respondents guilty of constructively
7. The POEA, without knowledge that dismissing the complainant by not
he was not deployed with the honoring the employment contract.
vessel, certified the Second Accordingly, respondents are
Employment Contract on 18 hereby ordered jointly and
September 1992. solidarily to pay complainant the
following:
8. Despite the commencement of the
Second Contract on 21 April 1992, 1. $12,537.00 or its peso equivalent
petitioners failed to deploy him at the time of payment.7
with the vessel MV Stolt Pride;
The Labor Arbiter found the first contract entered
9. He made a follow-up with the into by and between the complainant and the
petitioner but the same refused to respondents to have been novated by the
comply with the Second execution of the second contract. In other words,
Employment Contract. respondents cannot be held liable for the first
contract but are clearly and definitely liable for
the breach of the second contract.8 However, he
ruled that there was no substantial evidence to
10. On 22 December 1994, he grant the prayer for moral and exemplary
demanded for his passport, damages.9
seamans book and other
employment documents. However, The petitioners appealed the adverse decision
he was only allowed to claim the before the National Labor Relations Commission
said documents in exchange of his assailing that they were denied due process, that
signing a document; the respondent cannot be considered as
dismissed from employment because he was not
even deployed yet and the monetary award in
favor of the respondent was exorbitant and not in The petitioners filed a Petition

227
accordance with law.10 for Certiorari before the Court of Appeals alleging
grave abuse of discretion on the part of NLRC
On 28 February 2003, the NLRC affirmed when it affirmed with modification the ruling of

Page
with modification the Decision of the Labor
Arbiter. The dispositive portion reads:
WHEREFORE, premises
considered, the decision under
review is hereby, MODIFIED BY
DELETING the award of overtime
pay in the total amount of Three
Thousand Six Hundred Thirty Six
US Dollars (US $3,636.00).
the Labor Arbiter. They prayed that the Decision
and Resolution promulgated by the NLRC be
vacated and another one be issued dismissing
the complaint of the respondent.
Finding no grave abuse of discretion, the
Court of Appeals AFFIRMED the Decision of the
labor tribunal.

In all other respects, the The Courts Ruling

assailed decision so stands as,
AFFIRMED.11 The following are the assignment of errors
presented before this Court
Before the NLRC, the petitioners assailed that I.
they were not properly notified of the hearings THE COURT A QUO ERRED IN
that were conducted before the Labor Arbiter. FINDING THAT THE SECOND
They further alleged that after the suspension of CONTRACT NOVATED THE FIRST
proceedings before the POEA, the only notice CONTRACT.
they received was a copy of the decision of the
Labor Arbiter.12 1. THERE WAS NO NOVATION OF
THE FIRST CONTRACT BY THE
The NLRC ruled that records showed that SECOND CONTRACT; THE
attempts to serve the various notices of hearing ALLEGATION OF ILLEGAL
were made on petitioners counsel on record but DISMISSAL UNDER THE FIRST
these failed on account of their failure to furnish CONTRACT MUST BE RESOLVED
the Office of the Labor Arbiter a copy of any SEPARATELY FROM THE
notice of change of address. There was also no ALLEGATION OF FAILURE TO
evidence that a service of notice of change of DEPLOY UNDER THE SECOND
address was served on the POEA.13 CONTRACT.

The NLRC upheld the finding of unjustified 2. THE ALLEGED ILLEGAL

termination of contract for failure on the part of DISMISSAL UNDER THE FIRST
the petitioners to present evidence that would CONTRACT TRANSPIRED MORE
justify their non-deployment of the THAN THREE (3) YEARS AFTER
respondent.14 It denied the claim of the THE CASE WAS FILED AND
petitioners that the monetary award should be THEREFORE HIS CASE SHOULD
limited only to three (3) months for every year of HAVE BEEN DISMISSED FOR
the unexpired term of the contract. It ruled that BEING BARRED BY
the factual incidents material to the case PRESCRIPTION.
transpired within 1991-1992 or before the
effectivity of Republic Act No. 8042 or the Migrant II.
Workers and Overseas Filipinos Act of 1995 which
provides for such limitation.15 THE COURT A QUO ERRED IN
RULING THAT THERE WAS
CONSTRUCTIVE DISMISSAL UNDER
However, the NLRC upheld the reduction of the THE SECOND CONTRACT.
monetary award with respect to the deletion of
the overtime pay due to the non-deployment of 1. IT IS LEGALLY IMPOSSIBLE TO
the respondent.16 HAVE CONSTRUCTIVE
DISMISSAL WHEN THE
The Partial Motion for Reconsideration filed EMPLOYMENT HAS NOT YET
by the petitioners was denied by the NLRC in its COMMENCED.
Resolution dated 27 July 2005.17
 2. ASSUMING THERE WAS between the complainant and the

228
OMISSION UNDER THE SECOND respondents is deemed to have been
CONTRACT, PETITIONERS CAN novated by the execution of the second
ONLY BE FOUND AS HAVING contract. In other words, respondents

Page
FAILED IN DEPLOYING PRIVATE cannot be held liable for the first contract
RESPONDENT BUT WITH VALID but are clearly and definitely liable for the
REASON. breach of the second contract.20

III. This ruling was later affirmed by the Court of

THE COURT A QUO ERRED IN
FAILING TO FIND THAT EVEN
ASSUMING THERE WAS BASIS FOR
HOLDING PETITIONER LIABLE FOR
FAILURE TO DEPLOY
RESPONDENT, THE POEA RULES
PENALIZES SUCH OMISSION WITH A
MERE REPRIMAND.18
The petitioners contend that the first
employment contract between them and the
private respondent is different from and
independent of the second contract subsequently
executed upon repatriation of respondent to
Manila.
We do not agree.
Novation is the extinguishment of an obligation
by the substitution or change of the obligation by
a subsequent one which extinguishes or modifies
the first, either by changing the object or
principal conditions, or, by substituting another in
place of the debtor, or by subrogating a third
person in the rights of the creditor. In order for
novation to take place, the concurrence of the
following requisites is indispensable:
1. There must be a previous valid
obligation,
2. There must be an agreement of
the parties concerned to a new
contract,
Appeals in its decision ruling that:
Guided by the foregoing legal precepts, it
is evident that novation took place in this
particular case. The parties impliedly
extinguished the first contract by agreeing
to enter into the second contract to
placate Medequillo, Jr. who was
unexpectedly dismissed and repatriated to
Manila. The second contract would not
have been necessary if the petitioners
abided by the terms and conditions of
Madequillo, Jr.s employment under the
first contract. The records also reveal that
the 2nd contract extinguished the first
contract by changing its object or
principal. These contracts were for
overseas employment aboard different
vessels. The first contract was for
employment aboard the MV Stolt
Aspiration while the second contract
involved working in another vessel, the MV
Stolt Pride. Petitioners and Madequillo,
Jr. accepted the terms and conditions of
the second contract. Contrary to
petitioners assertion, the first contract
was a previous valid contract since it
had not yet been terminated at the time of
Medequillo, Jr.s repatriation to Manila. The
legality of his dismissal had not yet been
resolved with finality. Undoubtedly, he was
still employed under the first contract
when he negotiated with petitioners on
the second contract. As such, the NLRC
correctly ruled that petitioners could only
be held liable under the second contract.21

3. There must be the We concur with the finding that there was
extinguishment of the old contract, a novation of the first employment contract.
and
We reiterate once more and emphasize
4. There must be the validity of the the ruling in Reyes v. National Labor Relations
new contract.19 Commission,22 to wit:

In its ruling, the Labor Arbiter clarified that x x x [F]indings of quasi-judicial

novation had set in between the first and second bodies like the NLRC, and affirmed
contract. To quote: by the Court of Appeals in due
course, are conclusive on this
xxx [T]his office would like to make it clear Court, which is not a trier of facts.
that the first contract entered into by and
Findings of fact of administrative
229
agencies and quasi-judicial bodies,
which have acquired expertise
because their jurisdiction is confined
Page
to specific matters, are generally
accorded not only respect, but
finality when affirmed by the Court of
Appeals. Such findings deserve full
respect and, without justifiable reason,
ought not to be altered, modified or
reversed.(Emphasis supplied)23
With the finding that respondent was still
employed under the first contract when he
negotiated with petitioners on the second
contract,24 novation became an unavoidable
conclusion.
Equally settled is the rule that factual
findings of labor officials, who are deemed to
have acquired expertise in matters within their
jurisdiction, are generally accorded not only
respect but even finality by the courts when
supported by substantial evidence, i.e., the
amount of relevant evidence which a reasonable
mind might accept as adequate to justify a
conclusion.25 But these findings are not infallible.
When there is a showing that they were arrived at
arbitrarily or in disregard of the evidence on
record, they may be examined by the courts. 26 In
this case, there was no showing of any
arbitrariness on the part of the lower courts in
their findings of facts. Hence, we follow the
settled rule.
We need not dwell on the issue of
prescription. It was settled by the Court of
Appeals with its ruling that recovery of damages
under the first contract was already time-barred.
Thus:
Accordingly, the prescriptive
period of three (3) years within which
Medequillo Jr. may initiate money claims
under the 1st contract commenced on the
date of his repatriation. xxx The start of the
three (3) year prescriptive period must
therefore be reckoned on February 1992,
which by Medequillo Jr.s own admission was
the date of his repatriation to Manila. It was
at this point in time that Medequillo Jr.s
cause of action already accrued under the
first contract. He had until February 1995 to
pursue a case for illegal dismissal and
damages arising from the 1st contract. With
the filing of his Complaint-Affidavit on March
6, 1995, which was clearly beyond the
prescriptive period, the cause of action under
the 1st contract was already time-barred.27
The issue that proceeds from the fact of
novation is the consequence of the non-
deployment of respondent.
The petitioners argue that under the POEA
Contract, actual deployment of the seafarer is a
suspensive condition for the commencement of
the employment.28 We agree with petitioners on
such point. However, even without actual
deployment, the perfected contract gives rise to
obligations on the part of petitioners.
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.29 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.30
The POEA Standard Employment Contract
provides that employment shall commence upon
the actual departure of the seafarer from the
airport or seaport in the port of hire. 31 We adhere
to the terms and conditions of the contract so as
to credit the valid prior stipulations of the parties
before the controversy started. Else, the
obligatory force of every contract will be useless.
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.32
Thus, even if by the standard contract
employment commences only upon actual
departure of the seafarer, this does not mean
that the seafarer has no remedy in case of non-
deployment without any valid reason.
Parenthetically, the contention of the petitioners
of the alleged poor performance of respondent
while on board the first ship MV Stolt Aspiration
cannot be sustained to justify the non-
deployment, for no evidence to prove the same
was presented.33
We rule that distinction must be made
between the perfection of the employment
contract and the commencement of the
employer-employee relationship. The perfection
of the contract, which in this case coincided with
the date of execution thereof, occurred when
petitioner and respondent agreed on the object
and the cause, as well as the rest of the terms
and conditions therein. The commencement of
the employer-employee relationship, as earlier
discussed, would have taken place had petitioner
been actually deployed from the point of hire.
Thus, even before the start of any employer-
230
employee relationship, contemporaneous with
the perfection of the employment contract was
the birth of certain rights and obligations, the
Page
breach of which may give rise to a cause of action
against the erring party. Thus, if the reverse had
happened, that is the seafarer failed or refused to
be deployed as agreed upon, he would be liable
for damages.34
Further, we do not agree with the
contention of the petitioners that the penalty is a
mere reprimand.
The POEA Rules and Regulations
Governing Overseas Employment35 dated 31 May
1991 provides for the consequence and penalty
against in case of non-deployment of the seafarer
without any valid reason. It reads:
Section 4. Workers Deployment.
An agency shall deploy its recruits
within the deployment period as
indicated below:
b. Thirty (30) calendar days from
the date of processing by the
administration of the employment
contracts of seafarers.
Failure of the agency to deploy
a worker within the prescribed
period without valid reasons
shall be a cause for suspension
or cancellation of license or
fine. In addition, the agency
shall return all documents at
no cost to the worker.(Emphasis
and underscoring supplied)
The appellate court correctly ruled that
the penalty of reprimand36 provided under Rule
IV, Part VI of the POEA Rules and Regulations
Governing the Recruitment and Employment of
Land-based Overseas Workers is not applicable in
this case. The breach of contract happened on
February 1992 and the law applicable at that time
was the 1991 POEA Rules and Regulations
Governing Overseas Employment. The penalty for
non-deployment as discussed is suspension or
cancellation of license or fine.
Now, the question to be dealt with is how
will the seafarer be compensated by reason of
the unreasonable non-deployment of the
petitioners?
The POEA Rules Governing the
Recruitment and Employment of Seafarers do not
provide for the award of damages to be given in
favor of the employees. The claim provided by
the same law refers to a valid contractual claim
for compensation or benefits arising from
employer-employee relationship or for any
personal injury, illness or death at levels provided
for within the terms and conditions of
employment of seafarers. However, the absence
of the POEA Rules with regard to the payment of
damages to the affected seafarer does not mean
that the seafarer is precluded from claiming the
same. The sanctions provided for non-
deployment do not end with the suspension or
cancellation of license or fine and the return of all
documents at no cost to the worker. As earlier
discussed, they do not forfend a seafarer from
instituting an action for damages against the
employer or agency which has failed to deploy
him.37
We thus decree the application of Section
10 of Republic Act No. 8042 (Migrant Workers Act)
which provides for money claims by reason of a
contract involving Filipino workers for overseas
deployment. The law provides:
Sec. 10. Money Claims.
Notwithstanding any provision of
law to the contrary, the Labor
Arbiters of the National Labor
Relations Commission (NLRC) shall
have the original and exclusive
jurisdiction to hear and decide,
within ninety (90) calendar days
after the filing of the complaint, the
claims arising out of an employer-
employee relationship or by virtue
of any law or contract involving
Filipino workers for overseas
deployment including claims for
actual, moral, exemplary and other
forms of damages. x x x
(Underscoring supplied)
Following the law, the claim is still
cognizable by the labor arbiters of the NLRC
under the second phrase of the provision.
Applying the rules on actual damages,
Article 2199 of the New Civil Code provides that
one is entitled to an adequate compensation only
for such pecuniary loss suffered by him as he has
duly proved. Respondent is thus liable to pay
petitioner actual damages in the form of the loss
of nine (9) months worth of salary as provided in
the contract.38 This is but proper because of the
non-deployment of respondent without just
cause.
 WHEREFORE, the appeal is DENIED. The The Facts

231
31 January 2007 Decision of the Court of Appeals
in CA-G.R. SP. No. 91632 is hereby AFFIRMED.
The Petitioners are hereby ordered to pay
On May 14, 2002, United Pulp and Paper
Co., Inc. (UPPC) filed a civil case for collection of
the amount of P42,844,353.14 against Unibox

Page
Sulpecio Medequillo, Jr., the award of actual
damages equivalent to his salary for nine (9) Packaging Corporation (Unibox) and Vicente
months as provided by the Second Employment Ortega (Ortega) before the Regional Trial Court of
Contract. Makati, Branch 148 (RTC).[3] UPPC also prayed for
a Writ of Preliminary Attachment against the
properties of Unibox and Ortega for the reason
that the latter were on the verge of insolvency
and were transferring assets in fraud of creditors.
[4]
On August 29, 2002, the RTC issued the Writ of
Attachment[5] after UPPC posted a bond in the
UNITED PULP AND G.R. No. 171750 same amount of its claim. By virtue of the said
PAPER CO., INC., writ, several properties and assets of Unibox and
Ortega were attached.[6]
Petitioner,
Present: On October 10, 2002, Unibox and Ortega filed
their Motion for the Discharge of Attachment,
[7]
praying that they be allowed to file a counter-
bond in the amount of P42,844,353.14 and that
the writ of preliminary attachment be discharged
CORONA,* CJ,
after the filing of such bond. Although this was
opposed by UPPC, the RTC, in its Order
VELASCO, dated October 25, 2002, granted the said motion
JR., J., Chairperson, for the discharge of the writ of attachment
subject to the condition that Unibox and Ortega
- versus ABAD, file a counter-bond.[8] Thus, on November 21,
2002, respondent Acropolis Central Guaranty
MENDOZA, and Corporation (Acropolis) issued the Defendants
Bond for Dissolution of Attachment[9] in the
PERLAS-BERNABE, JJ. amount of P42,844,353.14 in favor of Unibox.

Not satisfied with the counter-bond issued

ACROPOLIS
CENTRAL
GUARANTY Promulgated:
CORPORATION,
Respondent. January 25, 2012
This is a petition for review under Rule 45
praying for the annulment of the November 17,
2005 Decision[1] and the March 2, 2006
Resolution[2] of the Court of Appeals (CA) in CA-
G.R. SP No. 89135 entitled Acropolis Central
Guaranty Corporation (formerly known as the
Philippine Pryce Assurance Corp.) v. Hon. Oscar
B. Pimentel, as Presiding Judge, RTC of Makati
City, Branch 148 (RTC), and United Pulp and
Paper Co., Inc.
by Acropolis, UPPC filed its Manifestation and
Motion to Discharge the Counter-
Bond[10] dated November 27, 2002, claiming that
Acropolis was among those insurance companies
whose licenses were set to be cancelled due to
their failure to put up the minimum amount of
capitalization required by law. For that reason,
UPPC prayed for the discharge of the counter-
bond and the reinstatement of the attachment. In
its December 10, 2002 Order,[11] the RTC denied
UPPCs Motion to Discharge Counter-Bond and,
instead, approved and admitted the counter-bond
posted by Acropolis. Accordingly, it ordered the
sheriff to cause the lifting of the attachment on
the properties of Unibox and Ortega.
On September 29, 2003, Unibox, Ortega
and UPPC executed a compromise agreement,
[12]
wherein Unibox and Ortega acknowledged
their obligation to UPPC in the amount
ofP35,089,544.00 as of August 31, 2003,
inclusive of the principal and the accrued interest,
and bound themselves to pay the said amount in
accordance with a schedule of payments agreed
upon by the parties. Consequently, the RTC
promulgated its Judgment[13] dated October 2,
232
2003 approving the compromise agreement.
For failure of Unibox and Ortega to pay the
Page
required amounts for the months of May and June
2004 despite demand by UPPC, the latter filed its
Motion for Execution[14] to satisfy the remaining
unpaid balance. In the July 30, 2004 Order,[15] the
RTC acted favorably on the said motion and,
on August 4, 2004, it issued the requested Writ of
Execution.[16]
The sheriff then proceeded to enforce the
Writ of Execution. It was discovered, however,
that Unibox had already ceased its business
operation and all of its assets had been
foreclosed by its creditor bank. Moreover, the
responses of the selected banks which were
served with notices of garnishment indicated that
Unibox and Ortega no longer had funds available
for garnishment. The sheriff also proceeded to
the residence of Ortega to serve the writ but he
was denied entry to the premises. Despite his
efforts, the sheriff reported in his November 4,
2008 Partial Return[17] that there was no
satisfaction of the remaining unpaid balance by
Unibox and Ortega.
On the basis of the said return, UPPC filed
its Motion to Order Surety to Pay Amount of
Counter-Bond[18] directed at
Acropolis. On November 30, 2004, the RTC issued
its Order[19]granting the motion and ordering
Acropolis to comply with the terms of its counter-
bond and pay UPPC the unpaid balance of the
judgment in the amount of P27,048,568.78 with
interest of 12% per annum from default.
Thereafter, on December 13, 2004,
Acropolis filed its Manifestation and Very Urgent
Motion for Reconsideration,[20] arguing that it
could not be made to pay the amount of the
counter-bond because it did not receive a
demand for payment from UPPC. Furthermore, it
reasoned that its obligation had been discharged
by virtue of the novation of its obligation
pursuant to the compromise agreement executed
by UPPC, Unibox and Ortega. The motion, which
was set for hearing on December 17, 2004, was
received by the RTC and UPPC only on December
20, 2004.[21] In the Order dated February 22,
2005, the RTC denied the motion for
reconsideration for lack of merit and for having
been filed three days after the date set for the
hearing on the said motion.[22]
Aggrieved, Acropolis filed a petition for
certiorari before the CA with a prayer for the
issuance of a Temporary Restraining Order and
Writ of Preliminary Injunction.[23] On November
17, 2005, the CA rendered its Decision [24] granting
the petition, reversing the February 22, 2005
Order of the RTC, and absolving and relieving
Acropolis of its liability to honor and pay the
amount of its counter-attachment bond. In
arriving at said disposition, the CA stated that,
firstly, Acropolis was able to comply with the
three-day notice rule because the motion it filed
was sent by registered mail on December 13,
2004, four days prior to the hearing set for
December 17, 2004;[25] secondly, UPPC failed to
comply with the following requirements for
recovery of a judgment creditor from the surety
on the counter-bond in accordance with Section
17, Rule 57 of the Rules of Court, to wit: (1)
demand made by creditor on the surety, (2)
notice to surety and (3) summary hearing as to
his liability for the judgment under the counter-
bond;[26] and, thirdly, the failure of UPPC to
include Acropolis in the compromise agreement
was fatal to its case.[27]
UPPC then filed a motion for
reconsideration but it was denied by the CA in its
Resolution dated March 1, 2006.[28]
Hence, this petition
The Issues
For the allowance of its petition, UPPC raises the
following
GROUNDS
I.
The Court of Appeals erred in not
holding respondent liable on its
counter-attachment bond which it
posted before the trial court
inasmuch as:
A. The requisites for recovering upon
the respondent-surety were clearly
complied with by petitioner and the trial
court, inasmuch as prior demand and
notice in writing was made upon
respondent, by personal service, of
petitioners motion to order respondent
surety to pay the amount of its counter-
attachment bond, and a hearing
thereon was held for the purpose of
 determining the liability of the personal service, of the hearing held on UPPCs

233
respondent-surety. Motion to Order Respondent-Surety to Pay the
Bond.[30] Moreover, it points out that the terms of
B. The terms of respondents counter- the counter-attachment bond are clear in that
attachment bond are clear, and

Page
Acropolis, as surety, shall jointly and solidarily
unequivocally provide that respondent bind itself with Unibox and Ortega to secure the
as surety shall jointly and solidarily payment of any judgment that UPPC may recover
bind itself with defendants to secure in the action.[31]
and pay any judgment that petitioner
may recover in the action. Hence, such Section 17, Rule 57 of the Rules of Court sets
being the terms of the bond, in forth the procedure for the recovery from a surety
accordance with fair insurance on a counter-bond:
practices, respondent cannot, and
should not be allowed to, evade its Sec. 17. Recovery upon the
liability to pay on its counter- counter-bond. When the judgment
attachment bond posted by it before has become executory, the surety
the trial court. or sureties on any counter-bond
given pursuant to the provisions of
II. this Rule to secure the payment of
the judgment shall become
The Court of Appeals erred in holding that charged on such counter-bond and
the trial court gravely abused its discretion bound to pay the judgment obligee
in denying respondents manifestation and upon demand the amount due
motion for reconsideration considering that under the judgment, which amount
the said motion failed to comply with the may be recovered from such
three (3)-day notice rule under Section 4, surety or sureties after notice and
Rule 15 of the Rules of Court, and that it summary hearing on the same
had lacked substantial merit to warrant a action.
reversal of the trial courts previous order. [29]
From a reading of the abovequoted provision, it is
Simply put, the issues to be dealt with in
evident that a surety on a counter-bond given to
this case are as follows:
secure the payment of a judgment becomes
liable for the payment of the amount due upon:
(1) Whether UPPC failed to
(1) demand made upon the surety; and (2) notice
make the required demand
and summary hearing on the same action. After a
and notice upon Acropolis;
careful scrutiny of the records of the case, the
and
Court is of the view that UPPC indeed complied
with these twin requirements.
(2) Whether the execution of
the compromise agreement
This Court has consistently held that the filing of
between UPPC and Unibox
a complaint constitutes a judicial demand.
and Ortega was tantamount [32]
Accordingly, the filing by UPPC of the Motion to
to a novation which had the
Order Surety to Pay Amount of Counter-Bond was
effect of releasing Acropolis
already a demand upon Acropolis, as surety, for
from its obligation under the
the payment of the amount due, pursuant to the
counter-attachment bond.
terms of the bond. In said bond, Acropolis bound
itself in the sum of 42,844,353.14 to secure the
The Courts Ruling payment of any judgment that UPPC might
recover against Unibox and Ortega.[33]
UPPC complied with the
Furthermore, an examination of the records
twin requirements of notice and
reveals that the motion was filed by UPPC
demand on November 11, 2004 and was set for hearing
on November 19, 2004.[34] Acropolis was duly
On the recovery upon the counter-bond, notified of the hearing and it was personally
the Court finds merit in the arguments of the served a copy of the motion on November 11,
petitioner. 2004,[35] contrary to its claim that it did not
receive a copy of the motion.
UPPC argues that it complied with the
requirement of demanding payment from
Acropolis by notifying it, in writing and by
On November 19, 2004, the case was reset for defendant/s personal property,

234
hearing on November 30, 2004. The minutes of upon the filing of a counterbond by
the hearing on both dates show that only the the defendants in the sun of
counsel for UPPC was present. Thus, Acropolis PESOS FORTY TWO MILLION EIGHT

Page
was given the opportunity to defend itself. That it HUNDRED FORTY FOUR THOUSAND
chose to ignore its day in court is no longer the THREE HUNDRED FIFTY THREE
fault of the RTC and of UPPC. It cannot now invoke AND 14/100 ONLY (P
the alleged lack of notice and hearing when, 42,844,353.14) Philippine
undeniably, both requirements were met by Currency.
UPPC.
NOW, THEREFORE, we
No novation despite compromise UNIBOX PACKAGING CORP. as
agreement; Acropolis still liable under Principal and PHILIPPINE PRYCE
ASSURANCE CORP., a corporation
the terms of the counter-bond duly organized and existing under
and by virtue of the laws of the
UPPC argues that the undertaking of Philippines, as Surety, in
Acropolis is to secure any judgment rendered by consideration of the
the RTC in its favor. It points out that because of dissolution of said attachment,
the posting of the counter-bond by Acropolis and hereby jointly and severally
the dissolution of the writ of preliminary bind ourselves in the sum of
attachment against Unibox and Ortega, UPPC lost FORTY TWO MILLION EIGHT
its security against the latter two who had gone HUNDRED FORTY FOUR
bankrupt.[36] It cites the cases of Guerrero v. THOUSAND THREE HUNDRED
Court of Appeals[37] and Martinez v. Cavives[38] to FIFTY THREE AND 14/100 ONLY
support its position that the execution of a (P 42,844,353.14) Philippine
compromise agreement between the parties and Currency, in favor of the
the subsequent rendition of a judgment based on plaintiff to secure the payment
the said compromise agreement does not release of any judgment that the
the surety from its obligation nor does it novate plaintiff may recover against
the obligation.[39] the defendants in this action.
[42]
[Emphasis and underscoring
Acropolis, on the other hand, contends supplied]
that it was not a party to the compromise
agreement. Neither was it aware of the execution Based on the foregoing, Acropolis voluntarily
of such an agreement which contains an bound itself with Unibox to be solidarily liable to
acknowledgment of liability on the part of Unibox answer for ANY judgment which UPPC may
and Ortega that was prejudicial to it as the recover from Unibox in its civil case for
surety. Accordingly, it cannot be bound by the collection. Its counter-bond was issued in
judgment issued based on the said agreement. consideration of the dissolution of the writ of
[40]
Acropolis also questions the applicability attachment on the properties of Unibox and
of Guerrero and draws attention to the fact that Ortega. The counter-bond then replaced the
in said case, the compromise agreement properties to ensure recovery by UPPC from
specifically stipulated that the surety shall Unibox and Ortega. It would be the height of
continue to be liable, unlike in the case at bench injustice to allow Acropolis to evade its obligation
where the compromise agreement made no to UPPC, especially after the latter has already
mention of its obligation to UPPC.[41] secured a favorable judgment.

On this issue, the Court finds for UPPC
also.
The terms of the Bond for Dissolution of
Attachment issued by Unibox and Acropolis in
favor of UPPC are clear and leave no room for
ambiguity:
WHEREAS, the Honorable
Court in the above-entitled case
issued on _____ an Order dissolving
/ lifting partially the writ of
attachment levied upon the
This issue is not novel. In the case
of Luzon Steel Corporation v. Sia,[43] Luzon Steel
Corporation sued Metal Manufacturing of
the Philippines and Jose Sia for breach of contract
and damages. A writ of preliminary attachment
was issued against the properties of the
defendants therein but the attachment was lifted
upon the filing of a counter-bond issued by Sia, as
principal, and Times Surety & Insurance Co., as
surety. Later, the plaintiff and the defendants
entered into a compromise agreement whereby
Sia agreed to settle the plaintiffs claim. The lower
court rendered a judgment in accordance with the effective against the

235
terms of the compromise. Because the counterbondregardless of the
defendants failed to comply with the same, the manner how the judgment was
plaintiff obtained a writ of execution against Sia obtained.

Page
and the surety on the counter-bond. The surety
moved to quash the writ of execution on the xxx
ground that it was not a party to the compromise
and that the writ was issued without giving the As declared by us
surety notice and hearing. Thus, the court set in Mercado v. Macapayag, 69 Phil.
aside the writ of execution and cancelled the 403, 405-406, in passing upon
counter-bond. On appeal, this Court, speaking the liability of counter sureties in
through the learned Justice J.B.L. Reyes, replevin who bound themselves to
discussed the nature of the liability of a surety on answer solidarily for the
a counter-bond: obligations of the defendants to
the plaintiffs in a fixed amount
Main issues posed are (1) of 912.04, to secure payment of
whether the judgment upon the the amount that said plaintiff be
compromise discharged adjudged to recover from the
the surety from its obligation defendants,
under its attachment counterbond
and (2) whether the writ of the liability of the
execution could be issued against sureties was fixed
the surety without previous and conditioned
exhaustion of the debtor's on the finality of
properties. the judgment
rendered regardle
Both questions can be ss of whether the
solved by bearing in mind that we decision was
are dealing with based on the
a counterbond filed to discharge a consent of the
levy on attachment. Rule 57, parties or on the
section 12, specifies that an merits. A
attachment may be discharged judgment entered
upon the making of a cash deposit on a stipulation is
or filing a counterbond in an nonetheless a
amount equal to the value of the judgment of the
property attached as determined court because
by the judge; that upon the filing consented to by
of the counterbond the property the parties.[44]
attached ... shall be delivered to
the party making the deposit or [Emphases and
giving the counterbond, or the underscoring
person appearing on his supplied]
behalf, the deposit or counterbond
aforesaid standing in place of the The argument of Acropolis that its
property so released. obligation under the counter-bond was novated
by the compromise agreement is, thus,
untenable. In order for novation to extinguish its
The italicized expressions obligation, Acropolis must be able to show that
constitute the key to the entire there is an incompatibility between the
problem. Whether the judgment be compromise agreement and the terms of the
rendered after trial on the merits counter-bond, as required by Article 1292 of the
or upon compromise, such Civil Code, which provides that:
judgment undoubtedly may be
made effective upon the property Art. 1292. In order that an
released; and since the obligation may be extinguished by
counterbond merely stands in another which substitute the
the place of such property, same, it is imperative that it be so
there is no reason why the declared in unequivocal terms, or
judgment should not be made that the old and the new
 obligations be on every point
236
incompatible with each other.
(1204)
Page
Nothing in the compromise agreement
indicates, or even hints at, releasing Acropolis
from its obligation to pay UPPC after the latter
has obtained a favorable judgment. Clearly, there
is no incompatibility between the compromise
agreement and the counter-bond. Neither can
novation be presumed in this case. As explained
in Dugo v. Lopena:[45]
Novation by presumption
has never been favored. To be
sustained, it need be established
that the old and new contracts are
incompatible in all points, or that
the will to novate appears by
express agreement of the parties
or in acts of similar import.[46]
All things considered, Acropolis, as surety under
the terms of the counter-bond it issued, should be
held liable for the payment of the unpaid balance
due to UPPC.
Three-day notice rule, not a hard and
fast rule
Although this issue has been obviated by
our disposition of the two main issues, the Court
would like to point out that the three-day notice
requirement is not a hard and fast rule and
substantial compliance is allowed.
Pertinently, Section 4, Rule 15 of the Rules
of Court reads:
Sec. 4. Hearing of motion. Except
for motions which the court may
act upon without prejudicing the
rights of the adverse party, every
written motion shall be set for
hearing by the applicant.
Every written motion required to
be heard and the notice of the
hearing thereof shall be served
in such a manner as to insure
its receipt by the other party
at least three (3) days before
the date of hearing, unless the
court for good cause sets the
hearing on shorter notice.
[Emphasis supplied]
The law is clear that it intends for the other party
to receive a copy of the written motion at least
three days before the date set for its hearing. The
purpose of the three (3)-day notice requirement,
which was established not for the benefit of the
movant but rather for the adverse party, is to
avoid surprises upon the latter and to grant it
sufficient time to study the motion and to enable
it to meet the arguments interposed therein.
[47]
In Preysler, Jr. v. Manila Southcoast
Development Corporation,[48] the Court restated
the ruling that the date of the hearing should be
at least three days after receipt of the notice of
hearing by the other parties.
It is not, however, a hard and fast rule.
Where a party has been given the opportunity to
be heard, the time to study the motion and
oppose it, there is compliance with the rule. This
was the ruling in the case of Jehan Shipping
Corporation v. National Food Authority,[49] where it
was written:
Purpose Behind the
Notice Requirement
This Court has indeed held
time and time again that, under
Sections 4 and 5 of Rule 15 of the
Rules of Court, mandatory is the
notice requirement in a motion,
which is rendered defective by
failure to comply with the
requirement. As a rule, a motion
without a notice of hearing is
considered pro forma and does not
affect the reglementary period for
the appeal or the filing of the
requisite pleading.
As an integral component of
procedural due process, the three-
day notice required by the Rules is
not intended for the benefit of the
movant. Rather, the requirement is
for the purpose of avoiding
surprises that may be sprung upon
the adverse party, who must be
given time to study and meet the
arguments in the motion before a
resolution by the court. Principles
of natural justice demand that the
right of a party should not be
affected without giving it an
opportunity to be heard.
The test is the presence
of the opportunity to be heard,
 as well as to have time to

237
study the motion and
meaningfully oppose or
controvert the grounds upon

Page
which it is based. Considering CRESENCIO C. MILLA,
the circumstances of the present Petitioner,
case, we believe that the - versus -
requirements of procedural due
process were substantially PEOPLE OF THE PHILIPPINES and
complied with, and that the MARKET PURSUITS, INC. represented by
compliance justified a departure CARLO V. LOPEZ,
from a literal application of the Respondents.
rule on notice of hearing.
[50]
[Emphasis supplied] This is a Petition for Certiorari assailing the
22 April 2009 Decision[1] and 8 July 2009
Resolution[2] of the Court of Appeals, affirming the
In the case at bench, the RTC gave UPPC Decision of the trial court finding petitioner
sufficient time to file its comment on the Cresencio C. Milla (Milla) guilty of two counts
motion. On January 14, 2005, UPPC filed its of estafa through falsification of public
Opposition to the motion, discussing the issues documents.
raised by Acropolis in its motion. Thus, UPPCs
right to due process was not violated because it Respondent Carlo Lopez (Lopez) was the Financial
was afforded the chance to argue its position. Officer of private respondent, Market Pursuits,
Inc. (MPI). In March 2003, Milla represented
WHEREFORE, the petition is GRANTED. The himself as a real estate developer from Ines
November 17, 2005 Decision and the March 1, Anderson Development Corporation, which was
2006 Resolution of the Court of Appeals, in CA- engaged in selling business properties in Makati,
G.R. SP No. 89135, are and offered to sell MPI a property therein located.
hereby REVERSED andSET ASIDE. The For this purpose, he
November 30, 2004 Order of the Regional Trial showed Lopez a photocopy of Transfer Certificate
Court, Branch 148, Makati City, ordering Acropolis of Title (TCT) No. 216445 registered in the name
to comply with the terms of its counter-bond and of spouses Farley and Jocelyn Handog (Sps.
pay UPPC the unpaid balance of the judgment in Handog), as well as a Special Power of Attorney
the amount of P27,048,568.78 with interest of purportedly executed by the spouses in favor of
12% per annum from default is REINSTATED. Milla.[3] Lopez verified with the Registry of Deeds
of Makati and confirmed that the property was
indeed registered under the names of Sps.
Handog. Since Lopez was convinced by Millas
______________________________________________ authority, MPI purchased the property for P2
million, issuing Security Bank and Trust Co.
(SBTC) Check No. 154670 in the amount of P1.6
million. After receiving the check, Milla gave
Lopez (1) a notarized Deed of Absolute Sale
dated 25 March 2003 executed by Sps. Handog in
favor of MPI and (2) an original Owners Duplicate
Copy of TCT No. 216445.[4]

Milla then gave Regino Acosta (Acosta),

Lopezs partner, a copy of the new Certificate of
Title to the property, TCT No. 218777, registered
in the name of MPI. Thereafter, it tendered in
favor of Milla SBTC Check No. 15467111 in the
amount of P400,000 as payment for the balance.
[5]

Milla turned over TCT No. 218777 to

Acosta, but did not furnish the latter with the
receipts for the transfer taxes and other costs
incurred in the transfer of the property. This
failure to turn over the receipts prompted Lopez
to check with the Register of Deeds, where he Lopez, and complainant believing

238
discovered that (1) the Certificate of Title given to in the genuineness of the Deed of
them by Milla could not be found therein; (2) Absolute Sale paid accused the
there was no transfer of the property from Sps. amount of P1,600,000.00 as partial

Page
Handog to MPI; and (3) TCT No. 218777 was payment for the property, to the
registered in the name of a certain Matilde M. damage and prejudice of
Tolentino.[6] complainant in the aforementioned
amount of P1,600,000.00
Consequently, Lopez demanded the return
of the amount of P2 million from Milla, who then CONTRARY TO LAW.
issued Equitable PCI Check Nos. 188954 and
188955 dated 20 and 23 May 2003, respectively, CRIMINAL CASE NO. 034168
in the amount of P1 million each. However, these
That on or about the 3rd day of April
checks were dishonored for having been drawn
2003, in the City of Makati,
against insufficient funds. When Milla ignored the
Philippines and within the
demand letter sent by Lopez, the latter, by virtue
jurisdiction of this Honorable Court,
of the authority vested in him by the MPI Board of
the above-named accused, a
Directors, filed a Complaint against the former on
private individual, did then and
4 August 2003. On 27 and 29 October 2003, two
there wilfully, unlawfully and
Informations for Estafa Thru Falsification of Public
feloniously falsify a document
Documents were filed against Milla and were
denominated as Transfer Certificate
raffled to the Regional Trial Court, National
of Title No. 218777 purportedly
Capital Judicial Region, Makati City, Branch 146
issued by the Register of Deeds of
(RTC Br. 146).[7] Milla was accused of having
Makati City, hence, a public
committed estafa through the falsification of the
document, by causing it to appear
notarized Deed of Absolute Sale and TCT No.
that the lot covered by TCT No.
218777 purportedly issued by the Register of
218777 was already registered in
Deeds of Makati, viz:
the name of complainant Market
CRIMINAL CASE NO. 034167 Pursuits, Inc., herein represented
by Carlo V. Lopez, when in truth
That on or about the and in fact, as said accused well
25th day of March 2003, in the City knew that the Register of Deeds of
of Makati, Philippines and within Makati did not issue TCT No.
the jurisdiction of this Honorable 218777 in the name of Market
Court, the above-named accused, a Pursuits Inc., and after the
private individual, did then and document was falsified, accused
there, wilfully, unlawfully and with
feloniously falsify a document intent to defraud complainant and
denomindated as Deed of Absolute complainant believing in the
Sale, duly notarized by Atty. Lope genuineness of Transfer Certificate
M. Velasco, a Notary Public for and of Title No. 218777 paid accused
in the City of Makati, denominated the amount of P400,000.00, to the
as Doc. No. 297, Page No. 61, Book damage and prejudice of
No. 69, Series of 2003 in his complainant in the aforementioned
Notarial Register, hence, a public amount of P4000,000.00 (sic).
document, by causing it to appear
that the registered owners of the CONTRARY TO LAW.[8]
property covered by TCT No.
216445 have sold their land to After the prosecution rested its case, Milla
complainant Market Pursuits, Inc. filed, with leave of court, his Demurrer to
when in truth and in fact the said Evidence.[9] In its Order dated 26 January 2006,
Deed of Absolute Sale was not RTC Br. 146 denied the demurrer and ordered him
executed by the owners thereof to present evidence, but he failed to do so
and after the document was despite having been granted ample opportunity.
[10]
falsified, accused, with intent to Though the court considered his right to
defraud complainant Market present evidence to have been consequently
Pursuits, Inc. presented the falsified waived, it nevertheless allowed him to file a
Deed of Sale to complainant, memorandum.[11]
herein represented by Carlo V.
 In its Joint Decision dated 28 November
239
2006,[12] RTC Br. 146 found Milla guilty beyond
reasonable doubt of two counts of estafa through
falsification of public documents, thus:
Page
WHEREFORE, judgment is
rendered finding the accused
Cresencio Milla guilty beyond
reasonable doubt of two (2) counts
of estafa through falsification of
public documents. Applying the
indeterminate sentence law and
considering that the amount
involved is more than P22,000,00
this Court should apply the
provision that an additional one (1)
year should be imposed for every
ten thousand (P10,000.00) pesos in
excess of P22,000.00, thus, this
Court is constrained to impose the
Indeterminate (sic) penalty of four
(4) years, two (2) months one (1)
day of prision correccional as
minimum to twenty (20) years of
reclusion temporal as maximum for
each count.
Accused is adjudged to be
civilly liable to the private
complainant and is ordered pay
(sic) complainant the total amount
of TWO MILLION (P2,000,000.00)
PESOS with legal rate of interest
from the filing of the Information
until the same is fully paid and to
pay the costs. He is further ordered
to pay attorneys fees equivalent to
ten (10%) of the total amount due
as and for attorneys fees. A lien on
the monetary award is constituted
in favor of the government, the
private complainant not having
paid the required docket fee prior
to the filing of the Information.
SO ORDERED.[13]
On appeal, the Court of Appeals, in the
assailed Decision dated 22 April 2009, affirmed
the findings of the trial court.[14] In its assailed
Resolution dated 8 July 2009, it also denied Millas
subsequent Motion for Reconsideration.[15]
In the instant Petition, Milla alleges that
the Decision and the Resolution of the Court of
Appeals were not in accordance with law and
jurisprudence. He raises the following issues:
I. Whether the case should be reopened
on the ground of negligence of counsel;
II. Whether the principle of novation is
applicable;
III. Whether the principle of simple loan is
applicable;
IV. Whether the Secretarys Certificate
presented by the prosecution is
admissible in evidence;
V. Whether the supposed inconsistent
statements of prosecution witnesses cast
a doubt on the guilt of petitioner.[16]
In its Comment, MPI argues that (1) Milla was not
deprived of due process on the ground of gross
negligence of counsel; (2) under the Revised
Penal Code, novation is not one of the grounds for
the extinction of criminal liability for estafa; and
(3) factual findings of the trial court, when
affirmed by the Court of Appeals, are final and
conclusive.[17]
On the other hand, in its Comment, the Office of
the Solicitor General contends that (1) Milla was
accorded due process of law; (2) the elements of
the crime charged against him were established
during trial; (3) novation is not a ground for
extinction of criminal liability for estafa; (4) the
money received by Milla from Lopez was not in
the nature of a simple loan or cash advance; and
(5) Lopez was duly authorized by MPI to institute
the action.[18]
In his Consolidated Reply, Milla reiterates that the
negligence of his former counsel warrants a
reopening of the case, wherein he can present
evidence to prove that his transaction with MPI
was in the nature of a simple loan.[19]
In the disposition of this case, the following issues
must be resolved:
I. Whether the negligence of
counsel deprived Milla of due
process of law
II. Whether the principle of
novation can exculpate Milla from
criminal liability
III. Whether the factual findings of
the trial court, as affirmed by the
appellate court, should be reviewed
on appeal
We resolve to deny the Petition.
Milla was not deprived of due process. Milla contends that his issuance of Equitable PCI

240
Check Nos. 188954 and 188955 before the
Milla argues that the negligence of his former institution of the criminal complaint against him
counsel, Atty. Manuel V. Mendoza (Atty. Mendoza), novated his obligation to MPI, thereby enabling

Page
deprived him of due process. Specifically, he him to avoid any incipient criminal liability and
states that after the prosecution had rested its converting his obligation into a purely civil one.
case, Atty. Mendoza filed a Demurrer to Evidence, This argument does not persuade.
and that the former was never advised by the
latter of the demurrer. Thus, Milla was The principles of novation cannot apply to the
purportedly surprised to discover that RTC Br. 146 present case as to extinguish his criminal liability.
had already rendered judgment finding him Milla cites People v. Nery[23] to support his
guilty, and that it had issued a warrant for his contention that his issuance of the Equitable PCI
arrest. Atty. Mendoza filed an Omnibus Motion for checks prior to the filing of the criminal complaint
Leave to File Motion for New Trial, which Milla averted his incipient criminal liability. However, it
claims to have been denied by the trial court for must be clarified that mere payment of an
being an inappropriate remedy, thus, obligation before the institution of a criminal
demonstrating his counsels negligence. These complaint does not, on its own, constitute
contentions cannot be given any merit. novation that may prevent criminal liability. This
Courts ruling in Nery in fact warned:
The general rule is that the mistake of a counsel
binds the client, and it is only in instances
wherein the negligence is so gross or palpable
that courts must step in to grant relief to the It may be observed in this
aggrieved client.[20] In this case, Milla was able to
regard that novation is not one of
file a Demurrer to Evidence, and upon the trial
courts denial thereof, was allowed to present the means recognized by the Penal
evidence.[21] Because of his failure to do so, RTC Code whereby criminal liability can
Br. 146 was justified in considering that he had be extinguished; hence, the role of
waived his right thereto. Nevertheless, the trial novation may only be to either
court still allowed him to submit a memorandum prevent the rise of criminal liability
in the interest of justice. Further, contrary to his or to cast doubt on the true nature
assertion that RTC Br. 146 denied the Motion to
of the original petition, whether or
Recall Warrant of Arrest thereafter filed by his
former counsel, a reading of the 2 August 2007 not it was such that its breach
Order of RTC Br. 146 reveals that it partially would not give rise to penal
denied the Omnibus Motion for New Trial and responsibility, as when money
Recall of Warrant of Arrest, but granted the loaned is made to appear as a
Motion for Leave of Court to Avail of Remedies deposit, or other similar disguise is
under the Rules of Court, allowing him to file an resorted to (cf. Abeto vs. People, 90
appeal and lifting his warrant of arrest.[22]
Phil. 581; Villareal, 27 Phil. 481).
It can be gleaned from the foregoing
circumstances that Milla was given opportunities
to defend his case and was granted concomitant
reliefs. Thus, it cannot be said that the mistake Even in Civil Law the
and negligence of his former counsel were so acceptance of partial
gross and palpable to have deprived him of due
payments, without further
process.
change in the original relation
between the complainant and
the accused, can not produce
The principle of novation cannot be applied novation. For the latter to
to the case at bar.
exist, there must be proof of
intent to extinguish the
original relationship, and such
intent can not be inferred from
the mere acceptance of
payments on account of what is
totally due. Much less can it be
 said that the acceptance of partial an irreconcilable

241
satisfaction can effect the incompatibility between the old
nullification of a criminal liability and the new obligations.
that is fully matured, and already in

Page
the process of enforcement. Thus,
this Court has ruled that the
offended partys acceptance of There are two ways which
a promissory note for all or could indicate, in fine, the presence
part of the amount misapplied of novation and thereby produce
does not obliterate the criminal the effect of extinguishing an
offense (Camus vs. Court of obligation by another which
Appeals, 48 Off. Gaz. 3898). substitutes the same. The first is
[24]
(Emphasis supplied.) when novation has been explicitly
stated and declared in unequivocal
terms. The second is when the old
and the new obligations are
Further, in Quinto v. People,[25] this Court incompatible on every point. The
exhaustively explained the concept of novation in test of incompatibility is
relation to incipient criminal liability, viz: whether or not the two
obligations can stand together,
each one having its
independent existence. If they
Novation is never cannot, they are incompatible
presumed, and the animus and the latter obligation
novandi, whether totally or novates the first. Corollarily,
partially, must appear by express changes that breed
agreement of the parties, or by incompatibility must be
their acts that are too clear and essential in nature and not
unequivocal to be mistaken. merely accidental. The
incompatibility must take place
in any of the essential
elements of the obligation,
The extinguishment of the such as its object, cause or
old obligation by the new one is a principal conditions thereof;
necessary element of novation otherwise, the change would
which may be effected either be merely modificatory in
expressly or impliedly. The term nature and insufficient to
expressly means that the extinguish the original
contracting parties incontrovertibly obligation.
disclose that their object in
executing the new contract is to
extinguish the old one. Upon the
other hand, no specific form is The changes alluded to
required for an implied by petitioner consists only in
novation, and all that is prescribed the manner of payment. There
by law would be an incompatibility was really no substitution of
between the two contracts. While debtors since private complainant
there is really no hard and fast merely acquiesced to the payment
rule to determine what might but did not give her consent to
constitute to be a sufficient enter into a new contract. The
change that can bring about appellate court observed:
novation, the touchstone for
contrariety, however, would be
xxx xxx xxx xxx xxx xxx

242
Page
The Art. 315 of the Revised
acceptance by Penal Code defines estafa and
complainant of penalizes any person who shall
partial payment defraud another by
tendered by the misappropriating or converting, to
buyer, Leonor the prejudice of another, money,
Camacho, does not goods, or any other personal
evince the property received by the offender
intention of the in trust or on commission, or for
complainant to administration, or under any other
have their obligation involving the duty to
agreement make delivery of or to return the
novated. It was same, even though such obligation
simply be totally or partially guaranteed
necessitated by by a bond; or by denying having
the fact that, at received such money, goods, or
that time, other property. It is axiomatic that
Camacho had the gravamen of the offense is the
substantial appropriation or conversion of
accounts payable money or property received to the
to complainant, prejudice of the owner. The terms
and because of the convert and misappropriate have
fact that appellant been held to connote an act of
made herself using or disposing of anothers
scarce to property as if it were ones own or
complainant. (TSN, devoting it to a purpose or use
April 15, 1981, 31- different from that agreed upon.
32) Thus, to The phrase, to misappropriate to
obviate the ones own use has been said to
situation where include not only conversion to ones
complainant would personal advantage, but also every
end up with attempt to dispose of the property
nothing, she was of another without right. Verily, the
forced to receive sale of the pieces of jewelry on
the tender of installments (sic) in contravention
Camacho. Moreover of the explicit terms of the
, it is to be noted authority granted to her in Exhibit
that the aforesaid A (supra) is deemed to be one of
payment was for the conversion. Thus, neither the
purchase, not of the theory of delay in the fulfillment of
jewelry subject of commission nor that of novation
this case, but of posed by petitioner, can avoid the
some other jewelry incipient criminal liability. In People
subject of a previous vs. Nery, this Court held:
transaction. (Ibid.
June 8, 1981, 10-11)

xxx xxx xxx

 243
Art. 315. Swindling
The criminal liability for (estafa). Any person who shall
defraud another by any of the
estafa already committed is

Page
means mentioned hereinbelow shall
then not affected by the be punished by:
subsequent novation of
contract, for it is a public xxx xxx xxx
offense which must be
prosecuted and punished by 2. By means of any of the
the State in its own conation. following false pretenses or
fraudulent acts executed prior to or
(Emphasis supplied.)[26]
simultaneously with the commission
of the fraud:
In the case at bar, the acceptance by MPI of the
Equitable PCI checks tendered by Milla could not (a) By using a fictitious
have novated the original transaction, as the name, or falsely pretending to
checks were only intended to secure the return of possess power, influence,
theP2 million the former had already given him. qualifications, property, credit,
Even then, these checks bounced and were thus agency, business or imaginary
unable to satisfy his liability. Moreover, transactions; or by means of other
the estafa involved here was not for simple similar deceits.
misappropriation or conversion, but was
committed through Millas falsification of public xxx xxx xxx
documents, the liability for which cannot be
extinguished by mere novation. It was proven during trial that Milla misrepresented
himself to have the authority to sell the subject
The Court of Appeals was correct in property, and it was precisely this
affirming the trial courts finding of guilt. misrepresentation that prompted MPI to purchase
Finally, Milla assails the factual findings of the trial it. Because of its reliance on his authority and on
court. Suffice it to say that factual findings of the the falsified Deed of Absolute Sale and TCT No.
trial court, especially when affirmed by the 218777, MPI parted with its money in the amount
appellate court, are binding on and accorded great of P2 million, which has not been returned until
respect by this Court.[27] now despite Millas allegation of novation. Clearly,
There was no reversible error on the part of the he is guilty beyond reasonable doubt
Court of Appeals when it affirmed the finding of of estafa through falsification of public
the trial court that Milla was guilty beyond documents.
reasonable doubt of the offense of estafa through WHEREFORE, we resolve to DENY the
falsification of public documents. The prosecution Petition. The assailed Decision and Resolution of
was able to prove the existence of all the elements the Court of Appeals are hereby AFFIRMED.
of the crime charged. The relevant provisions of SO ORDERED.
the Revised Penal Code read:

Art. 172. Falsification by

private individual and use of
falsified documents. The penalty
of prision correccional in its medium
and maximum periods and a fine of ALAYAN INSURANCE G.R. No. 194320
not more than 5,000 shall be CO., INC.,
imposed upon: Present:
Petitioner,
1. Any private VELASCO, JR., J.,
individual who shall commit any of Chairperson,
the falsification enumerated in the PERALTA,
next preceding article in any public MENDOZA,
or official document or letter of - versus -
REYES,* and
exchange or any other kind of PERLAS-BERNABE, JJ.
commercial document
RODELIO ALBERTO and
Promulgated:
xxx xxx xxx ENRICO ALBERTO
February 1, 2012
REYES,
Respondents.
The Case
Before Us is a Petition for Review on
Certiorari under Rule 45, seeking to reverse and
set aside the July 28, 2010 Decision [1] of the Court
of Appeals (CA) and its October 29, 2010
Resolution[2] denying the motion
reconsideration filed by petitioner Malayan
Insurance Co., Inc. (Malayan Insurance). The July
28, 2010 CA Decision reversed and set aside the
Decision[3]dated February 2, 2009 of the Regional
Trial Court, Branch 51 in Manila.
The Facts
At around 5 oclock in the morning of
December 17, 1995, an accident occurred at the
corner of EDSA and Ayala Avenue, Makati City,
involving four (4) vehicles, to wit: (1) a Nissan
Bus operated by Aladdin Transit with plate
number NYS 381; (2) an Isuzu Tanker with plate
number PLR 684; (3) a Fuzo Cargo Truck with
plate number PDL 297; and (4) a Mitsubishi
Galant with plate number TLM 732.[4]
Based on the Police Report issued by the
on-the-spot investigator, Senior Police Officer 1
Alfredo M. Dungga (SPO1 Dungga), the Isuzu
Tanker was in front of the Mitsubishi Galant with
the Nissan Bus on their right side shortly before
the vehicular incident. All three (3) vehicles were
at a halt along EDSA facing the south direction
when the Fuzo Cargo Truck simultaneously
bumped the rear portion of the Mitsubishi Galant
and the rear left portion of the Nissan Bus. Due to
the strong impact, these two vehicles were
shoved forward and the front left portion of the
Mitsubishi Galant rammed into the rear right
portion of the Isuzu Tanker.[5]
Previously, particularly on December 15,
1994, Malayan Insurance issued Car Insurance
Policy No. PV-025-00220 in favor of First Malayan
Leasing and Finance Corporation (the assured),
insuring the aforementioned Mitsubishi Galant
against third party liability, own damage and
theft, among others. Having insured the vehicle
244
against such risks, Malayan Insurance claimed in
its Complaint dated October 18, 1999 that it paid
the damages sustained by the assured amounting
Page
to PhP 700,000.[6]
Maintaining that it has been subrogated to
the rights and interests of the assured by
operation of law upon its payment to the latter,
Malayan Insurance sent several demand letters to
respondents Rodelio Alberto (Alberto) and Enrico
for Alberto Reyes (Reyes), the registered owner and
the driver, respectively, of the Fuzo Cargo Truck,
requiring them to pay the amount it had paid to
the assured. When respondents refused to settle
their liability, Malayan Insurance was constrained
to file a complaint for damages for gross
negligence against respondents.[7]
In their Answer, respondents asserted that
they cannot be held liable for the vehicular
accident, since its proximate cause was the
reckless driving of the Nissan Bus driver. They
alleged that the speeding bus, coming from the
service road of EDSA, maneuvered its way
towards the middle lane without due regard to
Reyes right of way. When the Nissan Bus abruptly
stopped, Reyes stepped hard on the brakes but
the braking action could not cope with the inertia
and failed to gain sufficient traction. As a
consequence, the Fuzo Cargo Truck hit the rear
end of the Mitsubishi Galant, which, in turn, hit
the rear end of the vehicle in front of it. The
Nissan Bus, on the other hand, sideswiped the
Fuzo Cargo Truck, causing damage to the latter in
the amount of PhP 20,000.Respondents also
controverted the results of the Police Report,
asserting that it was based solely on the biased
narration of the Nissan Bus driver.[8]
After the termination of the pre-trial
proceedings, trial ensued. Malayan Insurance
presented the testimony of its lone witness, a
motor car claim adjuster, who attested that he
processed the insurance claim of the assured and
verified the documents submitted to
him. Respondents, on the other hand, failed to
present any evidence.
In its Decision dated February 2, 2009, the
trial court, in Civil Case No. 99-95885, ruled in
favor of Malayan Insurance and declared
respondents liable for damages. The dispositive
portion reads:
WHEREFORE, judgment is
hereby rendered in favor of the
 plaintiff against defendants jointly
245
and severally to pay plaintiff the
following:
1. The amount of P700,000.00
Page
with legal interest from the
time of the filing of the
complaint;
2. Attorneys fees of P10,000.00 and;
3. Cost of suit.
SO ORDERED.[9]
Dissatisfied, respondents filed an appeal
with the CA, docketed as CA-G.R. CV No. 93112.
In its Decision dated July 28, 2010, the CA
reversed and set aside the Decision of the trial
court and ruled in favor of respondents,
disposing:
WHEREFORE, the
foregoing considered, the instant
appeal is hereby GRANTED and
the assailed Decision dated 2
February
2009 REVERSED and SET ASIDE.
The Complaint dated 18 October
1999 is hereby DISMISSED for
lack of merit. No costs.
SO ORDERED.[10]
The CA held that the evidence on record
has failed to establish not only negligence on the
part of respondents, but also compliance with the
other requisites and the consequent right of
Malayan Insurance to subrogation.[11] It noted that
the police report, which has been made part of
the records of the trial court, was not properly
identified by the police officer who conducted the
on-the-spot investigation of the subject collision.
It, thus, held that an appellate court, as a
reviewing body, cannot rightly appreciate
firsthand the genuineness of an unverified and
unidentified document, much less accord it
evidentiary value.[12]
Subsequently, Malayan Insurance filed its
Motion for Reconsideration, arguing that a police
report is a prima facie evidence of the facts
stated in it. And inasmuch as they never
questioned the presentation of the report in
evidence, respondents are deemed to have
waived their right to question its authenticity and
due execution.[13]
In its Resolution dated October 29, 2010,
the CA denied the motion for
reconsideration. Hence, Malayan Insurance filed
the instant petition.
The Issues
In its Memorandum[14] dated June 27,
2011, Malayan Insurance raises the following
issues for Our consideration:
I
WHETHER THE CA ERRED IN REFUSING
ADMISSIBILITY OF THE POLICE REPORT
SINCE THE POLICE INVESTIGATOR WHO
PREPARED THE SAME DID NOT
ACTUALLY TESTIFY IN COURT THEREON.
II
WHETHER THE SUBROGATION OF
MALAYAN INSURANCE IS IMPAIRED
AND/OR DEFICIENT.
On the other hand, respondents submit
the following issues in its Memorandum[15] dated
July 7, 2011:
I
WHETHER THE CA IS CORRECT IN DISMISSING
THE COMPLAINT FOR FAILURE OF MALAYAN
INSURANCE TO OVERCOME THE BURDEN OF
PROOF REQUIRED TO ESTABLISH THE
NEGLIGENCE OF RESPONDENTS.
II
WHETHER THE PIECES OF EVIDENCE
PRESENTED BY MALAYAN INSURANCE ARE
SUFFICIENT TO CLAIM FOR THE AMOUNT OF
DAMAGES.
III
WHETHER THE SUBROGATION OF MALAYAN
INSURANCE HAS PASSED COMPLIANCE AND
REQUISITES AS PROVIDED UNDER PERTINENT
LAWS.
Essentially, the issues boil down to the
following: (1) the admissibility of the
police report; (2) the sufficiency of the
evidence to support a claim for gross
negligence; and (3) the validity of
subrogation in the instant case.
Our Ruling
The petition has merit.
Admissibility of the Police Report
 Malayan Insurance contends that, even
246
without the presentation of the police investigator
who prepared the police report, said report is still
admissible in evidence, especially since
Page
respondents failed to make a timely objection to
its presentation in evidence.[16] Respondents
counter that since the police report was never
confirmed by the investigating police officer, it
cannot be considered as part of the evidence on
record.[17]
Indeed, under the rules of evidence, a
witness can testify only to those facts which the
witness knows of his or her personal knowledge,
that is, which are derived from the witness own
perception.[18] Concomitantly, a witness may not
testify on matters which he or she merely learned
from others either because said witness was told
or read or heard those matters.[19] Such testimony
is considered hearsay and may not be received as
proof of the truth of what the witness has
learned. This is known as the hearsay rule.[20]
As discussed in D.M. Consunji, Inc. v. CA,
[21]
Hearsay is not limited to oral testimony or
statements; the general rule that excludes
hearsay as evidence applies to written, as well as
oral statements.
There are several exceptions to the
hearsay rule under the Rules of Court, among
which are entries in official records. [22] Section 44,
Rule 130 provides:
Entries in official records
made in the performance of his
duty by a public officer of
the Philippines, or by a person in
the performance of a duty specially
enjoined by law are prima facie
evidence of the facts therein
stated.
In Alvarez v. PICOP Resources,[23] this
Court reiterated the requisites for the
admissibility in evidence, as an exception to the
hearsay rule of entries in official records, thus: (a)
that the entry was made by a public officer or by
another person specially enjoined by law to do so;
(b) that it was made by the public officer in the
performance of his or her duties, or by such other
person in the performance of a duty specially
enjoined by law; and (c) that the public officer or
other person had sufficient knowledge of the
facts by him or her stated, which must have been
acquired by the public officer or other person
personally or through official information.
Notably, the presentation of the police
report itself is admissible as an exception to the
hearsay rule even if the police investigator who
prepared it was not presented in court, as long as
the above requisites could be adequately proved.
[24]
Here, there is no dispute that SPO1
Dungga, the on-the-spot investigator, prepared
the report, and he did so in the performance of
his duty. However, what is not clear is whether
SPO1 Dungga had sufficient personal knowledge
of the facts contained in his report. Thus, the
third requisite is lacking.
Respondents failed to make a timely
objection to the police reports presentation in
evidence; thus, they are deemed to have waived
their right to do so. [25] As a result, the police
report is still admissible in evidence.
Sufficiency of Evidence
Malayan Insurance contends that since
Reyes, the driver of the Fuzo Cargo truck,
bumped the rear of the Mitsubishi Galant, he is
presumed to be negligent unless proved
otherwise. It further contends that respondents
failed to present any evidence to overturn the
presumption of negligence.[26] Contrarily,
respondents claim that since Malayan Insurance
did not present any witness who shall affirm any
negligent act of Reyes in driving the Fuzo Cargo
truck before and after the incident, there is no
evidence which would show negligence on the
part of respondents.[27]
We agree with Malayan Insurance. Even if
We consider the inadmissibility of the police
report in evidence, still, respondents cannot
evade liability by virtue of the res ipsa
loquitur doctrine. The D.M. Consunji, Inc. case is
quite elucidating:
Petitioners contention,
however, loses relevance in the
face of the application of res ipsa
loquitur by the CA. The effect of the
doctrine is to warrant a
presumption or inference that the
mere fall of the elevator was a
result of the person having charge
of the instrumentality was
negligent. As a rule of evidence,
the doctrine of res ipsa loquitur is
peculiar to the law of negligence
which recognizes that prima
facie negligence may be
established without direct proof
and furnishes a substitute for
specific proof of negligence.
The concept of res ipsa loquitur has been
explained in this wise:
 While negligence is not ordinarily
247
inferred or presumed, and while the mere
happening of an accident or injury will not
generally give rise to an inference or
Page
presumption that it was due to negligence on
defendants part, under the doctrine of res ipsa
loquitur, which means, literally, the thing or
transaction speaks for itself, or in one
jurisdiction, that the thing or instrumentality
speaks for itself, the facts or circumstances
accompanying an injury may be such as to raise
a presumption, or at least permit an inference
of negligence on the part of the defendant, or
some other person who is charged with
negligence.
x x x where it is shown that the thing or
instrumentality which caused the injury
complained of was under the control or
management of the defendant, and that the
occurrence resulting in the injury was such as in
the ordinary course of things would not happen
if those who had its control or management
used proper care, there is sufficient evidence,
or, as sometimes stated, reasonable evidence,
in the absence of explanation by the defendant,
that the injury arose from or was caused by the
defendants want of care.
One of the theoretical bases for the
doctrine is its necessity, i.e., that necessary
evidence is absent or not available.
The res ipsa loquitur doctrine is based in
part upon the theory that the defendant in
charge of the instrumentality which causes the
injury either knows the cause of the accident or
has the best opportunity of ascertaining it and
that the plaintiff has no such knowledge, and
therefore is compelled to allege negligence in
general terms and to rely upon the proof of the
happening of the accident in order to establish
negligence. The inference which the doctrine
permits is grounded upon the fact that the chief
evidence of the true cause, whether culpable or
innocent, is practically accessible to the
defendant but inaccessible to the injured
person.
It has been said that the doctrine of res
ipsa loquitur furnishes a bridge by which a
plaintiff, without knowledge of the cause,
reaches over to defendant who knows or should
know the cause, for any explanation of care
exercised by the defendant in respect of the
matter of which the plaintiff complains. The res
ipsa loquitur doctrine, another court has said, is
a rule of necessity, in that it proceeds on the
theory that under the peculiar circumstances in
which the doctrine is applicable, it is within the
power of the defendant to show that there was
no negligence on his part, and direct proof of
defendants negligence is beyond plaintiffs
power. Accordingly, some courts add to the
three prerequisites for the application of the res
ipsa loquitur doctrine the further requirement
that for the res ipsa loquitur doctrine to apply, it
must appear that the injured party had no
knowledge or means of knowledge as to the
cause of the accident, or that the party to be
charged with negligence has superior
knowledge or opportunity for explanation of the
accident.
The CA held that all the requisites of res
ipsa loquitur are present in the case at bar:
There is no dispute that appellees
husband fell down from the 14th floor of a
building to the basement while he was working
with appellants construction project, resulting
to his death. The construction site is within the
exclusive control and management of appellant.
It has a safety engineer, a project
superintendent, a carpenter leadman and
others who are in complete control of the
situation therein. The circumstances of any
accident that would occur therein are peculiarly
within the knowledge of the appellant or its
employees. On the other hand, the appellee is
not in a position to know what caused the
accident.Res ipsa loquitur is a rule of necessity
and it applies where evidence is absent or not
readily available, provided the following
requisites are present: (1) the accident was of a
kind which does not ordinarily occur unless
someone is negligent; (2) the instrumentality or
agency which caused the injury was under the
exclusive control of the person charged with
negligence; and (3) the injury suffered must not
have been due to any voluntary action or
contribution on the part of the person injured. x
x x.
No worker is going to fall from the 14th
floor of a building to the basement while
performing work in a construction site unless
someone is negligent[;] thus, the first requisite
for the application of the rule of res ipsa
loquitur is present. As explained earlier, the
construction site with all its paraphernalia and
248
human resources that likely caused the injury is
under the exclusive control and management of
appellant[;] thus[,] the second requisite is also
Page
present. No contributory negligence was
attributed to the appellees deceased husband[;]
thus[,] the last requisite is also present. All the
requisites for the application of the rule of res
ipsa loquitur are present, thus a reasonable
presumption or inference of appellants
negligence arises. x x x.
Petitioner does not dispute the existence
of the requisites for the application of res ipsa
loquitur, but argues that the presumption or
inference that it was negligent did not arise
since it proved that it exercised due care to
avoid the accident which befell respondents
husband.
Petitioner apparently misapprehends the
procedural effect of the doctrine. As stated
earlier, the defendants negligence is presumed
or inferred when the plaintiff establishes the
requisites for the application of res ipsa
loquitur. Once the plaintiff makes out a prima
facie case of all the elements, the burden then
shifts to defendant to explain. The presumption
or inference may be rebutted or overcome by
other evidence and, under appropriate
circumstances a disputable presumption, such
as that of due care or innocence, may outweigh
the inference. It is not for the defendant to
explain or prove its defense to prevent the
presumption or inference from arising. Evidence
by the defendant of say, due care, comes into
play only after the circumstances for the
application of the doctrine has been
established.[28]
In the case at bar, aside from the
statement in the police report, none of the parties
disputes the fact that the Fuzo Cargo Truck hit the
rear end of the Mitsubishi Galant, which, in turn,
hit the rear end of the vehicle in front of it.
Respondents, however, point to the reckless
driving of the Nissan Bus driver as the proximate
cause of the collision, which allegation is totally
unsupported by any evidence on record. And
assuming that this allegation is, indeed, true, it is
astonishing that respondents never even
bothered to file a cross-claim against the owner
or driver of the Nissan Bus.
What is at once evident from the instant
case, however, is the presence of all the
requisites for the application of the rule of res
ipsa loquitur. To reiterate, res ipsa loquitur is a
rule of necessity which applies where evidence is
absent or not readily available. As explained
in D.M. Consunji, Inc., it is partly based upon the
theory that the defendant in charge of the
instrumentality which causes the injury either
knows the cause of the accident or has the best
opportunity of ascertaining it and that the
plaintiff has no such knowledge, and, therefore, is
compelled to allege negligence in general terms
and to rely upon the proof of the happening of
the accident in order to establish negligence.
As mentioned above, the requisites for the
application of the res ipsa loquitur rule are the
following: (1) the accident was of a kind which
does not ordinarily occur unless someone is
negligent; (2) the instrumentality or agency
which caused the injury was under the exclusive
control of the person charged with negligence;
and (3) the injury suffered must not have been
due to any voluntary action or contribution on the
part of the person injured.[29]
In the instant case, the Fuzo Cargo Truck
would not have had hit the rear end of the
Mitsubishi Galant unless someone is negligent.
Also, the Fuzo Cargo Truck was under the
exclusive control of its driver, Reyes. Even if
respondents avert liability by putting the blame
on the Nissan Bus driver, still, this allegation was
self-serving and totally unfounded. Finally, no
contributory negligence was attributed to the
driver of the Mitsubishi Galant. Consequently, all
the requisites for the application of the doctrine
of res ipsa loquitur are present, thereby creating
a reasonable presumption of negligence on the
part of respondents.
It is worth mentioning that just like any
other disputable presumptions or inferences, the
presumption of negligence may be rebutted or
overcome by other evidence to the contrary. It is
unfortunate, however, that respondents failed to
present any evidence before the trial court. Thus,
the presumption of negligence remains.
Consequently, the CA erred in dismissing the
complaint for Malayan Insurances adverted
failure to prove negligence on the part of
respondents.
Validity of Subrogation
Malayan Insurance contends that there
was a valid subrogation in the instant case, as
evidenced by the claim check voucher [30] and the
Release of Claim and Subrogation
Receipt[31]presented by it before the trial court.
Respondents, however, claim that the documents
presented by Malayan Insurance do not indicate
249
certain important details that would show proper
subrogation.
As noted by Malayan Insurance,
Page
respondents had all the opportunity, but failed to
object to the presentation of its evidence. Thus,
and as We have mentioned earlier, respondents
are deemed to have waived their right to make
an objection. As this Court held in Asian
Construction and Development Corporation v.
COMFAC Corporation:
The rule is that failure to
object to the offered evidence
renders it admissible, and the
court cannot, on its own,
disregard such evidence. We
note that ASIAKONSTRUCTs counsel
of record before the trial court,
Atty. Bernard Dy, who actively
participated in the initial stages of
the case stopped attending the
hearings when COMFAC was about
to end its presentation. Thus,
ASIAKONSTRUCT could not object
to COMFACs offer of evidence nor
present evidence in its defense;
ASIAKONSTRUCT was deemed by
the trial court to have waived its
chance to do so.
Note also that when a
party desires the court to
reject the evidence offered, it
must so state in the form of a
timely objection and it cannot
raise the objection to the
evidence for the first time on
appeal. Because of a partys
failure to timely object, the
evidence becomes part of the
evidence in the case.
Thereafter, all the parties are
considered bound by any
outcome arising from the offer
of evidence properly
presented.[32] (Emphasis
supplied.)
Bearing in mind that the claim check
voucher and the Release of Claim and
Subrogation Receipt presented by Malayan
Insurance are already part of the evidence on
record, and since it is not disputed that the
insurance company, indeed, paid PhP 700,000 to
the assured, then there is a valid subrogation in
the case at bar. As explained in Keppel Cebu
Shipyard, Inc. v. Pioneer Insurance and Surety
Corporation:
Subrogation is the
substitution of one person by
another with reference to a lawful
claim or right, so that he who is
substituted succeeds to the rights
of the other in relation to a debt or
claim, including its remedies or
securities. The principle covers a
situation wherein an insurer has
paid a loss under an insurance
policy is entitled to all the rights
and remedies belonging to the
insured against a third party with
respect to any loss covered by the
policy. It contemplates full
substitution such that it places the
party subrogated in the shoes of
the creditor, and he may use all
means that the creditor could
employ to enforce payment.
We have held that payment
by the insurer to the insured
operates as an equitable
assignment to the insurer of all the
remedies that the insured may
have against the third party whose
negligence or wrongful act caused
the loss. The right of subrogation is
not dependent upon, nor does it
grow out of, any privity of contract.
It accrues simply upon payment by
the insurance company of the
insurance claim. The doctrine of
subrogation has its roots in equity.
It is designed to promote and to
accomplish justice; and is the mode
that equity adopts to compel the
ultimate payment of a debt by one
who, in justice, equity, and good
conscience, ought to pay.[33]
Considering the above ruling, it is only but
proper that Malayan Insurance be subrogated to
the rights of the assured.
WHEREFORE, the petition is
hereby GRANTED. The CAs July 28, 2010
Decision and October 29, 2010 Resolution in CA- interest for one month at 6% per

250
G.R. CV No. 93112 are month. Servado and Leticia
hereby REVERSED and SET ASIDE. The Decision executed a promissory note
dated February 2, 2009 issued by the trial court for P50,000.00, to evidence the

Page
in Civil Case No. 99-95885 is loan, payable on January 7, 1986.
hereby REINSTATED.
On November 19, 1985,
Servando and Leticia obtained from
Veronica another loan in the
No pronouncement as to cost. amount of P90,000.00, payable in
two months, at 6% interest per
HEIRS OF G.R. No. 159709
month. They executed a
SERVANDO
promissory note to evidence the
FRANCO, Present:
loan, maturing on January 19,
Petitioners,
1986. They received
LEONARDO-DE
only P84,000.00, out of the
CASTRO,
proceeds of the loan.
Acting Chairperson,
- versus - BERSAMIN,
On maturity of the two
DEL CASTILLO,
promissory notes, the borrowers
VILLARAMA, JR, and
failed to pay the indebtedness.
PERLAS-BERNABE, JJ
.
On June 11, 1986, Servando
SPOUSES Promulgated:
and Leticia secured from Veronica
VERONICA AND
still another loan in the amount
DANILO June 27, 2012
of P300,000.00, maturing in one
GONZALES,
month, secured by a real estate
Respondents.
mortgage over a property
belonging to Leticia Makalintal
There is novation when there is an irreconcilable Yaptinchay, who issued a special
incompatibility between the old and the new power of attorney in favor of Leticia
obligations. There is no novation in case of only Medel, authorizing her to execute
slight modifications; hence, the old obligation the mortgage. Servando and
prevails. Leticia executed a promissory note
in favor of Veronica to pay the sum
The petitioners challenge the of P300,000.00, after a month, or
decision promulgated on March 19, 2003, on July 11, 1986. However, only
[1]
whereby the Court of Appeals (CA) upheld the the sum of P275,000.00, was given
issuance of a writ of execution by the Regional to them out of the proceeds of the
Trial Court (RTC), Branch 16, in Malolos, Bulacan. loan.

Antecedents Like the previous loans,

The Court adopts the following summary Servando and Medel failed to pay
of the antecedents rendered by the Court the third loan on maturity.
in Medel v. Court of Appeals,[2] the case from
which this case originated, to wit: On July 23, 1986, Servando
and Leticia with the latter's
On November 7, 1985, husband, Dr. Rafael Medel,
Servando Franco and Leticia Medel consolidated all their previous
(hereafter Servando and Leticia) unpaid loans totaling P440,000.00,
obtained a loan from Veronica R. and sought from Veronica another
Gonzales (hereafter Veronica), who loan in the amount ofP60,000.00,
was engaged in the money lending bringing their indebtedness to a
business under the name Gonzales total of P500,000.00, payable on
Credit Enterprises, in the amount August 23, 1986. They executed a
of P50,000.00, payable in two promissory note, reading as
months. Veronica gave only the follows:
amount of P47,000.00, to the
borrowers, as she Baliwag, Bulacan July 23, 1986
retained P3,000.00, as advance
Maturity Date August 23, 1986
251
P500,000.00
Page
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 therate of 5.
5 PER CENT per month plus 2% service charge
per 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
anadditional amount equivalent to one per ce
nt (1%) per month of the amount due and de
mandable as penalty charges in the form of li
quidated damages until fully paid; and the
further sum of TWENTY FIVEPER CENT (25%) t
hereof 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% of the 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
252
conscience". Hence, the trial court applied
"the provision of the New [Civil] Code" that
the "legal rate of interest for loan or
Page
forbearance of money, goods or credit is 12%
per annum."
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.
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 Central Bank 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. 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.
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 ORDERED.
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.
[3]
On review, the Court in Medel v. Court
of Appeals struck down as void the stipulation
on the interest for being iniquitous or
unconscionable, and revived the judgment of
the RTC rendered on December 9, 1991, viz:
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.[4]
Upon the finality of the decision
in Medel v. Court of Appeals, the respondents
moved for execution.[5] Servando Franco
opposed,[6] claiming that he and the
253
respondents had agreed to fix the entire
obligation at P775,000.00.[7] According to
Servando, their agreement, which was
Page
allegedly embodied in a receipt dated
February 5, 1992,[8] whereby he made an
initial payment ofP400,000.00 and promised
to pay the balance of P375,000.00 on
February 29, 1992, superseded the July 23,
1986 promissory note.
The RTC granted the motion for
execution over Servandos opposition, thus:
There is no doubt that the decision
dated December 9, 1991 had already been
affirmed and had already become final and
executory. Thus, in accordance with Sec. 1 of
Rule 39 of the 1997 Rules of Civil Procedure,
execution shall issue as a matter of right. It
has likewise been ruled that a judgment which
has acquired finality becomes immutable and
unalterable and hence may no longer be
modified at any respect except only to correct
clerical errors or mistakes (Korean Airlines Co.
Ltd. vs. C.A., 247 SCRA 599). In this respect,
the decision deserves to be respected.
The argument about the modification of
the contract or non-participation of defendant
Servando Franco in the proceedings on appeal
on the alleged belief that the payment he
made had already absolved him from liability
is of no moment. Primarily, the decision was
for him and Leticia Medel to pay the plaintiffs
jointly and severally the amounts stated in
the Decision. In other words, the liability of
the defendants thereunder is solidary. Based
on this aspect alone, the new defense raised
by defendant Franco is unavailing.
WHEREFORE, in the light of all the
foregoing, the Court hereby grants the Motion
for Execution of Judgment.
Accordingly, let a writ of execution be
issued for implementation by the Deputy
Sheriff of this Court.
SO ORDERED.[9]
On March 8, 2001, the RTC issued the writ of
execution.[10]
Servando moved for reconsideration,
[11]
but the RTC denied his motion.[12]
On March 19, 2003, the CA affirmed the RTC
through its assailed decision, ruling that the
execution was proper because of Servandos
failure to comply with the terms of the
compromise agreement, stating:[13]
Petitioner cannot deny the fact that
there was no full compliance with the tenor of
the compromise agreement. Private
respondents on their part did not disregard
the payments made by the petitioner. They
even offered that whatever payments made
by petitioner, it can be deducted from the
principal obligation including interest.
However, private respondents posit that the
payments made cannot alter, modify or
revoke the decision of the Supreme Court in
the instant case.
In the case of Prudence Realty and
Development Corporation vs. Court of
Appeals, the Supreme Court ruled that:
When the terms of the compromise
judgment is violated, the aggrieved party
must move for its execution, not its
invalidation.
It is clear from the aforementioned
jurisprudence that even if there is a
compromise agreement and the terms have
been violated, the aggrieved party, such as
the private respondents, has the right to
move for the issuance of a writ of execution of
the final judgment subject of the compromise
agreement.
Moreover, under the circumstances of
this case, petitioner does not stand to suffer
any harm or prejudice for the simple reason
that what has been asked by private
respondents to be the subject of a writ of
execution is only the balance of petitioners
obligation after deducting the payments made
on the basis of the compromise agreement.
WHEREFORE, premises considered, the
instant petition is hereby DENIED DUE
COURSE and consequently DISMISSED for lack
of merit.
SO ORDERED.
His motion for reconsideration having been
denied,[14] Servando appealed. He was
eventually substituted by his heirs, now the
petitioners herein, on account of his
intervening death. The substitution was
 pursuant to the resolution dated June 15,
254
2005.[15]
Issue
Page
The petitioners submit that the CA erred in
ruling that:
I A novation arises when there is a substitution of
THE 9 DECEMBER 1991 DECISION OF BRANCH
16 OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN WAS NOT NOVATED BY
THE COMPROMISE AGREEMENT BETWEEN THE
PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO
RESPONDENTS SHOULD BE BASED ON THE
DECEMBER 1991 DECISION OF BRANCH 16 OF
THE REGIONAL TRIAL COURT OF MALOLOS,
BULACAN AND NOT ON THE COMPROMISE
AGREEMENT EXECUTED IN 1992.
The petitioners insist that the RTC could not
validly enforce a judgment based on a promissory
note that had been already novated; that the
promissory note had been impliedly novated
when the principal obligation of P500,000.00 had
been fixed at P750,000.00, and the maturity date
had been extended from August 23, 1986 to
February 29, 1992.
In contrast, the respondents aver that the
petitioners seek to alter, modify or revoke the
final and executory decision of the Court; that
novation did not take place because there was no
complete incompatibility between the promissory
note and the memorandum receipt; that
Servandos previous payment would be deducted
from the total liability of the debtors based on the
RTCs decision.
Issue
Was there a novation of the August 23,
1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?
Ruling
The petition lacks merits.
I that the parties to a contract should expressly
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the
receipt
To buttress their claim of novation, the petitioners
rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servandos
obligation was fixed at P750,000.00. They insist
that even the maturity date was extended until
February 29, 1992. Such changes, they assert,
were incompatible with those of the original
agreement under the promissory note.
The petitioners assertion is wrong.
an obligation by a subsequent one that
extinguishes the first, either by changing the
object or the principal conditions, or by
substituting the person of the debtor, or by
subrogating a third person in the rights of the
creditor.[16] For a valid novation to take place,
there must be, therefore: (a) a previous valid
obligation; (b) an agreement of the parties to
make a new contract; (c) an extinguishment of
the old contract; and (d) a valid new contract.
[17]
In short, the new obligation extinguishes the
prior agreement only when the substitution is
unequivocally declared, or the old and the new
obligations are incompatible on every point. A
compromise of a final judgment operates as a
novation of the judgment obligation upon
compliance with either of these two conditions. [18]
The receipt dated February 5, 1992, excerpted
below, did not create a new obligation
incompatible with the old one under the
promissory note, viz:
February 5, 1992
Received from SERVANDO
FRANCO BPI Managers Check No.
001700 in the amount
of P400,00.00 as partial payment
of loan. Balance of P375,000.00 to
be paid on or before FEBRUARY 29,
1992. In case of default an interest
will be charged as stipulated in the
promissory note subject of this
case.
(
Sgd)
V
. Gonzalez[19]
To be clear, novation is not presumed. This means
agree to abrogate the old contract in favor of a
new one. In the absence of the express
agreement, the old and the new obligations must
be incompatible on every point. [20] According
to California Bus Lines, Inc. v. State Investment
House, Inc.:[21]
 The extinguishment of the old
255
obligation by the new one is a
necessary element of novation
which may be effected either
Page
expressly or impliedly. The term
expressly means that the
contracting parties incontrovertibly
disclose that their object in
executing the new contract is to
extinguish the old one. Upon the
other hand, no specific form is
required for an implied novation,
and all that is prescribed by law
would be an incompatibility
between the two contracts. While
there is really no hard and fast rule
to determine what might constitute
to be a sufficient change that can
bring about novation, the
touchstone for contrariety,
however, would be an
irreconcilable incompatibility
between the old and the new
obligations.
There is incompatibility when the two obligations
cannot stand together, each one having its
independent existence. If the two obligations
cannot stand together, the latter obligation
novates the first.[22] Changes that breed
incompatibility must be essential in nature and
not merely accidental. The incompatibility must
affect any of the essential elements of the
obligation, such as its object, cause or principal
conditions thereof; otherwise, the change is
merely modificatory in nature and insufficient to
extinguish the original obligation.[23]
In light of the foregoing, the issuance of the
receipt created no new obligation. Instead, the
respondents only thereby recognized the original
obligation by stating in the receipt that
the P400,000.00 was partial payment of loan and
by referring to the promissory note subject of the
case in imposing the interest. The loan mentioned
in the receipt was still the same loan involving
the P500,000.00 extended to
Servando. Advertence to the interest stipulated in
the promissory note indicated that the contract
still subsisted, not replaced and extinguished, as
the petitioners claim.
The receipt dated February 5, 1992 was only the
proof of Servandos payment of his obligation as
confirmed by the decision of the RTC. It did not
establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an
obligation to pay a sum of money is not novated
by an instrument that expressly recognizes the
old, or changes only the terms of payment, or
adds other obligations not incompatible with the
old ones, or the new contract merely
supplements the old one.[24] A new contract that
is a mere reiteration, acknowledgment or
ratification of the old contract with slight
modifications or alterations as to the cause or
object or principal conditions can stand together
with the former one, and there can be no
incompatibility between them.[25]Moreover, a
creditors acceptance of payment after demand
does not operate as a modification of the original
contract.[26]
Worth noting is that Servandos liability was joint
and solidary with his co-debtors. In a solidary
obligation, the creditor may proceed against any
one of the solidary debtors or some or all of them
simultaneously.[27] The choice to determine
against whom the collection is enforced belongs
to the creditor until the obligation is fully
satisfied.[28] Thus, the obligation was being
enforced against Servando, who, in order to
escape liability, should have presented evidence
to prove that his obligation had already been
cancelled by the new obligation or that another
debtor had assumed his place. In case of change
in the person of the debtor, the substitution must
be clear and express,[29] and made with the
consent of the creditor.[30] Yet, these
circumstances did not obtain herein, proving
precisely that Servando remained a solidary
debtor against whom the entire or part of the
obligation might be enforced.
Lastly, the extension of the maturity date did not
constitute a novation of the previous agreement.
It is settled that an extension of the term or
period of the maturity date does not result in
novation.[31]
II
Total liability to be reduced by P400,000.00
The petitioners argue that Servandos remaining
liability amounted to only P375,000.00, the
balance indicated in the February 5, 1992 receipt.
Accordingly, the balance was not yet due because
the respondents did not yet make a demand for
payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the
taking place of a novation. However, as found
now, novation did not take place. Accordingly,
Servandos obligation, being solidary, remained to
be that decreed in the December 9, 1991
decision of the RTC, inclusive of interests, less the
amount of P400,000.00 that was meanwhile paid
by him.
WHEREFORE, the Court AFFIRMS the
decision of the Court of Appeals promulgated on
March 19, 2003; ORDERS the Regional Trial
256
Court, Branch 16, in Malolos, Bulacan to proceed
with the execution based on its decision rendered
on December 9, 1991, deducting the amount
Page
of P400,000.00 already paid by the late Servando
Franco; and DIRECTS the petitioners to pay the
costs of suit.
ASIAN TERMINALS, INC. vs. PHILAM
INSURANCE CO., INC. (now Chartis
Philippines Insurance, Inc.)
Before us are three consolidated petitions for
review on certiorari assailing the Decision1 dated
October 15, 2007 and the Resolution2 dated
January 11, 2008 of the Court of Appeals (CA)
which affirmed with modification the Decision3 of
the Regional Trial Court (RTC) of Makati City,
Branch 148, in Civil Case No. 96-062. The RTC
had ordered Westwind Shipping Corporation
(Westwind) and Asian Terminals, Inc. (ATI) to pay,
jointly and severally, Philam Insurance Co., Inc.
(Philam) the sum of P633,957.15, with interest at
12% per annum from the date of judicial demand
and P158,989.28 as attorneys fees.
The facts of the case follow:
On April 15, 1995, Nichimen Corporation shipped
to Universal Motors Corporation (Universal
Motors) 219 packages containing 120 units of
brand new Nissan Pickup Truck Double Cab 4x2
model, without engine, tires and batteries, on
board the vessel S/S "Calayan Iris" from Japan to
Manila. The shipment, which had a declared value
of US$81,368 or P29,400,000, was insured with
Philam against all risks under Marine Policy No.
708-8006717-4.4
The carrying vessel arrived at the port of Manila
on April 20, 1995, and when the shipment was
unloaded by the staff of ATI, it was found that the
package marked as 03-245-42K/1 was in bad
order.5 The Turn Over Survey of Bad Order
Cargoes6 dated April 21, 1995 identified two
packages, labeled 03-245-42K/1 and
03/237/7CK/2, as being dented and broken.
Thereafter, the cargoes were stored for
temporary safekeeping inside CFS Warehouse in
Pier No. 5.
On May 11, 1995, the shipment was withdrawn
by R.F. Revilla Customs Brokerage, Inc., the
authorized broker of Universal Motors, and
delivered to the latters warehouse in
Mandaluyong City. Upon the request7 of Universal
Motors, a bad order survey was conducted on the
cargoes and it was found that one Frame Axle
Sub without LWR was deeply dented on the buffle
plate while six Frame Assembly with Bush were
deformed and misaligned.8Owing to the extent of
the damage to said cargoes, Universal Motors
declared them a total loss.
On August 4, 1995, Universal Motors filed a
formal claim for damages in the amount
of P643,963.84 against Westwind,9 ATI10 and R.F.
Revilla Customs Brokerage, Inc.11 When Universal
Motors demands remained unheeded, it sought
reparation from and was compensated in the sum
of P633,957.15 by Philam. Accordingly, Universal
Motors issued a Subrogation Receipt 12 dated
November 15, 1995 in favor of Philam.
On January 18, 1996, Philam, as subrogee of
Universal Motors, filed a Complaint 13 for damages
against Westwind, ATI and R.F. Revilla Customs
Brokerage, Inc. before the RTC of Makati City,
Branch 148.
On September 24, 1999, the RTC rendered
judgment in favor of Philam and ordered
Westwind and ATI to pay Philam, jointly and
severally, the sum of P633,957.15 with interest at
the rate of 12% per annum, P158,989.28 by way
of attorneys fees and expenses of litigation.
The court a quo ruled that there was sufficient
evidence to establish the respective participation
of Westwind and ATI in the discharge of and
consequent damage to the shipment. It found
that the subject cargoes were compressed while
being hoisted using a cable that was too short
and taut.
The trial court observed that while the staff of ATI
undertook the physical unloading of the cargoes
from the carrying vessel, Westwinds duty officer
exercised full supervision and control throughout
the process. It held Westwind vicariously liable for
failing to prove that it exercised extraordinary
diligence in the supervision of the ATI stevedores
who unloaded the cargoes from the vessel.
However, the court absolved R.F. Revilla Customs
Brokerage, Inc. from liability in light of its finding
that the cargoes had been damaged before
delivery to the consignee.
The trial court acknowledged the subrogation
between Philam and Universal Motors on the
strength of the Subrogation Receipt dated
November 15, 1995. It likewise upheld Philams
claim for the value of the alleged damaged
vehicle parts contained in Case Nos. 03-245-
42K/1 and 03-245-51K or specifically for "7 pieces
of Frame Axle Sub Without Lower and Frame
257
Assembly with Bush."14
Westwind filed a Motion for
Page
Reconsideration15 which was, however, denied in
an Order16 dated October 26, 2000.
On appeal, the CA affirmed with modification the
ruling of the RTC. In a Decision dated October 15,
2007, the appellate court directed Westwind and
ATI to pay Philam, jointly and severally, the
amount of P190,684.48 with interest at the rate
of 12% per annum until fully paid, attorneys fees
of P47,671 and litigation expenses.
The CA stressed that Philam may not modify its
allegations by claiming in its Appellees
Brief17 that the six pieces of Frame Assembly with
Bush, which were purportedly damaged, were
also inside Case No. 03-245-42K/1. The CA noted
that in its Complaint, Philam alleged that "one (1)
pc. FRAME AXLE SUB W/O LWR from Case No. 03-
245-42K/1 was completely deformed and
misaligned, and six (6) other pcs. of FRAME
ASSEMBLY WITH BUSH from Case No. 03-245-51K
were likewise completely deformed and
misaligned."18
The appellate court accordingly affirmed
Westwind and ATIs joint and solidary liability for
the damage to only one (1) unit of Frame Axle
Sub without Lower inside Case No. 03-245-42K/1.
It also noted that when said cargo sustained
damage, it was not yet in the custody of the
consignee or the person who had the right to
receive it. The CA pointed out that Westwinds
duty to observe extraordinary diligence in the
care of the cargoes subsisted during unloading
thereof by ATIs personnel since the former
exercised full control and supervision over the
discharging operation.
Similarly, the appellate court held ATI liable for
the negligence of its employees who carried out
the offloading of cargoes from the ship to the
pier. As regards the extent of ATIs liability, the CA
ruled that ATI cannot limit its liability to P5,000
per damaged package. It explained that Section
7.0119 of the Contract for Cargo Handling
Services20 does not apply in this case since ATI
was not yet in custody and control of the cargoes
when the Frame Axle Sub without Lower suffered
damage.
Citing Belgian Overseas Chartering and Shipping
N.V. v. Philippine First Insurance Co., Inc., 21 the
appellate court also held that Philams action for
damages had not prescribed notwithstanding the
absence of a notice of claim.
All the parties moved for reconsideration, but
their motions were denied in a Resolution dated
January 11, 2008. Thus, they each filed a petition
for review on certiorari which were consolidated
together by this Court considering that all three
petitions assail the same CA decision and
resolution and involve the same parties.
Essentially, the issues posed by petitioner ATI in
G.R. No. 181163, petitioner Philam in G.R. No.
181262 and petitioner Westwind in G.R. No.
181319 can be summed up into and resolved by
addressing three questions: (1) Has Philams
action for damages prescribed? (2) Who between
Westwind and ATI should be held liable for the
damaged cargoes? and (3) What is the extent of
their liability?
Petitioners Arguments
G.R. No. 181163
Petitioner ATI disowns liability for the damage to
the Frame Axle Sub without Lower inside Case No.
03-245-42K/1. It shifts the blame to Westwind,
whom it charges with negligence in the
supervision of the stevedores who unloaded the
cargoes. ATI admits that the damage could have
been averted had Westwind observed
extraordinary diligence in handling the goods.
Even so, ATI suspects that Case No. 03-245-42K/1
is "weak and defective"22considering that it alone
sustained damage out of the 219 packages.
Notwithstanding, petitioner ATI submits that, at
most, it can be held liable to pay only P5,000 per
package pursuant to its Contract for Cargo
Handling Services. ATI maintains that it was not
properly notified of the actual value of the
cargoes prior to their discharge from the vessel.
G.R. No. 181262
Petitioner Philam supports the CA in holding both
Westwind and ATI liable for the deformed and
misaligned Frame Axle Sub without Lower inside
Case No. 03-245-42K/1. It, however, faults the
appellate court for disallowing its claim for the
value of six Chassis Frame Assembly which were
likewise supposedly inside Case Nos. 03-245-51K
and 03-245-42K/1. As to the latter container,
Philam anchors its claim on the results of the
Inspection/Survey Report23 of Chartered
Adjusters, Inc., which the court received without
objection from Westwind and ATI. Petitioner
believes that with the offer and consequent
admission of evidence to the effect that Case No.
03-245-42K/1 contains six pieces of dented
Chassis Frame Assembly, Philams claim thereon
should be treated, in all respects, as if it has been
258
raised in the pleadings. Thus, Philam insists on
the reinstatement of the trial courts award in its
favor for the payment of P633,957.15 plus legal
Page
interest, P158,989.28 as attorneys fees and
costs.
G.R. No. 181319
Petitioner Westwind denies joint liability with ATI
for the value of the deformed Frame Axle Sub
without Lower in Case No. 03-245-42K/1.
Westwind argues that the evidence shows that
ATI was already in actual custody of said case
when the Frame Axle Sub without Lower inside it
was misaligned from being compressed by the
tight cable used to unload it. Accordingly,
Westwind ceased to have responsibility over the
cargoes as provided in paragraph 4 of the Bill of
Lading which provides that the responsibility of
the carrier shall cease when the goods are taken
into the custody of the arrastre.
Westwind contends that sole liability for the
damage rests on ATI since it was the latters
stevedores who operated the ships gear to
unload the cargoes. Westwind reasons that ATI is
an independent company, over whose employees
and operations it does not exercise control.
Moreover, it was ATIs employees who selected
and used the wrong cable to lift the box
containing the cargo which was damaged.
Westwind likewise believes that ATI is bound by
its acceptance of the goods in good order despite
a finding that Case No. 03-245-42K/1 was partly
torn and crumpled on one side. Westwind also
notes that the discovery that a piece of Frame
Axle Sub without Lower was completely deformed
and misaligned came only on May 12, 1995 or 22
days after the cargoes were turned over to ATI
and after the same had been hauled by R.F.
Revilla Customs Brokerage, Inc.
Westwind further argues that the CA erred in
holding it liable considering that Philams cause
of action has prescribed since the latter filed a
formal claim with it only on August 17, 1995 or
four months after the cargoes arrived on April 20,
1995. Westwind stresses that according to the
provisions of clause 20, paragraph 224 of the Bill
of Lading as well as Article 366 25 of the Code of
Commerce, the consignee had until April 20,
1995 within which to make a claim considering
the readily apparent nature of the damage, or
until April 27, 1995 at the latest, if it is assumed
that the damage is not readily apparent.
Lastly, petitioner Westwind contests the
imposition of 12% interest on the award of
damages to Philam reckoned from the time of
extrajudicial demand. Westwind asserts that, at
most, it can only be charged with 6% interest
since the damages claimed by Philam does not
constitute a loan or forbearance of money.
The Courts Ruling
The three consolidated petitions before us call for
a determination of who between ATI and
Westwind is liable for the damage suffered by the
subject cargo and to what extent. However, the
resolution of the issues raised by the present
petitions is predicated on the appreciation of
factual issues which is beyond the scope of a
petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended. It
is settled that in petitions for review on certiorari,
only questions of law may be put in issue.
Questions of fact cannot be entertained.26
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.
The resolution of the issue must rest solely on
what the law provides on the given set of
circumstances. Once it is clear that the issue
invites a review of the evidence presented, the
question posed is one of fact. If the query
requires a re-evaluation of the credibility of
witnesses, or the existence or relevance of
surrounding circumstances and their relation to
each other, the issue in that query is factual.27
In the present petitions, the resolution of the
question as to who between Westwind and ATI
should be liable for the damages to the cargo and
to what extent would have this Court pass upon
the evidence on record. But while it is not our
duty to review, examine and evaluate or weigh all
over again the probative value of the evidence
presented,28 the Court may nonetheless resolve
questions of fact when the case falls under any of
the following exceptions:
(1) when the findings are grounded entirely on
speculation, surmises, or conjectures; (2) when
the inference made is manifestly mistaken,
absurd, or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when
the findings of fact are conflicting; (6) when in
making its findings the Court of Appeals went
beyond the issues of the case, or its findings are
contrary to the admissions of both the appellant
and the appellee; (7) when the findings are
contrary to those of the trial court; (8) when the
findings are conclusions without citation of
259
specific evidence on which they are based; (9)
when the facts set forth in the petition as well as
in the petitioners main and reply briefs are not
Page
disputed by the respondent; and (10) when the
findings of fact are premised on the supposed
absence of evidence and contradicted by the
evidence on record.29
In the cases at bar, the fifth and seventh
exceptions apply. While the CA affirmed the joint
liability of ATI and Westwind, it held them liable
only for the value of one unit of Frame Axle Sub
without Lower inside Case No. 03-245-42K/1. The
appellate court disallowed the award of damages
for the six pieces of Frame Assembly with Bush,
which petitioner Philam alleged, for the first time
in its Appellees Brief, to be likewise inside Case
No. 03-245-42K/1. Lastly, the CA reduced the
award of attorneys fees to P47,671.
Foremost, the Court holds that petitioner Philam
has adequately established the basis of its claim
against petitioners ATI and Westwind. Philam, as
insurer, was subrogated to the rights of the
consignee, Universal Motors Corporation,
pursuant to the Subrogation Receipt executed by
the latter in favor of the former. The right of
subrogation accrues simply upon payment by the
insurance company of the insurance
claim.30 Petitioner Philams action finds support in
Article 2207 of the Civil Code, which provides as
follows:
Art. 2207. If the plaintiffs property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract
complained of, the insurance company shall be
subrogated to the rights of the insured against
the wrongdoer or the person who has violated the
contract. x x x.
In their respective comments31 to Philams Formal
Offer of Evidence,32 petitioners ATI and Westwind
objected to the admission of Marine Certificate
No. 708-8006717-4 and the Subrogation Receipt
as documentary exhibits "B" and "P," respectively.
Petitioner Westwind objects to the admission of
both documents for being hearsay as they were
not authenticated by the persons who executed
them. For the same reason, petitioner ATI assails
the admissibility of the Subrogation Receipt. As
regards Marine Certificate No. 708-8006717-4, ATI
makes issue of the fact that the same was issued
only on April 27, 1995 or 12 days after the
shipment was loaded on and transported via S/S
"Calayan Iris."
The nature of documents as either public or
private determines how the documents may be
presented as evidence in court. Public
documents, as enumerated under Section
19,33 Rule 132 of the Rules of Court, are self-
authenticating and require no further
authentication in order to be presented as
evidence in court.34
In contrast, a private document is any other
writing, deed or instrument executed by a private
person without the intervention of a notary or
other person legally authorized by which some
disposition or agreement is proved or set forth.
Lacking the official or sovereign character of a
public document, or the solemnities prescribed by
law, a private document requires
authentication35 in the manner prescribed under
Section 20, Rule 132 of the Rules:
SEC. 20. Proof of private document. Before any
private document offered as authentic is received
in evidence, its due execution and authenticity
must be proved either:
(a) By anyone who saw the document
executed or written; or
(b) By evidence of the genuineness of the
signature or handwriting of the maker.
Any other private document need only be
identified as that which it is claimed to be.
The requirement of authentication of a private
document is excused only in four instances,
specifically: (a) when the document is an ancient
one within the context of Section 21,36 Rule 132
of the Rules; (b) when the genuineness and
authenticity of the actionable document have not
been specifically denied under oath by the
adverse party; (c) when the genuineness and
authenticity of the document have been
admitted; or (d) when the document is not being
offered as genuine.37
Indubitably, Marine Certificate No. 708-8006717-4
and the Subrogation Receipt are private
documents which Philam and the consignee,
respectively, issue in the pursuit of their
business. Since none of the exceptions to the
requirement of authentication of a private
document obtains in these cases, said documents
may not be admitted in evidence for Philam
without being properly authenticated.
Contrary to the contention of petitioners ATI and
Westwind, however, Philam presented its claims
officer, Ricardo Ongchangco, Jr. to testify on the
260
execution of the Subrogation Receipt, as follows:
ATTY. PALACIOS
Page
Q How were you able to get hold of this
subrogation receipt?
A Because I personally delivered the claim check
to consignee and have them receive the said
check.
Q I see. Therefore, what you are saying is that
you personally delivered the claim check of
Universal Motors Corporation to that company
and you have the subrogation receipt signed by
them personally?
A Yes, sir.
Q And it was signed in your presence?
A Yes, sir.38
Indeed, all that the Rules require to establish the
authenticity of a document is the testimony of a
person who saw the document executed or
written. Thus, the trial court did not err in
admitting the Subrogation Receipt in evidence
despite petitioners ATI and Westwinds objections
that it was not authenticated by the person who
signed it.
However, the same cannot be said about Marine
Certificate No. 708-8006717-4 which
Ongchangcho, Jr. merely identified in court. There
is nothing in Ongchangco, Jr.s testimony which
indicates that he saw Philams authorized
representative sign said document, thus:
ATTY. PALACIOS
Q Now, I am presenting to you a copy of this
marine certificate 708-8006717-4 issued by
Philam Insurance Company, Inc. to Universal
Motors Corporation on April 15, 1995. Will you tell
us what relation does it have to that policy risk
claim mentioned in that letter?
A This is a photocopy of the said policy issued by
the consignee Universal Motors Corporation.
ATTY. PALACIOS
I see. May I request, if Your Honor please, that
this marine risk policy of the plaintiff as
submitted by claimant Universal Motors
Corporation be marked as Exhibit B.
COURT
Mark it.39
As regards the issuance of Marine Certificate No.
708-8006717-4 after the fact of loss occurred,
suffice it to say that said document simply
certifies the existence of an open insurance
policy in favor of the consignee. Hence, the
reference to an "Open Policy Number 9595093" in
said certificate. The Court finds it completely
absurd to suppose that any insurance company,
of sound business practice, would assume a loss
that has already been realized, when the
profitability of its business rests precisely on the
non-happening of the risk insured against.
Yet, even with the exclusion of Marine Certificate
No. 708-8006717-4, the Subrogation Receipt, on
its own, is adequate proof that petitioner Philam
paid the consignees claim on the damaged
goods. Petitioners ATI and Westwind failed to offer
any evidence to controvert the same. In Malayan
Insurance Co., Inc. v. Alberto,40 the Court
explained the effect of payment by the insurer of
the insurance claim in this wise:
We have held that payment by the insurer to the
insured operates as an equitable assignment to
the insurer of all the remedies that the insured
may have against the third party whose
negligence or wrongful act caused the loss. The
right of subrogation is not dependent upon, nor
does it grow out of, any privity of contract. It
accrues simply upon payment by the insurance
company of the insurance claim. The doctrine of
subrogation has its roots in equity. It is designed
to promote and accomplish justice; and is the
mode that equity adopts to compel the ultimate
payment of a debt by one who, in justice, equity,
and good conscience, ought to pay.41
Neither do we find support in petitioner
Westwinds contention that Philams right of
action has prescribed.
The Carriage of Goods by Sea Act (COGSA) or
Public Act No. 521 of the 74th US Congress, was
accepted to be made applicable to all contracts
for the carriage of goods by sea to and from
Philippine ports in foreign trade by virtue of
Commonwealth Act (C.A.) No. 65. 42 Section 1 of
C.A. No. 65 states:
Section 1. That the provisions of Public Act
261
Numbered Five hundred and twenty-one of the
Seventy-fourth Congress of the United States,
approved on April sixteenth, nineteen hundred
Page
and thirty-six, be accepted, as it is hereby
accepted to be made applicable to all contracts
for the carriage of goods by sea to and from
Philippine ports in foreign trade: Provided, That
nothing in the Act shall be construed as repealing
any existing provision of the Code of Commerce
which is now in force, or as limiting its
application.
The prescriptive period for filing an action for the
loss or damage of the goods under the COGSA is
found in paragraph (6), Section 3, thus:
(6) Unless notice of loss or damage and the
general nature of such loss or damage be given in
writing to the carrier or his agent at the port of
discharge before or at the time of the removal of
the goods into the custody of the person entitled
to delivery thereof under the contract of carriage,
such removal shall be prima facie evidence of the
delivery by the carrier of the goods as described
in the bill of lading. If the loss or damage is not
apparent, the notice must be given within three
days of the delivery.
Said notice of loss or damage maybe endorsed
upon the receipt for the goods given by the
person taking delivery thereof.
The notice in writing need not be given if the
state of the goods has at the time of their receipt
been the subject of joint survey or inspection.
In any event the carrier and the ship shall be
discharged from all liability in respect of loss or
damage unless suit is brought within one year
after delivery of the goods or the date when the
goods should have been delivered: Provided, That
if a notice of loss or damage, either apparent or
concealed, is not given as provided for in this
section, that fact shall not affect or prejudice the
right of the shipper to bring suit within one year
after the delivery of the goods or the date when
the goods should have been delivered.
In the Bill of Lading 43 dated April 15, 1995, Rizal
Commercial Banking Corporation (RCBC) is
indicated as the consignee while Universal Motors
is listed as the notify party. These designations
are in line with the subject shipment being
covered by Letter of Credit No. I501054, which
RCBC issued upon the request of Universal
Motors.
A letter of credit is a financial device developed
by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of his
goods before paying.44 However, letters of credit
are employed by the parties desiring to enter into
commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the
parties to the original transaction,45 in these
cases, Nichimen Corporation as the seller and
Universal Motors as the buyer. Hence, the latter,
as the buyer of the Nissan CKD parts, should be
regarded as the person entitled to delivery of the
goods. Accordingly, for purposes of reckoning
when notice of loss or damage should be given to
the carrier or its agent, the date of delivery to
Universal Motors is controlling.
S/S "Calayan Iris" arrived at the port of Manila on
April 20, 1995, and the subject cargoes were
discharged to the custody of ATI the next day. The
goods were then withdrawn from the CFS
Warehouse on May 11, 1995 and the last of the
packages delivered to Universal Motors on May
17, 1995. Prior to this, the latter filed a Request
for Bad Order Survey46 on May 12,1995 following
a joint inspection where it was discovered that six
pieces of Chassis Frame Assembly from two
bundles were deformed and one Front Axle Sub
without Lower from a steel case was dented. Yet,
it was not until August 4, 1995 that Universal
Motors filed a formal claim for damages against
petitioner Westwind.
Even so, we have held in Insurance Company of
North America v. Asian Terminals, Inc. that a
request for, and the result of a bad order
examination, done within the reglementary
period for furnishing notice of loss or damage to
the carrier or its agent, serves the purpose of a
claim. A claim is required to be filed within the
reglementary period to afford the carrier or
depositary reasonable opportunity and facilities
to check the validity of the claims while facts are
still fresh in the minds of the persons who took
part in the transaction and documents are still
available.47 Here, Universal Motors filed a request
for bad order survey on May 12, 1995, even
before all the packages could be unloaded to its
warehouse.
Moreover, paragraph (6), Section 3 of the COGSA
clearly states that failure to comply with the
notice requirement shall not affect or prejudice
the right of the shipper to bring suit within one
year after delivery of the goods. Petitioner
Philam, as subrogee of Universal Motors, filed the
Complaint for damages on January 18, 1996, just
eight months after all the packages were
262
delivered to its possession on May 17, 1995.
Evidently, petitioner Philams action against
petitioners Westwind and ATI was seasonably
Page
filed.
This brings us to the question that must be
resolved in these consolidated petitions. Who
between Westwind and ATI should be liable for
the damage to the cargo?
It is undisputed that Steel Case No. 03-245-42K/1
was partly torn and crumpled on one side while it
was being unloaded from the carrying vessel. The
damage to said container was noted in the Bad
Order Cargo Receipt48dated April 20, 1995 and
Turn Over Survey of Bad Order Cargoes dated
April 21, 1995. The Turn Over Survey of Bad Order
Cargoes indicates that said steel case was not
opened at the time of survey and was accepted
by the arrastre in good order. Meanwhile, the Bad
Order Cargo Receipt bore a notation "B.O. not yet
t/over to ATI." On the basis of these documents,
petitioner ATI claims that the contents of Steel
Case No. 03-245-42K/1 were damaged while in
the custody of petitioner Westwind.
We agree.
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence in the
vigilance over the goods transported by them.
Subject to certain exceptions enumerated under
Article 173449 of the Civil Code, common carriers
are responsible for the loss, destruction, or
deterioration of the goods. The extraordinary
responsibility of the common carrier lasts from
the time the goods are unconditionally placed in
the possession of, and received by the carrier for
transportation until the same are delivered,
actually or constructively, by the carrier to the
consignee, or to the person who has a right to
receive them.50
The court a quo, however, found both petitioners
Westwind and ATI, jointly and severally, liable for
the damage to the cargo. It observed that while
the staff of ATI undertook the physical unloading
of the cargoes from the carrying vessel,
Westwinds duty officer exercised full supervision
and control over the entire process. The appellate
court affirmed the solidary liability of Westwind
and ATI, but only for the damage to one Frame
Axle Sub without Lower.
Upon a careful review of the records, the Court
finds no reason to deviate from the finding that
petitioners Westwind and ATI are concurrently
accountable for the damage to the content of
Steel Case No. 03-245-42K/1.
Section 251 of the COGSA provides that under
every contract of carriage of goods by the sea,
the carrier in relation to the loading, handling,
stowage, carriage, custody, care and discharge of
such goods, shall be subject to the
responsibilities and liabilities and entitled to the
rights and immunities set forth in the Act. Section
3 (2)52thereof then states that among the
carriers responsibilities are to properly load,
handle, stow, carry, keep, care for and discharge
the goods carried.53
At the trial, Westwinds Operation Assistant,
Menandro G. Ramirez, testified on the presence of
a ship officer to supervise the unloading of the
subject cargoes.
ATTY. LLAMAS
Q Having been present during the entire
discharging operation, do you remember who
else were present at that time?
A Our surveyor and our checker the foreman of
ATI.
Q Were there officials of the ship present also?
A Yes, sir there was an officer of the vessel on
duty at that time.54
xxxx
Q Who selected the cable slink to be used?
A ATI Operation.
Q Are you aware of how they made that
selection?
A Before the vessel arrived we issued a manifesto
of the storage plan informing the ATI of what type
of cargo and equipment will be utilitized in
discharging the cargo.55
xxxx
Q You testified that it was the ATI foremen who
select the cable slink to be used in discharging, is
that correct?
A Yes sir, because they are the one who select
the slink and they know the kind of cargoes
because they inspected it before the discharge of
263
said cargo.
Q Are you aware that the ship captain is
Page
consulted in the selection of the cable sling?
A Because the ship captain knows for a fact the
equipment being utilized in the discharge of the
cargoes because before the ship leave the port of
Japan the crew already utilized the proper
equipment fitted to the cargo. 56(Emphasis
supplied.)
It is settled in maritime law jurisprudence that
cargoes while being unloaded generally remain
under the custody of the carrier. 57 The Damage
Survey Report58 of the survey conducted by Phil.
Navtech Services, Inc. from April 20-21, 1995
reveals that Case No. 03-245-42K/1 was damaged
by ATI stevedores due to overtightening of a
cable sling hold during discharge from the
vessels hatch to the pier. Since the damage to
the cargo was incurred during the discharge of
the shipment and while under the supervision of
the carrier, the latter is liable for the damage
caused to the cargo.
This is not to say, however, that petitioner ATI is
without liability for the damaged cargo.
The functions of an arrastre operator involve the
handling of cargo deposited on the wharf or
between the establishment of the consignee or
shipper and the ships tackle. Being the custodian
of the goods discharged from a vessel, an
arrastre operators duty is to take good care of
the goods and to turn them over to the party
entitled to their possession.59
Handling cargo is mainly the arrastre operators
principal work so its drivers/operators or
employees should observe the standards and
measures necessary to prevent losses and
damage to shipments under its custody.60
While it is true that an arrastre operator and a
carrier may not be held solidarily liable at all
times,61 the facts of these cases show that apart
from ATIs stevedores being directly in charge of
the physical unloading of the cargo, its foreman
picked the cable sling that was used to hoist the
packages for transfer to the dock. Moreover, the
fact that 218 of the 219 packages were unloaded
with the same sling unharmed is telling of the
inadequate care with which ATIs stevedore
handled and discharged Case No. 03-245-42K/1.
With respect to petitioners ATI and Westwinds
liability, we agree with the CA that the same
should be confined to the value of the one piece
Frame Axle Sub without Lower.
In the Bad Order Inspection Report62 prepared by
Universal Motors, the latter referred to Case No.
03-245-42K/1 as the source of said Frame Axle
Sub without Lower which suffered a deep dent on
its buffle plate. Yet, it identified Case No. 03-245-
51K as the container which bore the six pieces
Frame Assembly with Bush. Thus, in Philams
Complaint, it alleged that "the entire shipment
showed one (1) pc. FRAME AXLE SUB W/O LWR
from Case No. 03-245-42K/1 was completely
deformed and misaligned, and six (6) other pcs.
of FRAME ASSEMBLY WITH BUSH from Case No.
03-245-51K were likewise completely deformed
and misaligned."63 Philam later claimed in its
Appellees Brief that the six pieces of Frame
Assembly with Bush were also inside the
damaged Case No. 03-245-42K/1.
However, there is nothing in the records to show
conclusively that the six Frame Assembly with
Bush were likewise contained in and damaged
inside Case No. 03-245-42K/1. In the Inspection
Survey Report of Chartered Adjusters, Inc., it
mentioned six pieces of chassis frame assembly
with deformed body mounting bracket. However,
it merely noted the same as coming from two
bundles with no identifying marks.
Lastly, we agree with petitioner Westwind that
the CA erred in imposing an interest rate of 12%
on the award of damages. Under Article 2209 of
the Civil Code, when an obligation not
constituting a loan or forbearance 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. 64 In the similar
case of Belgian Overseas Chartering and Shipping
NV v. Philippine First Insurance Co., lnc.,65 the
Court reduced the rate of interest on the
damages awarded to the carrier therein to 6%
from the time of the filing of the complaint until
the finality of the decision.
WHEREFORE, the Court AFFIRMS with
MODIFICATION the Decision dated October
15,2007 and the Resolution dated January 11,
2008 of the Court of Appeals in CA-G.R. CV No.
69284 in that the interest rate on the award
ofP190,684.48 is reduced to 6% per annum from
the date of extrajudicial demand, until fully paid.
With costs against the petitioners in G.R. No.
181163 and G.R. No. 181319, respectively.
SO ORDERED.

264
Page
NARCISO DEGAOS, vs. PEOPLE
Novation is not a mode of extinguishing criminal
liability under the penal laws of the country. Only
the. State may validly waive the criminal action
against an accused. Novation is relevant only to
determine if the parties have meanwhile altered
the nature of the obligation prior to the
commencement of the criminal prosecution in
order to prevent the incipient criminal liability of
the accused.
Antecedents
In an amended information dated March 23,
1994, the Office of the Provincial Prosecutor of
Bulacan charged Brigida D. Luz, alias Aida Luz,
and Narciso Degaos in the Regional Trial Court in
Malolos, Bulacan with estafa under Article 315
paragraph 1 b) of the Revised Penal Code,
allegedly committed as follows:
That on or about the 27th day of April, 1987 until
July 20, 1987, in the municipality of Meycauayan,
province of Bulacan, Philippines, and within the
jurisdiction of this Honorable Court, the above-
named accused conspiring, confederating and
helping one another, received from Spouses Atty.
Jose Bordador and Lydia Bordador gold and pieces
of jewelry worth P438,702.00, under express
obligation to sell the same on commission and
remit the proceeds thereof or return the unsold
gold and pieces of jewelry, but the said accused,
once in possession of the said merchandise and
far from complying with their aforesaid obligation,
inspite of repeated demands for compliance
therewith, did then and there willfully, unlawfully
and feloniously, with intent of gain and grave
abuse of confidence misapply, misappropriate
and convert to their own use and benefit the said
merchandise and/or the proceeds thereof, to the
damage and prejudice of said Sps. Atty. Jose
Bordador and Lydia Bordador in the said amount
of P438,702.00.
Contrary to law.2
The decision of the Court of Appeals (CA)
summarized the evidence of the parties as
follows:
Prior to the institution of the instant case, a
separate civil action for the recovery of sum of
money was filed on June 25, 1990 by the private
complainants spouses Jose and Lydia Bordador
against accused Brigida D. Luz alias Aida D. Luz
and Narciso Degaos. In an amended complaint
dated November 29, 1993, Ernesto Luz, husband
of Brigida Luz, was impleaded as party defendant.
The case docketed as Civil Case No. 412-M-90
was raffled to Branch 15, RTC of Malolos, Bulacan.
On June 23, 1995, the said court found Narciso
Degaos liable and ordered him to pay the sum
of P725,463,98 as actual and consequential
damages plus interest and attorneys fees in the
amount of P10,000.00. On the other hand, Brigida
Luz alias Aida Luz was ordered to pay the amount
ofP21,483.00, representing interest on her
personal loan. The case against Ernesto Luz was
dismissed for insufficiency of evidence. Both
parties appealed to the Court of Appeals. On July
9, 1997, this Court affirmed the aforesaid
decision. On further appeal, the Supreme Court
on December 15, 1997 sustained the Court of
Appeals. Sometime in 1994, while the said civil
case was pending, the private complainants
instituted the present case against the accused.
EVIDENCE FOR THE PROSECUTION
The prosecution evidence consists of the
testimonies of the private complainants-spouses,
Jose and Lydia Bordador.
Private complainant Lydia Bordador, a jeweler,
testified that accused Narciso Degaos and
Brigida/Aida Luz are brother and sister. She knew
them because they are the relatives of her
husband and their Kumpadre/kumadre.
Brigida/Aida Luz was the one who gave
instructions to Narciso Degaos to get gold and
jewelry from Lydia for them to sell. Lydia came to
know Narciso Degaos because the latter
frequently visited their house selling religious
articles and books. While in their house, Narciso
Degaos saw her counting pieces of jewelry and
he asked her if he could show the said pieces of
jewelry to his sister, Brigida/Aida Luz, to which
she agreed. Thereafter, Narciso Degaos returned
the jewelry and Aida/Brigida Luz called her to ask
if she could trust Narciso Degaos to get the
pieces of jewelry from her for Aida/Brigida Luz to
sell. Lydia agreed on the condition that if they
could not pay it in cash, they should pay it after
one month or return the unsold jewelry within the
said period. She delivered the said jewelry
starting sometime in 1986 as evidenced by
265
several documents entitled "Katibayan at
Kasunduan", the earliest of which is dated March
16, 1986. Everytime Narciso Degaos got jewelry
Page
from her, he signed the receipts in her presence.
They were able to pay only up to a certain point.
However, receipt nos. 614 to 745 dated from April
27, 1987 up to July 20, 1987 (Exhs. "A"-"O") were
no longer paid and the accused failed to return
the jewelry covered by such receipts. Despite oral
and written demands, the accused failed and
refused to pay and return the subject jewelry. As
of October 1998, the total obligation of the
accused amounted toP725,000.00.
Private complainant Atty. Jose Bordador
corroborated the testimony of his wife, Lydia. He
confirmed that their usual business practice with
the accused was for Narciso Degaos to receive
the jewelry and gold items for and in behalf of
Brigida/Aida Luz and for Narciso Degaos to sign
the "Kasunduan at Katibayan" receipts while
Brigida/Aida Luz will pay for the price later on.
The subject items were usually given to Narciso
Degaos only upon instruction from Brigida/Aida
Luz through telephone calls or letters. For the last
one year, the "Kasunduan at Katibayan" receipts
were signed in his presence. Said business
arrangement went on for quite sometime since
Narciso Degaos and Brigida/Aida Luz had been
paying religiously. When the accused defaulted in
their payment, they sent demand letters. It was
the accuseds sister, Julie dela Rosa, who
responded, seeking an extension of time for the
accused to settle their obligation.
EVIDENCE FOR THE DEFENSE
The defense presented accused Brigida/Aida Luz,
who testified that she started transacting
business of selling gold bars and jewelry with the
private complainants sometime in 1986 through
her brother, Narciso Degaos. It was the usual
business practice for Narciso Degaos to get the
gold bars and pieces of jewelry from the private
complainants after she placed orders through
telephone calls to the private complainants,
although sometimes she personally went to the
private complainants house to get the said
items. The gold bars and pieces of jewelry
delivered to her by Narciso Degaos were usually
accompanied by a pink receipt which she would
sign and after which she would make the
payments to the private complainants through
Narciso Degaos, which payments are in the form
of postdated checks usually with a thirty-day
period. In return, the private complainants would
give the original white receipts to Narciso
Degaos for him to sign. Thereafter, as soon as
the postdated checks were honored by the
drawee bank, the said white receipts were
stamped "paid" by Lydia Bordador, after which
the same would be delivered to her by Narciso
Degaos.
On September 2, 1987, she sent a letter to
private complainant Lydia Bordador requesting
for an accounting of her indebtedness. Lydia
Bordador made an accounting which contained
the amount of P122,673.00 as principal
and P21,483.00 as interest. Thereafter, she paid
the principal amount through checks. She did not
pay the interest because the same was allegedly
excessive. In 1998, private complainant Atty. Jose
Bordador brought a ledger to her and asked her
to sign the same. The said ledger contains a list
of her supposed indebtedness to the private
complainants. She refused to sign the same
because the contents thereof are not her
indebtedness but that of his brother, Narciso
Degaos. She even asked the private
complainants why they gave so many pieces of
jewelry and gold bars to Narciso Degaos without
her permission, and told them that she has no
participation in the transactions covered by the
subject "Kasunduan at Katibayan" receipts.
Co-accused Narciso Degaos testified that he
came to know the private complainants when he
went to the latters house in 1986 to sell some
Bible books. Two days later he returned to their
house and was initially given a gold bracelet and
necklace to sell. He was able to sell the same and
paid the private complainants with the proceeds
thereof. Since then he started conducting similar
business transactions with the private
complainants. Said transactions are usually
covered by receipts denominated as "Kasunduan
at Katibayan". All the "Kasunduan at Katibayan"
receipts were issued by the private complainants
and was signed by him. The phrase "for Brigida
Luz" and for "Evely Aquino" were written on the
receipts so that in case he fails to pay for the
items covered therein, the private complainants
would have someone to collect from. He
categorically admitted that he is the only one
who was indebted to the private complainants
and out of his indebtedness, he already made
partial payments in the amount of P53,307.00.
Included in the said partial payments is the
amount of P20,000.00 which was contributed by
his brothers and sisters who helped him and
which amount was delivered by Brigida Luz to the
private complainants.3
Ruling of the RTC
On June 23, 1999, the RTC found Degaos guilty
as charged but acquitted Luz for insufficiency of
evidence, imposing on Degaos twenty years of
266
reclusion temporal, viz:
WHEREFORE, judgment is hereby rendered as
Page
follows:
1. finding accused Narciso Degaos
GUILTY beyond reasonable doubt of the
crime of estafa penalized under Article
315, Subsection 1, paragraph (b) of the
Revised Penal code and hereby sentences
him to suffer the penalty of TWENTY
YEARS (20) of reclusion temporal;
2. finding accused Brigida Luz NOT GUILTY
and is hereby ACQUITTED on the ground of
insufficiency of evidence.
SO ORDERED.4
Decision of the CA
On appeal, Degaos assailed his conviction upon
the following grounds, to wit:
I
THE HONORABLE COURT A QUO ERRED IN NOT
FINDING THAT THE AGREEMENT BETWEEN THE
PRIVATE COMPLAINANT LYDIA BORDADOR AND
THE ACCUSED WAS ONE OF SALE ON CREDIT.
II
THE HONORABLE COURT A QUO ERRED IN NOT
FINDING THAT NOVATION HAD CONVERTED THE
LIABILITY OF THE ACCUSED INTO A CIVIL ONE.
III
THE HONORABLE COURT ERRED IN NOT APPLYING
THE INDETERMINATE SENTENCE LAW.5
On September 23, 2003, however, the CA
affirmed the conviction of Degaos but modified
the prescribed penalty,6 thusly:
WHEREFORE, the appealed Decision finding the
accused-appellant Narciso Degaos guilty beyond
reasonable doubt of the crime of Estafa under
Article 315 (1) par. b of the Revised Penal code is
hereby AFFIRMED with the modification that the
accused-appellant is sentenced to suffer an
indeterminate penalty of imprisonment of four (4)
years and two (2) months of prision correccional
in its medium period, as the minimum, to twenty
(20) years of reclusion temporal as maximum .
SO ORDERED.7
Issues
Hence, Degaos has appealed, again submitting
that:
I.
THE HONORABLE COURT A QUO ERRED IN NOT
FINDING THAT THE AGREEMENT BETWEEN THE
PRIVATE COMPLAINANT LYDIA BORDADOR AND
THE ACCUSED WAS ONE OF SALE ON CREDIT;
II.
THE HONORABLE COURT A QUO ERRED IN NOT
FINDING THAT NOVATION HAD CONVERTED THE
LIABILITY OF THE ACCUSED INTO A CIVIL ONE.8
Ruling
The appeal lacks merit.
I.
Transaction was an agency, not a sale on credit
Degaos contends that his agreement with the
complainants relative to the items of jewelry and
gold subject of the amended information as
embodied in the relevant Kasunduan at Katibayan
was a sale on credit, not a consignment to sell on
commission basis.
The contention of Degaos is devoid of factual
and legal bases.
The text and tenor of the relevant Kasunduan at
Katibayan follow:
KASUNDUAN AT KATIBAYAN
xxxx
Akong nakalagda sa ibaba nito ay nagpapatunay
na tinanggap ko kay Ginang LYDIA BORDADOR ng
Calvario, Meycauayan, Bulacan ang mga hiyas
(jewelries) [sic] na natatala sa ibaba nito upang
ipagbili ko sa kapakanan ng nasabing Ginang.
Ang pagbibilhan ko sa nasabing mga hiyas ay
aking ibibigay sa nasabing Ginang, sa loob ng
__________ araw at ang hindi mabili ay aking
isasauli sa kanya sa loob din ng nasabing taning
na panahon sa mabuting kalagayan katulad ng
aking tanggapin. Ang bilang kabayaran o pabuya
sa akin ay ano mang halaga na aking mapalabis
na mga halagang nakatala sa ibaba nito. Ako ay
267
walang karapatang magpautang o kaya ay
magpalako sa ibang tao ng nasabing mga hiyas.9
Page
xxxx
Based on the express terms and tenor of the
Kasunduan at Katibayan , Degaos received and
accepted the items under the obligation to sell
them in behalf of the complainants ("ang mga
hiyas (jewelries) na natatala sa ibaba nito upang
ipagbili ko sa kapakanan ng nasabing Ginang"),
and he would be compensated with the overprice
as his commission ("Ang bilang kabayaran o
pabuya sa akin ay ano mang halaga na aking
mapalabis na mga halagang nakatala sa ibaba
nito."). Plainly, the transaction was a offended party. A criminal offense is committed
consignment under the obligation to account for
the proceeds of sale, or to return the unsold
items. As such, he was the agent of the
complainants in the sale to others of the items
listed in the Kasunduan at Katibayan.
In contrast, according the first paragraph of
Article 1458 of the Civil Code, one of the
contracting parties in a contract of sale obligates
himself to transfer the ownership of and to
deliver a determinate thing, while the other party
obligates himself to pay therefor a price certain in
money or its equivalent. Contrary to the
contention of Degaos, there was no sale on
credit to him because the ownership of the items
did not pass to him.
II.
Novation did not transpire as to prevent
the incipient criminal liability from arising
Degaos claims that his partial payments to the
complainants novated his contract with them
from agency to loan, thereby converting his
liability from criminal to civil. He insists that his
failure to complete his payments prior to the
filing of the complaint-affidavit by the
complainants notwithstanding, the fact that the
complainants later required him to make a formal
proposal before the barangay authorities on the
payment of the balance of his outstanding
obligations confirmed that novation had occurred.
The CA rejected the claim of Degaos, opining as
follows:
Likewise untenable is the accused-appellants
argument that novation took place when the
private complainants accepted his partial
payments before the criminal information was
filed in court and therefore, his criminal liability
was extinguished.
Novation is not one of the grounds prescribed by
the Revised Penal Code for the extinguishment of
criminal liability.1wphi1 It is well settled that
criminal liability for estafa is not affected by
compromise or novation of contract, for it is a
public offense which must be prosecuted and
punished by the Government on its own motion
even though complete reparation should have
been made of the damage suffered by the
against the People and the offended party may
not waive or extinguish the criminal liability that
the law imposes for the commission of the
offense. The criminal liability for estafa already
committed is not affected by the subsequent
novation of the contract.10
We sustain the CA.
Degaos claim was again factually unwarranted
and legally devoid of basis, because the partial
payments he made and his purported agreement
to pay the remaining obligations did not equate
to a novation of the original contractual
relationship of agency to one of sale. As we see
it, he misunderstands the nature and the role of
novation in a criminal prosecution.
Novation is the extinguishment of an obligation
by the substitution or change of the obligation by
a subsequent one that terminates the first, either
by (a) changing the object or principal conditions;
or (b) substituting the person of the debtor; or (c)
subrogating a third person in the rights of the
creditor. In order that an obligation may be
extinguished by another that substitutes the
former, it is imperative that the extinguishment
be so declared in unequivocal terms, or that the
old and the new obligations be on every point
incompatible with each other.11Obviously, in case
of only slight modifications, the old obligation still
prevails.12
The Court has further pointed out in Quinto v.
People:13
Novation is never presumed, and the animus
novandi, whether totally or partially, must appear
by express agreement of the parties, or by their
acts that are too clear and unequivocal to be
mistaken.
The extinguishment of the old obligation by the
268
new one is necessary element of novation which
may be effected either expressly or impliedly. The
term "expressly" means that the contracting
Page
parties incontrovertibly disclose that their object
in executing the new contract is to extinguish the
old one. Upon the other hand, no specific form is
required for an implied novation, and all that is
prescribed by law would be an incompatibility
between the two contracts. While there is really
no hard and fast rule to determine what might
constitute to be a sufficient change that can bring
about novation, the touchstone for contrarity,
however would be an irreconcilable
incompatibility between the old and the new
obligations.
There are two ways which could indicate, in fine,
the presence of novation and thereby produce
the effect of extinguishing an obligation by
another which substitutes the same. The firs t is
when novation has been explicitly stated and
declared in unequivocal terms. The second is
when the old and the new obligations are
incompatible on every point. The test of
incompatibility is whether or not the two
obligations can stand together, each one having
its independent existence. If they cannot, they
are incompatible and the latter obligation novates
the first. Corollarily, changes that breed
incompatibility must be essential in nature and
not merely accidental. The incompatibility must
take place in any of the essential elements of the
obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient
to extinguish the original obligation.
The changes alluded to by petitioner consists
only in the manner of payment.1wphi1 There
was really no substitution of debtors since private
complainant merely acquiesced to the payment
but did not give her consent to enter into a new
contract.14 x x x
The legal effects of novation on criminal liability
were explained by the Court, through Justice J.B.L.
Reyes, in People v. Nery,15 viz:
The novation theory may perhaps apply prior to
the filing of the criminal information in court by
the state prosecutors because up to that time the
original trust relation may be converted by the
parties into an ordinary creditor-debtor situation,
thereby placing the complainant in estoppel to
insist on the original trust. But after the justice
authorities have taken cognizance of the crime
and instituted action in court, the offended party
may no longer divest the prosecution of its power
to exact the criminal liability, as distinguished
from the civil. The crime being an offense against
the state, only the latter can renounce it (People
vs. Gervacio, 54 Off. Gaz. 2898; People vs.
Velasco, 42 Phil. 76; U.S. vs. Montaes, 8 Phil.
620).
It may be observed in this regard that novation is
not one of the means recognized by the Penal
Code whereby criminal liability can be
extinguished; hence, the role of novation may
only be to either prevent the rise of criminal
liability or to cast doubt on the true nature of the
original basic transaction, whether or not it was
such that its breach would not give rise to penal
responsibility, as when money loaned is made to
appear as a deposit, or other similar disguise is
resorted to (cf. Abeto vs. People, 90 Phil. 581;
U.S. vs. Villareal, 27 Phil. 481).
Even in Civil Law the acceptance of partial
payments, without further change in the original
relation between the complainant and the
accused, can not produce novation. For the latter
to exist, there must be proof of intent to
extinguish the original relationship, and such
intent can not be inferred from the mere
acceptance of payments on account of what is
totally due. Much less can it be said that the
acceptance of partial satisfaction can effect the
nullification of a criminal liability that is fully
matured, and already in the process of
enforcement. Thus, this Court has ruled that the
offended partys acceptance of a promissory note
for all or part of the amount misapplied does not
obliterate the criminal offense (Camus vs. Court
of Appeals, 48 Off. Gaz. 3898).
Novation is not a ground under the law to
extinguish criminal liability. Article 89 (on total
extinguishment)16 and Article 94 (on partial
extinguishrnent)17 of the Revised Penal Code list
down the various grounds for the extinguishment
of criminal liability. Not being included in the list,
novation is limited in its effect only to the civil
aspect of the liability, and, for that reason, is not
an efficient defense in estafa. This is because
only the State may validly waive the criminal
action against an accused.18 The role of novation
may only be either to prevent the rise of criminal
liability, or to cast doubt on the true nature of the
original basic transaction, whether or not it was
such that the breach of the obligation would not
give rise to penal responsibility, as when money
loaned is made to appear as a deposit, or other
similar disguise is resorted to.19
Although the novation of a contract of agency to
make it one of sale may relieve an offender from
an incipient criminal liability, that did not happen
269
here, for the partial payments and the proposal to
pay the balance the accused made during the
barangay proceedings were not at all
Page
incompatible with Degafios liability under the
agency that had already attached. Rather than
converting the agency to sale, therefore, he even
thereby confirmed his liability as the sales agent
of the complainants.
VHEREFORE, the Court AFFIRMS the decision of
the Court of Appeals promulgated on September
23, 2003; and ORDERS petitioner to pay the costs
of suit.
BANK OF THE PHILIPPINE
ISLANDS, Petitioner, v. AMADOR
DOMINGO, Respondent.
Before the Court is a Petition for Review
on Certiorari under Rule 45 of the Rules of Court,
filed by petitioner Bank of the Philippine Islands
(BPI), seeking the reversal and setting aside of
the Decision1dated July 11, 2005 and
Resolution2 dated August 19, 2005 of the Court of
Appeals in CA-G.R. SP No. 88836.
The Petition arose from the following facts:
On September 27, 1993, respondent Amador
Domingo (Amador) and his wife, the late Mercy
Maryden Domingo (Mercy),3 (collectively referred
to as the spouses Domingo) executed a
Promissory Note4 in favor of Makati Auto Center,
Inc. in the sum of P629,856.00, payable in 48
successive monthly installments in the amount of
P13,122.00 each. They simultaneously executed
a Deed of Chattel Mortgage5 over a 1993 Mazda
323 (subject vehicle) to secure the payment of
their Promissory Note. Makati Auto Center, Inc.
then assigned, ceded, and transferred all its
rights and interests over the said Promissory Note
and chattel mortgage to Far East Bank and Trust
Company (FEBTC).
On April 7, 2000, the Securities and Exchange
Commission (SEC) approved and issued the
Certificate of Filing of the Articles of Merger and
Plan of Merger executed on January 20, 2000 by
and between BPI, the surviving corporation, and
FEBTC, the absorbed corporation. By virtue of
said merger, all the assets and liabilities of FEBTC
were transferred to and absorbed by BPI.6
The spouses Domingo defaulted when they failed
to pay 21 monthly installments that had fallen
due consecutively from January 15, 1996 to
September 15, 1997. BPI, being the surviving
corporation after the merger, demanded that the
spouses Domingo pay the balance of the
Promissory Note including accrued late payment
charges/interests or to return the possession of
the subject vehicle for the purpose of foreclosure
in accordance with the undertaking stated in the
chattel mortgage. When the spouses Domingo
still failed to comply with its demands, BPI filed
on November 14, 2000 a Complaint7 for Replevin
and Damages (or in the alternative, for the
collection of sum of money, interest and other
charges, and attorney's fees) which was raffled to
the Metropolitan Trial Court (MeTC) of Manila,
Branch 9, and docketed as Civil Case No. 168949-
CV. BPI included a John Doe as defendant because
at the time of filing of the Complaint, BPI was
already aware that the subject vehicle was in the
possession of a third person but did not yet know
the identity of said person.
In their Answer,8 the spouses Domingo raised the
following affirmative
defenses:chanroblesvirtuallawlibrary
4. [BPI] has no cause of action against the
[spouses Domingo].
5. The Honorable Court has no jurisdiction over
this case,
6. As per the allegations in the complaint, JOHN
DOE is an indispensable party to this case so with
his whereabouts unknown, service by publication
should first be made before proceeding with the
trial of this case;
7. Defendant Maryden Domingo once obtained a
car loan from Far East Bank and Trust Company
but the car was later sold to Carmelita S.
Gonzales with the bank's conformity and the
buyer subsequently assumed payment of the
balance of the mortgaged loan.
During trial, the prosecution presented as witness
Vicente Magpusao, a former employee of FEBTC
and now an Account Analyst of BPI. His testimony
was summed up by the MeTC as
follows:chanroblesvirtuallawlibrary
Vicente Magpusao, [BPI's] Account Analyst and
formerly connected with Far East Bank and Trust
Company testified that on September 27, 1993,
[the spouses Domingo] for consideration
executed and delivered to Makati Auto Center,
Inc. a Promissory Note in the sum of P629,856.00
payable in monthly installments in accordance
with the schedule of payment indicated in said
Promissory Note. In order to secure the payment
of the obligation, the [spouses Domingo]
executed in favor of said Makati Auto Center, Inc.
on the same date a Chattel Mortgage over one
(1) unit of 1993 Mazda (323) with Motor No. B6-
270146 and with Serial No. BG1062M9100287.
With notice to [the spouses Domingo], said
270
Makati Auto Center, Inc. assigned to Far East
Bank and Trust Co. the Chattel Mortgage as
shown by the Deed of Assignment executed by
Page
[Makati Auto Center, Inc.]. Far East Bank and
Trust Co. on the other hand, has been merged
with and/or absorbed by herein plaintiff [BPI]. The
[spouses Domingo] defaulted in complying with
the terms and conditions of the Promissory Note
with Chattel Mortgage by failing to pay twenty[-
one] (21) successive installments which fell due
on January 15, 1996 up to September 15, 1997.
[BPI] sent a demand letter [to] defendant Mercy
Domingo thru registered mail demanding
payment of the whole balance of the Promissory
Note plus the stipulated interest and other
charges or return to [BPI] the possession of the
above-described motor vehicle. There were some
negotiations made by the [spouses Domingo] to
their In House Legal Assistant but the same did
not materialize. Based on the Statement of
Account dated October 31, 2000, [the spouses
Domingo have] an outstanding balance of
P275,562.00 exclusive of interest and other
charges.
On cross-examination, the witness explained that
the first time he came to handle [the spouses
Domingo's] account was in 1997. Despite the fact
that he was not yet employed with the bank in
1993, he knew exactly what happened in this
particular transaction because of his experience
in auto financing. He also has an access [to] the
Promissory Note, Chattel Mortgage and other
records of payment made by the bank. Based on
the records, the [spouses Domingo] issued
several postdated checks but not for the entire
term. There were payments made from October
30, 199[3] up to September 14, 1994. He was not
the one who received payments for the auto
finance. If there were receipts issued, they will
only ride for the account of Mrs. Domingo. He was
not sure if these receipts are kept in the
warehouse or probably disposed of by the bank
since the transaction was made in 1997. They
already have a computer records of all payments
made by their client. Based on the subsidiary
ledger, there were three (3) checks that bounced
and these are payments from the new buyer.
They only have one (1) photocopy of these
checks in the amount of P325,431.60 while the
other two (2) are missing. He was not aware who
owns Cargo and Hardware Corporation but the
check was issued by a certain Miss Gonzales. The
witness further testified that anyone can pay the
monthly amortization as long as the payment is
for the account of Maryden Domingo. They
cannot include Carmelita Gonzales as one of the
defendants in this case because they don't have
a document executed by the latter in behalf of Far
East Bank and Trust Co. The bank did not approve
the Deed of Sale with Assumption of Mortgage.
Witness further testified that he found the
photocopy of the Deed of Sale in the records of
Maryden Domingo. The Promissory Note and
Chattel Mortgage were executed by the
defendants Maryden and Amador Domingo. There
was no assumption of obligation of the [spouses
Domingo]. Witness however admitted that Far
East Bank did not turn over to [BPI] all the
records pertaining to the account of the [spouses
Domingo].9 (Citations omitted.)
Amador himself testified for the defense. The
MeTC provided the following summary of
Amador's testimony:chanroblesvirtuallawlibrary
For his defense, defendant Amador Domingo
testified that his wife and co-defendant Mercy
Maryden Domingo died on November 27, 2003.
He admitted that his wife bought a car and was
mortgaged to Far East Bank and Trust Company.
He identified the Chattel Mortgage and the
Promissory Note he executed together with his
wife. In connection with the execution of this
Promissory Note, he recalled that his wife issued
forty-eight (48) checks. The twelve (12) checks
were cleared by the bank and his wife was able to
obtain a discount for prompt payments up to
October 1994. While they were still paying for the
car, Carmelita Gonzales got interested to buy the
car and is willing to assume the mortgage. After
furnishing the bank [with] the Deed of Sale duly
notarized, Carmelita Gonzales subsequently
issued a check payable to Far East Bank and Trust
Company and the remaining postdated checks
were returned to them. Based on the application
of payment prepared by [BPI's] witness, Carmelita
Gonzales made payments from November 14,
1995 to December 1995. Aside from these
payments on May 19, 1997, Carmelita Gonzales
issued a check to Far East Bank in the amount of
P385,431.60. In 1996, he received a phone call
from a certain Marvin Orence asking for their
assistance to locate the car which Carmelita
Gonzales bought from them. His lawyer went to
Land Transportation Office for assistance. From
the time Ms. Gonzales started to pay, they never
received any demand letter from Far East Bank.
Thereafter, on February 29, 1997, they received a
demand letter from Espino Law Office [on] behalf
of [FEBTC]. His lawyer made a reply on March 31,
1997 stating therein that the motor vehicle for
which the loan was obtained had been sold to
Carmelita Gonzales as of July 5, 1994 with the
knowledge and approval of their client. After
three years, they received another demand letter
dated October 31, 2000 from Labaguis Law
Office. His lawyer made the same reply on March
7, 2000 and another letter on November 24,
2000.

271
Witness further testified that this malicious
complaint probably triggered the early demise of
his wife who has a high blood pressure. His wife
Page
died of aneurism. As damages, he is asking for
the amount of P200,000.00 as moral damages,
P75,000.00 as attorney's fees and P5,000.00
appearance fee.
On cross-examination, witness elaborates that
when his wife presented to Far East Bank the
Deed of Sale with Assumption of Mortgage, the
bank made no objection and returned all their
postdated checks. His wife was the one who
deal[t] with Carmelita Gonzales but he always
provide[d] assistance with respect to paper
works. Aside from the aforesaid Deed of Sale,
there is no other document which shows the
conformity of the bank. They were only verbally
assured by Mr. Orence that their papers are in
order.10cralawlawlibrary
On June 10, 2004, the MeTC rendered a Decision
in favor of BPI as the bank was able to establish
by preponderance of evidence a valid cause of
action against the spouses Domingo. According to
the MeTC, novation is never presumed and must
be clearly shown by express agreement or by
acts of equal import. To effect a subjective
novation by a change in the person of the debtor,
it is necessary that the old debtor be released
expressly from the obligation and the third person
or new debtor assumes his place. Without such
release, there is no novation and the third person
who assumes the debtor's obligation merely
becomes a co-debtor or surety. The MeTC found
Amador's bare testimony as insufficient evidence
to prove that he and his wife Mercy had been
expressly released from their obligations and that
Carmelita Gonzales (Carmelita) assumed their
place as the new debtor within the context of
subjective novation; and if at all, Carmelita only
became the spouses Domingo's co-debtor or
surety. While finding that BPI was entitled to the
reliefs prayed for, the MeTC made no adjudication
as to the entitlement of the bank to the Writ of
Replevin, and instead awarded monetary reliefs
as were just and equitable. The dispositive
portion of the MeTC decision
reads:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, judgment is
hereby rendered in favor of [BPI], ordering
defendant Amador Domingo:
1. To pay [BPI] the sum of P275,562.00 plus
interest thereon at the rate of 36% per
annum from November 15, 2000 until fully
paid;
2. To pay [BPI] the sum equivalent to 25% of
the total amount due as atorney's fees;
and
3. To pay the costs of suit.11
Acting on Amador's Motion for Reconsideration,
the MeTC issued an Order12 dated September 6,
2004 affirming its earlier judgment but reducing
the attorney's fees awarded,
thus:chanroblesvirtuallawlibrary
WHEREFORE, premises considered the Decision of
this Court dated June 10, 2014 stands, subject to
the modification that the attorney's fees of
twenty-five percent (25%) is ordered reduced to
ten percent (10%) of the total amount
due.13cralawlawlibrary
Dissatisfied, Amador appealed his case before the
Regional Trial Court (RTC) of Manila, Branch 26,
wherein it was docketed as Civil Case No. 04-
111100. In its Decision dated February 10, 2005,
the RTC held that in novation, consent of the
creditor to the substitution of the debtor need not
be by express agreement, it can be merely
implied. The consent is not required to be in any
specific or particular form; the only requirement
being that it must be given by the creditor in one
way or another. To the RTC, the following
circumstances demonstrated the implied consent
of BPI to the novation: (1) BPI had knowledge of
the Deed of Sale and Assumption of Mortgage
executed between Mercy and Carmelita, but did
not interpose any objection to the same; and (2)
BPI (through FEBTC) returned the personal checks
of the spouses Domingo and accepted the
payments made by Carmelita. The RTC also noted
that BPI made a demand for payment upon the
spouses Domingo only after 30 months from the
time Carmelita assumed payments for the
installments due. The RTC reasoned that if the
spouses Domingo truly remained as debtors, BPI
would not have wasted time in demanding
payments from them. Ultimately, the RTC
decreed:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, the judgment
appealed from is hereby reversed. The complaint
filed by [BPI] before [MeTC] Branch 9, Manila, is
hereby DISMISSED and ordering [BPI] to pay
defendant/appellant Amador Domingo the
following, to wit:
a) One Hundred Thousand (P100,000.00) Pesos
as moral damages;
b) Fifty Thousand (P50,000.00) Pesos as
exemplary damages;
c) Fifty Thousand (P50,000.00) Pesos as
attorney's fees;
d) Twenty-Five Thousand (P25,000.00) [Pesos] as
272
litigation expenses;
e) Costs of this suit.14cralawlawlibrary
Page
Aggrieved by the foregoing RTC judgment, BPI
filed a Petition for Review with the Court of
Appeals, docketed as CA-G.R. SP No. 88836. The
Court of Appeals promulgated its Decision on July
11, 2005, affirming the finding of the RTC that
novation took place. The Court of Appeals, relying
on the declaration in Babst v. Court of
Appeals15 that consent of the creditor to the
substitution of debtors need not always be
express and may be inferred from the acts of the
creditor, ruled that:chanroblesvirtuallawlibrary
In this case, there is no doubt that FEBTC had the
intention to release private respondent [Amador]
and his wife from the obligation when the latter
sold the subject vehicle to [Carmelita]. This
intention can be inferred from the following acts
of FEBTC: 1) it returned the postdated checks
issued by private respondent [Amador's] wife in
favor of FEBTC; 2) it accepted the payments
made by [Carmelita]; 3) it did not interpose any
objection despite knowledge of the existence of
the Deed of Sale with Assumption of Mortgage;
and 4) it did not demand payment from private
respondent [Amador] and his wife for thirty (30)
long months.
xxxx
As correctly found by the RTC, the testimony of
private respondent [Amador] as regards the
return of the said checks to them by FEBTC was
not rebutted by petitioner BPI.
If indeed the said checks were not returned to
private respondent [Amador's] wife, the least
thing that petitioner BPI or FEBTC could have
done was to deposit them. Should the checks
thereafter bounce, then petitioner BPI or FEBTC
could have filed a separate case against private
respondent [Amador's] wife. This was never done
by petitioner BPI or FEBTC. Hence, it is safe to
conclude that the said checks were indeed
returned to private respondent [Amador's]
wife.16cralawlawlibrary
The Court of Appeals rejected the other
arguments of BPI:chanroblesvirtuallawlibrary
Petitioner BPI further argues that as regards the
payment made by the alleged new debtor,
Carmelita Gonzales, it appears that the only
payment made by her was a PNB Check No.
00190322 dated May 19, 1997 which was
dishonored due to Account Closed.
Careful scrutiny of the records of the case reveals
otherwise. As found by the MeTC in its decision
dated June 10, 2004, Carmelita Gonzales made
several payments on the said loan obligation, as
testified to by witness Vicente Magpusao,
petitioner BPFs Account Analyst,
thus:chanroblesvirtuallawlibrary
xxx. Based on the subsidiary leger, (Exhibit "2"),
there were three (3) checks that bounced and
these are payments from the new buyer. They
only have one (1) photocopy of these checks in
the amount of P325,431.60 (Exhibit 4) while the
other two are missing. He was not aware who
owns Cargo and Hardware Corporation but the
check was issued by a certain Miss Gonzales. xxx.
xxxx
Petitioner BPI further argues that it was not its
obligation to interpose any objection to the Deed
of Sale with Assumption of Mortgage. Rather it
should be the vendee, [Carmelita], who should
secure the approval and consent of petitioner BPI
to the Deed of Sale.
This argument is untenable.
The Deed of Sale with Assumption of Mortgage
between private respondent [Amador's] wife and
[Carmelita] was executed way back on July 5,
1994. The check that was issued by [Carmelita]
was dated May 19, 1997. The position of
petitioner BPI is not possible because when the
Deed of Sale with Assumption of Mortgage was
executed and the said check was issued, private
respondent [Amador's] wife and [Carmelita] were
still dealing with FEBTC, considering the fact that
the merger of petitioner BPI and FEBTC was
formalized on April 10, 2000.
Nevertheless, FEBTC interposed no objection to
the Deed of Sale with Assumption of Mortgage,
hence, it consented to it.
From the foregoing, it is clear that novation took
place so that private respondent Domingo is no
longer the debtor of petitioner BPI. 17 (Citations
omitted.)
The Court of Appeals, however, deleted the
damages awarded to Amador for the following
reasons:chanroblesvirtuallawlibrary
As to the second issue, petitioner BPI argues that
the RTC awarded moral and exemplary damages
and attorney's fees to respondent [Amador] only
in the dispositive portion of the assailed decision
without any basis in fact and in law.
This Court finds the argument tenable.
In the case of Solid Homes, Inc. vs. Court of
Appeals, it was held
that:chanroblesvirtuallawlibrary
"It is basic that the claim for actual, moral and
punitive damages as well as exemplary damages
and attorney's fees must each be independently
273
identified and justified."
Furthermore, Section 14, paragraph 1 of Article
VIII, of the 1987 Constitution lays down the
Page
standard in rendering decisions, to wit: it must be
express therein clearly and distinctly the facts
and law on which it is based.
Perusal of the assailed decision reveals that the
award of moral and exemplary damages as well
as attorney's fees and litigation expenses were
only touched in the dispositive portion, which is in
clear disregard of the established rules laid down
by the Constitution and existing jurisprudence.
Therefore, their deletion is in order.
As regards the award of litigation expenses and
costs of the suit, the same should also be deleted
considering that "no premium should be placed
on the right to litigate."18(Citations omitted.)
The Court of Appeals ultimately
adjudged:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, the assailed
decision dated February 10, 2005 of the Regional
Trial Court, Branch 26, Manila in Civil Case No. 04-
111100 is
herebyAFFIRMED with MODIFICATION in that
the award of moral and exemplary damages as
well as attorney's fees, litigation expenses and
costs of suit, is hereby deleted.19cralawlawlibrary
In its Resolution dated August 19, 2005, the Court
of Appeals denied the Motion for Partial
Reconsideration of BPI.
BPI comes to this Court via the present Petition
for Review/Appeal by Certiorari raising the sole
issue of whether or not there had been a novation
of the loan obligation with chattel mortgage of
the spouses Domingo to BPI so that the spouses
Domingo were released from said obligation and
Carmelita was substituted as debtor.
The Court answers in the negative and grants the
Petition.
In De Cortes v. Venturanza,20 the Court discussed
some principles and jurisprudence underlying the
concept and nature of novation as a mode of
extinguishing
obligations:chanroblesvirtuallawlibrary
According to Manresa, novation is the
extinguishment of an obligation by the
substitution or change of the obligation by a
subsequent one which extinguishes or modifies
the first, either by changing the object or
principal conditions, or by substituting the person
of the debtor, or by subrogating a third person to
the rights of the creditor (8 Manresa 428, cited in
IV Civil Code of the Philippines by Tolentino 1962
ed., p. 352). Unlike other modes of extinction of
obligations, novation is a juridical act with a dual
function - it extinguishes an obligation and
creates a new one in lieu of the old.
Article 1293 of the New Civil Code
provides:chanroblesvirtuallawlibrary
"Novation which consists in substituting a new
debtor in the place of the original one, may be
made even without the knowledge or against the
will of the latter, but not without the consent of
the creditor." (emphasis supplied)
Under this provision, there are two forms of
novation by substituting the person of the debtor,
and they are: (1) expromision and (2) delegacion.
In the former, the initiative for the change does
not come from the debtor and may even be made
without his knowledge, since it consists in a third
person assuming the obligation. As such, it
logically requires the consent of the third person
and the creditor. In the latter, the debtor
offers and the creditor accepts a third
person who consents to the substitution
and assumes the obligation, so that the
intervention and the consent of these three
persons are necessary (8 Manresa 436-437,
cited in IV Civil Code of the Philippines by
Tolentino, 1962 ed., p. 360). In these two
modes of substitution, the consent of the
creditor is an indispensable
requirement (Garcia vs. Khu Yek Chiong, 65 Phil.
466, 468). (Emphases supplied.)
The Court also emphasized in De Cortes the
indispensability of the creditor's consent to the
novation, whether expromision or delegacion,
given that the "substitution of one debtor for
another may delay or prevent the fulfillment of
the obligation by reason of the financial inability
or insolvency of the new debtor; hence, the
creditor should agree to accept the substitution in
order that it may be binding on him."21
Both the RTC and the Court of Appeals found that
there was novation by delegacion in the case at
bar. The Deed of Sale with Assumption of
Mortgage was executed between Mercy
(representing herself and her husband Amador)
and Carmelita, thus, their consent to the
substitution as debtors and third person,
respectively, are deemed undisputed. It is the
existence of the consent of BPI (or its absorbed
corporation FEBTC) as creditor that is being
challenged herein.
As a general rule, since novation implies a waiver
of the right the creditor had before the novation,
such waiver must be express.22 The Court
explained the rationale for the rule in Testate
Estate of Lazaro Mota v.
Serra23:chanroblesvirtuallawlibrary
It should be noted that in order to give novation
274
its legal effect, the law requires that the creditor
should consent to the substitution of a new
debtor. This consent must be given expressly for
Page
the reason that, since novation extinguishes the
personality of the first debtor who is to be
substituted by a new one, it implies on the part of
the creditor a waiver of the right that he had
before the novation, which waiver must be
express under the principle that renuntiatio non
praesumitor, recognized by the law in declaring
that a waiver of right may not be performed
unless the will to waive is indisputably shown by
him who holds the right.
However, in Asia Banking Corporation v.
Elser,24 the Court qualified
thus:chanroblesvirtuallawlibrary
The aforecited article 1205 [now 1293] of the
Civil Code does not state that the creditor's
consent to the substitution of the new debtor for
the old be express, or given at the time of the
substitution, and the Supreme Court of Spain, in
its judgment of June 16, 1908, construing said
article, laid down the doctrine that "article 1205
of the Civil Code does not mean or require that
the creditor's consent to the change of debtors
must be given simultaneously with the debtor's
consent to the substitution; its evident purpose
being to preserve the creditor's full right, it is
sufficient that the latter's consent be given at any
time and in any form whatever, while the
agreement of the debtors subsists." The same
rule is stated in the Enciclopedia Juridica
Espaola, volume 23, page 503, which reads:
"The rule that this kind of novation, like all others,
must be express, is not absolute; for the
existence of the consent may well be inferred
from the acts of the creditor, since volition may
as well be expressed by deeds as by words." The
understanding between Henry W. Elser and the
principal director of Yangco, Rosenstock & Co.,
Inc., with respect to Luis R. Yangco's stock in said
corporation, and the acts of the board of directors
after Henry W. Elser had acquired said shares, in
substituting the latter for Luis R. Yangco, are a
clear and unmistakable expression of its consent.
When this court said in the case of Estate of Mota
vs. Serra (47 Phil., 464), that the creditor's
express consent is necessary in order that there
may be a novation of a contract by the
substitution of debtors, it did not wish to convey
the impression that the word "express" was to be
given an unqualified meaning, as indicated in the
authorities or cases, both Spanish and American,
cited in said decision.
Hence, based on the aforequoted ruling in Asia
Banking, the existence of the creditor's consent
may also be inferred from the creditor's acts, but
such acts still need to be "a clear and
unmistakable expression of [the creditor's]
consent."25
In Ajax Marketing and Development Corporation
v. Court of Appeals,26 the Court further clarified
that:chanroblesvirtuallawlibrary
The well settled rule is that novation is never
presumed. Novation will not be allowed unless it
is clearly shown by express agreement, or by acts
of equal import. Thus, to effect an objective
novation it is imperative that the new obligation
expressly declare that the old obligation is
thereby extinguished, or that the new obligation
be on every point incompatible with the new one.
In the same vein, to effect a subjective novation
by a change in the person of the debtor it is
necessary that the old debtor be released
expressly from the obligation, and the third
person or new debtor assumes his place in the
relation. There is no novation without such
release as the third person who has assumed the
debtor's obligation becomes merely a co-debtor
or surety. (Citations omitted.)
The determination of the existence of the consent
of BPI to the substitution of debtors, in
accordance with the standards set in the
preceding jurisprudence, is a question of fact
because it requires the Court to review the
evidence on record. It is an established rule that
the jurisdiction of the Court in cases brought
before it from the Court of Appeals via a petition
for review on certiorari under Rule 45 of the Rules
of Court is generally limited to reviewing errors of
law as the former is not a trier of facts. Thus, the
findings of fact of the Court of Appeals are
conclusive and binding upon the Court in the
latter's exercise of its power to review for it is not
the function of the Court to analyze or weigh
evidence all over again.27 However, several of the
recognized exceptions28 to this rule are present in
the instant case that justify a factual review, i.e.,
the inference is manifestly mistaken, the
judgment is based on misapprehension of facts,
and the findings of the Court of Appeals and the
RTC are contrary to those of the MeTC.
The burden of establishing a novation is on the
party who asserts its existence.29 Contrary to the
findings of the Court of Appeals and the RTC,
Amador failed to discharge such burden as he
was unable to present proof of the clear and
unmistakable consent of BPI to the substitution of
debtors.
Irrefragably, there is no express consent of BPI to
the substitution of debtors. The Court of Appeals
and the RTC inferred the consent of BPI from the
following facts: (1) BPI had a copy of the Deed of
Sale and Assumption of Mortgage executed
between Mercy and Carmelita in its file, indicating
its knowledge of said agreement, and still it did
not interpose any objection to the same; (2) BPI
275
(through FEBTC) returned the spouses Domingo's
checks and accepted Carmelita's payments; and
(3) BPI did not demand any payment from the
Page
spouses Domingo not until 30 months after
Carmelita assumed the payment of balance on
the Promissory Note.
The Court disagrees with the inferences made by
the Court of Appeals and the RTC.
First, that BPI (or FEBTC) had a copy of the Deed
of Sale and Assumption of Mortgage executed
between Mercy and Carmelita in its file does not
mean that it had consented to the same. The
very Deed itself
states:chanroblesvirtuallawlibrary
That the VENDEE [Carmelita] assumes as he/she
had assumed to pay the aforecited mortgage in
accordance with the original terms and conditions
of said mortgage, and the parties hereto [Mercy
and Carmelita] have agreed to seek the
conformity of the MORTGAGEE
[FEBTC].30cralawlawlibrary
This brings the Court back to the original question
of whether there is proof of the conformity of BPI.
The Court notes that the documents of BPI
concerning the car loan and chattel mortgage are
still in the name of the spouses Domingo. No new
promissory note or chattel mortgage had been
executed between BPI (or FEBTC) and Carmelita.
Even the account itself is still in the names of the
spouses Domingo.
The absence of objection on the part of BPI (or
FEBTC) cannot be presumed as consent.
Jurisprudence requires presentation of proof of
consent, not mere absence of objection. Amador
cannot rely on Babst which involved a different
factual milieu. Relevant portions of the Court's
ruling in Babst are reproduced
below:chanroblesvirtuallawlibrary
In the case at bar, Babst, MULTI and ELISCON all
maintain that due to the failure of BPI to register
its objection to the take-over by DBP of ELISCON's
assets, at the creditors' meeting held in June
1981 and thereafter, it is deemed to have
consented to the substitution of DBP for ELISCON
as debtor.
We find merit in the argument. Indeed, there exist
clear indications that BPI was aware of the
assumption by DBP of the obligations of ELISCON.
In fact, BPI admits that
"[T]he Development Blank of the Philippines
(DBP), for a time, had proposed a formula for the
settlement of Eliscon's past obligations to its
creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as
not acceptable (long before the filing of the
complaint at bar)."
The Court of Appeals held that even if the
account officer who attended the June 1981
creditors' meeting had expressed consent to the
assumption by DBP of ELISCON's debts, such
consent would not bind BPI for lack of a specific
authority therefor. In its petition, ELISCON
counters that the mere presence of the account
officer at the meeting necessarily meant that he
was authorized to represent BPI in that creditors'
meeting. Moreover, BPI did not object to the
substitution of debtors, although it objected to
the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its
account officer to attend the creditors' meeting
was an authority to represent the bank, such that
when he failed to object to the substitution of
debtors, he did so on behalf of and for the bank.
Even granting arguendo that the said account
officer was not so empowered, BPI could have
subsequently registered its objection to the
substitution, especially after it had already
learned that DBP had taken over the assets and
assumed the liabilities of ELISCON. Its failure to
do so can only mean an acquiescence in the
assumption by DBP of ELISCON's obligations. As
repeatedly pointed out by ELISCON and MULTI,
BPI's objection was to the proposed payment
formula, not to the substitution
itself.31cralawlawlibrary
In Babst, there was a clear opportunity for BPI, as
creditor therein, to o ject to the substitution of
debtors given that its representative attended a
creditor's meeting, during which, said
representative already objected to the proposed
payment formula made by DBP, as the new
debtor. Hence, the silence of BPI during the same
meeting as to the matter of substitution of
debtors could already be interpreted as its
acquiescence to the same. In contrast, there was
no clear opportunity for BPI (or FEBTC) to have
expressed its objection to the substitution of
debtors in the case at bar.
Second, the consent of BPI to the substitution of
debtors cannot be deduced from its acceptance
of payments from Carmelita, absent proof of its
clear and unmistakable consent to release the
spouses Domingo from their obligation. Since the
spouses Domingo remained as debtors of BPI,
together with Carmelita, the fact that BPI
demanded payment from the spouses Dokningo
30 months after accepting payment from
Carmelita is insignificant.
The acceptance by a creditor of payments from a
third person, who has assumed the obligation,
will result merely to the addition of debtors and
not novation. The creditor may therefore enforce
276
the obligation against both debtors.32 As the
Court pronounced in Magdalena Estates, Inc. v.
Rodriguez,33"[t]he mere fact that the creditor
Page
receives a guaranty or accepts payments from a
third person who has agreed to assume the
obligation, when there is no agreement that the
first debtor shall be released from responsibility,
does not constitute a novation, and the creditor
can still enforce the obligation against the
original debtor." The Court reiterated in Quinto v.
People34 that "[n]ot too uncommon is when a
stranger to a contract agrees to assume an
obligation; and while this may have the effect of
adding to the number of persons liable, it does
not necessarily imply the extinguishment of the
liability of the first debtor. Neither would the fact
alone that the creditor receives guaranty or
accepts payments from a third person who has
agreed to assume the obligation, constitute an
extinctive novation absent an agreement that the
first debtor shall be released from responsibility."
Absent proof that BPI gave its clear and
unmistakable consent to release the spouses
Domingo from the obligation to pay the car loan,
Carmelita is simply considered an additional
debtor. Consequently, BPI can still enforce the
obligation against the spouses Domingo even 30
months after it had started accepting payments
from Carmelita.
And third, there is no sufficient or competent
evidence to establish the return of the checks to
the spouses Domingo and the assurance made by
FEBTC that the spouses Domingo were already
released from their obligation.
During his direct examination, Amador testified
as follows:chanroblesvirtuallawlibrary
Atty. Rivera:
1. Q. Do you remember who was this person
who became interested to buy this car?
A. Carmelita S. Gonzales, Sir.
2. Q. What did you tell Mrs. Gonzales when she
expressed interest in buying this car, this
Mazda vehicle?
A. We told her that the car was mortgaged
and she told us that she is willing to
assume the mortgage, Sir.
3. Q. With that willingness, what happened
next on the part of Mrs. Gonzales to
assume the mortgage?
A. My wife and Mrs. Gonzales went to Far
East Bank and Trust Company and she
informed the bank that somebody is
interested in buying the car and assume
the mortgage and the bank informed her
that the bank is agreeable and with no
objection.
Atty. Objection, your Honor. May we object to
Ganitan the answer of the witness, it would be
o: hearsay. The witness testified that it was
his wife and the would-be buyer who
went to the bank.
Atty. Then, we are just offering it as part of the
Rivera: narration not necessarily to prove the
truth of the statement, your Honor.
Court: The witness may continue.
Atty. So, after that meeting with the bank
Rivera: occurred, what happened next in
connection with this intention of Mrs.
Gonzales to purchase the car?
Witness After furnishing the bank with the Deed of
: Absolute Sale duly notarized, [Ms.]
Carmelita Gonzales subsequently issued
a check payable to Far East Bank and
Trust Company, Sir.
Atty.
Rivera:
1. Q. How about the postdated checks that
your wife issued to Far East Bank and
Trust Company?
A. The remaining postdated checks were
returned to us, Sir.
2. Q. Do you remember what were those
postdated checks that were returned by
the bank?
A. Those were the checks we issued in
advance, Sir.
3. Q. What were the dates of these checks?
A. October 30, 1994 to 1997, Sir.
xxxx
Atty.
Rivera:
1. Q. Aside from this evidence that you have
enumerated, were you able to talk to any
representative from Far East Bank relative
to the approval of the change in the
personality of the debtor from your wife
to...
A. As I remember, sometime in 1996, I
received a call from a certain Marvin
Orence asking for our assistance to locate
the car that Mrs. Carmelita Gonzales
 bought from us and informed us that we
have nothing to worry except that we
provide them assistance to locate the car
and I informed our lawyer, Atty. Rivera,
about this and Atty. Rivera went to the
Land Transportation Office for
assistance.35
Amador continued to testify on cross-
examination, thus:
CROSS EXAMINATION BY ATTY. GANITANO
1. Q.. You testified that out of the 48 checks you
paid to Far East Bank & Trust Company,
only 12 checks were made good. What
happened to the 36 checks?
A. When my wife brought the transaction to
Far East Bank and presented the Deed of
Absolute Sale, the bank have no objection
to the sale of the car and afterwards, the
bank returned all the postdated checks
prepared by my wife that was in the
possession of the bank, Sir.
1. Q. Do you have with you those 36 checks
that were allegedly returned by Far East
Bank?
A. AThese checks have already been
discarded, Sir.
2. Q. So, you cannot present those 36 checks
anymore?
A. No, Sir.
3. Q. Who was the alleged buyer of
mortgaged car again?
Witness Carmelita S. Gonzales, Sir.
: assurance from the bank?
Atty.
Ganitan
o:
1. Q. To whom did this Carmelita Gonzales
transacted with respect to the sale of
mortgaged vehicle?
A. To my wife, Mercy Maryden Domingo, Sir.
2. Q. Not with you, Mr. Witness?
A. Well, I always provide assistance to my
wife with regards to paper works, Sir.
3. Q. Q When was this Deed of Sale executed,
was it before when your wife and the
buyer went to the bank or after they went
to the bank?
A. A I think it was simultaneous, Sir.
4. Q. When you say "simultaneous", Mr.
Witness, I'm showing to you this Deed of
Sale with Assumption of Mortgage and
277
you said it was with the conformity of the
bank. Will you please tell us in this Deed
of Sale with Assumption of Mortgage if
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you could find any entry which indicate
that the bank agreed to the sale with
assumption of mortgage?
Witness None, Sir.
:
Atty. Aside from this Deed of Sale with
Ganitan Assumption of Mortgage, do you have
o: any document which shows that the bank
indeed conformed to the sale of the
mortgaged vehicle with assumption of
mortgage?
Witness We were verbally assured that our papers
: are in order, Sir.
Atty. So, there is no document, Mr. Witness, it
Ganitan was only made orally?
o:
Witness Yes, Sir, we were verbally assured that
: our papers are in order.
Atty.
Ganitan
o:
1. Q. Were you present when your wife and the
the would be buyer went to the bank?
A. No, Sir.
2. Q. How did you know that there was an
A. I received a phone call from Mr. Oronce. I
asked about the transaction and he told
me that there is nothing to worry because
our documents or papers were in order,
Sir.
3. Q. Do I get you right, Mr. Witness, that the
confirmation was only through phone
call?
A. It was Mr. Oronce who called me, Sir.
4. Q. I'm just asking what was the means of
communication, was it only thru phone
call?
A. Yes, Sir, thru phone call. I think twice or
three times.
Atty. We would like to manifest, your Honor, as
Rivera: early as 1997, just to stress this point, as
early as March 1997, the name of Marvin
Oronce...
Atty. The witness is under cross, your Honor.
278
Ganitan
o:
Page
Court: You just ask that in re-direct, counsel.
Atty. Yes, you Honor.36
Rivera:
Amador admitted that it was his wife Mercy,
together with Carmelita, who directly transacted
with FEBTC regarding the sale of the subject
vehicle to and assumption of mortgage by
Carmelita. Amador had no personal knpwledge of
what had happened when Mercy and Carmelita
went to the bank so his testimony on the matter
was hearsay, which, if not excluded, deserves no
credence.
The Court explained in Da Jose v. Angeles37 that:
Evidence is hearsay when its probative force
depends on the competency and credibility of
some persons other than the witness by whom it
is sought to be produced. The exclusion of
hearsay evidence is anchored on three reasons:
(1) absence of cross-examination; (2) absence of
demeanor evidence; and (3) absence of oath.
Basic under the rules of evidence is that a
witness can only testify on facts within his or her
personal knowledge. This personal knowledge is a
substantive prerequisite in accepting testimonial
evidence establishing the truth of a disputed fact,
x x x. (Citations omitted.)
The Court of Appeals and the RTC substantively
based their finding that BPI (or FEBTC) consented
to the substitution of debtors on the return of the
checks to the spouses Domingo, but the proof of
the issuance of the checks, their delivery to the
bank, and the return of the checks flimsily
consists of Amador's unsubstantiated testimony.
Amador recounted that the postdated checks
which he and Mercy executed in favor of FEBTC
were returned to them, however, he failed to
provide the details surrounding the return.
Amador only stated that when Mercy provided
FEBTC with a copy of the Deed of Sale and
Assumption of Mortgage, the bank returned the
checks to them "subsequently" or "afterwards."
Amador did not say how the checks were
returned and to whom. The checks were not
presented during the trial since according to
Amador, they were already "discarded," although
once more, any other detail surrounding the
discarding of the checks is sorely lacking. Aside
from Amador's bare testimony, no other
supporting evidence of the return of the checks to
the spouses Domingo was submitted during trial.
For the foregoing reasons, the Court accords little
weight and credence to Amador's testimony on
the return of the checks.
It is worthy to stress that Amador, as the party
asserting novation, bears the burden of proving
its existence. Amador cannot simply rely on the
failure of BPI to produce the checks if these were
not actually returned to the spouses Domingo.
There is simply not enough evidence to establish
theprima facie existence of novation to shift the
burden of evidence to BPI to controvert the same.
The verbal assurances purportedly given by a Mr.
Marvin Orence or Oronce (Orence/Oronce) of
FEBTC to Amador over the telephone that the
spouses Domingo's documents were in order do
not constitute the clear and unmistakable
consent of the bank to the substitution of
debtors. Once again, except for Amador's bare
testimony, there is no other evidence of such
telephone conversations taking place and the
subject of such telephone conversations. In
addition, Mr. Orence/Oronce's identity, position at
FEBTC, and authority to represent and bind the
bank, were not even clearly established.
The letter dated March 31, 1997 of Atty. Ricardo
J.M. Rivera (Rivera), counsel for the spouses
Domingo, addressed to Atty. Cresenciano L.
Espino, counsel for FEBTC, does not serve as
supporting evidence for Amador's testimony
regarding the return of the checks and the verbal
assurances given by Mr. Orence/Oronce. The
contents of such letter are rriere hearsay because
the events stated therein did not personally
happen to Aity. Rivera or in his presence, and he
merely relied on what his clients, the spouses
Domingo, told him.
The Court is therefore convinced that there is no
novation by delegacion in this case and Amador
remains a debtor of BPI. The Court reinstates the
MeTC judgment ordering Amador to pay for the
P275,562.00 lance on the Promissory Note, 10%
attorney's fees, and costs of suit; but modifies the
rate of interest imposed and the date when such
interest began to run.
In Ruiz v. Court of Appeals,38 the Court equitably
reduced the interest te of 3% per month or 36%
per annum stipulated in the promissory notes
jrein to 1% per month or 12% per annum, based
on the following
ratiocination:chanroblesvirtuallawlibrary
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
279
payment of the entire amount due. Also, the only
permissible rate of surcharge is 1% per month,
without compounding. We also uphold the award
Page
of the appellate court of attorney's fees, the
amount of which having been reasonably reduced
from the stipulated 25% (in the March 22, 1995
promissory note) and 10% (in the other three
promissory notes) of the entire amount due, to a
fixed amount of 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,
Garcia vs. Court of Appeals, Bautista vs. Pilar
Development Corporation, and the recent case
of Spouses Solangon vs. Salazar. This Court
invalidated a stipulated 5.5% per month or 66%
per annum interest on a P500,000.00 loan
in Medel and a 6% per month or 72% per annum
interest on a P60,000.00 loan in Solangon 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. On the other hand, in Bautista vs. Pilar
Development Corp., 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 Medel and 72% in Solangon it has sustained
the validity of a much lower interest rate of 21%
in Bautista and 24% in Garcia. We 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. (Citations
omitted.)
On the strength of the foregoing jurisprudence,
the Court likewise finds the interest rate of 3%
per month or 36% per annum stipulated in the
Promissory Note herein for the balance of
P275,562.00 as excessive, iniquitous,
unconscionable, and exorbitant. Following the
guidelines set forth in Eastern Shipping Lines, Inc.
v. Court of Appeals39 and Nacar v. Gallery
Frames,40 the Court imposes instead legal interest
in the following rates: (1) legal interest of 12%
per annum from date of extrajudicial demand on
January 29, 1997 until June 30, 2013; and (2)
legal interest of 6% per annum from July 1, 2013
until fully paid.
Incidentally, Amador passed away on June 5,
2010 during the pendency of the instant petition,
and is survived by his children, namely: Joann D.
Moya, Annabelle G. Domingo, Cristina G.
Domingo, Amador G. Domingo, Jr., Gloria Maryden
D. Macatangay, Dante Amador G. Domingo,
Gregory Amador A. Domingo, and Ina Joy A.
Domingo.41 To prevent future litigation in the
enforcement of the award, the Court clarifies that
Amador's heirs are not personally responsible for
the debts of their predecessor. The extent of
liability of Amador's heirs to BPI is limited to the
value of the estate which they inherited from
Amador. In this jurisdiction, "it is the estate or
mass of the property left by the decedent,
instead of the heirs directly, that becomes vested
and charged with his rights and obligations which
survive after his death."42 To rule otherwise would
unduly deprive Amador's heirs of their
properties.cralawred
WHEREFORE, in view of the foregoing, the
Petition is GRANTED. The Decision dated July 11,
2005 and Resolution dated August 19, 2005 of
the Court of Appeals in CA-G.R. SP No. 88836,
affirming with modification the Decision dated
February 10, 2005 of the RTC of Manila, Branch
26 in Civil Case No. 04-111100,
is REVERSED and SET ASIDE. The Decision
dated June 10, 2004 and Order dated September
6, 2004 of the MeTC of Manila, Branch 9 in Civil
Case No. 168949-CV,
is REINSTATEDwith MODIFICATIONS. The heirs
of respondent Amador Domingo are ORDERED to
pay petitioner Bank of the Philippine Islands the
following:
(1) the P275,562.00 balance on the Promissory
Note, plus legal interest of 12% from January 29,
1997 to June 30, 2013 and 6% from July 1, 2013
until fully paid; (2) attorney's fees of 10%; and (3)
costs of suit. However, the liability of Amador
Domingo's heirs is limited to the value of the
inheritance they received from the deceased.
SO ORDERED.chanro