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G.R. No.

151953

June 29, 2007

SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,


vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners
are not under obligation to reimburse respondent, a claim that
can be easily debunked. The more perplexing question is
whether this obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint as argued by
petitioners.
On 28 April 1980, Private Development Corporation of the
Philippines (PDCP)1 entered into a loan agreement with Falcon
Minerals, Inc. (Falcon) whereby PDCP agreed to make
available and lend to Falcon the amount of US$320,000.00, for
specific purposes and subject to certain terms and
conditions.2 On the same day, three stockholders-officers of
Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas),
George A. Scholey and George T. Scholey executed an
Assumption of Solidary Liability whereby they agreed "to
assume in [their] individual capacity, solidary liability with
[Falcon] for the due and punctual payment" of the loan
contracted by Falcon with PDCP.3 In the meantime, two
separate guaranties were executed to guarantee the payment
of the same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities. One
Guaranty4 was executed by petitioner Salvador Escao
(Escao), while the other5 by petitioner Mario M. Silos (Silos),
Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo)
and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of
Falcon to Escao, Silos and Joseph M. Matti (Matti). Thus,
contracts were executed whereby Ortigas, George A. Scholey,
Inductivo and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon to Escao,
Silos and Matti.6 Part of the consideration that induced the
sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and
several undertakings with Falcon, including those related to
the loan with PDCP. Thus, an Undertaking dated 11 June 1982
was executed by the concerned parties,7 namely: with Escao,
Silos and Matti identified in the document as "SURETIES," on
one hand, and Ortigas, Inductivo and the Scholeys as
"OBLIGORS," on the other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately
cause PDCP and PAIC to release OBLIGORS from their said
guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs said guarantees [sic] to
PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from
PDCP and/or PAIC for the payment of FALCONs obligations
with it, any of [the] OBLIGORS shall immediately inform
SURETIES thereof so that the latter can timely take
appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any
and/or all of OBLIGORS for collection of said loans and/or
credit facilities, SURETIES agree to defend OBLIGORS at their
own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims of
PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason
made to pay any amount to PDCP and/or PAIC, SURETIES shall
reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all
fees which may be due from FALCON arising out of, or in
connection with, their said guarantees[sic].8

Falcon eventually availed of the sum of US$178,655.59 from


the credit line extended by PDCP. It would also execute a Deed
of Chattel Mortgage over its personal properties to further
secure the loan. However, Falcon subsequently defaulted in its
payments. After PDCP foreclosed on the chattel mortgage,
there remained a subsisting deficiency of P5,031,004.07,
which Falcon did not satisfy despite demand. 9
On 28 April 1989, in order to recover the indebtedness, PDCP
filed a complaint for sum of money with the Regional Trial
Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos,
Silverio and Inductivo. The case was docketed as Civil Case
No. 89-5128. For his part, Ortigas filed together with his
answer a cross-claim against his co-defendants Falcon, Escao
and Silos, and also manifested his intent to file a third-party
complaint against the Scholeys and Matti. 10 The cross-claim
lodged against Escao and Silos was predicated on the 1982
Undertaking, wherein they agreed to assume the liabilities of
Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement
with PDCP. The first to come to terms with PDCP was Escao,
who in December of 1993, entered into a compromise
agreement whereby he agreed to pay the
bank P1,000,000.00. In exchange, PDCP waived or assigned in
favor of Escao one-third (1/3) of its entire claim in the
complaint against all of the other defendants in the
case.11 The compromise agreement was approved by the RTC
in a Judgment12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own
compromise agreement13 with PDCP, allegedly without the
knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed
to pay PDCP P1,300,000.00 as "full satisfaction of the PDCPs
claim against Ortigas,"14 in exchange for PDCPs release of
Ortigas from any liability or claim arising from the Falcon loan
agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay P500,000.00 in
exchange for PDCPs waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escao, Silos and Matti, on the
basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos,16 while he maintained his
cross-claim against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao, Silos and
Matti. On 5 October 1995, the RTC issued the Summary
Judgment, ordering Escao, Silos and Matti to pay Ortigas,
jointly and severally, the amount of P1,300,000.00, as well
as P20,000.00 in attorneys fees.17 The trial court ratiocinated
that none of the third-party defendants disputed the 1982
Undertaking, and that "the mere denials of defendants with
respect to non-compliance of Ortigas of the terms and
conditions of the Undertaking, unaccompanied by any
substantial fact which would be admissible in evidence at a
hearing, are not sufficient to raise genuine issues of fact
necessary to defeat a motion for summary judgment, even if
such facts were raised in the pleadings." 18 In an Order dated 7
March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed from
28 February 1994.19
From the Summary Judgment, recourse was had by way of
appeal to the Court of Appeals. Escao and Silos appealed
jointly while Matti appealed by his lonesome. In a
Decision20 dated 23 January 2002, the Court of Appeals
dismissed the appeals and affirmed the Summary Judgment.
The appellate court found that the RTC did not err in rendering
the summary judgment since the three appellants did not
effectively deny their execution of the 1982 Undertaking. The
special defenses that were raised, "payment and excussion,"
were characterized by the Court of Appeals as "appear[ing] to
be merely sham in the light of the pleadings and supporting
documents and affidavits."21 Thus, it was concluded that there
was no genuine issue that would still require the rigors of trial,
and that the appealed judgment was decided on the bases of
the undisputed and established facts of the case.

Hence, the present petition for review filed by Escao and


Silos.22 Two main issues are raised. First, petitioners dispute
that they are liable to Ortigas on the basis of the 1982
Undertaking, a document which they do not disavow and have
in fact annexed to their petition. Second, on the assumption
that they are liable to Ortigas under the 1982 Undertaking,
petitioners argue that they are jointly liable only, and not
solidarily. Further assuming that they are liable, petitioners
also submit that they are not liable for interest and if at all,
the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their
petition or their memorandum before the Court, the
appropriateness of the summary judgment as a relief
favorable to Ortigas. Under Section 3, Rule 35 of the 1997
Rules of Civil Procedure, summary judgment may avail if the
pleadings, supporting affidavits, depositions and admissions
on file show that, except as to the amount of damages, there
is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.
Petitioner have not attempted to demonstrate before us that
there existed a genuine issue as to any material fact that
would preclude summary judgment. Thus, we affirm with ease
the common rulings of the lower courts that summary
judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners
were correctly held liable to Ortigas on the basis of the 1982
Undertaking in this Summary Judgment. An examination of
the document reveals several clauses that make it clear that
the agreement was brought forth by the desire of Ortigas,
Inductivo and the Scholeys to be released from their liability
under the loan agreement which release was, in turn, part of
the consideration for the assignment of their shares in Falcon
to petitioners and Matti. The whereas clauses manifest that
Ortigas had bound himself with Falcon for the payment of the
loan with PDCP, and that "amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is
SURETIES relieving OBLIGORS of any and all liability arising
from their said joint and several undertakings with
FALCON."23 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and
undertake to assume all of OBLIGORs said guarantees [sic] to
PDCP x x x under the following terms and conditions." 24
At the same time, it is clear that the assumption by
petitioners of Ortigass "guarantees" [sic] to PDCP is governed
by stipulated terms and conditions as set forth in subparagraphs (a) to (c) of Paragraph 3. First, upon receipt by
"any of OBLIGORS" of any demand from PDCP for the payment
of Falcons obligations with it, "any of OBLIGORS" was to
immediately inform "SURETIES" thereof so that the latter can
timely take appropriate measures. Second, should "any and/or
all of OBLIGORS" be impleaded by PDCP in a suit for collection
of its loan, "SURETIES agree[d] to defend OBLIGORS at their
own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity,
subrogation or other relief"25 in respect to any of the claims of
PDCP. Third, if any of the "OBLIGORS is for any reason made to
pay any amount to [PDCP], SURETIES [were to] reimburse
OBLIGORS for said amount/s within seven (7) calendar days
from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not "made to pay" PDCP the amount
now sought to be reimbursed, as Ortigas voluntarily paid
PDCP the amount of P1.3 Million as an amicable settlement of
the claims posed by the bank against him. However, the
subject clause in paragraph 3(c) actually reads "[i]n the event
that any of OBLIGORS is for any reason made to pay any
amount to PDCP x x x"27 As pointed out by Ortigas, the phrase
"for any reason" reasonably includes any extra-judicial
settlement of obligation such as what Ortigas had undertaken
to pay to PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment
adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water
had the Undertaking made clear that the right of Ortigas to
seek reimbursement accrued only after he had delivered
payment to PDCP as a consequence of a final and executory
judgment. On the contrary, the clear intent of the Undertaking
was for petitioners and Matti to relieve the burden on Ortigas
and his fellow "OBLIGORS" as soon as possible, and not only

after Ortigas had been subjected to a final and executory


adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert
all efforts to cause PDCP x x x to within a reasonable time
release all the OBLIGORS x x x from their guarantees [sic] to
PDCP x x x"28 In the event that Ortigas and his fellow
"OBLIGORS" could not be released from their guaranties,
paragraph 2 commits petitioners and Matti to cause the Board
of Directors of Falcon to make a call on its stockholders for the
payment of their unpaid subscriptions and to pledge or assign
such payments to Ortigas, et al., as security for whatever
amounts the latter may be held liable under their guaranties.
In addition, paragraph 1 also makes clear that nothing in the
Undertaking "shall prevent OBLIGORS, or any one of them,
from themselves negotiating with PDCP x x x for the release of
their said guarantees [sic]." 29
There is no argument to support petitioners position on the
import of the phrase "made to pay" in the Undertaking, other
than an unduly literalist reading that is clearly inconsistent
with the thrust of the document. Under the Civil Code, the
various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.30 Likewise applicable
is the provision that if some stipulation of any contract should
admit of several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual.31 As
a means to effect the general intent of the document to
relieve Ortigas from liability to PDCP, it is his interpretation,
not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any
of the other conditions set in paragraph 3, as they claim.
Following the general assertion in the petition that Ortigas
violated the terms of the Undertaking, petitioners add that
Ortigas "paid PDCP BANK the amount of P1.3 million without
petitioners ESCANO and SILOSs knowledge and
consent."32 Paragraph 3(a) of the Undertaking does impose a
requirement that any of the "OBLIGORS" shall immediately
inform "SURETIES" if they received any demand for payment
of FALCONs obligations to PDCP, but that requirement is
reasoned "so that the [SURETIES] can timely take appropriate
measures"33 presumably to settle the obligation without
having to burden the "OBLIGORS." This notice requirement in
paragraph 3(a) is markedly way off from the suggestion of
petitioners that Ortigas, after already having been impleaded
as a defendant in the collection suit, was obliged under the
1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape
liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the
first place. They note that Ortigas had, in his answer, denied
any liability to PDCP and had alleged that he signed the
Assumption of Solidary Liability not in his personal capacity,
but as an officer of Falcon. However, such position, according
to petitioners, could not be justified since Ortigas later
voluntarily paid PDCP the amount of P1.3 Million. Such
circumstances, according to petitioners, amounted to estoppel
on the part of Ortigas.
Even as we entertain this argument at depth, its premises are
still erroneous. The Partial Compromise Agreement between
PDCP and Ortigas expressly stipulated that Ortigass offer to
pay PDCP was conditioned "without [Ortigass] admitting
liability to plaintiff PDCP Banks complaint, and to terminate
and dismiss the said case as against Ortigas
solely."34 Petitioners profess it is "unthinkable" for Ortigas to
have voluntarily paid PDCP without admitting his liability, 35 yet
such contention based on assumption cannot supersede the
literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to
PDCP after he had already assigned his obligation to
petitioners through the 1982 Undertaking. Yet the fact is PDCP
did pursue a judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not being a party to
such Undertaking, PDCP was not precluded by a contract from

pursuing its claim against Ortigas based on the original


Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas
from relieving his distress through a settlement with the
creditor bank. Indeed, paragraph 1 of the Undertaking
expressly states that "nothing herein shall prevent OBLIGORS,
or any one of them, from themselves negotiating with PDCP x
x x for the release of their said guarantees [sic]." 36 Simply put,
the Undertaking did not bar Ortigas from pursuing his own
settlement with PDCP. Neither did the Undertaking bar Ortigas
from recovering from petitioners whatever amount he may
have paid PDCP through his own settlement. The stipulation
that if Ortigas was "for any reason made to pay any amount to
PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such
payment"37 makes it clear that petitioners remain liable to
reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in
the alternative, that is, on the assumption that they are
indeed liable.
Petitioners submit that they could only be held jointly, not
solidarily, liable to Ortigas, claiming that the Undertaking did
not provide for express solidarity. They cite Article 1207 of the
New Civil Code, which states in part that "[t]here is a solidary
liability only when the obligation expressly so states, or when
the law or the nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are
jointly and severally liable for the Undertaking, as the
language used in the agreement "clearly shows that it is a
surety agreement"38 between the obligors (Ortigas group) and
the sureties (Escao group). Ortigas points out that the
Undertaking uses the word "SURETIES" although the
document, in describing the parties. It is further contended
that the principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are
solidarily liable "because the total loan obligation can not be
paid or settled to free or release the OBLIGORS if one or any
of the SURETIES default from their obligation in the
Undertaking."39
In case, there is a concurrence of two or more creditors or of
two or more debtors in one and the same obligation, Article
1207 of the Civil Code states that among them, "[t]here is a
solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires
solidarity." Article 1210 supplies further caution against the
broad interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility."
These Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence of
express and indubitable terms characterizing the obligation as
solidary, the presumption is that the obligation is only joint. It
thus becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact
with a preponderance of evidence.
The Undertaking does not contain any express stipulation that
the petitioners agreed "to bind themselves jointly and
severally" in their obligations to the Ortigas group, or any
such terms to that effect. Hence, such obligation established
in the Undertaking is presumed only to be joint. Ortigas, as
the party alleging that the obligation is in fact solidary, bears
the burden to overcome the presumption of jointness of
obligations. We rule and so hold that he failed to discharge
such burden.
Ortigas places primary reliance on the fact that the petitioners
and Matti identified themselves in the Undertaking as
"SURETIES", a term repeated no less than thirteen (13) times
in the document. Ortigas claims that such manner of
identification sufficiently establishes that the obligation of
petitioners to him was joint and solidary in nature.

The term "surety" has a specific meaning under our Civil


Code. Article 2047 provides the statutory definition of a surety
agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book shall
be observed. In such case the contract is called a suretyship.
[Emphasis supplied]40
As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor.
Thus, a surety agreement is an ancillary contract as it
presupposes the existence of a principal contract. It appears
that Ortigass argument rests solely on the solidary nature of
the obligation of the surety under Article 2047. In tandem with
the nomenclature "SURETIES" accorded to petitioners and
Matti in the Undertaking, however, this argument can only be
viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as
defined under Article 2047 in the first place. That clearly is not
the case here, notwithstanding the use of the nomenclature
"SURETIES" in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a
principal debtor to whom the surety is solidarily bound by way
of an ancillary obligation of segregate identity from the
obligation between the principal debtor and the creditor. The
suretyship does bind the surety to the creditor, inasmuch as
the latter is vested with the right to proceed against the
former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation.41 At the same time,
there is also a legal tie created between the surety and the
principal debtor to which the creditor is not privy or party to.
The moment the surety fully answers to the creditor for the
obligation created by the principal debtor, such obligation is
extinguished.42 At the same time, the surety may seek
reimbursement from the principal debtor for the amount paid,
for the surety does in fact "become subrogated to all the
rights and remedies of the creditor."43
Note that Article 2047 itself specifically calls for the
application of the provisions on joint and solidary obligations
to suretyship contracts.44 Article 1217 of the Civil Code thus
comes into play, recognizing the right of reimbursement from
a co-debtor (the principal debtor, in case of suretyship) in
favor of the one who paid (i.e., the surety).45However, a
significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity
signifies that the creditor can compel any one of the joint and
several debtors or the surety alone to answer for the entirety
of the principal debt. The difference lies in the respective
faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary codebtor and a surety:
A guarantor who binds himself in solidum with the principal
debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes.
There is a difference between a solidary co-debtor and a
fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of the
fiansa; while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, Title I, Book
IV of the Civil Code.
The second paragraph of [Article 2047] is practically
equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing
between the co-debtors liable in solidum is similar to the
common law suretyship.46

In the case of joint and several debtors, Article 1217 makes


plain that the solidary debtor who effected the payment to the
creditor "may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment
already made." Such solidary debtor will not be able to
recover from the co-debtors the full amount already paid to
the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the
particular proportional share of the solidary debtor who
already paid. In contrast, even as the surety is solidarily
bound with the principal debtor to the creditor, the surety who
does pay the creditor has the right to recover the full amount
paid, and not just any proportional share, from the principal
debtor or debtors. Such right to full reimbursement falls within
the other rights, actions and benefits which pertain to the
surety by reason of the subsidiary obligation assumed by the
surety.
What is the source of this right to full reimbursement by the
surety? We find the right under Article 2066 of the Civil Code,
which assures that "[t]he guarantor who pays for a debtor
must be indemnified by the latter," such indemnity comprising
of, among others, "the total amount of the debt." 47 Further,
Article 2067 of the Civil Code likewise establishes that "[t]he
guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor." 48

Articles 2066 and 2067 explicitly pertain to guarantors, and


one might argue that the provisions should not extend to
sureties, especially in light of the qualifier in Article 2047 that
the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr.
Tolentinos observation that "[t]he reference in the second
paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations,
however, does not mean that suretyship is withdrawn from
the applicable provisions governing guaranty." 49 For if that
were not the implication, there would be no material
difference between the surety as defined under Article 2047
and the joint and several debtors, for both classes of obligors
would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and
2067 extend as well to sureties as defined under Article 2047.
These rights granted to the surety who pays materially differ
from those granted under Article 1217 to the solidary debtor
who pays, since the "indemnification" that pertains to the
latter extends "only [to] the share which corresponds to each
[co-debtor]." It is for this reason that the Court cannot accord
the conclusion that because petitioners are identified in the
Undertaking as "SURETIES," they are consequently joint and
severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in
light of the general presumption favoring joint liability, the
Court would have to be satisfied that among the petitioners
and Matti, there is one or some of them who stand as the
principal debtor to Ortigas and another as surety who has the
right to full reimbursement from the principal debtor or
debtors. No suggestion is made by the parties that such is the
case, and certainly the Undertaking is not revelatory of such
intention. If the Court were to give full fruition to the use of
the term "sureties" as conclusive indication of the existence of
a surety agreement that in turn gives rise to a solidary
obligation to pay Ortigas, the necessary implication would be
to lay down a corresponding set of rights and obligations as
between the "SURETIES" which petitioners and Matti did not
clearly intend.
It is not impossible that as between Escao, Silos and Matti,
there was an agreement whereby in the event that Ortigas
were to seek reimbursement from them per the terms of the
Undertaking, one of them was to act as surety and to pay
Ortigas in full, subject to his right to full reimbursement from
the other two obligors. In such case, there would have been,
in fact, a surety agreement which evinces a solidary obligation
in favor of Ortigas. Yet if there was indeed such an agreement,
it does not appear on the record. More consequentially, no
such intention is reflected in the Undertaking itself, the very
document that creates the conditional obligation that
petitioners and Matti reimburse Ortigas should he be made to
pay PDCP. The mere utilization of the term "SURETIES" could

not work to such effect, especially as it does not appear who


exactly is the principal debtor whose obligation is "assured" or
"guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking
requires "solidary obligation of the Sureties," since the
Undertaking expressly seeks to "reliev[e] obligors of any and
all liability arising from their said joint and several undertaking
with [F]alcon," and for the "sureties" to "irrevocably agree and
undertake to assume all of obligors said guarantees to
PDCP."50 We do not doubt that a finding of solidary liability
among the petitioners works to the benefit of Ortigas in the
facilitation of these goals, yet the Undertaking itself contains
no stipulation or clause that establishes petitioners obligation
to Ortigas as solidary. Moreover, the aims adverted to by
Ortigas do not by themselves establish that the nature of the
obligation requires solidarity. Even if the liability of petitioners
and Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP
would still be accomplished through the complete execution of
such a judgment.
Petitioners further claim that they are not liable for attorneys
fees since the Undertaking contained no such stipulation for
attorneys fees, and that the situation did not fall under the
instances under Article 2208 of the Civil Code where
attorneys fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of
the petitioners led to his being impleaded in the suit filed by
PDCP. The Undertaking was precisely executed as a means to
obtain the release of Ortigas and the Scholeys from their
previous obligations as sureties of Falcon, especially
considering that they were already divesting their shares in
the corporation. Specific provisions in the Undertaking
obligate petitioners to work for the release of Ortigas from his
surety agreements with Falcon. Specific provisions likewise
mandate the immediate repayment of Ortigas should he still
be made to pay PDCP by reason of the guaranty agreements
from which he was ostensibly to be released through the
efforts of petitioners. None of these provisions were complied
with by petitioners, and Article 2208(2) precisely allows for
the recovery of attorneys fees "[w]hen the defendants act or
omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest."
Finally, petitioners claim that they should not be liable for
interest since the Undertaking does not contain any
stipulation for interest, and assuming that they are liable, that
the rate of interest should not be 12% per annum, as
adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals51 set forth the rules with respect to the manner of
computing legal interest:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 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 quantification of damages may be
deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.52
Since what was the constituted in the Undertaking consisted
of a payment in a sum of money, the rate of interest thereon
shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand. The interest rate
imposed by the RTC is thus proper. However, the computation
should be reckoned from judicial or extrajudicial demand. Per
records, there is no indication that Ortigas made any
extrajudicial demand to petitioners and Matti after he paid
PDCP, but on 14 March 1994, Ortigas made a judicial demand
when he filed a Third-Party Complaint praying that petitioners
and Matti be made to reimburse him for the payments made
to PDCP. It is the filing of this Third Party Complaint on 14
March 1994 that should be considered as the date of judicial
demand from which the computation of interest should be
reckoned.53 Since the RTC held that interest should be
computed from 28 February 1994, the appropriate redefinition
should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of
the Regional Trial Court dated 5 October 1995 is modified by
declaring that petitioners and Joseph M. Matti are only jointly
liable, not jointly and severally, to respondent Rafael Ortigas,
Jr. in the amount of P1,300,000.00. The Order of the Regional
Trial Court dated 7 March 1996 is MODIFIED in that the legal
interest of 12% per annum on the amount of P1,300,000.00 is
to be computed from 14 March 1994, the date of judicial
demand, and not from 28 February 1994 as directed in the
Order of the lower court. The assailed rulings are affirmed in
all other respects. Costs against petitioners.
SO ORDERED.
G.R. No. L-7721

March 25, 1914

INCHAUSTI & CO., plaintiff-appellant,


vs.
GREGORIO YULO, defendant-appellee.
Hausserman, Cohn and Fisher for appellant.
Rohde and Wright for appellee.
Bruce, Lawrence, Ross and Block, Amici Curiae, for Manuel,
Francisco and Carmen Yulo.
ARELLANO, C.J.:
This suit is brought for the recovery of a certain sum of
money, the balance of a current account opened by the firm
of Inchausti & Company with Teodoro Yulo and after his death
continued with his widow and children, whose principal
representative is Gregorio Yulo. Teodoro Yulo, a property
owner of Iloilo, for the exploitation and cultivation of his
numerous haciendas in the province of Occidental Negros,
had been borrowing money from the firm of Inchausti &
Company under specific conditions. On April 9, 1903; Teodoro
Yulo died testate and for the execution of the provisions of his
will he had appointed as administrators his widow and five of
his sons, Gregorio Yulo being one of the latter. He thus left a
widow, Gregoria Regalado, who died on October 22d of the
following year, 1904, there remaining of the marriage the
following legitimate children: Pedro, Francisco, Teodoro,
Manuel, Gregorio, Mariano, Carmen, Concepcion, and Jose Yulo
y Regalado. Of these children Concepcion and Jose were
minors, while Teodoro was mentally incompetent. At the death
of their predecessor in interest, Teodoro Yulo, his widow and

children held the conjugal property in common and at the


death of this said widow, Gregoria Regalado, these children
preserved the same relations under the name of Hijos de T.
Yulo continuing their current account with Inchausti &
Company in the best and most harmonious reciprocity until
said balance amounted to two hundred thousand pesos. In for
the payment of the disbursements of money which until that
time it had been making in favor of its debtors, the Yulos.
First. Gregorio Yulo, for himself and in representation of his
brothers Pedro Francisco, Manuel, Mariano, and Carmen,
executed on June 26, 1908, a notarial document (Exhibit S)
whereby all admitted their indebtedness to Inchausti &
Company in the sum of P203,221.27 and, in order to secure
the same with interest thereon at 10 per cent per annum,
they especially mortgaged an undivided six-ninth of their
thirty-eight rural properties, their remaining urban
properties, lorchas, and family credits which were listed,
obligating themselves to make a forma inventory and to
describe in due form all the said properties, as well as to cure
all the defects which might prevent the inscription of the said
instrument in the registry of property and finally to extend by
the necessary formalities the aforesaid mortgage over the
remaining three-ninths part of all the property and rights
belonging to their other brothers, the incompetent Teodoro,
and the minors Concepcion and Jose.
Second. On January 11, 1909, Gregorio Yulo in representation
of Hijos de T. Yulo answered a letter of the firm of Inchausti &
Company in these terms: "With your favor of the 2d inst. we
have received an abstract of our current account with your
important firm, closed on the 31st of last December, with
which we desire to express our entire conformity as also with
the balance in your favor of P271,863.12." On July 17, 1909,
Inchausti & Company informed Hijos de T. Yulo of the
reduction of the said balance to P253,445.42, with which
balance Hijos de T. Yulo expressed its conformity by means of
a letter of the 19th of the same month and year. Regarding
this conformity a new document evidencing the mortgage
credit was formalized.
Third. On August 12, 1909, Gregorio Yulo, for himself and in
representation of his brother Manuel Yulo, and in their own
behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and
Concepcion Yulo, the latter being of age at the time, executed
the notarial instrument (Exhibit X). Through this, the said
persons, including Concepcion Yulo ratified all the contents of
the prior document of June 26, 1908, severally and jointly
acknowledged and admitted their indebtedness to Inchausti &
Company for the net amount of two hundred fifty-three
thousand four hundred forty-five pesos and forty-two centavos
(P253,445.42) which they obligated themselves to pay, with
interest at ten per cent per annum, in five installments at the
rate of fifty thousand pesos (P50,000), except the last, this
being fifty-three thousand four hundred forty-five pesos and
forty-two centavos (P53,445.42), beginning June 30, 1910,
continuing successively on the 30th of each June until the last
payment on June 30, 1914. Among other clauses, they
expressly stipulated the following:
Fifth. The default in payment of any of the
installments established in clause 3, or the
noncompliance of any of the other obligations which
by the present document and that of June 26, 1908,
we, the Yulos, brothers and sisters, have assumed,
will result in the maturity of all the said installments,
and as a consequence thereof, if they so deem
expedient Messrs. Inchausti & Company may
exercise at once all the rights and actions which to
them appertain in order to obtain the immediate and
total payment of our debt, in the same manner that
they would have so done at the maturity of the said
installments.
Fifteenth. All the obligations which by this, as well as
by the document of June 26, 1908, concern us, will
be understood as having been contradicted in
solidum by all of us, the Yulos, brothers and sisters.
Sixteenth. It is also agreed that this instrument shall
be confirmed and ratified in all its parts, within the
present week, by our brother Don Mariano Yulo y
Regalado who resides in Bacolod, otherwise it will not

be binding on Messrs. Inchausti & Company who can


make use of their rights to demand and obtain
immediate payment of their credit without any
further extension or delay, in accordance with what
we have agreed.

Ninth. The Court of First Instance of Iloilo decided the case "in
favor of the defendant without prejudice to the plaintiff's
bringing within the proper time another suit for his
proportional part of the joint debt, and that the plaintiff pay
the costs." (B. of E., 21.)

Fourth. This instrument was neither ratified nor confirmed by


Mariano Yulo.

The plaintiff appealed from this judgment by bill of exceptions


and before this court made the following assignment of errors:

Fifth. The Yulos, brothers and sisters, who executed the


preceding instrument, did not pay the first installment of the
obligation.

I. That the court erred in considering the contract of May 12,


1911, as constituting a novation of that of August 12, 1909.

Sixth. Therefore, on March 27, 1911, Inchausti & Company


brought an ordinary action in the Court of First Instance of
Iloilo, against Gregorio Yulo for the payment of the said
balance due of two hundred fifty-three thousand, four hundred
forty-five pesos and forty-two centavos P253,445.42) with
interest at ten per cent per annum, on that date aggregating
forty-two thousand, nine hundred forty-four pesos and
seventy-six centavos (P42,944.76)
Seventh. But, on May 12, 1911, Francisco, Manuel, and
Carmen Yulo y Regalado executed in favor Inchausti &
Company another notarial instrument in recognition of the
debt and obligation of payment in the following terms: "First,
the debt is reduce for them to two hundred twenty-five
thousand pesos (P225,000); second, the interest is likewise
reduced for them to 6 percent per annum, from March 15,
1911; third, the installments are increase to eight, the first of
P20,000, beginning on June 30, 1911, and the rest of P30,000
each on the same date of each successive year until the total
obligation shall be finally and satisfactorily paid on June 30,
1919," it being expressly agreed "that if any of the partial
payments specified in the foregoing clause be not paid at its
maturity, the amount of the said partial payment together
with its interest shall bear interest at the rate of 15 per cent
per annum from the date of said maturity, without the
necessity of demand until its complete payment;" that "if
during two consecutive years the partial payments agreed
upon be not made, they shall lose the right to make use of the
period granted to them for the payment of the debt or the
part thereof which remains unpaid, and that Messrs. Inchausti
& Company may consider the total obligation due and
demandable, and proceed to collect the same together with
the interest for the delay above stipulated through all legal
means." (4th clause.)
Thus was it stipulated between Inchausti & Company and the
said three Yulos, brothers and sisters by way of compromise
so that Inchausti & Company might, as it did, withdraw the
claims pending in the special proceedings for the probate of
the will of Don Teodoro Yulo and of the intestacy of Doa
Gregoria Regalado stipulating expressly however in the
sixth clause that "Inchausti & Company should include in their
suit brought in the Court of First Instance of Iloilo against Don
Gregorio Yulo, his brother and joint co-obligee, Don Pedro Yulo,
and they will procure by all legal means and in the least time
possible a judgment in their favor against the said Don
Gregorio and Don Pedro, sentencing the later to pay the total
amount of the obligation acknowledged by them in the
aforementioned instrument of August 12, 1909; with the
understanding that if they should deem it convenient for their
interests, Don Francisco, Don Manuel, and Doa Carmen Yulo
may appoint an attorney to cooperate with the lawyers of
Inchausti & Company in the proceedings of the said case."
Eighth. Matters being thus on July 10, 1911, Gregorio Yulo
answered the complaint and alleged as defenses; first, that an
accumulation of interest had taken place and that compound
interest was asked for the Philippine currency at par with
Mexican; second, that in the instrument of August 21, 1909,
two conditions were agreed one of which ought to be
approved by the Court of First Instance, and the other ratified
and confirmed by the other brother Mariano Yulo, neither of
which was complied with; third , that with regard to the same
debt claims were presented before the commissioners in the
special proceedings over the inheritances of Teodoro Yulo and
Gregoria Regalado, though later they were dismissed, pending
the present suit; fourth and finally, that the instrument of
August 12, 1909, was novated by that of May 12, 1911,
executed by Manuel, Francisco and Carmen Yulo.

II. That the court erred in rendering judgment in favor of the


defendant.
III. And that the court erred n denying the motion for a new
trial.
"No one denies in this case," says the trial judge, "that the
estate of Teodoro Yulo or his heirs owe Inchausti & Company
an amount of money, the object of this action, namely,
P253,445.42" (B. of E. 18). "The fact is admitted," says the
defendant, "that the plaintiff has not collected the debt, and
that the same is owing" (Brief, 33). "In the arguments of the
attorneys," the judge goes on, "it was really admitted that the
plaintiff had a right to bring an action against Gregorio Yulo,
as one of the conjoint and solidary obligors in the contract of
August 12, 1909; but the defendant says that the plaintiff has
no right to sue him alone, since after the present suit was
brought, the plaintiff entered into a compromise with the
other conjoint and solidary debtors, the result being the new
contract of May 12, 1911, by virtue of which the payments
were extended, the same constituting a novation of the
contract which gave him the same privileges that were given
his conjoint and solidary codebtors. This (the judge concludes)
is the only question brought up by the parties." (B. of E., 19.)
And this is the only one which the Supreme Court has to solve
by virtue of the assignments of errors alleged. Consequently,
there is no need of saying anything regarding the first three
defenses of the answer, nor regarding the lack of the
signature of Mariano Yulo ratifying and confirming the
instrument of August 12, 1909, upon which the appellee still
insists in his brief for this appeal; although it will not be
superfluous to state the doctrine that a condition, such as is
contained in the sixteenth clause of the said contract (third
point in the statement of facts), is by no means of suspensive
but a resolutory condition; the effect of the failure of
compliance with the said clause, that is to say, the lack of the
ratification and confirmance by Mariano Yulo being not to
suspend but to resolve the contract, leaving Inchausti &
Company at liberty, as stipulated, "to make use of its rights to
demand and obtain the immediate payment of its credit."
The only question indicated in the decision of the inferior
court involves, however, these others: First, whether the
plaintiff can sue Gregorio Yulo alone, there being other
obligors; second, if so, whether it lost this right by the fact of
its having agreed with the other obligors in the reduction of
the debt, the proroguing of the obligation and the extension of
the time for payment, in accordance with the instrument of
May 12, 1911; third, whether this contract with the said three
obligors constitutes a novation of that of August 12, 1909,
entered into with the six debtors who assumed the payment
of two hundred fifty-three thousand and some odd pesos, the
subject matter of the suit; and fourth, if not so, whether it
does have any effect at all in the action brought, and in this
present suit.
With respect to the first it cannot be doubted that, the debtors
having obligated themselves in solidum, the creditor can bring
its action in toto against any one of them, inasmuch as this
was surely its purpose in demanding that the obligation
contracted in its favor should be solidary having in mind the
principle of law that, "when the obligation is constituted as a
conjoint and solidary obligation each one of the debtors is
bound to perform in full the undertaking which is the subject
matter of such obligation." (Civil Code, articles 1137 and
1144.)
And even though the creditor may have stipulated with some
of the solidary debtors diverse installments and conditions, as

in this case, Inchausti & Company did with its debtors Manuel,
Francisco, and Carmen Yulo through the instrument of May 12,
1911, this does not lead to the conclusion that the solidarity
stipulated in the instrument of August 12, 1909 is broken, as
we already know the law provides that "solidarity may exist
even though the debtors are not bound in the same manner
and for the same periods and under the same conditions."
(Ibid, article 1140.) Whereby the second point is resolved.
With respect to the third, there can also be no doubt that the
contract of May 12, 1911, does not constitute a novation of
the former one of August 12, 1909, with respect to the other
debtors who executed this contract, or more concretely, with
respect to the defendant Gregorio Yulo: First, because "in
order that an obligation may be extinguished by another
which substitutes it, it is necessary that it should be so
expressly declared or that the old and the new be
incompatible in all points" (Civil Code, article 1204); and the
instrument of May 12, 1911, far from expressly declaring that
the obligation of the three who executed it substitutes the
former signed by Gregorio Yulo and the other debtors,
expressly and clearly stated that the said obligation of
Gregorio Yulo to pay the two hundred and fifty-three thousand
and odd pesos sued for exists, stipulating that the suit must
continue its course and, if necessary, these three parties who
executed the contract of May 12, 1911, would cooperate in
order that the action against Gregorio Yulo might prosper (7th
point in the statement of facts), with other undertakings
concerning the execution of the judgment which might be
rendered against Gregorio Yulo in this same suit. "It is always
necessary to state that it is the intention of the contracting
parties to extinguish the former obligation by the new one"
(Judgment in cassation, July 8, 1909). There exist no
incompatibility between the old and the new obligation as will
be demonstrated in the resolution of the last point, and for the
present we will merely reiterate the legal doctrine that an
obligation to pay a sum of money is not novated in a new
instrument wherein the old is ratified, by changing only the
term of payment and adding other obligations not
incompatible with the old one. (Judgments in cassation of June
28, 1904 and of July 8, 1909.)
With respect to the last point, the following must be borne in
mind:
Facts. First. Of the nine children of T. Yulo, six executed the
mortgage of August 12, 1909, namely, Gregorio, Pedro,
Francisco, Manuel, Carmen, and Concepcion, admitting a debt
of P253,445.42 at 10 per cent per annum and mortgaging sixninths of their hereditary properties. Second. Of those six
children, Francisco, Manuel and Carmen executed the
instrument of May 12, 1911, wherein was obtained a
reduction of the capital to 225,000 pesos and of the interest
to 6 per cent from the 15th of March of the same year of
1911. Third. The other children of T. Yulo named Mariano,
Teodoro, and Jose have not taken part in these instruments
and have not mortgaged their hereditary portions. Fourth. By
the first instrument the maturity of the first installment was
June 30, 1910, whereas by the second instrument, Francisco,
Manuel, and Carmen had in their favor as the maturity of the
first installment of their debt, June 30, 1912, and Fifth, on
March 27, 1911, the action against Gregorio Yulo was already
filed and judgment was pronounced on December 22, 1911,
when the whole debt was not yet due nor even the first
installment of the same respective the three aforesaid
debtors, Francisco, Manuel, and Carmen.
In jure it would follow that by sentencing Gregorio Yulo to pay
253,445 pesos and 42 centavos of August 12, 1909, this
debtor, if he should pay all this sum, could not recover from
his joint debtors Francisco, Manuel, and Carmen their
proportional parts of the P253,445.42 which he had paid,
inasmuch as the three were not obligated by virtue of the
instrument of May 12, 1911, to pay only 225,000 pesos, thus
constituting a violation of Gregorio Yulo's right under such
hypothesis, of being reimbursed for the sum paid by him, with
the interest of the amounts advanced at the rate of one-sixth
part from each of his five codebtors. (Civ. Code, article 1145,
par. 2). This result would have been a ponderous obstacle
against the prospering of the suit as it had been brought. It
would have been very just then to have absolved the solidary
debtor who having to pay the debt in its entirety would not be
able to demand contribution from his codebtors in order that
they might reimburse him pro rata for the amount advanced

for them by him. But such hypothesis must be put out of


consideration by reason of the fact that occurred during the
pendency of the action, which fact the judge states in his
decision. "In this contract of May last," he says, "the amount
of the debt was reduced to P225,000 and the attorney of the
plaintiff admits in his plea that Gregorio Yulo has a right to the
benefit of this reduction." (B. of E., 19.) This is a fact which
this Supreme Court must hold as firmly established,
considering that the plaintiff in its brief, on page 27,
corroborates the same in these words: "What effect," it says,
"could this contract have over the rights and obligations of the
defendant Gregorio Yulo with respect to the plaintiff company?
In the first place, we are the first to realize that it benefits him
with respect to the reduction of the amount of the debt. The
obligation being solidary, the remission of any part of the debt
made by a creditor in favor of one or more of the solidary
debtors necessarily benefits the others, and therefore there
can be no doubt that, in accordance with the provision of
article 1143 of the Civil Code, the defendant has the right to
enjoy the benefits of the partial remission of the debt granted
by the creditor."
Wherefore we hold that although the contract of May 12,
1911, has not novated that of August 12, 1909, it has affected
that contract and the outcome of the suit brought against
Gregorio Yulo alone for the sum of P253,445.42; and in
consequence thereof, the amount stated in the contract of
August 12, 1909, cannot be recovered but only that stated in
the contract of May 12, 1911, by virtue of the remission
granted to the three of the solidary debtors in this instrument,
in conformity with what is provided in article 1143 of the Civil
Code, cited by the creditor itself.
If the efficacy of the later instrument over the former touching
the amount of the debt had been recognized, should such
efficacy not likewise be recognized concerning the maturity of
the same? If Francisco, Manuel, and Carmen had been
included in the suit, they could have alleged the defense of
the nonmaturity of the installments since the first installment
did not mature until June 30, 1912, and without the least
doubt the defense would have prospered, and the three would
have been absolved from the suit. Cannot this defense of the
prematurity of the action, which is implied in the last special
defense set up in the answer of the defendant Gregorio Yulo
be made available to him in this proceeding?
The following commentary on article 1140 of the Civil Code
sufficiently answers this question: ". . . . Before the
performance of the condition, or before the execution of
a term which affects one debtor alone proceedings may be
had against him or against any of the others for the remainder
which may be already demandable but the conditional
obligation or that which has not yet matured cannot be
demanded from any one of them. Article 1148 confirms the
rule which we now enunciate inasmuch as in case the total
claim is made by one creditor, which we believe improper if
directed against the debtor affected by the condition or the
term, the latter can make use of such exceptions as are
peculiarly personal to his own obligation; and if against the
other debtors, they mightmake use of those exceptions, even
though they are personal to the other, inasmuch as they
alleged they are personal to the other, inasmuch as they
alleged them in connection with that part of the
responsibility attaching in a special manner to the other." (8
Manresa, Sp. Civil Code, 196.)
Article 1148 of the Civil Code. "The solidary debtor may
utilize against the claims of the creditor of the defenses
arising from the nature of the obligation and those which are
personal to him. Those personally pertaining to the others
may be employed by him only with regard to the share of the
debt for which the latter may be liable."
Gregorio Yulo cannot allege as a defense to the action that it
is premature. When the suit was brought on March 27, 1911,
the first installment of the obligation had already matured of
June 30, 1910, and with the maturity of this installment, the
first not having been paid, the whole debt had become
mature, according to the express agreement of the parties,
independently of the resolutory condition which gave the
creditor the right to demand the immediate payment of the
whole debt upon the expiration of the stipulated term of one
week allowed to secure from Mariano Yulo the ratification and
confirmation of the contract of August 12, 1909.

Neither could he invoke a like exception for the shares of his


solidary codebtors Pedro and Concepcion Yulo, they being in
identical condition as he.
But as regards Francisco, Manuel, and Carmen Yulo, none of
the installments payable under their obligation, contracted
later, had as yet matured. The first payment, as already
stated, was to mature on June 30, 1912. This exception or
personal defense of Francisco, Manuel, and Carmen Yulo "as to
the part of the debt for which they were responsible" can be
sent up by Gregorio Yulo as a partial defense to the action.
The part of the debt for which these three are responsible is
three-sixths of P225,000 or P112,500, so that Gregorio Yulo
may claim that, even acknowledging that the debt for which
he is liable is P225,000, nevertheless not all of it can now be
demanded of him, for that part of it which pertained to his
codebtors is not yet due, a state of affairs which not only
prevents any action against the persons who were granted
the term which has not yet matured, but also against the
other solidary debtors who being ordered to pay could not
now sue for a contribution, and for this reason the action will
be only as to the P112,500.
Against the propriety and legality of a judgment against
Gregorio Yulo for this sum, to wit, the three-sixths part of the
debt which forms the subject matter of the suit, we do not
think that there was any reason or argument offered which
sustains an opinion that for the present it is not proper to
order him to pay all or part of the debt, the object of the
action.
It has been said in the brief of the appellee that the
prematurity of the action is one of the defenses derived from
the nature of the obligation, according to the opinion of the
commentator of the Civil Code, Mucius Scaevola, and
consequently the defendant Gregorio Yulo may make use of it
in accordance with article 1148 of the said Code. It may be so
and yet, taken in that light, the effect would not be different
from that already stated in this decision; Gregorio Yulo could
not be freed from making any payment whatever but only
from the payment of that part of the debt which corresponds
to his codebtors Francisco, Manuel, and Carmen. The same
author, considering the case of the opposing contention of
two solidary debtors as to one of whom the obligation is pure
and unconditional and as to the other it is conditional and is
not yet demandable, and comparing the disadvantages which
must flow from holding that the obligation is demandable with
these which must follow if the contrary view is adopted, favors
this solution of the problem:
There is a middle ground, (he says), from which we
can safely set out, to wit, that the creditor may
of course, demand the payment of his credit against
the debtor not favored by any condition or extension
of time." And further on, he decides the question as
to whether the whole debt may be recovered or only
that part unconditionally owing or which has already
matured, saying, "Without failing to proceed with
juridical rigor, but without falling into extravagances
or monstrosities, we believe that the solution of the
difficulty is perfectly possible. How? By limiting the
right of the creditor to the recovery of the amount
owed by the debtors bound unconditionally or as to
whom the obligation has matured, and leaving in
suspense the right to demand the payment of the
remainder until the expiration of the term of the
fulfillment of the condition. But what then is the
effect of solidarity? How can this restriction of right
be reconciled with the duty imposed upon each one
of the debtors to answer for the whole obligation?
Simply this, by recognizing in the creditor the power,
upon the performance of the condition or the
expiration of the term of claiming from any one or all
of the debtors that part of the obligation affected by
those conditions. (Scaevola, Civil Code, 19, 800 and
801.)
It has been said also by the trial judge in his decision that if a
judgment be entered against Gregorio Yulo for the whole debt
of P253,445.42, he cannot recover from Francisco, Manuel,
and Carmen Yulo that part of the amount which is owed by
them because they are obliged to pay only 225,000 pesos and
this is eight installments none of which was due. For this
reason he was of the opinion that he (Gregorio Yulo) cannot be

obliged to pay his part of the debt before the contract of May
12, 1911, may be enforced, and "consequently he decided the
case in favor of the defendant, without prejudice to the
plaintiff proceeding in due time against him for his
proportional part of the joint debt." (B. of E., 21 and 22.)
But in the first place, taking into consideration the conformity
of the plaintiff and the provision of article 1143 of the Civil
Code, it is no longer possible to sentence the defendant to
pay the P253,445.42 of the instrument of August 12, 1909,
but, if anything, the 225,000 of the instrument of May 12,
1911.
In the second place, neither is it possible to curtail the
defendant's right of recovery from the signers of the
instrument of May 12, 1911, for he was justly exonerated from
the payment of that part of the debt corresponding to them by
reason of there having been upheld in his favor the exception
of an unmatured installment which pertains to them.
In the third place, it does not seem just, Mucius Scaevola
considers it "absurd," that, there being a debtor who is
unconditionally obligated as to when the debt has matured,
the creditor should be forced to await the realization of the
condition (or the expiration of the term.) Not only is there no
reason for this, as stated by the author, but the court would
even fail to consider the special law of the contract, neither
repealed nor novated, which cannot be omitted without
violating article 1091 of the Civil Code according to which "the
obligations arising from contracts have the force of law
between the contracting parties and must be complied with in
accordance with the tenor of the same." Certain it is that the
trial court, in holding that this action was premature but might
be brought in the time, regarded the contract of August 12,
1909, as having been expressly novated; but it is absolutely
impossible in law to sustain such supposed novation, in
accordance with the legal principles already stated, and
nevertheless the obligation of the contract of May 12, 1911,
must likewise be complied with in accordance with its tenor,
which is contrary in all respects to the supposed novation, by
obliging the parties who signed the contract to carry on the
suit brought against Gregorio Yulo. The contract of May 12,
1911, has affected the action and the suit, to the extent that
Gregorio Yulo has been able to make in his favor the defense
of remission of part of the debt, thanks to the provision of
article 1148, because it is a defense derived from the nature
of the obligation, so that although the said defendant was not
party to the contract in question, yet because of the principle
of solidarity he was benefited by it.
The defendant Gregorio Yulo cannot be ordered to pay the
P253,445.42 claimed from him in the suit here, because he
has been benefited by the remission made by the plaintiff to
three of his codebtors, many times named above.
Consequently, the debt is reduced to 225,000 pesos.
But, as it cannot be enforced against the defendant except as
to the three-sixths part which is what he can recover from his
joint codebtors Francisco, Manuel, and Carmen, at present,
judgment can be rendered only as to the P112,500.
We therefore sentence the defendant Gregorio Yulo to pay the
plaintiff Inchausti & Company P112,500, with the interest
stipulated in the instrument of May 12, 1911, from March 15,
1911, and the legal interest on this interest due, from the time
that it was claimed judicially in accordance with article 1109
of the Civil Code, without any special finding as to costs. The
judgment appealed from is reversed. So ordered.
G.R. No. 96405 June 26, 1996
BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

ROMERO, J.:p

This is a petition for review on certiorari of the decision of the


Court of Appeals affirming that of the Regional Trial Court of
Misamis Oriental, Branch 18, 1 which disposed of Civil Case
No. 10507 for collection of a sum of money and damages, as
follows:

in the amount of P5,000.00 only. Finally, the lower court held


that, even granting that said limited amount had actually
been agreed upon, the same would have been merely
collateral between him and Naybe and, therefore, not binding
upon the private respondent as creditor-bank.

WHEREFORE, defendant BALDOMERO L.


INCIONG, JR. is adjudged solidarily liable and
ordered to pay to the plaintiff Philippine
Bank of Communications, Cagayan de Oro
City, the amount of FIFTY THOUSAND PESOS
(P50,000.00), with interest thereon from
May 5, 1983 at 16% per annum until fully
paid; and 6% per annum on the total
amount due, as liquidated damages or
penalty from May 5, 1983 until fully paid;
plus 10% of the total amount due for
expenses of litigation and attorney's fees;
and to pay the costs.

The lower court also noted that petitioner was a holder of a


Bachelor of Laws degree and a labor consultant who was
supposed to take due care of his concerns, and that, on the
witness stand, Pio Tio denied having participated in the
alleged business venture although he knew for a fact that the
falcata logs operation was encouraged by the bank for its
export potential.

The counterclaim, as well as the cross claim,


are dismissed for lack of merit.

On February 6, 1991, the Court denied the petition for failure


of petitioner to comply with the Rules of Court and paragraph
2 of Circular
No. 1-88, and to sufficiently show that respondent court had
committed any reversible error in its questioned decision. 4 His
motion for the reconsideration of the denial of his petition was
likewise denied with finality in the Resolution of April 24,
1991. 5 Thereafter, petitioner filed a motion for leave to file a
second motion for reconsideration which, in the Resolution of
May 27, 1991, the Court denied. In the same Resolution, the
Court ordered the entry of judgment in this case.6

SO ORDERED.
Petitioner's liability resulted from the promissory note in the
amount of P50,000.00 which he signed with Rene C. Naybe
and Gregorio D. Pantanosas on February 3, 1983, holding
themselves jointly and severally liable to private respondent
Philippine Bank of Communications, Cagayan de Oro City
branch. The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid
their obligation. Consequently, on November 14, 1983 and on
June 8, 1984, private respondent sent petitioner telegrams
demanding payment thereof. 2 On December 11, 1984 private
respondent also sent by registered mail a final letter of
demand to Rene C. Naybe. Since both obligors did not
respond to the demands made, private respondent filed on
January 24, 1986 a complaint for collection of the sum of
P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for
failure of the plaintiff to prosecute the case. However, on
January 9, 1987, the lower court reconsidered the dismissal
order and required the sheriff to serve the summonses. On
January 27, 1987, the lower court dismissed the case against
defendant Pantanosas as prayed for by the private respondent
herein. Meanwhile, only the summons addressed to petitioner
was served as the sheriff learned that defendant Naybe had
gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January
1983, he was approached by his friend, Rudy Campos, who
told him that he was a partner of Pio Tio, the branch manager
of private respondent in Cagayan de Oro City, in the falcata
logs operation business. Campos also intimated to him that
Rene C. Naybe was interested in the business and would
contribute a chainsaw to the venture. He added that, although
Naybe had no money to buy the equipment, Pio Tio had
assured Naybe of the approval of a loan he would make with
private respondent. Campos then persuaded petitioner to act
as a "co-maker" in the said loan. Petitioner allegedly acceded
but with the understanding that he would only be a co-maker
for the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank
promissory note were brought to him by Campos at his office.
He affixed his signature thereto but in one copy, he indicated
that he bound himself only for the amount of P5,000.00. Thus,
it was by trickery, fraud and misrepresentation that he was
made liable for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted
that the typewritten figure "-- 50,000 --" clearly appears
directly below the admitted signature of the petitioner in the
promissory note. 3 Hence, the latter's uncorroborated
testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under
Sec. 5 (q) of Rule 131. The lower court added that it was
"rather odd" for petitioner to have indicated in a copy and not
in the original, of the promissory note, his supposed obligation

Petitioner appealed the said decision to the Court of Appeals


which, in its decision of August 31, 1990, affirmed that of the
lower court. His motion for reconsideration of the said decision
having been denied, he filed the instant petition for review
on certiorari.

Unfazed, petitioner filed a notion for leave to file a motion for


clarification. In the latter motion, he asserted that he had
attached Registry Receipt No. 3268 to page 14 of the petition
in compliance with Circular No. 1-88. Thus, on August 7, 1991,
the Court granted his prayer that his petition be given due
course and reinstated the same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on
May 3, 1988, or after the rendition of the decision of the lower
court, by Gregorio Pantanosas, Jr., an MTCC judge and
petitioner's co-maker in the promissory note. It supports
petitioner's allegation that they were induced to sign the
promissory note on the belief that it was only for P5,000.00,
adding that it was Campos who caused the amount of the loan
to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's
contention in the instant petition that the Court of Appeals
should have declared the promissory note null and void on the
following grounds: (a) the promissory note was signed in the
office of Judge Pantanosas, outside the premises of the bank;
(b) the loan was incurred for the purpose of buying a secondhand chainsaw which cost only P5,000.00; (c) even a new
chainsaw would cost only P27,500.00; (d) the loan was not
approved by the board or credit committee which was the
practice, as it exceeded P5,000.00; (e) the loan had no
collateral; (f) petitioner and Judge Pantanosas were not
present at the time the loan was released in contravention of
the bank practice, and (g) notices of default are sent
simultaneously and separately but no notice was validly sent
to him. 8 Finally, petitioner contends that in signing the
promissory note, his consent was vitiated by fraud as,
contrary to their agreement that the loan was only for the
amount of P5,000.00, the promissory note stated the amount
of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be
reminded of the basic rule that this Court is not a trier of
facts. Having lost the chance to fully ventilate his factual
claims below, petitioner may no longer be accorded the same
opportunity in the absence of grave abuse of discretion on the
part of the court below. Had he presented Judge Pantanosas
affidavit before the lower court, it would have strengthened
his claim that the promissory note did not reflect the correct
amount of the loan.
Nor is there merit in petitioner's assertion that since the
promissory note "is not a public deed with the formalities

prescribed by law but . . . a mere commercial paper which


does not bear the signature of . . . attesting witnesses," parol
evidence may "overcome" the contents of the promissory
note. 9 The first paragraph of the parol evidence rule 10 states:
When the terms of an agreement have been reduced to
writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and
their successors in interest, no evidence of such terms
other than the contents of the written agreement.
Clearly, the rule does not specify that the written
agreement be a public document.
What is required is that the agreement be in writing as the
rule is in fact founded on "long experience that written
evidence is so much more certain and accurate than that
which rests in fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their contract in
writing, to admit weaker evidence to control and vary the
stronger and to show that the
parties intended a different contract from that expressed in
the writing signed by them." 11 Thus, for the parol evidence
rule to apply, a written contract need not be in any particular
form, or be signed by both parties. 12 As a general rule, bills,
notes and other instruments of a similar nature are not
subject to be varied or contradicted by parol or extrinsic
evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in
the right direction towards proving that he and his co-makers
agreed to a loan of P5,000.00 only considering that, where a
parol contemporaneous agreement was the inducing and
moving cause of the written contract, it may be shown by
parol evidence. 15 However, fraud must be established by
clear and convincing evidence, mere preponderance of
evidence, not even being adequate. 16 Petitioner's attempt to
prove fraud must, therefore, fail as it was evidenced only by
his own uncorroborated and, expectedly, self-serving
testimony.
Petitioner also argues that the dismissal of the complaint
against Naybe, the principal debtor, and against Pantanosas,
his co-maker, constituted a release of his obligation,
especially because the dismissal of the case against
Pantanosas was upon the motion of private respondent itself.
He cites as basis for his argument, Article 2080 of the Civil
Code which provides that:
The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor,
they cannot be subrogated to the rights, mortgages, and
preferences of the latter.
It is to be noted, however, that petitioner signed the
promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the
promissory note which states as follows:
Ninety one (91) days after date, for value received, I/we,
JOINTLY and SEVERALLY promise to pay to the PHILIPPINE
BANK OF COMMUNICATIONS at its office in the City of
Cagayan de Oro, Philippines the sum of FIFTY THOUSAND
ONLY (P50,000.00) Pesos, Philippine Currency, together with
interest . . . at the rate of SIXTEEN (16) per cent per
annum until fully paid.
A solidary or joint and several obligation is one in which each
debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation. 17 on the other
hand, Article 2047 of the Civil Code states:
By guaranty a person, called the guarantor, binds himself
to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such a case the contract is
called a suretyship. (Emphasis supplied.)

While a guarantor may bind himself solidarily with the


principal debtor, the liability of a guarantor is different from
that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been
exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;
while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book
IV of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states
the law on joint and several obligations. Under Art. 1207
thereof, when there are two or more debtors in one and the
same obligation, the presumption is that the obligation is joint
so that each of the debtors is liable only for a proportionate
part of the debt. There is a solidary liability only when the
obligation expressly so states, when the law so provides or
when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly
states that the three signatories therein are jointly and
severally liable, any one, some or all of them may be
proceeded against for the entire obligation. 20 The choice is
left to the solidary creditor to determine against whom he will
enforce collection. 21 Consequently, the dismissal of the case
against Judge Pontanosas may not be deemed as having
discharged petitioner from liability as well. As regards Naybe,
suffice it to say that the court never acquired jurisdiction over
him. Petitioner, therefore, may only have recourse against his
co-makers, as provided by law.
WHEREFORE, the instant petition for review on certiorari is
hereby DENIED and the questioned decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 85396 October 27, 1989
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, PHILIPPINE BLOOMING MILLS, INC.
and ALFREDO CHING, respondents.
Ponce Enrile, Cayetano, Reyes & Manalastas for petitioner.
Balgos & Perez for respondents,

MELENCIO-HERRERA, J.:
Will a Securities and Exchange Commission (SEC) Order
suspending, during the pendency of a rehabilitation
proceeding, payment of all claims against the principal debtor
bar or preclude the creditor from recovering from the surety?
Respondents Philippine Blooming Mills (PBM) and its Surety,
Alfredo Ching, answer in the affirmative; petitioner Bank in the
negative.
The facts:
On 4 May 1979, Alfredo Ching signed a 'Comprehensive
Surety Agreement' with Rizal Commercial Banking Corporation
(RCBC), binding himself to jointly and severally guarantee the
prompt payment of all PBM obligations owing RCBC in the
aggregate sum of Forty Million (P40,000,000.00) Pesos.
Between 8 September to 30 October 1980, PBM filed several
applications for letters of credit with RCBC. Through said
applications, PBM obligated itself, among other things, to pay
on demand for all draft(s) drawn under or purporting to be

drawn under the credits. Everything being in order, RCBC


opened the corresponding letters of credit and imported
various goods for PBM's account. In due time the imported
goods arrived and were released, in trust, to PBM who
acknowledged receipt thereof through various trust receipts.
All in all, PBM's obligations stood at P7,982,649.08.
Less than a year later, or on 7 August 1981, RCBC filed a
Complaint for collection of said sum against respondents PBM
and Alfredo Ching with the then Court of First Instance of
Pasig, docketed as CV-42333. Upon filing of a bond
satisfactory to the Court, a Writ of Preliminary Attachment was
issued against the assets and properties of respondents PBM
and Ching on the same day. By way of special and affirmative
defenses they alleged that "although the trust receipts
stipulate due dates, the true intent and agreement of the
parties was that the maturity dates of the trust receipts were
to be extended at the end of the stipulated dates, as had
been the customary practice of RCBC with PBM."
On 23 September 1981, PBM and Ching moved to discharge
the attachment, which RCBC opposed. On 4 December 1981
the Court issued an Order lifting the attachment upon their
filing of a satisfactory counter-bond.
Meanwhile, on 1 April 1982, PBM filed a Petition for
Suspension of Payments with the Securities and Exchange
Commission, docketed as SEC Case No. 2250, seeking at the
same time its rehabilitation.
In an injunctive Order, dated 6 July 1982, all actions for claims
against PBM pending before any Court or tribunal, in whatever
stage the same may have been, were ordered suspended by
the SEC in order to give the Commission the opportunity to
pass upon the feasibility of any rehabilitation plans. And on 26
April 1988, SEC approved the revised rehabilitation plan and
ordered its implementation.
On 14 October 1982, RCBC pursued its claims with the Trial
Court and filed, unopposed, a Motion for Summary Judgment
in CV-42333, a motion for extension to file said opposition
having been earlier withdrawn. RCBC contended that
respondents PBM and Ching had not denied their
indebtedness to RCBC and, therefore, no genuine issue was
raised in the pleadings.
On 25 November 1982, the CFI rendered such summary
judgment** in RCBC's favor, declaring:
WHEREFORE, judgment is hereby rendered against the
defendants (PBM and Ching) in favor of plaintiff (RCBC)
ordering defendants to pay plaintiff jointly and severally the
following:
a) P7,982,649.08 inclusive of interest, service charges and
penalties as of August 7, 1981 on account of their liability in
solidum arising from the trust receipts and comprehensive
surety agreements plus such other additional amount by
way of interest, service charges and penalties from August
7,1981 until fully paid; and
b) P10,000.00 as attorney's fees.
With costs against the defendants.
SO ORDERED (p. 192, Original Record).
On appeal, respondent Court of Appeals,*** ruling that it was
precipitate and improper for the lower Court to have
continued with the proceedings despite the SEC Order of
suspension, set aside the lower Court Decision and ordered it
to hold in abeyance the determination of the merits invoked in
CV-42333 pending the outcome of SEC Case No. 2250. On 6
October 1988, the Appellate Court denied RCBC's Motion for
Reconsideration.
Hence, this Petition for Review, to which we gave due course
on 31 May 1989, and required the filing of Memoranda by the
parties, the last of which was submitted on 27 July 1989.

RCBC takes the position that the SEC injunctive Order pertains
and affects only PBM, the corporation under rehabilitation,
and that its right, as creditor, to proceed against respondent
Ching, as Surety, is not affected by said Order. In fine, RCBC
avers that to hold the injunctive Order applicable to both
respondents PBM and Ching is to deprive RCBC of its right to
proceed against the Surety based on the latter's separate and
independent undertaking.
PBM and Ching counter that the liabilities incurred by PBM
were corporate in character and, hence, as a corporate officer,
Alfredo Ching cannot be held liable therefor; that the
pendency of SEC Case No. 2250 and the rendition of an Order
therein on 26 April 1988 implementing respondent PBM's
rehabilitation plan must necessarily benefit the Surety,
inasmuch as payment of PBM obligations must be made
pursuant to that plan; and that the liability of the Surety can
not be more than what would remain after payment of all the
obligations of the principal. Moreover, they continue, it is
usual for majority stockholders to act as co-signors with their
respective corporations where promissory notes, collaterals or
guaranty or security agreements are involved. Respondent
Ching's action may, it is claimed, be classified as a corporate
act.
Under the attendant facts and circumstances, we answer the
question earlier posed in the negative.
Where an obligation expressly states a solidary liability, the
concurrence of two or more creditors or two or more debtors
in one and the same obligation implies that each one of the
former has a right to demand, or that each one of the latter is
bound to render, entire compliance with the prestation (Article
1207, Civil Code). The creditor may proceed against any one
of the solidary debtors or some or all of them simultaneously
(Article 1216, Civil Code).
That there exists a Comprehensive Surety Agreement
between RCBC and respondent Ching is admitted. There is no
escaping the attendant liability that binds respondent Ching,
as Surety. He is charged as an original promissor by virtue of
his primary obligation under the Suretyship Agreement. That
Agreement is bare of words imputing to respondent Ching any
liability other than that of a Surety who binds himself to insure
a debt in his personal capacity, lacking consideration therefor
notwithstanding (p. 94, Original Record). That respondent
Ching acted for and on behalf of respondent PBM as part of its
usual corporate procedure is not supported by the evidence
nor the pleadings on record, nor the Agreement itself .We can
not give any additional meaning to the plain language of the
subject agreement. It is basic that the parties are bound by
the terms of their contract, which is the law between them. As
held in Zenith Insurance Corporation vs. Court of Appeals (No.
L-57957, 29 December 1982,119 SCRA 485), the extent of a
surety's liability is determined only by the clause of the
contract of suretyship. It cannot be extended by implication,
beyond the terms of the contract. Conversely, liability therefor
may not be restricted unless expressly so stated.
Neither can respondent Ching seek refuge behind the SEC
injunctive Order. Under Section 3 of P.D. 902-A, as amended
by P.D. 1758, the Commission is given absolute jurisdiction,
supervision and control only over corporations or associations,
which are grantees of a primary franchise and/or a license or
permit issued by the government to operate in the Philippines.
The SEC injunctive Order can not effect a suspension of
payment of respondent Surety's due and demandable
obligation, it being clear therefrom that the rehabilitation
receivers were limited "to tak(ing) custody and control over all
the existing assets and property of PBM." Nothing in said
Order puts respondent Ching within its scope.
To further avoid payment of their obligation, PBM and Ching
allege a customary extension given by petitioner in PBM's
favor, which, it is averred, must necessarily benefit the Surety.
Suffice it to say that the summary judgment made by the
lower Court offers an acceptable explanation finding
respondents' obligation as matured and demandable. Thus:
The trust receipts from No. 2042 to 2100 in the schedule
(pages 2 and 3, complaint) shows that the maturity dates
thereof vary from May 12, 1981 at the latest and
February 19, 1981 at the earliest. The alleged agreement

to extend, granting its existence, obviously would have


had a much earlier date than the maturity dates of the
trust receipts and considering that the instant case was
brought on August 7, 1981, there should have been, to
say the least, representation made prior to the maturity
dates or at least on the dates of maturity thereof. But it
has not even been alleged by defendants that such
representations were made by defendants. It is too far
fetched to rule that the Court will grant an extension of
time to pay, when no such extension has ever been
requested by defendants. The obligation, therefore, is
covered by Article 1193 of the Civil Code and hence,
demandable when the day comes (pp. 199-200, Original
Record).
The lower Court correctly found the case to be without any
genuine issue of fact and ripe for summary judgment.
Respondents' bare allegation of customary extensions is not
corroborated by any documentary evidence but remains plain
self-serving assertions.
In fine, the SEC injunctive Order is of no effect as far as the
respondent Surety, Alfredo Ching, is concerned. He can be
sued separately to enforce his liability as Surety for PBM
(Traders Royal Bank vs. Court of Appeals, et al. G.R. No.
78412, September 26, 1989).
WHEREFORE, the Decision of the Court of Appeals, dated 30
June 1988, and its Resolution denying reconsideration thereof,
dated 6 October 1988, are SET ASIDE. The judgment of the
lower Court is hereby REINSTATED and made executory as far
as respondent, Alfredo Ching, is concerned.
Costs against private respondents, Philippine Blooming Mills
and Alfredo Ching.
SO ORDERED.
G.R. No. 155173

November 23, 2004

LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge


Philippines, Inc.), LUZON CONTINENTAL LAND
CORPORATION, CONTINENTAL OPERATING
CORPORATION and PHILIP ROSEBERG, petitioners,
vs.
CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM
and ANTHONY A. MARIANO, respondents.

DECISION

PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims
persons who were not parties to the original complaints? This
is the main question to be answered in this controversy.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules
of Court, seeking to nullify the May 22, 20022 and the
September 3, 2002 Orders3 of the Regional Trial Court (RTC) of
Quezon City (Branch 80) in Civil Case No. Q-00-41103. The
decretal portion of the first assailed Order reads:
"WHEREFORE, in the light of the foregoing as earlier stated,
the plaintiff's motion to dismiss claims is granted.
Accordingly, the defendants' claims against Mr. Lim and Mr.
Mariano captioned as their counterclaims are dismissed." 4
The second challenged Order denied petitioners' Motion for
Reconsideration.
The Facts
Briefly, the origins of the present controversy can be traced to
the Letter of Intent (LOI) executed by both parties on August
11, 1998, whereby Petitioner Lafarge Cement Philippines, Inc.
(Lafarge) -- on behalf of its affiliates and other qualified
entities, including Petitioner Luzon Continental Land
Corporation (LCLC) -- agreed to purchase the cement business
of Respondent Continental Cement Corporation (CCC). On
October 21, 1998, both parties entered into a Sale and
Purchase Agreement (SPA). At the time of the foregoing
transactions, petitioners were well aware that CCC had a case
pending with the Supreme Court. The case was docketed as
GR No. 119712, entitled Asset Privatization Trust (APT) v.
Court of Appeals and Continental Cement Corporation.

In anticipation of the liability that the High Tribunal might


adjudge against CCC, the parties, under Clause 2 (c) of the
SPA, allegedly agreed to retain from the purchase price a
portion of the contract price in the amount of
P117,020,846.84 -- the equivalent of US$2,799,140. This
amount was to be deposited in an interest-bearing account in
the First National City Bank of New York (Citibank) for payment
to APT, the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the
payment to APT, despite the subsequent finality of the
Decision in GR No. 119712 in favor of the latter and the
repeated instructions of Respondent CCC. Fearful that
nonpayment to APT would result in the foreclosure, not just of
its properties covered by the SPA with Lafarge but of several
other properties as well, CCC filed before the Regional Trial
Court of Quezon City on June 20, 2000, a "Complaint with
Application for Preliminary Attachment" against petitioners.
Docketed as Civil Case No. Q-00-41103, the Complaint
prayed, among others, that petitioners be directed to pay the
"APT Retained Amount" referred to in Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground
that it violated the prohibition on forum-shopping. Respondent
CCC had allegedly made the same claim it was raising in Civil
Case No. Q-00-41103 in another action, which involved the
same parties and which was filed earlier before the
International Chamber of Commerce. After the trial court
denied the Motion to Dismiss in its November 14, 2000 Order,
petitioners elevated the matter before the Court of Appeals in
CA-GR SP No. 68688.
In the meantime, to avoid being in default and without
prejudice to the outcome of their appeal, petitioners filed their
Answer and Compulsory Counterclaims ad Cautelam before
the trial court in Civil Case No. Q-00-41103. In their Answer,
they denied the allegations in the Complaint. They prayed -by way of compulsory counterclaims against Respondent CCC,
its majority stockholder and president Gregory T. Lim, and its
corporate secretary Anthony A. Mariano -- for the sums of (a)
P2,700,000 each as actual damages, (b) P100,000,000 each
as exemplary damages, (c) P100,000,000 each as moral
damages, and (d) P5,000,000 each as attorney's fees plus
costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had
filed the "baseless" Complaint in Civil Case No. Q-00-41103
and procured the Writ of Attachment in bad faith. Relying on
this Court's pronouncement in Sapugay v. CA, 5 petitioners
prayed that both Lim and Mariano be held "jointly and
solidarily" liable with Respondent CCC.
On behalf of Lim and Mariano who had yet to file any
responsive pleading, CCC moved to dismiss petitioners'
compulsory counterclaims on grounds that essentially
constituted the very issues for resolution in the instant
Petition.
Ruling of the Trial Court
On May 22, 2002, the Regional Trial Court of Quezon City
(Branch 80) dismissed petitioners' counterclaims for several
reasons, among which were the following: a) the
counterclaims against Respondents Lim and Mariano were not
compulsory; b) the ruling in Sapugay was not applicable; and
c) petitioners' Answer with Counterclaims violated procedural
rules on the proper joinder of causes of action. 6
Acting on the Motion for Reconsideration filed by petitioners,
the trial court -- in an Amended Order dated September 3,
20027 -- admitted some errors in its May 22, 2002 Order,
particularly in its pronouncement that their counterclaim had
been pleaded against Lim and Mariano only. However, the RTC
clarified that it was dismissing the counterclaim insofar as it
impleaded Respondents Lim and Mariano, even if it included
CCC.
Hence this Petition.8
Issues
In their Memorandum, petitioners raise the following issues
for our consideration:
"[a] Whether or not the RTC gravely erred in refusing to rule
that Respondent CCC has no personality to move to dismiss
petitioners' compulsory counterclaims on Respondents Lim
and Mariano's behalf.
"[b] Whether or not the RTC gravely erred in ruling that (i)
petitioners' counterclaims against Respondents Lim and
Mariano are not compulsory; (ii) Sapugay v. Court of
Appeals is inapplicable here; and (iii) petitioners violated
the rule on joinder of causes of action."9
For clarity and coherence, the Court will resolve the foregoing
in reverse order.
The Court's Ruling
The Petition is meritorious.

First Issue:
Counterclaims and Joinder of Causes of Action.
Petitioners' Counterclaims Compulsory
Counterclaims are defined in Section 6 of Rule 6 of the Rules
of Civil Procedure as "any claim which a defending party may
have against an opposing party." They are generally allowed
in order to avoid a multiplicity of suits and to facilitate the
disposition of the whole controversy in a single action, such
that the defendant's demand may be adjudged by a
counterclaim rather than by an independent suit. The only
limitations to this principle are (1) that the court should have
jurisdiction over the subject matter of the counterclaim, and
(2) that it could acquire jurisdiction over third parties whose
presence is essential for its adjudication.10
A counterclaim may either be permissive or compulsory. It is
permissive "if it does not arise out of or is not necessarily
connected with the subject matter of the opposing party's
claim."11 A permissive counterclaim is essentially an
independent claim that may be filed separately in another
case.
A counterclaim is compulsory when its object "arises out of or
is necessarily connected with the transaction or occurrence
constituting the subject matter of the opposing party's claim
and does not require for its adjudication the presence of third
parties of whom the court cannot acquire jurisdiction." 12
Unlike permissive counterclaims, compulsory counterclaims
should be set up in the same action; otherwise, they would be
barred forever. NAMARCO v. Federation of United Namarco
Distributors13 laid down the following criteria to determine
whether a counterclaim is compulsory or permissive: 1) Are
issues of fact and law raised by the claim and by the
counterclaim largely the same? 2) Would res judicata bar a
subsequent suit on defendant's claim, absent the compulsory
counterclaim rule? 3) Will substantially the same evidence
support or refute plaintiff's claim as well as defendant's
counterclaim? 4) Is there any logical relation between the
claim and the counterclaim? A positive answer to all four
questions would indicate that the counterclaim is compulsory.
Adopted in Quintanilla v. CA14 and reiterated in Alday v. FGU
Insurance Corporation,15 the "compelling test of
compulsoriness" characterizes a counterclaim as compulsory
if there should exist a "logical relationship" between the main
claim and the counterclaim. There exists such a relationship
when conducting separate trials of the respective claims of
the parties would entail substantial duplication of time and
effort by the parties and the court; when the multiple claims
involve the same factual and legal issues; or when the claims
are offshoots of the same basic controversy between the
parties.
We shall now examine the nature of petitioners' counterclaims
against respondents with the use of the foregoing parameters.
Petitioners base their counterclaim on the following
allegations:
"Gregory T. Lim and Anthony A. Mariano were the persons
responsible for making the bad faith decisions for, and
causing plaintiff to file this baseless suit and to procure an
unwarranted writ of attachment, notwithstanding their
knowledge that plaintiff has no right to bring it or to secure
the writ. In taking such bad faith actions, Gregory T. Lim
was motivated by his personal interests as one of the
owners of plaintiff while Anthony A. Mariano was motivated
by his sense of personal loyalty to Gregory T. Lim, for which
reason he disregarded the fact that plaintiff is without any
valid cause.
"Consequently, both Gregory T. Lim and Anthony A. Mariano
are the plaintiff's co-joint tortfeasors in the commission of
the acts complained of in this answer and in the compulsory
counterclaims pleaded below. As such they should be held
jointly and solidarily liable as plaintiff's co-defendants to
those compulsory counterclaims pursuant to the Supreme
Court's decision in Sapugay v. Mobil.
xxx

xxx

xxx

"The plaintiff's, Gregory T. Lim and Anthony A. Mariano's


bad faith filing of this baseless case has compelled the
defendants to engage the services of counsel for a fee and
to incur costs of litigation, in amounts to be proved at trial,
but in no case less than P5 million for each of them and for
which plaintiff Gregory T. Lim and Anthony A. Mariano
should be held jointly and solidarily liable.
"The plaintiff's, Gregory T. Lim's and Anthony A. Mariano's
actions have damaged the reputations of the defendants
and they should be held jointly and solidarily liable to them
for moral damages of P100 million each.
"In order to serve as an example for the public good and to
deter similar baseless, bad faith litigation, the plaintiff,
Gregory T. Lim and Anthony A. Mariano should be held

jointly and solidarily liable to the defendants for exemplary


damages of P100 million each." 16
The above allegations show that petitioners' counterclaims for
damages were the result of respondents' (Lim and Mariano)
act of filing the Complaint and securing the Writ of
Attachment in bad faith. Tiu Po v. Bautista17 involved the issue
of whether the counterclaim that sought moral, actual and
exemplary damages and attorney's fees against respondents
on account of their "malicious and unfounded" complaint was
compulsory. In that case, we held as follows:
"Petitioners' counterclaim for damages fulfills the necessary
requisites of a compulsory counterclaim. They are damages
claimed to have been suffered by petitioners as a
consequence of the action filed against them. They have to
be pleaded in the same action; otherwise, petitioners would
be precluded by the judgment from invoking the same in an
independent action. The pronouncement in Papa vs. Banaag
(17 SCRA 1081) (1966) is in point:
"Compensatory, moral and exemplary damages, allegedly
suffered by the creditor in consequence of the debtor's
action, are also compulsory counterclaim barred by the
dismissal of the debtor's action. They cannot be claimed in
a subsequent action by the creditor against the debtor."
"Aside from the fact that petitioners' counterclaim for
damages cannot be the subject of an independent action, it
is the same evidence that sustains petitioners' counterclaim
that will refute private respondent's own claim for damages.
This is an additional factor that characterizes petitioners'
counterclaim as compulsory."18
Moreover, using the "compelling test of compulsoriness," we
find that, clearly, the recovery of petitioners' counterclaims is
contingent upon the case filed by respondents; thus,
conducting separate trials thereon will result in a substantial
duplication of the time and effort of the court and the parties.
Since the counterclaim for damages is compulsory, it must be
set up in the same action; otherwise, it would be barred
forever. If it is filed concurrently with the main action but in a
different proceeding, it would be abated on the ground of litis
pendentia; if filed subsequently, it would meet the same fate
on the ground of res judicata.19
Sapugay v. Court of Appeals Applicable to the Case at
Bar
Sapugay v. Court of Appeals finds application in the present
case. In Sapugay, Respondent Mobil Philippines filed before
the trial court of Pasig an action for replevin against Spouses
Marino and Lina Joel Sapugay. The Complaint arose from the
supposed failure of the couple to keep their end of their
Dealership Agreement. In their Answer with Counterclaim,
petitioners alleged that after incurring expenses in
anticipation of the Dealership Agreement, they requested the
plaintiff to allow them to get gas, but that it had refused. It
claimed that they still had to post a surety bond which,
initially fixed at P200,000, was later raised to P700,000.
The spouses exerted all efforts to secure a bond, but the
bonding companies required a copy of the Dealership
Agreement, which respondent continued to withhold from
them. Later, petitioners discovered that respondent and its
manager, Ricardo P. Cardenas, had intended all along to
award the dealership to Island Air Product Corporation.
In their Answer, petitioners impleaded in the counterclaim
Mobil Philippines and its manager -- Ricardo P. Cardenas -- as
defendants. They prayed that judgment be rendered, holding
both jointly and severally liable for pre-operation expenses,
rental, storage, guarding fees, and unrealized profit including
damages. After both Mobil and Cardenas failed to respond to
their Answer to the Counterclaim, petitioners filed a "Motion
to Declare Plaintiff and its Manager Ricardo P. Cardenas in
Default on Defendant's Counterclaim."
Among the issues raised in Sapugay was whether Cardenas,
who was not a party to the original action, might nevertheless
be impleaded in the counterclaim. We disposed of this issue
as follows:
"A counterclaim is defined as any claim for money or other
relief which a defending party may have against an
opposing party. However, the general rule that a defendant
cannot by a counterclaim bring into the action any claim
against persons other than the plaintiff admits of an
exception under Section 14, Rule 6 which provides that
'when the presence of parties other than those to the
original action is required for the granting of complete relief
in the determination of a counterclaim or cross-claim, the
court shall order them to be brought in as defendants, if
jurisdiction over them can be obtained.' The inclusion,
therefore, of Cardenas in petitioners' counterclaim is
sanctioned by the rules."20
The prerogative of bringing in new parties to the action at any
stage before judgment is intended to accord complete relief to

all of them in a single action and to avert a duplicity and even


a multiplicity of suits thereby.
In insisting on the inapplicability of Sapugay, respondents
argue that new parties cannot be included in a counterclaim,
except when no complete relief can be had. They add that
"[i]n the present case, Messrs. Lim and Mariano are not
necessary for petitioners to obtain complete relief from
Respondent CCC as plaintiff in the lower court. This is because
Respondent CCC as a corporation with a separate [legal
personality] has the juridical capacity to indemnify petitioners
even without Messrs. Lim and Mariano." 21
We disagree. The inclusion of a corporate officer or
stockholder -- Cardenas in Sapugay or Lim and Mariano in the
instant case -- is not premised on the assumption that the
plaintiff corporation does not have the financial ability to
answer for damages, such that it has to share its liability with
individual defendants. Rather, such inclusion is based on the
allegations of fraud and bad faith on the part of the corporate
officer or stockholder. These allegations may warrant the
piercing of the veil of corporate fiction, so that the said
individual may not seek refuge therein, but may be held
individually and personally liable for his or her actions.
In Tramat Mercantile v. Court of Appeals,22 the Court held that
generally, it should only be the corporation that could properly
be held liable. However, circumstances may warrant the
inclusion of the personal liability of a corporate director,
trustee, or officer, if the said individual is found guilty of bad
faith or gross negligence in directing corporate affairs.
Remo Jr. v. IAC23 has stressed that while a corporation is an
entity separate and distinct from its stockholders, the
corporate fiction may be disregarded if "used to defeat public
convenience, justify a wrong, protect fraud, or defend crime."
In these instances, "the law will regard the corporation as an
association of persons, or in case of two corporations, will
merge them into one." Thus, there is no debate on whether, in
alleging bad faith on the part of Lim and Mariano the
counterclaims had in effect made them "indispensable
parties" thereto; based on the alleged facts, both are clearly
parties in interest to the counterclaim.24
Respondents further assert that "Messrs. Lim and Mariano
cannot be held personally liable [because their assailed acts]
are within the powers granted to them by the proper board
resolutions; therefore, it is not a personal decision but rather
that of the corporation as represented by its board of
directors."25 The foregoing assertion, however, is a matter of
defense that should be threshed out during the trial; whether
or not "fraud" is extant under the circumstances is an issue
that must be established by convincing evidence.26
Suability and liability are two distinct matters. While the Court
does rule that the counterclaims against Respondent CCC's
president and manager may be properly filed, the
determination of whether both can in fact be held jointly and
severally liable with respondent corporation is entirely another
issue that should be ruled upon by the trial court.
However, while a compulsory counterclaim may implead
persons not parties to the original complaint, the general rule
-- a defendant in a compulsory counterclaim need not file any
responsive pleading, as it is deemed to have adopted the
allegations in the complaint as its answer -- does not apply.
The filing of a responsive pleading is deemed a voluntary
submission to the jurisdiction of the court; a new party
impleaded by the plaintiff in a compulsory counterclaim
cannot be considered to have automatically and unknowingly
submitted to the jurisdiction of the court. A contrary ruling
would result in mischievous consequences whereby a party
may be indiscriminately impleaded as a defendant in a
compulsory counterclaim; and judgment rendered against it
without its knowledge, much less participation in the
proceedings, in blatant disregard of rudimentary due process
requirements.
The correct procedure in instances such as this is for the trial
court, per Section 12 of Rule 6 of the Rules of Court, to "order
[such impleaded parties] to be brought in as defendants, if
jurisdiction over them can be obtained," by directing that
summons be served on them. In this manner, they can be
properly appraised of and answer the charges against them.
Only upon service of summons can the trial court obtain
jurisdiction over them.
In Sapugay, Cardenas was furnished a copy of the Answer
with Counterclaim, but he did not file any responsive pleading
to the counterclaim leveled against him. Nevertheless, the
Court gave due consideration to certain factual
circumstances, particularly the trial court's treatment of the
Complaint as the Answer of Cardenas to the compulsory
counterclaim and of his seeming acquiescence thereto, as
evidenced by his failure to make any objection despite his
active participation in the proceedings. It was held thus:

"It is noteworthy that Cardenas did not file a motion to


dismiss the counterclaim against him on the ground of lack
of jurisdiction. While it is a settled rule that the issue of
jurisdiction may be raised even for the first time on appeal,
this does not obtain in the instant case. Although it was only
Mobil which filed an opposition to the motion to declare in
default, the fact that the trial court denied said motion, both
as to Mobil and Cardenas on the ground that Mobil's
complaint should be considered as the answer to
petitioners' compulsory counterclaim, leads us to the
inescapable conclusion that the trial court treated the
opposition as having been filed in behalf of both Mobil and
Cardenas and that the latter had adopted as his answer the
allegations raised in the complaint of Mobil. Obviously, it
was this ratiocination which led the trial court to deny the
motion to declare Mobil and Cardenas in default.
Furthermore, Cardenas was not unaware of said incidents
and the proceedings therein as he testified and was present
during trial, not to speak of the fact that as manager of
Mobil he would necessarily be interested in the case and
could readily have access to the records and the pleadings
filed therein.
"By adopting as his answer the allegations in the complaint
which seeks affirmative relief, Cardenas is deemed to have
recognized the jurisdiction of the trial court over his person
and submitted thereto. He may not now be heard to
repudiate or question that jurisdiction."27
Such factual circumstances are unavailing in the instant
case. The records do not show that Respondents Lim and
Mariano are either aware of the counterclaims filed against
them, or that they have actively participated in the
proceedings involving them. Further, in dismissing the
counterclaims against the individual respondents, the court
a quo -- unlike in Sapugay -- cannot be said to have treated
Respondent CCC's Motion to Dismiss as having been filed on
their behalf.
Rules on Permissive Joinder of Causes
of Action or Parties Not Applicable
Respondent CCC contends that petitioners' counterclaims
violated the rule on joinder of causes of action. It argues that
while the original Complaint was a suit for specific
performance based on a contract, the counterclaim for
damages was based on the tortuous acts of respondents.28 In
its Motion to Dismiss, CCC cites Section 5 of Rule 2 and
Section 6 of Rule 3 of the Rules of Civil Procedure, which we
quote:
"Section 5. Joinder of causes of action. A party may in one
pleading assert, in the alternative or otherwise, as many
causes of action as he may have against an opposing party,
subject to the following conditions:
(a) The party joining the causes of action shall comply with
the rules on joinder of parties; x x x"
Section 6. Permissive joinder of parties. All persons in
whom or against whom any right to relief in respect to or
arising out of the same transaction or series of transactions
is alleged to exist whether jointly, severally, or in the
alternative, may, except as otherwise provided in these
Rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to all
such plaintiffs or to all such defendants may arise in the
action; but the court may make such orders as may be just
to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any
proceedings in which he may have no interest."
The foregoing procedural rules are founded on practicality and
convenience. They are meant to discourage duplicity and
multiplicity of suits. This objective is negated by insisting -- as
the court a quo has done -- that the compulsory counterclaim
for damages be dismissed, only to have it possibly re-filed in a
separate proceeding. More important, as we have stated
earlier, Respondents Lim and Mariano are real parties in
interest to the compulsory counterclaim; it is imperative that
they be joined therein. Section 7 of Rule 3 provides:
"Compulsory joinder of indispensable parties. Parties in
interest without whom no final determination can be had of an
action shall be joined either as plaintiffs or defendants."
Moreover, in joining Lim and Mariano in the compulsory
counterclaim, petitioners are being consistent with the
solidary nature of the liability alleged therein.
Second Issue:
CCC's Personality to Move to Dismiss the Compulsory
Counterclaims
Characterizing their counterclaim for damages against
Respondents CCC, Lim and Mariano as "joint and solidary,"
petitioners prayed:
"WHEREFORE, it is respectfully prayed that after trial
judgment be rendered:

"1. Dismissing the complaint in its entirety;


"2. Ordering the plaintiff, Gregory T. Lim and Anthony
A. Mariano jointly and solidarily to pay defendant
actual damages in the sum of at least P2,700,000.00;
"3. Ordering the plaintiff, Gregory T. Lim and Anthony
A, Mariano jointly and solidarily to pay the
defendants LPI, LCLC, COC and Roseberg:
"a. Exemplary damages of P100 million each;
"b. Moral damages of P100 million each; and
"c. Attorney's fees and costs of suit of at least P5
million each.
Other reliefs just and equitable are likewise prayed
for."29
Obligations may be classified as either joint or solidary. "Joint"
or "jointly" or "conjoint" means mancum or mancomunada or
pro rata obligation; on the other hand, "solidary obligations"
may be used interchangeably with "joint and several" or
"several." Thus, petitioners' usage of the term "joint and
solidary" is confusing and ambiguous.
The ambiguity in petitioners' counterclaims notwithstanding,
respondents' liability, if proven, is solidary. This
characterization finds basis in Article 1207 of the Civil Code,
which provides that obligations are generally considered joint,
except when otherwise expressly stated or when the law or
the nature of the obligation requires solidarity. However,
obligations arising from tort are, by their nature, always
solidary. We have assiduously maintained this legal principle
as early as 1912 in Worcester v. Ocampo,30 in which we held:
"x x x The difficulty in the contention of the appellants is
that they fail to recognize that the basis of the present
action is tort. They fail to recognize the universal doctrine
that each joint tort feasor is not only individually liable for
the tort in which he participates, but is also jointly liable
with his tort feasors. x x x
"It may be stated as a general rule that joint tort feasors are
all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is
done, if done for their benefit. They are each liable as
principals, to the same extent and in the same manner as if
they had performed the wrongful act themselves. x x x
"Joint tort feasors are jointly and severally liable for the tort
which they commit. The persons injured may sue all of
them or any number less than all. Each is liable for the
whole damages caused by all, and all together are jointly
liable for the whole damage. It is no defense for one sued
alone, that the others who participated in the wrongful act
are not joined with him as defendants; nor is it any excuse
for him that his participation in the tort was insignificant as
compared to that of the others. x x x
"Joint tort feasors are not liable pro rata. The damages can
not be apportioned among them, except among
themselves. They cannot insist upon an apportionment, for
the purpose of each paying an aliquot part. They are jointly
and severally liable for the whole amount. x x x
"A payment in full for the damage done, by one of the joint
tort feasors, of course satisfies any claim which might exist
against the others. There can be but satisfaction. The
release of one of the joint tort feasors by agreement
generally operates to discharge all. x x x
"Of course the court during trial may find that some of the
alleged tort feasors are liable and that others are not liable.
The courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is
true even though they are charged jointly and severally."
In a "joint" obligation, each obligor answers only for a part of
the whole liability; in a "solidary" or "joint and several"
obligation, the relationship between the active and the
passive subjects is so close that each of them must comply
with or demand the fulfillment of the whole obligation.31 The
fact that the liability sought against the CCC is for specific
performance and tort, while that sought against the individual
respondents is based solely on tort does not negate the
solidary nature of their liability for tortuous acts alleged in the
counterclaims. Article 1211 of the Civil Code is explicit on this
point:
"Solidarity may exist although the creditors and the debtors
may not be bound in the same manner and by the same
periods and conditions."
The solidary character of respondents' alleged liability is
precisely why credence cannot be given to petitioners'
assertion. According to such assertion, Respondent CCC
cannot move to dismiss the counterclaims on grounds that
pertain solely to its individual co-debtors.32 In cases filed by
the creditor, a solidary debtor may invoke defenses arising

from the nature of the obligation, from circumstances


personal to it, or even from those personal to its co-debtors.
Article 1222 of the Civil Code provides:
"A solidary debtor may, in actions filed by the creditor, avail
itself of all defenses which are derived from the nature of
the obligation and of those which are personal to him, or
pertain to his own share. With respect to those which
personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the
latter are responsible." (Emphasis supplied).
The act of Respondent CCC as a solidary debtor -- that of filing
a motion to dismiss the counterclaim on grounds that pertain
only to its individual co-debtors -- is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims
shows that Respondent CCC filed it on behalf of Corespondents Lim and Mariano; it did not pray that the
counterclaim against it be dismissed. Be that as it may,
Respondent CCC cannot be declared in default. Jurisprudence
teaches that if the issues raised in the compulsory
counterclaim are so intertwined with the allegations in the
complaint, such issues are deemed automatically
joined.33 Counterclaims that are only for damages and
attorney's fees and that arise from the filing of the complaint
shall be considered as special defenses and need not be
answered.34
CCC's Motion to Dismiss the Counterclaim on Behalf of
Respondents Lim and Mariano Not Allowed
While Respondent CCC can move to dismiss the counterclaims
against it by raising grounds that pertain to individual
defendants Lim and Mariano, it cannot file the same Motion on
their behalf for the simple reason that it lacks the requisite
authority to do so. A corporation has a legal personality
entirely separate and distinct from that of its officers and
cannot act for and on their behalf, without being so
authorized. Thus, unless expressly adopted by Lim and
Mariano, the Motion to Dismiss the compulsory counterclaim
filed by Respondent CCC has no force and effect as to them.
In summary, we make the following pronouncements:
1. The counterclaims against Respondents CCC,
Gregory T. Lim and Anthony A. Mariano are
compulsory.
2. The counterclaims may properly implead
Respondents Gregory T. Lim and Anthony A. Mariano,
even if both were not parties in the original
Complaint.
3. Respondent CCC or any of the three solidary
debtors (CCC, Lim or Mariano) may include, in a
Motion to Dismiss, defenses available to their codefendants; nevertheless, the same Motion cannot
be deemed to have been filed on behalf of the said
co-defendants.
4. Summons must be served on Respondents Lim
and Mariano before the trial court can obtain
jurisdiction over them.
WHEREFORE, the Petition is GRANTED and the assailed Orders
REVERSED. The court of origin is hereby ORDERED to take
cognizance of the counterclaims pleaded in petitioners'
Answer with Compulsory Counterclaims and to cause the
service of summons on Respondents Gregory T. Lim and
Anthony A. Mariano. No costs.
SO ORDERED.

PHILIPPINE NATIONAL BANK, plaintiff-appellee,


vs.
CONCEPCION MINING COMPANY, INC., ET
AL., defendants-appellants.
Ramon B. de los Reyes for plaintiff-appellee.
Demetrio Miraflor for defendants-appellants.

And Article 1216 of the Civil Code of the Philippines also


provides as follows:

LABRADOR, J.:
Appeal from a judgment or decision of the Court of First
Instance of Manila, Hon. Gustavo Victoriano, presiding,
sentencing defendants Concepcion Mining Company and Jose
Sarte to pay jointly and severally to the plaintiff the amount of
P7,197.26 with interest up to September 29, 1959, plus a
daily interest of P1.3698 thereafter up to the time the amount
is fully paid, plus 10% of the amount as attorney's fees, and
costs of this suit.
The present action was instituted by the plaintiff to recover
from the defendants the face of a promissory note the
pertinent part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to pay
to the order of the Philippine National Bank . . . .
In case it is necessary to collect this note by or through an
attorney-at-law, the makers and indorsers shall pay ten
percent (10%) of the amount due on the note as attorney's
fees, which in no case shall be less than P100.00 exclusive of
all costs and fees allowed by law as stipulated in the contract
of real estate mortgage. Demand and Dishonor Waived.
Holder may accept partial payment reserving his right of
recourse again each and all indorsers.
(Purpose mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE

ART. 1216. The creditor may proceed against any one


of the solidary debtors or some of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others so long
as the debt has not been fully collected.
In view of the above quoted provisions, and as the promissory
note was executed jointly and severally by the same parties,
namely, Concepcion Mining Company, Inc. and Vicente L.
Legarda and Jose S. Sarte, the payee of the promissory note
had the right to hold any one or any two of the signers of the
promissory note responsible for the payment of the amount of
the note. This judgment of the lower court should be affirmed.
Our attention has been attracted to the discrepancies in the
printed record on appeal. We note, first, that the names of the
defendants, who are evidently the Concepcion Mining Co., Inc.
and Jose S. Sarte, do not appear in the printed record on
appeal. The title of the complaint set forth in the record on
appeal does not contain the name of Jose Sarte, when it
should, as two defendants are named in the complaint and
the only defense of the defendants is the non-inclusion of the
deceased Vicente L. Legarda as a defendant in the action. We
also note that the copy of the promissory note which is set
forth in the record on appeal does not contain the name of the
third maker Jose S. Sarte. Fortunately, the brief of appellee on
page 4 sets forth said name of Jose S. Sarte as one of the comaker of the promissory note. Evidently, there is an attempt
to mislead the court into believing that Jose S. Sarte is no one
of the co-makers. The attorney for the defendants Atty. Jose S.
Sarte himself and he should be held primarily responsible for
the correctness of the record on appeal. We, therefore, order
the said Atty. Jose S. Sarte to explain why in his record on
appeal his own name as one of the defendants does not
appear and neither does his name appear as one of the cosigners of the promissory note in question. So ordered.
G.R. No. L-11307

"Please issue check to


Mr. Jose S. Sarte"
Upon the filing of the complaint the defendants presented
their answer in which they allege that the co-maker the
promissory note Don Vicente L. Legarda died on February 24,
1946 and his estate is in the process of judicial determination
in Special Proceedings No. 29060 of the Court of First Instance
of Manila. On the basis of this allegation it is prayed, as a
special defense, that the estate of said deceased Vicente L.
Legarda be included as party-defendant. The court in its
decision ruled that the inclusion of said defendant is
unnecessary and immaterial, in accordance with the
provisions of Article 1216 of the Deny Civil Code and section
17 (g) of the Negotiable Instruments Law.
A motion to reconsider this decision was denied and
thereupon defendants presented a petition for relief, asking
that the effects of the judgment be suspended for the reason
that the deceased Vicente L. Legarda should have been
included as a party-defendant and his liability should be
determined in pursuance of the provisions of the promissory
note. This motion for relief was also denied, hence defendant
appealed to this Court.
Section 17 (g) of the Negotiable Instruments Law provides as
follows:
SEC. 17. Construction where instrument is
ambiguous. Where the language of the instrument
is ambiguous or there are omissions therein, the
following rules of construction apply:
xxx

(g) Where an instrument containing the word "I


promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable
thereon.

xxx

xxx

October 5, 1918

ROMAN JAUCIAN, plaintiff-appellant,


vs.
FRANCISCO QUEROL, administrator of the intestate
estate of the deceased Hermenegildo Rogero,defendantappellee.
Manly, Goddard & Lockwood for appellant.
Albert E. Somersille for appellee.

STREET, J.:
This appeal by bill of exceptions was brought to reverse a
judgment of the Court of First Instance of the Province of
Albay whereby said court has refused to allow a claim in favor
of the plaintiff, Roman Jaucian, against the state of
Hermenegilda Rogero upon the facts hereinbelow stated.
In October, 1908, Lino Dayandante and Hermenegilda Rogero
executed a private writing in which they acknowledged
themselves to be indebted to Roman Jaucian in the sum of
P13,332.33. The terms of this obligation are fully set out at
page 38 of the bill of exceptions. Its first clause is in the
following words:
We jointly and severally acknowledge our
indebtedness in the sum of P13,332.23 Philippine
currency (a balance made October 23, 1908) bearing
interest at the rate of 10 per cent per annum to
Roman Jaucian, of age, a resident of the municipality

of Ligao, Province of Albay, Philippine Islands and


married to Pilar Tell.
Hermenegilda Rogero signed this document in the capacity of
surety for Lino Dayandante; but as clearly appears from the
instrument itself both debtors bound themselves jointly and
severally to the creditor, and there is nothing in the terms of
the obligation itself to show that the relation between the two
debtors was that of principal and surety.
In November, 1909, Hermenegilda Rogero brought an action
in the Court of First Instance of Albay against Jaucian, asking
that the document in question be canceled as to her upon the
ground that her signature was obtained by means of fraud. In
his answer to the complaint, Jaucian, by was of crosscomplaint, asked for judgment against the plaintiff for the
amount due upon the obligation, which appears to have
matured at that time. Judgment was rendered in the Court of
First Instance in favor of the plaintiff, from which judgment the
defendant appealed to the Supreme Court.
In his appeal to this court, Jaucian did not assign as error the
failure of the lower court to give him judgment on his crossdemand, and therefore the decision upon the appeal was
limited to the issues concerning the validity of the document.
While the case was pending in the Supreme Court,
Hermenegilda Rogero died and the administrator of her estate
was substituted as the party plaintiff and appellee. On
November 25, 1913, the Supreme Court rendered in its
decision reversing the judgment of the trial court and holding
that the disputed claim was valid. 1
During the pendency of the appeal, proceedings were had in
the Court of First Instance of Albay for the administration of
the estate of Hermenegilda Rogero; Francisco Querol was
named administrator; and a committee was appointed to pass
upon claims against the estate. This committee made its
report on September 3, 1912. On March 24, 1914, or about a
year and half after the filing of the report of the committee on
claims against the Rogero estate, Jaucian entered an
appearance in the estate proceedings, and filed with the court
a petition in which he averred the execution of the document
of October, 1908, by the deceased, the failure of her coobligor Dayandante, to pay any part of the debt, except P100
received from him in March, 1914, and the complete
insolvency of Dayandante. Upon these facts Jaucian prayed
the court for an order directing the administrator of the
Rogero estate to pay him the principal sum of P13,332.33,
plus P7,221.66, as interest thereon from October 24, 1908, to
March 24, 1914, with interest on the principal sum of
P13,332.33, plus P7,221.66, as interest thereon from October
24, 1908, to March 24, 1914, with interest on the principal
sum from March 24, 1914, at 10 per cent per annum, until
paid.
A copy of this petition was served upon the administrator of
the estate, who, on March 30, 1914, appeared by his attorney
and opposed the granting of the petition upon the grounds
that the claim had never been presented to the committee on
claims for allowance; that more than eighteen months had
passed since the filing of the report of the committee, and
that the court was therefore without jurisdiction to entertain
the demand of the claimant. A hearing was had upon the
petition before the Honorable P.M. Moir, then sitting in the
Court of First Instance of Albay. On April 13, 1914, he rendered
his decision, in which, after reciting the facts substantially as
above set forth, he said:
During the pendency of that action (the cancellation suit) in
the Supreme Court Hermenegilda Rogero died, and
Francisco Querol was named administrator of the estate,
and he was made a party defendant to the action then
pending in the Supreme Court. As such he had full
knowledge of the claim presented and was given an
opportunity to make his defense. It is presumed that
defense was made in the Supreme Court.
No contingent claim was filed before the commissioners by
Roman Jaucian, who seems to have rested content with the
action pending. Section 746 et seq. of the Code of Civil
Procedure provides for the presentation of contingent

claims, against the estate. This claim is a contingent claim,


because, according to the decision of the Supreme Court,
Hermenegilda Rogero was a surety of Lino Dayandante. The
object of presenting the claim to the commissioners is
simply to allow them to pass on the claim and to give the
administrator an opportunity to defend the estate against
the claim. This having been given by the administrator
defending the suit in the Supreme Court, the court
considers this a substantial compliance with the law, and
the said defense having been made by the administrator,
he cannot now come into court and hide behind a
technicality and say that the claim had not been presented
to the commissioners and that, the commissioners having
long since made report, the claim cannot be referred to the
commissioners and therefore the claim of Roman Jaucian is
barred. The court considers that paragraph (e) of the
opposition is well-taken and that there must be legal action
taken against Lino Dayandante to determine whether or not
he is insolvent, and that declaration under oath to the effect
that he has no property except P100 worth of property,
which he has ceded to Roman Jaucian, is not sufficient.
Hermenegilda Rogero having been simply surety for Lino
Dayandante, the administrator has a right to require that
Roman Jaucian produce a judgment for his claim against
Lino Dayandante, in order that the said administrator may
be subrogated to the rights of Jaucian against Dayandante.
The simple affidavit of the principal debtor that he had no
property except P100 worth of property which he has ceded
to the creditor is not sufficient for the court to order the
surety to pay the debt of the principal. When this action
shall have been taken against Lino Dayandante and an
execution returned "no effects," then the claim of Jaucian
against the estate will be ordered paid or any balance that
may be due to him.
Acting upon the suggestions contained in this order Jaucian
brought an action against Dayandante and recovered a
judgment against him for the full amount of the obligation
evidenced by the document of October 24, 1908. Execution
was issued upon this judgment, but was returned by the
sheriff wholly unsatisfied, no property of the judgment debtor
having been found.
On October 28, 1914, counsel for Jaucian filed another petition
in the proceedings upon the estate of Hermenegilda Rogero,
in which they averred, upon the grounds last stated, that
Dayandante was insolvent, and renewed the prayer of the
original petition. It was contended that the court, by its order
of April 13, 1914, had "admitted the claim."
The petition was again opposed by the administrator of the
estate upon the grounds (a) that the claim was not admitted
by the order of April 13, 1914, and that "the statement of the
court with regard to the admissibility of the claim was
mere dictum," and (b) "that the said claim during the life and
after the death of Hermenegilda Rogero, which occurred on
August 2, 1911, was a mere contingent claim against the
property of the said Hermenegilda Rogero, was not reduced to
judgment during the lifetime of said Hermenegilda Rogero,
and was not presented to the commissioners on claims during
the period of six months from which they were appointed in
this estate, said commissioner having given due and lawful
notice of their sessions and more than one year having
expired since the report of the said commissioners; and this
credit is outlawed or prescribed, and that this court has no
jurisdiction to consider this claim."
On November 24, 1914, the Honorable J. C. Jenkins, then
sitting in the Court of First Instance of Albay, after hearing
argument, entered an order refusing to grant Jaucian's
petition. To this ruling the appellant excepted and moved for a
rehearing. On December 11, 1914, the judge a quo entered an
order denying the rehearing and setting forth at length, the
reasons upon which he based his denial of the petition. These
grounds were briefly, that as the claim had never been
presented to the committee on claims, it was barred; that the
court had no jurisdiction to entertain it; that the decision of
the Supreme Court in the action brought by the deceased
against Jaucian did not decide anything except that the
document therein disputed was a valid instrument.

In this court the appellant contends that the trial judge erred
(a) in refusing to give effect to the order made by the
Honorable P.M. Moir, dated April 13, 1914; and (b) in refusing
to order the administrator of the estate of Hermenegilda
Rogero to pay the appellant the amount demanded by him.
The contention with regard to the order of April 13, 1914, is
that no appeal from it having been taken, it became final.
An examination of the order in question, however, leads us to
conclude that it was not a final order, and therefore it was not
appealable. In effect, it held that whatever rights Jaucian
might have against the estate of Rogero were subject to the
performance of a condition precedent, namely, that he should
first exhaust this remedy against Dayandante. The court
regarded Dayandante. The court regarded Dayandante as the
principal debtor, and the deceased as a surety only liable for
such deficiency as might result after the exhaustion of the
assets of the principal co-obligor. The pivotal fact upon which
the order was based was the failure of appellant to show that
he had exhausted his remedy against Dayandante, and this
failure the court regarded as a complete bar to the granting of
the petition at that time. The court made no order requiring
the appellee to make any payment whatever, and that part of
the opinion, upon which the order was based, which contained
statements of what the court intended to do when the petition
should be renewed, was not binding upon him or any other
judge by whom he might be succeeded. Regardless of what
may be our views with respect to the jurisdiction of the court
to have granted the relief demanded by appellant in any
event, it is quite clear from what we have stated that the
order of April 13, 1914, required no action by the
administrator at that time, was not final, and therefore was
not appealable. We therefore conclude that no rights were
conferred by the said order of April 13, 1914, and that it did
not preclude the administrator from making opposition to the
petition of the appellant when it was renewed.
Appellant contends that his claim against the deceased was
contingent. His theory is that the deceased was merely a
surety of Dayandante. His argument is that as section 746 of
the Code of Civil Procedure provides that contingent claims
"may be presented with the proof to the committee," it follows
that such presentation is optional. Appellant, furthermore,
contends that if a creditor holding a contingent claim does not
see fit to avail himself of the privilege thus provided, there is
nothing in the law which says that his claim is barred or
prescribed, and that such creditor, under section 748 of the
Code of Civil Procedure, at any time within two years from the
time allowed other creditors to present their claims, may, if
his claim becomes absolute within that period present it to the
court for allowance. On the other hand counsel for appellee
contends (1) that contingent claims like absolute claims are
barred for non-presentation to the committee but (2) that the
claim in question was in reality an absolute claim and
therefore indisputably barred.
The second contention takes logical precedence over the first
and our view of its conclusiveness renders any consideration
of the first point entirely unnecessary to a determination of
the case. Bearing in mind that the deceased Hermenegilda
Rogero, though surety for Lino Dayandante, was nevertheless
bound jointly and severally with him in the obligation, the
following provisions of law are here pertinent.

The surety can not be compelled to pay a creditor until


application has been previously made of all the property of
the debtor.
Article 1831 provides:
This application can not take place
(1) . . . (2) If he has jointly bound himself with the
debtor . . . .
The foregoing articles of the Civil Code make it clear that
Hermenegilda Rogero was liable absolutely and
unconditionally for the full amount of the obligation without
any right to demand the exhaustion of the property of the
principal debtor previous to its payment. Her position so far as
the creditor was concerned was exactly the same as if she
had been the principal debtor.
The absolute character of the claim and the duty of the
committee to have allowed it is full as such against the estate
of Hermenegilda Rogero had it been opportunely presented
and found to be a valid claim is further established by section
698 of the Code of Civil Procedure, which provides:
When two or more persons are indebted on a joint contract,
or upon a judgment founded on a joint contract, and either
of them dies, his estate shall be liable therefor, and it shall
be allowed by the committee as if the contract had been
with him alone or the judgment against him alone. But the
estate shall have the right to recover contribution from the
other joint debtor.
In the official Spanish translation of the Code of Civil
Procedure, the sense of the English word "joint," as used in
two places in the section above quoted, is rendered by the
Spanish word "mancomunadamente." This is incorrect. The
sense of the word "joint," as here used, would be more
properly translated in Spanish by the word "solidaria," though
even this word does not express the meaning of the English
with entire fidelity.
The section quoted, it should be explained, was originally
taken by the author, or compiler, of our Code of Civil
Procedure from the statutes of the State of Vermont; and the
word "joint" is, therefore, here used in the sense which
attaches to it in the common law. Now, in the common law
system there is no conception of obligation corresponding to
the divisible joint obligation contemplated in article 1138 of
the Civil Code. This article declares in effect that, if not
otherwise expressly determined, every obligation in which
there is no conception of obligation corresponding to the
divisible joint obligation contemplated in article 1138 of the
Civil Code. This article declares in effect that, if not otherwise
expressly determined, every obligation in which there are
numerous debtors we here ignore plurality of creditors
shall be considered divided into as many parts as there are
debtors, and each part shall be deemed to be the distinct
obligation of one of the respective debtors. In other words, the
obligation is apportionable among the debtors; and in case of
the simple joint contract neither debtor can be required to
satisfy more than his aliquot part.

Article 1822 of the Civil Code provides:


By security a person binds himself to pay or perform for a
third person in case the latter should fail to do so.
"If the surety binds himself jointly with the principal debtor,
the provisions of section fourth, chapter third, title first, of
this book shall be observed.
Article 1144 of the same code provides:
A creditor may sue any of the joint and several (solidarios)
debtors or all of them simultaneously. The claims instituted
against one shall not be an obstacle for those that may be
later presented against the others, as long as it does not
appear that the debt has been collected in full.
Article 1830 of the same code provides:

In the common law system every debtor in a joint obligation is


liable in solidum for the whole; and the only legal peculiarity
worthy of remark concerning the "joint" contract at common
law is that the creditor is required to sue all the debtors at
once. To avoid the inconvenience of this procedural
requirement and to permit the creditor in a joint contract to do
what the creditor in a solidary obligation can do under article
1144 of the Civil Code, it is not unusual for the parties to a
common law contract to stipulate that the debtors shall be
"jointly and severally" liable. The force of this expression is to
enable the creditor to sue any one of the debtors or all
together at pleasure.
It will thus be seen that the purpose of section 698 of the
Code of Civil Procedure, considered as a product of common
law ideas, is not to convert an apportionable joint obligation
into a solidary joint obligation for the idea of the benefit of
division is totally foreign to the common law system but to
permit the creditor to proceed at once separately against the

estate of the deceased debtor, without attempting to draw the


other debtors into intestate or testamentary proceedings. The
joint contract of the common law is and always has been a
solidary obligation so far as the extent of the debtor's liability
is concerned.
In Spanish law the comprehensive and generic term by which
to indicate multiplicity of obligation, arising from plurality of
debtors or creditors, is mancomunidad, which term includes
(1) mancomunidad simple, or mancomunidad properly such,
and (2) mancomunidad solidaria. In other words the Spanish
system recognizes two species of multiple obligation, namely,
the apportionable joint obligation and the solidary joint
obligation. The solidary obligation is, therefore, merely a form
of joint obligation.
The idea of the benefit of division as a feature of the simple
joint obligation appears to be a peculiar creation of Spanish
jurisprudence. No such idea prevailed in the Roman law, and it
is not recognized either in the French or in the Italian system.
This conception is a badge of honor to Spanish
legislation, honorably shared with the Spanish
American, since French and Italian codes do not
recognize the distinction of difference, just
expounded, between the two sorts of multiple
obligation. . . . (Giorgi, Theory of Obligations, Span.
ed., vol. I, p. 77, note.)
Considered with reference to comparative jurisprudence,
liability in solidum appears to be the normal characteristic of
the multiple obligation, while the benefit of division in the
Spanish system is an illustration of the abnormal, evidently
resulting from the operation of a positive rule created by the
lawgiver. This exceptional feature of the simple joint obligation
in Spanish law dates from an early period; and the rule in
question is expressed with simplicity and precision in a
passage transcribed into the Novisima Recopilacion as
follows:
If two persons bind themselves by contract, simply and not
otherwise, to do or accomplish something, it is thereby to
be understood that each is bound for one-half, unless it is
specified in the contract that each is bound in solidum, or it
is agreed among themselves that they shall be bound in
some other manner, and this notwithstanding any
customary law to the contrary; . . . (Law X, tit. I, book
X, Novisima Recopilacion, copied from law promulgated at
Madrid in 1488 by Henry IV.)
The foregoing exposition of the conflict between the juridical
conceptions of liability incident to the multiple obligation, as
embodied respectively in the common law system and the
Spanish Civil Code, prepares us for a few words of comment
upon the problem of translating the terms which we have
been considering from English into Spanish or from Spanish
into English.
The Spanish expression to be chosen as the equivalent of the
English word "joint" must, of course, depend upon the idea to
be conveyed; and it must be remembered that the matter to
be translated may be an enunciation either of a common law
conception or of a civil law idea. In Sharruf vs. Tayabas Land
Co. and Ginainati (37 Phil. Rep., 655), a judge of one of the
Courts of First Instance in these Islands rendered judgment in
English declaring the defendants to be "jointly" liable. It was
held that he meant "jointly" in the sense of
"mancomunadamente," because the obligation upon which
the judgment was based was apportionable under article 1138
of the Civil Code. This mode of translation does not, however,
hold good where the word to be translated has reference to a
multiple common law obligation, as in article 698 of the Code
of Civil Procedure. Here it is necessary to render the word
"joint" by the Spanish word "solidaria."
In translating the Spanish word "mancomunada" into English a
similar difficulty is presented. In the Philippine Islands at least
we must probably continue to tolerate the use of the English
word "joint" as an approximate English equivalent, ambiguous
as it may be to a reader indoctrinated with the ideas of the
common law. The Latin phrase pro rata is a make shift, the
use of which is not to be commended. The Spanish word

"solidary," though it is not inaccurate here to use the


compound expression "joint obligation," as conveying the full
juridical sense of "obligacion mancomunada" and "obligacion
solidaria," respectively.
From what has been said it is clear that Hermenegilda Rogero,
and her estate after her death, was liable absolutely for the
whole obligation, under section 698 of the Code of Civil
Procedure; and if the claim had been duly presented to the
committee for allowance it should have been allowed, just as
if the contact had been with her alone.
It is thus apparent that by the express and incontrovertible
provisions both of the Civil Code and the Code of Civil
Procedure, this claim was an absolute claim. Applying section
695 of the Code of Civil Procedure, this court has frequently
decided that such claims are barred if not presented to the
committee in time (In re estate of Garcia Pascual, 11 Phil.
Rep., 34; Ortiga Bros. & Co. vs. Enage and Yap Tico, 18 Phil.
Rep., 345, 351; Santos vs.Manarang, 27 Phil. Rep., 209, 213);
and we are of the opinion that, for this reason, the claim was
properly rejected by Judge Jenkins.
There is no force, in our judgment, in the contention that the
pendency of the suit instituted by the deceased for the
cancellation of the document in which the obligation in
question was recorded was a bar to the presentation of the
claim against the estate. The fact that the lower court had
declared the document void was not conclusive, as its
judgment was not final, and even assuming that if the claim
had been presented to the committee for allowance, it would
have been rejected and that the decision of the committee
would have been sustained by the Court of First Instance, the
rights of the creditor could have been protected by an appeal
from that decision.
Appellant apparently takes the position that had his claim
been filed during the pendency of the cancellation suit, it
would have been met with the plea of another suit pending
and that this plea would have been successful. This view of
the law is contrary to the doctrine of the decision in the case
of Hongkong & Shanghai Banking Corporation vs. Aldecoa &
Co. ([1915], 30 Phil. Rep., 255.)
Furthermore, even had Jaucian, in his appeal from the decision
in the cancellation suit, endeavored to obtain judgment on his
cross-complaint, the death of the debtor would probably have
required the discontinuance of the action presented by the
cross-complaint or counterclaim, under section 703.
As already observed the case is such as not to require the
court to apply sections 746-749, inclusive, of the Code of Civil
Procedure, nor to determine the conditions under which
contingent claims are barred. But a few words of comment
may be added to show further that the solidary obligation
upon which this proceeding is based is not a contingent claim,
such as is contemplated in those sections. The only concrete
illustration of a contingent claim given is section 746 is the
case where a person is liable as surety for the deceased, that
is, where the principal debtor is dead. This is a very different
situation from that presented in the concrete case now before
us, where the surety is the person who is dead. In the
illustration put in section 746 where the principal debtor is
dead and the surety is the party preferring the claim against
the estate of the deceased it is obvious that the surety has
no claim against the estate of the principal debtor, unless he
himself satisfies the obligation in whole or in part upon which
both are bound. It is at this moment, and not before, that the
obligation of the principal to indemnify the surety arises (art.
1838, Civil Code); and by virtue of such payment the surety is
subrogated in all the rights which the creditor had against the
debtor (art. 1839, same code).
Another simple illustration of a contingent liability is found in
the case of the indorser of a contingent liability is found in the
case of the indorser of a negotiable instrument, who is not
liable until his liability is fixed by dishonor and notice, or
protest an notice, in conformity with the requirements of law.
Until this event happens there is a mere possibility of a
liability is fixed by dishonor and notice, or protest and notice,
in conformity with the requirements of law. Until this event
happens there is a mere possibility of a liability, which is fact
may never become fixed at all. The claims of all persons who

assume the responsibility of a liability, which in fact may


never become fixed at all. The claims of all persons who
assume the responsibility of mere guarantors in as against
their principles of the same contingent character.
It is possible that "contingency," in the cases contemplated in
section 746, may depend upon other facts than those which
relate to the creation or inception of liability. It may be, for
instance, that the circumstance that a liability is subsidiary,
and the execution has to be postponed after judgment is
obtained until the exhaustion of the assets of the person or
entity primarily liable, makes a claim contingent within the
meaning of said section; but upon this point it is unnecessary
to express an opinion. It is enough to say that where, as in the
case now before us, liability extends unconditionally to the
entire amount stated in the obligation, or, in other words,
where the debtor is liable in solidum and without
postponement of execution, the liability is not contingent but
absolute.
For the reasons stated, the decision of the trial court denying
appellant's petition and his motion for a new trial was correct
and must be affirmed. No costs will be allowed on this appeal.
So ordered.
G.R. No. L-50076 September 14, 1990
NORBERTO QUISUMBING, SR., and GUNTHER
LOEFFLER petitioners,
vs.
COURT OF APPEALS and PHILIPPINE AIR LINES,
INC., respondents.

4. After receiving the note, which was about 15 minutes


after take off, the pilot of the plane, Capt. Luis Bonnevie, Jr.,
came out of the cockpit and sat beside Villarin at the rear
portion of the plane and explained that he could not send
the message because it would be heard by all ground
aircraft stations. Villarin, however, told the pilot of the
danger of commission of violent acts on board the plane by
the notorious 'Zaldy' and his three companions.
5. While the pilot and Villarin were talking, 'Zaldy' and one
of his companions walked to the rear and stood behind
them. Capt. Bonnevie then stood up and went back to the
cockpit. 'Zaldy' and his companions returned to their seats,
but after a few minutes they moved back to the rear
throwing ugly looks at Villarin who, sensing danger, stood
up and went back to his original seat across the aisle on the
second to the last seat near the window. 'Zaldy and his
companion likewise went back to their respective seats in
front.
6. Soon thereafter an exchange of gunshots ensued
between Villarin and 'Zaldy' and the latter's companions.
'Zaldy' announced to the passengers and the pilots in the
cockpit that it was a hold-up and ordered the pilot not to
send any SOS. The hold-uppers divested passengers of their
belongings.
7. Specifically, ... Norberto Quisumbing, Sr. was divested of
jewelries and cash in the total amount of P18,650.00 out of
which recoveries were made amounting to P4,550.00. . .
Gunther Leoffler was divested of a wrist watch, cash and a
wallet in the total of P1,700.00. As a result of the incident ...
Quisumbing, Sr.suffered shock, because a gun had been
pointed at him by one of the holduppers.

N.J. Quisumbing & Associates for petitioners


Siguion Reyna, Montecillo & Ongsiako for private respondent.

NARVASA, J.:
Having met with no success in the Court of First Instance of
Rizal and in the Court of Appeals, the petitioners are now in
this Court in a third and final attempt to recover from the
Philippine Airlines, Inc. (hereafter, simply PAL) the value of
jewelry, other valuables and money taken from them by four
(4) armed robbers on board one of the latter's airplanes while
on a flight from Mactan City to Manila, as well as moral and
exemplary damages, attorney's fees and expenses of
litigation.
The petitioners accept the correctness of the basic facts
adopted by the Court of Appeals from the judgment of the
Court of First Instance, to wit: 1
1. . . . Norberto Quisumbing, Sr. and Gunther Leoffler were
among the of ... (PAL's) Fokker 'Friendship' PIC-536 plane in
its flight of November 6,1968 which left Mactan City at
about 7:30 in the evening with Manila for its destination.
2. After the plane had taken off, Florencio O. Villarin, a
Senior NBI Agent who was also a passenger of the said
plane, noticed a certain 'Zaldy,' a suspect in the killing of
Judge Valdez, seated at the front seat near the door leading
to the cockpit of the plane. A check by Villarin with the
passenger's ticket in the possession of flight Stewardess
Annie Bontigao, who was seated at the last seat right row,
revealed that 'Zaldy' had used the name 'Cardente,' one of
his aliases known to Villarin. Villarin also came to know from
the stewardess that 'Zaldy' had three companions on board
the plane."
3. Villarin then scribbled a note addressed to the pilot of the
plane requesting the latter to contact NBI duty agents in
Manila for the said agents to ask the Director of the NBI to
send about six NBI agents to meet the plane because the
suspect in the killing of Judge Valdez was on board (Exh.
'G'). The said note was handed by Villarin to the stewardess
who in tum gave the same to the pilot.

8. Upon landing at the Manila International Airport. 'Zaldy'


and his three companions succeeded in escaping.
Demands were thereafter made on PAL by Quisumbing and
Loeffler "to indemnify ... (them) on their aforesaid loss, but ...
(PAL) refused ... (averring that) it is not liable to (them) in law
or in fact." 2
Contending that the "aforesaid loss is a result of breach of ...
(PAL's) contractual obligation to carry ... (them) and their
belongings and effects to their Manila destination without loss
or damage, and constitutes a serious dereliction of ... (PAL's)
legal duty to exercise extraordinary diligence in the vigilance
over the same." , Quisumbing and Loeffler brought suit
against PAL in the Court of First Instance of Rizal, as stated in
this opinion's opening paragraph, to recover the value of the
property lost by them to the robbers as well as moral and
exemplary damages, attorney's fees and expenses of
litigation. 3 The plaintiffs declared that their suit was instituted
"... pursuant to Civil Code articles 1754, 998, 2000 and 2001
and on the ground that in relation to said Civil Code article
2001 the complained-of act of the armed robbers is not
a force majeure, as the 'use of arms' or 'irresistible force' was
not taken advantage of by said armed robbers in gaining
entrance to defendant's ill-fated plane in questions. And, with
respect to said Civil Code article 1998, it is not essential that
the lost effects and belongings of plaintiffs were actually
delivered to defendant's plane personnel or that the latter
were notified thereof (De los Santos v. Tamn Khey, [CA] 58
O.G. 7693)." 4
PAL filed answer denying liability, alleging inter alia that the
robbery during the flight and after the aircraft was forcibly
landed at the Manila Airport did indeed constitute force
majeure, and neither of the plaintiffs had notified PAL "or its
crew or employees that they were in possession of cash,
German marks and valuable jewelries and watches" or
surrendered said items to "the crew or personnel on board the
aircraft." 5
After trial, the Court of First Instance rendered judgment
'dismissing plaintiffs' complaint with costs against ...
(them)." 6 The Court opined that since the plaintiffs "did not
notify defendant or its employees that they were in
possession of the cash, jewelries, and the wallet they are now
claiming," the very provision of law invoked by them, Article

1998 of the Civil Code, denies them any recourse against PAL.
The Court also pointed out that... while it is true that the use of gems was not taken
advantage of by the robbers in gaining entrance to
defendant's ill-fated plane, the armed robbery that took
place constitutes force majeure for which defendant is not
liable because the robbers were able to gain entrance to the
plane with the guns they used already in their possession,
which fact could not have been prevented nor avoided by
the defendant since it was not authorized to search its
passengers for firearms and deadly weapons as shown in
Exhibits '6', '7', '8,' and '8-A.' As its robbery
constitutes force majeure, defendant is not liable.
The plaintiffs appealed to the Court of Appeals. 7 The Court
affirmed the trial court's judgment. 8 It rejected the argument
that "the use of arms or ... irresistible force" referred to in
Article 2001 constitutes force majeure only if resorted to gain
entry into the airplane, and not if it attends "the robbery
itself." The Court ruled that under the facts, "the highjackingrobbery was force majeure," observing that
... hijackers do not board an airplane through a blatant
display of firepower and violent fury. Firearms, handgrenades, dynamite, and explosives are introduced into the
airplane surreptitiously and with the utmost cunning and
stealth, although there is an occasional use of innocent
hostages who will be coldly murdered unless a plane is
given to the hijackers' complete disposal. The objective of
modern-day hijackers is to display the irresistible force
amounting to force majeure only when it is most effective
and that is when the jetliner is winging its way at Himalayan
altitudes and ill-advised heroics by either crew or
passengers would send the multi-million peso airplane and
the priceless lives of all its occupants into certain death and
destruction. ...
The Appellate Court also ruled that in light of the evidence
PAL could not be faulted for want of diligence, particularly for
failing "to take positive measures to implement Civil
Aeronautics Administration regulations prohibiting civilians
from carrying firearms on board aircrafts;" and that "the
absence of coded transmissions, the amateurish behaviour of
the pilot in dealing with the NBI agent, the allegedly open
cockpit door, and the failure to return to Mactan, in the light of
the circumstances of the case ..., were not negligent acts
sufficient to overcome the force majeure nature of the armed
robbery." In fact, the Court went on to says, 9
... it is illusive to assume that had these precautions been
taken, the hijacking or the robbery would not have
succeeded. The mandatory use of the most sophisticated
electronic detection devices and magnetometers, the
imposition of severe penalties, the development of
screening procedures, the compilation of hijacker
behavioural profiles, the assignment of sky marshals, and
the weight of outraged world opinion may have minimized
hijackings but all these have proved ineffective against truly
determined hijackers. World experience shows that if a
group of armed hijackers want to take over a plane in flight,
they can elude the latest combined government and airline
industry measures. And as our own experience in
Zamboanga City illustrates, the use of force to overcome
hijackers, results in the death and injury of innocent
passengers and crew members. We are not in the least bit
suggesting that the Philippine Airlines should not do
everything humanly possible to protect passengers from
hijackers' acts. We merely state that where the defendant
has faithfully complied with the requirements of
government agencies and adhered to the established
procedures and precautions of the airline industry at any
particular time, its failure to take certain steps that a
passenger in hindsight believes should have been taken is
not the negligence or misconduct which mingles with force
majeure as an active and cooperative cause.
Under the circumstance of the instant case, the acts of the
airline and its crew cannot be faulted as negligence. The
hijackers had already shown their willingness to kill. One
passenger was in fact killed and another survived gunshot
wounds. The lives of the rest of the passengers and crew
were more important than their properties. Cooperation

with the hijackers until they released their hostages at the


runway end near the South Superhighway was dictated by
the circumstances.
Insisting that the evidence demonstrates negligence on the
part of the PAL crew "occurring before and exposing them to
hijacking," Quisumbing and Loeffler have come up to this
Court praying that the judgments of the trial Court and the
Court of Appeals be reversed and another rendered in their
favor. Once again, the issue will be resolved against them.
A careful analysis of the record in relation to the memoranda
and other pleadings of the parties, convinces this Court of the
correctness of the essential conclusion of both the trial and
appellate courts that the evidence does indeed fail to prove
any want of diligence on the part of PAL, or that, more
specifically, it had failed to comply with applicable regulations
or universally accepted and observed procedures to preclude
hijacking; and that the particular acts singled out by the
petitioners as supposedly demonstrative of negligence were,
in the light of the circumstances of the case, not in truth
negligent acts "sufficient to overcome the force majeure
nature of the armed robbery." The Court quite agrees, too,
with the Appellate Tribunal's wry observation that PAL's
"failure to take certain steps that a passenger in hindsight
believes should have been taken is not the negligence or
misconduct which mingles with force majeure as an active
and cooperative cause."
No success can therefore attend petitioners' appeal, not only
because they wish to have a review and modification of
factual conclusions of the Court of Appeals, which established
and uniformly observed axiom proscribes, 10 but also because
those factual conclusions have in this Court's view been
correctly drawn from the proofs on record.
WHEREFORE, the petition is DENIED and the appealed
Decision of the Court of Appeals is AFFIRMED, with costs
against petitioners.
SO ORDERED.
G.R. No. 96405 June 26, 1996
BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

ROMERO, J.:p
This is a petition for review on certiorari of the decision of the
Court of Appeals affirming that of the Regional Trial Court of
Misamis Oriental, Branch 18, 1 which disposed of Civil Case
No. 10507 for collection of a sum of money and damages, as
follows:
WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is
adjudged solidarily liable and ordered to pay to the plaintiff
Philippine Bank of Communications, Cagayan de Oro City,
the amount of FIFTY THOUSAND PESOS (P50,000.00), with
interest thereon from May 5, 1983 at 16% per annum until
fully paid; and 6% per annum on the total amount due, as
liquidated damages or penalty from May 5, 1983 until fully
paid; plus 10% of the total amount due for expenses of
litigation and attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed
for lack of merit.
SO ORDERED.
Petitioner's liability resulted from the promissory note in the
amount of P50,000.00 which he signed with Rene C. Naybe
and Gregorio D. Pantanosas on February 3, 1983, holding
themselves jointly and severally liable to private respondent
Philippine Bank of Communications, Cagayan de Oro City
branch. The promissory note was due on May 5, 1983.

Said due date expired without the promissors having paid


their obligation. Consequently, on November 14, 1983 and on
June 8, 1984, private respondent sent petitioner telegrams
demanding payment thereof. 2 On December 11, 1984 private
respondent also sent by registered mail a final letter of
demand to Rene C. Naybe. Since both obligors did not
respond to the demands made, private respondent filed on
January 24, 1986 a complaint for collection of the sum of
P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for
failure of the plaintiff to prosecute the case. However, on
January 9, 1987, the lower court reconsidered the dismissal
order and required the sheriff to serve the summonses. On
January 27, 1987, the lower court dismissed the case against
defendant Pantanosas as prayed for by the private respondent
herein. Meanwhile, only the summons addressed to petitioner
was served as the sheriff learned that defendant Naybe had
gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January
1983, he was approached by his friend, Rudy Campos, who
told him that he was a partner of Pio Tio, the branch manager
of private respondent in Cagayan de Oro City, in the falcata
logs operation business. Campos also intimated to him that
Rene C. Naybe was interested in the business and would
contribute a chainsaw to the venture. He added that, although
Naybe had no money to buy the equipment, Pio Tio had
assured Naybe of the approval of a loan he would make with
private respondent. Campos then persuaded petitioner to act
as a "co-maker" in the said loan. Petitioner allegedly acceded
but with the understanding that he would only be a co-maker
for the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank
promissory note were brought to him by Campos at his office.
He affixed his signature thereto but in one copy, he indicated
that he bound himself only for the amount of P5,000.00. Thus,
it was by trickery, fraud and misrepresentation that he was
made liable for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted
that the typewritten figure "-- 50,000 --" clearly appears
directly below the admitted signature of the petitioner in the
promissory note. 3 Hence, the latter's uncorroborated
testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under
Sec. 5 (q) of Rule 131. The lower court added that it was
"rather odd" for petitioner to have indicated in a copy and not
in the original, of the promissory note, his supposed obligation
in the amount of P5,000.00 only. Finally, the lower court held
that, even granting that said limited amount had actually
been agreed upon, the same would have been merely
collateral between him and Naybe and, therefore, not binding
upon the private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a
Bachelor of Laws degree and a labor consultant who was
supposed to take due care of his concerns, and that, on the
witness stand, Pio Tio denied having participated in the
alleged business venture although he knew for a fact that the
falcata logs operation was encouraged by the bank for its
export potential.
Petitioner appealed the said decision to the Court of Appeals
which, in its decision of August 31, 1990, affirmed that of the
lower court. His motion for reconsideration of the said decision
having been denied, he filed the instant petition for review
on certiorari.
On February 6, 1991, the Court denied the petition for failure
of petitioner to comply with the Rules of Court and paragraph
2 of Circular
No. 1-88, and to sufficiently show that respondent court had
committed any reversible error in its questioned decision. 4 His
motion for the reconsideration of the denial of his petition was
likewise denied with finality in the Resolution of April 24,
1991. 5 Thereafter, petitioner filed a motion for leave to file a
second motion for reconsideration which, in the Resolution of
May 27, 1991, the Court denied. In the same Resolution, the
Court ordered the entry of judgment in this case.6

Unfazed, petitioner filed a notion for leave to file a motion for


clarification. In the latter motion, he asserted that he had
attached Registry Receipt No. 3268 to page 14 of the petition
in compliance with Circular No. 1-88. Thus, on August 7, 1991,
the Court granted his prayer that his petition be given due
course and reinstated the same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on
May 3, 1988, or after the rendition of the decision of the lower
court, by Gregorio Pantanosas, Jr., an MTCC judge and
petitioner's co-maker in the promissory note. It supports
petitioner's allegation that they were induced to sign the
promissory note on the belief that it was only for P5,000.00,
adding that it was Campos who caused the amount of the loan
to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's
contention in the instant petition that the Court of Appeals
should have declared the promissory note null and void on the
following grounds: (a) the promissory note was signed in the
office of Judge Pantanosas, outside the premises of the bank;
(b) the loan was incurred for the purpose of buying a secondhand chainsaw which cost only P5,000.00; (c) even a new
chainsaw would cost only P27,500.00; (d) the loan was not
approved by the board or credit committee which was the
practice, as it exceeded P5,000.00; (e) the loan had no
collateral; (f) petitioner and Judge Pantanosas were not
present at the time the loan was released in contravention of
the bank practice, and (g) notices of default are sent
simultaneously and separately but no notice was validly sent
to him. 8 Finally, petitioner contends that in signing the
promissory note, his consent was vitiated by fraud as,
contrary to their agreement that the loan was only for the
amount of P5,000.00, the promissory note stated the amount
of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be
reminded of the basic rule that this Court is not a trier of
facts. Having lost the chance to fully ventilate his factual
claims below, petitioner may no longer be accorded the same
opportunity in the absence of grave abuse of discretion on the
part of the court below. Had he presented Judge Pantanosas
affidavit before the lower court, it would have strengthened
his claim that the promissory note did not reflect the correct
amount of the loan.
Nor is there merit in petitioner's assertion that since the
promissory note "is not a public deed with the formalities
prescribed by law but . . . a mere commercial paper which
does not bear the signature of . . . attesting witnesses," parol
evidence may "overcome" the contents of the promissory
note. 9 The first paragraph of the parol evidence rule 10 states:
When the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed
upon and there can be, between the parties and their
successors in interest, no evidence of such terms other
than the contents of the written agreement.
Clearly, the rule does not specify that the written
agreement be a public document.
What is required is that the agreement be in writing as the
rule is in fact founded on "long experience that written
evidence is so much more certain and accurate than that
which rests in fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their contract in
writing, to admit weaker evidence to control and vary the
stronger and to show that the
parties intended a different contract from that expressed in
the writing signed by them." 11 Thus, for the parol evidence
rule to apply, a written contract need not be in any particular
form, or be signed by both parties. 12 As a general rule, bills,
notes and other instruments of a similar nature are not
subject to be varied or contradicted by parol or extrinsic
evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in
the right direction towards proving that he and his co-makers
agreed to a loan of P5,000.00 only considering that, where a

parol contemporaneous agreement was the inducing and


moving cause of the written contract, it may be shown by
parol evidence. 15 However, fraud must be established by
clear and convincing evidence, mere preponderance of
evidence, not even being adequate. 16 Petitioner's attempt to
prove fraud must, therefore, fail as it was evidenced only by
his own uncorroborated and, expectedly, self-serving
testimony.

proceeded against for the entire obligation. 20 The choice is


left to the solidary creditor to determine against whom he will
enforce collection. 21 Consequently, the dismissal of the case
against Judge Pontanosas may not be deemed as having
discharged petitioner from liability as well. As regards Naybe,
suffice it to say that the court never acquired jurisdiction over
him. Petitioner, therefore, may only have recourse against his
co-makers, as provided by law.

Petitioner also argues that the dismissal of the complaint


against Naybe, the principal debtor, and against Pantanosas,
his co-maker, constituted a release of his obligation,
especially because the dismissal of the case against
Pantanosas was upon the motion of private respondent itself.
He cites as basis for his argument, Article 2080 of the Civil
Code which provides that:

WHEREFORE, the instant petition for review on certiorari is


hereby DENIED and the questioned decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.

The guarantors, even though they be


solidary, are released from their obligation
whenever by some act of the creditor, they
cannot be subrogated to the rights,
mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the
promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the
promissory note which states as follows:
Ninety one (91) days after date, for value
received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of
Cagayan de Oro, Philippines the sum of
FIFTY THOUSAND ONLY (P50,000.00) Pesos,
Philippine Currency, together with interest . .
. at the rate of SIXTEEN (16) per cent per
annum until fully paid.
A solidary or joint and several obligation is one in which each
debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation. 17 on the other
hand, Article 2047 of the Civil Code states:
By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such a case the contract
is called a suretyship. (Emphasis supplied.)
While a guarantor may bind himself solidarily with the
principal debtor, the liability of a guarantor is different from
that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been
exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;
while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book
IV of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states
the law on joint and several obligations. Under Art. 1207
thereof, when there are two or more debtors in one and the
same obligation, the presumption is that the obligation is joint
so that each of the debtors is liable only for a proportionate
part of the debt. There is a solidary liability only when the
obligation expressly so states, when the law so provides or
when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly
states that the three signatories therein are jointly and
severally liable, any one, some or all of them may be

SO ORDERED.

G.R. No. L-7721

March 25, 1914

INCHAUSTI & CO., plaintiff-appellant,


vs.
GREGORIO YULO, defendant-appellee.
Hausserman, Cohn and Fisher for appellant.
Rohde and Wright for appellee.
Bruce, Lawrence, Ross and Block, Amici Curiae, for Manuel,
Francisco and Carmen Yulo.
ARELLANO, C.J.:
This suit is brought for the recovery of a certain sum of
money, the balance of a current account opened by the firm
of Inchausti & Company with Teodoro Yulo and after his death
continued with his widow and children, whose principal
representative is Gregorio Yulo. Teodoro Yulo, a property
owner of Iloilo, for the exploitation and cultivation of his
numerous haciendas in the province of Occidental Negros,
had been borrowing money from the firm of Inchausti &
Company under specific conditions. On April 9, 1903; Teodoro
Yulo died testate and for the execution of the provisions of his
will he had appointed as administrators his widow and five of
his sons, Gregorio Yulo being one of the latter. He thus left a
widow, Gregoria Regalado, who died on October 22d of the
following year, 1904, there remaining of the marriage the
following legitimate children: Pedro, Francisco, Teodoro,
Manuel, Gregorio, Mariano, Carmen, Concepcion, and Jose Yulo
y Regalado. Of these children Concepcion and Jose were
minors, while Teodoro was mentally incompetent. At the death
of their predecessor in interest, Teodoro Yulo, his widow and
children held the conjugal property in common and at the
death of this said widow, Gregoria Regalado, these children
preserved the same relations under the name of Hijos de T.
Yulo continuing their current account with Inchausti &
Company in the best and most harmonious reciprocity until
said balance amounted to two hundred thousand pesos. In for
the payment of the disbursements of money which until that
time it had been making in favor of its debtors, the Yulos.
First. Gregorio Yulo, for himself and in representation of his
brothers Pedro Francisco, Manuel, Mariano, and Carmen,
executed on June 26, 1908, a notarial document (Exhibit S)
whereby all admitted their indebtedness to Inchausti &
Company in the sum of P203,221.27 and, in order to secure
the same with interest thereon at 10 per cent per annum,
they especially mortgaged an undivided six-ninth of their
thirty-eight rural properties, their remaining urban
properties, lorchas, and family credits which were listed,
obligating themselves to make a forma inventory and to
describe in due form all the said properties, as well as to cure
all the defects which might prevent the inscription of the said
instrument in the registry of property and finally to extend by
the necessary formalities the aforesaid mortgage over the
remaining three-ninths part of all the property and rights
belonging to their other brothers, the incompetent Teodoro,
and the minors Concepcion and Jose.
Second. On January 11, 1909, Gregorio Yulo in representation
of Hijos de T. Yulo answered a letter of the firm of Inchausti &
Company in these terms: "With your favor of the 2d inst. we
have received an abstract of our current account with your
important firm, closed on the 31st of last December, with
which we desire to express our entire conformity as also with
the balance in your favor of P271,863.12." On July 17, 1909,
Inchausti & Company informed Hijos de T. Yulo of the
reduction of the said balance to P253,445.42, with which
balance Hijos de T. Yulo expressed its conformity by means of
a letter of the 19th of the same month and year. Regarding
this conformity a new document evidencing the mortgage
credit was formalized.
Third. On August 12, 1909, Gregorio Yulo, for himself and in
representation of his brother Manuel Yulo, and in their own
behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and
Concepcion Yulo, the latter being of age at the time, executed
the notarial instrument (Exhibit X). Through this, the said
persons, including Concepcion Yulo ratified all the contents of
the prior document of June 26, 1908, severally and jointly
acknowledged and admitted their indebtedness to Inchausti &

Company for the net amount of two hundred fifty-three


thousand four hundred forty-five pesos and forty-two centavos
(P253,445.42) which they obligated themselves to pay, with
interest at ten per cent per annum, in five installments at the
rate of fifty thousand pesos (P50,000), except the last, this
being fifty-three thousand four hundred forty-five pesos and
forty-two centavos (P53,445.42), beginning June 30, 1910,
continuing successively on the 30th of each June until the last
payment on June 30, 1914. Among other clauses, they
expressly stipulated the following:
Fifth. The default in payment of any of the installments
established in clause 3, or the noncompliance of any of the
other obligations which by the present document and that
of June 26, 1908, we, the Yulos, brothers and sisters, have
assumed, will result in the maturity of all the said
installments, and as a consequence thereof, if they so deem
expedient Messrs. Inchausti & Company may exercise at
once all the rights and actions which to them appertain in
order to obtain the immediate and total payment of our
debt, in the same manner that they would have so done at
the maturity of the said installments.
Fifteenth. All the obligations which by this, as well as by the
document of June 26, 1908, concern us, will be understood
as having been contradicted in solidum by all of us, the
Yulos, brothers and sisters.
Sixteenth. It is also agreed that this instrument shall be
confirmed and ratified in all its parts, within the present
week, by our brother Don Mariano Yulo y Regalado who
resides in Bacolod, otherwise it will not be binding on
Messrs. Inchausti & Company who can make use of their
rights to demand and obtain immediate payment of their
credit without any further extension or delay, in accordance
with what we have agreed.
Fourth. This instrument was neither ratified nor confirmed by
Mariano Yulo.
Fifth. The Yulos, brothers and sisters, who executed the
preceding instrument, did not pay the first installment of the
obligation.
Sixth. Therefore, on March 27, 1911, Inchausti & Company
brought an ordinary action in the Court of First Instance of
Iloilo, against Gregorio Yulo for the payment of the said
balance due of two hundred fifty-three thousand, four hundred
forty-five pesos and forty-two centavos P253,445.42) with
interest at ten per cent per annum, on that date aggregating
forty-two thousand, nine hundred forty-four pesos and
seventy-six centavos (P42,944.76)
Seventh. But, on May 12, 1911, Francisco, Manuel, and
Carmen Yulo y Regalado executed in favor Inchausti &
Company another notarial instrument in recognition of the
debt and obligation of payment in the following terms: "First,
the debt is reduce for them to two hundred twenty-five
thousand pesos (P225,000); second, the interest is likewise
reduced for them to 6 percent per annum, from March 15,
1911; third, the installments are increase to eight, the first of
P20,000, beginning on June 30, 1911, and the rest of P30,000
each on the same date of each successive year until the total
obligation shall be finally and satisfactorily paid on June 30,
1919," it being expressly agreed "that if any of the partial
payments specified in the foregoing clause be not paid at its
maturity, the amount of the said partial payment together
with its interest shall bear interest at the rate of 15 per cent
per annum from the date of said maturity, without the
necessity of demand until its complete payment;" that "if
during two consecutive years the partial payments agreed
upon be not made, they shall lose the right to make use of the
period granted to them for the payment of the debt or the
part thereof which remains unpaid, and that Messrs. Inchausti
& Company may consider the total obligation due and
demandable, and proceed to collect the same together with
the interest for the delay above stipulated through all legal
means." (4th clause.)
Thus was it stipulated between Inchausti & Company and the
said three Yulos, brothers and sisters by way of compromise

so that Inchausti & Company might, as it did, withdraw the


claims pending in the special proceedings for the probate of
the will of Don Teodoro Yulo and of the intestacy of Doa
Gregoria Regalado stipulating expressly however in the
sixth clause that "Inchausti & Company should include in their
suit brought in the Court of First Instance of Iloilo against Don
Gregorio Yulo, his brother and joint co-obligee, Don Pedro Yulo,
and they will procure by all legal means and in the least time
possible a judgment in their favor against the said Don
Gregorio and Don Pedro, sentencing the later to pay the total
amount of the obligation acknowledged by them in the
aforementioned instrument of August 12, 1909; with the
understanding that if they should deem it convenient for their
interests, Don Francisco, Don Manuel, and Doa Carmen Yulo
may appoint an attorney to cooperate with the lawyers of
Inchausti & Company in the proceedings of the said case."
Eighth. Matters being thus on July 10, 1911, Gregorio Yulo
answered the complaint and alleged as defenses; first, that an
accumulation of interest had taken place and that compound
interest was asked for the Philippine currency at par with
Mexican; second, that in the instrument of August 21, 1909,
two conditions were agreed one of which ought to be
approved by the Court of First Instance, and the other ratified
and confirmed by the other brother Mariano Yulo, neither of
which was complied with; third , that with regard to the same
debt claims were presented before the commissioners in the
special proceedings over the inheritances of Teodoro Yulo and
Gregoria Regalado, though later they were dismissed, pending
the present suit; fourth and finally, that the instrument of
August 12, 1909, was novated by that of May 12, 1911,
executed by Manuel, Francisco and Carmen Yulo.
Ninth. The Court of First Instance of Iloilo decided the case "in
favor of the defendant without prejudice to the plaintiff's
bringing within the proper time another suit for his
proportional part of the joint debt, and that the plaintiff pay
the costs." (B. of E., 21.)
The plaintiff appealed from this judgment by bill of exceptions
and before this court made the following assignment of errors:
I. That the court erred in considering the contract of May 12,
1911, as constituting a novation of that of August 12, 1909.
II. That the court erred in rendering judgment in favor of the
defendant.
III. And that the court erred n denying the motion for a new
trial.
"No one denies in this case," says the trial judge, "that the
estate of Teodoro Yulo or his heirs owe Inchausti & Company
an amount of money, the object of this action, namely,
P253,445.42" (B. of E. 18). "The fact is admitted," says the
defendant, "that the plaintiff has not collected the debt, and
that the same is owing" (Brief, 33). "In the arguments of the
attorneys," the judge goes on, "it was really admitted that the
plaintiff had a right to bring an action against Gregorio Yulo,
as one of the conjoint and solidary obligors in the contract of
August 12, 1909; but the defendant says that the plaintiff has
no right to sue him alone, since after the present suit was
brought, the plaintiff entered into a compromise with the
other conjoint and solidary debtors, the result being the new
contract of May 12, 1911, by virtue of which the payments
were extended, the same constituting a novation of the
contract which gave him the same privileges that were given
his conjoint and solidary codebtors. This (the judge concludes)
is the only question brought up by the parties." (B. of E., 19.)
And this is the only one which the Supreme Court has to solve
by virtue of the assignments of errors alleged. Consequently,
there is no need of saying anything regarding the first three
defenses of the answer, nor regarding the lack of the
signature of Mariano Yulo ratifying and confirming the
instrument of August 12, 1909, upon which the appellee still
insists in his brief for this appeal; although it will not be
superfluous to state the doctrine that a condition, such as is
contained in the sixteenth clause of the said contract (third
point in the statement of facts), is by no means of suspensive
but a resolutory condition; the effect of the failure of
compliance with the said clause, that is to say, the lack of the

ratification and confirmance by Mariano Yulo being not to


suspend but to resolve the contract, leaving Inchausti &
Company at liberty, as stipulated, "to make use of its rights to
demand and obtain the immediate payment of its credit."
The only question indicated in the decision of the inferior
court involves, however, these others: First, whether the
plaintiff can sue Gregorio Yulo alone, there being other
obligors; second, if so, whether it lost this right by the fact of
its having agreed with the other obligors in the reduction of
the debt, the proroguing of the obligation and the extension of
the time for payment, in accordance with the instrument of
May 12, 1911; third, whether this contract with the said three
obligors constitutes a novation of that of August 12, 1909,
entered into with the six debtors who assumed the payment
of two hundred fifty-three thousand and some odd pesos, the
subject matter of the suit; and fourth, if not so, whether it
does have any effect at all in the action brought, and in this
present suit.
With respect to the first it cannot be doubted that, the debtors
having obligated themselves in solidum, the creditor can bring
its action in toto against any one of them, inasmuch as this
was surely its purpose in demanding that the obligation
contracted in its favor should be solidary having in mind the
principle of law that, "when the obligation is constituted as a
conjoint and solidary obligation each one of the debtors is
bound to perform in full the undertaking which is the subject
matter of such obligation." (Civil Code, articles 1137 and
1144.)
And even though the creditor may have stipulated with some
of the solidary debtors diverse installments and conditions, as
in this case, Inchausti & Company did with its debtors Manuel,
Francisco, and Carmen Yulo through the instrument of May 12,
1911, this does not lead to the conclusion that the solidarity
stipulated in the instrument of August 12, 1909 is broken, as
we already know the law provides that "solidarity may exist
even though the debtors are not bound in the same manner
and for the same periods and under the same conditions."
(Ibid, article 1140.) Whereby the second point is resolved.
With respect to the third, there can also be no doubt that the
contract of May 12, 1911, does not constitute a novation of
the former one of August 12, 1909, with respect to the other
debtors who executed this contract, or more concretely, with
respect to the defendant Gregorio Yulo: First, because "in
order that an obligation may be extinguished by another
which substitutes it, it is necessary that it should be so
expressly declared or that the old and the new be
incompatible in all points" (Civil Code, article 1204); and the
instrument of May 12, 1911, far from expressly declaring that
the obligation of the three who executed it substitutes the
former signed by Gregorio Yulo and the other debtors,
expressly and clearly stated that the said obligation of
Gregorio Yulo to pay the two hundred and fifty-three thousand
and odd pesos sued for exists, stipulating that the suit must
continue its course and, if necessary, these three parties who
executed the contract of May 12, 1911, would cooperate in
order that the action against Gregorio Yulo might prosper (7th
point in the statement of facts), with other undertakings
concerning the execution of the judgment which might be
rendered against Gregorio Yulo in this same suit. "It is always
necessary to state that it is the intention of the contracting
parties to extinguish the former obligation by the new one"
(Judgment in cassation, July 8, 1909). There exist no
incompatibility between the old and the new obligation as will
be demonstrated in the resolution of the last point, and for the
present we will merely reiterate the legal doctrine that an
obligation to pay a sum of money is not novated in a new
instrument wherein the old is ratified, by changing only the
term of payment and adding other obligations not
incompatible with the old one. (Judgments in cassation of June
28, 1904 and of July 8, 1909.)
With respect to the last point, the following must be borne in
mind:
Facts. First. Of the nine children of T. Yulo, six executed the
mortgage of August 12, 1909, namely, Gregorio, Pedro,
Francisco, Manuel, Carmen, and Concepcion, admitting a debt
of P253,445.42 at 10 per cent per annum and mortgaging sixninths of their hereditary properties. Second. Of those six

children, Francisco, Manuel and Carmen executed the


instrument of May 12, 1911, wherein was obtained a
reduction of the capital to 225,000 pesos and of the interest
to 6 per cent from the 15th of March of the same year of
1911. Third. The other children of T. Yulo named Mariano,
Teodoro, and Jose have not taken part in these instruments
and have not mortgaged their hereditary portions. Fourth. By
the first instrument the maturity of the first installment was
June 30, 1910, whereas by the second instrument, Francisco,
Manuel, and Carmen had in their favor as the maturity of the
first installment of their debt, June 30, 1912, and Fifth, on
March 27, 1911, the action against Gregorio Yulo was already
filed and judgment was pronounced on December 22, 1911,
when the whole debt was not yet due nor even the first
installment of the same respective the three aforesaid
debtors, Francisco, Manuel, and Carmen.
In jure it would follow that by sentencing Gregorio Yulo to pay
253,445 pesos and 42 centavos of August 12, 1909, this
debtor, if he should pay all this sum, could not recover from
his joint debtors Francisco, Manuel, and Carmen their
proportional parts of the P253,445.42 which he had paid,
inasmuch as the three were not obligated by virtue of the
instrument of May 12, 1911, to pay only 225,000 pesos, thus
constituting a violation of Gregorio Yulo's right under such
hypothesis, of being reimbursed for the sum paid by him, with
the interest of the amounts advanced at the rate of one-sixth
part from each of his five codebtors. (Civ. Code, article 1145,
par. 2). This result would have been a ponderous obstacle
against the prospering of the suit as it had been brought. It
would have been very just then to have absolved the solidary
debtor who having to pay the debt in its entirety would not be
able to demand contribution from his codebtors in order that
they might reimburse him pro rata for the amount advanced
for them by him. But such hypothesis must be put out of
consideration by reason of the fact that occurred during the
pendency of the action, which fact the judge states in his
decision. "In this contract of May last," he says, "the amount
of the debt was reduced to P225,000 and the attorney of the
plaintiff admits in his plea that Gregorio Yulo has a right to the
benefit of this reduction." (B. of E., 19.) This is a fact which
this Supreme Court must hold as firmly established,
considering that the plaintiff in its brief, on page 27,
corroborates the same in these words: "What effect," it says,
"could this contract have over the rights and obligations of the
defendant Gregorio Yulo with respect to the plaintiff company?
In the first place, we are the first to realize that it benefits him
with respect to the reduction of the amount of the debt. The
obligation being solidary, the remission of any part of the debt
made by a creditor in favor of one or more of the solidary
debtors necessarily benefits the others, and therefore there
can be no doubt that, in accordance with the provision of
article 1143 of the Civil Code, the defendant has the right to
enjoy the benefits of the partial remission of the debt granted
by the creditor."
Wherefore we hold that although the contract of May 12,
1911, has not novated that of August 12, 1909, it has affected
that contract and the outcome of the suit brought against
Gregorio Yulo alone for the sum of P253,445.42; and in
consequence thereof, the amount stated in the contract of
August 12, 1909, cannot be recovered but only that stated in
the contract of May 12, 1911, by virtue of the remission
granted to the three of the solidary debtors in this instrument,
in conformity with what is provided in article 1143 of the Civil
Code, cited by the creditor itself.
If the efficacy of the later instrument over the former touching
the amount of the debt had been recognized, should such
efficacy not likewise be recognized concerning the maturity of
the same? If Francisco, Manuel, and Carmen had been
included in the suit, they could have alleged the defense of
the nonmaturity of the installments since the first installment
did not mature until June 30, 1912, and without the least
doubt the defense would have prospered, and the three would
have been absolved from the suit. Cannot this defense of the
prematurity of the action, which is implied in the last special
defense set up in the answer of the defendant Gregorio Yulo
be made available to him in this proceeding?
The following commentary on article 1140 of the Civil Code
sufficiently answers this question: ". . . . Before the
performance of the condition, or before the execution of
a term which affects one debtor alone proceedings may be

had against him or against any of the others for the remainder
which may be already demandable but the conditional
obligation or that which has not yet matured cannot be
demanded from any one of them. Article 1148 confirms the
rule which we now enunciate inasmuch as in case the total
claim is made by one creditor, which we believe improper if
directed against the debtor affected by the condition or the
term, the latter can make use of such exceptions as are
peculiarly personal to his own obligation; and if against the
other debtors, they mightmake use of those exceptions, even
though they are personal to the other, inasmuch as they
alleged they are personal to the other, inasmuch as they
alleged them in connection with that part of the
responsibility attaching in a special manner to the other." (8
Manresa, Sp. Civil Code, 196.)
Article 1148 of the Civil Code. "The solidary debtor may
utilize against the claims of the creditor of the defenses
arising from the nature of the obligation and those which are
personal to him. Those personally pertaining to the others
may be employed by him only with regard to the share of the
debt for which the latter may be liable."
Gregorio Yulo cannot allege as a defense to the action that it
is premature. When the suit was brought on March 27, 1911,
the first installment of the obligation had already matured of
June 30, 1910, and with the maturity of this installment, the
first not having been paid, the whole debt had become
mature, according to the express agreement of the parties,
independently of the resolutory condition which gave the
creditor the right to demand the immediate payment of the
whole debt upon the expiration of the stipulated term of one
week allowed to secure from Mariano Yulo the ratification and
confirmation of the contract of August 12, 1909.
Neither could he invoke a like exception for the shares of his
solidary codebtors Pedro and Concepcion Yulo, they being in
identical condition as he.
But as regards Francisco, Manuel, and Carmen Yulo, none of
the installments payable under their obligation, contracted
later, had as yet matured. The first payment, as already
stated, was to mature on June 30, 1912. This exception or
personal defense of Francisco, Manuel, and Carmen Yulo "as to
the part of the debt for which they were responsible" can be
sent up by Gregorio Yulo as a partial defense to the action.
The part of the debt for which these three are responsible is
three-sixths of P225,000 or P112,500, so that Gregorio Yulo
may claim that, even acknowledging that the debt for which
he is liable is P225,000, nevertheless not all of it can now be
demanded of him, for that part of it which pertained to his
codebtors is not yet due, a state of affairs which not only
prevents any action against the persons who were granted
the term which has not yet matured, but also against the
other solidary debtors who being ordered to pay could not
now sue for a contribution, and for this reason the action will
be only as to the P112,500.
Against the propriety and legality of a judgment against
Gregorio Yulo for this sum, to wit, the three-sixths part of the
debt which forms the subject matter of the suit, we do not
think that there was any reason or argument offered which
sustains an opinion that for the present it is not proper to
order him to pay all or part of the debt, the object of the
action.
It has been said in the brief of the appellee that the
prematurity of the action is one of the defenses derived from
the nature of the obligation, according to the opinion of the
commentator of the Civil Code, Mucius Scaevola, and
consequently the defendant Gregorio Yulo may make use of it
in accordance with article 1148 of the said Code. It may be so
and yet, taken in that light, the effect would not be different
from that already stated in this decision; Gregorio Yulo could
not be freed from making any payment whatever but only
from the payment of that part of the debt which corresponds
to his codebtors Francisco, Manuel, and Carmen. The same
author, considering the case of the opposing contention of
two solidary debtors as to one of whom the obligation is pure
and unconditional and as to the other it is conditional and is
not yet demandable, and comparing the disadvantages which
must flow from holding that the obligation is demandable with

these which must follow if the contrary view is adopted, favors


this solution of the problem:
There is a middle ground, (he says), from which we can
safely set out, to wit, that the creditor may of course,
demand the payment of his credit against the debtor not
favored by any condition or extension of time." And further
on, he decides the question as to whether the whole debt
may be recovered or only that part unconditionally owing or
which has already matured, saying, "Without failing to
proceed with juridical rigor, but without falling into
extravagances or monstrosities, we believe that the solution
of the difficulty is perfectly possible. How? By limiting the
right of the creditor to the recovery of the amount owed by
the debtors bound unconditionally or as to whom the
obligation has matured, and leaving in suspense the right to
demand the payment of the remainder until the expiration
of the term of the fulfillment of the condition. But what then
is the effect of solidarity? How can this restriction of right be
reconciled with the duty imposed upon each one of the
debtors to answer for the whole obligation? Simply this, by
recognizing in the creditor the power, upon the performance
of the condition or the expiration of the term of claiming
from any one or all of the debtors that part of the obligation
affected by those conditions. (Scaevola, Civil Code, 19, 800
and 801.)
It has been said also by the trial judge in his decision that if a
judgment be entered against Gregorio Yulo for the whole debt
of P253,445.42, he cannot recover from Francisco, Manuel,
and Carmen Yulo that part of the amount which is owed by
them because they are obliged to pay only 225,000 pesos and
this is eight installments none of which was due. For this
reason he was of the opinion that he (Gregorio Yulo) cannot be
obliged to pay his part of the debt before the contract of May
12, 1911, may be enforced, and "consequently he decided the
case in favor of the defendant, without prejudice to the
plaintiff proceeding in due time against him for his
proportional part of the joint debt." (B. of E., 21 and 22.)
But in the first place, taking into consideration the conformity
of the plaintiff and the provision of article 1143 of the Civil
Code, it is no longer possible to sentence the defendant to
pay the P253,445.42 of the instrument of August 12, 1909,
but, if anything, the 225,000 of the instrument of May 12,
1911.
In the second place, neither is it possible to curtail the
defendant's right of recovery from the signers of the
instrument of May 12, 1911, for he was justly exonerated from
the payment of that part of the debt corresponding to them by
reason of there having been upheld in his favor the exception
of an unmatured installment which pertains to them.
In the third place, it does not seem just, Mucius Scaevola
considers it "absurd," that, there being a debtor who is
unconditionally obligated as to when the debt has matured,
the creditor should be forced to await the realization of the
condition (or the expiration of the term.) Not only is there no
reason for this, as stated by the author, but the court would
even fail to consider the special law of the contract, neither
repealed nor novated, which cannot be omitted without
violating article 1091 of the Civil Code according to which "the
obligations arising from contracts have the force of law
between the contracting parties and must be complied with in
accordance with the tenor of the same." Certain it is that the
trial court, in holding that this action was premature but might
be brought in the time, regarded the contract of August 12,
1909, as having been expressly novated; but it is absolutely
impossible in law to sustain such supposed novation, in
accordance with the legal principles already stated, and
nevertheless the obligation of the contract of May 12, 1911,
must likewise be complied with in accordance with its tenor,
which is contrary in all respects to the supposed novation, by
obliging the parties who signed the contract to carry on the
suit brought against Gregorio Yulo. The contract of May 12,
1911, has affected the action and the suit, to the extent that
Gregorio Yulo has been able to make in his favor the defense
of remission of part of the debt, thanks to the provision of
article 1148, because it is a defense derived from the nature
of the obligation, so that although the said defendant was not
party to the contract in question, yet because of the principle
of solidarity he was benefited by it.

The defendant Gregorio Yulo cannot be ordered to pay the


P253,445.42 claimed from him in the suit here, because he
has been benefited by the remission made by the plaintiff to
three of his codebtors, many times named above.
Consequently, the debt is reduced to 225,000 pesos.
But, as it cannot be enforced against the defendant except as
to the three-sixths part which is what he can recover from his
joint codebtors Francisco, Manuel, and Carmen, at present,
judgment can be rendered only as to the P112,500.
We therefore sentence the defendant Gregorio Yulo to pay the
plaintiff Inchausti & Company P112,500, with the interest
stipulated in the instrument of May 12, 1911, from March 15,
1911, and the legal interest on this interest due, from the time
that it was claimed judicially in accordance with article 1109
of the Civil Code, without any special finding as to costs. The
judgment appealed from is reversed. So ordered.
G.R. No. 134100

September 29, 2000

PURITA ALIPIO, petitioner,


vs.
COURT OF APPEALS and ROMEO G. JARING,
represented by his Attorney-In-Fact RAMON G.
JARING,respondents.
DECISION
MENDOZA, J.:
The question for decision in this case is whether a creditor can
sue the surviving spouse for the collection of a debt which is
owed by the conjugal partnership of gains, or whether such
claim must be filed in proceedings for the settlement of the
estate of the decedent. The trial court and the Court of
Appeals ruled in the affirmative. We reverse.
The facts are as follows:
Respondent Romeo Jaring1 was the lessee of a 14.5 hectare
fishpond in Barito, Mabuco, Hermosa, Bataan. The lease was
for a period of five years ending on September 12, 1990. On
June 19, 1987, he subleased the fishpond, for the remaining
period of his lease, to the spouses Placido and Purita Alipio
and the spouses Bienvenido and Remedios Manuel. The
stipulated amount of rent was P485,600.00, payable in two
installments of P300,000.00 and P185,600.00, with the
second installment falling due on June 30, 1989. Each of the
four sublessees signed the contract.
The first installment was duly paid, but of the second
installment, the sublessees only satisfied a portion thereof,
leaving an unpaid balance of P50,600.00. Despite due
demand, the sublessees failed to comply with their obligation,
so that, on October 13, 1989, private respondent sued the
Alipio and Manuel spouses for the collection of the said
amount before the Regional Trial Court, Branch 5, Dinalupihan,
Bataan. In the alternative, he prayed for the rescission of the
sublease contract should the defendants fail to pay the
balance.
Petitioner Purita Alipio moved to dismiss the case on the
ground that her husband, Placido Alipio, had passed away on
December 1, 1988.2 She based her action on Rule 3, 21 of
the 1964 Rules of Court which then provided that "when the
action is for recovery of money, debt or interest thereon, and
the defendant dies before final judgment in the Court of First
Instance, it shall be dismissed to be prosecuted in the manner
especially provided in these rules." This provision has been
amended so that now Rule 3, 20 of the 1997 Rules of Civil
Procedure provides:
When the action is for the recovery of money arising from
contract, express or implied, and the defendant dies before
entry of final judgment in the court in which the action was
pending at the time of such death, it shall not be dismissed
but shall instead be allowed to continue until entry of final
judgment. A favorable judgment obtained by the plaintiff

therein shall be enforced in the manner especially provided in


these Rules for prosecuting claims against the estate of a
deceased person.
The trial court denied petitioner's motion on the ground that
since petitioner was herself a party to the sublease contract,
she could be independently impleaded in the suit together
with the Manuel spouses and that the death of her husband
merely resulted in his exclusion from the case. 3 The Manuel
spouses failed to file their answer. For this reason, they were
declared in default.
On February 26, 1991, the lower court rendered judgment
after trial, ordering petitioner and the Manuel spouses to pay
private respondent the unpaid balance of P50,600.00 plus
attorney's fees in the amount of P10,000.00 and the costs of
the suit.
Petitioner appealed to the Court of Appeals on the ground that
the trial court erred in denying her motion to dismiss. In its
decision4 rendered on July 10, 1997, the appellate court
dismissed her appeal. It held:
The rule that an action for recovery of money, debt or interest
thereon must be dismissed when the defendant dies before
final judgment in the regional trial court, does not apply where
there are other defendants against whom the action should be
maintained. This is the teaching of Climaco v. Siy Uy, wherein
the Supreme Court held:
Upon the facts alleged in the complaint, it is clear that
Climaco had a cause of action against the persons named as
defendants therein. It was, however, a cause of action for the
recovery of damages, that is, a sum of money, and the
corresponding action is, unfortunately, one that does not
survive upon the death of the defendant, in accordance with
the provisions of Section 21, Rule 3 of the Rules of Court.
xxx

xxx

xxx

However, the deceased Siy Uy was not the only defendant,


Manuel Co was also named defendant in the complaint.
Obviously, therefore, the order appealed from is erroneous
insofar as it dismissed the case against Co. (Underlining
added)
Moreover, it is noted that all the defendants, including the
deceased, were signatories to the contract of sub-lease. The
remaining defendants cannot avoid the action by claiming
that the death of one of the parties to the contract has totally
extinguished their obligation as held in Imperial Insurance,
Inc. v. David:
We find no merit in this appeal. Under the law and well settled
jurisprudence, when the obligation is a solidary one, the
creditor may bring his action in toto against any of the
debtors obligated in solidum. Thus, if husband and wife bound
themselves jointly and severally, in case of his death, her
liability is independent of and separate from her husband's;
she may be sued for the whole debt and it would be error to
hold that the claim against her as well as the claim against
her husband should be made in the decedent's estate.
(Agcaoili vs. Vda. de Agcaoili, 90 Phil. 97).5
Petitioner filed a motion for reconsideration, but it was denied
on June 4, 1998.6 Hence this petition based on the following
assignment of errors:
A. THE RESPONDENT COURT COMMITTED REVERSIBLE
ERROR IN APPLYING CLIMACO v. SIY UY, 19 SCRA 858, IN
SPITE OF THE FACT THAT THE PETITIONER WAS NOT
SEEKING THE DISMISSAL OF THE CASE AGAINST REMAINING
DEFENDANTS BUT ONLY WITH RESPECT TO THE CLAIM FOR
PAYMENT AGAINST HER AND HER HUSBAND WHICH SHOULD
BE PROSECUTED AS A MONEY CLAIM.
B. THE RESPONDENT COURT COMMITTED REVERSIBLE
ERROR IN APPLYING IMPERIAL INSURANCE INC. v. DAVID,
133 SCRA 317, WHICH IS NOT APPLICABLE BECAUSE THE
SPOUSES IN THIS CASE DID NOT BIND THEMSELVES JOINTLY
AND SEVERALLY IN FAVOR OF RESPONDENT JARING. 7

The petition is meritorious. We hold that a creditor cannot sue


the surviving spouse of a decedent in an ordinary proceeding
for the collection of a sum of money chargeable against the
conjugal partnership and that the proper remedy is for him to
file a claim in the settlement of estate of the decedent.
First. Petitioner's husband died on December 1, 1988, more
than ten months before private respondent filed the collection
suit in the trial court on October 13, 1989. This case thus falls
outside of the ambit of Rule 3, 21 which deals with dismissals
of collection suits because of the death of the defendant
during the pendency of the case and the subsequent
procedure to be undertaken by the plaintiff, i.e., the filing of
claim in the proceeding for the settlement of the decedent's
estate. As already noted, Rule 3, 20 of the 1997 Rules of Civil
Procedure now provides that the case will be allowed to
continue until entry of final judgment. A favorable judgment
obtained by the plaintiff therein will then be enforced in the
manner especially provided in the Rules for prosecuting
claims against the estate of a deceased person. The issue to
be resolved is whether private respondent can, in the first
place, file this case against petitioner.
Petitioner and her late husband, together with the Manuel
spouses, signed the sublease contract binding themselves to
pay the amount of stipulated rent. Under the law, the Alipios'
obligation (and also that of the Manuels) is one which is
chargeable against their conjugal partnership. Under Art.
161(1) of the Civil Code, the conjugal partnership is liable for

All debts and obligations contracted by the husband for the


benefit of the conjugal partnership, and those contracted by
the wife, also for the same purpose, in the cases where she
may legally bind the partnership.8
When petitioner's husband died, their conjugal partnership
was automatically dissolved9 and debts chargeable against it
are to be paid in the settlement of estate proceedings in
accordance with Rule 73, 2 which states:
Where estate settled upon dissolution of marriage. When
the marriage is dissolved by the death of the husband or wife,
the community property shall be inventoried, administered,
and liquidated, and the debts thereof paid, in the testate or
intestate proceedings of the deceased spouse. If both spouses
have died, the conjugal partnership shall be liquidated in the
testate or intestate proceedings of either.
As held in Calma v. Taedo,10 after the death of either of the
spouses, no complaint for the collection of indebtedness
chargeable against the conjugal partnership can be brought
against the surviving spouse. Instead, the claim must be
made in the proceedings for the liquidation and settlement of
the conjugal property. The reason for this is that upon the
death of one spouse, the powers of administration of the
surviving spouse ceases and is passed to the administrator
appointed by the court having jurisdiction over the settlement
of estate proceedings.11 Indeed, the surviving spouse is not
even a de facto administrator such that conveyances made by
him of any property belonging to the partnership prior to the
liquidation of the mass of conjugal partnership property is
void.12
The ruling in Calma v. Taedo was reaffirmed in the recent
case of Ventura v. Militante.13 In that case, the surviving wife
was sued in an amended complaint for a sum of money based
on an obligation allegedly contracted by her and her late
husband. The defendant, who had earlier moved to dismiss
the case, opposed the admission of the amended complaint
on the ground that the death of her husband terminated their
conjugal partnership and that the plaintiff's claim, which was
chargeable against the partnership, should be made in the
proceedings for the settlement of his estate. The trial court
nevertheless admitted the complaint and ruled, as the Court
of Appeals did in this case, that since the defendant was also
a party to the obligation, the death of her husband did not
preclude the plaintiff from filing an ordinary collection suit
against her. On appeal, the Court reversed, holding that
as correctly argued by petitioner, the conjugal partnership
terminates upon the death of either spouse. . . . Where a

complaint is brought against the surviving spouse for the


recovery of an indebtedness chargeable against said conjugal
[partnership], any judgment obtained thereby is void. The
proper action should be in the form of a claim to be filed in the
testate or intestate proceedings of the deceased spouse.
In many cases as in the instant one, even after the death of
one of the spouses, there is no liquidation of the conjugal
partnership. This does not mean, however, that the conjugal
partnership continues. And private respondent cannot be said
to have no remedy. Under Sec. 6, Rule 78 of the Revised Rules
of Court, he may apply in court for letters of administration in
his capacity as a principal creditor of the deceased . . . if after
thirty (30) days from his death, petitioner failed to apply for
administration or request that administration be granted to
some other person.14
The cases relied upon by the Court of Appeals in support of its
ruling, namely, Climaco v. Siy Uy15 and Imperial Insurance,
Inc. v. David,16 are based on different sets of facts. In Climaco,
the defendants, Carlos Siy Uy and Manuel Co, were sued for
damages for malicious prosecution. Thus, apart from the fact
the claim was not against any conjugal partnership, it was one
which does not survive the death of defendant Uy, which
merely resulted in the dismissal of the case as to him but not
as to the remaining defendant Manuel Co.
With regard to the case of Imperial, the spouses therein jointly
and severally executed an indemnity agreement which
became the basis of a collection suit filed against the wife
after her husband had died. For this reason, the Court ruled
that since the spouses' liability was solidary, the surviving
spouse could be independently sued in an ordinary action for
the enforcement of the entire obligation.
It must be noted that for marriages governed by the rules of
conjugal partnership of gains, an obligation entered into by
the husband and wife is chargeable against their conjugal
partnership and it is the partnership which is primarily bound
for its repayment.17 Thus, when the spouses are sued for the
enforcement of an obligation entered into by them, they are
being impleaded in their capacity as representatives of the
conjugal partnership and not as independent debtors such
that the concept of joint or solidary liability, as between them,
does not apply. But even assuming the contrary to be true,
the nature of the obligation involved in this case, as will be
discussed later, is not solidary but rather merely joint,
making Imperial still inapplicable to this case.
From the foregoing, it is clear that private respondent cannot
maintain the present suit against petitioner.1wphi1 Rather,
his remedy is to file a claim against the Alipios in the
proceeding for the settlement of the estate of petitioner's
husband or, if none has been commenced, he can file a
petition either for the issuance of letters of administration 18 or
for the allowance of will,19 depending on whether petitioner's
husband died intestate or testate. Private respondent cannot
short-circuit this procedure by lumping his claim against the
Alipios with those against the Manuels considering that, aside
from petitioner's lack of authority to represent their conjugal
estate, the inventory of the Alipios' conjugal property is
necessary before any claim chargeable against it can be paid.
Needless to say, such power exclusively pertains to the court
having jurisdiction over the settlement of the decedent's
estate and not to any other court.
Second. The trial court ordered petitioner and the Manuel
spouses to pay private respondent the unpaid balance of the
agreed rent in the amount of P50,600.00 without specifying
whether the amount is to be paid by them jointly or solidarily.
In connection with this, Art. 1207 of the Civil Code provides:
The concurrence of two or more creditors or of two or more
debtors in one and the same obligation does not imply that
each one of the former has a right to demand, or that each
one of the latter is bound to render, entire compliance with
the prestations. There is a solidary liability only when the
obligation expressly so estates, or when the law or the nature
of the obligation requires solidarity.
Indeed, if from the law or the nature or the wording of the
obligation the contrary does not appear, an obligation is

presumed to be only joint, i.e., the debt is divided into as


many equal shares as there are debtors, each debt being
considered distinct from one another.20
Private respondent does not cite any provision of law which
provides that when there are two or more lessees, or in this
case, sublessees, the latter's obligation to pay the rent is
solidary. To be sure, should the lessees or sublessees refuse to
vacate the leased property after the expiration of the lease
period and despite due demands by the lessor, they can be
held jointly and severally liable to pay for the use of the
property. The basis of their solidary liability is not the contract
of lease or sublease but the fact that they have become joint
tortfeasors.21 In the case at bar, there is no allegation that the
sublessees refused to vacate the fishpond after the expiration
of the term of the sublease. Indeed, the unpaid balance
sought to be collected by private respondent in his collection
suit became due on June 30, 1989, long before the sublease
expired on September 12, 1990.
Neither does petitioner contend that it is the nature of lease
that when there are more than two lessees or sublessees their
liability is solidary. On the other hand, the pertinent portion of
the contract involved in this case reads:22
2. That the total lease rental for the sub-leased fishpond for
the entire period of three (3) years and two (2) months is
FOUR HUNDRED EIGHT-FIVE THOUSAND SIX HUNDRED
(P485,600.00) PESOS, including all the improvements, prawns,
milkfishes, crabs and related species thereon as well all
fishing equipment, paraphernalia and accessories. The said
amount shall be paid to the Sub-Lessor by the Sub-Lessees in
the following manner, to wit:
A. Three hundred thousand (P300,000.00) Pesos upon signing
this contract; and
B. One Hundred Eight-Five Thousand Six-Hundred
(P185,6000.00) Pesos to be paid on June 30, 1989.
Clearly, the liability of the sublessees is merely joint. Since the
obligation of the Manuel and Alipio spouses is chargeable
against their respective conjugal partnerships, the unpaid
balance of P50,600.00 should be divided into two so that each
couple is liable to pay the amount of P25,300.00.
WHEREFORE, the petition is GRANTED. Bienvenido Manuel
and Remedios Manuel are ordered to pay the amount
of P25,300.00, the attorney's fees in the amount
of P10,000.00 and the costs of the suit. The complaint against
petitioner is dismissed without prejudice to the filing of a
claim by private respondent in the proceedings for the
settlement of estate of Placido Alipio for the collection of the
share of the Alipio spouses in the unpaid balance of the rent in
the amount of P25,300.00.
SO ORDERED.

G.R. No. 171660

October 17, 2011

CONTINENTAL CEMENT CORPORATION Petitioner,


vs.
ASEA BROWN BOVERI, INC., BBC BROWN BOVERI,
CORP., AND TORD B. ERIKSON,** Respondents.

KW Kiln DC Drive Motor, the plaintiff sustained the following


losses:
(a) Production and opportunity losses - P10,600,000.00
This amount represents only about 25% of the production
losses at the rate of P72.00 per bag of cement.

DECISION
(b) Labor Cost and Rental of Crane - 26,965.78
DEL CASTILLO, J.:
"Except as provided by law or by stipulation, one is entitled to
an adequate compensation only for such pecuniary loss
suffered by him as he has duly proved. Such compensation is
referred to as actual or compensatory damages." 1
This Petition for Review on Certiorari2 under Rule 45 of the
Rules of Court assails the Decision3 dated August 25, 2005
and the Resolution4 dated February 16, 2006 of the Court of
Appeals (CA) in CA-G.R. CV No. 58551.
Factual Antecedents
Sometime in July 1990, petitioner Continental Cement
Corporation (CCC),
a corporation engaged in the business of producing
cement,5 obtained the services of respondents6 Asea Brown
Boveri, Inc. (ABB) and BBC Brown Boveri, Corp. to repair its
160 KW Kiln DC Drive Motor (Kiln Drive Motor). 7
On October 23, 1991, due to the repeated failure of
respondents to repair the Kiln Drive Motor, petitioner filed
with Branch 101 of the Regional Trial Court (RTC) of Quezon
City a Complaint8 for sum of money and damages, docketed
as Civil Case No. Q-91-10419, against respondent
corporations and respondent Tord B. Eriksson (Eriksson), VicePresident of the Service Division of the respondent
ABB.9 Petitioner alleged that:
4. On July 11, 1990, the plaintiff delivered the 160 KW Kiln
DC Drive Motor to the defendants to be repaired under PO
No. 17136-17137, x x x
The defendant, Tord B. Eriksson, was personally directing
the repair of the said Kiln Drive Motor. He has direction and
control of the business of the defendant corporations.
Apparently, the defendant Asea Brown Boveri, Inc. has no
separate personality because of the 4,000 shares of stock,
3996 shares were subscribed by Honorio Poblador, Jr. The
four other stockholders subscribed for one share of stock
each only.
5. After the first repair by the defendants, the 160 KW Kiln
Drive Motor was installed for testing on October 3, 1990. On
October 4, 1990 the test failed. The plaintiff removed the
DC Drive Motor and replaced it with its old motor. It was
only on October 9, 1990 that the plaintiff resumed
operation. The plaintiff lost 1,040 MTD per day from October
5 to October 9, 1990.
6. On November 14, 1990, after the defendants had
undertaken the second repair of the motor in question, it
was installed in the kiln. The test failed again. The plaintiff
resumed operation with its old motor on November 19,
1990. The plaintiff suffered production losses for five days
at the rate of 1,040 MTD daily.
7. The defendants were given a third chance to repair the
160 KW Kiln DC Drive Motor.1avvphi1 On March 13, 1991,
the motor was installed and tested. Again, the test failed.
The plaintiff resumed operation on March 15, 1991. The
plaintiff sustained production losses at the rate of 1,040
MTD for two days.
8. As a consequence of the failure of the defendants to
comply with their contractual obligation to repair the 160

(c) Penalties (at P987.25 a day) for


failure to deliver the motor from
Aug. 29, 1990 to July 31, 1991. - 331,716.00
(d) Cost of money interest of the
P987.25 a day from July 18, 1990
to April 5, 1991 at 34% for 261 days - 24,335.59
Total Damages 10,983,017.42
9. The plaintiff has made several demands on the
defendants for the payment of the above-enumerated
damages, but the latter refused to do so without valid
justification.
10. The plaintiff was constrained to file this action and has
undertaken to pay its counsel Twenty Percentum (20%) of
the amount sought to be recovered as attorneys fees.10
Respondents, however, claimed that under Clause 7 of the
General Conditions,11 attached to the letter of offer12dated July
4, 1990 issued by respondent ABB to petitioner, the liability of
respondent ABB "does not extend to consequential damages
either direct or indirect."13 Moreover, as to respondent
Eriksson, there is no lawful and tenable reason for petitioner
to sue him in his personal capacity because he did not
personally direct the repair of the Kiln Drive Motor.14
Ruling of the Regional Trial Court
On August 30, 1995, the RTC rendered a Decision15 in favor of
petitioner. The RTC rejected the defense of limited liability
interposed by respondents since they failed to prove that
petitioner received a copy of the General
Conditions.16 Consequently, the RTC granted petitioners
claims for production loss, labor cost and rental of crane, and
attorneys fees.17 Thus:
WHEREFORE, premises above considered, finding the
complaint substantiated by plaintiff, judgment is hereby
rendered in favor of plaintiff and against defendants, hereby
ordering the latter to pay jointly and severally the former, the
following sums:
P10,600,00.00 for loss of production;
P 26,965.78 labor cost and rental of crane;
P 100,000.00 attorneys fees and cost.
SO ORDERED.18
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA
applied the exculpatory clause in the General Conditions and
ruled that there is no implied warranty on repair work; thus,
the repairman cannot be made to pay for loss of production as
a result of the unsuccessful repair.19 The fallo of the CA
Decision20 reads:
WHEREFORE, premises considered, the assailed August 30,
1995 Decision of the Regional Trial Court of Quezon City,
Branch 101 is hereby REVERSED and SET ASIDE. The
October 23, 1991 Complaint is hereby DISMISSED.

SO ORDERED.21
Petitioner moved for reconsideration22 but the CA denied the
same in its Resolution23 dated February 16, 2006.
Issues

Having breached the contract it entered with petitioner,


respondent ABB is liable for damages pursuant to Articles
1167, 1170, and 2201 of the Civil Code, which state:
Art. 1167. If a person obliged to do something fails to do it,
the same shall be executed at his cost.

Hence, the present recourse where petitioner interposes the


following issues:

This same rule shall be observed if he does it in contravention


of the tenor of the obligation. Furthermore, it may be decreed
that what has been poorly done be undone.

1. Whether x x x the [CA] gravely erred in applying the


terms of the "General Conditions" of Purchase Orders Nos.
17136 and 17137 to exculpate the respondents x x x from
liability in this case.

Art. 1170. Those who in the performance of their obligations


are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.

2. Whether x x x the [CA] seriously erred in applying the


concepts of implied warranty and warranty against hidden
defects of the New Civil Code in order to exculpate the
respondents x x x from its contractual obligation.24
Petitioners Arguments
Petitioner reiterates that the General Conditions cannot
exculpate respondents because petitioner never agreed to be
bound by it nor did petitioner receive a copy of it. 25 Petitioner
also imputes error on the part of the CA in applying the
concepts of warranty against hidden defects and implied
warranty.26 Petitioner contends that these concepts are not
applicable because the instant case does not involve a
contract of sale.27 What applies are Articles 1170 and 2201 of
the Civil Code.28
Respondents Arguments
Conversely, respondents insist that petitioner is bound by the
General Conditions.29 By issuing Purchase Order Nos. 1713637, petitioner in effect accepted the General Conditions
appended to respondent ABBs letter of offer. 30 Respondents
likewise defend the ruling of the CA that there could be no
implied warranty on the repair made by respondent ABB as
the warranty of the fitness of the equipment should be
enforced directly against the manufacturer of the Kiln Drive
Motor.31 Respondents also deny liability for damages claiming
that they performed their obligation in good faith.32

Art. 2201. In contracts and quasi-contracts, the damages for


which the obligor who acted in good faith is liable shall be
those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation
was constituted.
In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation.
Based on the foregoing, a repairman who fails to perform his
obligation is liable to pay for the cost of the execution of the
obligation plus damages. Though entitled, petitioner in this
case is not claiming reimbursement for the repair allegedly
done by Newton Contractor,36 but is instead asking for
damages for the delay caused by respondent ABB.
Petitioner is entitled to penalties under Purchase Order Nos.
17136-37
As per Purchase Order Nos. 17136-37, petitioner is entitled to
penalties in the amount of P987.25 per day from the time of
delay, August 30, 1990, up to the time the Kiln Drive Motor
was finally returned to petitioner. Records show that although
the testing of Kiln Drive Motor was done on March 13, 1991,
the said motor was actually delivered to petitioner as early as
January 7, 1991.37 The installation and testing was done only
on March 13, 1991 upon the request of petitioner because the
Kiln was under repair at the time the motor was delivered;
hence, the load testing had to be postponed.38

Our Ruling
The petition has merit.
Petitioner and respondent ABB entered into a contract for the
repair of petitioners Kiln Drive Motor, evidenced by Purchase
Order Nos. 17136-37,33 with the following terms and
conditions:
a) Total Price: P197,450.00
b) Delivery Date: August 29, 1990 or six (6) weeks from
receipt of order and down payment34
c) Penalty: One half of one percent of the total cost or Nine
Hundred Eighty Seven Pesos and Twenty five centavos
(P987.25) per day of delay.
Respondent ABB, however, not only incurred delay in
performing its obligation but likewise failed to repair the Kiln
Drive Motor; thus, prompting petitioner to sue for damages.

Under Article 122639 of the Civil Code, the penalty clause


takes the place of indemnity for damages and the payment of
interests in case of non-compliance with the obligation, unless
there is a stipulation to the contrary. In this case, since there
is no stipulation to the contrary, the penalty in the amount
of P987.25 per day of delay covers all other damages (i.e.
production loss, labor cost, and rental of the crane) claimed
by petitioner.
Petitioner is not entitled to recover production loss, labor cost
and the rental of crane
Article 1226 of the Civil Code further provides that if the
obligor refuses to pay the penalty, such as in the instant
case, 40 damages and interests may still be recovered on top
of the penalty. Damages claimed must be the natural and
probable consequences of the breach, which the parties have
foreseen or could have reasonably foreseen at the time the
obligation was constituted.41

Clause 7 of the General Conditions is not binding on petitioner

Thus, in addition to the penalties, petitioner seeks to recover


as damages production loss, labor cost and the rental of the
crane.

Respondents contend that under Clause 7 of the General


Conditions their liability "does not extend to consequential
damages either direct or indirect."35 This contention, however,
is unavailing because respondents failed to show that
petitioner was duly furnished with a copy of said General
Conditions. Hence, it is not binding on petitioner.

Petitioner avers that every time the Kiln Drive Motor is tested,
petitioner had to rent a crane and pay for labor to install the
motor.42 But except for the Summary of Claims for
Damages,43 no other evidence was presented by petitioner to
show that it had indeed rented a crane or that it incurred labor
cost to install the motor.

Petitioner likewise claims that as a result of the delay in the


repair of the Kiln Drive Motor, its production from August 29,
1990 to March 15, 1991 decreased since it had to use its old
motor which was not able to produce cement as much as the
one under repair;44 and that every time the said motor was
installed and tested, petitioner had to stop its operations;
thereby, incurring more production losses.45 To support its
claim, petitioner presented its monthly production reports 46 for
the months of April to June 1990 showing that on the average
it was able to produce 1040 MT of cement per day. However,
the production reports for the months of August 1990 to
March 1991 were not presented. Without these production
reports, it cannot be determined with reasonable certainty
whether petitioner indeed incurred production losses during
the said period. It may not be amiss to say that competent
proof and a reasonable degree of certainty are needed to
justify a grant of actual or compensatory damages;
speculations, conjectures, assertions or guesswork are not
sufficient.47
Besides, consequential damages, such as loss of profits on
account of delay or failure of delivery, may be recovered only
if such damages were reasonably foreseen or have been
brought within the contemplation of the parties as the
probable result of a breach at the time of or prior to
contracting.48 Considering the nature of the obligation in the
instant case, respondent ABB, at the time it agreed to repair
petitioners Kiln Drive Motor, could not have reasonably
foreseen that it would be made liable for production loss,
labor cost and rental of the crane in case it fails to repair the
motor or incurs delay in delivering the same, especially since
the motor under repair was a spare motor. 49
For the foregoing reasons, petitioner is not entitled to recover
production loss, labor cost and the rental of the crane.
Petitioner is not entitled to attorneys fees
Neither is petitioner entitled to the award of attorneys fees.
Jurisprudence requires that the factual basis for the award of
attorneys fees must be set forth in the body of the decision
and not in the dispositive portion only.50 In this case, no
explanation was given by the RTC in awarding attorneys fees
in favor of petitioner. In fact, the award of attorneys fees was
mentioned only in the dispositive portion of the decision.
Respondent Eriksson cannot be made jointly and severally
liable for the penalties
Respondent Eriksson, however, cannot be made jointly and
severally liable for the penalties. There is no showing that
respondent Eriksson directed or participated in the repair of
the Kiln Drive Motor or that he is guilty of bad faith or gross
negligence in directing the affairs of respondent ABB. It is a
basic principle that a corporation has a personality separate
and distinct from the persons composing or representing it;
hence, personal liability attaches only in exceptional cases,
such as when the director, trustee, or officer is guilty of bad
faith or gross negligence in directing the affairs of the
corporation.51
In sum, we find petitioner entitled to penalties in the amount
of P987.25 per day from August 30, 1990 up to January 7,
1991 (131 days) or a total amount of P129,329.75 for the
delay caused by respondent ABB. Finally, we impose interest
at the rate of six percent (6%) on the total amount due from
the date of filing of the complaint until finality of this Decision.
However, from the finality of judgment until full payment of
the total award, the interest rate of twelve percent (12%) shall
apply.52
WHEREFORE, the petition is hereby GRANTED. The assailed
Decision dated August 25, 2005 and the Resolution dated
February 16, 2006 of the Court of Appeals in CA-G.R. CV No.
58551 are hereby REVERSED and SET ASIDE. Respondent ABB
is ORDERED to pay petitioner the amount of P129,329.75,
with interest at 6% per annum to be computed from the date
of the filing of the complaint until finality of this Decision and
12% per annum thereafter until full payment.
SO ORDERED.

G.R. No. L-21780

June 30, 1967

MAKATI DEVELOPMENT CORPORATION, plaintiffappellant,


vs.
EMPIRE INSURANCE CO., defendant-appellee.
RODOLFO P. ANDAL, third-party defendant-appellee.
Salvador J. Lorayes for plaintiff-appellant Makati Development
Corporation.
Tomacruz and Ferrer for defendant-appellee Empire Insurance
Company, Inc.
Crispin D. Baizas and Associates for defendant-appellee
Rodolfo Andal.
CASTRO, J.:
On March 31, 1959, the Makati Development Corporation sold
to Rodolfo P. Andal a lot, with an area of 1,589 square meters,
in the Urdaneta Village, Makati, Rizal, for
P55,615.1wph1.t
A so-called "special condition" contained in the deed of sale
provides that "[T]he VENDEE/S shall commence the
construction and complete at least 50% of his/her/their/its
residence on the property within two (2) years from March 31,
1959 to the satisfaction of the VENDOR and, in the event of
his/her/their/its failure to do so, the bond which the VENDEE/S
has delivered to the VENDOR in the sum of P11,123.00 and
evidenced by a cash bond receipt dated April 10, 1959 will be
forfeited in favor of the VENDOR by the mere fact of failure of
the VENDEE/S to comply with this special condition." To insure
faithful compliance with this "condition," Andal gave a surety
bond on April 10, 1959 wherein he, as principal, and the
Empire Insurance Company, as surety, jointly and severally,
undertook to pay the Makati Development Corporation the
sum of P12,000 in case Andal failed to comply with his
obligation under the deed of sale.
Andal did not build his house; instead he sold the lot to Juan
Carlos on January 18, 1960. As neither Andal nor Juan Carlos
built a house on the lot within the stipulated period, the
Makati Development Corporation, on April 3, 1961, that is,
three days after the lapse of the two-year period, sent a
notice of claim to the Empire Insurance Co. advising it of
Andal's failure to comply with his undertaking. Demand for the
payment of P12,000 was refused, whereupon the Makati
Development Corporation filed a complaint in the Court of
First Instance of Rizal on May 22, 1961 against the Empire
Insurance Co. to recover on the bond in the full amount, plus
attorney's fees. In due time, the Empire Insurance Co. filed its
answer with a third-party complaint against Andal. It asked
that the complaint be dismissed or, in the event of a judgment
in favor of the Makati Development Corporation, that
judgment be rendered ordering Andal to pay the Empire
Insurance Co. whatever amount it maybe ordered to pay the
Makati Development Corporation, plus interest at 12%, from
the date of the filing of the complaint until said amount was
fully reimbursed, and attorney's fees.
In his answer, Andal admitted the execution of the bond but
alleged that the "special condition" in the deed of sale was
contrary to law, morals and public policy. He averred that, at
any rate, Juan Carlos had started construction of a house on
the lot.
Hearing was held and, on March 28, 1963, the lower court
rendered judgment, sentencing the Empire Insurance Co. to
pay the Makati Development Corporation the amount of
P1,500, with interest at the rate of 12% from the time of the
filing of the complaint until the amount was fully paid, and to
pay attorney's fees in the amount of P500, and the
proportionate part of the costs. The court directed that in case
the amount of the judgment was paid by the Empire Insurance
Co., Andal should in turn pay the former the sum of P1,500
with interest at 12% from the time of the filing of the
complaint to the time of payment and to pay attorney's fees
in the sum of P500 and proportionate part of the costs. The
Makati Development Corporation appealed directly to this
Court.

In reducing Andal's liability for breach of his undertaking from


P12,000, as stipulated in the bond to P1,500, the court noted
that
While no building has actually been constructed before the
target date which is March 31, 1961, it is also a fact that
even before that date the entire area was already fenced
with a stone wall and building materials were also stocked
in the premises which are clear indicia of the owner's desire
to construct his house with the least possible delay. As a
matter of fact the incontrovertible testimony of Juan Carlos
is to the effect that by the end of April 1961, he had
finished very much more than the required 50% stipulated
in the contract of sale. In short there was only really a little
delay.
But the appellant argues that Andal became liable for the full
amount of his bond upon his failure to build a house within the
two-year period which expired on March 31, 1961 and that the
trial court was without authority to reduce Andal's liability on
the basis of Carlos' construction of a house a month after the
stipulated period because there was no privity of contract
between Carlos and the Makati Development Corporation.
To begin with, the so-called "special condition" in the deed of
sale is in reality an obligation1 to build a house at least 50
per cent of which must be finished within two years. It was to
secure the performance of this obligation that a penal clause
was inserted.
While it is true that in obligations with a penal sanction the
penalty takes the place of "damages and the payment of
interest in case of non-compliance" 2 and that the obligee is
entitled to recover upon the breach of the obligation without
the need of proving damages,3 it is nonetheless true that in
certain instances a mitigation of the obligor's liability is
allowed. Thus article 1229 of the Civil Code states:
The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
Here the trial court found that Juan Carlos had finished more
than 50 per cent of his house by April, 1961, or barely a
month after the expiration on March 31, 1961 of the stipulated
period. There was therefore a partial performance of the
obligation within the meaning and intendment of article
1229.4 The case of General Ins. & Surety Corp. vs. Republic,
G.R. L-13873, Jan. 31, 19635 cannot be invoked as authority
for the forfeiture of the full amount of the bond because unlike
this case there was in that case no performance at all of any
part of the obligation to secure the payment of salaries to
teachers. Indeed, it has been held that where there has been
partial or irregular compliance with the provisions in a
contract for special indemnification in the event of failure to
comply with its terms, courts will rigidly apply the doctrine of
strict construction against the enforcement in its entirety of
the indemnification, where it is clear from the contract that
the amount or character of the indemnity is fixed without
regard to the probable damages which might be anticipated
as a result of a breach of the terms of the contract, or, in
other words, where the indemnity provided for is essentially a
mere penalty having for its object the enforcement of
compliance with the contract.6 The penal clause in this case
was inserted not to indemnify the Makati Development
Corporation for any damage it might suffer as a result of a
breach of the contract but rather to compel performance of
the so-called "special condition" and thus encourage home
building among lot owners in the Urdaneta Village.
Considering that a house had been built shortly after the
period stipulated, the substantial, if tardy, performance of the
obligation, having in view the purpose of the penal clause,
fully justified the trial court in reducing the penalty.
Still it is insisted that Carlos' construction of a house on the lot
sold cannot be considered a partial performance of Andal's
obligation because Carlos bears no contractual relation to the
Makati Development Corporation. This case is in many
respects analogous to Insular Gov't. vs. Amechazurra, 10 Phil.

637 (1908) where a similar claim was made by a party and


rejected by this Court. There the defendant gave a bond for
$800 to guarantee the return to the plaintiff of four firearms
issued to him "on demand" of the Government. Three of the
firearms were stolen from the defendant so that on demand of
the Government he was able to produce only one.
Subsequently the constabulary recovered two of the missing
guns and the question was whether defendant was entitled to
a mitigation of liability even if recovery of the firearms was
made possible through the efforts of third parties (the
Constabulary) This Court gave an affirmative answer.
Indeed the stipulation in this case to commence the
construction and complete at least 50 per cent of the
vendee's house within two years cannot be construed as
imposing a strictly personal obligation on Andal. To adopt such
a construction would be to limit Andal's right to dispose of the
lot. There is nothing in the deed of sale restricting Andal's
right to sell the lot at least within the two-year period and we
think it plain that a reading of such a limitation on one of the
rights of ownership must rest on more explicit language in the
contract. It cannot be left to mere inference.
Accordingly, the decision appealed from is affirmed, at
appellant's cost.

G.R. No. 116285

October 19, 2001

ANTONIO TAN, petitioner,


vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision 1 dated August
31, 1993 and Resolution2 dated July 13, 1994 of the Court of
Appeals affirming the Decision3 dated May 8, 1991 of the
Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan
obtained two (2) loans each in the principal amount of Two
Million Pesos (P2,000,000.00), or in the total principal amount
of Four Million Pesos (P4,000,000.00) from respondent Cultural
Center of the Philippines (CCP, for brevity) evidenced by two
(2) promissory notes with maturity dates on May 14, 1979 and
July 6, 1979, respectively. Petitioner defaulted but after a few
partial payments he had the loans restructured by respondent
CCP, and petitioner accordingly executed a promissory note
(Exhibit "A") on August 31, 1979 in the amount of Three
Million Four Hundred Eleven Thousand Four Hundred TwentyOne Pesos and Thirty-Two Centavos (P3,411,421.32) payable
in five (5) installments. Petitioner Tan failed to pay any
installment on the said restructured loan of Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos
and Thirty-Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated January
26, 1982, petitioner requested and proposed to respondent
CCP a mode of paying the restructured loan, i.e., (a) twenty
percent (20%) of the principal amount of the loan upon the
respondent giving its conformity to his proposal; and (b) the
balance on the principal obligation payable in thirty-six (36)
equal monthly installments until fully paid. On October 20,
1983, petitioner again sent a letter to respondent CCP
requesting for a moratorium on his loan obligation until the
following year allegedly due to a substantial deduction in the
volume of his business and on account of the peso
devaluation. No favorable response was made to said letters.
Instead, respondent CCP, through counsel, wrote a letter
dated May 30, 1984 to the petitioner demanding full payment,
within ten (10) days from receipt of said letter, of the
petitioners restructured loan which as of April 30, 1984
amounted to Six Million Eighty-Eight Thousand Seven Hundred
Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila
a complaint for collection of a sum of money, docketed as
Civil Case No. 84-26363, against the petitioner after the latter
failed to settle his said restructured loan obligation. The
petitioner interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly asked
for his help to obtain a loan from respondent CCP. Petitioner
claimed that he has not been able to locate Wilson Lucmen.
While the case was pending in the trial court, the petitioner
filed a Manifestation wherein he proposed to settle his
indebtedness to respondent CCP by proposing to make a down
payment of One Hundred Forty Thousand Pesos (P140,000.00)

and to issue twelve (12) checks every beginning of the year to


cover installment payments for one year, and every year
thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioners proposals and so the trial
of the case ensued.
On May 8, 1991, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against defendant, ordering defendant to pay
plaintiff, the amount of P7,996,314.67, representing
defendants outstanding account as of August 28, 1986,
with the corresponding stipulated interest and charges
thereof, until fully paid, plus attorneys fees in an amount
equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack
of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of
respondent CCP. First, it gave little weight to the petitioners
contention that the loan was merely for the accommodation of
Wilson Lucmen for the reason that the defense propounded
was not credible in itself. Second, assuming, arguendo, that
the petitioner did not personally benefit from the said loan, he
should have filed a third party complaint against Wilson
Lucmen, the alleged accommodated party but he did not.
Third, for three (3) times the petitioner offered to settle his
loan obligation with respondent CCP. Fourth, petitioner may
not avoid his liability to pay his obligation under the
promissory note (Exh. "A") which he must comply with in good
faith pursuant to Article 1159 of the New Civil Code. Fifth,
petitioner is estopped from denying his liability or loan
obligation to the private respondent.
The petitioner appealed the decision of the trial court to the
Court of Appeals insofar as it charged interest, surcharges,
attorneys fees and exemplary damages against the
petitioner. In his appeal, the petitioner asked for the reduction
of the penalties and charges on his loan obligation. He
abandoned his alleged defense in the trial court that he
merely accommodated his friend, Wilson Lucmen, in obtaining
the loan, and instead admitted the validity of the same. On
August 31, 1993, the appellate court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the
judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges
and interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for
modification on the basis of alleged partial or irregular
performance, there being none. Appellants offer or tender
of payment cannot be deemed as a partial or irregular
performance of the contract, not a single centavo appears
to have been paid by the defendant.
However, the appellate court modified the decision of the trial
court by deleting the award for exemplary damages and
reducing the amount of awarded attorneys fees to five
percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that
plaintiff was represented by a government lawyer, We
believe the award of 25% as attorneys fees and
P500,000.00 as exemplary damages is out of proportion to
the actual damage caused by the non-performance of the
contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied
the petitioners motion for reconsideration of the said
decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE
IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE TRIAL
COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT
SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF
TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST
PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH
THE COMMISSION ON AUDIT AND THE OFFICE OF THE
PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
DELETING AWARD OF ATTORNEYS FEES AND IN REDUCING
PENALTIES.

Significantly, the petitioner does not question his liability for


his restructured loan under the promissory note marked
Exhibit "A". The first question to be resolved in the case at bar
is whether there are contractual and legal bases for the
imposition of the penalty, interest on the penalty and
attorneys fees.
The petitioner imputes error on the part of the appellate court
in not totally eliminating the award of attorneys fees and in
not reducing the penalties considering that the petitioner,
contrary to the appellate courts findings, has allegedly made
partial payments on the loan. And if penalty is to be awarded,
the petitioner is asking for the non-imposition of interest on
the surcharges inasmuch as the compounding of interest on
surcharges is not provided in the promissory note marked
Exhibit "A". The petitioner takes exception to the computation
of the private respondent whereby the interest, surcharge and
the principal were added together and that on the total sum
interest was imposed. Petitioner also claims that there is no
basis in law for the charging of interest on the surcharges for
the reason that the New Civil Code is devoid of any provision
allowing the imposition of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of
the New Civil Code provides that:
In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation
to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly
provides for the imposition of both interest and penalties in
case of default on the part of the petitioner in the payment of
the subject restructured loan. The pertinent6 portion of the
promissory note (Exhibit "A") imposing interest and penalties
provides that:
For value received, I/We jointly and severally promise to pay
to the CULTURAL CENTER OF THE PHILIPPINES at its office in
Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN
THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32)
Philippine Currency, xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%)


per annum from the date hereof until paid. PLUS
THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on
demand or upon default of payment of any portion of
it when due, I/We jointly and severally agree to
pay additional penalty charges at the rate of TWO
per cent (2%) per month on the total amount due
until paid, payable and computed monthly. Default of
payment of this note or any portion thereof when due
shall render all other installments and all existing
promissory notes made by us in favor of the
CULTURAL CENTER OF THE PHILIPPINES immediately
due and demandable. (Underscoring supplied)
xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest


charge until full payment of the loan constitutes the monetary
interest on the note and is allowed under Article 1956 of the
New Civil Code.7 On the other hand, the stipulated two
percent (2%) per month penalty is in the form of penalty
charge which is separate and distinct from the monetary
interest on the principal of the loan.
Penalty on delinquent loans may take different forms.
In Government Service Insurance System v. Court of
Appeals,8 this Court has ruled that the New Civil Code permits
an agreement upon a penalty apart from the monetary
interest. If the parties stipulate this kind of agreement, the
penalty does not include the monetary interest, and as such
the two are different and distinct from each other and may be
demanded separately. Quoting Equitable Banking Corp. v.
Liwanag,9 the GSIS case went on to state that such a
stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned
by law, more particularly under Article 2209 of the New Civil
Code which provides that:
If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per
annum.
The penalty charge of two percent (2%) per month in the case
at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for

both the stipulated monetary interest and the stipulated


penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next
issue to be resolved is whether interest may accrue on the
penalty or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code, which
provides that:
Without prejudice to the provisions of Article 2212, interest
due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest
due and unpaid, which as added principal, shall earn new
interest.
According to the petitioner, there is no legal basis for the
imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary
interest but not the charging of interest on penalty. He claims
that since there is no law that allows imposition of interest on
penalties, the penalties should not earn interest. But as we
have already explained, penalty clauses can be in the form of
penalty or compensatory interest. Thus, the compounding of
the penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article
1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note
(Exhibit "A") permitting the compounding of interest. The fifth
paragraph of the said promissory note provides that: "Any
interest which may be due if not paid shall be added to the
total amount when due and shall become part thereof, the
whole amount to bear interest at the maximum rate allowed
by law."10 Therefore, any penalty interest not paid, when due,
shall earn the legal interest of twelve percent (12%) per
annum,11 in the absence of express stipulation on the specific
rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that
"Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began to
run on the penalty interest upon the filing of the complaint in
court by respondent CCP on August 29, 1984. Hence, the
courts a quo did not err in ruling that the petitioner is bound
to pay the interest on the total amount of the principal, the
monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded
interest imposed on the total amount based allegedly on the
case of National Power Corporation v. National Merchandising
Corporation,12 wherein we ruled that the imposition of interest
on the damages from the filing of the complaint is unjust
where the litigation was prolonged for twenty-five (25) years
through no fault of the defendant. However, the ruling in the
said National Power Corporation (NPC) case is not applicable
to the case at bar inasmuch as our ruling on the issue of
interest in that NPC case was based on equitable
considerations and on the fact that the said case lasted for
twenty-five (25) years "through no fault of the defendant." In
the case at bar, however, equity cannot be considered
inasmuch as there is a contractual stipulation in the
promissory note whereby the petitioner expressly agreed to
the compounding of interest in case of failure on his part to
pay the loan at maturity. Inasmuch as the said stipulation on
the compounding of interest has the force of law between the
parties and does not appear to be inequitable or unjust, the
said written stipulation should be respected.
The private respondents Statement of Account (marked
Exhibits "C" to "C-2")13 shows the following breakdown of the
petitioners indebtedness as of August 28, 1986:
Principal
Interest
Surcharge

P2,838,454.68
P 576,167.89
P4,581,692.10
P7,996,314.67

The said statement of account also shows that the above


amounts stated therein are net of the partial payments
amounting to a total of Four Hundred Fifty-Two Thousand Five
Hundred Sixty-One Pesos and Forty-Three Centavos
(P452,561.43) which were made during the period from May
13, 1983 to September 30, 1983.14 The petitioner now seeks
the reduction of the penalty due to the said partial payments.
The principal amount of the promissory note (Exhibit "A") was
Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32)
when the loan was restructured on August 31, 1979. As of
August 28, 1986, the principal amount of the said restructured
loan has been reduced to Two Million Eight Hundred ThirtyEight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight
Centavos (P2,838,454.68). Thus, petitioner contends that

reduction of the penalty is justifiable pursuant to Article 1229


of the New Civil Code which provides that: "The judge shall
equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also
be reduced by the courts if it is iniquitous or unconscionable."
Petitioner insists that the penalty should be reduced to ten
percent (10%) of the unpaid debt in accordance
with Bachrach Motor Company v. Espiritu.15
There appears to be a justification for a reduction of the
penalty charge but not necessarily to ten percent (10%) of the
unpaid balance of the loan as suggested by petitioner.
Inasmuch as petitioner has made partial payments which
showed his good faith, a reduction of the penalty charge from
two percent (2%) per month on the total amount due,
compounded monthly, until paid can indeed be justified under
the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the
two percent (2%) penalty charge on the total amount due to
be unconscionable inasmuch as the same appeared to have
been compounded monthly.
Considering petitioners several partial payments and the fact
he is liable under the note for the two percent (2%) penalty
charge per month on the total amount due, compounded
monthly, for twenty-one (21) years since his default in 1980,
we find it fair and equitable to reduce the penalty charge to a
straight twelve percent (12%) per annum on the total amount
due starting August 28, 1986, the date of the last Statement
of Account (Exhibits "C" to "C-2"). We also took into
consideration the offers of the petitioner to enter into a
compromise for the settlement of his debt by presenting
proposed payment schemes to respondent CCP. The said
offers at compromise also showed his good faith despite
difficulty in complying with his loan obligation due to his
financial problems. However, we are not unmindful of the
respondents long overdue deprivation of the use of its money
collectible from the petitioner.
The petitioner also imputes error on the part of the appellate
court for not declaring the suspension of the running of the
interest during that period when the respondent allegedly
failed to assist the petitioner in applying for relief from
liability. In this connection, the petitioner referred to the
private respondents letter16 dated September 28, 1988
addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx

xxx

xxx

With reference to your appeal for condonation of


interest and surcharge, we wish to inform you that
the center will assist you in applying for relief of
liability through the Commission on Audit and Office
of the President xxx.
While your application is being processed and
awaiting approval, the center will be accepting your
proposed payment scheme with the downpayment of
P160,000.00 and monthly remittances of P60,000.00
xxx.
xxx

xxx

xxx

The petitioner alleges that his obligation to pay the interest


and surcharge should have been suspended because the
obligation to pay such interest and surcharge has become
conditional, that is dependent on a future and uncertain event
which consists of whether the petitioners request for
condonation of interest and surcharge would be
recommended by the Commission on Audit and the Office of
the President to the House of Representatives for approval as
required under Section 36 of Presidential Decree No. 1445.
Since the condition has not happened allegedly due to the
private respondents reneging on its promise, his liability to
pay the interest and surcharge on the loan has not arisen.
This is the petitioners contention.
It is our view, however, that the running of the interest and
surcharge was not suspended by the private respondents
promise to assist the petitioners in applying for relief
therefrom through the Commission on Audit and the Office of
the President.
First, the letter dated September 28, 1988 alleged to have
been sent by the respondent CCP to the petitioner is not part
of the formally offered documentary evidence of either party
in the trial court. That letter cannot be considered evidence
pursuant to Rule 132, Section 34 of the Rules of Court which
provides that: "The court shall consider no evidence which has
not been formally offered xxx." Besides, the said letter does
not contain any categorical agreement on the part of
respondent CCP that the payment of the interest and
surcharge on the loan is deemed suspended while his appeal
for condonation of the interest and surcharge was being
processed.

Second, the private respondent correctly asserted that it was


the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his
application for condonation of interest and surcharge. It was
incumbent upon the petitioner to bring his administrative
appeal for condonation of interest and penalty charges to the
attention of the said government offices.
On the issue of attorneys fees, the appellate court ruled
correctly and justly in reducing the trial courts award of
twenty-five percent (25%) attorneys fees to five percent (5%)
of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is
hereby AFFIRMED with MODIFICATION in that the penalty
charge of two percent (2%) per month on the total amount
due, compounded monthly, is hereby reduced to a straight
twelve percent (12%) per annum starting from August 28,
1986. With costs against the petitioner.
SO ORDERED.
G.R. No. 85161 September 9, 1991
COUNTRY BANKERS INSURANCE CORPORATION and
ENRIQUE SY, petitioners,
vs.
COURT OF APPEALS and OSCAR VENTANILLA
ENTERPRISES CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the
Court of Appeals in CA-G.R. CV No. 09504 "Enrique Sy and
Country Bankers Insurance Corporation v. Oscar Ventanilla
Enterprises Corporation" affirming in toto the decision of the
Regional Trial Court, Cabanatuan City, Branch XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is
dismissed, and on the counterclaim of the defendant O.
Ventanilla Enterprises Corporation, judgment is hereby
rendered:
1. Declaring as lawful, the cancellation and termination of
the Lease Agreement (Exh. A) and the defendant's re-entry
and repossession of the Avenue, Broadway and Capitol
theaters under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph
12 of the Id Lease Agreement, and confirming the forfeiture
of the plaintiffs remaining cash deposit of P290,000.00 in
favor of the defendant thereunder, as of February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of
P289,534.78, representing arrears in rentals, unremitted
amounts for amusement tax delinquency and accrued
interest thereon, with further interest on said amounts at
the rate of 12% per annum (per lease agreement) from
December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of
P100,000.00, representing the P10,000.00 portion of the
monthly lease rental which were not deducted from the
cash deposit of the plaintiff from February to November,
1980, after the forfeiture of the said cash deposit on
February 11, 1980, with interest thereon at the rate of 12%
per annum on each of the said monthly amounts of
P10,000.00 from the time the same became due until it is
paid;
5. Ordering the plaintiff to pay the defendant through the
injunction bond, the sum of P100,000.00, representing the
P10,000.00 monthly increase in rentals which the defendant
failed to realize from February to November 1980 result
from the injunction, with legal interest thereon from the
finality of this decision until fully paid;

6. Ordering the plaintiff to pay to the defendant the sum


equivalent to ten per centum (10%) of the above-mentioned
amounts of P289,534.78, P100,000.00 and P100,000.00, as
and for attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC),
as lessor, and the petitioner Enrique F. Sy, as lessee, entered
into a lease agreement over the Avenue, Broadway and
Capitol Theaters and the land on which they are situated in
Cabanatuan City, including their air-conditioning systems,
projectors and accessories needed for showing the films or
motion pictures. The term of the lease was for six (6) years
commencing from June 13, 1977 and ending June 12,1983.
After more than two (2) years of operation of the Avenue,
Broadway and Capitol Theaters, the lessor OVEC made
demands for the repossession of the said leased properties in
view of the Sy's arrears in monthly rentals and non-payment
of amusement taxes. On August 8,1979, OVEC and Sy had a
conference and by reason of Sy's request for reconsideration
of OVECs demand for repossession of the three (3) theaters,
the former was allowed to continue operating the leased
premises upon his conformity to certain conditions imposed
by the latter in a supplemental agreement dated August 13,
1979.
In pursuance of their latter agreement, Sy's arrears in rental in
the amount of P125,455.76 (as of July 31, 1979) was reduced
to P71,028.91 as of December 31, 1979. However, the
accrued amusement tax liability of the three (3) theaters to
the City Government of Cabanatuan City had accumulated to
P84,000.00 despite the fact that Sy had been deducting the
amount of P4,000.00 from his monthly rental with the
obligation to remit the said deductions to the city
government. Hence, letters of demand dated January 7, 1980
and February 3, 1980 were sent to Sy demanding payment of
the arrears in rentals and amusement tax delinquency. The
latter demand was with warning that OVEC will re-enter and
repossess the Avenue, Broadway and Capital Theaters on
February 11, 1980 in pursuance of the pertinent provisions of
their lease contract of June 11, 1977 and their supplemental
letter-agreement of August 13, 1979. But notwithstanding the
said demands and warnings SY failed to pay the abovementioned amounts in full Consequently, OVEC padlocked the
gates of the three theaters under lease and took possession
thereof in the morning of February 11, 1980 by posting its
men around the premises of the Id movie houses and
preventing the lessee's employees from entering the same.
Sy, through his counsel, filed the present action for
reformation of the lease agreement, damages and injunction
late in the afternoon of the same day. And by virtue of a
restraining order dated February 12, 1980 followed by an
order directing the issuance of a writ of preliminary injunction
issued in said case, Sy regained possession and operation of
the Avenue, Broadway and Capital theaters.
As first cause of action, Sy alleged that the amount of deposit
P600,000.00 as agreed upon, P300,000.00 of which was to
be paid on June 13, 1977 and the balance on December 13,
1977 was too big; and that OVEC had assured him that said
forfeiture will not come to pass. By way of second cause of
action, Sy sought to recover from OVEC the sums of
P100,000.00 which Sy allegedly spent in making "major
repairs" on Broadway Theater and the application of which to
Sy's due rentals; (2) P48,000.00 covering the cost of electrical
current allegedly used by OVEC in its alleged "illegal
connection" to Capitol Theater and (3) P31,000.00 also for the
cost of electrical current allegedly used by OVEC for its
alleged "illegal connection" to Broadway Theater and for
damages suffered by Sy as a result of such connection. Under
the third cause of action, it is alleged in the complaint that on
February 11, 1980, OVEC had the three theaters padlocked
with the use of force, and that as a result, Sy suffered
damages at the rate of P5,000.00 a day, in view of his failure
to go thru the contracts he had entered into with movie and
booking companies for the showing of movies at ABC. As
fourth cause of action, Sy prayed for the issuance of a
restraining order/preliminary injunction to enjoin OVEC and all
persons employed by it from entering and taking possession

of the three theaters, conditioned upon Sy's filing of a


P500,000.00 bond supplied by Country Bankers Insurance
Corporation (CBISCO).

From this decision, CBISCO and Sy filed this instant petition on


the following grounds:
A

OVEC on the other hand, alleged in its answer by way of


counterclaims, that by reason of Sy's violation of the terms of
the subject lease agreement, OVEC became authorized to
enter and possess the three theaters in question and to
terminate said agreement and the balance of the deposits
given by Sy to OVEC had thus become forfeited; that OVEC
would be losing P50,000.00 for every month that the
possession and operation of said three theaters remain with
Sy and that OVEC incurred P500,000.00 for attorney's service.
The trial court arrived at the conclusions that Sy is not entitled
to the reformation of the lease agreement; that the
repossession of the leased premises by OVEC after the
cancellation and termination of the lease was in accordance
with the stipulation of the parties in the said agreement and
the law applicable thereto and that the consequent forfeiture
of Sy's cash deposit in favor of OVEC was clearly agreed upon
by them in the lease agreement. The trial court further
concluded that Sy was not entitled to the writ of preliminary
injunction issued in his favor after the commencement of the
action and that the injunction bond filed by Sy is liable for
whatever damages OVEC may have suffered by reason of the
injunction.
On the counterclaim of OVEC the trial court found that the
said lessor was deprived of the possession and enjoyment of
the leased premises and also suffered damages as a result of
the filing of the case by Sy and his violation of the terms and
conditions of the lease agreement. Hence, it held that OVEC is
entitled to recover the said damages in addition to the arrears
in rentals and amusement tax delinquency of Sy and the
accrued interest thereon. From the evidence presented, it
found that as of the end of November, 1980, when OVEC
finally regained the possession of the three (3) theaters under
lease, Sy's unpaid rentals and amusement tax liability
amounted to P289,534.78. In addition, it held that Sy was
under obligation to pay P10,000.00 every month from
February to November, 1980 or the total amount of
P100,000.00 with interest on each amount of P10,000.00 from
the time the same became due. This P10,000.00 portion of
the monthly lease rental was supposed to come from the
remaining cash deposit of Sy but with the consequent
forfeiture of the remaining cash deposit of P290,000.00, there
was no more cash deposit from which said amount could be
deducted. Further, it adjudged Sy to pay attorney's fees
equivalent to 10% of the amounts above-mentioned.
Finally, the trial court held Sy through the injunction bond
liable to pay the sum of P10,000.00 every month from
February to November, 1980. The amount represents the
supposed increase in rental from P50,000.00 to P60,000.00 in
view of the offer of one RTG Productions, Inc. to lease the
three theaters involved for P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed
the decision in toto while OVEC appealed insofar as the
decision failed to hold the injunction bond liable for an
damages awarded by the trial court.
The respondent Court of Appeals found no ambiguity in the
provisions of the lease agreement. It held that the provisions
are fair and reasonable and therefore, should be respected
and enforced as the law between the parties. It held that the
cancellation or termination of the agreement prior to its
expiration period is justified as it was brought about by Sy's
own default in his compliance with the terms of the
agreement and not "motivated by fraud or greed." It also
affirmed the award to OVEC of the amount of P100,000.00
chargeable against the injunction bond posted by CBISCO
which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS
appeal and held that the trial court did not err in not charging
and holding the injunction bond posted by Sy liable for all the
awards as the undertaking of CBISCO under the bond referred
only to damages which OVEC may suffer as a result of the
injunction.

PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO


UNJUSTLY ENRICH OR BE BENEFITTED AT THE EXPENSE OF
THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF
LAW AND GRAVE ABUSE OF DISCRETION IN NOT SETTING OFF
THE P100,000.00 SUPPOSED DAMAGE RESULTING FROM THE
INJUNCTION AGAINST THE P290,000.00 REMAINING CASH
DEPOSIT OF PETITIONER ENRIQUE SY.
C
RESPONDENT COURT OF APPEALS FURTHER COMMITTED
SERIOUS ERROR OF LAW AND GRAVE ABUSE OF DISCRETION
IN NOT DISMISSING PRIVATE RESPONDENTS COUNTER-CLAIM
FOR FAILURE TO PAY THE NECESSARY DOCKET FEE. (p.
10, Rollo)
We find no merit in petitioners' argument that the forfeiture
clause stipulated in the lease agreement would unjustly enrich
the respondent OVEC at the expense of Sy and CBISCO
contrary to law, morals, good customs, public order or public
policy. A provision which calls for the forfeiture of the
remaining deposit still in the possession of the lessor, without
prejudice to any other obligation still owing, in the event of
the termination or cancellation of the agreement by reason of
the lessee's violation of any of the terms and conditions of the
agreement is a penal clause that may be validly entered into.
A penal clause is an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special
presentation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled. (Eduardo P. Caguioa, Comments and
Cases on Civil Law, Vol. IV, First Edition, pp. 199-200) As a
general rule, in obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the payment
of interests in case of non-compliance. This is specifically
provided for in Article 1226, par. 1, New Civil Code. In such
case, proof of actual damages suffered by the creditor is not
necessary in order that the penalty may be demanded (Article
1228, New Civil Code). However, there are exceptions to the
rule that the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance with the principal obligation. They are first, when
there is a stipulation to the contrary; second, when the obligor
is sued for refusal to pay the agreed penalty; and third, when
the obligor is guilty of fraud (Article 1226, par. 1, New Civil
Code). It is evident that in all said cases, the purpose of the
penalty is to punish the obligor. Therefore, the obligee can
recover from the obligor not only the penalty but also the
damages resulting from the non-fulfillment or defective
performance of the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides
that the deposit shall be deemed forfeited, without prejudice
to any other obligation still owing by the lessee to the lessor,
the penalty cannot substitute for the P100,000.00 supposed
damage resulting from the issuance of the injunction against
the P290,000.00 remaining cash deposit. This supposed
damage suffered by OVEC was the alleged P10,000.00 a
month increase in rental from P50,000.00 to P60,000,00),
which OVEC failed to realize for ten months from February to
November, 1980 in the total sum of P100,000.00. This
opportunity cost which was duly proven before the trial court,
was correctly made chargeable by the said court against the
injunction bond posted by CBISCO. The undertaking assumed
by CBISCO under subject injunction refers to "all such
damages as such party may sustain by reason of the
injunction if the Court should finally decide that the Plaintiff
was/were not entitled thereto." (Rollo, p. 101) Thus, the
respondent Court correctly sustained the trial court in holding
that the bond shall and may answer only for damages which
OVEC may suffer as a result of the injunction. The arrears in
rental, the unmeritted amounts of the amusement tax

delinquency, the amount of P100,000.00 (P10,000.00 portions


of each monthly rental which were not deducted from
plaintiffs cash deposit from February to November, 1980 after
the forfeiture of said cash deposit on February 11, 1980) and
attorney's fees which were all charged against Sy were
correctly considered by the respondent Court as damages
which OVEC sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that
respondent Court committed serious error of law and grave
abuse of discretion in not dismissing private respondent's
counterclaim for failure to pay the necessary docket fee,
which is an issue raised for the first time in this petition.
Petitioners rely on the rule in Manchester Development
Corporation v. Court of Appeals, G.R. No. 75919, May 7, 1987,
149 SCRA 562 to the effect that all the proceedings held in
connection with a case where the correct docket fees are not
paid should be peremptorily be considered null and void
because, for all legal purposes, the trial court never acquired
jurisdiction over the case. It should be remembered however,
that in Davao Light and Power Co., Inc. v. Dinopol, G.R. 75195,
August 19, 1988, 164 SCRA 748, this Court took note of the
fact that the assailed order of the trial court was issued prior
to the resolution in the Manchester case and held that its
strict application to the case at bar would therefore be unduly
harsh. Thus, We allowed the amendment of the complaint by
specifying the amount of damages within a non-extendible
period of five (5) days from notice and the re-assessment of
the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion,
G.R. 79937-38, February 3, 1989, 170 SCRA 274, We held that
where the filing of the initiatory pleading is not accompanied
by payment of the docket fee, the court may allow payment of
the fee within a reasonable time but in no case beyond the
applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no
docket fees are required as the following circumstances are
present: (a) they arise out of or are necessarily connected
with the transaction or occurrence that is subject matter of
the opposing party's claim; (b) they do not require for their
adjudication the presence of third parties of whom the court
cannot acquire jurisdiction; and (c) the court has jurisdiction
to entertain the claim (see Javier v. Intermediate Appellate
Court, G.R. 75379, March 31, 1989, 171 SCRA 605). Whether
the respective claims asserted by the parties arise out of the
same contract or transaction within the limitation on
counterclaims imposed by the statutes depends on a
consideration of all the facts brought forth by the parties and
on a determination of whether there is some legal or equitable
relationship between the ground of recovery alleged in the
counterclaim and the matters alleged as the cause of action
by the plaintiff (80 C.J.S. 48). As the counterclaims of OVEC
arise from or are necessarily connected with the facts alleged
in the complaint for reformation of instrument of Sy, it is clear
that said counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by
petitioners in their petition, the same is hereby DENIED and
the decision dated June 15, 1988 and the resolution dated
September 21, 1988, both of the respondent Court of Appeals
are AFFIRMED.
SO ORDERED.

G.R. No. 175490

September 17, 2009

ILEANA DR. MACALINAO, Petitioner,


vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45
of the Rules of Court seeking to reverse and set aside the June
30, 2006 Decision1 of the Court of Appeals (CA) and its
November 21, 2006 Resolution2 denying petitioners motion
for reconsideration.
The Facts
Petitioner Ileana Macalinao was an approved cardholder of BPI
Mastercard, one of the credit card facilities of respondent
Bank of the Philippine Islands (BPI).3 Petitioner Macalinao
made some purchases through the use of the said credit card
and defaulted in paying for said purchases. She subsequently
received a letter dated January 5, 2004 from respondent BPI,
demanding payment of the amount of one hundred forty-one
thousand five hundred eighteen pesos and thirty-four
centavos (PhP 141,518.34), as follows:
Statement Date

Previous Balance

Purchases (Payments)

10/27/2002

94,843.70

11/27/2002

98,465.41

(15,000)

12/31/2002

86,351.02

30,308.80

1/27/2003

119,752.28

2/27/2003

124,234.58

3/27/2003

129,263.13

4/27/2003

115,177.90

5/27/2003

119,565.44

(10,000.00)

6/29/2003

113,540.10

8,362.50 (7,000.00)

7/27/2003

118,833.49

8/27/2003

123,375.65

9/28/2003

128,435.56

(18,000.00)

For failure of petitioner Macalinao to settle her obligations,


respondent BPI filed with the Metropolitan Trial Court (MeTC)
of Makati City a complaint for a sum of money against her and
her husband, Danilo SJ. Macalinao. This was raffled to Branch
66 of the MeTC and was docketed as Civil Case No. 84462
entitled Bank of the Philippine Islands vs. Spouses Ileana Dr.
Macalinao and Danilo SJ. Macalinao.5
In said complaint, respondent BPI prayed for the payment of
the amount of one hundred fifty-four thousand six hundred
eight pesos and seventy-eight centavos (PhP 154,608.78) plus
3.25% finance charges and late payment charges equivalent
to 6% of the amount due from February 29, 2004 and an
amount equivalent to 25% of the total amount due as
attorneys fees, and of the cost of suit.6
After the summons and a copy of the complaint were served
upon petitioner Macalinao and her husband, they failed to file
their Answer.7 Thus, respondent BPI moved that judgment be
rendered in accordance with Section 6 of the Rule on
Summary Procedure.8 This was granted in an Order dated June
16, 2004.9 Thereafter, respondent BPI submitted its
documentary evidence.101avvphi1

10/28/2003
11/28/2003
12/28/2003
1/27/2004

CARD within thirty (30) days from date or dates thereof.


Failure of the Cardholder to pay the charges made through the
CARD within the payment period as stated in the SOA or
within thirty (30) days from actual date or dates of purchase
whichever occur earlier, shall render him in default without
the necessity of demand from BCC, which the Cardholder
expressly waives. The charges or balance thereof remaining
unpaid after the payment due date indicated on the monthly
Statement of Accounts shall bear interest at the rate of 3%
per month for BPI Express Credit, BPI Gold Mastercard and an
additional penalty fee equivalent to another 3% of the amount
due for every month or a fraction of a months delay.
PROVIDED that if there occurs any change on the prevailing
market rates, BCC shall have the option to adjust the rate of
interest and/or penalty fee due on the outstanding obligation
with prior notice to the cardholder. The Cardholder hereby
authorizes BCC to correspondingly increase the rate of such
interest [in] the event of changes in the prevailing market
rates, and to charge additional service fees as may be
deemed necessary in order to maintain its service to the
Cardholder. A CARD with outstanding balance unpaid after
thirty (30) days from original billing statement date shall
automatically be suspended, and those with accounts unpaid
after ninety (90) days from said original billing/statement date
shall automatically be cancel (sic), without prejudice to BCCs
right to suspend or cancel any card anytime and for whatever
reason. In case of default in his obligation as provided herein,
Cardholder shall surrender his/her card to BCC and in addition
to the interest and penalty charges aforementioned , pay the
following liquidated damages and/or fees (a) a collection fee
of 25% of the amount due if the account is referred to a
collection agency or attorney; (b) service fee for every
dishonored check issued by the cardholder in payment of his
account without prejudice, however, to BCCs right of
considering Cardholders account, and (c) a final fee
equivalent to 25% of the unpaid balance, exclusive of
litigation expenses and judicial cost, if the payment of the
account is enforced though court action. Venue of all civil suits
to enforce this Agreement or any other suit directly or
indirectly arising from the relationship between the parties as
established herein, whether arising from crimes, negligence or
breach thereof, shall be in the process of courts of the City of
Makati or in other courts at the option of BCC. 4 (Emphasis
supplied.)1avvphi1

141,518.34

Under the Terms and Conditions Governing the Issuance and


Use of the BPI Credit and BPI Mastercard, the charges or
balance thereof remaining unpaid after the payment due date
indicated on the monthly Statement of Accounts shall bear
interest at the rate of 3% per month and an additional penalty
fee equivalent to another 3% per month. Particularly:
8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a
monthly Statement of Account (SOA) and the Cardholder
agrees that all charges made through the use of the CARD
shall be paid by the Cardholder as stated in the SOA on or
before the last day for payment, which is twenty (20) days
from the date of the said SOA, and such payment due date
may be changed to an earlier date if the Cardholders account
is considered overdue and/or with balances in excess of the
approved credit limit, or to such other date as may be
deemed proper by the CARD issuer with notice to the
Cardholder on the same monthly SOA. If the last day fall on a
Saturday, Sunday or a holiday, the last day for the payment
automatically becomes the last working day prior to said
payment date. However, notwithstanding the absence or lack
of proof of service of the SOA of the Cardholder, the latter
shall pay any and all charges made through the use of the

In its Decision dated August 2, 2004, the MeTC ruled in favor


of respondent BPI and ordered petitioner Macalinao and her
husband to pay the amount of PhP 141,518.34 plus interest
and penalty charges of 2% per month, to wit:
WHEREFORE, finding merit in the allegations of the complaint
supported by documentary evidence, judgment is hereby
rendered in favor of the plaintiff, Bank of the Philippine Islands
and against defendant-spouses Ileana DR Macalinao and
Danilo SJ Macalinao by ordering the latter to pay the former
jointly and severally the following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE
THOUSAND FIVE HUNDRED EIGHTEEN AND 34/100
(P141,518.34) plus interest and penalty charges of
2% per month from January 05, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of suit.
SO ORDERED.11
Only petitioner Macalinao and her husband appealed to the
Regional Trial Court (RTC) of Makati City, their recourse
docketed as Civil Case No. 04-1153. In its Decision dated
October 14, 2004, the RTC affirmed in toto the decision of the
MeTC and held:

In any event, the sum of P141,518.34 adjudged by the trial


court appeared to be the result of a recomputation at the
reduced rate of 2% per month. Note that the total amount
sought by the plaintiff-appellee was P154,608.75 exclusive of
finance charge of 3.25% per month and late payment charge
of 6% per month.

reasonable as the same are based on the Terms and


Conditions Governing the Issuance and Use of the BPI Credit
Card.16

WHEREFORE, the appealed decision is hereby affirmed in toto.

Indeed, in the Terms and Conditions Governing the Issuance


and Use of the BPI Credit Card, there was a stipulation on the
3% interest rate. Nevertheless, it should be noted that this is
not the first time that this Court has considered the interest
rate of 36% per annum as excessive and unconscionable. We
held in Chua vs. Timan:17

No pronouncement as to costs.
SO ORDERED.12
Unconvinced, petitioner Macalinao filed a petition for review
with the CA, which was docketed as CA-G.R. SP No. 92031.
The CA affirmed with modification the Decision of the RTC:
WHEREFORE, the appealed decision is AFFIRMED but
MODIFIED with respect to the total amount due and interest
rate. Accordingly, petitioners are jointly and severally ordered
to pay respondent Bank of the Philippine Islands the following:
1. The amount of One Hundred Twenty Six Thousand
Seven Hundred Six Pesos and Seventy Centavos plus
interest and penalty charges of 3% per month from
January 5, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of Suit.
SO ORDERED.13
Although sued jointly with her husband, petitioner Macalinao
was the only one who filed the petition before the CA since
her husband already passed away on October 18, 2005.14
In its assailed decision, the CA held that the amount of PhP
141,518.34 (the amount sought to be satisfied in the demand
letter of respondent BPI) is clearly not the result of the recomputation at the reduced interest rate as previous higher
interest rates were already incorporated in the said amount.
Thus, the said amount should not be made as basis in
computing the total obligation of petitioner Macalinao.
Further, the CA also emphasized that respondent BPI should
not compound the interest in the instant case absent a
stipulation to that effect. The CA also held, however, that the
MeTC erred in modifying the amount of interest rate from 3%
monthly to only 2% considering that petitioner Macalinao
freely availed herself of the credit card facility offered by
respondent BPI to the general public. It explained that
contracts of adhesion are not invalid per se and are not
entirely prohibited.
Petitioner Macalinaos motion for reconsideration was denied
by the CA in its Resolution dated November 21, 2006. Hence,
petitioner Macalinao is now before this Court with the
following assigned errors:
I.
THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%,
SHOULD BE UPHELD SINCE THE STIPULATED RATE OF
INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND
THUS ILLEGAL.
II.
THE COURT OF APPEALS ARBITRARILY MODIFIED THE
REDUCED RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO
THE TENOR OF ITS OWN DECISION.
III.
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A
RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR
FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT
AMOUNT OF PETITIONERS OBLIGATION, OR IN THE
ALTERNATIVE, REMANDED THE CASE TO THE LOWER COURT
FOR RESPONDENT BPI TO PRESENT PROOF OF THE CORRECT
AMOUNT THEREOF.
Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month
or 36% Per Annum Should Be Reduced to 2% Per Month
or 24% Per Annum
In its Complaint, respondent BPI originally imposed the
interest and penalty charges at the rate of 9.25% per month
or 111% per annum. This was declared as unconscionable by
the lower courts for being clearly excessive, and was thus
reduced to 2% per month or 24% per annum. On appeal, the
CA modified the rate of interest and penalty charge and
increased them to 3% per month or 36% per annum based on
the Terms and Conditions Governing the Issuance and Use of
the BPI Credit Card, which governs the transaction between
petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest rate
and penalty charge of 3% per month imposed by the CA is
iniquitous as the same translates to 36% per annum or thrice
the legal rate of interest.15 On the other hand, respondent BPI
asserts that said interest rate and penalty charge are

We find for petitioner. We are of the opinion that the interest


rate and penalty charge of 3% per month should be equitably
reduced to 2% per month or 24% per annum.

The stipulated interest rates of 7% and 5% per month


imposed on respondents loans must be equitably reduced to
1% per month or 12% per annum. We need not unsettle the
principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not
against the law. While C.B. Circular No. 905-82, which took
effect on January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could
possibly be read as granting carte blanche authority to
lenders to raise interest rates to levels which would either
enslave their borrowers or lead to a hemorrhaging of their
assets. (Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if
there was no express contract thereon. Hence, courts may
reduce the interest rate as reason and equity demand.18
The same is true with respect to the penalty charge. Notably,
under the Terms and Conditions Governing the Issuance and
Use of the BPI Credit Card, it was also stated therein that
respondent BPI shall impose an additional penalty charge of
3% per month. Pertinently, Article 1229 of the Civil Code
states:
Art. 1229. The judge shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of
each case since what may be iniquitous and unconscionable
in one may be totally just and equitable in another. 19
In the instant case, the records would reveal that petitioner
Macalinao made partial payments to respondent BPI, as
indicated in her Billing Statements.20 Further, the stipulated
penalty charge of 3% per month or 36% per annum, in
addition to regular interests, is indeed iniquitous and
unconscionable.
Thus, under the circumstances, the Court finds it equitable to
reduce the interest rate pegged by the CA at 1.5% monthly to
1% monthly and penalty charge fixed by the CA at 1.5%
monthly to 1% monthly or a total of 2% per month or 24% per
annum in line with the prevailing jurisprudence and in
accordance with Art. 1229 of the Civil Code.
There Is No Basis for the Dismissal of the Case,
Much Less a Remand of the Same for Further Reception
of Evidence
Petitioner Macalinao claims that the basis of the recomputation of the CA, that is, the amount of PhP 94,843.70
stated on the October 27, 2002 Statement of Account, was
not the amount of the principal obligation. Thus, this allegedly
necessitates a re-examination of the evidence presented by
the parties. For this reason, petitioner Macalinao further
contends that the dismissal of the case or its remand to the
lower court would be a more appropriate disposition of the
case.
Such contention is untenable. Based on the records, the
summons and a copy of the complaint were served upon
petitioner Macalinao and her husband on May 4, 2004.
Nevertheless, they failed to file their Answer despite such
service. Thus, respondent BPI moved that judgment be
rendered accordingly.21 Consequently, a decision was rendered
by the MeTC on the basis of the evidence submitted by
respondent BPI. This is in consonance with Sec. 6 of the
Revised Rule on Summary Procedure, which states:
Sec. 6. Effect of failure to answer. Should the defendant fail
to answer the complaint within the period above provided, the
court, motu proprio, or on motion of the plaintiff, shall render
judgment as may be warranted by the facts alleged in the
complaint and limited to what is prayed for therein: Provided,
however, that the court may in its discretion reduce the
amount of damages and attorneys fees claimed for being
excessive or otherwise unconscionable. This is without
prejudice to the applicability of Section 3(c), Rule 10 of the

Rules of Court, if there are two or more defendants. (As


amended by the 1997 Rules of Civil Procedure; emphasis
supplied.)
Considering the foregoing rule, respondent BPI should not be
made to suffer for petitioner Macalinaos failure to file an
answer and concomitantly, to allow the latter to submit
additional evidence by dismissing or remanding the case for
further reception of evidence. Significantly, petitioner
Macalinao herself admitted the existence of her obligation to
respondent BPI, albeit with reservation as to the principal
amount. Thus, a dismissal of the case would cause great
injustice to respondent BPI. Similarly, a remand of the case for
further reception of evidence would unduly prolong the
proceedings of the instant case and render inutile the
proceedings conducted before the lower courts.
Significantly, the CA correctly used the beginning balance of
PhP 94,843.70 as basis for the re-computation of the interest
considering that this was the first amount which appeared on
the Statement of Account of petitioner Macalinao. There is no
other amount on which the re-computation could be based, as
can be gathered from the evidence on record. Furthermore,
barring a showing that the factual findings complained of are
totally devoid of support in the record or that they are so
glaringly erroneous as to constitute serious abuse of
discretion, such findings must stand, for this Court is not
expected or required to examine or contrast the evidence
submitted by the parties.22
In view of the ruling that only 1% monthly interest and 1%
penalty charge can be applied to the beginning balance of PhP
94,843.70, this Court finds the following computation more
appropriate:

Stat
eme
nt
Date

Prev
ious
Bala
nce

10/2
7/20
02

94,8
43.7
0

11/2
7/20
02

94,8
43.7
0

12/3
1/20
02

79,8
43.7
0

1/27
/200
3

Purc
hase
s
(Pay
men
ts)

Bala
nce

Inte
rest
(1%
)

Pen
alty
Cha
rge
(1%
)

Total
Amo
unt
Due
for
the
Mon
th

94,8
43.7
0

948
.44

948
.44

96,7
40.5
8

(15,
000)

79,8
43.7
0

798
.44

798
.44

81,4
40.5
8

30,3
08.8
0

110,
152.
50

1,1
01.
53

1,1
01.
53

112,
355.
56

110,
152.
50

110,
152.
50

1,1
01.
53

1,1
01.
53

112,
355.
56

2/27
/200
3

110,
152.
50

110,
152.
50

1,1
01.
53

1,1
01.
53

112,
355.
56

3/27
/200
3

110,
152.
50

4/27
/200
3

92,1
52.5
0

5/27
/200
3

92,1
52.5
0

6/29
/200
3

82,1
52.5
0

7/27
/200
3
8/27

(18,
000.
00)

92,1
52.5
0

921
.53

921
.53

93,9
95.5
6

92,1
52.5
0

921
.53

921
.53

93,9
95.5
6

(10,
000.
00)

82,1
52.5
0

821
.53

821
.53

83,7
95.5
6

8,36
2.50
(7,0
00.0
0)

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

83,5
15.0
0

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

83,5

83,5

835

835

85,1

/200
3

15.0
0

15.0
0

.15

.15

85.3
0

9/28
/200
3

83,5
15.0
0

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

10/2
8/20
03

83,5
15.0
0

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

11/2
8/20
03

83,5
15.0
0

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

12/2
8/20
03

83,5
15.0
0

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

1/27
/200
4

83,5
15.0
0

83,5
15.0
0

835
.15

835
.15

85,1
85.3
0

83,5
15.0
0

14,
397
.26

14,
397
.26

112,
309.
52

TOT
AL

WHEREFORE, the petition is PARTLY GRANTED. The CA


Decision dated June 30, 2006 in CA-G.R. SP No. 92031 is
hereby MODIFIED with respect to the total amount due,
interest rate, and penalty charge. Accordingly, petitioner
Macalinao is ordered to pay respondent BPI the following:
(1) The amount of one hundred twelve thousand
three hundred nine pesos and fifty-two centavos (PhP
112,309.52) plus interest and penalty charges of 2%
per month from January 5, 2004 until fully paid;
(2) PhP 10,000 as and by way of attorneys fees; and
(3) Cost of suit.
SO ORDERED.
G.R. No. 153201

January 26, 2005

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON


MENCHAVEZ, RODOLFO MENCHAVEZ, CESAR
MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA
MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA, FE
M. POTOT, THELMA M. REROMA, MYRNA M. YBAEZ,
and SARAH M. VILLABER, petitioners,
vs.
FLORENTINO TEVES JR., respondent.
DECISION
PANGANIBAN, J.:
Avoid contract is deemed legally nonexistent. It produces no
legal effect. As a general rule, courts leave parties to such a
contract as they are, because they are in pari delicto or
equally at fault. Neither party is entitled to legal protection.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules
of Court, assailing the February 28, 2001 Decision 2and the
April 16, 2002 Resolution3 of the Court of Appeals (CA) in CAGR CV No. 51144. The challenged Decision disposed as
follows:
"WHEREFORE, the assailed decision is hereby MODIFIED, as
follows:
"1. Ordering [petitioners] to jointly and severally pay the
[respondent] the amount of P128,074.40 as actual
damages, and P50,000.00 as liquidated damages;
"2. Dismissing the third party complaint against the third
party defendants;

"3. Upholding the counterclaims of the third party


defendants against the [petitioners. Petitioners] are hereby
required to pay [the] third party defendants the sum
of P30,000.00 as moral damages for the clearly unfounded
suit;
"4. Requiring the [petitioners] to reimburse the third party
defendants the sum of P10,000.00 in the concept of
attorneys fees and appearance fees of P300.00 per
appearance;
"5. Requiring the [petitioners] to reimburse the third party
defendants the sum of P10,000.00 as exemplary damages
pro bono publico and litigation expenses including costs, in
the sum of P5,000.00."4
The assailed Resolution denied petitioners Motion for
Reconsideration.

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and


Arturo Cabigon demolished the fishpond dikes constructed by
respondent and delivered possession of the subject property
to other parties.6 As a result, he filed a Complaint for damages
with application for preliminary attachment against
petitioners. In his Complaint, he alleged that the lessors had
violated their Contract of Lease, specifically the peaceful and
adequate enjoyment of the property for the entire duration of
the Contract. He claimed P157,184.40 as consequential
damages for the demolition of the fishpond
dikes, P395,390.00 as unearned income, and an amount not
less than P100,000.00 for rentals paid.7
Respondent further asserted that the lessors had withheld
from him the findings of the trial court in Civil Case No. 510-T,
entitled "Eufracia Colongan and Paulino Pamplona v. Juan
Menchavez Sr. and Sevillana S. Menchavez." In that case
involving the same property, subject of the lease, the
Menchavez spouses were ordered to remove the dikes illegally
constructed and to pay damages and attorneys fees.8

The Facts
On February 28, 1986, a "Contract of Lease" was executed by
Jose S. Menchavez, Juan S. Menchavez Sr., Juan S. Menchavez
Jr., Rodolfo Menchavez, Simeon Menchavez, Reynaldo
Menchavez, Cesar Menchavez, Charito M. Maga, Fe M. Potot,
Thelma R. Reroma, Myrna Ybaez, Sonia S. Menchavez, Sarah
Villaver, Alma S. Menchavez, and Elma S. Menchavez, as
lessors; and Florentino Teves Jr. as lessee.l^vvphi1.net The
pertinent portions of the Contract are herein reproduced as
follows:
"WHEREAS, the LESSORS are the absolute and lawful coowners of that area covered by FISHPOND APPLICATION No.
VI-1076 of Juan Menchavez, Sr., filed on September 20, 1972,
at Fisheries Regional Office No. VII, Cebu City covering an area
of 10.0 hectares more or less located at Tabuelan, Cebu;
xxxxxxxxx
"NOW, THEREFORE, for and in consideration of the mutual
covenant and stipulations hereinafter set forth, the LESSORS
and the LESSEE have agreed and hereby agree as follows:
"1. The TERM of this LEASE is FIVE (5) YEARS, from and after
the execution of this Contract of Lease, renewable at the
OPTION of the LESSORS;
"2. The LESSEE agrees to pay the LESSORS at the residence
of JUAN MENCHAVEZ SR., one of the LESSORS herein, the
sum of FORTY THOUSAND PESOS (P40,000.00) Philippine
Currency, annually x x x;
"3. The LESSORS hereby warrant that the above-described
parcel of land is fit and good for the intended use as
FISHPOND;
"4. The LESSORS hereby warrant and assure to maintain the
LESSEE in the peaceful and adequate enjoyment of the
lease for the entire duration of the contract;

Petitioners filed a Third Party Complaint against Benny and


Elizabeth Allego, Albino Laput, Adrinico Che and Charlemagne
Arendain Jr., as agents of Eufracia Colongan and Paulino
Pamplona. The third-party defendants maintained that the
Complaint filed against them was unfounded. As agents of
their elderly parents, they could not be sued in their personal
capacity. Thus, they asserted their own counterclaims. 9
After trial on the merits, the RTC ruled thus:
"[The court must resolve the issues one by one.] As to the
question of whether the contract of lease between Teves and
the [petitioners] is valid, we must look into the present law on
the matter of fishponds. And this is Pres. Decree No. 704
which provides in Sec. 24:
Lease of fishponds-Public lands available for fishpond
development including those earmarked for family-size
fishponds and not yet leased prior to November 9, 1972 shall
be leased only to qualified persons, associations, cooperatives
or corporations, subject to the following conditions.
1. The lease shall be for a period of twenty five years (25),
renewable for another twenty five years;
2. Fifty percent of the area leased shall be developed and
be producing in commercial scale within three years and
the remaining portion shall be developed and be producing
in commercial scale within five years; both periods begin
from the execution of the lease contract;
3. All areas not fully developed within five years from the
date of the execution of the lease contract shall
automatically revert to the public domain for disposition of
the bureau; provided that a lessee who failed to develop the
area or any portion thereof shall not be permitted to reapply
for said area or any portion thereof or any public land under
this decree; and/or any portion thereof or any public land
under this decree;
4. No portion of the leased area shall be subleased.

"5. The LESSORS hereby further warrant that the LESSEE


can and shall enjoy the intended use of the leased premises
as FISHPOND FOR THE ENTIRE DURATION OF THE
CONTRACT;

The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution)


states:

"6. The LESSORS hereby warrant that the above-premises is


free from all liens and encumbrances, and shall protect the
LESSEE of his right of lease over the said premises from any
and all claims whatsoever;

Sec. 2 - All lands of the public domain, waters, minerals, coal,


petroleum and other mineral oils, all forces of potential
energy, fisheries, forests, or timber, wild life, flora and fauna
and other natural resources are owned by the state.

"7. Any violation of the terms and conditions herein


provided, more particularly the warranties abovementioned, the parties of this Contract responsible thereof
shall pay liquidated damages in the amount of not less
than P50,000.00 to the offended party of this Contract; in
case the LESSORS violated therefor, they bound themselves
jointly and severally liable to the LESSEE;"

Sec. 3 - Lands of the public domain are classified into


agricultural, forest or timber, mineral lands and national
parks. Agricultural lands of the public domain may be further
classified by law according to the uses to which they may be
devoted. Alienable lands of the public domain shall be limited
to agricultural lands x x x.

x x x x x x x x x.5

"As a consequence of these provisions, and the declared


public policy of the State under the Regalian Doctrine, the

lease contract between Florentino Teves, Jr. and Juan


Menchavez Sr. and his family is a patent nullity. Being a patent
nullity, [petitioners] could not give any rights to Florentino
Teves, Jr. under the principle: NEMO DAT QUOD NON HABET meaning ONE CANNOT GIVE WHAT HE DOES NOT HAVE,
considering that this property in litigation belongs to the State
and not to [petitioners]. Therefore, the first issue is resolved in
the negative, as the court declares the contract of lease as
invalid and void ab-initio.
"On the issue of whether [respondent] and [petitioners] are
guilty of mutual fraud, the court rules that the [respondent]
and [petitioners] are in pari-delicto. As a consequence of this,
the court must leave them where they are found. x x x.
xxxxxxxxx
"x x x. Why? Because the defendants ought to have known
that they cannot lease what does not belong to them for as a
matter of fact, they themselves are still applying for a lease of
the same property under litigation from the government.
"On the other hand, Florentino Teves, being fully aware that
[petitioners were] not yet the owner[s], had assumed the risks
and under the principle of VOLENTI NON FIT INJURIA NEQUES
DOLUS - He who voluntarily assumes a risk, does not suffer
damage[s] thereby. As a consequence, when Teves leased the
fishpond area from [petitioners]- who were mere holders or
possessors thereof, he took the risk that it may turn out later
that his application for lease may not be approved.
"Unfortunately however, even granting that the lease of
[petitioners] and [their] application in 1972 were to be
approved, still [they] could not sublease the same. In view
therefore of these, the parties must be left in the same
situation in which the court finds them, under the principle IN
PARI DELICTO NON ORITOR ACTIO, meaning[:] Where both are
at fault, no one can found a claim.
"On the third issue of whether the third party defendants are
liable for demolishing the dikes pursuant to a writ of execution
issued by the lower court[, t]his must be resolved in the
negative, that the third party defendants are not
liable.l^vvphi1.net First, because the third party defendants
are mere agents of Eufracia Colongan and Eufenio Pamplona,
who are the ones who should be made liable if at all, and
considering that the demolition was pursuant to an order of
the court to restore the prevailing party in that Civil Case 510T, entitled: Eufracia Colongan v. Menchavez.
"After the court has ruled that the contract of lease is null and
void ab-initio, there is no right of the [respondent] to protect
and therefore[,] there is no basis for questioning the Sheriffs
authority to demolish the dikes in order to restore the
prevailing party, under the principle VIDETUR NEMO
QUISQUAM ID CAPERE QUOD EI NECESSE EST ALII
RESTITUERE - He will not be considered as using force who
exercise his rights and proceeds by the force of law.

"5. Requiring the [petitioners] to pay to the third


party defendants the sum of P10,000.00 as
exemplary damages probono publico and litigation
expenses including costs, in the sum
of P5,000.00."10(Underscoring in the original)
Respondent elevated the case to the Court of Appeals, where
it was docketed as CA-GR CV No. 51144.
Ruling of the Court of Appeals
The CA disagreed with the RTCs finding that petitioners and
respondent were in pari delicto. It contended that while there
was negligence on the part of respondent for failing to verify
the ownership of the subject property, there was no evidence
that he had knowledge of petitioners lack of ownership. 11 It
held as follows:
"x x x. Contrary to the findings of the lower court, it was not
duly proven and established that Teves had actual knowledge
of the fact that [petitioners] merely usurped the property they
leased to him. What Teves admitted was that he did not ask
for any additional document other than those shown to him,
one of which was the fishpond application. In fact, [Teves]
consistently claimed that he did not bother to ask the latter
for their title to the property because he relied on their
representation that they are the lawful owners of the fishpond
they are holding for lease. (TSN, July 11, 1991, pp. 811)"121awphi1.nt
The CA ruled that respondent could recover actual damages in
the amount of P128,074.40. Citing Article 135613of the Civil
Code, it further awarded liquidated damages in the amount
of P50,000, notwithstanding the nullity of the Contract. 14
Hence, this Petition.15
The Issues
Petitioners raise the following issues for our consideration:
"1. The Court of Appeals disregarded the evidence, the law
and jurisprudence when it modified the trial courts decision
when it ruled in effect that the trial court erred in holding
that the respondent and petitioners are in pari delicto, and
the courts must leave them where they are found;
"2. The Court of Appeals disregarded the evidence, the law
and jurisprudence in modifying the decision of the trial
court and ruled in effect that the Regional Trial Court erred
in dismissing the respondents Complaint." 16
The Courts Ruling
The Petition has merit.
Main Issue:

"WHEREFORE, in view of all foregoing [evidence] and


considerations, this court hereby renders judgment as follows:
"1. Dismissing the x x x complaint by the
[respondent] against the [petitioners];
"2. Dismissing the third party complaint against the
third party defendants;
"3. Upholding the counterclaims of the third party
defendants against the [petitioners. The petitioners]
are hereby required to pay third party defendants the
sum of P30,000.00 as moral damages for this clearly
unfounded suit;
"4. Requiring the [petitioners] to reimburse the third
party defendants the sum of P10,000.00 in the
concept of attorneys fees and appearance fees
of P300.00 per appearance;

Were the Parties in Pari Delicto?


The Court shall discuss the two issues simultaneously.
In Pari Delicto Rule on Void Contracts
The parties do not dispute the finding of the trial and the
appellate courts that the Contract of Lease was void. 17Indeed,
the RTC correctly held that it was the State, not petitioners,
that owned the fishpond. The 1987 Constitution specifically
declares that all lands of the public domain,
waters, fisheries and other natural resources belong to the
State.18 Included here are fishponds, which may not be
alienated but only leased.19 Possession thereof, no matter how
long, cannot ripen into ownership.20
Being merely applicants for the lease of the fishponds,
petitioners had no transferable right over them. And even if
the State were to grant their application, the law expressly
disallowed sublease of the fishponds to respondent. 21Void are

all contracts in which the cause, object or purpose is contrary


to law, public order or public policy.22

reasonably expected of the counsel herein to advise his client


regarding the matter of ownership.

A void contract is equivalent to nothing; it produces no civil


effect.23 It does not create, modify or extinguish a juridical
relation.24 Parties to a void agreement cannot expect the aid
of the law; the courts leave them as they are, because they
are deemed in pari delicto or "in equal fault."25 To this rule,
however, there are exceptions that permit the return of that
which may have been given under a void contract.26 One of
the exceptions is found in Article 1412 of the Civil Code, which
states:

Indeed, the evidence presented by respondent demonstrates


the contradictory claims of petitioners regarding their alleged
ownership of the fishpond. On the one hand, they claimed
ownership and, on the other, they assured him that their
fishpond lease application would be approved.37 This
circumstance should have been sufficient to place him on
notice. It should have compelled him to determine their right
over the fishpond, including their right to lease it.

"Art. 1412. If the act in which the unlawful or forbidden cause


consists does not constitute a criminal offense, the following
rules shall be observed:
"(1) When the fault is on the part of both contracting
parties, neither may recover what he has given by
virtue of the contract, or demand the performance of
the others undertaking;
"(2) When only one of the contracting parties is at
fault, he cannot recover what he has given by reason
of the contract, or ask for the fulfillment of what has
been promised him. The other, who is not at fault,
may demand the return of what he has given without
any obligation to comply with his promise."
On this premise, respondent contends that he can recover
from petitioners, because he is an innocent party to the
Contract of Lease.27 Petitioners allegedly induced him to enter
into it through serious misrepresentation.28
Finding of In Pari Delicto:
A Question of Fact
The issue of whether respondent was at fault or whether the
parties were in pari delicto is a question of fact not normally
taken up in a petition for review on certiorari under Rule 45 of
the Rules of Court.29 The present case, however, falls under
two recognized exceptions to this rule.30 This Court is
compelled to review the facts, since the CAs factual findings
are (1) contrary to those of the trial court;31 and (2) premised
on an absence of evidence, a presumption that is contradicted
by the evidence on record.32
Unquestionably, petitioners leased out a property that did not
belong to them, one that they had no authority to sublease.
The trial court correctly observed that petitioners still had a
pending lease application with the State at the time they
entered into the Contract with respondent.33
Respondent, on the other hand, claims that petitioners misled
him into executing the Contract.34 He insists that he relied on
their assertions regarding their ownership of the property. His
own evidence, however, rebuts his contention that he did not
know that they lacked ownership. At the very least, he had
notice of their doubtful ownership of the fishpond.
Respondent himself admitted that he was aware that the
petitioners lease application for the fishpond had not yet
been approved.35 Thus, he knowingly entered into the
Contract with the risk that the application might be
disapproved. Noteworthy is the fact that the existence of a
fishpond lease application necessarily contradicts a claim of
ownership. That respondent did not know of petitioners lack
of ownership is therefore incredible.
The evidence of respondent himself shows that he negotiated
the lease of the fishpond with both Juan Menchavez Sr. and
Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge
Esparagoza.36 His counsels presence during the negotiations,
prior to the parties meeting of minds, further debunks his
claim of lack of knowledge. Lawyers are expected to know
that fishponds belong to the State and are inalienable. It was

The Contract itself stated that the area was still covered by a
fishpond application.38 Nonetheless, although petitioners
declared in the Contract that they co-owned the property,
their erroneous declaration should not be used against them.
A cursory examination of the Contract suggests that it was
drafted to favor the lessee. It can readily be presumed that it
was he or his counsel who prepared it -- a matter supported
by petitioners evidence.39 The ambiguity should therefore be
resolved against him, being the one who primarily caused it.40
The CA erred in finding that petitioners had failed to prove
actual knowledge of respondent of the ownership status of the
property that had been leased to him. On the contrary, as the
party alleging the fact, it was he who had the burden of
proving through a preponderance of evidence 41 -- that they
misled him regarding the ownership of the fishpond. His
evidence fails to support this contention. Instead, it reveals
his fault in entering into a void Contract. As both parties are
equally at fault, neither may recover against the other. 42
Liquidated Damages Not Proper
The CA erred in awarding liquidated damages,
notwithstanding its finding that the Contract of Lease was
void. Even if it was assumed that respondent was entitled to
reimbursement as provided under paragraph 1 of Article 1412
of the Civil Code, the award of liquidated damages was
contrary to established legal principles.1a\^/phi1.net
Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of a breach thereof. 43Liquidated
damages are identical to penalty insofar as legal results are
concerned.44 Intended to ensure the performance of the
principal obligation, such damages are accessory and
subsidiary obligations.45 In the present case, it was stipulated
that the party responsible for the violation of the terms,
conditions and warranties of the Contract would pay not less
than P50,000 as liquidated damages. Since the principal
obligation was void, there was no contract that could have
been breached by petitioners; thus, the stipulation on
liquidated damages was inexistent. The nullity of the principal
obligation carried with it the nullity of the accessory obligation
of liquidated damages.46
As explained earlier, the applicable law in the present factual
milieu is Article 1412 of the Civil Code. This law merely allows
innocent parties to recover what they have given without any
obligation to comply with their prestation. No damages may
be recovered on the basis of a void contract; being
nonexistent, the agreement produces no juridical tie between
the parties involved. Since there is no contract, the injured
party may only recover through other sources of obligations
such as a law or a quasi-contract.47 A party recovering through
these other sources of obligations may not claim liquidated
damages, which is an obligation arising from a contract.
WHEREFORE, the Petition is GRANTED and the assailed
Decision and Resolution SET ASIDE. The Decision of the trial
court is hereby REINSTATED.
No pronouncement as to costs.
SO ORDERED.