1

G.R. No. 191555

January 20, 2014

UNION BANK OF THE PHILIPPINES, Petitioner,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on Certiorari1 are the Decision2 dated November 3, 2009 and
Resolution3 dated February 26, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed
the Orders4 dated November 9, 2005 and January 30, 2006 of the Regional Trial Court of Makati, Branch
585 (RTC) in Civil Case No. 7648 denying the motion to affirm legal compensation6 filed by petitioner
Union Bank of the Philippines (Union Bank) against respondent Development Bank of the Philippines
(DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks predecessor-in-interest,
Bancom Development Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of
Debt7 (dacion en pago) whereby the former ceded in favor of the latter certain properties (including a
processing plant in Marilao, Bulacan [processing plant]) in consideration of the following: (a) the full and
complete satisfaction of FIs loan obligations to DBP; and (b) the direct assumption by DBP of FIs
obligations to Bancom in the amount of P17,000,000.00 (assumed obligations).8
On the same day, DBP, as the new owner of the processing plant, leased back9 for 20 years the said property
to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and
Bancom.
DBP also entered into a separate agreement10 with Bancom (Assumption Agreement) whereby the former:
(a) confirmed its assumption of FIs obligations to Bancom; and (b) undertook to remit up to 30% of any
and all rentals due from FI to Bancom (subject rentals) which would serve as payment of the assumed
obligations, to be paid in monthly installments. The pertinent portions of the Assumption Agreement reads
as follows:
WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom
which DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the lease rentals
or part of the proceeds of sale of those properties of the Assignors conveyed to DBP pursuant to the [Deed of
Cession of Property in Payment of Debt dated May 21, 1979] and which are the subject of [the Lease
Agreement] made and executed by and between DBP and [FI], the last hereafter referred to as the "Lessee"
to be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from the
Lessee pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the latters offices at Pasay
Road, Makati, Metro Manila within five (5) days from due dates thereof, and applied in payment of the
Assumed Obligations. Likewise, the amount up to 30% of the proceeds from any sale of the Leased

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Properties shall within the same period above, be remitted by DBP to Bancom and applied in payment or
prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales
proceeds actually received by Bancom on the Leased Properties shall be paid by DBP to Bancom not later
than December 29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters
Worldwide, Inc. (FW);11 while on May 9, 1984, Bancom conveyed all its receivables, including, among
others, DBPs assumed obligations, to Union Bank.12
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank
filed, on June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case No. 7648.13 In
opposition, DBP countered, among others, that the obligations it assumed were payable only out of the
rental payments made by FI. Thus, since FI had yet to pay the same, DBPs obligation to Union Bank had
not arisen.14 In addition, DBP sought to implead FW as third party-defendant in its capacity as FIs assignee
and, thus, should be held liable to Union Bank.15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be a
real-party-in-interest due to the supervening transfer of its rights, title and interests over the subject matter
to the Asset Privatization Trust (APT). Said motion was, however, denied by the RTC in an Order dated May
27, 1988.16
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a Decision17 dated May 8, 1990, ordered: (a) DBP to
pay Union Bank the sum of P4,019,033.59, representing the amount of the subject rentals (which, again,
constitutes 30% of FIs [now FWs] total rental debt), including interest until fully paid; and (b) FW, as
third-party defendant, to indemnify DBP, as third- party plaintiff, for its payments of the subject rentals to
Union Bank. It ruled that there lies no evidence which would show that DBPs receipt of the rental payments
from FW is a condition precedent to the formers obligation to remit the subject rentals under the Lease
Agreement. Thus, when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed
obligations.18 DBP then elevated the case on appeal before the CA, docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTCs ruling, and
consequently ordered: (a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt
incurred under the Lease Agreement, including P10,000.00 as attorneys fees; and (b) DBP, after having
been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals) to Union Bank.20
It rejected Union Banks claim that DBP has the direct obligation to remit the subject rentals not only from
FWs rental payments but also out of its own resources since said claim contravened the "plain meaning" of
the Assumption Agreement which specifies that the payment of the assumed obligations shall be made "out
of the portion of the lease rentals or part of the proceeds of the sale of those properties of [FI] conveyed to
DBP."21 It also construed the phrase under the Assumption Agreement that DBP is obligated to "pay any
balance of the Assumed Obligations after application of the entire rentals and/or the entire sales proceeds
actually received by [Union Bank] on the Leased Properties . . . not later than December 29, 1998" to mean
that the lease rentals must first be applied to the payment of the assumed obligations in the amount of
P17,000,000.00, and that DBP would have to pay out of its own money only in case the lease rentals were
insufficient, having only until December 29, 1998 to do so. Nevertheless, the monthly installments in
satisfaction of the assumed obligations would still have to be first sourced from said lease rentals as

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stipulated in the assumption agreement.22 In view of the foregoing, the CA ruled that DBP did not default in
its obligations to remit the subject rentals to Union Bank precisely because it had yet to receive the rental
payments of FW.23
Separately, the CA upheld the RTCs denial of DBPs motion to dismiss for the reason that the transfer of its
rights, title and interests over the subject matter to the APT occurred pendente lite, and, as such, the
substitution of parties is largely discretionary on the part of the court.
At odds with the CAs ruling, Union Bank and DBP filed separate petitions for review on certiorari before the
Court, respectively docketed as G.R. Nos. 115963 and 119112, which were thereafter consolidated.
The Courts Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution24 dated December 13, 1995. First, it upheld the CAs finding
that while DBP directly assumed FIs obligations to Union Bank, DBP was only obliged to remit to the latter
30% of the lease rentals collected from FW, from which any deficiency was to be settled by DBP not later
than December 29, 1998.25 Similarly, the Court agreed with the CA that the denial of DBPs motion to
dismiss was proper since substitution of parties, in case of transfers pendente lite, is merely discretionary on
the part of the court, adding further that the proposed substitution of APT will amount to a novation of
debtor which cannot be done without the consent of the creditor.26
On August 2, 2000, the Courts resolution became final and executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution28 before the RTC, praying that DBP be directed
to pay the amount of P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the
FWs total rental debt in the amount of P32,441,401.85). DBP opposed29 Union Banks motion, contending
that it sought to effectively vary the dispositive portion of the CAs May 27, 1994 Decision in CA-G.R. CV No.
35866. Also, on September 12, 2001, DBP filed its own motion for execution against FW, citing the same CA
decision as its basis.
In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC granted both motions for
execution. Anent Union Banks motion, the RTC opined that the CAs ruling that DBPs payment to Union
Bank shall be demandable only upon payment of FW must be viewed in light of the date when the same was
rendered. It noted that the CA decision was promulgated only on May 27, 1994, which was before the
December 29, 1998 due date within which DBP had to fully pay its obligation to Union Bank under the
Assumption Agreement. Since the latter period had already lapsed, "[i]t would, thus, be too strained to
argue that payment by DBP of its assumed obligation[s] shall be dependent on [FWs] ability, if not
availability, to pay."31 In similar regard, the RTC granted DBPs motion for execution against FW since its
liability to Union Bank and DBP remained undisputed.
As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of Execution) and,
thereafter, a notice of garnishment33 against DBP were issued. Records, however, do not show that the
same writ was implemented against FW.
DBP filed a motion for reconsideration34 from the Execution Order, averring that the latter issuance varied
the import of the CAs May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered DBP
to pay the assumed obligations to Union Bank before FWs payment. The motion was, however, denied on
December 5, 2001.35 Thus, DBPs deposits were eventually garnished.36 Aggrieved, DBP filed a petition for
certiorari37 before the CA, docketed as CA-G.R. SP No. 68300.
The CA Ruling in CA-G.R. SP No. 68300

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In a Decision38 dated July 26, 2002, the CA dismissed DBPs petition, finding that the RTC did not abuse
its discretion when it issued the October 15, 2001 Writ of Execution. It upheld the RTCs observation that
there was "nothing wrong in the manner how [said writ] was implemented," as well as "in the zealousness
and promptitude exhibited by Union Bank" in moving for the same. DBP appealed the CAs ruling before the
Court, which was docketed as G.R. No. 155838.
The Courts Ruling in G.R. No. 155838
In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBPs appeal, and
thereby reversed and set aside the CAs ruling in CA-G.R. SP No. 68300. It found significant points of
variance between the CAs May 27, 1994 Decision in CA-G.R. CV No. 35866, and the RTCs Order of
Execution/October 15, 2001 Writ of Execution. It ruled that both the body and the dispositive portion of the
same decision acknowledged that DBPs obligation to Union Bank for remittance of the lease payments is
contingent on FWs prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as
per the Assumption Agreement cannot be determined until after the satisfaction of FWs own rental
obligations to DBP. Accordingly, the Court: (a) nullified the October 15, 2001 Writ of Execution and all
related issuances thereto; and (b) ordered Union Bank to return to DBP the amounts it received pursuant to
the said writ.40 Dissatisfied, Union Bank moved for reconsideration which was, however, denied by the
Court in a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained
finality on April 30, 2004.41 Thereafter, DBP moved for the execution of the said decision before the RTC.
After numerous efforts on the part of Union Bank proved futile, the RTC issued a writ of execution
(September 6, 2005 Writ of Execution), ordering Union Bank to return to DBP all funds it received pursuant
to the October 15, 2001 Writ of Execution.42
Union Banks Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation,43
praying that the RTC apply legal compensation between itself and DBP in order to offset the return of the
funds it previously received from DBP. Union Bank anchored its motion on two grounds which were
allegedly not in existence prior to or during trial, namely: (a) on December 29, 1998, DBPs assumed
obligations became due and demandable;44 and (b) considering that FWI became non-operational and nonexistent, DBP became primarily liable to the balance of its assumed obligation, which as of Union Banks
computation after its claimed set-off, amounted to P1,849,391.87.45
On November 9, 2005, the RTC issued an Order46 denying the above-mentioned motion for lack of merit,
holding that Union Banks stated grounds were already addressed by the Court in the January 13, 2004
Decision in G.R. No. 155838. With Union Banks motion for reconsideration therefrom having been denied,
it filed a petition for certiorari47 with the CA, docketed as CA-G.R. SP No. 93833.
Pending resolution, Union Bank issued Managers Check48 No. 099-0003192363 dated April 21, 2006
amounting to P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September 6,
2005 Writ of Execution. DBP, however, averred that Union Bank still has a balance of P756,372.39
representing a portion of the garnished funds of DBP,49 which means that said obligation had not been
completely extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision50 dated November 3, 2009, the CA dismissed Union Banks petition, finding no grave abuse
of discretion on the RTCs part. It affirmed the denial of its motion to affirm legal compensation considering
that: (a) the RTC only implemented the Courts January 13, 2004 Decision in G.R. No. 155838 which by
then had already attained finality; (b) DBP is not a debtor of Union Bank; and (c) there is neither a
demandable nor liquidated debt from DBP to Union Bank.51

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Undaunted, Union Bank moved for reconsideration which was, however, denied in a Resolution52 dated
February 26, 2010; hence, the instant petition.
The Issue Before the Court
The sole issue for the Courts resolution is whether or not the CA correctly upheld the denial of Union Banks
motion to affirm legal compensation.
The Courts Ruling
The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two
persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally
liquidated and demandable obligations to which no retention or controversy has been timely commenced
and communicated by third parties.53 The requisites therefor are provided under Article 1279 of the Civil
Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.1awp++i1 (Emphases and underscoring supplied)
The rule on legal54 compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all
the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of
the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order
to effectively offset (a) its own obligation to return the funds it previously received from DBP as directed
under the September 6, 2005 Writ of Execution with (b) DBPs assumed obligations under the Assumption
Agreement. However, legal compensation could not have taken place between these debts for the apparent
reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBPs assumed
obligations to Union Bank for remittance of the lease payments are in the Courts words in its Decision
dated January 13, 2004 in G.R. No. 155838 " contingent on the prior payment thereof by [FW] to DBP," it
cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling,
the Court observed that any deficiency that DBP had to make up (by December 29, 1998 as per the
Assumption Agreement) for the full satisfaction of the assumed obligations " cannot be determined until
after the satisfaction of Foodmasters obligation to DBP." In this regard, it cannot be concluded that the
same debt had already been liquidated, and thereby became demandable (requisite 4 of Article 1279 of the
Civil Code).
The aforementioned Court decision had already attained finality on April 30, 200455 and, hence, pursuant
to the doctrine of conclusiveness of judgment, the facts and issues actually and directly resolved therein may
not be raised in any future case between the same parties, even if the latter suit may involve a different cause
of action.56 Its pertinent portions are hereunder quoted for ready reference:57

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Both the body and the dispositive portion of the [CAs May 27, 1994 Decision in CA-G.R. CV No. 35866]
correctly construed the nature of DBPs liability for the lease payments under the various contracts, to wit:
x x x Construing these three contracts, especially the "Agreement" x x x between DBP and Bancom as
providing for the payment of DBPs assumed obligation out of the rentals to be paid to it does not mean
negating DBPs assumption "for its own account" of the P17.0 million debt x x x. It only means that they
provide a mechanism for discharging [DBPs] liability. This liability subsists, since under the "Agreement" x
x x, DBP is obligated to pay "any balance of the Assumed Obligations after application of the entire rentals
and or the entire sales proceeds actually received by [Union Bank] on the Leased Properties not later than
December 29, 1998." x x x It only means that the lease rentals must first be applied to the payment of the
P17 million debt and that [DBP] would have to pay out of its money only in case of insufficiency of the lease
rentals having until December 29, 1998 to do so. In this sense, it is correct to say that the means of
repayment of the assumed obligation is not limited to the lease rentals. The monthly installments, however,
would still have to come from the lease rentals since this was stipulated in the "Agreement."
xxxx
Since, as already stated, the monthly installments for the payment of the P17 million debt are to be funded
from the lease rentals, it follows that if the lease rentals are not paid, there is nothing for DBP to remit to
[Union Bank], and thus [DBP] should not be considered in default. It is noteworthy that, as stated in the
appealed decision, "as regards plaintiffs claim for damages against defendant for its alleged negligence in
failing and refusing to enforce a lessors remedies against Foodmasters Worldwide, Inc., the Court finds no
competent and reliable evidence of such claim."
xxxx
WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay defendant and third-party
plaintiff-appellant Development Bank of the Philippines the sum of P32,441,401.85, representing the
unpaid rentals from August 1981 to June 30, 1987, as well as P10,000.00 for attorneys fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the Philippines after
having been paid by third-party defendant-appellee the sum of P32,441,401.85, to remit 30% thereof to
plaintiff-appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the aforequoted decision acknowledged that
DBPs obligation to Union Bank for remittance of the lease payments is contingent on the prior payment
thereof by Foodmasters to DBP.
A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme Court,
found that only the balance or the deficiency of the P17 million principal obligation, if any, would be due and
demandable as of December 29, 1998. Naturally, this deficiency cannot be determined until after the
satisfaction of Foodmasters obligation to DBP, for remittance to Union Bank in the proportion set out in the
1994 Decision. (Emphases and underscoring supplied; citations omitted)
xxxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal
compensation could have taken place between the above-stated debts pursuant to Article 1290 of the Civil
Code. Perforce, the petition must be denied, and the denial of Union Bank s motion to affirm legal
compensation sustained.

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WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated
February 26, 2010 of the Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.
SO ORDERED.

G.R. No. 172592

July 9, 2008

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners,

vs.
ROBAN LENDING CORPORATION, Respondent.
AUSTRIA-MARTINEZ,*
DECISION
CARPIO MORALES, J.:
On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from Roban Lending Corporation (respondent) in the total
amount of P4,000,000.00. These loans were secured by a real estate mortgage on petitioners parcels of
land located in Binauganan, Tarlac City and covered by TCT No. 297840.1
On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate
Mortgage2 consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even date,
the parties executed a Dacion in Payment Agreement3 wherein petitioners assigned the properties covered
by TCT No. 297840 to respondent in settlement of their total obligation, and a Memorandum of
Agreement4 reading:
That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the petitioners] agreed to
consolidate and restructure all aforementioned loans, which have been all past due and delinquent since
April 19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND PARTY hereby sign [sic]
another promissory note in the amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx
an integral part of this document), with a promise to pay the FIRST PARTY in full within one year from the
date of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their "DACION IN
PAYMENT" agreement, which they have executed and signed today in favor of the FIRST PARTY be
enforced[.]5
In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No. 9322, before
the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned,
annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the
Memorandum of Agreement and the Dacion in Payment executed are void for being pactum
commissorium.7
Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000 were founded on
several uniform promissory notes, which provided for 3.5% monthly interest rates, 5% penalty per month on
the total amount due and demandable, and a further sum of 25% attorneys fees thereon,8 and in addition,
respondent exacted certain sums denominated as "EVAT/AR."9 Petitioners decried these additional charges
as "illegal, iniquitous, unconscionable, and revolting to the conscience as they hardly allow any borrower
any chance of survival in case of default."10

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Petitioners further alleged that they had previously made payments on their loan accounts, but because of
the illegal exactions thereon, the total balance appears not to have moved at all, hence, accounting was in
order.11
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage Contract and its amendments x x x as null and void and without legal
force and effect for having been renounced, abandoned, and given up;
b) Declaring the "Memorandum of Agreement" xxx and "Dacion in Payment" x x x as null and void for being
pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and attorneys fees assessed and loaded into the loan
accounts of the plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal and therefore,
stricken out or set aside;
d) Ordering an accounting on plaintiffs loan accounts to determine the true and correct balances on their
obligation against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs: -e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages of P50,000.00;
e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance fee per hearing; and
e.3 The cost of suit.12
as well as other just and equitable reliefs.
In its Answer with Counterclaim,13 respondent maintained the legality of its transactions with petitioners,
alleging that:
xxxx
If the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated
the Real Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art. 1245 of the Civil
Code as a special form of payment whereby the debtor-Plaintiffs alienates their property to the creditorDefendant in satisfaction of their monetary obligation;
The accumulated interest and other charges which were computed for more than two (2) years would stand
reasonable and valid taking into consideration [that] the principal loan is P4,000,000 and if indeed it
became beyond the Plaintiffs capacity to pay then the fault is attributed to them and not the Defendant[.]14
After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset several times
due to, among other things, the parties efforts to settle the case amicably.151avvphi1
During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:
Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in Manila and he is
attending to a very sick relative, without objection on the part of the defendants counsel, the initial hearing
of this case is reset to June 18, 2003 at 10:00 oclock in the morning.

9
Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in the person of Mr. Wilfredo
Ong in the next scheduled hearing, the counsel manifested that he will submit the case for summary
judgment.16 (Underscoring supplied)
It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at which both
counsels were present17 and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 oclock in the morning. However, the
counsels are directed to be ready with their memorand[a] together with all the exhibits or evidence needed
to support their respective positions which should be the basis for the judgment on the pleadings if the
parties fail to settle the case in the next scheduled setting.
x x x x18 (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of respondent filed a
memorandum.1
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the pleadings that
there was no pactum commissorium, dismissed the complaint.20
On appeal,21 the Court of Appeals22 noted that
x x x [W]hile the trial court in its decision stated that it was rendering judgment on the pleadings, x x x what
it actually rendered was a summary judgment. A judgment on the pleadings is proper when the answer fails
to tender an issue, or otherwise admits the material allegations of the adverse partys pleading. However, a
judgment on the pleadings would not have been proper in this case as the answer tendered an issue, i.e. the
validity of the MOA and DPA. On the other hand, a summary judgment may be rendered by the court if the
pleadings, supporting affidavits, and other documents show that, except as to the amount of damages, there
is no genuine issue as to any material fact.23
Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on the merits of the
case",24 the Court of Appeals upheld the RTC decision that there was no pactum commissorium.25
Their Motion for Reconsideration26 having been denied,27 petitioners filed the instant Petition for Review
on Certiorari,28 faulting the Court of Appeals for having committed a clear and reversible error
I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES WHICH WOULD
WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS
RIGHT TO DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY BECAUSE THE
FACTS ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF AGREEMENT
(MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE
LAW AGAINST PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF AGREEMENT (MOA) AND
THE DACION EN PAGO (DPA) ARE NULL AND VOID FOR BEING CONTRARY TO LAW AND PUBLIC
POLICY.29
The petition is meritorious.
Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in Payment.
They differ, however, on whether both contracts constitute pactum commissorium or dacion en pago.

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This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum
commissorium, which is prohibited under Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void."
The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the
mortgaged property without the need of any foreclosure proceedings,30 are: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.31
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the
petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in
Payment transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect,
automatically acquires ownership of the properties upon petitioners failure to pay their debt within the
stipulated period.
Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor
alienates property to the creditor in satisfaction of a monetary obligation.32 This does not persuade. In a
true dacion en pago, the assignment of the property extinguishes the monetary debt.33 In the case at bar,
the alienation of the properties was by way of security, and not by way of satisfying the debt.34 The Dacion
in Payment did not extinguish petitioners obligation to respondent. On the contrary, under the
Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute
a promissory note for P5,916,117.50 which they were to pay within one year.35
Respondent cites Solid Homes, Inc. v. Court of Appeals36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago.37 That case did not involve the issue of pactum commissorium.38
That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no
moment, pactum commissorium being void for being prohibited by law.39
Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and attorneys fees if
they are iniquitous or unconscionable.40
This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly
rate of 5% (60% per annum) of the total amount due and demandable principal plus interest, with interest
not paid when due added to and becoming part of the principal and likewise bearing interest at the same
rate, compounded monthly42 unconscionable and reduces it to a yearly rate of 12% of the amount due, to
be computed from the time of demand.43 This Court finds the attorneys fees of 25% of the principal,
interests and interests thereon, and the penalty fees unconscionable, and thus reduces the attorneys fees to
25% of the principal amount only.44
The prayer for accounting in petitioners complaint requires presentation of evidence, they claiming to have
made partial payments on their loans, vis a vis respondents denial thereof.45 A remand of the case is thus
in order.
Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding that a
summary judgment is proper. A summary judgment is permitted only if there is no genuine issue as to any
material fact and a moving party is entitled to a judgment as a matter of law.46 A summary judgment is
proper if, while the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions

11
presented by the moving party show that such issues are not genuine.47 A genuine issue, as opposed to a
fictitious or contrived one, is an issue of fact that requires the presentation of evidence.48 As mentioned
above, petitioners prayer for accounting requires the presentation of evidence on the issue of partial
payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings may be rendered only when
an answer fails to tender an issue or otherwise admits the material allegations of the adverse partys
pleadings.49 In the case at bar, respondents Answer with Counterclaim disputed petitioners claims that the
Memorandum of Agreement and Dation in Payment are illegal and that the extra charges on the loans are
unconscionable.50 Respondent disputed too petitioners allegation of bad faith.51
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The Memorandum
of Agreement and the Dacion in Payment executed by petitioner- spouses Wilfredo N. Ong and Edna Sheila
Paguio-Ong and respondent Roban Lending Corporation on February 12, 2001 are declared NULL AND
VOID for being pactum commissorium.
In line with the foregoing findings, the following terms of the loan contracts between the parties are
MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;
2. The monthly penalty fee of 5% of the total amount due and demandable is reduced to 12% per annum, to
be computed from the time of demand; and
3. The attorneys fees are reduced to 25% of the principal amount only.
Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving evidence on
petitioners prayer for accounting.
SO ORDERED.

G.R. No. 172346

July 24, 2013

SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners,

vs.
SPOUSES JUAN and CONSTANCIA LUNA, Respondents.
DECISION
DEL CASTILLO, J.:
Questioned in this case is the Court of Appeals' (CA) disquisition on the matter of interest.
Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro) assail through this Petition for
Review on Certiorari1 the April 15, 2005 Decision2 of the CA in CA-G.R. CV No. 56414 which affirmed with
modifications the April 4, 1997 Decision3 of the Regional Trial Court (RTC) of Quezon City, Branch 104 in
Civil Case No. Q-94-18895. They likewise question the CA April17, 2006 Resolution4 denying their motion
for partial reconsideration.

12
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to Sell5 with Bliss
Development Corporation (Bliss) involving a house and lot identified as Lot 19, Block 26 of New Capitol
Estates in Diliman, Quezon City. Barely a year after, Constancia, this time as the seller, entered into another
Contract to Sell6 with petitioner Lourdes Bonrostro (Lourdes) concerning the same property under the
following terms and conditions:
1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following
manner:
(a) P200,000.00 upon signing x x x the Contract To Sell,
(b) P300,000.00 payable on or before April 30, 1993,
(c) P330,000.00 payable on or before July 31, 1993,
(d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month,
2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting
May 1, 1993 a 2% interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the
amount of P630,000.00 on the stipulated time, this CONTRACT TO SELL shall likewise be deemed
cancelled and rescinded and x x x 5% of the total contract price of P1,250,000.00 shall be deemed forfeited
in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from the initial down
payment in favor of the VENDOR.7
Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the
property. However, except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated
subsequent amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna), filed before the
RTC a Complaint8 for Rescission of Contract and Damages against the spouses Bonrostro praying for the
rescission of the contract, delivery of possession of the subject property, payment by the latter of their
unpaid obligation, and awards of actual, moral and exemplary damages, litigation expenses and attorneys
fees.
In their Answer with Compulsory Counterclaim,9 the spouses Bonrostro averred that they were willing to
pay their total balance of P630,000.00 to the spouses Luna after they sought from them a 60-day extension
to pay the same.10 However, during the time that they were ready to pay the said amount in the last week of
October 1993, Constancia and her lawyer, Atty. Arlene Carbon (Atty. Carbon), did not show up at their
rendezvous. On November 24, 1993, Lourdes sent Atty. Carbon a letter11 expressing her desire to pay the
balance, but received no response from the latter. Claiming that they are still willing to settle their
obligation, the spouses Bonrostro prayed that the court fix the period within which they can pay the spouses
Luna.
The spouses Bonrostro likewise belied that they were not paying the monthly amortization to New Capitol
Estates and asserted that on November 18, 1993, they paid Bliss, the developer of New Capitol Estates, the
amount of P46,303.44. Later during trial, Lourdes testified that Constancia instructed Bliss not to accept
amortization payments from anyone as evidenced by her March 4, 1993 letter12 to Bliss.
On April 4, 1997, the RTC rendered its Decision13 focusing on the sole issue of whether the spouses
Bonrostros delay in their payment of the installments constitutes a substantial breach of their obligation

13
under the contract warranting rescission. The RTC ruled that the delay could not be considered a substantial
breach considering that Lourdes (1) requested for an extension within which to pay; (2) was willing and
ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon about this on November
24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1.) Declaring the Contract to Sell executed by the plaintiff Constancia and defendant Lourdes with respect to
the house and lot located at Blk. 26, Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and
effect. And that Lourdes Bonrostro must remain in the possession of the premises.
2.) Ordering the defendants to pay plaintiffs within 60 days from receipt of this decision the sum of
P300,000.00 plus an interest of 2% per month from April 1993 to November 1993.
3.) Ordering the defendants to pay plaintiffs within sixty (60) days from receipt of this decision the sum of
P330,000.00 plus an interest of 2% per month from July 1993 to November 1993.
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62 which plaintiffs paid to Bliss
Development Corporation.
No pronouncement as to Cost.
SO ORDERED.14
As their Motion for Reconsideration15 was likewise denied in an Order16 dated July 15, 1997, the spouses
Luna appealed to the CA.17
Ruling of the Court of Appeals
In its Decision18 of April 15, 2005, the CA concluded that since the contract entered into by and between the
parties is a Contract to Sell, rescission is not the proper remedy. Moreover, the subject contract being
specifically a contract to sell a real property on installment basis, it is governed by Republic Act No. 655219
or the Maceda Law, Section 4 of which states:
Sec. 4. In case where less than two years of installment were paid, the seller shall give the buyer a grace
period of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the
contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission
of the contract by a notarial act. (Emphases supplied)
The CA held that while the spouses Luna sent the spouses Bonrostro letters20 rescinding the contract for
non-payment of the sum of P630,000.00, the same could not be considered as valid and effective
cancellation under the Maceda Law since they were made within the 60-day grace period and were not
notarized. The CA concluded that there being no cancellation effected in accordance with the procedure
prescribed by law, the contract therefore remains valid and subsisting.
The CA also affirmed the RTCs finding that Lourdes was ready to pay her obligation on November 24, 1993.
However, the CA modified the RTC Decision with respect to interest, viz:
Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum
of P300,000.00 is only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of
P330,000.00 is 2% per month and is only for the period July 1993 to November 1993; (iii) it does not

14
impose interest on the amount of P214,492.62 which was paid by Constancia to BLISS in behalf of Lourdes x
xx
The rule is that no interest shall be due unless it has been expressly stipulated in writing (Art. 1956, Civil
Code). However, the contract does not provide for interest in case of default in payment of the sum of
P330,000.00 to Constancia and the monthly amortizations to BLISS.
Considering that Lourdes had incurred x x x delay in the performance of her obligations, she should pay (i)
interest at the rate of 2% per month on the sum of P300,000.00 from May 1, 1993 until fully paid and (ii)
interest at the legal rate on the amounts of P330,000.00 and P214,492.62 from the date of default (August
1, 1993 and April 4, 1997 date of the appealed decision, respectively) until the same are fully paid x x x21
Hence, the dispositive portion of the said Decision:
WHEREFORE, the appealed decision is AFFIRMED with the MODIFICATIONS that paragraphs 2, 3, and 4
of its dispositive portion shall now read:
2.) Ordering the defendants to pay plaintiffs the sum of P300,000.00 plus interest thereon at the rate of 2%
per month from May 1, 1993 until fully paid;
3.) Ordering the defendants to pay plaintiffs the sum of P330,000.00 plus interest thereon at the legal rate
from August 1, 1993 until fully paid; and
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62, which plaintiffs paid to Bliss
Development Corporation, plus interest thereon at the legal rate from filing of the complaint until fully
reimbursed.
SO ORDERED.22
The spouses Luna no longer assailed the ruling. On the other hand, the spouses Bonrostro filed a Partial
Motion for Reconsideration23 questioning the above-mentioned modifications. The CA, however, denied for
lack of merit the said motion in a Resolution24 dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA correctly modified the RTC Decision with respect to interests.
The Parties Arguments
As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive portion of its Decision ordered the
spouses Bonrostro to pay the spouses Luna the sums of P300,000.00 plus interest of 2% per month from
April 1993 to November 1993 and P330,000.00 plus interest of 2% per month from July 1993 to November
1993, respectively. The CA modified these by reckoning the payment of the 2% interest on the P300,000.00
from May 1, 1993 until fully paid and by imposing interest at the legal rate on the P330,000.00 reckoned
from August 1, 1993 until fully paid.
The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the CA, that Lourdes was
willing and ready to pay her obligation as evidenced by her November 24, 1993 letter to Atty. Carbon. They
also assert that the sending of the said letter constitutes a valid tender of payment on their part. Hence, they
argue that they should not be assessed any interest subsequent to the date of the said letter. Neither should
they be ordered to pay interest on the amount of P214,492.62 which covers the amortizations paid by the
spouses Luna to Bliss. They point out that it was Constancia who prevented them from fulfilling their
obligation to pay the amortizations when she instructed Bliss not to accept payment from them.25

15
The spouses Luna, on the other hand, aver that the November 24, 1993 letter of Lourdes is not equivalent to
tender of payment since the mere sending of a letter expressing the intention to pay, without the
accompanying payment, cannot be considered a valid tender of payment. Also, if the spouses Bonrostro
were really willing and ready to pay at that time and assuming that the spouses Luna indeed refused to
accept payment, the former should have resorted to consignation. Anent the payment of amortization, the
spouses Luna explain that under the parties Contract to Sell, Lourdes was to assume Constancias balance
to Bliss by paying the monthly amortization in order to avoid the cancellation of the earlier Contract to Sell
entered into by Constancia with Bliss.26 However, since Lourdes was remiss in paying the same, the
spouses Luna were constrained to pay the amortization. They thus assert that reimbursement to them of the
said amount with interest is proper considering that by reason of such payment, the spouses Bonrostro were
spared from the interests and penalties which would have been imposed by Bliss if the amortizations
remained unpaid.
Our Ruling
The Petition lacks merit.
The spouses Bonrostros reliance on the RTCs factual finding that Lourdes was willing and ready to pay on
November 24, 1993 is misplaced.
As mentioned, the RTC in resolving the Complaint focused on the sole issue of whether the failure of
spouses Bonrostro to pay the installments of P300,000.00 on April 30, 1993 and P330,000.00 on July 31,
1993 is a substantial breach of their obligation under the contract as to warrant the rescission of the same.27
The said court ratiocinated, viz:
After careful evaluation of the evidence testimonial and documentary, the Court believes that the
defendants delay in the payment of the two installments is not so substantial as to warrant rescission of
contract. Although, the defendant failed to pay the two installments in due time, she was able to
communicate with the plaintiffs through letters requesting for an extension of two months within which to
pay the installments. In fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was
ready to pay the installments and the money is ready for pick-up. However, plaintiff did not bother to get or
pick-up the money without any valid reason. It would be very prejudicial on the part of the defendant if the
contract to sell be rescinded considering that she made a downpayment of P200,000.00 and made partial
amortization to the Bliss Development Corporation. In fact, the defendant testified that she is willing and
ready to pay the balance including the interest on November 24, 1993.
The Court is of the opinion that the delay in the payment of the balance of the purchase price of the house
and lot is not so substantial as to warrant the rescission of the contract to sell. The question of whether a
breach of contract is substantial depends upon the attendant circumstance. x x x28
Clearly, the RTC arrived at the above-quoted conclusion based on its mistaken premise that rescission is
applicable to the case. Hence, its determination of whether there was substantial breach. As may be recalled,
however, the CA, in its assailed Decision, found the contract between the parties as a contract to sell,
specifically of a real property on installment basis, and as such categorically declared rescission to be not the
proper remedy. This is considering that in a contract to sell, payment of the price is a positive suspensive
condition, failure of which is not a breach of contract warranting rescission under Article 119129 of the Civil
Code but rather just an event that prevents the supposed seller from being bound to convey title to the
supposed buyer.30 Also, and as correctly ruled by the CA, Article 1191 cannot be applied to sales of real
property on installment since they are governed by the Maceda Law.31
There being no breach to speak of in case of non-payment of the purchase price in a contract to sell, as in
this case, the RTCs factual finding that Lourdes was willing and able to pay her obligation a conclusion

16
arrived at in connection with the said courts determination of whether the non-payment of the purchase
price in accordance with the terms of the contract was a substantial breach warranting rescission therefore
loses significance. The spouses Bonrostros reliance on the said factual finding is thus misplaced. They
cannot invoke their readiness and willingness to pay their obligation on November 24, 1993 as an excuse
from being made liable for interest beyond the said date.
The spouses Bonrostro are liable for interest on the installments due from the date of default until fully paid.
The spouses Bonrostro assert that Lourdes letter of November 24, 1993 amounts to tender of payment of
the remaining balance amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be
suspended.
Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If
refused without just cause, the tender of payment will discharge the debtor of the obligation to pay but only
after a valid consignation of the sum due shall have been made with the proper court."32 "Consignation is
the deposit of the proper amount with a judicial authority in accordance with rules prescribed by law, after
the tender of payment has been refused or because of circumstances which render direct payment to the
creditor impossible or inadvisable."33
"Tender of payment, without more, produces no effect."34 "To have the effect of payment and the
consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of
payment and consignation."35
As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows:
When a tender of payment is made in such a form that the creditor could have immediately realized
payment if he had accepted the tender, followed by a prompt attempt of the debtor to deposit the means of
payment in court by way of consignation, the accrual of interest on the obligation will be suspended from
the date of such tender. But when the tender of payment is not accompanied by the means of payment, and
the debtor did not take any immediate step to make a consignation, then interest is not suspended from the
time of such tender. x x x x36 (Emphasis supplied)
Here, the subject letter merely states Lourdes willingness and readiness to pay but it was not accompanied
by payment. She claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to
collect her payment, but, neither said lawyer nor Constancia came to collect the payment. After that, the
spouses Bonrostro took no further steps to effect payment. They did not resort to consignation of the
payment with the proper court despite knowledge that under the contract, non-payment of the installments
on the agreed date would make them liable for interest thereon. The spouses Bonrostro erroneously
assumed that their notice to pay would excuse them from paying interest. Their claimed tender of payment
did not produce any effect whatsoever because it was not accompanied by actual payment or followed by
consignation. Hence, it did not suspend the running of interest. The spouses Bonrostro are therefore liable
for interest on the subject installments from the date of default until full payment of the sums of
P300,000.00 and P330,000.00.
The spouses Bonrostro are likewise liable for interest on the amount paid by the spouses Luna to Bliss as
amortization.
The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the
spouses Luna paid to Bliss as amortizations by asserting that they were prevented by the latter from
fulfilling such obligation. They invoke Art. 1186 of the Civil Code which provides that "the condition shall be
deemed fulfilled when the obligor voluntarily prevents its fulfillment."

17
However, the Court finds Art. 1186 inapplicable to this case. The said provision explicitly speaks of a
situation where it is the obligor who voluntarily prevents fulfillment of the condition. Here, Constancia is
not the obligor but the obligee. Moreover, even if this significant detail is to be ignored, the mere intention
to prevent the happening of the condition or the mere placing of ineffective obstacles to its compliance,
without actually preventing fulfillment is not sufficient for the application of Art. 1186.37 Two requisites
must concur for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual
prevention of compliance.38
In this case, while it is undisputed that Constancia indeed instructed Bliss on March 4, 1994 not to accept
payment from anyone but her, there is nothing on record to show that Bliss heeded the instruction of
Constancia as to actually prevent the spouses Bonrostro from making payments to Bliss. There is no
showing that subsequent to the said letter, the spouses Bonrostro attempted to make payment to and was
refused by Bliss. Neither was there a witness presented to prove that Bliss indeed gave effect to the
instruction contained in Constancias letter. While Bliss Project Development Officer, Mr. Ariel Cordero,
testified during trial, nothing could be gathered from his testimony regarding this except for the fact that
Bliss received the said letter.39 In view of these, the spouses Luna could not be said to have placed an
effective obstacle as to actually prevent the spouses Bonrostro from making amortization payments to Bliss.
On the other hand, there are telling circumstances which militate against the spouses Bonrostros claimed
keenness to comply with their obligation to pay the monthly amortization. After the execution of the
contract in January 1993, they immediately took possession of the property but failed to make amortization
payments. It was only after seven months or on November 18, 1993 that they made payments to Bliss in the
amount of P46,303.44.40 Whether the same covers previous unpaid amortizations is also not clear as the
receipt does not indicate the same41 and per Statement of Account42 as of March 8, 1994 issued by Bliss,
the unpaid monthly amortizations for February to November 1993 in the total amount of P78,271.69
remained outstanding. There was also no payment made of the amortizations due on December 4, 1993 and
January 4, 199443 before the filing of the Complaint on January 11, 1994.
On the part of the spouses Luna, it is understandable that they paid the amortizations due.1wphi1 The
assumption of payment of the monthly amortization to Bliss was made part of the obligations of the spouses
Bonrostro under their contract with the spouses Luna precisely to avoid the cancellation of the earlier
contract entered into by Constancia with Bliss. But as the spouses Bonrostro failed in this obligation, the
spouses Luna were constrained to pay Bliss to avoid the adverse effect of such failure. This act of the spouses
Luna proved to be even more beneficial to the spouses Bonrostro as the cancellation of the Contract to Sell
between Constancia and Bliss would result in the cancellation of the subsequent Contract to Sell between
Constancia and Lourdes. Also, the spouses Bonrostro were relieved from paying the penalties that would
have been imposed by Bliss if the monthly amortizations covered by the said payment remained unpaid. The
Statements of Account44 issued by Bliss clearly state that each monthly amortization is due on or before the
fourth day of every month and a penalty equivalent to 1/10th of 1% per day of delay shall be imposed for all
payments made after due date. That translates to 3% monthly or 36% per annum rate of interest, three
times higher than the 12% per annum rate of interest correctly imposed by the CA.
Hence, the resulting situation is that the spouses Luna are constrained to part with their money while the
spouses Bonrostro, despite being remiss in their obligation to pay the monthly amortization, are relieved
from paying higher penalties at the expense of the former. This is aside from the fact that the spouses
Bonrostro are in continued possession of the subject property and are enjoying the beneficial use thereof.
Under the circumstances and considering that the spouses Bonrostro are obviously in delay in complying
with their obligation to pay the amortizations due from February 1993 to January 1995 for which the
spouses Luna paid P214,492.62,45 the CA correctly ordered the reimbursement to the latter of the said
amount with interest. "Delay in the performance of an obligation is looked upon with disfavor because,

18
when a party to a contract incurs delay, the other party who performs his part of the contract suffers
damages thereby."46 As discussed, the spouses Luna obviously suffered damages brought about by the
failure of the spouses Bonrostro to comply with their obligation on time. "And, sans elaboration of the
matter at hand, damages take the form of interest x x x."47
Under Article 2209 of the Civil Code, "if the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest x x x." There being
no stipulation on interest in case of delay in the payment of amortization, the CA thus correctly imposed
interest at the legal rate which is now 12% per annum.
WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed Decision dated April 15,
2005 and the Resolution dated April 17, 2006 of the Court of Appeals in CA-G.R. CV No. 56414 are
AFFIRMED.
SO ORDERED.

G.R. No. 174882

January 21, 2013

MONDRAGON PERSONAL SALES, INC., Petitioner,

vs.
VICTORIANO S. SOLA, JR., Respondent.
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to set aside the Decision1 dated February 10, 2006
and the Resolution2 dated September 6, 2006 issued by the Court of Appeals (CA) in CA-G.R. CV No.
71690.
Petitioner Mondragon Personal Sales Inc., a company engaged in the business of selling various consumer
products through a network of sales representatives, entered into a Contract of Services3 with respondent
Victoriano S. Sola, Jr. for a period of three years commencing on October 2, 1994 up to October 1, 1997.
Under the said contract, respondent, as service contractor, would provide service facilities, i.e., bodega cum
office, to petitioner's products, sales force and customers in General Santos City and as such, he was entitled
to commission or service fee as follows:
MONTHLY SALES
(net of vat)

SERVICE FEE

P50,000.00 to 2,500,000.00 Five percent (5%)

P2,500,001.00 to 3,000.000.00

P125,000.00

P3,000,001.00 to 3,500,000.00

150,000.00

P3,500,001.00 UP 200,000.004

19
The agreement then came into effect when petitioner's goods were delivered to respondent's bodega and
were sold by petitioner's employees. Prior to the execution of the contract, however, respondents wife, Lina
Sola, had an existing obligation with petitioner arising from her Franchise Distributorship Agreement with
the latter. On January 26, 1995, respondent wrote a letter5 addressed to Renato G. de Leon, petitioner's
Vice-President for Finance, wherein he acknowledged and confirmed his wifes indebtedness to petitioner in
the amount of P1,973,154.73 (the other accountability in the sum of P1,490,091.15 was still subject to
reconciliation) and, together with his wife, bound himself to pay on installment basis the said debt.
Consequently, petitioner withheld the payment of respondent's service fees from February to April 1995 and
applied the same as partial payments to the debt which he obligated to pay. On April 29, 1995, respondent
closed and suspended operation of his office cum bodega where petitioner's products were stored and
customers were being dealt with.
On May 24, 1995, respondent filed with the Regional Trial Court (RTC) of Davao, a Complaint6 for
accounting and rescission against petitioner alleging that petitioner withheld portions of his service fees
covering the months from October 1994 to January 1995 and his whole service fees for the succeeding
months of February to April 1995, the total amount of which was P222,202.84; that petitioner's act grossly
hampered, if not paralyzed, his business operation, thus left with no other recourse, he suspended
operations to minimize losses. He prayed for the rescission of the contract of services and for petitioner to
render an accounting of his service fees.
In its Answer with Counterclaim7 filed on June 14, 1995, petitioner contended that respondents letter dated
January 26, 1995 addressed to petitioner's Vice-President for Finance, confirmed and obligated himself to
pay on installment basis the accountability of his wife with petitioner, thus respondent's service
fees/commission earned for the period of February to April 1995 amounting to P125,040.01 was applied by
way of compensation to the amounts owing to it; that all the service fees earned by respondent prior to
February 1995 were fully paid to him. By way of counterclaim, petitioner asked for the payment of the
amount of P1,547,892.55 which respondent obligated to pay plus interest; the delivery of petitioner's
products padlocked in respondent's office cum bodega, the payment for the loss of income in the amount of
P833,600.00 as well as the remaining balance of P45,728.30 from the P100,000.00 given by petitioner to
respondent as advance money for the purchase of office equipment and the renovation of the bodega cum
office.
In his Reply and Answer8 to petitioner's counterclaim, respondent averred that he was made to believe that
the sales commission contained in petitioner's memorandum dated July 5, 1994 would be applicable to him;
that it was improper for petitioner to confuse respondent's transaction with that of his wife as it was
divergent in nature and terms.
Pending trial, petitioner moved for the issuance of a preliminary attachment and replevin which the RTC
granted in its Order dated June 19, 1995 upon the filing of bonds.9 Respondent filed a Motion to Quash the
Writ of Attachment, which the RTC denied in an Order dated July 24, 1995.10 As respondent's motion for
reconsideration was also denied, he filed with us a petition for certiorari, docketed as G.R. No. 126427,
assailing the RTC orders which we dismissed in a Resolution11 dated November 11, 1996 on procedural
matters.
Trial thereafter ensued.
On July 6, 2000, the RTC rendered its Decision,12 the dispositive portion of which reads:
FOR THE FOREGOING, judgment is hereby rendered in favor of defendant and against plaintiff, ordering
the latter to pay the former:

20
1) the sum of P1,543,643.96 representing the principal balance of plaintiff's account with defendant, plus
legal interest from the time of filing of the complaint until fully paid, at the rate of 6% per annum;
2) attorney's fees in the amount of P25,000.00
3) costs of the suit.13
In so ruling, the RTC found that in computing the service fees/commissions due respondent, the rate as
provided in the contract of service dated January 27, 1995 was controlling, since respondent was a party
thereto duly affixing his signature therein; that petitioner's computation of respondent's service fees for the
months of February to April 1995 in the total amount of P125,040.01 which was based on the said contract
deserved credence. The RTC ruled that while Article 1381 of the Civil Code provides for the grounds for
which a contract may be rescinded, none of these grounds existed in this case; that there was no showing of
fraud which petitioner employed when it entered into the contract with respondent nor did respondent
agree to such a contract without knowing its content, thus the contract was not rescissible.
As regards to petitioner's counterclaim that respondent confirmed and assumed the payment of his wife's
account with petitioner, the RTC found that respondent obligated himself to pay his wife's account as
evidenced by his letter dated January 26, 1995; that after deducting from the confirmed amount of
P1,668,683.97 the respondent's service commission for the period from February 1995 to April 1995, which
was in the total amount of P125,040.01, the amount owing to petitioner would still be P1,543,643.96. The
RTC dismissed the other counterclaims, since they were not substantiated but found petitioner entitled to
attorney's fees due to the amount of money involved and the time spent in pursuing the case.
Respondent filed his appeal to the CA to which petitioner filed its appellee's brief. On February 10, 2006, the
CA rendered its assailed decision, the dispositive portion of which reads as follows:
WHEREFORE, in the light of the foregoing premises, herein appeal is GRANTED. Accordingly, the Contract
of Services is hereby RESCINDED. Let the case be REMANDED to the court a quo for the proper
determination of the amount of service fees unlawfully withheld from the appellant.
Furthermore, Appellee is hereby ordered to pay the Appellant attorneys fees in the amount of twenty-five
thousand pesos (P25,000.00).14
The CA found that under Article 1191 of the Civil Code, respondent was entitled to rescind the contract of
services as it was petitioner who breached the same by withholding the service fees lawfully due to the
former; that petitioner's act of unlawfully withholding the service fees due respondent constituted a willful
and deliberate infringement on contractual obligations which would justify rescission under Article 1191.
The CA declared that the contract of services entered into by the parties did not fall under any of the
rescissible contracts enumerated under Article 1381 of the Civil Code but under Article 1191 which pertains
to rescission of reciprocal obligations as in the instant case.
The CA ruled that respondent did not assume his wife's obligation as he did not substitute himself in the
shoes of his wife regarding the payment of the latter's liability; that there can be no novation as novation
was never presumed. Petitioner's act of withholding respondent's service fee and thereafter applying them to
the obligation of his wife was unlawful, considering that respondent never assumed his wife's obligation
with petitioner; that there could be no legal compensation, since it was respondent's wife who was
principally indebted to petitioner owing from the franchise distributorship agreement she earlier entered
into with petitioner; that granting the debt redounded to the benefit of the family and incurred with the
consent of respondent, and the spouse, as joint administrators of the community property are solidarily
liable with their separate properties for debts incurred, however, such liability is only subsidiary, when the

21
community property is not sufficient to pay for all liabilities, however, in this case, there was no showing
that the community property of the spouses was insufficient to pay the debt.
The CA ordered the deletion of attorney's fees as it was respondent who was entitled to such award, since he
was compelled to litigate to protect his interest for the unjustified act of petitioner.
Petitioner's motion for reconsideration was denied in a Resolution dated September 6, 2006.
Hence, this petition where petitioner alleges that the CA erred:
1. In finding that petitioner breached its contract with respondent and that there is no compensation in
accordance to Article 1279 of the Civil Code;
2. In finding that respondent did not assume the obligation of his wife;
3. In remanding the case to the court a quo for proper determination of service fee withheld when the same
has been determined;
4. In obliterating the award of petitioner's counterclaim when respondent admitted his obligation to
petitioner.15
The CA found that petitioner's act of withholding respondent's service fees and thereafter applying them as
partial payment to the obligation of respondent's wife with petitioner was unlawful, considering that
respondent never assumed his wifes obligation, thus, there can be no legal compensation under Article 1279
of the Civil Code.
We do not agree.
In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon, petitioner's Vice-President for
Finance, respondent wrote, and which we quote in full:
Gentlemen:
This refers to the account of my wife, Lina (Beng) Sola, with Mondragon Personal Sales, Inc. in the amount
of P3,463,173.88. Of this total amount, we are initially confirming the total amount of P1,973,154.73 as due
from Lina (Beng) Sola, while the remaining balance of P1,490,091.15 will be subject to a reconciliation on or
before February 5, 1995.
In recognition of Lina (Beng) Sola's account, we undertake to pay P100,000.00 on or before February 01,
1995 and the balance of P1,873,154.73 plus interest of 18% per annum and 2% administrative charge per
month on the diminishing balance will be covered by postdated checks of not less than P100,000.00 per
month starting February 28, 1995 and every end of the month thereafter but not to exceed eighteen (18)
months or July 31, 1996.
With regards to the remaining balance of P1,490,019.15, we agree that upon final verification of these
accounts, we will issue additional postdated checks subject to the same terms and conditions as stated
above.
We further agree that all subsequent orders that will be released to us will be covered by postdated checks.
I fully understand and voluntarily agree to the above undertaking with full knowledge of the consequences
which may arise therefrom.
Very truly yours,
(signed)

22
Victoriano S. Sola16
A reading of the letter shows that respondent becomes a co-debtor of his wife's accountabilities with
petitioner. Notably, the last paragraph of his letter which states "I fully understand and voluntarily agree to
the above undertaking with full knowledge of the consequences which may arise therefrom" and which was
signed by respondent alone, shows that he solidarily bound himself to pay such debt. Based on the letter,
respondent's wife had an account with petitioner in the amount of P3,463,173.88, out of which only the
amount of P1,973,154.73 was confirmed while the remaining amount of P1,490,019.15 would still be subject
to reconciliation. As respondent bound himself to pay the amount of P1,973,154.73, he becomes petitioner's
principal debtor to such amount.
On the other hand, respondent, as petitioner's service contractor, was entitled to a payment of service fees as
provided in their contract of services dated January 26, 1995. We note that respondent never refuted the
amount of monthly sales recorded but only assailed in the RTC the rate of the service fees which he was
entitled to. However, we find that there could be no other computation of the rate of the service fees other
than what was provided in the contract of services dated January 26, 1995 signed by respondent and
petitioner. Thus, we give credence to petitioner's computation of respondent's service fees for the months of
February to April 1995 in the total amount of P125,040.01. Since respondent promised petitioner in his
letter dated January 26, 1995, to monthly pay a certain amount to cover the indebtedness to petitioner
which he failed to do, the latter withheld the payment of respondent's service fees and applied the same as
partial payments of the debt by way of compensation.
We find that petitioner's act of withholding respondent's service fees/commissions and applying them to the
latter's outstanding obligation with the former is merely an acknowledgment of the legal compensation that
occurred by operation of law between the parties.17 Compensation is a mode of extinguishing to the
concurrent amount the obligations of persons who in their own right and as principals are reciprocally
debtors and creditors of each other. Legal compensation takes place by operation of law when all the
requisites are present, as opposed to conventional compensation which takes place when the parties agree to
compensate their mutual obligations even in the absence of some requisites.18 Legal compensation requires
the concurrence of the following conditions:
(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.19
We find the presence of all the requisites for legal compensation. Petitioner and respondent are both
principal obligors and creditors of each other. Their debts to each other consist in a sum of money.
Respondent acknowledged and bound himself to pay petitioner the amount of P1,973,154.73 which was
already due, while the service fees owing to respondent by petitioner become due every month.
Respondent's debt is liquidated and demandable, and petitioner's payments of service fees are liquidated
and demandable every month as they fall due. Finally, there is no retention or controversy commenced by
third persons over either of the debts. Thus, compensation is proper up to the concurrent amount where
petitioner owes respondent P125,040.01 for service fees, while respondent owes petitioner P1,973,154.73.

23
As legal compensation took place in this case, there is no basis for respondent to ask for rescission since he
was the first to breach their contract when, on April 29, 1995, he suddenly closed and padlocked his bodega
cum office in General Santos City occupied by petitioner.1wphi1
Petitioner claims that the CA erred in obliterating the RTCs award of its counterclaim which it had alleged
and proved during trial and which respondent even admitted.
We agree.
In his letter dated January 6, 1995, respondent confirmed the amount of P1,973,154.73 owing to petitioner.
On September 29, 1997, petitioner wrote another letter20 to petitioner's Credit and Collection Manager,
Rudy Machanco, wherein he again confirmed the indebtedness in the amount of P1,973,154.73. In the same
letter, he showed the payments he had already made and after deducting the same from the confirmed
indebtedness, the total balance remained to be at P1,668,683.97. As we have said earlier, respondent's
service fees from February to April 1995 which was in the total amount of P125,040.01 was not assailed at all
by respondent in his appeal with the CA, thus he is bound by such computation. Hence, the amount of
P125,040.01 which petitioner owes respondent shall be offset against the P1,973,154.73 which respondent
owes petitioner, and therefore leaving a balance of P1,543,643.96 which respondent must pay.
WHEREFORE, the petition for review is GRANTED. The Decision dated February 10, 2006 and the
Resolution dated September 6, 2006 of the Court of Appeals are hereby REVERSED and SET ASIDE.
Respondent is hereby ordered to pay petitioner the amount of P1,543,643.96 with 6% percent per annum
from June 14, 1995 until finality of this Decision and 12% percent per annum thereafter until full payment.
SO ORDERED.