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1267 DOCTRINE OF UNFORTUNATE EVENTS

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION petitioner, vs. COURT OF


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

Period Applicable

P21,000.00

Starting on the 2nd year

P22,000.00

Starting on the 3rd year

P23,000.00

Starting on the 4th year

P24,000.00

Starting on the 5th year

3. TERMS OF PAYMENT - The rent stipulated in Paragraph 2 above shall be paid yearly in
advance by the LESSEE. The first annual rent in the amount of TWO HUNDRED
FORTY THOUSAND PESOS (P240,000.00), Philippine currency, shall be due and
payable upon the execution of this Agreement and the succeeding annual rents shall be
payable every twelve (12) months thereafter during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY - It is understood that the Property shall be used by the
LESSEE as the site, grounds and premises of a rock crushing plant and field office,
sleeping quarters and canteen/mess hall. The LESSORS hereby grant to the LESSEE

the right to erect on the Leased Property such structure(s) and/or improvement(s)
necessary for or incidental to the LESSEE's purposes.
...
11. TERMINATION OF LEASE - This Agreement may be terminated by mutual agreement
of the parties. Upon the termination or expiration of the period of lease without the
same being renewed, the LESSEE shall vacate the Leased Property at its expense.
On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a
Temporary Use Permit[2] for the proposed rock crushing project. The permit was to be valid for
two years unless sooner revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner requesting payment of the first
annual rental in the amount of P240,000 which was due and payable upon the execution of the
contract. They also assured the latter that they had already stopped considering the proposals
of other aggregates plants to lease the property because of the existing contract with petitioner.
[3]

In its reply-letter, petitioner argued that under paragraph 1 of the lease contract, payment of
rental would commence on the date of the issuance of an industrial clearance by the Ministry of
Human Settlements, and not from the date of signing of the contract. It then expressed its
intention to terminate the contract, as it had decided to cancel or discontinue with the rock
crushing project "due to financial, as well as technical, difficulties."[4]
The private respondents refused to accede to petitioner's request for the pretermination of
the lease contract. They insisted on the performance of petitioner's obligation and reiterated
their demand for the payment of the first annual rental.[5]
Petitioner objected to the claim of the private respondents and argued that it was "only
obligated to pay ... the amount of P20,000.00 as rental payments for the one-month period of
lease, counted from 07 January 1986 when the Industrial Permit was issued by the Ministry of
Human Settlements up to 07 February 1986 when the Notice of Termination was served"[6] on
private respondents.
On 19 May 1986, the private respondents instituted with the Regional Trial Court of Pasig
an action against petitioner for Specific Performance with Damages.[7] The case was docketed
as Civil Case No. 53444 at Branch 160 of the said court. After the filing by petitioner of its
Answer with Counterclaim, the case was set for trial on the merits.
What transpired next was summarized by the trial court in this wise:
Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant asked for
postponement of the reception of its evidence scheduled on August 10, 1988 and as prayed for,
was reset to August 25, 1988 (p. 91 rec.) Counsel for defendant again asked for postponement,
through representative, as he was presently indisposed. The case was reset, intransferable to
September 15 and 26, 1988 (p. 94 rec.) On September 2, 1988, the office of the Government

Corporate Counsel entered its appearance for defendant (p. 95, rec.) and the original counsel
later withdrew his appearance. On September 15, 1988 the Government Corporate Counsel
asked for postponement, represented by Atty. Elpidio de Vega, and with his conformity in open
court, the hearing was reset, intransferable to September 26 and October 17, 1988. (p. 98,
rec.) On September 26, 1988 during the hearing, defendant's counsel filed a motion for
postponement (urgent) as he had "sore eyes", a medical certificate attached.
Counsel for plaintiffs objected to the postponement and the court considered the evidence of the
government terminated or waived. The case was deemed submitted for decision upon the filing
of the memorandum. Plaintiffs filed their memorandum on October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for reconsideration of the
order of the court on September 26, 1988 (p. 107, rec.) The motion was not asked to be set for
hearing (p. 110 rec.) There was also no proof of notice and service to counsel for plaintiff. The
court in the interest of justice set the hearing on the motion on November 29, 1988. (p. 120,
rec.) but despite notice, again defendant's counsel was absent (p. 120-A, dorsal side,
rec.) without reason. The court reset the motion to December 16, 1988, in the interest of
justice. The motion for reconsideration was denied by the court. A second motion for
reconsideration was filed and counsel set for hearing the motion on January 19, 1989. During
the hearing, counsel for the government was absent. The motion was deemed abandoned but
the court at any rate, after a review of the incidents and the grounds relied upon in the earlier
motion of defendant, found no reason to disturb its previous order.[8]
On 12 April 1989, the trial court rendered a decision ordering petitioner to pay the private
respondents the amount of P492,000 which represented the rentals for two years, with legal
interest from 7 January 1986 until the amount was fully paid, plus attorney's fees in the amount
of P20,000 and costs.[9]
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in
ordering it to pay the private respondent the amount ofP492,000 and in denying it the right to be
heard.
Upon the affirmance of the trial court's decision[10] and the denial of its motion for
reconsideration, petitioner came to this Court ascribing to the respondent Court of Appeals the
same alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract,
which reads: "This lease shall be for a period of five (5) years, commencing on the date of
issuance of the industrial clearance by the Ministry of Human Settlements...." It then submits
that the issuance of an industrial clearance is a suspensive condition without which the rights
under the contract would not be acquired. The Temporary Use Permit is not the industrial
clearance referred to in the contract; for the said permit requires that a clearance from the
National Production Control Commission be first secured, and besides, there is a finding in the
permit that the proposed project does not conform to the Zoning Ordinance of Rodriguez,
(formerly Montalban), Rizal, where the leased property is located. Without the industrial
clearance the lease contract could not become effective and petitioner could not be compelled
to perform its obligation under the contract.

Petitioner is now estopped from claiming that the Temporary Use Permit was not the
industrial clearance contemplated in the contract. In its letter dated 24 April 1986, petitioner
states:
We wish to reiterate PNCC Management's previous stand that it is only obligated to pay
your clients the amount of P20,000.00 as rental payments for the one-month period of the
lease, counted from 07 January 1986 when the Industrial Permit was issued by the Ministry
of Human Settlements up to 07 February 1986 when the Notice of Termination was served
on your clients.[11] (Underscoring Supplied).
The "Industrial Permit" mentioned in the said letter could only refer to the Temporary Use Permit
issued by the Ministry of Human Settlements on 7 January 1986. And it can be gleaned from
this letter that petitioner has considered the permit as industrial clearance; otherwise, petitioner
could have simply told the private respondents that its obligation to pay rentals has not yet
arisen because the Temporary Use Permit is not the industrial clearance contemplated by
them. Instead, petitioner recognized its obligation to pay rental counted from the date the permit
was issued.
Also worth noting is the earlier letter of petitioner; thus:
[P]lease be advised of PNCC Management's decision to cancel or discontinue with the
rock crushing project due to financial as well as technical difficulties. In view thereof, we
would like to terminate our Lease Contract dated 18 November, 1985. Should you agree
to the mutual termination of our Lease Contract, kindly indicate your conformity hereto
by affixing your signature on the space provided below. May we likewise request
Messrs. Rene, Jose and Antonio, all surnamed Raymundo and Mrs. Socorro A.
Raymundo as Attorney-in-Fact of Amador S. Raymundo to sign on the spaces indicated
below.[12]
It can be deduced from this letter that the suspensive condition - issuance of industrial
clearance - has already been fulfilled and that the lease contract has become
operative. Otherwise, petitioner did not have to solicit the conformity of the private respondents
to the termination of the contract for the simple reason that no juridical relation was created
because of the non-fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently
cancelling the lease contract was financial as well as technical difficulties, not the alleged
insufficiency of the Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts
that it should be released from the obligatory force of the contract of lease because the purpose
of the contract did not materialize due to unforeseen events and causes beyond its control, i.e.,
due to abrupt change in political climate after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and
obligations arising therefrom have the force of law between the parties and should be complied
with in good faith.[13] But the law recognizes exceptions to the principle of the obligatory force of

contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: "The
debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable
only to obligations "to do", and not to obligations "to give".[14] An obligation "to do" includes all
kinds of work or service; while an obligation "to give" is a prestation which consists in the
delivery of a movable or an immovable thing in order to create a real right, or for the use of the
recipient, or for its simple possession, or in order to return it to its owner.[15]
The obligation to pay rentals[16] or deliver the thing in a contract of lease[17] falls within the
prestation to give; hence, it is not covered within the scope of Article 1266. At any rate, the
unforeseen event and causes mentioned by petitioner are not the legal or physical
impossibilities contemplated in said article. Besides, petitioner failed to state specifically the
circumstances brought about by the abrupt change in the political climate in the country except
the alleged prevailing uncertainties in government policies on infrastructure projects.
The principle of rebus sic stantibus[18] neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to exist. [19] This theory is said to be the basis
of Article 1267 of the Civil Code, which provides:
ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an
absolute application of the principle of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be presumed to have assumed the risks
of unfavorable developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.[20]
In this case, petitioner wants this Court to believe that the abrupt change in the political
climate of the country after the EDSA Revolution and its poor financial condition rendered the
performance of the lease contract impractical and inimical to the corporate survival of the
petitioner.
This Court cannot subscribe to this argument. As pointed out by private respondents:[21]
It is a matter of record that petitioner PNCC entered into a contract with private
respondents on November 18, 1985. Prior thereto, it is of judicial notice that after the
assassination of Senator Aquino on August 21, 1983, the country has experienced
political upheavals, turmoils, almost daily mass demonstrations, unprecedented,
inflation, peace and order deterioration, the Aquino trial and many other things that
brought about the hatred of people even against crony corporations. On November 3,
1985, Pres. Marcos, being interviewed live on U.S. television announced that there
would be a snap election scheduled for February 7, 1986.

On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the
contract of lease with private respondents with open eyes of the deteriorating conditions
of the country.
Anent petitioners alleged poor financial condition, the same will neither release petitioner
from the binding effect of the contract of lease. As held in Central Bank v. Court of Appeals,
[22]
cited by the private respondents, mere pecuniary inability to fulfill an engagement does not
discharge a contractual obligation, nor does it constitute a defense to an action for specific
performance.
With regard to the non-materialization of petitioners particular purpose in entering into the
contract of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same
will not invalidate the contract. The cause or essential purpose in a contract of lease is the use
or enjoyment of a thing.[23] As a general principle, the motive or particular purpose of a party in
entering into a contract does not affect the validity or existence of the contract; an exception is
when the realization of such motive or particular purpose has been made a condition upon
which the contract is made to depend.[24] The exception is not apply here.
Third. According to petitioner, the award of P492,000 representing the rent for two years is
excessive, considering that it did not benefit from the property. Besides, the temporary permit,
conformably with the express provision therein, was deemed automatically revoked for failure of
petitioner to use the same within one year from the issuance thereof. Hence, the rent payable
should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary permit
was valid for two years but was automatically revoked because of its non-use within one year
from its issuance. The non-use of the permit and the non-entry into the property subject of the
lease contract were both imputable to petitioner and cannot, therefore, be taken advantage of in
order to evade or lessen petitioners monetary obligation. The damage or prejudice to private
respondents is beyond dispute. They unquestionably suffered pecuniary losses because of
their inability to use the leased premises. Thus, in accordance with Article 1659 of the Civil
Code,[25] they are entitled to indemnification for damages; and the award ofP492,000 is fair and
just under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in denying
petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several postponements[26] to
petitioner before it deemed terminated and waived the presentation of evidence in petitioners
behalf.
It must be recalled that private respondents rested their case on 7 September 1987 yet.
Almost a year after, or on 10 August 1988 when it was petitioners turn to present evidence,
petitioners counsel asked for postponement of the hearing to 25 August 1988 due to conflict of
schedules,[28] and this was granted.[29] At the rescheduled hearing, petitioners counsel, through
a representative, moved anew for postponement, as he was allegedly indisposed.[30] The case
was then reset intransferable to September 15 and 26, 1988. [31] On 2 September 1988, the
[27]

Office of the Government Corporate Counsel, through Atty. Elpidio J. Vega, entered its
appearance for the petitioner,[32] and later the original counsel withdrew his appearance.[33] On
15 September 1988, Atty. Vega requested for postponement to enable him to go over the
records of the case.[34] With his conformity, the hearing was reset intransferable to September
26 and October 17, 1988.[35] In the morning of 26 September 1988, the court received Atty.
Vegas Urgent Motion for Postponement on the ground that he was afflicted with conjunctivitis or
sore eyes.[36] This time, private respondents objected; and upon their motion, the court deemed
terminated and waived the presentation of evidence for the petitioner. [37] Nevertheless, before
the court considered the case submitted for decision, it required the parties to submit their
respective memoranda within thirty days.[38] But petitioner failed to file one.
Likewise, the court was liberal in respect to petitioners motion for
reconsideration. Notwithstanding the lack of request for hearing and proof of notice and service
to private respondents, the court set the hearing of the said motion on 29 November 1988.
[39]
Upon the denial of the said motion for lack of merit, [40] petitioner filed a second motion for
reconsideration. But during the hearing of the motion on a date selected by him, Atty. Vega was
absent for no reason at all, despite due notice.[41]
From the foregoing narration of procedural antecedents, it cannot be said that the petitioner
was deprived of its day in court. The essence of due process is simply an opportunity to be
heard.[42] To be heard does not only mean oral arguments in court; one may be heard also
through pleadings. Where opportunity to be heard, either through oral arguments or pleadings,
is accorded, there is no denial of procedural due process.[43]
WHEREFORE, the instant petition is DENIED and the challenged decision of the Court of
Appeals is AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.

VICTORINO MAGAT, JR. substituted by heirs, OLIVIA D. MAGAT, and minors MA. DULCE
MAGAT,
MA.
MAGNOLIA
MAGAT,
RONALD
MAGAT
and
DENNIS
MAGAT, petitioners,
vs.
COURT
OF
APPEALS
and
SANTIAGO
A.
GUERRERO, respondents.
DECISION
PARDO, J.:

The case is an appeal[1] from the decision of the Court of Appeals [2] reversing the decision of
the Regional Trial Court of Makati, Metro Manila,[3]ruling in favor of respondent Santiago A.
Guerrero and dismissing petitioners' complaint.
First, the facts.
Private respondent Santiago A. Guerrero (hereinafter referred to as "Guerrero") was
President and Chairman of[4] Guerrero Transport Services", a single proprietorship.[5]
Sometime in 1972, Guerrero Transport Services won a bid for the operation of a fleet of
taxicabs within the Subic Naval Base, in Olongapo. As highest bidder, Guerrero was to "provide
radio-controlled taxi service within the U. S. Naval Base, Subic Bay, utilizing as demand
requires... 160 operational taxis consisting of four wheel, four-door, four passenger, radio
controlled, meter controlled, sedans, not more than one year..."[6]
On September 22, 1972, with the advent of martial law, President Ferdinand E. Marcos
issued Letter of Instruction No. 1 (hereinafter referred to as "the LOI"). We reproduce the text,
as follows:
"Letter of Instruction No. 1
"SUBJECT: SEIZURE AND CONTROL OF ALL PRIVATELY OWNED NEWSPAPERS,
MAGAZINES, RADIO AND TELEVISION FACILITIES AND ALL OTHERMEDIA
OF COMMUNICATION.
"To: 1.The Press Secretary
Office of the President
Manila
" 2. The Secretary
Department of National Defense
Camp E. Aguinaldo, Q.C.
"In view of the present national emergency which has been brought about by the activities of
those who are actively engaged in a criminal conspiracy to seize political and state power in the
Philippines and to take over the Government by force and violence the extent of which has now
assumed the proportion of an actual war against our people and their legitimate Government,
and pursuant to Proclamation No. 1081 dated September 21, 1972, and in my capacity as
commander in chief of all the armed forces of the Philippines and in order to prevent the use of
privately owned newspapers, magazines, radio and television facilities and all other media of
communications, for propaganda purposes against the government and its duly constituted
authorities or for any purpose that tend to undermine the faith and confidence of the people in
our government and aggravate the present national emergency, you are hereby ordered

forthwith to take over and control or cause the taking over and control of all such newspapers,
magazines, radio and television facilities and all other media of communications, wherever they
are, for the duration of the present national emergency, or until otherwise ordered by me or by
my duly designated representative.
"In carrying out the foregoing order you are hereby also directed to see to it that reasonable
means are employed by you and your men and that injury to persons and property must be
carefully avoided."
On September 25, 1972, pursuant to the aforequoted Letter of Instruction, the Radio
Control Office issued Administrative Circular No. 4 (hereinafter referred to as "the Admin.
Circular"), herein quoted in full:
"SUBJECT: SUSPENDING THE ACCEPTANCE AND PROCESSING OF APPLICATIONS
FOR RADIO STATION CONSTRUCTION PERMITS AND FOR PERMITS TO
OWN AND/OR POSSESS RADIO TRANSMITTERS OR TRANSCEIVERS.
"In view of the existence of a state of emergency and the declaration by the President of martial
law in the entire country under Proclamation No. 1081 dated September 21, 1972, effective
immediately the acceptance and processing by the radio control office of applications for radio
stations constructions permits and for permits to possess, own, transfer, purchase and sale of
radio transmitters and transreceivers as well as manufacturers and dealers permits of said
equipment is hereby suspended. "Exempted from this circular are applications for radio station
construction permits and for permits to possess, own, transfer, purchase and sell radio
transmitters and transceivers for the following radio stations:
"1. Aeronautical Stations;
" 2. Aeronautical Fixed Stations;
" 3. Aircraft Stations;
"4. Coastal Stations; and
"5. Ship Stations.
"This circular shall be strictly observed until lifted upon proper instructions from higher
authorities."
On September 25, 1972, Guerrero and Victorino D. Magat (hereinafter referred to as
Victorino), as General Manager of Spectrum Electronic Laboratories, a single proprietorship,
executed a letter-contract for the purchase of transceivers at a quoted price of US$77,620.59,
FOB Yokohoma. Victorino was to deliver the transceivers within 60 to 90 days after receiving
notice from Guerrero of the assigned radio frequency,[7] "taking note of Government
Regulations."[8]

The contract was signed and Victorino contacted his Japanese supplier, Koide & Co., Ltd.
and placed an order for the transceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed that Guerrero won
the bid for the commercial transportation contract.[9]
On October 4, 1972, middle man and broker[10] Isidro Q. Aligada of Reliance Group
Engineers, Inc. (hereinafter referred to as "Aligada"), wrote Victorino, informing him that a radio
frequency was not yet assigned to Guerrero and that government regulations might complicate
the importation of the transceivers. However, in the same letter, Victorino was advised to advise
his supplier "to proceed (with) production pending frequency information." Victorino was also
assured of Guerrero's financial capability to comply with the contract.[11]
On October 6, 1972, Guerrero informed Aligada of the frequency number [12] assigned by
Subic Naval Base authorities. Aligada was instructed to "proceed with the order thru Spectrum
Electronics Laboratories."[13]
On October 7, 1972, Aligada informed Magat of the assigned frequency number. Aligada
also advised Victorino to "proceed with the order upon receipt of letter of credit."[14]
On January 10, 1973, Guerrero applied for a letter of credit with the Metropolitan Bank and
Trust Company.[15] This application was not pursued.[16]
On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio S. Vergara, informed
Guererro that the order with the Japanese supplier has not been canceled. Should the contract
be canceled, the Japanese firm would forfeit 30% of the deposit and charge a cancellation fee in
an amount not yet known, Guerrero to bear the loss. Further, should the contract be canceled,
Victorino would demand an additional amount equivalent to 10% of the contract price.[17]
Unable to get a letter of credit from the Central Bank due to the refusal of the Philippine
government[18] to issue a permit to import the transceivers,[19] Guerrero commenced operation of
the taxi cabs within Subic Naval Base, using radio units borrowed from the U.S. government
(through the Subic Naval Base authorities). [20] Victorino thus canceled his order with his
Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court, Makati a complaint for
damages arising from breach of contract against Guerrero.[21]
On June 7, 1973, Guerrero moved to dismiss the complaint on the ground that it did not
state a cause of action.[22]
On June 16, 1973, the trial court[23] granted the motion and dismissed the complaint.[24]
On July 11, 1973, Victorino filed a petition for review on certiorari with this Court assailing
the dismissal of the complaint.[25]

On April 20, 1983, this Court[26] ruled that the complaint sufficiently averred a cause of
action. We set aside the order of dismissal and remanded the case to the trial court for further
proceedings, to wit:[27]
"ACCORDINGLY, the questioned order of dismissal is hereby set aside and the case ordered
remanded to the court of origin for further proceedings. No costs.
"SO ORDERED."
On November 27, 1984, the trial court [28] ordered that the case be archived for failure of
Victorino to prosecute.[29]
On March 11, 1985, petitioners, Olivia, Dulce, Ma. Magnolia, Ronald and Dennis Magat
(hereinafter referred to as "heirs of Victorino"), moved to reinstate the case and to substitute
Victorino in its prosecution. Apparently, Victorino died on February 18, 1985.[30]
On April 29, 1985, the trial court granted the motion.[31]
On July 12, 1991, the trial court decided in favor of the heirs of Victorino and ordered
Guerrero to pay temperate, moral and exemplary damages, and attorney's fees, disposing of
the case in this wise :[32]
"WHEREFORE, judgment is rendered for the substituted plaintiffs and against the defendant
"1. Ordering defendant to pay substituted plaintiffs the sum of -P25,000.00 for temperate
damages for injury to plaintiff's business dealings with foreign and local businessmen;
"2. P50,000.00 as moral damages;
"3. P25,000.00 as exemplary damages; and
"4. P20,000.00 as attorney's fees.
"SO ORDERED."
On August 21, 1991, Guerrero appealed to the Court of Appeals.[33]
On October 4, 1995, the Court of Appeals rendered the decision appealed from, disposing
as follows:[34]
"WHEREFORE, judgment is hereby rendered DISMISSING the complaint.
"No pronouncements as to costs.
" SO ORDERED."

On October 26, 1995, the heirs of Victorino filed with the Court of Appeals a motion for
reconsideration.[35]
On March 12, 1996, the Court of Appeals denied the motion for reconsideration.[36]
Hence, this appeal.[37]
The issue is whether the contract between Victorino and Guerrero for the purchase of radio
transceivers was void. Stated differently, whether the transceivers subject of the contract were
banned/ contraband items prohibited by the LOI and the Administrative Circular to import.
The contract was valid; the radio transceivers were not contraband.
"Contraband" generally refers to "any property which is unlawful to produce or possess." It
refers to goods which are exported and imported into a country against its laws.[38]
In declaring the contract void ab initio, the Court of Appeals ruled that the importation of the
transceivers meant the inevitable passing of such goods through Philippine Ports, where the
LOI and the Administrative Circular have to be observed and applied with full force and effect.
[39]
The Court of Appeals declared that the proposed importation of such goods was contrary to
law, hence, the nullity of the contract.[40]
We do not agree. The contract was not void ab initio. Nowhere in the LOI and Admin.
Circular is there an express ban on the importation of transceivers.
The LOI and Administrative Circular did not render "radios and transceivers" illegal per
se. The Administrative Circular merely ordered the Radio Control Office to suspend the
"acceptance and processing .... of applications... for permits to possess, own, transfer, purchase
and sell radio transmitters and transceivers..."[41] Therefore, possession and importation of the
radio transmitters and transceivers was legal provided one had the necessary license for it.
[42]
Transceivers were not prohibited but merely regulated goods. The LOI and Administrative
Circular did not render the transceivers outside the commerce of man. They were valid objects
of the contract.[43]
Affirming the validity of the contract, we next discuss whether the contract was breached.
Guerrero testified that a permit to import the transceivers from Japan was denied by the
Radio Control Board. He stated that he, together with Aligada, Victorino and a certain John
Dauden personally went to the Radio Control Office, and were denied a permit to import. They
also went to the Office of the President, where Secretary Ronaldo B. Zamora explained that
radios were "banned like guns because of martial law."[44] Guerrero testified that this prevented
him from securing a letter of credit from the Central Bank.[45] This testimony was not rebutted.
The law provides that "[w]hen the service (required by the contract) has become so
manifestly beyond the contemplation of the parties, the obligor may also be released therefrom,
in whole or in part."[46] Here, Guerrero's inability to secure a letter of credit and to comply with his

obligation was a direct consequence of the denial of the permit to import. For this, he cannot be
faulted.
Even if we assume that there was a breach of contract, damages cannot be
awarded. Damnum absque injuria.
There was no bad faith.[47] Bad faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest or ill will that partakes of the nature of
fraud.[48]Guerrero honestly relied on the representations of the Radio Control Office and the
Office of the President.
True, Guerrero borrowed equipment from the Subic Naval Base authorities at zero cost.
This does not automatically translate to bad faith. Guerrero was faced with the danger of the
cancellation of his contract with Subic Naval Base. He borrowed equipment as a prudent and
swift alternative. There was no proof that he resorted to this option with a deliberate and
malicious intent to dishonor his contract with Victorino. An award of damages surely cannot be
based on mere hypotheses, conjectures and surmises. Good faith is presumed, the burden of
proving bad faith rests on the one alleging it. [50] Petitioners did not effectively discharge the
burden in this case.
[49]

To recover moral damages in an action for breach of contract, the breach must be palpably
wanton, reckless, malicious, in bad faith, oppressive or abusive.[51] This is not the case here.
Exemplary damages also cannot be awarded. Guerrero did not act in a wanton, fraudulent,
reckless, oppressive or malevolent manner.[52]
Neither can actual damages be awarded. True, indemnification for damages contemplates
not only actual loss suffered (damnum emergens) but unrealized profits (lucrum cessans) as
well.[53] However, to be entitled to adequate compensation for pecuniary loss, the loss must be
actually suffered and duly proved.[54] To recover actual damages, the amount of loss must not
only be capable of proof, but must be proven with a reasonable degree of certainty. The claim
must be premised upon competent proof or upon the best evidence obtainable,[55] such as
receipts[56] or other documentary proof.
Only the testimony of Aligada was presented to substantiate petitioners' claim for unrealized
profits.[57] Aligada testified that as a result of the cancellation of the contract, Victorino had to
suspend transactions with his Japanese supplier for six (6) months. Aligada stated that the
volume of Victorino's business with Subic Naval Base also diminished significantly. Aligada
approximated that Victorino's unrealized business opportunities amounted to P400,000.00.
[58]
Being a witness for Victorino's heirs and standing to gain from the contract's fulfillment,
Aligada's testimony is self-serving. It is also hearsay. We fail to see how this "evidence" proves
actual damages with a "reasonable degree of certainty." [59] If proof is "flimsy", we cannot award
actual damages.[60]
WHEREFORE, we AFFIRM the decision of the Court of Appeals promulgated on October
11, 1995, in CA-G. R. CV No. 34952, dismissing the complaint.

No costs.
SO ORDERED.

1278-1290 COMPENSATION
BANK OF THE PHILIPPINE ISLANDS and GRACE ROMERO, petitioners, vs. COURT OF
APPEALS and EDVIN F. REYES,respondents.
DECISION
PUNO, J.:
Petitioners seek a review of the Decision 1 of respondent Court of Appeals in CA-G.R. CV
No. 41543 reversing the Decision2 of the Regional Trial Court of Quezon City, Branch 79, and
ordering petitioners to credit private respondents Savings
Account No. 3185-0172-56 with P10,556.00 plus interest.
The facts reveal that on September 25, 1985, private respondent Edvin F. Reyes opened
Savings Account No. 3 185-0172-56 at petitioner Bank of the Philippine Islands (BPI) Cubao,
Shopping Center Branch. It is a joint AND/OR account with his wife, Sonia S. Reyes.
Private respondent also held a joint AND/OR Savings Account No. 3185-0128-82 with
his grandmother, Emeteria M. Fernandez, opened3on February 11, 1986 at the same BPI
branch. He regularly deposited in this account the U.S. Treasury Warrants payable to the order
of Emeteria M. Fernandez as her monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S.
Treasury Department. She was still sent U.S. Treasury Warrant No. 21667302
dated January 1, 1990 in the amount of U.S. $377.003 or P10,556.00. On January
4, 1990, private respondent deposited the said U.S. treasury check of Fernandez in Savings
Account No. 3 185-0128-82. The U.S. Veterans Administration Office in Manila conditionally
cleared the check.4 The check was then sent to the United States for further clearing.5
Two months after or on March 8, 1990, private respondent closed Savings Account No. 3
185-0128-82 and transferred its funds amounting to P13,112.91 to Savings Account No. 3 1850172-56, the joint account with his wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was
discovered that Fernandez died three (3) days prior to its issuance. The U.S. Department of
Treasury requested petitioner bank for a refund.6 For the first time petitioner bank came to know
of the death of Fernandez.

On February 19, 1991, private respondent received a PT & T urgent telegram from
petitioner bank requesting him to contact Manager Grace S. Romero or Assistant Manager
Carmen Bernardo. When he called up the bank, he was informed that the treasury check was
the subject of a claim by Citibank NA, correspondent of petitioner bank. He assured petitioners
that he would drop by the bank to look into the matter. He also verbally authorized them to
debit from his other joint account the amount stated in the dishonored U.S. Treasury
Warrant.7 On the same day, petitioner bank debited the amount of P10,556.00 from private
respondents Savings Account No. 3185-0172-56.
On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the
petitioner bank and the refund documents were shown to them. Surprisingly, private respondent
demanded from petitioner bank restitution of the debited amount. He claimed that because of
the debit, he failed to withdraw his money when he needed them. He then filed a suit for
Damages8 against petitioners before the Regional Trial Court of Quezon City, Branch 79.
Petitioners contested the complaint and counter-claimed for moral and exemplary
damages. By way of Special and Affirmative Defense, they averred that private respondent
gave them his express verbal authorization to debit the questioned amount. They claimed
that private respondent later refused to execute a written authority.9
In a Decision dated January 20, 1993, the trial court dismissed the complaint of private
respondent for lack of cause of action.10
Private respondent appealed to the respondent Court of Appeals. On August 16, 1994, the
Sixteenth Division of respondent court in AC-G.R. CV No. 41543 reversed the impugned
decision, viz:
WHEREFORE, the judgment appealed from is set aside, and another one entered ordering
defendant (petitioner) to credit plaintiffs (private respondents) S.A. No. 3 185-0172-56 with
P10,556.00 plus interest at the applicable rates for express teller savings accounts
from February 19,1991, until compliance herewith. The claim and counterclaim for damages are
dismissed for lack of merit.
SO ORDERED.11
Petitioners now contend that respondent Court of Appeals erred:
I
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT
RESPONDENT REYES GAVE EXPRESS AUTHORITY TO PETITIONER BANK TO DEBIT HIS
JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE OF THE RETURNED U.S. TREASURY
WARRANT.
II

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT


PETITIONER BANK HAS LEGAL RIGHT TO APPLY THE DEPOSIT OF RESPONDENT
REYES TO HIS OUTSTANDING OBLIGATION TO PETITIONER BANK BROUGHT ABOUT BY
THE RETURN OF THE U.S.TREASURY WARRANT HE EARLIER DEPOSITED UNDER THE
PRINCIPLE OF LEGAL COMPENSATION.
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING CORRECTLY
THE PRINCIPLES ENUNCIATED BY THE SUPREME COURT IN THE CASE OF
GULLAS V. PNB, 62 PHIL. 519.
IV
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPRECIATING THE FACT
THAT THE MONEY DEBITED BY PETITIONER BANK WAS THE SAME MONEY
TRANSFERRED BY RESPONDENT REYES FROM HIS JOINT AND/OR ACCOUNT WITH
HIS GRANDMOTHER TO HIS JOINT AND/OR ACCOUNT WITH HIS WIFE.12
We find merit in the petition.
The first issue for resolution is whether private respondent verbally authorized petitioner
bank to debit his joint account with his wife for the amount of the returned U.S. Treasury
Warrant. We find that petitioners were able to prove this verbal authority by preponderance
of evidence. The testimonies of Bernardo and Romero deserve credence. Bernardo testified:
xxx
Q: After that, what
A:

xxx

xxx

happened?

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

Q: What was his response if any?


A:

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


xxx

xxx

xxx

Q: And so what was his response?


A:

He said that dont you worry about it.


xxx

xxx

xxx

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

A:

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


confirmation or authorization.13

The conversation was promptly relayed to Romero who testified:


xxx

xxx

xxx

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

This was immediately relayed to me as manager of the Bank of the Philippine


Islands, sir.

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


A:

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

xxx

xxx

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

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

We are not disposed to believe private respondents allegation that he did not give any
verbal authorization. His testimony is uncorroborated. Nor does he inspire credence. His past
and fraudulent conduct is an evidence against him. 15 He concealed from petitioner bank the
death of Fernandez on December 28, 1989.16 As of that date, he knew that Fernandez was no
longer entitled to receive any pension. Nonetheless, he still received the U.S. Treasury Warrant
of Fernandez, and on January 4, 1990 deposited the same in Savings Account No. 3185-012882. To pre-empt a refund, private respondent closed his joint account with Fernandez (Savings
Account No. 31-85- 0128-82) on March 8, 1990 and transferred its balance to his joint account
with his wife (Savings Account No. 3 185-0172-56). Worse, private respondent declared under
the penalties of perjury in the withdrawal slip 17 dated March 8, 1990 that his co-depositor,
Fernandez, is still living. By his acts, private respondent has stripped himself of credibility.
More importantly, the respondent court erred when it failed to rule that legal compensation
is proper. Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other.18 Article 1290 of the Civil Code provides that when all the requisites
mentioned inArticle 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation. Legal compensation operates even against the
will of the interested parties and even without the consent of them.19 Since this compensation
takes place ipso jure, its effects arise on the very day on which all its requisites concur. 20 When
used as a defense, it retroacts to the date when its requisites are fulfilled.21

Article 1279 states that in order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The obligors bound
principally are at the same time creditors of each other. Petitioner bank stands as a debtor of
the private respondent, a depositor. At the same time, said bank is the creditor of the private
respondent with respect to the dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a third person.
It is true that the joint account of private respondent and his wife was debited in the case at
bar. We hold that the presence of private respondents wife does not negate the element of
mutuality of parties, i.e., that they must be creditors and debtors of each other in their own
right. The wife of private respondent is not a party in the case at bar. She never asserted any
right to the debited U.S. Treasury Warrant. Indeed, the right of the petitioner bank to make the
debit is clear and cannot be doubted. To frustrate the application of legal compensation on the
ground that the parties are not all mutually obligated would result in unjust enrichment on the
part of the private respondent and his wife who herself out of honesty has not objected to the
debit.
The rule as to mutuality is strictly applied at law. But not in equity, where to allow the
same would defeat a clear right or permit irremediable injustice.22
IN VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV No. 41543
dated August 16,1994 is ANNULLED and SET ASIDE and the Decision of the trial court in Civil
Case No. Q-91-8451 dated January 20, 1993 is REINSTATED. Costs against private
respondent.
SO ORDERED.
PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON
LAPEZ,[1] doing business under the name and style SAPPHIRE SHIPPING,
respondents.
DECISION

PANGANIBAN, J.:
Does a local bank, while acting as local correspondent bank, have the right to intercept
funds being coursed through it by its foreign counterpart for transmittal and deposit to the
account of an individual with another local bank, and apply the said funds to certain obligations
owed to it by the said individual?
Assailed in this petition is the Decision of respondent Court of Appeals [2] in CA-G.R. CV No.
27926 rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107
of Quezon City, the dispositive portion of which read:[3]
"WHEREFORE, judgment is hereby rendered:
1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff
(private respondent herein) the sum of US$2,627.11 or its equivalent in Philippine currency with
interest at the legal rate from January 13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dfismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are reproduced hereinbelow,
the same being undisputed by the parties:[4]
"The body of the decision reads:
"'After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the
Court makes the following conclusions:
"'(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from
remittances of the plaintiff's principals (sic) abroad. These were admitted by the defendant,
subject to the affirmative defenses of compensation for what is owing to it on the principle of
solution (sic) indebiti;
"'(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to be
credited to his account at Citibank, Greenhills Branch; the second was from Libya, and was
intended to be deposited at the plaintiff's account with the defendant, No. 830-2410;
(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of
P2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This was answered by the
defendant on December 22, 1986 (Exh. 13), inviting the plaintiff to come for a conference;
"'(d) There were indeed two instances in the past, one in November 1980 and the other in
January 1981 when the plaintiff's account No. 830-2410 was doubly credited with the
equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an aggregate amount

of P87,380.44. The defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15; see also
Annexes C and E to defendant's Answer), were never refuted nor impugned by the plaintiff. He
claims, however, that plaintiffs claim has prescribed.
"'(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated
credits erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23,
1986 or 5 years and 11 months from November 1980, and 5 years and 9 months from January
1981. Such letter was answered by the plaintiff on December 2, 1986 (Annex C,
Complaint). This plaintiff's letter was likewise replied to by the defendant through Exh. 13;
"'(f) The deduction of P34,340.38 was made by the defendant not without the knowledge and
consent of the plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E)
by the defendant.
"'There is no question that the two erroneous double payments made to plaintiff's accounts in
1980 and 1981 created an extra-contractual obligation on the part of the plaintiff in favor of the
defendant, under the principle of solutio indebiti, as follows:
"'If something is received when there is no right to demand it, and it was unduly delivered
throughg (sic) mistake, the obligation to return it arises."' (Article 2154, Civil Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the herein petitioner
was legally justified in making the compensation or set-off against the two remittances coursed
through it in favor of private respondent to recover on the double credits it erroneously made in
1980 and 1981, based on the principle of solutio indebiti, and second, whether or not petitioner's
claim is barred by the statute of limitations. The trial court's ratiocination, as quoted by the
appellate Court, follows:[5]
"'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy, commenced by
third persons and communicated in due time to the debtor."'
"'In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts
consist in a sum of money, are both due, liquidated and demandable, and over neither of them

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

in the banking system of the country, something we can ill afford at this time when we need to
attract and invite deposits of foreign currencies."'
"It would have been different has the telex advice from NCB of Jeddah been for deposit of
$2,627.11 to plaintiffs account No. 830-2410 with the defendant bank. However, the defendant
alleged this for the first time in its Memorandum (Pls. see par. 16, p. 6 of defendant's
Memorandum). There was neither any allegation thereof in its pleadings, nor was there any
evidence to prove such fact. On the contrary, the defendant admitted that the telex advice was
for credit of the amount of $2,627.11 to plaintiffs account with Citibank, Greenhills, San Juan,
MetroManila (Pls. see par. of defendant's Answer with Compulsory Counterclaim, in relation to
plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11
against the double payments to plaintiff's account is not in accordance with law.
"'On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing,
there was no express contract of agency. On the other hand, were we to infer that there was an
implied agency, the same would not be between the plaintiff and defendant, but rather, between
the National Commercial Bank of Jeddah as principal on the one hand, and the defendant as
agent on the other. Thus, in case of violation of the agency, the cause of action would accrue to
the NCB and not to the plaintiff.
"'The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's
Exh. "E", which is a receipt issued to the plaintiff by the defendant for the amount of P34,340.00
in "full settlement of accounts receivables with RICB Fund Transfer Department, PNB-Escolta
base on Legal Department Memo dated February 28, 1987" seems to uphold the defendant's
theory that the said amount was voluntarily delivered by the plaintiff to the defendant as alleged
in the last paragraph of defendant's memorandum. The same is in accordance with the
defendant's answer, as follows:
"The retention and application of the amount of P34,340.38 was done in a manner consonant
with basic due process considering that
plaintiff was not only furnisheddocumented proof of the cause but was also given the opportunit
y to con(tro)vert such Proof.
"Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent
to the retention and application of the amount in question." (Pls. see paragraphs 8-9,
defendant's Answer with Compulsory Counterclaim to Plaintiff's Supplemental Complaint)."
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating
that such receipt was handed over to the plaintiff when he "paid" or allowed the deduction from
the amount of $28,392.38 from Libya.
"'At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from
Brega Petroleum Marketing Company of Libya (from where the P34,340.38 was deducted) was
intended for credit and deposit in plaintiff's account at the defendant's Bank CA No. 830-2410
(per par. 1, page 2, Memorandum for the plaintiff). Such being the case, the Court believes that
insofar as the amount of P34,340.38 is concerned, all the requirements of Art. 1279 of the Civil
Code are present, and the said amount may properly be the subject of compensation or set-

off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as the amount
of P34,392.38 is concerned), compensation takes place by operation of law (Art.
1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44.
"Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is
not applicable in this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive
period for actions upon a quasi-contract (such as solutio indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the herein petitioner was
obligated to pay private respondent the amount of US$2,627.11 or its peso equivalent, with
interest at the legal rate. The court dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained
the US$2,627.11 in payment of the private respondent's indebtedness by way of compensation
or set-off, as provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:
"The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi
Arabia, thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the
credit/account of Plaintiff with the Citibank, Greenhills Branch, San Juan, Metro Manila, coursed
thru the PNB's head office, the NCB's corresponden(t) bank in the Philippines.
"The credit account, or simply account means
that the amount stated in the telegraphic money transfer is to be credited in the account of plaint
iff with the Citibank,and, in that sense, presupposes a creditor-debtor relationship between the p
laintiff, as creditor and the Citibank, as debtor. Withal the telegraphic money transfer, nosuch cr
editor-debtor relationship could have been created between the plaintiff and defendant.
"The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN
from the NCB in Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank in the
Philippines, there is created between the two banks a sort of communication exchange for the
corresponden(t) bank to transmit and/or remit and/or pay the value of the telegraphic transfer in
accordance with the dictate of the correspondence exchange. Some such responsibility of the
corresponden(t) bank is akin to Section 7 of the Rules and Regulations Implementing E.O. 857,
as amended by E.O. 925, "x x x to take charge of the prompt payment" of the telegraphic
transfer, that is,
by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptl
y credited to the account of the plaintiffwith the said bank. That is all that the PNB can do under
the remittance arrangement that it has with the NCB. With its responsibility as defined as well
as by the nature of its banking business and the responsibility attached to it, and through which
the industry, trade and commerce of all countries and communities are carried on, the PNB's
liability as corresponden(t) bank continues until it has completgely (sic) performed and
discharged it(s) obligation thereunder." (underscoring ours)
Hence, the respondent Court affirmed the trial court's holding in toto.

Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed
Decision.
The Issue
Petitioner's arguments revolve around one single issue:[6]
"WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT
LEGALLY BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB
THE SUM OF US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS
TAKEN PLACE WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO
PRIVATE RESPONDENT THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN
CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD PREVENT THE
UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE
SAME AMOUNT FROM PRIVATE RESPONDENT."
The Court's Ruling
We note that in framing the issue in the manner aforecited, the petitioner implicitly
admits the correctness of the respondent Court's affirmance of the trial court's ruling finding
herein petitioner liable to private respondent for the sum of US$2,627.11 or its peso
equivalent. And it could not have done otherwise. After a careful scrutiny of both the decision
of the trial court and that of the appellate court, we find no reversible error whatsoever in either
ruling, and see no need to add to the extensive discussions already made regarding the nonexistence of all the requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since respondent Court found
that private respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor
of private respondent (resulting in legal compensation), the (h)onorable respondent court should
have ordered private respondent to pay PNB what the latter is bound by the trial court's decision
to return the former.[7]
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the
trial court and the appellate Court, and have this Court validate its original misdeed, thereby
making a mockery of the entire judicial process of this country. What the petitioner bank is
effectively saying is that since the respondent Court of Appeals ruled that petitioner bank could
not do a shortcut and simply intercept funds being coursed through it, for transmittal to another
bank, and eventually to be deposited to the account of an individual who happens to owe some
amount of money to the petitioner, and because respondent Court ordered petitioner bank to
return the intercepted amount to said individual, who in turn was found by the appellate Court to
be indebted to petitioner bank, THEREFORE, there must now be legal compensation of the
amounts each owes the other, and hence, there is no need for petitioner bank to actually
return the amount, and finally, that petitioner bank ends up in exactly the same position as when
it first took the improper and unwarranted shortcut by intercepting the said money transfer,
notwithstanding the assailed Decision saying that this could not be done!

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

REALTY DEVELOPMENT CORPORATION and CRISTINA CONDOMINIUM


CORPORATION, petitioners, vs. COURT OF APPEALS and UNISHPERE
INTERNATIONAL, INC. respondents.
DECISION

KAPUNAN, J.:
This petition for review on certiorari seeks to set aside the decision and resolution of the
Court of Appeals rendered on February 17, 1995 and on May 15, 1995, respectively, in CA-G.R.
SP No. 22735 reversing the order of the Securities and Exchange Commission (SEC) in SECAC No. 271 issued on August 21, 1990.
The following facts are not disputed:
Petitioner E.G.V. Realty Development Corporation (hereinafter referred to as E.G.V.
Realty) is the owner/developer of a seven-storey condominium building known as Cristina
Condominium. Cristina Condominium Corporation (hereinafter referred to as CCC) holds title to
all common areas of Cristina Condominium and is in charge of managing, maintaining and
administering the condominiums common areas and providing for the buildings security.
Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere) is the
owner/occupant of Unit 301 of said condominium.
On November 28, 1981, respondent Unispheres Unit 301 was allegedly robbed of various
items valued at P6,165.00. The incident was reported to petitioner CCC.
On July 25, 1982, another robbery allegedly occurred at Unit 301 where the items carted
away were valued at P6,130.00, bringing the total value of items lost to P12,295.00. This
incident was likewise reported to petitioner CCC.

On October 5, 1982, respondent Unisphere demanded compensation and reimbursement


from petitioner CCC for the losses incurred as a result of the robbery.
Petitioner CCC denied any liability for the losses claimed to have been incurred by
respondent Unisphere, stating that the goods lost belonged to Amtrade, a third party.
As a consequence of the denial, respondent Unisphere withheld payment of its monthly
dues starting November 1982.
On September 13, 1983, respondent Unisphere received a letter from petitioner CCC
demanding payment of past dues.
On December 5, 1984, petitioner E.G.V. Realty executed a Deed of Absolute Sale over Unit
301 in favor of respondent Unisphere. Thereafter, Condominium Certificate of Title No. 7010
was issued in respondent Unispheres name bearing the annotation of a lien in favor of
petitioner E.G.V. Realty for the unpaid condominium dues in the amount of P13,142.67.
On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a petition with the
Securities and Exchange Commission (SEC) for the collection of the unpaid monthly dues in the
amount of P13,142.67 against respondent Unisphere.
In its answer, respondent Unisphere alleged that it could not be deemed in default in the
payment of said unpaid dues because its tardiness was occasioned by the petitioners' failure to
comply with what was incumbent upon them, that is, to provide security for the building
premises in order to prevent, if not to stop, the robberies taking place therein. It asserted as
counterclaim that the amount of P12,295.00 representing the total value of its loss due to the
two robberies be awarded to it by way of damages for the latters failure to secure the premises.
On January 11, 1989, SEC Hearing Officer Antero F.L. Villaflor, Jr. rendered a decision
which dispositively read as follows:
WHEREFORE, respondent is hereby ordered to pay petitioner the sum of P13,142.67 within
fifteen (15) days from receipt of this Decision. Further, petitioner is hereby ordered to pay
respondent within fifteen (15) days from receipt of this Decision, the sum of P12,295.00.
Let copy of this Decision be furnished the Register of Deeds of Makati, Metro Manila for the
purpose of cancellation of the lien in favor of Cristina Condominium found at the back of Title for
unpaid monthly dues in the sum of P13,142.67, upon full payment of respondent of said amount
unto petitioner.
SO ORDERED.[1]
Both parties filed their respective motions for reconsideration.
On July 17, 1989, the decision of Hearing Officer Villaflor was modified and amended by
Hearing Officer Enrique L. Flores, Jr. to read as follows:

WHEREFORE, respondents motion for reconsideration should be, as it is, hereby DENIED and
the petitioners motion for reconsideration is hereby GRANTED.
Accordingly, the decision dated January 11, 1989, is partially reconsidered to the effect that
petitioners are not made liable for the value of the items/articles burglarized from respondents
condominium unit.
SO ORDERED.[2]
On July 18, 1989, respondent Unisphere filed a notice of appeal with the SEC en
banc questioning the above-mentioned decision.
On August 15, 1989, it filed a motion for an extension of thirty (30) days to file its
memorandum on appeal thirty (30) days from the stated deadline of August 18, 1989.
Said motion was granted on August 17, 1989.
On September 18, 1989, respondent Unisphere filed a second motion for extension of time
to file its memorandum on appeal for another twenty (20) days.
The motion was likewise granted on September 26, 1989.
On October 9, 1989, respondent Unisphere filed its memorandum on appeal.
After the petitioners filed their reply thereto, the SEC en banc issued the Order dated
February 23, 1990 which is quoted hereunder:
Before this Commission en banc is an appeal from the Order dated July 17, 1989 of the Hearing
Officer in SEC Case No. 3119 entitled E.G.V. Realty Development Corporation and Cristina
Condominium Corporation vs. Unisphere International , Inc.
The records of the case show that respondent-appellant received a copy of the above order on
July 18, 1989 and filed its Notice of Appeal on July 21, 1989. On August 15, 1989, respondent
asked for an extension of thirty (30) days to file its Memorandum on Appeal which was granted
on August 17, 1989.
On September 18, 1989, respondent asked for an additional period of twenty (20) days until
October 8, 1989 to file his Appeal which was also granted.
Respondent filed his Memorandum on October 13, 1989, five days after the due date.
The penultimate paragraph of Section 6 of Presidential Decree no. 902-A (as amended) clearly
provides:
x x x The decision, ruling or order of any such Commissioner, bodies, boards, committees,
and/or officer as may be appealed to the Commission sitting en banc within thirty (30) days after
receipt by the appellant of notice of such decision, ruling or order. The Commission shall

promulgate rules or procedure to govern the proceedings, hearings and appeals of cases falling
within its jurisdiction.
Pursuant to the above provision, the Commission promulgated the Revised Rules of Procedure
of the Securities and Exchange Commisison, Section 3, Rule XVI of said Rules reiterates the
thirty (30)-day period provided for under the above provision:
Appeal may be taken by filing with the Hearing Officer who promulgated the decision, order or
ruling within thirty (30) days from notice thereof, and serving upon the adverse party, a notice of
appeal and a memorandum on appeal and paying the corresponding docket fee therefor. The
appeal shall be considered perfected upon the filing of the memorandum on appeal and
payment of the docket fee within the period hereinabove fixed.
The Commission en banc notes that respondent had, extensions included, a total of eighty (80)
days to file its Appeal memorandum but failed to do so.
WHEREFORE, premises considered, the instant appeal is hereby dismissed for having been
filed out of time.
SO ORDERED.[3]
Respondent Unisphere moved for a reconsideration of the above-quoted order but the
same was denied, and so was it its second motion for reconsideration.
On September 6, 1990, respondent Unisphere filed a notice of appeal to the SEC en
banc in order to question the latters ruling to the Court of Appeals pursuant to Rule 43 of the
Rules of Court, as amended by Republic Act No. 5434.
On September 10, 1990, it filed a notice of appeal to the Court of Appeals.
The Court of Appeals reversed the SEC en bancs Order of August 21, 1990 in its Decision
dated February 17, 1995 which dispositively reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Order dated August 21, 1989
is hereby REVERSED and SET ASIDE. Another judgment is entered declaring that the appeal
memorandum before the SEC (en banc) of appellant Unisphere was filed on time and that the
amount of P13,142.67, the unpaid monthly dues of Unisphere to the Corporation should be
offset by the losses suffered by the Unisphere in the amount of P12,295.00. Unisphere is
hereby ordered to pay the Cristina Condominium Corporation the amount of P847.67
representing the balance after offsetting the amount of P12,295.00 against the said P13,142.67,
with 12% interest per annum from January 28, 1987 when the Joint Petition of the petitionersappellees was filed before the SEC (for collection and damages) until fully paid.
No pronouncement as to costs.
SO ORDERED.[4]

Petitioners moved for reconsideration of the said decision but the same was denied by the
appellate court on May 15, 1995.
Hence, the instant petition for review interposed by petitioners E.G.V. Realty and CCC
challenging the decision of the Court of Appeals on the following grounds: (a) the Court of
Appeals did not acquire jurisdiction over respondent Unispheres appeal because the latter
failed to comply with the prescribed mode of appeal; (b) even if the jurisdictional infirmity is
brushed aside, the SEC en banc Order dated February 23, 1990 has already attained finality;
and (c) the ruling of the Court of Appeals on the offsetting of the parties claims is unfounded.
A perusal of the foregoing issues readily reveals that petitioners raise two (2) aspects of the
case for consideration, that is, the procedural aspect and the substantive aspect.
We will discuss the procedural aspect first. Petitioners contend that (a) the Court of
Appeals did not acquire jurisdiction over the appeal because respondent failed to comply with
the prescribed mode of appeal; and (b) assuming that the Court of Appeals has jurisdiction, the
assailed SEC en banc Order of February 23, 1990 had already become final and executory.
Anent the first contention, petitioners claim that respondent Unisphere erred in merely filing
a notice of appeal as in ordinary civil cases from the regular courts instead of a petition for
review with the Court of Appeals.
Contrary to petitioners contention, respondent Unisphere complied with the prescribed
mode of appeal. At the time the appeal was elevated to the Court of Appeals in 1990, the rule
governing recourse to the Court of Appeals from the decision, resolution or final order of a
quasi-judicial body was Rule 43 of the Revised Rules of Court, as amended by Republic Act No.
5434 as embodied in Batas Pambansa Blg. 129 and its Interim Rules and Guidelines. [5] The rule
provided for a uniform procedure for appeals from the specified administrative tribunals, SEC
included, to the Court of Appeals by filing a notice of appeal with the appellate court and with the
court, officer, board, commission or agency that made or rendered the assailed ruling within
fifteen (15) days from notice thereof. Records bear out that respondent Unisphere complied
with the foregoing rules when it filed a notice of appeal with the SEC en banc on September 6,
1990 and with the Court of Appeals on September 10, 1990. Clearly therefore, respondent
Unisphere complied with the proper mode of appeal as mandated by the rules.
With respect to the second contention, petitioners asseverate that the February 23, 1990
order of the SEC en banc has already become final and unappealable, therefore can no longer
be reversed, amended or modified. They maintain that respondent Unisphere received a copy
of said order on February 26, 1990 and that ten (10) days thereafter, it filed its motion for
reconsideration. Said motion was denied by the SEC on May 14, 1990 which was received by
respondent Unisphere on May 15, 1990. Consequently, they assert that respondent Unisphere
had only the remaining five (5) days or on May 20, 1990 within which to file a notice of
appeal. However, instead of appealing therefrom, respondent Unisphere filed a second motion
for reconsideration on May 25, 1990 with the SEC en banc. Petitioners contend that no second
motion for reconsideration is allowed by SEC Rules unless with express prior to leave of the
hearing officer. Said second motion for reconsideration was likewise denied on August 21,

1990. Fifteen (15) days later or on September 5, 1990, respondent Unisphere filed its notice of
appeal.
Section 8, Rule XII of the Revised Rules of Procedure of the SEC provides that:
SEC. 8. Reconsideration.-- Within thirty (30) days from receipt of the order or decision of the
Hearing Officer, the aggrieved party may file a motion for reconsideration of such order or
decision together with proof of service thereof upon the adverse party. No more than one
motion for reconsideration shall be allowed unless with the express prior leave of the Hearing
Officer.
Respondent Unispheres non-observance of the foregoing rule rendered the February 23, 1990
and the May 14, 1990 orders of the SEC en banc final and unappealable. Its failure to perfect
its appeal in the manner and within the period fixed by law rendered the decision sought to be
appealed final, with the result that no court can exercise appellate jurisdiction to review the
decision.[6] Contrary to petitioners view, the appeal to the Court of Appeals in this case should
have been perfected within fifteen (15) days from receipt of the order denying the motion for
reconsideration on May 15, 1990. But instead of appealing, respondent Unisphere filed a
prohibited second motion for reconsideration without express prior leave of the hearing
officer. Consequently, when it subsequently filed its notice of appeal on September 6, 1990, it
was already eighty-two (82) days late. Therefore, the appeal before the Court of Appeals could
have been dismissed outright for being time-barred. Rules of procedure are intended to ensure
the proper administration of justice and the protection of substantive rights in judicial and quasijudicial proceedings. Blatant violation of such rules smacks of a dilatory tactic which we simply
cannot countenance.
Now, we go to the substantive aspect.
It is petitioners assertion that the ruling of the Court of Appeals to offset the alleged losses
as a result of the robberies in the amount of P12,295.00 from the unpaid monthly dues
of P13,142.67 is unfounded because respondent Unisphere is not the owner of the goods lost
but a third party, Amtrade. Respondent Unisphere, on its part, claims that this issue is factual,
hence, not a proper issue to raise before this Court.
Actually, the issue for our consideration is whether or not set-off or compensation has taken
place in the instant case. The Court of Appeals dissertation on the matter is commendably
instructive, but, lamentably, it reached a different conclusion. We quote pertinent portions of the
assailed decision:
Compensation or offset under the New Civil Code takes place only when two persons or entities
in their own rights, are creditors and debtors of each other. (Art. 1278). xxx
A distinction must be made between a debt and a mere claim. A debt is an amount actually
ascertained. It is a claim which has been formally passed upon by the courts or quasi-judicial
bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process
prescribed by law before it develops into what is properly called a debt. (Vallarta vs. CA, 163

SCRA 587). Absent, however, any such categorical admission by an obligor or final
adjudication, no compensation or off-set can take place. Unless admitted by a debtor himself,
the conclusion that he is in truth indebted to another cannot be definitely and finally pronounced,
no matter how convinced he may be from the examination of the pertinent records of the validity
of that conclusion the indebtedness must be one that is admitted by the alleged debtor or
pronounced by final judgment of a competent court or in this case by the Commission
(Villanueva vs. Tantuico, 182 SCRA 263).
There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues
in the amount of P13,142.67. This is admitted. But whether the Corporation is indebted to
Unisphere is vigorously disputed by the former.
It appears quite clear that the offsetting of debts does not extend to unliquidated, disputed
claims arising from tort or breach of contract. (Compania General de Tobacos vs. French and
Unson, 39 Phil. 34; Lorenzo and Martinez vs. herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly dues to the Corporation on
September 23, 1983 without notifying the latter. It was only on February 24, 1984, or five
months after, that it informed the corporation of its suspension of payment of the condominium
dues to offset the losses it suffered because of the robberies.
In resisting the finding which underscores their negligence, E.G.V. Realty and Cristina
condominium corporation, would have this Court appreciate in their favor the admission of Mr.
Alfonso Zamora of Unisphere that there was no such agreement among the unit owners that
any member who incurred losses will be indemnified from the common contribution. (TSN, July
7, 1987, p. 60).
The herein appellees further argue that the cause of action for reimbursement of the value of
the items lost because of the robberies should be against the security agency and not the
Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil Code which provides:
ART. 1170.- Those who in the performance of their obligations are guilty of fraud, negligence, or
delay and those who in any manner contravene the tenor thereof, are liable for damages.
There is weight in the initial factual findings of the SEC Hearing Officer with respect to the
losses suffered by Unisphere in the amount of P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that occurred on November 28, 1981 and
July 26, 1982 inside 301 Cristina Condominium.
Plaintiff admits that it had secured the services of Jimenez Protective and Security Agency to
safeguard the Condominium premises under its instructions and supervision, but which failed to
detect the robbery incidents that occurred twice at Unit 301 of respondent, canting (sic) away
bulk items.

xxx xxx

xxx

From the undisputed facts, plaintiff was remissed (sic) within its obligation to provide safety to
respondent inside its unit. This was demonstrated by the fact that two robbery incidents befell
respondents under the negligent eye of plaintiffs hired security guards. It can be safely
pronounced that plaintiff has not complied with what was incumbent upon it to do in a proper
manner.
Since it has been determined and proven by the evidence presented before the hearing office of
respondent SEC that Unisphere indeed suffered losses because of the robbery incidents and
since it (Unisphere) did not refute its liability to the corporation for the unpaid monthly dues in
the amount of P13,142. 67, this amount should be set-off against the aforestated losses of
Unisphere.[7]
We fully agree with the appellate courts dissertation on the nature and character of a set-off
or compensation. However, we cannot subscribe to its conclusion that a set-off or
compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take place when two persons, in
their own right, are creditors and debtors of each other. Compensation is a mode of
extinguishing to the concurrent amount, the obligations of those persons who in their own right
are reciprocally debtors an creditors of each other and the offsetting of two obligations which
are reciprocally extinguished if they are of equal value, or extinguished to the concurrent
amount if of different values.[8] Article 1279 of the same Code provides:
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Absent any showing that all of these requisites exist, compensation may not take place.
While respondent Unisphere does not deny its liability for its unpaid dues to petitioners, the
latter do not admit any responsibility for the loss suffered by the former occasioned by the
burglary. At best, what respondent Unisphere has against petitioners is just a claim, not a
debt. Such being the case, it is not enforceable in court. It is only the debts that are
enforceable in court, there being no apparent defenses inherent in them.[9] Respondent

Unispheres claim for its loss has not been passed upon by any legal authority so as to elevate it
to the level of a debt. So we held in Alfonso Vallarta v. Court of Appeals, et al.,[10] that:
Compensation or offset takes place by operation of law when two (2) persons, in their own right,
are creditor and debtor of each other. For compensation to take place, a distinction must be
made between a debt and a mere claim. A debt is a claim which has been formally passed
upon by the highest authority to which it can in law be submitted and has been declared to be a
debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must
pass thru the process prescribed by law before it develops into what is properly called a debt.[11]
Tested by the foregoing yardstick, it has not been sufficiently established that compensation
or set-off is proper here as there is lack of evidence to show that petitioners E.G.V. Realty and
CCC and respondent Unisphere are mutually debtors and creditors to each other.
Considering the foregoing disquisition, therefore, we find that respondent Court of Appeals
committed reversible error in ruling that compensation or set-off is proper in the instant case.
WHEREFORE, for all the foregoing , the instant petition is hereby GRANTED. The
Decision of the Court of Appeals dated February 17, 1995 is REVERSED and SET ASIDE. The
Order of the Securities and Exchange Commission dated August 21, 1990 reiterating the
Hearing Officers Decision dated January 11, 1989, as amended by the Order of July 17, 1989,
is hereby REINSTATED.
SO ORDERED.
METROPOLITAN BANK and TRUST COMPANY, petitioner, vs. JOAQUIN TONDA and MA.
CRISTINA TONDA,respondents.
DECISION
GONZAGA_REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision[1] of the Court of Appeals[2] dated June 29, 1998 in CA-G.R. SP No. 38113
which: (1) reversed Resolution No. 417, s. 1994, [3] dated June 1, 1994 of the Department of
Justice[4]directing to file the appropriate Information against herein respondents Joaquin P.
Tonda and Ma. Cristina V. Tonda for violation of P.D. 115 in relation to Article 315 (1) (b) of the
Revised Penal Code; and (2) effectively set aside the Resolutions dated April 7, 1995 [5] and July
12 1995[6] of the Department of Justice denying the motions for reconsideration.
Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter referred to as the
TONDAS, applied for and were granted commercial letters of credit by petitioner Metropolitan
Bank and Trust Company, hereinafter referred to as METROBANK for a period of eight (8)
months beginning June 14, 1990 to February 1, 1991 in connection with the importation of raw
textile materials to be used in the manufacturing of garments. The TONDAS acting both in their
capacity as officers of Honey Tree Apparel Corporation (HTAC) and in their personal capacities,
executed eleven (11) trust receipts to secure the release of the raw materials to HTAC. The

imported fabrics with a principal value of P2,803,000.00 were withdrawn by HTAC under the 11
trust receipts executed by the TONDAS. Due to their failure to settle their obligations under the
trust receipts upon maturity, METROBANK through counsel, sent a letter dated August 10,
1992, making its final demand upon the TONDAS to settle their past due TR/LC accounts on or
before August 15, 1992. They were informed that by said date, the obligations would amount to
P4,870,499.13. Despite repeated demands therefor, the TONDAS failed to comply with their
obligations stated in the trust receipts agreements, i.e. the TONDAS failed to account to
METROBANK the goods and/or proceeds of sale of the merchandise, subject of the trust
receipts.
Consequently, on November 9, 1992, Metrobank, through its account officer Eligio Labog,
Jr., filed with the Provincial Prosecutor of Rizal a complaint/affidavit against the TONDAS for
violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 (1) (b) of the Revised
Penal Code. On February 12, 1993, the assigned Assistant Prosecutor of Rizal submitted a
Memorandum to the Provincial Prosecutor recommending that the complaint in I.S. No. 92-8703
be dismissed on the ground that the complainants had failed to establish the existence of the
essential elements of Estafa as charged. The recommendation was approved by Rizal
Provincial Prosecutor Mauro Castro on May 18, 1993.
METROBANK then appealed to the Department of Justice (DOJ). On June 1, 1994,
Undersecretary Ramon. S. Esguerra reversed the findings of the Provincial Prosecutor of Rizal
and ordered the latter to file the appropriate information against the TONDAS as charged in the
complaint.
The TONDAS immediately sought a reconsideration of the DOJ Resolution but their motion
was denied by the then acting Justice Secretary Demetrio G. Demetria in a Letter-Resolution
dated April 7, 1995. A second motion for reconsideration by the TONDAS was likewise denied
by then Justice Secretary Teofisto Guingona on July 12, 1995.
Subsequently, the TONDAS filed with the Court of Appeals a special civil action
for certiorari and prohibition with application for a temporary restraining order or a writ of
preliminary injunction,[7] which was docketed as CA-G.R. SP No. 38113. They contended therein
that the Secretary of Justice acted without or in excess of jurisdiction in issuing the
aforementioned Resolution dated July 12, 1995 denying with finality their motion for the
reconsideration of the Resolution dated April 7, 1995 of the Acting Secretary of Justice, which in
turn denied their motion for the reconsideration of Resolution No. 417, s. 94, dated June 1,
1994, directing to file the appropriate Information against the TONDAS.
The Court of Appeals granted the TONDAS' petition and ordered the criminal complaint
against them dismissed. The Court of Appeals held that METROBANK had failed to show
a prima facie case that the TONDAS violated the Trust Receipts Law in relation to Art. 315 (1)
(b) of the Revised Penal Code in the face of convincing proof that "that the amount of P2.8
Million representing the outstanding obligation of the TONDAS under the trust receipts account
had already been settled by them in compliance with the loan restructuring proposal; and that in
the absence of a loan restructuring agreement, METROBANK could still validly apply the
amount as payment thereof." The relevant portions of the Court of Appeals decision are quoted
as follows:

"Petitioners admitted that in 1991 their company, the Honey Tree Apparel Corporation (HTAC),
had some financial reversals making it difficult for them to comply with their loan obligations with
Metrobank. They were then constrained to propose a loan restructuring agreement with the
private respondent to enable them to finally settle all outstanding obligations with the latter. In a
letter dated 23 September 1991, petitioner Joaquin Tonda submitted a proposed Loan
Restructuring Scheme to Metrobank. In said letter, petitioner Tonda proposed to immediately
pay in full the outstanding principal charges under the trust receipts account and the remaining
obligations under a separate schedule of payment. Petitioners attached with said letter an
itemized proposal (Attachment "A"), part of which reads:
1. Trust Receipts - The new management and. Mr. Joaquin G. Tonda will pay
immediately the entire principal of the outstanding Trust Receipts amounting
to P2,803,097.14. While the interest accrued up to September 13, 1991 amounting
to P409,601.57 plus the additional interest shall be re-structured together with item
no. 2 below. A joint sharing account in the name of Joaquin G. Tonda and Wang
Tien En equal to Trust Receipt amount of 1.8 Million will be opened at Metrobank
Makati. (emphasis supplied)
It would appear that the aforestated amount of 1.8 Million was erroneously written since the
intention of the petitioners was to open an account of P2.8 Million to pay the entire principal of
the outstanding trust receipts account. In fact, also on 23 September 1991, petitioner Joaquin
Tonda and Wang Tien En deposited four different checks with a total amount of P2,800,000.00
with Metrobank. The checks were received by a certain Flor C. Naanep. Notably, the
petitioners had obtained a written acknowledgement of receipt of the checks totaling P2.8
Million from the Metrobank officer in order to show proof of compliance with the loan
restructuring proposal. If the petitioners had intended it to be a simple deposit, then a deposit
slip with a machine validation by the private respondent bank would have otherwise been
sufficient.
In a letter dated 22 October 1991, Metrobank wrote to the petitioners informing them that the
bank had accepted their proposal subject to certain conditions, the first of which referred to the
immediate payment of the amount of P2.8 Million, representing the outstanding trust receipts
account. The petitioners appeared to have offered a counter proposal such that no final
agreement had yet been reached.
However, the succeeding negotiations between petitioners and Metrobank, after the initial offer
of 23 September 1991 was made, dealt with the other outstanding obligations while the matter
regarding the trust receipts account remained unchanged; therefore, it was settled between the
parties that the amount of P2.8 Million should be paid to cover all outstanding obligations under
the trust receipts account. Despite the inability of both parties to reach a mutually agreeable
loan restructured agreement, the amount of P2.8 Million which was deposited on 23 September
1991 by the petitioners appears to remain intact and untouched as Metrobank had failed to
show evidence that the money has been withdrawn from the savings account of the petitioners.
Moreover, the deposit made by the petitioners was made known to Metrobank clearly as a
compliance with the proposed loan restructuring agreement. As shown in the correspondence

made by the petitioners on 28 February 1992 to Metrobank, after the latter had made a formal
demand for payment of all outstanding obligations, the deposit was mentioned, to wit:
"May we emphasize that to show sincerity and financial capability, soon after we received your
letter dated October 22, 1991 informing us of your approval of the restructuring and
consolidation of our firm's obligations, a personal account was opened by two (2) of our
stockholders in the amount equivalent to the TR/LC, Account of about P2.8 Million which deposit
is still maintained with your bank, free from any lien or encumbrance, and may be applied
anytime to the payment of the TR/LC Account upon the implementation by the parties of the
terms of restructuring.""(emphasis supplied)
The contention of Metrobank that the money had not been actually applied as payment for
petitioners' outstanding obligation under the trust receipts account is absolutely devoid of merit,
considering that the petitioners were still in the process of negotiating for a reasonable loan
restructuring arrangement with Metrobank when the latter abruptly abandoned all efforts to
negotiate and instantly demanded from the petitioners the fulfillment of all their outstanding
obligations.
In the case of Tan Tiong Tick vs. American Apothecaries, 65 Phil. 414, the Supreme Court had
held that:
When a depositor is indebted to a bank, and the debts are mutual - that is, between the same
parties and in the, same right - the bank may apply the deposit, or such portion thereof as may
be necessary, to the payment of the debt due it by the depositor, provided there is no express
agreement to the contrary and the deposit is not specifically applicable to some other particular
purpose.
Applying the above-mentioned ruling in this case, if the parties therefore fail to reach an
agreement regarding the restructuring of HTAC's loan, Metrobank can validly apply the amount
deposited by the petitioners as payment of the principal obligation under the trust receipts
account.
On the basis of all the evidence before Us, this Court is convinced that the amount of P2.8
Million representing the outstanding obligation of the petitioners under the trust receipts account
had already been settled by the petitioners. The money remains deposited under the savings
account of the petitioners awaiting a final agreement with Metrobank regarding the loan
restructuring arrangement. Meanwhile, Metrobank has the right to use the deposited amount in
connection with any of its banking business.
With convincing proof that the amount of P2.8 Million deposited under petitioners' savings
account with Metrobank was indeed intended to be applied as payment for the outstanding
obligations of HTAC under the trust receipts, Metrobank, therefore, had failed to show a prima
facie case that the petitioners had violated the Trust Receipts Law (P.D. No. 115) in relation to
Art. 315 of the Revised Penal Code. Besides, there is absolutely no evidence suggesting that
Metrobank has been damaged by the proposal and the deposit made by the petitioners. As
noted by the prosecutor:

It is clear from the evidence that complainant bank had, all the while, been informed of the
steps undertaken by the respondents relative to the trust receipts and other financial obligations
vis-a-vis HTAC's financial difficulties. Hardly therefore, could it be said that respondents were
unfaithfully, deceptively, deceitfully and fraudulently dealing with complainant bank to warrant an
indictment for Estafa.[8]
Hence, this recourse to this Court where petitioner submits for the consideration of this
Court the following issues:
I.
WHETHER METROBANK HAS SHOWN A PRIMA FACIE VIOLATION OF THE TRUST
RECEIPTS LAW IN RELATION TO ART. 315 OF THE REVISED PENAL CODE
II.
WHETHER AN AGREEMENT WAS FORGED BETWEEN THE PARTIES THAT THE 2.8
MILLION DEPOSITED IN THE JOINT ACCOUNT OF JOAGUIN G. TONDA AND WANG
TIEN EN WOULD BE CONSIDERED AS PAYMENT FOR THE OUTSTANDING
OBLIGATIONS OF THE SPOUSES TONDA UNDER THE TRUST RECEIPTS
III.
WHETHER INSPITE OF THE FAILURE OF THE PARTIES TO AGREE UPON A
RESTRUCTURING AGREEMENT, METROBANK CAN STILL APPLY THE P2.8 MILLION
DEPOSIT AS PAYMENT TO THE PRINCIPAL AMOUNT COVERED BY THE TRUST
RECEIPTS
IV.
WHETHER DAMAGE HAS BEEN CAUSED TO METROBANK BECAUSE OF THE
PROPOSAL AND OF THE DEPOSIT
V.
WHETHER METROBANK HAS THE STANDING TO PROSECUTE THE CASE A QUO
VI.
WHETHER THE ASSIGNED ERRORS IN THE PETITION FOR CERTIORARI FILED WITH
THIS HONORABLE COURT RAISES PURELY QUESTIONS OF FACTS[9]
In response to the foregoing, the TONDAS maintain that METROBANK has no legal
standing to file the present petition without the conformity or authority of the prosecutor as it
deals solely with the criminal aspect of the case, a separate action to recover civil liability having
already been instituted; that the issues raised in the present petition are purely factual; and that
the subject trust receipts obligations have been extinguished by payment or legal compensation.

We find for petitioner bank.


Preliminarily, we shall resolve the issues raised by the TONDAS regarding the standing of
METROBANK to file the instant petition and whether the same raises questions of law.
The general rule is that it is only the Solicitor General who is authorized to bring or defend
actions on behalf of the People or the Republic of the Philippines once the case is brought
before this Court or the Court of Appeals. However, an exception has been made that "if there
appears to be grave error committed by the judge or lack of due process, the petition will be
deemed filed by the private complainants therein as if it were filed by the Solicitor General." [10] In
that case, the Court gave due course to the petition and allowed the petitioners to argue their
case in lieu of the Solicitor General. We accord the same treatment to the instant petition on
account of the grave errors committed by the Court of Appeals. We add that no information
having been filed yet in court, there is, strictly speaking, no case yet for the People or the
Republic of the Philippines. In answer to the second issue raised by the TONDAS, while the
jurisdiction of the Supreme Court in a petition for review on certiorari under Rule 45 of the
Revised Rules of Court is limited to reviewing only errors of law, not of fact, one exception to the
rule is when the factual findings complained of are devoid of support by the evidence on record
or the assailed judgment is based on misappreciation of facts [11], as will be shown to have
happened in the instant case.
In the main, the issue is whether or not the dismissal by the Court of Appeals of the charge
for violation of the Trust Receipts Law in relation to Art. 315(1) (b) of the Revised Penal Code
against the TONDAS is warranted by the evidence at hand and by law.
The Court of Appeals gravely erred in reversing the Department of Justice on the finding of
probable cause to hold the TONDAS for trial. The documentary evidence presented during the
preliminary investigation clearly show that there was probable cause to warrant a criminal
prosecution for violation of the Trust Receipts Law.
The relevant penal provision of P.D. 115 provides:
SEC. 13. Penalty Clause. - The failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the provisions of Article Three Hundred
and Fifteen, Paragraph One (b), of Act Numbered Three Thousand Eight Hundred and Fifteen,
as amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other judicial entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
Section 1 (b), Article 315 of the Revised Penal Code under which the violation is made to
fall, states:

"x x x Swindling (estafa). - Any person who shall defraud another by any of the mans mentioned
herein below x x x:
xxx

xxx

xxx

b. By misappropriating or converting, to the prejudice of another, money, goods, or any


other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of
or to return the same, even though such obligation be totally or partially guaranteed
by a bond; or by denying having received such money, goods, or other property.
Based on the foregoing, it is plain to see that the Trust Receipts Law declares the failure to
turn over the goods or the proceeds realized from the sale thereof, as a criminal offense
punishable under Article 315 (1) (b) of the Revised Penal Code. The law is violated whenever
the entrustee or the person to whom the trust receipts were issued in favor of fails to: (1) return
the goods covered by the trust receipts; or (2) return the proceeds of the sale of the said
goods. The foregoing acts constitute estafa punishable under Article 315 (1) (b) of the Revised
Penal Code. Given that various trust receipts were executed by the TONDAS and that as
entrustees, they did not return the proceeds from the goods sold nor the goods themselves to
METROBANK, there is no dispute that that the TONDAS failed to comply with the obligations
under the trust receipts despite several demands from METROBANK.
Finding favorably for the TONDAS, however, and ordering the dismissal of the complaint
against them, the Court of Appeals held that: (1) the TONDAS opened a savings account of
P2.8 Million to pay the entire principal of the outstanding trust receipts account; (2) the TONDAS
obtained from a METROBANK officer[12] a written acknowledgement of receipt of checks totaling
P2.8 Million in order to show proof of compliance with the loan restructuring proposal; (3) it was
settled between the parties that the amount of 2.8 Million should be paid to cover all outstanding
obligations under the trust receipts account; (4) the money remains deposited under the savings
account of petitioners awaiting a final agreement with METROBANK regarding the loan
restructuring arrangement; and that (5) there is no evidence suggesting that METROBANK has
been damaged by the proposal and the deposit or that the TONDAS employed fraud and deceit
in their dealings with the bank.
The foregoing findings and conclusions are palpably erroneous.
First, the amount of P2.8 million was not directly paid to METROBANK to settle the trust
receipt accounts, but deposited in a joint account of Joaquin G. Tonda and a certain Wang Tien
En. In a letter dated February 28, 1992, signed by HTAC's Vice President for Finance,
METROBANK was informed that the amount "may be applied anytime to the payment of the
trust receipts account upon implementation of the parties of the terms of the
restructuring."[13] The parties failed to agree on the terms of the loan restructuring agreement as
the offer by the TONDAS to restructure the loan was followed by a series of counter-offers
which yielded nothing. It is axiomatic that acceptance of an offer must be unqualified and
absolute[14] to perfect a contract. The alleged payment of the trust receipts accounts never
became effectual on account of the failure of the parties to finalize a loan restructuring
arrangement.

Second, the handwritten note by the METROBANK officer acknowledging receipt of the
checks amounting to P2.8 Million made no reference to the TONDAS' trust receipt obligations,
and we cannot presume that it was anything more than an ordinary bank deposit. The Court of
Appeals citing the case of Tan Tiong Tick vs. American Apothecories[15] implied that in making
the deposit, the TONDAS are entitled to set off, by way of compensation, their obligations to
METROBANK. However, Article 1288 of the Civil Code provides that "compensation shall not
be proper when one of the debts consists in civil liability arising from a penal offense" as in the
case at bar. The raison d'etre for this is that, "if one of the debts consists in civil liability arising
from a penal offense, compensation would be improper and inadvisable because the
satisfaction of such obligation is imperative."[16]
Third, reliance on the negotiations for the settlement of the trust receipts obligations
between the TONDAS and METROBANK is simply misplaced. The negotiations pertain and
affect only the civil aspect of the case but does not preclude prosecution for the offense already
committed. It has been held that "[a]ny compromise relating to the civil liability arising from an
offense does not automatically terminate the criminal proceeding against or extinguish the
criminal liability of the malefactor."[17] All told, the P2.8 Million deposit could not be considered as
having settled the trust receipts obligations of the TONDAS to the end of extinguishing any
incipient criminal culpability arising therefrom.
Hence, it has been held in Office of the Court Administrator vs. Soriano[18] that:
xxx it is too well-settled for any serious argument that whether in malversation of public funds
or estafa, payment, indemnification, or reimbursement of, or compromise as to, the amounts or
funds malversed or misappropriated, after the commission of the crime, affects only the civil
liability of the offender but does not extinguish his criminal liability or relieve him from the
penalty prescribed by law for the offense committed, because both crimes are public offenses
against the people that must be prosecuted and penalized by the Government on its own
motion, though complete reparation should have been made of the damage suffered by the
offended parties. xxx."
As to the statement of the Court of Appeals that there is no evidence that METROBANK
has been damaged by the proposal and the deposit, it must be clarified that the damage can be
traced from the non-fulfillment of an entrustee's obligation under the trust receipts. The nature
of trust receipt agreements and the damage caused to trade circles and the banking community
in case of violation thereof was explained in Vintola vs. IBAA[19] and echoed in People
vs. Nitafan[20], as follows:
"[t]rust receipt arrangements do not involve a simple loan transaction between a creditor and a
debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security feature
that is covered by the trust receipt itself. The second feature is what provides the much needed
financial assistance to traders in the importation or purchase of goods or merchandise through
the use of those goods or merchandise as collateral for the advancements made by the
bank. The title of the bank to the security is the one sought to be protected and not the loan
which is a separate and distinct agreement."
xxx xxx

xxx.

"Trust receipts are indispensable contracts in international and domestic business


transactions. The prevalent use of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of goods, documents or
instruments held in trust for entruster-banks, and the need for regulation of trust receipt
transactions to safeguard the rights and enforce the obligations of the parties involved are the
main thrusts of P.D. 115. As correctly observed by the Solicitor General, P.D. 115, like Bata
Pambansa Blg. 22, punishes the act "not as an offense against property, but as an offense
against public order. x x x The misuse of trust receipts therefore should be deterred to prevent
any possible havoc in trade circles and the banking community. (citing Lozano vs. Martinez, 146
SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public interest that the law now
specifically designates a breach of a trust receipt agreement to be an act that "shall" make one
liable foe estafa."
The finding that there was no fraud and deceit is likewise misplaced Considering that the
offense is punished as a malum prohibitum regardless of the existence of intent or malice. A
mere failure to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal
offense that causes prejudice not only to another, but more to the public interest.[21]
Finally, it is worthy of mention that a preliminary investigation proper - whether or not there
is reasonable ground to believe that the accused is guilty of the offense and therefore, whether
or not he should be subjected to the expense, rigors and embarrassment of trial - is the function
of the prosecutor.[22] Preliminary investigation is an executive, not a judicial function. [23] Such
investigation is not part of the trial, hence, a full and exhaustive presentation of the parties'
evidence is not required, but only such as may engender a well-grounded belief that an offense
has been committed and that the accused is probably guilty thereof.[24]
Section 4, Rule 112 of the Rules of Court recognizes the authority of the Secretary of
Justice to reverse the resolution of the provincial or city prosecutor or chief state prosecutor
upon petition by a proper party.[25] Judicial review of the resolution of the Secretary of Justice is
limited to a determination of whether there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction considering that the full discretionary authority has been delegated
to the executive branch in the determination of probable cause during a preliminary
investigation. Courts are not empowered to substitute their judgment for that of the executive
branch; it may, however, look into the question of whether such exercise has been made in
grave abuse of discretion.[26]
Verily, there was no grave abuse of discretion on the part of the Secretary of Justice in
directing the filing of the Information against the TONDAS, end the Court of Appeals
overstepped its boundaries in reversing the same without basis in law and in evidence. We
emphasize that for purposes of preliminary investigation, it is enough that there is evidence
showing that a crime has been committed and that the accused is probably guilty thereof. [27] By
reason of the abbreviated nature of preliminary investigations, a dismissal of the charges as a
result thereof is not equivalent to a judicial pronouncement of acquittal,[28] a converso, the finding
of a prima facie case to hold the accused for trial is not equivalent to a finding of guilt.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED
and SET ASIDE.

SO ORDERED.
HERMENEGILDO M. TRINIDAD, Petitioner,
vs.
ESTRELLA ACAPULCO, Respondent
DECISION
AUSTRIA-MARTINEZ, J.:
Before this Court is a Petition for Review under Rule 45 of the Rules of Court assailing the
Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 42518 promulgated on February 16,
2001, which affirmed the Decision2 of the Regional Trial Court (RTC) Cebu City, Branch 6 dated
March 23, 1992.
The facts are as follows:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the
nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad.
She alleged: Sometime in February 1991, a certain Primitivo Caete requested her to sell a
Mercedes Benz for P580,000.00. Caete also said that if respondent herself will buy the car,
Caete was willing to sell it for P500,000.00. Petitioner borrowed the car from respondent for
two days but instead of returning the car as promised, petitioner told respondent to buy the car
from Caete forP500,000.00 and that petitioner would pay respondent after petitioner returns
from Davao. Following petitioners instructions, respondent requested Caete to execute a deed
of sale covering the car in respondents favor forP500,000.00 for which respondent issued three
checks in favor of Caete. Respondent thereafter executed a deed of sale in favor of petitioner
even though petitioner did not pay her any consideration for the sale. When petitioner returned
from Davao, he refused to pay respondent the amount of P500,000.00 saying that said amount
would just be deducted from whatever outstanding obligation respondent had with petitioner.
Due to petitioners failure to pay respondent, the checks that respondent issued in favor of
Caete bounced, thus criminal charges were filed against her.3 Respondent then prayed that
the deed of sale between her and petitioner be declared null and void; that the car be returned
to her; and that petitioner be ordered to pay damages.4
In his Answer petitioner contended that: it is not true that he borrowed the car and that any
demand was made to return it; he also did not give any instructions to respondent to buy the car
from Caete because as early as September 28, 1990, Caete has already sold the car to
respondent for P500,000.00; at the time respondent executed the deed of sale in his favor on
March 4, 1991, respondent was already in possession of the deed of sale from Caete; the
amount of P500,000.00 was fully paid by way of dation in payment to partially extinguish
respondents obligation with petitioner; the contract entered into was a true sale of a motor
vehicle and the mode of payment was that of dation in payment agreed upon at the time of the
sale.5

The parties filed their respective pre-trial briefs. Petitioner raised as issue: whether or not there
is valid dation in payment;6 while respondent put forth the questions: whether or not she is
indebted to petitioner in the amount ofP566,000.00, and whether the car was ceded by her to
petitioner in order to partially pay off her obligation ofP566,000.00 to petitioner as dation in
payment.7
On September 6, 1991, the trial court came out with its Pre-Trial Order limiting the issue to
whether there is dacion en pago between petitioner and respondent.8
Trial ensued and on March 23, 1992, the RTC rendered its Decision finding that no dacion en
pago is present in this case as common consent was not proven.9 The fallo of said decision
reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff (Acapulco) and against the
defendant (Trinidad), to wit:
1. Declaring the deed of sale executed by plaintiff in favor of defendant as null and void
for being fictitious and/or simulated;
2. The defendant is ordered to return the Mercedes Benz car in question to plaintiff in the
same condition when it was delivered to him by plaintiff;
3. Defendant is ordered to pay plaintiff the amount of P100,000.00 as moral
damages; P20,000.00 as exemplary damages and attorneys fees of P20,000.00 as well
as litigation expenses in the amount ofP5,000.00 and costs.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration arguing that contrary to the findings of the trial court
that there was no common consent, the offer to deliver the car to him actually came from
respondent after petitioner told her that he was going to file estafa cases against her for her
failure to pay her debt to petitioner.11
Petitioner also filed a Supplemental Motion and for the first time averred that assuming that
respondent did not agree to having the purchase price charged against the P566,000.00 she
owed petitioner, nonetheless, with or without her consent and/or knowledge, the obligations
parties owed to each other were extinguished by operation of law or through legal compensation
in the amount of P500,000.00.12
The RTC issued an Order dated October 18, 1992 denying the Motion for Reconsideration and
Supplemental Motion of petitioner stating that the claim of dacion en pago is inexistent in this
case and the defense of legal compensation was not alleged or pleaded in petitioners Answer.13
Petitioner appealed to the CA which affirmed the Decision of the trial court, finding that the issue
of legal compensation was filed too late as it was brought up only in the supplemental motion for
reconsideration; that the parties agreed that the issue to be tried was whether or not there was
dacion en pago; that dacion en pago however is not present in this case as the parties did not

give their consent thereto; that there can also be no legal compensation as one of the
obligations of this case did not entail payment of a monetary debt but the delivery of a car; and
that the admission of petitioner that the sale price of the car was not paid entitled respondent to
file the action for rescission of sale.14
Petitioner now comes before this Court claiming that:
>1. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT THE ANSWER DID
NOT ALLEGE FACTS AMOUNTING TO EXTINGUISHMENT OF OBLIGATION BY LEGAL
COMPENSATION;
>2. THE HONORABLE APPELLATE COURT ERRED IN GIVING UNDUE RELIANCE TO
PETITIONERS CONCLUSION IN HIS ANSWER THAT HIS OBLIGATION WAS DEEMED
EXTINGUISHED BECAUSE OF DATION IN PAYMENT INSTEAD OF DISREGARDING SAID
CONCLUSION AND SIMPLY APPRECIATING THE FACTS ALLEGED AND PROVED AND
DRAWING FOR ITSELF THE JURIDICAL IMPLICATION OF SAID FACTS;
>3. ASSUMING THAT LEGAL COMPENSATION HAD NOT BEEN ALLEGED IN THE ANSWER,
STILL THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT LEGAL
COMPENSATION AS A MANNER OF EFFECTING PAYMENT HAD TO BE SPECIFICALLY
ALLEGED, THE SAME BEING ONLY EVIDENTIARY;
>4. ASSUMING THAT LEGAL COMPENSATION HAD TO BE ALLEGED AND THAT THE
ANSWER FAILED TO DO SO, NEVERTHELESS THE HONORABLE APPELLATE COURT
ERRED IN IGNORING THE EVIDENCE PRESENTED WITHOUT OBJECTION FROM
RESPONDENT SHOWING THAT PARITES(SIC) MUTUAL MONETARY OBLIGATIONS TO
EACH OTHER HAD BEEN EXTINGUISHED TO THE CONCURRENT AMOUNT
OF P500,00.00;
>5. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT LEGAL
COMPENSATION COULD BE EFFECTED ONLY THROUGH THE CONSENT OF THE
PARTIES;
>6. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT NON-PAYMENT OF
THE PURCHASE PRICE MADE THE CONTRACT OF SALE FICTITIOUS, HENCE NULL AND
VOID;
>7. IN VIEW OF THE RESPONDENTS ADMISSION THAT SHE OWED
PETITIONER P566,000.00, THE HONORABLE APPELLATE COURT ERRED IN NOT
ORDERING RESPONDENT TO PAY THE SAME WITH LEGAL INTEREST;
>8. THE HONORABLE APPELLATE COURT ERRED IN ASSESSING DAMAGES AGAINST
THE PETITIONER.15
Petitioner argues that: the purchase price of the car had been automatically offset by
respondents own monetary obligation of P566,000.00, even if he and respondent had not
agreed to offsetting following Article 129016 of the Civil Code; Bank of the Philippine Islands v.

Court of Appeals17 also held that compensation shall take place when two persons, in their own
right, are creditors and debtors of each other; legal compensation takes place by operation of
law and may be taken up even though it is not raised in the pleadings or during trial; it is the
duty of courts to grant the relief to which the parties are entitled as shown by the allegations and
the facts proven at the trial; here, while petitioner claimed dation in payment, there was more
than enough testimony and admissions to prove elements of legal compensation; failure to pay
the agreed purchase price does not make the contract of sale fictitious and null and void; the CA
erred in not ordering respondent to pay petitioner the balance of her partially extinguished
indebtedness and in assessing damages against him as there was no basis therefor.18
In her Comment, respondent counters that: it was only in the Supplemental Motion for
Reconsideration of the decision of the trial court that petitioner changed his theory and started
claiming legal compensation as a defense; the CA did not commit any error in rejecting the
belated new defense of petitioner as it would be offensive to the basic rule of fair play, justice
and due process; Article 1279 of the Civil Code also states that for legal compensation to be
proper both debts should consist of sum of money; in this case, one of the obligations does not
entail payment of money but delivery of a car.19
Petitioner merely reiterated his arguments in his Memorandum,20 while respondent in hers,
further averred that: she is not the owner of the car, but was only in possession thereof in order
to sell it at a price of P580,000.00 withP80,000.00 going to her; both the trial court and the CA
failed to make a finding as to the exact amount respondent owed petitioners.21
Stripped to its basics, what petitioner is contending is that legal compensation should be
appreciated, though not expressly stated in his Answer to the Complaint before the trial court, as
his allegations therein and the facts proven at the trial show the presence of legal
compensation. He further argues that, in any case, legal compensation takes place by operation
of law even without the consent of the interested parties.
The Court resolves to grant the petition.
Our rules recognize the broad discretionary power of an appellate court to waive the lack of
proper assignment of errors and to consider errors not assigned.22 The interest of justice
dictates that the Court consider and resolve issues even though not particularly raised if it is
necessary for the complete adjudication of the rights and obligations of the parties and it falls
within the issues already found by them.23 While it is true that petitioner failed to raise the issue
of legal compensation at the earliest opportunity, this should not preclude the courts from
appreciating the same especially in this case, where ignoring the same would only result to
unnecessary and circuitous filing of cases.
Indeed, the doctrine that higher courts are precluded from entertaining matters neither alleged in
the pleadings nor raised during the proceedings below but ventilated for the first time only in a
motion for reconsideration or on appeal, is subject to exceptions, such as when:
(a) grounds not assigned as errors but affecting jurisdiction over the subject matter; (b) matters
not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of
law; (c) matters not assigned as errors on appeal but consideration of which is necessary in

arriving at a just decision and complete resolution of the case or to serve the interests of justice
or to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors on
appeal but raised in the trial court and are matters of record having some bearing on the issue
submitted which the parties failed to raise or which the lower court ignored; (e) matters not
assigned as errors on appeal but closely related to an error assigned; and (f) matters not
assigned as errors on appeal but upon which the determination of a question properly assigned,
is dependent.24
In this case, petitioner raised the issue of dacion en pago in his Answer to respondents
Complaint. The trial court thus focused on ascertaining whether the elements of dacion en
pago are present in the case at bar, i.e.: whether there is consent, object certain and cause or
consideration, with common consent as an essential prerequisite to have the effect of totally
extinguishing the debt or obligation.25 As respondents consent was not adequately proven by
petitioner, the trial court held that there could be no dacion en pago. Petitioner thereafter filed a
Motion for Reconsideration and a Supplemental Motion for Reconsideration where, for the first
time, he raised the issue of legal compensation. In striking down petitioners claim of legal
compensation, the trial court reasoned that it was raised too late. This was affirmed by the CA.
This Court holds otherwise.
Compensation takes effect by operation of law even without the consent or knowledge of the
parties concerned when all the requisites mentioned in Article 1279 of the Civil Code are
present.26 This is in consonance with Article 1290 of the Civil Code which provides that:
Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.
Since it takes place ipso jure,27 when used as a defense, it retroacts to the date when all its
requisites are fulfilled.28
Article 1279 provides that in order that compensation may be proper, it is necessary:
(1) that each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) that both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;
(5) that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

Here, petitioners stance is that legal compensation has taken place and operates even against
the will of the parties because: (a) respondent and petitioner were personally both creditor and
debtor of each other; (b) the monetary obligation of respondent was P566,000.00 and that of the
petitioner was P500,000.00 showing that both indebtedness were monetary obligations the
amount of which were also both known and liquidated; (c) both monetary obligations had
become due and demandablepetitioners obligation as shown in the deed of sale and
respondents indebtedness as shown in the dishonored checks; and (d) neither of the debts or
obligations are subject of a controversy commenced by a third person.
While the proceedings in the RTC focused on ascertaining the presence of the elements
of dacion en pago, it was likewise proven that petitioner owed respondent the amount
of P500,000.00 while respondent owed petitionerP566,000.00; that both debts are due,
liquidated and demandable, and; that neither of the debts or obligations are subject of a
controversy commenced by a third person.
Respondent in her cross-examination categorically admitted that she is indebted to petitioner as
follows:
Q But you will admit that you have borrowed several times from Mr. Trinidad some money?
A Yes.
Q And in fact the total amount of money that you have borrowed from Mr. Trinidad reaches
to P566,000.00, right?
A Yes.
Q And in fact you have issued checks to cover for this account?
A Yes.
Q There were several checks you have issued, right?
A Yes.
Q And all of these checks bounced?
A Yes.29
xxxx
Q x x x It is now very clear, Mrs. Acapulco, that at the time you executed a deed of absolute sale
of the car in favor of Hermenegildo Trinidad you have an outstanding account with him in the
amount of P566,000.00?
A Yes.30

Ignoring this admission would only result in added burden to petitioner as well as the courts as
petitioner will be forced to file a separate case for collection of sum of money just so he could
enforce his right to collect from respondent. This is precisely what compensation seeks to avoid
as its aim is to prevent unnecessary suits and payments through the mutual extinction of
concurring debts by operation of law.31
The claim of respondent that there could be no legal compensation in this case as one of the
obligations consists of delivery of a car and not a sum of money must also fail. Respondent sold
the car to petitioner on March 4, 1991 forP500,000.00 while she filed her complaint for
nullification of the sale only on May 6, 1991. As legal compensation takes place ipso jure, and
retroacts to the date when its requisites are fulfilled, legal compensation has already taken place
at the time of the sale. At such time, petitioner owed respondent the sum of P500,000.00 which
is the price of the vehicle.
Consequently, by operation of law, the P500,000.00 which petitioner owed respondent is off-set
against theP566,000.00 owed by respondent to petitioner, leaving a balance of P66,000.00,
which respondent should pay with 12% interest per annum from date of judicial or extrajudicial
deed.32 Since there was no extrajudicial deed in this case, the interest shall be resolved from the
date petitioner filed its Supplemental Motion for Reconsideration invoking for the first time legal
compensation, that is, May 20, 1992.33
Finally, the Court agrees with petitioner that the trial court erred in awarding damages in favor of
respondent.
In order that moral damages may be awarded, there must be pleading and proof of moral
suffering, mental anguish, fright and the like, and while no proof of pecuniary loss is necessary
in order that moral damages may be awarded, it is nevertheless essential that the claimant
should satisfactorily show the existence of the factual basis of damages and its causal
connection to defendants acts.34 Claims must be substantiated by clear and convincing
proof35 and there must be clear testimony on the anguish and other forms of mental sufferings
as mere allegations will not suffice.36 Allegations of besmirched reputation, embarrassment and
sleepless nights are insufficient for it must be shown that the proximate cause thereof was the
unlawful act or omission of the opposing party.37
Indeed, for a court to arrive upon a judicious approximation of emotional or moral injury,
competent and substantial proof of the suffering experienced must be laid before it.38 There
must be definite findings as to what the supposed moral damages suffered consisted of.39 The
award of moral damages must be solidly anchored on a definite showing that the claiming party
actually experienced emotional and mental sufferings.40
In this case, respondent merely testified that after petitioner refused the payment of the car as
well as its return, she was very much worried, which if converted into monetary amount is
equivalent to P200,000.00.41 We deem such testimony insufficient to warrant the award of moral
damages.
Similarly, in order that exemplary damages may be awarded, it must be shown that the wrongful
act was accompanied by bad faith or done in a wanton, fraudulent, reckless or malevolent

manner.42 Exemplary damages are also allowed only in addition to moral damages such that no
exemplary damage can be awarded unless the claimant first establishes his clear right to moral
damages.43 As moral damages are improper in the present case, so is the award of exemplary
damages.
The decision of the trial court also does not mention the reason for the award of attorneys fees
and the award was simply contained in the dispositive portion of the decision. Again, the trial
court erred on this score as it must explicitly state in the body of its decision and not only in the
dispositive portion thereof the legal reason for the award of attorneys fees.44
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated February
16, 2001 is REVERSED and SET ASIDE. The P500,000.00 which Hermenegildo M. Trinidad
owed Estrella Acapulco is offset against the P566,000.00 which Acapulco owed Trinidad.
Acapulco is ordered to pay Trinidad the amount ofP66,000.00 plus interest at 12% per annum
from May 20, 1992 until full payment.
SO ORDERED.
INSULAR INVESTMENT AND TRUST CORPORATION, Petitioner,
vs.
CAPITAL ONE EQUITIES CORP. (now known as CAPITAL ONE HOLDINGS CORP.) and
PLANTERS DEVELOPMENT BANK, Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil
Procedure assailing the June 6, 2008 Decision1 of the Court of Appeals (CA) in C.A.-G.R. CV
No. 79320 entitled "Insular Investment and Trust Corporation v. Capital One Equities
Corporation (now known as Capital One Holdings Corporation) and Planters Development
Bank."
THE FACTS
Based on the records of the case and on the September 2, 1999 Partial Stipulation of Facts and
Documents2 (the Partial Stipulation) agreed upon by the parties, the facts are as follows:
Petitioner Insular Investment and Trust Corporation (IITC) and respondents Capital One
Equities Corporation(COEC) and Planters Development Bank (PDB) are regularly engaged in
the trading, sale and purchase of Philippine treasury bills.
On various dates in 1994, IITC purchased from COEC treasury bills with an aggregate face
value ofP260,683,392.51 (the IITC T-Bills), as evidenced by the confirmations of purchase
issued by IITC. The purchase price for the said treasury bills were fully paid by IITC to COEC
which was able to deliver P121,050,000.00 worth of treasury bills to IITC.

On May 2, 1994, COEC purchased treasury bills with a face value of P186,774,739.49 (the
COEC T-Bills). IITC issued confirmations of sale in favor of COEC covering the said transaction.
COEC paid the purchase price by issuing the following checks:
Check No.

Payee

Amount

(1) City Trust Managers


Check No. 001180

Planters Development Bank

P154,802,341.59

(2) UCPB-Ayala Managers


Check No. AYLO43841

Planters Development Bank

P16,975,883.89

(3) UCPB-Ayala Managers


Check No. AYLO43840

Planters Development Bank

P10,413,043.78

(4) UCPB-Ayala
Check No. AYL213346

Insular Investment and Trust Corporation

P24,116.11

Both IITC and PDB received the proceeds of the checks.


On May 2, 1994, PDB issued confirmations of sale in favor of IITC for the sale of treasury bills
and IITC, in turn, issued confirmations of purchase in favor of PDB over treasury bills with a total
face value of P186,790,000.00.
Thereafter, PDB sent a letter3 dated May 4, 1994 to IITC undertaking to deliver treasury bills
worthP186,790,000.00, which IITC purchased from PDB on May 2, 1994, as soon as they would
be available.
On May 10, 1994, COEC wrote a letter to IITC demanding the physical delivery of the treasury
bills which the former purchased from the latter on May 2, 1994.
In its May 18, 1994 Letter4 to PDB, IITC requested, on behalf of COEC, the delivery to IITC of
treasury bills worthP186,790,000.00 which had been paid in full by COEC. COEC was furnished
with a copy of the said letter.
On May 30, 1994, COEC protested the tenor of IITCs letter to PDB and took exception to IITCs
assertion that it merely acted as a facilitator with regard to the sale of the treasury bills.
IITC sent COEC a letter5 dated June 3, 1994, demanding that COEC deliver to it (IITC)
the P139,833,392.00 worth of treasury bills or return the full purchase price. In either case, it
also demanded that COEC (1) pay IITC the amount of P1,729,069.50 representing business
opportunity lost due to the non-delivery of the treasury bills, and (2) deliver treasury bills
worth P121,050,000 with the same maturity dates originally purchased by IITC.
COEC sent a letter-reply6 dated June 9, 1994 to IITC in which it acknowledged its obligation to
deliver the treasury bills worth P139,833,392.007 which it sold to IITC and formally demanded
the delivery of the treasury bills worthP186,774,739.49 which it purchased from IITC. COEC
also demanded the payment of lost profits in the amount ofP3,253,250.00. Considering that
COEC and IITC both have claims against each other for the delivery of treasury bills, COEC
proposed that a legal set-off be effected, which would result in IITC owing COEC the difference
ofP46,941,446.49.

In its June 13, 1994 letter to COEC, IITC rejected the suggestion for a legal setting-off of
obligations, alleging that it merely acted as a facilitator between PDB and COEC.
On June 27, 1994, COEC replied to IITCs letter, reiterating its demand and its position stated in
its June 9, 1994 letter.
On July 1, 1994, IITC, COEC and PDB entered into a Tripartite Agreement8 (the Tripartite
Agreement) wherein PDB assigned to IITC, which in turn assigned to COEC, Central Bank Bills
with a total face value of P50,000,000.00. These assignments were made in consideration of (a)
IITC relinquishing all its rights to claim delivery under the confirmation of sale issued by PDB to
IITC to the extent of P50,000,000.00 (face value) and (b) COEC relinquishing all its rights to
claim delivery of the COEC T-Bills under the IITC confirmations of sale to COEC to the extent
ofP50,000,000.00 (face value).
On the same day, COEC and IITC entered into an Agreement9 (the COEC-IITC
Agreement) whereby COEC reassigned to IITC the Central Bank bills subject of the Tripartite
Agreement to the extent of P20,000,000.00 in consideration of which IITC relinquished all its
rights to claim from COEC the IITC T-Bills covered by the COEC confirmation of sale to the
extent of an aggregate P20,000,000.00 face value.
Despite repeated demands, however, PDB failed to deliver the balance of P136,790,000.00
worth of treasury bills which IITC purchased from PDB allegedly for COEC. COEC was likewise
unable to deliver the remaining IITC T-Bills amounting to P119,633,392.00. Neither PDB and
COEC returned the purchase price for the duly paid treasury bills.10
This prompted IITC to file the Amended Complaint11 dated March 20, 1995 before the Regional
Trial Court, Branch 138, Makati City (RTC), praying that COEC be ordered to deliver treasury
bills worth P119,633,392.00 to IITC or pay the monetary equivalent plus legal interests; and, in
the alternative, that PDB be ordered to comply with its obligations under the conduit transaction
involving treasury bills worth P136,790,000.00 by delivering the treasury bills to IITC, in addition
to actual and exemplary damages and attorneys fees.
COEC filed its Answer to Amended Complaint12 dated April 10, 1995, admitting that it owed IITC
treasury bills worthP119,633,392.00. It countered, however, that IITC had an outstanding
obligation to deliver to COEC treasury bills worth P136,774,739.49.13 COEC prayed that IITC be
required to deliver P17,141,347.49 (the amount IITC still owed COEC after a legal off-setting of
their debts against each other) to COEC in addition to moral and exemplary damages and
attorneys fees.14
PDB, for its part, insisted in its Answer Ad Cautelam15 that it had no knowledge or participation
in the sale by IITC of treasury bills to COEC. It admitted that it sent a letter dated May 4, 1994 to
IITC, undertaking to deliver treasury bills worth P186,790,000.00 which IITC purchased from
PDB. PDB posited, however, that IITC was not entitled to the delivery of the said treasury bills
because IITC did not remit payment to PDB. Neither did the subject securities become available
to PDB.
In its Judgment16 dated June 16, 2003, the RTC found that COEC still owed
IITC P119,633,392.00 worth of treasury bills, pursuant to their transaction in early 1994. As
regards the sale of treasury bills by IITC to COEC, however, the RTC determined that IITC was
not merely a conduit in the purchase a sale of treasury bills between PDB and COEC. Rather,

IITC acted as a principal in two transactions: as a buyer of treasury bills from PDB and as a
seller to COEC. Taking into consideration the Tripartite Agreement, IITC was still liable to pay
COEC the sum ofP136,790,000.00. Since IITC and COEC were both debtors and creditors of
each other, the RTC off-set their debts, resulting in a difference of P 17,056,608.00 in favor of
COEC. As to PDBs liability, it ruled that PDB had the obligation to pay P136,790,000.00 to IITC.
Thus, the trial court ordered (a) IITC to pay COEC P17,056,608.00 with interest at the rate of
6% from June 10, 1994 until full payment and (b) PDB to pay IITC P136,790,000.00 with
interest at the rate of 6% from March 21, 1995 until full payment.
Aggrieved, all parties appealed to the CA which promulgated its decision on June 6, 2008. The
CA affirmed the RTC finding that IITC was not a mere conduit but rather a direct seller to COEC
of the treasury bills.17 The CA, however, absolved PDB from any liability, ruling that because
PDB was not involved in the transactions between IITC and COEC, IITC should have alleged
and proved that PDB sold treasury bills to IITC.18 Moreover, PDB only undertook to deliver
treasury bills worth P186,790,000.00 to IITC "as soon as they are available."19 But, the said
treasury bills did not become available. Neither did IITC remit payment to PDB. As such, PDB
incurred no obligation to deliverP186,790,000.00 worth of treasury bills to IITC.
Hence, this petition.
THE ISSUES
IITC raises the following grounds for the grant of its petition:
A. The petition is not dismissible. The issue of whether IITC acted as a conduit is a
question of law. Assuming for the sake of argument that the petition involves questions
of fact, the Supreme Court may take cognizance of the petition under exceptional
circumstances.
B. The Court of Appeals gravely erred and acted contrary to law and jurisprudence and
the evidence on record in holding that IITC did not act as a conduit of Capital One and
Plantersbank in the 2 May 1994 sale of COEC T-bills.
C. The Court of Appeals erred and acted contrary to law and the evidence on record in
ruling that Plantersbank did not have any obligation to delivery the COEC T-Bills to IITC
under IITCs alternative cause of action.
D. The Court of Appeals erred and acted contrary to law in holding that Capital One
could validly set off its claims for the undelivered COEC T-Bills against the fully paid IITC
T-Bills.
E. The Court of Appeals further erred and acted contrary to law in holding that Capital
One and Plantersbank were not guilty of fraud.
F. The Court of Appeals violated IITCs right to due process in affirming, without citing
any basis whatsoever, the erroneous holding of the trial court that there was insufficient
evidence to prove the actual and consequential damages sustained by IITC.20
COEC puts forth the following issues:

Whether the Court of Appeals correctly held that IITC did not act as a conduit of Capital One
and Plantersbank in the May 2, 1994 sale of the COEC T-Bills by IITC to Capital One.
Whether the Court of Appeals correctly held that Capital One may validly set off its claim for the
undelivered COEC T-Bills against the balance of the IITC T-Bills.
Whether the Court of Appeals correctly affirmed the holding of the trial court that Capital One
and Plantersbank are not guilty of fraud.
Whether the Petition raises questions of fact, and whether it is defective.
Whether Capital One is entitled to the correction of the mathematical error in the computation of
the money judgment in its favor.21
For its part, PDB identifies the principal issue to be "whether it was obliged to deliver to
petitioner Insular the treasury bills which the latter sold, as principal, to Capital One, and/or pay
the value thereof."22 The following are stated as corollary issues:
Whether petitioner Insular was acting as "facilitator" or "conduit" in the May 2, 1994 sales of the
treasury bills;
Whether petitioner Insular may raise in this petition the issue of it being merely as "facilitator" or
"conduit" after the Trial Court and Court of Appeals found that petitioner Insular was not a
"facilitator" or "conduit."
Whether respondents Plantersbank and Capital One were guilty of fraud in their transactions
with petitioner Insular.
Whether petitioner Insular was entitled to actual and consequential damages.23
The numerous issues can be simplified as follows:
(1) Whether IITC acted as a conduit in the transaction between COEC and PDB;
(2) Whether COEC can set-off its obligation to IITC as against the latters
obligation to it; and
(3) Whether PDB has the obligation to deliver treasury bills to IITC.
THE COURTS RULING
The petition is partly meritorious.
Question of fact;
IITC did not act as conduit
Petitioner IITC insists that the issue of whether it acted as a conduit is a question of law which
can properly be the subject of a petition for review before this Court. Because the parties

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

Contrary to IITCs claim, the circumstances surrounding the case at bench do not justify the
application of any of the exceptions. At any rate, even if the Court would be willing to disregard
this time-honored principle, the inevitable conclusion would be the same as that made by the
RTC and the CA that IITC did not act as a conduit but rather as a principal in two separate
transactions, one as the purchaser of treasury bills from PDB and, in another, as the seller of
treasury bills to COEC.
The evidence against IITC cannot be denied.
The confirmations of sale issued by IITC to COEC unmistakably show that the former, as
principal, sold the treasury bills to the latter:31
Gentlemen:
As principal, we confirm having sold to you on a without recourse basis the following
securities against which you shall pay us clearing funds on value date.
IITCs confirmations of purchase to PDB likewise reflect that it acted as the principal in the
transaction:32
Gentlemen:
As principal, we confirm having purchased from you on a without recourse basis the following
securities against which we shall pay you clearing funds on value date.
There is nothing in these documents which mentions that IITC merely acted as a conduit in the
sale and purchase of treasury bills between PDB and COEC. On the contrary, the confirmations
of sale and of purchase all clearly and expressly indicate that IITC acted as a principal seller to
COEC and as a principal buyer from PDB.
IITC then tries to shift the blame to PDB and COEC by alleging that it was the two parties which
conceptualized the two-step or conduit transaction and dictated the documents to be used. As
such, they cannot be allowed to "take advantage of the ambiguity created by the documentation
which it, in conspiracy with Plantersbank, concocted to render IITC, an innocent party, liable."33
This argument is far-fetched and borders on the incredible. At the outset, it should be pointed
out that there is no ambiguity whatsoever in the language of the documents used. The
confirmations of sale and purchase unequivocally state that IITC acted as a principal buyer and
seller of treasury bills. The language used is as clear as day and cannot be more explicit. Thus,
because the words of the documents in question are clear and readily understandable by any
ordinary reader, there is no need for the interpretation or construction thereof.34 This was
emphasized in the case of Pichel v. Alonzo:35
Xxx. To begin with, We agree with petitioner that construction or interpretation of the document
in question is not called for. A perusal of the deed fails to disclose any ambiguity or
obscurity in its provisions, nor is there doubt as to the real intention of the contracting
parties. The terms of the agreement are clear and unequivocal, hence the literal and plain
meaning thereof should be observed. Such is the mandate of the Civil Code of the
Philippines which provides that:

"Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall control"
Pursuant to the aforequoted legal provision, the first and fundamental duty of the courts
is the application of the contract according to its express terms, interpretation being
resorted to only when such literal application is impossible.36 (Emphases supplied)
COEC and PDB did not take advantage of any vagueness in the documents in question. They
only seek to enforce the intention of the parties, in accordance with the terms of the
confirmations of sale and purchase voluntarily entered into by the parties.
The Court also finds it hard to believe that an entity would carelessly and imprudently expose
itself to liability in the amount of millions of pesos by failing to ensure that the documents used in
the transaction would be a faithful account of its true nature. It is important to note that the
confirmations of sale were issued by IITC itself using its own documents. Therefore, it defies
imagination how COEC and PDB could have foisted off these forms on IITC against its will.
In addition, a comparison of the confirmations of sale issued by IITC in favor of COEC as
against the confirmations of sale issued by PDB in favor of IITC indicates that there is a
difference in the interest rates of the treasury bills and in the face values:
PDB Confirmations of Sale to IITC37
Maturity Date

Yield

Face Value

Total Price

July 13, 1994

17.150%

P44,170,000.00

P42,998,169.00

July 6, 1994

17.150%

142,620,000.00

139,193,100.56

P186,790,000.00

P182,191,269.56

IITC Confirmations of Sale to COEC38


Maturity Date

Yield

Face Value

Total Price

July 13, 1994

17.0%

P 44,161,700.44

P 43,000,000.00

July 6, 1994

17.0%

142,613,039.05

139,215,385.70

P186,774,739.49

P182,215,385.70

IITC offered a lower interest rate of 17% to COEC, in contrast to the 17.15% interest rate given
to it by PDB. There is also a notable difference in the face value of the treasury bills and in the
total price paid for each set. If, as IITC insists, it only acted as a conduit to the sale between
PDB and COEC, then there should be no disparity in the terms (the interest rate, the face value
and the total price) of the sale of the treasury bills. Obviously, this is not the case. The figures
lead to no other conclusion but that there were two separate transactions in both of which IITC
played a principal role as a buyer from PDB of treasury bills with an aggregate face value
of P186,790,000.00 at an interest rate of 17.15% and as a seller to COEC of treasury bills with
an aggregate face value of P186,774,739.49 at an interest rate of 17%.

Again, IITC attempts to hold PDB and COEC responsible for this questionable variation, alleging
that it was PDB and COEC which dictated the details of the purchase and sale of the treasury
bills. IITC heavily relies on the fact that COEC directly paid PDB the amount of P182,191,269.26
representing the amount covered in the confirmations of sale issued by PDB to strengthen its
position that it merely acted as a conduit between PDB and COEC.39 This was further supported
by the internal trading sheets of IITC where the following handwritten notations were made: (1)
in Purchase Trading Sheet No. 10856 covering the purchase of treasury bills by IITC from PDB:
"dont prepare any check; payment will come from Capital One (See STS 10811)", and (2) in
Sale Trading Sheet No. 10811 covering the sale of treasury bills by IITC to COEC: "for STS
10810 and 10811 will receive 2 checks payable to the ff: 1. Planters Devt Bank
- P182,191,269.59 2. IITC - 24,116.11"
The Court is not convinced. That COEC directly paid PDB is of no moment and does not
necessarily mean that COEC recognized IITCs conduit role in the transaction. Neither does it
disprove the findings of both the RTC and the CA that IITC acted as principal in the two
transactions the purchase of treasury bills from PDB and the subsequent sale thereof to
COEC. The Court agrees with the explanation of the RTC:
The Court is aware that in the trading business, agreements are concluded even before the
goods being traded are received by the "would be seller." Buyers in turn conclude their
transactions even before they are paid. For this reason, the mere fact that in document for
internal use, the instruction that "payment will come from Capital One" will not, by itself, prove
that plaintiff was a mere conduit. Neither could it be considered as circumstantial to establish
the fact in issue. At most, the instructions merely identified the source of funds but whether
those funds are to be received by the plaintiff as purchase price or for remittance to whoever is
entitled to it, none was indicated. The Court may look at the instruction differently if the entries
were "no payment required; COEC to pay PDB directly" or "this is a conduit transaction;
servicing to be done by COEC" or "COEC to pay PDB directly."40
IITC also insists that the fact that the P24,116.11 which it claims to be a facilitation fee is exactly
the difference between the principal amounts of the treasury bills purchased from PDB and the
treasury bills sold to COEC constitutes "the smoking gun or the veritable elephant in the living
room."41 To IITC, it is apparent that the amount is a facilitation fee, adding credence to its
contention that it only acted as a conduit.
The Court cannot sustain that view. There is nothing to prove that the amount of P24,116.11
received by IITC from COEC was a facilitation fee. As explained by COEC, the amount could
easily have been the margin or spread earned by IITC in the buy-and-sell transaction.42 This is,
however, not for the Court to determine. As such, the Court relies on the findings of the RTC on
this matter:
Plaintiffs other evidence to prove its conduit role was the delivery to it by COEC by way of its
corporate check ofP24,116.11 in payment of plaintiffs conduit fee. The Court is hesitant to give
probative value to this proof because nowhere does it appear in the trading sheets or any other
document that it was collected by plaintiff and received by it from COEC in that concept.
Business practice is to issue an official receipt because it is an income, but none was
presented. The testimonial evidence was refuted. COEC presented controverting evidence on
the original mode of payment which was requested to be changed by witness Bombaes. COEC
presented the unsigned check and voucher. The latter was duly accomplished and bears the

signatures or initials of the approving officers. On this particular issue, COECs evidence
deserves more weight.43
Finally, as correctly observed by the RTC, the actions of IITC after the transaction were not
those of a conduit but of a principal:
The Court notes with particular interest the events which transpired on May 4, 1994, two (2)
days after plaintiff through witness Mendoza learned of the non-delivery by PDB of the treasury
bills. Witness Mendoza went to the office of PDB and secured the letter, Exhibit E, which
contains the undertaking of PDB to deliver the treasury bills. This was procured by plaintiff and
addressed to the plaintiff. The language used by PDB was "purchase[d] from us" and plaintiff
accepted it.
Plaintiff failed to explain the reason for demanding delivery of the treasury bills when it was not
the buyer as it so claims. It also failed to object to the use by PDB of the words "purchase[d]
from us," something which it could easily do or should do considering the amount involved.
The conduct of the plaintiff after concluding the May 2, 1994 transaction [was] [that] of a buyer.44
From the foregoing, it is clear that IITC acted as principal purchaser from PDB and principal
seller to COEC, and not simply as a conduit between PDB and COEC.
Set-off allowed
IITC argues that the RTC and the CA erred in holding that COEC can validly set off its claims for
the undelivered IITC T-Bills against the COEC T-Bills.45 IITC reiterates that COEC did not
become a creditor of IITC because the former did not pay the latter for the purchased treasury
bills. Rather, it was PDB which received the proceeds of the payment from COEC.46 In addition,
their obligations do not consist of a sum or money. Neither are they of the same kind because
the obligations call for the delivery of specific determinate things treasury bills with specific
maturity dates and various interest rates. Thus, legal compensation cannot take place.47
COEC, on the other hand, points out that it has already unquestionably proven that IITC acted
as a principal, and not as a conduit, in the sale of treasury bills to COEC.48 Furthermore, it
asserts that the treasury bills in question are generic in nature because the confirmations of sale
and purchase do not mention specific treasury bills with serial numbers.49 The securities were
sold as indeterminate objects which have a monetary equivalent, as acknowledged by the
parties in the Tripartite Agreement.50 As such, because both IITC and COEC are principal
creditors of the other over debts which consist of consumable things or a sum of money, the
RTC correctly ruled that COEC may validly set-off its claims for undelivered treasury bills
against that of IITCs claims.51
The Court finds in favor of respondent COEC.
The applicable provisions of law are Articles 1278, 1279 and 1290 of the Civil Code of the
Philippines:
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.

Art. 1279. In order that compensation may be proper, it is necessary:


(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts 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.
xxx
Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.
Based on the foregoing, in order for compensation to be valid, the five requisites mentioned in
the abovequoted Article 1279 should be present, as in the case at bench. The lower courts have
already determined, to which this Court concurs, that IITC acted as a principal in the purchase
of treasury bills from PDB and in the subsequent sale to COEC of the COEC T-Bills. Thus,
COEC and IITC are principal creditors of each other in relation to the sale of the COEC T-Bills
and IITC T-Bills, respectively.
IITC also claims that the COEC T-Bills cannot be set-off against the IITC T-Bills because the
latter are specific determinate things which consist of treasury bills with specific maturity dates
and various interest rates.52 IITCs actions belie its own assertion. The fact that IITC accepted
the assignment by COEC of Central Bank Bills with an aggregate face value of P20,000,000.00
as payment of part of the IITC T-Bills is evidence of IITCs willingness to accept other forms of
security as satisfaction of COECs obligation. It should be noted that the second requisite only
requires that the thing be of the same kind and quality. The COEC T-Bills and the IITC T-Bills
are both government securities which, while having differing interest rates and dates of maturity,
have each been assigned a certain face value to determine their monetary equivalent. In fact, in
the Tripartite Agreement, the COEC-IITC Agreement and in the memoranda of the parties, the
parties recognized the monetary value of the treasury bills in question, and, in some instances,
treated them as sums of money.53 Thus, they are of the same kind and are capable of being
subject to compensation.
The third, fourth and fifth requirements are clearly present and are not denied by the parties.
Both debts are due and demandable because both remain unsatisfied, despite payment made
by IITC for the IITC T-Bills and by COEC for the COEC T-Bills. Moreover, COEC readily admits
that it has an outstanding balance in favor of IITC.54 Conversely, IITC has been found by the
lower courts to be liable, as principal seller, for the delivery of the COEC T-Bills.55 The debts are
also liquidated because their existence and amount are determined.56 Finally, there exists no
retention or controversy over the COEC T-Bills and the IITC T-Bills.

Because all the stipulations under Article 1279 are present in this case, compensation can take
place. COEC is allowed to set-off its obligation to deliver the IITC T-Bills against IITCs
obligation to deliver the COEC T-Bills.
Correction of the amount due
Having established that compensation or set-off is allowed between COEC and IITC, the Court
will now delve into the proper amount of the award and the applicable interest rates.
The RTC, in its Judgment, ordered IITC to pay COEC the amount of P17,056,608 with interest
at the rate of 6% per annum until full payment. In arriving at the said amount, the trial court
used, as its basis, COECs claim against IITC for P186,790,000 worth of treasury bills
less P50,000,000 which it received under the Tripartite Agreement. Then it deducted from this
the P139,633,392.00 face value of the undelivered treasury bills by COEC to IITC less
theP20,000,000 which COEC assigned to IITC pursuant to the COEC-IITC Agreement.57
As correctly pointed out by COEC, there was a mistake in the arithmetic subtraction made by
the RTC. Using the figures provided by the lower court, the correct result should have
been P17,156,608.00, P100,000.00 more than what was adjudged in favor of COEC. To
illustrate:
The trial courts computation
COECs counterclaim against IITC

P186,790,000.00

Amount assigned by IITC to COEC

(50,000,000.00)

Subtotal
IITCs claim against COEC

P136,790,000.00
P139,633,392.00

Amount reassigned by COEC to IITC

(20,000,000.00)

Subtotal

P119,633,392.00

TOTAL

P17,156,608.00

Aside from the error in the RTCs mathematical computation, a review of the records,
particularly the March 20, 1995 Amended Complaint filed by IITC, the April 10, 1995 Answer to
Amended Complaint (With Counterclaim) filed by COEC and the September 2, 1999 Partial
Stipulation of Facts and Documents submitted by IITC, COEC and PDB to the trial court,
reveals that there was some confusion as to the correct basis to be used for calculating the
amount due to COEC. In COECs Answer and in the Partial Stipulation, it explicitly stated that it
purchased from IITC treasury bills with a face value of P186,774,739.49, as evidenced by the
Confirmations of Sale issued by IITC. If this figure is used in computing COECs award, the
resulting amount would be P17,141,347.49, which is consistent with COECs counterclaim.
The revised computation
COECs counterclaim against IITC

P186,774,739.49

Amount assigned by IITC to COEC

(50,000,000.00)

Subtotal
IITCs claim against COEC

P136,774,739.49
P139,633,392.00

Amount reassigned by COEC to IITC

(20,000,000.00)

Subtotal

P119,633,392.00

TOTAL

P17,141,347.49

Lastly, as regards the legal interest which should be imposed on the award, the Court directs
the attention of the parties to the case of Eastern Shipping Lines v. Court of Appeals,58
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.59 (Emphases supplied)
Because the obligation arose from a contract of sale and purchase of government securities,
and not from a loan or forbearance of money, the applicable interest rate is 6% from June 10,
1994, when IITC received the demand letter from COEC.60 After the judgment becomes final
and executory, the legal interest rate increases to 12% until the obligation is satisfied.
In sum, the Court finds that after compensation is effected, IITC still owes
COEC P17,141,347.49 worth of treasury bills, subject to the interest rate of 6% per annum from
June 10, 1994, then subsequently to the increased interest rate of 12% from the date of finality
of this decision until full payment.
PDB has an obligation to deliver
the treasury bills to IITC

The CA, in absolving PDB from all liability, reasoned that: (1) PDB was not involved in the
transactions for the purchase and sale of treasury bills between IITC and COEC; (2) IITC failed
to allege in its Amended Complaint and prove during the trial that PDB directly and principally
sold to IITC P186,790,000 worth of treasury bills; (3) while PDB undertook, in its May 4, 1994
letter to deliver to IITC the said treasury bills, the obligation did not ripen because the bills did
not become available to PDB and IITC did not remit any payment to PDB; (4) IITC did not
demand delivery of the treasury bills; (5) IITC merely sued PDB as an alternative defendant,
implying that IITC did not have a principal and direct cause of action against PDB on the
treasury bills; and (6) there was nothing in the records to support the trial courts finding that
PDB owed IITC P186,790,000 worth of treasury bills.61
PDB essentially echoes the reasons set forth by the CA and reiterated that because IITC did not
pay for the treasury bills subject of its (PDB) May 4 undertaking, then IITC had no right to
demand delivery of the said securities from PDB. Moreover, the check payments made by
COEC to PDB were not in payment of the treasury bills purchased by IITC from PDB, but for
COECs other obligations with PDB. The total amount of the checks P182,191,269.26 did not
correspond to the treasury bills worth P186,790,000 which COEC allegedly purchased from
PDB with IITC acting as conduit. PDB also points out that COEC did not interpose a cross-claim
against it precisely because COEC was aware that it had no claim against PDB.62 Also, the
checks clearly indicated that they were made in payment for the account of COEC.63
IITC insists that it alleged in its Amended Complaint (by way of alternative cause of action) that
PDB directly and principally sold to IITC treasury bills worth P186,790,000.00. By suing PDB as
an alternative defendant, IITC did not acknowledge that PDB could not be held principally liable.
On the contrary, by bringing suit against PDB under an alternative cause of action, IITC set forth
a claim against PDB as the principal seller of the treasury bills. In addition, IITC categorically
refuted PDBs allegation that the former did not pay for the treasury bills purchased from the
latter. The judicial admissions of PDB during the course of the trial and in the Partial Stipulation,
that PDB received the proceeds of the managers checks issued by COEC as payment for
COECs purchase of treasury bills from IITC, contradict PDBs defense that no payment was
made by IITC for the said treasury bills. Payment by COEC to PDB, upon IITCs instructions,
should be treated as a payment by a third person with the knowledge of the debtor, under Article
1236 of the Civil Code. Thus, when PDB accepted COECs checks, it became duty bound to
deliver the treasury bills sold to IITC as the principal buyer.64
Lastly, IITC points out the absurdity of the CA decision in allowing COEC to offset its liability to
IITC against its liability to deliver the treasury bills purchased by COEC. The parties do not deny
that COEC paid for the purchase price of the subject treasury bills by issuing managers checks
in the name of PDB and IITC. As such, unless COECs payment to PDB is credited as payment
by IITC to PDB for the securities purchased by IITC, under that theory that IITC acted as a
principal buyer, there would be no obligation on the part of IITC against which a set-off can be
effected by COEC.65
On this point, the Court agrees with IITC.
First, while it is true that PDB was not involved in the sale of the COEC T-Bills, it is irrelevant to
the issue because it is IITC which interposed a claim, albeit an alternative one, against PDB for
having sold to IITC treasury bills worthP186,790,000.00. This was alleged in IITCs Amended
Complaint and was deemed by the RTC to have been successfully proven.66 The findings of the
RTC are supported by the confirmations of sale issued by PDB in favor of IITC and PDBs letter

dated May 4, 1994 undertaking to deliver the treasury bills worth P186,790,000.00 to IITC.67The
due execution and the veracity of the contents of the aforesaid documents have been admitted
by the parties.68
Second, it is erroneous to say that IITC never made any demand upon PDB. IITCs letter dated
May 18, 1994 addressed to PDB confirms that it demanded delivery by PDB of the treasury bills
covered by the confirmations of sale issued by PDB in its favor. Although the demand was made
on behalf of COEC, which allegedly purchased the treasury bills from PDB, consistent with
IITCs assertion that it only facilitated the sale, it was nevertheless a demand for delivery. Even if
this were to be considered an invalid demand because it was not made by IITC as the principal
party to the transaction with PDB, the filing of the Amended Complaint by IITC is equivalent to
demand, in keeping with the rule that the filing of a complaint constitutes judicial demand.69
Third, the CA ruling that IITC impliedly did not have a principal cause of action because it merely
sued PDB as an alternative defendant is an extremely flawed and baseless supposition which
runs counter to established law and jurisprudence. The filing of a suit against an alternative
defendant and under an alternative cause of action should not be taken against IITC. Section
13, Rule 3 and Section 2, Rule 8 of the Rules of Civil Procedure explicitly allows such filing:
Rule 13, Section 13: Alternative defendants. Where the plaintiff is uncertain against who of
several persons he is entitled to relief, he may join any or all of them as defendants in the
alternative, although a right to relief against one may be inconsistent with a right of relief against
the other. (13a)
Rule 8, Section 2: Alternative causes of action or defenses. A party may set forth two or more
statements of a claim or defense alternatively or hypothetically, either in one cause of action or
defense or in separate causes of action or defenses. When two or more statements are made in
the alternative and one of them if made independently would be sufficient, the pleading is not
made insufficient by the insufficiency of one or more of the alternative statements.
As discussed earlier, the Court is not granting IITCs primary cause of action against COEC
because IITC acted, not as a mere conduit for the sale of shares by PDB to COEC as alleged
by IITC, but rather as a principal purchaser of securities from PDB and then later as a principal
seller to COEC. By reason of this determination, COEC is allowed to offset its outstanding
obligation to deliver the remaining IITC T-Bills against the latters obligation to deliver the COEC
T-Bills. Consequently, IITCs alternative action against the alternative defendant PDB should be
considered in order for IITC to be able to recover from PDB the P186,790,000.00 worth of
treasury bills which had already been fully paid for.
To ascertain whether IITC was able to adequately state an alternative cause of action against
PDB in its Amended Complaint, the Court refers to Perpetual Savings Bank v. Fajardo70 where
the test for determining the existence of a cause of action was extensively discussed:
The familiar test for determining whether a complaint did or did not state a cause of
action against the defendants is whether or not, admitting hypothetically the truth of the
allegations of fact made in the complaint, a judge may validly grant the relief demanded
in the complaint. InRava Development Corporation v. Court of Appeals, the Court elaborated
on this established standard in the following manner:

"The rule is that a defendant moving to dismiss a complaint on the ground of lack of cause of
action is regarded as having hypothetically admitted all the averments thereof. The test of the
sufficiency of the facts found in a petition as constituting a cause of action is whether or not,
admitting the facts alleged, the court can render a valid judgment upon the same in accordance
with the prayer thereof (Consolidated Bank and Trust Corp. v. Court of Appeals, 197 SCRA 663
[1991]).1wphi1
In determining the existence of a cause of action, only the statements in the complaint
may properly be considered. It is error for the court to take cognizance of external facts or
hold preliminary hearings to determine their existence. If the allegation in a complaint furnish
sufficient basis by which the complaint may be maintained, the same should not be dismissed
regardless of the defenses that may be assessed by the defendants (supra).
A careful review of the records of this case reveals that the allegations set forth in the complaint
sufficiently establish a cause of action. The following are the requisites for the existence of
a cause of action: (1) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created; (2) an obligation on the part of the named defendant
to respect, or not to violate such right; and (3) an act or omission on the part of the said
defendants constituting a violation of the plaintiff's right or a breach of the obligation of
the defendant to the plaintiff (Heirs of Ildefonso Coscolluela, Sr., Inc. v. Rico General
Insurance Corporation, 179 SCRA 511 [1989])."71(Emphases supplied)
Following the disquisition above, IITCs Amended Complaint, while not a model of superb
draftsmanship in its struggle to maintain IITCs conduit theory, adequately sets forth a cause of
action against PDB. Under its claim against PDB as alternative defendant, IITC alleged that,
even if it acted as a direct buyer from PDB, (1) IITC is entitled to the delivery of the treasury bills
worth P186,790,000.00 covered by the confirmations of sale issued by PDB, (2) PDB has an
obligation to deliver the same to IITC, and (3) PDB failed to deliver the said securities to IITC.72
It would be the height of injustice to hold IITC accountable for the delivery of the COEC T-Bills to
COEC without similarly holding PDB liable for the release of the treasury bills
worth P186,790,000.00 to IITC, which cannot be accomplished without allowing IITCs
alternative cause of action against PDB to prosper.
The Court now tackles the main argument of PDB for sustaining the ruling of the CA absolving it
from liability that IITC allegedly failed to make the required payment for the purchase. PDB
claims that the managers checks which it received from COEC were payment by the latter for
its other obligations to the former. Conspicuously, PDB failed to elaborate on the supposed
obligations of COEC.
This flimsy allegation is patently untrue. In its Memorandum,73 COEC denied that the checks
were payment for an account which it had with PDB, as PDB so desperately alleges. COEC
clarified that the managers checks payable to PDB were issued by COEC upon the instructions
of IITC in payment for the COEC T-Bills. PDBs theory was negated by COEC itself as the issuer
of the checks. Moreover, PDB already judicially admitted, through the Partial Stipulation, that the
checks were given by COEC as payment for the COEC T-Bills. Section 4, Rule 129 of the
Revised Rules of Evidence provides that:
Sec. 4. Judicial admissions. An admission, verbal or written, made by a party in the course of
the proceedings in the same case, does not require proof. The admission may be contradicted

only by showing that it was made through palpable mistake or that no such admission was
made.
As such, PDB cannot now gainsay itself by claiming that the checks were payment by COEC for
certain unidentified obligations to PDB. "It is well-settled that judicial admissions cannot be
contradicted by the admitter who is the party himself and binds the person who makes the
same, and absent any showing that this was made thru palpable mistake, no amount of
rationalization can offset it."74
Since it has been sufficiently established that it was IITC which instructed that payment be
made to PDB, it is apparent that the said checks were delivered to PDB in consideration of a
transaction between PDB and IITC. On May 2, 1994, the same date the checks were issued,
IITC purchased treasury bills with a combined face value ofP186,790,000.00 from PDB for the
total price of P182,191,269.56. The Court notes that the P182,191,269.26 aggregate amount of
the checks issued by COEC to PDB is almost exactly equal to the total price of the treasury bills
which IITC purchased from PDB.75 The payment by COEC on behalf of IITC can be considered
as payment made by a third-party to the transaction between IITC and PDB which is allowed
under Article 1236 of the Civil Code of the Philippines.76
The Court finds no logical reason either for PDB to execute the May 4, 1994 Letter to IITC
undertaking to deliver treasury bills worth P186,790,000.00 if it had not received the payment
from IITC. Especially so because there is nothing in the letter to indicate that PDB was still
awaiting payment for the said securities. There is no other reasonable conclusion but that PDB
received payment, in the form of three managers checks issued by COEC, for the treasury bills
purchased by IITC, and that having failed to promptly deliver the treasury bills despite having
encashed the checks, PDB then executed the foregoing letter of undertaking.
Also telling is PDBs participation in the Tripartite Agreement with IITC and COEC where it
assigned P50,000,000 worth of Central Bank Bills to IITC, in consideration of which, IITC
relinquished its right to claim delivery under the confirmations of sale issued by PDB to the
extent of P50,000,000. While the agreement stipulated that it was not in any way an admission
of any liability by any one of them against another, the fact that PDB agreed to execute such an
agreement is indicative of the existence of its obligation to IITC. In its Answer Ad Cautelam filed
before the RTC, PDB explained that it gave up P50,000,000 worth of Central Bank Bills simply
to assist COEC and IITC meet their financial difficulties. The Court finds this allegation highly
inconceivable, preposterous and even ludicrous because no company in its right mind would
willingly part with such a huge amount of bank bills for no consideration whatsoever except for
solely altruistic reasons.
Finally, PDBs argument that it had no obligation to deliver the treasury bills purchased by IITC
because the same did not become available to PDB is evidently a frantic last ditch attempt to
evade liability. That the subject securities did not become available to PDB should not be the
concern of IITC. For as long as payment was made, PDB was obliged to deliver the securities
subject of its confirmations of sale.
PDBs adroit maneuvering coupled with IITCs poorly conceived conduit theory led the CA to
reach an erroneous conclusion. This Court, however, will not be similarly blinded. There is
simply an incongruity in the CA decision. Accordingly, this Court rules that PDB should be liable
for the delivery of P186,790,000.00 worth of treasury bills to IITC, or payment of the same,

reduced by P50,000,000.00 which the former assigned to the latter under the Tripartite
Agreement. The total liability of PDB is P136,790,000.00, computed as follows:
PDBs Liability
Amount of treasury bills purchased by IITC

P186,790,000.00

Amount assigned by PDB to IITC

50,000,000.00
TOTAL

P136,790,000.00

This shall be subject to interest at the rate of 6% per annum from the date of the filing of the
Amended Complaint on March 21, 1995, considered as the date of judicial demand, then to
12% per annum from the date of finality of this decision until full payment.
To rule otherwise would be to allow unjust enrichment on the part of PDB to the detriment of
IITC. Article 22 of the Civil Code of the Philippines provides that:
Art. 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or legal
ground, shall return the same to him.
In the recent case of Flores v. Spouses Lindo,77 this Court expounded on the subject matter:
There is unjust enrichment "when a person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against the fundamental principles of
justice, equity and good conscience." The principle of unjust enrichment requires two conditions:
(1) that a person is benefited without a valid basis or justification, and (2) that such benefit is
derived at the expense of another.
The main objective of the principle against unjust enrichment is to prevent one from enriching
himself at the expense of another without just cause or consideration.78
The Court cannot condone a decision which is manifestly partial. Neither shall the Court be a
party to the perpetration of injustice. As the last bastion of justice, this Court shall always rule
pursuant to the precepts of fairness and equity in order to dispel any doubt in the integrity and
competence of the Judiciary.
WHEREFORE, the petition is PARTIALLY GRANTED. The June 6, 2008 Decision of the Court
of Appeals in C.A.-G.R. CV No. 79320 is SET ASIDE. Accordingly, the June 16, 2003 RTC
Decision is REINSTATED thoughMODIFIED to read as follows:
FOR THE REASONS GIVEN, judgment is hereby rendered a] ordering Planters Development Bank to pay plaintiff P 136,790,000.00 with interest at
the rate of six (6%) percent per annum from March 21, 1995 until full payment;
b] ordering Insular and Trust Investment Corporation to pay Capital One Equities
Corporation P17,156,608.00 with legal interest at the rate of six (6%) percent per annum
from June 10, 1994 until full payment; and

c] dismissing the counterclaim of Planters Development Bank.


Any amount not paid upon the finality of this decision shall be subject to interest at the
increased rate of twelve (12%) percent per annum reckoned from the date of finality of this
decision until full payment thereof.
No pronouncement as to costs.
SO ORDERED.
FIRST UNITED CONSTRUCTORS CORPORATION AND BLUE STAR CONSTRUCTION
CORPORATION,Petitioners, v. BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the applicability of the legal principles of recoupment and compensation.
The Case
Under review is the decision promulgated on July 26, 2004,1 whereby the Court of Appeals (CA)
affirmed the judgment rendered on May 14, 1996 by the Regional Trial Court, Branch 107, in
Quezon City adjudging the petitioners (defendants) liable to pay to the respondent (plaintiff)
various sums of money and damages.2
Antecedents
Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction
Corporation (Blue Star) were associate construction firms sharing financial resources,
equipment and technical personnel on a case-to-case basis. From May 27, 1992 to July 8,
1992, they ordered six units of dump trucks from the respondent, a domestic corporation
engaged in the business of importing and reconditioning used Japan-made trucks, and of selling
the trucks to interested buyers who were mostly engaged in the construction business, to wit:
UNIT

TO WHOM DELIVERED

DATE OF DELIVERY

Isuzu Dump Truck

FUCC

27 May 1992

Isuzu Dump Truck

FUCC

27 May 1992

Isuzu Dump Truck

FUCC

10 June 1992

Isuzu Dump Truck

FUCC

18 June 1992

Isuzu Dump Truck

Blue Star

4 July 1992

Isuzu Cargo Truck

FUCC

8 July 1992

The parties established a good business relationship, with the respondent extending service
and repair work to the units purchased by the petitioners. The respondent also practiced

liberality towards the petitioners in the latters manner of payment by later on agreeing to
payment on terms for subsequent purchases.
On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that
the respondent delivered on the same date. On September 29, 1992, FUCC again ordered from
the respondent one unit of Isuzu Transit Mixer that was also delivered to the petitioners. For the
two purchases, FUCC partially paid in cash, and the balance through post-dated checks, as
follows:
BANK/CHECK NO.

DATE

AMOUNT

Pilipinas Bank 18027379

23 November 1992

P360,000.00

Pilipinas Bank 18027384

1 December 1992

P375,000.00

Upon presentment of the checks for payment, the respondent learned that FUCC had ordered
the payment stopped. The respondent immediately demanded the full settlement of their
obligation from the petitioners, but to no avail. Instead, the petitioners informed the respondent
that they were withholding payment of the checks due to the breakdown of one of the dump
trucks they had earlier purchased from respondent, specifically the second dump truck delivered
on May 27, 1992.
Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993,
seeking payment of the unpaid balance in the amount of P735,000.00 represented by the two
checks.
In their answer, the petitioners averred that they had stopped the payment on the two checks
worth P735,000.00 because of the respondents refusal to repair the second dump truck; and
that they had informed the respondent of the defects in that unit but the respondent had refused
to comply with its warranty, compelling them to incur expenses for the repair and spare parts.
They prayed that the respondent return the price of the defective dump truck worth P830,000.00
minus the amounts of their two checks worth P735,000.00, with 12% per annum interest on the
difference of P90,000.00 from May 1993 until the same is fully paid; that the respondent should
also reimburse them the sum of P247,950.00 as their expenses for the repair of the dump truck,
with 12% per annum interest from December 16, 1992, the date of demand, until fully paid; and
that the respondent pay exemplary damages as determined to be just and reasonable but not
less than P500,000, and attorneys fees of P50,000 plus P1,000.00 per court appearance and
other litigation expenses.
It was the position of the respondent that the petitioners were not legally justified in withholding
payment of the unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu
Transit Mixer due the alleged defects in second dump truck because the purchase of the two
units was an entirely different transaction from the sale of the dump trucks, the warranties for
which having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its judgment,3 finding the petitioners liable to pay for the
unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer

totaling P735,000.00 with legal interest and attorneys fees; and declaring the respondent liable
to pay to the petitioners the sum of P71,350.00 as costs of the repairs incurred by the
petitioners. The RTC held that the petitioners could not avail themselves of legal compensation
because the claims they had set up in the counterclaim were not liquidated and demandable.
The fallo of the judgment states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum of P360,000.00
and P375,000.00 with interest at the legal rate of 12% per annum computed from
February 11, 1993, which is the date of the first extrajudicial demand, until fully
paid;
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent
to 10% of the principal amount due, for attorneys fees;
3. On the counterclaim, ordering plaintiff to pay defendants the sum of P71,350.00
with interest at the legal rate of 12% per annum computed from the date of this
decision until fully paid;
4. Ordering plaintiff to pay the defendants attorneys fees equivalent to 10% of the
amount due;
5. No pronouncement as to costs.

SO ORDERED.4
Decision of the CA
The petitioners appealed, stating that they could justifiably stop the payment of the checks in the
exercise of their right of recoupment because of the respondents refusal to settle their claim for
breach of warranty as to the purchase of the second dump truck.
In its decision promulgated on July 26, 2004,5 however, the CA affirmed the judgment of the
RTC. It held that the remedy of recoupment could not be properly invoked by the petitioners
because the transactions were different; that the expenses incurred for the repair and spare
parts of the second dump truck were not a proper subject of recoupment because they did not
arise out of the purchase of the Hino Prime Mover and the Isuzu Transit Mixer; and that the
petitioners claim could not also be the subject of legal compensation or set-off, because the
debts in a set-off should be liquidated and demandable.
Issues
The petitioners are now before the Court asserting in their petition for review on certiorari that
the CA erred in:
I

x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT UNDER PAR. (1)


OF ART. 1599 OF THE CIVIL CODE, WHICH PROVIDES [FOR] THE RIGHTS AND
REMEDIES AVAILABLE TO A BUYER AGAINST A SELLERS BREACH OF WARRANTY.
II
x x x RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION ALLEGEDLY
BECAUSE THEIR CLAIMS AGAINST RESPONDENT ARE NOT LIQUIDATED AND
DEMANDABLE.
III
x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL INTEREST
COMPUTED FROM THE FIRST EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY
DAMAGES.6
The petitioners submit that they were justified in stopping the payment of the two checks due to
the respondents breach of warranty by refusing to repair or replace the defective second dump
truck earlier purchased; that the withholding of payments was an effective exercise of their right
of recoupment as allowed by Article 1599(1) of the Civil Code; due to the sellers breach of
warranty that the CAs interpretation (that recoupment in diminution or extinction of price in case
of breach of warranty by the seller should refer to the reduction or extinction of the price of the
same item or unit sold and not to a different transaction or contract of sale) was not supported
by jurisprudence; that recoupment should not be restrictively interpreted but should include the
concept of compensation or set-off between two parties who had claims arising from different
transactions; and that the series of purchases and the obligations arising therefrom, being interrelated, could be considered as a single and ongoing transaction for all intents and purposes.
The respondent counters that the petitioners could not refuse to pay the balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer on the basis of the right of
recoupment under Article 1599 of the Civil Code; that the buyers remedy of recoupment related
only to the same transaction; and that compensation was not proper because the claims of the
petitioners as alleged in their counterclaim were not liquidated and demandable.
There is no longer any question that the petitioners were liable to the respondent for the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer. What
remain to be resolved are strictly legal, namely: one, whether or not the petitioners validly
exercised the right of recoupment through the withholding of payment of the unpaid balance of
the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer; and, two, whether or
not the costs of the repairs and spare parts for the second dump truck delivered to FUCC on
May 27, 1992 could be offset for the petitioners obligations to the respondent.
Ruling
We affirm the decision of the CA with modification.
1.
Petitioners could not validly resort to recoupment against respondent

Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one
is sued by means of a legal or equitable right resulting from a counterclaim arising out of the
same transaction.7 It is the setting up of a demand arising from the same transaction as the
plaintiffs claim, to abate or reduce that claim.
The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil
Code, viz:
Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:
(1) Accept or keep the goods and set up against the seller, the breach of warranty by way
of recoupment in diminution or extinction of the price;
(2) Accept or keep the goods and maintain an action against the seller for damages for the
breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the seller for damages for the
breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already
been received, return them or offer to return them to the seller and recover the price or any part
thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these ways, no other
remedy can thereafter be granted, without prejudice to the provisions of the second paragraph
of article 1191. (Emphasis supplied)
xxxx
In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case,
explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment in
diminution or extinction of price in case of breach of warranty by the seller should therefore be
interpreted as referring to the reduction or extinction of the price of the same item or unit sold
and not to a different transaction or contract of sale. This is more logical interpretation of the
said article considering that it talks of breach of warranty with respect to a particular item sold by
the seller. Necessarily, therefore, the buyers remedy should relate to the same transaction and
not to another.
Defendants-appellants act of ordering the payment on the prime mover and transit mixer
stopped was improper considering that the said sale was a different contract from that of the
dump trucks earlier purchased by defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair
and spare parts of dump truck no. 2 is therefore not a proper subject of recoupment since it
does not arise out of the contract or transaction sued on or the claim of plaintiff-appellee for
unpaid balances on the last two (2) purchases, i. e. the prime mover and the transit mixer.8

The CA was correct. It was improper for petitioners to set up their claim for repair expenses and
other spare parts of the dump truck against their remaining balance on the price of the prime
mover and the transit mixer they owed to respondent. Recoupment must arise out of the
contract or transaction upon which the plaintiffs claim is founded.9 To be entitled to recoupment,
therefore, the claim must arise from the same transaction, i.e., the purchase of the prime mover
and the transit mixer and not to a previous contract involving the purchase of the dump truck.
That there was a series of purchases made by petitioners could not be considered as a single
transaction, for the records show that the earlier purchase of the six dump trucks was a
separate and distinct transaction from the subsequent purchase of the Hino Prime Mover and
the Isuzu Transit Mixer. Consequently, the breakdown of one of the dump trucks did not grant to
petitioners the right to stop and withhold payment of their remaining balance on the last two
purchases.
2.
Legal compensation was permissible
Legal compensation takes place when the requirements set forth in Article 1278 and Article
1279 of theCivil Code are present, to wit:
Article 1278. Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled
that they could not because the claims of petitioners against respondent were not liquidated and
demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount of P71,350.00 stated in their
counterclaim, and the CA concurred in the finding, stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. 1) defendants were charging
plaintiff only for the following items of repair:

1. Cost of repair and spare parts -

P46,800.00

2. Cost of repair and spare parts -

24,550.00
P71,350.00

Said amounts may be considered to have been spent for repairs covered by the warranty period
of three (3) months. While the invoices (Exhs. 2-B and 3-A) dated September 26, 1992 and
September 18, 1992, this delay in repairs is attributable to the fact that when defects were
brought to the attention of the plaintiff in the letter of August 14, 1992 (Exh. 8) which was within
the warranty period, the plaintiff did not respond with the required repairs and actual repairs
were undertaken by defendants. Thereafter, the spare parts covered by Exhibits 2-B and 3-A
pertain to the engine, which was covered by the warranty.
x x x. Defendants in their letter of August 14, 1992 (Exhb. 8) demanded correction of defects.
In their letter of August 22, 1992 (Exh. 9) they demanded replacement. In their letter of August
27, 1992 (Exh. 10), they demanded replacement/repair. In September, 1992, they undertook
repairs themselves (Exhs. 2-B and 3-A) and demanded payment for the expenses in their
letter of December 16, 1992 (Exh. 1). All other items of expenses connected with subsequent
breakdowns are no longer chargeable to plaintiff which granted only a 3-month warranty. x x x10
Considering that preponderant evidence showing that petitioners had spent the amount of
P71,350.00 for the repairs and spare parts of the second dump truck within the warranty period
of three months supported the finding of the two lower courts, the Court accepts their finding.
Verily, factual findings of the trial court, when affirmed by the CA, are conclusive on the Court
when supported by the evidence on record.11
A debt is liquidated when its existence and amount are determined.12 Accordingly, an
unliquidated claim set up as a counterclaim by a defendant can be set off against the plaintiffs
claim from the moment it is liquidated by judgment.13 Article 1290 of the Civil Code provides that
when all the requisites mentioned in Article 1279 of the Civil Code are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount. With
petitioners expenses for the repair of the dump truck being already established and determined
with certainty by the lower courts, it follows that legal compensation could take place because
all the requirements were present. Hence, the amount of P71,350.00 should be set off against
petitioners unpaid obligation of P735,000.00, leaving a balance of P663,650.00, the amount
petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial and appellate courts. The
legal interest rate to be imposed from February 11, 1993, the time of the extrajudicial demand
by respondent, should be 6% per annum in the absence of any stipulation in writing in
accordance with Article 2209 of theCivil Code, which provides:
Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which
is six per cent per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects
subject to the MODIFICATION that petitioners are ordered, jointly and severally, to pay to
respondent the sum of P663,650.00, plus interest of 6% per annum computed from February

11, 1993, the date of the first extrajudicial demand, until fully paid; and ORDERS the petitioners
to pay the costs of suit.
SO ORDERED.