Cases For Novation Until Prescription

CASES FOR NOVATION, ESTOPELL, 2016
TRUST AND PRESCRIPTION

NOVATION
Art. 1291. Obligations may be modifi ed by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the right of the creditor.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 145872
February 4, 2002
GLORIA OCAMPO-PAULE, petitioner,

vs.
HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
DECISION
KAPUNAN, J.:
This is a petition for review of the Decision dated October 26, 2000 of the Court of
Appeals in CA-G.R. CR No. 224371 affirming petitioner Gloria Ocampo-Paules conviction
for the crime of estafa by the Regional Trial Court of Guagua, Pampanga, Branch 49.
During the period August, 1991 to April, 1993, petitioner received from private
complainant Felicitas M. Calilung several pieces of jewelry with a total value of One
hundred Sixty Three Thousand One hundred Sixty Seven Pesos and Ninety Five Centavos
(P163,167.95). The agreement between private complainant and petitioner was that the
latter would sell the same and thereafter turn over and account for the proceeds of the
sale, or otherwise return to private complainant the unsold pieces of jewelry within two
months from receipt thereof. Since private complainant and petitioner are relatives, the
former no longer required petitioner to issue a receipt acknowledging her receipt of the
jewelry.
When petitioner failed to remit the proceeds of the sale of the jewelry or to return the
unsold pieces to private complainant, the latter sent petitioner a demand letter.
Notwithstanding receipt of the demand letter, petitioner failed to turn over the proceeds
of the sale or to return the unsold pieces of jewelry. Private complainant was
constrained to refer the matter to the barangay captain of Sta. Monica, Lubao,
Pampanga.

During the barangay conciliation proceedings, petitioner acknowledge having received
from private complainant several pieces of jewelry worth P163,167.95. Both parties
eventually executed an agreement entitled "Kasunduan sa Bayaran," whereby petitioner
promised to pay private complainant P3,000.00 every month to answer for the jewelry
which she received from the latter.
When petitioner failed to comply with the terms of the Kasunduan sa Bayaran, private
complainant sent her another demand letter dated March 9, 1994 but she still failed to
comply with her obligation.
Private complainant then filed a criminal complaint against petitioner in the Office of
the Provincial Prosecutor. The Provincial Prosecutor recommended the filing of a
criminal case against petitioner. Consequently, an information charging petitioner with
estafa was filed in the Regional Trial Court of Guagua, Pampanga. The information
stated:
That in or about the period comprised from August 1991 to April 1993, in the
Municipality of Lubao, province of Pampanga, Philippines and within the jurisdiction of
this honorable Court, the above-named accused GLORIA OCAMPO-PAULE received from
Felicita[s] M. Calilung various pieces of jewelry with a total value of ONE HUNDRED
SIXTY FIVE (sic) THOUSAND THREE HUNDRED FORTY SEVEN (P163,347.00) PESOS,
Philippine Currency for purposes of selling the same under the express obligation of
turning over and accounting for the proceeds of said jewelry if not sold, to the said
Felicita[s] U. Calilung within two (2) months from receipt hereof, once in possession of
the said jewelry and far from complying with her obligation aforesaid, the said accused,
did then and there willfully, unlawfully and feloniously, misappropriate, misapply and
convert the said amount to her own personal use and benefit to the damage and
prejudice of said complainant in the total sum of P163,347.00, Philippine currency.
All contrary to law.2
Petitioner pleaded Not Guilty to the charge. After trial, the lower court rendered a
Decision on August 17, 1998 finding petitioner guilty of estafa.
Petitioner appealed the lower courts decision to the Court of Appeals, but the latter
dismissed the appeal for lack of merit in its Decision dated October 26, 2000.3 The
dispositive portion thereof reads:
WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and the
assailed decision is hereby AFFIRMED in toto.
SO ORDERED.4
Hence, the instant petition.
Petitioner contends that the appellate court erred in finding that petitioner had
converted or misappropriated the proceeds of the sale of the jewelry, since the persons
to whom she delivered the pieces of jewelry had not yet paid for the same. Petitioner

insists that not having received the payment for said pieces of jewelry, she had nothing
to misappropriate.5
Petitioner further argues that the Kasunduan executed by her and private complainant,
which stipulate that she was to pay for the pieces of jewelry received by her in monthly
installments of P3,000.00 resulted in the novation of her obligation and extinguished
her criminal liability.6
In his Comment, the Solicitor General argues that during the trial of the criminal case
for estafa, it was established beyond reasonable doubt that petitioner had committed
the crime charged, and that her criminal liability was not extinguished by the execution
of the Kasunduan sa Bayaran. It is further contended that the petition raises questions
of fact which may not be reviewed in a petition for review on certiorari.7
There is no merit in petitioners arguments.
Art. 315, paragraph 1(b) of the Revised Penal Code provides:
Art. 315. Swindling. (estafa).any person who shall defraud another by any of the
means mentioned herein below shall be punished by:
xxx
1. With unfaithfulness or abuse of confidence, namely:
(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
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.
The elements of estafa with abuse of confidence under this paragraph are: (1) that
money, goods or other personal property be 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; (2) that there be misappropriation or
conversion of such money or property of the offender; or denial on his part of such
receipt; (3) that such misappropriation or conversion or denial to the prejudice of
another; and (4) that there is a demand made by the offended party to the offender. 8
Both the trial court and the Court of Appeals found that all the elements of estafa under
Article 315, paragraph 1(b) are present in this case. In its Decision, the appellate court
affirmed the finding of the trial court stating that:
These elements were amply and clearly established in this case, First, accused received
the jewelry for the purpose of selling the same under an express obligation to remit to
complainant the proceeds thereof or to return those she is unable to sell thereby
creating a fiduciary relationship between the[m]. Second, accused misappropriated the

jewelry as shown by the fact that she failed to return the same or the proceeds thereof
despite demand and Third, the misappropriation prejudiced the private complainant. 9
The rule is that factual findings of the Court of Appeals are conclusive on the parties on
and this Court, and carry even more weight when the appellate court affirms the factual
findings of the trial court.10 The Court finds no reason to depart from the foregoing rule,
considering that the evidence on record supports the conclusion of both the trial and the
appellate courts that petitioner is liable for estafa with abuse of confidence under
Article 315, paragraph 1(b) of the Revised Penal Code.
Likewise untenable is petitioners argument that there was a novation of her criminal
liability when she and private complainant executed the Kasunduan sa Bayaran. It is
well-settled that the following requisites must be present for novation to take place: (1)
a previous valid obligation; (2) agreement of all the parties to the new contract; (3)
extinguishment of the old contract; and (4) validity of the new one.11
In Quinto vs. People,12 the Court had occasion to discuss the concept of novation, as
follows:
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old obligation subsists to the
extent it remains compatible with the amendatory agreement. xxx
1wphi1
Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law would
be an incompatibility between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change that can bring about
novation, the touchstone for contrareity, however, would be an irreconcilable
incompatibility between the old and the new obligations.
xxx The test of incompatibility is whether or not the two obligations can stand together,
each one having its independent existence. If they cannot, they are incompatible and
the latter obligation novates the first. Corollarily, changes that breed incompatibility
must be essential in nature and not merely accidental. The incompatibility must take
place in any of the essential elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.13
1wphi1
The execution of the Kasunduan sa Bayaran does not constitute a novation of the
original agreement between petitioner and private complainant. Said Kasunduan did not

change the object or principal conditions of the contract between them. The change in
manner of payment of petitioners obligation did not render the Kasunduanincompatible
with the original agreement, and hence, did not extinguish petitioners liability to remit
the proceeds of the sale of the jewelry or to return the same to private complainant. As
this Court held in Velasquez vs. Court of Appeals:14
An obligation to pay a sum of money is not novated, in a new instrument wherein the
old is ratified, by changing only the terms of payment and adding other obligations not
incompatible with the old one, or wherein the old contract is merely supplemented by
the new one.15
In any case, novation is not one of the grounds prescribed by the Revised Penal Code for
the guishment of criminal liability.16
WHEREFORE, the petition is hereby DENIED and the decision of the Court of Appeals in
CA-G.R. CR No. 22437 is AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 126712 April 14, 1999

LEONIDA C. QUINTO, petitioner,
vs.
PEOPLE OF THE PHILIPPINES, respondent.
VITUG, J
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is
the decision of the Court of Appeals, promulgated on 27 September 1996, in People of
the Philippines vs. Leonida Quinto y Calayan, docketed CA-G.R. CR No. 16567, which has
affirmed the decision of Branch 157 of the Regional Trial Court (RTC), National Capital
Judicial Region, Branch 157, Pasig City, finding Leonida Quinto y Calayan guilty beyond
reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of estafa under
Article 315, paragraph 1(b), of the Revised Penal Code, in an information which read:

That on or about the 23rd day of March 1977, in the Municipality of
Makati, Metro Manila, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused, received in trust from one
Aurelia Cariaga the following pieces of jewelry, to wit:
One (1) set of marques with briliantitos
valued at P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at P16,000.00
One (1) diamond ring (rosetas)
valued at P 2,500.00
with a total value of P36,000.00 for the purpose of selling the same on
commission basis and with the express obligation on the part of the
accused to turn over the proceeds of sale thereof, or to return the said
jewelries (sic), if not sold, five (5) days after receipt thereof, but the
accused once in possession of the jewelries (sic), far from complying with
her obligation, with intent of gain, grave abuse of confidence and to
defraud said Aurelia Cariaga, did then and there wilfully, unlawfully and
feloniously misappropriate, misapply and convert to her own personal use
and benefit the said jewelries (sic) and/or the proceeds of sale or to
recturn the pieces of jewelry, to the damage and prejudice of the said
Aurelia Cariaga in the aforementioned amount of P36,000.00.
Contrary to law.
Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not guilty; trial on
the merits thereupon ensued.
According to the prosecution, on or about 23 March 1977, Leonida went to see Aurelia
Cariaga (private complainant) at the latter's residence in Makati. Leonida asked Aurelia
to allow her have some pieces of jewelry that she could show to prospective buyers.
Aurelia acceded and handed over to Leonida one (1) set of marques
with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00
and one (1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A")
therefor, thus:
RECEIPT
Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mga
alahas na nakatala sa ibaba, upang aking ipagbili sa pamamagitan ng
BIGAY PALA o Commission at Kaliwaan lamang. Ako'y hindi

pinahihintulutan (na) ipagbili ang mga ito ng Pautang. Pinananagutan ko
na ang mga alahas na ito ay hindi ko ipagkakaloob o ipagkakatiwala sa
kanino pa man upang ilagak o maipagbili nila, at ang mga ito ay ako ang
magbibili sa ilalim ng aking pangangasiwa at pananagutan sa halagang
nakatala sa ibaba. At aking isasauli ang mga hindi na maipagbili sa loob ng
5 days (sic) araw mula sa petsa nito o sa kahilingan, na nasa mabuti at
malinis na kalagayan katulad ng tanggapin ko sa petsang ito.
MGA URI NG ALAHAS
1 set marques with titos 17,500.
1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.
Makati, March 23, 1977
(Sgd.) 2
When the 5-day period given to her had lapsed, Leonida requested for and was
granted additional time within which to vend the items. Leonida failed to
conclude any sale and, about six (6) months later, Aurelia asked that the pieces
of jewelry be returned. She sent to Leonida a demand letter which the latter
ignored. The inexplicable delay of Leonida in returning the items spurred the
filing of the case for estafa against her.
The defense proffered differently. In its version, the defense sought to prove that
Leonida was engaged in the purchase and sale of jewelry. She was used to buying
pieces of jewelry from a certain Mrs. Antonia Ilagan who later introduced her (Leonida)
to Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started to transact business
in pieces of jewelry among which included a solo ring worth P40,000.00 which was sold
to Mrs. Camacho who paid P20,000.00 in check and the balance of P20,000.00 in
installments later paid directly to Aurelia. The last transaction Leonida had with Mrs.
Camacho involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs.
Camacho was not able to pay the due amount in full and left a balance of P13,000.00.
Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay the
balance in installments. Leonida was also able to sell for Aurelia a 2-karat diamond ring
worth P17,000.00 to Mrs. Concordia Ramos who, unfortunately, was unable to pay the
whole amount. Leonida brought Mrs. Ramos to Aurelia and they talked about the terms
of payment. As first payment, Mrs. Ramos gave Leonida a ring valued at P3,000.00. The
next payment made by her was P5,000.00. Leonida herself then paid P2,000.00.
The RTC, in its 25th January 1993 decision, found Leonida guilty beyond reasonable
doubt of the crime of estafa and sentenced her to suffer the penalty of imprisonment of
seven (7) years and one (1) day of prision mayor as minimum to nine (9) years
of prision mayor as maximum and to indemnify private complainant in the amount of
P36,000.00.

Leonida interposed an appeal to the Court of Appeals which affirmed, in its 27th
September 1996 decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the agreement between
petitioner and private complainant was effectively novated when the latter consented to
receive payment on installments directly from Mrs. Camacho and Mrs. Ramos.
The petition is bereft of merit.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old obligation subsists to the
extent it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal). 3 Under this mode, novation would have dual functions
one to extinguish an existing obligation, the other to substitute a new one in its place 4
requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new obligation. 5
Novation is never presumed, 6 and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken. 7
novation which may be effected either expressly or impliedly. 8 The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in executing
the new contract is to extinguish the old one. 9 Upon the other hand, no specific form is
required for an implied novation, 10 and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable incompatibility between the
old and the new obligations. 11
There are two ways which could indicate, in fine, the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the
same. The first is when novation has been explicitly stated and declared in unequivocal
terms. The second is when the old and the new obligations are incompatible on every
point. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first.12 Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental. The incompatibility
must take place in any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of payment. There was
really no substitution of debtors since private complainant merely acquiesced to the

payment but did not give her consent
13
to enter into a new contract. The appellate court
observed:
Appellant, however, insists that their agreement was novated when

complainant agreed to be paid directly by the buyers and on installment
basis. She adds that her liability is merely civil in nature.
We are unimpressed.
It is to remembered that one of the buyers, Concordia Ramos, was not
presented to testify on the alleged aforesaid manner of payment.
The acceptance by complainant of partial payment tendered by the buyer,
Leonor Camacho, does not evince the intention of the complainant to have
their agreement novated. It was simply necessitated by the fact that, at
that time, Camacho had substantial accounts payable to complainant, and
because of the fact that appellant made herself scarce to complainant.
(TSN, April 15, 1981, 31-32) Thus, to obviate the situation where
complainant would end up with nothing, she was forced to receive the
tender of Camacho. Moreover, it is to be noted that the aforesaid payment
was for the purchase, not of the jewelry subject of this case, but of some
other jewelry subject of a previous transaction. (Ibid. June 8, 1981, 1011) 14
There are two forms of novation by substituting the person of the debtor, depending on
whose initiative it comes from, to wit: expromision and delegacion. In the former, the
initiative for the change does not come from the debtor and may even be made without
his knowledge. Since a third person would substitute for the original debtor and assume
the obligation, his consent and that of the creditor would be required. In the latter, the
debtor offers, and the creditor accepts, a third person who consents to the substitution
and assumes the obligation, thereby releasing the original debtor from the obligation;
here, the intervention and the consent of all parties thereto would perforce be
necessary. 15 In either of these two modes of substitution, the consent of the creditor, such
as can be seen, is an indispensable requirement.
16
It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment on
installment basis cannot be construed as a case of
either expromision or delegacion sufficient to justify the attendance of extinctive
novation. Not too uncommon is when a stranger to a contract agrees to assume an
obligation; and while this may have the effect of adding to the number of persons liable,
it does not necessarily imply the extinguishment of the liability of the first
debtor. 17 Neither would the fact alone that the creditor receives guaranty or accepts
payments from a third person who has agreed to assume the obligation, constitute an
extinctive novation absent an agreement that the first debtor shall be released from
responsibility. 18
Petitioner's reliance on Candida Mariano vs. People
is misplaced. The factual milieu in

Mariano would indicate a clear intention on the part of the parties to release the accused
19

from her responsibility as an agent and for her to instead assume the obligation of a
guarantor. Unfortunately for petitioner in the case at bar, the factual findings of both the
trial court and the appellate court prove just the opposite which is that there has never been
any animus novandi between or among the parties.
Art. 315 of the Revised Penal Code defines estafa and penalizes any person who shall
defraud another 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. It is axiomatic that the gravemen of the offense is the appropriation or
conversion of money or property received to the prejudice of the owner. The terms
"convert" and "misappropriate" have been held to connote "an act of using or disposing
of another's property as if it were one's own or devoting it to a purpose or use different
from that agreed upon." The phrase, "to misappropriate to one's own use" has been said
to include "not only conversion to one's personal advantage, but also every attempt to
dispose of the property of another without right." 20 Verily, the sale of the pieces of
jewelry on installments in contravention of the explicit terms of the authority granted to her
in Exhibit "A" (supra) is deemed to be one of conversion. Thus, neither the theory of "delay
in the fulfillment of commission" nor that of novation posed by petitioner, can avoid the
incipient criminal liability. In People vs. Nery, 21 this Court held:
It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be either to prevent
the rise of criminal liability or to cast doubt on the true nature of the
original basic transaction, whether or not it was such that its breach would
not give rise to penal responsibility . . .
The criminal liability for estafa already committed is then not affected by the
subsequent novation of contract, for it is a public offense which must be
prosecuted and punished by the State in its own conation.22
Finally, this Court fails to see any reversible error, let alone any grave abuse of
discretion, in the appreciation of the evidence by the Court of Appeals which, in fact,
hews with those of the trial court. Indeed, under the circumstances, this Court must be
deemed bound by the factual findings of those courts.
Art. 315, 1st paragraph, of the Revised Penal Code, as amended by Presidential Decree
No. 818, provides that the penalty of "prison correccional in its maximum period
to prison mayor in its minimum period, if the amount of the fraud is over 12,000 but
does not exceed 22,000 pesos, and if such amount exceeds the latter sum, the penalty
provided in this paragraph shall be imposed in its maximum period, adding one year for
each additional 10,000 pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such case, and in connection with the accessory penalties
which may be imposed and for the purpose of the other provisions of this Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case may be."

In the leading case of People vs. Gabres 23 this Court ruled:
Under the Indeterminate Sentence Law, the maximum term of the penalty
shall be "that which, in view of the attending circumstances, could be
properly imposed" under the Revised Penal Code, and the minimum shall
be "within the range of the penalty next lower to that prescribed" for the
offense. The penalty next lower should be based on the penalty prescribed
by the Code for the offense, without first considering any modifying
circumstance attendant to the commission of the crime. The determination
of the minimum penalty is left by law to the sound discretion of the court
and it can be anywhere within the range of the penalty next lower without
any reference to the periods into which it might be subdivided. The
modifying circumstances are considered only in the imposition of the
maximum term of the indeterminate sentence.
The fact that the amounts involved in the instant case exceed P22,000.00
should not be considered in the initial determination of the indeterminate
penalty; instead, the matter should be so taken as analogous to modifying
circumstances in the imposition of the maximum term of the full
indeterminate sentence. This interpretation of the law accords with the
rule that penal laws should be construed in favor of the accused. Since the
penalty prescribed by law for the estafa charge against accused-appellant
is prision correccional maximum to prision mayor minimum, the penalty
next lower would then be prision correccional minimum to medium. Thus,
the minimum term of the indeterminate sentence should be anywhere
within six (6) months and one (1) day to four (4) years and two (2)
months while the maximum term of the indeterminate sentence should at
least be six (6) years and one (1) day because the amounts involved
exceeded P22,000.00, plus an additional one (1) year for each additional
P10,000.00. 24
The penalty imposed by the trial court, affirmed by the appellate court, should
accordingly be modified.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED except that the
imprisonment term is MODIFIED by now sentencing petitioner to an indeterminate
penalty of from two (2) years, eight (8) months and one (1) day of prison
correccional to seven (7) years and one (1) day of prision mayor. The civil liability of
appellant for P36,000.00 in favor of private complainant is maintained. Costs against
petitioner.
1wphi1.nt
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 159709
June 27, 2012
HEIRS OF SERVANDO FRANCO, Petitioners,

vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
DECISION
BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility between the old and
the new obligations. There is no novation in case of only slight modifications; hence, the
old obligation prevails.
The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the
Court of Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial
Court (RTC), Branch 16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in
Medel v. Court of Appeals,2the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and
Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was
engaged in the money lending business under the name "Gonzales Credit Enterprises",
in the amount of P50,000.00, payable in two months. Veronica gave only the amount
of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one
month at 6% per month. Servado and Leticia executed a promissory note
for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in
the amount of P90,000.00, payable in two months, at 6% interest per month. They
executed a promissory note to evidence the loan, maturing on January 19, 1986. They
received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the
amount of P300,000.00, maturing in one month, secured by a real estate mortgage over
a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of
attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando
and Leticia executed a promissory note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11, 1986. However, only the sum
of P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from
Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a
total of P500,000.00, payable on August 23, 1986. They executed a promissory note,
reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT
ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag
Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00)
Philippine
Currency with interest thereon at the rate of 5.5PER CENT per month plus 2% service ch
arge per annum from date hereof until fully paid according to the amortization schedule
contained herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable
and I/WE hereby agree to pay
an additional amount equivalent to one per cent (1%) per month of the amount due and
demandable as penalty charges in the form of liquidated damages until fully paid; and
the furthersum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due
and demandable, exclusive of costs and judicial or extra judicial expenses.
(Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by
law or the Central Bank of the Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although the original interest have
already been collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of peso,
and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted shall
be adjusted in accordance with the value of the peso then prevailing at the time of the
complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all
indorsers and all parties to this note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive
all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of
Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00,
plus interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales,
filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a
complaint for collection of the full amount of the loan including interests and other
charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum
of P500,000.00, and actually received the amount and benefited therefrom; that the
loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that
he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel
alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and
that substantial payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the
four promissory notes had been duly proved, and ruled that although the Usury Law had
been repealed, the interest charged by the plaintiffs on the loans was unconscionable
and "revolting to the conscience". Hence, the trial court applied "the provision of the
New [Civil] Code" that the "legal rate of interest for loan or forbearance of money,
goods or credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive
portion of which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to
pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7,
1985 and 1% per month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
and severally the amount of P84,000.00 with 12% interest per annum and 1% per cent
per month as penalty from November 19,1985 until the whole amount is fully paid;

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

On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on
the interest for being iniquitous or unconscionable, and revived the judgment of the RTC
rendered on December 9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997.
Instead, we render judgment REVIVING and AFFIRMING the decision dated December
9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil
Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED.4
Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.5 Servando Franco opposed,6 claiming that he and the respondents had agreed
to fix the entire obligation at P775,000.00.7According to Servando, their agreement,
which was allegedly embodied in a receipt dated February 5, 1992,8whereby he made an
initial payment of P400,000.00 and promised to pay the balance of P375,000.00 on
February 29, 1992, superseded the July 23, 1986 promissory note.
The RTC granted the motion for execution over Servandos opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been affirmed
and had already become final and executory. Thus, in accordance with Sec. 1 of Rule 39
of the 1997 Rules of Civil Procedure, execution shall issue as a matter of right. It has
likewise been ruled that a judgment which has acquired finality becomes immutable and
unalterable and hence may no longer be modified at any respect except only to correct
clerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this
respect, the decision deserves to be respected.
The argument about the modification of the contract or non-participation of defendant
Servando Franco in the proceedings on appeal on the alleged belief that the payment he
made had already absolved him from liability is of no moment. Primarily, the decision
was for him and Leticia Medel to pay the plaintiffs jointly and severally the amounts
stated in the Decision. In other words, the liability of the defendants thereunder is
solidary. Based on this aspect alone, the new defense raised by defendant Franco is
unavailing.
WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for
Execution of Judgment.
Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff
of this Court.
SO ORDERED.9

On March 8, 2001, the RTC issued the writ of execution.10
Servando moved for reconsideration,11 but the RTC denied his motion.12
On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that
the execution was proper because of Servandos failure to comply with the terms of the
compromise agreement, stating:13
Petitioner cannot deny the fact that there was no full compliance with the tenor of the
compromise agreement. Private respondents on their part did not disregard the
payments made by the petitioner. They even offered that whatever payments made by
petitioner, it can be deducted from the principal obligation including interest. However,
private respondents posit that the payments made cannot alter, modify or revoke the
decision of the Supreme Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:
"When the terms of the compromise judgment is violated, the aggrieved party must
move for its execution, not its invalidation."
It is clear from the aforementioned jurisprudence that even if there is a compromise
agreement and the terms have been violated, the aggrieved party, such as the private
respondents, has the right to move for the issuance of a writ of execution of the final
judgment subject of the compromise agreement.
Moreover, under the circumstances of this case, petitioner does not stand to suffer any
harm or prejudice for the simple reason that what has been asked by private
respondents to be the subject of a writ of execution is only the balance of petitioners
obligation after deducting the payments made on the basis of the compromise
agreement.
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE
and consequently DISMISSED for lack of merit.
SO ORDERED.
His motion for reconsideration having been denied,14 Servando appealed. He was
eventually substituted by his heirs, now the petitioners herein, on account of his
intervening death. The substitution was pursuant to the resolution dated June 15,
2005.15
Issue
The petitioners submit that the CA erred in ruling that:
I

THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON
THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT
OF MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT EXECUTED
IN 1992.
The petitioners insist that the RTC could not validly enforce a judgment based on a
promissory note that had been already novated; that the promissory note had been
impliedly novated when the principal obligation ofP500,000.00 had been fixed
at P750,000.00, and the maturity date had been extended from August 23, 1986 to
February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the
final and executory decision of the Court; that novation did not take place because there
was no complete incompatibility between the promissory note and the memorandum
receipt; that Servandos previous payment would be deducted from the total liability of
the debtors based on the RTCs decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent
Veronica Gonzales issued the February 5, 1992 receipt?
Ruling
The petition lacks merits.
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on
February 5, 1992 by respondent Veronica whereby Servandos obligation was fixed
at P750,000.00. They insist that even the maturity date was extended until February 29,
1992. Such changes, they assert, were incompatible with those of the original
agreement under the promissory note.
The petitioners assertion is wrong.

A novation arises when there is a substitution of an obligation by a subsequent one that
extinguishes the first, either by changing the object or the principal conditions, or by
substituting the person of the debtor, or by subrogating a third person in the rights of
the creditor.16 For a valid novation to take place, there must be, therefore: (a) a previous
valid obligation; (b) an agreement of the parties to make a new contract; (c) an
extinguishment of the old contract; and (d) a valid new contract. 17 In short, the new
obligation extinguishes the prior agreement only when the substitution is unequivocally
declared, or the old and the new obligations are incompatible on every point. A
compromise of a final judgment operates as a novation of the judgment obligation upon
compliance with either of these two conditions.18
The receipt dated February 5, 1992, excerpted below, did not create a new obligation
incompatible with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No. 001700 in the amount
of P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid on or
before FEBRUARY 29, 1992. In case of default an interest will be charged as stipulated
in the promissory note subject of this case.
(Sgd)
V. Gonzalez19
To be clear, novation is not presumed. This means that the parties to a contract should
expressly agree to abrogate the old contract in favor of a new one. In the absence of the
express agreement, the old and the new obligations must be incompatible on every
point.20 According to California Bus Lines, Inc. v. State Investment House, Inc.:21
novation which may be effected either expressly or impliedly. The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law would
be an incompatibility between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
1wphi1
There is incompatibility when the two obligations cannot stand together, each one
having its independent existence. If the two obligations cannot stand together, the
latter obligation novates the first.22 Changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must affect any of the
essential elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change is merely modificatory in nature and insufficient to
extinguish the original obligation.23

In light of the foregoing, the issuance of the receipt created no new obligation. Instead,
the respondents only thereby recognized the original obligation by stating in the receipt
that the P400,000.00 was "partial payment of loan" and by referring to "the promissory
note subject of the case in imposing the interest." The loan mentioned in the receipt
was still the same loan involving the P500,000.00 extended to Servando. Advertence to
the interest stipulated in the promissory note indicated that the contract still subsisted,
not replaced and extinguished, as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servandos payment of his
obligation as confirmed by the decision of the RTC. It did not establish the novation of
his agreement with the respondents. Indeed, the Court has ruled that an obligation to
pay a sum of money is not novated by an instrument that expressly recognizes the old,
or changes only the terms of payment, or adds other obligations not incompatible with
the old ones, or the new contract merely supplements the old one.24 A new contract that
is a mere reiteration, acknowledgment or ratification of the old contract with slight
modifications or alterations as to the cause or object or principal conditions can stand
together with the former one, and there can be no incompatibility between
them.25Moreover, a creditors acceptance of payment after demand does not operate as
a modification of the original contract.26
Worth noting is that Servandos liability was joint and solidary with his co-debtors. In a
solidary obligation, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously.27 The choice to determine against whom the
collection is enforced belongs to the creditor until the obligation is fully satisfied. 28Thus,
the obligation was being enforced against Servando, who, in order to escape liability,
should have presented evidence to prove that his obligation had already been cancelled
by the new obligation or that another debtor had assumed his place. In case of change
in the person of the debtor, the substitution must be clear and express, 29 and made with
the consent of the creditor.30 Yet, these circumstances did not obtain herein, proving
precisely that Servando remained a solidary debtor against whom the entire or part of
the obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a novation of the previous
agreement. It is settled that an extension of the term or period of the maturity date
does not result in novation.31
II
Total liability to be reduced by P400,000.00
The petitioners argue that Servandos remaining liability amounted to only P375,000.00,
the balance indicated in the February 5, 1992 receipt. Accordingly, the balance was not
yet due because the respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of a novation. However,
as found now, novation did not take place. Accordingly, Servandos obligation, being

solidary, remained to be that decreed in the December 9, 1991 decision of the RTC,
inclusive of interests, less the amount of P400,000.00 that was meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on
March 19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to
proceed with the execution based on its decision rendered on December 9, 1991,
deducting the amount of P400,000.00 already paid by the late Servando Franco; and
DIRECTS the petitioners to pay the costs of suit.
SO ORDERED.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 177936
January 18, 2012
STARBRIGHT SALES ENTERPRISES, INC., Petitioner,

vs.
PHILIPPINE REALTY CORPORATION, MSGR. DOMINGO A. CIRILOS, TROPICANA
PROPERTIES AND DEVELOPMENT CORPORATION and STANDARD REALTY
CORPORATION, Respondents.
DECISION
ABAD, J.:
The present case involves a determination of the perfection of contract of sale.
The Facts and the Case
On April 17, 1988 Ramon Licup wrote Msgr. Domingo A. Cirilos, offering to buy three
contiguous parcels of land in Paraaque that The Holy See and Philippine Realty
Corporation (PRC) owned for P1,240.00 per square meter. Licup accepted the
responsibility for removing the illegal settlers on the land and enclosed a check
forP100,000.00 to "close the transaction."1 He undertook to pay the balance of the
purchase price upon presentation of the title for transfer and once the property has
been cleared of its occupants.
Msgr. Cirilos, representing The Holy See and PRC, signed his name on the conforme
portion of the letter and accepted the check. But the check could not be encashed due to
Licups stop-order payment. Licup wrote Msgr. Cirilos on April 26, 1988, requesting that
the titles to the land be instead transferred to petitioner Starbright Sales Enterprises,
Inc. (SSE). He enclosed a new check for the same amount. SSEs representatives, Mr.
and Mrs. Cu, did not sign the letter.

On November 29, 1988 Msgr. Cirilos wrote SSE, requesting it to remove the occupants
on the property and, should it decide not to do this, Msgr. Cirilos would return to it
the P100,000.00 that he received. On January 24, 1989 SSE replied with an "updated
proposal."2 It would be willing to comply with Msgr. Cirilos condition provided the
purchase price is lowered to P1,150.00 per square meter.
On January 26, 1989 Msgr. Cirilos wrote back, rejecting the "updated proposal." He said
that other buyers were willing to acquire the property on an "as is, where is" basis
at P1,400.00 per square meter. He gave SSE seven days within which to buy the
property at P1,400.00 per square meter, otherwise, Msgr. Cirilos would take it that SSE
has lost interest in the same. He enclosed a check for P100,000.00 in his letter as refund
of what he earlier received.
On February 4, 1989 SSE wrote Msgr. Cirilos that they already had a perfected contract
of sale in the April 17, 1988 letter which he signed and that, consequently, he could no
longer impose amendments such as the removal of the informal settlers at the buyers
expense and the increase in the purchase price.
SSE claimed that it got no reply from Msgr. Cirilos and that the next thing they knew,
the land had been sold to Tropicana Properties on March 30, 1989. On May 15, 1989 SSE
demanded rescission of that sale. Meanwhile, on August 4, 1989 Tropicana Properties
sold the three parcels of land to Standard Realty.
Its demand for rescission unheeded, SSE filed a complaint for annulment of sale and
reconveyance with damages before the Regional Trial Court (RTC) of Makati, Branch 61,
against The Holy See, PRC, Msgr. Cirilos, and Tropicana Properties in Civil Case 90-183.
SSE amended its complaint on February 24, 1992, impleading Standard Realty as
additional defendant.
The Holy See sought dismissal of the case against it, claiming that as a foreign
government, it cannot be sued without its consent. The RTC held otherwise but, on
December 1, 1994,3 the Court reversed the ruling of the RTC and ordered the case
against The Holy See dismissed. By Order of January 26, 1996 the case was transferred
to the Paraaque RTC, Branch 258.
SSE alleged that Licups original letter of April 17, 1988 to Msgr. Cirilos constituted a
perfected contract. Licup even gave an earnest money of P100,000.00 to "close the
transaction." His offer to rid the land of its occupants was a "mere gesture of
accommodation if only to expedite the transfer of its title."4 Further, SSE claimed that, in
representing The Holy See and PRC, Msgr. Cirilos acted in bad faith when he set the
price of the property atP1,400.00 per square meter when in truth, the property was sold
to Tropicana Properties for only P760.68 per square meter.
Msgr. Cirilos maintained, on the other hand, that based on their exchange of letters, no
contract of sale was perfected between SSE and the parties he represented. And, only
after the negotiations between them fell through did he sell the land to Tropicana
Properties.

In its Decision of February 14, 2000, the Paraaque RTC treated the April 17, 1988 letter
between Licum and Msgr. Cirilos as a perfected contract of sale between the parties.
Msgr. Cirilos attempted to change the terms of contract and return SSEs initial deposit
but the parties reached no agreement regarding such change. Since such agreement
was wanting, the original terms provided in the April 17, 1988 letter continued to bind
the parties.
On appeal to the Court of Appeals (CA), the latter rendered judgment on November 10,
2006,5 reversing the Paraaque RTC decision. The CA held that no perfected contract
can be gleaned from the April 17, 1988 letter that SSE had relied on. Indeed, the
subsequent exchange of letters between SSE and Msgr. Cirilos show that the parties
were grappling with the terms of the sale. Msgr. Cirilos made no unconditional
acceptance that would give rise to a perfected contract.
As to the P100,000.00 given to Msgr. Cirilos, the CA considered it an option money that
secured for SSE only the privilege to buy the property even if Licup called it a "deposit."
The CA denied SSEs motion for reconsideration on May 2, 2007.
The Issue Presented
The only issue in this case is whether or not the CA erred in holding that no perfected
contract of sale existed between SSE and the land owners, represented by Msgr. Cirilos.
The Courts Ruling
Three elements are needed to create a perfected contract: 1) the consent of the
contracting parties; (2) an object certain which is the subject matter of the contract;
and (3) the cause of the obligation which is established.6 Under the law on sales, a
contract of sale is perfected when the seller, obligates himself, for a price certain, to
deliver and to transfer ownership of a thing or right to the buyer, over which the latter
agrees.7 From that moment, the parties may demand reciprocal performance.
The Court believes that the April 17, 1988 letter between Licup and Msgr. Cirilos, the
representative of the propertys owners, constituted a perfected contract. When Msgr.
Cirilos affixed his signature on that letter, he expressed his conformity to the terms of
Licups offer appearing on it. There was meeting of the minds as to the object and
consideration of the contract.
But when Licup ordered a stop-payment on his deposit and proposed in his April 26,
1988 letter to Msgr. Cirilos that the property be instead transferred to SSE, a subjective
novation took place.
A subjective novation results through substitution of the person of the debtor or
through subrogation of a third person to the rights of the creditor. To accomplish a
subjective novation through change in the person of the debtor, the old debtor needs to
be expressly released from the obligation and the third person or new debtor needs to
assume his place in the relation.8

Novation serves two functions one is to extinguish an existing obligation, the other to
substitute a new one in its place requiring concurrence of four requisites: 1) a
previous valid obligation; 2) an agreement of all parties concerned to a new contract; 3)
the extinguishment of the old obligation; and 4) the birth of a valid new obligation. 9
Notably, Licup and Msgr. Cirilos affixed their signatures on the original agreement
embodied in Licups letter of April 26, 1988. No similar letter agreement can be found
between SSE and Msgr. Cirilos.
The proposed substitution of Licup by SSE opened the negotiation stage for a new
contract of sale as between SSE and the owners. The succeeding exchange of letters
between Mr. Stephen Cu, SSEs representative, and Msgr. Cirilos attests to an unfinished
negotiation. Msgr. Cirilos referred to his discussion with SSE regarding the purchase as a
"pending transaction."10
Cu, on the other hand, regarded SSEs first letter to Msgr. Cirilos as an "updated
proposal."11 This proposal took up two issues: which party would undertake to evict the
occupants on the property and how much must the consideration be for the property.
These are clear indications that there was no meeting of the minds between the
parties. As it turned out, the parties reached no consensus regarding these issues, thus
producing no perfected sale between them.
1avvphi1
Parenthetically, Msgr. Cirilos did not act in bad faith when he sold the property to
Tropicana even if it was for a lesser consideration. More than a month had passed since
the last communication between the parties on February 4, 1989. It is not improbable
for prospective buyers to offer to buy the property during that time.
The P100,000.00 that was given to Msgr. Cirilos as "deposit" cannot be considered as
earnest money. Where the parties merely exchanged offers and counter-offers, no
contract is perfected since they did not yet give their consent to such offers. 12 Earnest
money applies to a perfected sale.
SSE cannot revert to the original terms stated in Licups letter to Msgr. Cirilos dated
April 17, 1988 since it was not privy to such contract. The parties to it were Licup and
Msgr. Cirilos. Under the principle of relativity of contracts, contracts can only bind the
parties who entered into it. It cannot favor or prejudice a third person.13 Petitioner SSE
cannot, therefore, impose the terms Licup stated in his April 17, 1988 letter upon the
owners.
WHEREFORE, the Court DISMISSES the petition and AFFIRMS the Court of Appeals
Decision dated November 10, 2006 in CA-G.R. CV 67366.
SO ORDERED.
SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 149040
July 4, 2007
EDGAR LEDONIO, petitioner,

vs.
CAPITOL DEVELOPMENT CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Revised
Rules of Court praying that (1) the Decision,2 dated 20 March 2001, of the Court of
Appeals in CA-G.R. CV No. 43604, affirming in toto the Decision,3 dated 6 August 1993,
of the Quezon City Regional Trial Court (RTC), Branch 91, in Civil Case No. Q-90-5247,
be set aside; and (2) the Complaint4 in Civil Case No. Q-90-5247 be dismissed.
Herein respondent Capitol Development Corporation instituted Civil Case No. Q-90-5247
by filing a Complaint for the collection of a sum of money against herein petitioner
Edgar Ledonio.
In its Complaint, respondent alleged that petitioner obtained from a Ms. Patrocinio S.
Picache two loans, with the aggregate principal amount of P60,000.00, and covered by
promissory notes duly signed by petitioner. In the first promissory note,5 dated 9
November 1988, petitioner promised to pay to the order of Ms. Picache the principal
amount of P30,000.00, in monthly installments of P3,000.00, with the first monthly
installment due on 9 January 1989. In the second promissory note,6 dated 10 November
1988, petitioner again promised to pay to the order of Ms. Picache the principal amount
of P30,000.00, with 36% interest per annum, on 1 December 1988. In case of default in
payment, both promissory notes provide that (a) petitioner shall be liable for a penalty
equivalent to 20% of the total outstanding balance; (b) unpaid interest shall be
compounded or added to the balance of the principal amount and shall bear the same
rate of interest as the latter; and (c) in case the creditor, Ms. Picache, shall engage the
services of counsel to enforce her rights and powers under the promissory notes,
petitioner shall pay as attorney's fees and liquidated damages the sum equivalent to
20% of the total amount sought to be recovered, but in no case shall the said sum be
less that P10,000.00, exclusive of costs of suit.
On 1 April 1989, Ms. Picache executed an Assignment of Credit7 in favor of respondent,
which reads
KNOW ALL MEN BY THESE PRESENTS:
That I, PAT S. PICACHE of legal age and with postal address at 373 Quezon
Avenue, Quezon City for and in consideration of SIXTY THOUSAND PESOS
(P60,000.00) Philippine Currency, to me paid by [herein respondent] CAPITOL
DEVELOPMENT CORPORATION, a corporation organized and existing under the

laws of the Republic of the Philippines with principal office at 373 Quezon
Avenue, Quezon City receipt whereof is hereby acknowledged have sold,
transferred, assigned and conveyed and (sic) by me these presents do hereby
sell, assign, transfer and convey unto the said [respondent] CAPITOL
DEVELOPMENT CORPORATION, a certain debt due me from [herein petitioner]
EDGAR A. LEDONIO in the principal sum of SIXTY THOUSAND PESOS
(P60,000.00) Philippine Currency, under two (2) Promissory Notes dated
November 9, 1988 and November 10, 1988, respectively, photocopies of which
are attached to as annexes A & B to form integral parts hereof with full power to
sue for, collect and discharge, or sell and assign the same.
That I hereby declare that the principal sum of SIXTY THOUSAND PESOS
(P60,000.00) with interest thereon at THIRTY SIX (36%) PER CENT per annum is
justly due and owing to me as aforesaid.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of April, 1989 at
Quezon City.
(SGD)PAT S. PICACHE
The foregoing document was signed by two witnesses and duly acknowledged by Ms.
Picache before a Notary Public also on 1 April 1989.
Since petitioner did not pay any of the loans covered by the promissory notes when they
became due, respondent -- through its Vice President Nina P. King and its counsel King,
Capuchino, Banico & Associates -- sent petitioner several demand letters.8 Despite
receiving the said demand letters, petitioner still failed and refused to settle his
indebtedness, thus, prompting respondent to file the Complaint with the RTC, docketed
as Civil Case No. Q-90-5247.
In his Answer filed with the RTC, petitioner sought the dismissal of the Complaint
averring that respondent had no cause of action against him. He denied obtaining any
loan from Ms. Picache and questioned the genuineness and due execution of the
promissory notes, for they were the result of intimidation and fraud; hence, void. He
asserted that there had been no transaction or privity of contract between him, on one
hand, and Ms. Picache and respondent, on the other. The assignment by Ms. Picache of
the promissory notes to respondent was a mere ploy and simulation to effect the unjust
enforcement of the invalid promissory notes and to insulate Ms. Picache from any direct
counterclaims, and he never consented or agreed to the said assignment.
Petitioner then presented his own narration of events leading to the filing of Civil Case
No. Q-90-5247. According to him, on 24 February 1988, he entered into a Contract of
Lease9 of real property located in Quezon City with Mission Realty & Management
Corporation (MRMC), of which Ms. Picache is an incorporator and member of the Board
of Directors.10 Petitioner relocated the plant and machines used in his garments
business to the leased property. After a month or two, a foreign investor was interested
in doing business with him and sent a representative to conduct an ocular inspection of

petitioner's plant at the leased property. During the inspection, a group of Meralco
employees entered the leased property to cut off the electric power connections of the
plant. The event gave an unfavorable impression to the foreign investor who desisted
from further transacting with petitioner. Upon verification with Meralco, petitioner
discovered that there were unpaid electric bills on the leased property amounting to
hundreds of thousands of pesos. These electric bills were supposedly due to the
surreptitious electrical connections to the leased property. Petitioner claimed that he
was never informed or advised by MRMC of the existence of said unpaid electric bills. It
took Meralco considerable time to restore electric power to the leased property and only
after petitioner pleaded that he was not responsible for the illegal electrical connections
and/or the unpaid electric bills, for he was only a recent lessee of the leased property.
Because of the work stoppage and loss of business opportunities resulting from the
foregoing incident, petitioner purportedly suffered damages amounting to United States
$60,000.00, for which petitioner verbally attempted to recover compensation from
MRMC.
Having failed to obtain compensation from MRMC, petitioner decided to vacate and pull
out his machines from the leased property but he can only do so, unhampered and
uninterrupted by MRMC security personnel, if he signed, as he did, blank promissory
note forms. Petitioner alleged that when he signed the promissory note forms, the
allotted spaces for the principal amount of the loans, interest rates, and names of the
promisee/s were in blank; and that Ms. Picache took advantage of petitioner's
signatures on the blank promissory note forms by filling up the blanks.
To raise even more suspicions of fraud and spuriousness of the promissory notes and
their subsequent assignment to respondent, petitioner called attention to the fact that
Ms. Picache is an incorporator and member of the Board of Directors of both MRMC and
respondent.11
After the pre-trial conference and the trial proper, the RTC rendered a Decision12 on 6
August 1993, ruling in favor of respondent. The RTC gave more credence to
respondent's version of the facts, finding that
[Herein petitioner]'s disclaimer of the promissory note[s] does not inspire belief.
He is a holder of a degree in Bachelor of Science in Chemical Engineering and has
been a manufacturer of garments since 1979. As a matter of fact, [petitioner]'s
testimony that he was made to sign blank sheets of paper is contrary to his
admission in paragraphs 12 and 13 of his Answer that as a condition to his
removal of his machines [from] the leased premises, he was made to sign blank
promissory note forms with respect to the amount, interest and promisee. It thus
appears incredulous that a businessman like [petitioner] would simply sign blank
sheets of paper or blank promissory notes just [to] be able to vacate the leased
premises.
Moreover, the credibility of [petitioner]'s testimony leaves much to be desired.
He contradicted his earlier testimony that he only met Patrocinio Picache once,
which took place in the office of Mission Realty and Management Corporation, by
stating that he saw Patrocinio Picache a second time when she went to his house.

Likewise, his claim that the electric power in the leased premises was cut off only
two months after he occupied the same is belied by his own evidence. The
contract of lease submitted by [petitioner] is dated February 24, 1988 and took
effect on March 1, 1988. His letter to Mission Realty and Management
Corporation dated September 21, 1988, complained of the electric power
disconnection that took place on September 6, 1988, that is, six (6) months after
he had occupied the leased premises, and did not even give a hint of his intention
to vacate the premises because of said incident. It appears that [petitioner] was
already advised to pay his rental arrearages in a letter dated August 9, 1988
(Exh. "2") and was notified of the termination of the lease contract in a letter
dated September 19, 1988 (Exh. "4"). However, in a letter dated September 26,
1988, [petitioner] requested for time to look for a place to transfer.
The RTC also sustained the validity and enforceability of the Assignment of Credit
executed by Ms. Picache in favor of respondent, even in the absence of petitioner's
consent to the said assignment, based on the following reasoning
The promissory notes (Exhs. "A" and "B") were assigned by Ms. Patrocinio
Picache to [herein respondent] by virtue of a notarized Assignment of Credit
dated April 1, 1989 for a consideration of P60,000.00 (Exh. "C"). The fact that the
assignment of credit does not bear the conformity of [herein petitioner] is of no
moment. In C & C Commercial Corporation vs. Philippine National Bank, 175
SCRA 1, 11, the Supreme Court held thus:
"x x x Article 1624 of the Civil Code provides that 'an assignment of credits
and other incorporeal rights shall be perfected in accordance with the
provisions of Article 1475' which in turn states that 'the contract of sale is
perfected at the moment there is a meeting of the minds upon the thing
which is the object of the contract and upon the price.' The meeting of the
minds contemplated here is that between the assignor of the credit and
his assignee, there being no necessity for the consent of the debtor,
contrary to petitioner's claim. It is sufficient that the assignment be
brought to his knowledge in order to be binding upon him. This may be
inferred from Article 1626 of the Civil Code which declares that 'the debtor
who, before having knowledge of the assignment, pays his creditor shall
be released from the obligation.'"
[Petitioner] does not deny having been notified of the assignment of credit by
Patrocinio Picache to the [respondent]. Thus, [respondent] sent several demand
letters to the [petitioner] in connection with the loan[s] (Exhs. "D", "E", "F" and
"G"). [Petitioner] acknowledged receipt of [respondent]'s letter of demand dated
June 13, 1989 (Exh. "F") and assured [respondent] that he would settle his
account, as per their telephone conversation (Exhs. "H" and "9"). Such
communications between [respondent] and [petitioner] show that the latter had
been duly notified of the said assignment of credit. x x x.

Given its aforequoted findings, the RTC proceeded to a determination of petitioner's
liabilities to respondent, taking into account the provisions of the promissory notes,
thus
x x x Consequently, [herein respondent] is entitled to recover from [herein
petitioner] the principal amount of P30,000.00 for the promissory note dated
November 9, 1988. As said note did not provide for any interest, [respondent]
may only recover interest at the legal rate of 12% per annum from April 18,
1990, the date of the filing of the complaint. With respect to the promissory note
dated November 10, 1988, the same provided for interest at 36% per annum and
that interest not paid when due shall be added to and shall become part of the
principal and shall bear the same rate of interest as the principal. Likewise, both
promissory notes provided for a penalty of 20% of the total outstanding balance
thereon and attorney's fees equivalent to 20% of the sum sought to be recovered
in case of litigation.
In Garcia vs. Court of Appeals, 167 SCRA 815, it was held that penalty interests
are in the nature of liquidated damages and may be equitably reduced by the
courts if they are iniquitous or unconscionable, pursuant to Articles 1229 and
2227 of the Civil Code. Considering that the promissory note dated November 10,
1988 already provided for interest at 36% per annum on the principal obligation,
as well as for the capitalization of the unpaid interest, the penalty charge of 20%
of the total outstanding balance of the obligation thus appears to be excessive
and unconscionable. The interest charges are enough punishment for
[petitioner]'s failure to comply with his obligation under the promissory note
dated November 10, 1988.
With respect to the attorney's fees, the court is likewise empowered to reduce
the same if they are unreasonable or unconscionable, notwithstanding the
express contract therefor. (Insular Bank of Asia and America vs. Spouses Salazar,
159 SCRA 133, 139). Thus, an award of P10,000.00 as and for attorney's fees
appears to be enough.
Consequently, the fallo of the RTC Decision reads
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of
the [herein respondent] and against [herein petitioner] ordering the latter as
follows:
1. To pay [respondent], on the promissory note dated November 9, 1988,
the amount of P30,000.00 with interest thereon at the legal rate of 12%
per annum from April 18, 1990 until fully paid and a penalty of 20% on the
total amount;
2. To pay [respondent], on the promissory note dated November 10, 1988,
the amount ofP30,000.00 with interest thereon at 36% per annum
compounded at the same rate until fully paid;

3. To pay [respondent] the amount of P10,000.00, as and for attorney's
fees; and
4. To pay the costs of the suit.13
Aggrieved by the RTC Decision, dated 6 August 1993, petitioner filed an appeal with the
Court of Appeals, which was docketed as CA-G.R. CV No. 43604. The appellate court, in a
Decision,14 dated 20 March 2001, found no cogent reason to depart from the conclusions
arrived at by the RTC in its appealed Decision, dated 6 August 1993, and affirmed the
latter Decision in toto. The Court of Appeals likewise denied petitioner's Motion for
Reconsideration in a Resolution,15 dated 16 July 2001, stating that the grounds relied
upon by petitioner in his Motion were mere reiterations of the issues and matters
already considered, weighed and passed upon; and that no new matter or substantial
argument was adduced by petitioner to warrant a modification, much less a reversal, of
the Court of Appeals Decision, dated 20 March 2001.
Comes now petitioner to this Court, via a Petition for Review on Certiorari under Rule 45
of the Revised Rules of Court, raising the sole issue16 of whether or not the Court of
Appeals committed grave abuse of discretion in affirming in toto the RTC Decision,
dated 6 August 1993. Petitioner's main argument is that the Court of Appeals erred
when it ruled that there was an assignment of credit and that there was no
novation/subrogation in the case at bar. Petitioner asserts the position that consent of
the debtor to the assignment of credit is a basic/essential element in order for the
assignee to have a cause of action against the debtor. Without the debtor's consent, the
recourse of the assignee in case of non-payment of the assigned credit, is to recover
from the assignor. Petitioner further argues that even if there was indeed an
assignment of credit, as alleged by the respondent, then there had been a novation of
the original loan contracts when the respondent was subrogated in the rights of Ms.
Picache, the original creditor. In support of said argument, petitioner invokes the
following provisions of the Civil Code
ART. 1300. Subrogation of a third person in the rights of the creditor is either
legal or conventional. The former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly established in order that it may
take effect.
ART. 1301. Conventional subrogation of a third person requires the consent of
the original parties and the third person.
According to petitioner, the assignment of credit constitutes conventional subrogation
which requires the consent of the original parties to the loan contract, namely, Ms.
Picache (the creditor) and petitioner (the debtor); and the third person, the respondent
(the assignee). Since petitioner never gave his consent to the assignment of credit, then
the subrogation of respondent in the rights of Ms. Picache as creditor by virtue of said
assignment is without force and effect.
This Court finds no merit in the present Petition.

Before proceeding to a discussion of the points raised by petitioner, this Court deems it
appropriate to emphasize that the findings of fact of the Court of Appeals and the RTC in
this case shall no longer be disturbed. It is axiomatic that this Court will not review,
much less reverse, the factual findings of the Court of Appeals, especially where, as in
this case, such findings coincide with those of the trial court, since this Court is not a
trier of facts.17
The jurisdiction of this 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, unless it is
shown, inter alia, that: (a) the conclusion is grounded entirely on speculations, surmises
and conjectures; (b) the inference is manifestly mistaken, absurd and impossible; (c)
there is grave abuse of discretion; (d) the judgment is based on a misapplication of
facts; (e) the findings of fact of the trial court and the appellate court are contradicted
by the evidence on record and (f) the Court of Appeals went beyond the issues of the
case and its findings are contrary to the admissions of both parties. 18 None of these
circumstances are present in the case at bar. After a perusal of the records, this Court
can only conclude that the factual findings of the Court of Appeals, affirming those of
the RTC, are amply supported by evidence and are, resultantly, conclusive on this
Court.19
Therefore, the following facts are already beyond cavil: (1) petitioner obtained two
loans totaling P60,000.00 from Ms. Picache, for which he executed promissory notes,
dated 9 November 1988 and 10 November 1988; (2) he failed to pay any of the said
loans; (3) Ms. Picache executed on 1 April 1989 an Assignment of Credit covering
petitioner's loans in favor of respondent for the consideration of P60,000.00; (4)
petitioner had knowledge of the assignment of credit; and (5) petitioner still failed to
pay his indebtedness despite repeated demands by respondent and its counsel.
Petitioner's persistent assertions that he never acquired any loan from Ms. Picache, or
that he signed the promissory notes in blank and under duress, deserve scant
consideration. They were already found by both the Court of Appeals and the RTC to be
implausible and inconsistent with petitioner's own evidence.
Now this Court turns to the questions of law raised by petitioner, all of which hinges on
the contention that a conventional subrogation occurred when Ms. Picache assigned the
debt, due her from the petitioner, to the respondent; and without petitioner's consent as
debtor, the said conventional subrogation should be deemed to be without force and
effect.
This Court cannot sustain petitioner's contention and hereby declares that the
transaction between Ms. Picache and respondent was an assignment of credit, not
conventional subrogation, and does not require petitioner's consent as debtor for its
validity and enforceability.
An assignment of credit has been defined as an agreement by virtue of which the owner
of a credit (known as the assignor), by a legal cause - such as sale, dation in payment or
exchange or donation - and without need of the debtor's consent, transfers that credit
and its accessory rights to another (known as the assignee), who acquires the power to

enforce it, to the same extent as the assignor could have enforced it against the
debtor.20
On the other hand, subrogation, by definition, is the transfer of all the rights of the
creditor to a third person, who substitutes him in all his rights. It may either be legal or
conventional. Legal subrogation is that which takes place without agreement but by
operation of law because of certain acts. Conventional subrogation is that which takes
place by agreement of parties.21
Although it may be said that the effect of the assignment of credit is to subrogate the
assignee in the rights of the original creditor, this Court still cannot definitively rule that
assignment of credit and conventional subrogation are one and the same.
A noted authority on civil law provided a discourse22 on the difference between these
two transactions, to wit
Conventional Subrogation and Assignment of Credits. In the Argentine Civil
Code, there is essentially no difference between conventional subrogation and
assignment of credit. The subrogation is merely the effect of the assignment. In
fact it is expressly provided (article 769) that conventional redemption shall be
governed by the provisions on assignment of credit.
Under our Code, however, conventional subrogation is not identical to

assignment of credit. In the former, the debtor's consent is necessary; in the
latter, it is not required. Subrogation extinguishes an obligation and gives rise to

a new one; assignment refers to the same right which passes from one person to
another. The nullity of an old obligation may be cured by subrogation, such that
the new obligation will be perfectly valid; but the nullity of an obligation is not
remedied by the assignment of the creditor's right to another. (Emphasis
supplied.)
This Court has consistently adhered to the foregoing distinction between an assignment
of credit and a conventional subrogation.23 Such distinction is crucial because it would
determine the necessity of the debtor's consent. In an assignment of credit, the consent
of the debtor is not necessary in order that the assignment may fully produce the legal
effects. What the law requires in an assignment of credit is not the consent of the
debtor, but merely notice to him as the assignment takes effect only from the time he
has knowledge thereof. A creditor may, therefore, validly assign his credit and its
accessories without the debtor's consent. On the other hand, conventional subrogation
requires an agreement among the parties concerned the original creditor, the debtor,
and the new creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties.24
Article 1300 of the Civil Code provides that conventional subrogation must be clearly
established in order that it may take effect. Since it is petitioner who claims that there is
conventional subrogation in this case, the burden of proof rests upon him to establish
the same25 by a preponderance of evidence.26

In Licaros v. Gatmaitan,27 this Court ruled that there was conventional subrogation, not
just an assignment of credit; thus, consent of the debtor is required for the effectivity of
the subrogation. This Court arrived at such a conclusion in said case based on its
following findings
We agree with the finding of the Court of Appeals that the Memorandum of
Agreement dated July 29, 1988 was in the nature of a conventional subrogation
which requires the consent of the debtor, Anglo-Asean Bank, for its validity. We
note with approval the following pronouncement of the Court of Appeals:
"Immediately discernible from above is the common feature of contracts
involving conventional subrogation, namely, the approval of the debtor to
the subrogation of a third person in place of the creditor. That Gatmaitan
and Licaros had intended to treat their agreement as one of conventional
subrogation is plainly borne by a stipulation in their Memorandum of
Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the
nature, form and extent of their mutual prestations which they now
record herein with the express conformity of the third parties
concerned" (emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere
"assignee" of appellee's credit, there is simply no sense for them to have
stipulated in their agreement that the same is conditioned on the "express
conformity" thereto of Anglo-Asean Bank. That they did so only accentuates their
intention to treat the agreement as one of conventional subrogation. And it is
basic in the interpretation of contracts that the intention of the parties must be
the one pursued (Rule 130, Section 12, Rules of Court).
xxxx
Aside for the 'whereas clause" cited by the appellate court in its decision, we
likewise note that on the signature page, right under the place reserved for the
signatures of petitioner and respondent, there is, typewritten, the words "WITH
OUR CONFORME." Under this notation, the words "ANGLO-ASEAN BANK AND
TRUST" were written by hand. To our mind, this provision which contemplates
the signed conformity of Anglo-Asean Bank, taken together with the
aforementioned preambulatory clause leads to the conclusion that both parties
intended that Anglo-Asean Bank should signify its agreement and conformity to
the contractual arrangement between petitioner and respondent. The fact that
Anglo-Asean Bank did not give such consent rendered the agreement inoperative
considering that, as previously discussed, the consent of the debtor is needed in
the subrogation of a third person to the rights of a creditor.

None of the foregoing circumstances are attendant in the present case. The Assignment
of Credit, dated 1 April 1989, executed by Ms. Picache in favor of respondent, was a
simple deed of assignment. There is nothing in the said Assignment of Credit which
imparts to this Court, whether literally or deductively, that a conventional subrogation
was intended by the parties thereto. The terms of the Assignment of Credit only convey
the straightforward intention of Ms. Picache to "sell, assign, transfer, and convey" to
respondent the debt due her from petitioner, as evidenced by the two promissory notes
of the latter, dated 9 November 1988 and 10 November 1988, for the consideration
of P60,000.00. By virtue of the same document, Ms. Picache gave respondent full power
"to sue for, collect and discharge, or sell and assign" the very same debt. The
Assignment of Credit was signed solely by Ms. Picache, witnessed by two other persons.
No reference was made to securing the conforme of petitioner to the transaction, nor
any space provided for his signature on the said document.
Perhaps more in point to the case at bar is Rodriguez v. Court of Appeals,
Court found that
28
in which this
The basis of the complaint is not a deed of subrogation but an assignment of

credit whereby the private respondent became the owner, not the subrogee of
the credit since the assignment was supported by HK $1.00 and other valuable
considerations.
xxxx
The petitioner further contends that the consent of the debtor is essential to the
subrogation. Since there was no consent on his part, then he allegedly is not
bound.
Again, we find for the respondent. The questioned deed of assignment is neither
one of subrogation nor a power of attorney as the petitioner alleges. The deed of
assignment clearly states that the private respondent became an assignee and,
therefore, he became the only party entitled to collect the indebtedness. As a
result of the Deed of Assignment, the plaintiff acquired all rights of the assignor
including the right to sue in his own name as the legal assignee. Moreover, in
assignment, the debtor's consent is not essential for the validity of the
assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof
affecting only the validity of the payment he might make (Article 1626, Civil
Code).
Since the Assignment of Credit, dated 1 April 1989, is just as its title suggests, then
petitioner's consent as debtor is not necessary in order that the assignment may fully
produce legal effects. The duty to pay does not depend on the consent of the debtor;
otherwise, all creditors would be prevented from assigning their credits because of the
possibility of the debtors' refusal to give consent.29 Moreover, this Court had already
noted previously that there does not appear to be anything in Philippine statutes or
jurisprudence which prohibits a creditor, without the consent of the debtor, from
making an assignment of his credit and the rights accessory thereto; and, certainly, an
assignment of credit and its accessory rights does not at all obliterate the obligation of

the debtor to pay, but merely puts the assignee in the place of the assignor.30 Hence, the
obligation of petitioner to pay his debt subsists despite the assignment thereof; only, his
obligation after he came to know of the said assignment would be to pay the debt to the
respondent (the assignee), instead of Ms. Picache (the original creditor).
It bears to emphasize that even if the consent of petitioner as debtor is unnecessary for
the validity and enforceability of the assignment of credit, nonetheless, the petitioner
must have knowledge, acquired either by formal notice or some other means, of the
assignment so that he may pay the debt to the proper party, which shall now be the
assignee. This much can be gathered from a reading of Article 1626 of the Civil Code
providing that, "The debtor who, before having knowledge of the assignment, pays his
creditor shall be released from the obligation."
This Court, in Sison v. Yap Tico,31 presented and adopted Manresa's analysis of Article
1626 of the Civil Code (then Article 1527 of the old Civil Code)
Manresa, in commenting upon the provisions of article 1527 of the Civil Code,
after discussing the articles of the Mortgage Law, says:
"We have said that article 1527 deals with the individual phase or aspect which
presupposes the existence of a relationship with third parties, that is, with the
person of the debtor. Let us see in what way.
"The above-mentioned article states that a debtor who, before having knowledge
of the assignment, should pay the creditor shall be released from the obligation.
"In the first place, the necessity for the notice to the debtor in order that the
assignment may fully produce its legal effects may be inferred from the above. It
refers to a notice and not to a petition for the consent which is not necessary. We
say that the notice is not necessary in order that the legal effects may be fully
produced, because if it should be omitted, such omission will not imply that the
assignment will not exist legally, but that its effects will be limited to the parties
thereto; at least, they will not reach the debtor.
"* * * * * * * *
"Let us go to the legal effects produced by the failure to give the notice. In the
beginning, we have said that the contract does not lose its efficacy with respect
to the parties who made it; but article 1527 determines specifically one of the
consequences arising from the failure to give notice, for it evidently takes for
granted that the debtor who, before having knowledge of the assignment, should
pay the creditor shall be released from the obligation. So that if the creditor
assigned his credit, acting in bad faith and taking advantage of the fact that the
debtor does not know anything about the assignment because the latter has not
been notified, and collects its amount, the debtor shall be free from the
obligation, inasmuch as it has been legally extinguished by a payment which fully
redounds to his benefit. The assignee can take advantage of all civil and criminal
actions against the assignor, but he can ask nothing from the debtor, because the

latter did not know of the assignment, nor was he bound to know it; the assignor
should blame himself for his failure to have the notice made.
"* * * * * * * *
"Hence, there not having been any notice to the debtor, the existence of his
knowledge of the assignment should be proved by him who is interested therein;
and the debtor is not bound to prove his ignorance."
In a more recent case, Aquintey v. Spouses Tibong,32 this Court stated: "The law does
not require any formal notice to bind the debtor to the assignee, all that the law
requires is knowledge of the assignment. Even if the debtor had not been notified, but
came to know of the assignment by whatever means, the debtor is bound by it."
Since his consent is immaterial, the only other matter which this Court must determine
is whether petitioner had knowledge of the Assignment of Credit, dated 1 April 1989,
between Ms. Picache and respondent. Both the Court of Appeals and the RTC ruled in
the affirmative, and so must this Court. Petitioner does not deny having knowledge of
the assignment of credit by Ms. Picache to the respondent. In 1989, when petitioner's
loans became overdue, it was respondent and its counsel who sent several demand
letters to him. It can be reasonably presumed that petitioner received said letters for
they were sent by registered mail, and the return cards were signed by petitioner's
agent. Petitioner expressly acknowledged receipt of respondent's demand letter, dated
13 June 1989, to which he replied with another letter, dated 21 June 1989, stating that
he would settle his account with respondent but also requesting consideration of the
losses he suffered from the electric power disconnection at the property he leased from
MRMC. It further appears that petitioner had never questioned why it was respondent
seeking payment of the loans and not the original creditor, Ms. Picache. All these
circumstances tend to establish that respondent already knew of the assignment of
credit made by Ms. Picache in favor of respondent and explains his acceptance of all the
demands for payment of the loans made upon him by the respondent.
Finally, assuming arguendo that this Court considers petitioner a third person to the
Assignment of Credit, dated 1 April 1989, the fact that the said document was duly
notarized makes it legally enforceable even as to him. According to Article 1625 of the
Civil Code
ART. 1625. An assignment of credit, right or action shall produce no effect as
against third persons, unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the assignment involves real
property.
Notarization converted the Assignment of Credit, dated 1 April 1989, a private
document, into a public document,33 thus, complying with the mandate of the aforequoted provision and making it enforceable even as against third persons.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED,
and the Decision, dated 20 March 2001, of the Court of Appeals in CA-G.R. CV No.

43604, affirming in toto the Decision, dated 6 August 1993, of the Quezon City Regional
Trial Court, Branch 91, in Civil Case No. Q-90-5247, is hereby AFFIRMED. Costs against
the petitioner.
SO ORDERED.
ESTOPPEL
Art. 1431. Through estoppel an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person
relying thereon.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 161718
December 14, 2011
MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner,

vs.
DING VELAYO SPORTS CENTER, INC., Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before Us is a Petition for Review under Rule 45 of the Rules of Court of the
Decision1 dated January 8, 2004 of the Court Appeals in CA-G.R. CV No. 68787, affirming
the Decision2 dated October 29, 1999 of Branch 111 of the Regional Trial Court (RTC) of
Pasay City in Civil Case No. 8847, which granted the Complaint for Injunction,
Consignation, and Damages with prayer for a Temporary Restraining Order filed by
respondent Ding Velayo Sports Center, Inc. against petitioner Manila International
Airport Authority (MIAA), and essentially compelled petitioner to renew the lease of
respondent over a parcel of land within the airport premises.
Below are the facts as culled from the records of the case:
On February 15, 1967, petitioner (then still called the Civil Aeronautics Administration
or CAA) and Salem Investment Corporation (Salem) entered into a Contract of Lease
whereby petitioner leased in favor of Salem a parcel of land known as Lot 2-A, with an
area of 76,328 square meters, located in front of the Manila International Airport (MIA)
in Pasay City, and registered under Transfer Certificate of Title (TCT) No. 6735 in the
name of the Republic (Lot 2-A). Petitioner and Salem entered into said Contract of Lease
for the following reasons:

WHEREAS, this particular portion of land is presently an eyesore to the airport premises
due to the fact that a major portion of it consists of swampy and talahib infested silt and
abandoned fishponds and occupied by squatters and some [petitioners] employees with
ungainly makeshift dwellings;
WHEREAS, the LESSOR, in accordance with its general plan to improve and beautify the
airport premises, is interested in developing this particular area by providing such
facilities and conveniences as may be necessary for the comfort, convenience and
relaxation of transients, tourists and the general public;
WHEREAS, the LESSEE, a corporation engaged in hostelry and other allied business, is
ready, willing and able to cooperate with the LESSOR in the implementation of this
general development plan for the airport premises;
xxxx
WHEREAS, the LESSEEs main interest is to have a sufficient land area within which to
construct a modern hotel with such facilities as would ordinarily go with modern
hostelry, including recreation halls, facilities for banks, tourist agencies, travel bureaus,
laundry shops, postal stations, curio and native shops and other allied business
calculated to make the hotel and its facilities comfortable, convenient and attractive,
and for this purpose, an initial land area of some Thirty[-]Five Thousand Ten (35,010)
square meters would be first utilized.3
The term of the lease and renewal thereof as stipulated upon by petitioner and Salem
are as follows:
3. That the term of the lease shall be for a period of Twenty-Five (25) years,
commencing from the date of receipt of approval of this Contract by the Secretary of
Public Works and Communications, and at the option of the LESSEE, renewable for
another Twenty-Five (25) years. It is understood, that after the first 25 years lease, the
ownership of, and full title to, all the buildings and permanent improvements introduced
by the LESSEE on the leased premises including those introduced on the Golf Driving
Range shall automatically vest in the LESSOR, without cost.
Upon the termination of the lease or should the LESSEE not exercise this option for
renewal, the LESSEE shall deliver the peaceful possession of all the building and other
permanent improvements herein above referred to, with the understanding that the
LESSEE shall have the right to remove from the premises such equipment, furnitures,
accessories and other articles as would ordinarily be classified as movable property
under pertinent provisions of law.
4. That the renewal of this lease contract shall be for another period of Twenty-Five (25)
years, under the same terms and conditions herein stipulated; provided, however that,
since the ownership of the hotel building and permanent improvement have passed on
the LESSOR, the LESSEE shall pay as rental, in addition to the rentals herein agreed
upon, an amount equivalent to One percent (1%) of the appraised value of the hotel

building and permanent improvements at the time of expiration of Twenty-Five (25)
years lease period, payable annually.4
Subsequently, in a Transfer of Lease Rights and Existing Improvements dated
September 30, 1974, Salem conveyed in favor of Ding Velayo Export Corporation
(Velayo Export), for the consideration of P1,050,000.00, its leasehold rights over a
portion of Lot 2-A, measuring about 15,534 square meters, with the improvements
thereon, consisting of an unfinished cinema-theater. Accordingly, petitioner and Velayo
Export executed a Contract of Lease dated November 26, 1974 pertaining to the
aforementioned leased portion of Lot 2-A.
In turn, Velayo Export executed a Transfer of Lease Rights dated April 27, 1976 by
which it conveyed to respondent, for the consideration of P500,000.00, its leasehold
rights over an 8,481-square meter area (subject property) out of the 15,534-square
meter portion it was leasing from petitioner. As a result, petitioner and respondent
executed another Contract of Lease5 dated May 14, 1976 covering the subject property.
The Contract of Lease dated May 14, 1976 between petitioner (as lessor) and
respondent (as lessee) specified how respondent shall develop and use the subject
property:
2. That the LESSEE shall utilize the premises as the site for the construction of a Sports
Complex facilities and shopping centers in line with the Presidential Decree for Sports
Development and Physical Fitness, including the beautification of the premises and
providing cemented parking areas.
3. That the LESSEE shall construct at its expense on the leased premises a parking area
parallel to and fronting the Domestic Airport Terminal to be open to the traveling public
free of charge to ease the problem of parking congestion at the Domestic Airport.6
Pursuant to the aforequoted objectives, respondent agreed to the following:
9. Physical improvements on building spaces and areas subject of this agreement may
be undertaken by and at the expenses of the LESSEE. However, no improvements may
be commenced without prior approval of the plans by the LESSOR and, whenever
deemed necessary a cash deposit shall be made in favor of the LESSOR which shall be
equivalent to the cost of restoration of any portion affected by such alteration or
improvements;
10. The LESSEE agrees and binds himself to complete the physical improvements or
contemplated structures within the leased premises for a period of one (1) year. Failure
on the part of the LESSEE to do so within said period shall automatically revoke the
Contract of Lease without necessity of judicial process.7
The lease rental shall be computed as follows:
5. That the LESSEE shall pay to the LESSOR as monthly rentals for the leased premises
the rate of P0.45 per square meter for the first 300 square meters, P0.30 per square

meter for the next 500 square meters, and P0.25 per square meter for the remaining
area pursuant to Part VIII, Section 4 of Administrative Order No. 4, Series of 1970,
which in the case of the 8,481 square meters herein leased shall amount to P2,205.25
per month, or a royalty equivalent to one percent (1%) of the monthly gross income of
the LESSEE, whichever is higher.
6. That for the purpose of accurately determining the monthly gross income, the LESSEE
hereby gives its consent for the examination of the books by authorized representatives
of the LESSOR or the Commission on Audit;
xxxx
13. If, during the lifetime of this agreement and upon approval by the LESSOR, the
leased area is increased or diminished, or the LESSEE is relocated to another area,
rentals, fees, and charges imposed shall be amended accordingly. Subsequent
amendments to the Administrative Order which will affect an increase of the rates of
fees, charges and rentals agreed upon in this contract shall automatically amend this
contract to the extent that the rates of fees, rentals, and charges are increased.
In the event of relocation of the LESSEE to other areas, the cost of relocation shall be
shouldered by the LESSEE.8
Nonpayment of lease rentals shall have the following consequence:
8. Failure on the part of the LESSEE TO PAY ANY fees, charges, rentals or the royalty of
one percent (1%) within thirty (30) days after receipt of written demand, the LESSOR
shall deny the LESSEE of the further use of the leased premises and /or any of its
facilities, utilities and services. x x x.9
The Contract of Lease prohibits respondent from transferring its leasehold rights,
engaging in any other business outside those mentioned in said Contract, and subletting
the premises whether in whole or in part, thus:
16. The LESSEE agrees not to assign, sell, transfer or mortgage his rights under this
agreement or sublet the whole or part of premises covered by it to a third party or
parties nor engage in any other business outside of those mentioned in this contract.
Violation of this provision shall also be a ground for revocation of the lease contract
without need of judicial process.10
Period of the lease and renewal thereof are governed by paragraphs 4 and 17 of the
Contract of Lease that read:
4. That the period of this lease shall take effect from June 1, 1976 up to February 15,
1992 which is equivalent to the unexpired portion of the lease contract executed
between [petitioner] and Ding Velayo Export Corporation.
xxxx

17. The LESSEE, if desirous of continuing his lease, should notify the LESSOR sixty (60)
days prior to expiration of the period agreed upon for the renewal of the Contract of
Lease.11
The lease may be revoked/terminated under the following conditions:
15. This contract of lease may be terminated by other party upon thirty (30) days notice
in writing. Failure on the part of the LESSEE to comply with any of the provisions of this
lease contract or any violation of any rule or regulations of the Airport shall give the
LESSOR the right to revoke this contract effective thirty (30) days after notice of
revocation without need of judicial demand. However, the LESSEE shall remain liable
and obligated to pay rentals and other fees and charges due and in arrears with interest
at the rate of twelve percent (12%) per annum;
xxxx
18. Upon termination or revocation of this contract of lease as herein provided, the
LESSEE shall deliver possession of the premises to the LESSOR in the same condition
that they were received giving allowance to normal wear and tear and to damage or
destruction caused by act of God. All permanent improvements, however, which the
LESSEE might have constructed in the premises by virtue hereof shall upon the
termination of this lease automatically become the absolute property of the LESSOR
without cost;
19. In the event that the LESSOR shall need the leased premises in its airport
development program, the LESSEE agrees to vacate the premises within thirty (30) days
from receipt of notice. All improvements not removed by the LESSEE within the thirty
(30) day period shall become the property of the LESSOR without cost.12
Respondent began occupying the subject property and paying petitioner the amount
of P2,205.25 per month as rental fee. Respondent then constructed a multi-million plaza
with a three-storey building on said property. Respondent leased spaces in the building
to various business proprietors.
In a Letter13 dated April 11, 1979, petitioner requested respondent for a copy of the
latters Gross Income Statement from December 1977 to December 1978, duly certified
by a certified public accountant, for the purpose of computing the royalty equivalent to
1% of the monthly gross income of respondent. Acceding to this request, respondent
sent petitioner a Letter14 dated May 31, 1979 and appended therewith the requested
income statements which disclosed that the total gross income of respondent for the
period in question amounted toP1,972,968.11. Respondent also submitted to petitioner
and the Commission on Audit (COA) its duly audited financial statements15 for the years
1984 to 1988. Meanwhile, petitioner had continued billing respondent the amount
of P2,205.25 as monthly rental fee, which the latter obediently paid.
Petitioner eventually issued Administrative Order (AO) No. 4, series of 1982,16 and AO
No. 1, series of 1984, fixing various rates for the lease rentals of its properties. AO No. 4,
series of 1982, and AO No. 1, series of 1984, allegedly effected an increase in the lease

rental of respondent for the subject property, as provided for in paragraph 13 of the
Contract of Lease dated May 14, 1976 between petitioner and respondent. However,
said issuances were subjected to review for revision purposes and their implementation
was suspended. Still, petitioner, through a letter dated September 23, 1986, required
respondent to pay a moratorium rental at the rate of P5.00 per square meter rate per
month or a total of P42,405.00 every month.
In a Letter17 dated October 18, 1986, respondent opposed the implementation of any
increase in its lease rental for the subject property. Respondent wrote:
We believe that an increase in rental of a property which does not form part of the
Airport or its immediate premises, like the premises leased to DVSC, although owned by
MIAA is not covered by Batas Pambansa Blg. 325 or Finance Ministry Order No. 6-83.
Furthermore, the language of B.P. No. 325 and Ministry Order No. 6-83 authorizes the
fixing or revision of fees and charges only for "services and functions."
xxxx
Assuming that the increase in rental of MIAA property is authorized by B.P. No. 325 and
Ministry Order No. 6-83, such increase as ordered in your moratorium rental rate insofar
as it is made applicable to DVSC is not valid.
The increase which is around 2,000 percent or 20 times above present rental rate is
unreasonably high. Both B.P. No. 325 and Ministry Order No. 6-83 prescribed only "just
and reasonable rates sufficient to cover administrative costs."
Such increase in rental is uncalled for considering that:
Upon termination of the lease, all the improvements on the property shall belong to
MIAA without costs. The original cost of the buildings and other improvements on the
land we have leased is P10,600,000.00. Said improvements would now cost
over P30,000,000.00. In effect the Government would be collecting another P2.0 million
a year.
We, therefore, request that the moratorium rate be not applied to us.
Following the foregoing exchange, petitioner had kept on charging respondent the
original monthly rental ofP2,205.25.
More than 60 days prior to the expiration of the lease between petitioner and
respondent, the latter, through its President, Conrado M. Velayo (Velayo), sent the
former a Letter18 dated December 2, 1991 stating that respondent was interested in
renewing the lease for another 25 years.
Petitioner, through its General Manager, Eduardo O. Carrascoso, in a Letter19 dated
February 24, 1992, declined to renew the lease, ordered respondent to vacate the

subject property within five days, and demanded respondent to pay arrears in lease
rentals as of January 1992 in the sum of P15,671,173.75.
Velayo, on behalf of respondent, replied to petitioner through a Letter20 dated March 3,
1992 that reads:
This refers to your letters which we received on 26 February 1992 and 27 February
1992, respectively, the first as a response to our letter of 2 December 1991 where we
informed you of our intention to renew our lease contract, and the second wherein you
asked us to vacate within five (5) days the leased premises.
Your second letter surprised us inasmuch as we have been negotiating with you for the
renewal of our lease. In addition, your sudden decision gave us no time to discuss your
terms and conditions with our Board considering that the issues involved major
decision.
For a smoother transition and for the mutual interest of the government, the tenants
and ourselves, may we request for a reconsideration of your decision, and we be given
up to the end of March 1992 to peacefully turn-over to you the leased premises. This will
enable you to create a committee that will take-over the leased property and its
operations.
Likewise, consistent with our previous stand as communicated to you by our legal
counsel, copy of which is hereto attached, we deny any liability on rental increases.
In Letters21 all dated March 10, 1992, Velayo informed petitioner that he already sent
individual letters to Manila Electric Company, Philippine Long Distance Telephone
Company, and Manila Waterworks and Sewerage System, instructing the said utility
companies that succeeding billings for electric, telephone, and water consumptions
should already be transferred to the account of petitioner in light of the expected turnover of the subject property and improvements thereon from respondent to petitioner.
However, around the same time, Samuel Alomesen (Alomesen) became the new
President and General Manager of respondent, replacing Velayo. Alomesen, acting on
behalf of respondent, sent petitioner a Letter22 dated March 25, 1992, revoking the
aforementioned Letters dated March 3 and 10, 1992 since these were purportedly sent
by Velayo without authority from respondents Board of Directors. Respondent
expressed its interest in continuing the lease of the subject property for another 25
years and tendered to petitioner a managers check in the amount of P8,821.00 as
payment for the lease rentals for the subject property from December 1991 until March
1992.
Petitioner entirely disregarded the claims of respondent and threatened to take-over the
subject property.
On March 30, 1992, respondent filed against petitioner before the RTC a Complaint for
Injunction, Consignation, and Damages with a Prayer for a Temporary Restraining
Order.23 Respondent essentially prayed for the RTC to order the renewal of the Contract

of Lease between the parties for another 25-year term counted from February 15, 1992.
On even date, the RTC issued a Temporary Restraining Order24 preventing petitioner and
all persons acting on its behalf from taking possession of the entire or any portion of the
subject property, from administering the said property, from collecting rental payments
from sub-lessees, and from taking any action against respondent for the collection of
alleged arrears in rental payments until further orders from the trial court.
In its Answer,25 petitioner contended that its Contract of Lease with respondent was
already terminated on February 15, 1992, the expiration date explicitly stated under
paragraph 4 of the same Contract. Petitioner was not bound to renew the Contract of
Lease with respondent. The renewal provision under paragraph 17 of the Contract was
not automatic but merely directory and procedural and that, in any event, Velayo, the
former President of respondent, already conceded to the non-renewal of the Contract.
Petitioner likewise invoked paragraph 15 of the Contract of Lease, i.e., its right to
revoke the said Contract in case of violation of any of the provisions thereof by
respondent. Petitioner averred that respondent committed the following violations: (1)
respondent failed to fulfill the conditions set forth under paragraphs 2 and 3 of the
Contract as it did not establish a shopping center on the subject property and did not
help ease the problems of parking congestion at the Domestic Airport; (2) respondent
"sub-leased" the subject property in defiance of the prohibition under paragraph 16 of
the Contract; and (3) respondent did not pay the lease rentals in accordance with
paragraphs 5 and 13 of the Contract, thus, incurring a total outstanding balance
of P15,671,173.75 as of February 1992.
By way of counter-claim, petitioner demanded that respondent pay the total
outstanding balance of its lease rentals for the subject property and turn-over lease
rentals it had collected from sub-lessees beginning February 15, 1992.
After the preliminary hearing, the RTC issued a Writ of Preliminary Injunction26 against
petitioner on April 30, 1992 upon the posting by respondent of a bond in the amount
of P100,000.00.
In an Order27 dated June 11, 1996, the RTC denied the Omnibus Motion of petitioner for
the dissolution of the writ of injunction and appointment of a receiver for the fruits of
the subject property; and at the same time, granted the motion of respondent for the
consignment of their monthly lease rentals for the subject property with the RTC.
The RTC terminated the pre-trial proceedings in an Order28 dated October 23, 1997 for
failure of the parties to amicably settle the dispute. Thereafter, trial on the merits
ensued.
Respondent presented the testimonies of Mariano Nocom, Jr.,29 Gladioluz
Segundo,30 Mariano Nocom, Sr.,31and Rosila Mabanag.32 The RTC admitted all the
documentary evidence of respondent in an Order33 dated December 14, 1998.
Petitioner, on the other hand, presented the lone testimony of their accounting
manager, Arlene Britanico.34Among the numerous documents submitted by petitioner as

evidence were its own issuances imposing various rates for the lease of its properties,
which allegedly effected an increase in the lease rentals of respondent for the subject
property, specifically, AO No. 4, series of 1982;35 AO No. 1, series of 1984;36 AO No. 1,
series of 1990;37AO No. 1, series of 1993;38 Resolution No. 94-74,39 Resolution No. 9632,40 and Resolution No. 97-51,41 all amending AO No. 1, series of 1993; and AO No. 1,
series of 1998.42 All of the documentary evidence of petitioner were admitted by the RTC
in an Order43 dated May 28, 1999.
In its Decision dated October 29, 1999, the RTC ruled in favor of respondent, disposing
thus:
WHEREFORE, judgment is hereby rendered in favor of [respondent] and against
[petitioner].
Accordingly, [petitioner] is hereby ordered to:
1. Grant renewal of the lease contract for the same term as stipulated in the old
contract and the rental to be based on the applicable rate of the time or renewal;
2. To respect and maintain [respondents] peaceful possession of the premises;
3. To accept the rental payment consigned by the [respondent] to the court
beginning December 1991 onward until and after a renewal has been duly
executed by both parties;
4. To pay [respondent] as and by way of attorneys fees the sum of P500,000.00;
and
5. To pay the cost of suit.44
Petitioner appealed the RTC judgment before the Court of Appeals and assigned these
errors:
I. The trial court gravely erred in declaring that [respondent] is entitled to a
renewal of the contract of lease.
II. The trial court gravely erred in ordering the renewal of the contract of lease
despite of the fact that it has no legal authority to do so.
III. The trial court gravely erred in declaring that [respondent] did not violate the
terms and conditions of the contract.
IV. The trial court gravely erred in declaring that [petitioners] act of effecting
the increase in the rental during the stipulated lifetime of the contract has no
valid basis.

V. The trial court gravely erred in not finding that [petitioner] is entitled to its
counterclaim.45
The Court of Appeals promulgated its Decision on January 8, 2004, finding no reversible
error in the appealed judgment of the RTC and decreeing as follows:
WHEREFORE, finding no reversible error committed by the trial court, the instant appeal
is hereby DISMISSED, and the assailed decision is hereby AFFIRMED.46
Hence, the instant Petition for Review, wherein petitioner basically attributed to the
Court of Appeals the very same errors it assigned to the RTC.
Petitioner argues that the renewal of the Contract of Lease cannot be made to depend
on the sole will of respondent for the same would then be void for being a potestative
condition.
We do not agree. As we have already explained in Allied Banking Corporation v. Court of
Appeals 47 :
Article 1308 of the Civil Code expresses what is known in law as the principle of
mutuality of contracts. It provides that "the contract must bind both the contracting
parties; its validity or compliance cannot be left to the will of one of them." This binding
effect of a contract on both parties is based on the principle that the obligations arising
from contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant
to have one party bound by the contract while leaving the other free therefrom. The
ultimate purpose is to render void a contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is
frequent and subject to statutory restrictions, valid and binding on the parties. This
option, which is provided in the same lease agreement, is fundamentally part of the
consideration in the contract and is no different from any other provision of the lease
carrying an undertaking on the part of the lessor to act conditioned on the performance
by the lessee. It is a purely executory contract and at most confers a right to obtain a
renewal if there is compliance with the conditions on which the right is made to depend.
The right of renewal constitutes a part of the lessee's interest in the land and forms a
substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the
lessee does not render it void for lack of mutuality. After all, the lessor is free to give or
not to give the option to the lessee. And while the lessee has a right to elect whether to
continue with the lease or not, once he exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the new lease agreement. Their rights and
obligations become mutually fixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor may hold him liable for the
rent therefor. The lessee cannot thereafter escape liability even if he should
subsequently decide to abandon the premises. Mutuality obtains in such a contract and

equality exists between the lessor and the lessee since they remain with the same
faculties in respect to fulfillment.48
Paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and
respondent solely granted to respondent the option of renewing the lease of the subject
property, the only express requirement was for respondent to notify petitioner of its
decision to renew the lease within 60 days prior to the expiration of the original lease
term. It has not been disputed that said Contract of Lease was willingly and knowingly
entered into by petitioner and respondent. Thus, petitioner freely consented to giving
respondent the exclusive right to choose whether or not to renew the lease. As we
stated in Allied Banking, the right of renewal constitutes a part of the interest of
respondent, as lessee, in the subject property, and forms a substantial and integral part
of the lease agreement with petitioner. Records show that respondent had duly
complied with the only condition for renewal under Section 17 of the Contract of Lease
by notifying petitioner 60 days prior to the expiration of said Contract that it chooses to
renew the lease. We cannot now allow petitioner to arbitrarily deny respondent of said
right after having previously agreed to the grant of the same.
Equally unmeritorious is the assertion of petitioner that paragraph 17 of the Contract of
Lease dated May 14, 1976 merely provides a procedural basis for a negotiation for
renewal of the lease and the terms thereof. The exercise by respondent of its option to
renew the lease need no longer be subject to negotiations. We reiterate the point we
made in Allied Banking that:
[I]f we were to adopt the contrary theory that the terms and conditions to be embodied
in the renewed contract were still subject to mutual agreement by and between the
parties, then the option - which is an integral part of the consideration for the contract would be rendered worthless. For then, the lessor could easily defeat the lessee's right
of renewal by simply imposing unreasonable and onerous conditions to prevent the
parties from reaching an agreement, as in the case at bar. As in a statute, no word,
clause, sentence, provision or part of a contract shall be considered surplusage or
superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably
avoided. To this end, a construction which will render every word operative is to be
preferred over that which would make some words idle and nugatory.49
In case the lessee chooses to renew the lease but there are no specified terms and
conditions for the new contract of lease, the same terms and conditions as the original
contract of lease shall continue to govern, as the following survey of cases in Allied
Banking would show:
In Ledesma v. Javellana this Court was confronted with a similar problem. In that case
the lessee was given the sole option to renew the lease, but the contract failed to
specify the terms and conditions that would govern the new contract. When the lease
expired, the lessee demanded an extension under the same terms and conditions. The
lessor expressed conformity to the renewal of the contract but refused to accede to the
claim of the lessee that the renewal should be under the same terms and conditions as
the original contract. In sustaining the lessee, this Court made the following
pronouncement:

x x x [i]n the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this
Court. It was held that 'such a clause relates to the very contract in which it is placed,
and does not permit the defendant upon the renewal of the contract in which the clause
is found, to insist upon different terms than those embraced in the contract to be
renewed'; and that 'a stipulation to renew always relates to the contract in which it is
found and the rights granted thereunder, unless it expressly provides for variations in
the terms of the contract to be renewed.'
The same principle is upheld in American Law regarding the renewal of lease contracts.
In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: 'The rule is wellestablished that a general covenant to renew or extend a lease which makes no
provision as to the terms of a renewal or extension implies a renewal or extension upon
the same terms as provided in the original lease.'
In the lease contract under consideration, there is no provision to indicate that the
renewal will be subject to new terms and conditions that the parties may yet agree
upon. It is to renewal provisions of lease contracts of the kind presently considered that
the principles stated above squarely apply. We do not agree with the contention of the
appellants that if it was intended by the parties to renew the contract under the same
terms and conditions stipulated in the contract of lease, such should have expressly so
stated in the contract itself. The same argument could easily be interposed by the
appellee who could likewise contend that if the intention was to renew the contract of
lease under such new terms and conditions that the parties may agree upon, the
contract should have so specified. Between the two assertions, there is more logic in the
latter.
The settled rule is that in case of uncertainty as to the meaning of a provision granting
extension to a contract of lease, the tenant is the one favored and not the landlord. 'As a
general rule, in construing provisions relating to renewals or extensions, where there is
any uncertainty, the tenant is favored, and not the landlord, because the latter, having
the power of stipulating in his own favor, has neglected to do so; and also upon the
principle that every man's grant is to be taken most strongly against himself (50 Am Jur.
2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'50 (Emphases supplied.)
Being consistent with the foregoing principles, we sustain the interpretation of the RTC
of paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and
respondent, to wit:
[Paragraph 17 of the Contract of Lease dated May 14, 1976] admits several meanings.
In simpler terms, the phrase, i.e., "if desirous of continuing his lease, may be simply
restated, i.e., if he wants to go on with his lease, considering the word `CONTINUE in
its verb form ordinarily means to go on in present state, or even restated in another
way if desirous of extending his lease, because the word `continue in its verb form
also means extend uniformly." Thus, if we are to adopt the interpretation of
[petitioner] that the stipulation merely established the procedural basis for a
negotiation for renewal then the aforequoted phrase would be rendered a mere
surplusage, meaningless and insignificant. But if we are to prod deeper to the very
context of the entire stipulations setforth in the contract and from what is obvious with

respect to the intentions of the contracting parties based on their contemporaneous and
subsequent acts including but not limited to the historical antecedents of the agreement
then an interpretation invariably different from that of [petitioner] becomes inevitable.
Specifically, the extraneous source of the lease contract in question could be the original
and renewed contract of lease by and between Salem Investment Corporation and CAA
the predecessor-in-interest of [petitioner] executed on February 10, 1967 (Exh.
"M"). Under the said lease contract between CAA and Salem, the term is for a period of
twenty-five (25) years renewable for another 25 years at the option of the lessee
Salem (Exh. "Y-1"). Later, with the approval of CAA, Salem transferred its leasehold
rights over a portion of the land leased to Ding Velayo Export Corporation on September
30, 1974 (Exh. "N") and in turn Velayo Export transferred its leasehold rights over a
portion of the leased land transferred to it by Salem to Velayo Sports Complex, Inc.
[respondent] herein on April 29, 1976 (Exh. "O"). Thus, on May 14, 1976, [respondent]
and CAA, predecessor-in-interest of [petitioner], concluded the lease agreement in
question with a term equivalent to the unexpired portion of the lease between Velayo
Export and CAA.
As culled from the transfers effected prior to the May 14, 1976 agreement of
[respondent] and [petitioner]s predecessor-in-interest, the renewal of the contract was
clearly at the option of the lessee. Considering that there was no evidence positively
showing that [respondent] and CAA expressly intended the removal of the option for the
renewal of the lease contract from the lessee, it is but logical to conclude, although the
stipulation setforth in paragraph 17 appears to have been worded or couched in
somewhat uncertain terms, that the parties agreed that the option should remain with
the lessee. This must be so because based on the context of their agreements and
bolstered by the testimony of Mr. Mariano Nocom of Salem Investment and particularly
Rosila Mabanag, one of the signatory witness to the contract and a retired employee of
CAAs Legal Division the parties really intended a renewal for the same term as it was
then the usual practice of CAA to have the term of leases on lands where substantial
amount will be involved in the construction of the improvements to be undertaken by
the lessee to give a renewal. In fact, it clearly appears that the right of renewal
constitutes a part of the lessees interest in the land considering the multimillion
investments it made relative to the construction of the building and facilities thereon
and forms a substantial and integral part of the agreement.51 (Emphases supplied.)
In sum, the renewed contract of lease of the subject property between petitioner and
respondent shall be based on the same terms and conditions as the original contract of
lease. The "original contract of lease" does not pertain to the Contract of Lease dated
May 14, 1976 between petitioner and respondent alone, but also to the Contract of
Lease dated February 15, 1967 between petitioner (then still called CAA) and Salem, as
well as the Contract of Lease dated November 26, 1974 between petitioner and Velayo
Export all three contracts being inextricably connected. Since the Contract of Lease
between petitioner and Salem was for a term of 25 years, then the renewed contract of
lease of between petitioner and respondent shall be for another term of 25 years. This
construction of the renewal clause under paragraph 17 of the Contract of Lease dated
May 14, 1976 between petitioner and respondent is most consistent with the intent of

the parties at the time of the execution of said Contract and most effectual in
implementing the same.
In addition to challenging the exclusive right of respondent to renew the Contract of
Lease over the subject property, petitioner insists on its right to refuse the renewal
because of purported violations of the said Contract by respondent, particularly: (1)
subleasing of the premises; (2) failure to ease the problems of parking congestion at the
Domestic Airport and to provide a shopping center and sports facilities, such as an oval
track and a swimming pool; and (3) failure to pay monthly lease rentals in the form of
royalties equivalent to 1% of the gross income of respondent or in accordance with the
rates fixed in the administrative orders of petitioner.
We find no violations by the respondent of the Contract of Lease dated May 14, 1976 as
to justify the revocation or refusal to renew of said Contract by petitioner.
The RTC is once again correct in its construal that paragraph 16 of the Contract of
Lease, prohibiting the subleasing of the "premises," refers only to the subject property.
We stress that when the said Contract was executed on May 14, 1976, the "premises"
leased by petitioner to respondent, and which respondent was not allowed to sublease,
is the subject property, i.e., an idle piece of land with an area of 8,481 square meters.
More importantly, being the builder of the improvements on the subject property, said
improvements are owned by respondent until their turn-over to petitioner at the end of
the 25-year lease in 1992. As respondent is not leasing the improvements from
petitioner, then it is not subleasing the same to third parties.
While the Contract of Lease expressly obligated respondent to build certain
improvements, such as parking, shopping mall, and sports facilities, the belated
insistence by petitioner on compliance with the same appears to be a mere
afterthought.
Article 1235 of the Civil Code states that "[w]hen the obligee accepts the performance,
knowing its incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with."
As aptly observed by the RTC, paragraphs 9 and 10 of the Contract of Lease likewise
expressly require respondent to submit, for prior approval by petitioner, all construction
plans on the subject property; and to complete the contemplated improvements thereon
within a year. The Contract of Lease was executed on May 14, 1976, and the one-year
period expired on May 14, 1977. Yet, petitioner did not register any protest or objection
to the alleged incompleteness of or irregularity in the performance by respondent of its
obligation to build and develop improvements on the subject property. In fact, upon the
expiration of the original 25-year lease period in February 1992, petitioner was already
ready and willing to accept and appropriate as its own the improvements built on the
subject property in 1992. Petitioner only raised the issue of the purported
incompleteness/irregularity of the said improvements when it was brought to court by
respondent for refusing to renew the lease.

Just as the RTC adjudged, no fault could be attributed to respondent for deficient
payment of lease rentals. Lease rentals were based on either the rates fixed by AO No.
4, series of 1970, or 1% of the monthly gross income of respondent, whichever is
higher. At the very beginning of the lease, respondent had been paying monthly lease
rentals based on the rates fixed by AO No. 4, series of 1970, which amounted
to P2,205.25 per month. When requested, respondent submitted to petitioner its gross
income statements, so petitioner could very well compute the 1% royalty. However,
petitioner continued to charge respondent only P2,205.25 monthly lease rental, which
the latter faithfully paid.
Petitioner later demanded an increase in lease rentals based on subsequent
administrative issuances raising the rates for the rental of its properties. But the RTC
found that the adverted administrative orders were not published in full, thus, the same
were legally invalid within the context of Article 2 of the Civil Code which provides that
"[l]aws shall take effect after fifteen days following the completion of their publication
in the Official Gazette, unless it is otherwise provided. x x x" In Taada v.
Tuvera,52http://sc.judiciary.gov.ph/jurisprudence/2008/april2008/173918.htm _ftn we enunciated that publication is indispensable in order that all statutes, including
administrative rules that are intended to enforce or implement existing laws, attain
binding force and effect, to wit:
We hold therefore that all statutes, including those of local application and private laws,
shall be published as a condition for their effectivity, which shall begin fifteen days after
publication unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by the
President in the exercise of legislative powers whenever the same are validly delegated
by the legislature or, at present, directly conferred by the Constitution. Administrative
rules and regulations must also be published if their purpose is to enforce or implement
existing law pursuant also to a valid delegation.53
There is no basis for the argument of petitioner that the validity of its administrative
orders cannot be collaterally attacked. To the contrary, we have previously declared that
a party may raise the unconstitutionality or invalidity of an administrative regulation on
every occasion that said regulation is being enforced.54 Since it is petitioner which first
invoked its administrative orders to justify the increase in lease rentals of respondent,
then respondent may raise before the court the invalidity of said administrative orders
on the ground of non-publication thereof.
Finally, petitioner cannot oppose the renewal of the lease because of estoppel. Our
following disquisition in Kalalo v. Luz55 is relevant herein:
Under Article 1431 of the Civil Code, in order that estoppel may apply the person, to
whom representations have been made and who claims the estoppel in his favor must
have relied or acted on such representations. Said article provides:

"Art. 1431. Through estoppel an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person
relying thereon."
An essential element of estoppel is that the person invoking it has been influenced and
has relied on the representations or conduct of the person sought to be estopped, and
this element is wanting in the instant case. In Cristobal vs. Gomez, this Court held that
no estoppel based on a document can be invoked by one who has not been misled by
the false statements contained therein. And in Republic of the Philippines vs. Garcia, et
al., this Court ruled that there is no estoppel when the statement or action invoked as its
basis did not mislead the adverse party. Estoppel has been characterized as harsh or
odious, and not favored in law. When misapplied, estoppel becomes a most effective
weapon to accomplish an injustice, inasmuch as it shuts a man's mouth from speaking
the truth and debars the truth in a particular case. Estoppel cannot be sustained by mere
argument or doubtful inference; it must be clearly proved in all its essential elements by
clear, convincing and satisfactory evidence. No party should be precluded from making
out his case according to its truth unless by force of some positive principle of law, and,
consequently, estoppel in pais must be applied strictly and should not be enforced
unless substantiated in every particular.
1wphi1
The essential elements of estoppel in pais may be considered in relation to the party
sought to be estopped, and in relation to the party invoking the estoppel in his favor. As
related to the party to be estopped, the essential elements are: (1) conduct amounting
to false representation or concealment of material facts; or at least calculated to convey
the impression that the facts are otherwise than, and inconsistent with, those which the
party subsequently attempts to assert; (2) intent, or at least expectation that his
conduct shall be acted upon by, or at least influence, the other party; and (3)
knowledge, actual or constructive, of the real facts. As related to the party claiming the
estoppel, the essential elements are (1) lack of knowledge and of the means of
knowledge of the truth as the facts in questions; (2) reliance, in good faith, upon the
conduct or statements of the party to be estopped; (3) action or inaction based thereon
of such character as to change the position or status of the party claiming the estoppel,
to his injury, detriment or prejudice.56 (Emphases ours.)
Indeed, Velayos Letters dated March 3 and 10, 1992 to petitioner may have already
expressed acquiescence to the non-renewal of the lease and turn-over of the
improvements on the subject property to petitioner. But not long thereafter, Alomesen,
the new President of respondent, already wrote another Letter dated March 25, 1992,
which revoked Velayos earlier Letters for having been sent without authority of the
Board of Directors of respondent, insisted on the renewal of the lease, and tendered
payment of past due lease rentals. Respondent, through Alomesen, timely acted to
correct Velayos mistakes. In the 15-day interval between Velayos Letter dated March
10, 1992 and Alomesens Letter dated March 25, 1992, there is no showing that
petitioner, relying in good faith on Velayos Letters, acted or did not act as to have
caused it injury, detriment, or prejudice. There is an utter lack of clear, convincing, and
satisfactory evidence on the part of petitioner, as the party claiming estoppel, of the
second and third elements for the application of said principle against respondent.

WHEREFORE, the instant Petition is hereby DENIED for lack of merit. The Decision dated
January 8, 2004 of the Court Appeals in CA-G.R. CV No. 68787, which affirmed the
Decision dated October 29, 1999 of Branch 111 of the RTC of Pasay City in Civil Case No.
8847, is hereby AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 171379
January 10, 2011
JOSE MARQUES and MAXILITE TECHNOLOGIES, INC., Petitioners,

vs.
FAR EAST BANK AND TRUST COMPANY, FAR EAST BANK INSURANCE BROKERS, INC.,
and MAKATI INSURANCE COMPANY, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 171419
FAR EAST BANK AND TRUST COMPANY and MAKATI INSURANCE COMPANY, Petitioners,
vs.
JOSE MARQUES and MAXILITE TECHNOLOGIES, INC., Respondents.
DECISION
CARPIO, J.:
The Case
These consolidated petitions for review1 assail the 31 May 2005 Decision2 and the 26
January 2006 Resolution3of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105.
The Court of Appeals affirmed with modifications the 4 September 1998 Decision4 of the
Regional Trial Court of Cebu City, Branch 58, in Civil Case No. CEB-18979.
The Facts
Maxilite Technologies, Inc. (Maxilite) is a domestic corporation engaged in the
importation and trading of equipment for energy-efficiency systems. Jose N. Marques
(Marques) is the President and controlling stockholder of Maxilite.
Far East Bank and Trust Co. (FEBTC)5 is a local bank which handled the financing and
related requirements of Marques and Maxilite. Marques and Maxilite maintained

accounts with FEBTC. Accordingly, FEBTC financed Maxilites capital and operational
requirements through loans secured with properties of Marques under the latters name.
Among Maxilites and Marques transactions with FEBTC were:
a. A straight loan in the name of Jose N. Marques for Maxilite at the original
principal amount of P1 million. This is secured by real estate mortgage. From said
original principal amount, the bank increased it byP300,000.00 about 26 October
1994 to enable the wiping out of Maxilites Trust Receipts Account and simplify
the remaining accounts into straight loan accounts.
b. A straight loan in the name of Maxilite Technologies, Inc. for a principal
amount of P2 million. This is secured with a Real Estate Mortgage of Marques
residential property.
c. Master Card transactions covering two (2) Master Card Accounts of Marques,
and
d. Local credit card transactions covering one credit card account of Marques.6
Far East Bank Insurance Brokers, Inc. (FEBIBI) is a local insurance brokerage
corporation while Makati Insurance Company7 is a local insurance company. Both
companies are subsidiaries of FEBTC.8
On 17 June 1993, Maxilite and Marques entered into a trust receipt transaction with
FEBTC, in the sum of US$80,765.00, for the shipment of various high-technology
equipment from the United States,9 with the merchandise serving as collateral. The
foregoing importation was covered by a trust receipt document signed by Marques on
behalf of Maxilite, which pertinently reads:
The undersigned (Marques) further agree(s) to keep said merchandise insured against
fire to its full value, payable to the said bank, at the cost and expense of the
undersigned, who hereby further agree(s) to pay all charges for storage on said
merchandise or any or other expenses incurred thereon.
x x x x10
Sometime in August 1993, FEBIBI, upon the advice of FEBTC, facilitated the
procurement and processing from Makati Insurance Company of four separate and
independent fire insurance policies over the trust receipted merchandise: (1) Policy No.
BR-F-1016333, issued on 15 September 1993, covering the period 12 August 1993 to 12
November 1993 in the amount of P1,000,000.00;11 (2) Policy No. BR-F-1016888, issued
on 15 September 1993 covering the period 8 September 1993 to 8 December 1993 in
the amount of P605,494.28;12 (3) Policy No. BR-F-1016930, issued on 18 October 1993,
covering the period 14 October 1993 to 12 January 1994 in the amount
of P527,723.66;13 and (4) Policy No. BR-F-1018392, issued on 14 December 1993,
covering the period 1 December 1993 to 1 March 1994 in the amount
of P725,000.00.14 Maxilite paid the premiums for these policies through debit

arrangement. FEBTC would debit Maxilites account for the premium payments, as
reflected in statements of accounts sent by FEBTC to Maxilite.
On 19 August 1994, Insurance Policy No. 1024439, covering the period 24 June 1994 to
24 June 1995, was released to cover the trust receipted merchandise. The policy
relevantly provides:
2. This policy including any renewal thereof and/or any endorsement thereon is not in
force until the premium has been fully paid to and duly receipted by the Company in the
manner provided herein.
Any supplementary agreement seeking to amend this condition prepared by agent,
broker or Company official, shall be deemed invalid and of no effect.15
Finding that Maxilite failed to pay the insurance premium in the sum of P8,265.60 for
Insurance Policy No. 1024439 covering the period 24 June 1994 to 24 June 1995,
FEBIBI sent written reminders to FEBTC, dated 19 October 1994,16 24 January
1995,17 and 6 March 1995, to debit Maxilites account.18
On 24 and 26 October 1994, Maxilite fully settled its trust receipt account.
On 9 March 1995, a fire gutted the Aboitiz Sea Transport Building along M.J. Cuenco
Avenue, Cebu City, where Maxilites office and warehouse were located. As a result,
Maxilite suffered losses amounting to at least P2.1 million, which Maxilite claimed
against the fire insurance policy with Makati Insurance Company. Makati Insurance
Company denied the fire loss claim on the ground of non-payment of premium. FEBTC
and FEBIBI disclaimed any responsibility for the denial of the claim.
Maxilite and Marques sued FEBTC, FEBIBI, and Makati Insurance Company. Maxilite
prayed for (1) actual damages totaling P2.3 million representing full insurance coverage
and "business opportunity losses," (2) moral damages, and (3) exemplary
damages.19 On the other hand, Marques sought payment of actual, moral and exemplary
damages, attorneys fees, and litigation expenses. Maxilite and Marques also sought the
issuance of a preliminary injunction or a temporary restraining to enjoin FEBTC from (1)
imposing penalties on their obligations; (2) foreclosing the real estate mortage securing
their straight loan accounts; and (3) initiating actions to collect their obligations.
1avvphi1
FEBTC, FEBIBI, and Makati Insurance Company countered that Maxilite and Marques
have no cause of action against them and essentially denied the allegations in the
complaint.
The Ruling of the Trial Court
In ruling in favor of Maxilite and Marques, the Regional Trial Court of Cebu City, Branch
58, explained:

Considering the interest of the defendant FEBTC in the property insured, hence, its
concern that the insurance policy therefor has to be effected and enforceable, and
considering that the payment of the premium thereof was the procedure adopted by
debiting the plaintiffs account, the Court is of the view that the non-payment of the
premium of the insurance policy in question was due to the fault or negligence of the
defendant FEBTC. What could have happened to the interest of the defendant FEBTC in
the insurance policy in question had the fire occurred prior to the full settlement and
payment of plaintiffs Maxilite trust receipt account? Would defendant FEBTC have
tossed the blame on the non-payment of premium to the plaintiffs?
Although there were reminders by defendant FEBIBI of the non-payment of the
premium, the same were made by said defendant through the defendant FEBTC and not
to the plaintiffs directly. Despite said reminders, the first of which was made on October
19, 1994 when plaintiff Maxilite has sufficient fund in its trust receipt account,
defendant FEBTC did not heed the same and more so did it not care to pay the premium
after the plaintiff Maxilite fully and finally settled its trust receipt account with
defendant FEBTC as the latter has already lost its interest in the insurance policy in
question by virtue of said full payment. But despite the non-payment of the insurance
premium, the defendant Makati Insurance did not cancel the policy in question nor
informed plaintiffs of its cancellation if the insurance premium should not be paid. Just
as defendant FEBIBI failed to notify directly the plaintiffs of the said non-payment.
Considering the relationship of the three (3) defendants herein, as undeniably sister
companies, the non-payment of the premium of the insurance policy in question should
be imputable to their fault or negligence. Under the factual milieu in the case at bar, the
Court finds it just and equitable to hold said defendants liable to pay all the consequent
damages suffered by the plaintiffs and their liability is solidary (Art. 2194, Civil Code).20
The trial court disposed of the case as follows:
WHEREFORE, premises considered, judgment is hereby rendered ordering the
defendants to pay jointly and severally to the plaintiff Maxilite the sum of Two Million
One Hundred Thousand Pesos (P2,100,000.00), Philippine Currency, representing the
full coverage of Insurance Policy No. 1024439 (Exh. A), as actual damages, plus
interest of 12% per annum from filing of Complaint on July 11, 1996 until fully paid, to
the plaintiff Marque[s] the sum of P400,000.00 as moral damages, to both plaintiffs the
sum of P500,000.00 as exemplary damages, the sum of P50,000.00 as attorneys fees,
the sum of P23,082.50, representing the filing fees, as litigation expenses, and to pay
the costs.
The counter-claims are hereby dismissed.
The writ of preliminary injunction is hereby made permanent.
SO ORDERED.21
The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts decision, with modifications, on the
following grounds:
First, the relations among defendants with each other are closely related and so
intertwined. The said three defendants, FEBTC, FEBIBI and MICI, are sister companies.
This was never denied by the defendants themselves.
Second, the insurance coverage was the business of sister companies FEBIBI and Makati
Insurance, not with FEBTC, which has been the bank of plaintiffs which handled the
latters financing and related transactions. Stated a bit differently, defendant FEBTC
handled the financing and related requirements of plaintiffs; defendant FEBIBI on the
other hand is an insurance brokerage company of defendant FEBTC, while Makati
Insurance is the insurance (arm) company of both defendants FEBIBI and FEBTC.
Third, defendant FEBTC caused FEBIBI to facilitate the insurance coverage of plaintiffs.
FEBIBI then asked Makati Insurance to issue the subject policy. Makati Insurance
delivered the policy to FEBIBI which it tasked with the collection of premium. FEBIBI in
turn delivered the policy to FEBTC from where it sought the payment of the premiums.
Fourth, it must be noted that the cover note and policy was supposedly issued and made
effective on June 24, 1994, when the trust receipt account was still outstanding and the
insured merchandise was still theoretically owned by the bank. Thus, for all intents and
purposes, it was to the best interest and protection of the bank to see to it that the
goods were properly covered by insurance.
Fifth, the payment of premium has never been made an issue when the subject policy
was still separated into three. Or even after the said consolidation into one policy (No.
1024439), still, payment of the premium has never become an issue.
xxxx
For another, if We were to believe defendants claim that the premium for the subject
policy was not paid, then defendants should have cancelled the policy long before. But
even up to the time the fire gutted plaintiffs warehouse in March 1995, defendants
acknowledged that the subject policy remained effective. x x x
Furthermore, there was no notice of cancellation or any communication from
defendants sent to plaintiffs that the policy shall be cancelled because of non-payment
of premiums. Thus, the more reasonable and logical conclusion is that the subject policy
was still fully in force because plaintiffs are still paying its premiums and defendants are
collecting the same through debit account.22
The Court of Appeals disposed of the case as follows:
UPON THE VIEW WE TAKE OF THIS CASE, judgment appealed from is hereby MODIFIED
in such that:

a. the interest shall be at the rate of six percent (6%) per annum to run from the
time of demand on April 11, 1995, in accordance with Article 1589 of the Civil
Code, until the finality of this decision;
b. the moral damages of P400,000.00 is reduced to P50,000.00;
c. the exemplary damages of P500,000.00 is reduced to P50,000.00; and
d. the writ of preliminary injunction previously issued lifted and set aside.
In all other respects, judgment appealed from is AFFIRMED. Without pronouncement as
to costs.
SO ORDERED.23
Hence, these petitions.
The Issues
In G.R. No. 171379, petitioners assail the Court of Appeals reduction of (1) the interest
rate from 12% to 6% per annum to be imposed on respondents liabilities; and (2) the
award of moral and exemplary damages. Petitioners also question the portion of the
Court of Appeals judgment allowing FEBTC to foreclose the real estate mortgage
securing petitioners loans and disallowing legal compensation for the parties mutual
obligations.
In G.R. No. 171419, petitioners challenge the Court of Appeals findings that (1) the
premium for the subject insurance policy has in fact been paid; (2) FEBTC, FEBIBI and
Makati Insurance Company are jointly and severally liable to pay respondents the full
coverage of the subject insurance policy despite (a) their separate juridical
personalities; (b) the absence of any fault or negligence on their part; and (c)
respondents failure to prove the extent of the alleged loss. Petitioners further impugn
the award of damages and attorneys fees.
The Courts Ruling
The petition in G.R. No. 171319 lacks merit, whereas the petition in G.R. No. 171419 is
partially meritorious.
Essentially, Maxilite and Marques invoke estoppel in claiming against FEBTC, FEBIBI,
and Makati Insurance Company the face value of the insurance policy. In their
complaint, Maxilite and Marques alleged they were led to believe and they in fact
believed that the settlement of Maxilites trust receipt account included the payment of
the insurance premium.24 Maxilite and Marques faulted FEBTC "if it failed to transmit the
premium payments on subject insurance coverage contrary to its represented standard
operating procedure of solely handling the insurance coverage and past practice of
debiting [Maxilites] account."25

Article 1431 of the Civil Code defines estoppel as follows:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against the person relying
thereon.
Meanwhile, Section 2(a), Rule 131 of the Rules of Court provides:
SEC. 2. Conclusive presumptions. The following are instances of conclusive
presumptions:
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing is true, and to act upon such belief,
he cannot, in any litigation arising out of such declaration, act or omission, be permitted
to falsify it.
In estoppel, a party creating an appearance of fact, which is false, is bound by that
appearance as against another person who acted in good faith on it. 26 Estoppel is based
on public policy, fair dealing, good faith and justice.27 Its purpose is to forbid one to
speak against his own act, representations, or commitments to the injury of one who
reasonably relied thereon.28 It springs from equity, and is designed to aid the law in the
administration of justice where without its aid injustice might result.29
In Santiago Syjuco, Inc. v. Castro,30 the Court stated that "estoppel may arise from
silence as well as from words." Estoppel by silence arises where a person, who by force
of circumstances is obliged to another to speak, refrains from doing so and thereby
induces the other to believe in the existence of a state of facts in reliance on which he
acts to his prejudice.31 Silence may support an estoppel whether the failure to speak is
intentional or negligent.32
Both trial and appellate courts basically agree that FEBTC is estopped from claiming that
the insurance premium has been unpaid. That FEBTC induced Maxilite and Marques to
believe that the insurance premium has in fact been debited from Maxilites account is
grounded on the the following facts: (1) FEBTC represented and committed to handle
Maxilites financing and capital requirements, including the related transactions such as
the insurance of the trust receipted merchandise; (2) prior to the subject Insurance
Policy No. 1024439, the premiums for the three separate fire insurance policies had
been paid through automatic debit arrangement; (3) FEBIBI sent FEBTC, not Maxilite
nor Marques, written reminders dated 19 October 1994, 24 January 1995, and 6 March
1995 to debit Maxilites account, establishing FEBTCs obligation to automatically debit
Maxilites account for the premium amount; (4) there was no written demand from
FEBTC or Makati Insurance Company for Maxilite or Marques to pay the insurance
premium; (5) the subject insurance policy was released to Maxilite on 19 August 1994;
and (6) the subject insurance policy remained uncancelled despite the alleged nonpayment of the premium, making it appear that the insurance policy remained in force
and binding.

Moreover, prior to the full settlement of the trust receipt account on 24 and 26 October
1994, FEBTC had insurable interest over the merchandise, and thus had greater reason
to debit Maxilites account. Further, as found by the trial court, and apparently
undisputed by FEBTC, FEBIBI and Makati Insurance Company, Maxilite had sufficient
funds at the time the first reminder, dated 19 October 1994, was sent by FEBIBI to
FEBTC to debit Maxilites account for the payment of the insurance premium. Since (1)
FEBTC committed to debit Maxilites account corresponding to the insurance premium;
(2) FEBTC had insurable interest over the property prior to the settlement of the trust
receipt account; and (3) Maxilites bank account had sufficient funds to pay the
insurance premium prior to the settlement of the trust receipt account, FEBTC should
have debited Maxilites account as what it had repeatedly done, as an established
practice, with respect to the previous insurance policies. However, FEBTC failed to debit
and instead disregarded the written reminder from FEBIBI to debit Maxilites account.
FEBTCs conduct clearly constitutes negligence in handling Maxilites and Marques
accounts. Negligence is defined as "the omission to do something which a reasonable
man, guided upon those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a prudent man and reasonable man
could not do."33
As a consequence of its negligence, FEBTC must be held liable for damages pursuant to
Article 2176 of the Civil Code which states "whoever by act or omission causes damage
to another, there being fault or negligence, is obliged to pay for the damage done."
Indisputably, had the insurance premium been paid, through the automatic debit
arrangement with FEBTC, Maxilites fire loss claim would have been approved. Hence,
Maxilite suffered damage to the extent of the face value of the insurance policy or the
sum of P2.1 million.
Contrary to Maxilites and Marques view, FEBTC is solely liable for the payment of the
face value of the insurance policy and the monetary awards stated in the Court of
Appeals decision. Suffice it to state that FEBTC, FEBIBI, and Makati Insurance Company
are independent and separate juridical entities, even if FEBIBI and Makati Insurance
Company are subsidiaries of FEBTC. Absent any showing of its illegitimate or illegal
functions, a subsidiarys separate existence shall be respected, and the liability of the
parent corporation as well as the subsidiary shall be confined to those arising in their
respective business.34 Besides, the records are bereft of any evidence warranting the
piercing of corporate veil in order to treat FEBTC, FEBIBI, and Makati Insurance
Company as a single entity. Likewise, there is no evidence showing FEBIBIs and Makati
Insurance Companys negligence as regards the non-payment of the insurance
premium.
The Court agrees with the Court of Appeals in reducing the interest rate from 12% to
6% as the obligation to pay does not arise from a loan or forbearance of money.
In Eastern Shipping Lines, Inc. v. Court of Appeals,35 the Court laid down the following
guidelines for the application of the proper interest rates:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held liable

for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 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 . . . 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 forbearance of credit. (Emphasis supplied)
With respect to Maxilites and Marques invocation of legal compensation, we find the
same devoid of merit. Aside from their bare allegations, there is no clear and convincing
evidence that legal compensation exists in this case. In other words, Maxilite and
Marques failed to establish the essential elements of legal compensation. Therefore,
Maxilites and Marques claim of legal compensation must fail.
WHEREFORE, we AFFIRM with MODIFICATION the 31 May 2005 Decision and the 26
January 2006 Resolution of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105.
Only Far East Bank and Trust Company, and not Far East Bank Insurance Brokers, Inc. or
Makati Insurance Company, is ORDERED to PAY the face value of the subject insurance
policy and the monetary awards stated in the Court of Appeals decision.

SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. L-27828 February 27, 1970

THE SAN MIGUEL CORPORATION (Formerly San Miguel Brewery, Inc.), petitioner,
vs.
MACARIO CRUZ and the COURT OF INDUSTRIAL RELATIONS, respondents.
Siguion Reyna, Montecillo Belo and Ongsiako for petitioner.

Gonzalo A. Tejada for respondent Macario Cruz.
REYES, J.B.L., J.:

Petition filed by the San Miguel Corporation (formerly San Miguel Brewery, Inc.) for
review of the decision of the Court of Industrial Relations (in Case No. 2870-ULP),
finding it guilty of unfair labor practices and ordering the reinstatement with back
wages of complainant Macario Cruz.
The records of the case show that sometime in October, 1957 the "Pagkakaisa
Samahang Manggagawa sa S.M.B. (Paflu)", a labor organization in the San Miguel
Corporation, staged a strike against the latter. After said strike ended and the strikers
resumed their work, Macario Cruz, a driver-employee and member of the Union, was
called by one Mr. Camahort, a company official, and was shown a newspaper clipping
carrying a picture depicting him (Cruz) as one of the strikers. According to Cruz, he was
told by Camahort that he would be dismissed if he would not desist from union
activities. A few months thereafter, or on 17 March 1958, Cruz was advised of the
company's decision to retire him from the service for physical disability, effective 31
March 1958.1Cruz must have already received information thereof before it could be sent by
the company because under date of 15 March 1958 said employee wrote the company
requesting that the benefits due him on account of his retirement be given in only one
installment.2 Accordingly, on 10 April 1958, Cruz, received from the company HSBC Cheeks
Nos. K905357 and K905358 in the total sum of P3,019.46 as "full and complete payment of
all my (his) retirement benefits."3
On 12 June 1958, Cruz also filed with the Social Security System an application for
disability benefit,4 wherein he affirmed having retired from employment on 31 March 1958.
This claim, however, was denied for the reason that the case properly falls under sickness

benefits, to which claimant was not yet entitled, he having been a member of the System for
less than one year.5
Three years after he was retired, on 27 May 1961, Macario Cruz charged the San Miguel
Company before the Court of Industrial Relations with unfair labor practices for his
dismissal in 1958, allegedly for union activities. The formal complaint against the
company was filed by the Acting Prosecutor of the Court on 12 October 1961 (Case No.
2870-ULP). After hearing, the trial Judge rendered decision sustaining the charges and
ordering therein respondent Company to reinstate the complainant with back, wages,
but deducting there from the amounts already received by him as retirement benefits.
The company sought reconsideration thereof before the court en banc, and when the
same was denied on 5 June 1967 (with two judges dissenting) the present petition for
review was filed.
The primary question posed in this proceeding is whether or not a former employee who
has accepted retirement benefits may still contest the regularity and validity of his
retirement 3 years thereafter.
In disposing of the company's defense of estoppel and ruling that the acceptance by
complainant of retirement benefits did not preclude the latter from assailing the validity
of the termination of his employment, the respondent Court cited the case of Cario vs.
Agricultural Credit and Cooperative Financing Administration,6 wherein we said:
Acceptance of those benefits (separation pay and terminal leave benefits)
would not amount to estoppel. The reason is plain. Employer and
employee, obviously, do not stand on the same footing. The employer
drove the employee to the wall. The latter must have to get hold of money.
Because, out of job, he had to face the harsh necessities of life. He thus
found himself in no position to resist money proferred. His, then, is a case
of adherence, not of choice. One thing sure, however, is that petitioners
did not relent on their claim. They pressed it. They are deemed not to have
waived any of their rights.
The above pronouncement relied upon by the Industrial Court is not controlling in the
present case. In the first place, as distinctly stated in the Cario case, therein
petitioners were improperly dismissed and never relented in their efforts to assert the
illegality of their separation 'from employment and to demand reinstatement. By
contrast, the herein complainant not only specified, and obtained, payment of
retirement gratuities due him in a lump sum but even applied for disability benefits with
the Social Security System. Moreover, he never protested his alleged illegal dismissal
nor demanded reinstatement. It took him more than 3 years to question the validity of
his said retirement. The original posture taken by the complainant, indeed, can be
nothing but an agreement, or at least acquiescence, to the decision of the company to
have him retired for physical disability. Thus, even assuming that there was ground to
declare his separation from the service invalid, complainant's receipt of all the benefits
arising therefrom, with full knowledge of all the facts surrounding the same, amounts to
waiver of the right to contest the validity of the company's act.7

Secondly, the petitioner company's cause is not only premised on estoppel, but also on
complainant's right having lapsed into a stale demand. For, truly, all the elements for
the operation of the principle of laches are here present: (a) conduct on the part of the
employer that gave rise to the situation on which the complaint is made, which is the
retirement of the complainant for physical disability; (b) delay in the assertion of
complainant's right the lapsing of a period of 3 years which is neither explained nor
justified; (c) lack of knowledge or notice on the part of the respondent employer that
the complainant would assert the right on which the present suit is based; and (d)
injury or prejudice to the employer in the event relief is awarded to the complainant. 8
Herein private respondent tries to remove this case from the operation of the laches
principle by alleging that the matter of unfair labor practice involves public interest, and
that the Industrial Peace Act (Republic Act 875)did not prescribe any period within
which a right provided thereunder may be enforced. There can be no quarrel on this
point; but it must be realized that, unlike prescription, the defense of laches is not
dependent on the existence of a statutory period of limitation. It can be invoked without
reckoning any specific or fixed period; it is sufficient that there be an unreasonable and
unexplained delay in bringing the action that its maintenance would already constitute
inequity or injustice to the party claiming it. As this Court succinctly declared in previous
cases:
... Laches is different from the statute of limitations. Prescription is
concerned with the fact of delay, whereas laches is concerned with the
effect of delay. Prescription is a matter of time; laches is principally a
question of inequity of permitting a claim to be enforced, this inequity
being founded on some change in the condition of the property or the
relation of the parties. Prescription is statutory; laches is not. Laches
applies in equity, whereas prescription applies at law. Prescription is
based on fixed time; laches is not. (Nielson & Co., Inc. vs. Lepanto
Consolidated Mining Co., L-21601, 17 December 1966).9
Laches in a general sense, is failure or neglect, for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier, it is negligence or omission to assert a
right within a reasonable time, warranting a presumption that the party
entitled to assert it either has abandoned it or declined to assert it.
The doctrine of laches or of "stale demands" is based upon grounds of

public policy which requires, for the peace of society, the discouragement
of stale claims, and unlike the statute of limitations, is not a mere question
of time but is principally a question of the inequity or unfairness of
permitting a right or claim to be enforced or asserted. (Tijam vs.
Sibonghanoy, L-21456, 15 April 1968). 10
WHEREFORE, the decision of the Court of Industrial Relations under review is hereby
reversed, and the complaint for unfair labor practices against herein petitioner,
dismissed. No pronouncement as to costs.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 174104
February 14, 2011
INSURANCE OF THE PHILIPPINE ISLANDS CORPORATION, Petitioner,

vs.
SPOUSES VIDAL S. GREGORIO and JULITA GREGORIO, Respondents.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking the reversal and nullification of the Decision1 of the Court of Appeals (CA),
dated June 14, 2006 and its Resolution2 dated August 10, 2006 in CA-G.R. CV No. 82303.
The assailed CA Decision reversed the Decision3 of the Regional Trial Court (RTC) of
Morong, Rizal, Branch 79, in Civil Case No. 748-M in favor of herein petitioner, while the
questioned CA Resolution denied petitioner's motion for reconsideration.
The pertinent antecedent facts of the case, as summarized by the CA, are as follows:
On January 10, 1968, the spouses Vidal Gregorio and Julita Gregorio [herein
respondents] obtained a loan from the Insurance of the Philippine Islands Corporation
[herein petitioner] (formerly known as Pyramid Insurance Co., Inc.) in the sum of
P2,200.00, payable on or before January 10, 1969, with interest thereon at the rate of
12% per annum. By way of security for the said loan, [respondents] executed a Real
Estate Mortgage in favor of [petitioner] over a parcel of land known as Lot 6186 of the
Morong Cadastre, then covered by Tax Declaration No. 7899 issued by the Municipal
Assessor's Office of Morong, Rizal.
On February 14, 1968, [respondents] again obtained another loan from [petitioner] in
the sum of P2,000.00, payable on or before February 14, 1969, with 12% interest per
annum. Another Real Estate Mortgage, covering a parcel of land known as Lot No. 6190
of the Morong Cadastre under Tax Declaration No. 10518, was executed by
[respondents] in favor of [petitioner].
On April 10, 1968, [respondents] obtained, for the third time, another loan from
[petitioner] in the amount ofP4,500.00 payable on or before April 10, 1969 with 12%
interest per annum. As a security for the loan, [respondents] again executed a Real
Estate Mortgage, this time covering two parcels of land: Lot 3499 under Tax Declaration
No. 10631-Rizal and a lot situated in Brgy. Kay Kuliat under Tax Declaration No. 3918.

[Respondents] failed to pay their loans, as a result of which the [mortgaged] properties
were extrajudicially foreclosed. The extrajudicial foreclosure sale was conducted on
December 11, 1969 where [petitioner] was the highest bidder. Since [respondents]
failed to redeem the property, [petitioner] consolidated its ownership over the
properties. The corresponding Tax Declarations were thereafter issued in the name of
[petitioner].4
On February 20, 1996, petitioner filed a Complaint5 for damages against respondents
alleging that in 1995, when it was in the process of gathering documents for the
purpose of filing an application for the registration and confirmation of its title over the
foreclosed properties, it discovered that the said lots were already registered in the
names of third persons and transfer certificates of title (TCT) were issued to them.
Claiming that respondents acted in a fraudulent and malevolent manner in enticing it to
grant their loan applications by misrepresenting ownership of the subject properties,
petitioner prayed for the grant of actual and exemplary damages as well as attorney's
fees and litigation expenses.
In their Amended Answer,6 respondents contended that their obligations in favor of
petitioner were all settled by the foreclosure of the properties given as security therefor.
In the alternative, respondents argue that petitioner's cause of action and right of
action are already barred by prescription and laches.
1avvphi1
In its Decision dated February 23, 2004, the RTC of Morong, Rizal, ruled in favor of
petitioner, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
and as against the defendants, directing the latter to pay the plaintiff, jointly and
severally, as follows:
a. Actual damages in the amount of P1,000,000.00, representing the fair market
value of the real properties subject matter of this suit;
b. For defendants' deceit and bad faith, exemplary damage in the sum
of P300,000.00;
c. Attorney's fees and litigation expenses in the amount of P200,000.00; and
d. Costs of suit.
SO ORDERED.7
Aggrieved, respondents appealed the judgment of the trial court to the CA.
On June 14, 2006, the CA rendered a Decision reversing and setting aside the decision of
the RTC and dismissing the complaint of petitioner. It ruled that petitioner's action for
damages is barred by prescription and laches.

Petitioner filed a Motion for Reconsideration but the CA denied it in its Resolution of
August 10, 2006.
Petitioner's main contention is that the CA erred in ruling that petitioner's right to any
relief under the law has already prescribed or is barred by laches. Petitioner argues that
the prescriptive period of its action for damages should be counted from 1995, which it
alleges to be the time that it discovered the fraud committed by respondents against it.
On the other hand, the CA ruled that petitioner's right of action prescribed four years
after the subject properties were registered with the Register of Deeds of Morong, Rizal
and TCTs were subsequently issued in the names of third persons in the years 1970,
1973 and 1989.
The Court finds the petition meritorious.
Petitioner filed an action for damages on the ground of fraud committed against it by
respondents. Under the provisions of Article 1146 of the Civil Code, actions upon an
injury to the rights of the plaintiff or upon a quasi-delict must be instituted within four
years from the time the cause of action accrued.8
The Court finds no error in the ruling of the CA that petitioner's cause of action accrued
at the time it discovered the alleged fraud committed by respondents. It is at this point
that the four-year prescriptive period should be counted. However, the Court does not
agree with the CA in its ruling that the discovery of the fraud should be reckoned from
the time of registration of the titles covering the subject properties.
The Court notes that what has been given by respondents to petitioner as evidence of
their ownership of the subject properties at the time that they mortgaged the same are
not certificates of title but tax declarations, in the guise that the said properties are
unregistered. On the basis of the tax declarations alone and by reason of respondent's
misrepresentations, petitioner could not have been reasonably expected to acquire
knowledge of the fact that the said properties were already titled. As a consequence,
petitioner may not be charged with any knowledge of any subsequent entry of an
encumbrance which may have been annotated on the said titles, much less any change
of ownership of the properties covered thereby. As such, the Court agrees with
petitioner that the reckoning period for prescription of petitioner's action should be
from the time of actual discovery of the fraud in 1995. Hence, petitioner's suit for
damages, filed on February 20, 1996, is well within the four-year prescriptive period.
Neither may the principle of laches apply in the present case.
The essence of laches or "stale demands" is the failure or neglect for an unreasonable
and unexplained length of time to do that which, by exercising due diligence, could or
should have been done earlier, thus, giving rise to a presumption that the party entitled
to assert it either has abandoned or declined to assert it.9 It is not concerned with mere
lapse of time; the fact of delay, standing alone, being insufficient to constitute laches.10

In addition, it is a rule of equity and applied not to penalize neglect or sleeping on one's
rights, but rather to avoid recognizing a right when to do so would result in a clearly
unfair situation.11 There is no absolute rule as to what constitutes laches or staleness of
demand; each case is to be determined according to its particular
circumstances.12 Ultimately, the question of laches is addressed to the sound discretion
of the court and, being an equitable doctrine, its application is controlled by equitable
considerations.13 It cannot be used to defeat justice or perpetrate fraud and
injustice.14 It is the better rule that courts, under the principle of equity, will not be
guided or bound strictly by the statute of limitations or the doctrine of laches when to
be so, a manifest wrong or injustice would result.15
It is significant to point out at this juncture that the overriding consideration in the
instant case is that petitioner was deprived of the subject properties which it should
have rightly owned were it not for the fraud committed by respondents. Hence, it would
be the height of injustice if respondents would be allowed to go scot-free simply
because petitioner relied in good faith on the former's false representations. Besides, as
earlier discussed, even in the exercise of due diligence, petitioner could not have been
expected to immediately discover respondents' fraudulent scheme.
WHEREFORE, the instant petition is GRANTED. The Decision and Resolution, dated June
14, 2006 and August 10, 2006, respectively, of the Court of Appeals in CA-G.R. CV No.
82303, are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Morong, Rizal, Branch 79, dated February 23, 2004 in Civil Case No. 748-M,
is REINSTATED.
SO ORDERED.
Art. 1440. A person who establishes a trust is called the trustor; one in whom
confidence is reposed as regards property for the benefit of another person is known as
the trustee; and the person for whose benefit the trust has been created is referred to
as the beneficiary.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 175073
August 15, 2011
ESTATE OF MARGARITA D. CABACUNGAN, represented by LUZ LAIGO-ALI, Petitioner,

vs.
MARILOU LAIGO, PEDRO ROY LAIGO, STELLA BALAGOT and SPOUSES MARIO B.
CAMPOS AND JULIA S. CAMPOS, Respondents.
CARPIO,* J.,

BRION,**
SERENO,***JJ.
DECISION
PERALTA, J.:
This Petition for Review under Rule 45 of the Rules of Court assails the October 13,
2006 Decision1 of the Court of Appeals in CA-G.R. CV No. 72371. The assailed decision
affirmed the July 2, 2001 judgment2 rendered by the Regional Trial Court of La Union,
Branch 33 in Civil Case No. 1031-BG a complaint for annulment of sale of real
property, recovery of ownership and possession, cancellation of tax declarations and
damages filed by Margarita Cabacungan,3 represented by her daughter, Luz Laigo-Ali
against Marilou Laigo and Pedro Roy Laigo, respondents herein, and against Estella
Balagot,4 and the spouses Mario and Julia Campos.
The facts follow.
Margarita Cabacungan (Margarita) owned three parcels of unregistered land in Paringao
and in Baccuit, Bauang, La Union, each measuring 4,512 square meters, 1,986 square
meters and 3,454 square meters. The properties were individually covered by tax
declaration all in her name.5 Sometime in 1968, Margaritas son, Roberto Laigo, Jr.
(Roberto), applied for a non-immigrant visa to the United States, and to support his
application, he allegedly asked Margarita to transfer the tax declarations of the
properties in his name.6 For said purpose, Margarita, unknown to her other children,
executed an Affidavit of Transfer of Real Property whereby the subject properties were
transferred by donation to Roberto.7 Not long after, Robertos visa was issued and he
was able to travel to the U.S. as a tourist and returned in due time. In 1979, he adopted
respondents Pedro Laigo (Pedro) and Marilou Laigo (Marilou),8 and then he married
respondent Estella Balagot.
In July 1990, Roberto sold the 4,512 sq m property in Baccuit to the spouses Mario and
Julia Campos forP23,000.00.9 Then in August 1992, he sold the 1,986 sq m and 3,454 sq
m lots in Paringao, respectively, to Marilou for P100,000.00 and to Pedro
for P40,000.00.10 Allegedly, these sales were not known to Margarita and her other
children.11
It was only in August 1995, at Robertos wake, that Margarita came to know of the sales
as told by Pedro himself.12 In February 1996, Margarita, represented by her daughter,
Luz, instituted the instant complaint for the annulment of said sales and for the recovery
of ownership and possession of the subject properties as well as for the cancellation of
Ricardos tax declarations. Margarita admitted having accommodated Robertos request
for the transfer of the properties to his name, but pointed out that the arrangement was
only for the specific purpose of supporting his U.S. visa application. She emphasized that
she never intended to divest herself of ownership over the subject lands and, hence,
Roberto had no right to sell them to respondents and the Spouses Campos. She likewise
alleged that the sales, which were fictitious and simulated considering the gross

inadequacy of the stipulated price, were fraudulently entered into by Roberto. She
imputed bad faith to Pedro, Marilou and the Spouses Campos as buyers of the lots, as
they supposedly knew all along that Roberto was not the rightful owner of the
properties.13 Hence, she principally prayed that the sales be annulled; that Robertos tax
declarations be cancelled; and that the subject properties be reconveyed to her. 14
The Spouses Campos advanced that they were innocent purchasers for value and in
good faith, and had merely relied on Robertos representation that he had the right to
sell the property; and that, hence, they were not bound by whatever agreement entered
by Margarita with her son. They posited that the alleged gross inadequacy of the price
would not invalidate the sale absent a vitiation of consent or proof of any other
agreement. Further, they noted that Margaritas claim was already barred by
prescription and laches owing to her long inaction in recovering the subject properties.
Finally, they believed that inasmuch as Roberto had already passed away, Margarita
must have, instead, directed her claim against his estate.15
In much the same way, Marilou and Pedro,16 who likewise professed themselves to be
buyers in good faith and for value, believed that Margaritas cause of action had already
been barred by laches, and that even assuming the contrary, the cause of action was
nevertheless barred by prescription as the same had accrued way back in 1968 upon the
execution of the affidavit of transfer by virtue of which an implied trust had been
created. In this regard, they emphasized that the law allowed only a period of ten (10)
years within which an action to recover ownership of real property or to enforce an
implied trust thereon may be brought, but Margarita merely let it pass. 17
On February 3, 1999, prior to pre-trial, Margarita and the Spouses Campos amicably
entered into a settlement whereby they waived their respective claims against each
other.18 Margarita died two days later and was forthwith substituted by her estate.19 On
February 8, 1999, the trial court rendered a Partial Decision20 approving the compromise
agreement and dismissing the complaint against the Spouses Campos. Forthwith, trial
on the merits ensued with respect to Pedro and Marilou.
On July 2, 2001, the trial court rendered judgment dismissing the complaint as follows:
WHEREFORE, in view of the foregoing considerations, the complaint is DISMISSED. 21
The trial court ruled that the 1968 Affidavit of Transfer operated as a simple transfer of
the subject properties from Margarita to Roberto. It found no express trust created
between Roberto and Margarita by virtue merely of the said document as there was no
evidence of another document showing Robertos undertaking to return the subject
properties. Interestingly, it concluded that, instead, an "implied or constructive trust"
was created between the parties, as if affirming that there was indeed an agreement
albeit unwritten to have the properties returned to Margarita in due time. 22
Moreover, the trial court surmised how Margarita could have failed to recover the
subject properties from Roberto at any time between 1968, following the execution of
the Affidavit of Transfer, and Robertos return from the United States shortly thereafter.
Finding Margarita guilty of laches by such inaction, the trial court barred recovery from

respondents who were found to have acquired the properties supposedly in good faith
and for value.23 It also pointed out that recovery could no longer be pursued in this case
because Margarita had likewise exhausted the ten-year prescriptive period for
reconveyance based on an implied trust which had commenced to run in 1968 upon the
execution of the Affidavit of Transfer.24 Finally, it emphasized that mere inadequacy of
the price as alleged would not be a sufficient ground to annul the sales in favor of Pedro
and Marilou absent any defect in consent.25
Aggrieved, petitioner appealed to the Court of Appeals which, on October 13, 2006,
affirmed the trial courts disposition. The appellate court dismissed petitioners claim
that Roberto was merely a trustee of the subject properties as there was no evidence on
record supportive of the allegation that Roberto merely borrowed the properties from
Margarita upon his promise to return the same on his arrival from the United States.
Further, it hypothesized that granting the existence of an implied trust, still Margaritas
action thereunder had already been circumscribed by laches. 26
Curiously, while the appellate court had found no implied trust relation in the
transaction between Margarita and Roberto, nevertheless, it held that the ten-year
prescriptive period under Article 1144 of the Civil Code, in relation to an implied trust
created under Article 1456, had already been exhausted by Margarita because her cause
of action had accrued way back in 1968; and that while laches and prescription as
defenses could have availed against Roberto, the same would be unavailing against
Pedro and Marilou because the latter were supposedly buyers in good faith and for
value.27 It disposed of the appeal, thus:
WHEREFORE, the Appeal is hereby DENIED. The assailed Decision dated 2 July 2001 of
the Regional Trial Court of Bauang, La Union, Branch 33 is AFFIRMED.
SO ORDERED.28
Hence, the instant recourse imputing error to the Court of Appeals in holding: (a) that
the complaint is barred by laches and prescription; (b) that the rule on innocent
purchaser for value applies in this case of sale of unregistered land; and (c) that there is
no evidence to support the finding that there is an implied trust created between
Margarita and her son Roberto.29
Petitioner posits that the Court of Appeals should not have haphazardly applied the
doctrine of laches and failed to see that the parties in this case are bound by familial
ties. They assert that laches must not be applied when an injustice would result from it.
Petitioner believes that the existence of such confidential relationship precludes a
finding of unreasonable delay on Margaritas part in enforcing her claim, especially in
the face of Luzs testimony that she and Margarita had placed trust and confidence in
Roberto. Petitioner also refutes the Court of Appeals finding that there was a donation
of the properties to Roberto when the truth is that the subject properties were all that
Margarita possessed and that she could not have failed to provide for her other children
nor for means by which to support herself. It reiterates that the transfer to Roberto was
only an accommodation so that he could submit proof to support his U.S. visa
application.

On the issue of prescription, petitioner advances that it runs from the time Roberto, as
trustee, has repudiated the trust by selling the properties to respondents in August 15,
1992; that hence, the filing of the instant complaint in 1996 was well within the
prescriptive period. Finally, petitioner states that whether a buyer is in good or bad faith
is a matter that attains relevance in sales of registered land, as corollary to the rule that
a purchaser of unregistered land uninformed of the sellers defective title acquires no
better right than such seller.
Respondents stand by the ruling of the Court of Appeals. In their Comment, they
theorize that if indeed Margarita and Roberto had agreed to have the subject properties
returned following the execution of the Affidavit of Transfer, then there should have
been a written agreement evincing such intention of the parties. They note that
petitioners reliance on the Affidavit of Transfer as well as on the alleged unwritten
agreement for the return of the properties must fail, simply because they are not even
parties to it. Be that as it may, the said document had effectively transferred the
properties to Roberto who, in turn, had acquired the full capacity to sell them, especially
since these properties could well be considered as Robertos inheritance from Margarita
who, on the contrary, did have other existing properties in her name. Moreover, they
believe that the liberal application of the rule on laches between family members does
not apply in the instant case because there is no fiduciary relationship and privity
between them and Margarita.
There is merit in the petition.
To begin with, the rule is that the latitude of judicial review under Rule 45 generally
excludes factual and evidentiary reevaluation, and the Court ordinarily abides by the
uniform conclusions of the trial court and the appellate court. Yet, in the case at bar,
while the courts below have both arrived at the dismissal of petitioners complaint,
there still remains unsettled the ostensible incongruence in their respective factual
findings. It thus behooves us to be thorough both in reviewing the records and in
appraising the evidence, especially since an opposite conclusion is warranted and, as
will be shown, justified.
A trust is the legal relationship between one person having an equitable ownership of
property and another person owning the legal title to such property, the equitable
ownership of the former entitling him to the performance of certain duties and the
exercise of certain powers by the latter.30 Trusts are either express or implied.31 Express
or direct trusts are created by the direct and positive acts of the parties, by some
writing or deed, or will, or by oral declaration in words evincing an intention to create a
trust.32 Implied trusts also called "trusts by operation of law," "indirect trusts" and
"involuntary trusts" arise by legal implication based on the presumed intention of the
parties or on equitable principles independent of the particular intention of the
parties.33 They are those which, without being expressed, are deducible from the nature
of the transaction as matters of intent or, independently of the particular intention of
the parties, as being inferred from the transaction by operation of law basically by
reason of equity.34

Implied trusts are further classified into constructive trusts and resulting trusts.
Constructive trusts, on the one hand, come about in the main by operation of law and
not by agreement or intention. They arise not by any word or phrase, either expressly or
impliedly, evincing a direct intention to create a trust, but one which arises in order to
satisfy the demands of justice.35 Also known as trusts ex maleficio, trusts ex delicto and
trusts de son tort, they are construed against one who by actual or constructive fraud,
duress, abuse of confidence, commission of a wrong or any form of unconscionable
conduct, artifice, concealment of questionable means, or who in any way against equity
and good conscience has obtained or holds the legal right to property which he ought
not, in equity and good conscience, hold and enjoy.36 They are aptly characterized as
"fraud-rectifying trust,"37 imposed by equity to satisfy the demands of justice38 and to
defeat or prevent the wrongful act of one of the parties.39Constructive trusts are
illustrated in Articles 1450, 1454, 1455 and 1456.40
On the other hand, resulting trusts arise from the nature or circumstances of the
consideration involved in a transaction whereby one person becomes invested with legal
title but is obligated in equity to hold his title for the benefit of another. This is based on
the equitable doctrine that valuable consideration and not legal title is determinative of
equitable title or interest and is always presumed to have been contemplated by the
parties.41Such intent is presumed as it is not expressed in the instrument or deed of
conveyance and is to be found in the nature of their transaction. 42 Implied trusts of this
nature are hence describable as "intention-enforcing trusts."43Specific examples of
resulting trusts may be found in the Civil Code, particularly Articles 1448, 1449, 1451,
1452 and 1453.44
Articles 1448 to 1456 of the Civil Code enumerate cases of implied trust, but the list
according to Article 1447 is not exclusive of others which may be established by the
general law on trusts so long as the limitations laid down in Article 1442 are
observed,45 that is, that they be not in conflict with the New Civil Code, the Code of
Commerce, the Rules of Court and special laws.46
While resulting trusts generally arise on failure of an express trust or of the purpose
thereof, or on a conveyance to one person upon a consideration from another
(sometimes referred to as a "purchase-money resulting trust"), they may also be
imposed in other circumstances such that the court, shaping judgment in its most
efficient form and preventing a failure of justice, must decree the existence of such a
trust.47 A resulting trust, for instance, arises where, there being no fraud or violation of
the trust, the circumstances indicate intent of the parties that legal title in one be held
for the benefit of another.48 It also arises in some instances where the underlying
transaction is without consideration, such as that contemplated in Article 144949 of the
Civil Code. Where property, for example, is gratuitously conveyed for a particular
purpose and that purpose is either fulfilled or frustrated, the court may affirm the
resulting trust in favor of the grantor or transferor,50 where the beneficial interest in
property was not intended to vest in the grantee.51
Intention although only presumed, implied or supposed by law from the nature of the
transaction or from the facts and circumstances accompanying the transaction,
particularly the source of the consideration is always an element of a resulting

trust52 and may be inferred from the acts or conduct of the parties rather than from
direct expression of conduct.53 Certainly, intent as an indispensable element, is a matter
that necessarily lies in the evidence, that is, by evidence, even circumstantial, of
statements made by the parties at or before the time title passes.54 Because an implied
trust is neither dependent upon an express agreement nor required to be evidenced by
writing,55 Article 145756 of our Civil Code authorizes the admission of parole evidence to
prove their existence. Parole evidence that is required to establish the existence of an
implied trust necessarily has to be trustworthy and it cannot rest on loose, equivocal or
indefinite declarations.57
Thus, contrary to the Court of Appeals finding that there was no evidence on record
showing that an implied trust relation arose between Margarita and Roberto, we find
that petitioner before the trial court, had actually adduced evidence to prove the
intention of Margarita to transfer to Roberto only the legal title to the properties in
question, with attendant expectation that Roberto would return the same to her on
accomplishment of that specific purpose for which the transaction was entered into. The
evidence of course is not documentary, but rather testimonial.
We recall that the complaint before the trial court alleged that the 1968 Affidavit of
Transfer was executed merely to accommodate Robertos request to have the properties
in his name and thereby produce proof of ownership of certain real properties in the
Philippines to support his U.S. visa application. The agreement, the complaint further
stated, was for Margarita to transfer the tax declarations of the subject properties to
Roberto for the said purpose and without the intention to divest her of the rights of
ownership and dominion.58 Margarita, however, died before trial on the merits
ensued;59 yet the allegation was substantiated by the open-court statements of her
daughter, Luz, and of her niece, Hilaria Costales (Hilaria), a disinterested witness.
In her testimony, Luz, who affirmed under oath her own presence at the execution of
the Affidavit of Transfer, described the circumstances under which Margarita and
Roberto entered into the agreement. She narrated that Roberto had wanted to travel to
the U.S and to show the embassy proof of his financial capacity, he asked to "borrow"
from Margarita the properties involved but upon the condition that he would give them
back to her upon his arrival from the United States. She admitted that Robertos
commitment to return the properties was not put in writing because they placed trust
and confidence in him, and that while she had spent most of her time in Mindanao since
she married in 1956, she would sometimes come to La Union to see her mother but she
never really knew whether at one point or another her mother had demanded the return
of the properties from Roberto.60 She further asserted that even after Robertos arrival
from the United States, it was Margarita who paid off the taxes on the subject
properties and that it was only when her health started to deteriorate that Roberto had
taken up those obligations.61 Hilarias testimony ran along the same line. Like Luz, she
was admittedly present at the execution of the Affidavit of Transfer which took place at
the house she shared with Jacinto Costales, the notarizing officer who was her own
brother. She told that Roberto at the time had wanted to travel to the U.S. but did not
have properties in the Philippines which he could use to back up his visa application; as
accommodation, Margarita "lent" him the tax declarations covering the properties but
with the understanding that upon his return he would give them back to Margarita. She

professed familiarity with the properties involved because one of them was actually
sitting close to her own property.62
While indeed at one point at the stand both of Luzs and Hilarias presence at the
execution of the affidavit had been put to test in subtle interjections by respondents
counsel to the effect that their names and signatures did not appear in the Affidavit of
Transfer as witnesses, this, to our mind, is of no moment inasmuch as they had not been
called to testify on the fact of, or on the contents of, the Affidavit of Transfer or its due
execution. Rather, their testimony was offered to prove the circumstances surrounding
its execution the circumstances from which could be derived the unwritten
understanding between Roberto and Margarita that by their act, no absolute transfer of
ownership would be effected. Besides, it would be highly unlikely for Margarita to
institute the instant complaint if it were indeed her intention to vest in Roberto, by
virtue of the Affidavit of Transfer, absolute ownership over the covered properties.
It is deducible from the foregoing that the inscription of Robertos name in the Affidavit
of Transfer as Margaritas transferee is not for the purpose of transferring ownership to
him but only to enable him to hold the property in trust for Margarita. Indeed, in the
face of the credible and straightforward testimony of the two witnesses, Luz and Hilaria,
the probative value of the ownership record forms in the names of respondents,
together with the testimony of their witness from the municipal assessors office who
authenticated said forms, are utterly minimal to show Robertos ownership. It suffices
to say that respondents did not bother to offer evidence that would directly refute the
statements made by Luz and Hilaria in open court on the circumstances underlying the
1968 Affidavit of Transfer.
As a trustee of a resulting trust, therefore, Roberto, like the trustee of an express
passive trust, is merely a depositary of legal title having no duties as to the
management, control or disposition of the property except to make a conveyance when
called upon by the cestui que trust.63 Hence, the sales he entered into with respondents
are a wrongful conversion of the trust property and a breach of the trust. The question
is: May respondents now be compelled to reconvey the subject properties to petitioner?
We rule in the affirmative.
Respondents posit that petitioners claim may never be enforced against them as they
had purchased the properties from Roberto for value and in good faith. They also claim
that, at any rate, petitioners cause of action has accrued way back in 1968 upon the
execution of the Affidavit of Transfer and, hence, with the 28 long years that since
passed, petitioners claim had long become stale not only on account of laches, but also
under the rules on extinctive prescription governing a resulting trust. We do not agree.
First, fundamental is the rule in land registration law that the issue of whether the
buyer of realty is in good or bad faith is relevant only where the subject of the sale is
registered land and the purchase was made from the registered owner whose title to
the land is clean, in which case the purchaser who relies on the clean title of the
registered owner is protected if he is a purchaser in good faith and for value.64 Since the
properties in question are unregistered lands, respondents purchased the same at their
own peril. Their claim of having bought the properties in good faith, i.e., without notice

that there is some other person with a right to or interest therein, would not protect
them should it turn out, as it in fact did in this case, that their seller, Roberto, had no
right to sell them.
Second, the invocation of the rules on limitation of actions relative to a resulting trust is
not on point because the resulting trust relation between Margarita and Roberto had
been extinguished by the latters death. A trust, it is said, terminates upon the death of
the trustee, particularly where the trust is personal to him.65 Besides, prescription and
laches, in respect of this resulting trust relation, hardly can impair petitioners cause of
action. On the one hand, in accordance with Article 114466 of the Civil Code, an action
for reconveyance to enforce an implied trust in ones favor prescribes in ten (10) years
from the time the right of action accrues, as it is based upon an obligation created by
law.67 It sets in from the time the trustee performs unequivocal acts of repudiation
amounting to an ouster of the cestui que trust which are made known to the latter. 68 In
this case, it was the 1992 sale of the properties to respondents that comprised the act of
repudiation which, however, was made known to Margarita only in 1995 but
nevertheless impelled her to institute the action in 1996 still well within the
prescriptive period. Hardly can be considered as act of repudiation Robertos open court
declaration which he made in the 1979 adoption proceedings involving respondents to
the effect that he owned the subject properties,69 nor even the fact that he in 1977 had
entered into a lease contract on one of the disputed properties which contract had been
subject of a 1996 decision of the Court of Appeals.70 These do not suffice to constitute
unequivocal acts in repudiation of the trust.
On the other hand, laches, being rooted in equity, is not always to be applied strictly in a
way that would obliterate an otherwise valid claim especially between blood relatives.
The existence of a confidential relationship based upon consanguinity is an important
circumstance for consideration; hence, the doctrine is not to be applied mechanically as
between near relatives.71 Adaza v. Court of Appeals72 held that the relationship between
the parties therein, who were siblings, was sufficient to explain and excuse what would
otherwise have been a long delay in enforcing the claim and the delay in such situation
should not be as strictly construed as where the parties are complete strangers vis-avis each other; thus, reliance by one party upon his blood relationship with the other
and the trust and confidence normally connoted in our culture by that relationship
should not be taken against him. Too, Sotto v. Teves73 ruled that the doctrine of laches is
not strictly applied between near relatives, and the fact that the parties are connected
by ties of blood or marriage tends to excuse an otherwise unreasonable delay.
Third, there is a fundamental principle in agency that where certain property entrusted
to an agent and impressed by law with a trust in favor of the principal is wrongfully
diverted, such trust follows the property in the hands of a third person and the principal
is ordinarily entitled to pursue and recover it so long as the property can be traced and
identified, and no superior equities have intervened. This principle is actually one of
trusts, since the wrongful conversion gives rise to a constructive trust which pursues
the property, its product or proceeds, and permits the beneficiary to recover the
property or obtain damages for the wrongful conversion of the property. Aptly called the
"trust pursuit rule," it applies when a constructive or resulting trust has once affixed
itself to property in a certain state or form.74

Hence, a trust will follow the property through all changes in its state and form as
long as such property, its products or its proceeds, are capable of identification, even
into the hands of a transferee other than a bona fidepurchaser for value, or restitution
will be enforced at the election of the beneficiary through recourse against the trustee
or the transferee personally. This is grounded on the principle in property law that
ownership continues and can be asserted by the true owner against any withholding of
the object to which the ownership pertains, whether such object of the ownership is
found in the hands of an original owner or a transferee, or in a different form, as long as
it can be identified.75 Accordingly, the person to whom is made a transfer of trust
property constituting a wrongful conversion of the trust property and a breach of the
trust, when not protected as a bona fide purchaser for value, is himself liable and
accountable as a constructive trustee. The liability attaches at the moment of the
transfer of trust property and continues until there is full restoration to the beneficiary.
Thus, the transferee is charged with, and can be held to the performance of the trust,
equally with the original trustee, and he can be compelled to execute a reconveyance.76
This scenario is characteristic of a constructive trust imposed by Article 145677 of the
Civil Code, which impresses upon a person obtaining property through mistake or fraud
the status of an implied trustee for the benefit of the person from whom the property
comes. Petitioner, in laying claim against respondents who are concededly transferees
who professed having validly derived their ownership from Roberto, is in effect
enforcing against respondents a constructive trust relation that arose by virtue of the
wrongful and fraudulent transfer to them of the subject properties by Roberto.
Aznar Brother Realty Co. v. Aying,78 citing Buan Vda. de Esconde v. Court of
Appeals,79 explained this form of implied trust as follows:
A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in
a typical trust, confidence is reposed in one person who is named a trustee for the
benefit of another who is called the cestui que trust, respecting property which is held
by the trustee for the benefit of the cestui que trust. A constructive trust, unlike an
express trust, does not emanate from, or generate a fiduciary relation. While in an
express trust, a beneficiary and a trustee are linked by confidential or fiduciary
relations, in a constructive trust, there is neither a promise nor any fiduciary relation to
speak of and the so-called trustee neither accepts any trust nor intends holding the
property for the beneficiary.
xxxx
x x x [C]onstructive trusts are created by the construction of equity in order to satisfy
the demands of justice and prevent unjust enrichment. They arise contrary to intention
against one who, by fraud, duress or abuse of confidence, obtains or holds the legal
right to property which he ought not, in equity and good conscience, to hold.80
It is settled that an action for reconveyance based on a constructive implied trust
prescribes in 10 years likewise in accordance with Article 1144 of the Civil Code. Yet not
like in the case of a resulting implied trust and an express trust, prescription supervenes
in a constructive implied trust even if the trustee does not repudiate the relationship. In

other words, repudiation of said trust is not a condition precedent to the running of the
prescriptive period.81
As to when the prescriptive period commences to run, Crisostomo v. Garcia82 elucidated
as follows:
When property is registered in another's name, an implied or constructive trust is
created by law in favor of the true owner. The action for reconveyance of the title to the
rightful owner prescribes in 10 years from the issuance of the title. An action for
reconveyance based on implied or constructive trust prescribes in ten years from the
alleged fraudulent registration or date of issuance of the certificate of title over the
property.
1avvphi1
It is now well settled that the prescriptive period to recover property obtained by fraud
or mistake, giving rise to an implied trust under Art. 1456 of the Civil Code, is 10 years
pursuant to Art. 1144. This ten-year prescriptive period begins to run from the date the
adverse party repudiates the implied trust, which repudiation takes place when the
adverse party registers the land.83
From the foregoing, it is clear that an action for reconveyance under a constructive
implied trust in accordance with Article 1456 does not prescribe unless and until the
land is registered or the instrument affecting the same is inscribed in accordance with
law, inasmuch as it is what binds the land and operates constructive notice to the
world.84 In the present case, however, the lands involved are concededly unregistered
lands; hence, there is no way by which Margarita, during her lifetime, could be notified
of the furtive and fraudulent sales made in 1992 by Roberto in favor of respondents,
except by actual notice from Pedro himself in August 1995. Hence, it is from that date
that prescription began to toll. The filing of the complaint in February 1996 is well
within the prescriptive period. Finally, such delay of only six (6) months in instituting
the present action hardly suffices to justify a finding of inexcusable delay or to create an
inference that Margarita has allowed her claim to stale by laches.
WHEREFORE, the Petition is GRANTED. The October 13, 2006 Decision of the Court of
Appeals in CA-G.R. CV No. 72371, affirming the July 2, 2001 judgment of the Regional
Trial Court of La Union, Branch 33 in Civil Case No. 1031-BG, is REVERSED and SET
ASIDE, and a new one is entered (a) directing the cancellation of the tax declarations
covering the subject properties in the name of Roberto D. Laigo and his transferees; (b)
nullifying the deeds of sale executed by Roberto D. Laigo in favor of respondents Pedro
Roy Laigo and Marilou Laigo; and (c) directing said respondents to execute
reconveyance in favor of petitioner.
SO ORDERED.
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 116211 March 7, 1997

MEYNARDO POLICARPIO, petitioner,
vs.
COURT OF APPEALS and ROSITO PUECHI S. UY, respondents.
PANGANIBAN, J.:
The Court finds occasion to apply the general principles of constructive trust as
authorized by the Civil Code in granting this petition and in compelling private
respondent to implement his trust relationship with petitioner.
This is a petition under Rule 45 of the Rules of Court to reverse the Decision 1 of public
respondent 2 in CA-G.R. CV No. 32821 promulgated on March 21, 1994, and the
Resolution 3 promulgated on July 5, 1994, denying petitioner's motion for reconsideration.
The dispositive portion of the assailed Decision reads: 4

WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. REVERSING and SETTING ASIDE the appealed decision dated 10
September 1990;
2. DISMISSING the Complaint; and
3. Without pronouncement as to costs.
The Facts
The facts of the case, as culled from the challenged Decision, are simple. Petitioner
(along with his co-plaintiffs in the antecedent cases, namely, Rodolfo Gayatin, Jose
Villacin and Jocelyn Montinola 5) and private respondent were former tenants of the 30-
door Barretto Apartments formerly owned by Serapia Realty, Inc.. Sometime in April 1984,
private respondent was elected President of the Barretto Tenants Association (hereafter
referred to as the "Association") which was formed, among others, "to promote, safeguard
and protect the general interest and welfare of its members." 6
In a letter dated July 30, 1984, private respondent as president of the Association
sought the assistance of the then Minister of Human Settlements to cause the
expropriation of the subject property under the Urban Land Reform Program for
subsequent resale to its tenants. The matter was endorsed to the Human Settlements
Regulatory Commission, which in a letter dated November 5, 1984, signed by

Commissioner and Chief Executive Officer Ernesto C. Mendiola, rejected the tenant's
request for expropriation. The letter stated in part: 7
At the moment, the effects of the provisions of PD 1517, otherwise known
as the Urban Land Reform Decree, are limited only to the proclaimed 245
APD's and/or ULRZ's. Be informed further that, pursuant to Rule VIII & IX
of the Rules and Regulations of the abovementioned Decree, expropriation
will be availed of only as a last resort as there are various modes of Land
Acquisition/Disposition techniques which the Ministry can avail of to help
bonafide (sic) tenants/residents of a certain area.
Failing to get the assistance of the government, the tenants undertook to negotiate
directly with the owners of the Barretto Apartments. Initially, Private Respondent
Rosito Uy orally expressed to Mrs. Rosita Barretto Ochoa the tenants' desire to purchase
their respective units. Later, in a letter dated May 29, 1985, signed by thirty (30)
tenants of the commercial and residential units, the tenants formally expressed to Mrs.
Ochoa their intent to purchase.
On July 27, 1985, Serapia Real Estate, Inc., sent to Rosito Uy, in his capacity as
president of the Association, the following letter: 8
Sir:
This is in response to your letter regarding your intent to buy our property
together with its improvements located at corners Haig and Romualdez
Streets and along Gen. Kalentong Street, Mandaluyong, Metro Manila. We
would like to inform you that we are offering to sell the said property at a
price of FOUR MILLION FIVE HUNDRED THOUSAND (P4,500,000.00)
PESOS ONLY, under the following Terms and Conditions:
AREA: 2,237 square meters
Manner of Payment: An earnest money of P100,000.00 within 30 days.
Full payment payable within 60
days.
This offer is on a "FIRST COME FIRST SERVED BASIS" and our price is
good only within 60 days or until September 30, 1985 only.
Thank You.
In addition, Serapia Realty, Inc., sent to spouses Gayatin a mimeographed letter
stating: 9
Mr./Mrs. Gayatin

SIR/MADAM:
Please be informed that we are intending to sell the unit you are now
occupying.
We are therefore giving you the first priority to purchase the same, if you
desire.
We are giving you a period of ten (10) days from receipt hereof to see
us(,) otherwise, we will consider your inaction a waiver in (sic) your part
to purchase the same.
On November 20, 1985, Rodolfo Gayatin acknowledged receipt of the said letter with a
request that he be furnished with the following information: 10
a. Consideration of the sale;
b. Terms and conditions of the sale; and
c. Plan indicating the areas and boundaries of each unit.
Letters acknowledging receipt of Mrs. Ochoa's letter of intent to sell the apartment unit
occupied by the tenants were sent by Dionisio Enriquez and Elena J. Baares. The
tenants designated and appointed private respondent as their president to negotiate
with Serapia Realty, Inc.. But the negotiations apparently did not ripen into a perfected
sale.
One and a half years later, on March 12, 1987, petitioner and his co-plaintiffs were
notified that private respondent was the new owner of the apartment units occupied by
them. Believing that they had been betrayed by their Association president, petitioner
sued for "Redemption and Damages with Prayer For Preliminary Injunction."
Private respondent counter-sued for Damages and Accion Publiciana with Preliminary
Attachment. Joint trial of the two cases ensued. The trial court found that private
respondent had been designated and entrusted by plaintiffs to negotiate with the
Barretto family for the sale of the units. It also found that a constructive trust was
created between the private respondent as "the cestui que trust [should be trustee] and
plaintiffs as beneficiaries [or cestuis que trust] vis-a-vis the subject units." 11 The
dispositive portion of the trial court decision
reads: 12
WHEREFORE, judgment is hereby rendered in the above-entitled cases in

favor of plaintiffs Rodolfo Gayatin, Jose Villacin, Jocelyn Montinola and
Meynardo Policarpio, and against defendant, Rosito Puechi S. Uy,
1. Ordering said defendant to execute the corresponding deeds of
conveyance in favor of plaintiffs Meynardo Policarpio, Jocelyn Montinola,

Jose Villacin and Rodolfo Gayatin covering Door 8, Lot 14; Door 3, Lot 9;
Door 2, Lot 9; and Door 1, Lot 9, upon refund by the plaintiffs to the
defendant of the sums of P35,200.00; P35,520.00; P35,600.00 and
P47,200.00 respectively, without any interest.
Should defendant Uy fail to so execute the deeds of conveyance herein
ordered within fifteen (15) days from finality of judgment, the Clerk of this
Court will execute the same and the Register of Deeds will be ordered to
nullify the certificates of title in the name of said defendant and to issue
other certificates of title in favor of the four above-named plaintiffs,
respectively; and to pay to the plaintiffs the following sums:
a) P15,000.00 as attorney's fees;
b) P40,000.00 as moral damages; and
c) P20,000.00 as exemplary damages,
all with interest at 12% per annum from date of this decision;
2. Dismissing the Complaint in Civil Case No. 54444 as far as defendant
Serapia Real Estate Inc. is concerned;
3. Dismissing defendants' counterclaims in Civil Case No. 54444; and
4. Dismissing Rosito Puechi Uy's complaint in Civil Case No. 55739.
Costs against defendant Uy.
Private respondent appealed the decision to public respondent which as earlier stated
reversed the decision and denied the subsequent motion for reconsideration. Hence, this
petition only by Meynardo Policarpio. His co-plaintiff in the antecedent case, Jose
Villacin, filed a Petition for Intervention 13 on March 28, 1995, which the First Division of
this Court in a Resolution dated June 26, 1995, denied for lack of merit, because Villacin's
earlier petition docketed as G.R. No. 116137 (Jose Villacin vs. Court of Appeals, et al.) had
already been dismissed for failure to attach an affidavit of service. 14
The Issue
The sole issue raised by petitioner in this appeal is:
15
The respondent Court erred in reversing the finding of the trial court that a
constructive trust existed between the plaintiffs and the defendant.
Public respondent, in finding that a constructive trust had not been created, ruled: 16

The contemporary and subsequent acts of the parties herein fail to
convince Us that a constructive trust exists for the benefit of the appellees
(tenants). A reading of the Articles of Incorporation of Barretto Apartment
Tenants Association, Inc. (Exh. "J") shows that the purpose for its
formation is couched in general terms without specifically stipulating the
proposed purchase and sale of the apartment units. While it may be
conceded that the sale to the tenants was a general concern that would
have redounded to their benefit, still it cannot be denied that the
transaction could not have been effected unless the tenants and the
owners came to terms regarding the sale. The record reveals that
appellant (herein private respondent) did in fact send several
communications, first to the Ministry of Human Settlements and when this
avenue did not prosper, to the Barretto family in an effort to pursue their
common desire to own their respective unit(s). The letter to the Minister
of Human Settlements is dated July 30, 1984 (Exh. "J") about a year
before the execution of the Articles of Incorporation on 06 August 1985.
Incidentally, no evidence appears on record to show that the Association
filed the requisite documents for incorporation with the Securities and
Exchange Commission.
The Deeds of Absolute Sale in favor of appellant over appellees' unit
appear to have been executed on 05 August 1986 (Exhs. "B" to "F") or
about two (2) years after appellant was designated President of the
Association and approximately one (1) year after the Articles of
Incorporation were drawn up and signed by the parties. (Exhibit "S")
Public respondent contended that plaintiffs were informed of the negotiations for the
purchase and sale of property. Further, public respondent said:
it appears incumbent upon the tenants to verify from time to time on ( sic)
the progress of the negotiations not only from Mrs. Ochoa but also from
appellant who live (sic) in the same apartment complex. Their inaction
leads to the impression that they lacked interest to pursue their original
plan to purchase the property or they could not agree on the terms and
conditions for the sale. 17
Before us, petitioner argues that public respondent erred in stating that "there was no
common interest on the pan of the members of the association to purchase units they
were occupying." 18 He also maintains that it is immaterial whether the intent to buy the
units was specifically stated in the purposes of the Association. What is important is that the
"contemporary and subsequent acts of parties indicated such a purpose." Petitioner insists
that the tenants had authorized and private respondent had agreed to negotiate with the
owners regarding the terms of the sale, precisely to conform to the desire of the owners to
deal with only one person. Petitioner vehemently denies that the co-tenants of private
respondent "had revoked or withdrawn the authority and trust reposed on the private
respondent to act as negotiator in their behalf." 19

Private respondent rebuts by saying that the entire property consisting of thirty (30)
doors was not sold on one particular date. Rather, there were actually two batches of
sale. He asserts that petitioner, in feigning ignorance of the two batches of sale and
siting private respondent, had created an alibi to suspend payment of rental for years.
20
It should also be considered, states private respondent, that upon denial of the tenants'
request for expropriation by the Ministry of Human Settlements, and the revelation that
Barretto's apartments were heavily encumbered, tenants "completely abandoned the
plan to organize a formal association." Assuming for the sake of argument, adds private
respondent, that the informal Association created a relationship among the parties, "the
same ceased and expired by virtue of the act of the owners of the apartment who
directly deal with the tenants" under Article 1924 21 of the Civil Code. 22
The Court's Ruling

We find for petitioner.
As a rule, the jurisdiction of this Court in cases brought before it from the Court of
Appeals is limited to the review and revision of errors of law allegedly committed by the
appellate court. However, when there is conflict between the factual findings of the
Court of Appeals and the trial court, 23 the Court may review such findings and conclusions,
as we now do.
We hold that an implied trust was created by the agreement between petitioner (and
the other tenants) and private respondent. Implied trusts are those which, without
being expressed, are deducible from the nature of the transaction by operation of law as
matters of equity, independently of the particular intention of the parties. 24 Constructive
trusts are created in order to satisfy the demands of justice and prevent unjust enrichment.
They arise against one who, by fraud, duress or abuse of confidence, obtains or holds the
legal right to property which he ought not, in equity and good conscience, to hold. 25 It is not
necessary that the intention of the tenants to purchase their apartments units be
categorically stated in the purposes of their Association. A constructive trust as invoked by
petitioner can be implied from the nature of the transaction as a matter of equity, regardless
of the absence of such intention in the purposes of their Association. During his negotiations
with Serapia Realty, Inc., private respondent admitted that he was not only representing
himself but also the other tenants as president of the Association. This admission recognized
the confidence reposed in him by his co-tenants. He testified: 26
Q Apart from the Regulatory Commission, and from the First

Lady Imelda Marcos, you did not make any communication
to any person or body in your capacity as President of the
Association anymore?
A We also tried to negotiate with Mr. Ochoa.
Q What was your purpose of attempting to communicate
with Mr. Ochoa?

A So that those who cannot afford to pay in cash can be
allowed to pay in installment.
Q You used the word "we", to whom are you referring to?
A My co-tenants in the apartment.
Q And when you made representations with the owner of the
apartment, you were doing this in your capacity as
President?
A Both as individual member and as President.
Q In your capacity as both individual member and President?
A Yes, sir.
Alfonso Barretto, president of Serapia Real Estate Corporation, testified that the owners
wanted to deal with one "spokesman." 27 Hence, the tenants authorized private respondent
to negotiate on their behalf. Unfortunately, private respondent negotiated for himself only,
and successfully purchased eight (8) apartment units and secured an authority to sell the
remaining twenty-two (22) units.
Private respondent alleges that, after being informed by the owner, petitioner, together
with the latter's co-plaintiffs in the action for redemption, did not want to contribute
funds to redeem the encumbered apartment. (Such redemption was required before the
units could be sold.) The trial court debunked this allegation thus: 28
. . . . It taxes the mind no end to accept defendant's claim that when the
units which the tenants have for years been dreaming of owning one day
were ready to be sold to them, all of them would suddenly become
"reluctant," to quote his word, to buy them. Considering the virtually ( sic)
give-away considerations (P42,200.00, P35,600.00, P35,520.00 and
P35,200.00) for the subject units all of which were uniformly two-storey
apartments with "2 bedrooms, living and dining rooms and kitchen" (citing
TSN, January 12, 1990, p. 7) situated in a strategic and prime area, it is
unbelievable and inconsistent with the ordinary imperatives of human
experience for the plaintiffs to suddenly show reluctance towards the
opportunity they have been expecting and preparing for all along.
If only the tenants had been informed by private respondent of this predicament of the
owners, surely they would have raised the required amount to redeem the property and,
in turn, acquired the units being rented by them. The incriminating admission of private
respondent that he had not informed the plaintiffs in the redemption case of the prices
at which the apartment units were sold demonstrated beyond cavil his betrayal of their
trust: 29

Q Did you inform vergally (sic) these 4 plaintiffs that their
apartments were being bought at P47,200.00, P35,600,
P35,520 and P35,200?
A I did not.
Q As President of the association who got the trust and
confidence of the members including the 4 plaintiffs, did you
not consider it in keeping with trust and confidence to
officially inform them that these apartments is (sic) being
sold at that (sic) prices and if you could buy this (sic), you
pay this (sic) amount. You did not inform them, is it not?
ATTY. BALLELOS (counsel for private respondent):
Already answered. He did not inform them but as far as the
amount is concerned as a matter of discretion.
The ability of the tenants to pay the purchase price for their units was clearly found by
trial court to be sufficient; and this finding was not contested by private respondent, to
wit: 30
The ability of the plaintiffs to pay for their respective apartment units in
question is demonstrated when they promptly complied with the Court's
Order of March 15, 1990 "to pay to the Branch Clerk of this Court all the
rentals due on their respective units from the time they stopped paying up
to this month of March, which amounts were ordered to be deposited
"with the Philippine National Bank, Pasig Branch, Shaw Blvd., Pasig, in
self-renewing 120-day time deposits," which now stands at P126,434.84
(including "the monthly rentals in the same amount that they were last
paying to defendant Serapia Real Estate, Inc.," from the month of April
1990 to July 1990) per PNB Certificates of Time Deposit Nos. 713637-C,
713638-C, 713639-C, 713640-C and 6713641-C, all dated August 30,
1990, now in the possession of the Branch Clerk of this Court.
The tenants could not be faulted for not inquiring into the status of private respondent's
negotiation with the owners of the apartments. They had a right to expect private
respondent to be true to his duty as their representative and to take the initiative of
informing them of the progress of his negotiations.
The sale of the apartments in favor of private respondent was on August 6, 1986. Yet, it
was only on March 27, 1987, that he informed the tenants of such sale. If he was in
good faith, why the delay? Obviously, he hid the perfection of the sale from them. Why
did he not inform the tenants that he was the owner as soon as the sale was
consummated if, according to him, his co-tenants were unwilling to share the expenses
of redemption? His co-tenants could not have blamed him for acquiring the entire
property; after all, they supposedly did not have the money to contribute. Truly, the
actuations of private respondent show nothing but greed on his part; he purchased the

units for himself at bargain prices so he could resell them at a profit at the expense of
the tenants. This violation of the trust reposed in him warrants the sanction provided by
the equitable rule on which constructive trust is founded. Unfortunately, however, not
all the plaintiffs in the original redemption case will be able to avail of this award
because a party who has not appealed from the decision may not obtain any affirmative
relief from the appellate court other than what he had obtained from the lower court, if
any, whose decision is brought up on appeal. 31
The conclusion we thus reach in this case, finding constructive trust under Article
1447 32 of the New Civil Code, rests on the general principles on trust which, by Article 1442,
have been adopted or incorporated into our civil law, to the extent that such principles are
not inconsistent with the Civil Code, other statutes and the Rules of Court.
This Court has ruled in the case of Sumaoang vs. Judge, RTC, Br. XXXI, Guimba, Nueva
Ecija 33 that:
A constructive trust, otherwise known as a trust ex maleficio, a trust ex

delicto, a trust de son tort, an involuntary trust, or an implied trust, is a
trust by operation of law which arises contrary to intention and in invitum,
against one who, by fraud, actual or constructive, by duress or abuse of
confidence, by commission of wrong, or by any form of unconscionable
conduct, artifice, concealment, or questionable means, or who in any way
against equity and good conscience, either has obtained or holds the legal
right to property which he ought not, in equity and good conscience, hold
and enjoy. It is raised by equity to satisfy the demands of justice.
However, a constructive trust does not arise on every moral wrong in
acquiring or holding property or on every abuse of confidence in business
or other affairs; ordinarily such a trust arises and will be declared only on
wrongful acquisitions or retentions of property of which equity, in
accordance with its fundamental principles and the traditional exercise of
its jurisdiction or in accordance with statutory provision, takes cognizance.
It has been broadly ruled that a breach of confidence, although in business
or social relations, rendering an acquisition or retention of property by one
person unconscionable against another, raises a constructive trust.
And specifically applicable to the case at bar is the doctrine that "A
constructive trust is substantially an appropriate remedy against unjust
enrichment. It is raised by equity in respect of property, which has been
acquired by fraud, or where although acquired originally without fraud, it
is against equity that it should be retained by the person holding it."
The above principle is not in conflict with the New Civil Code, Codes of
Commerce, Rules of Court and special laws. And since We are a court of
law and of equity, the case at bar must be resolved on the general
principles of law on constructive trust which basically rest on equitable
considerations in order to satisfy the demands of justice, morality,
conscience and fair dealing and thus protect the innocent against fraud. As
the respondent court said, "It behooves upon the courts to shield fiduciary

relations against every manner of chicanery or detestable design cloaked
by legal technicalities."
Although the citations in the said case originated from American jurisprudence, they
may well be applied in our jurisdiction. "(S)ince the law of trust has been more
frequently applied in England and in the United States than it has been in Spain, we may
draw freely upon American precedents in determining the effects of trusts, especially so
because the trusts known to American and English equity jurisprudence are derived
from the fidei commissa of the Roman Law and are based entirely upon civil law
principles." 34
Having concluded that private respondent willfully violated the trust reposed in him by
his co-tenants, we consider it a serious matter of "justice, morality, conscience and fair
dealing" that he should not be allowed to profit from his breach of trust. "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." 35 Thus, petitioner is granted the opportunity to purchase the
property which should have been his long ago had private respondent been faithful to his
trust.
We only regret that we cannot grant the same opportunity to the other beneficiaries
or cestuis que trustfor their failure to perfect their petitions for review of the
respondent Court's Decision.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision and Resolution are
hereby REVERSED and SET ASIDE. Consistent with the trial court's decision, Private
Respondent Rosito Puechi S. Uy is ORDERED to EXECUTE a deed of conveyance covering
Door 8, Lot 14, in favor of Petitioner Meynardo Policarpio upon the latter's payment of
P35,200.00 without any interest.
No costs.
SO ORDERED.

PRESCRIPTION
Prescription of Action
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 143377
February 20, 2001
SHIPSIDE INCORPORATED, petitioner,

vs.
THE HON. COURT OF APPEALS [Special Former Twelfth Division], HON. REGIONAL TRIAL
COURT, BRANCH 26 (San Fernando City, La Union) & The REPUBLIC OF THE
PHILIPPINES, respondents.
MELO, J.:
Before the Court is a petition for certiorari filed by Shipside Incorporated under Rule 65
of the 1997 Rules on Civil Procedure against the resolutions of the Court of Appeals
promulgated on November 4, 1999 and May 23, 2000, which respectively, dismissed a
petition for certiorari and prohibition and thereafter denied a motion for
reconsideration.
The antecedent facts are, undisputed:
On October 29, 1958, Original Certificate of Title No. 0-381 was issued in favor of Rafael
Galvez, over four parcels of land - Lot 1 with 6,571 square meters; Lot 2, with 16,777
square meters; Lot 3 with 1,583 square meters; and Lot 4, with 508 square meters.
On April 11, 1960, Lots No. 1 and 4 were conveyed by Rafael Galvez in favor of Filipina
Mamaril, Cleopatra Llana, Regina Bustos, and Erlinda Balatbat in a deed of sale which
was inscribed as Entry No. 9115 OCT No.0-381 on August 10, 1960. Consequently,
Transfer Certificate No. T-4304 was issued in favor of the buyers covering Lots No. 1 and
4.
Lot No. 1 is described as:
A parcel of land (Lot 1, Plan PSU-159621, L.R. Case No. N-361; L.R.C. Record No.
N-14012, situated in the Barrio of Poro, Municipality of San Fernando, Province of
La Union, bounded on the NE, by the Foreshore; on the SE, by Public Land and
property of the Benguet Consolidated Mining Company; on the SW, by properties

of Rafael Galvez (US Military Reservation Camp Wallace) and Policarpio Munar;
and on the NW, by an old Barrio Road. Beginning at a point marked "1" on plan,
being S. 74 deg. 11'W., 2670.36 from B.L.L.M. 1, San Fernando, thence
S. 66 deg. 19'E., 134.95 m. to point 2; S.14 deg. 57'W., 11.79 m. to point 3;
S. 12 deg. 45'W., 27.00 m. to point 4; S. 12 deg. 45'W, 6.90 m. to point 5;
N. 69 deg., 32'W., 106.00 m. to point 6; N. 52 deg., 21'W., 36.85 m. to point 7;
N. 21 deg. 31'E., 42.01 m. to the point of beginning; containing an area of SIX
THOUSAND FIVE HUNDRED AND SEVENTY - ONE (6,571) SQUARE METERS, more
or less. All points referred to are indicated on the plan; and marked on the
ground; bearings true, date of survey, February 4-21, 1957.
Lot No. 4 has the following technical description:
A parcel of land (Lot 4, Plan PSU-159621, L.R. Case No. N-361 L.R.C. Record No.
N-14012), situated in the Barrio of Poro, Municipality of San Fernando, La Union.
Bounded on the SE by the property of the Benguet Consolidated Mining Company;
on the S. by property of Pelagia Carino; and on the NW by the property of Rafael
Galvez (US Military Reservation, Camp Wallace). Beginning at a point marked "1"
on plan, being S. deg. 24'W. 2591.69 m. from B.L.L.M. 1, San Fernando, thence S.
12 deg. 45'W., 73.03 m. to point 2; N. 79 deg. 59'W., 13.92 m. to point 3; N. 23
deg. 26'E., 75.00 m. to the point of beginning; containing an area of FIVE
HUNDED AND EIGHT (508) SQUARE METERS, more or less. All points referred to
are indicated in the plan and marked on the ground; bearings true, date of
survey, February 4-21, 1957.
On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4 to Lepanto Consolidated
Mining Company. The deed of sale covering the aforesaid property was inscribed as
Entry No. 9173 on TCT No. T-4304. Subsequently, Transfer Certificate No. T-4314 was
issued in the name of Lepanto Consolidated Mining Company as owner of Lots No. 1 and
4.
On February 1, 1963, unknown to Lepanto Consolidated Mining Company, the Court of
First Instance of La Union, Second Judicial District, issued an Order in Land Registration
Case No. N- 361 (LRC Record No. N-14012) entitled "Rafael Galvez, Applicant, Eliza
Bustos, et al., Parties-In-Interest; Republic of the Philippines, Movant" declaring OCT
No. 0-381 of the Registry of Deeds for the Province of La Union issued in the name of
Rafael Galvez, null and void, and ordered the cancellation thereof.
The Order pertinently provided: Accordingly, with the foregoing, and without
prejudice on the rights of incidental parties concerned herein to institute their
respective appropriate actions compatible with whatever cause they may have, it
is hereby declared and this court so holds that both proceedings in Land
Registration Case No. N-361 and Original Certificate No. 0-381 of the Registry of
Deeds for the province of La Union issued in virtue thereof and registered in the

name of Rafael Galvez, are null and void; the Register of Deeds for the Province
of La Union is hereby ordered to cancel the said original certificate and/or such
other certificates of title issued subsequent thereto having reference to the same
parcels of land; without pronouncement as to costs.
On October 28, 1963, Lepanto Consolidated Mining Company sold to herein petitioner
Lots No. 1 and 4, with the deed being entered in TCT No. 4314 as entry No. 12381.
Transfer Certificate of Title No. T-5710 was thus issued in favor of the petitioner which
starting since then exercised proprietary rights over Lots No. 1 and 4.
In the meantime, Rafael Galvez filed his motion for reconsideration against the order
issued by the trial court declaring OCT No. 0-381 null and void. The motion was denied
on January 25, 1965. On appeal, the Court of Appeals ruled in favor of the Republic of
the Philippines in a Resolution promulgated on August 14, 1973 in CA-G.R. No. 36061R.
1wphi1.nt
Thereafter, the Court of Appeals issued an Entry of Judgment, certifying that its decision
dated August 14, 1973 became final and executory on October 23, 1973.
On April 22, 1974, the trial court in L.R.C. Case No. N-361 issued a writ of execution of
the judgment which was served on the Register of Deeds, San Fernando, La Union on
April 29, 1974.
Twenty four long years, thereafter, on January 14, 1999, the Office of the Solicitor
General received a letter dated January 11, 1999 from Mr. Victor G. Floresca, VicePresident, John Hay Poro Point Development Corporation, stating that the
aforementioned orders and decision of the trial court in L.R.C. No. N-361 have not been
executed by the Register of Deeds, San Fernando, La Union despite receipt of the writ of
execution.
On April 21, 1999, the Office of the Solicitor General filed a complaint for revival of
judgment and cancellation of titles before the Regional Trial Court of the First Judicial
Region (Branch 26, San Fernando, La Union) docketed therein as Civil Case No. 6346
entitled, "Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez,
represented by Teresita Tan, Reynaldo Mamaril, Elisa Bustos, Erlinda Balatbat, Regina
Bustos, Shipside Incorporated and the Register of Deeds of La Union, Defendants."
The evidence shows that the impleaded defendants (except the Register of Deeds of the
province of La Union) are the successors-ininterest of Rafael Galvez (not Reynaldo
Galvez as alleged by the Solicitor General) over the property covered by OCT No. 0-381,
namely: (a) Shipside Inc. which is presently the registered owner in fee simple of Lots
No. 1 and 4 covered by TCT No. T -5710, with a total area of 7,079 square meters; (b)
Elisa Bustos, Jesusito Galvez, and Teresita Tan who are the registered owners of Lot No.
2 of OCT No. 0-381; and (c) Elisa Bustos, Filipina Mamaril, Regina Bustos and Erlinda
Balatbat who are the registered owners of Lot No. 3 of OCT No. 0-381, now covered by
TCT No. T-4916, with an area of 1,583 square meters.

In its complaint in Civil Case No.6346, the Solicitor General argued that since the trial
court in LRC Case No. 361 had ruled and declared OCT No. 0-381 to be null and void,
which ruling was subsequently affirmed by the Court of Appeals, the defendantssuccessors-in-interest of Rafael Galvez have no valid title over the property covered by
OCT No. 0-381, and the subsequent Torrens titles issued in their names should be
consequently cancelled.
On July 22, 1999, petitioner Shipside, Inc. filed its Motion to Dismiss, based on the
following grounds: (1) the complaint stated no cause of action because only final and
executory judgments may be subject of an action for revival of judgment; (2) .the
plaintiff is not the real party-in-interest because the real property covered by the
Torrens titles sought to be cancelled, allegedly part of Camp Wallace (Wallace Air
Station), were under the ownership and administration of the Bases Conversion
Development Authority (BCDA) under Republic Act No. 7227; (3) plaintiff's cause of
action is barred by prescription; {4) twenty-five years having lapsed since the issuance
of the writ of execution, no action for revival of judgment may be instituted because
under Paragraph 3 of Article 1144 of the Civil Code, such action may be brought only
within ten (10) years from the time the judgment had been rendered.
An opposition to the motion to dismiss was filed by the Solicitor General on August 23,
1999, alleging among others, that: (1) the real party-in-interest is the Republic of the
Philippines; and (2) prescription does not run against the State.
On August 31, 1999, the trial court denied petitioner's motion to dismiss and on October
14, 1999, its motion for reconsideration was likewise turned down.
On October 21, 1999, petitioner instituted a petition for certiorari and prohibition with
the Court of Appeals, docketed therein as CA-G.R. SP No. 55535, on the ground that the
orders of the trial court denying its motion to dismiss and its subsequent motion for
reconsideration were issued in excess of jurisdiction.
On November 4, 1999, the Court of Appeals dismissed the petition in CA-G.R. SP No.
55535 on the ground that the verification and certification in the petition, tinder the
signature of Lorenzo Balbin, Jr., was made without authority, there being no proof
therein that Balbin was authorized to institute the petition for and in behalf and of
petitioner.
On May 23, 2000, the Court of Appeals denied petitioner's, motion for reconsideration
on the grounds that: (1) a complaint filed on behalf of a corporation can be made only if
authorized by its Board of Directors, and in the absence thereof, the petition cannot
prosper and be granted due course; and (2) petitioner was unable to show that it had
substantially complied with the rule requiring proof of authority to institute an action or
proceeding.
In support of its petition, Shipside, Inc. asseverates that:

1. The Honorable Court of Appeals gravely abused its discretion in dismissing the
petition when it made a conclusive legal presumption that Mr. Balbin had no
authority to sign the petition despite the clarity of laws, jurisprudence and
Secretary's certificate to the contrary;
2. The Honorable Court of Appeals abused its discretion when it dismissed the
petition, in effect affirming the grave abuse of discretion committed by the lower
court when it refused to dismiss the 1999 Complaint for Revival of a 1973
judgment, in violation of clear laws and jurisprudence.
Petitioner likewise adopted the arguments it raised in the petition' and comment/reply
it filed with the Court of Appeals, attached to its petition as Exhibit "L" and "N",
respectively.
In his Comment, the Solicitor General moved for the dismissal of the instant petition
based on the following considerations: (1) Lorenzo Balbin, who signed for and in behalf
of petitioner in the verification and certification of non-forum shopping portion of the
petition, failed to show proof of his authorization to institute the petition for certiorari
and prohibition with the Court of Appeals, thus the latter court acted correctly in
dismissing the same; (2) the real party-in-interest in the case at bar being the Republic
of the Philippines, its claims are imprescriptible.
In order to preserve the rights of herein parties, the Court issued a temporary
restraining order on June 26, 2000 enjoining the trial court from conducting further
proceedings in Civil Case No. 6346.
The issues posited in this case are: (1) whether or not an authorization from petitioner's
Board of Directors is still required in order for its resident manager to institute or
commence a legal action for and in behalf of the corporation; and (2) whether or not the
Republic of the Philippines can maintain the action for revival of judgment herein.
We find for petitioner.
Anent the first issue:
The Court of Appeals dismissed the petition for certiorari on the ground that Lorenzo
Balbin, the resident manager for petitioner, who was the signatory in the verification
and certification on non-forum shopping, failed to show proof that he was authorized by
petitioner's board of directors to file such a petition.
A corporation, such as petitioner, has no power except those expressly conferred on it
by the Corporation Code and those that are implied or incidental to its existence. In
turn, a corporation exercises said powers through its board of directors and/or its duly
authorized officers and agents. Thus, it has been observed that the power of a
corporation to sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers (Premium Marble Resources, Inc. v. CA, 264 SCRA 11
[1996]). In turn, physical acts of the corporation, like the signing of documents, can be

performed only by natural persons duly authorized for the purpose by corporate by-laws
or by a specific act of the board of directors.
It is undisputed that on October 21, 1999, the time petitioner's Resident Manager Balbin
filed the petition, there was no proof attached thereto that Balbin was authorized to
sign the verification and non-forum shopping certification therein, as a consequence of
which the petition was dismissed by the Court of Appeals. However, subsequent to such
dismissal, petitioner filed a motion for reconsideration, attaching to said motion a
certificate issued by its "board secretary stating that on October 11, 1999, or ten days
prior to the filing of the petition, Balbin had been authorized by petitioner's board of
directors to file said petition.
The Court has consistently held that the requirement regarding verification of a pleading
is formal, not jurisdictional (Uy v. LandBank, G.R. No. 136100, July 24, 2000). Such
requirement is simply a condition affecting the form of the pleading, non-compliance
with which does not necessarily render the pleading fatally defective. Verification is
simply intended to secure an assurance that the allegations in the pleading are true and
correct and not the product of the imagination or a matter of speculation, and that the
pleading is filed in good faith. The court may order the correction of the pleading if
verification is lacking or act on the pleading although it is not verified, if the attending
circumstances are such that strict compliance with the rules may be dispensed with in
order that the ends of justice may thereby be served.
On the other hand, the lack of certification, against forum shopping is generally not
curable by the submission thereof after the filing of the petition. Section 5, Rule 45 of
the 1997 Rules of civil Procedure provides that the failure of the petitioner to submit the
required documents that should accompany the petition, including the certification
against forum shopping, shall be sufficient ground for the dismissal thereof. The same
rule applies to certifications against forum shopping signed by a person on behalf of a
corporation which are unaccompanied by proof that said signatory is authorized to file a
petition on behalf of the corporation.
In certain exceptional circumstances, however, the Court has allowed the belated filing
of the certification. InLoyola v. Court of Appeals, et. al. (245 SCRA 477 [1995]), the
Court considered the filing of the certification one day after the filing of an election
protest as substantial compliance with the requirement. In Roadway Express, Inc. v.
Court of Appeals, et. al. (264 SCRA 696 [1996]), the Court allowed the filing of the
certification 14 days before the dismissal of the petition. In "Uy v. LandBank, supra, the
Court had dismissed Uy's petition for lack of verification and certification against nonforum shopping. However, it subsequently reinstated the petition after Uy submitted a
motion to admit certification and non-forum shopping certification. In all these cases,
there were special circumstances or compelling "reasons that justified the relaxation of
the rule requiring verification and certification on non-forum shopping.
In the instant case, the merits of petitioner' case should be considered special
circumstances or compelling reasons that justify tempering the requirement in regard to
the certificate of non-forum shopping. Moreover, inLoyola, Roadway, and Uy, the Court
excused non-compliance with the requirement as to the certificate of non-forum

shopping. With more reason should we allow the instant petition since petitioner
herein did submit a certification on non-forum shopping, failing only to show proof that
the signatory was authorized to do so. That petitioner subsequently submitted a
secretary's certificate attesting that Balbin was authorized to file an action on behalf of
petitioner likewise, mitigates this oversight.
It must also be kept in mind that while the requirement of the certificate of non-forum
shopping is mandatory, nonetheless the requirements must not be interpreted too
literally and thus defeat the objective of preventing the undesirable practice of forumshopping (Bernardo v. NLRC, .255 SCRA 108 [1996]). Lastly, technical rules of
procedure should be used to promote, not frustrate justice. While the swift unclogging
of court dockets is a laudable objective, the granting of substantial justice is an even
more urgent ideal.
Now to the second issue:
The action instituted by the Solicitor General in the trial court is one for revival of
judgment which is governed by Article 1144(3) of the Civil Code and Section 6, Rule 39
of the 1997 Rules on Civil Procedure. Article 1144(3) provides that an action upon a
judgment "must be brought within 10 years from the time the right of action
accrues." On the other hand, Section 6, Rule 39 provides that a final and executory
judgment or order may be executed on motion within five (5) years from the date of its
entry, but that after the lapse of such time, and before it is barred by the statute of
limitations, a judgment may be enforced by action. Taking these two provisions into
consideration, it is plain that an action for revival of judgment must be brought within
ten years from the time said judgment becomes final.
From the records of this, case, it is clear that the judgment sought to be revived became
final on October 23, 1973. On the other hand, the action for revival of judgment was
instituted only in 1999, or more than twenty-five (25) years after the judgment had
become final. Hence, the action is barred by extinctive prescription considering that
'such an action can be instituted only within ten (10) years from the time the cause of
action accrues.
The Solicitor General, nonetheless, argues that the State's cause , of action in the
cancellation of the land title issued to petitioner's predecessor-in-interest is
imprescriptible because it is included in Camp Wallace, which belongs to the
government.
The argument is misleading.
While it is true that prescription does not run against the State, the same may not be
invoked by the government in this case since it is no longer interested in the subject
matter. While Camp Wallace may have belonged to the government at the time Rafael
Galvez's title was ordered cancelled in Land Registration Case No. N-361, the same no
longer holds true today.

Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act
of 1992, created the Bases Conversion and Development Authority Section 4 pertinently
provides:
Section 4. Purposes of the Conversion Authority. - The Conversion Authority shall
have the following purposes:
(a) To own, hold and/or administer the military reservations of John Hay
Air Station, Wallace Air Station, O'Donnell Transmitter Station, San Miguel
Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan)
and those portions of Metro Manila military camps which may be
transferred to it by the President;
Section 2 of Proclamation No. 216, issued on July 27, 1993, also provides:
Section 2. Transfer of Wallace Air Station Areas to the Bases Conversion and
Development Authority. - All areas covered by the Wallace Air Station as
embraced and defined by the 1947 Military Bases Agreement between the
Philippines and the United States of America, as amended, excluding those
covered by Presidential Proclamations and some 25-hectare area for the radar
and communication station of the Philippine Air Force, are hereby transferred to
the Bases Conversion Development Authority ...
With the transfer of Camp Wallace to the BCDA, the government no longer has a right or
interest to protect. Consequently, the Republic is not a real party in interest and it may
not institute the instant action. Nor may it raise the defense of imprescriptibility, the
same being applicable only in cases where the government is a party in interest. Under
Section 2 of Rule 3 of the 1997 Rules of Civil Procedure, "every action must be
prosecuted or defended in the name of the real party in interest." To qualify a person to
be a real party in interest in whose name an action must be prosecuted, he must appear
to be the present real owner of the right sought to enforced (Pioneer Insurance v. CA,
175 SCRA 668 [1989]). A real party in interest is the party who stands to be benefited or
injured by the judgment in the suit, or the party entitled to the avails of the suit. And by
real interest is meant a present substantial interest, as distinguished from a mere
expectancy, or a future, contingent, subordinate or consequential interest (Ibonilla v.
Province of Cebu, 210 SCRA 526 [1992]). Being the owner of the areas covered by Camp
Wallace, it is the Bases Conversion and Development Authority, not the Government,
which stands to be benefited if the land covered by TCT No. T-5710 issued in the name
of petitioner is cancelled.
Nonetheless, it has been posited that the transfer of military reservations and their
extensions to the BCDA is basically for the purpose of accelerating the sound and
balanced conversion of these military reservations into alternative productive uses and
to enhance the benefits to be derived from such property as a measure of promoting the
economic and social development, particularly of Central Luzon and, in general, the
country's goal for enhancement (Section 2, Republic Act No. 7227). It is contended that
the transfer of these military reservations to the Conversion Authority does not amount
to an abdication on the part of the Republic of its interests, but simply a recognition of

the need to create a body corporate which will act as its agent for the realization of its
program. It is consequently asserted that the Republic remains to be the real party in
interest and the Conversion Authority merely its agent.
We, however, must not lose sight of the fact that the BCDA is an entity invested with a
personality separate and distinct from the government. Section 3 of Republic Act No.
7227 reads:
Section 3. Creation of the Bases Conversion and Development Authority. - There
is hereby created a body corporate to be known as the Conversion Authority
which shall have the attribute of perpetual succession and shall be vested with
the powers of a corporation.
It may not be amiss to state at this point that the functions of government have been
classified into governmental or constituent and proprietary or ministrant. While public
benefit and public welfare, particularly, the promotion of the economic and social
development of Central Luzon, may be attributable to the operation of the BCDA, yet it
is certain that the functions performed by the BCDA are basically proprietary in nature.
The promotion of economic and social development of Central Luzon, in particular, and
the country's goal for enhancement, in general, do not make the BCDA equivalent to the
Government. Other corporations have been created by government to act as its agents
for the realization of its programs, the SSS, GSIS, NAWASA arid the NIA, to count a few,
and yet, the Court has ruled that these entities, although performing functions aimed at
promoting public interest and public welfare, are not government-function corporations
invested with governmental attributes. It may thus be said that the BCDA is not a mere
agency of the Government but a corporate body performing proprietary functions.
Moreover, Section 5 of Republic Act No. 7227 provides:
Section 5. Powers of the Conversion Authority. - To carry out its objectives under
this Act, the Conversion Authority is hereby vested with the following powers:
(a) To succeed in its corporate name, to sue and be sued in such corporate
name and to adopt, alter and use a corporate seal which shall be judicially
noticed;
Having the capacity to sue or be sued, it should thus be the BCDA which may file an
action to cancel petitioner's title, not the Republic, the former being the real party in
interest. One having no right or interest to protect cannot invoke the jurisdiction of the
court as a party plaintiff in an action (Ralla v. Ralla, 199 SCRA 495 [1991]). A suit may
be dismissed if the plaintiff or the defendant is not a real party in interest. If the suit is
not brought in the name of the real party in interest, a motion to dismiss may be filed,
as was done by petitioner in this case, on the ground that the complaint states no cause
of action (Tanpingco v. IAC, 207 SCRA 652 [1992]).
However, E.B. Marcha Transport Co., Inc. v. IAC (147 SCRA 276 [1987]) is cited as
authority that the Republic is the proper party to sue for the recovery of possession of
property which at the time of the institution of the suit was no longer held by the

national government but by the Philippine Ports Authority .In E.B. Marcha, the Court
ruled:
It can be said that in suing for the recovery of the rentals, the Republic of the
Philippines, acted as principal of the Philippine Ports Authority, directly
exercising the commission it had earlier conferred on the latter as its agent. We
may presume that, by doing so, the Republic of the Philippines did not intend .to
retain the said rentals for its own use, considering that by its voluntary act it had
transferred the land in question to the Philippine Ports Authority effective July
11, 1974. The Republic of the Philippines had simply sought to assist, not
supplant, the Philippine Ports Authority, whose title to the disputed property it
continues to recognize, We may expect then that the said rentals, once collected
by the Republic of the Philippines, shall be turned over by it to the Philippine
Ports Authority conformably to the purposes of P.D. No. 857.
E.B. Marcha is, however, not on all fours with the case at bar. In the former, the Court
considered the Republic a proper party to sue since the claims of the Republic and the
Philippine Ports Authority against the petitioner therein were the same. To dismiss the
complaint in E.B. Marcha would have brought needless delay in the settlement of the
matter since the PPA would have to refile the case on the same claim already litigated
upon. Such is not the case here since to allow the government to sue herein enables it to
raise the issue of imprescriptibility, a claim which is not available to the BCDA. The rule
that prescription does not run against the State does not apply to corporations or
artificial bodies created by the State for special purposes, it being said that when the
title of the Republic has been divested, its grantees, although artificial bodies of its own
creation, are in the same category as ordinary persons (Kingston v. LeHigh Valley Coal
Co., 241 Pa 469). By raising the claim of imprescriptibility, a claim which cannot be
raised by the BCDA, the Government not only assists the BCDA, as it did in E.B.
Marcha, it even supplants the latter, a course of action proscribed by said case.
Moreover, to recognize the Government as a proper party to sue in this case would set a
bad precedent as it would allow the Republic to prosecute, on behalf of governmentowned or controlled corporations, causes of action which have already prescribed, on
the pretext that the Government is the real party in interest against whom prescription
does not run, said corporations having been created merely as agents for the realization
of government programs.
Parenthetically, petitioner was not a party to the original suit for cancellation of title
commenced by the Republic twenty-seven years for which it is now being made to
answer, nay, being made to suffer financial losses.
It should also be noted that petitioner is unquestionably a buyer in good faith and for
value, having acquired the property in 1963, or 5 years after the issuance of the original
certificate of title, as a third transferee. If only not to do violence and to give some
measure of respect to the Torrens System, petitioner must be afforded some measure of
protection.
One more point.

Since the portion in dispute now forms part of the property owned and administered by
the Bases Conversion and Development Authority, it is alienable and registerable real
property.
We find it unnecessary to rule on the other matters raised by the herein parties.
WHEREFORE, the petition is hereby granted and the orders dated August 31, 1999 and
October 4, 1999 of the Regional Trial, Court of the First National Judicial Region (Branch
26, San Fernando, La Union) in Civil Case No. 6346 entitled "Republic of the Philippines,
Plaintiff, versus Heirs of Rafael Galvez, et. al., Defendants" as well as the resolutions
promulgated on November 4, 1999 and May 23, 2000 by the Court of Appeals (Twelfth
Division) in
CA-G.R. SP No. 55535 entitled "Shipside, Inc., Petitioner versus Ron. Alfredo Cajigal, as
Judge, RTC, San Fernando, La Union, Branch 26, and the Republic of the Philippines,
Respondents" are hereby reversed and set aside. The complaint in Civil Case No. 6346,
Regional Trial Court, Branch 26, San Fernando City, La Union entitled "Republic of the
Philippines, Plaintiff, versus Heirs of Rafael Galvez, et al." is ordered dismissed, without
prejudice to the filing of an appropriate action by the Bases Development and
Conversion Authority.
SO ORDERED.
Acquisitive Prescription:
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 174626
October 23, 2013
REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
LUIS MIGUEL O. ABOITIZ, Respondent.
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
filed by petitioner Republic of the Philippines Republic), represented by the Office of the
Solicitor General OSG), seeking to set aside the December 14 2005 Amended
Decision1 of the Court of Appeals CA), in CA-G.R. CV No. 75032 and its September 12

2006 Resolution2 affirming the February 21 2002 Decision3 of the Regional Trial . Court
Cebu City Branch 11 RTC), which granted the application for registration of respondent
Luis Miguel O. Aboitiz Aboitiz) in Land Registration Case LRC) No. 1474-N.
The Facts
On September 11, 1998, respondent Aboitiz filed his Application for Registration of Land
Title of a parcel of land with an area of 1,254 square meters, located in Talamban, Cebu
City, and identified as Lot 11193 of the Cebu Cadastre 12 Extension, before the RTC.
After establishing the jurisdiction of the RTC to act on the application for registration of
land title, hearing thereon ensued.
In support of his application, Aboitiz attached the original Tracing Cloth Plan with a
blueprint copy, the technical description of the land, the certificate of the geodetic
engineer surveying the land, and the documents evidencing possession and ownership
of the land.
To prove his claim, Aboitiz presented his witness, Sarah Benemerito (Sarah), his
secretary, who testified that he entrusted to her the subject property and appointed her
as its caretaker; that he purchased the subject property from Irenea Kapuno (Irenea) on
September 5, 1994; that he had been in actual, open, continuous, and exclusive
possession of the subject property in the concept of an owner; that as per record of the
Department of Environment and Natural Resources (DENR), Region VII, the subject
property had been classified as alienable and disposable since 1957; that per
certification of the Community Environment and Natural Resources Office (CENRO),
Cebu City, the subject property was not covered by any subsisting public land
application; and that the subject property had been covered by tax declarations from
1963 to 1994 in Ireneas name, and from 1994 to present, in his name.
Another witness for Aboitiz, Luz Kapuno (Luz), daughter of Irenea, the original owner of
the subject property, testified that she was one of the instrumental witnesses in the
deed of sale of the subject property and that saw her mother affix her signature on the
said document. She added that her mother was in open, continuous, peaceful, and
exclusive possession of the said property.
Subsequently, the Republic, through Assistant City Prosecutor Edito Y. Enemecio,
manifested that it would not adduce any evidence to oppose the application for
registration of Aboitiz.
On February 21, 2002, the RTC granted Aboitizs application for registration of the
subject property. The dispositive portion of the decision states:
WHEREFORE, in view of all the foregoing premises, the Court hereby renders judgment
in this case granting the application filed by the applicant. The Court hereby accordingly
adjudicates the land described on plan RS-07-000856 located in Talamban, Cebu City,
together with all the improvements thereon, as belonging to the applicant, and confirms
his title thereto. The Land Registration Authority is hereby ordered to issue the

corresponding Decree of Registration to confirm the applicants title to the said land and
to subject the said land under the operation of the Torrens System of Registration.
Upon this decision becoming final, let a decree of confirmation and registration be
entered and, thereafter, upon payment of the fees required by law, let the
corresponding original certificate of title be issued in the name of the applicant.
Furnish copies of this decision to the Administrator of the LRA, the Director of Lands and
the Director of the Bureau of Forestry, the Office of the Solicitor General and the Cebu
City Prosecutor.
SO ORDERED.4
Not in conformity, the Republic appealed the RTC ruling before the CA.
In its June 7, 2005 Decision,5 the CA reversed the ruling of the RTC and denied Aboitizs
application for registration of land title, the decretal portion of which reads:
WHEREFORE, the Decision of the trial court dated February 21, 2002 is hereby
REVERSED and the application for registration of title is accordingly DISMISSED.
SO ORDERED.6
The CA ruled that it was only from the date of declaration of such lands as alienable and
disposable that the period for counting the statutory requirement of possession since
June 12, 1945 or earlier would commence. Possession prior to the date of declaration of
the lands alienability was not included. The CA observed that the subject property was
declared as alienable and disposable only in 1957, and so the application clearly did not
meet the requirements of possession needed under the first requisite of Section 14
(1)7 of Presidential Decree (P.D.) No. 1529 which must be since June 12, 1945, or
earlier.
Thereafter, Aboitiz moved for reconsideration of the June 7, 2005 Decision of the CA
which dismissed his application for registration of title. Aboitiz asserted, among others,
that although the subject land was classified as alienable and disposable only in 1957,
the tax declarations, from 1963 to 1994, for a period of thirty one (31) years, converted
the land, by way of acquisitive prescription, to private property. He asserted that the
evidence he presented substantially met the requisite nature and character of
possession under P.D. No. 1529.
In its December 14, 2005 Amended Decision, the CA reversed itself and granted the
application for registration of land title of Aboitiz. The pertinent portion of the said
decision reads:
WHEREFORE, in view of the foregoing, the June 7, 2005 Decision of this Court is hereby
REVERSED and the Decision dated February 21, 2002 of the Regional Trial Court, Branch
11, Cebu City with respect to L.R.C. No. 1474-N is hereby AFFIRMED in toto.

SO ORDERED.8
In granting the application for registration of land title, the CA relied on Section 14(2) of
P.D. No. 1529.9 It stated that although the application for registration of Aboitiz could
not be granted pursuant to Section 14(1) of P.D. No. 1529 because the possession of his
predecessor-in-interest commenced in 1963 (beyond June 12, 1945), it could prosper by
virtue of acquisitive prescription under Section 14(2) of P.D. No. 1529 upon the lapse of
thirty (30) years. The CA explained that the original owners (Ireneas) possession of the
subject property beginning from 1963 up to 1994, the year Aboitiz purchased the
subject property from Irenea, spanning thirty one (31) years, converted the said
property into private land and, thus, susceptible to registration. The CA also declared
that although tax declarations and real property tax payments were not by themselves
conclusive evidence of ownership of land, they were nevertheless good indicia of
possession in the concept of an owner.
The Republic moved for reconsideration but was denied by the CA on September 12,
2006. Hence, this petition.
ASSIGMENT OF ERROR
THE CA ERRED ON A QUESTION OF LAW IN GRANTING THE APPLICATION FOR
REGISTRATION OF LOT 11193 UNDER PLAN RS-07-000856 BASED ON THE EVIDENCE IT
RELIED UPON EARLIER DISMISSING THE SAID APPLICATION.10
In his Memorandum,11 Aboitiz contends that the Republic is raising questions of fact
which is beyond the appellate jurisdiction of this Court. Consequently, the findings of
fact by the RTC and affirmed by the CA are final, binding and conclusive upon the Court.
Aboitiz claims that sufficient evidence was presented to establish the nature and
character of his possession of the subject property as required by P.D. No. 1529.
In its Memorandum,12 the Republic, citing Republic v. T.A.N. Properties, Inc.,13 argues
that Aboitiz failed to validly establish the alienability of the subject property because he
only adduced a CENRO certification to that effect, without presenting a copy of the
original classification approved by the DENR Secretary and certified as a true copy by
the legal custodian of the official records. Further, a declaration that the property is
alienable and disposable is not sufficient to make it susceptible to acquisitive
prescription. An express government manifestation that the property is already
patrimonial or no longer intended for public use, for public service or for the
development for the national wealth pursuant to Article 42214 of the New Civil Code
must also be shown. The Republic asserts that it is only when the property has become
patrimonial that the period of acquisitive prescription can commence to run against the
State.
The Courts Ruling
The petition is meritorious. The vital issue to be resolved by the Court is whether Aboitiz
is entitled to the registration of land title under Section 14(1) of P.D. No. 1529, or, in the
alternative, pursuant to Section 14(2) of P.D. No. 1529.

Section 14(1) of P.D. No. 1529
Section 14(1) of P.D. No. 1529 in relation to Section 48(b) of Commonwealth Act No.
141,15 as amended by Section 4 of P.D. No. 1073,16 provides:
SECTION 14. Who may apply. The following persons may file in the proper Court of
First Instance an application for registration of title to land, whether personally or
through their duly authorized representatives:
(1) Those who by themselves or through their predecessors-in-interest have been in
open, continuous, exclusive and notorious possession and occupation of alienable and
disposable lands of the public domain under a bona fide claim of ownership since June
12, 1945, or earlier.
xxxx
Section 48. The following described citizens of the Philippines, occupying lands of the
public domain or claiming to own any such lands or an interest therein, but whose titles
have not been perfected or completed, may apply to the Court of First Instance now
Regional Trial Court of the province where the land is located for confirmation of their
claims and the issuance of a certificate of title therefor, under the Land Registration Act,
to wit:
xxxx
(b) Those who by themselves or through their predecessors-in-interest have been in
open, continuous, exclusive and notorious possession and occupation of agricultural
lands of the public domain, under a bona fide claim of acquisition of ownership, since
June 12, 1945, or earlier, immediately preceding the filing of the application for
confirmation of title except when prevented by war or force majeure. These shall be
conclusively presumed to have performed all the conditions essential to a Government
grant and shall be entitled to a certificate of title under the provisions of this chapter.
[Emphases supplied]
Based on the above-quoted provisions, applicants for registration of land title must
establish and prove: (1) that the subject land forms part of the disposable and alienable
lands of the public domain; (2) that the applicant and his predecessors-in-interest have
been in open, continuous, exclusive and notorious possession and occupation of the
same; and (3) that it is under a bona fide claim of ownership since June 12, 1945, or
earlier.
The foregoing requisites are indispensable for an application for registration of land
title, under Section 14(1) of P.D. No. 1529, to validly prosper. The absence of any one
requisite renders the application for registration substantially defective.
Anent the first requisite, to authoritatively establish the subject lands alienable and
disposable character, it is incumbent upon the applicant to present a CENRO or
Provincial Environment and Natural Resources Office (PENRO) Certification; and a copy

of the original classification approved by the DENR Secretary and certified as a true copy
by the legal custodian of the official records.17
Strangely, the Court cannot find any evidence to show the subject lands alienable and
disposable character, except for a CENRO certification submitted by Aboitiz. Clearly, his
attempt to comply with the first requisite of Section 14(1) of P.D. No. 1529 fell short
due to his own omission. In Republic v. Hanover Worldwide Trading Corporation,18 the
Court declared that the CENRO is not the official repository or legal custodian of the
issuances of the DENR Secretary declaring the alienability and disposability of public
lands. Thus, the CENRO Certification should be accompanied by an official publication of
the DENR Secretarys issuance declaring the land alienable and disposable. For this
reason, the application for registration of Aboitiz should be denied.
With regard to the third requisite, it must be shown that the possession and occupation
of a parcel of land by the applicant, by himself or through his predecessors-in-interest,
started on June 12, 1945 or earlier.19 A mere showing of possession and occupation for
30 years or more, by itself, is not sufficient.20
Unfortunately, Aboitiz likewise failed to satisfy this third requisite. As the records and
pleadings of this case will reveal, the earliest that he and his predecessor-in-interest can
trace back possession and occupation of the subject land was only in the year 1963.
Evidently, his possession of the subject property commenced roughly eighteen (18)
years beyond June 12, 1945, the reckoning date expressly provided under Section 14(1)
of P.D. No. 1529. Here, he neglected to present any convincing and persuasive evidence
to manifest compliance with the requisite period of possession and occupation since
June 12, 1945 or earlier. Accordingly, his application for registration of land title was
legally infirm.
Section 14(2) of P.D. No. 1529
Notwithstanding his failure to comply with the requirements for registration of land title
under Section 14(1) of P.D. No. 1529, Aboitiz advances that he has, nonetheless,
satisfied the requirements of possession for thirty (30) years to acquire title to the
subject property via prescription under Section 14(2) of P. D. No. 1529.
Regrettably, the Court finds Itself unable to subscribe to applicants proposition.
Significantly, Section 14(2) of P.D. No. 1529 provides:
SEC. 14. Who may apply. The following persons may file in the proper Court of First
Instance an application for registration of title to land, whether personally or through
their duly authorized representatives:
xxxx
(2) Those who have acquired ownership of private lands by prescription under the
provisions of existing laws.

In the case of Heirs of Mario Malabanan v. Republic,21 the Court clarified the import of
Section 14(1) as distinguished from Section 14(2) of P.D. No. 1529, viz:
(1) In connection with Section 14(1) of the Property Registration Decree, Section
48(b) of the Public Land Act recognizes and confirms that "those who by
themselves or through their predecessors in interest have been in open,
continuous, exclusive, and notorious possession and occupation of alienable and
disposable lands of the public domain, under a bona fide claim of acquisition of
ownership, since June 12, 1945" have acquired ownership of, and registrable title
to, such lands based on the length and quality of their possession.
(a) Since Section 48(b) merely requires possession since 12 June 1945 and
does not require that the lands should have been alienable and disposable
during the entire period of possession, the possessor is entitled to secure
judicial confirmation of his title thereto as soon as it is declared alienable
and disposable, subject to the timeframe imposed by Section 4722 of the
Public Land Act.
(b) The right to register granted under Section 48(b) of the Public Land
Act is further confirmed by Section 14(1) of the Property Registration
Decree.
(2) In complying with Section 14(2) of the Property Registration Decree, consider
that under the Civil Code, prescription is recognized as a mode of acquiring
ownership of patrimonial property.
However, public domain lands become only patrimonial property not only with a
declaration that these are alienable or disposable. There must also be an express
government manifestation that the property is already patrimonial or no longer retained
for public service or the development of national wealth, under Article 422 of the Civil
Code. And only when the property has become patrimonial can the prescriptive period
for the acquisition of property of the public dominion begin to run.
(a) Patrimonial property is private property of the government. The person
acquires ownership of patrimonial property by prescription under the Civil Code
is entitled to secure registration thereof under Section 14(2) of the Property
Registration Decree.
1wphi1
(b) There are two kinds of prescription by which patrimonial property may be
acquired, one ordinary and other extraordinary. Under ordinary acquisitive
prescription, a person acquires ownership of a patrimonial property through
possession for at least ten (10) years, in good faith and with just title. Under
extraordinary acquisitive prescription, a persons uninterrupted adverse
possession of patrimonial property for at least thirty (30) years, regardless of
good faith or just title, ripens into ownership.23 [Emphasis supplied]
On September 3, 2013, the Court En Banc came out with its Resolution, 24 in the same
case of Malabanan, denying the motion for reconsideration questioning the decision. In

the said resolution, the Court authoritatively stated that x x x the land continues to be
ineligible for land registration under Section 14(2) of the Property Registration Decree
unless Congress enacts a law or the President issues a proclamation declaring the land
as no longer intended for public service or for the development of the national wealth." 25
Thus, under Section 14(2) of P.D. No. 1529, for acquisitive prescription to commence
and operate against the State, the classification of ' land as alienable and disposable
alone is not sufficient. The applicant must be able to show that the State, in addition to
the said classification, expressly declared through either a law enacted by Congress or a
proclamation issued, by the President that the subject land is no longer retained for
public service or the development of the national wealth or that the property has been
converted into patrimonial. Consequently, without an express declaration by the State,
the land remains to be a property of public dominion and, hence, not susceptible to
acquisition by virtue of prescription.
In fine, the Court holds that the ruling of the CA lacks sufficient factual or legal
justification. Hence, the Court is constrained to reverse the assailed CA Amended
Decision and Resolution and to deny the application for registration of land title of
Aboitiz.
WHEREFORE, the petition is GRANTED. The December 14, 2005 Amended Decision and
the September 12, 2006 Resolution of the Court of Appeals, in CA-G.R. CV No. 75032,
are hereby REVERSED and SET ASIDE. Accordingly, the Application for Registration of
Title of respondent Luis Miguel O. Aboitiz in Land Registration Case No. 1474-N is
DENIED.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No.180086
July 2, 2014
AFP RETIREMENT AND SEPARATION BENEFITS SYSTEM [AFP-RSBS], Petitioner,

vs.
REPUBLIC OF THE PHILIPPINES, Respondent.
DECISION
LEONEN, J.:

The period of possession prior to the declaration that land is alienable and disposable
agricultural land is included in the computation of possession for purposes of acquiring
registration rights over a property if the land has already been declared as such at the
time of the application for registration.
This is a Rule 45 petition of the Court of Appeals' January 10, 2007 decision and October
5, 2007 resolution. The Court of Appeals reversed the trial court decision approving
petitioner's application for registration.
On July 10, 1997, the Armed Forcesof the Philippines Retirement and Separation
Benefits System (AFP-RSBS) filed an application for original registration of parcels of
land consisting of 48,151 square meters in Silang, Cavite.1The parcels of land were
designated as Lot Nos. 2969-A, 2969-B, and 2969-C, and had a total area of 48,151
square meters.2 These were allegedly acquired from Narciso Ambrad, Alberto Tibayan,
and Restituto Tibayan on March 13, 1997.3 It was also alleged that their predecessorsininterest had been in possession ofthe properties since June 12, 1945.4
In a decision dated July 28, 2001,the Municipal Circuit Trial Court approved AFP-RSBSs
application for original registration.5 The Register of Deeds was directed to cause the
registration of the properties in the name of AFP-RSBS.6
The Republic of the Philippines moved for the reconsideration of the decision.7 However,
the motion was denied in an order dated February 19, 2003.8
On March 14, 2003, the Republic appealed the decision and order of the trial court,
alleging improper identification of the properties, noncompliance with SC Administrative
Circular No. 7-96 dated July 15, 1996 requiring that copies of a list of lots applied for be
furnished to the Bureau of Lands,9 non-submission of a tracing cloth plan, and lack of
the Department of Environment and Natural Resources certification showing that the
properties were already declared alienable and disposable at the time of possession by
the predecessors-in-interest.10
On January 10, 2007, the Court ofAppeals reversed the decision of the trial court and
dismissed AFP-RSBSs application.11 The dispositive portion of the decision reads:
WHEREFORE, the Decision appealed from is REVERSED and SET ASIDE and another one
entered DISMISSING the application for original registration.12
The Court of Appeals found that the properties had no pending land application and that
there were no overlapping lots.13 Hence, no person needed to be notified of the land
registration proceedings.14 The Court of Appeals also found that AFP-RSBS complied with
the requirement to submit a tracing cloth plan.15
However, according to the Court of Appeals, since Lot 2969 was declared alienable and
disposable only on March 15, 1982, the period of possession of the predecessors-ininterest before that date should be excluded from the computation of the period of
possession.16 Hence, AFPRSBSs and its predecessors-in-interests possessions could not
ripen into ownership.17

The Court of Appeals also ruled that AFP-RSBS, as a private corporation or association,
may not own alienable lands of the public domain pursuant to Section 3, Article XII of
the Constitution.18
On February 7, 2007, AFP-RSBS filed a motion for reconsideration of the Court of
Appeals decision.19 The Court of Appeals denied this motion in a resolution promulgated
on October 5, 2007.20
Hence, this petition was filed.
The issue in this case is whether the period of possession before the declaration that
land is alienable and disposable agricultural land should be excluded from the
computation of the period of possession for purposes of original registration.
AFP-RSBS argued that "[w]hat is required is that the property sought to be registered
has already been declared to be alienable and disposable land of the public domain at
the time [of]the application for registration . . . before the court."21 In support of this
argument, AFP-RSBS cited Republic v. CA and Naguit22 and Republic v. Bibonia and
Manahan.23 Hence, AFPRSBS and its predecessors-in-interests possession before June
12, 1945 should have ripened into a bonafide claim of ownership.24 AFP-RSBS also
argued that the land had already been private before its acquisition in 1997 by virtue of
the claim of ownership ofits predecessors-in-interest before 1945.25Therefore, petitioner
corporation may acquire the property.
In its comment, the Republic argued that the classification of land as alienable and
disposable is required before possession can ripen into ownership.26 The period of
possession before declaration that the land is alienable and disposable cannot be
included in computing the period of adverse possession.27 Hence, before March 15, 1982,
there could have been no possession in the concept of an owner.28 The Republic also
argued that there was no sufficient evidence of open, continuous, exclusive, and
notorious possession under a bona fide claim of ownership before June 12, 1945.
We rule for petitioner.
The requirements for the application for original registration of land based on a claim of
open and continuous possession of alienable and disposable lands of public domain are
provided in Section 14(1) of Presidential Decree No. 1529 or the Property Registration
Decree. It provides:
Section 14. Who may apply. The following persons may file in the proper Court of First
Instance an application for registration of title to land, whether personally orthrough
their duly authorized representatives:
(1) Those who by themselves or through their predecessors-in-interest have been in
open, continuous, exclusive and notorious possession and occupationof alienable and
disposable lands of the public domainunder a bona fide claim of ownership since June
12, 1945, or earlier. (Emphasis supplied)

A similar provision can be found in Commonwealth Act No. 141 or Public Land Act:
Sec. 48. The following-described citizens of the Philippines, occupying lands of the
public domain or claiming to own any such lands or an interest therein, but whose titles
have not been perfected or completed, may apply to the Court of First Instance of the
province where the land is located for confirmation of their claims and the issuance of a
certificate of title therefor under the Land Registration Act, to wit:
....
(b) Those who by themselves or through their predecessors-in-interest have been in
open, continuous, exclusive, and notorious possession and occupationof agricultural
lands of the public domain, under a bona fide claim of acquisition or ownership, since
June 12, 1945, immediately preceding the filing of the application for confirmation of
title, except when prevented by war or force majeure. Those shall be conclusively
presumed to have performed all the conditions essential to a government grant and
shall be entitled to a certificate of title under the provisions of this chapter. (As
amended by Presidential Decree No. 1073) (Emphasis supplied)
Based on these provisions, an applicant for original registration based on a claim of
exclusive and continuouspossession or occupation must show the existence of the
following:
1) Open, continuous, exclusive,and notorious possession, by themselves or through
their predecessors-in-interest, of land;
2) The land possessed or occupied musthave been declared alienable and disposable
agricultural land of public domain;
3) The possession or occupation was under a bona fide claim of ownership;
4) Possession dates back to June 12, 1945 or earlier.
On one hand, petitioner argued that its and its predecessors-ininterests possession
before the declaration that the property was alienable and disposable agricultural land
in1982 should be included in the computation of the period of possession for purposes
of registration.29 On the other hand, respondent holds the position that possession
before the establishment of alienability of the land should be excluded in the
computation.30
Republic v. Naguit31 involves the similar question.In that case, this court clarified that
Section 14(1) of the Property Registration Decree should be interpreted to
includepossession before the declaration of the lands alienability as long as at the time
of the application for registration, the land has already been declared part of the
alienable and disposable agricultural public lands. This court also emphasized in that
case the absurdity that would result in interpreting Section 14(1)as requiring that the
alienability of public land should have already been established by June 12, 1945. Thus,
this court said in Naguit:

Besides, we are mindful of the absurdity that would result if we adopt petitioners
position. Absent a legislative amendment, the rule would be, adopting the OSGs view,
that all lands of the public domain which were not declared alienable or disposable
before June 12, 1945 would not be susceptible to originalregistration, no matter the
length of unchallenged possession by the occupant. Such interpretation renders
paragraph (1) of Section 14 virtually inoperative and even precludes the government
from giving it effect even as it decides to reclassify public agricultural lands as alienable
and disposable. The unreasonableness of the situation would even be aggravated
considering that before June 12, 1945, the Philippines was not yet even considered an
independent state.
Instead, the more reasonable interpretation of Section 14(1) is that it merely requires
the property sought tobe registered as already alienable and disposable at the time the
application for registration of title is filed. If the State, at the time the application is
made, has not yet deemed it proper to release the property for alienation ordisposition,
the presumption is that the government is still reserving the rightto utilize the property;
hence, the need to preserve its ownership in the State irrespective of the length of
adverse possession even if in good faith. However, if the property has already been
classified as alienable and disposable, as it is in this case, then there is already an
intention on the part of the State to abdicate its exclusive prerogative over the
property.32
However, in the later case of Republic v. Herbieto33 that was cited by respondent, this
court ruled that the period of possession before the declaration that land is alienable
and disposable cannot be included in the computation of the period of possession. This
court said:
Section 48(b), as amended, now requires adverse possession of the land since 12 June
1945 or earlier.In the present Petition, the Subject Lots became alienable and
disposable only on 25 June 1963. Any period of possession prior tothe date when the
Subject Lots were classified as alienable and disposable is inconsequential and should
be excluded from the computation of the period of possession; such possession can
never ripen into ownership and unless the land had been classified as alienable and
disposable, the rules on confirmation of imperfect title shall not apply thereto. It is very
apparent then that respondents could not have complied with the period of possession
required by Section 48(b) of the Public Land Act, as amended, to acquire imperfect or
incomplete title to the Subject Lots that may be judicially confirmed or legalized. 34 This
court clarified the role of the date, June 12, 1945, in computing the period of possession
for purposes of registration in Heirs of Mario Malabanan v. Republic of the
Philippines.35 In that case, this court declared that Naguit and not Herbieto should be
followed. Herbieto "has [no] precedental value with respect to Section 14(1)."36 This
court said:
The Court declares that the correct interpretation of Section 14(1) is that which was
adopted in Naguit. The contrary pronouncement in Herbieto, as pointed out in Naguit,
absurdly limits the application of the provision to the point of virtual inutility since it
would only cover lands actually declared alienable and disposable prior to 12 June 1945,

even if the current possessor is able to establish open, continuous, exclusive and
notorious possession under a bona fideclaim of ownership long before that date.
Moreover, the Naguitinterpretation allows more possessors under a bona fideclaim of
ownership to avail ofjudicial confirmation of their imperfect titles than whatwould be
feasible under Herbieto. This balancing fact is significant, especially considering our
forthcoming discussion on the scope and reach ofSection 14(2) of the Property
Registration Decree.
....
Thus, neither Herbietonor its principal discipular ruling Buenaventura has any
precedental value with respect to Section 14(1). On the other hand, the ratio of Naguitis
embedded in Section 14(1), since it precisely involved situation wherein the applicant
had been in exclusive possession under a bona fideclaim of ownership prior to 12 June
1945. The Courts interpretation of Section 14(1) therein was decisive to the resolution
of the case. Any doubt as to which between Naguitor Herbieto provides the final word of
the Court on Section 14(1) isnow settled in favor of Naguit.37
Moreover, in the resolution of the motions for reconsideration of this courts 2009
decision in Heirs of Malabanan,38 this court explained that there was no other legislative
intent thatcould be associated with the date, June 12, 1945, as written in our
registration laws except that it qualifies the requisite period of possession and
occupation. The law imposes no requirement that land should have been declared
alienable and disposable agricultural land as early as June 12, 1945.
Therefore, what is important in computing the period of possession is that the land has
already been declaredalienable and disposable at the time of the application for
registration. Upon satisfaction of this requirement, the computation of the period may
include the period of adverse possession prior to the declaration that land is alienable
and disposable.
Persons are entitled to the registration of their titles upon satisfaction of all the
requirements enumerated under our laws. No presumption or doctrine in favor of state
ownership candeprive them of their titles once all the conditions are satisfied. 39 Our
Constitution contains no such limit upon our citizens or privilege upon the
state.40Neither was this doctrine extended to our organic acts.41
Respondent argued that "[s]ince the land subject of petitioners application for
registration was classified alienable and disposable only on March 15, 1982, it follows
that petitioner could not have possessed the same in the concept of owner, earlier than
the said date."42
Respondent is mistaken. Although adverse, open, continuous, and notorious possession
in the concept of an owner is a conclusion of law to be determined by courts, it has more
to do with a persons belief in good faith that he or she has just title to the property that
he or she is occupying. It is unrelated to the declaration that land isalienable or
disposable. A possessor or occupant of property may, therefore,be a possessor in the

concept of an owner prior to the determination that the property is alienable and
disposable agricultural land. His or her rights, however, are still to be determined under
the law.
Petitioners right to the original registration of titleover the property is, therefore,
dependent on the existence of: a) a declaration that the land is alienable and disposable
at the time ofthe application for registration and b) open and continuous possession in
the concept of an owner through itself or through its predecessors-in-interest since
June 12, 1945 or earlier.
In this case, there is no dispute that the properties were already declared alienable and
disposable land on March 15, 1982. Hence, the property was already alienable and
disposable at the time of petitioners application for registration on July 10, 1997.
As to the required period of possession, petitioner was able to show that it, through
itself or its predecessors-in-interest, has been in open, continuous, exclusive, and
notorious possession before 1945 through testimonies and documents.
One of petitioners predecessors-in-interest, Emilia Amadure, testified that as early as
her birth in 1917, her family was already residing in Barangay Biluso, Silang, Cavite. Her
father, Maximo Amadure, was the properties previous owner. She was able to describe
the lots metes and bounds as well as the adjoining properties owners.43 She also
testified that "the first time she came to know aboutsaid lots was at the age of
reason"44 at which time, she saw her father in possession of the properties. By June 12,
1945, she was already 28 years old.Tax declarations between 1948 to 1998 under
Maximos name and other previous owners names were also presented.45
Maximo Amadures grandson, Rogelio Amadure, corroborated Emilias testimony. He
testified thathis grandfather owned and tilled the properties with his five children:
Catalino, Dominador, Margarita, Gregonia, and Emelia Amadure.46 They cultivated
banana, corn, papaya, and palay on the properties.47 Before the war, Rogelios father
informed him that Maximo owned the properties.48 Maximos children took possession of
the properties after Maximos death.49
Based on the testimonies, we can already deduce that petitioners predecessors-ininterest had possessed the properties in the concept of an owner even earlier than
1945.
Petitioner was, therefore, able to prove all the requisites for the grant of an original
registration of title under our registration laws.
Respondent argues that although petitioner is a government-owned and -controlled
corporation, it cannot acquire title through acquisitive prescription. This argument is
unmeritorious. The type of corporation that petitioner is has nothing to do with the
grant of its application for original registration. Petitioner also acquired title to the
property under Section 14(1) of the Property Registration Decree or Section 48(b) of the
Public Land Act, and not through acquisitive prescription.

If respondents argument stems from the Court of Appeals ruling that petitioner cannot
acquire title to the property because of Section 3, Article XII of the Constitution, which
prohibits private corporations from acquiring public land, respondent is, again,
mistaken. The prohibition in Section 3, Article XII of the Constitution applies only to
private corporations. Petitioner is a government corporation organized under
Presidential Decree No. 361, as amended by Presidential Decree No. 1656.
WHEREFORE, the petition is GRANTED. The Court of Appeals' decision of January 10,
2007 and resolution of October 5, 2007 are SET ASIDE. The July 28, 2001 trial court
decision is REINSTATED.
SO ORDERED.

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CASES FOR NOVATION, ESTOPELL, 2016

TRUST AND PRESCRIPTION

GLORIA OCAMPO-PAULE, petitioner,

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G.R. No. 126712 April 14, 1999

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to enter into a new contract. The appellate court

Appellant, however, insists that their agreement was novated when

Petitioner's reliance on Candida Mariano vs. People

is misplaced. The factual milieu in

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June 27, 2012

HEIRS OF SERVANDO FRANCO, Petitioners,

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January 18, 2012

STARBRIGHT SALES ENTERPRISES, INC., Petitioner,

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EDGAR LEDONIO, petitioner,

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Under our Code, however, conventional subrogation is not identical to

latter, it is not required. Subrogation extinguishes an obligation and gives rise to

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The basis of the complaint is not a deed of subrogation but an assignment of

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Republic of the Philippines

December 14, 2011

MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner,

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