[G.R. No.

178218 : December 14, 2011]

RAMONA RAMOS AND THE ESTATE OF LUIS T. RAMOS, PETITIONERS, VS. PHILIPPINE NATIONAL BANK,
Assailed in this Petition for Review on Certiorari
November 8, 2006 and the Resolution

under Rule 45 of the Rules of Court are the Decision

dated

dated May 28, 2007 of the Court of Appeals in CA-G.R. CV No. 64360.

cralaw

From the records of the case, the following facts emerge:

The Real Estate Mortgage
In 1973, Luis Ramos obtained a credit line under an agricultural loan account from the Philippine National Bank (PNB),
Balayan Branch, for P83,000.00.

To secure the loan, the parties executed a Real Estate Mortgage

on October 23,

1973, the relevant provisions of which stated:

That for and in consideration of certain loans, overdrafts and other credit accommodations obtained from the
Mortgagee, which is hereby fixed at P83,000.00 Philippine Currency and to secure the payment of the same and those
others that the Mortgagee may extend to the Mortgagor, including interest and expenses, and other obligations owing
by the Mortgagor to the Mortgagee, whether direct or indirect principal or secondary, as appear in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted at the back of this
document, or in a supplementary list attached hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon and all easements, sugar quotas, agricultural or land
indemnities, aids or subsidies, including all other rights or benefits annexed to or inherent therein now existing or
which may hereafter exist, and also other assets acquired with the proceeds of the loan hereby secured all of which
the mortgagor declares that he is the absolute owner free from all liens and encumbrances. In case the Mortgagor
executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a
new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of
exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and
any and all other obligations of the Mortgagor to the Mortgagee of whatever kind and nature whether such obligations
have been contracted before, during or after the constitution of this mortgage. However, if the Mortgagor shall pay to
the Mortgagee, its successors or assigns the obligations secured by this mortgage, together with interests, cost and
other expenses, on or before the date they are due, and shall keep and perform all the covenants and agreements
herein contained for the Mortgagor to keep and perform, then this mortgage shall be null and void, otherwise, it shall
remain in full force and effect.

The properties included in the mortgage were the parcels of land covered under Transfer Certificate of Title (TCT) Nos.
17217, (T-262) RT-644, 259, (T-265) RT-646, (T-261) RT-643

of the Registry of Deeds of Batangas. From the year

1973, Luis Ramos would renew the loan every year after paying the amounts falling due therein.

The Sugar Quedan Financing Loans

On March 31, 1989, Luis Ramos and PNB entered into a Credit Line Agreement

in the amount of P50,000,000.00

under the bank's sugar quedan financing program. The agreement pertinently provided thus:

For and in consideration of the Bank agreeing to extend to the Borrower a Revolving Credit Line (the "Line') in an
amount not to exceed PESOS: FIFTY MILLION ONLY (P50,000,000.00), under the Bank's Sugar Quedan Financing
Program for Crop Year 88/89, the parties hereto hereby agree as follows:
SECTION 1. TERMS OF THE LINE
1.01 Amount and Purpose of the Line. The Line shall be available to the Borrower in an aggregate amount not to
exceed FIFTY MILLION ONLY Pesos (P50,000,000.00). x x x Availments on the Line shall be used by the Borrower
exclusively for additional capital in sugar quedan financing.
1.02 Availability Period; Availments. (a) Subject to the terms and conditions hereof, the Line shall be available to
the Borrower in several availments (individually an "Availment' and collectively the "Availments') on any
Banking Day x x x during the period commencing on the Effectivity Date x x x and terminating on the earliest of (i)
August 31, 19__, or (ii) the date the Bank revokes the Line, or (iii) the date the Borrower ceases to be entitled to
avail of the Line under the terms hereof.
1.03 Promissory Notes. Availments on the Line shall be evidenced by promissory notes (individually a
"Note' and collectively the "Notes') issued by the Borrower in favor of the Bank in the form and substance
acceptable to the Bank. Each Note shall be (i) dated the date of Availment, (ii) in the principal amount of such
Availment, with interest thereon at the rate as provided in Section 1.04 hereof, and (iii) payable on the date occurring
sixty (60) days from date of the availment, but in no case later than August 31, 19__ (the "Initial Repayment Date').
SECTION 3. SECURITY
3.01 Security Document. The full payment of any and all sums payable by the Borrower hereunder and under the
Notes, the Renewal Notes and the other documents contemplated hereby and the performance of all obligations of the
Borrower hereunder and under the Notes, the Renewal Notes and such other documents shall be secured by a
pledge (the "Pledge') on the Borrower's quedans for crop year ---____, as more particularly described in and subject
to the terms and conditions of that Contract of Pledge to be executed by the Borrower in favor of the Bank, which
Contract shall in any event be in form and substance acceptable to the Bank (the "Security Document').
Pursuant to the above agreement, Luis Ramos obtained an availment of P7,800,000.00, which was evidenced by a
promissory note dated April 3, 1989.

11

Accordingly, Luis Ramos executed a Contract of Pledge

12

in favor of PNB on

April 6, 1989. Pledged as security for the availment were two official warehouse receipts (quedans) for refined sugar
issued by Noah's Ark Sugar Refinery (Noah's Ark), which bore the serial numbers NASR RS-18080 and NASR RS18081.

13

The said quedans were duly indorsed to PNB.

On June 6, 1989, Luis Ramos procured another availment of P7,800,000.00 that was likewise contained in a
promissory note

14

and for which he executed another Contract of Pledge

15

on the aforementioned quedans on even

date.
Thereafter, Luis Ramos was granted a renewal on the promissory notes dated April 3, 1989 and June 6, 1989. Hence,
he executed in favor of PNB the promissory notes dated October 3, 1989 and October 9, 1989.

16

Luis Ramos eventually failed to settle his sugar quedan financing loans amounting to P15,600,000.00. On December
28, 1989, he issued an Authorization

17

in favor of PNB, stating as follows:

AUTHORIZATION
KNOW ALL MEN BY THESE PRESENTS:
In consideration of my Sugar Quedan Financing line granted by Philippine National Bank, Balayan Branch in the
amount of P50.0 Million, as evidenced by Credit Agreement dated March 31, 1989, the undersigned, as borrower,
authorizes the Philippine National Bank, Balayan Branch, or any of its duly authorized officer, to dispose
and sell all the Quedan Receipts (Warehouse Receipts) pledged to said bank, after maturity date of the
Sugar Quedan Financing line.
The Sugar Quedan Receipts are hereunder specifically enumerated:
Official Warehouse Receipt (Quedan) Serial Nos.:
1) NASR RS ' 18081 Crop Year 1988-89 (16,129.03 ' 50 kilo bags)
2) NASR RS ' 18080 Crop Year 1988-89 (16,393.44 ' 50 kilo bags)
Incidentally, the above-mentioned sugar quedans became the subject of three other cases between PNB and Noah's
Ark, which cases have since reached this Court.

18

The Agricultural Crop Loan

Meanwhile, on August 7, 1989, the spouses Luis Ramos and Ramona Ramos (spouses Ramos) also obtained an
agricultural loan of P160,000.00 from PNB. Said loan was evidenced by a promissory note

19

issued by the spouses on

even date. The said loan was secured by the real estate mortgage previously executed by the parties on October 23,
1973.
On November 2, 1990, the spouses Ramos fully settled the agricultural loan of P160,000.00.

20

They then demanded

from PNB the release of the real estate mortgage. PNB, however, refused to heed the spouses' demand.
On February 28, 1996, the spouses Ramos filed a complaint for Specific Performance

22

21

against the PNB, Balayan

Branch, which was docketed as Civil Case No. 3241 in the Regional Trial Court (RTC) of Balayan, Batangas. The
spouses claimed that the actions of PNB impaired their rights in the properties included in the real estate
mortgage. They alleged that they lost business opportunities since they could not raise enough capital, which they
could have acquired by mortgaging or disposing of the said properties. The spouses Ramos prayed for the trial court
to order PNB to release the real estate mortgage on their properties and to return to the spouses the TCTs of the
properties subject of the mortgage.
In its Answer,

23

PNB countered that the spouses Ramos had no cause of action against it since the latter knew that

the real estate mortgage secured not only their P160,000.00 agricultural loan but also the other loans the spouses
obtained from the bank. Specifically, PNB alleged that the spouses' sugar quedan financing loan of P15,600,000.00
remained unpaid as the quedans were dishonored by the warehouseman Noah's Ark. PNB averred that it filed a civil
action for specific performance against Noah's Ark involving the quedans and the case was still pending at that
time. As PNB was still unable to collect on the quedans, it claimed that the spouses Ramos' loan obligations were yet
to be fully satisfied. Thus, PNB argued that it could not release the real estate mortgage in favor of the spouses.
On March 26, 1999, the RTC rendered a Decision

24

in favor of the spouses Ramos, holding that:

A careful analysis of the evidence on record clearly shows that there is merit to the [spouses Ramos'] complaint that
their obligation with [PNB] has long been paid and satisfied.
As the records show, PNB admitted that [Luis Ramos] has already paid his sugar crop loan in the amount of
P160,000.00 x x x. The reason why it refused to release the certificates of titles to the [spouses Ramos] was
allegedly because the said titles were also mortgaged to secure the other obligations of Luis Ramos, particularly the
sugar crop loan in the amount of P15.6 Million. However, even assuming that its argument is correct that the said
certificates of titles were also security for the said sugar financing loan, the same is of no consequence since the
[spouses Ramos] have likewise fully paid the sugar loan when they effectively transferred the sugar quedans to [PNB]
by issuing a letter authority, authorizing it to dispose and sell all the Quedan Receipts (Warehouse Receipts) of the
[spouses Ramos] which they pledged to the bank on December 29, 1989 x x x. [Luis Ramos] executed the said letter
of authority to the PNB when he could not anymore afford to pay his loan which became due. There is no doubt that
[PNB] accepted the said quedans with the understanding that the same shall be treated as payment of [spouses
Ramos'] obligation, considering that it did not hesitate to proceed to demand from Noah's Ark Sugar Refinery, the
delivery of the sugar stocks to them as new owners thereof. It is, therefore, very clear that the authorization
issued by [Luis Ramos] in favor of [PNB], giving the latter the right to dispose and sell the pledged
warehouse receipts/quedans totally terminated the contract of pledge between the [spouses Ramos] and
[PNB]. In effect there was a novation of their agreement and dation in payment set in between the
parties thereby extinguishing the loan obligation of the [spouses Ramos], as provided in Article 1245 of
the Civil Code.
Article 1245 of the Civil Code provides that dation in payment is a special form of payment whereby property is
alienated by the debtor to the creditor in satisfaction of a debt in money. As stated differently by the noted
commentator Manresa, dacion en pago is the transfer of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of an obligation. This was what precisely plaintiff Luis Ramos did in this
case. He alienated the ownership of the sugar quedans and the goods covered by said quedans to [PNB] in
WHEREFORE, the defendant Philippine National Bank, Balayan Branch is hereby ORDERED to RELEASE the real estate
mortgage on the properties of the [spouses Ramos] and to return to them all the transfer certificates of titles which
were pledged as security for the agricultural loan which had long been paid and satisfied and to pay the costs.

25

(Emphasis ours.)
PNB filed a Notice of Appeal

26

involving the above decision, which was given due course by the RTC in an Order dated

May 11, 1999. The records of the case were then forwarded to the Court of Appeals where the case was docketed as
CA-G.R. CV No. 64360.
Before the appellate court, PNB contested the ruling of the RTC that the spouses Ramos have already settled their
sugar quedan financing loan with PNB when they issued a letter of authority, which authorized PNB to sell the quedan
receipts of the spouses Ramos. PNB also contended that the real estate mortgage executed by the spouses Ramos in
its favor secured not only the spouses Ramos' agricultural crop loan in the amount of P160,000.00, but also their
1989 sugar quedan financing loan.

27

On the other hand, the spouses Ramos averred that the authorization issued by Luis Ramos in favor of PNB,
authorizing the latter to dispose and sell the pledged sugar quedans terminated the contract of pledge between the
spouses Ramos and PNB. There was in effect a novation of the contract of pledge and, thereafter, dation in payment
set in between the parties.

28

The spouses Ramos also claimed that the condition in the parties' real estate mortgage,

which stated that the "mortgage shall also stand as security for said obligations and any and all other obligations of

the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted
before, during or after the constitution of mortgage[,]' was essentially a contract of adhesion and violated the doctrine
of mutuality of contract.

29

On November 8, 2006, the Court of Appeals promulgated its assailed decision, reversing the judgment of the
RTC. The appellate court elucidated thus:
In the instant appeal, the trial court ruled that the issuance of [the] authorization letter by [spouses Ramos] in favor
of [PNB] terminated the contract of pledge between the parties and in effect dation in payment sets-in.
We do not agree. First, the authorization letter did not provide that ownership of the goods pledged would pass to
[PNB] for failure of [spouses Ramos] to pay the loan on time. This is contrary to the concept of Dacion en pago as the
"delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.' Second, the authorization merely provided for the appointment of [PNB] as attorneyin-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by
[spouses Ramos], and to apply the proceeds to the payment of the loan. This provision is a standard condition in
pledge contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the pledgee to foreclose
the pledge and alienate the pledged property for the payment of the principal obligation. Lastly, there was no
meeting of the minds between [spouses Ramos] and [PNB] that the loan would be extinguished by dation in payment.
Article 1245 of the Civil Code provides that the law on sales shall govern an agreement of dacion en pago. A
contract of sale is perfected at the moment there is a meeting of the minds of the parties thereto upon the thing
which is the object of the contract and upon the price. x x x.
In this case, there was no meeting of the mind between the parties that would lead us to conclude that dation in
payment has set-in. The trial court based its decision that there was dation in payment solely on the authorization
letter, which we do not agree. This is because the authorization letter merely authorizes "the Philippine National
Bank, Balayan Branch, or any of its duly authorized officer, to dispose and sell all the Quedan Receipts (Warehouse
Receipts) pledge to said bank, after maturity date of the Sugar Quedan Financing Loan.'
Moreover, in case of doubt as to whether a transaction is a pledge or dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights and interest.
WHEREFORE, the appeal is hereby GRANTED. ACCORDINGLY, the Decision dated March 26, 1999 of the Regional Trial
Court of Balayan, Batangas, Branch 9, is hereby REVERSED and a new one is entered ordering [PNB] to hold the
release of all the transfer certificates of titles which were pledged as security for the agricultural loan of [spouses
Ramos].

30

On November 30, 2006, the spouses Ramos filed a Motion for Reconsideration

31

of the Court of Appeals decision. The

spouses then asserted that it was unclear whether the parties intended that the real estate mortgage would also
secure the sugar quedan financing loan, which was specifically secured by the pledge on the quedans. They alleged
that the sugar quedan financing loan, the contract of pledge and the promissory notes did not even make any
reference to the real estate mortgage. PNB apparently violated its implied duty of good faith by wrongfully retaining
the spouses Ramos' collateral and improperly invoking the obscure terms of the real estate mortgage it prepared.
Subsequently, the spouses Ramos filed a Motion for Leave to File Supplemental Argument.

32

They added that PNB

could not have acquired a security interest on the real estate mortgage for the purpose of the sugar quedan financing

loan because when the real estate mortgage was constituted, the credit line from whence the sugar quedan financing
loan was sourced did not yet exist. The spouses Ramos also argued that PNB was in bad faith in retaining the
collateral of their real estate mortgage as it knew or should have known that the said security was already void given
that the agricultural crop loan secured by the mortgage was already fully paid.
In the assailed Resolution dated May 28, 2007, the Court of Appeals denied the spouses Ramos' motion for
reconsideration as it found no compelling reason to reverse its Decision dated November 8, 2006.
On June 18, 2007, the counsel for the spouses Ramos notified the Court of Appeals that Luis Ramos had passed away
and that the latter's wife, Ramona Ramos, acted as the legal representative of Luis' estate.
Thereafter, Ramona Ramos and the estate of Luis Ramos (petitioners) filed the instant petition in a final bid to have
the real estate mortgage declared null and void as regards their sugar quedan financing loan, as well as to compel
PNB to return the TCTs of the properties included in the said mortgage.
On September 10, 2007, PNB filed a Motion for Substitution of Party,
Equities, Inc.

33

alleging that it has sold to Golden Dragon Star

all of its rights, titles and interests in and all obligations arising out of or in connection with several

cases, including the instant case. Afterwards, Golden Dragon Star Equities, Inc. assigned to Opal Portfolio
Investments (SPV-AMC) Inc. all of its rights and obligations as a purchaser under the contract of sale with PNB. Thus,
PNB prayed that it be substituted by Opal Portfolio Investments (SPV-AMC) Inc. as party respondent in the petition.
In the Resolution

34

dated October 10, 2007, the Court denied the above motion of PNB and instead ordered that Opal

Portfolio Investments (SPV-AMC) Inc. and Golden Dragon Star Equities, Inc. be included as respondents in addition to
PNB. The said corporations were then required to file their comment on the petition within ten days from notice.
35

On January 25, 2008, Opal Portfolio Investments (SPV-AMC) Inc. and Golden Dragon Star Equities, Inc. manifested

that they were adopting as their own the comment filed by PNB.

36

The Issues
Petitioners raise the following issues:
1.
IS THE MEANING OF THE GENERAL TERMS OF THE REAL ESTATE MORTGAGE CLEAR AND LEAVE NO DOUBT THAT
THERE IS NO NEED TO DETERMINE WHETHER THE PARTIES INTENDED TO CREATE AND PROVIDE SECURITY
INTEREST ON THE REAL ESTATE COLLATERAL OF BORROWER LUIS T. RAMOS FOR THE SUGAR QUEDAN FINANCING
LOAN GRANTED TO HIM BY LENDER PNB, IN ADDITION TO THE AGRICULTURAL CROP LOAN THAT WAS
UNDISPUTEDLY AGREED UPON BY THEM TO BE COVERED BY THE COLLATERAL?
2.
SHOULD THE GENERAL TERMS OF THE REAL ESTATE MORTGAGE EXECUTED BY BORROWER LUIS T. RAMOS IN
FAVOR OF LENDER PNB BE UNDERSTOOD TO INCLUDE IN ITS COVERAGE THE BORROWER'S SUGAR QUEDAN
FINANCING LOAN THAT IS DIFFERENT FROM HIS AGRICULTURAL CROP LOAN UNDISPUTEDLY AGREED UPON BY THE
PARTIES TO BE COVERED BY THE COLLATERAL?
3.
SHOULD THE REAL ESTATE MORTGAGE EXECUTED IN 1973 BE CONSIDERED VALID AND EXISTING SECURITY DEVICE
AGREEMENT FOR SUGAR QUEDAN FINANCING LOAN OBTAINED PURSUANT TO CREDIT LINE AGREEMENT EXECUTED
ONLY IN 1989?

37

Petitioners principally argue that the scope and coverage of the real estate mortgage excluded the sugar quedan
financing loan. Petitioners assert that the mortgage contained a blanket mortgage clause or a dragnet clause, which
stated that the mortgage would secure not only the loans already obtained but also any other amount that Luis Ramos
may loan from PNB. Petitioners posit that a dragnet clause will cover and secure a subsequent loan only if said loan is
made in reliance on the original security containing the dragnet clause. Petitioners state that said condition did not
exist in the instant case, as the sugar quedan financing loan was not obtained in reliance on the previously executed
real estate mortgage. Such fact was supposedly apparent from the documents pertaining to the sugar quedan
financing loans, i.e., the credit line agreement, the various promissory notes and the contracts of pledge.
PNB responded that the issue of whether the parties intended for the real estate mortgage to secure the sugar quedan
financing loan was never raised in the RTC or in the Court of Appeals. Therefore, the same cannot be raised for the
first time in the motion for reconsideration of the Court of Appeals decision and in the instant petition. Likewise, PNB
asserts that the spouses Ramos consented to the terms of the real estate mortgage that the real properties subject
thereof should be used to secure future and subsequent loans of the mortgagor. Since the spouses never contested
the validity and enforceability of the real estate mortgage, the same must be respected and should govern the
relations of the parties therein.
PNB also avers that the Court of Appeals did not err in ruling that there was no dacion en pago and/or novation under
the circumstances prevailing in the instant case. The Authorization issued by Luis Ramos in favor of PNB did not
terminate the contract of pledge between the parties as PNB was merely authorized to dispose and sell the sugar
quedans to be applied as payment to the obligation. Hence, no transfer of ownership occurred. Article 2103 of the
Civil Code expressly states that "unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.' PNB argued that when it accepted the Authorization, it recognized that it was merely being authorized by
Luis Ramos to dispose of the quedans. Therefore, until the spouses Ramos fully settle their loans from PNB, the latter
believes that it has every right to retain possession of the properties offered as collateral thereto.
After due consideration of the issues raised, we are compelled to deny the petition.
To begin with, we note that, indeed, petitioners are presently raising issues that were neither invoked nor discussed
before the RTC and the main proceedings before the Court of Appeals. The very issues laid down by petitioners for
our consideration were first brought up only in their motion for reconsideration of the Court of Appeals Decision dated
November 8, 2006.
In their complaint before the RTC and in their reply to PNB's appeal to the Court of Appeals, petitioners relied on the
theory that they have already settled all of their loan obligations with PNB, including their sugar quedan financing
loan, such that they were entitled to the release of the real estate mortgage that secured the said obligations. When
the Court of Appeals rendered the assailed decision, petitioners foisted a new argument in their motion for
reconsideration that the parties did not intend for the sugar quedan financing loan to be covered by the real estate
mortgage. Before this Court, petitioners are now reiterating and expounding on their argument that their sugar
quedan financing loan was beyond the ambit of the previously executed real estate mortgage. We rule that such a
change in petitioners' theory may not be allowed at such late a stage in the case.
The general rule is that issues raised for the first time on appeal and not raised in the proceedings in the lower court
are barred by estoppel. Points of law, theories, issues, and arguments not brought to the attention of the trial court
ought not to be considered by a reviewing court, as these cannot be raised for the first time on appeal. To consider
the alleged facts and arguments raised belatedly would amount to trampling on the basic principles of fair play,
justice, and due process.

38

Jurisprudence, nonetheless, provides for certain exceptions to the above rule. First, it is a settled rule that the issue
of jurisdiction may be raised at any time, even on appeal, provided that its application does not result in a mockery of
the tenets of fair play. Second, as held in Lianga Lumber Company v. Lianga Timber Co., Inc.,

39

in the interest of

justice and within the sound discretion of the appellate court, a party may change his legal theory on appeal only
when the factual bases thereof would not require presentation of any further evidence by the adverse party in order to
enable it to properly meet the issue raised in the new theory.
None of the above exceptions, however, applies to the instant case. As regards the first exception, the issue of
jurisdiction was never raised at any point in this case. Anent the second exception, the Court finds that the
application of the same in the case would be improper, as further evidence is needed in order to answer and/or refute
the issue raised in petitioners' new theory.
To recapitulate, petitioners are now claiming that the sugar quedan financing loan it availed from PNB was not
obtained in reliance on the real estate mortgage. Petitioners even insist that the credit line agreement, the
promissory notes and the contracts of pledge entered into by the parties were silent as to the applicability thereto of
the real estate mortgage. Otherwise stated, petitioners are harping on the intention of the parties vis- -vis the
security arrangement for the credit line agreement and the availments thereof constituting the sugar quedan financing
loan. The impropriety of the petitioners' posturing is further confounded by the fact that the credit line agreement
under PNB's sugar quedan financing program and the availments thereto were entered into by Luis Ramos and PNB as
far back as the year 1989. Petitioners' new theory, on the other hand, was only raised much later on the spouses'
motion for reconsideration of the Court of Appeals decision dated November 8, 2006, or after a period of more or less
seventeen years since the execution of the credit line agreement. The Court, therefore, finds itself unable to give
credit to the new theory proffered by petitioners since to do so would gravely offend the rights of PNB to due process.
Even if the Court were willing to overlook petitioners' procedural misstep on appeal, their belatedly proffered theory
still fails to convince us that the Court of Appeals committed any reversible error in its resolution of the present case.
According to petitioners, their case requires an application of Article 1371 of the Civil Code, which provides that "in
order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally
considered.' To their mind, the mere fact that the 1989 credit line agreement, the promissory notes and the contracts
of pledge executed in relation to the sugar quedan financing loan contained no reference to the real estate mortgage
is sufficient proof that the parties did not intend the real estate mortgage to secure the sugar quedan financing loan,
but only the agricultural crop loans. The Court finds that it cannot uphold this proposition.
In Prisma Construction & Development Corporation v. Menchavez,

40

we discussed the settled principles that:

Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties,
the literal meaning of its stipulations governs. In such cases, courts have no authority to alter the contract by
construction or to make a new contract for the parties; a court's duty is confined to the interpretation of the contract
the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations
or read into the contract words the contract does not contain. It is only when the contract is vague and ambiguous
that courts are permitted to resort to the interpretation of its terms to determine the parties' intent.

41

Here, it cannot be denied that the real estate mortgage executed by the parties provided that it shall stand as security
for any "subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as
a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of
exchange, releases of import shipments on Trust Receipts, etc.' The same real estate mortgage likewise expressly

covered "any and all other obligations of the Mortgagor to the Mortgagee of whatever kind and nature whether
such obligations have been contracted before, during or after the constitution of this mortgage.' Thus, from
the clear and unambiguous terms of the mortgage contract, the same has application even to future loans and
obligations of the mortgagor of any kind, not only agricultural crop loans.
Such a "blanket clause' or "dragnet clause' in mortgage contracts has long been recognized in our
jurisprudence. Thus, in another case, we held:
As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the
amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may
stand as security if, from the four corners of the instrument, the intent to secure future and other
indebtedness can be gathered. This stipulation is valid and binding between the parties and is known as the
"blanket mortgage clause" (also known as the "dragnet clause)."
In the present case, the mortgage contract indisputably provides that the subject properties serve as security, not
only for the payment of the subject loan, but also for "such other loans or advances already obtained, or still to be
obtained." The cross-collateral stipulation in the mortgage contract between the parties is thus simply a variety of a
dragnet clause. After agreeing to such stipulation, the petitioners cannot insist that the subject properties
be released from mortgage since the security covers not only the subject loan but the two other loans as
well.

42

(Emphases supplied.)

Moreover, petitioners' reliance on Prudential Bank v. Alviar

43

is sorely misplaced. In Prudential, the fact that another

security was given for subsequent loans did not remove such loans from the ambit of the dragnet clause in a previous
real estate mortgage contract. However, it was held in Prudential that the special security for subsequent loans must
first be exhausted before the creditor may foreclose on the real estate mortgage. In other words, the creditor is
allowed to hold on to the previous security (the real estate mortgage) in case of deficiency after resort to the special
security given for the subsequent loans. Verily, even under the Prudential ruling cited by petitioners, they are not
entitled to the release of the real estate mortgage and the titles to the properties mentioned therein.
Ultimately, we likewise find no reason to overturn the assailed ruling of the Court of Appeals that the contract of
pledge between petitioners and PNB was not terminated by the Authorization letter issued by Luis Ramos in favor of
PNB. The status of PNB as a pledgee of the sugar quedans involved in this case had long been confirmed by the Court
in its Decision dated July 9, 1998 in Philippine National Bank v. Sayo, Jr.

44

and the same is neither disputed in the

instant case. We reiterate our ruling in Sayo that:

The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the things given by way
of pledge. Any stipulation to the contrary, termed pactum commissorio, is null and void. The law requires foreclosure
in order to allow a transfer of title of the good given by way of security from its pledgor, and before any such
foreclosure, the pledgor, not the pledgee, is the owner of the goods. x x x.

45

A close reading of the Authorization executed by Luis Ramos reveals that it was nothing more than a letter that gave
PNB the authority to dispose of and sell the sugar quedans after the maturity date thereof. As held by the Court of
Appeals, the said grant of authority on the part of PNB is a standard condition in a contract of pledge, in accordance
with the provisions of Article 2087 of the Civil Code that "it is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor.' More importantly, Article 2115 of the Civil Code expressly provides that the sale of the thing
pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of

the principal obligation, interest and expenses in a proper case. As we adverted to in Sayo, it is the foreclosure of the
thing pledged that results in the satisfaction of the loan liabilities to the pledgee of the pledgors. Thus, prior to the
actual foreclosure of the thing pleged, the sugar quedan financing loan in this case is yet to be settled.
As matters stand, with more reason that PNB cannot be compelled to release the real estate mortgage and the titles
involved therein since the issue of whether the sugar quedan financing loan will be fully paid through the pledged
sugar receipts remains the subject of pending litigation.

cralaw

WHEREFORE, the petition is DENIED. The Decision dated November 8, 2006 and the Resolution dated May 28,
2007 of the Court of Appeals in CA-G.R. CV No. 64360 are hereby AFFIRMED. Costs against petitioners.

G.R. No. 189871, August 13, 2013

DARIO NACAR, Petitioner, v. GALLERY FRAMES AND/OR FELIPE BORDEY, JR.,
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioners motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor
Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC
NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he was dismissed
from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu of
reinstatement in the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause. All the more, it is clear from the records that complainant
was never afforded due process before he was terminated. As such, we are perforce constrained to grant
complainants prayer for the payments of separation pay in lieu of reinstatement to his former position, considering
the strained relationship between the parties, and his apparent reluctance to be reinstated, computed only up to
promulgation of this decision as follows:

SEPARATION PAY
Date Hired
=
Rate
=
Date of Decision
=
Length of Service
=
P198.00 x 26 days x 8
months
BACKWAGES
Date Dismissed
=
Rate per day
=
Date of Decisions
=
a) 1/24/97 to 2/5/98 = 12.36
mos.
P196.00/day x 12.36 mos.
b) 2/6/98 to 8/18/98 = 6.4
months
Prevailing Rate per day
P198.00 x 26 days x 6.4 mos.
TOTAL

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August 1990
P198/day
Aug. 18, 1998
8 yrs. & 1 month
= P41,184.00
January 24, 1997
P196.00
Aug. 18, 1998

= P62,986.56

= P62,986.00
= P32,947.20
= P95.933.76

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal
and are therefore, ordered:
1. To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and
56/100 (P62,986.56) Pesos representing his separation pay;

chan r0 blesvi rtua lawlib rary

2. To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and
36/100 (P95,933.36) representing his backwages; and
3. All other claims are hereby dismissed for lack of merit. SO ORDERED.4

c ralaw vi rtualaw l ibra ry

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29, 2000.
Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration, but
it was denied.6

cralaw virt ualaw lib ra ry

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued a
Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001.7

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Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error
on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8

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An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002.9
The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently scheduled,
but respondents failed to appear.10

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On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount in
the sum of P471,320.31.12

cralaw virtua law lib rary

On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing, among
other things, that since the Labor Arbiter awarded separation pay of P62,986.56 and limited backwages of
P95,933.36, no more recomputation is required to be made of the said awards. They claimed that after the decision
becomes final and executory, the same cannot be altered or amended anymore.14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the appeal in
favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and executory.
Consequently, another pre-execution conference was held, but respondents failed to appear on time. Meanwhile,
petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment award in the
sum of P471,320.31.18

cralaw virt ualaw lib ra ry

The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where the
judgment award of petitioner was reassessed to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his
backwages and separation pay.

On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due
to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the
appropriate interests.19

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On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount of P11,459.73.
The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was
the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of
P158,919.92 that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled to the
balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated September
27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution 23 dated January 31,
2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since petitioner no
longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce
the said judgment. Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF
DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC
WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE
PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION
EXPRESSED IN THE BODY OF THE SAME DECISION.26

cra l aw virtualaw l ibra ry

Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiters
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered
in the Book of Entries on May 27, 2002, the reckoning point for the computation of the backwages and separation pay
should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15, 1998.
Further, petitioner posits that he is also entitled to the payment of interest from the finality of the decision until full
payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner by
the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that the separation pay and backwages are computed only

up to [the] promulgation of this decision, and considering that petitioner no longer appealed the decision, petitioner
is only entitled to the award as computed by the Labor Arbiter in the total amount of P158,919.92. Respondents
added that it was only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further recomputation of the
backwages to be awarded to petitioner at this point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the awards
made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a distinct
feature of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for the
computation of the payable separation pay and backwages due and did not further order the computation of the
monetary awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed employee
failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original
computation of the awards made, pegged as of the time the decision was rendered and confirmed with modification by
a final CA decision, is legally proper. The question is posed, given that the petitioner did not immediately pay the
awards stated in the original labor arbiter's decision; it delayed payment because it continued with the litigation until
final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original labor
arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared, can, by its nature, be re-computed. This is
the part, too, that the petitioner now posits should no longer be re-computed because the computation is already in
the labor arbiter's decision that the CA had affirmed. The public and private respondents, on the other hand, posit that
a re-computation is necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a
computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure which
requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall embody
in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we
noted above, this implication is apparent from the terms of the computation itself, and no question would have arisen
had the parties terminated the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional

grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule
65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th
month pay and indemnity, lapsed to finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been terminated and implemented at the labor
arbiter's level. Thus, the labor arbiter re-computed the award to include the separation pay and the backwages due up
to the finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29, 2003) and included as well the payment
for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity awards.
Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the labor
arbiter's original decision in accordance with its basic component parts as we discussed above. To reiterate, the first
part contains the finding of illegality and its monetary consequences; the second part is the computation of the
awards or monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's original
decision.28
cralaw virtuala

w libra ry

Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows from
the nature of the illegality of dismissal declared by the Labor Arbiter in that decision.29 A recomputation (or an original
computation, if no previous computation has been made) is a part of the law specifically, Article 279 of the Labor
Code and the established jurisprudence on this provision that is read into the decision. By the nature of an illegal
dismissal case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor Code.
The recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute an
alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30
cralaw virtualaw l ibra ry

That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that separation pay and backwages are to be
computed up to that point.31
cralaw virtualaw l ibra ry

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals,32
the Court laid down the guidelines regarding the manner of computing legal interest, to wit:
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:

cralawlib rary

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may be deemed to have been

reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
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.33

cralaw virtualaw l ib rary

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16,
2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No.
799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series
of 1982:
Section 1. 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, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and Sections 4305Q.1,37
4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended
accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping Lines40
and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will
now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could
only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes
the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries.
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines42
are 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 certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
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 6% per annum from such finality until
its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP
No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are Ordered to
Pay petitioner:

cralawlib ra ry

(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002,
when the Resolution of this Court in G.R. No. 151332 became final and executory;

chanr0ble svirtualawl ibra ry

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of service;
and(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to
June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.

[G.R. No. 138588. August 23, 2001.]

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

chanro b1es vi rtua 1 1aw 1ib ra ry

The Case
The foregoing principle is used by this Court in resolving the Petition for Review 1 on Certiorari before us, challenging
the January 26, 1999 Decision 2 of the Court of Appeals 3 (CA) in GA-GR CV No. 45349. The dispositive portion of the
assailed Decision reads as follows:

jgc:chanroble s.com.p h

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

WHEREFORE, JUDGMENT IS HEREBY RENDERED ORDERING:

chanrob1es vi rt ual 1aw li bra ry

chan rob1e s virtual 1aw l ibra ry

1. The plaintiffs to pay Far East Bank & Trust Company the principal sum of P1,067,000.00 plus interests thereon
computed at 12% per annum from July 9, 1988 until fully paid;
2. The parties to negotiate for a new lease over the subject premises; and
3. The defendant to pay the plaintiff the sum of fifteen thousand (P15,000.00) pesos as and for attorneys fees plus
the costs of litigation.
"All other claims of the parties against each other are DENIED." 4
Likewise assailed is the May 4, 1999 CA Resolution, 5 which denied petitioners Motion for Reconsideration.

chan rob1e s virtua1 1aw 1 ibra ry

The Facts
The court a quo summarized the antecedents of the case as follows:

jgc:chanrobles. com.ph

"Sometime in August 1973, Diaz and Company got a loan from the former PaBC [Pacific Banking Corporation] in the
amount of P720,000.00, with interest at 12% per annum, later increased to 14%, 16%, 18% and 20%. The loan was
secured by a real estate mortgage over two parcels of land owned by the plaintiff Diaz Realty, both located in Davao
City. In 1981, Allied Banking Corporation rented an office space in the building constructed on the properties covered
by the mortgage contract, with the conformity of mortgagee PaBC, whereby the parties agreed that the monthly
rentals shall be paid directly to the mortgagee for the lessors account, either to partly or fully pay off the aforesaid
mortgage indebtedness. Pursuant to such contract, Allied Bank paid the monthly rentals to PaBC instead of to the
plaintiffs. On July 5, 1985, the Central Bank closed PaBC, placed it under receivership, and appointed Renan Santos as
its liquidator. Sometime in December 1986, appellant FEBTC purchased the credit of Diaz & Company in favor of
PaBC, but it was not until March 23, 1988 that Diaz was informed about it.
"According to the plaintiff as alleged in the complaint and testified to by Antonio Diaz (President of Diaz & Company

and Vice-President of Diaz Realty), on March 23, 1988, he went to office of PaBC which by then housed FEBTC and
was told that the latter had acquired PaBC; that Cashier Ramon Lim told him that as of such date, his loan was
P1,447,142.03; that he (Diaz) asked the defendant to make an accounting of the monthly rental payments made by
Allied Bank; that on December 14, 1988, 6 Diaz tendered to FEBTC the amount of P1,450,000.00 through an
Interbank check, in order to prevent the imposition of additional interests, penalties and surcharges on its loan; that
FEBTC did not accept it as payment; that instead, Diaz was asked to deposit the amount with the defendants Davao
City Branch Office, allegedly pending the approval of Central Bank Liquidator Renan Santos; that in the meantime,
Diaz wrote the defendant, asking that the interest rate be reduced from 20% to 12% per annum, but no reply was
ever made; that subsequently, the defendant told him to change the P1,450,000.00 deposit into a money market
placement, which he did; that the money market placement expired on April 14, 1989; that when there was still no
news from the defendant whether or not it [would] accept his tender of payment, he filed this case at the Regional
Trial Court of Davao City.
"In its responsive pleading, the defendant set up the following special/affirmative defenses: that sometime in
December 1986, FEBTC purchased from the PaBC the account of the plaintiffs for a total consideration of
P1,828,875.00; that despite such purchase, PaBC Davao Branch continued to collect interests and penalty charges on
the loan from January 6, 1987 to July 8, 1988; that it was therefore not FEBTC which collected the interest rates
mentioned in the complaint, but PaBC; that it is not true that FEBTC was trying to impose [exorbitant] rates of
interest; that as a matter of fact, after the transfer of plaintiffs account, it sought to negotiate with the plaintiffs, and
in fact, negotiations were made for a settlement and possible reduction of charges; that FEBTC has no knowledge of
the rates of interest imposed and collected by PaBC prior to the purchase of the account from the latter, hence it could
not be held responsible for those transactions which transpired prior to the purchase; and that the defendant acted at
the opportune time for the settlement of the account, albeit exercising prudence in the handling of such account. The
rest of the affirmative defenses are bare denials.

chanro b1es vi rtua 1 1aw 1i bra ry

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

chanrob 1es vi rtual 1aw

libra ry

WHEREFORE, judgment is hereby rendered as follows:

chan rob1es v irt ual 1aw l ibra ry

1. The plaintiff and defendant shall jointly compute the interest due on the P1,057,000.00 loan from April 18, 1985
until November 14, 1988 at 12% per annum (IBAA Salazar Case Supra).
2. That the parties shall then add the result of the joint computation mentioned in paragraph one of the dispositive
portion to the P1,057,000.00 principal.
3. The result of the addition of the P1,057,000.00 principal and the interests arrived at shall then be compared with
the P1,450,000.00 deposit and if P1,450,000.00 is not enough, then the plaintiff shall pay the difference/deficiency
between the P1,450,000.00 deposit and what the parties jointly computed[;] conversely, if the P1,450,000.00 is more
than what the parties have arrived [at] after the computation, the defendant shall return the difference or the excess
to the plaintiffs.
4. The defendant shall cancel the mortgage.
5. Paragraph eight of the Lease Contract between Allied Bank and the plaintiffs in which the defendants predecessor,
Pacific Banking gave its conformity (Exh.H) is hereby cancelled, so that the rental should now be paid to the
plaintiffs.
6. The defendant shall pay the plaintiffs the sums:

chan rob1e s virtu al 1aw lib rary

6-A. Fifteen thousand pesos as attorneys fees.

6-B. Three [h]undred [t]housand [p]esos (P300,000.00) as exemplary damages.

6-C. The cost of suit.

chan rob1e s virtua1 1aw 1ib rary

SO ORDERED."

c ralaw vi rtua1aw lib rary

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

chan rob1es v irt ual 1aw l ibra ry

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

chanrob 1es vi rtua l 1aw lib rary

1. The plaintiff and defendant shall jointly compute the interest due on the P1,167,000.00 loan from April 18, 1985
until November 14, 1988 at 12% per annum.
2. That the parties shall then add the result of the joint computation mentioned in paragraph one above to the
P1,067,000.00 principal.
3. The result of the addition of the P1,067,000.00 principal and the interests arrived at shall then be compared with
the P1,450,000.00 money market placement put up by the plaintiff with the defendant bank if the same is still
existing or has not yet matured.
4. The defendant shall cancel the mortgage.
5. Paragraph eight of the lease contract between Allied Bank and the plaintiff in which the defendant[s predecessor],
Pacific Banking gave its conformity (Exh.H) is hereby cancelled and deleted, so that the rental should now be paid to
the plaintiff.
6. The defendant shall pay the plaintiff the sums:

chan rob1es v irt ual 1aw l ibrary

6.A. Fifteen [t]housand [p]esos as attorneys fees;

6.B. Cost of suit." 7
The CA Ruling
The CA sustained the trial courts finding that there was a valid tender of payment in the sum of P1,450,000, made by
Diaz Realty Inc. in favor of Far East and Trust Company. The appellate court reasoned that petitioner failed to
effectively rebut respondents evidence that it so tendered the check to liquidate its indebtedness, and that petitioner
had unilaterally treated the same as a deposit instead.

cralaw : red

The CA further ruled that in the computation of interest charges, the legal rate of 12 percent per annum should apply,
reckoned from July 9, 1988, until full and final payment of the whole indebtedness. It explained that while petitioners
purchase of respondents account from Pacific Banking Corporation (PaBC) was valid, the 20 percent interest
stipulated in the Promissory Note should not apply, because the account transfer was without the knowledge and the
consent of respondent-obligor.
The appellate court, however, sustained petitioners assertion that the trial court should not have cancelled the real
estate mortgage, inasmuch as the principal obligation upon which it was anchored was yet to be extinguished.
Further, the CA held that the lease contract was subject to renegotiation by the parties.
Lastly, the court a quo upheld the trial courts award of attorneys fees, pointing to petitioners negligence in not
immediately informing respondent of the purchase and transfer of its credit, and in failing to negotiate in order to
avoid litigation.
Issues

Petitioner submits for our resolution the following issues:

jgc:chanrobles. com.ph

"A."Whether or not the Court of Appeals correctly ruled that the validity of the tender of payment was not properly
raised in the trial court and could not thus be raised in the appeal.
"B."Whether or not the Court of Appeals erred in failing to apply settled jurisprudential principles militating against the
private respondents contention that a valid tender of payment had been made by it.

chanro b1es vi rtua 1 1aw 1i bra ry

"C."Whether or not the Court of Appeals correctly found that the transaction between petitioner and PaBC was an
ineffective novation and that the consent of private respondent was necessary therefor.
"D."Whether or not the Court of Appeals erred in refusing to apply the rate of interest freely stipulated upon by the
parties to the respondents obligation.
"E."Whether or not the Court of Appeals committed an irreconcilable error in ordering the parties to re-negotiate the
terms of the contract while finding at the same time that the mortgage contract containing the lease was valid.
"F."Whether or not the petition, as argued by private respondent, raises questions of fact not reviewable by
certiorari." 8
In the main, the Court will determine (1) the efficacy of the alleged tender of payment made by respondent, (2) the
effect of the transfer to petitioner of respondents account with PaBC, (3) the interest rate applicable, and (4) the
status of the Real Estate Mortgage.
The Courts Ruling
The Petition 9 is not meritorious.
First Issue:

cha nrob 1es vi rtual 1aw lib rary

Tender of Payment

Petitioner resolutely argues that the CA erred in upholding the validity of the tender of payment made by Respondent.
What the latter had tendered to settle its outstanding obligation, it points out, was a check which could not be
considered legal tender.
We disagree. The records show that petitioner bank purchased respondents account from PaBC in December 1986,
and that the latter was notified of the transaction only on March 23, 1988. Thereafter, Antonio Diaz, president of
respondent corporation, inquired from petitioner on the status and the amount of its obligation. He was informed that
the obligation summed up to P1,447,142.03. On November 14, 1988, petitioner received from respondent Interbank,
Check No. 81399841 dated November 13, 1988, bearing the amount of P1,450,000, with the notation "Re: Full
Payment of Pacific Bank Account now turn[ed] over to Far East Bank" 10 The check was subsequently cleared and
honored by Interbank, as shown by the Certification it issued on January 20, 1992. 11
True, jurisprudence holds that, in general, a check does not constitute legal tender, and that a creditor may validly
refuse it. 12 It must be emphasized, however, that this dictum does not prevent a creditor from accepting a check as
payment. In other words, the creditor has the option and the discretion of refusing or accepting it.

chanrob1e s virtua1 1aw 1 ibra ry

In the present case, petitioner bank did not refuse respondents check. On the contrary, it accepted the check which,

it insisted, was a deposit. As earlier stated, the check proved to be fully funded and was in fact honored by the drawee
bank Moreover, petitioner was in possession of the money for several months.
In further contending that there was no valid tender of payment, petitioner emphasizes our pronouncement in Roman
Catholic Bishop of Malolos, Inc. v. Intermediate Appellate Court, 13 as follows:

jgc:chanroble s.c om.ph

"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.
"Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most,
sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain.
But whether or not the obligor avails himself of such funds to settle his outstanding account remains to be proven by
independent and credible evidence. Tender of payment presupposes not only that the obligor is able, ready, and
willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio.A proof that an act could
have been done is no proof that it was actually done."
In other words, tender of payment is the definitive act of offering the creditor what is due him or her, together with
the demand that the creditor accept the same. More important, there must be a fusion of intent, ability and capability
to make good such offer, which must be absolute and must cover the amount due. 14
That respondent intended to settle its obligation with petitioner is evident from the records of the case. After learning
that its loan balance was P1,447,142.03, it presented to petitioner a check in the amount of P1,450,000, with the
specific notation that it was for full payment of its Pacific Bank account that had been purchased by petitioner. The
latter accepted the check, even if it now insists that it considered the same as a mere deposit. The check was
sufficiently funded, as in fact it was honored by the drawee bank. When petitioner refused to release the mortgage,
respondent instituted the present case to compel the bank to acknowledge the tender of payment, accept payment
and cancel the mortgage. These acts demonstrate respondents intent, ability and capability to fully settle and
extinguish its obligation to petitioner.
That respondent subsequently withdrew the money from petitioner-bank is of no moment, because such withdrawal
would not affect the efficacy or the legal ramifications of the tender of payment made on November 14, 1988. As
already discussed, the tender of payment to settle respondents obligation as computed by petitioner was accepted,
the check given in payment thereof converted into money, and the money kept in petitioners possession for several
months.

chan rob1e s virtua1 1aw 1 ib rary

Finally, petitioner points out that, in any case, tender of payment extinguishes the obligation only after proper
consignation, which respondent did not do.
The argument does not persuade. For a consignation to be necessary, the creditor must have refused, without just
cause, to accept the debtors payment. 15 However, as pointed out earlier, petitioner accepted respondents check.
To iterate, the tender was made by respondent for the purpose of settling its obligation. It was incumbent upon
petitioner to refuse, or accept it as payment. The latter did not have the right or the option to accept and treat it as a
deposit. Thus, by accepting the tendered check and converting it into money, petitioner is presumed to have accepted
it as payment. To hold otherwise would be inequitable and unfair to the obligor.

Second Issue:

c han rob1es v irt ual 1aw li bra ry

Nature of the Transfer of Respondents Account

Petitioner bewails the CAs characterization of the transfer of respondents account from Pacific Banking Corporation to
petitioner as an "ineffective novation." Petitioner contends that the transfer was an assignment of credit.
Indeed, the transfer of respondents credit from PaBC to petitioner was an assignment of credit. Petitioners
acquisition of respondents credit did not involve any changes in the original agreement between PaBC and
respondent; neither did it vary the rights and the obligations of the parties. Thus, no novation by conventional
subrogation could have taken place.
An assignment of credit is an agreement by virtue of which the owner of a credit (known as the assignor), by a legal
cause such as sale, dation in payment or exchange or donation and without the need of the debtors consent,
transfers that credit and its accessory rights to another (known as the assignee), who acquires the power to enforce
it, to the same extent as the assignor could have enforced it against the debtor. 16
In the present case, it is undisputed that petitioner purchased respondents loan from PaBC. In doing so, the former
acquired all of the latters rights against Respondent. Thus, petitioner had the right to collect the full value of the
credit from respondent, subject to the terms as orally agreed upon in the Promissory Note. HCSEcI
Third Issue:

chan rob1e s virtual 1aw l ibra ry

Applicable Interest Rate

Petitioner bank, as assignee of respondents credit, is entitled to the interest rate of 20 percent in the computation of
the debt of private respondent, as stipulated in the August 26, 1983 Promissory Note executed by the latter in favor
of PaBC. 17
However, because there was a valid tender of payment made on November 14, 1988, the accrual of interest based on
the stipulated rate should stop on that date. Thus, respondent should pay petitioner-bank its principal obligation in the
amount of P1,067,000 plus accrued interest thereon at 20 percent per annum until November 14, 1988, less interest
payments given to PaBC from December 1986 to July 8, 1988. 18 Thereafter, the interest shall be computed at 12
percent per annum until full payment.
Fourth Issue:

chan rob1e s virtual 1aw lib rary

Status of Mortgage Contract

The Real Estate Mortgage executed between respondent and PaBC to secure the formers principal obligation, as well
as the provision in the Contract of Lease between respondent and Allied Bank with regard to the application of rent
payment to the formers indebtedness, should subsist until full and final settlement of such obligation pursuant to the
guidelines set forth in this Decision. Thereafter, the parties are free to negotiate a renewal of either or both contracts,
or to end any and all of their contractual relations.
WHEREFORE the Petition is hereby DENIED. The assailed Decision of the Court of Appeals is AFFIRMED with the
following modifications: Respondent Diaz Realty Inc. is ORDERED to pay Far East Bank and Trust Co. its principal loan
obligation in the amount of P1,067,000, with interest thereon computed at 20 percent per annum until November 14,
1988, less any interest payments made to PaBC, petitioners assignor. Thereafter, interest shall be computed at 12
percent per annum until fully paid.

chanrob1e s virtua1 1aw 1 ibra ry

G.R. No. 182128, February 19, 2014

PHILIPPINE NATIONAL BANK, Petitioner, v. TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (NOW
PRIME EAST PROPERTIES, INC.) AND AFPRSBS, INC., Respondents.

This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the Decision2 dated August 13, 2007 and
Resolution3 dated March 13, 2008 rendered by the Court of Appeals (CA) in CAG.R. SP No. 86033, which affirmed the
Decision4 dated August 4, 2004 of the Office of the President (OP) in O.P. Case No. 04D182 (HLURB Case No. REM
A0307240186).
Facts of the Case
Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties Inc. 5
(PEPI) on an installment basis a residential lot located in Binangonan, Rizal, with an area of 204 square meters6 and
covered by Transfer Certificate of Title (TCT) No. 619608. Subsequently, PEPI assigned its rights over a 213,093sq m
property on August 1996 to respondent Armed Forces of the PhilippinesRetirement and Separation Benefits System,
Inc. (AFPRSBS), which included the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from petitioner Philippine National Bank
(petitioner), secured by a mortgage over several properties, including Dees property. The mortgage was cleared by
the Housing and Land Use Regulatory Board (HLURB) on September 18, 1996.7

cralawred

After Dees full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFPRSBS on
July 1998 in Dees favor. Consequently, Dee sought from the petitioner the delivery of the owners duplicate title over
the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to compel delivery of
TCT No. 619608 by the petitioner, PEPI and AFPRSBS, among others. In its Decision8 dated May 21, 2003, the
HLURB ruled in favor of Dee and disposed as follows:

chanRoblesvi rtual Lawl ibra ry

WHEREFORE, premises considered, judgment is hereby rendered as follows:

chan roblesv irt uallawl ibra ry

1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21A, Village East Executive Homes
covered by Transfer Certificate of Title No. 619608 (TCT No. 619608), and accordingly, surrender/release the
title thereof to [Dee];
2. Immediately upon receipt by [Dee] of the owners duplicate of Transfer Certificate of Title No. 619608 (TCT No.
619608), respondents PEPI and AFPRSBS are hereby ordered to deliver the title of the subject lot in the name
of [Dee] free from all liens and encumbrances;
3. Directing respondents PEPI and AFPRSBS to pay [the petitioner] the redemption value of Lot 12, Block 21A,
Village East Executive Homes covered by Transfer Certificate of Title No. 619608 (TCT No. 619608) as
agreed upon by them in their Real Estate Mortgage within six (6) months from the time the owners duplicate of
Transfer Certificate of Title No. 619608 (TCT No. 619608) is actually surrendered and released by [the
petitioner] to [Dee];
4. In the alternative, in case of legal and physical impossibility on the part of [PEPI, AFPRSBS, and the petitioner]
to comply and perform their respective obligation/s, as abovementioned, respondents PEPI and AFPRSBS are
hereby ordered to jointly and severally pay to [Dee] the amount of FIVE HUNDRED TWENTY THOUSAND
PESOS ([P]520,000.00) plus twelve percent (12%) interest to be computed from the filing of complaint on April
24, 2002 until fully paid; and

5. Ordering [PEPI, AFPRSBS, and the petitioner] to pay jointly and severally [Dee] the following sums:

a)
b)
c)

The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as attorneys fees;

The cost of litigation[;] and
An administrative fine of TEN THOUSAND PESOS ([P]10,000.00) payable to this Office
fifteen (15) days upon receipt of this decision, for violation of Section 18 in relation to Section
38 of PD 957.

SO ORDERED.9

ChanRoblesVirtualawl ibra ry

The HLURB decision was affirmed by its Board of Commissioners per Decision dated March 15, 2004, with modification
as to the rate of interest.10
On appeal, the Board of Commissioners decision was affirmed by the OP in its Decision dated August 4, 2004, with
modification as to the monetary award.11

cralaw red

Hence, the petitioner filed a petition for review with the CA, which, in turn, issued the assailed Decision dated August
13, 2007, affirming the OP decision. The dispositive portion of the decision reads:

chanRoble svirtual Lawli bra ry

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated August 4, 2004 rendered by the
Office of the President in O. P. Case No. 04D182 (HLURB Case No. REMA0307240186) is hereby AFFIRMED.

chan roble svirtualawl ibra ry

SO ORDERED.

12
ChanRobles Virtualawl ibra ry

Its motion for reconsideration having been denied by the CA in the Resolution dated March 13, 2008, the petitioner
filed the present petition for review on the following grounds:
I.

chanRoble svirtual Lawlib ra ry

THE HONORABLE COURT OF APPEALS ERRED IN ORDERING OUTRIGHT RELEASE OF TCT NO. 619608 DESPITE
PNBS DULY REGISTERED AND HLURB[] APPROVED MORTGAGE ON TCT NO. 619608.

II.

THE HONORABLE COURT OF APPEALS ERRED IN ORDERING CANCELLATION OF MORTGAGE/RELEASE OF TITLE IN

FAVOR OF RESPONDENT DEE DESPITE THE LACK OF PAYMENT OR SETTLEMENT BY THE MORTGAGOR (API/PEPI
and AFPRSBS) OF ITS EXISTING LOAN OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT OF
REDEMPTION BY THE MORTGAGOR AS MANDATED BY SECTION 25 OF PD 957 OR DIRECT PAYMENT MADE BY
RESPONDENT DEE TO PNB PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD WARRANT RELEASE OF
THE SAME.13

The petitioner claims that it has a valid mortgage over Dees property, which was part of the property mortgaged by
PEPI to it to secure its loan obligation, and that Dee and PEPI are bound by such mortgage. The petitioner also argues
that it is not privy to the transactions between the subdivision project buyers and PEPI, and has no obligation to
perform any of their respective undertakings under their contract.14
The petitioner also maintains that Presidential Decree (P.D.) No. 957 15 cannot nullify the subsisting agreement
between it and PEPI, and that the petitioners rights over the mortgaged properties are protected by Act 3135 16 . If at
all, the petitioner can be compelled to release or cancel the mortgage only after the provisions of P.D. No. 957 on
redemption of the mortgage by the owner/developer (Section 25) are complied with. The petitioner also objects to the
denomination by the CA of the provisions in the Affidavit of Undertaking as stipulations pour autrui,17 arguing that the
release of the title was conditioned on Dees direct payment to it.18
Respondent AFPRSBS, meanwhile, contends that it cannot be compelled to pay or settle the obligation under the
mortgage contract between PEPI and the petitioner as it is merely an investor in the subdivision project and is not
privy to the mortgage.19

Respondent PEPI, on the other hand, claims that the title over the subject property is one of the properties due for
release by the petitioner as it has already been the subject of a Memorandum of Agreement and dacion en pago
entered into between them.20 The agreement was reached after PEPI filed a petition for rehabilitation, and contained
the stipulation that the petitioner agreed to release the mortgage lien on fully paid mortgaged properties upon the
issuance of the certificates of title over the dacioned properties.21
For her part, respondent Dee adopts the arguments of the CA in support of her prayer for the denial of the petition for
review.22
Ruling of the Court
The petition must be DENIED.
The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI and
AFPRSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity of contracts is
that contracts can only bind the parties who entered into it,23 and cannot favor or prejudice a third person, even if he
is aware of such contract and has acted with knowledge thereof.24 Where there is no privity of contract, there is
likewise no obligation or liability to speak about.25

cralawred

The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFPRSBS. In this case, there
are two phases involved in the transactions between respondents PEPI and Dee the first phase is the contract to
sell, which eventually became the second phase, the absolute sale, after Dees full payment of the purchase price. In
a contract of sale, the parties obligations are plain and simple. The law obliges the vendor to transfer the ownership
of and to deliver the thing that is the object of sale.26 On the other hand, the principal obligation of a vendee is to pay
the full purchase price at the agreed time.27 Based on the final contract of sale between them, the obligation of PEPI,
as owners and vendors of Lot 12, Block 21A, Village East Executive Homes, is to transfer the ownership of and to
deliver Lot 12, Block 21A to Dee, who, in turn, shall pay, and has in fact paid, the full purchase price of the property.
There is nothing in the decision of the HLURB, as affirmed by the OP and the CA, which shows that the petitioner is
being ordered to assume the obligation of any of the respondents. There is also nothing in the HLURB decision, which
validates the petitioners claim that the mortgage has been nullified. The order of cancellation/release of the mortgage
is simply a consequence of Dees full payment of the purchase price, as mandated by Section 25 of P.D. No. 957, to
wit:

chanRoblesvirtua lLawl ib rary

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full
payment of the lot or unit. No fee, except those required for the registration of the deed of sale in the Registry of
Deeds, shall be collected for the issuance of such title. In the event a mortgage over the lot or unit is outstanding at
the time of the issuance of the title to the buyer, the owner or developer shall redeem the mortgage or the
corresponding portion thereof within six months from such issuance in order that the title over any fully paid lot or
unit may be secured and delivered to the buyer in accordance herewith.
It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory contract to the
principal threeyear loan takeout from the petitioner by PEPI for its expansion project. It need not be belaboured that
[a] mortgage is an accessory undertaking to secure the fulfillment of a principal obligation, 28 and it does not affect
the ownership of the property as it is nothing more than a lien thereon serving as security for a debt. 29
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between respondents PEPI
and Dee was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the property. On this point,
PEPI was acting fully well within its right when it mortgaged the property to the petitioner, for in a contract to sell,

ownership is retained by the seller and is not to pass until full payment of the purchase price. 30 In other words, at the
time of the mortgage, PEPI was still the owner of the property. Thus, in China Banking Corporation v. Spouses
Lozada,31 the Court affirmed the right of the owner/developer to mortgage the property subject of development, to
wit: [P.D.] No. 957 cannot totally prevent the owner or developer from mortgaging the subdivision lot or
condominium unit when the title thereto still resides in the owner or developer awaiting the full payment of the
purchase price by the installment buyer.32 Moreover, the mortgage bore the clearance of the HLURB, in compliance
with Section 18 of P.D. No. 957, which provides that [n]o mortgage on any unit or lot shall be made by the owner or
developer without prior written approval of the [HLURB].
Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still bound
to respect the transactions between respondents PEPI and Dee. The petitioner was well aware that the properties
mortgaged by PEPI were also the subject of existing contracts to sell with other buyers. While it may be that the
petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as against the installment
buyers. This is because the contract between the respondents is protected by P.D. No. 957, a social justice measure
enacted primarily to protect innocent lot buyers.33 Thus, in Luzon Development Bank v. Enriquez,34 the Court reiterated
the rule that a bank dealing with a property that is already subject of a contract to sell and is protected by the
provisions of P.D. No. 957, is bound by the contract to sell.35
However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquezs rights thereunder. This
is because the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957. x x x.
x x x Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned
properties were already covered by existing contracts to sell in favor of subdivision lot buyers. As observed by the
Court in another case involving a bank regarding a subdivision lot that was already subject of a contract to sell with a
third party:

chanRoblesvi rtua lLawl ibra ry

[The Bank] should have considered that it was dealing with a property subject of a real estate development project.
A reasonable person, particularly a financial institution x x x, should have been aware that, to finance the project,
funds other than those obtained from the loan could have been used to serve the purpose, albeit partially. Hence,
there was a need to verify whether any part of the property was already intended to be the subject of any other
contract involving buyers or potential buyers. In granting the loan, [the Bank] should not have been content merely
with a clean title, considering the presence of circumstances indicating the need for a thorough investigation of the
existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be deemed to be an innocent mortgagee.
x x x36 (Citation omitted)

chanroblesv i rtualaw lib rary

More so in this case where the contract to sell has already ripened into a contract of absolute sale.
Moreover, PEPI brought to the attention of the Court the subsequent execution of a Memorandum of Agreement dated
November 22, 2006 by PEPI and the petitioner. Said agreement was executed pursuant to an Order dated February
23, 2004 by the Regional Trial Court (RTC) of Makati City, Branch 142, in SP No. 021219, a petition for Rehabilitation
under the Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI. The RTC order approved PEPIs
modified Rehabilitation Plan, which included the settlement of the latters unpaid obligations to its creditors by way of
dacion of real properties. In said order, the RTC also incorporated certain measures that were not included in PEPIs
plan, one of which is that [t]itles to the lots which have been fully paid shall be released to the purchasers within 90
days after the dacion to the secured creditors has been completed.37 Consequently, the agreement stipulated that as
partial settlement of PEPIs obligation with the petitioner, the former absolutely and irrevocably conveys by way of
dacion en pago the properties listed therein,38 which included the lot purchased by Dee. The petitioner also
committed to
[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the
Dacioned Properties in the name of the [petitioner]. The request for release of a Mortgaged Property shall be

accompanied with: (i) proof of full payment by the buyer, together with a certificate of full payment issued by the
Borrower x x x. The [petitioner] hereby undertakes to cause the transfer of the certificates of title over the Dacioned
Properties and the release of the Mortgaged Properties with reasonable dispatch.39

ChanRobles Vi rtualawl ib rary

Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the obligation.40 It is a mode of extinguishing an existing
obligation41 and partakes the nature of sale as the creditor is really buying the thing or property of the debtor, the
payment for which is to be charged against the debtors debt.42 Dation in payment extinguishes the obligation to the
extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the
parties by agreement express or implied, or by their silence consider the thing as equivalent to the obligation, in
which case the obligation is totally extinguished.43
There is nothing on record showing that the Memorandum of Agreement has been nullified or is the subject of pending
litigation; hence, it carries with it the presumption of validity.44 Consequently, the execution of the dation in payment
effectively extinguished respondent PEPIs loan obligation to the petitioner insofar as it covers the value of the
property purchased by Dee. This negates the petitioners claim that PEPI must first redeem the property before it can
cancel or release the mortgage. As it now stands, the petitioner already stepped into the shoes of PEPI and there is no
more reason for the petitioner to refuse the cancellation or release of the mortgage, for, as stated by the Court in
Luzon Development Bank, in accepting the assigned properties as payment of the obligation, [the bank] has assumed
the risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957. 45
Whatever claims the petitioner has against PEPI and AFPRSBS, monetary or otherwise, should not prejudice the
rights and interests of Dee over the property, which she has already fully paid for.
As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious
that the lawas an instrument of social justicemust favor the weak.46 (Emphasis omitted)

chanroblesvi rtua lawlib rary

Finally, the Court will not dwell on the arguments of AFPRSBS given the finding of the OP that [b]y its nonpayment
of the appeal fee, AFPRSBS is deemed to have abandoned its appeal and accepts the decision of the HLURB.47 As
such, the HLURB decision had long been final and executory as regards AFPRSBS and can no longer be altered or
modified.48
WHEREFORE, the petition for review is DENIED for lack of merit. Consequently, the Decision dated August 13, 2007
and Resolution dated March 13, 2008 of the Court of Appeals in CAG.R. SP No. 86033 are AFFIRMED.
Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed Forces of the Philippines
Retirement and Separation Benefits System, Inc. are hereby ENJOINED to strictly comply with the Housing and Land
Use Regulatory Board Decision dated May 21, 2003, as modified by its Board of Commissioners Decision dated March
15, 2004 and Office of the President Decision dated August 4, 2004.

Cha

G.R. No. 172346, July 24, 2013

SPOUSES NAMEAL AND LOURDES BONROSTRO, Petitioners, v. SPOUSES JUAN AND CONSTANCIA LUNA,
Respondents.
DECISION
DEL CASTILLO, J.:

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
Certiorari1 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 CAs April 17, 2006 Resolution4 denying their motion for partial reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to Sell 5 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 Sell 6 with petitioner
Lourdes Bonrostro (Lourdes) concerning the same property under the following terms and conditions:

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1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:

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(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 [I]n the event the VENDEE fails to pay the second installment on time, [t]he 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 shall likewise be deemed cancelled and 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
Complaint8 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 Counterclaim,9 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 letter11 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 of
P46,303.44. Later during trial, Lourdes testified that Constancia instructed Bliss not to accept amortization payments
from anyone as evidenced by her 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:

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

cral avvonlinelawl ibra ry

1.) Declaring [t]he Contract to Sell executed by the plaintiff [Constancia] and defendant [Lourdes] with respect to the
house and lot located at Blk. 26, [L]ot 19, New Capitol Estate[s], Diliman[,] Quezon City to be in force and
effect. And that Lourdes Bonrostro must remain in the possession of the premises.
2.) Ordering the defendant[s] to pay plaintiff[s] within 60 days from receipt of this decision the sum of P300,000.00
plus an interest of 2% per month from April 1993 to November 1993.
3.) Ordering the defendant[s] to pay plaintiff[s] within sixty (60) days from receipt of this decision the sum of
P330,000.00 plus an interest of 2% [per month] from July 1993 to November 1993.
4.) Ordering the defendant[s] to reimburse plaintiff[s] the sum of P214,492.62 which plaintiff[s] 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:

cra lavvonli nelawlib ra ry

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:

cralavvonl inelawl ibra ry

Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of
P300,000.00 is only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00
is 2% per month and is only for the period July 1993 to November 1993; (iii) it does not impose interest on the
amount of P214,492.62 which was paid by 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 x
Hence, the dispositive portion of the said Decision:

21

cralavvon linelaw lib rary

WHEREFORE, the appealed decision is AFFIRMED with the MODIFICATIONS that paragraphs 2, 3, and 4 of its
dispositive portion shall now read:

cralavvo nli nelawlib rary

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, the former should have resorted to
consignation. 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:

cra lavvonlinelawlib ra ry

After careful evaluation of the evidence testimonial and documentary, the Court believes that the defendants[] delay
in the payment of the two installment[s] is not so substantial [as to] warrant [rescission] of contract. Although, the
defendant failed to pay the two installments [i]n due time, she was able to communicate with the plaintiffs through
letters requesting for an extension of two months within which to pay the installment[s]. 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 the installments due from the
date of default until 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 [T]o 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:

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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 nothing on record to show that Bliss heeded the 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 of P46,303.44.40 Whether the
same covers previous unpaid amortizations is also not clear as the receipt does not indicate the same 41 and per
Statement of Account42 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. 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, [i]f 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 imposed interest at the legal rate which is now 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.

[G.R. No. 107112. February 24, 1994.]

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, Petitioners, v. THE COURT OF APPEALS
AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II), Respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATION AND CONTRACTS; RULE WHERE A PERSON BY HIS CONTRACT CHARGES HIMSELF WITH
AN OBLIGATION POSSIBLE TO BE PERFORMED. The case of Reyes v. Caltex (Philippines), Inc. enunciated the
doctrine that where a person by his contract charges himself with an obligation possible to be performed, he must
perform it, unless its performance is rendered impossible by the act of God, by the law, or by the other party, it being
the rule that in case the party desires to be excused from performance in the event of contingencies arising thereto, it
is his duty to provide the basis therefor in his contract. With the enactment of the New Civil Code, a new provision
was included therein namely, Article 1267 which provides: "When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part."
In the report of the Code Commission, the rationale behind this innovation was explained, thus: "The general rule is
that impossibility of performance releases the obligor. However, it is submitted that when the service has become so
difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the
obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be
so difficult as to have been beyond their contemplation, it would be doing violence to that intention to hold the obligor
still responsible." In other words, fair and square consideration underscores the legal precept therein.
2. ID.; ID.; "SERVICE" UNDER ART. 1267 REFERS TO THE PERFORMANCE OF AN OBLIGATION; CASE AT BAR.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the contract
does not involve the rendition of service or a personal prestation and it is not for future service with future unusual
change. Instead, the ruling in the case Occea, Et. Al. v. Jabson, etc, Et Al., (G.R. No. L-44349, October 29, 1976, 73
SCRA 637) which interpreted the article, should be followed in resolving this case. Besides, said article was never
raised by the parties in their pleadings and was never the subject of trial and evidence. Article 1267 speaks of
"service" which has become so difficult. Taking into consideration the rationale behind this provision, the term
"service" should be understood as referring to the "performance" of the obligation. In the present case, the obligation
of private respondent consists in allowing petitioners to use its posts in Naga City, which is the service contemplated
in said article. Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the
contract be for future service with future unusual change. According to Senator Arturo M. Tolentino, Article 1267
states in our law the doctrine of unforeseen events. This is said to be based on the discredited theory of rebus sic
stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract also ceases to exist. Considering practical needs and
the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in
favor of the party prejudiced.

3. ID.; ID.; POTESTATIVE CONDITION; MEANING THEREOF; APPLICATION IN CASE AT BAR. A potestative condition
is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional
obligation is void. Based on this definition, respondent courts finding that the provision in the contract, to wit:" (a)
That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for the
electric light posts of the party of the second part (private respondent) . . ." is a potestative condition, is correct.
However, it must have overlooked the other conditions in the same provision, to wit: ". . . it being understood that
this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is
forced to stop, abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light
post (sic);" which are casual conditions since they depend on chance, hazard, or the will of a third person. In sum, the
contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance,
hazard or the will of a third person, which do not invalidate the aforementioned provision.
4. ID.; PRESCRIPTION OF ACTIONS; RULE ON WRITTEN CONTRACT. Article 1144 of the New Civil Code provides,
inter alia, that an action upon a written contract must be brought within ten (10) years from the time the right of the
action accrues. Clearly, the ten (10) year period is to be reckoned from the time the right of action accrues which is
not necessarily the date of execution of the contract. As correctly ruled by respondent court, private respondents
right of action arose "sometime during the latter part of 1982 or in 1983 when according to Atty. Luis General, Jr. . .
., he was asked by (private respondents) Board of Directors to study said contract as it already appeared
disadvantageous to (private respondent). (Private respondents) cause of action to ask for reformation of said contract
should thus be considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint
in this case was filed, ten (10) years had not yet elapsed."

DECISION

NOCON, J.:

The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his contract charges
himself with an obligation possible to be performed, he must perform it, unless its performance is rendered impossible
by the act of God, by the law, or by the other party, it being the rule that in case the party desires to be excused from
performance in the event of contingencies arising thereto, it is his duty to provide the basis therefor in his contract.

chanrobles. com:c ralaw:red

With the enactment of the New Civil Code, a new provision was included therein namely, Article 1267 which
provides:

jgc:chanrobles. com.ph

"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."

cra law virt ua1aw li bra ry

In the report of the Code Commission, the rationale behind this innovation was explained, thus:

jgc:cha nrob les.co m.ph

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

In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267 in favor
of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former insists that the
complaint should have been dismissed for failure to state a cause of action.

chan robles. com.ph : vi rtua l law lib ra ry

The antecedent facts, as narrated by respondent Court of Appeals are, as follows:

chan rob1es v irt ual 1aw l ibra ry

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance
service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private
corporation established for the purpose of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation of its
telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners
agreed to install, free of charge, ten (10) telephone connections for the use by private respondent in the following
places:

jgc:chanroble s.com. ph

"(a) 3 units The Main Office of (private respondent);

(b) 2 Units The Warehouse of (private respondent);
(c) 1 Unit The Sub-Station of (private respondent) at Concepcion Pequea;
(d) 1 Unit The Residence of (private respondents) President;
(e) 1 Unit The Residence of (private respondents) Acting General Manager; &
(f) 2 Units To be determined by the General Manager. 3
Said contract also provided:

jgc:chanro bles. com.ph

"(a) That the term or period of this contract shall be as long as the party of the first part has need for the electric light
posts of the party of the second part it being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public service and it
becomes necessary to remove the electric lightpost;" (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of the
Board of Directors of private respondent and at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the
Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract with
damages, on the ground that it is too one-sided in favor of petitioners; that it is not in conformity with the guidelines
of the National Electrification Administration (NEA) which direct that the reasonable compensation for the use of the
posts is P10.00 per post, per month; that after eleven (11) years of petitioners use of the posts, the telephone cables
strung by them thereon have become much heavier with the increase in the volume of their subscribers, worsened by
the fact that their linemen bore holes through the posts at which points those posts were broken during typhoons;
that a post now costs as much as P2,630.00; so that justice and equity demand that the contract be reformed to

abolish the inequities thereon.

chanro bles. com.ph : vi rtua l law lib rary

As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319
posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any contract
with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use thereof the total
amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay private
respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten (10)
telephone units which had caused it great inconvenience and damages to the tune of not less than P100,000.00
In petitioners answer to the first cause of action, they averred that it should be dismissed because (1) it does not
sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the same having been
filed more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel, since private
respondent seeks to enforce the contract in the same action. Petitioners further alleged that their utilization of private
respondents post could not have caused their deterioration because they have already been in use for eleven (11)
years; and that the value of their expenses for the ten (10) telephone lines long enjoyed by private respondent free of
charge are far in excess of the amounts claimed by the latter for the use of the posts, so that if there was any
inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines in
areas outside Naga City for which its posts were used by them; and that if petitioners had refused to comply with
private respondents demands for payment for the use of the posts outside Naga City, it was probably because what is
due to them from private respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had been
categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:

cra law virt ua1aw li bra ry

chanrob1e s virtual 1aw l ibra ry

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

chanroble s law li bra ry

(2) Engr. Antonio Borja, Chief of private respondents Line Operation and Maintenance Department, declared that the
posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili, Canaman,
and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners cables strung to the posts in 1989 are
much bigger than those in November, 1977; that in 1987, almost 100 posts were destroyed by typhoon Sisang:
around 20 posts were located between Naga City and the town of Pili while the posts in barangay Concepcion, Naga
City were broken at the middle which had been bored by petitioners linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977 was only from P700.00 to P1,000.00, their costs in 1989 went up
from P1,500.00 to P2,000.00, depending on the size; that some lines that were strung to the posts did not follow the
minimum vertical clearance required by the National Building Code, so that there were cases in 1988 where, because

of the low clearance of the cables, passing trucks would accidentally touch said cables causing the posts to fall and
resulting in brown-outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of Region V
of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private telephone systems of
electric cooperatives posts, they should pay a minimum monthly rental of P4.00 per post, and considering the
escalation of prices since 1985, electric cooperatives have been charging from P10.00 to P15.00 per post, which is
what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on the
poor service rendered by petitioners telephone lines, like the telephone in their Complaints Section which was usually
out of order such that they could not respond to the calls of their customers. In case of disruption of their telephone
lines, it would take two to three hours for petitioners to reactivate them notwithstanding their calls on the emergency
line.
(5) Finally, Atty. Luis General, Jr., private respondents counsel, testified that the Board of Directors asked him to
study the contract sometime during the latter part of 1982 or in 1983, as it had appeared very disadvantageous to
private Respondent. Notwithstanding his recommendation for the filing of a court action to reform the contract, the
former general managers of private respondent wanted to adopt a soft approach with petitioners about the matter
until the term of General Manager Henry Pascual who, after failing to settle the matter amicably with petitioners,
finally agreed for him to file the present action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:

chanrob1e s virtual 1aw l ibra ry

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

cha nrob 1es vi rtua l 1aw lib rary

(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long as it
wishes without paying anything therefor except for long distance calls through PLDT out of which the latter get only
10% of the charges.

chan robles law lib rary : re d

(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have
remained erect up to present;
(c) Petitioners linemen have strung only small messenger wires to many of the posts and they need only small holes
to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners cables in Naga City are according to standard
and comparable to those of PLDT. The accidents mentioned by private respondent involved trucks that were either
overloaded or had loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was that
the coverage thereof would include the whole area serviced by petitioners because at that time, they already had
subscribers outside Naga City. Private respondent, in fact, had asked for telephone connections outside Naga City for

its officers and employees residing there in addition to the ten (10) telephone units mentioned in the contract.
Petitioners have not been charging private respondent for the installation, transfers and re-connections of said
telephones so that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners cable installations to be in accordance
with engineering standards and practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private
respondents first cause of action, that while the contract appeared to be fair to both parties when it was entered into
by them during the first year of private respondents operation and when its Board of Directors did not yet have any
experience in that business, it had become disadvantageous and unfair to private respondent because of subsequent
events and conditions, particularly the increase in the volume of the subscribers of petitioners for more than ten (10)
years without the corresponding increase in the number of telephone connections to private respondent free of
charge. The trial court concluded that while in an action for reformation of contract, it cannot make another contract
for the parties, it can, however, for reasons of justice and equity, order that the contract be reformed to abolish the
inequities therein. Thus, said court ruled that the contract should be reformed by ordering petitioners to pay private
respondent compensation for the use of their posts in Naga City, while private respondent should also be ordered to
pay the monthly bills for the use of the telephones also in Naga City. And taking into consideration the guidelines of
the NEA on the rental of posts by telephone companies and the increase in the costs of such posts, the trial court
opined that a monthly rental of P10.00 for each post of private respondent used by petitioners is reasonable, which
rental it should pay from the filing of the complaint in this case on January 2, 1989. And in like manner, private
respondent should pay petitioners from the same date its monthly bills for the use and transfers of its telephones in
Naga City at the same rate that the public are paying.

chan roble svirtualawl ibra ry

On private respondents second cause of action, the trial court found that the contract does not mention anything
about the use by petitioners of private respondents posts outside Naga City. Therefore, the trial court held that for
reason of equity, the contract should be reformed by including therein the provision that for the use of private
respondents posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment to
start on the date this case was filed, or on January 2, 1989, and private respondent should also pay petitioners the
monthly dues on its telephone connections located outside Naga City beginning January, 1989.
And with respect to private respondents third cause of action, the trial court found the claim not sufficiently proved.
Thus, the following decretal portion of the trial courts decision dated July 20, 1990:

jgc:chanroble s.com.p h

"WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the agreement
(Exh. A); ordering the defendants to pay plaintiffs electric poles in Naga City and in the towns of Milaor, Canaman,
Maragao and Pili, Camarines Sur and in other places where defendant NATELCO uses plaintiffs electric poles, the sum
of TEN (P10.00) PESOS per plaintiffs pole, per month beginning January, 1989 and ordering also the plaintiff to pay
defendant NATELCO the monthly dues of all its telephones including those installed at the residence of its officers,
namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General,
Jr. beginning January, 1989. Plaintiffs claim for attorneys fees and expenses of litigation and defendants
counterclaim are both hereby ordered dismissed. Without pronouncement as to costs."

cha nrob les lawl ibra ry : red nad

Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision dated
May 28, 1992, respondent court affirmed the decision of the trial court, 5 but based on different grounds to wit: (1)
that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a potestative condition

which rendered said condition void. The motion for reconsideration was denied in the resolution dated September 10,
1992. 6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:

chanrob 1es vi rtual 1aw lib rary

1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced from the time it
became disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the contract
does not involve the rendition of service or a personal prestation and it is not for future service with future unusual
change. Instead, the ruling in the case Occea, Et. Al. v. Jabson, etc, Et Al., 7 which interpreted the article, should be
followed in resolving this case. Besides, said article was never raised by the parties in their pleadings and was never
the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:

jgc:chanrob les.com .ph

"We agree with appellant that in order that an action for reformation of contract would lie and may prosper, there
must be sufficient allegations as well as proof that the contract in question failed to express the true intention of the
parties due to error or mistake, accident, or fraud. Indeed, in embodying the equitable remedy of reformation of
instruments in the New Civil Code, the Code Commission gave its reasons as follows:

chanrob1e s virtual 1aw l ibra ry

Equity dictates the reformation of an instrument in order that the true intention of the contracting parties may be
expressed. The courts by the reformation do not attempt to make a new contract for the parties, but to make the
instrument express their real agreement. The rationale of the doctrine is that it would be unjust and inequitable to
allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the
parties. The rigor of the legalistic rule that a written instrument should be the final and inflexible criterion and
measure of the rights and obligations of the contracting parties is thus tempered to forestall the effects of mistake,
fraud, inequitable conduct, or accident. (pp. 55-56, Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where through mistake
or accident on the part of either or both of the parties or mistake or fraud on the part of the clerk or typist who
prepared the instrument, the true intention of the parties is not expressed therein, then the instrument may be
reformed at the instance of either party if there was mutual mistake on their part, or by the injured party if only he
was mistaken.

c hanro bles vi rtua l lawli bra ry

Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a mistake on its
part or mutual mistake on the part of both parties when they entered into the agreement Exh. "A", and that because
of this mistake, said agreement failed to express their true intention. Rather, plaintiffs evidence shows that said
agreement was prepared by Atty. Luciano Maggay, then a member of plaintiffs Board of Directors and its legal
counsel at that time, who was also the legal counsel for defendant-appellant, so that as legal counsel for both
companies and presumably with the interests of both companies in mind when he prepared the aforesaid agreement,
Atty. Maggay must have considered the same fair and equitable to both sides, and this was affirmed by the lower
court when it found said contract to have been fair to both parties at the time of its execution. In fact, there were no

complaints on the part of both sides at the time of and after the execution of said contract, and according to 73-year
old Justino de Jesus, Vice President and General manager of appellant at the time who signed the agreement Exh. "A"
in its behalf and who was one of the witnesses for the plaintiff (sic), both parties complied with said contract from the
very beginning (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become iniquitous or unfavorable or disadvantageous to the plaintiff with the
expansion of the business of appellant and the increase in the volume of its subscribers in Naga City and environs
through the years, necessitating the stringing of more and bigger telephone cable wires by appellant to plaintiffs
electric posts without a corresponding increase in the ten (10) telephone connections given by appellant to plaintiff
free of charge in the agreement Exh. "A" as consideration for its use of the latters electric posts in Naga City, appear,
however, undisputed from the totality of the evidence on record and the lower court so found. And it was for this
reason that in the later (sic) part of 1982 or 1983 (or five or six years after the subject agreement was entered into
by the parties), plaintiffs Board of Directors already asked Atty. Luis General who had become their legal counsel in
1982, to study said agreement which they believed had become disadvantageous to their company and to make the
proper recommendation, which study Atty. General did, and thereafter, he already recommended to the Board the
filing of a court action to reform said contract, but no action was taken on Atty. Generals recommendation because
the former general managers of plaintiff wanted to adopt a soft approach in discussing the matter with appellant,
until, during the term of General Manager Henry Pascual, the latter, after failing to settle the problem with Atty.
Luciano Maggay who had become the president and general manager of appellant, already agreed for Atty. Generals
filing of the present action. The fact that said contract has become iniquitous or disadvantageous to plaintiff as the
years went by did not, however, give plaintiff a cause of action for reformation of said contract, for the reasons
already pointed out earlier. But this does not mean that plaintiff is completely without a remedy, for we believe that
the allegations of its complaint herein and the evidence it has presented sufficiently make out a cause of action under
Art. 1267 of the New Civil Code for its release from the agreement in question.
x

chanrobles.com: cralaw: red

The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977 and the
prevailing circumstances and conditions at the time, were described by Dioscoro Ragragio, the President of plaintiff in
1977 and one of its two officials who signed said agreement in its behalf, as follows:

chanrob1es vi rt ual 1aw li bra ry

Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in the City of
Naga because at that time the capability of NATELCO was very limited, as a matter of fact we do [sic] not expect to be
able to expand because of the legal squabbles going on in the NATELCO. So, even at that time there were so many
subscribers in Naga City that cannot be served by the NATELCO, so as a matter of public service we allowed them to
sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very light and that
very few telephone lines were attached to the posts of CASURECO II in 1977, said posts have become heavily loaded
in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of appellants subscribers and
the corresponding increase in the telephone cables and wires strung by it to plaintiffs electric posts in Naga City for
the more 10 years that the agreement Exh. "A" of the parties has been in effect, there has been no corresponding
increase in the ten (10) telephone units connected by appellant free of charge to plaintiffs offices and other places
chosen by plaintiffs general manager which was the only consideration provided for in said agreement for appellants

use of plaintiffs electric posts. Not only that, appellant even started using plaintiffs electric posts outside Naga City
although this was not provided for in the agreement Exh. "A" as it extended and expanded its telephone services to
towns outside said city. Hence, while very few of plaintiffs electric posts were being used by appellant in 1977 and
they were all in the City of Naga, the number of plaintiffs electric posts that appellant was using in 1989 had jumped
to 1,403,192 of which are outside Naga City (Exh. "B"). Add to this the destruction of some of plaintiffs poles during
typhoons like the strong typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the
escalation of the costs of electric poles from 1977 to 1989, and the conclusion is indeed ineluctable that the
agreement Exh. "A" has already become too one-sided in favor of appellant to the great disadvantage of plaintiff, in
short, the continued enforcement of said contract has manifestly gone far beyond the contemplation of plaintiff, so
much so that it should now be released therefrom under Art. 1267 of the New Civil Code to avoid appellants unjust
enrichment at its (plaintiffs) expense. As stated by Tolentino in his commentaries on the Civil Code citing foreign
civilist Ruggiero, equity demands a certain economic equilibrium between the prestation and the counter-prestation,
and does not permit the unlimited impoverishment of one party for the benefit of the other by the excessive rigidity of
the principle of the obligatory force of contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed., pp. 247-248).

cralawnad

We therefore, find nothing wrong with the ruling of the trial court, although based on a different and wrong premise
(i.e., reformation of contract), that from the date of the filing of this case, appellant must pay for the use of plaintiffs
electric posts in Naga City at the reasonable monthly rental of P10.00 per post, while plaintiff should pay appellant for
the telephones in the same City that it was formerly using free of charge under the terms of the agreement Exh. "A"
at the same rate being paid by the general public. In affirming said ruling, we are not making a new contract for the
parties herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered
by both parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff, said
arrangement to continue only until such time as said parties can re-negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A." Once said agreement is reached and executed by the parties, the
aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall be substituted and superseded by
their new agreement. . . ." 8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this
provision, 9 the term "service" should be understood as referring to the "performance" of the obligation. In the
present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which
is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it is not a
requirement thereunder that the contract be for future service with future unusual change. According to Senator
Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforeseen events. This is said to be based on
the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the
light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the disappearance of the basis of a contract
gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occea case filed a complaint against petitioner before the trial court praying
for modification of the terms and conditions of the contract that they entered into by fixing the proper shares that
should pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the dismissal of the
complaint therein for failure to state a sufficient cause of action. We rationalized that the Court of Appeals misapplied
Article 1267 because:

jgc:chanroble s.com.p h

". . . respondents complaint seeks not release from the subdivision contract but that the court render judgment
modifying the terms and conditions of the contract . . . by fixing the proper shares that should pertain to the herein
parties out of the gross proceeds from the sales of subdivided lots of subject subdivision. The cited article (Article

1267) does not grant the courts (the) authority to remake, modify or revise the contract or to fix the division of
shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its
own terms for those covenanted by the parties themselves. Respondents complaint for modification of contract
manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondents
complaint and the circumstances therein averred, the courts cannot even in equity the relief sought." 11
The ruling in the Occea case is not applicable because we agree with respondent court that the allegations in private
respondents complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267.
We, therefore, release the parties from their correlative obligations under the contract. However, our disposition of the
present controversy does not end here. We have to take into account the possible consequences of merely releasing
the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting
in disruption of their essential service to the public; while private respondent, in consonance with the contract 12 will
return all the telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality.
Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its posts in
Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners
use private respondents posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2)
private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the public
beginning January, 1989. The peculiar circumstances of the present case, as distinguished further from the Occea
case, necessitates exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the rationalization of
respondent court that:

chanroblesvi rt ualawlib ra ry

". . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do
so in order not to disrupt the basic and essential services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff . . . ." 14
Petitioners assertion that Article 1267 was never raised by the parties in their pleadings and was never the subject of
trial and evidence has been passed upon by respondent court in its well reasoned resolution, which we hereunder
quote as our own:

jgc:cha nro bles.c om.ph

"First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this case, we have
changed its theory and decided the same on an issue not invoked by plaintiff in the lower court. For basically, the
main and pivotal issue in this case is whether the continued enforcement of the contract Exh. "A" between the parties
has, through the years (since 1977), become too iniquitous or disadvantageous to the plaintiff and too one-sided in
favor of defendant-appellant, so that a solution must be found to relieve plaintiff from the continued operation of said
agreement and to prevent defendant-appellant from further unjustly enriching itself at plaintiffs expense. It is indeed
unfortunate that defendant had turned deaf ears to plaintiffs requests for renegotiation, constraining the latter to go
to court. But although plaintiff cannot, as we have held, correctly invoke reformation of contract as a proper remedy
(there having been no showing of a mistake or error in said contract on the part of any of the parties so as to result in
its failure to express their true intent), this does not mean that plaintiff is absolutely without a remedy in order to
relieve itself from a contract that has gone far beyond its contemplation and has become highly iniquitous and
disadvantageous to it through the years because of the expansion of defendant-appellants business and the increase
in the volume of its subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in
the best way and manner it can in the light of the proven facts and the law or laws applicable thereto.

chanrob les vi rtua l lawlib ra ry

It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellate court may
uphold the decision below upon some other point which was ignored or erroneously decided by the trial court (Garcia
Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore,

the appellate court has the discretion to consider an unassigned error that is closely related to an error properly
assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also been held that the Supreme
Court (and this Court as well) has the authority to review matters, even if they are not assigned as errors in the
appeal, if it is found that their consideration is necessary in arriving at a just decision of the case (Saura Import &
Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is the material allegations of fact in the
complaint, not the legal conclusion made therein or the prayer, that determines the relief to which the plaintiff is
entitled, and the plaintiff is entitled to as much relief as the facts warrant although that relief is not specifically prayed
for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios,
77 Phil. 120). To quote an old but very illuminating decision of our Supreme Court through the pen of American jurist
Adam C. Carson:

c hanro b1es vi rt ual 1aw li bra ry

Under our system of pleading it is the duty of the courts to grant the relief to which the parties are shown to be
entitled by the allegations in their pleadings and the facts proven at the trial, and the mere fact that they themselves
misconstrue the legal effects of the facts thus alleged and proven will not prevent the court from placing the just
construction thereon and adjudicating the issues accordingly. (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil. Inc. v. IAC, 176 SCRA 741, the Honorable Supreme Court also held:

chanro b1es vi rtua l 1aw li bra ry

We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues, although not
raised before the trial court. The presence of strong consideration of substantial justice has led this Court to relax the
well-entrenched rule that, except questions on jurisdiction, no question will be entertained on appeal unless it has
been raised in the court below and it is within the issues made by the parties in their pleadings (Cordero v. Cabral, L36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the New Civil
Code to this case. Defendant-appellant stresses that the applicability of said provision is a question of fact, and that it
should have been given the opportunity to present evidence on said question. But defendant-appellant cannot
honestly and truthfully claim that it (did) not (have) the opportunity to present evidence on the issue of whether the
continued operation of the contract Exh. "A" has now become too one-sided in its favor and too iniquitous, unfair, and
disadvantageous to plaintiff. As held in our decision, the abundant and copious evidence presented by both parties in
this case and summarized in said decision established the following essential and vital facts which led us to apply Art.
1267 of the New Civil Code to this case:
x

chanroble s virtual lawlib rary

x." 15

On the issue of prescription of private respondents action for reformation of contract, petitioners allege that
respondent courts ruling that the right of action "arose only after said contract had already become disadvantageous
and unfair to it due to subsequent events and conditions, which must be sometime during the latter part of 1982 or in
1983 . . ." 16 is erroneous. In reformation of contracts, what is reformed is not the contract itself, but the instrument
embodying the contract. It follows that whether the contract is disadvantageous or not irrelevant to reformation and
therefore, cannot be an element in the determination of the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought within
ten (10) years from the time the right of the action accrues. Clearly, the ten (10) year period is to be reckoned from
the time the right of action accrues which is not necessarily the date of execution of the contract. As correctly ruled by
respondent court, private respondents right of action arose "sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private respondents) Board of Directors to study said

contract as it already appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private
respondents) cause of action to ask for reformation of said contract should thus be considered to have arisen only in
1982 or 1983, and from 1982 to January 2, 1989 when the complaint in this case was filed, ten (10) years had not
yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either
party because petitioners permission for free use of telephones is not made to depend purely on their will, neither is
private respondents permission for free use of its posts dependent purely on its will.

chanro bles lawl ib rary : red nad

Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent under
the allegations of its complaint and the preponderant evidence presented by it:

jgc:chanrob les.com.ph

". . . we believe that the provision in said agreement

(a) That the term or period of this contract shall be as long as the party of the first part [herein appellant] has need
for the electric light posts of the party of the second part [herein plaintiff] it being understood that this contract shall
terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes necessary to remove the electric light post [sic]; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the aforesaid
agreement to the latters sole and exclusive will as long as plaintiffs is in operation. A similar provision in a contract of
lease wherein the parties agreed that the lessee could stay on the leased premises for as long as the defendant
needed the premises and can meet and pay said increases was recently held by the Supreme Court in Lim v. C.A.,
191 SCRA 150, citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being a purely
potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will
of the lessee. Further held the High Court in the Lim case:

chanro bles law lib rary : red nad

The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free
and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the
owner of any say in the matter. Mutuality does not obtain in such a contract of lease of no equality exists between the
lessor and the lessee since the life of the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh. "A" between the parties in this case. There is no mutuality and
equality between them under the afore-quoted provision thereof since the life and continuity of said agreement is
made to depend as long as appellant needs plaintiffs electric posts. And this is precisely why, since 1977 when said
agreement was executed and up to 1989 when this case was finally filed by plaintiff, it could do nothing to be released
from or terminate said agreement notwithstanding that its continued effectivity has become very disadvantageous and
iniquitous to it due to the expansion and increase of appellants telephone services within Naga City and even outside
the same, without a corresponding increase in the ten (10) telephone units being used by plaintiff free of charge, as
well as the bad and inefficient service of said telephones to the prejudice and inconvenience of plaintiff and its
customers. . . ." 18
Petitioners allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which
depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on this definition,
respondent courts finding that the provision in the contract, to wit:

jgc:chanrob les.com. ph

"(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for the

electric light posts of the party of the second part (private respondent) . . ."

chan roble s virtualawl ibra ry cha nroble s.com:c hanrobles. com.ph

is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to
wit:

jgc:chanrob les.co m.ph

". . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the second
part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it becomes necessary
to remove the electric light post (sic);"
which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In sum, the contract
is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the
will of a third person, which do not invalidate the aforementioned provision. 21 Nevertheless, in view of our
discussions under the first and second issues raised by petitioners, there is no reason to set aside the questioned
decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and its
resolution dated September 10, 1992 are AFFIRMED.

G.R. No. L-22490. May 21, 1969.]

GAN TION, Petitioner, v. HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the
Court of First Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, Respondents.
Burgos & Sarte for Petitioner.
Roxas, Roxas, Roxas & Associates for Private Respondents.

SYLLABUS

1. CIVIL LAW; DAMAGES; AWARD OF ATTORNEYS FEES; NATURE OF AWARD. The award for attorneys fees is
made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the
former in the cases enumerated in Art. 2208 of the Civil Code.
2. ID.; ID.; ID.; PROPER SUBJECT OF LEGAL COMPENSATION. Where attorneys fees are awarded, it is the litigant,
not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit,
therefore, may properly be the subject of legal compensation.

DECISION

MAKALINTAL, J.:

The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion and respondent
Ong Wan Sieng.
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case
against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360
altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160, which he had
offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of
Manila), but upon appeal the Court of First Instance, on July 2, 1962, reversed the judgment and dismissed the
complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorneys fees. That judgment became
final.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month,
effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount
of P4,320.00, corresponding to a period from August 1961 to October 1963.
In the meantime, over Gan Tions opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment
for attorneys fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal
compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid rents. The appellate
court accepted the petition but eventually decided for the respondent, holding that although "respondent Ong is
indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could not be the

subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned over
by the client to his counsel." In the opinion of said Court, the requisites of legal compensation, namely, that the
parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of
them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not present
in the instant case, since the real creditor with respect to the sum of P500 was the defendants counsel.
This is not an accurate statement of the nature of an award for attorneys fees. The award is made in favor of the
litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases
enumerated in Article 2208 of the Civil Code. 1 It is the litigant, not his counsel, who is the judgment creditor and who
may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation.
Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is
indebted to him for more than P4,000.
WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court of First
Instance of Manila in its Civil Case No. 49535 is set aside. Costs against Respondent.

[G.R. No. L-56101. February 20, 1984.]

CORAZON PEREZ, Petitioner, v. HON. COURT OF APPEALS and MEVER FILMS, INCORPORATED,
Respondents.
Francisco A. Lava, Jr. for Petitioner.
Alberto O. Villaraza for Private Respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; COMPENSATION; NOT PROPER WHERE ONE DEBT IS NOT YET DUE
AND DEMANDABLE; CASE AT BAR. Since, on the respective dates of maturity, specifically, August 6, 1974 and
August 13, 1974, respectively, Ramon C. Mojica was still the holder of those bills, it can be safely assumed that it was
he who had asked for the roll-overs on the said dates. MEVER was bound by the roll-overs since the assignment to it
was made only on September 9, 1974. The inevitable result of the roll-overs of the principals was that Bill No. 1298
and Bill No. 1419 were not yet due and demandable as of the date of their assignment by MOJICA to MEVER on
September 9, 1974, nor as of October 3, 1974 when MEVER surrendered said Bills to CONGENERIC. As a
consequence, no legal compensation could have taken place because, for it to exist, the two debts, among other
requisites, must be due and demandable (Article 1279, Civil Code).
2. REMEDIAL LAW; APPEALS; AUTHORITY OF SUPREME COURT TO REVIEW ERRORS NOT ASSIGNED. We note that
the xerox copies of Bill No. 1298 and Bill No. 1419 attached by MEVER to its Brief do not contain the "roll-over"
notations. However, MEVERs own exhibits before respondent Appellate Court, Exhibits "3" and "3-A", do show those
notations and MEVER must be held bound by them. And although this issue may not have been squarely raised below,
in the interest of substantial justice this Court is not prevented from considering such a pivotal factual matter that had
been overlooked by the Courts below (Heirs of Enrique Zambales v. CA, 120 SCRA 897 [1983]). The Supreme Court is
clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is
necessary in arriving at a just decision (Tumalad v. Vicencio, 41 SCRA 146 [1971]).
3. MERCANTILE LAW; CREDIT TRANSACTIONS; MONEY MARKET TRANSACTION DEFINED. There is another aspect
to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money market
is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a middle man or dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtedness of any person or entity . . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse" (The
Money Market Industry Today A Question of Survival by Horacio T. Lava, Jr., in the PNB Quarterly, A Supplement
of the Philnabank News, Second Quarter 1978.) The fundamental function of the money market device in its operation
is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The
money market is an "impersonal market", free from personal considerations." (The Money Market mechanism is
intended to provide quick mobility of money and securities." (Woodworth, p. 5.)
4. ID.; ID.; ID.; NOTICE OF TRANSFER, NOT REQUIRED. The impersonal character of the money market device
overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily
knows in advance that it would be expeditiously transacted and transferred to any investor/lender without need of

notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor. Accordingly, we find no applicability herein of Article 1285, 3rd paragraph of the Civil Code.
Rather, it is the first paragraph of the same legal provision that is applicable which states that the debtor who has
consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the
assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to
the compensation.

DECISION

MELENCIO-HERRERA, J.:

This is a Petition for Review on Certiorari of a Decision of the then Court of Appeals. The relevant facts of the case
may be stated as follows:

chanrob1es virtua l 1aw lib rary

1. CONGENERIC Development & Finance Corporation is, or was, a company engaged in "money market" operations
2. (a) On May 8, 1974, CONGENERIC issued what was in effect a promissory note in the amount of P111,973.58 in
favor of bearer No. 049, later identified as Ramon C. MOJICA, or an entity owned by him. That promissory note,
denominated hereinafter as Bill 1298, was to mature on August 6, 1974.
(b) On May 15, 1974, CONGENERIC issued another bearer promissory note for the sum of P208,666.67, also in favor
of MOJICA or an entity owned by him. The note, denominated hereinafter as Bill 1419, was to mature on August 13,
1974.
3. On June 5, 1974, MEVER Films, Inc. the private respondent herein, borrowed P500,000.00 from CONGENERIC, the
former issuing in favor of the latter a negotiable promissory note to mature on August 5, 1974. That note shall
hereinafter be referred to as NCI-0352. What may be stated in connection with the note is that it had no provision for
interest, except that, if not paid on due date, it would be subject to interest at 14% per annum.
4. On July 3, 1974, CONGENERIC received P200,000.00 from petitioner herein (CORAZON, for short), and issued to
her, as BEARER 209, a confirmation of sale (CS) numbered 0366. Under the terms of CS-0366, CORAZON was to be
paid P203,483.33 on August 5, 1974, CONGENERIC would make collection on behalf of CORAZON; and ALL OF
CONGENERICS INTEREST IN NCI-0352 WAS BEING TRANSFERRED TO HER. Under this last provision, CORAZON,
subject to defenses, could have sued MEVER for payment of the full amount of P500,000.00, specially if CONGENERIC
should not object. It may also be noted that while NCI-0352 was not subject to interest prior to August 5, 1974,
CONGENERIC obligated itself to pay CORAZON interest on August 5, 1974 in the amount of P3,483.33, or roughly an
interest rate of 19% per annum.
5. (a) On August 5, 1974, MEVER paid P100,000.00 to CONGENERIC on account of NCI-0352.
(b) On the same date of August 5, 1974, CONGENERIC paid CORAZON the sum of P103,483.33, the P3,483.33
coming from its own funds.
6. (a) On August 6, 1974, CONGENERIC paid MOJICA the interest due on Bill 1298, the principal being rolled-over to
mature on October 4, 1974. The roll-over was annotated on the original of Bill 1298.

(b) On August 13, 1974, CONGENERIC paid MOJICA the interest due on Bill 1419, the principal being rolled-over to
mature on October 11, 1974. The roll-over was annotated on Bill 1419.
7. On September 9, 1974, MOJICA assigned Bill 1298 and Bill 1419 to MEVER through a notarized deed.
8. On October 3, 1974, MEVER surrendered the originals of Bill 1298 and Bill 1419 to CONGENERIC, and asked the
latter to compute the balance of the account of MEVER with CONGENERIC, taking account of the amounts of the two
Bills, which balance MEVER would then pay.
9. (a) On October 7, 1974, MEVER was served with garnishment by the Provincial Sheriff of Rizal in two collection
cases filed against CONGENERIC by two of its creditors whose credits totaled P185,693.78.
(b) On the same date of October 7, 1974, CONGENERIC advised MEVER by telephone that of the original amount of
P500,000.00 of NCI-0352, the sum of P200,000.00 was sold on July 3, 1974 to a third party, but not naming
CORAZON as the third party.
10. On October 8, 1974, CONGENERIC confirmed in writing to MEVER the previous "sale" of P200,000.00 out of the
P500,000.00 amount of NCI-0352; and advised that it could not take account of the assignment to MEVER of Bill 1298
and Bill 1419.
11. On November 15, 1974, MEVER turned over to the Provincial Sheriff of Rizal (Exhibit "5"), the sum of P79,359.75,
which MEVER had computed as the amount it was still owing CONGENERIC and which was subject to garnishment.
12. (a) On October 23, 1974, CONGENERIC filed a Petition for Suspension of Payments in Civil Case No. 20212 of the
Court of First Instance of Rizal. In that petition, MEVER was listed as a debtor.
(b) On November 11, 1974, the Court issued an order enjoining CONGENERIC from making any payment to creditors.
13. In subsequent proceedings in Civil Case No. 20212, the Court promulgated an Order, dated January 24, 1975
(Exhibit "10"), to the effect that MEVER was not a debtor of CONGENERIC, and said Order has become final.
14. (a) On July 14, 1975, CORAZON filed suit before the Court of First Instance of Rizal against MEVER for the
recovery of P100,000.00, plus interest, damages, and attorneys fees. She admits that CS-0366 issued to her by
CONGENERIC was a "without recourse" instrument.
(b) The Trial Court rendered judgment in favor of CORAZON and, upon her filing a bond, she was able to have
execution pending appeal. MEVER had to pay her P131,166.00 under the Trial Courts judgment.
(c) On Mevers appeal, the Court of Appeals reversed the judgment of the Trial Court.
Before us, petitioner has made the following Assignments of Error:

chan rob1e s virtual 1 aw lib rary

A.
"Respondent Court of Appeals erred gravely in applying Article 1626 of the Civil Code, which refers to a debtor who
pays his creditor before knowledge of an assignment, when what is involved principally in the case at bar is

compensation rather than payment.

B.
"Respondent Court of Appeals erred gravely in completely disregarding the essentially impersonal, fluid and mobile
nature of money market transactions.
C.
"Respondent Court of Appeals erred gravely in completely disregarding the vital circumstance that respondent Mever
Films, Inc. necessarily consented in advance to the purchase by petitioner Corazon Perez of part of its obligation
under its Negotiable Certificate of Indebtedness (NCI).
D.
"Respondent Court of Appeals erred gravely in applying the third parag. of Article 1285 of the Civil Code allowing
compensation of credits if assignment of credit is made without knowledge of the debtor, and in not applying the first
paragraph of said Article 1285 barring the defense of compensation where the debtor has consented to the
assignment of rights in favor of a third person.
E.
"Respondent Court of Appeals erred gravely in holding that compensation had set in and reduced respondent Mevers
obligation to P79,359.75.
F.
"Respondent Court of Appeals erred gravely in holding that payment by respondent Mever of P79,359.75 to the Sheriff
in connection with garnishment in certain civil cases against Congeneric extinguished Mevers obligation and could be
set up as another defense to the claim of petitioner Corazon Perez.
G.
"Respondent Court of Appeals erred gravely in reversing the decision of the Trial Court, in denying the motion for
reconsideration of petitioner Corazon Perez, and in granting respondent Mevers motion for resolution and/or
clarification by ordering refund of P139,141.63 with interest at 14% per annum, and ordering payment of P10,000.00
as attorneys fees." 1
The foregoing take issue with the following observations and findings of respondent Appellate Court:

jgc:chanroble s.com.p h

". . . We agree with the appellant (MEVER) that there was legal compensation under Article 1279 of the New Civil
Code which caused the extinguishment of the obligation under Negotiable Certificate of Indebtedness No. 0352.
"The original obligation of defendant-appellant to Congeneric is P500,000.00 (Exhibit 1) out of which it paid
P100,000.00 on the maturity date of the note leaving a balance of P400,000.00.
"By a Deed of Assignment dated September 9, 1974 executed by Ramon C. Mojica in favor of the appellant (Exhibit

2), the latter acquired the rights of the assignor to two Congeneric bills Nos. 1298 for P111,973.58 which matured on
August 6, 1974 (Exhibit 3) and No. 1419 for P208,666.67 which matured on August 13, 1974 (Exhibit 4) or a total
of P320,640.25. As of September 9, 1974, therefore, said bills were already due and demandable.
"On the other hand, appellants obligation in favor of Congeneric matured on August 5, 1974. As a result defendantappellant became both a debtor and a creditor of Congeneric. A debtor to the extent of P400,000.00 under the
Negotiable Certificate of Indebtedness (Exhibit 1) and a creditor for the sum of P320,640.25. By operation of law,
there was partial compensation to the extent of P320,640.25 (Articles 1281 & 1290, New Civil Code).
x

"As a consequence of compensation, the obligation of defendant-appellant to Congeneric as of September 9, 1974 was
reduced to P79,359.75.
"On October 7, 1974, Defendant-Appellant was served notices of garnishment in connection with Civil Cases Nos.
20043 and 20044 of the Court of First Instance of Rizal against Congeneric. It consists in the citation of some stranger
to the litigation, who is debtor to one of the parties to the action. By this means such debtor stranger becomes a
forced intervenor, and the court, having acquired jurisdiction over his person by means of the citation, requires him to
pay his debt, not to his former creditor, but to the new creditor, who is the creditor in the main litigation. It is merely
a case of involuntary novation by the substitution of one creditor for another (Tayabas Land Co. v. Sharuff, 41 Phil.
382, 387). Consequently, Defendant-Appellant held the amount it still owed Congeneric, which is P79,359.75, as any
payment to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid
(see Article 1243, New Civil Code). On November 15, 1975, the garnished amount was delivered by the appellant to
the deputy sheriff (Exhibit 5). Consequently, the balance of the obligation of defendant-appellant to Congeneric in
the sum of P79,359.75 was extinguished and therefore no longer obligated under its Negotiable Certificate of
Indebtedness.
". . . the evidence on record disclosed no notice to defendant-appellant of the purchase by appellee of part of
defendant-appellants obligation prior to compensation and consequently its non-liability to appellee.
"Prior to the telephone call of Mr. Dumadag to Mr. Jesus G. Sanchez on October 7, 1974 disclosing the sale to appellee
by Congeneric of part of its promissory note, appellant was unaware of the sale. In fact, it was the first time that it
came to know of the transaction (tsn. pp. 11-12 S, August 10, 1976) so much so that upon maturity of the note on
August 5, 1974, appellant made a partial payment of P100,000.00 not to appellee but to Congeneric. The telephone
advice to the appellant which was confirmed in writing or October 8, 1974 was too late. By that time the entire
obligation of appellant was already extinguished by payment, compensation and novation. A debtor who, before
having knowledge of the assignment, pays his creditor is released from his obligation (Article 1626, New Civil Code).
"Appellant correctly invoked compensation as a defense, for under Article 1285, 3rd paragraph
If the assignment is made without the knowledge of the debtor, he may set up compensation of all credits prior to the
same and also later ones until he had knowledge of the assignment."
If, in fact, Bill No. 1298 and Bill No. 1419 were due and demandable on September 9, 1974, the date of the
assignment from MOJICA to MEVER, or on October 3, 1974, the date of surrender of said Bills by MEVER to
CONGENERIC, it could be rightfully said that legal compensation had taken place. As pointed out by CORAZON,

however, said two bills contain the following notations:

jgc:chan roble s.com.p h

"Bill No. 1298 Paid 8/6/74 interest only, principal roll over up to 10/4/74 (Annexes A-1, A-2, Petitioners Reply
Brief; Exh. 3, Folder of Exhibits).
"Bill No. 1419 Paid 8/13/74 interest only, principal roll over up to 10/11/74 (Annexes A, A-3, ibid.; Exh. 3-A, Folder
of Exhibits).
Since, on the respective dates of maturity, specifically, August 6, 1974 and August 13, 1974, respectively, Ramon C.
Mojica was still the holder of those bills, it can be safely assumed that it was he who had asked for the roll-overs on
the said dates. MEVER was bound by the roll-overs since the assignment to it was made only on September 9, 1974.
The inevitable result of the roll-overs of the principals was that Bill No. 1298 and Bill No. 1419 were not yet due and
demandable as of the date of their assignment by MOJICA to MEVER on September 9, 1974, nor as of October 3, 1974
when MEVER surrendered said Bills to CONGENERIC. As a consequence, no legal compensation could have taken place
because, for it to exist, the two debts, among other requisites, must be due and demandable.
"Art. 1279. In order that compensation may be proper, it is necessary:

chanrobles. com:c ralaw:red

jgc:cha nrob les.com .ph

"(1) That each one of the obligors be found principally, and that he be at the same time a principal creditor of the
other;
"(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
"(3) That the two debts be due;
"(4) That they be liquidated and demandable;
"(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor."

cralaw virtua 1aw lib rary

We note that the xerox copies of Bill No. 1298 and Bill No. 1419 attached by MEVER to its Brief do not contain the
"roll-over" notations. However, MEVERs own exhibits before respondent Appellate Court, Exhibits "3" and "3-A", do
show those notations and MEVER must be held bound by them. And although this issue may not have been squarely
raised below, in the interest of substantial justice this Court is not prevented from considering such a pivotal factual
matter that had been overlooked by the Courts below. 2 The Supreme Court is clothed with ample authority to review
palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision. 3
There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence
Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts)
where lenders and borrowers do not deal directly with each other but through a middle man or dealer in the open
market." It involves "commercial papers" which are instruments "evidencing indebtedness of any person or entity . . .,
which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or
without recourse." 4 The fundamental function of the money market device in its operation is to match and bring
together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is an
"impersonal market", free from personal considerations." 5 The market mechanism is intended to provide quick
mobility of money and securities." 6

The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a
commercial paper in the money market necessarily knows in advance that it would be expeditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the
borrower or issuer of commercial paper of the sale or transfer to the investor.
Accordingly, we find no applicability herein of Article 1285, 3rd paragraph of the Civil Code. Rather, it is the first
paragraph of the same legal provision that is applicable:

jgc:chanroble s.com.p h

"ART. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation."

cralaw

virtua 1aw lib rary

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

[G.R. No. L-47369. June 30, 1987.]

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, Petitioners, v. R & B SURETY AND INSURANCE
COMPANY, INC., Respondent.

DECISION

FELICIANO, J.:

This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only
questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17,
Republic Act 296, as amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of
credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To
secure PNBs approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing
the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line
of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by
the respondent R & B Surety and Insurance Co., Inc. ("R & B Surety") in the specified amount in favor of the PNB.
Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply
with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the
Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the
principal obligor, PAGRICO. The Surety Bond also provided that R & B Suretys liability was not to be limited to the
principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses,
charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond.
In consideration of R & B Suretys issuance of the Surety Bond, two identical indemnity agreements were entered into
with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and
by petitioner Joseph Cochingyan, Jr.; the latter signed not only as President of CCM but also in his personal and
individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra
Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr. Villanueva signed both as Manager of PAGRICO and in
his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal
capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an
annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY
BOND for a period beginning . . . until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements
further provided:

jgc:chanrob les.com. ph

"(b) INDEMNITY: To indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances
and expenses of whatever kind and nature, including [of] attorneys fees, which the CORPORATION may, at any time,
become liable for, sustain or incur, as consequence of having executed the above mentioned Bond, its renewals,
extensions or substitutions and said attorneys fees [shall] not be less than twenty [20%] per cent of the total amount
claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether
the case is settled judicially or extrajudicially and whether the amount has been actually paid or not;

(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said indemnities will be paid to the
CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it
becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its renewals, extensions,
modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on
account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity
of previous knowledge of [or] consent from the other obligors.
x

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or disbursement made by the
SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the
belief that the SURETY COMPANY was obligate[dl to make such payment or in the belief that said payment was
necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of
the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be
disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any
and all such payments as stated in the preceeding clauses.
x

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B
Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of
payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cohingyan, Jr. and Jose K. Villanueva for
reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety
Bond. When petitioners failed to heed its demand, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K.
Villanueva and Liu Tua Beh in the Court of First Instance of Manila, praying principally that judgment be rendered:

jgc:chanroble s.com.p h

"b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid
premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the
Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the
total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of
P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of
September, 1966;
x

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R &
B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to
execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the

requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was
complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety
had assured him that the execution of the agreement was a mere formality and that he was to be considered a
stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from
enforcing the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R &
B Surety only "for accomodation purposes" and that it did not express their true intention; (ii) that the Principal
Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust
Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the
Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby
extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of
the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the
PNB had not yet proceeded against R & B Surety to enforce the latters liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner
Villanueva did not submit any evidence either on his "accomodation" defense. The trial court was therefore
constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted
in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the
dispositive portion of which reads as follows:

jgc:chanrob les.com. ph

"Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K.
Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of
their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 22, 1967;
On P8,000.00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000.00 from February 26, 1968.

chan rob1es v irt ual 1aw l ibra ry

until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00
as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiffs complaint on
August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorneys fees and expenses of litigation
which this Court deems just and equitable.
There being no showing the summons was duly served upon the defendant Liu Tua Beh who has filed no answer in
this case, plaintiffs complaint is hereby dismissed as against defendant Liu Tua Beh without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as
already noted, certified the case to us as one raising only questions of law.
The issues we must confront in this appeal are:

chanro b1es vi rtua l 1aw lib ra ry

1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under
the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their
obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B
Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965
(two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana
Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as follows:

chanrob 1es vi rtua l 1aw lib rary

WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and
Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor
of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to
P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc.
(CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities
extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of
the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason
of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective
obligations under the aforesaid bonds;

WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements
aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall
impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations
of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits
arising from the procurement of reparations consumer goods made thru the allocation of WARVETS;
x

1. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the
BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B
Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond
No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net
profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds
of Assignment of February 2, 1959 through the allocation of WARVETS;
x

6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION,
subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the
BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly
accredited to do business with the BENEFICIARY and its branches, unless said companies have been blacklisted for
reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT;
x

9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under
the bonds mentioned above." (Emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal
Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so
must the supporting Indemnity Agreements. 3
We are unable to sustain petitioners claim that the Surety Bond and their respective obligations under the Indemnity
Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object
or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of
either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also
be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose
is achieved an obligation is extinguished and a new one is created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation
is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is

never presumed: it must be established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the
emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical
relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be
released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is
not released. no novation occurs and the third person who has assumed the obligation of the debtor becomes merely
a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly
terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly
provides for the continuing subsistence of that obligation by stipulating that" [the Trust Agreement] shall not in any
manner release" R & B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new
obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case, the
parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other
words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied
novation is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or persons the Trustor[s] to
assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in
business for a stranger to a contract to assume obligations thereunder; a contract of surety ship or guarantee is the
classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the
extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates v. Rodriguez, 11 we held that:

jgc:chan roble s.com.p h

" [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to
assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not
constitute a novation, and the creditor can still enforce the obligation against the original debtor."

cralaw vi rtua1aw lib rary

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R
& B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the
PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two,
there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the
Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to
release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement,
could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor
under the Trust Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December
1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold
in abeyance any action to enforce its claims against [R & B Surety]."
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the [R &
B Surety] to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of

[P400.000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND ." This part of
the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security
Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact
became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply
indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the
Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code which provides in
part that" [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case. The petitioner-indemnitors are, as it were, second-tier parties so far as
the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligors (PAGRICO, R & B
Surety and the trustor[s]) could not prejudice the second-tier parties.
There is another reason why petitioner Villanuevas contention must fail. PNBs undertaking under the Trust
Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of
R & B Suretys obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that
of R & B Surety, by the time the Trust Agreement was entered into. Petitioners obligations under the Indemnity
Agreements had, in turn, already similarly matured, for those obligations were to mature "as soon as [R & B Surety]
became liable to make payment of any sum under the terms of the [Surety Bond] whether the said sum or sums or
part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079:

jgc:chanrob les.com. ph

" [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein." (Emphasis supplied).
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the
suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the
creditors remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period. The underlying rationale is not present in the instant case. As this Court has held,
"mere delay or negligence in proceeding against the principal will not discharge a surety unless there is between the
creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or
to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an
action on the original security." 12
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to
PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R &
B Surety may have against PAGRICO.
3. The last issue can be disposed of quickly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R
& B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held
similar indemnity clauses to be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against
actual loss but against liability as well. 14 While in a contract of indemnity against loss an indemnitor will not be liable
until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in
this case, the indemnitors liability arises as soon as the liability of the person to be indemnified has arisen without
regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against
petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB.

Summarizing, we hold that:

chan rob1es v irt ual 1aw li bra ry

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement
merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to "hold in abeyance any action to enforce its claim" against R & B Surety did not
amount to an "extension granted to the debtor" without petitioners consent so as to release petitioners from their
undertaking as indemnitors of R & B Surety under the Indemnity Agreements; and
(3) Petitioners are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The
present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B
Surety for the collection of its matured obligation under the Surety Bond.
WHEREFORE, the petitioners appeal is DENIED for lack of merit and the decision of the trial court is AFFIRMED in
toto. Costs against the petitioners.

G.R. No. 200602, December 11, 2013

ACE FOODS, INC., Petitioners, v. MICRO PACIFIC TECHNOLOGIES CO., LTD.,1Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2 are 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. 100023 10
(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 Letter14 dated September 19, 2002, stating that it ha[s] been returning the
[subject products] to [MTCL] thru [its] sales representative Mr. Mark Anteola who has agreed 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 Complaint 15 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

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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

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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 petition.
The Issue Before the Court
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 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.38
In the present case, it has not been shown that 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 obligation to pay the purchase price as well as to
accept the delivery of the goods,40 remain enforceable and subsisting.
As a final point, it may not be amiss to state that the return of the subject products pursuant to a rescissory action 41 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.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated October 21, 2011 and Resolution dated
February 8, 2012 of the Court of Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.

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