A.

OBLIGATIONS ARISING FROM LAW
ARTURO PELAYO, plaintiff-appellant, vs.
MARCELO LAURON, ET AL., defendants-appellees.
G.R. No. L-4089 January 12, 1909
J.H. Junquera, for appellant.
Filemon Sotto, for appellee.
TORRES, J.:
As a result of the evidence adduced by both parties, judgment was entered by the
court below on the 5th of April, 1907, whereby the defendants were absolved from
the former complaint, on account of the lack of sufficient evidence to establish a right
of action against the defendants, with costs against the plaintiff, who excepted to the
said judgment and in addition moved for a new trial on the ground that the judgment
was contrary to law; the motion was overruled and the plaintiff excepted and in due
course presented the corresponding bill of exceptions. The motion of the defendants
requesting that the declaration contained in the judgment that the defendants had
demanded therefrom, for the reason that, according to the evidence, no such request
had been made, was also denied, and to the decision the defendants excepted.

On the 23rd of November, 1906, Arturo Pelayo, a physician residing in Cebu, filed a
complaint against Marcelo Lauron and Juana Abella setting forth that on or about the
13th of October of said year, at night, the plaintiff was called to the house of the
defendants, situated in San Nicolas, and that upon arrival he was requested by them
to render medical assistance to their daughter-in-law who was about to give birth to
a child; that therefore, and after consultation with the attending physician, Dr.
Escaño, it was found necessary, on account of the difficult birth, to remove the fetus
by means of forceps which operation was performed by the plaintiff, who also had to
remove the afterbirth, in which services he was occupied until the following morning,
and that afterwards, on the same day, he visited the patient several times; that the
just and equitable value of the services rendered by him was P500, which the
defendants refuse to pay without alleging any good reason therefor; that for said
reason he prayed that the judgment be entered in his favor as against the
defendants, or any of them, for the sum of P500 and costs, together with any other
relief that might be deemed proper.
Assuming that it is a real fact of knowledge by the defendants that the plaintiff, by
virtue of having been sent for by the former, attended a physician and rendered
professional services to a daughter-in-law of the said defendants during a difficult
and laborious childbirth, in order to decide the claim of the said physician regarding
the recovery of his fees, it becomes necessary to decide who is bound to pay the bill,
whether the father and mother-in-law of the patient, or the husband of the latter.
According to article 1089 of the Civil Code, obligations are created by law, by
contracts, by quasi-contracts, and by illicit acts and omissions or by those in which
any kind of fault or negligence occurs.
Obligations arising from law are not presumed. Those expressly determined in the
code or in special laws, etc., are the only demandable ones. Obligations arising from
contracts have legal force between the contracting parties and must be fulfilled in
accordance with their stipulations. (Arts. 1090 and 1091.)

In answer to the complaint counsel for the defendants denied all of the allegation
therein contained and alleged as a special defense, that their daughter-in-law had
died in consequence of the said childbirth, and that when she was alive she lived with
her husband independently and in a separate house without any relation whatever
with them, and that, if on the day when she gave birth she was in the house of the
defendants, her stay their was accidental and due to fortuitous circumstances;
therefore, he prayed that the defendants be absolved of the complaint with costs
against the plaintiff.
The plaintiff demurred to the above answer, and the court below sustained the
demurrer, directing the defendants, on the 23rd of January, 1907, to amend their
answer. In compliance with this order the defendants presented, on the same date,
their amended answer, denying each and every one of the allegations contained in
the complaint, and requesting that the same be dismissed with costs.
1
The rendering of medical assistance in case of illness is comprised among the mutual
obligations to which the spouses are bound by way of mutual support. (Arts. 142 and
143.)
If every obligation consists in giving, doing or not doing something (art. 1088), and
spouses are mutually bound to support each other, there can be no question but
that, when either of them by reason of illness should be in need of medical
assistance, the other is under the unavoidable obligation to furnish the necessary
services of a physician in order that health may be restored, and he or she may be
freed from the sickness by which life is jeopardized; the party bound to furnish such
support is therefore liable for all expenses, including the fees of the medical expert
for his professional services. This liability originates from the above-cited mutual
obligation which the law has expressly established between the married couple.
 In the face of the above legal precepts it is unquestionable that the person bound to Therefore, in view of the consideration hereinbefore set forth, it is our opinion that
pay the fees due to the plaintiff for the professional services that he rendered to the the judgment appealed from should be affirmed with the costs against the appellant.
daughter-in-law of the defendants during her childbirth, is the husband of the patient So ordered.
and not her father and mother- in-law, the defendants herein. The fact that it was not
the husband who called the plaintiff and requested his assistance for his wife is no Mapa and Tracey, JJ., concur.
bar to the fulfillment of the said obligation, as the defendants, in view of the Arellano, C.J., and Carson, J., concurs in the result.
imminent danger, to which the life of the patient was at that moment exposed, Willard, J., dissents.
considered that medical assistance was urgently needed, and the obligation of the
husband to furnish his wife in the indispensable services of a physician at such critical
moments is specially established by the law, as has been seen, and compliance
DOMINGO DE LA CRUZ, plaintiff-appellant, vs. NORTHERN THEATRICAL
therewith is unavoidable; therefore, the plaintiff, who believes that he is entitled to
ENTERPRISES INC., ET AL., defendants-appellees.
recover his fees, must direct his action against the husband who is under obligation
G.R. No. L-7089 August 31, 1954
to furnish medical assistance to his lawful wife in such an emergency.
Conrado Rubio for appellant.
From the foregoing it may readily be understood that it was improper to have
Ruiz, Ruiz, Ruiz, Ruiz, and Benjamin Guerrero for appellees.
brought an action against the defendants simply because they were the parties who
called the plaintiff and requested him to assist the patient during her difficult
MONTEMAYOR, J.:
confinement, and also, possibly, because they were her father and mother-in-law and
the sickness occurred in their house. The defendants were not, nor are they now,
The facts in this case based on an agreed statement of facts are simple. In the year
under any obligation by virtue of any legal provision, to pay the fees claimed, nor in
1941 the Northern Theatrical Enterprises Inc., a domestic corporation operated a
consequence of any contract entered into between them and the plaintiff from which
movie house in Laoag, Ilocos Norte, and among the persons employed by it was the
such obligation might have arisen.
plaintiff DOMINGO DE LA CRUZ, hired as a special guard whose duties were to guard
the main entrance of the cine, to maintain peace and order and to report the
In applying the provisions of the Civil Code in an action for support, the supreme
commission of disorders within the premises. As such guard he carried a revolver. In
court of Spain, while recognizing the validity and efficiency of a contract to furnish
the afternoon of July 4, 1941, one Benjamin Martin wanted to crash the gate or
support wherein a person bound himself to support another who was not his relative,
entrance of the movie house. Infuriated by the refusal of plaintiff De la Cruz to let him
established the rule that the law does impose the obligation to pay for the support of
in without first providing himself with a ticket, Martin attacked him with a bolo. De la
a stranger, but as the liability arose out of a contract, the stipulations of the
Cruz defendant himself as best he could until he was cornered, at which moment to
agreement must be held. (Decision of May 11, 1897.)
save himself he shot the gate crasher, resulting in the latter's death.

Within the meaning of the law, the father and mother-in-law are strangers with
respect to the obligation that devolves upon the husband to provide support, among
which is the furnishing of medical assistance to his wife at the time of her
confinement; and, on the other hand, it does not appear that a contract existed
between the defendants and the plaintiff physician, for which reason it is obvious
that the former can not be compelled to pay fees which they are under no liability to
pay because it does not appear that they consented to bind themselves.
The foregoing suffices to demonstrate that the first and second errors assigned to the
judgment below are unfounded, because, if the plaintiff has no right of action against
the defendants, it is needless to declare whether or not the use of forceps is a
surgical operation.
2
For the killing, De la Cruz was charged with homicide in Criminal Case No. 8449 of the
Court of First Instance of Ilocos Norte. After a re-investigation conducted by the
Provincial Fiscal the latter filed a motion to dismiss the complaint, which was granted
by the court in January 1943. On July 8, 1947, De la Cruz was again accused of the
same crime of homicide, in Criminal Case No. 431 of the same Court. After trial, he
was finally acquitted of the charge on January 31, 1948. In both criminal cases De la
Cruz employed a lawyer to defend him. He demanded from his former employer
reimbursement of his expenses but was refused, after which he filed the present
action against the movie corporation and the three members of its board of directors,
to recover not only the amounts he had paid his lawyers but also moral damages said
to have been suffered, due to his worry, his neglect of his interests and his family as
well in the supervision of the cultivation of his land, a total of P15,000. On the basis of
 the complaint and the answer filed by defendants wherein they asked for the
dismissal of the complaint, as well as the agreed statement of facts, the Court of First
Instance of Ilocos Norte after rejecting the theory of the plaintiff that he was an agent
of the defendants and that as such agent he was entitled to reimbursement of the
expenses incurred by him in connection with the agency (Arts. 1709-1729 of the old
Civil Code), found that plaintiff had no cause of action and dismissed the complaint
without costs. De la Cruz appealed directly to this Tribunal for the reason that only
questions of law are involved in the appeal.
We agree with the trial court that the relationship between the movie corporation
and the plaintiff was not that of principal and agent because the principle of
representation was in no way involved. Plaintiff was not employed to represent the
defendant corporation in its dealings with third parties. He was a mere employee
hired to perform a certain specific duty or task, that of acting as special guard and
staying at the main entrance of the movie house to stop gate crashers and to
maintain peace and order within the premises. The question posed by this appeal is
whether an employee or servant who in line of duty and while in the performance of
the task assigned to him, performs an act which eventually results in his incurring in
expenses, caused not directly by his master or employer or his fellow servants or by
reason of his performance of his duty, but rather by a third party or stranger not in
the employ of his employer, may recover said damages against his employer.
The learned trial court in the last paragraph of its decision dismissing the complaint
said that "after studying many laws or provisions of law to find out what law is
applicable to the facts submitted and admitted by the parties, has found none and it
has no other alternative than to dismiss the complaint." The trial court is right. We
confess that we are not aware of any law or judicial authority that is directly
applicable to the present case, and realizing the importance and far-reaching effect of
a ruling on the subject-matter we have searched, though vainly, for judicial
authorities and enlightenment. All the laws and principles of law we have found, as
regards master and servants, or employer and employee, refer to cases of physical
injuries, light or serious, resulting in loss of a member of the body or of any one of the
senses, or permanent physical disability or even death, suffered in line of duty and in
the course of the performance of the duties assigned to the servant or employee, and
these cases are mainly governed by the Employer's Liability Act and the Workmen's
Compensation Act. But a case involving damages caused to an employee by a
stranger or outsider while said employee was in the performance of his duties,
presents a novel question which under present legislation we are neither able nor
prepared to decide in favor of the employee.
In a case like the present or a similar case of say a driver employed by a
transportation company, who while in the course of employment runs over and
3
inflicts physical injuries on or causes the death of a pedestrian; and such driver is later
charged criminally in court, one can imagine that it would be to the interest of the
employer to give legal help to and defend its employee in order to show that the
latter was not guilty of any crime either deliberately or through negligence, because
should the employee be finally held criminally liable and he is found to be insolvent,
the employer would be subsidiarily liable. That is why, we repeat, it is to the interest
of the employer to render legal assistance to its employee. But we are not prepared
to say and to hold that the giving of said legal assistance to its employees is a legal
obligation. While it might yet and possibly be regarded as a normal obligation, it does
not at present count with the sanction of man-made laws.
If the employer is not legally obliged to give, legal assistance to its employee and
provide him with a lawyer, naturally said employee may not recover the amount he
may have paid a lawyer hired by him.
Viewed from another angle it may be said that the damage suffered by the plaintiff
by reason of the expenses incurred by him in remunerating his lawyer, is not caused
by his act of shooting to death the gate crasher but rather by the filing of the charge
of homicide which made it necessary for him to defend himself with the aid of
counsel. Had no criminal charge been filed against him, there would have been no
expenses incurred or damage suffered. So the damage suffered by plaintiff was
caused rather by the improper filing of the criminal charge, possibly at the instance of
the heirs of the deceased gate crasher and by the State through the Fiscal. We say
improper filing, judging by the results of the court proceedings, namely, acquittal. In
other words, the plaintiff was innocent and blameless. If despite his innocence and
despite the absence of any criminal responsibility on his part he was accused of
homicide, then the responsibility for the improper accusation may be laid at the door
of the heirs of the deceased and the State, and so theoretically, they are the parties
that may be held responsible civilly for damages and if this is so, we fail to see now
this responsibility can be transferred to the employer who in no way intervened,
much less initiated the criminal proceedings and whose only connection or relation to
the whole affairs was that he employed plaintiff to perform a special duty or task,
which task or duty was performed lawfully and without negligence.
Still another point of view is that the damages incurred here consisting of the
payment of the lawyer's fee did not flow directly from the performance of his duties
but only indirectly because there was an efficient, intervening cause, namely, the
filing of the criminal charges. In other words, the shooting to death of the deceased
by the plaintiff was not the proximate cause of the damages suffered but may be
regarded as only a remote cause, because from the shooting to the damages suffered
there was not that natural and continuous sequence required to fix civil
responsibility.
 In view of the foregoing, the judgment of the lower court is affirmed. No costs.
Amount (Per
Years Covered
Hectare)
Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion, and Reyes, J.B.L.,
JJ., concur. 1998 – 2002 P1,865.00

2003 – 2006 P2,365.00

2007 – 2011 P2,865.00

OBLIGATION ARISING FROM CONTRACTS
2012 – 2016 P3,365.00

NGEI MULTI-PURPOSE COOPERATIVE INC. AND HERNANCITO 2017 – 2021 P3,865.00

RONQUILLO, Petitioners, vs. FILIPINAS PALMOIL PLANTATION INC. AND DENNIS
VILLAREAL, Respondents. 2022 – 2026 P4,365.00
G.R. No. 184950 October 11, 2012
2027 – 2031 P4,865.00
MENDOZA, J.: 2032 P5,365.00 4

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
the May 9, 2008 Decision 1 of the Court of Appeals (CA) in CA-G.R. SP No. 99552 and
its October 3, 2008 Resolution2 denying the motion for reconsideration thereof.
The Facts
On December 2, 1988, the petitioner NGEI Multi-Purpose Cooperative Inc. (NGEI
Coop), a duly-registered agrarian reform workers’ cooperative, was awarded by the
Department of Agrarian Reform (DAR) 3,996.6940 hectares of agricultural land for
palm oil plantations located in Rosario and San Francisco, Agusan del Sur.
On March 7, 1990, NGEI Coop entered into a lease agreement with respondent
Filipinas Palmoil Plantation, Inc. (FPPI), formerly known as NDC Gutrie Plantation, Inc.,
over the subject property commencing on September 27, 1988 and ending on
December 31, 2007. Under the lease agreement, FPPI (as lessee) shall pay NGEI Coop
(as lessor) a yearly fixed rental of ₱635.00 per hectare plus a variable component
equivalent to 1% of net sales from 1988 to 1996, and ½% from 1997 to 2007.3
On January 29, 1998, the parties executed an Addendum to the Lease Agreement
(Addendum) which provided for the extension of the lease contract for another 25
years from January 1, 2008 to December 2032. The Addendum was signed by Antonio
Dayday, Chairman of the NGEI Coop, and respondent Dennis Villareal (Villareal), the
President of FPPI, and witnessed by DAR Undersecretary Artemio Adasa. The annual
lease rental remained at ₱635.00 per hectare, but the package of economic benefits
for the bona fide members of NGEI Coop was amended and increased, as follows:
4
On June 20, 2002, NGEI Coop and petitioner Hernancito Ronquillo (Ronquillo) filed a
complaint for the Nullification of the Lease Agreement and the Addendum to the
Lease Agreement before the Department of Agrarian Reform Adjudication Board
(DARAB) Regional Adjudicator of San Francisco, Agusan del Sur (Regional
Adjudicator). The case was docketed as DARAB Case No. XIII (03)–176. The petitioners
alleged, among others, that the Addendum was null and void because Antonio
Dayday had no authority to enter into the agreement; that said Addendum was
approved neither by the farm worker-beneficiaries nor by the Presidential Agrarian
Reform Council (PARC) Executive Committee, as required by DAR Administrative
Order (A.O.) No. 5, Series of 1997; that the annual rental and the package of
economic benefits were onerous and unjust to them; and that the lease agreement
and the Addendum unjustly deprived them of their right to till their own land for an
exceedingly long period of time, contrary to the intent of Republic Act (R.A.) No.
6657, as amended by R.A. No. 7905.
In its Decision,5 dated February 3, 2004, the Regional Adjudicator declared the
Addendum as null and void for having been entered into by Antonio Dayday without
the express authority of NGEI Coop, and for having been executed in violation of the
Rules under A.O. No. 5, Series of 1997.
FPPI filed a motion for reconsideration. The Regional Adjudicator, finding merit in the
said motion, reversed his earlier decision in an Order, dated March 22, 2004. He
dismissed the complaint for the nullification of the Addendum on the grounds of
prescription and lack of cause of action. The Regional Adjudicator further opined that
 the Addendum was valid and binding on both the NGEI Coop and FPPI and, the
petitioners having enjoyed the benefits under the Addendum for more than four (4)
years before filing the complaint, were considered to have waived their rights to
assail the agreement.
The petitioners moved for a reconsideration of the said order but the Regional
Adjudicator denied it in the Order dated April 28, 2004.
On appeal, the DARAB Central Office rendered the October 9, 2006 Decision.6 It found
no reversible error on the findings of fact and law by the Regional Adjudicator and
disposed the case as follows:
WHEREFORE, premises considered, the instant Appeal is DENIED for lack of merit and
the assailed Order dated March 22, 2004 is hereby affirmed.
SO ORDERED.7
After their motion for reconsideration was denied, the petitioners appealed to the CA
via a petition for review under Rule 43 of the Rules of Court.
On May 9, 2008, the CA rendered the assailed decision upholding the validity and
binding effect of the Addendum as it was freely and voluntarily executed between
the parties, devoid of any vices of consent. The CA sustained its validity on the basis
of the civil law principle of mutuality of contracts that the parties were bound by the
terms and conditions unequivocally expressed in the addendum which was the law
between them.
In dismissing the petition, the CA ratiocinated that the findings of fact of the Regional
Adjudicator and the DARAB were supported by substantial evidence. Citing the case
of Sps. Joson v. Mendoza,8 the CA held that such findings of the agrarian court being
supported by substantial evidence were conclusive and binding on it.
The petitioners filed a motion for reconsideration of the said decision on the grounds,
among others, that the findings of fact of the Regional Adjudicator were in conflict
with those of the DARAB and were not supported by the evidence on record; and that
the conclusions of law were not in accordance with applicable law and existing
jurisprudence. The motion, however, was denied for lack of merit by the CA in its
Resolution, dated October 3, 2008.
Hence, NGEI Coop and Ronquillo interpose the present petition before this Court
anchored on the following GROUNDS
5
(I)
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
THAT THE ASSAILED ADDENDUM IS VOID AB-INITIO, THE SAME HAVING
BEEN EXECUTED WITHOUT THE CONSENT OF ONE OF THE PARTIES THERETO
(Petitioner NGEI-MPC), BY REASON OF THE ABSENCE OF AUTHORITY TO
EXECUTE THE SAME GIVEN BY SAID PARTY TO THE SUBSCRIBING INDIVIDUAL
(Dayday) AND THE FACT THAT THE ADDENDUM WAS NEVER RATIFIED BY
THE GENERAL MEMBERSHIP OF NGEI-MPC.
(II)
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
ADDENDUM TO LEASE AGREEMENT IS NULL AND VOID FOR BEING
CONTRARY TO LAW, MORALS, GOOD CUSTOMS, AND PUBLIC POLICY.
(III)
THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION, SERIOUSLY ERRED IN
HOLDING THAT THE DECISION OF THE DARAB IS SUPPORTED BY
SUBSTANTIAL EVIDENCE.
(IV)
WHETHER OR NOT PETITIONERS’ CAUSE OF ACTION HAS PRESCRIBED.9
The sole issue for the Court’s resolution is whether the CA committed reversible error
of law when it affirmed the decision of the DARAB which upheld the order of the
Regional Adjudicator dismissing the petitioners’ complaint for the nullification of the
Addendum.
The Court finds the petition bereft of merit.
The petitioners contend that the CA gravely erred in upholding the validity of the
Addendum. They allege that the yearly lease rental of P635.00 per hectare stipulated
in the Addendum was unconscionable because it violated the prescribed minimum
rental rates under DAR A.O. No. 5, Series of 1997 and R.A. No. 3844 which mandate
that the lease rental should not be less than the yearly amortization and taxes. They
also argue that it constitutes an infringement on the policy of the State to promote
social justice for the welfare and dignity of farmers and farm workers.
Relying on the same A.O. No. 5, the petitioners further argue that the Addendum
with another 25 years of extension period was invalid for lack of approval by the
PARC Executive Committee; that Antonio Dayday had no authority to enter into the
Addendum on behalf of NGEI Coop; that the authority given, if any, was merely for a
review of the lease agreement and to negotiate with FPPI on the specific issue of land
lease rental through a negotiating panel or committee, to which Dayday was a
 member; that Dayday’s act of signing for, and in behalf of, NGEI Coop being ultra
vires was null and void; that it was Vicente Flora who was authorized to sign the
Addendum as shown in Resolution No. 1, Series of 1998; that the Addendum was not
ratified through the use of attendance sheets for meal and transportation allowance;
that neither did NGEI Coop and its members ratify the Addendum by their receipt of
its so-called economic benefits; and that their acceptance of the benefits under the
agreement was not an indication of waiver of their right to pursue their claims
against FPPI considering their consistent actions to contest the subject Addendum.
The respondents, on the other hand, posit in their Comment 10 and reiterated in their
Memorandum11 that by raising factual issues, the petitioners were seeking a review
of the factual findings of the Regional Adjudicator and the DARAB which is proscribed
in a petition for review under Rule 45 of the Rules of Court. They add that the findings
of the said administrative agencies, having been sustained by the CA in the assailed
decision and supported by substantial evidence, should be respected.
The respondents further state that the CA correctly ruled that the Addendum was a
valid and binding contract. They claim that the package of economic benefits under
the Addendum was not unconscionable or contrary to public policy.
Indeed, the issues raised in this petition are mainly factual in nature. Factual issues
are not proper subjects of the Court’s power of judicial review. Well-settled is the
rule that only questions of law can be raised in a petition for review under Rule 45 of
the Rules of Civil Procedure.12 It is, thus, beyond the Court’s jurisdiction to review the
factual findings of the Regional Adjudicator, the DARAB and the CA as regards the
validity and the binding effect of the Addendum. Whether or not the person who
signed the Addendum on behalf of the NGEI Coop was authorized to do so; whether
or not the NGEI Coop members ratified the Addendum; whether or not the rental
rates prescribed in the Addendum were unconscionably low so as to be illegal, and
whether or not the NGEI Coop had consistently assailed the validity of the Addendum
even prior to the filing of the complaint with the Regional Adjudicator, are issues of
fact which cannot be passed upon by the Court for the simple reason that the Court is
not a trier of facts.
As held in the recent case of Carpio v. Sebastian,13 thus:
x x x It bears stressing that in a petition for review on certiorari, the scope of this
Court’s judicial review of decisions of the Court of Appeals is generally confined only
to errors of law, and questions of fact are not entertained. We elucidated on our
fidelity to this rule, and we said:
6
Thus, only questions of law may be brought by the parties and passed upon by this
Court in the exercise of its power to review. Also, judicial review by this Court does
not extend to a reevaluation of the sufficiency of the evidence upon which the proper
x x x tribunal has based its determination.
It is aphoristic that a re-examination of factual findings cannot be done through a
petition for review on certiorari under Rule 45 of the Rules of Court because as earlier
stated, this Court is not a trier of facts; it reviews only questions of law. The Supreme
Court is not duty-bound to analyze and weigh again the evidence considered in the
proceedings below.14
In the present case, the Court finds no cogent reason to depart from the
aforementioned settled rule. The DARAB made the following findings, viz:
This Board finds that the said "Addendum to the Lease Agreement" is valid and
binding to both parties. While the complainant impugns the validity of the
"Addendum" based on the ground that Chairman Dayday was not authorized by the
Cooperative to enter into the Agreement, based on the records, a series of Resolution
was made authorizing the Chairman to enter into the said "Addendum." Granting en
arguendo that Chairman Dayday was not authorized to enter into the said
Agreement, the fact remains that the terms and stipulations in the Addendum had
been observed and enforced by the parties for several years. Both parties have
benefited from the said contract. If indeed Chairman Dayday was not authorized to
enter into said Agreement, why does the Cooperative have to wait for four (4) years
to impugn the validity of the Contract. Thus, the Adjudicator a quo is correct in his
findings that:
As already discussed in the assailed Order, whatever procedural defects that may
have attended the final execution of the addendum, these are considered waived
and/or impliedly accepted or consented to by Complainants when its General
assembly ratified its execution and lived with for the next four (4) years.
Further the Adjudicator a quo is correct in his findings that:
It has to be impressed once more, that the Complaint is really one for the
cancellation of the Addendum to the original lease agreement. The negotiations that
led to its execution is in fact a re-negotiation of the old lease contract, and not a
negotiated original lease requiring the approval of the PARC Executive Committee.
The re-negotiation that culminated in the execution of the addendum requires only
the recommendation of the PARCCOM and the DAR, (AO No. 5, S-1997). It cannot be
gainsaid, therefore, that both PARCCOM and the DAR after a long and tedious re-
negotiation had no knowledge of such re-negotiation, but for reasons unknown, both
 have kept their peace, thus, allowing the addendum to be ratified, enforced and
implemented. On the other hand, the arguments, that said addendum being void ab
initio may be assailed at anytime cannot be conceded. First, because said addendum
has not been officially or legally declared as a nullity. It is not nullified just because a
subsequent resolution of the
Coop Board abrogated the Addendum. To annul a Contract cannot be done
unilaterally, in fact the reason why this case was filed. On the contrary, having been
forged in 1998, complainants waited until 2002 to assail its validity, and in the
meantime, their action to do so had prescribed pursuant to Section 28 of RA 3844,
the law governing leasehold. The other assigned alleged errors having been fully
discussed in the assailed Order of March 22, 2004, the same need no longer be
traversed.
Finding no reversible error on the finding of facts and law made by the Adjudicator a
quo this Board hereby affirms the Order dated March 22, 2004. 15
It is well to emphasize that the above-quoted factual findings and conclusions of the
DARAB affirming those of the Regional Adjudicator were sustained by the CA in the
assailed decision. The Court is in accord with the CA when it wrote:
In appeals in agrarian cases, the only function of this Court is to determine whether
the findings of fact of the Department of Agrarian Reform Adjudication Board
(DARAB) are supported by substantial evidence – it cannot make its own findings of
fact and substitute the same for the findings of the DARAB. And substantial evidence
has been defined to be such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion and its absence is not shown by stressing that there
is contrary evidence on record, direct or circumstantial; and where the findings of the
agrarian court are supported by substantial evidence, such findings are conclusive
and binding on the appellate court.16
Considering that the findings of the Regional Adjudicator and the DARAB are uniform
in all material respects, these findings should not be disturbed. More so in this case
where such findings were sustained by the CA for being supported by substantial
evidence and in accord with law and jurisprudence.
Verily, the factual findings of administrative officials and agencies that have acquired
expertise in the performance of their official duties and the exercise of their primary
jurisdiction are generally accorded not only respect but, at times, even finality if such
findings are supported by substantial evidence. 17 The factual findings of these quasi-
judicial agencies, especially when affirmed by the CA, are binding on the Court. The
recognized exceptions to this rule are: (1) when there is grave abuse of discretion; (2)
7
when the findings are grounded on speculation; (3) when the inference made is
manifestly mistaken; (4) when the judgment of the Court of Appeals is based on a
misapprehension of facts; (5) when the factual findings are conflicting; (6) when the
Court of Appeals went beyond the issues of the case and its findings are contrary to
the admissions of the parties; (7) when the Court of Appeals overlooked undisputed
facts which, if properly considered, would justify a different conclusion; (8) when the
facts set forth by the petitioner are not disputed by the respondent; and (9) when the
findings of the Court of Appeals are premised on the absence of evidence and are
contradicted by the evidence on record.18 None of these circumstances is obtaining in
this case.
The Court understands the predicament of these farmer-beneficiaries of NGEI Coop.
Under the prevailing circumstances, however, it cannot save them from the
consequences of the binding lease agreement, the Addendum. The petitioners,
having freely and willingly entered into the Addendum with FPPI, cannot and should
not now be permitted to renege on their compliance under it, based on the
supposition that its terms are unconscionable. The contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them.19
It is basic that a contract is the law between the parties. Obligations arising from
contracts have the force of law between the contracting parties and should be
complied with in good faith. Unless the stipulations in a contract are contrary to law,
morals, good customs, public order or public policy, the same are binding as between
the parties.20The Court quotes with approval the ruling of the CA on this matter, to
wit:
Indeed, the terms and conditions between the parties unequivocally expressed in the
Addendum must govern their contractual relations for these serve as the terms of the
agreement, which are binding and conclusive on them.
Consequently, petitioners cannot unilaterally change the tenor of the terms and
conditions of the Addendum or cancel it altogether after having gone through the
solemnities and formalities for its perfection. In fact, the Addendum had been
consummated upon performance by the parties of the prestations and after they had
already reaped the mutual benefits arising from the contract. Mutuality is one of the
characteristics of a contract, and its validity or performance or compliance cannot be
left to the will of only one of the parties. It is a long established doctrine that the law
does not relieve a party from the effects of an unwise, foolish, or disastrous contract,
entered into with all the required formalities and with full awareness of what he was
doing.21 (Underscoring supplied)
 It must be stressed that the Addendum was found to be a valid and binding contract.
The petitioners failed to show that the Addendum’s stipulated rental rates and
economic benefits violated any law or public policy. The Addendum should,
therefore, be given full force and effect, without prejudice to a renegotiation of the
terms of the leasehold agreement in accordance with the provisions of Administrative
Order No. 5, Series of 1997, governing their Addendum, as regards the contracting
procedures and fixing of lease rental in lands planted to palm oil trees, specifically:
IV. POLICIES AND GOVERNING PRINCIPLES
xxx
D. Renegotiation of the amount of lease rental shall be undertaken by the parties
every five (5) years, subject to the recommendation of the PARCCOM and review by
the DAR.
the Civil Code on imprescriptibility of actions for declaration of inexistence of
contracts, relied upon by the petitioners, is not applicable.1âwphi1
On a final note, the petitioners faulted the CA for failure to re-assess the facts of the
case despite the conflicting findings of the Regional Adjudicator and the DARAB. Such
imputation of error deserves no merit because, in truth and in fact, no such conflict
exists. Contrary to the petitioners' claim, both tribunals declared the validity of the
Addendum being in existence for several years and on the basis that the petitioners
had enjoyed the benefits accorded under it, and both raised the ground of
prescription of the petitioners' cause of action pursuant to Section 38, R.A. No. 3844.
All told, the Court, after a careful review of the records, finds no reversible error in
the assailed decision of the CA .
WHEREFORE, the petition is DENIED.

Lease rental on the leased lands may be renegotiated by the contracting parties even SO ORDERED.
prior to the termination of the contract on the following grounds: (a) domestic
inflation rate of seven percent (7%) or more; (b) drop in the world prices of the
commodity by at least twenty percent (20%); and (c) other valid reasons.
THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.
E. Any conflict that may arise from the implementation of the lease contract shall be G.R. No. 183204 January 13, 2014
referred to the PARCCOM by any of the contracting parties for mediation and
resolution. In the event of failure to resolve the issue, any of the parties may file an
DEL CASTILLO, J.:
action with the Department of Agrarian Reform Adjudication Board (DARAB) for
adjudication pursuant to Section 50 of R.A. No. 6657.
Bank deposits, which are in the nature of a simple loan or mutuum, 1 must be paid
upon demand by the depositor.2
Anent the issue of prescription, Section 38 of R.A. No. 3844 (The Agricultural Land
Reform Code), the applicable law to agricultural leasehold relations, provides:
This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the
April 2, 2008 Decision4 and the May 30, 2008 Resolution5 of he Court of Appeals CA)
Section 38. Statute of Limitations - An action to enforce any cause of action under this in CA-G.R. CV No. 89086.
Code shall be barred if not commenced within three years after such cause of action
accrued. (Underscoring supplied)
Factual Antecedents
On the basis of the aforequoted provision, the petitioners' cause of action to have the
Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation
Addendum, an agricultural leasehold arrangement between NGEI Coop and FPPI,
duly organized and existing under the laws of the Philippines. 6 Respondent Ana Grace
declared null and void has already prescribed. To recall, the Addendum was executed
Rosales (Rosales) is the owner of China Golden Bridge Travel Services,7 a travel
on January 29, 1998 and the petitioners tiled their complaint with the Regional
agency.8 Respondent Yo Yuk To is the mother of respondent Rosales.9
Adjudicator on June 20, 2002, or more than four years after the cause of action
accrued. Evidently, prescription has already set in. Inasmuch as the validity of the
Addendum was sustained by the CA as devoid of any vice or defect, Article 1410 of
8
 In 2000, respondents opened a Joint Peso Account10 with petitioner’s Pritil-Tondo
Branch.11 As of August 4, 2004, respondents’ Joint Peso Account showed a balance of
₱2,515,693.52.12
In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese
National applying for a retiree’s visa from the Philippine Leisure and Retirement
Authority (PLRA), to petitioner’s branch in Escolta to open a savings account, as
required by the PLRA.13 Since Liu Chiu Fang could speak only in Mandarin, respondent
Rosales acted as an interpreter for her.14
On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo Branch a Joint
Dollar Account15 with an initial deposit of US$14,000.00.16
On July 31, 2003, petitioner issued a "Hold Out" order against respondents’
accounts.17
On September 3, 2003, petitioner, through its Special Audit Department Head
Antonio Ivan Aguirre, filed before the Office of the Prosecutor of Manila a criminal
case for Estafa through False Pretences, Misrepresentation, Deceit, and Use of
Falsified Documents, docketed as I.S. No. 03I-25014,18 against respondent
Rosales.19 Petitioner accused respondent Rosales and an unidentified woman as the
ones responsible for the unauthorized and fraudulent withdrawal of US$75,000.00
from Liu Chiu Fang’s dollar account with petitioner’s Escolta Branch. 20Petitioner
alleged that on February 5, 2003, its branch in Escolta received from the PLRA a
Withdrawal Clearance for the dollar account of Liu Chiu Fang;21 that in the afternoon
of the same day, respondent Rosales went to petitioner’s Escolta Branch to inform its
Branch Head, Celia A. Gutierrez (Gutierrez), that Liu Chiu Fang was going to withdraw
her dollar deposits in cash;22 that Gutierrez told respondent Rosales to come back the
following day because the bank did not have enough dollars; 23 that on February 6,
2003, respondent Rosales accompanied an unidentified impostor of Liu Chiu Fang to
the bank;24 that the impostor was able to withdraw Liu Chiu Fang’s dollar deposit in
the amount of US$75,000.00;25 that on March 3, 2003, respondents opened a dollar
account with petitioner; and that the bank later discovered that the serial numbers of
the dollar notes deposited by respondents in the amount of US$11,800.00 were the
same as those withdrawn by the impostor. 26
Respondent Rosales, however, denied taking part in the fraudulent and unauthorized
withdrawal from the dollar account of Liu Chiu Fang.27 Respondent Rosales claimed
that she did not go to the bank on February 5, 2003. 28Neither did she inform
Gutierrez that Liu Chiu Fang was going to close her account. 29 Respondent Rosales
further claimed that after Liu Chiu Fang opened an account with petitioner, she lost
9
track of her.30 Respondent Rosales’ version of the events that transpired thereafter is
as follows:
On February 6, 2003, she received a call from Gutierrez informing her that Liu Chiu
Fang was at the bank to close her account.31 At noon of the same day, respondent
Rosales went to the bank to make a transaction.32 While she was transacting with the
teller, she caught a glimpse of a woman seated at the desk of the Branch Operating
Officer, Melinda Perez (Perez).33 After completing her transaction, respondent
Rosales approached Perez who informed her that Liu Chiu Fang had closed her
account and had already left.34 Perez then gave a copy of the Withdrawal Clearance
issued by the PLRA to respondent Rosales.35 On June 16, 2003, respondent Rosales
received a call from Liu Chiu Fang inquiring about the extension of her PLRA Visa and
her dollar account.36 It was only then that Liu Chiu Fang found out that her account
had been closed without her knowledge. 37 Respondent Rosales then went to the bank
to inform Gutierrez and Perez of the unauthorized withdrawal. 38 On June 23, 2003,
respondent Rosales and Liu Chiu Fang went to the PLRA Office, where they were
informed that the Withdrawal Clearance was issued on the basis of a Special Power of
Attorney (SPA) executed by Liu Chiu Fang in favor of a certain Richard So. 39 Liu Chiu
Fang, however, denied executing the SPA. 40 The following day, respondent Rosales,
Liu Chiu Fang, Gutierrez, and Perez met at the PLRA Office to discuss the
unauthorized withdrawal.41 During the conference, the bank officers assured Liu Chiu
Fang that the money would be returned to her.42
On December 15, 2003, the Office of the City Prosecutor of Manila issued a
Resolution dismissing the criminal case for lack of probable cause. 43 Unfazed,
petitioner moved for reconsideration.
On September 10, 2004, respondents filed before the Regional Trial Court (RTC) of
Manila a Complaint44 for Breach of Obligation and Contract with Damages, docketed
as Civil Case No. 04110895 and raffled to Branch 21, against petitioner. Respondents
alleged that they attempted several times to withdraw their deposits but were
unable to because petitioner had placed their accounts under "Hold Out" status. 45 No
explanation, however, was given by petitioner as to why it issued the "Hold Out"
order.46 Thus, they prayed that the "Hold Out" order be lifted and that they be
allowed to withdraw their deposits.47 They likewise prayed for actual, moral, and
exemplary damages, as well as attorney’s fees. 48
Petitioner alleged that respondents have no cause of action because it has a valid
reason for issuing the "Hold Out" order.49 It averred that due to the fraudulent
scheme of respondent Rosales, it was compelled to reimburse Liu Chiu Fang the
amount of US$75,000.0050 and to file a criminal complaint for Estafa against
respondent Rosales.51
 While the case for breach of contract was being tried, the City Prosecutor of Manila
issued a Resolution dated February 18, 2005, reversing the dismissal of the criminal
complaint.52 An Information, docketed as Criminal Case No. 05-236103,53 was then
filed charging respondent Rosales with Estafa before Branch 14 of the RTC of
Manila.54
Ruling of the Regional Trial Court
On January 15, 2007, the RTC rendered a Decision 55 finding petitioner liable for
damages for breach of contract.56The RTC ruled that it is the duty of petitioner to
release the deposit to respondents as the act of withdrawal of a bank deposit is an
act of demand by the creditor.57 The RTC also said that the recourse of petitioner is
against its negligent employees and not against respondents.58 The dispositive
portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering
[petitioner] METROPOLITAN BANK & TRUST COMPANY to allow [respondents] ANA
GRACE ROSALES and YO YUK TO to withdraw their Savings and Time Deposits with
the agreed interest, actual damages of ₱50,000.00, moral damages of ₱50,000.00,
exemplary damages of ₱30,000.00 and 10% of the amount due [respondents] as and
for attorney’s fees plus the cost of suit.
The counterclaim of [petitioner] is hereby DISMISSED for lack of merit.
SO ORDERED.59
Ruling of the Court of Appeals
Aggrieved, petitioner appealed to the CA.
On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the award of
actual damages because "the basis for [respondents’] claim for such damages is the
professional fee that they paid to their legal counsel for [respondent] Rosales’
defense against the criminal complaint of [petitioner] for estafa before the Office of
the City Prosecutor of Manila and not this case."60 Thus, the CA disposed of the case
in this wise:
WHEREFORE, premises considered, the Decision dated January 15, 2007 of the RTC,
Branch 21, Manila in Civil Case No. 04-110895 is AFFIRMED with MODIFICATION that
the award of actual damages to [respondents] Rosales and Yo Yuk To is hereby
DELETED.
10
SO ORDERED.61
Petitioner sought reconsideration but the same was denied by the CA in its May 30,
2008 Resolution.62
Issues
Hence, this recourse by petitioner raising the following issues:
A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT" PROVISION IN THE
APPLICATION AND AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT APPLY IN
THIS CASE.
B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S EMPLOYEES WERE
NEGLIGENT IN RELEASING LIU CHIU FANG’S FUNDS.
C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES,
EXEMPLARY DAMAGES, AND ATTORNEY’S FEES.63
Petitioner’s Arguments
Petitioner contends that the CA erred in not applying the "Hold Out" clause stipulated
in the Application and Agreement for Deposit Account.64 It posits that the said clause
applies to any and all kinds of obligation as it does not distinguish between
obligations arising ex contractu or ex delictu.65 Petitioner also contends that the fraud
committed by respondent Rosales was clearly established by evidence; 66 thus, it was
justified in issuing the "Hold-Out" order.67 Petitioner likewise denies that its
employees were negligent in releasing the dollars.68 It claims that it was the
deception employed by respondent Rosales that caused petitioner’s employees to
release Liu Chiu Fang’s funds to the impostor.69
Lastly, petitioner puts in issue the award of moral and exemplary damages and
attorney’s fees. It insists that respondents failed to prove that it acted in bad faith or
in a wanton, fraudulent, oppressive or malevolent manner. 70
Respondents’ Arguments
Respondents, on the other hand, argue that there is no legal basis for petitioner to
withhold their deposits because they have no monetary obligation to
petitioner.71 They insist that petitioner miserably failed to prove its accusations
against respondent Rosales.72 In fact, no documentary evidence was presented to
show that respondent Rosales participated in the unauthorized withdrawal.73 They
also question the fact that the list of the serial numbers of the dollar notes
fraudulently withdrawn on February 6, 2003, was not signed or acknowledged by the
alleged impostor.74Respondents likewise maintain that what was established during
the trial was the negligence of petitioner’s employees as they allowed the withdrawal
 of the funds without properly verifying the identity of the depositor. 75Furthermore,
respondents contend that their deposits are in the nature of a loan; thus, petitioner
had the obligation to return the deposits to them upon demand. 76 Failing to do so
makes petitioner liable to pay respondents moral and exemplary damages, as well as
attorney’s fees.77
Our Ruling
The Petition is bereft of merit.
At the outset, the relevant issues in this case are (1) whether petitioner breached its
contract with respondents, and (2) if so, whether it is liable for damages. The issue of
whether petitioner’s employees were negligent in allowing the withdrawal of Liu Chiu
Fang’s dollar deposits has no bearing in the resolution of this case. Thus, we find no
need to discuss the same.
The "Hold Out" clause does not apply
to the instant case.
Petitioner claims that it did not breach its contract with respondents because it has a
valid reason for issuing the "Hold Out" order. Petitioner anchors its right to withhold
respondents’ deposits on the Application and Agreement for Deposit Account, which
reads:
Authority to Withhold, Sell and/or Set Off:
The Bank is hereby authorized to withhold as security for any and all obligations with
the Bank, all monies, properties or securities of the Depositor now in or which may
hereafter come into the possession or under the control of the Bank, whether left
with the Bank for safekeeping or otherwise, or coming into the hands of the Bank in
any way, for so much thereof as will be sufficient to pay any or all obligations
incurred by Depositor under the Account or by reason of any other transactions
between the same parties now existing or hereafter contracted, to sell in any public
or private sale any of such properties or securities of Depositor, and to apply the
proceeds to the payment of any Depositor’s obligations heretofore mentioned.
xxxx
JOINT ACCOUNT
xxxx
11
The Bank may, at any time in its discretion and with or without notice to all of the
Depositors, assert a lien on any balance of the Account and apply all or any part
thereof against any indebtedness, matured or unmatured, that may then be owing to
the Bank by any or all of the Depositors. It is understood that if said indebtedness is
only owing from any of the Depositors, then this provision constitutes the consent by
all of the depositors to have the Account answer for the said indebtedness to the
extent of the equal share of the debtor in the amount credited to the Account.78
Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for
Deposit Account is misplaced.
The "Hold Out" clause applies only if there is a valid and existing obligation arising
from any of the sources of obligation enumerated in Article 1157 79 of the Civil Code,
to wit: law, contracts, quasi-contracts, delict, and quasi-delict. In this case, petitioner
failed to show that respondents have an obligation to it under any law, contract,
quasi-contract, delict, or quasi-delict. And although a criminal case was filed by
petitioner against respondent Rosales, this is not enough reason for petitioner to
issue a "Hold Out" order as the case is still pending and no final judgment of
conviction has been rendered against respondent Rosales. In fact, it is significant to
note that at the time petitioner issued the "Hold Out" order, the criminal complaint
had not yet been filed. Thus, considering that respondent Rosales is not liable under
any of the five sources of obligation, there was no legal basis for petitioner to issue
the "Hold Out" order. Accordingly, we agree with the findings of the RTC and the CA
that the "Hold Out" clause does not apply in the instant case.
In view of the foregoing, we find that petitioner is guilty of breach of contract when it
unjustifiably refused to release respondents’ deposit despite demand. Having
breached its contract with respondents, petitioner is liable for damages.
Respondents are entitled to moral and exemplary damages and attorney’s fees.
In cases of breach of contract, moral damages may be recovered only if the
defendant acted fraudulently or in bad faith, 80 or is "guilty of gross negligence
amounting to bad faith, or in wanton disregard of his contractual obligations."81
In this case, a review of the circumstances surrounding the issuance of the "Hold Out"
order reveals that petitioner issued the "Hold Out" order in bad faith. First of all, the
order was issued without any legal basis. Second, petitioner did not inform
respondents of the reason for the "Hold Out."82 Third, the order was issued prior to
the filing of the criminal complaint. Records show that the "Hold Out" order was
issued on July 31, 2003,83 while the criminal complaint was filed only on September 3,
2003.84 All these taken together lead us to conclude that petitioner acted in bad faith
 when it breached its contract with respondents. As we see it then, respondents are
entitled to moral damages.
As to the award of exemplary damages, Article 222985 of the Civil Code provides that
exemplary damages may be imposed "by way of example or correction for the public
good, in addition to the moral, temperate, liquidated or compensatory damages."
They are awarded only if the guilty party acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.86
In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner when it refused to release the deposits of
respondents without any legal basis. We need not belabor the fact that the banking
industry is impressed with public interest.87 As such, "the highest degree of diligence
is expected, and high standards of integrity and performance are even required of
it."88 It must therefore "treat the accounts of its depositors with meticulous care and
always to have in mind the fiduciary nature of its relationship with them." 89 For failing
to do this, an award of exemplary damages is justified to set an example.
The award of attorney's fees is likewise proper pursuant to paragraph 1, Article
220890 of the Civil Code.
In closing, it must be stressed that while we recognize that petitioner has the right to
protect itself from fraud or suspicions of fraud, the exercise of his right should be
done within the bounds of the law and in accordance with due process, and not in
bad faith or in a wanton disregard of its contractual obligation to respondents.
WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008 Decision and
the May 30, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 89086 are
hereby AFFIRMED. SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
12
MANILA ELECTRIC COMPANY, Petitioner, vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS,
ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO, Respondents.
G.R. No. 158911 March 4, 2008
AUSTRIA-MARTINEZ, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court,
praying that the Decision 1 of the Court of Appeals (CA) dated December 16, 2002,
ordering petitioner Manila Electric Company (MERALCO) to pay Leoncio
Ramoy2 moral and exemplary damages and attorney's fees, and the CA
Resolution3 dated July 1, 2003, denying petitioner's motion for reconsideration, be
reversed and set aside.
The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the
facts as culled from the records, thus:
The evidence on record has established that in the year 1987 the National Power
Corporation (NPC) filed with the MTC Quezon City a case for ejectment against
several persons allegedly illegally occupying its properties in Baesa, Quezon City.
Among the defendants in the ejectment case was Leoncio Ramoy, one of the
plaintiffs in the case at bar. On April 28, 1989 after the defendants failed to file an
answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered
judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or
remove the building and structures they built on the land of the plaintiff and to
vacate the premises." In the case of Leoncio Ramoy, the Court found that he was
occupying a portion of Lot No. 72-B-2-B with the exact location of his apartments
indicated and encircled in the location map as No. 7. A copy of the decision was
furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2,
1993, p. 5).
On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of
electric power supply to all residential and commercial establishments beneath the
NPC transmission lines along Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to
the letter was a list of establishments affected which included plaintiffs Leoncio and
Matilde Ramoy (Exh. 9), as well as a copy of the court decision (Exh. 2). After
deliberating on NPC's letter, Meralco decided to comply with NPC's request (Exhibits
6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all
establishments affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C),
Matilde Ramoy/Matilde Macabagdal (Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-
F), Ofelia Durian (Exh. 3-G), Jose Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).
 In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to
determine all the establishments which are considered under NPC property in view of
the fact that "the houses in the area are very close to each other" (Exh. 12). Shortly
thereafter, a joint survey was conducted and the NPC personnel pointed out the
electric meters to be disconnected (Exh. 13; TSN, October 8, 1993, p. 7; TSN, July
1994, p. 8).
In due time, the electric service connection of the plaintiffs [herein respondents] was
disconnected (Exhibits D to G, with submarkings, pp. 86-87, Record).
Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a
parcel of land covered by TCT No. 326346, a portion of which was occupied by
plaintiffs Rosemarie Ramoy, Ofelia Durian, Jose Valiza and Cyrene S. Panado as
lessees. When the Meralco employees were disconnecting plaintiffs' power
connection, plaintiff Leoncio Ramoy objected by informing the Meralco foreman that
his property was outside the NPC property and pointing out the monuments showing
the boundaries of his property. However, he was threatened and told not to interfere
by the armed men who accompanied the Meralco employees. After the electric
power in Ramoy's apartment was cut off, the plaintiffs-lessees left the premises.
During the ocular inspection ordered by the Court and attended by the parties, it was
found out that the residence of plaintiffs-spouses Leoncio and Matilde Ramoy was
indeed outside the NPC property. This was confirmed by defendant's witness R.P.
Monsale III on cross-examination (TSN, October 13, 1993, pp. 10 and 11). Monsale
also admitted that he did not inform his supervisor about this fact nor did he
recommend re-connection of plaintiffs' power supply (Ibid., p. 14).
The record also shows that at the request of NPC, defendant Meralco re-connected
the electric service of four customers previously disconnected none of whom was any
of the plaintiffs (Exh. 14).4
The RTC decided in favor of MERALCO by dismissing herein respondents' claim for
moral damages, exemplary damages and attorney's fees. However, the RTC ordered
MERALCO to restore the electric power supply of respondents.
Respondents then appealed to the CA. In its Decision dated December 16, 2002, the
CA faulted MERALCO for not requiring from National Power Corporation (NPC) a writ
of execution or demolition and in not coordinating with the court sheriff or other
proper officer before complying with the NPC's request. Thus, the CA held MERALCO
liable for moral and exemplary damages and attorney's fees. MERALCO's motion for
reconsideration of the Decision was denied per Resolution dated July 1, 2003.
13
Hence, herein petition for review on certiorari on the following grounds:
I
THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT
WHEN IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.
II
THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE
CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION
OF THE ELECTRIC SERVICES OF THE RESPONDENTS. 5
The petition is partly meritorious.
MERALCO admits6 that respondents are its customers under a Service Contract
whereby it is obliged to supply respondents with electricity. Nevertheless, upon
request of the NPC, MERALCO disconnected its power supply to respondents on the
ground that they were illegally occupying the NPC's right of way. Under the Service
Contract, "[a] customer of electric service must show his right or proper interest over
the property in order that he will be provided with and assured a continuous electric
service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial
Court (MTC) of Quezon City ruling that herein respondents were among the illegal
occupants of the NPC's right of way, MERALCO was justified in cutting off service to
respondents.
Clearly, respondents' cause of action against MERALCO is anchored on culpa
contractual or breach of contract for the latter's discontinuance of its service to
respondents under Article 1170 of the Civil Code which provides:
Article 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.
In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on
the nature of culpa contractual, thus:
"In culpa contractual x x x the mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief. The law,
recognizing the obligatory force of contracts, will not permit a party to be set free
from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof. A breach upon the contract confers upon the
injured party a valid cause for recovering that which may have been lost or
suffered. The remedy serves to preserve the interests of the promissee that may
 include his "expectation interest," which is his interest in having the benefit of his [B]eing a public utility vested with vital public interest, MERALCO is impressed with
bargain by being put in as good a position as he would have been in had the contract certain obligations towards its customers and any omission on its part to perform
been performed, or his "reliance interest," which is his interest in being reimbursed such duties would be prejudicial to its interest. For in the final analysis, the bottom
for loss caused by reliance on the contract by being put in as good a position as he line is that those who do not exercise such prudence in the discharge of their duties
would have been in had the contract not been made; or his "restitution interest," shall be made to bear the consequences of such oversight. 13
which is his interest in having restored to him any benefit that he has conferred on
the other party. Indeed, agreements can accomplish little, either for their makers or This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.
for society, unless they are made the basis for action. The effect of every infraction is
to create a new duty, that is, to make recompense to the one who has been injured The next question is: Are respondents entitled to moral and exemplary damages and
by the failure of another to observe his contractual obligation unless he can show attorney's fees?
extenuating circumstances, like proof of his exercise of due diligence x x x or of
the attendance of fortuitous event, to excuse him from his ensuing
Article 2220 of the Civil Code provides:
liability.9 (Emphasis supplied)
Article 2220. Willful injury to property may be a legal ground for awarding moral
Article 1173 also provides that the fault or negligence of the obligor consists in the
damages if the court should find that, under the circumstances, such damages are
omission of that diligence which is required by the nature of the obligation and
justly due. The same rule applies to breaches of contract where the defendant acted
corresponds with the circumstances of the persons, of the time and of the place. The
fraudulently or in bad faith.
Court emphasized in Ridjo Tape & Chemical Corporation v. Court of Appeals 10 that "as
a public utility, MERALCO has the obligation to discharge its functions with utmost
In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding
care and diligence."11
from him and his tenants the supply of electricity to which they were entitled under
the Service Contract. This is contrary to public policy because, as discussed above,
The Court agrees with the CA that under the factual milieu of the present case,
MERALCO, being a vital public utility, is expected to exercise utmost care and
MERALCO failed to exercise the utmost degree of care and diligence required of it. To
diligence in the performance of its obligation. It was incumbent upon MERALCO to do
repeat, it was not enough for MERALCO to merely rely on the Decision of the MTC
everything within its power to ensure that the improvements built by respondents
without ascertaining whether it had become final and executory. Verily, only upon
are within the NPC’s right of way before disconnecting their power supply. The Court
finality of said Decision can it be said with conclusiveness that respondents have no
emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that:
right or proper interest over the subject property, thus, are not entitled to the
services of MERALCO.
Electricity is a basic necessity the generation and distribution of which is imbued with
public interest, and its provider is a public utility subject to strict regulation by the
Although MERALCO insists that the MTC Decision is final and executory, it never
State in the exercise of police power. Failure to comply with these regulations will
showed any documentary evidence to support this allegation. Moreover, if it were
give rise to the presumption of bad faith or abuse of right. 15 (Emphasis supplied)
true that the decision was final and executory, the most prudent thing for MERALCO
to have done was to coordinate with the proper court officials in determining which
structures are covered by said court order. Likewise, there is no evidence on record Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the
to show that this was done by MERALCO. performance of its obligation to Leoncio Ramoy, its customer, is tantamount to bad
faith. Leoncio Ramoy testified that he suffered wounded feelings because of
MERALCO's actions.16 Furthermore, due to the lack of power supply, the lessees of his
The utmost care and diligence required of MERALCO necessitates such great degree
four apartments on subject lot left the premises.17 Clearly, therefore, Leoncio Ramoy
of prudence on its part, and failure to exercise the diligence required means that
is entitled to moral damages in the amount awarded by the CA.
MERALCO was at fault and negligent in the performance of its obligation. In Ridjo
Tape,12 the Court explained:
Leoncio Ramoy, the lone witness for respondents, was the only one who testified
regarding the effects on him of MERALCO's electric service disconnection. His co-
14
 respondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did
not present any evidence of damages they suffered.
It is a hornbook principle that damages may be awarded only if proven. In Mahinay v.
Velasquez, Jr.,18 the Court held thus:
In order that moral damages may be awarded, there must be pleading and proof of
moral suffering, mental anguish, fright and the like. While respondent alleged in his
complaint that he suffered mental anguish, serious anxiety, wounded feelings and
moral shock, he failed to prove them during the trial. Indeed, respondent should
have taken the witness stand and should have testified on the mental anguish,
serious anxiety, wounded feelings and other emotional and mental suffering he
purportedly suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof. No other person
could have proven such damages except the respondent himself as they were
extremely personal to him.
In Keirulf vs. Court of Appeals, we held:
"While no proof of pecuniary loss is necessary in order that moral damages may be
awarded, the amount of indemnity being left to the discretion of the court, it is
nevertheless essential that the claimant should satisfactorily show the existence of
the factual basis of damages and its causal connection to defendant’s acts. This is so
because moral damages, though incapable of pecuniary estimation, are in the
category of an award designed to compensate the claimant for actual injury suffered
and not to impose a penalty on the wrongdoer. In Francisco vs. GSIS, the Court held
that there must be clear testimony on the anguish and other forms of mental
suffering. Thus, if the plaintiff fails to take the witness stand and testify as to his/her
social humiliation, wounded feelings and anxiety, moral damages cannot be awarded.
In Cocoland Development Corporation vs. National Labor Relations Commission, the
Court held that "additional facts must be pleaded and proven to warrant the grant of
moral damages under the Civil Code, these being, x x x social humiliation, wounded
feelings, grave anxiety, etc. that resulted therefrom."
x x x The award of moral damages must be anchored to a clear showing that
respondent actually experienced mental anguish, besmirched reputation, sleepless
nights, wounded feelings or similar injury. There was no better witness to this
experience than respondent himself. Since respondent failed to testify on the
witness stand, the trial court did not have any factual basis to award moral
damages to him.19 (Emphasis supplied)
15
Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may
be awarded moral damages.20
With regard to exemplary damages, Article 2232 of the Civil Code provides that in
contracts and quasi-contracts, the court may award exemplary damages if the
defendant, in this case MERALCO, acted in a wanton, fraudulent, reckless, oppressive,
or malevolent manner, while Article 2233 of the same Code provides that such
damages cannot be recovered as a matter of right and the adjudication of the same
is within the discretion of the court.1avvphi1
The Court finds that MERALCO fell short of exercising the due diligence required, but
its actions cannot be considered wanton, fraudulent, reckless, oppressive or
malevolent. Records show that MERALCO did take some measures, i.e., coordinating
with NPC officials and conducting a joint survey of the subject area, to verify which
electric meters should be disconnected although these measures are not sufficient,
considering the degree of diligence required of it. Thus, in this case, exemplary
damages should not be awarded.
Since the Court does not deem it proper to award exemplary damages in this case,
then the CA's award for attorney's fees should likewise be deleted, as Article 2208 of
the Civil Code states that in the absence of stipulation, attorney's fees cannot be
recovered except in cases provided for in said Article, to wit:
Article 2208. In the absence of stipulation, attorney’s fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendant’s act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the
plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiff’s plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and
skilled workers;
(8) In actions for indemnity under workmen’s compensation and employer’s
liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
 (11) In any other case where the court deems it just and equitable that
attorney’s fees and expenses of litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
None of the grounds for recovery of attorney's fees are present.
WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's
fees is DELETED.
No costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
NATURE AND EFFRECTS OF OBLIGATIONS
OBLIGATION TO GIVE A DETERMINATE THING vs. A GENERIC
THING
GAISANO CAGAYAN, INC. Petitioner, vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
G.R. No. 147839 June 8, 2006
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 dated October
11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the
Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC)
in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner);
and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.
The factual background of the case is as follows:
16
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-made clothing materials which
have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."2 The policies defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy."3 The policies also provide for the following
conditions:
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from
the date of the covering invoice or actual delivery of the merchandise
whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve
(12) days after the close of every calendar month all amount shown in their
books of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks
of ready-made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It
alleges that IMC and LSPI filed with respondent their claims under their respective
fire insurance policies with book debt endorsements; that as of February 25, 1991,
the unpaid accounts of petitioner on the sale and delivery of ready-made clothing
materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was
subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could
not be held liable because the property covered by the insurance policies were
destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed by
 it since the loss was due to fire which it could not prevent or foresee; that IMC and
LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire was
not attributable to the negligence of the petitioner; that it has not been established
that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that
"it is further agreed that merely for purpose of securing the payment of purchase
price, the above-described merchandise remains the property of the vendor until the
purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods
and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision
reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc.
to pay:
1. the amount of P2,119,205.60 representing the amount paid by the
plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-
appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the
time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire must
be borne by petitioner since the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing
is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the
17
loss under the principle of res perit domino; that petitioner's obligation to IMC and
LSPI is not the delivery of the lost goods but the payment of its unpaid account and as
such the obligation to pay is not extinguished, even if the fire is considered a
fortuitous event; that by subrogation, the insurer has the right to go against
petitioner; that, being a fire insurance with book debt endorsements, what was
insured was the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case
cannot be deemed to be over credit since an insurance "on credit" belies not only the
nature of fire insurance but the express terms of the policies; that it was not credit
that was insured since respondent paid on the occasion of the loss of the insured
goods to fire and not because of the non-payment by petitioner of any obligation;
that, even if the insurance is deemed as one over credit, there was no loss as the
accounts were not yet due since no prior demands were made by IMC and LSPI
against petitioner for payment of the debt and such demands came from respondent
only after it had already paid IMC and LSPI under the fire insurance policies. 15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor
of respondent as no valid insurance could be maintained thereon by IMC and LSPI
since all risk had transferred to petitioner upon delivery of the goods; that petitioner
was not privy to the insurance contract or the payment between respondent and its
 insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting
its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from its
destruction by fire; that petitioner is liable for loss of the ready-made clothing
materials since it failed to overcome the presumption of liability under Article
126516 of the Civil Code; that the fire was caused through petitioner's negligence in
failing to provide stringent measures of caution, care and maintenance on its
property because electric wires do not usually short circuit unless there are defects in
their installation or when there is lack of proper maintenance and supervision of the
property; that petitioner is guilty of gross and evident bad faith in refusing to pay
respondent's valid claim and should be liable to respondent for contracted lawyer's
fees, litigation expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases
brought before it from the CA is limited to reviewing questions of law which involves
no examination of the probative value of the evidence presented by the litigants or
any of them.18 The Supreme Court is not a trier of facts; it is not its function to
analyze or weigh evidence all over again.19 Accordingly, findings of fact of the
appellate court are generally conclusive on the Supreme Court. 20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues
may be resolved by this Court, such as: (1) when the findings are grounded entirely
on speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts
are conflicting; (6) when in making its findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the findings
are conclusions without citation of specific evidence on which they are based; (9)
when the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the CA manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner
18
claims that the CA erred in construing a fire insurance policy on book debts as one
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of
the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."24 Nowhere is it provided in the questioned insurance
policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are to
be understood literally just as they appear on the face of the contract. 25 Thus, what
were insured against were the accounts of IMC and LSPI with petitioner which
remained unpaid 45 days after the loss through fire, and not the loss or destruction of
the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed
that merely for purpose of securing the payment of the purchase price the above
described merchandise remains the property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his obligations
 under the contract, the goods are at the buyer's risk from the time of such delivery;
(Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of
loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by
concept of title, but whether insured has substantial economic interest in the
property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which
the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an
interest, it is sufficient that the insured is so situated with reference to the property
that he would be liable to loss should it be injured or destroyed by the peril against
which it is insured.29 Anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction. 30Indeed, a vendor
or seller retains an insurable interest in the property sold so long as he has any
interest therein, in other words, so long as he would suffer by its destruction, as
where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI
pertain to the unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
19
under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods
by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days
after the fire. Accordingly, petitioner's obligation is for the payment of money. As
correctly stated by the CA, where the obligation consists in the payment of money,
the failure of the debtor to make the payment even by reason of a fortuitous event
shall not relieve him of his liability.33 The rationale for this is that the rule that an
obligor should be held exempt from liability when the loss occurs thru a fortuitous
event only holds true when the obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable even in case of fortuitous event. It
does not apply when the obligation is pecuniary in nature. 34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation." If
the obligation is generic in the sense that the object thereof is designated merely by
its class or genus without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect
of extinguishing the obligation.35 This rule is based on the principle that the genus of
a thing can never perish. Genus nunquan perit. 36 An obligation to pay money is
generic; therefore, it is not excused by fortuitous loss of any specific property of the
debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits
"C" to "C-22"38 show that petitioner has an outstanding account with IMC in the
amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to
IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent
upon receipt of the insurance proceeds. All these documents have been properly
identified, presented and marked as exhibits in court. The subrogation receipt, by
itself, is sufficient to establish not only the relationship of respondent as insurer and
IMC as the insured, but also the amount paid to settle the insurance claim. The right
of subrogation accrues simply upon payment by the insurance company of the
insurance claim.41 Respondent's action against petitioner is squarely sanctioned by
Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. x x x
 Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. No evidentiary weight can be given to Exhibit "F Levi Strauss", 42 a letter dated
April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is
not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of
Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no
subrogation receipt was offered in evidence. Thus, there is no evidence that
respondent has been subrogated to any right which LSPI may have against petitioner.
Failure to substantiate the claim of subrogation is fatal to petitioner's case for
recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount
of P535,613.00 to respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
FAILURE OF PERFORMANCE – ART. 1169, ART. 1170
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs. IGNACIO
CASTRO, SR., SOFIA C. CROUCHet al.
G.R. No. 73867 February 29, 1988
PADILLA, J.:
Petition for review on certiorari of the decision * of the Intermediate Appellate Court,
dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al.,
Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc.,
Defendant-Appellant."
20
The facts of the case are as follows:
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr.
and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same
day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines,
addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg,
Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted
by the defendant in its Dagupan office, for transmission, after payment of the
required fees or charges.
The telegram never reached its addressee. Consolacion was interred with only her
daughter Sofia in attendance. Neither the husband nor any of the other children of
the deceased, then all residing in the United States, returned for the burial.
When Sofia returned to the United States, she discovered that the wire she had
caused the defendant to send, had not been received. She and the other plaintiffs
thereupon brought action for damages arising from defendant's breach of contract.
The case was filed in the Court of First Instance of Pangasinan and docketed therein
as Civil Case No. 15356. The only defense of the defendant was that it was unable to
transmit the telegram because of "technical and atmospheric factors beyond its
control." 1 No evidence appears on record that defendant ever made any attempt to
advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.
The Court of First Instance of Pangasinan, after trial, ordered the defendant (now
petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with
interest at 6% per annum:
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and
P20,000.00 as moral damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages.
7. Conrado Castro, P10,000 moral damages.
8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages.
12. Gloria Castro, P10,000.00 moral damages.
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in
the amount of P1,000.00 to each of the plaintiffs and costs. 2
 On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's
decision but eliminated the award of P16,000.00 as compensatory damages to Sofia
C. Crouch and the award of P1,000.00 to each of the private respondents as
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C.
Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00
for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the
award of moral damages should be eliminated as defendant's negligent act was not
motivated by "fraud, malice or recklessness."
In other words, under petitioner's theory, it can only be held liable for P 31.92, the
fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the
addressee thereof.
Petitioner's contention is without merit.
Art. 1170 of the Civil Code provides that "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." Art. 2176 also provides that
"whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done."
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a
contract whereby, for a fee, petitioner undertook to send said private respondent's
message overseas by telegram. This, petitioner did not do, despite performance by
said private respondent of her obligation by paying the required charges. Petitioner
was therefore guilty of contravening its obligation to said private respondent and is
thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's
contrary position in this regard would result in an inequitous situation where
petitioner will only be held liable for the actual cost of a telegram fixed thirty (30)
years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral
damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
21
Here, petitioner's act or omission, which amounted to gross negligence, was precisely
the cause of the suffering private respondents had to undergo.
As the appellate court properly observed:
[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother
after she had already been interred, without being given the opportunity to even
make a choice on whether they wanted to pay her their last respects? There is no
doubt that these emotional sufferings were proximately caused by appellant's
omission and substantive law provides for the justification for the award of moral
damages. 4
We also sustain the trial court's award of P16,000.00 as compensatory damages to
Sofia C. Crouch representing the expenses she incurred when she came to the
Philippines from the United States to testify before the trial court. Had petitioner not
been remiss in performing its obligation, there would have been no need for this suit
or for Mrs. Crouch's testimony.
The award of exemplary damages by the trial court is likewise justified and, therefore,
sustained in the amount of P1,000.00 for each of the private respondents, as a
warning to all telegram companies to observe due diligence in transmitting the
messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that
petitioner is held liable to private respondents in the following amounts:
(1) P10,000.00 as moral damages, to each of private respondents;
(2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia C.
Crouch;
(4) P5,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED.
Yap (Chairman), Paras and Sarmiento, JJ., concur.
 SPOUSES CARMEN S. TONGSON and JOSE C. TONGSON substituted by his children
namely: JOSE TONGSON, JR., RAUL TONGSON, TITA TONGSON, GLORIA TONGSON
ALMA TONGSON, Petitioners, vs. EMERGENCY PAWNSHOP BULA, INC. and DANILO
R. NAPALA, Respondents
G.R. No. 167874 January 15, 2010
CARPIO, J.:
The Case
Before the Court is a petition for review 1 of the 31 August 2004 Decision2 and 10
March 2005 Resolution3 of the Court of Appeals in CA-G.R. CV No. 58242. In the 31
August 2004 Decision, the Court of Appeals partially granted the appeal filed by
Emergency Pawnshop Bula, Inc. (EPBI) and Danilo R. Napala (Napala) by modifying
the decision of the trial court. In the 10 March 2005 Resolution, the Court of Appeals
denied the motion for partial reconsideration filed by the Spouses Jose C. Tongson
and Carmen S. Tongson (Spouses Tongson).
The Facts
In May 1992, Napala offered to purchase from the Spouses Tongson their 364-square
meter parcel of land, situated in Davao City and covered by Transfer Certificate of
Title (TCT) No. 143020, for ₱3,000,000. Finding the offer acceptable, the Spouses
Tongson executed with Napala a Memorandum of Agreement 4 dated 8 May 1992.
On 2 December 1992, respondents’ lawyer Atty. Petronilo A. Raganas, Jr. prepared a
Deed of Absolute Sale5indicating the consideration as only ₱400,000. When Carmen
Tongson "noticed that the consideration was very low, she [complained] and called
the attention of Napala but the latter told her not to worry as he would be the one to
pay for the taxes and she would receive the net amount of ₱3,000,000."6
To conform with the consideration stated in the Deed of Absolute Sale, the parties
executed another Memorandum of Agreement, which allegedly replaced the first
Memorandum of Agreement,7 showing that the selling price of the land was only
₱400,000.8
Upon signing the Deed of Absolute Sale, Napala paid ₱200,000 in cash to the Spouses
Tongson and issued a postdated Philippine National Bank (PNB) check in the amount
of ₱2,800,000,9 representing the remaining balance of the purchase price of the
subject property. Thereafter, TCT No. 143020 was cancelled and TCT No. T-186128
was issued in the name of EPBI.10
22
When presented for payment, the PNB check was dishonored for the reason "Drawn
Against Insufficient Funds." Despite the Spouses Tongson's repeated demands to
either pay the full value of the check or to return the subject parcel of land, Napala
failed to do either. Left with no other recourse, the Spouses Tongson filed with the
Regional Trial Court, Branch 16, Davao City a Complaint for Annulment of Contract
and Damages with a Prayer for the Issuance of a Temporary Restraining Order and a
Writ of Preliminary Injunction.11
In their Answer, respondents countered that Napala had already delivered to the
Spouses Tongson the amount of ₱2,800,000 representing the face value of the PNB
check, as evidenced by a receipt issued by the Spouses Tongson. Respondents
pointed out that the Spouses Tongson never returned the PNB check claiming that it
was misplaced. Respondents asserted that the payment they made rendered the
filing of the complaint baseless.12
At the pre-trial, Napala admitted, among others, issuing the postdated PNB check in
the sum of ₱2,800,000.13 The Spouses Tongson, on the other hand, admitted issuing a
receipt which showed that they received the PNB check from Napala. Thereafter, trial
ensued.
The Ruling of the Trial Court
The trial court found that the purchase price of the subject property has not been
fully paid and that Napala’s assurance to the Spouses Tongson that the PNB check
would not bounce constituted fraud that induced the Spouses Tongson to enter into
the sale. Without such assurance, the Spouses Tongson would not have agreed to the
contract of sale. Accordingly, there was fraud within the ambit of Article 1338 of the
Civil Code,14 justifying the annulment of the contract of sale, the award of damages
and attorney’s fees, and payment of costs.
The dispositive portion of the 9 December 1996 Decision of the trial court reads:
WHEREFORE, judgment is hereby rendered –
I Annulling the contract entered into by the plaintiffs with the defendants;
II Declaring the writs of preliminary injunctions issued permanent;
III Ordering defendants to:
1) reconvey the property subject matter of the case to the plaintiffs;
2) pay plaintiffs:
a) ₱100,000 as moral damages;
b) ₱50,000 as exemplary damages;
c) ₱20,000 as attorney’s fees; and
 d) ₱35,602.50 cost of suit broken down as follows:
₱70.00 bond fee
₱60.00 lis pendens fee
₱902.00 docket fee
₱390.00 docket fee
₱8.00 summons fee
₱12.00 SDF
₱178.50 Xerox
₱9,000 Sidcor Insurance Bond fee
₱25,000 Sidcor Insurance Bond fee
or the total sum of ₱205,602.50.
It is further ordered that the monetary award be offsetted [sic] to defendants’
downpayment of ₱200,000 thereby leaving a balance of ₱5,602.50. 15
Respondents appealed to the Court of Appeals.
The Ruling of the Court of Appeals
The Court of Appeals agreed with the trial court’s finding that Napala employed fraud
when he misrepresented to the Spouses Tongson that the PNB check in the amount
of ₱2,800,000 would be properly funded at its maturity. However, the Court of
Appeals found that the issuance and delivery of the PNB check and fraudulent
representation made by Napala could not be considered as the determining cause for
the sale of the subject parcel of land. Hence, such fraud could not be made the basis
for annulling the contract of sale. Nevertheless, the fraud employed by Napala is a
proper and valid basis for the entitlement of the Spouses Tongson to the balance of
the purchase price in the amount of ₱2,800,000 plus interest at the legal rate of 6%
per annum computed from the date of filing of the complaint on 11 February 1993.
Finding the trial court’s award of damages unconscionable, the Court of Appeals
reduced the moral damages from ₱100,000 to ₱50,000 and the exemplary damages
from ₱50,000 to ₱25,000.
The dispositive portion of the 31 August 2004 Decision of the Court of Appeals reads:
WHEREFORE, the instant appeal is PARTIALLY GRANTED. The assailed decision of the
Regional Trial Court, 11th Judicial Region, Branch 16, Davao City, in Civil Case No.
21,858-93, is hereby MODIFIED, to read:
WHEREFORE, judgment is hereby rendered ordering defendants to pay plaintiffs:
23
a) the sum of ₱2,800,000.00 representing the balance of the purchase price
of the subject parcel of land, plus interest at the legal rate of 6% per annum
computed from the date of filing of the complaint on 11 February 1993, until
the finality of the assailed decision; thereafter, the interest due shall be at
the legal rate of 12% per annum until fully paid;
b) ₱50,000 as moral damages;
c) ₱25,000 as exemplary damages;
d) ₱20,000 as attorney’s fees; and
e) The costs of suit in the total amount of ₱35,602.50.
It is understood, however, that plaintiffs’ entitlement to items a to d, is subject to the
condition that they have not received the same or equivalent amounts in criminal
case for Violation of Batas Pambansa Bilang 22, docketed as Criminal Case No. 30508-
93, before the Regional Trial Court of Davao City, Branch 12, instituted against the
defendant Danilo R. Napala by plaintiff Carmen S. Tongson.
SO ORDERED.16
The Spouses Tongson filed a partial motion for reconsideration which was denied by
the Court of Appeals in its Resolution dated 10 March 2005.
The Issues
The Spouses Tongson raise the following issues:
1. WHETHER THE CONTRACT OF SALE CAN BE ANNULLED BASED ON THE
FRAUD EMPLOYED BY NAPALA; and
2. WHETHER THE COURT OF APPEALS ERRED IN REDUCING THE AMOUNT OF
DAMAGES AWARDED BY THE TRIAL COURT.
The Ruling of the Court
The petition has merit.
On the existence of fraud
A contract is a meeting of the minds between two persons, whereby one is bound to
give something or to render some service to the other. 17 A valid contract requires the
concurrence of the following essential elements: (1) consent or meeting of the minds,
that is, consent to transfer ownership in exchange for the price; (2) determinate
subject matter; and (3) price certain in money or its equivalent.18
 In the present case, there is no question that the subject matter of the sale is the 364-
square meter Davao lot owned by the Spouses Tongson and the selling price agreed
upon by the parties is ₱3,000,000. Thus, there is no dispute as regards the presence of
the two requisites for a valid sales contract, namely, (1) a determinate subject matter
and (2) a price certain in money.
The problem lies with the existence of the remaining element, which is consent of the
contracting parties, specifically, the consent of the Spouses Tongson to sell the
property to Napala. Claiming that their consent was vitiated, the Spouses Tongson
point out that Napala’s fraudulent representations of sufficient funds to pay for the
property induced them into signing the contract of sale. Such fraud, according to the
Spouses Tongson, renders the contract of sale void.
On the contrary, Napala insists that the Spouses Tongson willingly consented to the
sale of the subject property making the contract of sale valid. Napala maintains that
no fraud attended the execution of the sales contract.
The trial and appellate courts had conflicting findings on the question of whether the
consent of the Spouses Tongson was vitiated by fraud. While the Court of Appeals
agreed with the trial court’s finding that Napala employed fraud when he assured the
Spouses Tongson that the postdated PNB check was fully funded when it fact it was
not, the Court of Appeals disagreed with the trial court’s ruling that such fraud could
be the basis for the annulment of the contract of sale between the parties.
Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. In order that fraud may
vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract.19 Additionally, the fraud must
be serious.20
We find no causal fraud in this case to justify the annulment of the contract of sale
between the parties. It is clear from the records that the Spouses Tongson agreed to
sell their 364-square meter Davao property to Napala who offered to pay ₱3,000,000
as purchase price therefor. Contrary to the Spouses Tongson’s belief that the fraud
employed by Napala was "already operational at the time of the perfection of the
contract of sale," the misrepresentation by Napala that the postdated PNB check
would not bounce on its maturity hardly equates to dolo causante. Napala’s
assurance that the check he issued was fully funded was not the principal inducement
for the Spouses Tongson to sign the Deed of Absolute Sale. Even before Napala issued
the check, the parties had already consented and agreed to the sale transaction. The
24
Spouses Tongson were never tricked into selling their property to Napala. On the
contrary, they willingly accepted Napala’s offer to purchase the property at
₱3,000,000. In short, there was a meeting of the minds as to the object of the sale as
well as the consideration therefor.
Some of the instances where this Court found the existence of causal fraud include:
(1) when the seller, who had no intention to part with her property, was "tricked into
believing" that what she signed were papers pertinent to her application for the
reconstitution of her burned certificate of title, not a deed of sale; 21 (2) when the
signature of the authorized corporate officer was forged; 22 or (3) when the seller was
seriously ill, and died a week after signing the deed of sale raising doubts on whether
the seller could have read, or fully understood, the contents of the documents he
signed or of the consequences of his act. 23 Suffice it to state that nothing analogous
to these badges of causal fraud exists in this case.
However, while no causal fraud attended the execution of the sales contract, there is
fraud in its general sense, which involves a false representation of a fact, 24 when
Napala inveigled the Spouses Tongson to accept the postdated PNB check on the
representation that the check would be sufficiently funded at its maturity. In other
words, the fraud surfaced when Napala issued the worthless check to the Spouses
Tongson, which is definitely not during the negotiation and perfection stages of the
sale. Rather, the fraud existed in the consummation stage of the sale when the
parties are in the process of performing their respective obligations under the
perfected contract of sale. In Swedish Match, AB v. Court of Appeals,25 the Court
explained the three stages of a contract, thus:
I n general, contracts undergo three distinct stages, to wit: negotiation; perfection or
birth; and consummation. Negotiation begins from the time the prospective
contracting parties manifest their interest in the contract and ends at the moment of
agreement of the parties. Perfection or birth of the contract takes place when the
parties agree upon the essential elements of the contract. Consummation occurs
when the parties fulfill or perform the terms agreed upon in the contract, culminating
in the extinguishment thereof.
Indisputably, the Spouses Tongson as the sellers had already performed their
obligation of executing the Deed of Sale, which led to the cancellation of their title in
favor of EPBI. Respondents as the buyers, on the other hand, failed to perform their
correlative obligation of paying the full amount of the contract price. While Napala
paid ₱200,000 cash to the Spouses Tongson as partial payment, Napala issued an
insufficiently funded PNB check to pay the remaining balance of ₱2.8 million. Despite
repeated demands and the filing of the complaint, Napala failed to pay the ₱2.8
million until the present. Clearly, respondents committed a substantial breach of their
 reciprocal obligation, entitling the Spouses Tongson to the rescission of the sales
contract. The law grants this relief to the aggrieved party, thus:
Article 1191 of the Civil Code provides:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible.
Article 1385 of the Civil Code provides the effects of rescission, viz:
ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
While they did not file an action for the rescission of the sales contract, the Spouses
Tongson specifically prayed in their complaint for the annulment of the sales
contract, for the immediate execution of a deed of reconveyance, and for the return
of the subject property to them.26 The Spouses Tongson likewise prayed "for such
other reliefs which may be deemed just and equitable in the premises." In view of
such prayer, and considering respondents’ substantial breach of their obligation
under the sales contract, the rescission of the sales contract is but proper and
justified. Accordingly, respondents must reconvey the subject property to the
Spouses Tongson, who in turn shall refund the initial payment of ₱200,000 less the
costs of suit.
Napala’s claims that rescission is not proper and that he should be given more time to
pay for the unpaid remaining balance of ₱2,800,000 cannot be countenanced. Having
acted fraudulently in performing his obligation, Napala is not entitled to more time to
pay the remaining balance of ₱2,800,000, and thereby erase the default or breach
that he had deliberately incurred.27 To do otherwise would be to sanction a
deliberate and reiterated infringement of the contractual obligations incurred by
Napala, an attitude repugnant to the stability and obligatory force of contracts. 28
25
The Court notes that the selling price indicated in the Deed of Absolute Sale was only
₱400,000, instead of the true purchase price of ₱3,000,000. The undervaluation of
the selling price operates to defraud the government of the taxes due on the basis of
the correct purchase price. Under the law,29 the sellers have the obligation to pay the
capital gains tax. In this case, Napala undertook to "advance" the capital gains tax,
among other fees, under the Memorandum of Agreement, thus:
ATTY. ALABASTRO:
Q Is it not a fact that you were the one who paid for the capital gains tax?
A No, I only advanced the money.
Q To whom?
A To BIR.
COURT:
Q You were the one who went to the BIR to pay the capital gains tax?
A It is embodied in the memorandum agreement.30
While Carmen Tongson protested against the "very low consideration," she
eventually agreed to the "reduced" selling price indicated in the Deed of
Absolute since Napala assured her not to worry about the taxes and
expenses, as he had allegedly made arrangements with the Bureau of
Internal Revenue (BIR) regarding the payment of the taxes, thus:
Q What is the amount in the Deed of Absolute Sale?
A It was only Four Hundred Thousand. And he told me not to worry because
x x x the BIR and not to worry because he will pay me what was agreed – the
amount of Three Million and he will be paying all these expenses so I was
thinking, if that is the case, anyway he paid me the Two Hundred Thousand
cash and a subsequent Two Point Eight Million downpayment check so I
really thought that he was paying the whole amount.
COURT:
Proceed.
ATTY. LIZA:
Q So you eventually agreed that this consideration be reduced to Four
Hundred Thousand Pesos and to be reflected in the Deed of Absolute Sale?
A Yes, but when I was complaining to him why it is so because I was worried
why that was like that but Mr. Napala told me don’t worry because [he] can
remedy this. And I asked him how can [he] remedy this? And he told me we
 can make another Memorandum of Agreement.
COURT:
Q Before you signed the Deed of Absolute Sale, you found out the amount?
A Yes, sir.
Q And you complained?
A Yes.31
Considering that the undervaluation of the selling price of the subject property,
initiated by Napala, operates to defraud the government of the correct amount of
taxes due on the sale, the BIR must therefore be informed of this Decision for its
appropriate action.
On the award of damages
Citing Article 1338 of the Civil Code, the trial court awarded ₱100,000 moral damages
and ₱50,000 exemplary damages to the Spouses Tongson. While agreeing with the
trial court on the Spouses Tongson’s entitlement to moral and exemplary damages,
the Court of Appeals reduced such awards for being unconscionable. Thus, the moral
damages was reduced from ₱100,000 to ₱50,000, and the exemplary damages was
reduced from ₱50,000 to ₱25,000.
As discussed above, Napala defrauded the Spouses Tongson in his acts of issuing a
worthless check and representing to the Spouses Tongson that the check was funded,
committing in the process a substantial breach of his obligation as a buyer. For such
fraudulent acts, the law, specifically the Civil Code, awards moral damages to the
injured party, thus:
ART. 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith. (Emphasis supplied)
Considering that the Spouses Tongson are entitled to moral damages, the Court may
also award exemplary damages, thus:
ART. 2232. In contracts and quasi-contracts, the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.
26
Article 2234. When the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages
would be awarded. In case liquidated damages have been agreed upon, although no
proof of loss is necessary in order that such liquidated damages may be recovered,
nevertheless, before the court may consider the question of granting exemplary in
addition to the liquidated damages, the plaintiff must show that he would be entitled
to moral, temperate or compensatory damages were it not for the stipulation for
liquidated damages. (Emphasis supplied)
Accordingly, we affirm the Court of Appeals’ awards of moral and exemplary
damages, which we find equitable under the circumstances in this case.
WHEREFORE, we PARTIALLY GRANT the petition. We SET ASIDE the 31 August 2004
Decision and 10 March 2005 Resolution of the Court of Appeals in CA-G.R. CV No.
58242, except as to the award of moral and exemplary damages, and ORDER the
rescission of the contract of sale between the Spouses Tongson and Emergency
Pawnshop Bula, Inc.
Let a copy of this Decision be forwarded to the Bureau of Internal Revenue for its
appropriate action. SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
DELAY (Mora)
GENERAL MILLING CORPORATION, Petitioner, vs.
SPS. LIBRADO RAMOS and REMEDIOS RAMOS, Respondents.
9. G.R. No. 193723 July 20, 2011
VELASCO, JR., J.:
The Case
This is a petition for review of the April 15, 2010 Decision of the Court of Appeals (CA)
in CA-G.R. CR-H.C. No. 85400 entitled Spouses Librado Ramos & Remedios Ramos v.
General Milling Corporation, et al., which affirmed the May 31, 2005 Decision of the
Regional Trial Court (RTC), Branch 12 in Lipa City, in Civil Case No. 00-0129 for
Annulment and/or Declaration of Nullity of Extrajudicial Foreclosure Sale with
Damages.
 The Facts
On August 24, 1989, General Milling Corporation (GMC) entered into a Growers
Contract with spouses Librado and Remedios Ramos (Spouses Ramos). Under the
contract, GMC was to supply broiler chickens for the spouses to raise on their land in
Barangay Banaybanay, Lipa City, Batangas.1 To guarantee full compliance, the
Growers Contract was accompanied by a Deed of Real Estate Mortgage over a piece
of real property upon which their conjugal home was built. The spouses further
agreed to put up a surety bond at the rate of PhP 20,000 per 1,000 chicks delivered
by GMC. The Deed of Real Estate Mortgage extended to Spouses Ramos a maximum
credit line of PhP 215,000 payable within an indefinite period with an interest of
twelve percent (12%) per annum.2
The Deed of Real Estate Mortgage contained the following provision:
WHEREAS, the MORTGAGOR/S has/have agreed to guarantee and secure the full and
faithful compliance of [MORTGAGORS’] obligation/s with the MORTGAGEE by a First
Real Estate Mortgage in favor of the MORTGAGEE, over a 1 parcel of land and the
improvements existing thereon, situated in the Barrio/s of -Banaybanay, Municipality
of Lipa City, Province of Batangas, Philippines, his/her/their title/s thereto being
evidenced by Transfer Certificate/s No./s T-9214 of the Registry of Deeds for the
Province of Batangas in the amount of TWO HUNDRED FIFTEEN THOUSAND (P
215,000.00), Philippine Currency, which the maximum credit line payable within a x x
x day term and to secure the payment of the same plus interest of twelve percent
(12%) per annum.
Spouses Ramos eventually were unable to settle their account with GMC. They
alleged that they suffered business losses because of the negligence of GMC and its
violation of the Growers Contract.3
On March 31, 1997, the counsel for GMC notified Spouses Ramos that GMC would
institute foreclosure proceedings on their mortgaged property.4
On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage. On
June 10, 1997, the property subject of the foreclosure was subsequently sold by
public auction to GMC after the required posting and publication.5 It was foreclosed
for PhP 935,882,075, an amount representing the losses on chicks and feeds exclusive
of interest at 12% per annum and attorney’s fees.6 To complicate matters, on
October 27, 1997, GMC informed the spouses that its Agribusiness Division had
closed its business and poultry operations.7
27
On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or
Declaration of Nullity of the Extrajudicial Foreclosure Sale with Damages. They
contended that the extrajudicial foreclosure sale on June 10, 1997 was null and void,
since there was no compliance with the requirements of posting and publication of
notices under Act No. 3135, as amended, or An Act to Regulate the Sale of Property
under Special Powers Inserted in or Annexed to Real Estate Mortgages. They likewise
claimed that there was no sheriff’s affidavit to prove compliance with the
requirements on posting and publication of notices. It was further alleged that the
Deed of Real Estate Mortgage had no fixed term. A prayer for moral and exemplary
damages and attorney’s fees was also included in the complaint.8 Librado Ramos
alleged that, when the property was foreclosed, GMC did not notify him at all of the
foreclosure.9
During the trial, the parties agreed to limit the issues to the following: (1) the validity
of the Deed of Real Estate Mortgage; (2) the validity of the extrajudicial foreclosure;
and (3) the party liable for damages.10
In its Answer, GMC argued that it repeatedly reminded Spouses Ramos of their
liabilities under the Growers Contract. It argued that it was compelled to foreclose
the mortgage because of Spouses Ramos’ failure to pay their obligation. GMC insisted
that it had observed all the requirements of posting and publication of notices under
Act No. 3135.11
The Ruling of the Trial Court
Holding in favor of Spouses Ramos, the trial court ruled that the Deed of Real Estate
Mortgage was valid even if its term was not fixed. Since the duration of the term was
made to depend exclusively upon the will of the debtors-spouses, the trial court cited
jurisprudence and said that "the obligation is not due and payable until an action is
commenced by the mortgagee against the mortgagor for the purpose of having the
court fix the date on and after which the instrument is payable and the date of
maturity is fixed in pursuance thereto."12
The trial court held that the action of GMC in moving for the foreclosure of the
spouses’ properties was premature, because the latter’s obligation under their
contract was not yet due.
The trial court awarded attorney’s fees because of the premature action taken by
GMC in filing extrajudicial foreclosure proceedings before the obligation of the
spouses became due.
The RTC ruled, thus:
 WHEREFORE, premises considered, judgment is rendered as follows:
1. The Extra-Judicial Foreclosure Proceedings under docket no. 0107-97 is hereby
declared null and void;
2. The Deed of Real Estate Mortgage is hereby declared valid and legal for all intents
and puposes;
3. Defendant-corporation General Milling Corporation is ordered to pay Spouses
Librado and Remedios Ramos attorney’s fees in the total amount of P 57,000.00
representing acceptance fee of P30,000.00 and P3,000.00 appearance fee for nine (9)
trial dates or a total appearance fee of P 27,000.00;
4. The claims for moral and exemplary damages are denied for lack of merit.
IT IS SO ORDERED.13
The Ruling of the Appellate Court
On appeal, GMC argued that the trial court erred in: (1) declaring the extrajudicial
foreclosure proceedings null and void; (2) ordering GMC to pay Spouses Ramos
attorney’s fees; and (3) not awarding damages in favor of GMC.
The CA sustained the decision of the trial court but anchored its ruling on a different
ground. Contrary to the findings of the trial court, the CA ruled that the requirements
of posting and publication of notices under Act No. 3135 were complied with. The CA,
however, still found that GMC’s action against Spouses Ramos was premature, as
they were not in default when the action was filed on May 7, 1997.14
The CA ruled:
In this case, a careful scrutiny of the evidence on record shows that defendant-
appellant GMC made no demand to spouses Ramos for the full payment of their
obligation. While it was alleged in the Answer as well as in the Affidavit constituting
the direct testimony of Joseph Dominise, the principal witness of defendant-appellant
GMC, that demands were sent to spouses Ramos, the documentary evidence proves
otherwise. A perusal of the letters presented and offered as evidence by defendant-
appellant GMC did not "demand" but only request spouses Ramos to go to the office
of GMC to "discuss" the settlement of their account.15
According to the CA, however, the RTC erroneously awarded attorney’s fees to
Spouses Ramos, since the presumption of good faith on the part of GMC was not
overturned.
The CA disposed of the case as follows:
28
WHEREFORE, and in view of the foregoing considerations, the Decision of the
Regional Trial Court of Lipa City, Branch 12, dated May 21, 2005 is hereby AFFIRMED
with MODIFICATION by deleting the award of attorney’s fees to plaintiffs-appellees
spouses Librado Ramos and Remedios Ramos.16
Hence, We have this appeal.
The Issues
A. WHETHER [THE CA] MAY CONSIDER ISSUES NOT ALLEGED AND DISCUSSED IN THE
LOWER COURT AND LIKEWISE NOT RAISED BY THE PARTIES ON APPEAL, THEREFORE
HAD DECIDED THE CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF
THE SUPREME COURT.
B. WHETHER [THE CA] ERRED IN RULING THAT PETITIONER GMC MADE NO DEMAND
TO RESPONDENT SPOUSES FOR THE FULL PAYMENT OF THEIR OBLIGATION
CONSIDERING THAT THE LETTER DATED MARCH 31, 1997 OF PETITIONER GMC TO
RESPONDENT SPOUSES IS TANTAMOUNT TO A FINAL DEMAND TO PAY, THEREFORE IT
DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS.17
The Ruling of this Court
Can the CA consider matters not alleged?
GMC asserts that since the issue on the existence of the demand letter was not raised
in the trial court, the CA, by considering such issue, violated the basic requirements of
fair play, justice, and due process.18
In their Comment,19 respondents-spouses aver that the CA has ample authority to
rule on matters not assigned as errors on appeal if these are indispensable or
necessary to the just resolution of the pleaded issues.
In Diamonon v. Department of Labor and Employment,20 We explained that an
appellate court has a broad discretionary power in waiving the lack of assignment of
errors in the following instances:
(a) Grounds not assigned as errors but affecting the jurisdiction of the court over the
subject matter;
(b) Matters not assigned as errors on appeal but are evidently plain or clerical errors
within contemplation of law;
(c) Matters not assigned as errors on appeal but consideration of which is necessary
in arriving at a just decision and complete resolution of the case or to serve the
interests of a justice or to avoid dispensing piecemeal justice;
 (d) Matters not specifically assigned as errors on appeal but raised in the trial court
and are matters of record having some bearing on the issue submitted which the
parties failed to raise or which the lower court ignored;
(e) Matters not assigned as errors on appeal but closely related to an error assigned;
(f) Matters not assigned as errors on appeal but upon which the determination of a
question properly assigned, is dependent.
Paragraph (c) above applies to the instant case, for there would be a just and
complete resolution of the appeal if there is a ruling on whether the Spouses Ramos
were actually in default of their obligation to GMC.
Was there sufficient demand?
We now go to the second issue raised by GMC. GMC asserts error on the part of the
CA in finding that no demand was made on Spouses Ramos to pay their obligation. On
the contrary, it claims that its March 31, 1997 letter is akin to a demand.
We disagree.
There are three requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; and third, the
creditor judicially or extrajudicially requires the debtor’s performance.21
According to the CA, GMC did not make a demand on Spouses Ramos but merely
requested them to go to GMC’s office to discuss the settlement of their account. In
spite of the lack of demand made on the spouses, however, GMC proceeded with the
foreclosure proceedings. Neither was there any provision in the Deed of Real Estate
Mortgage allowing GMC to extrajudicially foreclose the mortgage without need of
demand.
Indeed, Article 1169 of the Civil Code on delay requires the following:
Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfilment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares; x x x
As the contract in the instant case carries no such provision on demand not being
necessary for delay to exist, We agree with the appellate court that GMC should have
29
first made a demand on the spouses before proceeding to foreclose the real estate
mortgage.
Development Bank of the Philippines v. Licuanan finds application to the instant case:
The issue of whether demand was made before the foreclosure was effected is
essential.1avvphi1 If demand was made and duly received by the respondents and
the latter still did not pay, then they were already in default and foreclosure was
proper. However, if demand was not made, then the loans had not yet become due
and demandable. This meant that respondents had not defaulted in their payments
and the foreclosure by petitioner was premature. Foreclosure is valid only when the
debtor is in default in the payment of his obligation.22
In turn, whether or not demand was made is a question of fact.23 This petition filed
under Rule 45 of the Rules of Court shall raise only questions of law. For a question to
be one of law, it must not involve an examination of the probative value of the
evidence presented by the litigants or any of them. The resolution of the issue must
rest solely on what the law provides on the given set of circumstances. Once it is clear
that the issue invites a review of the evidence presented, the question posed is one
of fact.24 It need not be reiterated that this Court is not a trier of facts.25 We will
defer to the factual findings of the trial court, because petitioner GMC has not shown
any circumstances making this case an exception to the rule.
WHEREFORE, the petition is DENIED. The CA Decision in CA-G.R. CR-H.C. No. 85400 is
AFFIRMED.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.
G.R. No. 153004 November 5, 2004
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the Decision, 1 dated January
30, 2002, as well as the April 12, 2002, Resolution 2 of the Court of Appeals in CA-G.R.
CV No. 55122. The appellate court reversed the Decision, 3dated October 4, 1996, of
the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95-811, and
likewise denied petitioner's Motion for Reconsideration.
 The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the
plaintiff and defendant, respectively, in several civil cases filed in different courts in
the Philippines. On October 26, 1990, the parties executed a Compromise
Agreement4 which amicably ended all their pending litigations. The pertinent portions
of the Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the
following manner:
a. P1.5 Million immediately upon the execution of this agreement;
b. The balance of P13 Million shall be paid, whether in one lump
sum or in installments, at the discretion of the Foundation, within a
period of not more than two (2) years from the execution of this
agreement; provided, however, that in the event that the
Foundation does not pay the whole or any part of such balance, the
same shall be paid with the corresponding portion of the land or
real properties subject of the aforesaid cases and previously
covered by the notices of lis pendens, under such terms and
conditions as to area, valuation, and location mutually acceptable
to both parties; but in no case shall the payment of such balance be
later than two (2) years from the date of this agreement; otherwise,
payment of any unpaid portion shall only be in the form of land
aforesaid;
2. Immediately upon the execution of this agreement (and [the] receipt of
the P1.5 Million), plaintiff Santos shall cause the dismissal with prejudice of
Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily
withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-
45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the
aforesaid various notices of lis pendens on the real properties
aforementioned (by signing herein attached corresponding documents, for
such lifting); provided, however, that in the event that defendant
Foundation shall sell or dispose of any of the lands previously subject of lis
pendens, the proceeds of any such sale, or any part thereof as may be
required, shall be partially devoted to the payment of the Foundation's
obligations under this agreement as may still be subsisting and payable at
the time of any such sale or sales;
...
30
5. Failure of compliance of any of the foregoing terms and conditions by
either or both parties to this agreement shall ipso facto and ipso jure
automatically entitle the aggrieved party to a writ of execution for the
enforcement of this agreement. [Emphasis supplied] 5
In compliance with the Compromise Agreement, respondent Santos moved for the
dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis
pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5
million to respondent Santos, leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation
two real properties, which were previously subjects of lis pendens. Discovering the
disposition made by the petitioner, respondent Santos sent a letter to the petitioner
demanding the payment of the remaining P13 million, which was ignored by the
latter. Meanwhile, on September 30, 1991, the Regional Trial Court of Makati City,
Branch 62, issued a Decision6approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to petitioner inquiring
when it would pay the balance of P13 million. There was no response from petitioner.
Consequently, respondent Santos applied with the Regional Trial Court of Makati City,
Branch 62, for the issuance of a writ of execution of its compromise judgment dated
September 30, 1991. The RTC granted the writ. Thus, on March 10, 1993, the Sheriff
levied on the real properties of petitioner, which were formerly subjects of the lis
pendens. Petitioner, however, filed numerous motions to block the enforcement of
the said writ. The challenge of the execution of the aforesaid compromise judgment
even reached the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga
were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12
million and it was issued a Certificate of Sale covering the real properties subject of
the auction sale. Subsequently, another auction sale was held on February 8, 1995,
for the sale of real properties of petitioner in Bacolod City. Again, Riverland, Inc. was
the highest bidder. The Certificates of Sale issued for both properties provided for the
right of redemption within one year from the date of registration of the said
properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief
and Damages7 alleging that there was delay on the part of petitioner in paying the
balance of P13 million. They further alleged that under the Compromise Agreement,
the obligation became due on October 26, 1992, but payment of the remaining P12
million was effected only on November 22, 1994. Thus, respondents prayed that
petitioner be ordered to pay legal interest on the obligation, penalty, attorney's fees
 and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared
final and not subject to legal redemption.
In its Answer,8 petitioner countered that respondents have no cause of action against
it since it had fully paid its obligation to the latter. It further claimed that the alleged
delay in the payment of the balance was due to its valid exercise of its rights to
protect its interests as provided under the Rules. Petitioner counterclaimed for
attorney's fees and exemplary damages.
On October 4, 1996, the trial court rendered a Decision 9 dismissing herein
respondents' complaint and ordering them to pay attorney's fees and exemplary
damages to petitioner. Respondents then appealed to the Court of Appeals. The
appellate court reversed the ruling of the trial court:
WHEREFORE, finding merit in the appeal, the appealed Decision is hereby
REVERSED and judgment is hereby rendered ordering appellee SVHFI to pay
appellants Santos and Riverland, Inc.: (1) legal interest on the principal
amount of P13 million at the rate of 12% per annum from the date of
demand on October 28, 1992 up to the date of actual payment of the whole
obligation; and (2) P20,000 as attorney's fees and costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner assigns the following
issues:
WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR
WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR.
SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT
NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE
JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF
INTEREST TO THE RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL
IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND,
INC., NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE
PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN
CONVERTED TO AN OBLIGATION TO PAY IN KIND – DELIVERY OF REAL
PROPERTIES OWNED BY THE PETITIONER – WHICH HAD BEEN FULLY
PERFORMED
III
31
WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING
PAYMENT OF INTEREST BY REASON OF THE WAIVER PROVISION IN THE
COMPROMISE AGREEMENT, WHICH BECAME THE LAW AMONG THE
PARTIES10
The only issue to be resolved is whether the respondents are entitled to legal
interest.
Petitioner SVHFI alleges that where a compromise agreement or compromise
judgment does not provide for the payment of interest, the legal interest by way of
penalty on account of fault or delay shall not be due and payable, considering that
the obligation or loan, on which the payment of legal interest could be based, has
been superseded by the compromise agreement.11 Furthermore, the petitioner
argues that the respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise agreement.12 Article 4
of the compromise agreement provides:
Plaintiff Santos waives and renounces any and all other claims that he and
his family may have on the defendant Foundation arising from and in
connection with the aforesaid civil cases, and defendant Foundation, on the
other hand, also waives and renounces any and all claims that it may have
against plaintiff Santos in connection with such cases. 13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement did not provide for a
period within which the obligation will become due and demandable, it is incumbent
upon respondent Santos to ask for judicial intervention for purposes of fixing the
period. It is only when a fixed period exists that the legal interests can be computed.
Respondents profer that their right to damages is based on delay in the payment of
the obligation provided in the Compromise Agreement. The Compromise Agreement
provides that payment must be made within the two-year period from its execution.
This was approved by the trial court and became the law governing their contract.
Respondents posit that petitioner's failure to comply entitles them to damages, by
way of interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already commenced. 15 It is an agreement
between two or more persons, who, for preventing or putting an end to a lawsuit,
adjust their difficulties by mutual consent in the manner which they agree on, and
 which everyone of them prefers in the hope of gaining, balanced by the danger of
losing.16
The general rule is that a compromise has upon the parties the effect and authority of
res judicata, with respect to the matter definitely stated therein, or which by
implication from its terms should be deemed to have been included therein. 17 This
holds true even if the agreement has not been judicially approved. 18
In the case at bar, the Compromise Agreement was entered into by the parties on
October 26, 1990.19 It was judicially approved on September 30, 1991. 20 Applying
existing jurisprudence, the compromise agreement as a consensual contract became
binding between the parties upon its execution and not upon its court approval. From
the time a compromise is validly entered into, it becomes the source of the rights and
obligations of the parties thereto. The purpose of the compromise is precisely to
replace and terminate controverted claims.21
In accordance with the compromise agreement, the respondents asked for the
dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial
P1.5 million upon the execution of the agreement. This act of the petitioner showed
that it acknowledges that the agreement was immediately executory and enforceable
upon its execution.
As to the remaining P13 million, the terms and conditions of the compromise
agreement are clear and unambiguous. It provides:
...
b. The balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more
than two (2) years from the execution of this agreement… 22[Emphasis
supplied.]
...
The two-year period must be counted from October 26, 1990, the date of execution
of the compromise agreement, and not on the judicial approval of the compromise
agreement on September 30, 1991. When respondents wrote a demand letter to
petitioner on October 28, 1992, the obligation was already due and demandable.
When the petitioner failed to pay its due obligation after the demand was made, it
incurred delay.
32
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of
their obligation. [Emphasis supplied]
Delay as used in this article is synonymous to default or mora which means delay in
the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to
time.23
In order for the debtor to be in default, it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance
judicially or extrajudicially.24
In the case at bar, the obligation was already due and demandable after the lapse of
the two-year period from the execution of the contract. The two-year period ended
on October 26, 1992. When the respondents gave a demand letter on October 28,
1992, to the petitioner, the obligation was already due and demandable.
Furthermore, the obligation is liquidated because the debtor knows precisely how
much he is to pay and when he is to pay it.
The second requisite is also present. Petitioner delayed in the performance. It was
able to fully settle its outstanding balance only on February 8, 1995, which is more
than two years after the extra-judicial demand. Moreover, it filed several motions
and elevated adverse resolutions to the appellate court to hinder the execution of a
final and executory judgment, and further delay the fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28, 1992, was in
accordance with an extra-judicial demand contemplated by law.
Verily, the petitioner is liable for damages for the delay in the performance of its
obligation. This is provided for in Article 117025 of the New Civil Code.
When the debtor knows the amount and period when he is to pay, interest as
damages is generally allowed as a matter of right. 26 The complaining party has been
deprived of funds to which he is entitled by virtue of their compromise agreement.
The goal of compensation requires that the complainant be compensated for the loss
of use of those funds. This compensation is in the form of interest. 27 In the absence of
agreement, the legal rate of interest shall prevail. 28 The legal interest for loan as
forbearance of money is 12% per annum29 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.30
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30,
2002 of the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No.
55122 are AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.
Azcuna, J., on leave.
SOLAR HARVEST, INC., Petitioner, vs.
DAVAO CORRUGATED CARTON CORPORATION, Respondent.
G.R. No. 176868 July 26, 2010
NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision 1 dated September 21,
2006 and Resolution2 dated February 23, 2007, which denied petitioner’s motion for
reconsideration. The assailed Decision denied petitioner’s claim for reimbursement
for the amount it paid to respondent for the manufacture of corrugated carton boxes.
The case arose from the following antecedents:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement
with respondent, Davao Corrugated Carton Corporation, for the purchase of
corrugated carton boxes, specifically designed for petitioner’s business of exporting
fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get
the production underway, petitioner deposited, on March 31, 1998, US$40,150.00 in
respondent’s US Dollar Savings Account with Westmont Bank, as full payment for the
ordered boxes.
Despite such payment, petitioner did not receive any boxes from respondent. On
January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount
paid.3 On February 19, 2001, respondent replied that the boxes had been completed
as early as April 3, 1998 and that petitioner failed to pick them up from the former’s
warehouse 30 days from completion, as agreed upon. Respondent mentioned that
petitioner even placed an additional order of 24,000 boxes, out of which, 14,000 had
been manufactured without any advanced payment from petitioner. Respondent
33
then demanded petitioner to remove the boxes from the factory and to pay the
balance of US$15,400.00 for the additional boxes and ₱132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes will
be delivered within 30 days from payment but respondent failed to manufacture and
deliver the boxes within such time. It further alleged
6. That repeated follow-up was made by the plaintiff for the immediate production of
the ordered boxes, but every time, defendant [would] only show samples of boxes
and ma[k]e repeated promises to deliver the said ordered boxes.
7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff
ha[d] to cancel the same and demand payment and/or refund from the defendant
but the latter refused to pay and/or refund the US$40,150.00 payment made by the
former for the ordered boxes.41avvphi1
In its Answer with Counterclaim,5 respondent insisted that, as early as April 3, 1998, it
had already completed production of the 36,500 boxes, contrary to petitioner’s
allegation. According to respondent, petitioner, in fact, made an additional order of
24,000 boxes, out of which, 14,000 had been completed without waiting for
petitioner’s payment. Respondent stated that petitioner was to pick up the boxes at
the factory as agreed upon, but petitioner failed to do so. Respondent averred that,
on October 8, 1998, petitioner’s representative, Bobby Que (Que), went to the
factory and saw that the boxes were ready for pick up. On February 20, 1999, Que
visited the factory again and supposedly advised respondent to sell the boxes as
rejects to recoup the cost of the unpaid 14,000 boxes, because petitioner’s
transaction to ship bananas to China did not materialize. Respondent claimed that
the boxes were occupying warehouse space and that petitioner should be made to
pay storage fee at ₱60.00 per square meter for every month from April 1998. As
counterclaim, respondent prayed that judgment be rendered ordering petitioner to
pay $15,400.00, plus interest, moral and exemplary damages, attorney’s fees, and
costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500 boxes and 14,000 boxes out
of the second order. It maintained that
respondent only manufactured a sample of the ordered boxes and that respondent
could not have produced 14,000 boxes without the required pre-payments.6
 During trial, petitioner presented Que as its sole witness. Que testified that he ordered DISMISSED without pronouncement as to cost. Defendant’s counterclaims
ordered the boxes from respondent and deposited the money in respondent’s are similarly dismissed for lack of merit.
account.7 He specifically stated that, when he visited respondent’s factory, he saw
that the boxes had no print of petitioner’s logo. 8 A few months later, he followed-up SO ORDERED.14
the order and was told that the company had full production, and thus, was promised
that production of the order would be rushed. He told respondent that it should Petitioner filed a notice of appeal with the CA.
indeed rush production because the need for the boxes was urgent. Thereafter, he
asked his partner, Alfred Ong, to cancel the order because it was already late for
On September 21, 2006, the CA denied the appeal for lack of merit. 15 The appellate
them to meet their commitment to ship the bananas to China. 9 On cross-
court held that petitioner failed to discharge its burden of proving what it claimed to
examination, Que further testified that China Zero Food, the Chinese company that
be the parties’ agreement with respect to the delivery of the boxes. According to the
ordered the bananas, was sending a ship to Davao to get the bananas, but since there
CA, it was unthinkable that, over a period of more than two years, petitioner did not
were no cartons, the ship could not proceed. He said that, at that time, bananas from
even demand for the delivery of the boxes. The CA added that even assuming that
Tagum Agricultural Development Corporation (TADECO) were already there. He
the agreement was for respondent to deliver the boxes, respondent would not be
denied that petitioner made an additional order of 24,000 boxes. He explained that it
liable for breach of contract as petitioner had not yet demanded from it the delivery
took three years to refer the matter to counsel because respondent promised to
of the boxes.16
pay.10
Petitioner moved for reconsideration,17 but the motion was denied by the CA in its
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao
Resolution of February 23, 2007.18
in October 1998 to inspect the boxes and that the latter got samples of them. In
February 2000, they inspected the boxes again and Que got more samples. Estanislao
In this petition, petitioner insists that respondent did not completely manufacture the
said that petitioner did not pick up the boxes because the ship did not arrive. 11 Jaime
boxes and that it was respondent which was obliged to deliver the boxes to TADECO.
Tan (Tan), president of respondent, also testified that his company finished
production of the 36,500 boxes on April 3, 1998 and that petitioner made a second
order of 24,000 boxes. He said that the agreement was for respondent to produce We find no reversible error in the assailed Decision that would justify the grant of this
the boxes and for petitioner to pick them up from the warehouse. 12 He also said that petition.
the reason why petitioner did not pick up the boxes was that the ship that was to
carry the bananas did not arrive.13 According to him, during the last visit of Que and Petitioner’s claim for reimbursement is actually one for rescission (or resolution) of
Estanislao, he asked them to withdraw the boxes immediately because they were contract under Article 1191 of the Civil Code, which reads:
occupying a big space in his plant, but they, instead, told him to sell the cartons as
rejects. He was able to sell 5,000 boxes at ₱20.00 each for a total of ₱100,000.00. Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
They then told him to apply the said amount to the unpaid balance. of the obligors should not comply with what is incumbent upon him.

In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did
not commit any breach of faith that would justify rescission of the contract and the
consequent reimbursement of the amount paid by petitioner. The RTC said that
respondent was able to produce the ordered boxes but petitioner failed to obtain
possession thereof because its ship did not arrive. It thus dismissed the complaint and
respondent’s counterclaims, disposing as follows:
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

WHEREFORE, premises considered, judgment is hereby rendered in favor of This is understood to be without prejudice to the rights of third persons who have
defendant and against the plaintiff and, accordingly, plaintiff’s complaint is hereby acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
34
 The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Art. 1191 should
be taken in conjunction with Art. 1169 of the same law, which provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
service is to be rendered was a controlling motive for the establishment of
the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
In reciprocal obligations, as in a contract of sale, the general rule is that the
fulfillment of the parties’ respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed, the default for each
obligation must be determined by the rules given in the first paragraph of the present
article,19 that is, the other party would incur in delay only from the moment the other
party demands fulfillment of the former’s obligation. Thus, even in reciprocal
obligations, if the period for the fulfillment of the obligation is fixed, demand upon
the obligee is still necessary before the obligor can be considered in default and
before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the lack
of demand by petitioner upon respondent to fulfill its obligation to manufacture and
deliver the boxes. The Complaint only alleged that petitioner made a "follow-up"
upon respondent, which, however, would not qualify as a demand for the fulfillment
of the obligation. Petitioner’s witness also testified that they made a follow-up of the
boxes, but not a demand. Note is taken of the fact that, with respect to their claim for
35
reimbursement, the Complaint alleged and the witness testified that a demand letter
was sent to respondent. Without a previous demand for the fulfillment of the
obligation, petitioner would not have a cause of action for rescission against
respondent as the latter would not yet be considered in breach of its contractual
obligation.
Even assuming that a demand had been previously made before filing the present
case, petitioner’s claim for reimbursement would still fail, as the circumstances would
show that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.20 The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact
made by the trial court, especially when reiterated by the CA, must be given great
respect if not considered as final.21 In dealing with this petition, we will not veer away
from this doctrine and will thus sustain the factual findings of the CA, which we find
to be adequately supported by the evidence on record.
As correctly observed by the CA, aside from the pictures of the finished boxes and the
production report thereof, there is ample showing that the boxes had already been
manufactured by respondent. There is the testimony of Estanislao who accompanied
Que to the factory, attesting that, during their first visit to the company, they saw the
pile of petitioner’s boxes and Que took samples thereof. Que, petitioner’s witness,
himself confirmed this incident. He testified that Tan pointed the boxes to him and
that he got a sample and saw that it was blank. Que’s absolute assertion that the
boxes were not manufactured is, therefore, implausible and suspicious.
In fact, we note that respondent’s counsel manifested in court, during trial, that his
client was willing to shoulder expenses for a representative of the court to visit the
plant and see the boxes.22 Had it been true that the boxes were not yet completed,
respondent would not have been so bold as to challenge the court to conduct an
ocular inspection of their warehouse. Even in its Comment to this petition,
respondent prays that petitioner be ordered to remove the boxes from its factory
site,23 which could only mean that the boxes are, up to the present, still in
respondent’s premises.
We also believe that the agreement between the parties was for petitioner to pick up
the boxes from respondent’s warehouse, contrary to petitioner’s allegation. Thus, it
was due to petitioner’s fault that the boxes were not delivered to TADECO.
Petitioner had the burden to prove that the agreement was, in fact, for respondent to
deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole
witness, Que, was not even competent to testify on the terms of the agreement and,
 therefore, we cannot give much credence to his testimony. It appeared from the
testimony of Que that he did not personally place the order with Tan, thus:
Q. No, my question is, you went to Davao City and placed your order there?
A. I made a phone call.
Q. You made a phone call to Mr. Tan?
A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact
with Mr. Tan.
Q. So, your first statement that you were the one who placed the order is
not true?
A. That’s true. The Solar Harvest made a contact with Mr. Tan and I
deposited the money in the bank.
Q. You said a while ago [t]hat you were the one who called Mr. Tan and
placed the order for 36,500 boxes, isn’t it?
A. First time it was Mr. Alfred Ong.
Q. It was Mr. Ong who placed the order[,] not you?
A. Yes, sir.24
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
Estanislao?
A. Yes, sir.25
Moreover, assuming that respondent was obliged to deliver the boxes, it
could not have complied with such obligation. Que, insisting that the boxes
had not been manufactured, admitted that he did not give respondent the
authority to deliver the boxes to TADECO:
Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the
carton, the quantity and quality. But I have not seen a single carton.
Q. Are you trying to impress upon the [c]ourt that it is only after the boxes
are completed, will you give authority to Mr. Tan to deliver the boxes to
TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I asked
Mr. Tan to rush the carton but not…26
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
A. Because I have not seen any of my carton.
Q. You don’t have any authority yet given to Mr. Tan?
A. None, your Honor.27
Surely, without such authority, TADECO would not have allowed respondent to
deposit the boxes within its premises.
In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any breach of
36
its contractual obligation. As previously stated, the subject boxes are still within
respondent’s premises. To put a rest to this dispute, we therefore relieve respondent
from the burden of having to keep the boxes within its premises and, consequently,
give it the right to dispose of them, after petitioner is given a period of time within
which to remove them from the premises.
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals
Decision dated September 21, 2006 and Resolution dated February 23, 2007 are
AFFIRMED. In addition, petitioner is given a period of 30 days from notice within
which to cause the removal of the 36,500
boxes from respondent’s warehouse. After the lapse of said period and petitioner
fails to effect such removal, respondent shall have the right to dispose of the boxes in
any manner it may deem fit.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
SOCIAL SECURITY SYSTEM, petitioner, vs. MOONWALK DEVELOPMENT & HOUSING
CORPORATION, et al
G.R. No. 73345. April 7, 1993.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate
Appellate Court affirming in toto the decision of the former Court of First Instance of
Rizal, Seventh Judicial District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in
the Court of First Instance of Rizal against Moonwalk Development & Housing
Corporation, Moonwalk for short, alleging that the former had committed an error in
failing to compute the 12% interest due on delayed payments on the loan of
Moonwalk — resulting in a chain of errors in the application of payments made by
Moonwalk and, in an unpaid balance on the principal loan agreement in the amount
of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance
 on the said penalties for delayed payments in the amount of P7,517,178.21 as of
October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity
to ascertain the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued
an order giving both parties thirty (30) days within which to submit a stipulation of
facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by
the parties on September 19, 1980 of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for
an interim loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the
purpose of developing and constructing a housing project in the provinces of Rizal
and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973
Annex `D' providing for restructuring of the payment of the released amount of
P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter
respectively, under paragraph 5 of the aforesaid Third Amended Deed of First
Mortgage substituted Associated Construction and Surveys Corporation, Philippine
Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos,
as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of
P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk delivered to the
plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR
THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T.
Ramos, and the said Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal
of P12,254,700.00 released to it. The last payment made by Moonwalk in the amount
of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by
plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant
Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite
and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by
another letter dated December 17, 1979, plaintiff alleged that it committed an honest
37
mistake in releasing defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had
completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A'
to 'O' inclusive, of the Complaint and the letter dated December 21, 1979 of the
defendant's counsel to the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the
ground that the obligation was already extinguished by the payment by Moonwalk of
its indebtedness to SSS and by the latter's act of cancelling the real estate mortgages
executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed
by SSS with the trial court was likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court
reduced the errors assigned by the SSS into this issue: ". . . are defendants-appellees,
namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita
U. Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-
appellant or is their obligation extinguished?" 3 As We have stated earlier, the
respondent Court held that Moonwalk's obligation was extinguished and affirmed the
trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived
and/or barred," the appellate court disregarded the basic tenet that waiver of a right
must be express, made in a clear and unequivocal manner. There is no evidence in
the case at bar to show that SSS made a clear, positive waiver of the penalties, made
with full knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a
mere trustee, cannot perform acts affecting the same, including condonation of
penalties, that would diminish property rights of the owners and beneficiaries
thereof. (United Christian Missionary Society v. Social Security Commission, 30 SCRA
982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of
mistake of fact." 4
 The same problem which confronted the respondent court is presented before Us: Is
the penalty demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in
the negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states
in its Brief, what is sought to be recovered in this case is not the 12% interest on the
loan but the 12% penalty for failure to pay on time the amortization. What is sought
to be enforced therefore is the penal clause of the contract entered into between the
parties.
Now, what is a penal clause. A penal clause has been defined as
"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" (3 Castan 8th Ed. p.
118).
Now an accessory obligation has been defined as that attached to a principal
obligation in order to complete the same or take its place in the case of breach (4
Puig Peña Part 1 p. 76). Note therefore that an accessory obligation is dependent for
its existence on the existence of a principal obligation. A principal obligation may exist
without an accessory obligation but an accessory obligation cannot exist without a
principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness
can exist without the mortgage but a mortgage cannot exist without the
indebtedness, which is the principal obligation. In the present case, the principal
obligation is the loan between the parties. The accessory obligation of a penal clause
is to enforce the main obligation of payment of the loan. If therefore the principal
obligation does not exist the penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non
performance or late performance of the main obligation. In other words in order that
the penalty may arise there must be a breach of the obligation either by total or
partial non fulfillment or there is non fulfillment in point of time which is called mora
or delay. The debtor therefore violates the obligation in point of time if there is mora
or delay. Now, there is no mora or delay unless there is a demand. It is noteworthy
that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the
38
creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time
of the letter of plaintiff-appellant there was no demand for the payment of the
penalty, hence the debtor was no in mora in the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account
(Exhibit F) showing the total obligation of Moonwalk as P15,004,905.74, and
forthwith demanded payment from defendant-appellee. Because of the demand for
payment, Moonwalk made several payments on September 29, October 9 and 19,
1979 respectively, all in all totalling P15,004,905.74 which was a complete payment
of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the
real estate mortgages given by Moonwalk were released on October 9, 1979 and
October 10, 1979 (Exhibits G and H). For all purposes therefore the principal
obligation of defendant-appellee was deemed extinguished as well as the accessory
obligation of real estate mortgage; and that is the reason for the release of all the
Real Estate Mortgages on October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory
obligation must also be deemed extinguished considering that the principal obligation
was considered extinguished, and the penal clause being an accessory obligation.
That being the case, the demand for payment of the penal clause made by plaintiff-
appellant in its demand letter dated November 28, 1979 and its follow up letter dated
December 17, 1979 (which parenthetically are the only demands for payment of the
penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the
extinguishment of the obligation because then the obligation of Moonwalk would
consist of: 1) the principal obligation 2) the interest of 12% on the principal obligation
and 3) the penalty of 12% for late payment for after demand, Moonwalk would be in
mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November
28, 1979 and December 17, 1979 as far as the penalty is concerned, the defendant-
appellee was not in default since there was no mora prior to the demand. That being
the case, therefore, the demand made after the extinguishment of the principal
obligation which carried with it the extinguishment of the penal clause being merely
an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10, 1979
together with the 12% interest by defendant-appellee Moonwalk, its obligation was
extinguished. It being extinguished, there was no more need for the penal clause.
Now, it is to be noted that penalty at anytime can be modified by the Court. Even
substantial performance under Art. 1234 authorizes the Court to consider it as
 complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:
"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."
If the penalty can be reduced after the principal obligation has been partly or
irregularly complied with by the debtor, which is nonetheless a breach of the
obligation, with more reason the penal clause is not demandable when full obligation
has been complied with since in that case there is no breach of the obligation. In the
present case, there has been as yet no demand for payment of the penalty at the
time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with
by the debtor, that is, the amount loaned together with the 12% interest has been
fully paid by the appellee. That being so, there is no basis for demanding the penal
clause since the obligation has been extinguished. Here there has been a waiver of
the penal clause as it was not demanded before the full obligation was fully paid and
extinguished. Again, emphasis must be made on the fact that plaintiff-appellant has
not lost anything under the contract since in got back in full the amount loan (sic) as
well as the interest thereof. The same thing would have happened if the obligation
was paid on time, for then the penal clause, under the terms of the contract would
not apply. Payment of the penalty does not mean gain or loss of plaintiff-appellant
since it is merely for the purpose of enforcing the performance of the main obligation
has been fully complied with and extinguished, the penal clause has lost its raison d'
entre." 5
We find no reason to depart from the appellate court's decision. We, however,
advance the following reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, 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.
39
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of
breach. 6 It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility
in the event of breach. 7 From the foregoing, it is clear that a penal clause is intended
to prevent the obligor from defaulting in the performance of his obligation. Thus, if
there should be default, the penalty may be enforced. One commentator of the Civil
Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of
the Civil Code? We must make a distinction between a positive and a negative
obligation. With regard to obligations which are positive (to give and to do), the
penalty is demandable when the debtor is in mora; hence, the necessity of demand
by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee
judicially or extrajudicially demands from the obligor the performance of the
obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation."
There are only three instances when demand is not necessary to render the obligor in
default. These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond
his power to perform." 9
This case does not fall within any of the established exceptions. Hence, despite the
provision in the promissory note that "(a)ll amortization payments shall be made
every first five (5) days of the calendar month until the principal and interest on the
loan or any portion thereof actually released has been fully paid," 10 petitioner is not
 excused from making a demand. It has been established that at the time of payment
of the full obligation, private respondent Moonwalk has long been delinquent in
meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment
does not necessarily mean delay in the legal concept. To be in default ". . . is different
from mere delay in the grammatical sense, because it involves the beginning of a
special condition or status which has its own peculiar effects or results." 11 In order
that the debtor may be in default it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance
judicially and extrajudicially. 12 Default generally begins from the moment the
creditor demands the performance of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment
of its monthly amortizations. Neither did it show that petitioner demanded the
payment of the stipulated penalty upon the failure of Moonwalk to meet its monthly
amortization. What the complaint itself showed was that SSS tried to enforce the
obligation sometime in September, 1977 by foreclosing the real estate mortgages
executed by Moonwalk in favor of SSS. But this foreclosure did not push through
upon Moonwalk's requests and promises to pay in full. The next demand for payment
happened on October 1, 1979 when SSS issued a Statement of Account to Moonwalk.
And in accordance with said statement, Moonwalk paid its loan in full. What is clear,
therefore, is that Moonwalk was never in default because SSS never compelled
performance. Though it tried to foreclose the mortgages, SSS itself desisted from
doing so upon the entreaties of Moonwalk. If the Statement of Account could
properly be considered as demand for payment, the demand was complied with on
time. Hence, no delay occurred and there was, therefore, no occasion when the
penalty became demandable and enforceable. Since there was no default in the
performance of the main obligation — payment of the loan — SSS was never entitled
to recover any penalty, not at the time it made the Statement of Account and
certainly, not after the extinguishment of the principal obligation because then, all
the more that SSS had no reason to ask for the penalties. Thus, there could never be
any occasion for waiver or even mistake in the application for payment because there
was nothing for SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that
the funds it held were trust funds and as trustee, the petitioner could not perform
acts affecting the funds that would diminish property rights of the owners and
beneficiaries thereof. To support its claim, SSS cited the case of United Christian
Missionary Society v. Social Security Commission. 14
40
We looked into the case and found out that it is not applicable to the present case as
it dealt not with the right of the SSS to collect penalties which were provided for in
contracts which it entered into but with its right to collect premiums and its duty to
collect the penalty for delayed payment or non-payment of premiums. The Supreme
Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement
of the law's mandate that the employer who fails to comply with his legal obligation
to remit the premiums to the System within the prescribed period shall pay a penalty
of three (3%) per month. The prescribed penalty is evidently of a punitive character,
provided by the legislature to assure that employers do not take lightly the State's
exercise of the police power in the implementation of the Republic's declared policy
"to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide
protection to employers against the hazards of disability, sickness, old age and death .
. ."
Thus, We agree with the decision of the respondent court on the matter which We
quote, to wit:
"Note that the above case refers to the condonation of the penalty for the non
remittance of the premium which is provided for by Section 22(a) of the Social
Security Act . . . In other words, what was sought to be condoned was the penalty
provided for by law for non remittance of premium for coverage under the Social
Security Act.
The case at bar does not refer to any penalty provided for by law nor does it refer to
the non remittance of premium. The case at bar refers to a contract of loan entered
into between plaintiff and defendant Moonwalk Development and Housing
Corporation. Note, therefore, that no provision of law is involved in this case, nor is
there any penalty imposed by law nor a case about non-remittance of premium
required by law. The present case refers to a contract of loan payable in installments
not provided for by law but by agreement of the parties. Therefore, the ratio
decidendi of the case of United Christian Missionary Society vs. Social Security
Commission which plaintiff-appellant relies is not applicable in this case; clearly, the
Social Security Commission, which is a creature of the Social Security Act cannot
condone a mandatory provision of law providing for the payment of premiums and
for penalties for non remittance. The life of the Social Security Act is in the premiums
because these are the funds from which the Social Security Act gets the money for its
purposes and the non-remittance of the premiums is penalized not by the Social
Security Commission but by law.
 xxx xxx xxx
It is admitted that when a government created corporation enters into a contract
with private party concerning a loan, it descends to the level of a private person.
Hence, the rules on contract applicable to private parties are applicable to it. The
argument therefore that the Social Security Commission cannot waive or condone
the penalties which was applied in the United Christian Missionary Society cannot
apply in this case. First, because what was not paid were installments on a loan but
premiums required by law to be paid by the parties covered by the Social Security
Act. Secondly, what is sought to be condoned or waived are penalties not imposed by
law for failure to remit premiums required by law, but a penalty for non payment
provided for by the agreement of the parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of
the respondent court is AFFIRMED. LLpr
SO ORDERED
RODOLFO G. CRUZ and ESPERANZA IBIAS, Petitioners, vs. ATTY. DELFIN
GRUSPE, Respondent.
G.R. No. 191431 March 13, 2013
BRION, J.:
Before the Court is the petition for review on certiorari 1 filed under Rule 45 of the
Rules of Court, assailing the decision2 dated July 30, 2009 and the resolution 3 dated
February 19, 2010 of the Court of Appeals (CA) in CA-G.R. CV No. 86083. The CA
rulings affirmed with modification the decision dated September 27, 2004 of the
Regional Trial Court (RTC) of Bacoor, Cavite, Branch 19, in Civil Case No. BCV-99-146
which granted respondent Atty. Delfin Grupe’s claim for payment of sum of money
against petitioners Rodolfo G. Cruz and Esperanza Ibias.4
THE FACTUAL BACKGROUND
The claim arose from an accident that occurred on October 24, 1999, when the mini
bus owned and operated by Cruz and driven by one Arturo Davin collided with the
Toyota Corolla car of Gruspe; Gruspe’s car was a total wreck. The next day, on
October 25, 1999, Cruz, along with Leonardo Q. Ibias went to Gruspe’s office,
apologized for the incident, and executed a Joint Affidavit of Undertaking promising
jointly and severally to replace the Gruspe’s damaged car in 20 days, or until
November 15, 1999, of the same model and of at least the same quality; or,
41
alternatively, they would pay the cost of Gruspe’s car amounting to ₱350,000.00,
with interest at
12% per month for any delayed payment after November 15, 1999, until fully
paid.5 When Cruz and Leonardo failed to comply with their undertaking, Gruspe filed
a complaint for collection of sum of money against them on November 19, 1999
before the RTC.
In their answer, Cruz and Leonardo denied Gruspe’s allegation, claiming that Gruspe,
a lawyer, prepared the Joint Affidavit of Undertaking and forced them to affix their
signatures thereon, without explaining and informing them of its contents; Cruz
affixed his signature so that his mini bus could be released as it was his only means of
income; Leonardo, a barangay official, accompanied Cruz to Gruspe’s office for the
release of the mini bus, but was also deceived into signing the Joint Affidavit of
Undertaking.
Leonardo died during the pendency of the case and was substituted by his widow,
Esperanza. Meanwhile, Gruspe sold the wrecked car for ₱130,000.00.
In a decision dated September 27, 2004, the RTC ruled in favor of Gruspe and ordered
Cruz and Leonardo to pay ₱220,000.00,6 plus 15% per annum from November 15,
1999 until fully paid, and the cost of suit.
On appeal, the CA affirmed the RTC decision, but reduced the interest rate to 12% per
annum pursuant to the Joint Affidavit of Undertaking. 7 It declared that despite its
title, the Joint Affidavit of Undertaking is a contract, as it has all the essential
elements of consent, object certain, and consideration required under Article 1318 of
the Civil
Code. The CA further said that Cruz and Leonardo failed to present evidence to
support their contention of vitiated consent. By signing the Joint Affidavit of
Undertaking, they voluntarily assumed the obligation for the damage they caused to
Gruspe’s car; Leonardo, who was not a party to the incident, could have refused to
sign the affidavit, but he did not.
THE PETITION
In their appeal by certiorari with the Court, Cruz and Esperanza assail the CA ruling,
contending that the Joint Affidavit of Undertaking is not a contract that can be the
basis of an obligation to pay a sum of money in favor of Gruspe. They consider an
affidavit as different from a contract: an affidavit’s purpose is simply to attest to facts
 that are within his knowledge, while a contract requires that there be a meeting of
the minds between the two contracting parties.
Even if the Joint Affidavit of Undertaking was considered as a contract, Cruz and
Esperanza claim that it is invalid because Cruz and Leonardo’s consent thereto was
vitiated; the contract was prepared by Gruspe who is a lawyer, and its contents were
never explained to them. Moreover, Cruz and Leonardo were simply forced to affix
their signatures, otherwise, the mini van would not be released.
Also, they claim that prior to the filing of the complaint for sum of money, Gruspe did
not make any demand upon them. Hence, pursuant to Article 1169 of the Civil Code,
they could not be considered in default. Without this demand, Cruz and Esperanza
contend that Gruspe could not yet take any action.
THE COURT’S RULING
The Court finds the petition partly meritorious and accordingly modifies the judgment
of the CA.
Contracts are obligatory no matter what their forms may be, whenever the essential
requisites for their validity are present. In determining whether a document is an
affidavit or a contract, the Court looks beyond the title of the document, since the
denomination or title given by the parties in their document is not conclusive of the
nature of its contents.8 In the construction or interpretation of an instrument, the
intention of the parties is primordial and is to be pursued. If the terms of the
document are clear and leave no doubt on the intention of the contracting parties,
the literal meaning of its stipulations shall control. If the words appear to be contrary
to the parties’ evident intention, the latter shall prevail over the former. 9
A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses
that it contains stipulations characteristic of a contract. As quoted in the CA
decision,10 the Joint Affidavit of Undertaking contained a stipulation where Cruz and
Leonardo promised to replace the damaged car of Gruspe, 20 days from October 25,
1999 or up to November 15, 1999, of the same model and of at least the same
quality. In the event that they cannot replace the car within the same period, they
would pay the cost of Gruspe’s car in the total amount of ₱350,000.00, with interest
at 12% per month for any delayed payment after November 15, 1999, until fully paid.
These, as read by the CA, are very simple terms that both Cruz and Leonardo could
easily understand.
42
There is also no merit to the argument of vitiated consent.1âwphi1 An allegation of
vitiated consent must be proven by preponderance of evidence; Cruz and Leonardo
failed to support their allegation.
Although the undertaking in the affidavit appears to be onerous and lopsided, this
does not necessarily prove the alleged vitiation of consent. They, in fact, admitted the
genuineness and due execution of the Joint Affidavit and Undertaking when they said
that they signed the same to secure possession of their vehicle. If they truly believed
that the vehicle had been illegally impounded, they could have refused to sign the
Joint Affidavit of Undertaking and filed a complaint, but they did not. That the release
of their mini bus was conditioned on their signing the Joint Affidavit of Undertaking
does not, by itself, indicate that their consent was forced – they may have given it
grudgingly, but it is not indicative of a vitiated consent that is a ground for the
annulment of a contract.
Thus, on the issue of the validity and enforceability of the Joint Affidavit of
Undertaking, the CA did not commit any legal error that merits the reversal of the
assailed decision.
Nevertheless, the CA glossed over the issue of demand which is material in the
computation of interest on the amount due. The RTC ordered Cruz and Leonardo to
pay Gruspe "₱350,000.00 as cost of the car xxx plus fifteen percent (15%) per annum
from November 15, 1999 until fully paid."11 The 15% interest (later modified by the
CA to be 12%) was computed from November 15, 1999 – the date stipulated in the
Joint Affidavit of Undertaking for the payment of the value of Gruspe’s car. In the
absence of a finding by the lower courts that Gruspe made a demand prior to the
filing of the complaint, the interest cannot be computed from November 15, 1999
because until a demand has been made, Cruz and Leonardo could not be said to be in
default.12 "In order that the debtor may be in default, it is necessary that the
following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires
the performance judicially and extrajudicially."13 Default generally begins from the
moment the creditor demands the performance of the obligation. In this case,
demand could be considered to have been made upon the filing of the complaint on
November 19, 1999, and it is only from this date that the interest should be
computed.
Although the CA upheld the Joint Affidavit of Undertaking, we note that it imposed
interest rate on a per annum basis, instead of the per month basis that was stated in
the Joint Affidavit of Undertaking without explaining its reason for doing so. 14 Neither
party, however, questioned the change. Nonetheless, the Court affirms the change in
 the interest rate from 12% per month to 12% per annum, as we find the interest rate
agreed upon in the Joint Affidavit of Undertaking excessive. 15
WHEREFORE, we AFFIRM the decision dated July 30, 2009 and the resolution dated
February 19, 2010 of the Court of Appeals in CA-G.R. CV No. 86083, subject to the
Modification that the twelve percent (12%) per annum interest imposed on the
amount due shall accrue only from November 19, 1999, when judicial demand was
made.
SO ORDERED.
ARTURO D. BRION
G.R. No. 184458 January 14, 2015
RODRIGO RIVERA, Petitioner, vs. SPOUSES SALVADOR CHUA AND VIOLETA S.
CHUA, Respondents.
x-----------------------x
G.R. No. 184472
SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners, vs. RODRIGO
RIVERA, Respondent.
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609
which affirmed with modification the separate rulings of the Manila City trial courts,
the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan
Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for collection of a sum
of money due a promissory note. While all three (3) lower courts upheld the validity
and authenticity of the promissory note as duly signed by the obligor, Rodrigo Rivera
(Rivera), petitioner in G.R. No. 184458, the appellate court modified the trial courts’
consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to
twelve percent (12%) per annumcomputed from the date of judicial or extrajudicial
demand, and (2) reinstatement of the award of attorney’s fees also in a reduced
amount of ₱50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no valid
promissory note and questions the entire ruling of the lower courts. On the other
hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses
Chua), take exception to the appellate court’s reduction of the stipulated interest
rate of sixty percent (60%) to twelve percent (12%) per annum.
43
We proceed to the facts.
The parties were friends of long standing having known each other since 1973: Rivera
and Salvador are kumpadres, the former is the godfather of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C.
CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine
Currency (₱120,000.00) on December 31, 1995.
It is agreed and understood that failure on my part to pay the amount of (120,000.00)
One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the
sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until
the entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the further sum
equivalent to twenty percent (20%) of the total amount due and payable as and for
attorney’s fees which in no case shall be less than ₱5,000.00 and to pay in addition
the cost of suit and other incidental litigation expense.
Any action which may arise in connection with this note shall be brought in the
proper Court of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment stipulated in the
promissory note, Rivera, as partial payment for the loan, issued and delivered to the
SpousesChua, as payee, a check numbered 012467, dated 30 December 1998, drawn
against Rivera’s current account with the Philippine Commercial International Bank
(PCIB) in the amount of ₱25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably issued
by Rivera, likewise drawn against Rivera’s PCIB current account, numbered 013224,
duly signed and dated, but blank as to payee and amount. Ostensibly, as per
 understanding by the parties, PCIB Check No. 013224 was issued in the amount of
₱133,454.00 with "cash" as payee. Purportedly, both checks were simply partial
payment for Rivera’s loan in the principal amount of ₱120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason
"account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00
covering the principal of ₱120,000.00 plus five percent (5%) interest per month from
1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera
to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were
constrained to file a suit on 11 June 1999. The case was raffled before the MeTC,
Branch 30, Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never
executed the subject Promissory Note; (2) in all instances when he obtained a loan
from the Spouses Chua, the loans were always covered by a security; (3) at the time
of the filing of the complaint, he still had an existing indebtedness to the Spouses
Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB Check No.
132224 signed by him which he delivered to the Spouses Chua on 21 December 1998,
should have been issued in the amount of only 1,300.00, representing the amount he
received from the Spouses Chua’s saleslady; (5) contrary to the supposed agreement,
the Spouses Chua presented the check for payment in the amount of ₱133,454.00;
and (6) there was no demand for payment of the amount of ₱120,000.00 prior to the
encashment of PCIB Check No. 0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his
indebtedness thereunder.
The MeTC summarized the testimonies of both parties’ respective witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence
(consisting of the testimonies of [the spouses] Chua and NBI Senior Documents
Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI
document examiner (1989); NBI Senior Document Examiner (1994 to the date he
44
testified); registered criminologist; graduate of 18th Basic Training Course [i]n
Questioned Document Examination conducted by the NBI; twice attended a seminar
on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended
a seminar on Effective Methodology in Teaching and Instructional design conducted
by the NBI Academy; seminar lecturer on Questioned Documents, Signature
Verification and/or Detection; had examined more than a hundred thousand
questioned documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of
[Rivera] appearing in the Promissory Note and compared the signature thereon with
the specimen signatures of [Rivera] appearing on several documents. After a
thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents
submitted to him, he concluded that the questioned signature appearing in the
Promissory Note and the specimen signatures of [Rivera] appearing on the other
documents submitted were written by one and the same person. In connection with
his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8
January 2001, with the following conclusion: "The questioned and the standard
specimen signatures RODGRIGO RIVERA were written by one and the same person."
[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May
1998, he obtained a loan from [respondent] Salvador and executed a real estate
mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside
from this loan, in October, 1998 he borrowed ₱25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of
the Promissory Note dated 24 February 1995 and alleged that the signature
appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB
Check No. 0132224 was partial payment for the Promissory Note was not true, the
truth being that he delivered the check to [respondent Salvador] with the space for
amount left blank as he and [respondent] Salvador had agreed that the latter was to
fill it in with the amount of ₱1,300.00 which amount he owed [the spouses Chua];
however, on 29 December 1998 [respondent] Salvador called him and told him that
he had written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the testimony of NBI
Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the
signature appearing on the Promissory Note was not his signature and that he did not
execute the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus
stipulated interest at the rate of 5% per month from 1 January 1996, and legal
 interest at the rate of 12% percent per annum from 11 June 1999, as actual and
compensatory damages; 20% of the whole amount due as attorney’s fees. 7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the
MeTC, but deleted the award of attorney’s fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the
rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly bore the
signature of Rivera. Undaunted, Rivera appealed to the Court of Appeals which
affirmed Rivera’s liability under the Promissory Note, reduced the imposition of
interest on the loan from 60% to 12% per annum, and reinstated the award of
attorney’s fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per
annum and the award of attorney’s fees is reinstated atthe reduced amount of
₱50,000.00 Costs against [Rivera].9
Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No.
184458 and the Spouses Chua in G.R. No. 184472, respectively raising the following
issues:
A. In G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE
WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS
LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE
SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT
THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION
OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10
B. In G.R. No. 184472
45
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL
ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST
RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT
RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED
RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE,
INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11
As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied
the petition, via a Minute Resolution, for failure to sufficiently show any reversible
error in the ruling of the appellate court specifically concerning the correct rate of
interest on Rivera’s indebtedness under the Promissory Note.12
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera
questioning the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that heexecuted the Promissory Note; he claims that given
his friendship withthe Spouses Chua who were money lenders, he has been able to
maintain a loan account with them. However, each of these loan transactions was
respectively "secured by checks or sufficient collateral."
Rivera points out that the Spouses Chua "never demanded payment for the loan nor
interest thereof (sic) from [Rivera] for almost four (4) years from the time of the
alleged default in payment [i.e., after December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are not inclined to
depart from the lower courts’ uniform rulings that Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory
note was forged, only that the signature is not his and varies from his usual signature.
He likewise makes a confusing defense of having previously obtained loans from the
Spouses Chua who were money lenders and who had allowed him a period of "almost
four (4) years" before demanding payment of the loan under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony of
the National Bureau of Investigation (NBI) handwriting expert on the integrity of the
promissory note. On that score, the appellate court aptly disabled Rivera’s
contention:
 [Rivera] failed to adduce clear and convincing evidence that the signature on the
promissory note is a forgery. The fact of forgery cannot be presumed but must be
proved by clear, positive and convincing evidence. Mere variance of signatures
cannot be considered as conclusive proof that the same was forged. Save for the
denial of Rivera that the signature on the note was not his, there is nothing in the
records to support his claim of forgery. And while it is true that resort to experts is
not mandatory or indispensable to the examination of alleged forged documents, the
opinions of handwriting experts are nevertheless helpful in the court’s determination
of a document’s authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the
promissory note and the testimony of the NBI witness. In fact, even a perfunctory
comparison of the signatures offered in evidence would lead to the conclusion that
the signatures were made by one and the same person.
It is a basic rule in civil cases that the party having the burden of proof must establish
his case by preponderance of evidence, which simply means "evidence which is of
greater weight, or more convincing than that which is offered in opposition to it."
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have
established a prima faciecase in their favor, hence, the burden of evidence has shifted
to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the appellate court, are
accorded the highest degree of respect and are considered conclusive between the
parties.15 A review of such findings by this Court is not warranted except upon a
showing of highly meritorious circumstances, such as: (1) when the findings of a trial
court are grounded entirely on speculation, surmises or conjectures; (2) when a lower
court's inference from its factual findings is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4)
when the findings of the appellate court go beyond the issues of the case, or fail to
notice certain relevant facts which, if properly considered, will justify a different
conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact
are conclusions without mention of the specific evidence on which they are based,
are premised on the absence of evidence, or are contradicted by evidence on
record.16 None of these exceptions obtains in this instance. There is no reason to
depart from the separate factual findings of the three (3) lower courts on the validity
of Rivera’s signature reflected in the Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations which he sets up in
his Answer to the plaintiff’s claim or cause of action, upon which issue is joined,
46
whether they relate to the whole case or only to certain issues in the case.17
In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the
testimony of a handwriting expert from the NBI. While it is true that resort to experts
is not mandatory or indispensable to the examination or the comparison of
handwriting, the trial courts in this case, on its own, using the handwriting expert
testimony only as an aid, found the disputed document valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following:
categorical statement of [respondent] Salvador that [Rivera] signed the Promissory
Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents
Examiner that the questioned signature (appearing on the Promissory Note) and
standard specimen signatures "Rodrigo Rivera" "were written by one and the same
person"; actual view at the hearing of the enlarged photographs of the questioned
signature and the standard specimen signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond
logic for a money lender to extend another loan on May 4, 1998 secured by a real
estate mortgage, when he was already in default and has not been paying any
interest for a loan incurred in February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing friendship of the parties
as "kumpadres," Rivera was allowed another loan, albeit this time secured by a real
estate mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is
nothing inconsistent with the Spouses Chua’s two (2) and successive loan
accommodations to Rivera: one, secured by a real estate mortgage and the other,
secured by only a Promissory Note.
Also completely plausible is thatgiven the relationship between the parties, Rivera
was allowed a substantial amount of time before the Spouses Chua demanded
payment of the obligation due under the Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery
and a discordant defense to assail the authenticity and validity of the Promissory
Note. Although the burden of proof rested on the Spouses Chua having instituted the
civil case and after they established a prima facie case against Rivera, the burden of
evidence shifted to the latter to establish his defense. 21 Consequently, Rivera failed to
discharge the burden of evidence, refute the existence of the Promissory Note duly
signed by him and subsequently, that he did not fail to pay his obligation thereunder.
On the whole, there was no question left on where the respective evidence of the
 parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues
that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the
part of the appellate court to apply Section 70 of the Negotiable Instruments Law
(NIL).22
We agree that the subject promissory note is not a negotiable instrument and the
provisions of the NIL do not apply to this case. Section 1 of the NIL requires the
concurrence of the following elements to be a negotiable instrument:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
On the other hand, Section 184 of the NIL defines what negotiable promissory note
is: SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. Where a
note is drawn to the maker’s own order, it is not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein respondents,
the Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua
as payees. However, even if Rivera’s Promissory Note is not a negotiable instrument
and therefore outside the coverage of Section 70 of the NIL which provides that
presentment for payment is not necessary to charge the person liable on the
instrument, Rivera is still liable under the terms of the Promissory Note that he
issued.
The Promissory Note is unequivocal about the date when the obligation falls due and
becomes demandable—31 December 1995. As of 1 January 1996, Rivera had already
incurred in delay when he failed to pay the amount of ₱120,000.00 due to the
Spouses Chua on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
47
Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
service is to be rendered was a controlling motive for the establishment of
the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
(Emphasis supplied)
There are four instances when demand is not necessary to constitute the debtor in
default: (1) when there is an express stipulation to that effect; (2) where the law so
provides; (3) when the period is the controlling motive or the principal inducement
for the creation of the obligation; and (4) where demand would be useless. In the first
two paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period lapses, default will
commence.
We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of
(₱120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I
agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the
date of default until the entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the
"date of default" until the entire obligation is fully paid for. The parties evidently
agreed that the maturity of the obligation at a date certain, 31 December 1995, will
give rise to the obligation to pay interest. The Promissory Note expressly provided
that after 31 December 1995, default commences and the stipulation on payment of
interest starts.
 The date of default under the Promissory Note is 1 January 1996, the day following 31
December 1995, the due date of the obligation. On that date, Rivera became liable
for the stipulated interest which the Promissory Note says is equivalent to 5% a
month. In sum, until 31 December 1995, demand was not necessary before Rivera
could be held liable for the principal amount of ₱120,000.00. Thereafter, on 1 January
1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the
form of stipulated interest.
The liability for damages of those who default, including those who are guilty of
delay, in the performance of their obligations is laid down on Article 1170 24 of the
Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of interest as
an indemnity for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists inthe 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 percent per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a
sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or
before 31 December 1995; and (3) the Promissory Note provides for an indemnity for
damages upon default of Rivera which is the payment of a 5%monthly interest from
the date of default.
We do not consider the stipulation on payment of interest in this case as a penal
clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on
the principal amount of ₱120,000.00 upon default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there isno 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.
48
The penal clause is generally undertaken to insure performance and works as either,
or both, punishment and reparation. It is an exception to the general rules on
recovery of losses and damages. As an exception to the general rule, a penal clause
must be specifically set forth in the obligation.25
In high relief, the stipulation in the Promissory Note is designated as payment of
interest, not as a penal clause, and is simply an indemnity for damages incurred by
the Spouses Chua because Rivera defaulted in the payment of the amount of
₱120,000.00. The measure of damages for the Rivera’s delay is limited to the interest
stipulated in the Promissory Note. In apt instances, in default of stipulation, the
interest is that provided by law.26
In this instance, the parties stipulated that in case of default, Rivera will pay interest
at the rate of 5% a month or 60% per annum. On this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly states the date of
payment tobe 31 December 1995. Given this circumstance, demand by the creditor
isno longer necessary in order that delay may exist since the contract itself already
expressly so declares. The mere failure of [Spouses Chua] to immediately demand or
collect payment of the value of the note does not exonerate [Rivera] from his liability
therefrom. Verily, the trial court committed no reversible error when it imposed
interest from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved
from making demand under Article 1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in
addition to legal interests and attorney’s fees is, indeed, highly iniquitous and
unreasonable. Stipulated interest rates are illegal if they are unconscionable and the
Court is allowed to temper interest rates when necessary. Since the interest rate
agreed upon is void, the parties are considered to have no stipulation regarding the
interest rate, thus, the rate of interest should be 12% per annum computed from the
date of judicial or extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top of
the legal interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous
and unconscionable. Significantly, the issue on payment of interest has been squarely
disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to
sufficiently showany reversible error in the ruling of the appellate court, specifically
the reduction of the interest rate imposed on Rivera’s indebtedness under the
Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res
 judicata in its concept of "bar by prior judgment" on whether the Court of Appeals
correctly reduced the interest rate stipulated in the Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the following
requisites concur: (1) the former judgment or order must be final; (2) the judgment or
order must be on the merits; (3) the decision must have been rendered by a court
having jurisdiction over the subject matter and the parties; and (4) there must be,
between the first and the second action, identity of parties, of subject matter and of
causes of action.28
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of
parties and subject matter raising specifically errors in the Decision of the Court of
Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of
the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling
thereon affirming the Court of Appeals is a "bar by prior judgment."
At the time interest accrued from 1 January 1996, the date of default under the
Promissory Note, the then prevailing rate of legal interest was 12% per annum under
Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of
money.29 Thus, the legal interest accruing from the Promissory Note is 12% per
annum from the date of default on 1 January 1996. However, the 12% per annumrate
of legal interest is only applicable until 30 June 2013, before the advent and
effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013
reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v.
Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In
short, the applicable rate of legal interest from 1 January 1996, the date when Rivera
defaulted, to date when this Decision becomes final and executor is divided into two
periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996
to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision
becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was
made, to the date when this Decision becomes final and executory, such is likewise
divided into two periods: (1) 12% per annum from 11 June 1999, the date of judicial
demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this
Decision becomes final and executor.31 We base this imposition of interest on interest
due earning legal interest on Article 2212 of the Civil Code which provides that
"interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent on this point."
49
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to
the Spouses Chua could already be determined with reasonable certainty given the
wording of the Promissory Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts,
quasicontracts, delicts or quasi-delicts is breached, the contravenor can be
held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or for bearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extra judicial demand
under and subject to the provisions ofArticle 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.1âwphi1 No interest, however, shall be adjudged
on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged. 3. When the judgment of
the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 6% per annum from such finality
until its satisfaction, this interim period being deemed to be by then
an equivalent to a for bearance of credit. And, in addition to the
above, judgments that have become final and executory prior to
 July 1, 2013, shall not be disturbed and shall continue to be (1) the principal amount of ₱120,000.00;
implemented applying the rate of interest fixed therein. (Emphasis (2) legal interest of 12% per annumof the principal amount of ₱120,000.00
supplied) reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of ₱120,000.00
On the reinstatement of the award of attorney’s fees based on the stipulation in the form 1 July 2013 to date when this Decision becomes final and executory;
Promissory Note, weagree with the reduction thereof but not the ratiocination of the (4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June
appellate court that the attorney’s fees are in the nature of liquidated damages or 1999, date of judicial demand, to 30 June 2013, as interest due earning legal
penalty. The interest imposed in the Promissory Note already answers as liquidated interest;
damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit (5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1
in a reduced amount, in recognition that the Spouses Chua were compelled to litigate July 2013 to date when this Decision becomes final and executor, asinterest
and incurred expenses to protect their interests. 34 Thus, the award of ₱50,000.00 as due earning legal interest;
attorney’s fees is proper. (6) Attorney’s fees in the amount of ₱50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the
For clarity and to obviate confusion, we chart the breakdown of the total amount finality of this Decision until full payment thereof.
owed by Rivera to the Spouses Chua:
Costs against petitioner Rodrigo Rivera.
Face value Stipulated Interest A Interest due earning legal Attorney’s Total
of the & B interest A & B fees SO ORDERED.
Amount
Promissory
Note JOSE PORTUGAL PEREZ
Associate Justice
February A. January 1, 1996 to A. June 11, 1999 (date of Wholesale
24, 1995 to June 30, 2013 judicial demand) to June 30, Amount
December 2013 LORENZO SHIPPING CORP., petitioner, vs. BJ MARTHEL INTERNATIONAL,
31, 1995 B. July 1 2013 to date B. July 1, 2013 to date when INC., respondent.
when this Decision this Decision becomes final G.R. No. 145483 November 19, 2004
becomes final and and executory
executory
CHICO-NAZARIO, J.:
₱120,000.00 A. 12 % per annumon A. 12% per annumon the total ₱50,000.00 Total
the principal amount amount of column 2 amount This is a petition for review seeking to set aside the Decision 1 of the Court of Appeals
of ₱120,000.00 B. 6% per annumon the total of in CA-G.R. CV No. 54334 and its Resolution denying petitioner's motion for
B. 6% per annumon amount of column 235
Columns reconsideration.
the principal amount
1-4
of ₱120,000.00
The factual antecedents of this case are as follows:
The total amount owing to the Spouses Chua set forth in this Decision shall further
earn legal interest at the rate of 6% per annum computed from its finality until full
payment thereof, the interim period being deemed to be a forbearance of credit. Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in
coastwise shipping. It used to own the cargo vessel M/V Dadiangas Express.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of
Upon the other hand, respondent BJ Marthel International, Inc. is a business entity
Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to
pay respondents Spouse Salvador and Violeta Chua the following: engaged in trading, marketing, and selling of various industrial commodities. It is also
an importer and distributor of different brands of engines and spare parts.
50
 From 1987 up to the institution of this case, respondent supplied petitioner with
Very truly yours,
spare parts for the latter's marine engines. Sometime in 1989, petitioner asked
(SGD) HENRY PAJARILLO
respondent for a quotation for various machine parts. Acceding to this request,
Sales Manager
respondent furnished petitioner with a formal quotation,2 thus:
Petitioner thereafter issued to respondent Purchase Order No. 13839, 3 dated 02
November 1989, for the procurement of one set of cylinder liner, valued at P477,000,
May 31, 1989 to be used for M/V Dadiangas Express. The purchase order was co-signed by Jose Go,
MINQ-6093 Jr., petitioner's vice-president, and Henry Pajarillo. Quoted hereunder is the pertinent
LORENZO SHIPPING LINES portion of the purchase order:
Pier 8, North Harbor
Manila Name of Description Qty. Amount

SUBJECT: PARTS FOR ENGINE MODEL CYL. LINER M/E 1 SET P477,000.00
MITSUBISHI 6UET 52/60
NOTHING FOLLOW
Dear Mr. Go:
INV. #
We are pleased to submit our offer for your above subject requirements.
TERM OF PAYMENT: 25% DOWN PAYMENT

Description Qty. Unit Price Total Price 5 BI-MONTHLY INSTALLMENT[S]

Instead of paying the 25% down payment for the first cylinder liner, petitioner issued
Nozzle Tip 6 pcs. P 5,520.00 33,120.00
in favor of respondent ten postdated checks4 to be drawn against the former's
Plunger & Barrel 6 pcs. 27,630.00 165,780.00 account with Allied Banking Corporation. The checks were supposed to represent the
full payment of the aforementioned cylinder liner.
Cylinder Head 2 pcs. 1,035,000.00 2,070,000.00
Subsequently, petitioner issued Purchase Order No. 14011, 5 dated 15 January 1990,
Cylinder Liner 1 set 477,000.00 for yet another unit of cylinder liner. This purchase order stated the term of payment
to be "25% upon delivery, balance payable in 5 bi-monthly equal installment[s]."6 Like
TOTAL PRICE FOB P2,745,900.00 the purchase order of 02 November 1989, the second purchase order did not state
the date of the cylinder liner's delivery.
MANILA ___________
On 26 January 1990, respondent deposited petitioner's check that was postdated 18
January 1990, however, the same was dishonored by the drawee bank due to
insufficiency of funds. The remaining nine postdated checks were eventually returned
DELIVERY: Within 2 months after receipt of firm order. by respondent to petitioner.
TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal
Installment[s] not to exceed 90 days.
The parties presented disparate accounts of what happened to the check which was
We trust you find our above offer acceptable and look forward to your most
previously dishonored. Petitioner claimed that it replaced said check with a good one,
valued order.
the proceeds of which were applied to its other obligation to respondent. For its part,
respondent insisted that it returned said postdated check to petitioner.
51
 Respondent thereafter placed the order for the two cylinder liners with its principal in
Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23 February 1990 under
its own name with the First Interstate Bank of Tokyo.
On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioner's warehouse
in North Harbor, Manila. The sales invoices 7 evidencing the delivery of the cylinder
liners both contain the notation "subject to verification" under which the signature of
Eric Go, petitioner's warehouseman, appeared.
Respondent thereafter sent a Statement of Account dated 15 November 1990 8 to
petitioner. While the other items listed in said statement of account were fully paid
by petitioner, the two cylinder liners delivered to petitioner on 20 April 1990
remained unsettled. Consequently, Mr. Alejandro Kanaan, Jr., respondent's vice-
president, sent a demand letter dated 02 January 1991 9 to petitioner requiring the
latter to pay the value of the cylinder liners subjects of this case. Instead of heeding
the demand of respondent for the full payment of the value of the cylinder liners,
petitioner sent the former a letter dated 12 March 199110 offering to pay only
P150,000 for the cylinder liners. In said letter, petitioner claimed that as the cylinder
liners were delivered late and due to the scrapping of the M/V Dadiangas Express, it
(petitioner) would have to sell the cylinder liners in Singapore and pay the balance
from the proceeds of said sale.
Shortly thereafter, another demand letter dated 27 March 199111 was furnished
petitioner by respondent's counsel requiring the former to settle its obligation to
respondent together with accrued interest and attorney's fees.
Due to the failure of the parties to settle the matter, respondent filed an action for
sum of money and damages before the Regional Trial Court (RTC) of Makati City. In its
complaint,12 respondent (plaintiff below) alleged that despite its repeated oral and
written demands, petitioner obstinately refused to settle its obligations. Respondent
prayed that petitioner be ordered to pay for the value of the cylinder liners plus
accrued interest of P111,300 as of May 1991 and additional interest of 14% per
annum to be reckoned from June 1991 until the full payment of the principal;
attorney's fees; costs of suits; exemplary damages; actual damages; and
compensatory damages.
On 25 July 1991, and prior to the filing of a responsive pleading, respondent filed an
amended complaint with preliminary attachment pursuant to Sections 2 and 3, Rule
57 of the then Rules of Court.13 Aside from the prayer for the issuance of writ of
preliminary attachment, the amendments also pertained to the issuance by
petitioner of the postdated checks and the amounts of damages claimed.
52
In an Order dated 25 July 1991,14 the court a quo granted respondent's prayer for the
issuance of a preliminary attachment. On 09 August 1991, petitioner filed an Urgent
Ex-Parte Motion to Discharge Writ of Attachment 15attaching thereto a counter-bond
as required by the Rules of Court. On even date, the trial court issued an
Order16lifting the levy on petitioner's properties and the garnishment of its bank
accounts.
Petitioner afterwards filed its Answer17 alleging therein that time was of the essence
in the delivery of the cylinder liners and that the delivery on 20 April 1990 of said
items was late as respondent committed to deliver said items "within two (2) months
after receipt of firm order"18 from petitioner. Petitioner likewise sought counterclaims
for moral damages, exemplary damages, attorney's fees plus appearance fees, and
expenses of litigation.
Subsequently, respondent filed a Second Amended Complaint with Preliminary
Attachment dated 25 October 1991. 19 The amendment introduced dealt solely with
the number of postdated checks issued by petitioner as full payment for the first
cylinder liner it ordered from respondent. Whereas in the first amended complaint,
only nine postdated checks were involved, in its second amended complaint,
respondent claimed that petitioner actually issued ten postdated checks. Despite the
opposition by petitioner, the trial court admitted respondent's Second Amended
Complaint with Preliminary Attachment.20
Prior to the commencement of trial, petitioner filed a Motion (For Leave To Sell
Cylinder Liners)21 alleging therein that "[w]ith the passage of time and with no
definite end in sight to the present litigation, the cylinder liners run the risk of
obsolescence and deterioration"22 to the prejudice of the parties to this case. Thus,
petitioner prayed that it be allowed to sell the cylinder liners at the best possible
price and to place the proceeds of said sale in escrow. This motion, unopposed by
respondent, was granted by the trial court through the Order of 17 March 1991.23
After trial, the court a quo dismissed the action, the decretal portion of the Decision
stating:
WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff,
which is ordered to pay P50,000.00 to the defendant as and by way of attorney's
fees.24
The trial court held respondent bound to the quotation it submitted to petitioner
particularly with respect to the terms of payment and delivery of the cylinder liners. It
also declared that respondent had agreed to the cancellation of the contract of sale
when it returned the postdated checks issued by petitioner. Respondent's
 counterclaims for moral, exemplary, and compensatory damages were dismissed for
insufficiency of evidence.
Respondent moved for the reconsideration of the trial court's Decision but the
motion was denied for lack of merit.25
Aggrieved by the findings of the trial court, respondent filed an appeal with the Court
of Appeals26 which reversed and set aside the Decision of the court a quo. The
appellate court brushed aside petitioner's claim that time was of the essence in the
contract of sale between the parties herein considering the fact that a significant
period of time had lapsed between respondent's offer and the issuance by petitioner
of its purchase orders. The dispositive portion of the Decision of the appellate court
states:
WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE.
The appellee is hereby ORDERED to pay the appellant the amount of
P954,000.00, and accrued interest computed at 14% per annum reckoned
from May, 1991.27
The Court of Appeals also held that respondent could not have incurred delay in the
delivery of cylinder liners as no demand, judicial or extrajudicial, was made by
respondent upon petitioner in contravention of the express provision of Article 1169
of the Civil Code which provides:
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of
their obligation.
Likewise, the appellate court concluded that there was no evidence of the alleged
cancellation of orders by petitioner and that the delivery of the cylinder liners on 20
April 1990 was reasonable under the circumstances.
On 22 May 2000, petitioner filed a motion for reconsideration of the Decision of the
Court of Appeals but this was denied through the resolution of 06 October
2000.28 Hence, this petition for review which basically raises the issues of whether or
not respondent incurred delay in performing its obligation under the contract of sale
and whether or not said contract was validly rescinded by petitioner.
That a contract of sale was entered into by the parties is not disputed. Petitioner,
however, maintains that its obligation to pay fully the purchase price was
extinguished because the adverted contract was validly terminated due to
53
respondent's failure to deliver the cylinder liners within the two-month period stated
in the formal quotation dated 31 May 1989.
The threshold question, then, is: Was there late delivery of the subjects of the
contract of sale to justify petitioner to disregard the terms of the contract considering
that time was of the essence thereof?
In determining whether time is of the essence in a contract, the ultimate criterion is
the actual or apparent intention of the parties and before time may be so regarded
by a court, there must be a sufficient manifestation, either in the contract itself or the
surrounding circumstances of that intention.29 Petitioner insists that although its
purchase orders did not specify the dates when the cylinder liners were supposed to
be delivered, nevertheless, respondent should abide by the term of delivery
appearing on the quotation it submitted to petitioner. 30 Petitioner theorizes that the
quotation embodied the offer from respondent while the purchase order
represented its (petitioner's) acceptance of the proposed terms of the contract of
sale.31 Thus, petitioner is of the view that these two documents "cannot be taken
separately as if there were two distinct contracts." 32 We do not agree.
It is a cardinal rule in interpretation of contracts that if the terms thereof are clear
and leave no doubt as to the intention of the contracting parties, the literal meaning
shall control.33 However, in order to ascertain the intention of the parties, their
contemporaneous and subsequent acts should be considered. 34 While this Court
recognizes the principle that contracts are respected as the law between the
contracting parties, this principle is tempered by the rule that the intention of the
parties is primordial35 and "once the intention of the parties has been ascertained,
that element is deemed as an integral part of the contract as though it has been
originally expressed in unequivocal terms."36
In the present case, we cannot subscribe to the position of petitioner that the
documents, by themselves, embody the terms of the sale of the cylinder liners. One
can easily glean the significant differences in the terms as stated in the formal
quotation and Purchase Order No. 13839 with regard to the due date of the down
payment for the first cylinder liner and the date of its delivery as well as Purchase
Order No. 14011 with respect to the date of delivery of the second cylinder liner.
While the quotation provided by respondent evidently stated that the cylinder liners
were supposed to be delivered within two months from receipt of the firm order of
petitioner and that the 25% down payment was due upon the cylinder liners'
delivery, the purchase orders prepared by petitioner clearly omitted these significant
items. The petitioner's Purchase Order No. 13839 made no mention at all of the due
dates of delivery of the first cylinder liner and of the payment of 25% down payment.
 Its Purchase Order No. 14011 likewise did not indicate the due date of delivery of the
second cylinder liner.
In the case of Bugatti v. Court of Appeals, 37 we reiterated the principle that "[a]
contract undergoes three distinct stages – preparation or negotiation, its perfection,
and finally, its consummation. Negotiation begins from the time the prospective
contracting parties manifest their interest in the contract and ends at the moment of
agreement of the parties. The perfection or birth of the contract takes place when
the parties agree upon the essential elements of the contract. The last stage is the
consummation of the contract wherein the parties fulfill or perform the terms agreed
upon in the contract, culminating in the extinguishment thereof."
In the instant case, the formal quotation provided by respondent represented the
negotiation phase of the subject contract of sale between the parties. As of that time,
the parties had not yet reached an agreement as regards the terms and conditions of
the contract of sale of the cylinder liners. Petitioner could very well have ignored the
offer or tendered a counter-offer to respondent while the latter could have, under
the pertinent provision of the Civil Code,38withdrawn or modified the same. The
parties were at liberty to discuss the provisions of the contract of sale prior to its
perfection. In this connection, we turn to the testimonies of Pajarillo and Kanaan, Jr.,
that the terms of the offer were, indeed, renegotiated prior to the issuance of
Purchase Order No. 13839.
During the hearing of the case on 28 January 1993, Pajarillo testified as follows:
Q: You testified Mr. Witness, that you submitted a quotation with defendant
Lorenzo Shipping Corporation dated rather marked as Exhibit A stating the
terms of payment and delivery of the cylinder liner, did you not?
A: Yes sir.
Q: I am showing to you the quotation which is marked as Exhibit A there
appears in the quotation that the delivery of the cylinder liner will be made
in two months' time from the time you received the confirmation of the
order. Is that correct?
A: Yes sir.
Q: Now, after you made the formal quotation which is Exhibit A how long a
time did the defendant make a confirmation of the order?
A: After six months.
Q: And this is contained in the purchase order given to you by Lorenzo
Shipping Corporation?
A: Yes sir.
Q: Now, in the purchase order dated November 2, 1989 there appears only
54
the date the terms of payment which you required of them of 25% down
payment, now, it is stated in the purchase order the date of delivery, will you
explain to the court why the date of delivery of the cylinder liner was not
mentioned in the purchase order which is the contract between you and
Lorenzo Shipping Corporation?
A: When Lorenzo Shipping Corporation inquired from us for that cylinder
liner, we have inquired [with] our supplier in Japan to give us the price and
delivery of that item. When we received that quotation from our supplier it
is stated there that they can deliver within two months but we have to get
our confirmed order within June.
Q: But were you able to confirm the order from your Japanese supplier on
June of that year?
A: No sir.
Q: Why? Will you tell the court why you were not able to confirm your order
with your Japanese supplier?
A: Because Lorenzo Shipping Corporation did not give us the purchase order
for that cylinder liner.
Q: And it was only on November 2, 1989 when they gave you the purchase
order?
A: Yes sir.
Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in
1989 did you confirm the order with your Japanese supplier after receiving
the purchase order dated November 2, 1989?
A: Only when Lorenzo Shipping Corporation will give us the down payment
of 25%.39
For his part, during the cross-examination conducted by counsel for
petitioner, Kanaan, Jr., testified in the following manner:
WITNESS: This term said 25% upon delivery. Subsequently, in the final
contract, what was agreed upon by both parties was 25% down payment.
Q: When?
A: Upon confirmation of the order.
...
Q: And when was the down payment supposed to be paid?
A: It was not stated when we were supposed to receive that. Normally, we
expect to receive at the earliest possible time. Again, that would depend on
the customers. Even after receipt of the purchase order which was what
happened here, they re-negotiated the terms and sometimes we do accept
that.
Q: Was there a re-negotiation of this term?
A: This offer, yes. We offered a final requirement of 25% down payment
upon delivery.
Q: What was the re-negotiated term?
A: 25% down payment
Q: To be paid when?
 A: Supposed to be paid upon order.40
The above declarations remain unassailed. Other than its bare assertion that the
subject contracts of sale did not undergo further renegotiation, petitioner failed to
proffer sufficient evidence to refute the above testimonies of Pajarillo and Kanaan, Jr.
Notably, petitioner was the one who caused the preparation of Purchase Orders No.
13839 and No. 14011 yet it utterly failed to adduce any justification as to why said
documents contained terms which are at variance with those stated in the quotation
provided by respondent. The only plausible reason for such failure on the part of
petitioner is that the parties had, in fact, renegotiated the proposed terms of the
contract of sale. Moreover, as the obscurity in the terms of the contract between
respondent and petitioner was caused by the latter when it omitted the date of
delivery of the cylinder liners in the purchase orders and varied the term with respect
to the due date of the down payment,41 said obscurity must be resolved against it.42
Relative to the above discussion, we find the case of Smith, Bell & Co., Ltd. v.
Matti,43 instructive. There, we held that –
When the time of delivery is not fixed or is stated in general and indefinite
terms, time is not of the essence of the contract. . . .
In such cases, the delivery must be made within a reasonable time.
The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery
intended. . . .
We also find significant the fact that while petitioner alleges that the cylinder liners
were to be used for dry dock repair and maintenance of its M/V Dadiangas Express
between the later part of December 1989 to early January 1990, the record is bereft
of any indication that respondent was aware of such fact. The failure of petitioner to
notify respondent of said date is fatal to its claim that time was of the essence in the
subject contracts of sale.
In addition, we quote, with approval, the keen observation of the Court of Appeals:
. . . It must be noted that in the purchase orders issued by the appellee,
dated November 2, 1989 and January 15, 1990, no specific date of delivery
was indicated therein. If time was really of the essence as claimed by the
appellee, they should have stated the same in the said purchase orders, and
55
not merely relied on the quotation issued by the appellant considering the
lapse of time between the quotation issued by the appellant and the
purchase orders of the appellee.
In the instant case, the appellee should have provided for an allowance of
time and made the purchase order earlier if indeed the said cylinder liner
was necessary for the repair of the vessel scheduled on the first week of
January, 1990. In fact, the appellee should have cancelled the first purchase
order when the cylinder liner was not delivered on the date it now says was
necessary. Instead it issued another purchase order for the second set of
cylinder liner. This fact negates appellee's claim that time was indeed of the
essence in the consummation of the contract of sale between the parties. 44
Finally, the ten postdated checks issued in November 1989 by petitioner and received
by the respondent as full payment of the purchase price of the first cylinder liner
supposed to be delivered on 02 January 1990 fail to impress. It is not an indication of
failure to honor a commitment on the part of the respondent. The earliest maturity
date of the checks was 18 January 1990. As delivery of said checks could produce the
effect of payment only when they have been cashed, 45 respondent's obligation to
deliver the first cylinder liner could not have arisen as early as 02 January 1990 as
claimed by petitioner since by that time, petitioner had yet to fulfill its undertaking to
fully pay for the value of the first cylinder liner. As explained by respondent, it
proceeded with the placement of the order for the cylinder liners with its principal in
Japan solely on the basis of its previously harmonious business relationship with
petitioner.
As an aside, let it be underscored that "[e]ven where time is of the essence, a breach
of the contract in that respect by one of the parties may be waived by the other
party's subsequently treating the contract as still in force." 46Petitioner's receipt of the
cylinder liners when they were delivered to its warehouse on 20 April 1990 clearly
indicates that it considered the contract of sale to be still subsisting up to that time.
Indeed, had the contract of sale been cancelled already as claimed by petitioner, it no
longer had any business receiving the cylinder liners even if said receipt was "subject
to verification." By accepting the cylinder liners when these were delivered to its
warehouse, petitioner indisputably waived the claimed delay in the delivery of said
items.
We, therefore, hold that in the subject contracts, time was not of the essence. The
delivery of the cylinder liners on 20 April 1990 was made within a reasonable period
of time considering that respondent had to place the order for the cylinder liners with
its principal in Japan and that the latter was, at that time, beset by heavy volume of
work.47
 There having been no failure on the part of the respondent to perform its obligation,
the power to rescind the contract is unavailing to the petitioner. Article 1191 of the
New Civil Code runs as follows:
The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The law explicitly gives either party the right to rescind the contract only upon the
failure of the other to perform the obligation assumed thereunder. 48 The right,
however, is not an unbridled one. This Court in the case of University of the
Philippines v. De los Angeles,49 speaking through the eminent civilist Justice J.B.L.
Reyes, exhorts:
Of course, it must be understood that the act of a party in treating a contract as
cancelled or resolved on account of infractions by the other contracting party must
be made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denied that rescission is justified, it
is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced. (Emphasis supplied)
In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages. 50
Here, there is no showing that petitioner notified respondent of its intention to
rescind the contract of sale between them. Quite the contrary, respondent's act of
proceeding with the opening of an irrevocable letter of credit on 23 February 1990
belies petitioner's claim that it notified respondent of the cancellation of the contract
of sale. Truly, no prudent businessman would pursue such action knowing that the
contract of sale, for which the letter of credit was opened, was already rescinded by
the other party.
56
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is
DENIED. The Decision of the Court of Appeals, dated 28 April 2000, and its Resolution,
dated 06 October 2000, are hereby AFFIRMED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH etal.
G.R. No. 73867 February 29, 1988
PADILLA, J.:
Petition for review on certiorari of the decision * of the Intermediate Appellate Court,
dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al.,
Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc.,
Defendant-Appellant."
The facts of the case are as follows:
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr.
and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same
day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines,
addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg,
Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted
by the defendant in its Dagupan office, for transmission, after payment of the
required fees or charges.
The telegram never reached its addressee. Consolacion was interred with only her
daughter Sofia in attendance. Neither the husband nor any of the other children of
the deceased, then all residing in the United States, returned for the burial.
When Sofia returned to the United States, she discovered that the wire she had
caused the defendant to send, had not been received. She and the other plaintiffs
thereupon brought action for damages arising from defendant's breach of contract.
The case was filed in the Court of First Instance of Pangasinan and docketed therein
as Civil Case No. 15356. The only defense of the defendant was that it was unable to
transmit the telegram because of "technical and atmospheric factors beyond its
control." 1 No evidence appears on record that defendant ever made any attempt to
advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.
 The Court of First Instance of Pangasinan, after trial, ordered the defendant (now
petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with
interest at 6% per annum:
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00
as moral damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages.
7. Conrado Castro, P10,000 moral damages.
8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages.
12. Gloria Castro, P10,000.00 moral damages.
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in
the amount of P1,000.00 to each of the plaintiffs and costs. 2
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's
decision but eliminated the award of P16,000.00 as compensatory damages to Sofia
C. Crouch and the award of P1,000.00 to each of the private respondents as
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C.
Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00
for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the
award of moral damages should be eliminated as defendant's negligent act was not
motivated by "fraud, malice or recklessness."
In other words, under petitioner's theory, it can only be held liable for P 31.92, the
fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the
addressee thereof.
Petitioner's contention is without merit.
Art. 1170 of the Civil Code provides that "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." Art. 2176 also provides that
57
"whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done."
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a
contract whereby, for a fee, petitioner undertook to send said private respondent's
message overseas by telegram. This, petitioner did not do, despite performance by
said private respondent of her obligation by paying the required charges. Petitioner
was therefore guilty of contravening its obligation to said private respondent and is
thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's
contrary position in this regard would result in an inequitous situation where
petitioner will only be held liable for the actual cost of a telegram fixed thirty (30)
years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral
damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
Here, petitioner's act or omission, which amounted to gross negligence, was precisely
the cause of the suffering private respondents had to undergo.
As the appellate court properly observed:
[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother
after she had already been interred, without being given the opportunity to even
make a choice on whether they wanted to pay her their last respects? There is no
doubt that these emotional sufferings were proximately caused by appellant's
omission and substantive law provides for the justification for the award of moral
damages. 4
We also sustain the trial court's award of P16,000.00 as compensatory damages to
Sofia C. Crouch representing the expenses she incurred when she came to the
Philippines from the United States to testify before the trial court. Had petitioner not
been remiss in performing its obligation, there would have been no need for this suit
or for Mrs. Crouch's testimony.
 The award of exemplary damages by the trial court is likewise justified and, therefore,
sustained in the amount of P1,000.00 for each of the private respondents, as a
warning to all telegram companies to observe due diligence in transmitting the
messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that
petitioner is held liable to private respondents in the following amounts:
(1) P10,000.00 as moral damages, to each of private respondents;
(2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;
(4) P5,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED.
Yap (Chairman), Paras and Sarmiento, JJ., concur.
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. COURT OF APPEALS
and FELIPE LUSTRE, respondents.
G.R. No. 133107 March 25, 1999
KAPUNAN, J.:
A simple telephone call and an ounce of good faith on the part of petitioner could
have prevented the present controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota
Corolla from Toyota Shaw, Inc. for which he made a down payment of P164,620.00,
the balance of the purchase price to be paid in 24 equal monthly installments. Private
respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The
first was dated April 10, 1991; subsequent checks were dated every 10th day of each
succeeding month.
To secure the balance, private respondent executed a promissory note 1 and a
contract of chattel mortgage 2 over the vehicle in favor of Toyota Shaw, Inc. The
contract of chattel mortgage, in paragraph 11 thereof, provided for an acceleration
clause stating that should the mortgagor default in the payment of any installment,
the whole amount remaining unpaid shall become due. In addition, the mortgagor
shall be liable for 25% of the principal due as liquidated damages.
58
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the
chattel mortgage to petitioner Rizal Commercial Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and
debited by RCBC from private respondent's account, except for RCBC Check No.
279805 representing the payment for August 10, 1991, which was unsigned.
Previously, the amount represented by RCBC Check No. 279805 was debited from
private respondent's account but was later recalled and re-credited, to him. Because
of the recall, the last two checks, dated February 10, 1993 and March 10, 1993, were
no longer presented for payment. This was purportedly in conformity with petitioner
bank's procedure that once a client's account was forwarded to its account
representative, all remaining checks outstanding as of the date the account was
forwarded were no longer presented for patent.
On the theory that respondent defaulted in his payments, the check representing the
payment for August 10, 1991 being unsigned, petitioner, in a letter dated January 21,
1993, demanded from private respondent the payment of the balance of the debt,
including liquidated damages. The latter refused, prompting petitioner to file an
action for replevin and damages before the Pasay City Regional Trial Court (RTC).
Private respondent, in his Answer, interposed a counterclaim for damages.
After trial, the. RTC 3 rendered a decision disposing of the case as follows:
WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:
I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is
hereby ordered,
A. To accept the payment equivalent to the three checks amounting to a total of
P44,938.00, without interest.
B. To release/cancel the mortgage on the car . . . upon payment of the amount of
P44,938.00, without interest.
C. To pay the cost of suit.
II. On The Counterclaim.
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is not entitled
to any fee for lawyering for himself.
 All awards for damages are subject to payment of fees to be assessed by the Clerk of
Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:
We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a
contract of adhesion — that is, one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his signature or
his "adhesion" thereto . . . — is to be strictly construed against appellant bank which
prepared the form Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage
contract [containing the acceleration clause] should be construed to cover only
deliberate and advertent failure on the part of the mortgagor to pay an amortization
as it became due in line with the consistent holding of the Supreme Court construing
obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in
the light of Article 1377 of the Civil Code.
In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee
rested solely on the fact that the 5th check issued by appellee . . . was recalled for
lack of signature. However, the check was recalled only after the amount covered
thereby had been deducted from defendant-appellee's account, as shown by the
testimony of plaintiff's own witness Francisco Bulatao who was in charge of the
preparation of the list and trial balances of bank customers . . . . The "default" was
therefore not a case of failure to pay, the check being sufficiently funded, and which
amount was in fact already debited [sic] from appellee's account by the appellant
bank which subsequently re-credited the amount to defendant-appelle's account for
lack of signature. All these actions RCBC did on its own without notifying defendant
until sixteen (16) months later when it wrote its demand letter dated January 21,
1993.
Clearly, appellant bank was remiss in the performance, of its functions for it could
have easily called the defendant's attention to the lack of signature on the check and
sent the check to or summoned, the latter to affix his signature. It is also to be noted
that the demand letter contains no explanation as to how defendant-appellee
incurred arrearages in the amount of P66,255.70, which is why defendant-appellee
made a protest notation thereon.
Notably, all the other checks issued by the appellee dated subsequent to August 10,
1991 and dated earlier than the demand letter, were duly encashed. This fact should
have already prompted the appellant bank to review its action relative to the
59
unsigned check. . . . 4
We take exception to the application by both the trial and appellate courts of Article
1377 of the Civil Code, which states:
The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
It bears stressing that a contract of adhesion is just as binding as ordinary
contracts. 5 It is true that we have, on occasion, struck down such contracts as void
when the weaker party is imposed upon in dealing with the dominant bargaining
party and is reduced to the alternative of taking it or leaving it, completely deprived
of the opportunity to bargain on equal footing. 6 Nevertheless, contracts of adhesion
are not invalid per se; 7 they are not entirely prohibited. 8 The one who adheres to the
contract is in reality free to reject it entirely; if he adheres, he gives his consent. 9
While ambiguities in a contract of adhesion are to be construed against the party that
prepared the same, 10 this rule applies only if the stipulations in such contract are
obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control. 11 In the latter case, there would be no need for construction. 12
Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13 are clear. Said
paragraph states:
11. In case the MORTGAGOR fails to pay any of the installments, or to pay the
interest that may be due as provided in the said promissory note, the whole amount
remaining unpaid therein shall immediately become due and payable and the
mortgage on the property (ies) herein-above described may be foreclosed by the
MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce
collection of the obligation hereby secured, and in either case the MORTGAGOR
further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due
and unpaid, as liquidated damages, which said sum shall become part thereof. The
MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it
to the MORTGAGEE.
The above terms leave no room for construction. All that is required is the application
thereof.
Petitioner claims that private respondent's check representing the fifth installment
was "not encashed," 14 such that the installment for August 1991 was not paid. By
virtue of paragraph 11 above, petitioner submits that it "was justified in treating the
entire balance of the obligation as due and
demandable." 15 Despite demand by petitioner, however, private respondent refused
 to pay the balance of the debt. Petitioner, in sum imputes delay on the part of private Failing thus, petitioner is liable for damages caused to private respondent. 20 These
respondent. include moral damages for the mental anguish, serious anxiety, besmirched
reputation, wounded feelings and social humiliation suffered by the latter. 21 The trial
We do not subscribe to petitioner's theory. court found that private respondent was:

Art. 170 of the Civil Code states that those who in the performance of their
obligations are guilty of delay are liable for damages. The delay in the performance of
the obligation, however, must be either malicious or negligent. 16 Thus, assuming that
private respondent was guilty of delay in the payment of the value of unsigned check,
private respondent cannot be held liable for damages. There is no imputation, much
less evidence, that private respondent acted with malice or negligence in failing to
sign the check. Indeed, we agree with the Court of Appeals finding that such omission
was mere "in advertence" on the part of private respondent. Toyota salesperson
Jorge Geronimo testified that he even verified whether private respondent had
signed all the checks and in fact returned three or four unsigned checks to him for
signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, I found out when he issued to me the 24
checks, I found out 3 to 4 checks are unsigned and I asked him to signed these checks.
Atty. Obispo:
Even when the checks were delivered to petitioner, it did not object to the unsigned
check. In view of the lack of malice or negligence on the part of private respondent,
petitioner's blind and mechanical invocation of paragraph 11 of the contract of
chattel mortgage was unwarranted.
Petitioner's conduct, in the light of the circumstances of this case, can only be
described as mercenary. Petitioner had already debited the value of the unsigned
check from private respondent's account only to re-credit it much later to him.
[a] client who has shared transactions for over twenty years with a bank . . ..The
shabby treatment given the defendant is unpardonable since he was put to shame
and embarrassment after the case was filed in Court. He is a lawyer in his own right,
married to another member of the bar. He sired children who are all professionals in
their chosen field. He is known to the community of golfers with whom he gravitates.
Surely the filing of the case made defendant feel so bad and bothered.
To deter others from emulating petitioner's callous example, we affirm the award of
exemplary damages. 22 As exemplary damages are warranted, so are attorney's
fees. 23
We, however, find excessive the amount of damages awarded by the trial court in
favor of private respondent with respect to his counterclaims and, accordingly,
reduce the same as follows:
(a) Moral damages — from P200,000.00 to P100,000.00
(b) Exemplary damages — from P100,000.00 to P75,000.00
(c) Attorney's fees — from P50,000.00 to P 30,000.00
WHEREFORE, subject to these modifications, the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Melo and Pardo, JJ., concur.

Thereafter, petitioner encashed checks subsequently dated, then abruptly refused to

encash the last two. More than a year after the date of the unsigned check,
petitioner, claiming delay and invoking paragraph 11, demanded from private
respondent payment of the value of said check and that of the last two checks,
including liquidated damages. As pointed out by the trial court, this whole
controversy could have been avoided if only petitioner bothered to call up private
respondent and ask him to sign the check. Good faith not only in compliance with its
contractual obligations, 18 but also in observance of the standard in human relations,
for every person "to act with justice, give everyone his due, and observe honesty and
60

good faith." 19 behooved the bank to do so.

 NEGLIGENCE
FORTUITOUS EVENT
G.R. No. L-45637 May 31, 1985
ROBERTO JUNTILLA, petitioner, vs. CLEMENTE FONTANAR, FERNANDO
BANZON and BERFOL CAMORO, respondents.
Valentin A. Zozobrado for petitioner.
Ruperto N. Alfarara for respondents.
GUTIERREZ, JR., J.:
This is a petition for review, on questions of law, of the decision of the Court
of First Instance of Cebu which reversed the decision of the City Court of
Cebu and exonerated the respondents from any liability arising from a
vehicular accident.
The background facts which led to the filing of a complaint for breach of
contract and damages against the respondents are summarized by the Court
of First Instance of Cebu as follows:
The facts established after trial show that the plaintiff was a passenger of
the public utility jeepney bearing plate No. PUJ-71-7 on the course of the trip
from Danao City to Cebu City. The jeepney was driven by defendant Berfol
Camoro. It was registered under the franchise of defendant Clemente
Fontanar but was actually owned by defendant Fernando Banzon. When the
jeepney reached Mandaue City, the right rear tire exploded causing the
vehicle to turn turtle. In the process, the plaintiff who was sitting at the front
seat was thrown out of the vehicle. Upon landing on the ground, the plaintiff
momentarily lost consciousness. When he came to his senses, he found that
he had a lacerated wound on his right palm. Aside from this, he suffered
injuries on his left arm, right thigh and on his back. (Exh. "D"). Because of his
shock and injuries, he went back to Danao City but on the way, he
discovered that his "Omega" wrist watch was lost. Upon his arrival in Danao
City, he immediately entered the Danao City Hospital to attend to his
injuries, and also requested his father-in-law to proceed immediately to the
place of the accident and look for the watch. In spite of the efforts of his
father-in-law, the wrist watch, which he bought for P 852.70 (Exh. "B") could
no longer be found.
xxx xxx xxx
61
Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract
with damages before the City Court of Cebu City, Branch I against Clemente
Fontanar, Fernando Banzon and Berfol Camoro.
The respondents filed their answer, alleging inter alia that the accident that
caused losses to the petitioner was beyond the control of the respondents
taking into account that the tire that exploded was newly bought and was
only slightly used at the time it blew up.
After trial, Judge Romulo R. Senining of the Civil Court of Cebu rendered
judgment in favor of the petitioner and against the respondents. The
dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants and the latter are hereby ordered, jointly and
severally, to pay the plaintiff the sum of P750.00 as reimbursement for the
lost Omega wrist watch, the sum of P246.64 as unrealized salary of the
plaintiff from his employer, the further sum of P100.00 for the doctor's fees
and medicine, an additional sum of P300.00 for attorney's fees and the
costs.
The respondents appealed to the Court of First Instance of Cebu, Branch XIV.
Judge Leonardo B. Canares reversed the judgment of the City Court of Cebu
upon a finding that the accident in question was due to a fortuitous event.
The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered exonerating the defendants from
any liability to the plaintiff without pronouncement as to costs.
A motion for reconsideration was denied by the Court of First Instance.
The petitioner raises the following alleged errors committed by the Court of
First Instance of Cebu on appeal—
a. The Honorable Court below committed grave abuse of discretion in failing
to take cognizance of the fact that defendants and/or their employee failed
to exercise "utmost and/or extraordinary diligence" required of common
carriers contemplated under Art. 1755 of the Civil Code of the Philippines.
 b. The Honorable Court below committed grave abuse of discretion by
deciding the case contrary to the doctrine laid down by the Honorable
Supreme Court in the case of Necesito et al. v. Paras, et al.
We find the petition impressed with merit.
The City Court and the Court of First Instance of Cebu found that the right
rear tire of the passenger jeepney in which the petitioner was riding blew up
causing the vehicle to fall on its side. The petitioner questions the conclusion
of the respondent court drawn from this finding of fact.
The Court of First Instance of Cebu erred when it absolved the carrier from
any liability upon a finding that the tire blow out is a fortuitous event. The
Court of First Instance of Cebu ruled that:
After reviewing the records of the case, this Court finds that the accident in
question was due to a fortuitous event. A tire blow-out, such as what
happened in the case at bar, is an inevitable accident that exempts the
carrier from liability, there being absence of a showing that there was
misconduct or negligence on the part of the operator in the operation and
maintenance of the vehicle involved. The fact that the right rear tire
exploded, despite being brand new, constitutes a clear case of caso fortuito
which can be a proper basis for exonerating the defendants from liability. ...
The Court of First Instance relied on the ruling of the Court of Appeals
in Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29,
1954, where the Court of Appeals ruled that:
A tire blow-out does not constitute negligence unless the tire was already
old and should not have been used at all. Indeed, this would be a clear case
of fortuitous event.
The foregoing conclusions of the Court of First Instance of Cebu are based on
a misapprehension of overall facts from which a conclusion should be drawn.
The reliance of the Court of First Instance on the Rodriguez case is not in
order. In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. (17 SCRA 23),
we held that:
Petitioner maintains that a tire blow-out is a fortuitous event and gives rise
to no liability for negligence, citing the rulings of the Court of Appeals in
Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29,
62
1954, and People v. Palapad, CA-G.R. No. 18480, June 27, 1958. These
rulings, however, not only are not binding on this Court but were based on
considerations quite different from those that obtain in the case at bar. The
appellate court there made no findings of any specific acts of negligence on
the part of the defendants and confined itself to the question of whether or
not a tire blow-out, by itself alone and without a showing as to the causative
factors, would generate liability. ...
In the case at bar, there are specific acts of negligence on the part of the
respondents. The records show that the passenger jeepney turned turtle and
jumped into a ditch immediately after its right rear tire exploded. The
evidence shows that the passenger jeepney was running at a very fast speed
before the accident. We agree with the observation of the petitioner that a
public utility jeep running at a regular and safe speed will not jump into a
ditch when its right rear tire blows up. There is also evidence to show that
the passenger jeepney was overloaded at the time of the accident. The
petitioner stated that there were three (3) passengers in the front seat and
fourteen (14) passengers in the rear.
While it may be true that the tire that blew-up was still good because the
grooves of the tire were still visible, this fact alone does not make the
explosion of the tire a fortuitous event. No evidence was presented to show
that the accident was due to adverse road conditions or that precautions
were taken by the jeepney driver to compensate for any conditions liable to
cause accidents. The sudden blowing-up, therefore, could have been caused
by too much air pressure injected into the tire coupled by the fact that the
jeepney was overloaded and speeding at the time of the accident.
In Lasam v. Smith (45 Phil. 657), we laid down the following essential
characteristics of caso fortuito:
xxx xxx xxx
... In a legal sense and, consequently, also in relation to contracts, a caso
fortuito presents the following essential characteristics: (1) The cause of the
unforeseen and unexpected occurrence, or of the failure of the debtor to
comply with his obligation, must be independent of the human will. (2) It
must be impossible to foresee the event which constitutes the caso fortuito,
or if it can be foreseen, it must be impossible to avoid. (3) The occurrence
must be such as to render it impossible for the debtor to fulfill his obligation
in a normal manner. And (4) the obligor (debtor) must be free from any
 participation in the aggravation of the injury resulting to the creditor.
(5 Encyclopedia Juridica Espanola, 309.)
In the case at bar, the cause of the unforeseen and unexpected occurrence
was not independent of the human will. The accident was caused either
through the negligence of the driver or because of mechanical defects in the
tire. Common carriers should teach their drivers not to overload their
vehicles, not to exceed safe and legal speed limits, and to know the correct
measures to take when a tire blows up thus insuring the safety of passengers
at all times. Relative to the contingency of mechanical defects, we held
in Necesito, et al. v. Paras, et al. (104 Phil. 75), that:
... The preponderance of authority is in favor of the doctrine that a
passenger is entitled to recover damages from a carrier for an injury
resulting from a defect in an appliance purchased from a manufacturer,
whenever it appears that the defect would have been discovered by the
carrier if it had exercised the degree of care which under the circumstances
was incumbent upon it, with regard to inspection and application of the
necessary tests. For the purposes of this doctrine, the manufacturer is
considered as being in law the agent or servant of the carrier, as far as
regards the work of constructing the appliance. According to this theory, the
good repute of the manufacturer will not relieve the carrier from liability' (10
Am. Jur. 205, s, 1324; see also Pennsylvania R. Co. v. Roy, 102 U.S. 451; 20 L.
Ed. 141; Southern R. Co. v. Hussey, 74 ALR 1172; 42 Fed. 2d 70; and Ed Note,
29 ALR 788.: Ann. Cas. 1916E 929).
The rationale of the carrier's liability is the fact that the passenger has
neither choice nor control over the carrier in the selection and use of the
equipment and appliances in use by the carrier. Having no privity whatever
with the manufacturer or vendor of the defective equipment, the passenger
has no remedy against him, while the carrier usually has. It is but logical,
therefore, that the carrier, while not an insurer of the safety of his
passengers, should nevertheless be held to answer for the flaws of his
equipment if such flaws were at all discoverable. ...
It is sufficient to reiterate that the source of a common carrier's legal liability
is the contract of carriage, and by entering into the said contract, it binds
itself to carry the passengers safely as far as human care and foresight can
provide, using the utmost diligence of a very cautious person, with a due
regard for all the circumstances. The records show that this obligation was
not met by the respondents.
63
The respondents likewise argue that the petitioner cannot recover any amount for
failure to prove such damages during the trial. The respondents submit that if the
petitioner was really injured, why was he treated in Danao City and not in Mandaue
City where the accident took place. The respondents argue that the doctor who
issued the medical certificate was not presented during the trial, and hence not
cross-examined. The respondents also claim that the petitioner was not wearing
any wrist watch during the accident.
It should be noted that the City Court of Cebu found that the petitioner had a
lacerated wound on his right palm aside from injuries on his left arm, right thigh
and on his back, and that on his way back to Danao City, he discovered that his
"Omega" wrist watch was lost. These are findings of facts of the City Court of Cebu
which we find no reason to disturb. More so when we consider the fact that the
Court of First Instance of Cebu impliedly concurred in these matters when it
confined itself to the question of whether or not the tire blow out was a fortuitous
event.
WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV
appealed from is hereby REVERSED and SET ASIDE, and the decision of the City
Court of Cebu, Branch I is REINSTATED, with the modification that the damages
shall earn interest at 12% per annum and the attorney's fees are increased to SIX
HUNDRED PESOS (P600.00). Damages shall earn interests from January 27, 1975.
SO ORDERED.
Teehankee (Chairman), Melencio-Herrera, Plana, Relova, De la Fuente and
Alampay, JJ., concur.
19. G.R. No. L-47379 May 16, 1988
NATIONAL POWER CORPORATION, petitioner, vs.
HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION,
INC., respondents.
G.R. No. L-47481 May 16, 1988
ENGINEERING CONSTRUCTION, INC., petitioner, vs.
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.
Raymundo A. Armovit for private respondent in L-47379.
The Solicitor General for petitioner.
 GUTIERREZ, JR., J.:
These consolidated petitions seek to set aside the decision of the respondent Court of
Appeals which adjudged the National Power Corporation liable for damages against
Engineering Construction, Inc. The appellate court, however, reduced the amount of
damages awarded by the trial court. Hence, both parties filed their respective
petitions: the National Power Corporation (NPC) in G.R. No. 47379, questioning the
decision of the Court of Appeals for holding it liable for damages and the Engineering
Construction, Inc. (ECI) in G.R. No. 47481, questioning the same decision for reducing
the consequential damages and attorney's fees and for eliminating the exemplary
damages.
The facts are succinctly summarized by the respondent Court of Appeals, as follows:
On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder,
executed a contract in Manila with the National Waterworks and Sewerage Authority
(NAWASA), whereby the former undertook to furnish all tools, labor, equipment, and
materials (not furnished by Owner), and to construct the proposed 2nd lpo-Bicti
Tunnel, Intake and Outlet Structures, and Appurtenant Structures, and Appurtenant
Features, at Norzagaray, Bulacan, and to complete said works within eight hundred
(800) calendar days from the date the Contractor receives the formal notice to
proceed (Exh. A).
The project involved two (2) major phases: the first phase comprising, the tunnel
work covering a distance of seven (7) kilometers, passing through the mountain, from
the Ipo river, a part of Norzagaray, Bulacan, where the Ipo Dam of the defendant
National Power Corporation is located, to Bicti; the other phase consisting of the
outworks at both ends of the tunnel.
By September 1967, the plaintiff corporation already had completed the first major
phase of the work, namely, the tunnel excavation work. Some portions of the
outworks at the Bicti site were still under construction. As soon as the plaintiff
corporation had finished the tunnel excavation work at the Bicti site, all the
equipment no longer needed there were transferred to the Ipo site where some
projects were yet to be completed.
The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon,
passing through defendant's Angat Hydro-electric Project and Dam at lpo,
Norzagaray, Bulacan. Strong winds struck the project area, and heavy rains
intermittently fell. Due to the heavy downpour, the water in the reservoir of the
Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour. To
64
prevent an overflow of water from the dam, since the water level had reached the
danger height of 212 meters above sea level, the defendant corporation caused the
opening of the spillway gates." (pp. 45-46, L-47379, Rollo)
The appellate court sustained the findings of the trial court that the evidence
preponlderantly established the fact that due to the negligent manner with which the
spillway gates of the Angat Dam were opened, an extraordinary large volume of
water rushed out of the gates, and hit the installations and construction works of ECI
at the lpo site with terrific impact, as a result of which the latter's stockpile of
materials and supplies, camp facilities and permanent structures and accessories
either washed away, lost or destroyed.
The appellate court further found that:
It cannot be pretended that there was no negligence or that the appellant exercised
extraordinary care in the opening of the spillway gates of the Angat Dam. Maintainers
of the dam knew very well that it was far more safe to open them gradually. But the
spillway gates were opened only when typhoon Welming was already at its height, in
a vain effort to race against time and prevent the overflow of water from the dam as
it 'was rising dangerously at the rate of sixty centimeters per hour. 'Action could have
been taken as early as November 3, 1967, when the water in the reservoir was still
low. At that time, the gates of the dam could have been opened in a regulated
manner. Let it be stressed that the appellant knew of the coming of the typhoon four
days before it actually hit the project area. (p. 53, L-47379, Rollo)
As to the award of damages, the appellate court held:
We come now to the award of damages. The appellee submitted a list of estimated
losses and damages to the tunnel project (Ipo side) caused by the instant flooding of
the Angat River (Exh. J-1). The damages were itemized in four categories, to wit:
Camp Facilities P55,700.00; Equipment, Parts and Plant — P375,659.51; Materials
P107,175.80; and Permanent Structures and accessories — P137,250.00, with an
aggregate total amount of P675,785.31. The list is supported by several vouchers
which were all submitted as Exhibits K to M-38 a, N to O, P to U-2 and V to X- 60-a
(Vide: Folders Nos. 1 to 4). The appellant did not submit proofs to traverse the
aforementioned documentary evidence. We hold that the lower court did not
commit any error in awarding P 675,785.31 as actual or compensatory damages.
However, We cannot sustain the award of P333,200.00 as consequential damages.
This amount is broken down as follows: P213,200.00 as and for the rentals of a crane
to temporarily replace the one "destroyed beyond repair," and P120,000.00 as one
month bonus which the appellee failed to realize in accordance with the contract
which the appellee had with NAWASA. Said rental of the crane allegedly covered the
 period of one year at the rate of P40.00 an hour for 16 hours a day. The evidence,
however, shows that the appellee bought a crane also a crawler type, on November
10, 1967, six (6) days after the incident in question (Exh N) And according to the lower
court, which finding was never assailed, the appellee resumed its normal construction
work on the Ipo- Bicti Project after a stoppage of only one month. There is no
evidence when the appellee received the crane from the seller, Asian Enterprise
Limited. But there was an agreement that the shipment of the goods would be
effected within 60 days from the opening of the letter of credit (Exh.
N).<äre||anº•1àw> It appearing that the contract of sale was consummated, We
must conclude or at least assume that the crane was delivered to the appellee within
60 days as stipulated. The appellee then could have availed of the services of another
crane for a period of only one month (after a work stoppage of one month) at the
rate of P 40.00 an hour for 16 hours a day or a total of P 19,200.00 as rental.
But the value of the new crane cannot be included as part of actual damages because
the old was reactivated after it was repaired. The cost of the repair was P 77,000.00
as shown in item No. 1 under the Equipment, Parts and Plants category (Exh. J-1),
which amount of repair was already included in the actual or compensatory damages.
(pp. 54-56, L-47379, Rollo)
The appellate court likewise rejected the award of unrealized bonus from NAWASA in
the amount of P120,000.00 (computed at P4,000.00 a day in case construction is
finished before the specified time, i.e., within 800 calendar days), considering that
the incident occurred after more than three (3) years or one thousand one hundred
seventy (1,170) days. The court also eliminated the award of exemplary damages as
there was no gross negligence on the part of NPC and reduced the amount of
attorney's fees from P50,000.00 to P30,000.00.
In these consolidated petitions, NPC assails the appellate court's decision as being
erroneous on the ground that the destruction and loss of the ECI's equipment and
facilities were due to force majeure. It argues that the rapid rise of the water level in
the reservoir of its Angat Dam due to heavy rains brought about by the typhoon was
an extraordinary occurrence that could not have been foreseen, and thus, the
subsequent release of water through the spillway gates and its resultant effect, if any,
on ECI's equipment and facilities may rightly be attributed to force majeure.
On the other hand, ECI assails the reduction of the consequential damages from
P333,200.00 to P19,000.00 on the grounds that the appellate court had no basis in
concluding that ECI acquired a new Crawler-type crane and therefore, it only can
claim rentals for the temporary use of the leased crane for a period of one month;
and that the award of P4,000.00 a day or P120,000.00 a month bonus is justified
65
since the period limitation on ECI's contract with NAWASA had dual effects, i.e.,
bonus for earlier completion and liquidated damages for delayed performance; and in
either case at the rate of P4,000.00 daily. Thus, since NPC's negligence compelled
work stoppage for a period of one month, the said award of P120,000.00 is justified.
ECI further assailes the reduction of attorney's fees and the total elimination of
exemplary damages.
Both petitions are without merit.
It is clear from the appellate court's decision that based on its findings of fact and
that of the trial court's, petitioner NPC was undoubtedly negligent because it opened
the spillway gates of the Angat Dam only at the height of typhoon "Welming" when it
knew very well that it was safer to have opened the same gradually and earlier, as it
was also undeniable that NPC knew of the coming typhoon at least four days before it
actually struck. And even though the typhoon was an act of God or what we may call
force majeure, NPC cannot escape liability because its negligence was the proximate
cause of the loss and damage. As we have ruled in Juan F. Nakpil & Sons v. Court of
Appeals, (144 SCRA 596, 606-607):
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of
the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must
be one occasioned exclusively by the violence of nature and human agencies are to
be excluded from creating or entering into the cause of the mischief. When the
effect, the cause of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or neglect, or failure to
act, the whole occurrence is thereby humanized, as it was, and removed from the
rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus, it has been held that when the negligence of a person concurs with an act of
God in producing a loss, such person is not exempt from liability by showing that the
immediate cause of the damage was the act of God. To be exempt from liability for
loss because of an act of God, he must be free from any previous negligence or
misconduct by which the loss or damage may have been occasioned. (Fish & Elective
Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan 49 O.G. 4379; Limpangco & Sons v.
Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
Furthermore, the question of whether or not there was negligence on the part of NPC
is a question of fact which properly falls within the jurisdiction of the Court of Appeals
 and will not be disturbed by this Court unless the same is clearly unfounded. Thus,
in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and
conclusive upon the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA 890
[1983]. In fact it is settled that the Supreme Court is not supposed to weigh evidence
but only to determine its substantially (Nuñez v. Sandiganbayan, 100 SCRA 433 [1982]
and will generally not disturb said findings of fact when supported by substantial
evidence (Aytona v. Court of Appeals, 113 SCRA 575 [1985]; Collector of Customs of
Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]. On the other hand
substantial evidence is defined as such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion (Philippine Metal Products, Inc. v. Court
of Industrial Relations, 90 SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA 757
[1984]; Canete v. WCC, 136 SCRA 302 [1985])
Therefore, the respondent Court of Appeals did not err in holding the NPC liable for
damages.
Likewise, it did not err in reducing the consequential damages from P333,200.00 to
P19,000.00. As shown by the records, while there was no categorical statement or
admission on the part of ECI that it bought a new crane to replace the damaged one,
a sales contract was presented to the effect that the new crane would be delivered to
it by Asian Enterprises within 60 days from the opening of the letter of credit at the
cost of P106,336.75. The offer was made by Asian Enterprises a few days after the
flood. As compared to the amount of P106,336.75 for a brand new crane and paying
the alleged amount of P4,000.00 a day as rental for the use of a temporary crane,
which use petitioner ECI alleged to have lasted for a period of one year, thus, totalling
P120,000.00, plus the fact that there was already a sales contract between it and
Asian Enterprises, there is no reason why ECI should opt to rent a temporary crane
for a period of one year. The appellate court also found that the damaged crane was
subsequently repaired and reactivated and the cost of repair was P77,000.00.
Therefore, it included the said amount in the award of of compensatory damages, but
not the value of the new crane. We do not find anything erroneous in the decision of
the appellate court that the consequential damages should represent only the service
of the temporary crane for one month. A contrary ruling would result in the unjust
enrichment of ECI.
The P120,000.00 bonus was also properly eliminated as the same was granted by the
trial court on the premise that it represented ECI's lost opportunity "to earn the one
month bonus from NAWASA ... ." As stated earlier, the loss or damage to ECI's
equipment and facilities occurred long after the stipulated deadline to finish the
66
construction. No bonus, therefore, could have been possibly earned by ECI at that
point in time. The supposed liquidated damages for failure to finish the project within
the stipulated period or the opposite of the claim for bonus is not clearly presented in
the records of these petitions. It is not shown that NAWASA imposed them.
As to the question of exemplary damages, we sustain the appellate court in
eliminating the same since it found that there was no bad faith on the part of NPC
and that neither can the latter's negligence be considered gross. In Dee Hua Liong
Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:
Neither may private respondent recover exemplary damages since he is not entitled
to moral or compensatory damages, and again because the petitioner is not shown to
have acted in a wanton, fraudulent, reckless or oppressive manner (Art. 2234, Civil
Code; Yutuk v. Manila Electric Co., 2 SCRA 377; Francisco v. Government Service
Insurance System, 7 SCRA 577; Gutierrez v. Villegas, 8 SCRA 527; Air France v.
Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil. Advertising Corp., 23 SCRA 977;
Marchan v. Mendoza, 24 SCRA 888).
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There
are no compelling reasons why we should set aside the appellate court's finding that
the latter amount suffices for the services rendered by ECI's counsel.
WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED
for LACK OF MERIT. The decision appealed from is AFFIRMED.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur
20. G.R. No. 138123 March 12, 2002
MINDEX RESOURCES DEVELOPMENT, petitioner, vs.
EPHRAIM MORILLO, respondent.
PANGANIBAN, J.:
Attorney’s fees cannot be granted simply because one was compelled to sue to
protect and enforce one’s right. The grant must be proven by facts; it cannot depend
on mere speculation or conjecture -- its basis must be stated in the text of the
decision.
The Case
 Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the "Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX
March 26, 1999 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 46967. The but the latter refused. Instead, it replaced the vehicle’s burned tires and had it towed
dispositive portion of the challenged Decision reads as follows: to a shop for repair and overhauling.

"WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION that the legal "On April 15, 1991, Morillo sent a letter to Mr. Arni Isberg, the Finance Manager of
interest to be paid on the rentals of P76,000.00 and costs of repair in the amount MINDEX, thru Mr. Ramoncito Gozar, Project Manager, proposing the following:
of P132,750.00 is six (6%) percent per annumfrom June 22, 1994, the date of the
decision of the court a quo to the date of its finality. Thereafter, if the amounts ‘x x x xxx xxx
adjudged remain unpaid, the interest rate shall be twelve (12%) percent per
annum from the date of finality of the decision until fully paid."2 ‘I have written to let you know that I am entrusting to you the said vehicle in the
amount of P275,000.00 which is its cost price. I will not charge your company for the
The Facts encumbrance of P76,800+ since you used it as my friendly gesture on account of the
unforeseen adversity.
The factual antecedents of the case are summarized by the CA in this wise:
‘In view of the tragic happening, I am asking you to pay us, in a way which will not be
"On February 1991, a verbal agreement was entered into between Ephraim Morillo hard for you to settle to pay us in four installment monthly as follows:
and Mindex Resources Corporation (MINDEX for brevity) for the lease of the former’s
6 x 6 ten-wheeler cargo truck for use in MINDEX’s mining operations in Binaybay,
Bigaan, San Teodoro, Oriental Mindoro, at the stipulated rental of ‘P300.00 per hour ‘First payment - April 25/91 P[1]50,000.00
for a minimum of eight hours a day or a total of P2,400.00 daily.’ MINDEX had been
paying the rentals until April 10, 1991.1âwphi1.nêt ‘Second payment - May 15/91 50,000.00

‘Third payme(n)t - June 15/91 50,000.00

"Unknown to Morillo, on April 11, 1991, the truck was burned by unidentified
persons while it was parked unattended at Sitio Aras, Bigaan, San Teodoro, Oriental ‘Fourth payme(n)t - July 15/91 25,000.00
Mindoro, due to mechanical trouble. The findings of the Mindoro Oriental Integrated
National Police in their investigation report read: TOTAL P275,000.00

‘3. On 121005H April 1991, Mr Alexander Roxas, project coordinator of MINDEX

MINING CORP. reported to this office that on the morning of 12 April 1991 while he ‘I promise to relinquish all the necessary documents upon full payment of said
was supposed to report for his Work at their office at Sitio Tibonbon, Bigaan, San account.
Teodoro, Oriental Mindoro, he x x x noticed that their hired 6 x 6 Ten wheeler Cargo
Truck temporarily parked at Sitio Aras, Bigaan, San Teodoro, Oriental Mindoro for ‘x x x xxx xxx
aplha Engine Trouble was burned on the night of April 11, 1991 by still unidentified
person. "Through Mr. Gozar, MINDEX responded by a handwritten letter to his cousin Malou
(wife of Ephraim Morillo), expressing their reservations on the above demands due to
‘x x x xxx xxx their tight financial situation. However, he made the following counter offers:

‘5. x x x Based also on the facts gathered and incident scene searched it was also
found out that said 6 x 6 Ten Wheeler Cargo Truck was burned by means of using
coconut leaves and as a result of which said 6 x 6 was totally burned excluding the
engine which was partially damaged by still undetermined amount.’
67
‘a) Pay the rental of the 6 x 6 truck (actual) in the amount of P76,000.00.
‘b) Repair and overhaul the truck on our own expenses and;
‘c) Return it to you on (A1) good running condition after repair.’
 "Morillo replied on April 18, 1991, (1) that he will relinquish to MINDEX the damaged
truck; (2) that he is amenable to receive the rental in the amount of P76,000.00; and
(3) that MINDEX will pay fifty thousand pesos (P50,000.00) monthly until the balance
of P275,000.00 is fully paid. It is noteworthy that except for his acceptance of the
proffered P76,000.00 unpaid rentals, Morillo’s stand has virtually not been changed
as he merely lowered the first payment on the P275,000.00 valuation of the truck
from P150,000.00 to P50,000.00.
"The parties had since remained intransigent and so on August 1991, Morillo pulled
out the truck from the repair shop of MINDEX and had it repaired elsewhere for
which he spent the total amount of P132,750.00."3(Citations omitted)
Ruling of the Trial Court
After evaluating the evidence adduced by both parties, the Regional Trial Court (RTC)
found petitioner responsible for the destruction or loss of the leased 6 x 6 truck and
ordered it to pay respondent (1) P76,000 as balance of the unpaid rental for the 6 x 6
truck with interest of 12 percent from June 22, 1994 (the rendition of the judgment)
up to the payment of the amount; (2) P132,750 representing the costs of repair and
overhaul of the said truck, with interest rate of 12 percent until fully paid; and
(3) P20,000 as attorney’s fees for compelling respondent to secure the services of
counsel in filing his Complaint.
Ruling of the Court of Appeals
The appellate court sustained the RTC’s finding that petitioner was not without fault
for the loss and destruction of the truck and, thus, liable therefor. The CA said:
"The burning of the subject truck was impossible to foresee, but not impossible to
avoid. MINDEX could have prevented the incident by immediately towing the truck to
a motor shop for the needed repair or by having it guarded day and night. Instead,
the appellant just left the vehicle where its transfer case broke down. The place was
about twelve (12) kilometers away from the camp site of the appellant corporation
and was sparsely populated. It was guarded only during daytime. It stayed in that
place for two (2) weeks until it was burned on April 11, 1991 while its transfer case
was being repaired elsewhere. It was only after it had been burned that the appellant
had it towed to a repair shop.
"The appellant [respondent] was thus not free from fault for the burning of the truck.
It miserably failed to overcome the presumption of negligence against it. Neither did
it rescind the lease over the truck upon its burning. On the contrary, it offered to
68
pay P76,000.00 as rentals. It did not also complete the needed repair. Hence, the
appellee was forced to pull out the truck and had it repaired at his own expense.
Since under the law, the ‘lessee shall return the thing leased, upon the termination of
the lease, just as he receive it, ‘the appellant stands liable for the expenses incurred
for the repair in the aggregate amount of P132,750.00."4
Nevertheless, the appellate court modified the Decision of the trial court. The 12
percent interest rate on the P76,000 rentals and the P132,750 repair costs, imposed
by the RTC, was changed by the CA to 6 percent per annum from June 22, 1994 to the
date of finality of the said Decision; and 12 percent per annum thereafter, if the
amounts adjudged would remain unpaid from such date of finality until the rentals
and the repair costs were fully paid. It affirmed the award of attorney’s fees.
Hence, this Petition.5
Issues
In its Memorandum, petitioner raises the following issues for the Court’s
consideration:
"4.1. Whether or not the Court of Appeals gravely erred in finding that petitioner
failed to overcome the presumption of negligence against it considering that the facts
show, as admitted by the respondent, that the burning of the truck was a fortuitous
event.
"4.2. Whether or not the Court of Appeals gravely erred in affirming the decision of
the trial court finding petitioner liable to pay unpaid rentals and cost of repairs.
"4.3. Whether or not the Court of Appeals also erred in affirming the decision of the
trial court finding petitioner liable to pay attorney’s fees." 6
This Court’s Ruling
The Petition is partly meritorious; the award of attorney’s fees should be deleted.
First Issue:
Petitioner’s Negligence
Petitioner claims that the burning of the truck was a fortuitous event, for which it
should not be held liable pursuant to Article 11747 of the Civil Code. Moreover, the
letter of respondent dated April 15, 1991, stating that the burning of the truck was an
"unforeseen adversity," was an admission that should exculpate the former from
liability.
 We are not convinced. Both the RTC and the CA found petitioner negligent and thus
liable for the loss or destruction of the leased truck. True, both parties may have
suffered from the burning of the truck; however, as found by both lower courts, the
negligence of petitioner makes it responsible for the loss. Well-settled is the rule that
factual findings of the trial court, particularly when affirmed by the Court of Appeals,
are binding on the Supreme Court. Contrary to its allegations, petitioner has not
adequately shown that the RTC and the CA overlooked or disregarded significant facts
and circumstances that, when considered, would alter the outcome of the
disposition.8 Article 1667 of the Civil Code9 holds lessees responsible for the
deterioration or loss of the thing leased, unless they prove that it took place without
their fault.
Fortuitous Event
In order for a fortuitous event to exempt one from liability, it is necessary that one
has committed no negligence or misconduct that may have occasioned the loss. 10 An
act of God cannot be invoked to protect a person who has failed to take steps to
forestall the possible adverse consequences of such a loss. One’s negligence may
have concurred with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the damage or injury
was a fortuitous event would not exempt one from liability. When the effect is found
to be partly the result of a person’s participation -- whether by active intervention,
neglect or failure to act -- the whole occurrence is humanized and removed from the
rules applicable to acts of God.11
This often-invoked doctrine of "fortuitous event" or "caso fortuito" has become a
convenient and easy defense to exculpate an obligor from liability. To constitute a
fortuitous event, the following elements must concur: (a) the cause of the unforeseen
and unexpected occurrence or of the failure of the debtor to comply with obligations
must be independent of human will; (b) it must be impossible to foresee the event
that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to
fulfill obligations in a normal manner; and (d) the obligor must be free from any
participation in the aggravation of the injury or loss.12
Article 1174 of the Civil Code states that no person shall be responsible for a
fortuitous event that could not be foreseen or, though foreseen, was inevitable. In
other words, there must be an exclusion of human intervention from the cause of
injury or loss.13
A review of the records clearly shows that petitioner failed to exercise reasonable
69
care and caution that an ordinarily prudent person would have used in the same
situation. Witness Alexander Roxas testified how petitioner fell short of ordinary
diligence in safeguarding the leased truck against the accident, which could have
been avoided in the first place. Pertinent portions of his testimony are reproduced
hereunder:
"ATTY. ACERON
Q Now, this Barangay Aras where the 6 x 6 truck had transmission trouble, how
far is it from the camp site of the defendant corporation?
ALEXANDER ROXAS
A Twelve (12) kilometers, more or less, sir.
Q Is this Barangay Aras populated?
A Not so many, sir.
Q The place where the 6 x 6 truck had transmission trouble, how far is the nearest
house from it?
A Perhaps three hundred meters, sir.
Q And how many houses are within the three hundred meter radius from the
place where the truck had engine trouble?
A Ten, more or less, in scattered.
Q You said that after hauling several sand to be used in the camp site the 6 x 6
truck had transmission trouble, what did the company do after the truck had that
engine trouble?
A For at least two weeks the truck was installed in the place where the said truck
had engine trouble.
Q Meaning in Barangay Aras?
A Yes, sir.
Q Was there any guard in that place by the company during the time that the
truck was in that place?
A Yes, sir, during daytime but at nighttime, there was no guard.
Q What happened to that 6 x 6 truck?
A In the month of March, 1991, the company dismissed thirteen (13) to seventeen
(17) employees and these employees came from Barangays Aras, Botolan, Calsapa,
Camatis and Tibonbon and on Aril 11, 1991, the 6 x 6 truck was burned.
Q How did you come to know that the 6 x 6 truck was burned on April 11, 1991?
A I together with my daughter, I met the service of the company near the
ORMECO and I was informed by the Project Engineer that the 6 x 6 truck was burned,
so, we returned to San Teodoro and have the incident blottered at the police station.
Q Aside from that, what other action did you undertake in connection with the
burning of the 6 x 6 truck?
A When we were at the police station, the Project Manager of the company
arrived and from the police station we proceeded to the place where the 6 x 6 truck
was burned and the Project Manager took pictures of the 6 x 6 truck.
 Q Now, did you come to know who was responsible or who were responsible for
the burning of the 6 x 6 truck?
A The responsible is the Mindex Resources Development Corporation, and as far
as I know, the persons who actually burned the said 6 x 6 truck were the dismissed
employees of the Mindex Resources Development Corporation.
Q These dismissed employees of the corporation, why were they employed by the
corporation?
A Because we have to make a road going to the mining site and in the process of
opening the road these dismissed employees happened to be the owners of the land
where the road will pass, so, we paid the land. The corporation likewise gave jobs to
the owners of the land."14
As can be gleaned from the foregoing testimony, petitioner failed to employ
reasonable foresight, diligence and care that would have exempted it from liability
resulting from the burning of the truck. Negligence, as commonly understood, is that
conduct that naturally or reasonably creates undue risk or harm to others. It may be a
failure to observe that degree of care, precaution or vigilance that the circumstances
justly demand;15 or to do any other act that would be done by a prudent and
reasonable person, who is guided by considerations that ordinarily regulate the
conduct of human affairs.16
Second Issue:
Unpaid Rentals and Cost of Repairs
Petitioner proceeds to argue that "it should be deemed to have already paid the
unpaid rentals in the amount of P76,000.00," and that it should not be made to pay
the P132,750 repair and overhaul costs. Nothing in the records, not even in the
documentary evidence it presented, would show that it already paid the aforesaid
amounts. In fact, it seeks to avoid payment of the rental by alleging that respondent
already condoned it in his letter dated April 15, 1991. However, a perusal of the letter
would show that his offer not to charge petitioner for the P76,000 rental was
premised on the condition that it would buy the truck.17
Moreover, the RTC based the P76,000 rental and the costs of repair and overhaul on
Exhibit "B," wherein Chito Gozar, the Project Manager of Mindex Resources
Development Corporation, proposed through a letter dated April 17, 1991, the
following: (1) to pay the P76,000 rental, (2) to repair the truck at the expense of
petitioner, and (3) to return the truck in good running condition after the repair.
Likewise, the nonpayment of the said amount was corroborated by Roxas thus:
70
"Q During that time when the 6 x 6 truck was already burned and when you went
to the Petron Gasoline Station to inform plaintiff about the burning, was the plaintiff
paid any amount for the rental of the 6 x 6 truck?
A: Before the burning of the 6 x 6 truck, the plaintiff Morillo was already paid
partially and there was a balance of P76,000.00."18
The P132,750 repair and overhaul costs was correctly granted by the lower courts.
Article 1667 of the Civil Code holds the lessee responsible for the deterioration or loss
of the thing leased. In addition, Article 1665 of the same Code provides that "the
lessee shall return the thing leased, upon the termination of the lease, just as he
received it, save what has been lost or impaired by the lapse of time, or by ordinary
wear and tear, or from an inevitable cause."
Courts begin with the assumption that compensatory damages are for pecuniary
losses that result from an act or omission of the defendant. Having been found to be
negligent in safeguarding the leased truck, petitioner must shoulder its repair and
overhaul costs to make it serviceable again. Such expenses are duly supported by
receipts; thus, the award of P132,750 is definitely in order.
Third Issue:
Attorney’s Fees
We find the award of attorney’s fees to be improper. The reason which the RTC gave
-- because petitioner had compelled respondent to file an action against it -- falls
short of our requirement in Scott Consultants and Resource Development v.
CA,19 from which we quote:
"It is settled that the award of attorney’s fees is the exception rather than the rule
and counsel’s fees are not to be awarded every time a party wins suit. The power of
the court to award attorney’s fees under Article 2208 of the Civil Code demands
factual, legal, and equitable justification; its basis cannot be left to speculation or
conjecture. Where granted, the court must explicitly state in the body of the decision,
and not only in the dispositive portion thereof, the legal reason for the award of
attorney’s fees."
Moreover, a recent case20 ruled that "in the absence of stipulation, a winning party
may be awarded attorney’s fees only in case plaintiff’s action or defendant’s stand is
so untenable as to amount to gross and evident bad faith."
 Indeed, respondent was compelled to file this suit to vindicate his rights. However, May 24, 1996 Trust Receipt No. 96-9605249 ₱4,602,648.08
such fact by itself will not justify an award of attorney’s fees, when there is no March 21, 1997 Trust Receipt No. 97-20472410 ₱7,289,757.79
sufficient showing of petitioner’s bad faith in refusing to pay the said rentals as well June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73
as the repair and overhaul costs.21 July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41
WHEREFORE, the Petition is DENIED, but the assailed CA Decision November 16, 1995 Trust Receipt No. 96-20243914 ₱13,015,109.87
is MODIFIED by DELETING the award of attorney’s fees. Costs against petitioner. July 3, 1996 Trust Receipt No. 96-20355215 ₱401,608.89
June 20, 1995 Trust Receipt No. 95-20171016 ₱750,089.25
SO ORDERED. December 13, 1995 Trust Receipt No. 96-37908917 ₱92,919.00
December 13, 1995 Trust Receipt No. 96/20258118 ₱224,713.58
Melo, Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per
G.R. No. 177921 December 4, 2013 annum (p.a.), with penalty charge of 3% per month in case of default; while the
METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and 1%
YAN, SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES VICENTE AND penalty charge. By way of security, the individual petitioners executed several
FILOMENA DYCHIAO, Petitioners, vs. ALLIED BANK CORPORATION, Respondent. Continuing Guaranty/Comprehensive Surety Agreements 19 in favor of Allied Bank.
Petitioners failed to settle their obligations under the aforementioned promissory
PERLAS-BERNABE, J.: note and trust receipts, hence, Allied Bank, through counsel, sent them demand
letters,20 all dated December 10, 1998, seeking payment of the total amount of
₱51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint
Assailed in this petition for review on certiorari1 are the Decision2 dated February 12,
for collection of sum of money21 (subject complaint) against petitioners before the
2007 and the Resolution3dated May 10, 2007 of the Court of Appeals (CA) in CA-G.R.
RTC, docketed as Civil Case No. 00-1563. In their second22 Amended
CV No. 86896 which reversed and set aside the Decision 4 dated January 17, 2006 of
Answer,23petitioners admitted their indebtedness to Allied Bank but denied liability
the Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby
for the interests and penalties charged, claiming to have paid the total sum of
ordering petitioners Metro Concast Steel Corporation (Metro Concast), Spouses Jose
₱65,073,055.73 by way of interest charges for the period covering 1992 to 1997.24
S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses
Vicente and Filomena Duchiao (individual petitioners) to solidarily pay respondent
Allied Bank Corporation (Allied Bank) the aggregate amount of ₱51,064,094.28, with They also alleged that the economic reverses suffered by the Philippine economy in
applicable interests and penalty charges. 1998 as well as the devaluation of the peso against the US dollar contributed greatly
to the downfall of the steel industry, directly affecting the business of Metro Concast
and eventually leading to its cessation. Hence, in order to settle their debts with
The Facts
Allied Bank, petitioners offered the sale of Metro Concast’s remaining assets,
On various dates and for different amounts, Metro Concast, a corporation duly
consisting of machineries and equipment, to Allied Bank, which the latter, however,
organized and existing under and by virtue of Philippine laws and engaged in the
refused. Instead, Allied Bank advised them to sell the equipment and apply the
business of manufacturing steel,5 through its officers, herein individual petitioners,
proceeds of the sale to their outstanding obligations. Accordingly, petitioners offered
obtained several loans from Allied Bank. These loan transactions were covered by a
the equipment for sale, but since there were no takers, the equipment was reduced
promissory note and separate letters of credit/trust receipts, the details of which are
into ferro scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation
as follows:
(Peakstar), represented by one Crisanta Camiling (Camiling), expressed interest in
buying the scrap metal. During the negotiations with Peakstar, petitioners claimed
Date Document Amount
that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal department, acted
December 13, 1996 Promissory Note No. 96-213016 ₱2,000,000.00 as the latter’s agent. Eventually, with the alleged conformity of Allied Bank, through
November 7, 1995 Trust Receipt No. 96-2023657 ₱608,603.04 Atty. Saw, a Memorandum of Agreement25 dated November 8, 2002 (MoA) was
May 13, 1996 Trust Receipt No. 96-9605228 ₱3,753,777.40
71

drawn between Metro Concast, represented by petitioner Jose Dychiao, and

 Peakstar, through Camiling, under which Peakstar obligated itself to purchase the
scrap metal for a total consideration of ₱34,000,000.00, payable as follows:
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and
the other ₱2,000,000.00 to be paid in two (2) post-dated checks of ₱1,000,000.00
each;26 and
(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of
₱3,000,000.00, secured by bank guarantees from Bankwise, Inc. (Bankwise) in the
form of separate post-dated checks.27
Unfortunately, Peakstar reneged on all its obligations under the MoA.1âwphi1 In this
regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank must be
considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions of
payment proposed by Peakstar, petitioners must therefore be deemed to have
settled their obligations to Allied Bank. To bolster their defense, petitioner Jose
Dychiao (Jose Dychiao) testified28 during trial that it was Atty. Saw himself who
drafted the MoA and subsequently received29 the ₱2,000,000.00 cash and the two (2)
Bankwise post-dated checks worth ₱1,000,000.00 each from Camiling. However, Atty.
Saw turned over only the two (2) checks and ₱1,500,000.00 in cash to the wife of Jose
Dychiao.30
Claiming that the subject complaint was falsely and maliciously filed, petitioners
prayed for the award of moral damages in the amount of ₱20,000,000.00 in favor of
Metro Concast and at least ₱25,000,000.00 for each individual petitioner,
₱25,000,000.00 as exemplary damages, ₱1,000,000.00 as attorney’s fees,
₱500,000.00 for other litigation expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision 31 dated January 17, 2006, dismissed
the subject complaint, holding that the "causes of action sued upon had been paid or
otherwise extinguished." It ruled that since Allied Bank was duly represented by its
agent, Atty. Saw, in all the negotiations and transactions with Peakstar – considering
that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
72
(c) was apprised of developments regarding the sale and disposition of the scrap
metal – then it stands to reason that the MoA between Metro Concast and Peakstar
was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision 32 dated February 12, 2007,
reversed and set aside the ruling of the RTC, ratiocinating that there was "no legal
basis in fact and in law to declare that when Bankwise reneged its guarantee under
the [MoA], herein [petitioners] should be deemed to be discharged from their
obligations lawfully incurred in favor of [Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of the ferro
scrap, and Peakstar, as the buyer thereof, and found that the same did not indicate
that Allied Bank intervened or was a party thereto. It also pointed out the fact that
the post-dated checks pursuant to the MoA were issued in favor of Jose Dychiao.
Likewise, the CA found no sufficient evidence on record showing that Atty. Saw was
duly and legally authorized to act for and on behalf of Allied Bank, opining that the
RTC was "indulging in hypothesis and speculation"34 when it made a contrary
pronouncement. While Atty. Saw received the earnest money from Peakstar, the
receipt was signed by him on behalf of Jose Dychiao.35
It also added that "[i]n the final analysis, the aforesaid checks and receipts were
signed by [Atty.] Saw either as representative of [petitioners] or as partner of the
latter’s legal counsel, and not in anyway as representative of [Allied Bank]." 36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay
Allied Bank their corresponding obligations under the aforementioned promissory
note and trust receipts, plus interests, penalty charges and attorney’s fees.
Petitioners sought reconsideration37 which was, however, denied in a
Resolution38 dated May 10, 2007. Hence, this petition.
The Issue Before the Court
At the core of the present controversy is the sole issue of whether or not the loan
obligations incurred by the petitioners under the subject promissory note and various
trust receipts have already been extinguished.
The Court’s Ruling
 Article 1231 of the Civil Code states that obligations are extinguished either by
payment or performance, the loss of the thing due, the condonation or remission of
the debt, the confusion or merger of the rights of creditor and debtor, compensation
or novation.
In the present case, petitioners essentially argue that their loan obligations to Allied
Bank had already been extinguished due to Peakstar’s failure to perform its own
obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstar’s
default as a form of force majeure in the sense that they have, beyond their control,
lost the funds they expected to have received from the Peakstar (due to the MoA)
which they would, in turn, use to pay their own loan obligations to Allied Bank. They
further state that Allied Bank was equally bound by Metro Concast’s MoA with
Peakstar since its agent, Atty. Saw, actively represented it during the negotiations and
execution of the said agreement. Petitioners’ arguments are untenable. At the outset,
the Court must dispel the notion that the MoA would have any relevance to the
performance of petitioners’ obligations to Allied Bank. The MoA is a sale of assets
contract, while petitioners’ obligations to Allied Bank arose from various loan
transactions. Absent any showing that the terms and conditions of the latter
transactions have been, in any way, modified or novated by the terms and conditions
in the MoA, said contracts should be treated separately and distinctly from each
other, such that the existence, performance or breach of one would not depend on
the existence, performance or breach of the other. In the foregoing respect, the issue
on whether or not Allied Bank expressed its conformity to the assets sale transaction
between Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant
to the issues related to petitioners’ loan obligations to the bank. Besides, as the CA
pointed out, the fact of Allied Bank’s representation has not been proven in this case
and hence, cannot be deemed as a sustainable defense to exculpate petitioners from
their loan obligations to Allied Bank. Now, anent petitioners’ reliance on force
majeure, suffice it to state that Peakstar’s breach of its obligations to Metro Concast
arising from the MoA cannot be classified as a fortuitous event under jurisprudential
formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable.1âwphi1 It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the happening is not impossibility
to foresee the same. To constitute a fortuitous event, the following elements must
concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure
of the debtor to comply with obligations must be independent of human will; (b) it
must be impossible to foresee the event that constitutes the caso fortuito or, if it can
be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and (d)
73
the obligor must be free from any participation in the aggravation of the injury or
loss.40(Emphases supplied)
While it may be argued that Peakstar’s breach of the MoA was unforseen by
petitioners, the same us clearly not "impossible"to foresee or even an event which is
independent of human will." Neither has it been shown that said occurrence
rendered it impossible for petitioners to pay their loan obligations to Allied Bank and
thus, negates the former’s force majeure theory altogether. In any case, as earlier
stated, the performance or breach of the MoA bears no relation to the performance
or breach of the subject loan transactions, they being separate and distinct sources of
obligations. The fact of the matter is that petitioners’ loan obligations to Allied Bank
remain subsisting for the basic reason that the former has not been able to prove
that the same had already been paid41 or, in any way, extinguished. In this regard,
petitioners’ liability, as adjudged by the CA, must perforce stand. Considering,
however, that Allied Bank’s extra-judicial demand on petitioners appears to have
been made only on December 10, 1998, the computation of the applicable interests
and penalty charges should be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and
Resolution dated May 10, 2007 of the Court of Appeals in CA-G.R. CV No. 86896 are
hereby AFFIRMED with MODIFICATION reckoning the applicable interests and penalty
charges from the date of the extrajudicial demand or on December 10, 1998. The rest
of the appellate court’s dispositions stand.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
22. G.R. No. L-47851 October 3, 1986
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs. THE COURT OF
APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the
PHILIPPINE BAR ASSOCIATION, respondents.
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner, vs. COURT OF APPEALS, ET AL.,
respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, vs. COURT OF APPEALS, ET AL.,
respondents.
 PARAS, J.:
These are petitions for review on certiorari of the November 28, 1977 decision of the
Court of Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First
Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as
modified by the Order of the lower court dated December 8, 1971. The Court of
Appeals in modifying the decision of the lower court included an award of an
additional amount of P200,000.00 to the Philippine Bar Association to be paid jointly
and severally by the defendant United Construction Co. and by the third-party
defendants Juan F. Nakpil and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants
(except Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of
P989,335.68 with interest at the legal rate from November 29, 1968, the date of the
filing of the complaint until full payment;
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;
(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of
merit;
(e) Ordering defendant United Construction Co., Inc. and third-party defendants
(except Roman Ozaeta) to pay the costs in equal shares.
SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the judgment appealed from is modified to include an award of
P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at
the legal rate from November 29, 1968 until full payment to be paid jointly and
severally by defendant United Construction Co., Inc. and third party defendants
(except Roman Ozaeta). In all other respects, the judgment dated September 21,
1971 as modified in the December 8, 1971 Order of the lower court is hereby
affirmed with COSTS to be paid by the defendant and third party defendant (except
Roman Ozaeta) in equal shares.
SO ORDERED.
74
Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and
Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals,
among other things, for exoneration from liability while petitioner Philippine Bar
Association in L-47896 seeks the modification of aforesaid decision to obtain an
award of P1,830,000.00 for the loss of the PBA building plus four (4) times such
amount as damages resulting in increased cost of the building, P100,000.00 as
exemplary damages; and P100,000.00 as attorney's fees.
These petitions arising from the same case filed in the Court of First Instance of
Manila were consolidated by this Court in the resolution of May 10, 1978 requiring
the respective respondents to comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal,
pp. 269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of
Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated
under the Corporation Law, decided to construct an office building on its 840 square
meters lot located at the comer of Aduana and Arzobispo Streets, Intramuros,
Manila. The construction was undertaken by the United Construction, Inc. on an
"administration" basis, on the suggestion of Juan J. Carlos, the president and general
manager of said corporation. The proposal was approved by plaintiff's board of
directors and signed by its president Roman Ozaeta, a third-party defendant in this
case. The plans and specifications for the building were prepared by the other third-
party defendants Juan F. Nakpil & Sons. The building was completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and
its environs and the building in question sustained major damage. The front columns
of the building buckled, causing the building to tilt forward dangerously. The tenants
vacated the building in view of its precarious condition. As a temporary remedial
measure, the building was shored up by United Construction, Inc. at the cost of
P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of
damages arising from the partial collapse of the building against United Construction,
Inc. and its President and General Manager Juan J. Carlos as defendants. Plaintiff
alleges that the collapse of the building was accused by defects in the construction,
the failure of the contractors to follow plans and specifications and violations by the
defendants of the terms of the contract.
Defendants in turn filed a third-party complaint against the architects who prepared
the plans and specifications, alleging in essence that the collapse of the building was
 due to the defects in the said plans and specifications. Roman Ozaeta, the then
president of the plaintiff Bar Association was included as a third-party defendant for
damages for having included Juan J. Carlos, President of the United Construction Co.,
Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and
Juan F. Nakpil presented a written stipulation which reads:
1. That in relation to defendants' answer with counterclaims and third- party
complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons and
Juan F. Nakpil personally as parties defendant.
2. That in the event (unexpected by the undersigned) that the Court should find after
the trial that the above-named defendants Juan J. Carlos and United Construction
Co., Inc. are free from any blame and liability for the collapse of the PBA Building, and
should further find that the collapse of said building was due to defects and/or
inadequacy of the plans, designs, and specifications p by the third-party defendants,
or in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F. Nakpil
contributorily negligent or in any way jointly and solidarily liable with the defendants,
judgment may be rendered in whole or in part. as the case may be, against Juan F.
Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes
as if plaintiff's complaint has been duly amended by including the said Juan F. Nakpil
& Sons and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance of
their contract with plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during
which among others, the parties agreed to refer the technical issues involved in the
case to a Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the
trial court, assumed his office as Commissioner, charged with the duty to try the
following issues:
1. Whether the damage sustained by the PBA building during the August 2, 1968
earthquake had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and specifications prepared by third-
75
party defendants;
(b) The deviations, if any, made by the defendants from said plans and specifications
and how said deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected of the
architect, the contractor and/or the owner of the building;
(e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the building arose from a combination of
the above-enumerated factors, the degree or proportion in which each individual
factor contributed to the damage sustained;
3. Whether the building is now a total loss and should be completely demolished or
whether it may still be repaired and restored to a tenantable condition. In the latter
case, the determination of the cost of such restoration or repair, and the value of any
remaining construction, such as the foundation, which may still be utilized or availed
of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).
Thus, the issues of this case were divided into technical issues and non-technical
issues. As aforestated the technical issues were referred to the Commissioner. The
non-technical issues were tried by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building on the ground
that it may topple down in case of a strong earthquake. The motions were opposed
by the defendants and the matter was referred to the Commissioner. Finally, on April
30, 1979 the building was authorized to be demolished at the expense of the plaintiff,
but not another earthquake of high intensity on April 7, 1970 followed by other
strong earthquakes on April 9, and 12, 1970, caused further damage to the property.
The actual demolition was undertaken by the buyer of the damaged building. (Record
on Appeal, pp. 278-280; Ibid.)
After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA
building was caused directly by the August 2, 1968 earthquake whose magnitude was
estimated at 7.3 they were also caused by the defects in the plans and specifications
prepared by the third-party defendants' architects, deviations from said plans and
specifications by the defendant contractors and failure of the latter to observe the
requisite workmanship in the construction of the building and of the contractors,
architects and even the owners to exercise the requisite degree of supervision in the
construction of subject building.
 All the parties registered their objections to aforesaid findings which in turn were
answered by the Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding
that the owner is charged with full nine supervision of the construction. The Court
sees no legal or contractual basis for such conclusion. (Record on Appeal, pp. 309-
328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which
was modified by the Intermediate Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the Intermediate Appellate Court.
Hence, these petitions.
On May 11, 1978, the United Architects of the Philippines, the Association of Civil
Engineers, and the Philippine Institute of Architects filed with the Court a motion to
intervene as amicus curiae. They proposed to present a position paper on the liability
of architects when a building collapses and to submit likewise a critical analysis with
computations on the divergent views on the design and plans as submitted by the
experts procured by the parties. The motion having been granted, the amicus
curiae were granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in
Our Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were
duly noted.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils
were not defective. But the Commissioner, when asked by Us to comment, reiterated
his conclusion that the defects in the plans and specifications indeed existed.
Using the same authorities availed of by the amicus curiae such as the Manila Code
(Ord. No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can
be proved that the defects in the constructionalone (and not in the plans and design)
caused the damage to the building, still the deficiency in the original design and jack
of specific provisions against torsion in the original plans and the overload on the
ground floor columns (found by an the experts including the original designer)
certainly contributed to the damage which occurred. (Ibid, p. 174).
76
In their respective briefs petitioners, among others, raised the following assignments
of errors: Philippine Bar Association claimed that the measure of damages should not
be limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6)
months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed
that it was an act of God that caused the failure of the building which should exempt
them from responsibility and not the defective construction, poor workmanship,
deviations from plans and specifications and other imperfections in the case of
United Construction Co., Inc. or the deficiencies in the design, plans and specifications
prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object
to the payment of the additional amount of P200,000.00 imposed by the Court of
Appeals. UCCI also claimed that it should be reimbursed the expenses of shoring the
building in the amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.
The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties
who are otherwise liable because of their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article
1723 of the New Civil Code, which provides:
Art. 1723. The engineer or architect who drew up the plans and specifications for a
building is liable for damages if within fifteen years from the completion of the
structure the same should collapse by reason of a defect in those plans and
specifications, or due to the defects in the ground. The contractor is likewise
responsible for the damage if the edifice fags within the same period on account of
defects in the construction or the use of materials of inferior quality furnished by him,
or due to any violation of the terms of the contract. If the engineer or architect
supervises the construction, he shall be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the
causes of action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events
which could not be foreseen or which though foreseen, were inevitable (Article 1174,
New Civil Code).
An act of God has been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight, pains or care,
reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174).
 There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an
act of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach
of an obligation due to an "act of God," the following must concur: (a) the cause of
the breach of the obligation must be independent of the will of the debtor; (b) the
event must be either unforseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; and (d)
the debtor must be free from any participation in, or aggravation of the injury to the
creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA
423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon
Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of
the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must
be one occasioned exclusively by the violence of nature and all human agencies are
to be excluded from creating or entering into the cause of the mischief. When the
effect, the cause of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or neglect, or failure to
act, the whole occurrence is thereby humanized, as it were, and removed from the
rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of
God in producing a loss, such person is not exempt from liability by showing that the
immediate cause of the damage was the act of God. To be exempt from liability for
loss because of an act of God, he must be free from any previous negligence or
misconduct by which that loss or damage may have been occasioned. (Fish & Elective
Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v.
Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
The negligence of the defendant and the third-party defendants petitioners was
established beyond dispute both in the lower court and in the Intermediate Appellate
Court. Defendant United Construction Co., Inc. was found to have made substantial
deviations from the plans and specifications. and to have failed to observe the
requisite workmanship in the construction as well as to exercise the requisite degree
of supervision; while the third-party defendants were found to have inadequacies or
defects in the plans and specifications prepared by them. As correctly assessed by
77
both courts, the defects in the construction and in the plans and specifications were
the proximate causes that rendered the PBA building unable to withstand the
earthquake of August 2, 1968. For this reason the defendant and third-party
defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-
31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on
the parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar
vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is
a finding grounded entirely on speculation, surmise and conjectures; (2) the inference
made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment
is based on misapprehension of facts; (5) the findings of fact are conflicting , (6) the
Court of Appeals went beyond the issues of the case and its findings are contrary to
the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co.,
February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648,
651); (7) the findings of facts of the Court of Appeals are contrary to those of the trial
court; (8) said findings of facts are conclusions without citation of specific evidence
on which they are based; (9) the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondents (Garcia vs. CA,
June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA
322, 366); (10) the finding of fact of the Court of Appeals is premised on the supposed
absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez,
May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan,
July 10, 1986).
It is evident that the case at bar does not fall under any of the exceptions above-
mentioned. On the contrary, the records show that the lower court spared no effort
in arriving at the correct appreciation of facts by the referral of technical issues to a
Commissioner chosen by the parties whose findings and conclusions remained
convincingly unrebutted by the intervenors/amicus curiae who were allowed to
intervene in the Supreme Court.
In any event, the relevant and logical observations of the trial court as affirmed by the
Court of Appeals that "while it is not possible to state with certainty that the building
would not have collapsed were those defects not present, the fact remains that
several buildings in the same area withstood the earthquake to which the building of
the plaintiff was similarly subjected," cannot be ignored.
The next issue to be resolved is the amount of damages to be awarded to the PBA for
the partial collapse (and eventual complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to
 restore it to tenantable condition was P900,000.00 inasmuch as it was not initially a
total loss. However, while the trial court awarded the PBA said amount as damages,
plus unrealized rental income for one-half year, the Court of Appeals modified the
amount by awarding in favor of PBA an additional sum of P200,000.00 representing
the damage suffered by the PBA building as a result of another earthquake that
occurred on April 7, 1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00
representing the total value of the building (L-47896, PBA's No. 1 Assignment of Error,
p. 19), while both the NAKPILS and UNITED question the additional award of
P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's
Brief as Petitioner, p. 25). The PBA further urges that the unrealized rental income
awarded to it should not be limited to a period of one-half year but should be
computed on a continuing basis at the rate of P178,671.76 a year until the judgment
for the principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment
of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968 earthquake was
only partial and it is undisputed that the building could then still be repaired and
restored to its tenantable condition. The PBA, however, in view of its lack of needed
funding, was unable, thru no fault of its own, to have the building repaired. UNITED,
on the other hand, spent P13,661.28 to shore up the building after the August 2,
1968 earthquake (L-47896, CA Decision, p. 46). Because of the earthquake on April 7,
1970, the trial court after the needed consultations, authorized the total demolition
of the building (L-47896, Vol. 1, pp. 53-54).
There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.
We quote with approval the following from the erudite decision penned by Justice
Hugo E. Gutierrez (now an Associate Justice of the Supreme Court) while still an
Associate Justice of the Court of Appeals:
There is no question that an earthquake and other forces of nature such as cyclones,
drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily
follow, however, that specific losses and suffering resulting from the occurrence of
these natural force are also acts of God. We are not convinced on the basis of the
evidence on record that from the thousands of structures in Manila, God singled out
the blameless PBA building in Intramuros and around six or seven other buildings in
various parts of the city for collapse or severe damage and that God alone was
78
responsible for the damages and losses thus suffered.
The record is replete with evidence of defects and deficiencies in the designs and
plans, defective construction, poor workmanship, deviation from plans and
specifications and other imperfections. These deficiencies are attributable to
negligent men and not to a perfect God.
The act-of-God arguments of the defendants- appellants and third party defendants-
appellants presented in their briefs are premised on legal generalizations or
speculations and on theological fatalism both of which ignore the plain facts. The
lengthy discussion of United on ordinary earthquakes and unusually strong
earthquakes and on ordinary fortuitous events and extraordinary fortuitous events
leads to its argument that the August 2, 1968 earthquake was of such an
overwhelming and destructive character that by its own force and independent of the
particular negligence alleged, the injury would have been produced. If we follow this
line of speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would have
toppled down. Following the same line of reasoning, Nakpil and Sons alleges that the
designs were adequate in accordance with pre-August 2, 1968 knowledge and appear
inadequate only in the light of engineering information acquired after the
earthquake. If this were so, hundreds of ancient buildings which survived the
earthquake better than the two-year old PBA building must have been designed and
constructed by architects and contractors whose knowledge and foresight were
unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more
down to earth explanation of the collapse. The failure of the PBA building, as a unique
and distinct construction with no reference or comparison to other buildings, to
weather the severe earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The theological
allusion of appellant United that God acts in mysterious ways His wonders to perform
impresses us to be inappropriate. The evidence reveals defects and deficiencies in
design and construction. There is no mystery about these acts of negligence. The
collapse of the PBA building was no wonder performed by God. It was a result of the
imperfections in the work of the architects and the people in the construction
company. More relevant to our mind is the lesson from the parable of the wise man
in the Sermon on the Mount "which built his house upon a rock; and the rain
descended and the floods came and the winds blew and beat upon that house; and it
fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the
rain descended and man which built his house the floods came, and the winds blew,
and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-
27)." The requirement that a building should withstand rains, floods, winds,
earthquakes, and natural forces is precisely the reason why we have professional
experts like architects, and engineers. Designs and constructions vary under varying
circumstances and conditions but the requirement to design and build well does not
change.
 The findings of the lower Court on the cause of the collapse are more rational and
accurate. Instead of laying the blame solely on the motions and forces generated by
the earthquake, it also examined the ability of the PBA building, as designed and
constructed, to withstand and successfully weather those forces.
The evidence sufficiently supports a conclusion that the negligence and fault of both
United and Nakpil and Sons, not a mysterious act of an inscrutable God, were
responsible for the damages. The Report of the Commissioner, Plaintiff's Objections
to the Report, Third Party Defendants' Objections to the Report, Defendants'
Objections to the Report, Commissioner's Answer to the various Objections, Plaintiffs'
Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's
Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to
the Commissioner's Report not to mention the exhibits and the testimonies show
that the main arguments raised on appeal were already raised during the trial and
fully considered by the lower Court. A reiteration of these same arguments on appeal
fails to convince us that we should reverse or disturb the lower Court's factual
findings and its conclusions drawn from the facts, among them:
The Commissioner also found merit in the allegations of the defendants as to the
physical evidence before and after the earthquake showing the inadequacy of design,
to wit:
Physical evidence before the earthquake providing (sic) inadequacy of design;
1. inadequate design was the cause of the failure of the building.
2. Sun-baffles on the two sides and in front of the building;
a. Increase the inertia forces that move the building laterally toward the
Manila Fire Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down spout on all exterior columns reduces
the cross-sectional area of each of the columns and the strength thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced.
Physical Evidence After the Earthquake, Proving Inadequacy of design;
1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.
3. Building leaned and sagged more on the front part of the building.
4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.
5. There was a lateral displacement of the building of about 8", Maximum sagging
occurs at the column A7 where the floor is lower by 80 cm. than the highest slab
79
level.
6. Slab at the corner column D7 sagged by 38 cm.
The Commissioner concluded that there were deficiencies or defects in the design,
plans and specifications of the PBA building which involved appreciable risks with
respect to the accidental forces which may result from earthquake shocks. He
conceded, however, that the fact that those deficiencies or defects may have arisen
from an obsolete or not too conservative code or even a code that does not require a
design for earthquake forces mitigates in a large measure the responsibility or liability
of the architect and engineer designer.
The Third-party defendants, who are the most concerned with this portion of the
Commissioner's report, voiced opposition to the same on the grounds that (a) the
finding is based on a basic erroneous conception as to the design concept of the
building, to wit, that the design is essentially that of a heavy rectangular box on stilts
with shear wan at one end; (b) the finding that there were defects and a deficiency in
the design of the building would at best be based on an approximation and,
therefore, rightly belonged to the realm of speculation, rather than of certainty and
could very possibly be outright error; (c) the Commissioner has failed to back up or
support his finding with extensive, complex and highly specialized computations and
analyzes which he himself emphasizes are necessary in the determination of such a
highly technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
knowledge at the time of the preparation of the design, but in the light of recent and
current standards.
The Commissioner answered the said objections alleging that third-party defendants'
objections were based on estimates or exhibits not presented during the hearing that
the resort to engineering references posterior to the date of the preparation of the
plans was induced by the third-party defendants themselves who submitted
computations of the third-party defendants are erroneous.
The issue presently considered is admittedly a technical one of the highest degree. It
involves questions not within the ordinary competence of the bench and the bar to
resolve by themselves. Counsel for the third-party defendants has aptly remarked
that "engineering, although dealing in mathematics, is not an exact science and that
the present knowledge as to the nature of earthquakes and the behaviour of forces
generated by them still leaves much to be desired; so much so "that the experts of
the different parties, who are all engineers, cannot agree on what equation to use, as
to what earthquake co-efficients are, on the codes to be used and even as to the type
of structure that the PBA building (is) was (p. 29, Memo, of third- party defendants
before the Commissioner).
 The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the questions
involved therein, constituted the reason for the reference of the said issues to a
Commissioner whose qualifications and experience have eminently qualified him for
the task, and whose competence had not been questioned by the parties until he
submitted his report. Within the pardonable limit of the Court's ability to
comprehend the meaning of the Commissioner's report on this issue, and the
objections voiced to the same, the Court sees no compelling reasons to disturb the
findings of the Commissioner that there were defects and deficiencies in the design,
plans and specifications prepared by third-party defendants, and that said defects
and deficiencies involved appreciable risks with respect to the accidental forces which
may result from earthquake shocks.
(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained by the
building.
(b) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building.
These two issues, being interrelated with each other, will be discussed together.
The findings of the Commissioner on these issues were as follows:
We now turn to the construction of the PBA Building and the alleged deficiencies or
defects in the construction and violations or deviations from the plans and
specifications. All these may be summarized as follows:
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
(1) Wrongful and defective placing of reinforcing bars.
(2) Absence of effective and desirable integration of the 3 bars in the cluster.
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger
than 1 inch.
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3"
off when on one face the main bars are only 1 1/2' from the surface.
80
(5) Prevalence of honeycombs,
(6) Contraband construction joints,
(7) Absence, or omission, or over spacing of spiral hoops,
(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second floor,
(12) Columns buckled at different planes. Columns buckled worst where there are no
spirals or where spirals are cut. Columns suffered worst displacement where the
eccentricity of the columnar reinforcement assembly is more acute.
b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
Columns are first (or ground) floor, unless otherwise stated.
(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,
(2) Column D5 — No spiral up to a height of 22" from the ground floor,
(3) Column D6 — Spacing of spiral over 4 l/2,
(4) Column D7 — Lack of lateral ties,
(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals
are at 2" from the exterior column face and 6" from the inner column face,
(6) Column B6 — Lack of spiral on 2 feet below the floor beams,
(7) Column B5 — Lack of spirals at a distance of 26' below the beam,
(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to
4",
(9) Column A3 — Lack of lateral ties,
(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,
(11) Column A4 — (second floor Column is completely hollow to a height of 30"
(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel
beam to a height of 6 feet,
(13) Column A6 — No spirals up to a height of 30' above the ground floor level,
(14) Column A7— Lack of lateralties or spirals,
c. Summary of alleged defects as reported by the experts of the Third-Party
defendants.
 Ground floor columns.
(1) Column A4 — Spirals are cut,
(2) Column A5 — Spirals are cut,
(3) Column A6 — At lower 18" spirals are absent,
(4) Column A7 — Ties are too far apart,
(5) Column B5 — At upper fourth of column spirals are either absent or improperly
spliced,
(6) Column B6 — At upper 2 feet spirals are absent,
(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.
(8) Column C7— Spirals are absent at lowest 18"
(9) Column D5 — At lowest 2 feet spirals are absent,
(10) Column D6 — Spirals are too far apart and apparently improperly spliced,
(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the engineering
experts for the defendants are either contrary to general principles of engineering
design for reinforced concrete or not applicable to the requirements for ductility and
strength of reinforced concrete in earthquake-resistant design and construction.
We shall first classify and consider defects which may have appreciable bearing or
relation to' the earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the connections
between columns and girders are desirable in earthquake resistant design and
construction. The omission of spirals and ties or hoops at the bottom and/or tops of
columns contributed greatly to the loss of earthquake-resistant strength. The plans
and specifications required that these spirals and ties be carried from the floor level
to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970,
Reference 11). There were several clear evidences where this was not done especially
in some of the ground floor columns which failed.
There were also unmistakable evidences that the spacings of the spirals and ties in
the columns were in many cases greater than those called for in the plans and
specifications resulting again in loss of earthquake-resistant strength. The assertion of
the engineering experts for the defendants that the improper spacings and the
cutting of the spirals did not result in loss of strength in the column cannot be
maintained and is certainly contrary to the general principles of column design and
construction. And even granting that there be no loss in strength at the yield point
(an assumption which is very doubtful) the cutting or improper spacings of spirals will
certainly result in the loss of the plastic range or ductility in the column and it is
81
precisely this plastic range or ductility which is desirable and needed for earthquake-
resistant strength.
There is no excuse for the cavity or hollow portion in the column A4, second floor,
and although this column did not fail, this is certainly an evidence on the part of the
contractor of poor construction.
The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column and
beam moments. The main effect of eccentricity is to change the beam or girder span.
The effect on the measured eccentricity of 2 inches, therefore, is to increase or
diminish the column load by a maximum of about 1% and to increase or diminish the
column or beam movements by about a maximum of 2%. While these can certainly
be absorbed within the factor of safety, they nevertheless diminish said factor of
safety.
The cutting of the spirals in column A5, ground floor is the subject of great contention
between the parties and deserves special consideration.
The proper placing of the main reinforcements and spirals in column A5, ground
floor, is the responsibility of the general contractor which is the UCCI. The burden of
proof, therefore, that this cutting was done by others is upon the defendants. Other
than a strong allegation and assertion that it is the plumber or his men who may have
done the cutting (and this was flatly denied by the plumber) no conclusive proof was
presented. The engineering experts for the defendants asserted that they could have
no motivation for cutting the bar because they can simply replace the spirals by
wrapping around a new set of spirals. This is not quite correct. There is evidence to
show that the pouring of concrete for columns was sometimes done through the
beam and girder reinforcements which were already in place as in the case of column
A4 second floor. If the reinforcement for the girder and column is to subsequently
wrap around the spirals, this would not do for the elasticity of steel would prevent
the making of tight column spirals and loose or improper spirals would result. The
proper way is to produce correct spirals down from the top of the main column bars,
a procedure which can not be done if either the beam or girder reinforcement is
already in place. The engineering experts for the defendants strongly assert and
apparently believe that the cutting of the spirals did not materially diminish the
strength of the column. This belief together with the difficulty of slipping the spirals
on the top of the column once the beam reinforcement is in place may be a sufficient
motivation for the cutting of the spirals themselves. The defendants, therefore,
should be held responsible for the consequences arising from the loss of strength or
ductility in column A5 which may have contributed to the damages sustained by the
building.
 The lack of proper length of splicing of spirals was also proven in the visible spirals of
the columns where spalling of the concrete cover had taken place. This lack of proper
splicing contributed in a small measure to the loss of strength.
The effects of all the other proven and visible defects although nor can certainly be
accumulated so that they can contribute to an appreciable loss in earthquake-
resistant strength. The engineering experts for the defendants submitted an estimate
on some of these defects in the amount of a few percent. If accumulated, therefore,
including the effect of eccentricity in the column the loss in strength due to these
minor defects may run to as much as ten percent.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the
top of some of the ground floor columns contributed greatly to the collapse of the
PBA building since it is at these points where the greater part of the failure occurred.
The liability for the cutting of the spirals in column A5, ground floor, in the considered
opinion of the Commissioner rests on the shoulders of the defendants and the loss of
strength in this column contributed to the damage which occurred.
It is reasonable to conclude, therefore, that the proven defects, deficiencies and
violations of the plans and specifications of the PBA building contributed to the
damages which resulted during the earthquake of August 2, 1968 and the vice of
these defects and deficiencies is that they not only increase but also aggravate the
weakness mentioned in the design of the structure. In other words, these defects and
deficiencies not only tend to add but also to multiply the effects of the shortcomings
in the design of the building. We may say, therefore, that the defects and deficiencies
in the construction contributed greatly to the damage which occurred.
Since the execution and supervision of the construction work in the hands of the
contractor is direct and positive, the presence of existence of all the major defects
and deficiencies noted and proven manifests an element of negligence which may
amount to imprudence in the construction work. (pp. 42-49, Commissioners Report).
As the parties most directly concerned with this portion of the Commissioner's
report, the defendants voiced their objections to the same on the grounds that the
Commissioner should have specified the defects found by him to be "meritorious";
that the Commissioner failed to indicate the number of cases where the spirals and
ties were not carried from the floor level to the bottom reinforcement of the deeper
beam, or where the spacing of the spirals and ties in the columns were greater than
that called for in the specifications; that the hollow in column A4, second floor, the
eccentricities in the columns, the lack of proper length of splicing of spirals, and the
cut in the spirals in column A5, ground floor, did not aggravate or contribute to the
82
damage suffered by the building; that the defects in the construction were within the
tolerable margin of safety; and that the cutting of the spirals in column A5, ground
floor, was done by the plumber or his men, and not by the defendants.
Answering the said objections, the Commissioner stated that, since many of the
defects were minor only the totality of the defects was considered. As regards the
objection as to failure to state the number of cases where the spirals and ties were
not carried from the floor level to the bottom reinforcement, the Commissioner
specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches
at the top, and in the latter, there were no spirals for 10 inches at the bottom. The
Commissioner likewise specified the first storey columns where the spacings were
greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5,
D-5 and B-7. The objection to the failure of the Commissioner to specify the number
of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were
less than 1-1/2 turns and were not welded, resulting in some loss of strength which
could be critical near the ends of the columns. He answered the supposition of the
defendants that the spirals and the ties must have been looted, by calling attention to
the fact that the missing spirals and ties were only in two out of the 25 columns,
which rendered said supposition to be improbable.
The Commissioner conceded that the hollow in column A-4, second floor, did not
aggravate or contribute to the damage, but averred that it is "evidence of poor
construction." On the claim that the eccentricity could be absorbed within the factor
of safety, the Commissioner answered that, while the same may be true, it also
contributed to or aggravated the damage suffered by the building.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was
answered by the Commissioner by reiterating the observation in his report that
irrespective of who did the cutting of the spirals, the defendants should be held liable
for the same as the general contractor of the building. The Commissioner further
stated that the loss of strength of the cut spirals and inelastic deflections of the
supposed lattice work defeated the purpose of the spiral containment in the column
and resulted in the loss of strength, as evidenced by the actual failure of this column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails
to find any sufficient cause to disregard or modify the same. As found by the
Commissioner, the "deviations made by the defendants from the plans and
specifications caused indirectly the damage sustained and that those deviations not
only added but also aggravated the damage caused by the defects in the plans and
specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)
 The afore-mentioned facts clearly indicate the wanton negligence of both the
defendant and the third-party defendants in effecting the plans, designs,
specifications, and construction of the PBA building and We hold such negligence as
equivalent to bad faith in the performance of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379,
4380) which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the
natural and probable consequences thereof, although the act of a third person, or an
act of God for which he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell
hundreds of ancient buildings in the vicinity were hardly affected by the earthquake.
Only one thing spells out the fatal difference; gross negligence and evident bad faith,
without which the damage would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, We deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE
MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's
fees) occasioned by the loss of the building (including interest charges and lost
rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

83
 A. USURIOUS TRANSACTIONS/INTEREST
23. G.R. No. 131622 November 27, 1998
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,
vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES,
JR. doing lending business under the trade name and style "GONZALES CREDIT
ENTERPRISES", respondents.
PARDO, J.:
The case before the Court is a petition for review on certiorari, under Rule 45 of the
Revised Rules of Court, seeking to set aside the decision of the Court of Appeals, 1 and
its resolution denying reconsideration, 2 the dispositive portion of which decision
reads as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are
hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per month
of the total amount due and demandable as penalty charges effective August 23,
1986, until the entire amount is fully paid.
The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
SO ORDERED. 3
The Court required the respondents to comment on the petition, 4 which was filed on
April 3, 1998,5 and the petitioners to reply thereto, which was filed on May 29,
1998.6 We now resolve to give due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are
considered binding and conclusive on the parties herein, as the appeal is limited to
questions of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and
Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was
84
engaged in the money lending business under the name "Gonzales Credit
Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as
advance interest for one month at 6% per month. Servando and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Liticia obtained from Veronica another loan in
the amount of P90,000.00, payable in two months, at 6% interest per month. They
executed a promissory note to evidence the loan, maturing on Janaury 19, 1986. They
received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in
the amout of P300,000.00, maturing in one month, secured by a real estate mortgage
over a property belonging to Leticia Makalintal Yaptinchay, who issued a special
power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage.
Servando and Leticia executed a promissory note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11, 1986. However, only the sum of
P275.000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from
Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a
total of P500,000.00, payable on August 23, 1986. They executed a promissory note,
reading as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date Augsut 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT
ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag,
Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00)
Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus
 2% service charge per annum from date hereof until fully paid according to the
amortization schedule contained herein. (Emphasis supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable
and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%)
per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's Fee whether actually incurred
or not, of the total amount due and demandable, exclusive of costs and judicial or
extra judicial expenses. (Emphasis supplied).
I, WE further agree that in the event the present rate of interest on loan is increased
by law or the Central Bank of the Philippines, the holder shall have the option to
apply and collect the increased interest charges without notice although the original
interest have already been collected wholly or partially unless the contrary is required
by law.
It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of the
peso, and if there be any change in the value thereof, due to extraordinary inflation
or deflation, or any other cause or reason, then the peso-obligation herein contracted
shall be adjusted in accordance with the value of the peso then prevailing at the time
of the complete fulfillment of the obligation.
Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note.
IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive
all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of
Court.
On maturity of the loan, the borrowers failed to pay the indebtedness of
P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory
note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos,
85
Bulacan, a complaint for collection of the full amount of the loan including interests
and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of
P500,000.00, and actually received the amount and benefited therefrom; that the
loan was secured by a real estate mortgage executed in favor of the plaintiffs, and
that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel
alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1% per month; that the stipulation
for attorney's fees of 25% of the amount due is unconscionable, illegal and excessive,
and that substantial payments made were applied to interest, penalties and other
charges.
After due trial, the lower court declared that the due execution and genuineness of
the four promissory notes had been duly proved, and ruled that although the Usury
Law had been repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial court applied "the
provision of the New [Civil] Code" that the "legal rate of interest for loan or
forbearance of money, goods or credit is 12% per annum." 7
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive
portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.
2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
and severally the amount of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19, 1985 until the whole amount is fully
paid;
 3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11,
1986, until the whole amount is fully paid;
4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of
P50,000.00 as attorney's fees;
5. All counterclaims are hereby dismissed.
With costs against the defendants.8
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which
consolidated all the unpaid loans of the defendants, is the law that governs the
parties. They further argued that Circular No. 416 of the Central Bank prescribing the
rate of interest for loans or forbearance of money, goods or credit at 12% per annum,
applies only in the absence of a stipulation on interest rate, but not when the parties
agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the
Usury Law having become 'legally inexistent' with the promulgation by the Central
Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest
that may be charged on the loan".9 The Court of Appeals further held that "the
imposition of 'an additional amount equivalent to 1% per month of the amount due
and demandable as penalty charges in the form of liquidated damages until fully paid'
was allowed by
law". 10
Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision
reversing that of the Regional Trial Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are
hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per month
of the total amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.
The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
86
SO ORDERED. 11
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the
said decision. By resolution dated November 25, 1997, the Court of Appeals denied
the motion. 12
Hence, defendants interposed the present recourse via petition for review
on certiorari. 13
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus,
the question presented is whether or not the stipulated rate of interest at 5.5% per
month on the loan in the sum of P500,000.00, that plaintiffs extended to the
defendants is usurious. In other words, is the Usury Law still effective, or has it been
repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant
to its powers under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. 13 However, we can not consider the rate "usurious" because this Court
has consistently held that Circular No. 905 of the Central Bank, adopted on December
22, 1982, has expressly removed the interest ceilings prescribed by the Usury
Law 14 and that the Usury Law is now "legally inexistent". 15
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch
61 16 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the
Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a
Central Bank Circular can not repeal a law. Only a law can repeal another law." 17 In
the recent case of Florendo vs. Court of Appeals 18, the Court reiterated the ruling that
"by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury
has been legally non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon." 19
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated
upon by the parties in the promissory note iniquitous or unconscionable, and, hence,
contrary to morals ("contra bonos mores"), if not against the law. 20 The stipulation is
void. 21 The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable. 22
 Consequently, the Court of Appeals erred in upholding the stipulation of the parties.
Rather, we agree with the trial court that, under the circumstances, interest at 12%
per annum, and an additional 1% a month penalty charge as liquidated damages may
be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 24. G.R. No. 183272 October 15, 2014
1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos,
SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,
Bulacan, in Civil Case No. 134-M-90, involving the same parties.
vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO TAN KIT, respondents.
No pronouncement as to costs in this instance.
DECISION
SO ORDERED.
DEL CASTILLO, J.:

The Court of Appeals' (CA) imposition of 12o/o interest on the ₱13,080.93 premium
refund is the only matter in question in this case.

This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in
CA-GR. CV No. 86923, which, among others, imposed a 12% per annum rate of
interest reckoned from the time of death of the insured until fully paid, on the
premium to be reimbursed by petitioner Sun Life of Canada (Philippines), Inc.
(petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the Estate of the
Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is
the CA's June 12, 2008 Resolution3 denying petitioner's Motion for Reconsideration of
the said Decision.

Factual Antecedents

Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit
(Norberto), whose application for a life insurance policy, 4 with face value of
₱300,000.00, was granted by petitioner on October 28, 1999. On February 19, 2001,
or within the two-year contestability period,5 Norberto died of disseminated gastric
carcinoma.6Consequently, respondent Tan Kit filed a claim under the subject policy.

In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on
account of Norberto’s failure to fully and faithfully disclose in his insurance
application certain material and relevant information about his health and smoking
history. Specifically, Norberto answered "No" to the question inquiring whether he
87

had smoked cigarettes or cigars within the last 12 months prior to filling out said
 application.8 However, the medical report of Dr. Anna Chua (Dr. Chua), one of the Cost de oficio.
several physicians that Norberto consulted for his illness, reveals that he was a
smoker and had only stopped smoking in August 1999. According to petitioner, its SO ORDERED.13
underwriters would not have approved Norberto’s application for life insurance had
they been given the correct information. Believing that the policy is null and void, Petitioner moved for reconsideration,14 but was denied in an Order15 dated February
petitioner opined that its liability is limited to the refund of all the premiums paid. 15, 2006.
Accordingly, it enclosed in the said letter a check for ₱13,080.93 representing the
premium refund.
Hence, petitioner appealed to the CA.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the
Ruling of the Court of Appeals
check and insisted on the payment of the insurance proceeds.
On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated
On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance
October 17, 2007.
Contract before the Regional Trial Court (RTC) of Makati City.
From the records, the CA found that prior to his death, Norberto had consulted two
Ruling of the Regional Trial Court
physicians, Dr. Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on
December 28, 2000, to whom he confided that he had stopped smoking only in 1999.
In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. At the time therefore that he applied for insurance policy on October 28, 1999, there
Charity Salvador (Dr. Salvador), conducted medical examination on Norberto. is no truth to his claim that he did not smoke cigarettes within 12 months prior to the
Moreover, petitioner’s agent, Irma Joy E. Javelosa (Javelosa), answered "NO" to the said application. The CA thus held that Norberto is guilty of concealment which
question "Are you aware of anything about the life to be insured’s lifestyle, hazardous misled petitioner in forming its estimates of the risks of the insurance policy. This
sports, habits, medical history, or any risk factor that would have an adverse effect on gave petitioner the right to rescind the insurance contract which it properly exercised
insurability?" in her Agent’s Report. Javelosa also already knew Norberto two years in this case.
prior to the approval of the latter’s application for insurance. The RTC concluded that
petitioner, through the above-mentioned circumstances, had already cleared
In addition, the CA held that the content of Norberto’s medical records are deemed
Norberto of any misrepresentation that he may have committed. The RTC also opined
admitted by respondents since they failed to deny the same despite having received
that the affidavit of Dr. Chua, presented as part of petitioner’s evidence and which
from petitioner a Request for Admission pursuant to Rule 26 of the Rules of
confirmed the fact that the insured was a smoker and only stopped smoking a year
Court.17 And since an admission is in the nature of evidence the legal effects of which
ago [1999], is hearsay since Dr. Chua did not testify in court. Further, since Norberto
form part of the records, the CA discredited the RTC’s ruling that the subject medical
had a subsisting insurance policy with petitioner during his application for insurance
records and the affidavits executed by Norberto’s physicians attesting to the truth of
subject of this case, it was incumbent upon petitioner to ascertain the health
the same were hearsay.
condition of Norberto considering the additional burden that it was assuming. Lastly,
petitioner did not comply with the requirements for rescission of insurance contract
The dispositive portion of the CA Decision reads:
as held in Philamcare Health Systems, Inc. v. Court of Appeals. 12 Thus, the dispositive
portion of the RTC Decision:
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and
the appealed Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is
WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor
hereby rendered GRANTING the complaint a quo.
of the [respondents and] against the [petitioner], hence it hereby orders the
[petitioner] to pay the [respondent], Sandra Tan Kit, the sum of Philippine Pesos:
THREE HUNDRED THOUSAND (₱300,000.00), representing the face value of the Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of
insurance policy with interest at six percent (6%) per annum from October 4, 2002 ₱13,080.93 representing the [premium] paid by the insured with interest at the rate
of 12% per annum from the time of the death of the insured until fully paid.
88

until fully paid.

 SO ORDERED.18
The parties filed their separate motions for reconsideration. 19 While respondents
questioned the factual and legal bases of the CA Decision, petitioner, on the other
hand, assailed the imposition of interest on the premium ordered refunded to
respondents.
However, the appellate court denied the motions in its June 12, 2008
Resolution,20 viz:
WHEREFORE, the foregoing considered, the separate motions for reconsideration
filed by the [petitioner] and the [respondents] are hereby DENIED.
SO ORDERED.21
Only petitioner appealed to this Court through the present Petition for Review on
Certiorari.
Issue
The sole issue in this case is whether petitioner is liable to pay interest on the
premium to be refunded to respondents.
The Parties’ Arguments
Petitioner argues that no interest should have been imposed on the premium to be
refunded because the CA Decision does not provide any legal or factual basis
therefor; that petitioner directly and timely tendered to respondents an amount
representing the premium refund but they rejected it since they opted to pursue
their claim for the proceeds of the insurance policy; that respondents should bear the
consequence of their unsound decision of rejecting the refund tendered to them;
and, that petitioner is not guilty of delay or of invalid or unjust rescission as to make it
liable for interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals,22 no
interest can be assessed against petitioner.
Respondents, on the other hand, contend that the reimbursement of premium is
clearly a money obligation or one that arises from forbearance of money, hence, the
imposition of 12% interest per annum is just, proper and supported by jurisprudence.
While they admit that they refused the tender of payment of the premium refund,
they aver that they only did so because they did not want to abandon their claim for
the proceeds of the insurance policy. In any case, what petitioner should have done
89
under the circumstances was to consign the amount of payment in court during the
pendency of the case.
Our Ruling
Tio Khe Chio is not applicable in this case.
Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive
on the issue of payment of interest.1âwphi1 There, the Court pointed to Sections 243
and 244 of the Insurance Code which explicitly provide for payment of interest when
there is unjustified refusal or withholding of payment of the claim by the
insurer, 23 and to Article 220924 of the New Civil Code which likewise provides for
payment of interest when the debtor is in delay.
The Court finds, however, that Tio Khe Chio is not applicable here as it deals with
payment of interest on the insurance proceeds in which the claim therefor was either
unreasonably denied or withheld or the insurer incurred delay in the payment
thereof. In this case, what is involved is an order for petitioner to refund to
respondents the insurance premium paid by Norberto as a consequence of the
rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not
unreasonably deny or withhold the insurance proceeds as it was satisfactorily
established that Norberto was guilty of concealment.
Nature of interest imposed by the CA
There are two kinds of interest – monetary and compensatory.
"Monetary interest refers to the compensation set by the parties for the use or
forbearance of money."25 No such interest shall be due unless it has been expressly
stipulated in writing.26 "On the other hand, compensatory interest refers to the
penalty or indemnity for damages imposed by law or by the courts." 27 The interest
mentioned in Articles 2209 and 221228of the Civil Code applies to compensatory
interest.29
Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not
monetary interest because aside from the fact that there is no use or forbearance of
money involved in this case, the subject interest was not one which was agreed upon
by the parties in writing. This being the case and judging from the tenor of the CA, to
wit:
 Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of SO ORDERED.
₱13,080.93 representing the [premium] paid by the insured with interest at the rate
of 12% per annum from time of death of the insured until fully paid. 30 MARIANO C. DEL CASTILLO
Associate Justice
there can be no other conclusion than that the interest imposed by the appellate
court is in the nature of compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund reckoned

from the time of death of the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven to

have failed to comply with his obligation.31

In this case, it is undisputed that simultaneous to its giving of notice to respondents

that it was rescinding the policy due to concealment, petitioner tendered the refund
of premium by attaching to the said notice a check representing the amount of
refund. However, respondents refused to accept the same since they were seeking
for the release of the proceeds of the policy. Because of this discord, petitioner filed
for judicial rescission of the contract. Petitioner, after receiving an adverse judgment
from the RTC, appealed to the CA. And as may be recalled, the appellate court found
Norberto guilty of concealment and thus upheld the rescission of the insurance
contract and consequently decreed the obligation of petitioner to return to
respondents the premium paid by Norberto. Moreover, we find that petitioner did
not incur delay or unjustifiably deny the claim.

Based on the foregoing, we find that petitioner properly complied with its obligation
under the law and contract. Hence, it should not be made liable to pay compensatory
interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to

reimburse the premium paid within 15 days from date of finality of this Decision. If
petitioner fails to pay within the said period, then the amount shall be deemed
equivalent to a forbearance of credit.32 In such a case, the rate of interest shall be 6%
per annum.33

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-
G.R. CV No. 86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc.
is ordered to reimburse to respondents Sandra Tan Kit and the Estate of the
Deceased Norberto Tan Kit the sum of ~13,080.93 representing the premium paid by
the insured within fifteen (15) days from date of finality of this Decision. If the
amount is not reimbursed within said period, the same shall earn interest of 6% per
90

annum until fully paid.

 1/27/2003 119,752.28 618.23 3,891.07 124,234.58
2/27/2003 124,234.58 990.93 4,037.62 129,263.13
3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
4/27/2003 115,177.90 644.26 3,743.28 119,565.44
25. G.R. No. 175490 September 17, 2009 5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10

ILEANA DR. MACALINAO, Petitioner, 8,362.50

6/29/2003 113,540.10 323.57 3,607.32 118,833.49
vs. (7,000.00)
BANK OF THE PHILIPPINE ISLANDS, Respondent.
7/27/2003 118,833.49 608.07 3,862.09 123,375.65

DECISION 8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56

9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
VELASCO, JR., J.:
10/28/2003
The Case
11/28/2003

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court 12/28/2003
seeking to reverse and set aside the June 30, 2006 Decision 1 of the Court of Appeals
1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78
(CA) and its November 21, 2006 Resolution2 denying petitioner’s motion for
reconsideration.
Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit
The Facts and BPI Mastercard, the charges or balance thereof remaining unpaid after the
payment due date indicated on the monthly Statement of Accounts shall bear
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of interest at the rate of 3% per month and an additional penalty fee equivalent to
the credit card facilities of respondent Bank of the Philippine Islands (BPI). 3 Petitioner another 3% per month. Particularly:
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 8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of
January 5, 2004 from respondent BPI, demanding payment of the amount of one Account (SOA) and the Cardholder agrees that all charges made through the use of
hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos the CARD shall be paid by the Cardholder as stated in the SOA on or before the last
(PhP 141,518.34), as follows: 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 Cardholder’s account is
considered overdue and/or with balances in excess of the approved credit limit, or to
Statement Previous Purchases Penalty Finance such other date as may be deemed proper by the CARD issuer with notice to the
Balance Due
Date Balance (Payments) Interest Charges Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a
10/27/2002 94,843.70 559.72 3,061.99 98,456.41 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
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02 service of the SOA of the Cardholder, the latter shall pay any and all charges made
through the use of the CARD within thirty (30) days from date or dates thereof.
12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28
Failure of the Cardholder to pay the charges made through the CARD within the
91
 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 month’s 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 BCC’s 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 BCC’s right of
considering Cardholder’s 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
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 attorney’s fees, and of the cost of suit. 6
92
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
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 attorney’s 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.
WHEREFORE, the appealed decision is hereby affirmed in toto.
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 attorney’s 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 re-computation 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 Macalinao’s 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.
93
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 PETITIONER’S 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 reasonable as the same are
based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit
Card.16
 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.
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
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
94
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 re-computation 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 attorney’s 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 Macalinao’s 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 8,362.50
6/29/2003 82,152.50 83,515.00 835.15 835.15 85,185.30
proceedings conducted before the lower courts. (7,000.00)
7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
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 8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
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 9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
the evidence on record. Furthermore, barring a showing that the factual findings 10/28/200
complained of are totally devoid of support in the record or that they are so glaringly 83,515.00 83,515.00 835.15 835.15 85,185.30
3
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 11/28/200
83,515.00 83,515.00 835.15 835.15 85,185.30
by the parties.22 3
12/28/200
In view of the ruling that only 1% monthly interest and 1% penalty charge can be 83,515.00 83,515.00 835.15 835.15 85,185.30
3
applied to the beginning balance of PhP 94,843.70, this Court finds the following
computation more appropriate: 1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
14,397.2 14,397.2 112,309.5
TOTAL 83,515.00
Total 6 6 2
Purchases Penalty
Statement Previous Interest Amount
(Payments Balance Charge
Date Balance (1%) Due for
) (1%) WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006
the Month
in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due,
10/27/200 interest rate, and penalty charge. Accordingly, petitioner Macalinao is ordered to pay
94,843.70 94,843.70 948.44 948.44 96,740.58
2 respondent BPI the following:

11/27/200
94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58 (1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-
2
two centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month
12/31/200 110,152.5 112,355.5 from January 5, 2004 until fully paid;
79,843.70 30,308.80 1,101.53 1,101.53
2 0 6
(2) PhP 10,000 as and by way of attorney’s fees; and
110,152.5 110,152.5 112,355.5
1/27/2003 1,101.53 1,101.53
0 0 6
(3) Cost of suit.
110,152.5 110,152.5 112,355.5
2/27/2003 1,101.53 1,101.53
0 0 6 SO ORDERED.
110,152.5 (18,000.00
3/27/2003 92,152.50 921.53 921.53 93,995.56 PRESBITERO J. VELASCO, JR.
0 )
Associate Justice
4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56
95

5/27/2003 92,152.50 (10,000.00 82,152.50 821.53 821.53 83,795.56

 26. G.R. No. 125944 June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners,

vs.
JOSE AVELINO SALAZAR, respondents.

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, of the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming
the decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No.
375-M-91, "Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar" for
annulment of mortgage. The dispositive portion of the RTC decision reads:

"WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the

defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;

3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of
attorney’s fees; and

4. To pay the costs.

SO ORDERED."1

The facts as summarized by the Court of Appeals in its decision being challenged are:

"On August 22, 1986, the plaintiffs-appellants executed a deed or real estate
mortgage in which they mortgaged a parcel of land situated in Sta. Maria, Bulacan, in
favor of the defendant-appellee, to secure payment of a loan of P60,000.00 payable
within a period of four (4) months, with interest thereon at the rate of 6% per month
96

(Exh. "B").
 On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in
which they mortgaged the same parcel of land to the defendant-appellee, to secure
payment of a loan of P136,512.00, payable within a period of one (1) year, with
interest thereon at the legal rate (Exh. "1").
On December 29, 1990, the plaintiffs-appellants executed a deed of real estate
mortgage in which they mortgaged the same parcel of land in favor of defendant-
appellee, to secure payment of a loan in the amount of P230,000.00 payable within a
period of four (4) months, with interest thereon at the legal rate (Exh. "2", Exh. "C").
This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the
mortgaged property. They alleged that they obtained only one loan form the
defendant-appellee, and that was for the amount of P60,000.00, the payment of
which was secured by the first of the above-mentioned mortgages. The subsequent
mortgages were merely continuations of the first one, which is null and void because
it provided for unconscionable rate of interest. Moreover, the defendant-appellee
assured them that he will not foreclose the mortgage as long as they pay the
stipulated interest upon maturity or within a reasonable time thereafter. They have
already paid the defendant-appellee P78,000.00 and tendered P47,000.00 more, but
the latter has initiated foreclosure proceedings for their alleged failure to pay the
loan P230,000.00 plus interest.1âwphi1.nêt
On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the
above-described mortgages were executed to secure three separate loans of
P60,000.00 P136,512.00 and P230,000.00, and that the first two loans were paid, but
the last one was not. He denied having represented that he will not foreclose the
mortgage as long as the plaintiffs-appellants pay interest."
In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals
the following errors:
1. The Court of Appeals erred in holding that three (3) mortgage contracts were
executed by the parties instead of one (1);
2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate
mortgage with an interest of 72% per cent per annum or 6% per month is not
unconscionable;
4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN
PAID when the mortgagee himself states in his ANSWER that the same was already
paid; and
97
5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the
appellants.
In his comment, respondent Jose Avelino Salazar avers that the petition should not be
given due course as it raises questions of facts which are not allowed in a petition for
review on certiorari.
We find no merit in the instant petition.
The core of the present controversy is the validity of the third contract of mortgage
which was foreclosed.
Petitioners contend that they obtained from respondent Avelino Salazar only one (1)
loan in the amount of P60,000.00 secured by the first mortgage of August 1986.
According to them, they signed the third mortgage contract in view of respondent’s
assurance that the same will not be foreclosed. The trial court, which is in the best
position to evaluate the evidence presented before it, did not give credence to
petitioners’ corroborated testimony and ruled:
"The testimony is improbable. The real estate mortgage was signed not only by
Ursula Solangon but also by her husband including the Promissory Note appended to
it. Signing a document without knowing its contents is contrary to common
experience. The uncorroborated testimony of Ursula Solangon cannot be given
weight."2
Petitioners likewise insist that, contrary to the finding of the Court of appeals, they
had paid the amount of P136,512.00, or the second loan. In fact, such payment was
confirmed by respondent Salazar in his answer to their complaint.
It is readily apparent that petitioners are raising issues of fact in this petition. In a
petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
only questions of law may be raised and they must be distinctly set forth. The settled
rule is that findings of fact of the lower courts (including the Court of Appeals) are
final and conclusive and will not be reviewed on appeal except: (1) when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the
Court of Appeals, in making its findings, went beyond the issues of the case and such
findings are contrary to the admission of both appellant and appellee; (6) when the
findings of the Court of Appeals are contrary to those of the trial court; and (7) when
 the findings of fact are conclusions without citation of specific evidence on which
they are based.3
None of these instances are extant in the present case.
Parenthetically, petitioners are questioning the rate of interest involved here. They
maintain that the Court of Appeals erred in decreeing that the stipulated interest rate
of 72% per annum or 6% per month is not unconscionable.
The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since
the Usury Law had been repealed by Central Bank Circular No. 905 there is no more
maximum rate of interest and the rate will just depend on the mutual agreement of
the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic
Sawmill Co.4
The factual circumstances of the present case require the application of a different
jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by
C.B. Circular No. 905, nothing in the said circular grants lenders carte
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.5 In Medel v. Court of
Appeals,6 this court had the occasion to rule on this question - whether or not the
stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is
usurious. While decreeing that the aforementioned interest was not usurious, this
Court held that the same must be equitably reduced for
being iniquitous, unconscionable and exorbitant, thus:
Nevertheless, we find the interest at 5.5 % per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or unconscionable,
and hence, contrary to morals (‘contra bonos mores’), if not against the law. The
stipulation is void. The courts shall reduce equitably liquidated damages, whether
intended as an indemnity or a penalty if they are iniquitous or
unconscionable." (Emphasis supplied)
In the case at bench, petitioners stand on a worse situation. They are required to pay
the stipulated interest rate of 6% per month or 72% per annum which is definitely
outrageous and inordinate. Surely, it is more consonant with justice that the said
interest rate be reduced equitably. An interest of 12% per annum is deemed fair and
reasonable.
WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to
the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12
% per annum.
SO ORDERED.
Melo, Vitug, Panganiban, Gonzaga-Reyes, JJ., concur.

"We agree with petitioners that the stipulated rate of interest at 5.5% per month
on the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. However, we can not consider the rate ‘usurious’ because this Court has
consistently held that Circular No. 905 of the Central Bank, adopted on December 22,
1982, has expressly removed the interest ceilings prescribed by the Usury Law and
that the Usury Law is now ‘legally inexistent.’

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the
Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury
Law but simply suspended the latter’s effectivity. Indeed, we have held that ‘a Central
Bank Circular can not repeal a law. Only a law can repeal another law. In the recent
case of Florendo v. Court of Appeals, the Court reiterated the ruling that ‘by virtue of
CB Circular 905, the Usury Law has been rendered ineffective.’ ‘Usury Law has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon.’
98
 FEDERAL BUILDERS, INC., Petitioner,
vs.
FOUNDATION SPECIALISTS, INC., Respondent,

x-----------------------x

G.R. No. 194621

FOUNDATION SPECIALISTS, INC., Petitioner,

vs.
FEDERAL BUILDERS, INC., Respondent.

DECISION

PERALTA, J.:

Before the Court are two consolidated cases, namely: (1) Petition for review on
certiorari under Rule 45 of the Rules of Court, docketed as G.R. No. 194507, filed by
Federal Builders, Inc., assailing the Decision 1 and Resolution,2dated July 15, 2010 and
November 23, 2010, respectively, of the Court of Appeals (CA) in CA-G.R. CV No.
70849, which affirmed with modification the Decision3 dated May 3, 2001 of the
Regional Trial Court (RTC) in Civil Case No. 92-075; and (2) Petition for review on
certiorari under Rule 45 of the Rules of Court,docketed as G.R. No. 194621, filed by
Foundation Specialists, Inc., assailing the same Decision4 and Resolution,5 dated July
15, 2010 and November 23, 2010,respectively, of the CA in CA- G.R. CV No. 70849,
which affirmed with modification the Decision 6 dated May 3, 2001 of the RTC in Civil
Case No. 92-075.

The antecedent facts are as follows:

On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with
Foundation Specialists, Inc. (FSI) whereby the latter, as subcontractor, undertook the
construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar
Plaza located at Salcedo Village, Makati City (the Project), for a total contract price of
Seven Million Four Hundred Thousand Pesos (₱7,400,000.00). 7 Under the
agreement,8 FBI was to pay a downpayment equivalent to twenty percent (20%) of
the contract price and the balance, through a progress billing every fifteen (15) days,
payable not later than one (1) week from presentation of the billing.
27. G.R. No. 194507 September 8, 2014

On January 9, 1992, FSI filed a complaint for Sum of Money against FBI before the RTC
of Makati City seeking to collect the amount of One Million Six Hundred Thirty-Five
99
 Thousand Two Hundred Seventy-Eight Pesos and Ninety-One Centavos
(₱1,635,278.91), representing Billings No. 3 and 4, with accrued interest from August
1, 1991 plus moral and exemplary damages with attorney’s fees. 9 In its complaint,FSI
alleged that FBI refused to pay said amount despite demand and itscompletion of
ninety-seven percent (97%) of the contracted works.
In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five
percent (85%) of the contracted works, failing to finish the diaphragm wall and
component works in accordance with the plans and specifications and abandoning
the jobsite. FBI maintains that because of FSI’s inadequacy, its schedule in finishing
the Project has been delayed resulting in the Project owner’s deferment of its own
progress billings.10 It further interposed counterclaims for amounts it spent for the
remedial works on the alleged defects in FSI’s work.
On May 3, 2001, after evaluating the evidence of both parties, the RTC ruled in favor
of FSI, the dispositive portion of its Decision reads:
WHEREFORE, on the basis of the foregoing, judgment is rendered ordering defendant
to pay plaintiff the following:
1. The sum of ₱1,024,600.00 representing billings 3 and 4, less the amount of
₱33,354.40 plus 12% legal interest from August 30, 1991;
2. The sum of ₱279,585.00 representing the cost of undelivered cement;
3. The sum of ₱200,000.00 as attorney’s fees; and
4. The cost of suit.
Defendant’s counterclaim is deniedfor lack of factual and legal basis.
SO ORDERED.11
On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of
₱279,585.00 representing the cost of undelivered cement and reduced the award of
attorney’s fees to ₱50,000.00. In its Decision 12 dated July 15, 2010, the CA explained
that FSI failed to substantiate how and in what manner it incurred the cost of cement
by stressing that its claim was not supported by actual receipts. Also, it found that
while the trial court did not err in awarding attorney’s fees, the same should be
reduced for being unconscionable and excessive. On FBI’s rejection of the 12% annual
100
interest rate on the amount of Billings 3 and 4, the CA ruled that the lower court did
not err in imposing the same in the following wise:
x x x The rule is well-settled that when an obligation is breached, and it consists in the
payment of a sum of money, the interest due shall itself earn legal interest from the
time it is judicially demanded (BPI Family Savings Bank, Inc. vs. First Metro
Investment Corporation, 429 SCRA 30). When there is no rate of interest stipulated,
such as in the present case, the legal rate of interest shall be imposed, pursuant to
Article 2209 of the New Civil Code. In the absence of a stipulated interest rate on a
loan due, the legal rate of interest shall be 12% per annum.13
Both parties filed separate Motions for Reconsideration assailing different portions of
the CADecision, but to no avail.14 Undaunted, they subsequently elevated their claims
withthis Court via petitions for review on certiorari.
On the one hand, FSI asserted that the CA should not have deleted the sum of
₱279,585.00 representing the cost of undelivered cement and reduced the award of
attorney’s fees to ₱50,000.00, since it was an undisputed fact that FBI failed to
deliver the agreed quantity of cement. On the other hand, FBI faulted the CA for
affirming the decision of the lower court insofar as the award of the sum representing
Billings 3 and 4, the interest imposed thereon, and the rejection of his counterclaim
were concerned. In a Resolution15 dated February 21, 2011, however, this Court
denied, with finality, the petition filed by FSI in G.R. No. 194621 for having been filed
late.
Hence, the present petition filed byFBI in G.R. No. 194507 invoking the following
arguments:
I.
THE COURT OF APPEALS COMMITTED A CLEAR, REVERSABLE ERROR WHEN IT
AFFIRMED THE TRIAL COURT’S JUDGMENT THAT FEDERAL BUILDERS, INC. WAS
LIABLE TO PAY THE BALANCE OF ₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40
NOTWITHSTANDING THAT THE DIAPHRAGM WALL CONSTRUCTED BY FOUNDATION
SPECIALIST, INC. WAS CONCEDEDLY DEFECTIVE AND OUT-OF-SPECIFICATIONS AND
THAT PETITIONER HAD TO REDO IT AT ITS OWN EXPENSE.
II.
THE COURT OF APPEALS COMMITTED SERIOUS, REVERSABLE ERROR WHEN IT
IMPOSED THE 12% LEGAL INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED
 CLAIM OF ₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40 DESPITE THE FACT THAT
THERE WAS NO STIPULATION IN THE AGREEMENT OF THE PARTIES WITH REGARD TO
INTEREST AND DESPITE THE FACT THAT THEIR AGREEMENT WAS NOT A "LOAN OR
FORBEARANCE OF MONEY."
III.
THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS REVERSABLE ERROR
WHEN IT DISMISSED THE COUNTERCLAIM OF PETITIONER NOTWITHSTANDING
OVERWHELMING EVIDENCE SUPPORTING ITS CLAIM OF ₱8,582,756.29 AS ACTUAL
DAMAGES.
The petition is partly meritorious.
We agree with the courts below and reject FBI’s first and third arguments. Well-
entrenched in jurisprudence is the rule that factual findings of the trial court,
especially when affirmed by the appellate court, are accorded the highest degree of
respectand considered conclusive between the parties, save for the following
exceptional and meritorious circumstances: (1) when the factual findings of the
appellate court and the trial court are contradictory; (2) whenthe findings of the trial
court are grounded entirely on speculation, surmises or conjectures; (3) when the
lower court’s inference from its factual findings is manifestly mistaken, absurd or
impossible; (4) when there is grave abuse of discretion in the appreciation of facts; (5)
when the findings of the appellate court go beyond the issues of the case, or fail to
notice certain relevant facts which, if properly considered, will justify a different
conclusion; (6) when there is a misappreciation of facts; (7) when the findings of fact
are themselves conflicting; and (8) when the findings of fact are conclusions without
mention of the specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on record. 16
None of the aforementioned exceptions are present herein. In the assailed Decision,
the RTC meticulouslydiscussed the obligations of each party, the degree of their
compliance therewith, as well as their respective shortcomings, all of which were
properly substantiated with the corresponding documentary and testimonial
evidence.
Under the construction agreement, FSI’s scope of workconsisted in (1) the
construction of the guide walls, diaphragm walls, and capping beam; and (2) the
installation of steel props.17 As the lower courts aptly observed from the records at
hand, FSI had, indeed, completed ninety-seven percent (97%) of its contracted works
and the non-completion of the remaining three percent (3%), as well as the alleged
101
defects in the said works, are actually attributable to FBI’s own fault such as, but not
limited to, the failure to deliver the needed cement as agreed upon in the contract, to
wit:
On March 8, 1991, plaintiff had finished the construction of the guide wall and
diaphragm wall (Exh. "R") but had not yet constructed the capping beam as of April
22, 1991 for defendant’s failure to deliver the needed cement in accordance with
their agreement(Exhibit "I"). The diaphragm wall had likewise been concrete tested
and was found to have conformed with the required design strength (Exh. "R").
Subsequently, plaintiff was paid the aggregate amount of ₱5,814,000.00. But as of
May 30, 1991, plaintiff’s billings numbers 3 and 4 had remained unpaid (Exhs. "L",
"M", and "M-1").
xxxx
On the misaligned diaphragm wall from top to bottom and inbetween panels, plaintiff
explained thatin the excavation of the soil where the rebar cages are lowered and
later poured with concrete cement, the characteristics of the soil is not the same or
homogenous all throughout. Because of this property of the soil,in the process of
excavation, it may erode in some places that may cause spaces that the cement may
fill or occupy which would naturally cause bulges, protrusions and misalignment in
the concrete cast into the excavated ground(tsn., June 1, 2000, pp 14-18). This, in fact
was anticipated when the agreement was executed and included as provision 6.4
thereof.
The construction of the diaphragm wall panel by panel caused misalignment and the
chipping off of the portions misaligned is considered a matter of course. Defendant,
as the main contractor of the project, has the responsibility of chopping or chipping
off of bulges(tsn., ibid, pp 20-21). Wrong location of rebar dowels was anticipated by
both contractor and subcontractor as the latter submitted a plan called "Detail of
Sheer Connectors" (Exh "T") which was approved.The plan provided two alternatives
by which the wrong location of rebar dowels may be remedied. Hence, defendant,
aware of the possibility of inaccurate location of these bars, cannot therefore ascribe
the same to the plaintiff as defective work.
Construction of the capping beam required the use of cement. Records, however,
show that from September 14, 1990 up to May 30, 1991 (Exhs. "B" to "L"), plaintiff
had repeatedly requested defendant to deliver cement. Finally, on April 22, 1991,
plaintiff notified defendant of its inability to construct the capping beam for the
latter’s failure to deliver the cement as provided in their agreement(Exh. "I").
Although records show that there was mention of revision of design, there was no
 evidence presented to show such revision required less amount of cement than what
was agreed on by plaintiff and defendant.
The seventh phase of the construction of the diaphragm wall is the construction of
the steel props which could be installed only after the soil has been excavated by the
main contractor. When defendant directed plaintiff to install the props, the latter
requested for a site inspection to determine if the excavation of the soil was finished
up to the 4th level basement. Plaintiff, however, did not receive any response.It later
learned that defendant had contracted out that portion of work to another sub-
contractor (Exhs. "O" and "P"). Nevertheless, plaintiff informed defendant of its
willingness to execute that portion of its work.18
It is clear from the foregoing that contrary to the allegations of FBI, FSI had indeed
completed its assigned obligations, with the exception of certain assigned tasks,
which was due to the failure of FBI to fulfil its end of the bargain.
It can similarly be deduced that the defects FBI complained of, such as the misaligned
diaphragm wall and the erroneous location of the rebar dowels, were not only
anticipated by the parties, having stipulated alternative plans to remedy the same,
but more importantly, are also attributable to the very actions of FBI. Accordingly,
considering that the alleged defects in FSI’s contracted works were not so much due
to the fault or negligence of the FSI, but were satisfactorily proven to be caused by
FBI’s own acts, FBI’s claim of ₱8,582,756.29 representing the cost of the measures it
undertook to rectify the alleged defects must necessarily fail. In fact, as the lower
court noted, at the time when FBI had evaluated FSI’s works, it did not categorically
pose any objection thereto, viz:
Defendant admitted that it had paid ₱6 million based on its evaluation of plaintiff’s
accomplishments (tsn., Sept. 28, 2000, p. 17) and its payment was made without
objection on plaintiff’s works, the majority of which were for the accomplishments in
the construction of the diaphragm wall (tsn., ibid, p. 70).
xxxx
While there is no evidence to show the scope of work for these billings, it is safe to
assume that these were also works in the construction of the diaphragm wall
considering that as of May 16, 1991, plaintiff had only the installation of the steel
props and welding works to complete (Exh. "H"). If defendant was able to evaluate
the work finished by plaintiff the majority of which was the construction of the
diaphragm wall and paid it about ₱6 million as accomplishment, there was no reason
why it could not evaluate plaintiff’s works covered by billings 3 and 4.In other words,
102
defendants did nothave to excavate in order to determine and evaluate plaintiff’s
works. Hence, defendant’s refusal to pay was not justified and the alleged defects of
the diaphragm wall (tsn, Sept. 28, 2000, p. 17) which it claims to have discovered only
after January 1992 were mere afterthoughts.19
Thus, in the absence of any record to otherwise prove FSI’s neglect in the fulfilment
of its obligations under the contract, this Court shall refrain from reversing the
findings of the courts below, which are fully supported by and deducible from, the
evidence on record. Indeed, FBI failed to present any evidence to justify its refusal to
pay FSI for the works it was contracted to perform. As such, We do not see any
reason to deviate from the assailed rulings.
Anent FBI’s second assignment of error, however, We find merit in the argument that
the 12% interest rateis inapplicable, since this case does not involve a loan or
forbearance ofmoney. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,20 We laid down the following guidelines in computing legal interest:
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 Article1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
 3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.21
In line, however, with the recent circular of the Monetary Board of the Bangko
Sentral ng Pilipinas (BSP-MB) No. 799, we have modified the guidelines in Nacar v.
Gallery Frames,22 as follows:
I. When an obligation, regardless of itssource, i.e., law, contracts, quasicontracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 6% per annumto be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially(Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged. 3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annumfrom such finality until its
103
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior
to July 1, 2013, shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein.23
It should be noted, however, that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013, the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable. Thus,
the need to determine whether the obligation involved herein is a loanand
forbearance of money nonetheless exists.
In S.C. Megaworld Construction and Development Corporation v. Engr. Parada, 24 We
clarified the meaning of obligations constituting loans or forbearance of money in the
following wise:
As further clarified in the case of Sunga-Chan v. CA, a loan or forbearance of money,
goods or credit describes a contractual obligation whereby a lender or creditor has
refrained during a given period from requiring the borrower or debtor to repay the
loan or debt then due and payable. Thus:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum
under Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the
loan or forbearance of money. And for transactions involving payment of indemnities
in the concept of damages arising from default in the performance of obligations in
general and/or for money judgment not involving a loan or forbearance of money,
goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a
yearly 6% interest. Art. 2209 pertinently provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest, which is six per cent per annum.
The term "forbearance," within the context of usury law, has been described as a
contractual obligation ofa lender or creditor to refrain, during a given period of time,
from requiring the borrower or debtor to repay the loan or debt then due and
payable.25
 Forbearance of money, goods or credits, therefore, refers to arrangements other
than loan agreements, where a person acquiesces to the temporary use of his money,
goods orcredits pending the happening of certain events or fulfilment of certain
conditions.26 Consequently, if those conditions are breached, said person is entitled
not only to the return of the principal amount paid, but also to compensation for the
use of his money which would be the same rateof legal interest applicable to a loan
since the use or deprivation of funds therein is similar to a loan. 27
This case, however, does not involve an acquiescence to the temporary use of a
party’s money but a performance of a particular service, specifically the construction
of the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza.
should be reduced to 6% per annum considering the fact that the obligation involved
herein does not partake of a loan or forbearance of money.
WHEREFORE, premises considered, the instant petition is DENIED. The Decision and
Resolution, dated July 15, 2010 and November 23, 2010, respectively, of the Court of
Appeals in CA-G.R. CV No. 70849 are hereby AFFIRMED with MODIFICATION. Federal
Builders, Inc. is ORDERED to pay Foundation Specialists, Inc. the sum of Pl ,024,600.00
representing billings 3 and 4, less the amount of ₱33,354.40, plus interest at six
percent (6%) per annum reckoned from August 30, 1991 until full payment thereof.
SO ORDERED.

A review of similar jurisprudence would tell us that this Court had repeatedly DIOSDADO M. PERALTA
recognized this distinction and awarded interest at a rate of 6% on actual or Associate Justice
compensatory damages arising from a breach not only of construction Acting Chairperson
contracts,28 such as the one subject ofthis case, but also of contracts wherein one of
the parties reneged on its obligation to perform messengerial services,29 deliver
certain quantities of molasses,30 undertake the reforestation of a denuded forest
land,31 as well as breaches of contracts of carriage,32 and trucking agreements.33 We
have explained therein that the reason behind such is that said contracts do not
partake of loans or forbearance of money but are more in the nature of contracts of
service.

Thus, in the absence of any stipulation as to interest in the agreement between the
parties herein, the matter of interest award arising from the dispute in this case
would actually fall under the second paragraph of the above-quoted guidelines inthe
landmark case of Eastern Shipping Lines, which necessitates the imposition of
interestat the rate of 6%, instead of the 12% imposed by the courts below.

The 6% interest rate shall further be imposed from the finality of the judgment herein
until satisfaction thereof, in light of our recent ruling in Nacar v. Gallery Frames. 34

Note, however, that contrary to FBI’sassertion, We find no error in the RTC’s ruling
that the interest shall begin to run from August 30, 1991 as this is the date when FSI
extrajudicially made its claim against FBI through a letter demanding payment for its
services.35

In view of the foregoing, therefore, We find no compelling reason to disturb the VII. KINDS OF CIVIL OBLIGATIONS
factual findings of the RTC and the CA, which are fully supported by and deducible
from, the evidence on record, insofar as the sum representing Billings 3 and 4 is ART 1180
concerned. As to the rate of interest due thereon, however, We note that the same
104
 28. G.R. No. L-7900. January 12, 1956.
CIRIACO TIGLAO, ET AL., Plaintiffs-Appellees, vs.
THE MANILA RAILROAD COMPANY, Defendant-Appellant.
DECISION
REYES, A., J.:
This action was commenced in the Municipal Court of Manila, in October, 1952, by 35
retired employees of the Defendant Manila Railroad Co. to recover the sum of
P7,275, the aggregate balance of salary differentials still due them under a
memorandum of agreement signed by the Defendant and the unions representing its
employees and laborers. After an unfavorable judgment in that court,
the Defendant appealed to the Court of First Instance of Manila, and having again lost
in that court it brought the case here on appeal, raising only questions of law.
The memorandum of agreement above-mentioned, which was signed in October,
1948, and constitutes the basis of Plaintiffs’ claim, contains the following stipulations:
“1. That the Manila Railroad Company hereby reiterates its approval of the
standardized salaries provided for by the Standardization Committee effective as of
July 1, 1948, to be carried in all subsequent budgets of the Company, payment to be
made in accordance with Item 2; and immediate payment of said salaries will
commence with the available funds of P400,000, already appropriated for this
purpose;
“2. That we hereby further agree that upon the exhaustion of the amount of
P400,000, the employees and laborers affected by the standardized plan will receive
their present salaries provided that any wage differential from date of exhaustion will
be paid when funds for the purpose are available.”
It is agreed that Plaintiffs, who retired with gratuity in January, 1951, were entitled to
collect the salary differentials, or increase in pay, resulting from the standardization
of their salaries; that for salary differentials corresponding to the period from July 1,
1948, to January 31, 1949, they have already received a total of P9,906.05, but that
there is still due them the total sum of P7,275, which has remained unpaid because of
the exhaustion of the P400,000 appropriated for the purpose.
105
In refusing to pay the balance still due the Plaintiffs, Defendant does not repudiate
the above agreement, but contends in substance that pursuant to its terms payment
of salary differentials after the exhaustion of the P400,000 already appropriated is
subject to the condition that “funds for the purpose are available” and that no such
funds are available because Defendant is losing in its business.
The Defendant has, indeed, presented in evidence two summary statements of its
accounting department, showing that it has sustained losses in its operations during
the fiscal year ending June 30, 1953, and during the month of July next following.
These statements, however, do not necessarily prove that, in a multimillion-peso
business such as that of the Defendant funds for the payment of a debt of P7,275 due
the Plaintiffs could not have been raised or made available because of the losses
suffered in one year and one month. The memorandum of agreement does not
stipulate that the salary differentials shall be paid only from surplus profits. In fact,
the agreement provides that the standardized salaries — with the resulting salary
differentials naturally — are “to be carried in all subsequent budgets of the
company.” And we think it may be admitted that in a going concern the availability of
funds for a particular purpose is a matter that does not necessarily depend upon the
cash position of the company but rather upon the judgment of its board of directors
in the choice of projects, measures or expenditures that should be given preference
or priority, or in the choice between alternatives. So if Defendant was able to raise or
appropriate funds to meet other obligations notwithstanding the fact that it was
losing, we think it could have done likewise with respect to its debt to the Plaintiffs,
an obligation which is deserving of preferential attention because it is owed to the
poor.
Viewed in this light, that is, that the time to redeem Defendant’s promise to pay
salary differentials, after the exhaustion of what had already been appropriated for
that purpose, really depended upon the judgment of its board of directors — it not
appearing that Defendant was bankrupt — the obligation to pay the said salary
differentials may be considered as one with a term whose duration has been left to
the will of the debtor, so that pursuant to article 1128 of the old Civil Code (Art. 1197
of the new), the duration of the term may be fixed by the courts.
There is something to Defendant’s contention that in previous cases this Court has
held that the duration of the term should be fixed in a separate action for that
express purpose. But we think the lower court has given good reasons for not
adhering to technicalities in its desire to do substantial justice. It says:
“(1) The facts in the instant case are not disputed, the parties having submitted the
case for decision to be based on an agreed stipulation of facts;
 “(2) The fixing of a period for the payment of the obligation has been amply
discussed by the parties in their pleadings so that this Court may render judgment on
that subject matter under the alternative prayer of the Plaintiffs ‘for such further
relief as this Honorable Court may deem just and equitable’;

“(3) To dismiss the present case and require the Plaintiffs to file another action for
fixing the period of Defendant’s obligation, would entail multiplicity of suits;

“(4) In this case there are thirty-five Plaintiffs who were low salaried employees of
the DefendantManila Railroad Company and the said Plaintiffs have not been paid
their salary differentials for the period of, from February 1 to June 30, 1948; and

“(5) To dismiss the present case and order the Plaintiffs to file another suit would
open the door for dilatory tactics leading to a protracted litigation and in effect deny
the benefits of social justice.”

We may add that Defendant does not claim that if a separate action were instituted
to fix the duration of the term of its obligation, it could present better proofs than
those already adduced in the present case. Such separate action would, therefore, be
a mere formality and would serve no purpose other than to delay.

We, however, agree that the lower court should not have made the interest adjudged
run from October 21, 1948, the day the action was commenced in the municipal
court, but only from default of payment of the principal within the period of one year
fixed by the court.

Wherefore, with the only modification as to the date the adjudged interest is to
commence to run, the judgment below is affirmed, with costs against
the Defendant and Appellant.

Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Reyes, J.
B. L., JJ., concur.
106
 February 15, 1966 he executed a "Deed of Assignment" 4 in favor of herein
petitioners the material parts of which read as follows:

xxx xxx xxx

I, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis

Oriental, for and in consideration of the sum of ONE HUNDRED TWENTY THOUSAND
PESOS (P120,000.00), Philippine Currency, do by these presents, ASSIGN, TRANSFER
AND CONVEY, absolutely and forever unto JOSE M. JAVIER and ESTRELLA F. JAVIER,
spouses, of legal age and a resident (sic) of 2897 F.B. Harrison, Pasay City, my shares
of stocks in the TIMBERWEALTH CORPORATION in the total amount of P120,000.00,
ART. 1181
payment of which shall be made in the following manner:
29. G.R. No. L-48194 March 15, 1990
1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
2. The balance of P100,000.00 shall be paid P10,000.00 every shipment of export logs
vs.
actually produced from the forest concession of Timberwealth Corporation.
COURT OF APPEALS and LEONARDO TIRO, respondents.

That I hereby agree to sign and endorse the stock certificate in favor of Mr. & Mrs.
Eddie Tamondong for petitioners.
Jose M. Javier, as soon as stock certificates are issued.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.
xxx xxx xxx

REGALADO, J.:
Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA-
G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive portion whereof decrees:
At the time the said deed of assignment was executed, private respondent had a
pending application, dated October 21, 1965, for an additional forest concession
covering an area of 2,000 hectares southwest of and adjoining the area of the
concession subject of the deed of assignment. Hence, on February 28, 1966, private
respondent and petitioners entered into another "Agreement" 5 with the following
stipulations:

WHEREFORE, the judgment appealed from is hereby set aside and another one
entered ordering the defendants-appellees, jointly and solidarily, to pay plaintiff-
appellant the sum of P79,338.15 with legal interest thereon from the filing of the
complaint, plus attorney's fees in the amount of P8,000.00. Costs against defendants-
appellees.2
As found by respondent court or disclosed by the records, 3 this case was generated
by the following antecedent facts.
xxx xxx xxx
1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede and
convey whatever rights he may acquire, absolutely and forever, to TIMBERWEALTH
CORPORATION, a corporation duly organized and existing under the laws of the
Philippines, over a forest concession which is now pending application and approval
as additional area to his existing licensed area under O.T. License No. 391-103166,
situated at Medina, Misamis Oriental;

Private respondent is a holder of an ordinary timber license issued by the Bureau of 2. That for and in consideration of the aforementioned transfer of rights over said
107

Forestry covering 2,535 hectares in the town of Medina, Misamis Oriental. On additional area to TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER and JOSE M.
 JAVIER, both directors and stockholders of said corporation, do hereby undertake to
pay LEONARDO TIRO, as soon as said additional area is approved and transferred to
TIMBERWEALTH CORPORATION the sum of THIRTY THOUSAND PESOS (P30,000.00),
which amount of money shall form part of their paid up capital stock in
TIMBERWEALTH CORPORATION;
3. That this Agreement is subject to the approval of the members of the Board of
Directors of the TIMBERWEALTH CORPORATION.
xxx xxx xxx
On November 18, 1966, the Acting Director of Forestry wrote private respondent that
his forest concession was renewed up to May 12, 1967 under O.T.L. No. 391-51267,
but since the concession consisted of only 2,535 hectares, he was therein informed
that:
In pursuance of the Presidential directive of May 13, 1966, you are hereby given until
May 12, 1967 to form an organization such as a cooperative, partnership or
corporation with other adjoining licensees so as to have a total holding area of not
less than 20,000 hectares of contiguous and compact territory and an aggregate
allowable annual cut of not less than 25,000 cubic meters, otherwise, your license will
not be further renewed. 6
Consequently, petitioners, now acting as timber license holders by virtue of the deed
of assignment executed by private respondent in their favor, entered into a Forest
Consolidation Agreement 7 on April 10, 1967 with other ordinary timber license
holders in Misamis Oriental, namely, Vicente L. De Lara, Jr., Salustiano R. Oca and
Sanggaya Logging Company. Under this consolidation agreement, they all agreed to
pool together and merge their respective forest concessions into a working unit, as
envisioned by the aforementioned directives. This consolidation agreement was
approved by the Director of Forestry on May 10, 1967. 8 The working unit was
subsequently incorporated as the North Mindanao Timber Corporation, with the
petitioners and the other signatories of the aforesaid Forest Consolidation Agreement
as incorporators. 9
On July 16, 1968, for failure of petitioners to pay the balance due under the two
deeds of assignment, private respondent filed an action against petitioners, based on
the said contracts, for the payment of the amount of P83,138.15 with interest at 6%
per annum from April 10, 1967 until full payment, plus P12,000.00 for attorney's fees
and costs.
108
On September 23, 1968, petitioners filed their answer admitting the due execution of
the contracts but interposing the special defense of nullity thereof since private
respondent failed to comply with his contractual obligations and, further, that the
conditions for the enforceability of the obligations of the parties failed to materialize.
As a counterclaim, petitioners sought the return of P55,586.00 which private
respondent had received from them pursuant to an alleged management agreement,
plus attorney's fees and costs.
On October 7, 1968, private respondent filed his reply refuting the defense of nullity
of the contracts in this wise:
What were actually transferred and assigned to the defendants were plaintiff's rights
and interest in a logging concession described in the deed of assignment, attached to
the complaint and marked as Annex A, and agreement Annex E; that the "shares of
stocks" referred to in paragraph II of the complaint are terms used therein merely to
designate or identify those rights and interests in said logging concession. The
defendants actually made use of or enjoyed not the "shares of stocks" but the logging
concession itself; that since the proposed Timberwealth Corporation was owned
solely and entirely by defendants, the personalities of the former and the latter are
one and the same. Besides, before the logging concession of the plaintiff or the
latter's rights and interests therein were assigned or transferred to defendants, they
never became the property or assets of the Timberwealth Corporation which is at
most only an association of persons composed of the defendants. 10
and contending that the counterclaim of petitioners in the amount of P55,586.39 is
actually only a part of the sum of P69,661.85 paid by the latter to the former in
partial satisfaction of the latter's claim. 11
After trial, the lower court rendered judgment dismissing private respondent's
complaint and ordering him to pay petitioners the sum of P33,161.85 with legal
interest at six percent per annum from the date of the filing of the answer until
complete payment. 12
As earlier stated, an appeal was interposed by private respondent to the Court of
Appeals which reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for extension of
time to file a motion for reconsideration, for the reason that they needed to change
counsel. 13 Respondent court, in its resolution dated March 31, 1978, gave petitioners
fifteen (15) days from March 28, 1978 within which to file said motion for
reconsideration, provided that the subject motion for extension was filed on
time. 14 On April 11, 1978, petitioners filed their motion for reconsideration in the
 Court of Appeals. 15 On April 21, 1978, private respondent filed a consolidated
opposition to said motion for reconsideration on the ground that the decision of
respondent court had become final on March 27, 1978, hence the motion for
extension filed on March 28, 1978 was filed out of time and there was no more
period to extend. However, this was not acted upon by the Court of Appeals for the
reason that on April 20, 1978, prior to its receipt of said opposition, a resolution was
issued denying petitioners' motion for reconsideration, thus:
The motion for reconsideration filed on April 11, 1978 by counsel for defendants-
appellees is denied. They did not file any brief in this case. As a matter of fact this
case was submitted for decision without appellees' brief. In their said motion, they
merely tried to refute the rationale of the Court in deciding to reverse the appealed
judgment. 16
Petitioners then sought relief in this Court in the present petition for review
on certiorari. Private respondent filed his comment, reiterating his stand that the
decision of the Court of Appeals under review is already final and executory.
Petitioners countered in their reply that their petition for review presents substantive
and fundamental questions of law that fully merit judicial determination, instead of
being suppressed on technical and insubstantial reasons. Moreover, the aforesaid
one (1) day delay in the filing of their motion for extension is excusable, considering
that petitioners had to change their former counsel who failed to file their brief in the
appellate court, which substitution of counsel took place at a time when there were
many successive intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can justifiably be
excused, considering that aside from the change of counsel, the last day for filing the
said motion fell on a holiday following another holiday, hence, under such
circumstances, an outright dismissal of the petition would be too harsh. Litigations
should, as much as possible, be decided on their merits and not on technicalities. In a
number of cases, this Court, in the exercise of equity jurisdiction, has relaxed the
stringent application of technical rules in order to resolve the case on its
merits. 17Rules of procedure are intended to promote, not to defeat, substantial
justice and, therefore, they should not be applied in a very rigid and technical sense.
We now proceed to the resolution of this case on the merits.
109
The assignment of errors of petitioners hinges on the central issue of whether the
deed of assignment dated February 15, 1966 and the agreement of February 28, 1966
are null and void, the former for total absence of consideration and the latter for
non-fulfillment of the conditions stated therein.
Petitioners contend that the deed of assignment conveyed to them the shares of
stocks of private respondent in Timberwealth Corporation, as stated in the deed
itself. Since said corporation never came into existence, no share of stocks was ever
transferred to them, hence the said deed is null and void for lack of cause or
consideration.
We do not agree. As found by the Court of Appeals, the true cause or consideration
of said deed was the transfer of the forest concession of private respondent to
petitioners for P120,000.00. This finding is supported by the following
considerations, viz:
1. Both parties, at the time of the execution of the deed of assignment knew that the
Timberwealth Corporation stated therein was non-existent. 18
2. In their subsequent agreement, private respondent conveyed to petitioners his
inchoate right over a forest concession covering an additional area for his existing
forest concession, which area he had applied for, and his application was then
pending in the Bureau of Forestry for approval.
3. Petitioners, after the execution of the deed of assignment, assumed the operation
of the logging concessions of private respondent. 19
4. The statement of advances to respondent prepared by petitioners stated:
"P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based on the
agreement, we pay P10,000.00 every after (sic) shipment. We had only 2
shipments" 20
5. Petitioners entered into a Forest Consolidation Agreement with other holders of
forest concessions on the strength of the questioned deed of assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and private
respondent reveal that the cause stated in the questioned deed of assignment is
false. It is settled that the previous and simultaneous and subsequent acts of the
parties are properly cognizable indica of their true intention. 22 Where the parties to a
contract have given it a practical construction by their conduct as by acts in partial
performance, such construction may be considered by the court in construing the
contract, determining its meaning and ascertaining the mutual intention of the
parties at the time of contracting. 23 The parties' practical construction of their
 contract has been characterized as a clue or index to, or as evidence of, their
intention or meaning and as an important, significant, convincing, persuasive, or
influential factor in determining the proper construction of the agreement. 24
The deed of assignment of February 15, 1966 is a relatively simulated contract which
states a false cause or consideration, or one where the parties conceal their true
agreement. 25 A contract with a false consideration is not null and void per
se. 26 Under Article 1346 of the Civil Code, a relatively simulated contract, when it
does not prejudice a third person and is not intended for any purpose contrary to
law, morals, good customs, public order or public policy binds the parties to their real
agreement.
The Court of Appeals, therefore, did not err in holding petitioners liable under the
said deed and in ruling that —
. . . In view of the analysis of the first and second assignment of errors, the
defendants-appellees are liable to the plaintiff-appellant for the sale and transfer in
their favor of the latter's forest concessions. Under the terms of the contract, the
parties agreed on a consideration of P120,000.00. P20,000.00 of which was paid,
upon the signing of the contract and the balance of P100,000.00 to be paid at the
rate of P10,000.00 for every shipment of export logs actually produced from the
forest concessions of the appellant sold to the appellees. Since plaintiff-appellant's
forest concessions were consolidated or merged with those of the other timber
license holders by appellees' voluntary act under the Forest Consolidation Agreement
(Exhibit D), approved by the Bureau of Forestry (Exhibit D-3), then the unpaid balance
of P49,338.15 (the amount of P70,661.85 having been received by the plaintiff-
appellant from the defendants-appellees) became due and demandable. 27
depends upon the fulfillment of the obligation of the other. In this case, the failure of
private respondent to comply with his obligation negates his right to demand
performance from petitioners. Delivery and payment in a contract of sale, are so
interrelated and intertwined with each other that without delivery of the goods there
is no corresponding obligation to pay. The two complement each other. 30
Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy
of the sale of a mere hope or expectancy is deemed subject to the condition that the
thing will come into existence. In this case, since private respondent never acquired
any right over the additional area for failure to secure the approval of the Bureau of
Forestry, the agreement executed therefor, which had for its object the transfer of
said right to petitioners, never became effective or enforceable.
WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED. The
agreement of the parties dated February 28, 1966 is declared without force and
effect and the amount of P30,000.00 is hereby ordered to be deducted from the sum
awarded by respondent court to private respondent. In all other respects, said
decision of respondent court is affirmed.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento JJ., concur.

As to the alleged nullity of the agreement dated February 28, 1966, we agree with
petitioners that they cannot be held liable thereon. The efficacy of said deed of
assignment is subject to the condition that the application of private respondent for
an additional area for forest concession be approved by the Bureau of Forestry. Since
private respondent did not obtain that approval, said deed produces no effect. When
a contract is subject to a suspensive condition, its birth or effectivity can take place
only if and when the event which constitutes the condition happens or is fulfilled. 28 If
the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed. 29

The said agreement is a bilateral contract which gave rise to reciprocal obligations,
that is, the obligation of private respondent to transfer his rights in the forest
concession over the additional area and, on the other hand, the obligation of
110

petitioners to pay P30,000.00. The demandability of the obligation of one party

 Atienza, Celestina A. Gonzales, Regalado Atienza and Melita A. Dela Cruz (collectively,
the Atienzas)1 own a 21,959 square meters of registered agricultural land at Valle
Cruz, Cabanatuan City.2 They acquired the land under an emancipation
patent3 through the government’s land reform program.4

On August 12, 2002 the Atienzas and respondent Domingo P. Espidol entered into a
contract called Kasunduan sa Pagbibili ng Lupa na may Paunang-Bayad (contract to
sell land with a down payment) covering the property.5 They agreed on a price of
₱130.00 per square meter or a total of ₱2,854,670.00, payable in three installments:
₱100,000.00 upon the signing of the contract; ₱1,750,000.00 in December 2002, and
the remaining ₱974,670.00 in June 2003. Respondent Espidol paid the Atienzas
₱100,000.00 upon the execution of the contract and paid ₱30,000.00 in commission
to the brokers.

When the Atienzas demanded payment of the second installment of ₱1,750,000.00 in

December 2002, however, respondent Espidol could not pay it. He offered to pay the
Atienzas ₱500.000.00 in the meantime,6 which they did not accept. Claiming that
Espidol breached his obligation, on February 21, 2003 the Atienzas filed a
complaint7 for the annulment of their agreement with damages before the Regional
Trial Court (RTC) of Cabanatuan City in Civil Case 4451.

30. G.R. No. 180665 August 11, 2010 In his answer,8 respondent Espidol admitted that he was unable to pay the December
2002 second installment, explaining that he lost access to the money which he shared
HEIRS OF PAULINO ATIENZA, namely, RUFINA L. ATIENZA, ANICIA A. IGNACIO, with his wife because of an injunction order issued by an American court in
ROBERTO ATIENZA, MAURA A. DOMINGO, AMBROCIO ATIENZA, MAXIMA ATIENZA, connection with a domestic violence case that she filed against him. 9 In his desire to
LUISITO ATIENZA, CELESTINA A. GONZALES, REGALADO ATIENZA and MELITA A. abide by his obligation, however, Espidol took time to travel to the Philippines to
DELA CRUZ Petitioners, offer ₱800,000.00 to the Atienzas.
vs.
DOMINGO P. ESPIDOL, Respondent. Respondent Espidol also argued that, since their contract was one of sale on
installment, his failure to pay the installment due in December 2002 did not amount
DECISION to a breach. It was merely an event that justified the Atienzas’ not to convey the title
to the property to him. The non-payment of an installment is not a legal ground for
ABAD, J.: annulling a perfected contract of sale. Their remedy was to bring an action for specific
performance. Moreover, Espidol contended that the action was premature since the
last payment was not due until June 2003.
This case is about the legal consequences when a buyer in a contract to sell on
installment fails to make the next payments that he promised.
In a decision10 dated January 24, 2005, the RTC ruled that, inasmuch as the non-
payment of the purchase price was not considered a breach in a contract to sell on
The Facts and the Case
installment but only an event that authorized the vendor not to convey title, the
proper issue was whether the Atienzas were justified in refusing to accept
Petitioner Heirs of Paulino Atienza, namely, Rufina L. Atienza, Anicia A. Ignacio, respondent Espidol’s offer of an amount lesser than that agreed upon on the second
111

Roberto Atienza, Maura A. Domingo, Ambrocio Atienza, Maxima Atienza, Luisito installment.
 The trial court held that, although respondent’s legal problems abroad cannot justify
his failure to comply with his contractual obligation to pay an installment, it could not
be denied that he made an honest effort to pay at least a portion of it. His traveling to
the Philippines from America showed his willingness and desire to make good on his
obligation. His good faith negated any notion that he intended to renege on what he
owed. The Atienzas brought the case to court prematurely considering that the last
installment was not then due.
Furthermore, said the RTC, any attempt by the Atienzas to cancel the contract would
have to comply with the provisions of Republic Act (R.A.) 6552 or the Realty
Installment Buyer Protection Act (R.A. 6552), particularly the giving of the required
notice of cancellation, that they omitted in this case. The RTC thus declared the
contract between the parties valid and subsisting and ordered the parties to comply
with its terms and conditions.
On appeal,11 the Court of Appeals (CA) affirmed the decision of the trial court. 12 Not
satisfied, the Atienzas moved for reconsideration.13 They argued that R.A. 6552 did
not apply to the case because the land was agricultural and respondent Espidol had
not paid two years worth of installment that the law required for coverage. And, in an
apparent shift of theory, the Atienzas now also impugn the validity of their contract
to sell, claiming that, since the property was covered by an emancipation patent, its
sale was prohibited and void. But the CA denied the motion for reconsideration,
hence, the present petition.14
Questions Presented
The questions presented for resolution are:
1. Whether or not the Atienzas could validly sell to respondent Espidol the subject
land which they acquired through land reform under Presidential Decree 2715 (P.D.
27);
2. Whether or not the Atienzas were entitled to the cancellation of the contract to
sell they entered into with respondent Espidol on the ground of the latter’s failure to
pay the second installment when it fell due; and
3. Whether or not the Atienzas’ action for cancellation of title was premature absent
the notarial notice of cancellation required by R.A. 6552.
The Court’s Rulings
112
One. That the Atienzas brought up the illegality of their sale of subject land only when
they filed their motion for reconsideration of the CA decision is not lost on this Court.
As a rule, no question will be entertained on appeal unless it was raised before the
court below. This is but a rule of fairness.16
Nonetheless, in order to settle a matter that would apparently undermine a
significant policy adopted under the land reform program, the Court cannot simply
shirk from the issue. The Atienzas’ title shows on its face that the government
granted title to them on January 9, 1990 by virtue of P.D. 27. This law explicitly
prohibits any form of transfer of the land granted under it except to the government
or by hereditary succession to the successors of the farmer beneficiary.
Upon the enactment of Executive Order 228 17 in 1987, however, the restriction
ceased to be absolute. Land reform beneficiaries were allowed to transfer ownership
of their lands provided that their amortizations with the Land Bank of the Philippines
(Land Bank) have been paid in full.18 In this case, the Atienzas’ title categorically
states that they have fully complied with the requirements for the final grant of title
under P.D. 27. This means that they have completed payment of their amortization
with Land Bank. Consequently, they could already legally transfer their title to
another.
Two. Regarding the right to cancel the contract for non-payment of an installment,
there is need to initially determine if what the parties had was a contract of sale or a
contract to sell. In a contract of sale, the title to the property passes to the buyer
upon the delivery of the thing sold. In a contract to sell, on the other hand, the
ownership is, by agreement, retained by the seller and is not to pass to the vendee
until full payment of the purchase price. In the contract of sale, the buyer’s non-
payment of the price is a negative resolutory condition; in the contract to sell, the
buyer’s full payment of the price is a positive suspensive condition to the coming into
effect of the agreement. In the first case, the seller has lost and cannot recover the
ownership of the property unless he takes action to set aside the contract of sale. In
the second case, the title simply remains in the seller if the buyer does not comply
with the condition precedent of making payment at the time specified in the
contract.19 Here, it is quite evident that the contract involved was one of a contract to
sell since the Atienzas, as sellers, were to retain title of ownership to the land until
respondent Espidol, the buyer, has paid the agreed price. Indeed, there seems no
question that the parties understood this to be the case.20
Admittedly, Espidol was unable to pay the second installment of ₱1,750,000.00 that
fell due in December 2002.1awph!1That payment, said both the RTC and the CA, was
a positive suspensive condition failure of which was not regarded a breach in the
sense that there can be no rescission of an obligation (to turn over title) that did not
 yet exist since the suspensive condition had not taken place. And this is correct so far.
Unfortunately, the RTC and the CA concluded that should Espidol eventually pay the
price of the land, though not on time, the Atienzas were bound to comply with their
obligation to sell the same to him.
But this is error. In the first place, since Espidol failed to pay the installment on a day
certain fixed in their agreement, the Atienzas can afterwards validly cancel and ignore
the contract to sell because their obligation to sell under it did not arise. Since the
suspensive condition did not arise, the parties stood as if the conditional obligation
had never existed.21
Secondly, it was not a pure suspensive condition in the sense that the Atienzas made
no undertaking while the installments were not yet due. Mr. Justice Edgardo L. Paras
gave a fitting example of suspensive condition: "I’ll buy your land for ₱1,000.00 if you
pass the last bar examinations." This he said was suspensive for the bar examinations
results will be awaited. Meantime the buyer is placed under no immediate obligation
to the person who took the examinations.22
Here, however, although the Atienzas had no obligation as yet to turn over title
pending the occurrence of the suspensive condition, it was implicit that they were
under immediate obligation not to sell the land to another in the meantime. When
Espidol failed to pay within the period provided in their agreement, the Atienzas were
relieved of any obligation to hold the property in reserve for him.
The ruling of the RTC and the CA that, despite the default in payment, the Atienzas
remained bound to this day to sell the property to Espidol once he is able to raise the
money and pay is quite unjustified. The total price was ₱2,854,670.00. The Atienzas
decided to sell the land because petitioner Paulino Atienza urgently needed money
for the treatment of his daughter who was suffering from leukemia.23 Espidol paid a
measly ₱100,000.00 in down payment or about 3.5% of the total price, just about the
minimum size of a broker’s commission. Espidol failed to pay the bulk of the price,
₱1,750,000.00, when it fell due four months later in December 2002. Thus, it was not
such a small default as to justify the RTC and the CA’s decision to continue to tie up
the Atienzas to the contract to sell upon the excuse that Espidol tried his honest best
to pay.
Although the Atienzas filed their action with the RTC on February 21, 2003, four
months before the last installment of ₱974,670.00 fell due in June 2003, it cannot be
said that the action was premature. Given Espidol’s failure to pay the second
installment of ₱1,750,000.00 in December 2002 when it was due, the Atienzas’
obligation to turn over ownership of the property to him may be regarded as no
113
longer existing.24 The Atienzas had the right to seek judicial declaration of such non-
existent status of that contract to relieve themselves of any liability should they
decide to sell the property to someone else. Parenthetically, Espidol never offered to
settle the full amount of the price in June 2003, when the last installment fell due, or
during the whole time the case was pending before the RTC.
Three. Notice of cancellation by notarial act need not be given before the contract
between the Atienzas and respondent Espidol may be validly declare non-existent.
R.A. 6552 which mandated the giving of such notice does not apply to this case. The
cancellation envisioned in that law pertains to extrajudicial cancellation or one done
outside of court,25 which is not the mode availed of here. The Atienzas came to court
to seek the declaration of its obligation under the contract to sell cancelled. Thus, the
absence of that notice does not bar the filing of their action.
Since the contract has ceased to exist, equity would, of course, demand that, in the
absence of stipulation, the amount paid by respondent Espidol be returned, the
purpose for which it was given not having been attained; 26 and considering that the
Atienzas have consistently expressed their desire to refund the ₱130,000.00 that
Espidol paid.27
WHEREFORE, the Court GRANTS the petition and REVERSES and SETS ASIDE the
August 31, 2007 decision and November 5, 2007 resolution of the Court of Appeals in
CA-G.R. CV 84953. The Court declares the Kasunduan sa Pagbibili ng Lupa na may
Paunang-Bayad between petitioner Heirs of Paulino Atienza and respondent
Domingo P. Espidol dated August 12, 2002 cancelled and the Heirs’ obligation under it
non-existent. The Court directs petitioner Heirs of Atienza to reimburse the
₱130,000.00 down payment to respondent Espidol.
SO ORDERED.
31. G.R. No. 112127 | July 17, 1995
CENTRAL PHILIPPINE UNIVERSITY, petitioner, vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE
LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents.
BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the
decision of the Court of Appeals which reversed that of the Regional Trial Court of
Iloilo City directing petitioner to reconvey to private respondents the property
donated to it by their predecessor-in-interest.
 Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the
Board of Trustees of the Central Philippine College (now Central Philippine University
[CPU]), executed a deed of donation in favor of the latter of a parcel of land identified
as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-
B, for which Transfer Certificate of Title No. T-3910-A was issued in the name of the
donee CPU with the following annotations copied from the deed of donation —
1. The land described shall be utilized by the CPU exclusively for the
establishment and use of a medical college with all its buildings as part of
the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in
any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said
college shall be under obligation to erect a cornerstone bearing that name.
Any net income from the land or any of its parks shall be put in a fund to be
known as the "RAMON LOPEZ CAMPUS FUND" to be used for improvements
of said campus and erection of a building thereon.1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr.,
filed an action for annulment of donation, reconveyance and damages against CPU
alleging that since 1939 up to the time the action was filed the latter had not
complied with the conditions of the donation. Private respondents also argued that
petitioner had in fact negotiated with the National Housing Authority (NHA) to
exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action
had prescribed; that it did not violate any of the conditions in the deed of donation
because it never used the donated property for any other purpose than that for
which it was intended; and, that it did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the
conditions of the donation and declared it null and void. The court a quo further
directed petitioner to execute a deed of the reconveyance of the property in favor of
the heirs of the donor, namely, private respondents herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the
annotations at the back of petitioner's certificate of title were resolutory conditions
breach of which should terminate the rights of the donee thus making the donation
114
revocable.
The appellate court also found that while the first condition mandated petitioner to
utilize the donated property for the establishment of a medical school, the donor did
not fix a period within which the condition must be fulfilled, hence, until a period was
fixed for the fulfillment of the condition, petitioner could not be considered as having
failed to comply with its part of the bargain. Thus, the appellate court rendered its
decision reversing the appealed decision and remanding the case to the court of
origin for the determination of the time within which petitioner should comply with
the first condition annotated in the certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted
annotations in the certificate of title of petitioner are onerous obligations and
resolutory conditions of the donation which must be fulfilled non-compliance of
which would render the donation revocable; (b) in holding that the issue of
prescription does not deserve "disquisition;" and, (c) in remanding the case to the
trial court for the fixing of the period within which petitioner would establish a
medical college.2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in
the deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative but
to conclude that his donation was onerous, one executed for a valuable consideration
which is considered the equivalent of the donation itself, e.g., when a donation
imposes a burden equivalent to the value of the donation. A gift of land to the City of
Manila requiring the latter to erect schools, construct a children's playground and
open streets on the land was considered an onerous donation. 3 Similarly, where Don
Ramon Lopez donated the subject parcel of land to petitioner but imposed an
obligation upon the latter to establish a medical college thereon, the donation must
be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights,
as well as the extinguishment or loss of those already acquired, shall depend upon
the happening of the event which constitutes the condition. Thus, when a person
donates land to another on the condition that the latter would build upon the land a
school, the condition imposed was not a condition precedent or a suspensive
condition but a resolutory one.4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the donee could
become the owner of the land, otherwise, it would be invading the property rights of
the donor. The donation had to be valid before the fulfillment of the condition. 5 If
there was no fulfillment or compliance with the condition, such as what obtains in
the instant case, the donation may now be revoked and all rights which the donee
may have acquired under it shall be deemed lost and extinguished.
 The claim of petitioner that prescription bars the instant action of private
respondents is unavailing.
The condition imposed by the donor, i.e., the building of a medical school
upon the land donated, depended upon the exclusive will of the donee as to
when this condition shall be fulfilled. When petitioner accepted the
donation, it bound itself to comply with the condition thereof. Since the time
within which the condition should be fulfilled depended upon the exclusive
will of the petitioner, it has been held that its absolute acceptance and the
acknowledgment of its obligation provided in the deed of donation were
sufficient to prevent the statute of limitations from barring the action of
private respondents upon the original contract which was the deed of
donation.6
Moreover, the time from which the cause of action accrued for the revocation of the
donation and recovery of the property donated cannot be specifically determined in
the instant case. A cause of action arises when that which should have been done is
not done, or that which should not have been done is done. 7 In cases where there is
no special provision for such computation, recourse must be had to the rule that the
period must be counted from the day on which the corresponding action could have
been instituted. It is the legal possibility of bringing the action which determines the
starting point for the computation of the period. In this case, the starting point begins
with the expiration of a reasonable period and opportunity for petitioner to fulfill
what has been charged upon it by the donor.
The period of time for the establishment of a medical college and the necessary
buildings and improvements on the property cannot be quantified in a specific
number of years because of the presence of several factors and circumstances
involved in the erection of an educational institution, such as government laws and
regulations pertaining to education, building requirements and property restrictions
which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances
it can be inferred that a period was intended, the general rule provided in Art. 1197
of the Civil Code applies, which provides that the courts may fix the duration thereof
because the fulfillment of the obligation itself cannot be demanded until after the
court has fixed the period for compliance therewith and such period has arrived.8
This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of fifty (50)
years has already been allowed petitioner to avail of the opportunity to comply with
115
the condition even if it be burdensome, to make the donation in its favor forever
valid. But, unfortunately, it failed to do so. Hence, there is no more need to fix the
duration of a term of the obligation when such procedure would be a mere
technicality and formality and would serve no purpose than to delay or lead to an
unnecessary and expensive multiplication of suits. 9 Moreover, under Art. 1191 of the
Civil Code, when one of the obligors cannot comply with what is incumbent upon
him, the obligee may seek rescission and the court shall decree the same unless there
is just cause authorizing the fixing of a period. In the absence of any just cause for the
court to determine the period of the compliance, there is no more obstacle for the
court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one,
doubts referring to incidental circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and interests. 10Records are clear
and facts are undisputed that since the execution of the deed of donation up to the
time of filing of the instant action, petitioner has failed to comply with its obligation
as donee. Petitioner has slept on its obligation for an unreasonable length of time.
Hence, it is only just and equitable now to declare the subject donation already
ineffective and, for all purposes, revoked so that petitioner as donee should now
return the donated property to the heirs of the donor, private respondents herein, by
means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991
is REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June
1993 is accordingly MODIFIED. Consequently, petitioner is directed to reconvey to
private respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by
Transfer Certificate of Title No. T-3910-A within thirty (30) days from the finality of
this judgment.
Costs against petitioner.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
 32. G.R. No. L-24190 | July 13, 1926
GEORGE L. PARKS, plaintiff-appellant, vs. PROVINCE OF TARLAC, MUNICIPALITY OF
TARLAC, CONCEPCION CIRER, and JAMES HILL, her husband, defendants-appellees.
Jos. N. Wolfson for appellant.
Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.
No appearance for the other appellees.
AVANCEÑA, C. J.:
On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land
No. 2 referred to in the complaint, donated it perpetually to the municipality of
Tarlac, Province of Tarlac, under certain conditions specified in the public document
in which they made this donation. The donation was accepted by Mr. Santiago de
Jesus in the same document on behalf of the municipal council of Tarlac of which he
was the municipal president. The parcel thus donated was later registered in the
name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion Cirer
and James Hill sold this parcel to the herein plaintiff George L. Parks. On August 24,
1923, the municipality of Tarlac transferred the parcel to the Province of Tarlac
which, by reason of this transfer, applied for and obtained the registration thereof in
its name, the corresponding certificate of title having been issued to it.
The plaintiff, George L. Parks, alleging that the conditions of the donation had not
been complied with and invoking the sale of this parcel of land made by Concepcion
Cirer and James Hill in his favor, brought this action against the Province of Tarlac, the
municipality of Tarlac, Concepcion Cirer and James Hill and prayed that he be
declared the absolute owner entitled to the possession of this parcel, that the
transfer of the same by the municipality of Tarlac to the Province of Tarlac be
annulled, and the transfer certificate issued to the Province of Tarlac cancelled.
The lower court dismissed the complaint.
The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this
parcel made by Concepcion Cirer and James Hill in his favor on January 15, 1921, but
that sale cannot have any effect. This parcel having been donated by Concepcion
Cirer and James Hill to the municipality of Tarlac, which donation was accepted by the
latter, the title to the property was transferred to the municipality of Tarlac. It is true
that the donation might have been revoked for the causes, if any, provided by the
law, but the fact is that it was not revoked when Concepcion Cirer and James Hill
made the sale of this parcel to the plaintiff. Even supposing that causes existed for
116
the revocation of this donation, still, it was necessary, in order to consider it revoked,
either that the revocation had been consented to by the donee, the municipality of
Tarlac, or that it had been judicially decreed. None of these circumstances existed
when Concepcion Cirer and James Hill sold this parcel to the plaintiff. Consequently,
when the sale was made Concepcion Cirer and James Hill were no longer the owners
of this parcel and could not have sold it to the plaintiff, nor could the latter have
acquired it from them.
But the appellant contends that a condition precedent having been imposed in the
donation and the same not having been complied with, the donation never became
effective. We find no merit in this contention. The appellant refers to the condition
imposed that one of the parcels donated was to be used absolutely and exclusively
for the erection of a central school and the other for a public park, the work to
commence in both cases within the period of six months from the date of the
ratification by the partes of the document evidencing the donation. It is true that this
condition has not been complied with. The allegation, however, that it is a condition
precedent is erroneous. The characteristic of a condition precedent is that the
acquisition of the right is not effected while said condition is not complied with or is
not deemed complied with. Meanwhile nothing is acquired and there is only an
expectancy of right. Consequently, when a condition is imposed, the compliance of
which cannot be effected except when the right is deemed acquired, such condition
cannot be a condition precedent. In the present case the condition that a public
school be erected and a public park made of the donated land, work on the same to
commence within six months from the date of the ratification of the donation by the
parties, could not be complied with except after giving effect to the donation. The
donee could not do any work on the donated land if the donation had not really been
effected, because it would be an invasion of another's title, for the land would have
continued to belong to the donor so long as the condition imposed was not complied
with.
The appellant also contends that, in any event, the condition not having been
complied with, even supposing that it was not a condition precedent but subsequent,
the non-compliance thereof is sufficient cause for the revocation of the donation.
This is correct. But the period for bringing an action for the revocation of the
donation has prescribed. That this action is prescriptible, there is no doubt. There is
no legal provision which excludes this class of action from the statute of limitations.
And not only this, — the law itself recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of five years for the revocation by
the subsequent birth of children (art. 646, Civil Code), and one year for the revocation
by reason of ingratitude. If no special period is provided for the prescription of the
action for revocation for noncompliance of the conditions of the donation (art. 647,
Civil Code), it is because in this respect the donation is considered onerous and is
governed by the law of contracts and the general rules of prescription. Under the law
 in force (sec. 43, Code of Civ. Proc.) the period of prescription of this class of action is
ten years. The action for the revocation of the donation for this cause arose on April
19, 1911, that is six months after the ratification of the instrument of donation of
October 18, 1910. The complaint in this action was presented July 5, 1924, more than
ten years after this cause accrued.

By virtue of the foregoing, the judgment appealed from is affirmed, with the costs
against the appellant. So ordered.

Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

117
 ART. 1182
33. G.R. No. 137909. December 11, 2003
FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner, vs. Spouses BERNARDINO
NAGUIAT and MARIA PAULINA GERONA-NAGUIAT, respondents.
DECISION
PANGANIBAN, J.:
The failure to pay in full the purchase price stipulated in a deed of sale does
not ipso facto grant the seller the right to rescind the agreement. Unless otherwise
stipulated by the parties, rescission is allowed only when the breach of the contract is
substantial and fundamental to the fulfillment of the obligation.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking
to nullify the October 31, 1997 Decision[2] and the February 23, 1999 Resolution[3] of
the Court of Appeals (CA) in CA-GR CV No. 51067. The assailed Decision disposed as
follows:
WHEREFORE, modified as indicated above, the decision of the Regional Trial Court is
hereby AFFIRMED.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The facts of the case are summarized by the CA as follows:
Eulalio Mistica, predecessor-in-interest of herein [petitioner], is the owner of a parcel
of land located at Malhacan, Meycauayan, Bulacan. A portion thereof was leased to
[Respondent Bernardino Naguiat] sometime in 1970.
On 5 April 1979, Eulalio Mistica entered into a contract to sell with [Respondent
Bernardino Naguiat] over a portion of the aforementioned lot containing an area of
200 square meters. This agreement was reduced to writing in a document entitled
Kasulatan sa Pagbibilihan which reads as follows:
NAGSASALAYSAY:
Na ang NAGBIBILI ay nagmamay-aring tunay at naghahawak ng isang lagay
na lupa na nasa Nayon ng Malhacan, Bayan ng Meycauayan, Lalawigan ng
Bulacan, na ang kabuuan sukat at mga kahangga nito gaya ng sumusunod:
xxxxxxxxx
Na alang-alang sa halagang DALAWANG PUNG LIBONG PISO
(P20,000.00) Kualtang Pilipino, ang NAGBIBILI ay nakipagkasundo ng kanyang
ipagbibili ang isang bahagi o sukat na DALAWANG DAAN (200) METROS
PARISUKAT, sa lupang nabanggit sa itaas, na ang mga kahangga nito
118
ay gaya ng sumusunod:
xxxxxxxxx
Na magbibigay ng paunang bayad ang BUMIBILI SA NAGBIBILI na halagang
DALAWANG LIBONG PISO (P2,000.00) Kualtang Pilipino, sa sandaling lagdaan
ang kasulatang ito.
Na ang natitirang halagang LABING WALONG LIBONG PISO (P18,000.00)
Kualtang Pilipino, ay babayaran ng BUM[I]BILI sa loob ng Sampung (10) taon,
na magsisimula sa araw din ng lagdaan ang kasulatang ito.
Sakaling hindi makakabayad ang Bumibili sa loob ng panahon
pinagkasunduan, an[g] BUMIBILI ay magbabayad ng pakinabang o interes ng
12% isang taon, sa taon nilakaran hanggang sa itoy mabayaran tuluyan ng
Bumibili:
Sa katunayan ng lahat ay nilagdaan ng Magkabilang Panig ang kasulatang ito,
ngayon ika 5 ng Abril, 1979, sa Bayan ng Meycauayan. Lalawigan ng Bulacan,
Pilipinas.
(signed) (signed)
BERNARDINO NAGUIAT EULALIO MISTICA
Bumibili Nagbibili
Pursuant to said agreement, [Respondent Bernardino Naguiat] gave a
downpayment of P2,000.00. He made another partial payment of P1,000.00 on 7
February 1980. He failed to make any payments thereafter. Eulalio Mistica died
sometime in October 1986.
On 4 December 1991, [petitioner] filed a complaint for rescission
alleging inter alia: that the failure and refusal of [respondents] to pay the balance of
the purchase price constitutes a violation of the contract which entitles her to rescind
the same; that [respondents] have been in possession of the subject portion and they
should be ordered to vacate and surrender possession of the same to [petitioner] ;
that the reasonable amount of rental for the subject land is P200.00 a month; that on
account of the unjustified actuations of [respondents], [petitioner] has been
constrained to litigate where she incurred expenses for attorneys fees and litigation
expenses in the sum of P20,000.00.
In their answer and amended answer, [respondents] contended that the contract
cannot be rescinded on the ground that it clearly stipulates that in case of failure to
pay the balance as stipulated, a yearly interest of 12% is to be paid. [Respondent
Bernardino Naguiat] likewise alleged that sometime in October 1986, during the wake
of the late Eulalio Mistica, he offered to pay the remaining balance to [petitioner] but
the latter refused and hence, there is no breach or violation committed by them and
no damages could yet be incurred by the late Eulalio Mistica, his heirs or assigns
pursuant to the said document; that he is presently the owner in fee simple of the
subject lot having acquired the same by virtue of a Free Patent Title duly awarded to
 him by the Bureau of Lands; and that his title and ownership had already become
indefeasible and incontrovertible. As counterclaim, [respondents] pray for moral
damages in the amount of P50,000.00; exemplary damages in the amount
of P30,000.00; attorneys fees in the amount of P10,000.00 and other litigation
expenses.
On 8 July 1992, [respondents] also filed a motion to dismiss which was denied by the
court on 29 July 1992. The motion for reconsideration was likewise denied per its
Order of 17 March 1993.
After the presentation of evidence, the court on 27 January 1995 rendered the now
assailed judgment, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Dismissing the complaint and ordering the [petitioner] to pay the [respondents]
attorneys fee in the amount of P10,000.00 and costs of the suit;
2. Ordering the [respondents]:
a. To pay [petitioner] and the heirs of Eulalio Mistica the balance of the
purchase price in the amount of P17,000.00, with interest thereon at the
rate of 12% per annum computed from April 5, 1989 until full payment is
made, subject to the application of the consigned amount to such
payment;
b. To return to [petitioner] and the heirs of Eulalio Mistica the extra area of 58
square meters from the land covered by OCT No. 4917 (M), the
corresponding price therefor based on the prevailing market price
thereof.[5] (Citations omitted)
CAs Decision
Disallowing rescission, the CA held that respondents did not breach the Contract
of Sale. It explained that the conclusion of the ten-year period was not a resolutory
term, because the Contract had stipulated that payment -- with interest of 12 percent
-- could still be made if respondents failed to pay within the period. According to the
appellate court, petitioner did not disprove the allegation of respondents that they
had tendered payment of the balance of the purchase price during her husbands
funeral, which was well within the ten-year period.
Moreover, rescission would be unjust to respondents, because they had already
transferred the land title to their names. The proper recourse, the CA held, was to
order them to pay the balance of the purchase price, with 12 percent interest.
119
As to the matter of the extra 58 square meters, the CA held that its
reconveyance was no longer feasible, because it had been included in the title issued
to them. The appellate court ruled that the only remedy available was to order them
to pay petitioner the fair market value of the usurped portion.
Hence, this Petition.[6]
Issues
In her Memorandum,[7] petitioner raises the following issues:
1. Whether or not the Honorable Court of Appeals erred in the application of Art.
1191 of the New Civil Code, as it ruled that there is no breach of obligation
inspite of the lapse of the stipulated period and the failure of the private
respondents to pay.
2. Whether or not the Honorable Court of Appeals [e]rred in ruling that rescission of
the contract is no longer feasible considering that a certificate of title had
been issued in favor of the private respondents.
3. Whether or not the Honorable Court of Appeals erred in ruling that since the 58 sq.
m. portion in question is covered by a certificate of title in the names of
private respondents reconveyance is no longer feasible and proper. [8]
The Courts Ruling
The Petition is without merit.
First Issue:
Rescission in Article 1191
Petitioner claims that she is entitled to rescind the Contract under Article
1191 of the Civil Code, because respondents committed a substantial breach when
they did not pay the balance of the purchase price within the ten-year period. She
further avers that the proviso on the payment of interest did not extend the period to
pay. To interpret it in that way would make the obligation purely potestative and,
thus, void under Article 1182 of the Civil Code.
We disagree. The transaction between Eulalio Mistica and respondents, as
evidenced by the Kasulatan, was clearly a Contract of Sale. A deed of sale is
considered absolute in nature when there is neither a stipulation in the deed that
title to the property sold is reserved to the seller until the full payment of the price;
nor a stipulation giving the vendor the right to unilaterally resolve the contract the
moment the buyer fails to pay within a fixed period.[9]
In a contract of sale, the remedy of an unpaid seller is either specific
performance or rescission.[10] Under Article 1191 of the Civil Code, the right to rescind
an obligation is predicated on the violation of the reciprocity between parties,
 brought about by a breach of faith by one of them. [11] Rescission, however, is allowed
only where the breach is substantial and fundamental to the fulfillment of the
obligation.[12]
In the present case, the failure of respondents to pay the balance of the
purchase price within ten years from the execution of the Deed did not amount to a
substantial breach. In the Kasulatan, it was stipulated that payment could be made
even after ten years from the execution of the Contract, provided the vendee paid 12
percent interest. The stipulations of the contract constitute the law between the
parties; thus, courts have no alternative but to enforce them as agreed upon and
written.[13]
Moreover, it is undisputed that during the ten-year period, petitioner and her
deceased husband never made any demand for the balance of the purchase
price. Petitioner even refused the payment tendered by respondents during her
husbands funeral, thus showing that she was not exactly blameless for the lapse of
the ten-year period. Had she accepted the tender, payment would have been made
well within the agreed period.
If petitioner would like to impress upon this Court that the parties intended
otherwise, she has to show competent proof to support her contention. Instead, she
argues that the period cannot be extended beyond ten years, because to do so would
convert the buyers obligation to a purely potestative obligation that would annul the
contract under Article 1182 of the Civil Code.
This contention is likewise untenable. The Code prohibits purely potestative,
suspensive, conditional obligations that depend on the whims of the debtor, because
such obligations are usually not meant to be fulfilled. [14] Indeed, to allow the
fulfillment of conditions to depend exclusively on the debtors will would be to
sanction illusory obligations. [15] The Kasulatan does not allow such thing. First,
nowhere is it stated in the Deed that payment of the purchase price is dependent
upon whether respondents want to pay it or not. Second, the fact that they already
made partial payment thereof only shows that the parties intended to be bound by
the Kasulatan.
Both the trial and the appellate courts arrived at this finding. Well-settled is the
rule that findings of fact by the CA are generally binding upon this Court and will not
be disturbed on appeal, especially when they are the same as those of the trial
court.[16] Petitioner has not given us sufficient reasons to depart from this rule.
Second Issue:
120
Rescission Unrelated to Registration
The CA further ruled that rescission in this case would be unjust to
respondents, because a certificate of title had already been issued in their
names. Petitioner nonetheless argues that the Court is still empowered to order
rescission.
We clarify. The issuance of a certificate of title in favor of respondents does not
determine whether petitioner is entitled to rescission. It is a fundamental principle in
land registration that such title serves merely as an evidence of an indefeasible and
incontrovertible title to the property in favor of the person whose name appears
therein.[17]
While a review of the decree of registration is no longer possible after the
expiration of the one-year period from entry, an equitable remedy is still available to
those wrongfully deprived of their property.[18] A certificate of title cannot be subject
to collateral attack and can only be altered, modified or canceled in direct
proceedings in accordance with law.[19] Hence, the CA correctly held that the
propriety of the issuance of title in the name of respondents was an issue that was
not determinable in these proceedings.
Third Issue:
Reconveyance of the Portion Importunately Included
Petitioner argues that it would be reasonable for respondents to pay her the
value of the lot, because the CA erred in ruling that the reconveyance of the extra 58-
square meter lot, which had been included in the certificate of title issued to them,
was no longer feasible.
In principle, we agree with petitioner. Registration has never been a mode of
acquiring ownership over immovable property, because it does not create or vest
title, but merely confirms one already created or vested.[20] Registration does not give
holders any better title than what they actually have. [21] Land erroneously included in
the certificate of title of another must be reconveyed in favor of its true and actual
owner.[22]
Section 48 of Presidential Decree 1529, however, provides that the certificate of
title shall not be subject to collateral attack, alteration, modification, or cancellation
except in a direct proceeding.[23] The cancellation or removal of the extra portion
from the title of respondents is not permissible in an action for rescission of the
contract of sale between them and petitioners late husband, because such action is
tantamount to allowing a collateral attack on the title.
It appears that an action for cancellation/annulment of patent and title and for
reversion was already filed by the State in favor of petitioner and the heirs of her
husband.[24] Hence, there is no need in this case to pass upon the right of respondents
 to the registration of the subject land under their names. For the same reason, there
is no necessity to order them to pay petitioner the fair market value of the extra 58-
square meter lot importunately included in the title.

WHEREFORE, the assailed Decision and Resolution are AFFIRMED with

the MODIFICATION that the payment for the extra 58-square meter lot included in
respondents title is DELETED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
121
 34. G.R. No. L-5003 June 27, 1953 College, Inc. presented a claim before the Court of First Instance of Bulacan in her
testate proceeding, for the collection of the sum of P20,000, representing the value
NAZARIO TRILLANA, administrator-appellee, vs. of the subscription to the capital stock of the Quezon College, Inc. This claim was
QUEZON COLLEGE, INC., claimant-appellant. opposed by the administrator of the estate, and the Court of First Instance of
Bulacan, after hearing issued an order dismissing the claim of the Quezon College,
PARAS, J.: Inc. on the ground that the subscription in question was neither registered in nor
authorized by the Securities and Exchange Commission. From this order the Quezon
College, Inc. has appealed.
Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon
College:
It is not necessary for us to discuss at length appellant's various assignments
of error relating to the propriety of the ground relief upon by the trial court, since, as
June 1, 1948 pointed out in the brief for the administrator and appellee, there are other decisive
considerations which, though not touched by the lower court, amply sustained the
appealed order.
ThE BOARD OF TRUSTEES
Quezon College It appears that the application sent by Damasa Crisostomo to the Quezon
Manila
College, Inc. was written on a general form indicating that an applicant will enclose an
amount as initial payment and will pay the balance in accordance with law and the
Gentlemen: regulations of the College. On the other hand, in the letter actually sent by Damasa
Crisostomo, the latter (who requested that her subscription for 200 shares be
Please enter my subscription to dalawang daan (200) shares of your capital stock with entered) not only did not enclose any initial payment but stated that "babayaran
a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the
ako ay makapag-pahuli ng isda) pesos as my initial payment and the balance payable record to show that the Quezon College, Inc. accepted the term of payment
in accordance with law and the rules and regulations of the Quezon College. I hereby suggested by Damasa Crisostomo, or that if there was any acceptance the same came
agree to shoulder the expenses connected with said shares of stock. I further submit to her knowledge during her lifetime. As the application of Damasa Crisostomo is
myself to all lawful demands, decisions or directives of the Board of Trustees of the obviously at variance with the terms evidenced in the form letter issued by the
Quezon College and all its duly constituted officers or authorities (ang nasa itaas ay Quezon College, Inc., there was absolute necessity on the part of the College to
binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman). express its agreement to Damasa's offer in order to bind the latter. Conversely, said
acceptance was essential, because it would be unfair to immediately obligate the
Quezon College, Inc. under Damasa's promise to pay the price of the subscription
Very respectfully,
after she had caused fish to be caught. In other words, the relation between Damasa
Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage
(Sgd.) DAMASA CRISOSTOMO whereby the latter offered its stock for subscription on the terms stated in the form
Signature of subscriber letter, and Damasa applied for subscription fixing her own plan of payment, — a
relation, in the absence as in the present case of acceptance by the Quezon College,
Nilagdaan sa aming harapan: Inc. of the counter offer of Damasa Crisostomo, that had not ripened into an
enforceable contract.
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO Indeed, the need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa Crisostomo to
Damasa Crisostomo died on October 26, 1948. As no payment appears to pay the value of the subscription after she has harvested fish, a condition obviously
122

have been made on the subscription mentioned in the foregoing letter, the Quezon dependent upon her sole will and, therefore, facultative in nature, rendering the
 obligation void, under article 1115 of the old Civil Code which provides as follows: "If
the fulfillment of the condition should depend upon the exclusive will of the debtor,
the conditional obligation shall be void. If it should depend upon chance, or upon the
will of a third person, the obligation shall produce all its effects in accordance with
the provisions of this code." It cannot be argued that the condition solely is void,
because it would have served to create the obligation to pay, unlike a case,
exemplified by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative
condition was held void because it referred merely to the fulfillment of an already
existing indebtedness.

In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court already
held that "a condition, facultative as to the debtor, is obnoxious to the first sentence
contained in article 1115 and renders the whole obligation void."

Wherefore, the appealed order is affirmed, and it is so ordered with costs against
appellant.

Tuason, Padilla and Reyes, JJ., concur in the result.

123
 35. G.R. No. 107207 November 23, 1995
VIRGILIO R. ROMERO, petitioner, vs. HON. COURT OF APPEALS and ENRIQUETA
CHUA VDA. DE ONGSIONG, respondents.
VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a contract
for the sale of a parcel of land for a cause traceable to his own failure to have the
squatters on the subject property evicted within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of
production, manufacture and exportation of perlite filter aids, permalite insulation
and processed perlite ore. In 1988, petitioner and his foreign partners decided to put
up a central warehouse in Metro Manila on a land area of approximately 2,000
square meters. The project was made known to several freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a
broker, offered a parcel of land measuring 1,952 square meters. Located in Barangay
San Dionisio, Parañaque, Metro Manila, the lot was covered by TCT No. 361402 in the
name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the
property and, except for the presence of squatters in the area, he found the place
suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance
the amount of P50,000.00 which could be used in taking up an ejectment case against
the squatters, private respondent would agree to sell the property for only P800.00
per square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract,
denominated "Deed of Conditional Sale," was executed between petitioner and
private respondent. The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines this 9th
day of June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at
105 Simoun St., Quezon City, Metro Manila, hereinafter referred to as the VENDOR;
124
-and-
VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and residing at
110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila, hereinafter
referred to as the VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of
ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less,
located in Barrio San Dionisio, Municipality of Parañaque, Province of Rizal, covered
by TCT No. 361402 issued by the Registry of Deeds of Pasig and more particularly
described as follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR
has accepted the offer, subject to the terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY,
Philippine Currency, payable by VENDEE to in to (sic) manner set forth, the VENDOR
agrees to sell to the VENDEE, their heirs, successors, administrators, executors,
assign, all her rights, titles and interest in and to the property mentioned in the FIRST
WHEREAS CLAUSE, subject to the following terms and conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is
to be paid upon signing and execution of this instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45 days
after the removal of all squatters from the above described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR without
necessity of demand shall immediately sign, execute, acknowledged (sic) and deliver
the corresponding deed of absolute sale in favor of the VENDEE free from all liens and
encumbrances and all Real Estate taxes are all paid and updated.
It is hereby agreed, covenanted and stipulated by and between the parties hereto
that if after 60 days from the date of the signing of this contract the VENDOR shall not
be able to remove the squatters from the property being purchased, the
 downpayment made by the buyer shall be returned/reimbursed by the VENDOR to
the VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance
of the purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to the
VENDEE of the removal of the squatters from the property being purchased, the FIFTY
THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be forfeited in
favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer
fee, assurances and such other fees and expenses as may be necessary to transfer the
title to the name of the VENDEE shall be for the account of the VENDEE while capital
gains tax shall be paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of
Makati MM, Philippines on this 9th day of June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.
DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz1
Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged
a check for P50,000.002from petitioner.3
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil
Case No. 7579) against Melchor Musa and 29 other squatter families with the
Metropolitan Trial Court of Parañaque. A few months later, or on 21 February 1989,
125
judgment was rendered ordering the defendants to vacate the premises. The decision
was handed down beyond the 60-day period (expiring 09 August 1988) stipulated in
the contract. The writ of execution of the judgment was issued, still later, on 30
March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00
she received from petitioner since, she said, she could not "get rid of the squatters"
on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April
1989, refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering
the favorable decision rendered by the Court and the writ of execution
issued pursuant thereto, it is now possible to eject the squatters from the
premises of the subject property, for which reason, he proposes that he shall
take it upon himself to eject the squatters, provided, that expenses which
shall be incurred by reason thereof shall be chargeable to the purchase price
of the land.4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its
Regional Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of
Parañaque for a grace period of 45 days from 21 April 1989 within which to relocate
and transfer the squatter families. Acting favorably on the request, the court
suspended the enforcement of the writ of execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-
day grace period and his client's willingness to "underwrite the expenses for the
execution of the judgment and ejectment of the occupants."5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent,
advised Atty. Apostol that the Deed of Conditional Sale had been
rendered null and void by virtue of his client's failure to evict the squatters from the
premises within the agreed 60-day period. He added that private respondent had
"decided to retain the property."6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very moment
that there was a meeting of the minds of the parties upon the subject lot and the
price in the amount of P1,561,600.00. Moreover, the contract had already been
partially fulfilled and executed upon receipt of the downpayment of your client.
Ms. Ongsiong is precluded from rejecting its binding effects relying upon her
inability to eject the squatters from the premises of subject property during the
agreed period. Suffice it to state that, the provision of the Deed of Conditional
 Sale do not grant her the option or prerogative to rescind the contract and to
retain the property should she fail to comply with the obligation she has assumed
under the contract. In fact, a perusal of the terms and conditions of the contract
clearly shows that the right to rescind the contract and to demand the
return/reimbursement of the downpayment is granted to our client for his
protection.
Instead, however, of availing himself of the power to rescind the contract and
demand the return, reimbursement of the downpayment, our client had opted to
take it upon himself to eject the squatters from the premises. Precisely, we refer
you to our letters addressed to your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given
to the injured party. Undoubtedly, under the circumstances, our client is the
injured party.
Furthermore, your client has not complied with her obligation under their
contract in good faith. It is undeniable that Ms. Ongsiong deliberately refused to
exert efforts to eject the squatters from the premises of the subject property and
her decision to retain the property was brought about by the sudden increase in
the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to
execute the absolute Deed of Sale.7
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's
continued refusal to accept the return of the P50,000.00 advance payment, filed with
the Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of
the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00
cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of
execution in Civil Case No. 7579 on motion of private respondent but the squatters
apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of
Makati8 rendered decision holding that private respondent had no right to rescind the
contract since it was she who "violated her obligation to eject the squatters from the
subject property" and that petitioner, being the injured party, was the party who
could, under Article 1191 of the Civil Code, rescind the agreement. The court ruled
126
that the provisions in the contract relating to (a) the return/reimbursement of the
P50,000.00 if the vendor were to fail in her obligation to free the property from
squatters within the stipulated period or (b), upon the other hand, the sum's
forfeiture by the vendor if the vendee were to fail in paying the agreed purchase
price, amounted to "penalty clauses". The court added:
This Court is not convinced of the ground relied upon by the plaintiff in
seeking the rescission, namely: (1) he (sic) is afraid of the squatters; and (2)
she has spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3,
1990). Militating against her profession of good faith is plaintiffs conduct
which is not in accord with the rules of fair play and justice. Notably, she
caused the issuance of an alias writ of execution on August 25, 1989 (Exh. 6)
in the ejectment suit which was almost two months after she filed the
complaint before this Court on June 27, 1989. If she were really afraid of the
squatters, then she should not have pursued the issuance of an alias writ of
execution. Besides, she did not even report to the police the alleged phone
threats from the squatters. To the mind of the Court, the so-called squatter
factor is simply factuitous (sic).9
The lower court, accordingly, dismissed the complaint and ordered, instead,
private respondent to eject or cause the ejectment of the squatters from the
property and to execute the absolute deed of conveyance upon payment of the
full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate
court rendered its decision. 10It opined that the contract entered into by the parties
was subject to a resolutory condition, i.e., the ejectment of the squatters from the
land, the non-occurrence of which resulted in the failure of the object of the contract;
that private respondent substantially complied with her obligation to evict the
squatters; that it was petitioner who was not ready to pay the purchase price and
fulfill his part of the contract, and that the provision requiring a mandatory
return/reimbursement of the P50,000.00 in case private respondent would fail to
eject the squatters within the 60-day period was not a penal clause. Thus, it
concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one
entered declaring the contract of conditional sale dated June 9, 1988 cancelled and
ordering the defendant-appellee to accept the return of the downpayment in the
amount of P50,000.00 which was deposited in the court below. No pronouncement
as to costs.11
Failing to obtain a reconsideration, petitioner filed this petition for review
on certiorari raising issues that, in fine, center on the nature of the contract adverted
to and the P50,000.00 remittance made by petitioner.
 A perfected contract of sale may either be absolute or conditional 12 depending on
whether the agreement is devoid of, or subject to, any condition imposed on
the passing of title of the thing to be conveyed or on the obligation of a party
thereto. When ownership is retained until the fulfillment of a positive condition the
breach of the condition will simply prevent the duty to convey title from acquiring
an obligatory force. If the condition is imposed on an obligationof a party which is not
complied with, the other party may either refuse to proceed or waive said condition
(Art. 1545, Civil Code). Where, of course, the condition is imposed upon
the perfection of the contract itself, the failure of such condition would prevent the
juridical relation itself from coming into existence.13
In determining the real character of the contract, the title given to it by the parties is
not as much significant as its substance. For example, a deed of sale, although
denominated as a deed of conditional sale, may be treated as absolute in nature, if
title to the property sold is not reserved in the vendor or if the vendor is not granted
the right to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed
condition.14
The term "condition" in the context of a perfected contract of sale pertains, in reality,
to the compliance by one party of an undertaking the fulfillment of which would
beckon, in turn, the demandability of the reciprocal prestation of the other party. The
reciprocal obligations referred to would normally be, in the case of vendee, the
payment of the agreed purchase price and, in the case of the vendor, the fulfillment
of certain express warranties (which, in the case at bench is the timely eviction of the
squatters on the property).
It would be futile to challenge the agreement here in question as not being a duly
perfected contract. A sale is at once perfected when a person (the seller) obligates
himself, for a price certain, to deliver and to transfer ownership of a specified thing or
right to another (the buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified to be a 1,952-
square meter lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of
Title No. 361402 of the Registry of Deeds for Pasig and therein technically described.
The purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid
upon the execution of the document of sale and the balance of P1,511,600.00
payable "45 days after the removal of all squatters from the above described
property."
From the moment the contract is perfected, the parties are bound not only to the
127
fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and law.
Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets
into motion the period of compliance by petitioner of his own obligation, i.e., to pay
the balance of the purchase price. Private respondent's failure "to remove the
squatters from the property" within the stipulated period gives petitioner the right to
either refuse to proceed with the agreement or waive that condition in consonance
with Article 1545 of the Civil Code.16 This option clearly belongs to petitioner and not
to private respondent.
We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will"
that might, otherwise, be void in accordance with Article 1182 of the Civil Code17 but
a "mixed" condition "dependent not on the will of the vendor alone but also of third
persons like the squatters and government agencies and personnel concerned."18 We
must hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the obligation is
avoided, leaving unaffected the obligation itself.19
In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows
the obligee to choose between proceeding with the agreement or waiving the
performance of the condition. It is this provision which is the pertinent rule in the
case at bench. Here, evidently, petitioner has waived the performance of the
condition imposed on private respondent to free the property from squatters. 20
In any case, private respondent's action for rescission is not warranted. She is not the
injured party.21 The right of resolution of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them.22 It is private respondent who has failed in her obligation
under the contract. Petitioner did not breach the agreement. He has agreed, in fact,
to shoulder the expenses of the execution of the judgment in the ejectment case and
to make arrangements with the sheriff to effect such execution. In his letter of 23
June 1989, counsel for petitioner has tendered payment and demanded forthwith the
execution of the deed of absolute sale. Parenthetically, this offer to pay, having been
made prior to the demand for rescission, assuming for the sake of argument that
such a demand is proper under Article 159223 of the Civil Code, would likewise suffice
to defeat private respondent's prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance
payment is reimbursable to petitioner or forfeitable by private respondent, since, on
the basis of our foregoing conclusions, the matter has ceased to be an issue. Suffice it
to say that petitioner having opted to proceed with the sale, neither may petitioner
 demand its reimbursement from private respondent nor may private respondent
subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED

AND SET ASIDE, and another is entered ordering petitioner to pay private respondent
the balance of the purchase price and the latter to execute the deed of absolute sale
in favor of petitioner. No costs.

SO ORDERED.

Feliciano, Romero, Melo and Panganiban, JJ., concur.

128
 ARTICLE 1189
36. G.R. No. 165272 | 2007-09-13
SERGIO R. OSMENA III et al Petitioners, vs SOCIAL SECURITY SYSTEM OF THE
PHILIPPINES et al, Respondents.
DECISION
GARCIA, J.:
Senator Sergio R. Osmeña III[1] and four (4) other members[2] of the Philippine
Senate, joined by Social Security System (SSS) members Luis F. Sison and Patricia C.
Sison, specifically seek in this original petition for certiorari and prohibition the
nullification of the following issuances of respondent Social Security Commission
(SSC):
1) RESOLUTION No. 428[3] dated July 14, 2004; and
2) RESOLUTION No. 485[4] dated August 11, 2004.
The first assailed resolution approved the proposed sale of the entire equity stake of
the SSS in what was then the Equitable PCI Bank, Inc. (EPCIB or EPCI), consisting of
187,847,891 common shares, through the Swiss Challengebidding procedure, and
authorized SSS President Corazon S. Dela Paz (Dela Paz) to constitute a bidding
committee that would formulate the terms of reference of the Swiss
Challenge bidding mode. The second resolution approved the Timetable and
Instructions to Bidders.
Petitioners[5] also ask that a prohibitive writ issue to permanently enjoin public
respondents from implementing Res. Nos. 428 and 485 or otherwise proceeding with
the sale of subject shares through the Swiss Challengemethod.
By Resolution[6] dated October 5, 2004, the Court en banc required the parties to
observe the status quo ante the passage of the assailed resolutions. In the same
resolution, the Court noted the motion of respondent BDO Capital and Investment
Corporation (BDO Capital) to admit its Opposition to the Petition.
The relevant factual antecedents:
129
Sometime in 2003, SSS, a government financial institution (GFI) created pursuant to
Republic Act (RA) No. 1161[7] and placed under the direction and control of SSC, took
steps to liquefy its long-term investments and diversify them into higher-yielding and
less volatile investment products. Among its assets determined as needing to be
liquefied were its shareholdings in EPCIB. The principal reason behind the intended
disposition, as explained by respondent Dela Paz during the February 4, 2004 hearing
conducted by the Senate Committee on Banks, Financial Institutions and Currencies,
is that the shares in question have substantially declined in value and the SSS could
no longer afford to continue holding on to them at the present level of EPCIB's
income.
Some excerpts of what respondent Dela Paz said in that hearing:
The market value of Equitable-PCI Bank had actually hovered at P34.00 since July
2003. At some point after the price went down to P16 or P17 after the September 11
..., it went up to P42.00 but later on went down to P34.00. xxx. We looked at the
prices in about March of 2001 and noted that the trade prices then ranged from P50
to P57.
xxx xxx xxx
I have to concede that [EPCIB] has started to recover, ....
Perhaps the fact that there had been this improved situation in the bank that
attracted Banco de Oro .... xxx. I wouldn't know whether the prices would eventually
go up to 60 of (sic) 120. But on the basis of my being the vice-chair on the bank, I
believe that this is the subject of a lot of conjecture. It can also go down .... So, in the
present situation where the holdings of SSS in [EPCIB] consists of about 10 percent of
the total reserve fund, we cannot afford to continue holding it at the present level of
income ....xxx. And therefore, on that basis, an exposure to certain form of assets
whose price can go down to 16 to 17 which is a little over 20 percent of what we have
in our books, is not a very prudent way or conservative way of handling those funds.
We need not continue experiencing opportunity losses but have an amount that will
give us a fair return to that kind of value (Words in bracket added.)
Albeit there were other interested parties, only Banco de Oro Universal Bank (BDO)
and its investment subsidiary, respondent BDO Capital,[8] appeared in earnest to
acquire the shares in question. Following talks between them, BDO and SSS signed,
on December 30, 2003, a Letter- Agreement,[9] for the sale and purchase of some
187.8 million EPCIB common shares (the Shares, hereinafter), at P43.50 per share,
 which represents a premium of 30% of the then market value of the EPCIB shares. At
about this time, the Shares were trading at an average of P34.50 @ share.
In the same Letter-Agreement,[10] the parties agreed "to negotiate in good faith a
mutually acceptable Share Sale and Purchase Agreement and execute the same not
later than thirty (30) business days from [December 30, 2003]."
On April 19, 2004, the Commission on Audit (COA),[11] in response to respondent
Dela Paz's letter-query on the applicability of the public bidding requirement under
COA Circular No. 89-296[12] on the divestment by the SSS of its entire EPICB equity
holdings, stated that the "circular covers all assets of government agencies except
those merchandize or inventory held for sale in the regular course of business." And
while it expressed the opinion[13] that the sale of the subject Shares are "subject to
guidelines in the Circular," the COA qualified its determination with a statement that
such negotiated sale would partake of a stock exchange transaction and, therefore,
would be adhering to the general policy of public auction. Wrote the COA:
Nevertheless, since activities in the stock exchange which offer to the general public
stocks listed therein, the proposed sale, although denominated as "negotiated sale"
substantially complies with the general policy of public auction as a mode of
divestment. This is so for shares of stocks are actually being auctioned to the general
public every time that the stock exchanges are openly operating.
Following several drafting sessions, SSS and BDO Capital, the designated buyers of the
Banco de Oro Group, agreed on a final draft version of the Share Purchase
Agreement[14] (SPA). In it, the parties mutually agreed to the purchase by the BDO
Capital and the sale by SSS of all the latter's EPCIB shares at the closing date at the
specified price of P43.50 per share or a total of P8,171,383,258.50.
The proposed SPA, together with the Letter-Agreement, was then submitted to the
Department of Justice (DOJ) which, in an Opinion[15] dated April 29, 2004, concurred
with the COA's opinion adverted to and stated that it did not find anything
objectionable with the terms of both documents.
On July 14, 2004, SSC passed Res. No. 428[16] approving, as earlier stated, the sale of
the EPCIB shares through the Swiss Challenge method. A month later, the equally
assailed Res. No. 485[17] was also passed.
On August 23, 24, and 25, 2004, SSS advertised an Invitation to Bid[18] for the block
purchase of the Shares. The Invitation to Bid expressly provided that the "result of the
130
bidding is subject to the right of BDO Capital ... to match the highest bid." October 20,
2004 was the date set for determining the winning bid.
The records do not show whether or not any interested group/s submitted bids. The
bottom line, however, is that even before the bid envelopes, if any, could be opened,
the herein petitioners commenced the instant special civil action
for certiorari, setting their sights primarily on the legality of the Swiss Challenge angle
and a provision in the Instruction to Bidders under which the SSS undertakes to offer
the Shares to BDO should no bidder or prospective bidder qualifies. And as earlier
mentioned, the Court, via a status quo order,[19] effectively suspended the
proceedings on the proposed sale.
Under the Swiss Challenge format, one of the bidders is given the option or
preferential "right to match" the winning bid.
Petitioners assert, in gist, that a public bidding with a Swiss Challenge component is
contrary to COA Circular No. 89-296 and public policy which requires adherence to
competitive public bidding in a government-contract award to assure the best price
possible for government assets. Accordingly, the petitioners urge that the planned
disposition of the Shares through a Swiss Challenge method be scrapped. As argued,
the Swiss Challenge feature tends to discourage would-be-bidders from undertaking
the expense and effort of bidding if the chance of winning is diminished by the
preferential "right to match" clause. Pushing the point, petitioners aver that the
Shares are in the nature of long-term or non-current assets not regularly traded or
held for sale in the regular course of business. As such, their disposition must be
governed by the aforementioned COA circular which, subject to several exceptions,
prescribes "public auction" as a primary mode of disposal of GFIs' assets. And
obviously finding the proposed purchase price to be inadequate, the petitioners
expressed the belief that "if properly bidded out in accordance with [the] COA Circular
..., the Shares could be sold at a price of at least Sixty Pesos (P60.00) per share." Other
supporting arguments for allowing certiorari are set forth in some detail in the basic
petition.
Against the petitioners' stance, public respondents inter alia submit that the sale of
subject Shares is exempt from the tedious public bidding requirement of COA.
Obviously stressing the practical side of the matter, public respondents assert that if
they are to hew to the bidding requirement in the disposition of SSS's Philippine Stock
Exchange (PSE)-listed stocks, it would place the System at a disadvantage vis-á -vis
other stock market players who certainly enjoy greater flexibility in reacting to the
vagaries of the market and could sell their holdings at a moment's notice when the
price is right. Public respondents hasten to add, however, that the bidding-exempt
 status of the Shares did not prevent the SSS from prudently proceeding with the
bidding as contemplated in the assailed resolutions as a measure to validate the
adequacy of the unit price BDO Capital offered therefor and to possibly obtain a
higher price than its definitive offer of P43.50 per share.[20] Public respondents also
advanced the legal argument, also shared by their co-respondent BDO Capital, in its
Comment,[21] that the proposed sale is not covered by COA Circular No. 89-296 since
the Shares partake of the nature of merchandise or inventory held for sale in the
regular course of SSS's business.
Pending consideration of the petition, supervening events and corporate movements
transpired that radically altered the factual complexion of the case. Some of these
undisputed events are detailed in the petitioners' separate Manifestation & Motion
to Take Judicial Notice[22] and their respective annexes. To cite the relevant ones:
1. In January 2006, BDO made public its intent to merge with EPCIB. Under what BDO
termed as "Merger of Equals", EPCIB shareholders would get 1.6 BDO shares for
every EPCIB share.[23]
2. In early January 2006, the GSIS publicly announced receiving from an undisclosed
entity an offer to buy its stake in EPCIB - 12% of the bank's outstanding capital stock -
at P92.00 per share.[24]
3. On August 31, 2006, SM Investments Corporation, an affiliate of BDO and BDO
Capital, in consortium with Shoemart, Inc. et al., (collectively, the SM Group)
commenced, through the facilities of the PSE and pursuant to R.A. No. 8799[25], a
mandatory tender offer (Tender Offer) covering the purchase of the entire
outstanding capital stock of EPCIB at P92.00 per share. Pursuant to the terms of the
Tender Offer, which was to start on August 31, 2006 and end on September 28, 2006
- the Tender Offer Period - all shares validly tendered under it by EPCIB shareholders
of record shall be deemed accepted for payment on closing date subject to certain
conditions.[26] Among those who accepted the Tender Offer of the SM Group was
EBC Investments, Inc., a subsidiary of EPCIB.
4. A day or two later, BDO filed a Tender Offer Report with the Securities and
Exchange Commission (SEC) and the PSE.[27]
Owing to the foregoing developments, the Court, on October 3, 2006, issued a
Resolution requiring the 'parties to CONFIRM news reports that price of subject
131
shares has been agreed upon at P92; and if so, to MANIFEST whether this case has
become moot."
First to comply with the above were public respondents SSS et al., by filing
their Compliance and Manifestation,[28] therein essentially stating that the case is
now moot in view of the SM-BDO Group's Tender Offer at P92.00 @ unit share, for
the subject EPCIB common shares, inclusive of the SSS shares subject of the petition.
They also stated the observation that the petitioners' Manifestation and Motion to
Take Judicial Notice,[29] never questioned the Tender Offer, thus confirming the
dispensability of a competitive public bidding in the disposition of subject Shares.
For perspective, a "tender offer" is a publicly announced intention by a person acting
alone or in concert with other persons to acquire equity securities of a public
company, i.e., one listed on an exchange, among others.[30] The term is also defined
as "an offer by the acquiring person to stockholders of a public company for them to
tender their shares therein on the terms specified in the offer"[31] Tender offer is in
place to protect the interests of minority stockholders of a target company against
any scheme that dilutes the share value of their investments. It affords such minority
shareholders the opportunity to withdraw or exit from the company under
reasonable terms, a chance to sell their shares at the same price as those of the
majority stockholders.[32]
Next to comply with the same Resolution of the Court was respondent BDO
Capital via its Compliance,[33] thereunder practically reiterating public respondents'
position on the question of mootness and the need, under the premises, to go into
public bidding. It added the arguments that the BDO-SM Group's Tender Offer,
involving as it did a general offer to buy all EPCIB common shares at the stated price
and terms, were inconsistent with the idea of public bidding; and that the Tender
Offer rules actually provide for an opportunity for competing groups to top the
Tender Offer price.
On the other hand, petitioners, in their Manifestation,[34] concede the huge gap
between the unit price stated in the Tender Offer and the floor price of P43.50 per
share stated in the Invitation to Bid. It is their posture, however, that unless SSS
withdraws the sale of the subject shares by way of the Swiss Challenge, the offer
price of P92 per share cannot render the case moot and academic.
Meanwhile, the positive response to the Tender Offer enabled the SM-BDO Group to
acquire controlling interests over EPCIB and paved the way for a BDO-EPCIB merger.
The merger was formalized by subsequent submission of the necessary merger
documents[35] to the SEC.
On May 25, 2007, the SEC issued a Certificate of Filing of the Article and Plan of
Merger[36] approving the merger between BDO and EPCIB, relevant portions of
which are reproduced hereunder:

THIS IS TO CERTIFY that the Plan and Articles of Merger
executed on December 28, 2006 by and between:
BANCO DE ORO UNIVERSAL BANK,
Now BANCO DE ORO-EPCI, INC.
(Surviving Corporation)
and
EQUITABLE PCI BANK, INC.
(Absorbed Corporation)
... approved by a majority of the Board of Directors on November 06, 2006 and by a
vote of the stockholders owning or representing at least two-thirds of the
outstanding capital stock of constituent corporations on December 27, 2006, signed
by the Presidents, certified by their respective Corporate Secretaries, whereby the
entire assets of [EPCI] Inc. will be transferred to and absorbed by [BDO] UNIVERSAL
BANK nowBANCO DE ORO-EPCI, INC. was approved by this Office on this date but
which approval shall be effective on May 31, 2007 pursuant to the provisions of ...
(Word in bracket added; emphasis in the original)
In line with Section 80 of the Corporation Code and as explicitly set forth in Article 1.3
of the Plan of Mergeradverted to, among the effects of the BDO-EPCIB merger are
the following:
a. BDO and EPCI shall become a single corporation, with BDO as the surviving
corporation. [EPCIB] shall cease to exist...;
xxx xxx xxx
c. All the rights, privileges, immunities, franchises and powers of EPCI shall be
132
deemed transferred to and possessed by the merged Bank...; and
d. All the properties of EPCI, real or personal, tangible or intangible ... shall be
deemed transferred to the Merged Bank without further act or deed.
Per Article 2 of the Plan of Merger on the exchange of shares mechanism, "all the
issued and outstanding common stock of [EPCIB] ('EPCI shares') shall be converted
into fully-paid and non assessable common stock of BDO ('BDO common shares') at
the ratio of 1.80 BDO Common shares for each issued [EPCIB] share ('the Exchange
Ratio')." And under the exchange procedure, "BDO shall issue BDO Common Shares to
EPCI stockholders corresponding to each EPCI Share held by them in accordance with
the aforesaid Exchange Ratio."
It appears that BDO, or BDO-EPCI, Inc. to be precise, has since issued BDO common
shares to respondent SSS corresponding to the number of its former EPCIB
shareholdings under the ratio and exchange procedure prescribed in the Plan of
Merger. In net effect, SSS, once the owner of a block of EPCIB shares, is now a large
stockholder of BDO-EPCI, Inc.
On the postulate that the instant petition has now become moot and academic, BDO
Capital supplemented its earlier Compliance and Manifestation[37] with a
formal Motion to Dismiss.[38]
By Resolution dated July 10, 2007, the Court required petitioners and respondent SSS
to comment on BDO Capital's motion to dismiss "within ten (10) days from notice."
To date, petitioners have not submitted their compliance. On the other hand, SSS, by
way of comment, reiterated its position articulated in respondents' Compliance and
Motion[39] that the SM-BDO Group Tender Offer at the price therein stated had
rendered this case moot and academic. And respondent SSS confirmed the following:
a) its status as BDO-EPCIB stockholder; b) the Tender Offer made by the SM Group to
EPCIB stockholders, including SSS, for their shares at P92.00 per share; and c) SSS'
acceptance of the Tender Offer thus made.
A case or issue is considered moot and academic when it ceases to present a
justiciable controversy by virtue of supervening events,[40] so that an adjudication of
the case or a declaration on the issue would be of no practical value or use.[41] In
such instance, there is no actual substantial relief which a petitioner would be
entitled to, and which would be negated by the dismissal of the petition.[42] Courts
generally decline jurisdiction over such case or dismiss it on the ground of mootness -
- save when, among others, a compelling constitutional issue raised requires the
 formulation of controlling principles to guide the bench, the bar and the public; or
when the case is capable of repetition yet evading judicial review.[43]
The case, with the view we take of it, has indeed become moot and academic for
interrelated reasons.
We start off with the core subject of this case. As may be noted, the Letter-
Agreement,[44] the SPA,[45] the SSC resolutions assailed in this recourse, and
the Invitation to Bid sent out to implement said resolutions, all have a common
subject: the Shares - the 187.84 Million EPCIB common shares. It cannot be
overemphasized, however, that the Shares, as a necessary consequence of the BDO-
EPCIB merger[46] which saw EPCIB being absorbed by the surviving BDO, have
been transferred to BDO and converted into BDO common shares under the
exchange ratio set forth in the BDO-EPCIB Plan of Merger. As thus converted, the
subject Shares are no longer equity security issuances of the now defunct EPCIB, but
those of BDO-EPCI, which, needless to stress, is a totally separate and distinct entity
from what used to be EPCIB. In net effect, therefore, the 187.84 Million EPCIB
common shares are now lost or inexistent. And in this regard, the Court takes judicial
notice of the disappearance of EPCIB stocks from the local bourse listing. Instead,
BDO-EPCI Stocks are presently listed and being traded in the PSE.
Under the law on obligations and contracts, the obligation to give a determinate
thing is extinguished if the object is lost without the fault of the debtor.[47] And per
Art. 1192 (2) of the Civil Code, a thing is considered lost when it perishes or
disappears in such a way that it cannot be recovered.[48] In a very real sense, the
interplay of the ensuing factors: a) the BDO-EPCIB merger; and b) the cancellation of
subject Shares and their replacement by totally new common shares of BDO, has
rendered the erstwhile 187.84 million EPCIB shares of SSS "unrecoverable" in the
contemplation of the adverted Civil Code provision.
With the above consideration, respondent SSS or SSC cannot, under any
circumstance, cause the implementation of the assailed resolutions, let alone
proceed with the planned disposition of the Shares, be it via the traditional
competitive bidding or the challenged public bidding with a Swiss Challenge feature.
At any rate, the moot-and-academic angle would still hold sway even if it were to be
assumed hypothetically that the subject Shares are still existing. This is so, for the
supervening BDO-EPCIB merger has so effected changes in the circumstances of SSS
and BDO/BDO Capital as to render the fulfillment of any of the obligations that each
may have agreed to undertake under either the Letter-Agreement, the SPA or
the Swiss Challenge package legally impossible. When the service has become so
133
difficult as to be manifestly beyond the contemplation of the parties,[49] total or
partial release from a prestation and from the counter-prestation is allowed.
Under the theory of rebus sic stantibus,[50] the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the contract
also ceases to exist.[51] Upon the facts obtaining in this case, it is abundantly clear
that the conditions in which SSS and BDO Capital and/or BDO executed the Letter-
Agreement upon which the pricing component - at P43.50 per share - of
the Invitation to Bid was predicated, have ceased to exist. Accordingly, the
implementation of the Letter- Agreement or of the challenged Res. Nos. 428 and 485
cannot plausibly push through, even if the central figures in this case are so minded.
Lest it be overlooked, BDO-EPCI, in a manner of speaking, stands now as the
issuer[52] of what were once the subject Shares. Consequently, should SSS opt to exit
from BDO and BDO Capital, or BDO Capital, in turn, opt to pursue SSS's shareholdings
in EPCIB, as thus converted into BDO shares, the sale-purchase ought to be via an
Issuer Tender Offer -- a phrase which means a publicly announced intention by an
issuer to acquire any of its own class of equity securities or by an affiliate of such
issuer to acquire such securities.[53] In that eventuality, BDO or BDO Capital cannot
possibly exercise the "right to match" under the Swiss Challenge procedure, a tender
offer being wholly inconsistent with public bidding. The offeror or buyer in an issue
tender offer transaction proposes to buy or acquire, at the stated price and given
terms, its own shares of stocks held by its own stockholder who in turn simply have to
accept the tender to effect the sale. No bidding is involved in the process.
While the Court ends up dismissing this petition because the facts and legal situation
call for this kind of disposition, petitioners have to be commended for their efforts in
initiating this proceeding. For, in the final analysis, it was their petition which initially
blocked implementation of the assailed SSC resolutions, and, in the process, enabled
the SSS and necessarily their members to realize very much more for their
investments.
WHEREFORE, the instant petition is DISMISSED.
No costs.
SO ORDERED.
CANCIO C. GARCIA
 Associate Justice
134
 ARTICLE 1191
parcel of land, under the following terms and conditions:
37. G.R. No. 188661 | 2012-04-11
ESTELITA VILLAMAR, Petitioner, vs. BALBINO MANGAOIL, Respondent.
DECISION
REYES, J.:
The Case
Before us is a petition for review on certiorari[1] under Rule 45 of the Rules of
Court filed by Estelita Villamar (Villamar) to assail the Decision [2] rendered by the
Court of Appeals (CA) on February 20, 2009 in CA-G.R. CV No. 86286, the dispositive
portion of which reads:
WHEREFORE, the instant appeal is DISMISSED. The
assailed decision is AFFIRMED in toto.
SO ORDERED.[3]
The resolution[4] issued by the CA on July 8, 2009 denied the petitioner's
motion for reconsideration to the foregoing.
The ruling[5] of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela, which
was affirmed by the CA in the herein assailed decision and resolution, ordered the (1)
rescission of the contract of sale of real property entered into by Villamar and Balbino
Mangaoil (Mangaoil); and (2) return of the down payment made relative to the said
contract.
Antecedents Facts
The CA aptly summarized as follows the facts of the case prior to the filing by
Mangaoil of the complaint[6] for rescission of contract before the RTC:
Villamar is the registered owner of a 3.6080 hectares parcel
of land [hereinafter referred as the subject property] in San
Francisco, Manuel, Isabela covered by Transfer Certificate of Title
(TCT) No. T-92958-A. On March 30, 1998, she entered into
135
an Agreement with Mangaoil for the purchase and sale of said
“1. The price of the land is ONE HUNDRED AND
EIGHTY THOUSAND (180,000.00) PESOS per hectare but
only the 3.5000 hec. shall be paid and the rest shall be
given free, so that the total purchase or selling price shall
be [P]630,000.00 only;
2. ONE HUNDRED EIGHTY FIVE THOUSAND
(185,000.00) PESOS of the total price was already
received on March 27, 1998 for payment of the loan
secured by the certificate of title covering the land in
favor of the Rural Bank of Cauayan, San Manuel Branch,
San Manuel, Isabela [Rural Bank of Cauayan], in order
that the certificate of title thereof be withdrawn and
released from the said bank, and the rest shall be for
the payment of the mortgag[e]s in favor of Romeo
Lacaden and Florante Parangan;
3. After the release of the certificate of title
covering the land subject-matter of this agreement, the
necessary deed of absolute sale in favor of the PARTY OF
THE SECOND PART shall be executed and the transfer be
immediately effected so that the latter can apply for a
loan from any lending institution using the corresponding
certificate of title as collateral therefor, and the proceeds
of the loan, whatever be the amount, be given to the
PARTY OF THE FIRST PART;
4. Whatever balance left from the agreed purchase
price of the land subject matter hereof after deducting
the proceed of the loan and the [P]185,000.00 already
received as above-mentioned, the PARTY OF THE SECOND
PART shall pay unto the PARTY OF THE FIRST PART not
later than June 30, 1998 and thereafter the parties shall
be released of any obligations for and against each other;
xxx”
 On April 1, 1998, the parties executed a Deed of Absolute 7. That, also, the plaintiff could not physically, actually and
Sale whereby Villamar (then Estelita Bernabe) transferred the materially posses[s] and cultivate the said land because the private
subject parcel of land to Mangaoil for and in consideration of mortgage[e]s and/or present possessors refuse to vacate the
[P]150,000.00. same;

In a letter dated September 18, 1998, Mangaoil informed

Villamar that he was backing out from the sale agreed upon giving
as one of the reasons therefor: xxxx

“3. That the area is not yet fully cleared by
incumbrances as there are tenants who are not willing to
vacate the land without giving them back the amount that
they mortgaged the land.”
Mangaoil demanded refund of his [P]185,000.00 down payment.
Reiterating said demand in another letter dated April 29, 1999, the
same, however, was unheeded.[7] x x x (Citations omitted)
On January 28, 2002, the respondent filed before the RTC a complaint [8] for
rescission of contract against the petitioner. In the said complaint, the respondent
sought the return of P185,000.00 which he paid to the petitioner, payment of
interests thereon to be computed from March 27, 1998 until the suit's termination,
and the award of damages, costs and P20,000.00 attorney's fees. The respondent's
factual allegations were as follows:
11. That on September 18, 1998, the plaintiff sent a letter
to the defendant demanding a return of the amount so advanced
by him, but the latter ignored the same, x x x;
12. That, again, on April 29, 1999, the plaintiff sent to the
defendant another demand letter but the latter likewise ignored
the same, x x x;
13. That, finally, the plaintiff notified the defendant by a
notarial act of his desire and intention to rescind the said contract
of sale, xxx;
x x x x.[9] (Citations omitted)

5. That as could be gleaned the “Agreement” (Annex “A”),

In the respondent’s answer to the complaint, she averred that she had complied
the plaintiff [Mangaoil] handed to the defendant [Villamar] the sum
with her obligations to the respondent. Specifically, she claimed having caused the
of [P]185,000.00 to be applied as follows; [P]80,000 was for the
release of TCT No. T-92958-A by the Rural Bank of Cauayan and its delivery to a
redemption of the land which was mortgaged to the Rural Bank of
certain “Atty. Pedro C. Antonio” (Atty. Antonio). The petitioner alleged that Atty.
Cauayan, San Manuel Branch, San Manuel, Isabela, to enable the
Antonio was commissioned to facilitate the transfer of the said title in the
plaintiff to get hold of the title and register the sale x x
respondent's name. The petitioner likewise insisted that it was the respondent who
x and[P]105,000.00 was for the redemption of the said land from
unceremoniously withdrew from their agreement for reasons only the latter knew.
private mortgages to enable plaintiff to posses[s] and cultivate the
same;
The Ruling of the RTC

On September 9, 2005, the RTC ordered the rescission of the agreement and the
deed of absolute sale executed between the respondent and the petitioner. The
6. That although the defendant had already long redeemed
petitioner was, thus directed to return to the respondent the sum of P185,000.00
the said land from the said bank and withdrawn TCT No. T-92958-A,
which the latter tendered as initial payment for the purchase of the subject property.
she has failed and refused, despite repeated demands, to hand over
The RTC ratiocinated that:
136

the said title to the plaintiff and still refuses and fails to do so;
 There is no dispute that the defendant sold the LAND to the
plaintiff for [P]630,000.00 with down payment of [P]185,000.00.
There is no evidence presented if there were any other partial
payments made after the perfection of the contract of sale.
Article 1458 of the Civil Code provides:
“Art. 1458. By the contract of sale[,] one of the
contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay therefore
a price certain in money or its equivalent.”
As such, in a contract of sale, the obligation of the vendee to
pay the price is correlative of the obligation of the vendor to deliver
the thing sold. It created or established at the same time, out of the
same course, and which result in mutual relations of creditor and
debtor between the parties.
The claim of the plaintiff that the LAND has not been
delivered to him was not refuted by the defendant. Considering
that defendant failed to deliver to him the certificate of title and of
the possession over the LAND to the plaintiff, the contract must be
rescinded pursuant to Article 1191 of the Civil Code which, in part,
provides:
“Art. 1191. The power of rescind obligations is
implied in reciprocal ones in case one of the obligors should not
comply with what is incumbent upon him.”[10]
The petitioner filed before the CA an appeal to challenge the foregoing. She
ascribed error on the part of the RTC when the latter ruled that the agreement and
deed of sale executed by and between the parties can be rescinded as she failed to
deliver to the respondent both the subject property and the certificate of title
covering the same.
The Ruling of the CA
On February 20, 2009, the CA rendered the now assailed decision dismissing the
137
petitioner’s appeal based on the following grounds:
Burden of proof is the duty of a party to prove the truth of
his claim or defense, or any fact in issue necessary to establish his
claim or defense by the amount of evidence required by law. In civil
cases, the burden of proof is on the defendant if he alleges, in his
answer, an affirmative defense, which is not a denial of an
essential ingredient in the plaintiff's cause of action, but is one
which, if established, will be a good defense – i.e., an “avoidance”
of the claim, which prima facie, the plaintiff already has because of
the defendant's own admissions in the pleadings.
Defendant-appellant Villamar's defense in this case was
an affirmative defense. She did not deny plaintiff-appellee’s
allegation that she had an agreement with plaintiff-appellee for the
sale of the subject parcel of land. Neither did she deny that she was
obliged under the contract to deliver the certificate of title to
plaintiff-appellee immediately after said title/property was
redeemed from the bank.What she rather claims is that she
already complied with her obligation to deliver the title to
plaintiff-appellee when she delivered the same to Atty. Antonio as
it was plaintiff-appellee himself who engaged the services of said
lawyer to precisely work for the immediate transfer of said title in
his name. Since, however, this affirmative defense as alleged in
defendant-appellant's answer was not admitted by plaintiff-
appellee, it then follows that it behooved the defendant-appellant
to prove her averments by preponderance of evidence.
Yet, a careful perusal of the record shows that the
defendant-appellant failed to sufficiently prove said affirmative
defense. She failed to prove that in the first place, “Atty. Antonio”
existed to receive the title for and in behalf of plaintiff-appellee.
Worse, the defendant-appellant failed to prove that Atty. Antonio
received said title “as allegedly agreed upon.”
We likewise sustain the RTC's finding that defendant-
appellant V[i]llamar failed to deliver possession of the subject
property to plaintiff-appellee Mangaoil. As correctly observed by
the RTC - “[t]he claim of the plaintiff that the land has not been
delivered to him was not refuted by the defendant.” Not only that.
On cross-examination, the defendant-appellant gave Us insight
on why no such delivery could be made, viz.:
 “x x x x the ownership is to pass, and that the buyer shall from
that time have and enjoy the legal and peaceful
Q: So, you were not able to deliver this property to Mr. Mangaoil possession of the thing;
just after you redeem the property because of the presence of these
two (2) persons, is it not? (2) An implied warranty that the thing shall be free
from any hidden defaults or defects, or any change or
encumbrance not declared or known to the buyer.

xxx x x x.”

A: Yes, sir. shows that actual, and not mere constructive delivery is warrantied
by the seller to the buyer. “(P)eaceful possession of the thing” sold
Q: Forcing you to file the case against them and which can hardly be enjoyed in a mere constructive delivery.
according to you, you have won, is it not?

A: Yes, sir.
The obligation of defendant-appellant Villamar to transfer
Q: And now at present[,] you are in actual possession of ownership and deliver possession of the subject parcel of land was
the land? her correlative obligation to plaintiff-appellee in exchange for the
latter's purchase price thereof. Thus, if she fails to comply with
what is incumbent upon her, a correlative right to rescind such
A: Yes, sir. x x x”
contract from plaintiff-appellee arises, pursuant to Article 1191 of
the Civil Code.[11] x x x (Citations omitted)
With the foregoing judicial admission, the RTC could not
have erred in finding that defendant-[appellant] failed to deliver the
The Issues
possession of the property sold, to plaintiff-appellee.

Aggrieved, the petitioner filed before us the instant petition and submits the
following issues for resolution:
Neither can We agree with defendant-appellant in her
I.
argument that the execution of the Deed of Absolute Sale by the
parties is already equivalent to a valid and constructive delivery of
the property to plaintiff-appellee. Not only is it doctrinally settled WHETHER THE FAILURE OF PETITIONER-SELLER TO DELIVER THE
that in a contract of sale, the vendor is bound to transfer the CERTIFICATE OF TITLE OVER THE PROPERTY TO RESPONDENT-
ownership of, and to deliver the thing that is the object of the BUYER IS A BREACH OF OBLIGATION IN A CONTRACT OF SALE OF
sale, the way Article 1547 of the Civil Code is worded, viz.: REAL PROPERTY THAT WOULD WARRANT RESCISSION OF THE
CONTRACT;
“Art. 1547. In a contract of sale, unless a contrary
intention appears, there is: II.

(1) An implied warranty on the part of the WHETHER PETITIONER IS LIABLE FOR BREACH OF OBLIGATION IN A
138

seller that he has a right to sell the thing at the time when CONTRACT OF SALE FOR FAILURE OF RESPONDENT[-]BUYER TO
 IMMEDIATELY TAKE ACTUAL POSSESSION OF THE PROPERTY
NOTWITHSTANDING THE ABSENCE OF ANY STIPULATION IN THE
CONTRACT PROVIDING FOR THE SAME;
III.
WHETHER THE EXECUTION OF A DEED OF SALE OF REAL PROPERTY
IN THE PRESENT CASE IS ALREADY EQUIVALENT TO A VALID AND
CONSTRUCTIVE DELIVERY OF THE PROPERTY TO THE BUYER;
IV.
WHETHER OR NOT THE CONTRACT OF SALE SUBJECT MATTER OF
THIS CASE SHOULD BE RESCINDED ON SLIGHT OR CASUAL BREACH;
V.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING
THE DECISION OF THE RTC ORDERING THE RESCISSION OF THE
CONTRACT OF SALE[.][12]
The Petitioner's Arguments
The petitioner avers that the CA, in ordering the rescission of the agreement and
deed of sale, which she entered into with the respondent, on the basis of her alleged
failure to deliver the certificate of title, effectively imposed upon her an extra duty
which was neither stipulated in the contract nor required by law. She argues that
under Articles 1495[13]and 1496[14] of the New Civil Code (NCC), the obligation to
deliver the thing sold is complied with by a seller who executes in favor of a buyer an
instrument of sale in a public document. Citing Chua v. Court of Appeals,[15] she claims
that there is a distinction between transferring a certificate of title in the buyer's
name, on one hand, and transferring ownership over the property sold, on the
other. The latter can be accomplished by the seller's execution of an instrument of
sale in a public document. The recording of the sale with the Registry of Deeds and
the transfer of the certificate of title in the buyer's name are necessary only to bind
third parties to the transfer of ownership.[16]
The petitioner contends that in her case, she had already complied with her
obligations under the agreement and the law when she had caused the release of TCT
No. T-92958-A from the Rural Bank of Cauayan, paid individual mortgagees Romeo
139
Lacaden (Lacaden) and Florante Parangan (Paranga), and executed an absolute deed
of sale in the respondent's favor. She adds that before T-92958-A can be cancelled
and a new one be issued in the respondent's favor, the latter decided to withdraw
from their agreement. She also points out that in the letters seeking for an outright
rescission of their agreement sent to her by the respondent, not once did he demand
for the delivery of TCT.
The petitioner insists that the respondent's change of heart was due to (1) the
latter's realization of the difficulty in determining the subject property's perimeter
boundary; (2) his doubt that the property he purchased would yield harvests in the
amount he expected; and (3) the presence of mortgagees who were not willing to
give up possession without first being paid the amounts due to them. The petitioner
contends that the actual reasons for the respondent's intent to rescind their
agreement did not at all constitute a substantial breach of her obligations.
The petitioner stresses that under Article 1498 of the NCC, when a sale is made
through a public instrument, its execution is equivalent to the delivery of the thing
which is the contract's object, unless in the deed, the contrary appears or can be
inferred. Further, in Power Commercial and Industrial Corporation v. CA,[17] it was
ruled that the failure of a seller to eject lessees from the property he sold and to
deliver actual and physical possession, cannot be considered a substantial breach,
when such failure was not stipulated as a resolutory or suspensive condition in the
contract and when the effects and consequences of the said failure were not
specified as well. The execution of a deed of sale operates as a formal or symbolic
delivery of the property sold and it already authorizes the buyer to use the
instrument as proof of ownership.[18]
The petitioner argues that in the case at bar, the agreement and the absolute
deed of sale contains no stipulation that she was obliged to actually and physically
deliver the subject property to the respondent. The respondent fully knew Lacaden's
and Parangan's possession of the subject property. When they agreed on the sale of
the property, the respondent consciously assumed the risk of not being able to take
immediate physical possession on account of Lacaden's and Parangan's presence
therein.
The petitioner likewise laments that the CA allegedly misappreciated the
evidence offered before it when it declared that she failed to prove the existence of
Atty. Antonio. For the record, she emphasizes that the said lawyer prepared and
notarized the agreement and deed of absolute sale which were executed between
the parties. He was also the petitioner’s counsel in the proceedings before the RTC.
Atty. Antonio was also the one asked by the respondent to cease the transfer of the
title over the subject property in the latter's name and to return the money he paid in
advance.
 The Respondent's Contentions
In the respondent's comment,[19] he seeks the dismissal of the instant petition.
He invokes Articles 1191 and 1458 to argue that when a seller fails to transfer the
ownership and possession of a property sold, the buyer is entitled to rescind the
contract of sale. Further, he contends that the execution of a deed of absolute sale
does not necessarily amount to a valid and constructive delivery. In Masallo v.
Cesar,[20] it was ruled that a person who does not have actual possession of real
property cannot transfer constructive possession by the execution and delivery of a
public document by which the title to the land is transferred. In Addison v. Felix and
Tioco,[21] the Court was emphatic that symbolic delivery by the execution of a public
instrument is equivalent to actual delivery only when the thing sold is subject to the
control of the vendor.
Our Ruling
The instant petition is bereft of merit.
There is only a single issue for resolution in the instant petition, to wit, whether
or not the failure of the petitioner to deliver to the respondent both the physical
possession of the subject property and the certificate of title covering the same
amount to a substantial breach of the former's obligations to the latter constituting a
valid cause to rescind the agreement and deed of sale entered into by the parties.
We rule in the affirmative
The RTC and the CA both found that the petitioner failed to comply with her
obligations to deliver to the respondent both the possession of the subject property
and the certificate of title covering the same.
Although Articles 1458, 1495 and 1498 of the NCC and case law do not
generally require the seller to deliver to the buyer the physical possession of the
property subject of a contract of sale and the certificate of title covering the same,
the agreement entered into by the petitioner and the respondent provides
otherwise. However, the terms of the agreement cannot be considered as violative
of law, morals, good customs, public order, or public policy, hence, valid.
Article 1458 of the NCC obliges the seller to transfer the ownership of and to
deliver a determinate thing to the buyer, who shall in turn pay therefor a price certain
in money or its equivalent. In addition thereto, Article 1495 of the NCC binds the
140
seller to warrant the thing which is the object of the sale. On the other hand, Article
1498 of the same code provides that when the sale is made through a public
instrument, the execution thereof shall be equivalent to the delivery of the thing
which is the object of the contract, if from the deed, the contrary does not appear or
cannot clearly be inferred.
In the case of Chua v. Court of Appeals,[22] which was cited by the petitioner, it
was ruled that “when the deed of absolute sale is signed by the parties and notarized,
then delivery of the real property is deemed made by the seller to the buyer.” [23] The
transfer of the certificate of title in the name of the buyer is not necessary to confer
ownership upon him.
In the case now under our consideration, item nos. 2 and 3 of the agreement
entered into by the petitioner and the respondent explicitly provide:
2. ONE HUNDRED EIGHTY FIVE THOUSAND (P185,000.00)
PESOS of the total price was already received on March 27, 1998
for payment of the loan secured by the certificate of title covering
the land in favor of the Rural Bank of Cauayan, San Manuel Branch,
San Manuel, Isabela, in order that the certificate of title thereof be
withdrawn and released from the said bank, and the rest shall be
for the payment of the mortgages in favor of Romeo Lacaden and
Florante Parangan;
3. After the release of the certificate of title covering the land
subject-matter of this agreement, the necessary deed of absolute
sale in favor of the PARTY OF THE SECOND PART shall be executed
and the transfer be immediately effected so that the latter can
apply for a loan from any lending institution using the
corresponding certificate of title as collateral therefor, and the
proceeds of the loan, whatever be the amount, be given to the
PARTY OF THE FIRST PART;[24] (underlining supplied)
As can be gleaned from the agreement of the contending parties, the
respondent initially paid the petitioner P185,000.00 for the latter to pay the loan
obtained from the Rural Bank of Cauayan and to cause the release from the said bank
of the certificate of title covering the subject property. The rest of the amount shall
be used to pay the mortgages over the subject property which was executed in favor
of Lacaden and Parangan. After the release of the TCT, a deed of sale shall be
executed and transfer shall be immediately effected so that the title covering the
subject property can be used as a collateral for a loan the respondent will apply for,
the proceeds of which shall be given to the petitioner.
 Under Article 1306 of the NCC, the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order or public policy.
While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the case
of Chua do not impose upon the petitioner the obligation to physically deliver to the
respondent the certificate of title covering the subject property or cause the transfer
in the latter's name of the said title, a stipulation requiring otherwise is not
prohibited by law and cannot be regarded as violative of morals, good customs,
public order or public policy. Item no. 3 of the agreement executed by the parties
expressly states that “transfer [shall] be immediately effected so that the latter can
apply for a loan from any lending institution using the corresponding certificate of
title as collateral therefore.” Item no. 3 is literal enough to mean that there should be
physical delivery of the TCT for how else can the respondent use it as a collateral to
obtain a loan if the title remains in the petitioner’s possession. We agree with the RTC
and the CA that the petitioner failed to prove that she delivered the TCT covering the
subject property to the respondent. What the petitioner attempted to establish was
that she gave the TCT to Atty. Antonio whom she alleged was commissioned to effect
the transfer of the title in the respondent's name. Although Atty. Antonio's existence
is certain as he was the petitioner’s counsel in the proceedings before the RTC, there
was no proof that the former indeed received the TCT or that he was commissioned
to process the transfer of the title in the respondent's name.
It is likewise the petitioner’s contention that pursuant to Article 1498 of the
NCC, she had already complied with her obligation to deliver the subject property
upon her execution of an absolute deed of sale in the respondent’s favor. The
petitioner avers that she did not undertake to eject the mortgagors Parangan and
Lacaden, whose presence in the premises of the subject property was known to the
respondent.
We are not persuaded.
In the case of Power Commercial and Industrial Corporation [25] cited by the
petitioner, the Court ruled that the failure of the seller to eject the squatters from the
property sold cannot be made a ground for rescission if the said ejectment was not
stipulated as a condition in the contract of sale, and when in the negotiation stage,
the buyer's counsel himself undertook to eject the illegal settlers.
The circumstances surrounding the case now under our consideration are
different. In item no. 2 of the agreement, it is stated that part of the P185,000.00
initially paid to the petitioner shall be used to pay the mortgagors, Parangan and
141
Lacaden. While the provision does not expressly impose upon the petitioner the
obligation to eject the said mortgagors, the undertaking is necessarily implied.
Cessation of occupancy of the subject property is logically expected from the
mortgagors upon payment by the petitioner of the amounts due to them
We note that in the demand letter[26] dated September 18, 1998, which was sent
by the respondent to the petitioner, the former lamented that “the area is not yet
fully cleared of incumbrances as there are tenants who are not willing to vacate the
land without giving them back the amount that they mortgaged the land.” Further, in
the proceedings before the RTC conducted after the complaint for rescission was
filed, the petitioner herself testified that she won the ejectment suit against the
mortgagors “only last year”.[27] The complaint was filed on September 8, 2002 or
more than four years from the execution of the parties' agreement. This means that
after the lapse of a considerable period of time from the agreement's execution, the
mortgagors remained in possession of the subject property.
Notwithstanding the absence of stipulations in the agreement and
absolute deed of sale entered into by Villamar and Mangaoil expressly indicating
the consequences of the former's failure to deliver the physical possession of the
subject property and the certificate of title covering the same, the latter is entitled
to demand for the rescission of their contract pursuant to Article 1191 of the NCC.
We note that the agreement entered into by the petitioner and the respondent
only contains three items specifying the parties' undertakings. In item no. 5, the
parties consented “to abide with all the terms and conditions set forth in this
agreement and never violate the same.”[28]
Article 1191 of the NCC is clear that “the power to rescind obligations is implied
in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.” The respondent cannot be deprived of his right to demand for
rescission in view of the petitioner’s failure to abide with item nos. 2 and 3 of the
agreement. This remains true notwithstanding the absence of express stipulations in
the agreement indicating the consequences of breaches which the parties may
commit. To hold otherwise would render Article 1191 of the NCC as useless.
Article 1498 of the NCC generally considers the execution of a public
instrument as constructive delivery by the seller to the buyer of the property
subject of a contract of sale. The case at bar, however, falls among the exceptions
to the foregoing rule since a mere presumptive and not conclusive delivery is
created as the respondent failed to take material possession of the subject
property.
 Further, even if we were to assume for argument's sake that the agreement
entered into by the contending parties does not require the delivery of the physical
possession of the subject property from the mortgagors to the respondent, still, the
petitioner's claim that her execution of an absolute deed of sale was already
sufficient as it already amounted to a constructive delivery of the thing sold which
Article 1498 of the NCC allows, cannot stand.
rescission of the agreement and absolute deed of sale entered into by Estelita
Villamar and Balbino Mangaoil and the return of the down payment made for the
purchase of the subject property, are AFFIRMED. However, pursuant to our ruling
in Eastern Shipping Lines, Inc. v. CA,[31] an interest of 12% per annum is imposed on
the sum ofP185,000.00 to be returned to Mangaoil to be computed from the date
of finality of this Decision until full satisfaction thereof.

In Philippine Suburban Development Corporation v. The Auditor General,[29] we SO ORDERED.

held:
BIENVENIDO L. REYES
When the sale of real property is made in a public instrument, the
execution thereof is equivalent to the delivery of the thing object of Associate Justice
the contract, if from the deed the contrary does not appear or
cannot clearly be inferred.

In other words, there is symbolic delivery of the property

subject of the sale by the execution of the public instrument, unless
from the express terms of the instrument, or by clear inference
therefrom, this was not the intention of the parties. Such would be
the case, for instance, x x x where the vendor has no control over
the thing sold at the moment of the sale, and, therefore, its
material delivery could not have been made.[30] (Underlining
supplied and citations omitted)

Stated differently, as a general rule, the execution of a public instrument

amounts to a constructive delivery of the thing subject of a contract of sale. However,
exceptions exist, among which is when mere presumptive and not conclusive delivery
is created in cases where the buyer fails to take material possession of the subject of
sale. A person who does not have actual possession of the thing sold cannot transfer
constructive possession by the execution and delivery of a public instrument.

In the case at bar, the RTC and the CA found that the petitioner failed to deliver
to the respondent the possession of the subject property due to the continued
presence and occupation of Parangan and Lacaden. We find no ample reason to
reverse the said findings. Considered in the light of either the agreement entered into
by the parties or the pertinent provisions of law, the petitioner failed in her
undertaking to deliver the subject property to the respondent.
142

IN VIEW OF THE FOREGOING, the instant petition is DENIED. The February 20,
2009 Decision and July 8, 2009 Resolution of the Court of Appeals, directing the
 38. G.R. No. L-39378 August 28, 1984
GENEROSA AYSON-SIMON, plaintiff-appellee, vs.
NICOLAS ADAMOS and VICENTA FERIA, defendants-appellants.
Wenceslao V. Jarin for plaintiff-appellee.
Arnovit, Lacre & Adamos for defendants-appellants.
MELENCIO-HERRERA, J.:
Originally, this was an appeal by defendants from the Decision of the then Court of
First Instance of Manila, Branch XX, in Civil Case No. 73942, to the Court of Appeals
(now Intermediate Appellate Court), which Tribunal, certified the case to us because
the issue is a pure question of law.
On December 13, 1943, Nicolas Adamos and Vicente Feria, defendants-appellants
herein, purchased two lots forming part of the Piedad Estate in Quezon City, with an
area of approximately 56,395 square meters, from Juan Porciuncula. Sometime
thereafter, the successors-in-interest of the latter filed Civil Case No. 174 in the then
Court of First Instance of Quezon City for annulment of the sale and the cancellation
of Transfer Certificate of Title No. 69475, which had been issued to defendants-
appellants by virtue of the disputed sale. On December 18, 1963, the Court rendered
a Decision annulling the sale, cancelling TCT 69475, and authorizing the issuance of a
new title in favor of Porciuncula's successors-in-interest. The said judgment was
affirmed by the Appellate Court and had attained finality.
In the meantime, on May 29, 1946, during the pendency of the above-mentioned
case, defendants-appellants sold to GENEROSA Ayson Simon, plaintiff-appellee
herein, the two lots in question for P3,800.00 each, plus an additional P800.00 paid
subsequently for the purpose of facilitating the issuance of new titles in GENEROSA's
name. Due to the failure of defendants-appellants to comply with their commitment
to have the subdivision plan of the lots approved and to deliver the titles and
possession to GENEROSA, the latter filed suit for specific performance before the
Court of First Instance of Quezon City on September 4, 1963 (Civil Case No. Q-7275).
On January 20, 1964, said Court ordered:
WHEREFORE, the plaintiff is declared entitled to a summary
judgment and the defendants are hereby ordered to have the subdivision
of Lot No. 6, Block No. 2, and Lot No. 11, Block No. 3, relocated and
resurveyed and the subdivision plan approved and, if not possible for one
143
reason or another, and in case of the absence or loss of said subdivision, to
cause and effect the subdivision of the said lots and deliver the titles and
possession thereof to the plaintiff. As to the claim and counterclaim for
damages, let the hearing thereon be deferred until further move by the
parties. 1
However, since execution of the foregoing Order was rendered impossible because of
the judgment in Civil Case No. 174, which earlier declared the sale of the lots in
question by Juan Porciuncula to defendants-appellants to be null and void,
GENEROSA filed, on August 16, 1968, another suit in the Court of First Instance of
Manila (Civil Case No. 73942) for rescission of the sale with damages. On June 7,
1969, the Court rendered judgment, the dispositive portion of which reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against defendants, ordering the latter jointly and severally, to pay the
former the sum of P7,600.00, the total amount received by them from her
as purchase price of the two lots, with legal rate of interest from May 29,
1946 until fully paid; another sum of P800.00, with legal rate 6f interest
from August 1, 1966 until fully paid; the sum of P1,000 for attorney's fees;
and the costs of this suit. 2
Hence, the appeal before the Appellate Court on the ground that GENEROSA's action
had prescribed, considering that she had only four years from May 29, 1946, the date
of sale, within which to rescind said transaction, and that her complaint for specific
performance may be deemed as a waiver of her right to rescission since the
fulfillment and rescission of an obligation are alternative and not cumulative
remedies.
The appeal is without merit. The Trial Court presided by then Judge, later Court of
Appeals Associate Justice Luis B. Reyes, correctly resolved the issues, reiterated in the
assignments of error on appeal, as follows:
Defendants contend (1) that the fulfillment and the rescission of the
obligation in reciprocal ones are alternative remedies, and plaintiff having
chosen fulfillment in Civil Case No. Q- 7525, she cannot now seek
rescission; and (2) that even if plaintiff could seek rescission the action to
rescind the obligation has prescribed.
The first contention is without merit. The rule that the injured party
can only choose between fulfillment and rescission of the obligation, and
cannot have both, applies when the obligation is possible of fulfillment. If,
as in this case, the fulfillment has become impossible, Article 1191 3 allows
the injured party to seek rescission even after he has chosen fulfillment.
 True it is that in Civil Case No. 7275 the Court already rendered a SO ORDERED.
Decision in favor of plaintiff, but since defendants cannot fulfill their
obligation to deliver the titles to and possession of the lots to plaintiff, the Teehankee, Actg. C.J., Plana, Relova,Gutierrez, Jr. and De la Fuente, JJ., concur.
portion of the decision requiring them to fulfill their obligations is without
force and effect. Only that portion relative to the payment of damages
remains in the dispositive part of the decision, since in either case
(fulfillment or rescission) defendants may be required to pay damages.

The next question to determine is whether the action to rescind the

obligation has prescribed.

Article 1191 of the Civil Code provides that the injured party may
also seek rescission, if the fulfillment should become impossible. The cause
of action to claim rescission arises when the fulfillment of the obligation
became impossible when the Court of First Instance of Quezon City in Civil
Case No. 174 declared the sale of the land to defendants by Juan
Porciuncula a complete nullity and ordered the cancellation of Transfer
Certificate of Title No. 69475 issued to them. Since the two lots sold to
plaintiff by defendants form part of the land involved in Civil Case No. 174,
it became impossible for defendants to secure and deliver the titles to and
the possession of the lots to plaintiff. But plaintiff had to wait for the
finality of the decision in Civil Case No. 174, According to the certification of
the clerk of the Court of First Instance of Quezon City (Exhibit "E-2"), the
decision in Civil Case No. 174 became final and executory "as per entry of
Judgment dated May 3, 1967 of the Court of Appeals." The action for
rescission must be commenced within four years from that date, May 3,
1967. Since the complaint for rescission was filed on August 16, 1968, the
four year period within which the action must be commenced had not
expired.

Defendants have the obligation to return to plaintiff the amount of

P7,600.00 representing the purchase price of the two lots, and the amount
of P800.00 which they received from plaintiff to expedite the issuance of
titles but which they could not secure by reason of the decision in Civil Case
No. 174. Defendant has to pay interest at the legal rate on the amount of
P7,600.00 from May 29, 1946, when they received the amount upon the
execution of the deeds of sale, and legal interest on the P800.00 from
August 1, 1966, when they received the same from plaintiff. 4

WHEREFORE, the appealed judgment of the former Court of First Instance of Manila,
Branch XX, in Civil Case No. 73942, dated June 7, 1969, is hereby affirmed in toto.
144

Costs against defendants-appellants.

 39. G.R No. 188986 B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
GALILEO A. MAGLASANG, doing business under the name GL D. ENGINE CONTROL SYSTEM
Enterprises, Petitioner, vs. E. WEATHER CONTROL SYSTEM
NORTHWESTERN INC., UNIVERSITY, Respondent. F. ECDIS SYSTEM
G. STEERING WHEEL SYSTEM
DECISION H. BRIDGE CONSOLE
TOTAL COST: Php 3,800,000.00
SERENO, CJ.:
LESS: OLD MARITIME
EQUIPMENT TRADE-IN VALUE 1,000,000.00
Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009 Court of
Appeals (CA) Decision in CA-G.R. CV No. 88989,1 which modified the Regional Trial DISCOUNT 100,000.00
Court (RTC) Decision of 8 January 2007 in Civil Case No. Q-04-53660.2 The CA held
that petitioner substantially breached its contracts with respondent for the PROJECT COST (MATERIALS & INSTALLATION) PhP 2,700,000.00
installation of an integrated bridge system (IBS).
(Emphasis in the original)
3
The antecedent .facts are as follows:
The second contract essentially contains the same terms and conditions as follows:6
On 10 June 2004, respondent Northwestern University (Northwestern), an
educational institution offering maritime-related courses, engaged the services of a That in consideration of the payment herein mentioned to be made by the First Party
Quezon City-based firm, petitioner GL Enterprises, to install a new IBS in Laoag City. (defendant), the Second Party agrees to furnish, supply, install & integrate the most
The installation of an IBS, used as the students’ training laboratory, was required by modern INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK
the Commission on Higher Education (CHED) before a school could offer maritime BOAT in accordance with the general conditions, plans and specifications of this
transportation programs.4 contract.

Since its IBS was already obsolete, respondent required petitioner to supply and SUPPLY & INSTALLATION OF THE FOLLOWING:
install specific components in order to form the most modern IBS that would be 1. ARPA RADAR SIMULATION ROOM
acceptable to CHED and would be compliant with the standards of the International xxxx
Maritime Organization (IMO). For this purpose, the parties executed two contracts. 2. GMDSS SIMULATION ROOM
xxxx
The first contract partly reads:5 TOTAL COST: PhP 270,000.00
(Emphasis in the original)
That in consideration of the payment herein mentioned to be made by the First Party
(defendant), the Second Party agrees to furnish, supply, install and integrate the most Common to both contracts are the following provisions: (1) the IBS and its
modern INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK components must be compliant with the IMO and CHED standard and with manuals
BOAT in accordance with the general conditions, plans and specifications of this for simulators/major equipment; (2) the contracts may be terminated if one party
contract. commits a substantial breach of its undertaking; and (3) any dispute under the
agreement shall first be settled mutually between the parties, and if settlement is not
SUPPLY & INSTALLATION OF THE FOLLOWING: obtained, resort shall be sought in the courts of law.
INTEGRATED BRIDGE SYSTEM
145

A. 2-RADAR SYSTEM
 Subsequently, Northwestern paid ₱1 million as down payment to GL Enterprises. The
former then assumed possession of Northwestern’s old IBS as trade-in payment for
its service. Thus, the balance of the contract price remained at ₱1.97 million.7
Two months after the execution of the contracts, GL Enterprises technicians delivered
various materials to the project site. However, when they started installing the
components, respondent halted the operations. GL Enterprises then asked for an
explanation.8
Northwestern justified the work stoppage upon its finding that the delivered
equipment were substandard.9 It explained further that GL Enterprises violated the
terms and conditions of the contracts, since the delivered components (1) were old;
(2) did not have instruction manuals and warranty certificates; (3) contained
indications of being reconditioned machines; and (4) did not meet the IMO and CHED
standards. Thus, Northwestern demanded compliance with the agreement and
suggested that GL Enterprises meet with the former’s representatives to iron out the
situation.
Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a
Complaint10 for breach of contract and prayed for the following sums: ₱1.97 million,
representing the amount that it would have earned, had Northwestern not stopped it
from performing its tasks under the two contracts; at least ₱100,000 as moral
damages; at least ₱100,000 by way of exemplary damages; at least ₱100,000 as
attorney’s fees and litigation expenses; and cost of suit. Petitioner alleged that
Northwestern breached the contracts by ordering the work stoppage and thus
preventing the installation of the materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted that since the
equipment delivered were not in accordance with the specifications provided by the
contracts, all succeeding works would be futile and would entail unnecessary
expenses. Hence, it prayed for the rescission of the contracts and made a compulsory
counterclaim for actual, moral, and exemplary damages, and attorney’s fees.
The RTC held both parties at fault. It found that Northwestern unduly halted the
operations, even if the contracts called for a completed project to be evaluated by
the CHED. In turn, the breach committed by GL Enterprises consisted of the delivery
of substandard equipment that were not compliant with IMO and CHED standards as
required by the agreement.
Invoking the equitable principle that "each party must bear its own loss," the trial
court treated the contracts as impossible of performance without the fault of either
146
party or as having been dissolved by mutual consent. Consequently, it ordered
mutual restitution, which would thereby restore the parties to their original positions
as follows:11
Accordingly, plaintiff is hereby ordered to restore to the defendant all the equipment
obtained by reason of the First Contract and refund the downpayment of
₱1,000,000.00 to the defendant; and for the defendant to return to the plaintiff the
equipment and materials it withheld by reason of the non-continuance of the
installation and integration project. In the event that restoration of the old
equipment taken from defendant's premises is no longer possible, plaintiff is hereby
ordered to pay the appraised value of defendant's old equipment at ₱1,000,000.00.
Likewise, in the event that restoration of the equipment and materials delivered by
the plaintiff to the defendant is no longer possible, defendant is hereby ordered to
pay its appraised value at ₱1,027,480.00.
Moreover, plaintiff is likewise ordered to restore and return all the equipment
obtained by reason of the Second Contract, or if restoration or return is not possible,
plaintiff is ordered to pay the value thereof to the defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them pointing a finger at
the other party as the violator of the contracts, the appellate court ultimately
determined that GL Enterprises was the one guilty of substantial breach and liable for
attorney’s fees.
The CA appreciated that since the parties essentially sought to have an IBS compliant
with the CHED and IMO standards, it was GL Enterprises’ delivery of defective
equipment that materially and substantially breached the contracts. Although the
contracts contemplated a completed project to be evaluated by CHED, Northwestern
could not just sit idly by when it was apparent that the components delivered were
substandard.
The CA held that Northwestern only exercised ordinary prudence to prevent the
inevitable rejection of the IBS delivered by GL Enterprises. Likewise, the appellate
court disregarded petitioner’s excuse that the equipment delivered might not have
been the components intended to be installed, for it would be contrary to human
experience to deliver equipment from Quezon City to Laoag City with no intention to
use it.
This time, applying Article 1191 of the Civil Code, the CA declared the rescission of
the contracts. It then proceeded to affirm the RTC’s order of mutual restitution.
 Additionally, the appellate court granted ₱50,000 to Northwestern by way of
attorney’s fees.
Before this Court, petitioner rehashes all the arguments he had raised in the courts a
quo.12 He maintains his prayer for actual damages equivalent to the amount that he
would have earned, had respondent not stopped him from performing his tasks
under the two contracts; moral and exemplary damages; attorney’s fees; litigation
expenses; and cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is whether the CA
gravely erred in (1) finding substantial breach on the part of GL Enterprises; (2)
refusing petitioner’s claims for damages, and (3) awarding attorney’s fees to
Northwestern.
RULING OF THE COURT
Substantial Breaches of the Contracts
Although the RTC and the CA concurred in ordering restitution, the courts a quo,
however, differed on the basis thereof. The RTC applied the equitable principle of
mutual fault, while the CA applied Article 1191 on rescission.
The power to rescind the obligations of the injured party is implied in reciprocal
obligations, such as in this case. On this score, the CA correctly applied Article 1191,
which provides thus:
The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
The two contracts require no less than substantial breach before they can be
rescinded. Since the contracts do not provide for a definition of substantial breach
that would terminate the rights and obligations of the parties, we apply the definition
found in our jurisprudence.
147
This Court defined in Cannu v. Galang13 that substantial, unlike slight or casual
breaches of contract, are fundamental breaches that defeat the object of the parties
in entering into an agreement, since the law is not concerned with trifles. 14
The question of whether a breach of contract is substantial depends upon the
attending circumstances.15
In the case at bar, the parties explicitly agreed that the materials to be delivered must
be compliant with the CHED and IMO standards and must be complete with manuals.
Aside from these clear provisions in the contracts, the courts a quo similarly found
that the intent of the parties was to replace the old IBS in order to obtain CHED
accreditation for Northwestern’s maritime-related courses.
According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as amended
by CMO No. 13, Series of 2005, any simulator used for simulator-based training shall
be capable of simulating the operating capabilities of the shipboard equipment
concerned. The simulation must be achieved at a level of physical realism appropriate
for training objectives; include the capabilities, limitations and possible errors of such
equipment; and provide an interface through which a trainee can interact with the
equipment, and the simulated environment.
Given these conditions, it was thus incumbent upon GL Enterprises to supply the
components that would create an IBS that would effectively facilitate the learning of
the students.
However, GL Enterprises miserably failed in meeting its responsibility. As contained in
the findings of the CA and the RTC, petitioner supplied substandard equipment when
it delivered components that (1) were old; (2) did not have instruction manuals and
warranty certificates; (3) bore indications of being reconditioned machines; and, all
told, (4) might not have met the IMO and CHED standards. Highlighting the defects of
the delivered materials, the CA quoted respondent’s testimonial evidence as
follows:16
Q: In particular which of these equipment of CHED requirements were not complied
with?
A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the monitor of
the Radar. That is 16-inch and the gyrocompass with two (2) repeaters and the
history card. The gyrocompass - there is no marker, there is no model, there is no
serial number, no gimbal, no gyroscope and a bulb to work it properly to point the
true North because it is very important to the Cadets to learn where is the true North
being indicated by the Master Gyrocompass.
xxxx
 Q: Mr. Witness, one of the defects you noted down in this history card is that the
master gyrocompass had no gimbals, gyroscope and balls and was replaced with an
ordinary electric motor. So what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the gyrocompass to work so it
will point the true North but they being replaced with the ordinary motor used for
toys so it will not indicate the true North.
Q: So what happens if it will not indicate the true North?
A: It is very big problem for my cadets because they must, to learn into school where
is the true North and what is that equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an ordinary automobile.
And what is the implication of this?
A: Because. on board Ma’am, we are using the real steering wheel and the cadets will
be implicated if they will notice that the ship have the same steering wheel as the car
so it is not advisable for them.
Q:. And another one is that the gyrocompass repeater was only refurbished and it has
no serial number. What is wrong with that?
A: It should be original Ma’am because this gyro repeater, it must to repeat also the
true North being indicated by the Master Gyro Compass so it will not work properly, I
don’t know it will work properly. (Underscoring supplied)
Evidently, the materials delivered were less likely to pass the CHED standards,
because the navigation system to be installed might not accurately point to the true
north; and the steering wheel delivered was one that came from an automobile,
instead of one used in ships. Logically, by no stretch of the imagination could these
form part of the most modern IBS compliant with the IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the equipment it
delivered was substandard. However, it reiterates its rejected excuse that
Northwestern should have made an assessment only after the completion of the
IBS.17 Thus, petitioner stresses that it was Northwestern that breached the
agreement when the latter halted the installation of the materials for the IBS, even if
the parties had contemplated a completed project to be evaluated by CHED.
However, as aptly considered by the CA, respondent could not just "sit still and wait
for such day that its accreditation may not be granted by CHED due to the apparent
substandard equipment installed in the bridge system." 18 The appellate court
correctly emphasized that, by that time, both parties would have incurred more costs
for nothing.
148
Additionally, GL Enterprises reasons that, based on the contracts, the materials that
were hauled all the way from Quezon City to Laoag City under the custody of the four
designated installers might not have been the components to be used. 19 Without
belaboring the point, we affirm the conclusion of the CA and the RTC that the excuse
is untenable for being contrary to human experience.20
Given that petitioner, without justification, supplied substandard components for the
new IBS, it is thus clear that its violation was not merely incidental, but directly
related to the essence of the agreement pertaining to the installation of an IBS
compliant with the CHED and IMO standards.
Consequently, the CA correctly found substantial breach on the part of petitioner.
In contrast, Northwestern’s breach, if any, was characterized by the appellate court
as slight or casual.21 By way of negative definition, a breach is considered casual if it
does not fundamentally defeat the object of the parties in entering into an
agreement. Furthermore, for there to be a breach to begin with, there must be a
"failure, without legal excuse, to perform any promise which forms the whole or part
of the contract."22
Here, as discussed, the stoppage of the installation was justified. The action of
Northwestern constituted a legal excuse to prevent the highly possible rejection of
the IBS. Hence, just as the CA concluded, we find that Northwestern exercised
ordinary prudence to avert a possible wastage of time, effort, resources and also of
the ₱2.9 million representing the value of the new IBS.
Actual Damages, Moral and Exemplary Damages, and Attorney's Fees
As between the parties, substantial breach can clearly be attributed to GL
Enterprises.1âwphi1 Consequently, it is not the injured party who can claim damages
under Article 1170 of the Civil Code. For this reason, we concur in the result of the
CA's Decision denying petitioner actual damages in the form of lost earnings, as well
as moral and exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code allows the grant thereof
when the court deems it just and equitable that attorney's fees should be recovered.
An award of attorney's fees is proper if one was forced to litigate and incur expenses
to protect one's rights and interest by reason of an unjustified act or omission on the
part of the party from whom the award is sought. 23
 Since we affirm the CA's finding that it was not Northwestern but GL Enterprises that
breached the contracts without justification, it follows that the appellate court
correctly awarded attorney’s fees to respondent. Notably, this litigation could have
altogether been avoided if petitioner heeded respondent's suggestion to amicably
settle; or, better yet, if in the first place petitioner delivered the right materials as
required by the contracts.

IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of Appeals in CA-
G.R. CV No. 88989 is hereby AFFIRMED.

SO ORDERED.

MARIA LOURDES P. A. SERENO

Chief Justice, Chairperson
149
 40. G.R. No. 188064 | 2011-06-01 her businesses. As a gesture of friendship, respondent verbally offered to
conditionally buy petitioner's real properties for P4,200,000.00 payable on
MILA A. REYES, Petitioner, installment basis without interest and to assume the bank loan. To induce the
petitioner to accept her offer, respondent offered the following
vs. conditions/concessions:

VICTORIA T. TUPARAN, Respondent.

1. That the conditional sale will be cancelled if the plaintiff (petitioner) can find a
DECISION buyer of said properties for the amount of P6,500,000.00 within the next three (3)
months provided all amounts received by the plaintiff from the defendant
MENDOZA, J.: (respondent) including payments actually made by defendant to Farmers Savings and
Loan Bank would be refunded to the defendant with additional interest of six (6%)
Subject of this petition for review is the February 13, 2009 Decision [1] of the Court of monthly;
Appeals (CA) which affirmed with modification the February 22, 2006 Decision [2] of
the Regional Trial Court, Branch 172, Valenzuela City (RTC), in Civil Case No. 3945-V-
92, an action for Rescission of Contract with Damages.
2. That the plaintiff would continue using the space occupied by her and drugstore
and cosmetics store without any rentals for the duration of the installment payments;
On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for Rescission of
Contract with Damages against Victoria T. Tuparan (respondent) before the RTC. In
her Complaint, petitioner alleged, among others, that she was the registered owner
of a 1,274 square meter residential and commercial lot located in Karuhatan, 3. That there will be a lease for fifteen (15) years in favor of the plaintiff over the
Valenzuela City, and covered by TCT No. V-4130; that on that property, she put up a space for drugstore and cosmetics store at a monthly rental of only P8,000.00 after
three-storey commercial building known as RBJ Building and a residential apartment full payment of the stipulated installment payments are made by the defendant;
building; that since 1990, she had been operating a drugstore and cosmetics store on
the ground floor of RBJ Building where she also had been residing while the other
areas of the buildings including the sidewalks were being leased and occupied by
tenants and street vendors.
4. That the defendant will undertake the renewal and payment of the fire insurance
policies on the two (2) subject buildings following the expiration of the then existing
fire insurance policy of the plaintiff up to the time that plaintiff is fully paid of the
In December 1989, respondent leased from petitioner a space on the ground floor of total purchase price of P4,200,000.00. [3]
the RBJ Building for her pawnshop business for a monthly rental of P4,000.00. A close
friendship developed between the two which led to the respondent investing
thousands of pesos in petitioner's financing/lending business from February 7, 1990
After petitioner's verbal acceptance of all the conditions/concessions, both parties
to May 27, 1990, with interest at the rate of 6% a month.
worked together to obtain FSL Bank's approval for respondent to assume her
(petitioner's) outstanding bank account. The assumption would be part of
respondent's purchase price for petitioner's mortgaged real properties. FSL Bank
On June 20, 1988, petitioner mortgaged the subject real properties to the Farmers approved their proposal on the condition that petitioner would sign or remain as co-
Savings Bank and Loan Bank, Inc. (FSL Bank) to secure a loan of P2,000,000.00 maker for the mortgage obligation assumed by respondent.
payable in installments. On November 15, 1990, petitioner's outstanding account on
the mortgage reached P2,278,078.13. Petitioner then decided to sell her real
150

properties for at least P6,500,000.00 so she could liquidate her bank loan and finance

On November 26, 1990, the parties and FSL Bank executed the corresponding Deed
of Conditional Sale of Real Properties with Assumption of Mortgage. Due to their
close personal friendship and business relationship, both parties chose not to reduce
into writing the other terms of their agreement mentioned in paragraph 11 of the
complaint. Besides, FSL Bank did not want to incorporate in the Deed of Conditional
Sale of Real Properties with Assumption of Mortgage any other side agreement
between petitioner and respondent.
Under the Deed of Conditional Sale of Real Properties with Assumption of Mortgage,
respondent was bound to pay the petitioner a lump sum of P1.2 million pesos
without interest as part of the purchase price in three (3) fixed installments as
follows:
a) P200,000.00 - due January 31, 1991
b) P200,000.00 - due June 30, 1991
c) P800,000.00 - due December 31, 1991
Respondent, however, defaulted in the payment of her obligations on their due
dates. Instead of paying the amounts due in lump sum on their respective maturity
dates, respondent paid petitioner in small amounts from time to time. To
compensate for her delayed payments, respondent agreed to pay petitioner an
interest of 6% a month. As of August 31, 1992, respondent had only paid
P395,000.00, leaving a balance of P805,000.00 as principal on the unpaid installments
and P466,893.25 as unpaid accumulated interest.
Petitioner further averred that despite her success in finding a prospective buyer for
the subject real properties within the 3-month period agreed upon, respondent
reneged on her promise to allow the cancellation of their deed of conditional sale.
Instead, respondent became interested in owning the subject real properties and
even wanted to convert the entire property into a modern commercial complex.
Nonetheless, she consented because respondent repeatedly professed friendship and
assured her that all their verbal side agreement would be honored as shown by the
fact that since December 1990, she (respondent) had not collected any rentals from
the petitioner for the space occupied by her drugstore and cosmetics store.
151
On March 19, 1992, the residential building was gutted by fire which caused the
petitioner to lose rental income in the amount of P8,000.00 a month since April 1992.
Respondent neglected to renew the fire insurance policy on the subject buildings.
Since December 1990, respondent had taken possession of the subject real
properties and had been continuously collecting and receiving monthly rental income
from the tenants of the buildings and vendors of the sidewalk fronting the RBJ
building without sharing it with petitioner.
On September 2, 1992, respondent offered the amount of P751,000.00 only payable
on September 7, 1992, as full payment of the purchase price of the subject real
properties and demanded the simultaneous execution of the corresponding deed of
absolute sale.
Respondent's Answer
Respondent countered, among others, that the tripartite agreement erroneously
designated by the petitioner as a Deed of Conditional Sale of Real Property with
Assumption of Mortgage was actually a pure and absolute contract of sale with a
term period. It could not be considered a conditional sale because the acquisition of
contractual rights and the performance of the obligation therein did not depend upon
a future and uncertain event. Moreover, the capital gains and documentary stamps
and other miscellaneous expenses and real estate taxes up to 1990 were supposed to
be paid by petitioner but she failed to do so.
Respondent further averred that she successfully rescued the properties from a
definite foreclosure by paying the assumed mortgage in the amount of P2,278,078.13
plus interest and other finance charges. Because of her payment, she was able to
obtain a deed of cancellation of mortgage and secure a release of mortgage on the
subject real properties including petitioner's ancestral residential property in Sta.
Maria, Bulacan.
Petitioner's claim for the balance of the purchase price of the subject real properties
 was baseless and unwarranted because the full amount of the purchase price had
already been paid, as she did pay more than P4,200,000.00, the agreed purchase
price of the subject real properties, and she had even introduced improvements WHEREFORE, judgment is hereby rendered as follows:
thereon worth more than P4,800,000.00. As the parties could no longer be restored
to their original positions, rescission could not be resorted to.

Respondent added that as a result of their business relationship, petitioner was able
to obtain from her a loan in the amount of P400,000.00 with interest and took several
pieces of jewelry worth P120,000.00. Petitioner also failed and refused to pay the
monthly rental of P20,000.00 since November 16, 1990 up to the present for the use
and occupancy of the ground floor of the building on the subject real property, thus,
accumulating arrearages in the amount of P470,000.00 as of October 1992.
1. Allowing the defendant to pay the plaintiff within thirty (30) days from the finality
hereof the amount of P805,000.00, representing the unpaid purchase price of the
subject property, with interest thereon at 2% a month from January 1, 1992 until fully
paid. Failure of the defendant to pay said amount within the said period shall cause
the automatic rescission of the contract (Deed of Conditional Sale of Real Property
with Assumption of Mortgage) and the plaintiff and the defendant shall be restored
to their former positions relative to the subject property with each returning to the
other whatever benefits each derived from the transaction;

Ruling of the RTC

2. Directing the defendant to allow the plaintiff to continue using the space occupied
On February 22, 2006, the RTC handed down its decision finding that respondent by her for drugstore and cosmetic store without any rental pending payment of the
failed to pay in full the P4.2 million total purchase price of the subject real properties aforesaid balance of the purchase price.
leaving a balance of P805,000.00. It stated that the checks and receipts presented by
respondent refer to her payments of the mortgage obligation with FSL Bank and not
the payment of the balance of P1,200,000.00. The RTC also considered the Deed of 3. Ordering the defendant, upon her full payment of the purchase price together with
Conditional Sale of Real Property with Assumption of Mortgage executed by and interest, to execute a contract of lease for fifteen (15) years in favor of the plaintiff
among the two parties and FSL Bank a contract to sell, and not a contract of sale. It over the space for the drugstore and cosmetic store at a fixed monthly rental of
was of the opinion that although the petitioner was entitled to a rescission of the P8,000.00; and
contract, it could not be permitted because her non-payment in full of the purchase
price "may not be considered as substantial and fundamental breach of the contract
as to defeat the object of the parties in entering into the contract." [4] The RTC
believed that the respondent's offer stated in her counsel's letter dated September 2,
4. Directing the plaintiff, upon full payment to her by the defendant of the purchase
1992 to settle what she thought was her unpaid balance of P751,000.00 showed her
price together with interest, to execute the necessary deed of sale, as well as to pay
sincerity and willingness to settle her obligation. Hence, it would be more equitable
the Capital Gains Tax, documentary stamps and other miscellaneous expenses
to give respondent a chance to pay the balance plus interest within a given period of
time. necessary for securing the BIR Clearance, and to pay the real estate taxes due on the
subject property up to 1990, all necessary to transfer ownership of the subject
property to the defendant.
Finally, the RTC stated that there was no factual or legal basis to award damages and
attorney's fees because there was no proof that either party acted fraudulently or in
No pronouncement as to damages, attorney's fees and costs.
bad faith.

SO ORDERED. [5]
Thus, the dispositive portion of the RTC Decision reads:
152

Ruling of the CA
On February 13, 2009, the CA rendered its decision affirming with modification the
RTC Decision. The CA agreed with the RTC that the contract entered into by the
parties is a contract to sell but ruled that the remedy of rescission could not apply
because the respondent's failure to pay the petitioner the balance of the purchase
price in the total amount of P805,000.00 was not a breach of contract, but merely an
event that prevented the seller (petitioner) from conveying title to the purchaser
(respondent). It reasoned that out of the total purchase price of the subject property
in the amount of P4,200,000.00, respondent's remaining unpaid balance was only
P805,000.00. Since respondent had already paid a substantial amount of the
purchase price, it was but right and just to allow her to pay the unpaid balance of the
purchase price plus interest. Thus, the decretal portion of the CA Decision reads:
WHEREFORE, premises considered, the Decision dated 22 February 2006 and Order
dated 22 December 2006 of the Regional Trial Court of Valenzuela City, Branch 172 in
Civil Case No. 3945-V-92 are AFFIRMED with MODIFICATION in that defendant-
appellant Victoria T. Tuparan is hereby ORDERED to pay plaintiff-appellee/appellant
Mila A. Reyes, within 30 days from finality of this Decision, the amount of
P805,000.00 representing the unpaid balance of the purchase price of the subject
property, plus interest thereon at the rate of 6% per annum from 11 September 1992
up to finality of this Decision and, thereafter, at the rate of 12% per annum until full
payment. The ruling of the trial court on the automatic rescission of the Deed of
Conditional Sale with Assumption of Mortgage is hereby DELETED. Subject to the
foregoing, the dispositive portion of the trial court's decision is AFFIRMED in all other
respects.
SO ORDERED. [6]
After the denial of petitioner's motion for reconsideration and respondent's motion
for partial reconsideration, petitioner filed the subject petition for review praying for
the reversal and setting aside of the CA Decision anchored on the following
ASSIGNMENT OF ERRORS
153
A. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DISALLOWING THE OUTRIGHT RESCISSION OF THE SUBJECT DEED OF CONDITIONAL
SALE OF REAL PROPERTIES WITH ASSUMPTION OF MORTGAGE ON THE GROUND
THAT RESPONDENT TUPARAN'S FAILURE TO PAY PETITIONER REYES THE BALANCE OF
THE PURCHASE PRICE OF P805,000.00 IS NOT A BREACH OF CONTRACT DESPITE ITS
OWN FINDINGS THAT PETITIONER STILL RETAINS OWNERSHIP AND TITLE OVER THE
SUBJECT REAL PROPERTIES DUE TO RESPONDENT'S REFUSAL TO PAY THE BALANCE OF
THE TOTAL PURCHASE PRICE OF P805,000.00 WHICH IS EQUAL TO 20% OF THE TOTAL
PURCHASE PRICE OF P4,200,000.00 OR 66% OF THE STIPULATED LAST INSTALLMENT
OF P1,200,000.00 PLUS THE INTEREST THEREON. IN EFFECT, THE COURT OF APPEALS
AFFIRMED AND ADOPTED THE TRIAL COURT'S CONCLUSION THAT THE
RESPONDENT'S NON-PAYMENT OF THE P805,000.00 IS ONLY A SLIGHT OR CASUAL
BREACH OF CONTRACT.
B. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DISREGARDING AS GROUND FOR THE RESCISSION OF THE SUBJECT CONTRACT THE
OTHER FRAUDULENT AND MALICIOUS ACTS COMMITTED BY THE RESPONDENT
AGAINST THE PETITIONER WHICH BY THEMSELVES SUFFICIENTLY JUSTIFY A DENIAL
OF A GRACE PERIOD OF THIRTY (30) DAYS TO THE RESPONDENT WITHIN WHICH TO
PAY TO THE PETITIONER THE P805,000.00 PLUS INTEREST THEREON.
C. EVEN ASSUMING ARGUENDO THAT PETITIONER IS NOT ENTITLED TO THE
RESCISSION OF THE SUBJECT CONTRACT, THE COURT OF APPEALS STILL SERIOUSLY
ERRED AND ABUSED ITS DISCRETION IN REDUCING THE INTEREST ON THE
P805,000.00 TO ONLY "6% PER ANNUM STARTING FROM THE DATE OF FILING OF THE
COMPLAINT ON SEPTEMBER 11, 1992" DESPITE THE PERSONAL COMMITMENT OF
THE RESPONDENT AND AGREEMENT BETWEEN THE PARTIES THAT RESPONDENT WILL
PAY INTEREST ON THE P805,000.00 AT THE RATE OF 6% MONTHLY STARTING THE
DATE OF DELINQUENCY ON DECEMBER 31, 1991.
D. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN THE
APPRECIATION AND/OR MISAPPRECIATION OF FACTS RESULTING INTO THE DENIAL
OF THE CLAIM OF PETITIONER REYES FOR ACTUAL DAMAGES WHICH CORRESPOND
TO THE MILLIONS OF PESOS OF RENTALS/FRUITS OF THE SUBJECT REAL PROPERTIES
WHICH RESPONDENT TUPARAN COLLECTED CONTINUOUSLY SINCE DECEMBER 1990,
EVEN WITH THE UNPAID BALANCE OF P805,000.00 AND DESPITE THE FACT THAT
 RESPONDENT DID NOT CONTROVERT SUCH CLAIM OF THE PETITIONER AS
CONTAINED IN HER AMENDED COMPLAINT DATED APRIL 22, 2006.
E. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN THE
APPRECIATION OF FACTS RESULTING INTO THE DENIAL OF THE CLAIM OF PETITIONER
REYES FOR THE P29,609.00 BACK RENTALS THAT WERE COLLECTED BY RESPONDENT
TUPARAN FROM THE OLD TENANTS OF THE PETITIONER.
F. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DENYING THE PETITIONER'S EARLIER "URGENT MOTION FOR ISSUANCE OF A
PRELIMINARY MANDATORY AND PROHIBITORY INJUNCTION" DATED JULY 7, 2008
AND THE "SUPPLEMENT" THERETO DATED AUGUST 4, 2008 THEREBY CONDONING
THE UNJUSTIFIABLE FAILURE/REFUSAL OF JUDGE FLORO ALEJO TO RESOLVE WITHIN
ELEVEN (11) YEARS THE PETITIONER'S THREE (3) SEPARATE "MOTIONS FOR
PRELIMINARY INJUNCTION/ TEMPORARY RESTRAINING ORDER, ACCOUNTING AND
DEPOSIT OF RENTAL INCOME" DATED MARCH 17, 1995, AUGUST 19, 1996 AND
JANUARY 7, 2006 THEREBY PERMITTING THE RESPONDENT TO UNJUSTLY ENRICH
HERSELF BY CONTINUOUSLY COLLECTING ALL THE RENTALS/FRUITS OF THE SUBJECT
REAL PROPERTIES WITHOUT ANY ACCOUNTING AND COURT DEPOSIT OF THE
COLLECTED RENTALS/FRUITS AND THE PETITIONERS "URGENT MOTION TO DIRECT
DEFENDANT VICTORIA TUPARAN TO PAY THE ACCUMULATED UNPAID REAL ESTATE
TAXES AND SEF TAXES ON THE SUBJECT REAL PROPERTIES" DATED JANUARY 13, 2007
THEREBY EXPOSING THE SUBJECT REAL PROPERTIES TO IMMINENT AUCTION SALE BY
THE CITY TREASURER OF VALENZUELA CITY.
G. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DENYING THE PETITIONER'S CLAIM FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY'S FEES AGAINST THE RESPONDENT.
In sum, the crucial issue that needs to be resolved is whether or not the CA was
correct in ruling that there was no legal basis for the rescission of the Deed of
Conditional Sale with Assumption of Mortgage.
154
Position of the Petitioner
The petitioner basically argues that the CA should have granted the rescission of the
subject Deed of Conditional Sale of Real Properties with Assumption of Mortgage for
the following reasons:
1. The subject deed of conditional sale is a reciprocal obligation whose outstanding
characteristic is reciprocity arising from identity of cause by virtue of which one
obligation is correlative of the other.
2. The petitioner was rescinding - not enforcing - the subject Deed of Conditional Sale
pursuant to Article 1191 of the Civil Code because of the respondent's failure/refusal
to pay the P805,000.00 balance of the total purchase price of the petitioner's
properties within the stipulated period ending December 31, 1991.
3. There was no slight or casual breach on the part of the respondent because she
(respondent) deliberately failed to comply with her contractual obligations with the
petitioner by violating the terms or manner of payment of the P1,200,000.00 balance
and unjustly enriched herself at the expense of the petitioner by collecting all rental
payments for her personal benefit and enjoyment.
Furthermore, the petitioner claims that the respondent is liable to pay interest at the
rate of 6% per month on her unpaid installment of P805,000.00 from the date of the
delinquency, December 31, 1991, because she obligated herself to do so.
Finally, the petitioner asserts that her claim for damages or lost income as well as for
the back rentals in the amount of P29,609.00 has been fully substantiated and,
therefore, should have been granted by the CA. Her claim for moral and exemplary
damages and attorney's fees has been likewise substantiated.
Position of the Respondent
 The respondent counters that the subject Deed of Conditional Sale with Assumption
of Mortgage entered into between the parties is a contract to sell and not a contract
of sale because the title of the subject properties still remains with the petitioner as
she failed to pay the installment payments in accordance with their agreement.
Respondent echoes the RTC position that her inability to pay the full balance on the
purchase price may not be considered as a substantial and fundamental breach of the
subject contract and it would be more equitable if she would be allowed to pay the
balance including interest within a certain period of time. She claims that as early as
1992, she has shown her sincerity by offering to pay a certain amount which was,
however, rejected by the petitioner.
Finally, respondent states that the subject deed of conditional sale explicitly provides
that the installment payments shall not bear any interest. Moreover, petitioner failed
to prove that she was entitled to back rentals.
The Court's Ruling
The petition lacks merit.
The Court agrees with the ruling of the courts below that the subject Deed of
Conditional Sale with Assumption of Mortgage entered into by and among the two
parties and FSL Bank on November 26, 1990 is a contract to sell and not a contract of
sale. The subject contract was correctly classified as a contract to sell based on the
following pertinent stipulations:
8. That the title and ownership of the subject real properties shall remain with the
First Party until the full payment of the Second Party of the balance of the purchase
price and liquidation of the mortgage obligation of P2,000,000.00. Pending payment
of the balance of the purchase price and liquidation of the mortgage obligation that
was assumed by the Second Party, the Second Party shall not sell, transfer and
convey and otherwise encumber the subject real properties without the written
consent of the First and Third Party.
155
9. That upon full payment by the Second Party of the full balance of the purchase
price and the assumed mortgage obligation herein mentioned the Third Party shall
issue the corresponding Deed of Cancellation of Mortgage and the First Party shall
execute the corresponding Deed of Absolute Sale in favor of the Second Party. [7]
Based on the above provisions, the title and ownership of the subject properties
remains with the petitioner until the respondent fully pays the balance of the
purchase price and the assumed mortgage obligation. Thereafter, FSL Bank shall then
issue the corresponding deed of cancellation of mortgage and the petitioner shall
execute the corresponding deed of absolute sale in favor of the respondent.
Accordingly, the petitioner's obligation to sell the subject properties becomes
demandable only upon the happening of the positive suspensive condition, which is
the respondent's full payment of the purchase price. Without respondent's full
payment, there can be no breach of contract to speak of because petitioner has no
obligation yet to turn over the title. Respondent's failure to pay in full the purchase
price is not the breach of contract contemplated under Article 1191 of the New Civil
Code but rather just an event that prevents the petitioner from being bound to
convey title to the respondent. The 2009 case of Nabus v. Joaquin & Julia
Pacson [8] is enlightening:
The Court holds that the contract entered into by the Spouses Nabus and
respondents was a contract to sell, not a contract of sale.
A contract of sale is defined in Article 1458 of the Civil Code, thus:
Art. 1458. By the contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
xxx
 Sale, by its very nature, is a consensual contract because it is perfected by mere
consent. The essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in
exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale
because the first essential element is lacking. In a contract to sell, the prospective
seller explicitly reserves the transfer of title to the prospective buyer, meaning, the
prospective seller does not as yet agree or consent to transfer ownership of the
property subject of the contract to sell until the happening of an event, which for
present purposes we shall take as the full payment of the purchase price. What the
seller agrees or obliges himself to do is to fulfill his promise to sell the subject
property when the entire amount of the purchase price is delivered to him. In other
words, the full payment of the purchase price partakes of a suspensive condition, the
non-fulfillment of which prevents the obligation to sell from arising and, thus,
ownership is retained by the prospective seller without further remedies by the
prospective buyer.
xxx xxx xxx
Stated positively, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, the prospective seller's obligation to sell the subject
property by entering into a contract of sale with the prospective buyer becomes
demandable as provided in Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
156
An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promissor if the promise is supported by a consideration
distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective
seller, while expressly reserving the ownership of the subject property despite
delivery thereof to the prospective buyer, binds himself to sell the said property
exclusively to the prospective buyer upon fulfillment of the condition agreed upon,
that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a
conditional contract of sale where the seller may likewise reserve title to the property
subject of the sale until the fulfillment of a suspensive condition, because in a
conditional contract of sale, the first element of consent is present, although it is
conditioned upon the happening of a contingent event which may or may not occur.
If the suspensive condition is not fulfilled, the perfection of the contract of sale is
completely abated. However, if the suspensive condition is fulfilled, the contract of
sale is thereby perfected, such that if there had already been previous delivery of the
property subject of the sale to the buyer, ownership thereto automatically transfers
to the buyer by operation of law without any further act having to be performed by
the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, ownership will not automatically transfer to the buyer
although the property may have been previously delivered to him. The prospective
seller still has to convey title to the prospective buyer by entering into a contract of
absolute sale.
Further, Chua v. Court of Appeals, cited this distinction between a contract of sale
and a contract to sell:
In a contract of sale, the title to the property passes to the vendee upon the delivery
 of the thing sold; in a contract to sell, ownership is, by agreement, reserved in the
vendor and is not to pass to the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over the property
and cannot recover it until and unless the contract is resolved or rescinded; whereas,
in a contract to sell, title is retained by the vendor until full payment of the price. In
the latter contract, payment of the price is a positive suspensive condition, failure of
which is not a breach but an event that prevents the obligation of the vendor to
convey title from becoming effective.
It is not the title of the contract, but its express terms or stipulations that determine
the kind of contract entered into by the parties. In this case, the contract entitled
"Deed of Conditional Sale" is actually a contract to sell. The contract stipulated that
"as soon as the full consideration of the sale has been paid by the vendee, the
corresponding transfer documents shall be executed by the vendor to the vendee for
the portion sold." Where the vendor promises to execute a deed of absolute sale
upon the completion by the vendee of the payment of the price, the contract is only a
contract to sell." The aforecited stipulation shows that the vendors reserved title to
the subject property until full payment of the purchase price.
xxx
Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale executed in
their favor was merely a contract to sell, the obligation of the seller to sell becomes
demandable only upon the happening of the suspensive condition. The full payment
of the purchase price is the positive suspensive condition, the failure of which is not a
breach of contract, but simply an event that prevented the obligation of the vendor
to convey title from acquiring binding force. Thus, for its non-fulfilment, there is no
contract to speak of, the obligor having failed to perform the suspensive condition
which enforces a juridical relation. With this circumstance, there can be no
rescission or fulfillment of an obligation that is still non-existent, the suspensive
condition not having occurred as yet. Emphasis should be made that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply
with an obligation already extant, not a failure of a condition to render binding that
obligation.[Emphases and underscoring supplied]
Consistently, the Court handed down a similar ruling in the 2010 case of Heirs of
Atienza v. Espidol, [9] where it was written:
157
Regarding the right to cancel the contract for non-payment of an installment, there is
need to initially determine if what the parties had was a contract of sale or a contract
to sell. In a contract of sale, the title to the property passes to the buyer upon the
delivery of the thing sold. In a contract to sell, on the other hand, the ownership is, by
agreement, retained by the seller and is not to pass to the vendee until full payment
of the purchase price. In the contract of sale, the buyer's non-payment of the price is
a negative resolutory condition; in the contract to sell, the buyer's full payment of the
price is a positive suspensive condition to the coming into effect of the agreement. In
the first case, the seller has lost and cannot recover the ownership of the property
unless he takes action to set aside the contract of sale. In the second case, the title
simply remains in the seller if the buyer does not comply with the condition
precedent of making payment at the time specified in the contract. Here, it is quite
evident that the contract involved was one of a contract to sell since the Atienzas, as
sellers, were to retain title of ownership to the land until respondent Espidol, the
buyer, has paid the agreed price. Indeed, there seems no question that the parties
understood this to be the case.
Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that
fell due in December 2002. That payment, said both the RTC and the CA, was a
positive suspensive condition failure of which was not regarded a breach in the sense
that there can be no rescission of an obligation (to turn over title) that did not yet
exist since the suspensive condition had not taken place. x x x. [Emphases and
underscoring supplied]
Thus, the Court fully agrees with the CA when it resolved: "Considering, however,
that the Deed of Conditional Sale was not cancelled by Vendor Reyes (petitioner) and
that out of the total purchase price of the subject property in the amount of
P4,200,000.00, the remaining unpaid balance of Tuparan (respondent) is only
P805,000.00, a substantial amount of the purchase price has already been paid. It is
only right and just to allow Tuparan to pay the said unpaid balance of the purchase
price to Reyes." [10]
Granting that a rescission can be permitted under Article 1191, the Court still cannot
allow it for the reason that, considering the circumstances, there was only a slight or
casual breach in the fulfillment of the obligation.
Unless the parties stipulated it, rescission is allowed only when the breach of the
 contract is substantial and fundamental to the fulfillment of the obligation. Whether
the breach is slight or substantial is largely determined by the attendant
circumstances. [11] In the case at bench, the subject contract stipulated the following
important provisions:
2. That the purchase price of P4,200,000.00 shall be paid as follows:
a) P278,078.13 received in cash by the First Party but directly paid to the Third Party
as partial payment of the mortgage obligation of the First Party in order to reduce the
amount to P2,000,000.00 only as of November 15, 1990;
b) P721,921.87 received in cash by the First Party as additional payment of the
Second Party;
c) P1,200,000.00 to be paid in installments as follows:
1. P200,000.00 payable on or before January 31, 1991;
2. P200,000.00 payable on or before June 30, 1991;
3. P800,000.00 payable on or before December 31, 1991;
Note: All the installments shall not bear any interest.
d) P2,000,000.00 outstanding balance of the mortgage obligation as of November 15,
1990 which is hereby assumed by the Second Party.
158
xxx
3. That the Third Party hereby acknowledges receipts from the Second
Party P278,078.13 as partial payment of the loan obligation of First Party in order to
reduce the account to only P2,000,000.00 as of November 15, 1990 to be assumed by
the Second Party effective November 15, 1990. [12]
From the records, it cannot be denied that respondent paid to FSL Bank petitioner's
mortgage obligation in the amount of P2,278,078.13, which formed part of the
purchase price of the subject property. Likewise, it is not disputed that respondent
paid directly to petitioner the amount of P721,921.87 representing the additional
payment for the purchase of the subject property. Clearly, out of the total price of
P4,200,000.00, respondent was able to pay the total amount of P3,000,000.00,
leaving a balance of P1,200,000.00 payable in three (3) installments.
Out of the P1,200,000.00 remaining balance, respondent paid on several dates the
first and second installments of P200,000.00 each. She, however, failed to pay the
third and last installment of P800,000.00 due on December 31, 1991. Nevertheless,
on August 31, 1992, respondent, through counsel, offered to pay the amount of
P751,000.00, which was rejected by petitioner for the reason that the actual balance
was P805,000.00 excluding the interest charges.
Considering that out of the total purchase price of P4,200,000.00, respondent has
already paid the substantial amount of P3,400,000.00, more or less, leaving an unpaid
balance of only P805,000.00, it is right and just to allow her to settle, within a
reasonable period of time, the balance of the unpaid purchase price. The Court
agrees with the courts below that the respondent showed her sincerity and
willingness to comply with her obligation when she offered to pay the petitioner the
amount of P751,000.00.
On the issue of interest, petitioner failed to substantiate her claim that respondent
made a personal commitment to pay a 6% monthly interest on the P805,000.00 from
the date of delinquency, December 31, 1991. As can be gleaned from the contract,
there was a stipulation stating that: "All the installments shall not bear interest." The
CA was, however, correct in imposing interest at the rate of 6% per annum starting
from the filing of the complaint on September 11, 1992.
 Finally, the Court upholds the ruling of the courts below regarding the non-imposition
of damages and attorney's fees. Aside from petitioner's self-serving statements, there
is not enough evidence on record to prove that respondent acted fraudulently and
maliciously against the petitioner. In the case of Heirs of Atienza v. Espidol, [13] it was
stated:

Respondents are not entitled to moral damages because contracts are not referred to
in Article 2219 of the Civil Code, which enumerates the cases when moral damages
may be recovered. Article 2220 of the Civil Code allows the recovery of moral
damages in breaches of contract where the defendant acted fraudulently or in bad
faith. However, this case involves a contract to sell, wherein full payment of the
purchase price is a positive suspensive condition, the non-fulfillment of which is not a
breach of contract, but merely an event that prevents the seller from conveying title
to the purchaser. Since there is no breach of contract in this case, respondents are
not entitled to moral damages.

In the absence of moral, temperate, liquidated or compensatory damages, exemplary

damages cannot be granted for they are allowed only in addition to any of the four
kinds of damages mentioned.

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice
159
 41. G.R. No. 147695 | 2007-09-13 Lastly, petitioner asserted that when respondent ceased paying her installments, her
status of buyer was automatically transformed to that of a lessee. Therefore, she
MANUEL C. PAGTALUNAN, Petitioner, versus RUFINA DELA CRUZ VDA. DE continued to possess the property by mere tolerance of Patricio and, subsequently, of
MANZANO, Respondent. petitioner.

DECISION On the other hand, respondent alleged that she paid her monthly installments
religiously, until sometime in 1980 when Patricio changed his mind and offered to
refund all her payments provided she would surrender the house. She refused.
AZCUNA, J.: Patricio then started harassing her and began demolishing the house portion by
portion. Respondent admitted that she failed to pay some installments after
This is a petition for review on certiorari under Rule 45 of the Rules of Court of the December 1979, but that she resumed paying in 1980 until her balance dwindled to
Court of Appeals' (CA) Decision promulgated on October 30, 2000 and its Resolution P5,650. She claimed that despite several months of delay in payment, Patricio never
dated March 23, 2001 denying petitioner's motion for reconsideration. The Decision sued for ejectment and even accepted her late payments.
of the CA affirmed the Decision of the Regional Trial Court (RTC) of Malolos, Bulacan,
dated June 25, 1999 dismissing the case of unlawful detainer for lack of merit. Respondent also averred that on September 14, 1981, she and Patricio signed an
agreement (Exh. 2) whereby he consented to the suspension of respondent's monthly
The facts are as follows: payments until December 1981. However, even before the lapse of said period,
Patricio resumed demolishing respondent's house, prompting her to lodge a
On July 19, 1974, Patricio Pagtalunan (Patricio), petitioner's stepfather and complaint with the Barangay Captain who advised her that she could continue
predecessor-in-interest, entered into a Contract to Sell with respondent, wife of suspending payment even beyond December 31, 1981 until Patricio returned all the
Patricio's former mechanic, Teodoro Manzano, whereby the former agreed to sell, materials he took from her house. This Patricio failed to do until his death.
and the latter to buy, a house and lot which formed half of a parcel of land, covered
by Transfer Certificate of Title (TCT) No. T-10029 (now TCT No. RT59929 [T-254773]), Respondent did not deny that she still owed Patricio P5,650, but claimed that she did
with an area of 236 square meters. The consideration of P17,800 was agreed to be not resume paying her monthly installment because of the unlawful acts committed
paid in the following manner: P1,500 as downpayment upon execution of the by Patricio, as well as the filing of the ejectment case against her. She denied having
Contract to Sell, and the balance to be paid in equal monthly installments of P150 on any knowledge of the Kasunduan of November 18, 1979.
or before the last day of each month until fully paid.
Patricio and his wife died on September 17, 1992 and on October 17, 1994,
It was also stipulated in the contract that respondent could immediately occupy the respectively. Petitioner became their sole successor-in-interest pursuant to a waiver
house and lot; that in case of default in the payment of any of the installments for 90 by the other heirs. On March 5, 1997, respondent received a letter from petitioner's
days after its due date, the contract would be automatically rescinded without need counsel dated February 24, 1997 demanding that she vacate the premises within five
of judicial declaration, and that all payments made and all improvements done on the days on the ground that her possession had become unlawful. Respondent ignored
premises by respondent would be considered as rentals for the use and occupation of the demand. The Punong Barangay failed to settle the dispute amicably.
the property or payment for damages suffered, and respondent was obliged to
peacefully vacate the premises and deliver the possession thereof to the vendor. On April 8, 1997, petitioner filed a Complaint for unlawful detainer against
respondent with the Municipal Trial Court (MTC) of Guiguinto, Bulacan praying that,
Petitioner claimed that respondent paid only P12,950. She allegedly stopped paying after hearing, judgment be rendered ordering respondent to immediately vacate the
after December 1979 without any justification or explanation. Moreover, in subject property and surrender it to petitioner; forfeiting the amount of P12,950 in
a "Kasunduan"[1] dated November 18, 1979, respondent borrowed P3,000 from favor of petitioner as rentals; ordering respondent to pay petitioner the amount of
Patricio payable in one year either in one lump sum payment or by installments, P3,000 under the Kasunduan and the amount of P500 per month from January 1980
failing which the balance of the loan would be added to the principal subject of the until she vacates the property, and to pay petitioner attorney's fees and the costs.
monthly amortizations on the land.
160

On December 22, 1998, the MTC rendered a decision in favor of petitioner. It stated
 that although the Contract to Sell provides for a rescission of the agreement upon Municipal Trial Court of Guiguinto, Bulacan and the ejectment case instead be
failure of the vendee to pay any installment, what the contract actually allows is dismissed for lack of merit.[3]
properly termed a resolution under Art. 1191 of the Civil Code.

The MTC held that respondent's failure to pay not a few installments caused the The motion for reconsideration and motion for execution filed by petitioner were
resolution or termination of the Contract to Sell. The last payment made by denied by the RTC for lack of merit in an Order dated August 10, 1999.
respondent was on January 9, 1980 (Exh. 71). Thereafter, respondent's right of
possession ipso facto ceased to be a legal right, and became possession by mere Thereafter, petitioner filed a petition for review with the CA.
tolerance of Patricio and his successors-in-interest. Said tolerance ceased upon
demand on respondent to vacate the property. In a Decision promulgated on October 30, 2000, the CA denied the petition and
affirmed the Decision of the RTC. The dispositive portion of the Decision reads:
The dispositive portion of the MTC Decision reads:
WHEREFORE, the petition for review on certiorari is Denied. The assailed
Wherefore, all the foregoing considered, judgment is hereby rendered, Decision of the Regional Trial Court of Malolos, Bulacan dated 25 June 1999
ordering the defendant: and its Order dated 10 August 1999 are hereby AFFIRMED.

a. to vacate the property covered by Transfer Certificate of Title No. T-10029 SO ORDERED. [4]
of the Register of Deeds of Bulacan (now TCT No. RT-59929 of the Register of
Deeds of Bulacan), and to surrender possession thereof to the plaintiff; The CA found that the parties, as well as the MTC and RTC failed to advert to and to
apply Republic Act (R.A.) No. 6552, more commonly referred to as the Maceda Law,
b. to pay the plaintiff the amount of P113,500 representing rentals from which is a special law enacted in 1972 to protect buyers of real estate on installment
January 1980 to the present; payments against onerous and oppressive conditions.

c. to pay the plaintiff such amount of rentals, at P500/month, that may The CA held that the Contract to Sell was not validly cancelled or rescinded under Sec.
become due after the date of judgment, until she finally vacates the subject 3 (b) of R.A. No. 6552, and recognized respondent's right to continue occupying
property; unmolested the property subject of the contract to sell.

d. to pay to the plaintiff the amount of P25,000 as attorney's fees. The CA denied petitioner's motion for reconsideration in a Resolution dated March
23, 2001.
SO ORDERED.[2]
Hence, this petition for review on certiorari.
On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999, reversed
the decision of the MTC and dismissed the case for lack of merit. According to the Petitioner contends that:
RTC, the agreement could not be automatically rescinded since there was delivery to
the buyer. A judicial determination of rescission must be secured by petitioner as a A. Respondent Dela Cruz must bear the consequences of her deliberate
condition precedent to convert the possession de facto of respondent from lawful to withholding of, and refusal to pay, the monthly payment. The Court of
unlawful. Appeals erred in allowing Dela Cruz who acted in bad faith from benefiting
under the Maceda Law.
The dispositive portion of the RTC Decision states:
B. The Court of Appeals erred in resolving the issue on the applicability of the
161

WHEREFORE, judgment is hereby rendered reversing the decision of the Maceda Law, which issue was not raised in the proceedings a quo.

C. Assuming arguendo that the RTC was correct in ruling that the MTC has no
jurisdiction over a rescission case, the Court of Appeals erred in not
remanding the case to the RTC for trial.[5]
Petitioner submits that the Maceda Law supports and recognizes the right of vendors
of real estate to cancel the sale outside of court, without need for a judicial
declaration of rescission, citing Luzon Brokerage Co., Inc., v. Maritime Building Co.,
Inc.[6]
Petitioner contends that respondent also had more than the grace periods provided
under the Maceda Law within which to pay. Under Sec. 3[7] of the said law, a buyer
who has paid at least two years of installments has a grace period of one month for
every year of installment paid. Based on the amount of P12,950 which respondent
had already paid, she is entitled to a grace period of six months within which to pay
her unpaid installments after December, 1979. Respondent was given more than six
months from January 1980 within which to settle her unpaid installments, but she
failed to do so. Petitioner's demand to vacate was sent to respondent in February
1997.
There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a right
to pay arrearages after the grace periods have lapsed, in the event of an invalid
demand for rescission. The Maceda Law only provides that actual cancellation shall
take place after 30 days from receipt of the notice of cancellation or demand for
rescission and upon full payment of the cash surrender value to the buyer.
Petitioner contends that his demand letter dated February 24, 1997 should be
considered the notice of cancellation since the demand letter informed respondent
that she had "long ceased to have any right to possess the premises in question due
to [her] failure to pay without justifiable cause." In support of his contention, he
cited Layug v. Intermediate Appellate Court[8] which held that "the additional
formality of a demand on [the seller's] part for rescission by notarial act would
appear, in the premises, to be merely circuitous and consequently superfluous." He
stated that in Layug, the seller already made a written demand upon the buyer.
In addition, petitioner asserts that whatever cash surrender value respondent is
entitled to have been applied and must be applied to rentals for her use of the house
and lot after December, 1979 or after she stopped payment of her installments.
Petitioner argues that assuming Patricio accepted respondent's delayed installments
in 1981, such act cannot prevent the cancellation of the Contract to Sell. Installments
162
after 1981 were still unpaid and the applicable grace periods under the Maceda Law
on the unpaid installments have long lapsed. Respondent cannot be allowed to hide
behind the Maceda Law. She acted with bad faith and must bear the consequences of
her deliberate withholding of and refusal to make the monthly payments.
Petitioner also contends that the applicability of the Maceda Law was never raised in
the proceedings below; hence, it should not have been applied by the CA in resolving
the case.
The Court is not persuaded.
The CA correctly ruled that R.A No. 6552, which governs sales of real estate on
installment, is applicable in the resolution of this case.
This case originated as an action for unlawful detainer. Respondent is alleged to be
illegally withholding possession of the subject property after the termination of the
Contract to Sell between Patricio and respondent. It is, therefore, incumbent upon
petitioner to prove that the Contract to Sell had been cancelled in accordance with
R.A. No. 6552.
The pertinent provision of R.A. No. 6552 reads:
Sec. 3. In all transactions or contracts involving the sale or financing of real
estate on installment payments, including residential condominium
apartments but excluding industrial lots, commercial buildings and sales to
tenants under Republic Act Numbered Thirty-eight hundred forty-four as
amended by Republic Act Numbered Sixty-three hundred eighty-nine, where
the buyer has paid at least two years of installments, the buyer is entitled to
the following rights in case he defaults in the payment of succeeding
installments:
(a) To pay, without additional interest, the unpaid installments due
within the total grace period earned by him, which is hereby fixed at
the rate of one month grace period for every one year of installment
payments made: Provided, That this right shall be exercised by the
buyer only once in every five years of the life of the contract and its
extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the
cash surrender value of the payments on the property equivalent to
fifty percent of the total payments made and, after five years of
installments, an additional five percent every year but not to exceed
 ninety percent of the total payments made: Provided, That the actual Clearly, the demand letter is not the same as the notice of cancellation or demand for
cancellation of the contract shall take place after thirty days from rescission by a notarial actrequired by R.A No. 6552. Petitioner cannot rely on Layug
receipt by the buyer of the notice of cancellation or the demand for v. Intermediate Appellate Court[12] to support his contention that the demand letter
rescission of the contract by a notarial act and upon full payment of was sufficient compliance. Layug held that "the additional formality of a demand on
the cash surrender value to the buyer.[9] [the seller's] part for rescission by notarial act would appear, in the premises, to be
merely circuitous and consequently superfluous" since the seller therein filed an
action for annulment of contract, which is a kindred concept of rescission by notarial
R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act," act.[13] Evidently, the case of unlawful detainer filed by petitioner does not exempt
recognizes in conditional sales of all kinds of real estate (industrial, commercial, him from complying with the said requirement.
residential) the right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents the obligation of the In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of
vendor to convey title from acquiring binding force.[10] The Court agrees with the payments on the property to the buyer before cancellation of the contract. The
petitioner that the cancellation of the Contract to Sell may be done outside the court provision does not provide a different requirement for contracts to sell which allow
particularly when the buyer agrees to such cancellation. possession of the property by the buyer upon execution of the contract like the
instant case. Hence, petitioner cannot insist on compliance with the requirement by
However, the cancellation of the contract by the seller must be in accordance with assuming that the cash surrender value payable to the buyer had been applied to
Sec. 3 (b) of R.A. No. 6552, which requires a notarial act of rescission and the refund rentals of the property after respondent failed to pay the installments due.
to the buyer of the full payment of the cash surrender value of the payments on the
property. Actual cancellation of the contract takes place after 30 days from receipt by There being no valid cancellation of the Contract to Sell, the CA correctly recognized
the buyer of the notice of cancellation or the demand for rescission of the contract by respondent's right to continue occupying the property subject of the Contract to Sell
a notarial act and upon full payment of the cash surrender value to the buyer. and affirmed the dismissal of the unlawful detainer case by the RTC.
Based on the records of the case, the Contract to Sell was not validly cancelled or The Court notes that this case has been pending for more than ten years. Both parties
rescinded under Sec. 3 (b) of R.A. No. 6552. prayed for other reliefs that are just and equitable under the premises. Hence, the
rights of the parties over the subject property shall be resolved to finally dispose of
First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992 without that issue in this case.
canceling the Contract to Sell.
Considering that the Contract to Sell was not cancelled by the vendor, Patricio, during
Second, petitioner also failed to cancel the Contract to Sell in accordance with law. his lifetime or by petitioner in accordance with R.A. No. 6552 when petitioner filed
this case of unlawful detainer after 22 years of continuous possession of the property
Petitioner contends that he has complied with the requirements of cancellation by respondent who has paid the substantial amount of P12,300 out of the purchase
under Sec. 3 (b) of R.A. No. 6552. He asserts that his demand letter dated February price of P17,800, the Court agrees with the CA that it is only right and just to allow
24, 1997 should be considered as the notice of cancellation or demand for rescission respondent to pay her arrears and settle the balance of the purchase price.
by notarial act and that the cash surrender value of the payments on the property has
been applied to rentals for the use of the house and lot after respondent stopped For respondent's delay in the payment of the installments, the Court, in its discretion,
payment after January 1980. and applying Article 2209[14] of the Civil Code, may award interest at the rate of 6%
per annum[15] on the unpaid balance considering that there is no stipulation in the
The Court, however, finds that the letter[11] dated February 24, 1997, which was Contract to Sell for such interest. For purposes of computing the legal interest, the
written by petitioner's counsel, merely made formal demand upon respondent to reckoning period should be the filing of the complaint for unlawful detainer on April
vacate the premises in question within five days from receipt thereof since she had 8, 1997.
"long ceased to have any right to possess the premises x x x due to [her] failure to pay
without justifiable cause the installment payments x x x."
163

Based on respondent's evidence[16] of payments made, the MTC found that

respondent paid a total of P12,300 out of the purchase price of P17,800. Hence,
 respondent still has a balance of P5,500, plus legal interest at the rate of 6% per
annum on the unpaid balance starting April 8, 1997.

The third issue is disregarded since petitioner assails an inexistent ruling of the RTC
on the lack of jurisdiction of the MTC over a rescission case when the instant case he
filed is for unlawful detainer.

WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000 sustaining
the dismissal of the unlawful detainer case by the RTC is AFFIRMED with the
following MODIFICATIONS:

1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner Manuel C.
Pagtalunan the balance of the purchase price in the amount of Five Thousand Five
Hundred Pesos (P5,500) plus interest at 6% per annum from April 8, 1997 up to the
finality of this judgment, and thereafter, at the rate of 12% per annum;

2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a Deed of Absolute

Sale of the subject property and deliver the certificate of title in favor of respondent
Rufina Dela Cruz Vda. de Manzano; and

3. In case of failure to pay within 60 days from finality of this Decision, respondent
Rufina Dela Cruz Vda. de Manzano shall immediately vacate the premises without
need of further demand, and the downpayment and installment payments of P12,300
paid by her shall constitute rental for the subject property.

No costs.

SO ORDERED.

ADOLFO S. AZCUNA
Associate Justice
164
 42. G.R. No. 152346 | 2005-11-25
ISAIAS F. FABRIGAS and MARCELINA R. FABRIGAS, Petitioners, versus SAN
FRANCISCO DEL MONTE, INC., Respondent.
DECISION
Tinga, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, which assails theDecision of the Court of Appeals in CA-G.R. CV No.
45203 and its Resolution therein denying petitioners' motion for reconsideration.
Said Decision affirmed the Decision dated January 3, 1994 of the Regional Trial Court
(RTC), Branch 63, Makati City in Civil Case No. 90-2711 entitled San Francisco Del
Monte, Inc. v. Isaias F. Fabrigas and Marcelina R. Fabrigas.
The dispositive portion of the trial court's Decision reads:
In the light of the foregoing, the Court is convinced that plaintiff has proven by
preponderance of evidence, the allegation appearing in its complaint and is
therefore, entitled to the reliefs prayed for.
Considering, however, that defendants had already paid P78,152.00, the Court
exercising its discretion, hereby renders judgment as follows:
1. Ordering defendant to make complete payment under the conditions of Contract
to Sell No. 2491-V dated January 21, 1985, within twenty days from receipt of this
Decision, and in the event that defendant fail or refuse to observe the latter,
defendants and all persons claiming right of possession or occupation from
defendants are ordered to vacate and leave the premises, described as Lot No. 9
Block No. 3 of Subdivision Plan (LRC) Psd-50064 covered by Transfer Certificate of
Title No. 4980 (161653) T-1083 of the Registry of Deeds of Rizal, and to surrender
possession thereof to plaintiff or any of its authorized representatives;
2. That in the event that defendants chose to surrender possession of the property,
they are further ordered to pay plaintiff P206,223.80 as unpaid installments on the
land inclusive of interests;
3. Ordering defendants to jointly and severally pay plaintiff the amount of P10,000.00
as and for attorney's fees; and
165
4. Ordering defendants to pay the costs of suit.
SO ORDERED.[1]
The following factual antecedents are matters of record.
On April 23, 1983, herein petitioner spouses Isaias and Marcelina Fabrigas ("Spouses
Fabrigas" or "petitioners") and respondent San Francisco Del Monte, Inc. ("Del
Monte") entered into an agreement, denominated as Contract to Sell No. 2482-V,
whereby the latter agreed to sell to Spouses Fabrigas a parcel of residential land
situated in Barrio Almanza, Las Piñas, Manila for and in consideration of the amount
of P109,200.00. Said property, which is known as Lot No. 9, Block No. 3 of Subdivision
Plan (LRC) Psd-50064, is covered by Transfer Certificate of Title No. 4980 (161653) T-
1083 registered in the name of respondent Del Monte. The agreement stipulated that
Spouses Fabrigas shall pay P30,000.00 as downpayment and the balance within ten
(10) years in monthly successive installments of P1,285.69.[2] Among the clauses in
the contract is an automatic cancellation clause in case of default, which states as
follows:
7. Should the PURCHASER fail to make any of the payments including interest as
herein provided, within 30 days after the due date, this contract will be deemed and
considered as forfeited and annulled without necessity of notice to the PURCHASER,
and said SELLER shall be at liberty to dispose of the said parcel of land to any other
person in the same manner as if this contract had never been executed. In the event
of such forfeiture, all sums of money paid under this contract will be considered and
treated as rentals for the use of said parcel of land, and the PURCHASER hereby
waives all right to ask or demand the return thereof and agrees to peaceably vacate
the said premises.[3]
After paying P30,000.00, Spouses Fabrigas took possession of the property but failed
to make any installment payments on the balance of the purchase price. Del Monte
sent demand letters on four occasions to remind Spouses Fabrigas to satisfy their
contractual obligation.[4] In particular, Del Monte's third letter dated November 9,
1983 demanded the payment of arrears in the amount of P8,999.00. Said notice
granted Spouses Fabrigas a fifteen-day grace period within which to settle their
accounts. Petitioners' failure to heed Del Monte's demands prompted the latter to
send a final demand letter dated December 7, 1983, granting Spouses Fabrigas
another grace period of fifteen days within which to pay the overdue amount and
warned them that their failure to satisfy their obligation would cause the rescission of
the contract and the forfeiture of the sums of money already paid. Petitioners
received Del Monte's final demand letter on December 23, 1983. Del Monte
 considered Contract to Sell No. 2482-V cancelled fifteen days thereafter, but did not
furnish petitioners any notice regarding its cancellation.[5]
On November 6, 1984, petitioner Marcelina Fabrigas ("petitioner Marcelina")
remitted the amount of P13,000.00 to Del Monte.[6] On January 12, 1985, petitioner
Marcelina again remitted the amount of P12,000.00.[7] A few days thereafter, or on
January 21, 1985, petitioner Marcelina and Del Monte entered into another
agreement denominated as Contract to Sell No. 2491-V, covering the same property
but under restructured terms of payment. Under the second contract, the parties
agreed on a new purchase price of P131,642.58, the amount of P26,328.52 as
downpayment and the balance to be paid in monthly installments of P2,984.60
each.[8]
Between March 1985 and January 1986, Spouses Fabrigas made irregular payments
under Contract to Sell No. 2491-V, to wit:
March 19, 1985 P1, 328.52
May 13, 1986 P2, 000.00
June 6, 1986 P2, 000.00
July 14, 1986 P2, 000.00[11]
No other payments were made by petitioners except the amount of P10,000.00
which petitioners tendered sometime in October 1987 but which Del Monte refused
to accept, the latter claiming that the payment was intended for the satisfaction of
Contract to Sell No. 2482-V which had already been previously cancelled. On March
24, 1988, Del Monte sent a letter demanding the payment of accrued installments
under Contract to Sell No. 2491-V in the amount of P165,759.60 less P48,128.52,
representing the payments made under the restructured contract, or the net amount
of P117,631.08. Del Monte allowed petitioners a grace period of thirty (30) days
within which to pay the amount asked to avoid rescission of the contract. For failure
to pay, Del Monte notified petitioners on March 30, 1989 that Contract to Sell No.
2482-V had been cancelled and demanded that petitioners vacate the property.[12]

July 2, 1985
September 30, 1985
November 27, 1985
January 20, 1986
P2, 600.00 On September 28, 1990, Del Monte instituted an action for Recovery of Possession
with Damages against Spouses Fabrigas before the RTC, Branch 63 of Makati City. The
P2, 600.00 complaint alleged that Spouses Fabrigas owed Del Monte the principal amount of
P206,223.80 plus interest of 24% per annum. In their answer, Spouses Fabrigas
P2, 600.00 claimed, among others, that Del Monte unilaterally cancelled the first contract and
forced petitioner Marcelina to execute the second contract, which materially and
unjustly altered the terms and conditions of the original contract.[13]
P2, 000.00[9]

After trial on the merits, the trial court rendered a Decision on January 3, 1994,
Del Monte sent a demand letter dated February 3, 1986, informing petitioners of
upholding the validity of Contract to Sell No. 2491-V and ordering Spouses Fabrigas
their overdue account equivalent to nine (9) installments or a total amount of
either to complete payments thereunder or to vacate the property.
P26,861.40. Del Monte required petitioners to satisfy said amount immediately in
two subsequent letters dated March 5 and April 2, 1986.[10] This prompted
petitioners to pay the following amounts: Aggrieved, Spouses Fabrigas elevated the matter to the Court of Appeals, arguing that
the trial court should have upheld the validity and existence of Contract to Sell No.
2482-V instead and nullified Contract to Sell No. 2491-V. The Court of Appeals
rejected this argument on the ground that Contract to Sell No. 2482-V had been
rescinded pursuant to the automatic rescission clause therein. While the Court of
February 3, 1986 P2, 000.00
Appeals declared Contract to Sell No. 2491-V as merely unenforceable for having
been executed without petitioner Marcelina's signature, it upheld its validity upon
March 10, 1986 P2, 000.00 finding that the contract was subsequently ratified.
166

April 9, 1986 P2, 000.00

 Hence, the instant petition attributing the following errors to the Court of Appeals:
A. THE COURT OF APPEALS GRAVELY ERRED WHEN IT IGNORED THE PROVISIONS OF
R.A. NO. 6552 (THE MACEDA LAW) AND RULED THAT CONTRACT TO SELL NO. 2482-V
WAS VALIDLY CANCELLED BY SENDING A MERE NOTICE TO THE PETITIONERS.
B. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THERE WAS AN IMPLIED
RATIFICATION OF CONTRACT TO SELL NO. 2491-V.
C. THE COURT OF APPEALS ERRED IN ITS APPLICATION OF THE RULES OF NOVATION
TO THE INSTANT CASE.[14]
As reframed for better understanding, the questions are the following: Was Contract
to Sell No. 2482-V extinguished through rescission or was it novated by the
subsequent Contract to Sell No. 2491-V? If Contract to Sell No. 2482-V was rescinded,
should the manner of rescission comply with the requirements of Republic Act No.
(R.A.) 6552? If Contract to Sell No. 2482-V was subsequently novated by Contract to
Sell No. 2491-V, are petitioners liable for breach under the subsequent agreement?
Petitioners theorize that Contract to Sell No. 2482-V should remain valid and
subsisting because the notice of cancellation sent by Del Monte did not observe the
requisites under Section 3 of R.A. 6552.[15] According to petitioners, since
respondent did not send a notarial notice informing them of the cancellation or
rescission of Contract to Sell No. 2482-Vand also did not pay them the cash surrender
value of the payments on the property, the Court of Appeals erred in concluding that
respondent correctly applied the automatic rescission clause of Contract to Sell No.
2482-V. Petitioners also cite Section 7[16] of said law to bolster their theory that the
automatic rescission clause in Contract to Sell No. 2482-V is invalid for being contrary
to law and public policy.
The Court of Appeals erred in ruling that Del Monte was "well within its right to
cancel the contract by express grant of paragraph 7 without the need of notifying
[petitioners],[17]" instead of applying the pertinent provisions of R.A. 6552.
Petitioners' contention that none of Del Monte's demand letters constituted a valid
rescission of Contract to Sell No. 2482-Vis correct.
Petitioners defaulted in all monthly installments. They may be credited only with the
amount of P30,000.00 paid upon the execution of Contract to Sell No. 2482-V, which
167
should be deemed equivalent to less than two (2) years' installments. Given the
nature of the contract between petitioners and Del Monte, the applicable legal
provision on the mode of cancellation of Contract to Sell No. 2482-V is Section 4 and
not Section 3 of R.A. 6552. Section 4 is applicable to instances where less than two
years installments were paid. It reads:
SECTION 4. In case where less than two years of installments were paid, the seller
shall give the buyer a grace period of not less than sixty days from the date the
installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the
seller may cancel the contract after thirty days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the contract by a notarial act.
Thus, the cancellation of the contract under Section 4 is a two-step process. First, the
seller should extend the buyer a grace period of at least sixty (60) days from the due
date of the installment. Second, at the end of the grace period, the seller shall furnish
the buyer with a notice of cancellation or demand for rescission through a notarial
act, effective thirty (30) days from the buyer's receipt thereof. It is worth mentioning,
of course, that a mere notice or letter, short of a notarial act, would not suffice.
While the Court concedes that Del Monte had allowed petitioners a grace period
longer than the minimum sixty (60)-day requirement under Section 4, it did not
comply, however, with the requirement of notice of cancellation or a demand for
rescission. Instead, Del Monte applied the automatic rescission clause of the contract.
Contrary, however, to Del Monte's position which the appellate court sustained, the
automatic cancellation clause is void under Section 7[18] in relation to Section 4 of
R.A. 6552.[19]
Rescission, of course, is not the only mode of extinguishing obligations. Ordinarily,
obligations are also extinguished by payment or performance, by the loss of the thing
due, by the condonation or remission of the debt, by the confusion or merger of the
rights of the creditor and debtor, by compensation, or by novation.[20]
Novation, in its broad concept, may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. An
extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). Under this mode,
novation would have dual functions-one to extinguish an existing obligation, the
other to substitute a new one in its place-requiring a conflux of four essential
 requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to
a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation.[21]
Notwithstanding the improper rescission, the facts of the case show that Contract to
Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V. The
execution of Contract to Sell No. 2491-V accompanied an upward change in the
contract price, which constitutes a change in the object or principal conditions of the
contract. In entering into Contract to Sell No. 2491-V, the parties were impelled by
causes different from those obtaining under Contract to Sell No. 2482-V. On the part
of petitioners, they agreed to the terms and conditions of Contract to Sell No. 2491-
V not only to acquire ownership over the subject property but also to avoid the
consequences of their default under Contract No. 2482-V. On Del Monte's end, the
upward change in price was the consideration for entering into Contract to Sell No.
2491-V.
In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other.[22] The test of
incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first.[23] The execution of Contract to Sell No. 2491-V created
new obligations in lieu of those under Contract to Sell No. 2482-V, which are already
considered extinguished upon the execution of the second contract. The two
contracts do not have independent existence for to hold otherwise would present an
absurd situation where the parties would be liable under each contract having only
one subject matter.
To dispel the novation of Contract to Sell No. 2482-V by Contract to Sell No. 2491-V,
petitioners contend that the subsequent contract is void for two reasons: first,
petitioner Isaias Fabrigas did not give his consent thereto, and second, the
subsequent contract is a contract of adhesion.
Petitioner rely on Article 172 of the Civil Code governing their property relations as
spouses. Said article states that the wife cannot bind the conjugal partnership
without the husband's consent except in cases provided by law. Since only petitioner
Marcelina executed Contract to Sell No. 2491-V, the same is allegedly void,
petitioners conclude.
Under the Civil Code, the husband is the administrator of the conjugal
partnership.[24] Unless the wife has been declared a non compos mentis or a
168
spendthrift, or is under civil interdiction or is confined in a leprosarium, the husband
cannot alienate or encumber any real property of the conjugal partnership without
the wife's consent.[25] Conversely, the wife cannot bind the conjugal partnership
without the husband's consent except in cases provided by law.[26]
Thus, if a contract entered into by one spouse involving a conjugal property lacks the
consent of the other spouse, as in the case at bar, is it automatically void for that
reason alone?
Article 173[27] of the Civil Code expressly classifies a contract executed by the
husband without the consent of the wife as merely annullable at the instance of the
wife. However, there is no comparable provision covering an instance where the wife
alone has consented to a contract involving conjugal property. Article 172 of the Civil
Code, though, does not expressly declare as void a contract entered by the wife
without the husband's consent. It is also not one of the contracts considered as void
under Article 1409[28] of the Civil Code.
In Felipe v. Heirs of Maximo Aldon,[29] the Court had the occasion to rule on the
validity of a sale of lands belonging to the conjugal partnership made by the wife
without the consent of the husband. Speaking through Mr. Justice Abad Santos, the
Court declared such a contract as voidable because one of the parties is incapable of
giving consent to the contract. The capacity to give consent belonged not even to the
husband alone but to both
spouses.[30] In that case, the Court anchored its ruling on Article 173 of the Civil
Code which states that contracts entered by the husband without the consent of the
wife when such consent is required, are annullable at her instance during the
marriage and within ten years from the transaction mentioned.[31]
The factual milieu of the instant case, however, differs from that in Felipe. The defect
which Contract to Sell No. 2491-V suffers from is lack of consent of the husband, who
was out of the country at the time of the execution of the contract. There is no
express provision in the Civil Code governing a situation where the husband is absent
and his absence incapacitates him from administering the conjugal partnership
property. The following Civil Code provisions, however, are illuminating:
ARTICLE 167. In case of abuse of powers of administration of the conjugal partnership
property by the husband, the courts, on petition of the wife, may provide for
receivership, or administration by the wife, or separation of property.
 ARTICLE 168. The wife may, by express authority of the husband embodied in a public
instrument, administer the conjugal partnership property.
ARTICLE 169. The wife may also, by express authority of the husband appearing in a
public instrument, administer the latter's estate.
While the husband is the recognized administrator of the conjugal property under the
Civil Code, there are instances when the wife may assume administrative powers or
ask for the separation of property. In the abovementioned instances, the wife must
be authorized either by the court or by the husband. Where the husband is absent
and incapable of administering the conjugal property, the wife must be expressly
authorized by the husband or seek judicial authority to assume powers of
administration. Thus, any transaction entered by the wife without the court or the
husband's authority is unenforceable in accordance with Article 1317[32] of the Civil
Code. That is the status to be accorded Contract to Sell No. 2491-V, it having been
executed by petitioner Marcelina without her husband's conformity.
Being an unenforceable contract, Contract to Sell No. 2491-V is susceptible to
ratification. As found by the courts below, after being informed of the execution of
the contract, the husband, petitioner Isaias Fabrigas, continued remitting payments
for the satisfaction of the obligation under Contract to Sell No. 2491-V. These acts
constitute ratification of the contract. Such ratification cleanses the contract from all
its defects from the moment it was constituted. The factual findings of the courts
below are beyond review at this stage.
Anent Del Monte's claim that Contract to Sell No. 2491-V is a contract of adhesion,
suffice it to say that assuming for the nonce that the contract is such the
characterization does not automatically render it void. A contract of adhesion is so-
called because its terms are prepared by only one party while the other party merely
affixes his signature signifying his adhesion thereto. Such contracts are not void in
themselves. They are as binding as ordinary contracts. Parties who enter into such
contracts are free to reject the stipulations entirely.[33]
The Court quotes with approval the following factual observations of the trial court,
which cannot be disturbed in this case, to wit:
169
The Court notes that defendant, Marcelina Fabrigas, although she had to sign
contract No. 2491-V, to avoid forfeiture of her downpayment, and her other monthly
amortizations, was entirely free to refuse to accept the new contract. There was no
clear case of intimidation or threat on the part of plaintiff in offering the new contract
to her. At most, since she was of sufficient intelligence to discern the agreement she
is entering into, her signing of Contract No. 2491-V is taken to be valid and binding.
The fact that she has paid monthly amortizations subsequent to the execution of
Contract to Sell No. 2491-V, is an indication that she had recognized the validity of
such contract. . . .[34]
In sum, Contract to Sell No. 2491-V is valid and binding. There is nothing to prevent
respondent Del Monte from enforcing its contractual stipulations and pursuing the
proper court action to hold petitioners liable for their breach thereof.
WHEREFORE, the instant Petition for Review is DENIED and the September 28, 2001
Decision of the Court of Appeals in CA-G.R. CV No. 45203 is AFFIRMED. Costs against
petitioners.
SO ORDERED.
DANTE O. TINGA Associate Justice
ARTICLE 1192
43. G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO,
JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of
the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying
the decision dated February 15, 1972 of the Court of First Instance of Agusan, which
dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific
performance or rescission, and damages with preliminary injunction.
 On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino,
who, as a security for the loan, executed on the same day a real estate mortgage over
his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-
305, and which mortgage was annotated on the said title the next day. The approved
loan application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made
by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a
promissory note for P17,000.00 at 12% annual interest, payable within 3 years from
the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64,
rec.). An advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965,
after being informed by the Bank that there was no fund yet available for the release
of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and
treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island
Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which
provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to
put up the required capital to restore its solvency, issued Resolution No. 967 which
prohibited Island Savings Bank from doing business in the Philippines and instructed
the Acting Superintendent of Banks to take charge of the assets of Island Savings
170
Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00
covered by the promissory note, filed an application for the extra-judicial foreclosure
of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino;
and the sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First
Instance of Agusan for injunction, specific performance or rescission and damages
with preliminary injunction, alleging that since Island Savings Bank failed to deliver
the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance
by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per
annum from April 28, 1965, and if said balance cannot be delivered, to rescind the
real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond,
issued a temporary restraining order enjoining the Island Savings Bank from
continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for
the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the
restraining order, filed by the Central Bank and by the Acting Superintendent of Banks
(pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision,
finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island
Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due
thereon, and lifting the restraining order so that the sheriff may proceed with the
foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino,
modified the Court of First Instance decision by affirming the dismissal of Sulpicio M.
Tolentino's petition for specific performance, but it ruled that Island Savings Bank can
neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31.
rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the
promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate
mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the consideration for that of
the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA
1 [1969]); and when one party has performed or is ready and willing to perform his
part of the contract, the other party who has not performed or is not ready and
willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio
M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island
Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of
the Monetary Board to take over insolvent banks for the protection of the public is
recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default
of Island Savings Bank in complying with its obligation of releasing the P63,000.00
balance because said resolution merely prohibited the Bank from making new loans
and investments, and nowhere did it prohibit island Savings Bank from releasing the
balance of loan agreements previously contracted. Besides, the mere pecuniary
inability to fulfill an engagement does not discharge the obligation of the contract,
nor does it constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency
of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is
taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-
deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering
a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00
balance. The act of Island Savings Bank, in asking the advance interest for 6 months
on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out
of the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted
interest was an exercise of his right to it, which right exist independently of his right
to demand the completion of the P80,000.00 loan. The exercise of one right does not
171
affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan
collateral cannot exempt it from complying with its reciprocal obligation to furnish
the entire P80,000.00 loan. 'This Court previously ruled that bank officials and
employees are expected to exercise caution and prudence in the discharge of their
functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the
obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of
the properties being offered as a loan security. The recent rush of events where
collaterals for bank loans turn out to be non-existent or grossly over-valued
underscore the importance of this responsibility. The mere reliance by bank officials
and employees on their customer's representation regarding the loan collateral being
offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as
to the valuation of the loan collateral, the bank shall bear the risk in case the
collateral turn out to be over-valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its own investigation. Furthermore,
the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners
from presenting proof on the alleged over-valuation because of their failure to raise
the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's
action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that
"defenses and objections not pleaded either in a motion to dismiss or in the answer
are deemed waived." Petitioners, thus, cannot raise the same issue before the
Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under
their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may
choose between specific performance or rescission with damages in either case. But
since Island Savings Bank is now prohibited from doing further business by Monetary
Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio
M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is
only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default
only insofar as such amount is concerned, as there is no doubt that the bank failed to
give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M.
Tolentino accepted and executed a promissory note to cover it, the bank was deemed
to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The
promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the
P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under
the promissory note made him a party in default, hence not entitled to rescission
(Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it
shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not
signed a promissory note setting the date for payment of P17,000.00 within 3 years,
 he would be entitled to ask for rescission of the entire loan because he cannot
possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish
the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay
his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a
breach of their reciprocal obligations, the liability of the first infractor shall be
equitably tempered by the courts. WE rule that the liability of Island Savings Bank for
damages in not furnishing the entire loan is offset by the liability of Sulpicio M.
Tolentino for damages, in the form of penalties and surcharges, for not paying his
overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since
Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that
he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be
entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as
that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the
debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in
the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt
(Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island Savings
Bank had not made any release on the loan, does not make the real estate mortgage
void for lack of consideration. It is not necessary that any consideration should pass
at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125
SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the
consideration is subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol.
176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when
there is partial failure of consideration, the mortgage becomes unenforceable to the
extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974
ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the
mortgage is less than the sum named in the mortgage, the mortgage cannot be
172
enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson,
Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00
loan, the real estate mortgage of Sulpicio M. Tolentino became unenforARTceable to
such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage
covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage
covering the remainder of 21.25 hectares subsists as a security for the P17,000.00
debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the
Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided
among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for
the proportionate extinguishment of the pledge or mortgage as long as the
debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of other heirs
who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977
IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22,
1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22,
1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE
COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED
UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.
NO COSTS. SO ORDERED.
 Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.
173
 ARTICLE 1207
44. G.R. No. 101723. May 11, 2000
INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP.
(INIMACO), petitioner, vs.
NATIONAL LABOR RELATIONS COMMISSION, (Fourth Division) Cebu City et
al respondents.
DECISION
BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4, 1991
issued by the National Labor Relations Commission in RAB-VII-0711-84 on the alleged
ground that it committed a grave abuse of discretion amounting to lack of jurisdiction
in upholding the Alias Writ of Execution issued by the Labor Arbiter which deviated
from the dispositive portion of the Decision dated March 10, 1987, thereby holding
that the liability of the six respondents in the case below is solidary despite the
absence of the word "solidary" in the dispositive portion of the Decision, when their
liability should merely be joint. S-jcj
The factual antecedents are undisputed: Supr-eme
In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo
Pegarido, Tita Bacusmo, Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo, and
Roberto Alegarbes filed a complaint with the Department of Labor and Employment,
Regional Arbitration Branch No. VII in Cebu City against Filipinas Carbon Mining
Corporation, Gerardo Sicat, Antonio Gonzales, Chiu Chin Gin, Lo Kuan Chin, and
petitioner Industrial Management Development Corporation (INIMACO), for payment
of separation pay and unpaid wages. Sc-jj
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:
"RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering
respondents Filipinas Carbon and Mining Corp. Gerardo Sicat, Antonio
Gonzales/Industrial Management Development Corp. (INIMACO), Chiu Chin
Gin and Lo Kuan Chin, to pay complainants Enrique Sulit, the total award of
P82,800.00; ESMERALDO PEGARIDO the full award of P19,565.00; Roberto
174
Nemenzo the total sum of P29,623.60 and DARIO GO the total award of
P6,599.71, or the total aggregate award of ONE HUNDRED THIRTY-EIGHT
THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31)
to be deposited with this Commission within ten (10) days from receipt of
this Decision for appropriate disposition. All other claims are hereby Dismiss
(sic) for lack of merit. Jjs-c
"SO ORDERED.
"Cebu City, Philippines.
"10 March 1987."0[1]
No appeal was filed within the reglementary period thus, the above Decision became
final and executory. On June 16, 1987, the Labor Arbiter issued a writ of execution
but it was returned unsatisfied. On August 26, 1987, the Labor Arbiter issued an Alias
Writ of Execution which ordered thus: Ed-pm-is
"NOW THEREFORE, by virtue of the powers vested in me by law, you are
hereby commanded to proceed to the premises of respondents Antonio
Gonzales/Industrial Management Development Corporation (INIMACO)
situated at Barangay Lahug, Cebu City, in front of La Curacha
Restaurant, and/or to Filipinas Carbon and Mining corporation and Gerardo
Sicat at 4th Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi Village,
Makati Metro Manila and at Philippine National Bank, Escolta, Manila
respectively, and collect the aggregate award of ONE HUNDRED THIRTY-
EIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE
CENTAVOS (P138,588.31) and thereafter turn over said amount to
complainants ENRIQUE SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO
AND DARIO GO or to this Office for appropriate disposition. Should you fail
to collect the said sum in cash, you are hereby authorized to cause the
satisfaction of the same on the movable or immovable property(s) of
respondents not exempt from execution. You are to return this writ sixty (6)
(sic) days from your receipt hereof, together with your corresponding report.
"You may collect your legal expenses from the respondents as provided for
by law.
"SO ORDERED."[2]
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution
and Set Aside Decision,"[3] alleging among others that the alias writ of execution
 altered and changed the tenor of the decision by changing the liability of therein
respondents from joint to solidary, by the insertion of the words "AND/OR" between
"Antonio Gonzales/Industrial Management Development Corporation and Filipinas
Carbon and Mining Corporation, et al." However, in an order dated September 14,
1987, the Labor Arbiter denied the motion. Mis-oedp
On October 2, 1987, petitioner appealed[4] the Labor Arbiters Order dated September
14, 1987 to the respondent NLRC. Mis-edp
The respondent NLRC dismissed the appeal in a Decision [5] dated August 31, 1988, the
pertinent portions of which read:
"In matters affecting labor rights and labor justice, we have always
adopted the liberal approach which favors the exercise of labor
rights and which is beneficial to labor as a means to give full
meaning and import to the constitutional mandate to afford
protection to labor. Considering the factual circumstances in this
case, there is no doubt in our mind that the respondents herein are
called upon to pay, jointly and severally, the claims of the
complainants as was the latters prayers. Inasmuch as respondents
herein never controverted the claims of the complainants below,
there is no reason why complainants prayer should not be granted.
Further, in line with the powers granted to the Commission under
Article 218 (c) of the Labor code, to waive any error, defect or
irregularity whether in substance or in form in a proceeding before
Us, We hold that the Writ of Execution be given due course in all
respects." Ed-p
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of
P23,198.05 Representing One Sixth Pro Rata Share of Respondent INIMACO As Full
and Final Satisfaction of Judgment As to Said Respondent." [6] The private respondents
opposed the motion. In an Order[7] dated August 15, 1989, the Labor Arbiter denied
the motion ruling thus:
"WHEREFORE, responsive to the foregoing respondent INIMACOs
Motions are hereby DENIED. The Sheriff of this Office is order (sic)
to accept INIMACOs tender payment (sic) of the sum of P23,198.05,
as partial satisfaction of the judgment and to proceed with the
enforcement of the Alias Writ of Execution of the levied properties,
now issued by this Office, for the full and final satisfaction of the
monetary award granted in the instant case.
175
"SO ORDERED." Ed-psc
Petitioner appealed the above Order of the Labor Arbiter but this was again
dismissed by the respondent NLRC in its Resolution[8] dated September 4, 1991 which
held that:
"The arguments of respondent on the finality of the dispositive
portion of the decision in this case is beside the point. What is
important is that the Commission has ruled that the Writ of
Execution issued by the Labor Arbiter in this case is proper. It is not
really correct to say that said Writ of Execution varied the terms of
the judgment. At most, considering the nature of labor proceedings
there was, an ambiguity in said dispositive portion which was
subsequently clarified by the Labor Arbiter and the Commission in
the incidents which were initiated by INIMACO itself. By sheer
technicality and unfounded assertions, INIMACO would now reopen
the issue which was already resolved against it. It is not in keeping
with the established rules of practice and procedure to allow this
attempt of INIMACO to delay the final disposition of this case.
"WHEREFORE, in view of all the foregoing, this appeal is DISMISSED
and the Order appealed from is hereby AFFIRMED. Sce-dp
"With double costs against appellant."
Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the
respondent NLRC committed grave abuse of discretion in affirming the Order of the
Labor Arbiter dated August 15, 1989, which declared the liability of petitioner to be
solidary.
The only issue in this petition is whether petitioners liability pursuant to the Decision
of the Labor Arbiter dated March 10, 1987, is solidary or not. Calrs-pped
Upon careful examination of the pleadings filed by the parties, the Court finds that
petitioner INIMACOs liability is not solidary but merely joint and that the respondent
NLRC acted with grave abuse of discretion in upholding the Labor Arbiters Alias Writ
of Execution and subsequent Orders to the effect that petitioners liability is solidary.
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. [9] In a
 joint obligation each obligor answers only for a part of the whole liability and to each
obligee belongs only a part of the correlative rights.[10]
Well-entrenched is the rule that solidary obligation cannot lightly be
inferred.[11] 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. [12]
In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear.
The said fallo expressly states the following respondents therein as liable, namely:
Filipinas Carbon and Mining Corporation, Gerardo Sicat, Antonio Gonzales, Industrial
Management Development Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo
Kuan Chin. Nor can it be inferred therefrom that the liability of the six (6)
respondents in the case below is solidary, thus their liability should merely be joint.
Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not
provided in a judgment that the defendants are liable to pay jointly and severally a
certain sum of money, none of them may be compelled to satisfy in full said
judgment. In Oriental Commercial Co. vs. Abeto and Mabanag [13] this Court held:
None of the parties in the case before the Labor Arbiter appealed the Decision dated
March 10, 1987, hence the same became final and executory. It was, therefore,
removed from the jurisdiction of the Labor Arbiter or the NLRC to further alter or
amend it. Thus, the proceedings held for the purpose of amending or altering the
dispositive portion of the said decision are null and void for lack of jurisdiction. Also,
the Alias Writ of Execution is null and void because it varied the tenor of the
judgment in that it sought to enforce the final judgment against "Antonio
Gonzales/Industrial Management Development Corp. (INIMACO) and/or Filipinas
Carbon and Mining Corp. and Gerardo Sicat," which makes the liability solidary. Ca-
lrsc
WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4,
1991 of the respondent National Labor Relations is hereby declared NULL and VOID.
The liability of the respondents in RAB-VII-0711-84 pursuant to the Decision of the
Labor Arbiter dated March 10, 1987 should be, as it is hereby, considered joint and
petitioners payment which has been accepted considered as full satisfaction of its
liability, without prejudice to the enforcement of the award, against the other five (5)
respondents in the said case. Sppedsc

"It is of no consequence that, under the contract of suretyship SO ORDERED.

executed by the parties, the obligation contracted by the sureties
was joint and several in character. The final judgment, which Bellosillo, (Chairman), Mendoza, and Quisumbing, JJ., concur.
superseded the action for the enforcement of said contract,
declared the obligation to be merely joint, and the same cannot be De Leon, Jr., J., on leave.
executed otherwise."[14]

Granting that the Labor Arbiter has committed a mistake in failing to indicate in the
dispositive portion that the liability of respondents therein is solidary, the correction -
- which is substantial -- can no longer be allowed in this case because the judgment
has already become final and executory. Scc-alr

It is an elementary principle of procedure that the resolution of the court in a given

issue as embodied in the dispositive part of a decision or order is the controlling
factor as to settlement of rights of the parties.[15] Once a decision or order becomes
final and executory, it is removed from the power or jurisdiction of the court which
rendered it to further alter or amend it.[16] It thereby becomes immutable and
unalterable and any amendment or alteration which substantially affects a final and
executory judgment is null and void for lack of jurisdiction, including the entire
proceedings held for that purpose.[17] An order of execution which varies the tenor of
the judgment or exceeds the terms thereof is a nullity.[18]
176
 45. G.R. No. L-55138 September 28, 1984 xxx xxx xxx

ERNESTO V. RONQUILLO, petitioner, 4. That both parties agree that failure on the part of either party to
comply with the foregoing terms and conditions, the innocent party
vs. will be entitled to an execution of the decision based on this
compromise agreement and the defaulting party agrees and hold
HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents themselves to reimburse the innocent party for attorney's fees,
execution fees and other fees related with the execution.
Gloria A. Fortun for petitioner.
xxx xxx xxx
Roselino Reyes Isler for respondents.
On December 26, 1979, herein private respondent (then plaintiff filed a Motion for
Execution on the ground that defendants failed to make the initial payment of
CUEVAS, J.:
P55,000.00 on or before December 24, 1979 as provided in the Decision. Said motion
for execution was opposed by herein petitioner (as one of the defendants)
This is a petition to review the Resolution dated June 30, 1980 of the then Court of
contending that his inability to make the payment was due to private respondent's
Appeals (now the Intermediate Appellate Court) in CA-G.R. No. SP-10573,
own act of making himself scarce and inaccessible on December 24, 1979. Petitioner
entitled "Ernesto V. Ronquillo versus the Hon. Florellana Castro-Bartolome, etc." and
then prayed that private respondent be ordered to accept his payment in the amount
the Order of said court dated August 20, 1980, denying petitioner's motion for of P13,750.00. 2
reconsideration of the above resolution.
During the hearing of the Motion for Execution and the Opposition thereto on
Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958
January 16, 1980, petitioner, as one of the four defendants, tendered the amount of
of the then Court of First Instance of Rizal (now the Regional Trial Court), Branch XV
P13,750.00, as his prorata share in the P55,000.00 initial payment. Another
filed by private respondent Antonio P. So, on July 23, 1979, for the collection of the
defendant, Pilar P. Tan, offered to pay the same amount. Because private respondent
sum of P17,498.98 plus attorney's fees and costs. The other defendants were
refused to accept their payments, demanding from them the full initial installment of
Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98
P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the
sought to be collected represents the value of the checks issued by said defendants in
Clerk of Court. The amount deposited was subsequently withdrawn by private
payment for foodstuffs delivered to and received by them. The said checks were respondent. 3
dishonored by the drawee bank.
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of
On December 13, 1979, the lower court rendered its Decision 1 based on the
execution for the balance of the initial amount payable, against the other two
compromise agreement submitted by the parties, the pertinent portion of which defendants, Offshore Catertrade Inc. and Johnny Tan 4 who did not pay their shares.
reads as follows:
On January 22, 1980, private respondent moved for the reconsideration and/or
1. Plaintiff agrees to reduce its total claim of P117,498-95 to only
modification of the aforesaid Order of execution and prayed instead for the
P11,000 .00 and defendants agree to acknowledge the validity of
"execution of the decision in its entirety against all defendants, jointly and
such claim and further bind themselves to initially pay out of the severally." 5 Petitioner opposed the said motion arguing that under the decision of
total indebtedness of P10,000.00 the amount of P55,000.00 on
the lower court being executed which has already become final, the liability of the
or before December 24, 1979, the balance of P55,000.00,
four (4) defendants was not expressly declared to be solidary, consequently each
defendants individually and jointly agree to pay within a period of
defendant is obliged to pay only his own pro-rata or 1/4 of the amount due and
six months from January 1980, or before June 30, 1980; (Emphasis
payable.
177

supplied)
 On March 17, 1980, the lower court issued an Order reading as follows:
ORDER
Regardless of whatever the compromise agreement has intended
the payment whether jointly or individually, or jointly and severally,
the fact is that only P27,500.00 has been paid. There appears to be
a non-payment in accordance with the compromise agreement of
the amount of P27,500.00 on or before December 24, 1979. The
parties are reminded that the payment is condition sine qua non to
the lifting of the preliminary attachment and the execution of an
affidavit of desistance.
WHEREFORE, let writ of execution issue as prayed for
On March 17, 1980, petitioner moved for the reconsideration of the above order, and
the same was set for hearing on March 25,1980.
Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for
the satisfaction of the sum of P82,500.00 as against the properties of the defendants
(including petitioner), "singly or jointly hable." 6
On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of
sheriff's sale, for the sale of certain furnitures and appliances found in petitioner's
residence to satisfy the sum of P82,500.00. The public sale was scheduled for April 2,
1980 at 10:00 a.m. 7
Petitioner's motion for reconsideration of the Order of Execution dated March 17,
1980 which was set for hearing on March 25, 1980, was upon motion of private
respondent reset to April 2, 1980 at 8:30 a.m. Realizing the actual threat to property
rights poised by the re-setting of the hearing of s motion for reconsideration for April
2, 1980 at 8:30 a.m. such that if his motion for reconsideration would be denied he
would have no more time to obtain a writ from the appellate court to stop the
scheduled public sale of his personal properties at 10:00 a.m. of the same day, April
2, 1980, petitioner filed on March 26, 1980 a petition for certiorari and prohibition
with the then Court of Appeals (CA-G.R. No. SP-10573), praying at the same time for
the issuance of a restraining order to stop the public sale. He raised the question of
the validity of the order of execution, the writ of execution and the notice of public
sale of his properties to satisfy fully the entire unpaid obligation payable by all of the
four (4) defendants, when the lower court's decision based on the compromise
178
agreement did not specifically state the liability of the four (4) defendants to be
solidary.
On April 2, 1980, the lower court denied petitioner's motion for reconsideration but
the scheduled public sale in that same day did not proceed in view of the pendency of
a certiorari proceeding before the then Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which
reads as follows:
This Court, however, finds the present petition to have been filed
prematurely. The rule is that before a petition for certiorari can be
brought against an order of a lower court, all remedies available in
that court must first be exhausted. In the case at bar, herein
petitioner filed a petition without waiting for a resolution of the
Court on the motion for reconsideration, which could have been
favorable to the petitioner. The fact that the hearing of the motion
for reconsideration had been reset on the same day the public sale
was to take place is of no moment since the motion for
reconsideration of the Order of March 17, 1980 having been
seasonably filed, the scheduled public sale should be suspended.
Moreover, when the defendants, including herein petitioner,
defaulted in their obligation based on the compromise agreement,
private respondent had become entitled to move for an execution
of the decision based on the said agreement.
WHEREFORE, the instant petition for certiorari and prohibition with
preliminary injunction is hereby denied due course. The restraining
order issued in our resolution dated April 9, 1980 is hereby lifted
without pronouncement as to costs.
SO ORDERED.
Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2,
1980, the lower court had already denied the motion referred to and consequently,
the legal issues being raised in the petition were already "ripe" for
determination. 8 The said motion was however denied by the Court of Appeals in its
Resolution dated August 20, 1980.
Hence, this petition for review, petitioner contending that the Court of Appeals erred
in
(a) declaring as premature, and in denying due course to the petition to restrain
implementation of a writ of execution issued at variance with the final decision of the
 lower court filed barely four (4) days before the scheduled public sale of the attached
movable properties;
(b) denying reconsideration of the Resolution of June 30, 1980, which declared as
premature the filing of the petition, although there is proof on record that as of April
2, 1980, the motion referred to was already denied by the lower court and there was
no more motion pending therein;
(c) failing to resolve the legal issues raised in the petition and in not declaring the
liabilities of the defendants, under the final decision of the lower court, to be only
joint;
(d) not holding the lower court's order of execution dated March 17, 1980, the writ of
execution and the notice of sheriff's sale, executing the lower court's decision against
"all defendants, singly and jointly", to be at variance with the lower court's final
decision which did not provide for solidary obligation; and
(e) not declaring as invalid and unlawful the threatened execution, as against the
properties of petitioner who had paid his pro-rata share of the adjudged obligation,
of the total unpaid amount payable by his joint co-defendants.
The foregoing assigned errors maybe synthesized into the more important issues of
—
1. Was the filing of a petition for certiorari before the then Court of Appeals against
the Order of Execution issued by the lower court, dated March 17, 1980, proper,
despite the pendency of a motion for reconsideration of the same questioned Order?
2. What is the nature of the liability of the defendants (including petitioner), was it
merely joint, or was it several or solidary?
Anent the first issue raised, suffice it to state that while as a general rule, a motion for
reconsideration should precede recourse to certiorari in order to give the trial court
an opportunity to correct the error that it may have committed, the said rule is not
absolutes 9 and may be dispensed with in instances where the filing of a motion for
reconsideration would serve no useful purpose, such as when the motion for
reconsideration would raise the same point stated in the motion 10 or where the
error is patent for the order is void 11 or where the relief is extremely urgent, as in
cases where execution had already been ordered 12 where the issue raised is one
purely of law. 13
179
In the case at bar, the records show that not only was a writ of execution issued but
petitioner's properties were already scheduled to be sold at public auction on April 2,
1980 at 10:00 a.m. The records likewise show that petitioner's motion for
reconsideration of the questioned Order of Execution was filed on March 17, 1980
and was set for hearing on March 25, 1980 at 8:30 a.m., but upon motion of private
respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very same clay
when petitioner's properties were to be sold at public auction. Needless to state that
under the circumstances, petitioner was faced with imminent danger of his
properties being immediately sold the moment his motion for reconsideration is
denied. Plainly, urgency prompted recourse to the Court of Appeals and the adequate
and speedy remedy for petitioner under the situation was to file a petition for
certiorari with prayer for restraining order to stop the sale. For him to wait until after
the hearing of the motion for reconsideration on April 2, 1980 before taking recourse
to the appellate court may already be too late since without a restraining order, the
public sale can proceed at 10:00 that morning. In fact, the said motion was already
denied by the lower court in its order dated April 2, 1980 and were it not for the
pendency of the petition with the Court of Appeals and the restraining order issued
thereafter, the public sale scheduled that very same morning could have proceeded.
The other issue raised refers to the nature of the liability of petitioner, as one of the
defendants in Civil Case No. 33958, that is whether or not he is liable jointly or
solidarily.
In this regard, Article 1207 and 1208 of the Civil Code provides —
Art. 1207. The concurrence 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 prestation. Then is a solidary liability
only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.
Art. 1208. If from the law,or the nature or the wording of the
obligation to which the preceding article refers the contrary does
not appear, the credit or debt shall be presumed to be divided into
as many equal shares as there are creditors and debtors, the credits
or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of quits.
The decision of the lower court based on the parties' compromise agreement,
provides:
 1. Plaintiff agrees to reduce its total claim of P117,498.95 to only
P110,000.00 and defendants agree to acknowledge the validity of
such claim and further bind themselves to initially pay out of the
total indebtedness of P110,000.00, the amount of P5,000.00 on or
before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of
six months from January 1980 or before June 30, 1980. (Emphasis
supply)

Clearly then, by the express term of the compromise agreement and the decision
based upon it, the defendants obligated themselves to pay their obligation
"individually and jointly".

The term "individually" has the same meaning as "collectively", "separately",

"distinctively", respectively or "severally". An agreement to be "individually liable"
undoubtedly creates a several obligation, 14 and a "several obligation is one by which
one individual binds himself to perform the whole obligation. 15

In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or
separadamente or in the promissory note is an express statement making each of the
persons who signed it individually liable for the payment of the fun amount of the
obligation contained therein." Likewise in Un Pak Leung vs. Negorra 17 We held that
"in the absence of a finding of facts that the defendants made themselves individually
hable for the debt incurred they are each liable only for one-half of said amount

The obligation in the case at bar being described as "individually and jointly", the
same is therefore enforceable against one of the numerous obligors.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby
DISMISSED. Cost against petitioner.
46. G.R. No. 191189, January 29, 2014
MANLAR RICE MILL, INC., Petitioner, v. LOURDES L. DEYTO, DOING BUSINESS UNDER
THE TRADE NAME “J.D. GRAINS CENTER” AND JENNELITA DEYTO ANG, A.K.A.
“JANET ANG,”Respondents.

SO ORDERED. DECISION

Makasiar (Chairman), Abad Santos and Escolin, JJ., concur. DEL CASTILLO, J.:

Aquino, J., concurs in the result. As a general rule, a contract affects only the parties to it, and cannot be enforced by
or against a person who is not a party thereto.
Concepcion, Jr. and Guerrero, JJ., are on leave.
This Petition for Review on Certiorari1 seeks to set aside the October 30, 2009
Decision2 of the Court of Appeals (CA) in CA–G.R. CV No. 91239, entitled “Manlar Rice
180

Mill, Inc., Plaintiff–Appellee, versus Lourdes L. Deyto, doing business under the trade
 name JD Grains Center, Defendant–Appellant,” as well as its February 9, 2010 drawn against a closed account. Manlar made oral and written demands upon both
Resolution3 denying reconsideration of the assailed judgment. Deyto and Ang, which went unheeded.7 It appears that during the time demand was
being made upon Deyto, she informed Manlar, through its Sales Manager Pablo Pua
Factual Antecedents (Pua), that Ang could not be located.8cralawlawlibrary

Petitioner Manlar Rice Mill, Inc. (Manlar), organized and existing under Philippine
laws, is engaged in the business of rice milling and selling of grains. Respondent
Lourdes L. Deyto (Deyto) does business under the trade name “JD Grains Center” and
is likewise engaged in the business of milling and selling of grains. Respondent
Jennelita Deyto Ang or Janet Ang (Ang) is Deyto’s daughter and, prior to her alleged
absconding, operated her own rice trading business through her own store, “Janet
Commercial Store” .4
On November 24, 2000,9 Manlar filed a Complaint10 for sum of money against Deyto
and Ang before the Regional Trial Court (RTC) of Quezon City. The case was docketed
as Civil Case No. Q–00–42527 and assigned to Branch 215. The Complaint essentially
sought to hold Deyto and Ang solidarily liable on the rice supply contract. Manlar
prayed for actual damages in the total amount of P3,843,220.00, with interest;
P300,000.00 attorney’s fees, with charges for appearance fees; and attachment bond
and attachment expenses.

It appears that in October 2000, Ang entered into a rice supply contract with Manlar, Deyto filed her Answer with Compulsory Counterclaim,11 claiming that she did not
with the former purchasing rice from the latter amounting to P3,843,220.00. The contract with Manlar or any of its representatives regarding the purchase and
transaction was covered by nine postdated checks issued by Ang from her personal delivery of rice; that JD Grains Center was solely owned by her, and Ang had no
bank/checking account with Chinabank,5 to wit: participation therein, whether as employee, consultant, agent or other capacity; that
JD Grains Center was engaged in rice milling and not in the buying and selling of rice;
Check NumberDate Amount (PhP) and that one of her customers was her daughter Ang, who was engaged in the buying
October 19, and selling of rice under the trade name “Janet Commercial Store.” Deyto prayed
146514 P 204,660.00 among others that the Complaint be dismissed.
2000
October 20,
146552 472,200.00 For her part, Ang failed to file an Answer despite summons by publication; for this
2000
October 27, reason, she was declared in default.
146739 327,600.00
2000
October 26, On June 7, 2001, Manlar submitted to the trial court a notarized minutes of a special
146626 212,460.00 meeting of its board of directors12 dated November 8, 2000, indicating that Pua was
2000
October 27, authorized to file and prosecute the Complaint in Civil Case No. Q–00–42527.
1466276 565,600.00
2000
October 30, In a July 31, 2001 Resolution,13 the trial court resolved to deny Deyto’s
146740 515,000.00 special/affirmative defenses contained in her Answer. Regarding her objection to
2000
October 31, Pua’s authority to prosecute the case for lack of the proper board resolution to such
146628 358,500.00 effect, the trial court held that the issue had been rendered moot by Manlar’s
2000
November submission on June 7, 2001 of the notarized board resolution.
146630 593,600.00
4, 2000
November During trial, Manlar presented its lone witness, Pua, who testified that he knew Deyto
146555 593,600.00 and Ang since 1995; that Ang was the Operations Manager of JD Grains Center; that
6, 2000
TOTAL P 3,843,220.00 they (Deyto and Ang) bought rice from Manlar on “cash on delivery” basis from 1995
up to 2000; that since 2000, they increased the volume of their purchases and
requested that they pay Manlar by postdated checks on a weekly basis, to which
Upon presentment, the first two checks were dishonored for having been drawn Manlar acceded; that Manlar agreed to this arrangement because Deyto induced Pua
181

against insufficient funds; the remaining seven checks were dishonored for being to deliver rice on the assurance that Deyto had extensive assets, financial capacity
and a thriving business, and Deyto provided Pua with copies of JD Grains Center’s
 certificate of registration, business permit, business card, and certificates of title no participation in the actual operation thereof; that JD Grains Center was registered
covering property belonging to Deyto; that when rice deliveries were made by in the name of Deyto for convenience, to avoid jealousy or intrigue among his
Manlar, Deyto was not around; that it was solely Ang who issued the subject checks siblings, and because they used Deyto’s properties as collateral to borrow money for
and delivered them to Pua or Manlar; that initially, they (Deyto and Ang) faithfully the business; that Ang was originally an agent of JD Grains Center, but was removed
complied with the arrangement; that later on, they defaulted in their payments thus in 1997 for failure to remit her collections.18
resulting in the dishonor of the subject nine checks previously issued to Manlar; that
by then, Manlar had delivered rice to them totaling P3,843,220.00; that he went to Finally, Petallano testified that he was the Operations Head of Chinabank del Monte
the residence of Deyto at No. 93 Bulusan Street, La Loma, Quezon City on five branch and that Ang is the sole owner and depositor of the account from which the
occasions to demand payment from Deyto; and that he likewise went to Ang’s subject checks were drawn.19
residence at No. 4 Sabucoy14 Street, San Francisco del Monte, Quezon City to demand
payment.15 Ruling of the Trial Court

On cross–examination, Pua testified that no rice deliveries were in fact made by On November 22, 2007, a Decision20 was rendered by the trial court in Civil Case No.
Manlar at Deyto’s Bulusan Street residence; that Deyto guaranteed Ang’s checks, Q–00–42527, the dispositive portion of which reads, as follows:
although the guarantee was made verbally; that although he ordered Manlar’s
drivers to deliver rice at Deyto’s residence at Bulusan Street, the deliveries would WHEREFORE, premises considered, judgment is hereby rendered finding the
actually end up at Ang’s Sabucoy residence. 16 defendants liable to the plaintiff jointly and severally and ordering them as follows:

On the other hand, the defense presented three witnesses: Deyto, her son Jose D. 1. To pay plaintiff actual damages in the sum of P3,843,200.00 21 plus interest
Ang, and Homer Petallano (Petallano), Chinabank del Monte branch Operations [thereon] at 6% per annum reckoned from the time of demand up to the time of
Head. Deyto testified that she did not know Pua; that Pua was a liar and that she did payment thereof;
not enter into a contract with him for the purchase and delivery of rice; that she did
not receive at any time any rice delivery from Manlar; that while she had a house at 2. To pay plaintiff attorney’s fees in the sum of P200,000.00 plus P2,500.00 as per
No. 93 Bulusan Street, La Loma, Quezon City, she actually resided in Santiago City, appearance fee; and
Isabela; that she met Pua for the first time when the latter went to her La Loma
residence sometime in November or December 2000 looking for Ang, and claiming 3. To pay the costs of this suit.
that Ang was indebted to Manlar; that she had nothing to do with the obligations of
Ang incurred for rice deliveries made to her or JD Grains Center, as Ang was not SO ORDERED.22
connected with JD Grains Center, and it was her son, Jose D. Ang, who managed and
ran the business; that all the checks issued to Manlar were drawn by Ang from her
own bank account, as a businessperson in her own right and with her own business Essentially, the trial court believed Pua’s declarations that both Deyto and Ang
and receipts; that as of 2000, Ang was the proprietress of Jane Commercial with personally transacted with him in purchasing rice from Manlar for JD Grains Center —
address at No. 49 Corumi Street, Masambong, San Francisco del Monte, Quezon City, with Ang paying for the deliveries with her personal checks and his testimony that
and not at No. 93 Bulusan Street, La Loma, Quezon City; that the last time she saw both Deyto and Ang received Manlar’s rice deliveries. For these reasons, the trial
Ang was in June 2000, during the blessing of Ang’s Sabucoy residence; that she was court ruled that both defendants should be held solidarily liable for the unpaid and
not on talking terms with her daughter as early as June 2000 on account of Ang’s outstanding Manlar account.
activities and involvements; that one of Ang’s children was living with her after the
child was recovered from a kidnapping perpetrated by Ang’s best friend; that Ang’s Ruling of the Court of Appeals
other child lived with the child’s father; and that Ang’s whereabouts could not be
ascertained.17 Deyto went up to the CA on appeal, assailing the Decision of the trial court and
claiming that there was no evidence to show her participation in the transactions
182

Jose D. Ang, on the other hand, testified that he is Deyto’s son; that from the start, JD between Manlar and Ang, or that rice deliveries were even made to her; that she had
Grains Center has been under his supervision and control as Manager and Deyto had
 no legal obligation to pay Manlar what Ang owed the latter in her personal capacity;
that the evidence proved that Ang had overpaid Manlar; that the Complaint in Civil
Case No. Q–00–42527 was defective for lack of the required board resolution
authorizing Pua to sign the Complaint, verification, and certification against forum
shopping on behalf of Manlar; and that the trial court erred in not awarding damages
in her favor.
On October 30, 2009, the CA issued the assailed Decision, which held thus:
WHEREFORE, premises considered, the assailed Decision dated November 22, 2007 in
Civil Case No. Q–00–42527 of the Regional Trial Court, Branch 215, Quezon City is
REVERSED and SET ASIDE, and a new one entered, DISMISSING the complaint for lack
of merit.
SO ORDERED.23
The CA held that in the absence of a board resolution from Manlar authorizing Pua to
sign the verification and certification against forum shopping, the Complaint in Civil
Case No. Q–00–42527 should have been dismissed; the subsequent submission on
June 7, 2001 — or six months after the filing of the case — of the notarized minutes
of a special meeting of Manlar’s board of directors cannot have the effect of curing or
amending the defective Complaint, as Revised Supreme Court Circular No. 28–
9124 enjoins strict compliance. Substantial compliance does not suffice.
The CA added that the trial court’s Decision overlooked, misapprehended, and failed
to appreciate important facts and circumstances of the case. Specifically, it held that
Manlar failed to present documentary evidence to prove deliveries of rice to Deyto,
yet the trial court sweepingly concluded that she took actual delivery of Manlar’s
rice. Likewise, Pua’s declaration that Manlar delivered rice to Deyto at her La Loma
residence was not based on personal knowledge or experience, but on Manlar’s
drivers’ supposed accounts of events. Because these drivers were not called to
testify on such fact or claim, the CA held that Pua’s testimony regarding Deyto’s
alleged acceptance of rice deliveries from Manlar was hearsay.
The appellate court conceded that if Ang indeed contracted with Manlar, she did so
on her own; the evidence failed to indicate that Deyto had any participation in the
supposed transactions between her daughter and Manlar. The record reveals that
Deyto and Ang owned separate milling and grains businesses: JD Grains Center and
Janet Commercial Store. If Ang did business with Manlar, it is likely that she did so on
her own or in her personal capacity, and not for and in behalf of Deyto’s JD Grains
183
Center. Besides, the subject checks were drawn against Ang’s personal bank account,
therefore Ang, not Deyto is bound to make good on the dishonored checks.
Thus, the CA concluded that there is no legal basis to hold Deyto solidarily liable with
Ang for what the latter may owe Manlar.
Manlar moved for reconsideration, but in its February 9, 2010 Resolution, the CA
stood its ground. Hence, Manlar took the present recourse.
Issues
Manlar raises the following issues in its Petition:
1. THE COURT OF APPEALS COMMITTED CLEAR REVERSIBLE ERROR WHEN IT SET
ASIDE THE JUDGMENT OF THE TRIAL COURT BY SWEEPINGLY AND BASELESSLY
CONCLUDING THAT THE VERIFICATION AND CERTIFICATE AGAINST FORUM
SHOPPING IN THE COMPLAINT WERE ALLEGEDLY “DEFECTIVE” IN THAT PABLO PUA,
THE SALES MANAGER, WAS SUPPOSEDLY “NOT AUTHORIZED” TO SIGN THE
VERIFICATION AND CERTIFICATE OF NON–FORUM SHOPPING FOR MANLAR RICE
MILL, INC.
2. THE CONCLUSION OF THE COURT OF APPEALS THAT THE ALL–ENCOMPASSING
PHRASE IN THE BOARD RESOLUTION THAT “MR. PABLO PUA IS AUTHORIZED TO
SIGN ANY DOCUMENT, PAPERS, FOR AND IN BEHALF OF THE COMPANY, AND TO
REPRESENT THE COMPANY IN ANY SUCH CASE OR CASES” IS ALLEGEDLY “NOT
SUFFICIENT” AUTHORITY FOR PABLO PUA TO SIGN THE VERIFICATION AND
CERTIFICATE AGAINST FORUM SHOPPING IS GROSSLY ERRONEOUS AND
MANIFESTLY MISTAKEN BECAUSE IT IS DIRECTLY NEGATED AND DISPROVED BY THE
EXPRESS TERMS OF HIS AUTHORITY.
3. FURTHER, THE SERIOUS AND GLARING ERROR OF THE COURT OF APPEALS IN
CONCLUDING THAT PABLO PUA WAS ALLEGEDLY NOT AUTHORIZED TO SIGN THE
VERIFICATION AND CERTIFICATE OF NON–FORUM SHOPPING HAD BEEN
PREVIOUSLY RAISED AND SQUARELY RESOLVED BY THE TRIAL COURT AND ITS
RESOLUTION ON THIS ISSUE HAD LONG BECOME FINAL AND EXECUTORY WITHOUT
LOURDES L. DEYTO TAKING ANY APPELLATE REMEDY.
4. THE COURT OF APPEALS ALSO COMMITTED REVERSIBLE ERROR IN SAYING THAT
“THERE WAS NO DOCUMENTARY EVIDENCE TO PROVE ACTUAL DELIVERIES OF
RICE” AS BASIS FOR THE DISMISSAL OF THE CASE BECAUSE THIS IS MANIFESTLY
MISTAKEN AND NEGATED BY THE RECORDS SINCE RESPONDENTS (MOTHER AND
DAUGHTER) ISSUED NINE (9) POSTDATED CHECKS TO PETITIONER THRU PABLO PUA
 IN THE TOTAL AMOUNT OF P3,843,2[2]0.00 IN PAYMENT OF THE RICE DELIVERED
TO THEM.
5. THE CONTRACTS OF SALE OF RICE WERE PERFECTED BY THE DELIVERY OF RICE TO
RESPONDENTS MOTHER AND DAUGHTER AND THEIR ISSUANCE OF NINE (9)
POSTDATED CHECKS (P3,843,220.00) AS PAYMENT THEREOF BY RESPONDENTS, BUT
THAT THE NINE (9) POSTDATED CHECKS OF RESPONDENTS WERE LATER
DISHONORED.
6. THE SWEEPING STATEMENT OF THE COURT OF APPEALS THAT ALLEGEDLY “THE
PARTICIPATION OF APPELLANT (LOURDES L. DEYTO) TO WHATEVER BUSINESS
TRANSACTIONS HER DAUGHTER (CO–RESPONDENT JENNELITA DEYTO ANG) HAD
WITH MANLAR RICE MILL INC. WAS NOT DULY PROVEN” IS NOT ONLY A PURE
SPECULATION BUT IS SQUARELY NEGATED AND DISPROVED BY THE
OVERWHELMING EVIDENCE OF THE CONSPIRACY AND COLLABORATIVE EFFORTS OF
BOTH MOTHER AND DAUGHTER IN KNOWINGLY DEFRAUDING PETITIONER.25
Manlar adds that Deyto disposed of some of her personal properties — specifically
delivery/cargo trucks — in fraud of her creditors, including Manlar. It is also argued
that the fact that Deyto was in possession of Ang’s negotiated checks proved that
both of them connived to defraud Manlar by using the said checks to convince and
induce Pua to contract with them.
Manlar goes on to argue that Ang and another of Deyto’s children, Judith Ang Yu
(Judith), were charged and the latter convicted of estafa for defrauding another rice
trader, a certain Sergio Casaclang, of P3,800,000.00 — attaching a certified true copy
of the Decision of Branch 215 of the RTC of Quezon City in Criminal Case No. Q–01–
105698, indicating that Judith was sentenced to three months of arresto mayor and
to pay a fine and indemnity.
Next, Manlar argues that it is not necessary to further show proof of deliveries of rice
to Deyto and Ang in order to prove the existence of their obligation; the issuance of
the subject postdated checks as payment established the obligation.

Manlar thus prays that the Court annul and set aside the assailed CA dispositions and
Petitioner’s Arguments thus reinstate the trial court’s November 22, 2007 Decision finding Deyto liable under
the rice supply contract.
In its Petition and Reply,26 Manlar insists that the CA’s findings and conclusions are
not supported by the evidence on record. On the procedural issue, it reiterates the Respondent’s Arguments
trial court’s pronouncement that its subsequent submission — on June 7, 2001, or six
months after the filing of Civil Case No. Q–00–42527 — of the notarized minutes of a Praying that the Petition be denied, respondent Deyto in her Comment 27 essentially
special meeting of its board of directors authorizing Pua to file and prosecute Civil argues that petitioner Manlar’s claims are “products of pure imagination” , having no
Case No. Q–00–42527, effectively cured the defective Complaint, or rendered the factual and legal basis, and that Manlar’s impleading her is simply a desperate
issue of lack of proper authority moot and academic, and should not result in the strategy or attempt to recover its losses from her, considering that Ang can no longer
dismissal of the case. Because Deyto did not question this ruling through the proper be located. Furthermore, Deyto claims that Manlar’s alleged rice deliveries are not
petition or appeal, it should stand; besides, the trial court’s disposition on the matter covered by sufficient documentary evidence, and while it may appear that Ang had
is sound and just. transacted with Manlar, she did so in her sole capacity; thus, Deyto may not be held
liable under a transaction in which she took no part.
Next, Manlar disputes the CA ruling that Manlar failed to present documentary
evidence to prove deliveries of rice to Deyto, apart from that delivered to Ang in her Deyto adds that Pua’s basis for claiming that deliveries were made at her Bulusan
personal capacity. It points to “compelling and convincing evidence” that both Deyto Street residence is unfounded, considering that it springs from hearsay, or on the
and Ang induced it to deliver rice to them, and that both of them issued the subject mere affirmation of Manlar’s drivers — who were not presented in court to testify on
postdated checks. It claims that it was Deyto who delivered the checks to Pua at his such fact. Pua himself had no personal knowledge of such fact, and thus could not be
office in Manila; that Deyto induced Pua to deliver rice to respondents on the believed in testifying that rice was indeed delivered to Deyto at her Bulusan Street
assurance that Deyto had extensive assets, financial capacity and a thriving business; residence. She argues further that overall, Pua — Manlar’s lone witness — proved to
and that Deyto provided Pua with copies of JD Grains Center’s certificate of be an unreliable witness, constantly changing his testimony when the inconsistencies
registration, business permit, business card, and certificates of title covering property of his previous declarations were called out.
belonging to Deyto.
184

Finally, Deyto reiterates the CA ruling that Manlar’s Complaint in Civil Case No. Q–00–
42527 was defective for lack of the required board resolution authorizing Pua to sign
 the verification and certification against forum shopping, characterizing the belated The evidence on record further indicates that Deyto was an old lady who owned vast
submission of the required resolution six months later as a mere afterthought. tracts of land in Isabela province, and other properties in Metro Manila; that she is a
reputable businessperson in Isabela; that Ang originally worked for JD Grains Center,
Our Ruling but was removed in 1997 for failure to remit collections; that as early as June 2000,
or prior to the alleged transaction with Manlar, Ang and Deyto were no longer on
good terms as a result of Ang’s activities; that Deyto took custody of one of Ang’s
The Court denies the Petition. children, who was previously recovered from a kidnapping perpetrated by no less
than Ang’s best friend; and that Ang appears to have abandoned her own family and
It is a basic rule in evidence that he who alleges must prove his case or claim by the could no longer be located. This shows not only what kind of person Ang is; it
degree of evidence required. likewise indicates the improbability of Deyto’s involvement in Ang’s activities, noting
her age, condition, reputation, and the extent of her business activities and holdings.
x x x Ei incumbit probatio qui dicit, non qui negat. This Court has consistently applied
This Court cannot believe Manlar’s claims that Deyto induced Pua to transact with
the ancient rule that “if the plaintiff, upon whom rests the burden of proving his
her and Ang by providing him with copies of JD Grains Center’s certificate of
cause of action, fails to show in a satisfactory manner the facts upon which he bases
registration, business permit, business card, and certificates of title covering property
his claim, the defendant is under no obligation to prove his exception or defense."28
belonging to Deyto to show her creditworthiness, extensive assets, financial capacity
and a thriving business. The documents presented by Manlar during trial — copies of
JD Grains Center’s certificate of registration, business permit, and certificates of title
In civil cases, the quantum of proof required is preponderance of evidence, which
covering Deyto’s landholdings — are public documents which Manlar could readily
connotes “that evidence that is of greater weight or is more convincing than that
obtain from appropriate government agencies; it is improbable that Deyto provided
which is in opposition to it. It does not mean absolute truth; rather, it means that the
Manlar with copies of these documents in order to induce the latter to contract with
testimony of one side is more believable than that of the other side, and that the
her. Considering that both Manlar and Deyto were in the same line of business in
probability of truth is on one side than on the other." 29
the same province, it may be said that Manlar knew Deyto all along without the latter
having to supply it with actual proof of her creditworthiness.
The CA is correct in concluding that there is no legal basis to hold Deyto solidarily
liable with Ang for what the latter may owe Manlar. The evidence does not support
The allegations that Deyto guaranteed Ang’s checks and that she consented to be
Manlar’s view that both Deyto and Ang contracted with Manlar for the delivery of
held solidarily liable with Ang under the latter’s rice supply contract with Manlar are
rice on credit; quite the contrary, the preponderance of evidence indicates that it was
hardly credible. Pua in fact admitted that this was not in writing, just a verbal
Ang alone who entered into the rice supply agreement with Manlar. Pua’s own direct
assurance. But this will not suffice. “Well–entrenched is the rule that solidary
testimony indicated that whenever rice deliveries were made by Manlar, Deyto was
obligation cannot lightly be inferred. There is a solidary liability only when the
not around; that it was solely Ang who issued the subject checks and delivered them obligation expressly so states, when the law so provides or when the nature of the
to Pua or Manlar. On cross–examination, he testified that no rice deliveries were in
obligation so requires."30
fact made by Manlar at Deyto’s Bulusan Street residence; that although Deyto
guaranteed Ang’s checks, this guarantee was made verbally; and that while he
What this Court sees is an attempt to implicate Deyto in a transaction between
ordered Manlar’s drivers to deliver rice at Deyto’s residence at Bulusan Street, the
Manlar and Ang so that the former may recover its losses, since it could no longer
deliveries would actually end up at Ang’s Sabucoy residence.
recover them from Ang as a result of her absconding; this conclusion is indeed
consistent with what the totality of the evidence on record appears to show. This,
The documentary evidence, on the other hand, shows that the subject checks were
however, may not be allowed. As a general rule, a contract affects only the parties to
issued from a bank account in Chinabank del Monte branch belonging to Ang
it, and cannot be enforced by or against a person who is not a party thereto. “It is a
alone. They did not emanate from an account that belonged to both Ang and
basic principle in law that contracts can bind only the parties who had entered into it;
Deyto. This is supported by no less than the testimony of Chinabank del Monte
it cannot favor or prejudice a third person."31 Under Article 1311 of the Civil Code,
branch Operations Head Petallano.
185

contracts take effect only between the parties, their assigns and heirs. Thus, Manlar
may sue Ang, but not Deyto, who the Court finds to be not a party to the rice supply
 contract.

Having decided the case in the foregoing manner, the Court finds no need to resolve
the other issues raised by the parties.

WHEREFORE, the Petition is DENIED. The assailed dispositions of the Court of

Appeals are AFFIRMED.chanroblesvirtualawlibrary ChanRoblesVirtualawlibrary

SO ORDERED.

Carpio, (Chairperson), Brion, Perez, and Perlas–Bernabe, JJ., concur.

186
 VIII. EXTINGUISHMENT OF OBLIGATIONS
ART. 1240
47. G.R. No. 104612 May 10, 1994
BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND
TRUST CO.), Petitioner, v. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and
BENIGNO D. LIM, Respondents.
Leonen, Ramirez & Associates for petitioner.chanrobles virtual law library
Constante A. Ancheta for private respondents.
DAVIDE, JR., J.:
The petitioner urges us to review and set aside the amended Decision 1 of 6 March
1992 of respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the
Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of
Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-
in-interest of Commercial Bank and Trust Company) versus Eastern Plywood
Corporation and Benigno D. Lim. The Court of Appeals had affirmed the dismissal of
the complaint but had granted the defendants' counterclaim for P331,261.44 which
represents the outstanding balance of their account with the
plaintiff.chanroblesvirtualawlibrarychanrobles virtual law library
As culled from the records and the pleadings of the parties, the following facts were
duly established:chanrobles virtual law library
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint
bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the
predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in
March 1975, a joint checking account ("and" account) with Lim in the amount of
P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account
of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the
joint account of Velasco and Lim. The money therein was placed in the money
market.chanroblesvirtualawlibrarychanrobles virtual law library
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the
187
account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking
executed by Lim for himself and as President and General Manager of Eastern, 2one-
half of this amount was provisionally released and transferred to one of the bank
accounts of Eastern with CBTC. 3chanrobles virtual law library
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as
"Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit
Transaction" (Disclosure Statement) signed by CBTC through its branch manager,
Ceferino Jimenez, and Eastern, through Lim, as its President and General
Manager. 4The loan was payable on demand with interest at 14% per
annum.chanroblesvirtualawlibrarychanrobles virtual law library
For this loan, Eastern issued on the same day a negotiable promissory note for
P73,000.00 payable on demand to the order of CBTC with interest at 14% per
annum. 5The note was signed by Lim both in his own capacity and as President and
General Manager of Eastern. No reference to any security for the loan appears on the
note. In the Disclosure Statement, the box with the printed word "UNSECURED" was
marked with "X" - meaning unsecured, while the line with the words "this loan is
wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on
C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a
balance of P331,261.44.chanroblesvirtualawlibrarychanrobles virtual law library
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout
Agreement," also dated 18 August 1978, 6wherein it was stated that "as security for
the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on
said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the
full extent of their alleged interests therein as these may appear as a result of final
and definitive judicial action or a settlement between and among the contesting
parties thereto." 7Paragraph 02 of the Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their
alleged interests in the Account Balance shall have been established with finality,
ample and sufficient power as shall be necessary to retain said Account Balance and
enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan
in respect of principal and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to declare the
loan payable on demand at any time, nor shall the existence hereof and the non-
resolution of the dispute between the contending parties in respect of entitlement to
the Account Balance, preclude Comtrust from instituting an action for recovery
against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and
 Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities
thereunder.
In the meantime, a case for the settlement of Velasco's estate was filed with Branch
152 of the RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and
docketed as Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in
the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's
estate. On 9 September 1986, the intestate court granted the urgent motion of the
heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco
and authorized the heirs to divide among themselves the amount
withdrawn. 8chanrobles virtual law library
Sometime in 1980, CBTC was merged with BPI. 9On 2 December 1987, BPI filed with
the RTC of Manila a complaint against Lim and Eastern demanding payment of the
promissory note for P73,000.00. The complaint was docketed as Civil Case No. 87-
42967 and was raffled to Branch 19 of the said court, then presided over by Judge
Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against
BPI for the return of the balance in the disputed account subject of the Holdout
Agreement and the interests thereon after deducting the amount due on the
promissory note.chanroblesvirtualawlibrarychanrobles virtual law library
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make out its case.
Furthermore, it ruled that "the promissory note in question is subject to the 'hold-
out' agreement," 10and that based on this agreement, "it was the duty of plaintiff
Bank [BPI] to debit the account of the defendants under the promissory note to set
off the loan even though the same has no fixed maturity." 11As to the defendants'
counterclaim, the trial court, recognizing the fact that the entire amount in question
had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in
Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without
disturbing the resolution" of the intestate court. 12chanrobles virtual law library
Both parties appealed from the said decision to the Court of Appeals. Their appeal
was docketed as CA-G.R. CV No. 25739.chanroblesvirtualawlibrarychanrobles virtual
law library
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision
of the trial court. It, however, failed to rule on the defendants' (private respondents')
partial appeal from the trial court's denial of their counterclaim. Upon their motion
for reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended
Decision 13wherein it ruled that the settlement of Velasco's estate had nothing to do
188
with the claim of the defendants for the return of the balance of their account with
CBTC/BPI as they were not privy to that case, and that the defendants, as depositors
of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the
defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by
Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44
representing the outstanding balance in the bank account of
defendants." 14chanrobles virtual law library
On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout
Agreement in question was subject to a suspensive condition stated therein, viz., that
the "P331,261.44 shall become a security for respondent Lim's promissory note only
if respondents' Lim and Eastern Plywood Corporation's interests to that amount are
established as a result of a final and definitive judicial action or a settlement between
and among the contesting parties thereto." 15Hence, BPI asserts, the Court of Appeals
erred in affirming the trial court's decision dismissing the complaint on the ground
that it was the duty of CBTC to debit the account of the defendants to set off the
amount of P73,000.00 covered by the promissory
note.chanroblesvirtualawlibrarychanrobles virtual law library
Private respondents Eastern and Lim dispute the "suspensive condition" argument of
the petitioner. They interpret the findings of both the trial and appellate courts that
the money deposited in the joint account of Velasco and Lim came from Eastern and
Lim's own account as a finding that the money deposited in the joint account of Lim
and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno
Lim." And because the latter are the rightful owners of the money in question, the
suspensive condition does not find any application in this case and the bank had the
duty to set off this deposit with the loan. They add that the ruling of the lower court
that they own the disputed amount is the final and definitive judicial action required
by the Holdout Agreement; hence, the petitioner can only hold the amount of
P73,000.00 representing the security required for the note and must return the
rest. 16chanrobles virtual law library
The petitioner filed a Reply to the aforesaid Comment. The private respondents filed
a Rejoinder thereto.chanroblesvirtualawlibrarychanrobles virtual law library
We gave due course to the petition and required the parties to submit simultaneously
their memoranda.chanroblesvirtualawlibrarychanrobles virtual law library
The key issues in this case are whether BPI can demand payment of the loan of
P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still
liable to the private respondents on the account subject of the Holdout Agreement
after its withdrawal by the heirs of Velasco.chanroblesvirtualawlibrarychanrobles
virtual law library
 The collection suit of BPI is based on the promissory note for P73,000.00. On its face,
the note is an unconditional promise to pay the said amount, and as stated by the
respondent Court of Appeals, "[t]here is no question that the promissory note is a
negotiable instrument." 17It further correctly ruled that BPI was not a holder in due
course because the note was not indorsed to BPI by the payee, CBTC. Only a
negotiation by indorsement could have operated as a valid transfer to make BPI a
holder in due course. It acquired the note from CBTC by the contract of merger or
sale between the two banks. BPI, therefore, took the note subject to the Holdout
Agreement.chanroblesvirtualawlibrarychanrobles virtual law library
We disagree, however, with the Court of Appeals in its interpretation of the Holdout
Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern and Lim settle their liability under
the promissory note. It cannot be compelled to retain and apply the deposit in Lim
and Velasco's joint account to the payment of the note. What the agreement
conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or
obligation to make the application. 18To apply the deposit to the payment of a loan is
a privilege, a right of set-off which the bank has the option to exercise. 19chanrobles
virtual law library
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the
agreement, CBTC was not in any way precluded from demanding payment from
Eastern and from instituting an action to recover payment of the loan. What it
provides is an alternative, not an exclusive, method of enforcing its claim on the note.
When it demanded payment of the debt directly from Eastern and Lim, BPI had opted
not to exercise its right to apply part of the deposit subject of the Holdout Agreement
to the payment of the promissory note for P73,000.00. Its suit for the enforcement of
the note was then in order and it was error for the trial court to dismiss it on the
theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI
should have debited. The Court of Appeals also erred in affirming such
dismissal.chanroblesvirtualawlibrarychanrobles virtual law library
The "suspensive condition" theory of the petitioner is, therefore,
untenable.chanroblesvirtualawlibrarychanrobles virtual law library
The Court of Appeals correctly decided on the counterclaim. The counterclaim of
Eastern and Lim for the return of the P331,261.44 20was equivalent to a demand that
they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil
Code expressly provides that "[f]ixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple loan."
In Serrano vs. Central Bank of the Philippines, 21we held that bank deposits are in the
189
nature of irregular deposits; they are really loans because they earn interest. The
relationship then between a depositor and a bank is one of creditor and debtor. The
deposit under the questioned account was an ordinary bank deposit; hence, it was
payable on demand of the depositor. 22chanrobles virtual law library
The account was proved and established to belong to Eastern even if it was deposited
in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the
right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty
to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the
whole balance of the account. The petitioner should not have allowed such
withdrawal because it had admitted in the Holdout Agreement the questioned
ownership of the money deposited in the account. As early as 12 May 1979, CBTC
was notified by the Corporate Secretary of Eastern that the deposit in the joint
account of Velasco and Lim was being claimed by them and that one-half was being
claimed by the heirs of Velasco. 23chanrobles virtual law library
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of
Velasco to withdraw the account. BPI was not specifically ordered to release the
account to the said heirs; hence, it was under no judicial compulsion to do so. The
authorization given to the heirs of Velasco cannot be construed as a final
determination or adjudication that the account belonged to Velasco. We have ruled
that when the ownership of a particular property is disputed, the determination by a
probate court of whether that property is included in the estate of a deceased is
merely provisional in character and cannot be the subject of execution. 24chanrobles
virtual law library
Because the ownership of the deposit remained undetermined, BPI, as the debtor
with respect thereto, had no right to pay to persons other than those in whose favor
the obligation was constituted or whose right or authority to receive payment is
indisputable. The payment of the money deposited with BPI that will extinguish its
obligation to the creditor-depositor is payment to the person of the creditor or to one
authorized by him or by the law to receive it. 25Payment made by the debtor to the
wrong party does not extinguish the obligation as to the creditor who is without fault
or negligence, even if the debtor acted in utmost good faith and by mistake as to the
person of the creditor, or through error induced by fraud of a third person. 26The
payment then by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor,
Eastern.chanroblesvirtualawlibrarychanrobles virtual law library
In the light of the above findings, the dismissal of the petitioner's complaint is
reversed and set aside. The award on the counterclaim is sustained subject to a
modification of the interest.chanroblesvirtualawlibrarychanrobles virtual law library
 WHEREFORE, the instant petition is partly GRANTED. The challenged amended
decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified:

(1) Private respondents are ordered to pay the petitioner the promissory note for
P73,000.00 with interest at:

(a) 14% per annum on the principal, computed from

18 August 1978 until payment;chanrobles virtual law library

(b) 12% per annum on the interest which had accrued up to the date of the filing of
the complaint, computed from that date until payment pursuant to Article 2212 of
the Civil Code.

(2) The award of P331,264.44 in favor of the private respondents shall bear interest
at the rate of 12% per annum computed from the filing of the counterclaim.

No pronouncement as to costs.chanroblesvirtualawlibrarychanrobles virtual law

library

SO ORDERED.

Cruz, Bellosillo, Quiason and Kapunan, JJ., concur

190
 48. G. R. No. 125862 – April 15, 2004 accountabilities which included his account. The defendant, in good faith, then paid
to the said supervisor, and he was, in turn, issued genuine SMC liquidation receipts.
FRANCISCO CULABA and DEMETRIA CULABA, doing business under the name and
style “Culaba Store”, Petitioners, vs. COURT OF APPEALS and SAN MIGUEL For its part, SMC submitted a publishers affidavit 9 to prove that the entire booklet of
CORPORATION, Respondents. TCSL Receipts bearing Nos. 27301-27350 were reported lost by it, and that it caused
the publication of the notice of loss in the July 9, 1983 issue of the Daily Express, as
DECISION follows:

CALLEJO, SR., J.: NOTICE OF LOSS

This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of
the Decision1 of the Court of Appeals in CA-G.R. CV No. 19836 affirming in toto the
Decision2 of the Regional Trial Court of Makati, Branch 138, in Civil Case No. 1033 for
collection of sum of money, and the Resolution 3 denying the motion for
reconsideration of the said decision.
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES
LIQUIDATION RECEIPTS WITH SERIAL NOS. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE
RECEIPTS WILL NOT BE HONORED.

The Undisputed Facts SAN MIGUEL CORPORATION

BEER DIVISION
The spouses Francisco and Demetria Culaba were the owners and proprietors of the Makati Beer Region10
Culaba Store and were engaged in the sale and distribution of San Miguel
Corporations (SMC) beer products. SMC sold beer products on credit to the Culaba The Trial Courts Ruling
spouses in the amount of P28,650.00, as evidenced by Temporary Credit Invoice No.
42943.4 Thereafter, the Culaba spouses made a partial payment of P3,740.00, leaving After trial on the merits, the trial court rendered judgment in favor of SMC, and held
an unpaid balance of P24,910.00. As they failed to pay despite repeated demands, the Culaba spouses liable on the balance of its obligation, thus:
SMC filed an action for collection of a sum of money against them before the RTC of
Makati, Branch 138. Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:

The defendant-spouses denied any liability, claiming that they had already paid the
plaintiff in full on four separate occasions. To substantiate this claim, the defendants
presented four (4) Temporary Charge Sales (TCS) Liquidation Receipts, as follows:
April 19, 1983 Receipt No. 27331 for P8,0005
1. Ordering defendants to pay the amount of P24,910.00 plus legal interest of 6% per
annum from April 12, 1983 until the whole amount is fully paid;
2. Ordering defendants to pay 20% of the amount due to plaintiff as and for attorneys
fees plus costs.

April 22, 1983 Receipt No. 27318 for P9,0006 SO ORDERED.11

April 27, 1983 Receipt No. 27339 for P4,5007

According to the trial court, it was unusual that defendant Francisco Culaba forgot
the name of the collector to whom he made the payments and that he did not
April 30, 1983 Receipt No. 27346 for P3,4108
require the said collector to print his name on the receipts. The court also noted that
although they were part of a single booklet, the TCS Liquidation Receipts submitted
Defendant Francisco Culaba testified that he made the foregoing payments to an SMC by the defendants did not appear to have been issued in their natural sequence.
191

supervisor who came in an SMC van. He was then showed a list of customers Furthermore, they were part of the lost booklet receipts, which the public was duly
 warned of through the Notice of Loss the plaintiff caused to be published in a daily
newspaper. This confirmed the plaintiffs claim that the receipts presented by the
defendants were spurious ones.
The Case on Appeal
On appeal, the appellants interposed the following assignment of errors:
I burden to establish the true identity of the assumed agent, and this could not be
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY
DEFENDANTS EVIDENCING HIS PAYMENTS TO PLAINTIFF SAN MIGUEL CORPORATION,
ARE SPURIOUS.
II
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS
SUFFICIENTLY PROVED ITS CAUSE OF ACTION AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE AMOUNT
DUE TO PLAINTIFF AS ATTORNEYS FEES.12
The appellants asserted that while the trial courts observations were true, it was the
usual business practice in previous transactions between them and SMC. The SMC
previously honored receipts not bearing the salesmans name. According to appellant
Francisco Culaba, he even lost some of the receipts, but did not encounter any
problems.
According to appellant Francisco, he could not be faulted for paying the SMC collector
who came in a van and was in uniform, and that any regular customer would, without
any apprehension, transact with such an SMC employee. Furthermore, the respective
receipts issued to him at the time he paid on the four occasions mentioned had not
yet then been declared lost. Thus, the subsequent publication in a daily newspaper
declaring the booklets lost did not affect the validity and legality of the payments
made. Accordingly, by its actuations, the SMC was estopped from questioning the
legality of the payments and had no cause of action against the appellants.
Anent the issue of attorneys fees, the order of the trial court for payment thereof is
192
without basis. According to the appellant, the provision for attorneys fees is a
contingent fee, already provided for in the SMCs contract with the law firm. To
further order them to pay 20% of the amount due as attorneys fees is double
payment, tantamount to undue enrichment and therefore improper.13
The appellee, for its part, contended that the primary issue in the case at bar
revolved around the basic and fundamental principles of agency.14 It was incumbent
upon the defendants-appellants to exercise ordinary prudence and reasonable
diligence to verify and identify the extent of the alleged agents authority. It was their
established by mere representation, rumor or general reputation. As they utterly
failed in this regard, the appellants must suffer the consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the appellants, we
cannot fault the lower court for giving more weight to appellees testimonial and
documentary evidence, all of which establish with some degree of preponderance the
existence of the account sued upon.
ALL CONSIDERED, we cannot find any justification to reject the factual findings of the
lower court to which we must accord respect, for which reason, the judgment
appealed from is hereby AFFIRMED in all respects.
SO ORDERED.15
Hence, the instant petition.
The petitioners pose the following issues for the Courts resolution:
II. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT
EVIDENCE THAT IT HAD PROPERLY AND TIMELY NOTIFIED PETITIONER
OF LOST BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE
THAT PETITIONER WAS REMISS IN THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT. 16
According to the petitioners, receiving receipts from the private respondents agents
instead of its salesmen was a usual occurrence, as they had been operating the store
since 1979. Thus, on four occasions in April 1983, when an agent of the respondent
came to the store wearing an SMC uniform and driving an SMC van, petitioner
Francisco Culaba, without question, paid his accounts. He received the receipts
 without fear, as they were similar to what he used to receive before. Furthermore,
the petitioners assert that, common experience will attest that unless the attention
of the customers is called for, they would not take note of the serial number of the
receipts.
The petitioners contend that the private respondent advertised its warning to the
public only after the damage was done, or on July 9, 1993. Its belated notice showed
its glaring lack of interest or concern for its customers welfare, and, in sum, its
negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the
accounts were paid had all the physical and material attributes or indications of a
representative of the private respondent, leaving no doubt that he was duly
authorized by the latter. Petitioner Francisco Culabas testimony that “he does not
necessarily check the contents of the receipts issued to him except for the amount
indicated if [the] same accurately reflects his actual payment” is a common attitude
of customers. He could, thus, not be faulted for paying the private respondents agent
on four occasions. Petitioner Francisco Culaba asserts that he made the payment in
good faith, to an agent who issued SMC receipts which appeared to be genuine. Thus,
according to the petitioners, they had duly paid their obligation in accordance with
Articles 1240 and 1242 of the New Civil Code.
The private respondent, for its part, avers that the burden of proving payment is with
the debtor, in consonance with the express provision of Article 1233 of the New Civil
Code. The petitioners miserably failed to prove the self-serving allegation that they
already paid their liability to the private respondent. Furthermore, under normal
circumstances, an obligor would not just pay a substantial amount to someone whom
he saw for the first time, without even asking for the latters name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to whether the
payment of the petitioners obligation to the private respondent was properly made,
thus, extinguishing the same. This is clearly a factual issue, and beyond the purview of
the Court to delve into. This is in consonance with the well-settled rule that findings
of fact of the trial court, especially when affirmed by the Court of Appeals, are
accorded the highest degree of respect, and generally will not be disturbed on
appeal. Such findings are binding and conclusive on the Court.17Furthermore, it is not
the Courts function under Rule 45 of the Rules of Court, as amended, to review,
193
examine and evaluate or weigh the probative value of the evidence presented. 18
To reiterate, the issue being raised by the petitioners does not involve a question of
law, but a question of fact, not cognizable by this Court in a petition for review under
Rule 45. The jurisdiction of the Court in such a case is limited to reviewing only errors
of law, unless the factual findings being assailed are not supported by evidence on
record or the impugned judgment is based on a misapprehension of facts. 19
A careful study of the records of the case reveal that the appellate court affirmed the
trial courts factual findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private
respondents lost booklet, which loss was duly advertised in a newspaper of general
circulation; thus, the private respondent could not have officially issued them to the
petitioners to cover the alleged payments on the dates appearing thereon.
Second. There was something amiss in the way the receipts were issued to the
petitioners, as one receipt bearing a higher serial number was issued ahead of
another receipt bearing a lower serial number, supposedly covering a later payment.
The petitioners failed to explain the apparent mix-up in these receipts, and no
attempt was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the four receipts
and that the petitioners could not even remember the name of the supposed
impostor who received the said payments strongly argue against the veracity of the
petitioners claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the merits of the
case.
Payment is a mode of extinguishing an obligation.20 Article 1240 of the Civil Code
provides that payment shall be made to the person in whose favor the obligation has
been constituted, or his successor-in-interest, or any person authorized to receive
it.21 In this case, the payments were purportedly made to a “supervisor” of the
private respondent, who was clad in an SMC uniform and drove an SMC van. He
appeared to be authorized to accept payments as he showed a list of customers
accountabilities and even issued SMC liquidation receipts which looked genuine.
Unfortunately for petitioner Francisco Culaba, he did not ascertain the identity and
authority of the said supervisor, nor did he ask to be shown any identification to
prove that the latter was, indeed, an SMC supervisor. The petitioners relied solely on
the mans representation that he was collecting payments for SMC. Thus, the
 payments the petitioners claimed they made were not the payments that discharged
their obligation to the private respondent.

The basis of agency is representation.22 A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent. 23 In the instant
case, the petitioners loss could have been avoided if they had simply exercised due
diligence in ascertaining the identity of the person to whom they allegedly made the
payments. The fact that they were parting with valuable consideration should have
made them more circumspect in handling their business transactions. Persons dealing
with an assumed agent are bound at their peril to ascertain not only the fact of
agency but also the nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it.24 The petitioners in this case failed to
discharge this burden, considering that the private respondent vehemently denied
that the payments were accepted by it and were made to its authorized
representative.

Negligence is the omission to do something which a reasonable man, guided by those

considerations which ordinarily regulate the conduct of human affairs, would do, or
the doing of something, which a prudent and reasonable man would not do. 25 In the
case at bar, the most prudent thing the petitioners should have done was to ascertain
the identity and authority of the person who collected their payments. Failing this,
the petitioners cannot claim that they acted in good faith when they made such
payments. Their claim therefor is negated by their negligence, and they are bound by
its consequences. Being negligent in this regard, the petitioners cannot seek relief on
the basis of a supposed agency.26

WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated April
16, 1996, and the Resolution dated July 19, 1996 of the Court of Appeals are
AFFIRMED. Costs against the petitioners.

SO ORDERED.

Puno, (Chairman), Quisumbing, Austria-Martinez, and Tinga, JJ., concur.

194
 49. G.R. No. 172825 : October 11, 2012
SPOUSES MINIANO B. DELA CRUZ and LETA L. DELA CRUZ, Petitioners, v. ANA MARIE
CONCEPCION, Respondent.
DECISION
PERALTA, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court
filed by petitioners spouses Miniano B. Dela Cruz and Leta L. Dela Cruz against
respondent Ana Marie Concepcion are the Court of Appeals (CA)
Decision1ςrνll dated March 31, 2005 and Resolution2ςrνll dated May 24, 2006 in
CA-G.R. CV No. 83030.
The facts of the case are as follows:chanroblesvirtuallawlibrary
On March 25, 1996, petitioners (as vendors) entered into a Contract to
Sell3ςrνll with respondent (as vendee) involving a house and lot in Cypress St., Phase
I, Town and Country Executive Village, Antipolo City for a consideration of
P2,000,000.00 subject to the following terms and conditions:
a) That an earnest money of P100,000.00 shall be paid immediately;
b) That a full down payment of Four Hundred Thousand Pesos (P400,000.00) shall be
paid on February 29, 1996;
c) That Five Hundred Thousand Pesos (P500,000.00) shall be paid on or before May 5,
1996; and
d) That the balance of One Million Pesos (P1,000,000.00) shall be paid on installment
with interest of Eighteen Percent (18%) per annum or One and a half percent (1-1/2
%) interest per month, based on the diminishing balance, compounded monthly,
effective May 6, 1996. The interest shall continue to run until the whole obligation
shall have been fully paid. The whole One Million Pesos shall be paid within three
years from May 6, 1996;
e) That the agreed monthly amortization of Fifty Thousand Pesos (P50,000.00),
principal and interest included, must be paid to the Vendors, without need of prior
demand, on or before May 6, 1996, and every month thereafter. Failure to pay the
195
monthly amortization on time, a penalty equal to Five Percent (5%) of the amount
due shall be imposed, until the account is updated. In addition, a penalty of One
Hundred Pesos per day shall be imposed until the account is updated;
f) That after receipt of the full payment, the Vendors shall execute the necessary
Absolute Deed of Sale covering the house and lot mentioned above x x x 4ςrνll
Respondent made the following payments, to wit: (1) P500,000.00 by way of
downpayment; (2) P500,000.00 on May 30, 1996; (3) P500,000.00 paid on January 22,
1997; and (4) P500,000.00 bounced check dated June 30, 1997 which was
subsequently replaced by another check of the same amount, dated July 7, 1997.
Respondent was, therefore, able to pay a total of P2,000,000.00. 5ςrνll
Before respondent issued the P500,000.00 replacement check, she told petitioners
that based on the computation of her accountant as of July 6, 1997, her unpaid
obligation which includes interests and penalties was only
P200,000.00.6ςrνll Petitioners agreed with respondent and said "if P200,000.00 is
the correct balance, it is okay with us."7ςrνll
Meanwhile, the title to the property was transferred to respondent. Petitioners later
reminded respondent to pay P209,000.00 within three months. 8ςrνll They claimed
that the said amount remained unpaid, despite the transfer of the title to the
property to respondent. Several months later, petitioners made further demands
stating the supposed correct computation of respondents liabilities. 9ςrνll Despite
repeated demands, petitioners failed to collect the amounts they claimed from
respondent. Hence, the Complaint for Sum of Money With Damages 10ςrνll filed with
the Regional Trial Court (RTC)11ςrνll of Antipolo, Rizal. The case was docketed as Civil
Case No. 98-4716.
In her Answer with Compulsory Counterclaim,12ςrνll respondent claimed that her
unpaid obligation to petitioners is only P200,000.00 as earlier confirmed by
petitioners and not P487,384.15 as later alleged in the complaint. Respondent thus
prayed for the dismissal of the complaint. By way of counterclaim, respondent prayed
for the payment of moral damages and attorneys fees. During the presentation of the
parties evidence, in addition to documents showing the statement of her paid
obligations, respondent presented a receipt purportedly indicating payment of the
remaining balance of P200,000.00 to Adoracion Losloso (Losloso) who allegedly
received the same on behalf of petitioners.13ςrνll
On March 8, 2004, the RTC rendered a Decision 14ςrνll in favor of respondent, the
dispositive portion of which reads:chanroblesvirtuallawlibrary
 WHEREFORE, premises considered, this case is hereby DISMISSED. The plaintiff is
hereby ordered to pay the defendants counterclaim, amounting to wit:
a) P300,000 as moral damages; and
b) P100,000 plus P2,000 per court appearance as attorneys fees.
SO ORDERED.15ςrνll
The RTC noted that the evidence formally offered by petitioners have not actually
been marked as none of the markings were recorded. Thus, it found no basis to grant
their claims, especially since the amount claimed in the complaint is different from
that testified to. The court, on the other hand, granted respondents
counterclaim.16ςrνll
On appeal, the CA affirmed the decision with modification by deleting the award of
moral damages and attorneys fees in favor of respondent. 17ςrνll It agreed with the
RTC that the evidence presented by petitioners cannot be given credence in
determining the correct liability of respondent.18ςrνll Considering that the purchase
price had been fully paid by respondent ahead of the scheduled date agreed upon by
the parties, petitioners were not awarded the excessive penalties and
interests.19ςrνll The CA thus maintained that respondents liability is limited to
P200,000.00 as claimed by respondent and originally admitted by
petitioners.20ςrνll This amount, however, had already been paid by respondent and
received by petitioners representative.21ςrνll Finally, the CA pointed out that the
RTC did not explain in its decision why moral damages and attorneys fees were
awarded. Considering also that bad faith cannot be attributed to petitioners when
they instituted the collection suit, the CA deleted the grant of their
counterclaims.22ςrνll
Aggrieved, petitioners come before the Court in this petition for review on certiorari
under Rule 45 of the Rules of Court raising the following errors:
I.
"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND THAT
PLAINTIFF FAILED TO FORMALLY OFFER THEIR EVIDENCE AS DEFENDANT JUDICIALLY
ADMITTED IN HER ANSWER WITH COMPULS[O]RY COUNTERCLAIM HER
OUTSTANDING OBLIGATION STILL DUE TO PLAINTIFFS AND NEED NO PROOF.
196
II.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT FOR ALLEGED FAILURE OF
PLAINTIFFS TO PRESENT COMPUTATION OF THE AMOUNT BEING CLAIMED AS
DEFENDANT JUDICIALLY ADMITTED HAVING RECEIVED THE DEMAND LETTER DATED
OCTOBER 22, 1997 WITH COMPUTATION OF THE BALANCE DUE.
III.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND THAT THE
DEFENDANT FULLY PAID THE CLAIMS OF PLAINTIFFS BASED ON THE ALLEGED RECEIPT
OF PAYMENT BY ADORACION LOSLOSO FROM ANA MARIE CONCEPCION
MAGLASANG WHICH HAS NOTHING TO DO WITH THE JUDICIALLY ADMITTED
OBLIGATION OF APPELLEE."23ςrνll
Invoking the rule on judicial admission, petitioners insist that respondent admitted in
her Answer with Compulsory Counterclaim that she had paid only a total amount of
P2 million and that her unpaid obligation amounts to P200,000.00.24ςrνll They thus
maintain that the RTC and the CA erred in concluding that said amount had already
been paid by respondent. Petitioners add that respondents total liability as shown in
the latters statement of account was erroneously computed for failure to compound
the monthly interest agreed upon.25ςrνll Petitioners also claim that the RTC and the
CA erred in giving credence to the receipt presented by respondent to show that her
unpaid obligation had already been paid having been allegedly given to a person who
was not armed with authority to receive payment.26ςrνll
The petition is without merit.
It is undisputed that the parties entered into a contract to sell a house and lot for a
total consideration of P2 million. Considering that the property was payable in
installment, they likewise agreed on the payment of interest as well as penalty in case
of default. It is likewise settled that respondent was able to pay the total purchase
price of P2 million ahead of the agreed term. Afterwhich, they agreed on the
remaining balance by way of interest and penalties which is P200,000.00. Considering
that the term of payment was not strictly followed and the purchase price had
already been fully paid by respondent, the latter presented to petitioners her
computation of her liabilities for interests and penalties which was agreed to by
petitioners. Petitioners also manifested their conformity to the statement of account
prepared by respondent.
In paragraph (9) of petitioners Complaint, they stated
that:chanroblesvirtuallawlibrary
 9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is the correct
balance, it is okay with us." x x x.27ςrνll
But in paragraph (17) thereof, petitioners claimed that defendants outstanding
liability as of November 6, 1997 was P487,384.15.28ςrνll Different amounts,
however, were claimed in their demand letter and in their testimony in court.
With the foregoing factual antecedents, petitioners cannot be permitted to assert a
different computation of the correct amount of respondents liability.
It is noteworthy that in answer to petitioners claim of her purported unpaid
obligation, respondent admitted in her Answer with Compulsory Counterclaim that
she paid a total amount of P2 million representing the purchase price of the subject
house and lot. She then manifested to petitioners and conformed to by respondent
that her only balance was P200,000.00. Nowhere in her Answer did she allege the
defense of payment. However, during the presentation of her evidence, respondent
submitted a receipt to prove that she had already paid the remaining balance. Both
the RTC and the CA concluded that respondent had already paid the remaining
balance of P200,000.00. Petitioners now assail this, insisting that the court should
have maintained the judicial admissions of respondent in her Answer with
Compulsory Counterclaim, especially as to their agreed stipulations on interests and
penalties as well as the existence of outstanding obligations.
It is, thus, necessary to discuss the effect of failure of respondent to plead payment of
its obligations.
Section 1, Rule 9 of the Rules of Court states that "defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived." Hence,
respondent should have been barred from raising the defense of payment of the
unpaid P200,000.00. However, Section 5, Rule 10 of the Rules of Court allows the
amendment to conform to or authorize presentation of evidence, to
wit:chanroblesvirtuallawlibrary
Section 5. Amendment to conform to or authorize presentation of evidence. When
issues not raised by the pleadings are tried with the express or implied consent of the
parties, they shall be treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any
party at any time, even after judgment; but failure to amend does not affect the
result of the trial of these issues. If evidence is objected to at the trial on the ground
that it is not within the issues made by the pleadings, the court may allow the
197
pleadings to be amended and shall do so with liberality if the presentation of the
merits of the action and the ends of substantial justice will be subserved thereby. The
court may grant a continuance to enable the amendment to be made.
The foregoing provision envisions two scenarios, namely, when evidence is
introduced in an issue not alleged in the pleadings and no objection was interjected;
and when evidence is offered on an issue not alleged in the pleadings but this time an
objection was raised.29ςrνll When the issue is tried without the objection of the
parties, it should be treated in all respects as if it had been raised in the
pleadings.30ςrνll On the other hand, when there is an objection, the evidence may
be admitted where its admission will not prejudice him.31ςrνll
Thus, while respondent judicially admitted in her Answer that she only paid P2 million
and that she still owed petitioners P200,000.00, respondent claimed later and, in fact,
submitted an evidence to show that she already paid the whole amount of her unpaid
obligation. It is noteworthy that when respondent presented the evidence of
payment, petitioners did not object thereto. When the receipt was formally offered
as evidence, petitioners did not manifest their objection to the admissibility of said
document on the ground that payment was not an issue. Apparently, petitioners only
denied receipt of said payment and assailed the authority of Losloso to receive
payment. Since there was an implied consent on the part of petitioners to try the
issue of payment, even if no motion was filed and no amendment of the pleading has
been ordered,32ςrνll the RTC cannot be faulted for admitting respondents
testimonial and documentary evidence to prove payment. 33ςrνll
As stressed by the Court in Royal Cargo Corporation v. DFS Sports Unlimited,
Inc.,34ςrνll
The failure of a party to amend a pleading to conform to the evidence adduced
during trial does not preclude adjudication by the court on the basis of such evidence
which may embody new issues not raised in the pleadings. x x x Although, the
pleading may not have been amended to conform to the evidence submitted during
trial, judgment may nonetheless be rendered, not simply on the basis of the issues
alleged but also on the issues discussed and the assertions of fact proved in the
course of the trial. The court may treat the pleading as if it had been amended to
conform to the evidence, although it had not been actually amended. x x x Clearly, a
court may rule and render judgment on the basis of the evidence before it even
though the relevant pleading had not been previously amended, so long as no
surprise or prejudice is thereby caused to the adverse party. Put a little differently, so
long as the basic requirements of fair play had been met, as where the litigants were
given full opportunity to support their respective contentions and to object to or
refute each other's evidence, the court may validly treat the pleadings as if they had
 been amended to conform to the evidence and proceed to adjudicate on the basis of
all the evidence before it. (Emphasis supplied)35ςrνll
To be sure, petitioners were given ample opportunity to refute the fact of and
present evidence to prove payment.
With the evidence presented by the contending parties, the more important question
to resolve is whether or not respondents obligation had already been extinguished by
payment.
We rule in the affirmative as aptly held by the RTC and the CA.
Respondents obligation consists of payment of a sum of money. In order to
extinguish said obligation, payment should be made to the proper person as set forth
in Article 1240 of the Civil Code, to wit:chanroblesvirtuallawlibrary
Article 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it.
(Emphasis supplied)
36
The Court explained in Cambroon v. City of Butuan, ςrνll cited in Republic v. De
Guzman,37ςrνll to whom payment should be made in order to extinguish an
obligation:chanroblesvirtuallawlibrary
Payment made by the debtor to the person of the creditor or to one authorized by
him or by the law to receive it extinguishes the obligation. When payment is made to
the wrong party, however, the obligation is not extinguished as to the creditor who is
without fault or negligence even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor or through error induced by fraud of a third
person.
In general, a payment in order to be effective to discharge an obligation, must be
made to the proper person. Thus, payment must be made to the obligee himself or to
an agent having authority, express or implied, to receive the particular payment.
Payment made to one having apparent authority to receive the money will, as a rule,
be treated as though actual authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to act for the creditor, it will work a
discharge. The receipt of money due on a judgment by an officer authorized by law to
accept it will, therefore, satisfy the debt.38ςrνll
198
Admittedly, payment of the remaining balance of P200,000.00 was not made to the
creditors themselves. Rather, it was allegedly made to a certain Losloso. Respondent
claims that Losloso was the authorized agent of petitioners, but the latter dispute it.
Loslosos authority to receive payment was embodied in petitioners
Letter39ςrνll addressed to respondent, dated August 7, 1997, where they informed
respondent of the amounts they advanced for the payment of the 1997 real estate
taxes. In said letter, petitioners reminded respondent of her remaining balance,
together with the amount of taxes paid. Taking into consideration the busy schedule
of respondent, petitioners advised the latter to leave the payment to a certain "Dori"
who admittedly is Losloso, or to her trusted helper. This is an express authority given
to Losloso to receive payment.
Moreover, as correctly held by the CA:chanroblesvirtuallawlibrary
Furthermore, that Adoracion Losloso was indeed an agent of the appellant spouses is
borne out by the following admissions of plaintiff-appellant Atty. Miniano dela Cruz,
to wit:chanroblesvirtuallawlibrary
Q: You would agree with me that you have authorized this Doiry Losloso to receive
payment of whatever balance is due you coming from Ana Marie Concepcion, that is
correct?
A: In one or two times but not total authority, sir.
Q: Yes, but you have authorized her to receive payment?
A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)40ςrνll
Thus, as shown in the receipt signed by petitioners agent and pursuant to the
authority granted by petitioners to Losloso, payment made to the latter is deemed
payment to petitioners. We find no reason to depart from the RTC and the CA
conclusion that payment had already been made and that it extinguished
respondent's obligations.ςηαοblενιrυαllαωlιbrαr
WHEREFORE, premises considered, the petition is DENIED for lack of merit. The Court
of Appeals Decision dated March 31, 2005 and Resolution dated May 24, 2006 in CA-
G.R. CV No. 83030, are AFFIRMED.ςrαlαωlιbrαr
SO ORDERED.
199
 ART 1245
50. G.R. No. 72703. November 13, 1992.
CALTEX (PHILIPPINES), INC., Petitioner, v. The INTERMEDIATE APPELLATE COURT
and ASIA PACIFIC AIRWAYS, INC., Respondents.
Bito, Misa & Lozada for Petitioner.
Carpio, Villaraza & Cruz for Private Respondent.
SYLLABUS
1. REMEDIAL LAW; MOTION FOR NEW TRIAL OR RECONSIDERATION; RESOLUTION OF
MAY 30, 1986 GIVEN PROSPECTIVE APPLICATION. — We held in the case of
Habaluyas Enterprises, Inc., et. al. v. Japson et. al. (138 SCRA 46 [1985]) promulgated
August 5, 1985), that the "15-day period for appealing or for filing a motion for
reconsideration cannot be extended." Subsequently, the Court, acting on
respondent’s motion for reconsideration in the same entitled case (142 SCRA 208
[1986]), restated and clarified the rule on this point for the guidance of the Bench and
Bar by giving the rule prospective application in its resolution dated May 30, 1986.
2. ID.; ID.; ID.; ONE MONTH GRACE PERIOD; CASE AT BAR. — When petitioner herein
filed its Motion for Extension of time to file motion for reconsideration on September
20, 1985, the said motion was filed within the one-month grace period, which expired
on June 30, 1986, and may still be allowed. Consequently, the Motion for
Reconsideration filed by petitioner on September 26, 1985, was also filed on time.
3. CIVIL LAW; OBLIGATION AND CONTRACT; DATION IN PAYMENT; WHEN
OBLIGATION IS EXTINGUISHED. — A dation in payment does not necessarily mean
total extinguishment of the obligation. The obligation is totally extinguished only
when the parties, by agreement, express or implied, or by their silence, consider the
thing as equivalent to the obligation.
4. ID.; ID.; INTERPRETATION OF CONTRACT; LITERAL MEANING OF STIPULATION
200
CONTROLS. — As aptly argued by petitioner, if it were the intention of the parties to
limit or fix respondent’s obligation to P4,072.682.13, they should have so stated and
there would have been no need for them to qualify the statement of said amount
with the clause "as of June 30, 1980 plus any applicable interest charges on overdue
account" and the clause "and other avturbo fuel lifting and deliveries that ASSIGNOR
may from time to time receive from the ASSIGNEE." The terms of the Deed of
Assignment being clear, the literal meaning of its stipulations should control (Art.
1370, Civil Code). In the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all (Rule 130, Sec. 9, Rules of Court).
5. ID.; ID.; APPLICATION OF PAYMENTS; INTENTION SHOWN BY CONTEMPORANEOUS
AND SUBSEQUENT ACTS. — In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered (Art.
1253, Civil Code). The foregoing subsequent acts of the parties clearly show that they
did not intend the Deed of Assignment to have the effect of totally extinguishing the
obligations of private respondent without payment of the applicable interest charges
on the overdue account.
6. ID.; ID.; ID.; PRINCIPAL CONSIDERED PAID AFTER INTERESTS HAVE BEEN COVERED.
— Finally, the payment of applicable interest charges on overdue account, separate
from the principal obligation of P4,072,682.13 was expressly stipulated in the Deed of
Assignment. The law provides that "if the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been
covered." (Art. 1253, Civil Code).
DECISION
BIDIN, J.:
This is a petition for certiorari seeking the annulment of the decision dated August 27,
1985 of the then Intermediate Appellate Court in CA-G.R. No. 02684, which reversed
the judgment of the trial court and ordered petitioner to return the amount of
P510,550.63 to private respondent plus interest at the legal rate of 14% per
 annum.chanrobles.com.ph : virtual law library
The facts of the case are as follows:chanrob1es virtual 1aw library
On January 12, 1978, private respondent Asia Pacific Airways Inc. entered into an
agreement with petitioner Caltex (Philippines) Inc., whereby petitioner agreed to
supply private respondent’s aviation fuel requirements for two (2) years, covering the
period from January 1, 1978 until December 31, 1979. Pursuant thereto, petitioner
supplied private respondent’s fuel supply requirements. As of June 30, 1980, private
respondent had an outstanding obligation to petitioner in the total amount of
P4,072,682.13, representing the unpaid price of the fuel supplied. To settle this
outstanding obligation, private respondent executed a Deed of Assignment dated July
31, 1980, wherein it assigned to petitioner its receivables or refunds of Special Fund
Import Payments from the National Treasury of the Philippines to be applied as
payment of the amount of P4,072,683.13 which private respondent owed to
petitioner. On February 12, 1981, pursuant to the Deed of Assignment, Treasury
Warrant No. B04708613 in the amount of P5,475,294.00 representing the refund to
respondent of Special Fund Import Payment on its fuel purchases was issued by the
National Treasury in favor of petitioner. Four days later, on February 16, 1981, private
respondent, having learned that the amount remitted to petitioner exceeded the
amount covered by the Deed of Assignment, wrote a letter to petitioner, requesting a
refund of said excess. Petitioner, acting on said request, made a refund in the amount
of P900,000.00 plus in favor of private Respondent. The latter, believing that it was
entitled to a larger amount by way of refund, wrote petitioner anew, demanding the
refund of the remaining amount. In response thereto, petitioner informed private
respondent that the amount not returned (P510,550.63) represented interest and
service charges at the rate of 18% per annum on the unpaid and overdue account of
respondent from June 1, 1980 to July 31, 1981.chanrobles law library
Thus, on September 13, 1982, private respondent filed a complaint against petitioner
in the Regional Trial Court of Manila, to collect the sum of P510,550.63.00.
Petitioner (defendant in the trial court) filed its answer, reiterating that the amount
not returned represented interest and service charges on the unpaid and overdue
account at the rate of 18% per annum. It was further alleged that the collection of
said interest and service charges is sanctioned by law, and is in accordance with the
terms and conditions of the sale of petroleum products to respondent, which was
made with the conformity of said private respondent who had accepted the validity
of said interest and service charges.
On November 7, 1983, the trial court rendered its decision dismissing the complaint,
201
as well as the counterclaim filed by defendant therein.
Private respondent (plaintiff) appealed to the Intermediate Appellate Court (IAC). On
August 27, 1985, a decision was rendered by the said appellate court reversing the
decision of the trial court, and ordering petitioner to return the amount of
P510,550.63 to private Respondent.
Counsel of petitioner received a copy of the appellate court’s decision on September
6, 1985. On September 20, 1985, or 14 days after receipt of the aforesaid decision, an
Urgent Motion fur extension of five days within which to file a motion for
reconsideration was filed by petitioner. On September 26, 1985, the Motion for
Reconsideration was filed. The following day, petitioner filed a motion to set the
motion for reconsideration for hearing.
In a Resolution dated October 24, 1985, the appellate court denied the aforesaid
three motions. The first motion praying for an extension of five days within which to
file a motion for reconsideration was denied by the appellate court citing the new
ruling of the Supreme Court in Habaluyas Enterprises Inc. v. Japzon (138 SCRA 46
[1985]) as authority. The appellate court, following said ruling, held that the 15-day
period for filing a motion for reconsideration cannot be extended. Thus, the motion
for reconsideration filed on September 26, 1985 was stricken from the record, having
been filed beyond the non-extendible 15-day reglementary period. The third motion
was likewise denied for being moot and academic.
On November 4, 1985, the prevailing party (respondent herein) filed an Urgent
Motion for Entry of Judgment. Two days later, or on November 6, 1985, the
petitioner filed a Motion for Reconsideration of the Resolution dated October 24,
1985.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
The appellate court in a Resolution dated November 12, 1985 granted the motion for
entry of judgment filed by private Respondent. It directed the entry of judgment and
ordered the remand of the records of the case to the court of origin for execution.
On November 14, 1985, Petitioner, without waiting for the resolution of the appellate
court in the urgent motion for reconsideration it filed on November 6, 1985, filed the
instant petition to annul and set aside the resolution of the appellate court dated
October 24, 1985 which denied the Motion for Reconsideration of its decision dated
August 27, 1985.
In a motion dated November 21, 1985, petitioner prayed for the issuance of a
temporary restraining order to enjoin the appellate court from remanding the
records of the case for execution of judgment. The petitioner also filed a Supplement
to Petition for Certiorari, dated November 21, 1985.
In a Resolution dated November 27, 1985, this Court, acting on the petition, required
 private respondent to file its Comment; granted the prayer of the petitioner in his
urgent motion, and a temporary restraining order was issued enjoining the appellate
court from remanding the records of the case for execution of judgment. THE IAC ERRED IN RULING THAT THE DEED OF ASSIGNMENT SATISFIES THE
REQUISITES OF DATION IN PAYMENT (WHICH HAS THE EFFECT OF IMMEDIATE
Private respondent filed its COMMENT dated December 14, 1985. EXTINGUISHMENT OF THE OBLIGATION) DESPITE THE FACT THAT SAID DEED OF
ASSIGNMENT (1) COVERS FUTURE OBLIGATIONS FOR "APPLICABLE INTEREST
In a Resolution dated January 27, 1986, the Court resolved to give due course to the CHARGES ON OVER DUE ACCOUNT AND OTHER AVTURBO FUEL LIFTING AND
petition, and required the parties to submit their memoranda. In compliance with the DELIVERIES THAT ASSIGNOR MAY FROM TIME TO TIME RECEIVE FROM ASSIGNEES"
said Resolution, the parties filed their respective memoranda. AND (2) INCLUDES AN EXPRESS RESERVATION BY ASSIGNEE TO DEMAND FULL
PAYMENT OF THE OBLIGATIONS OF THE ASSIGNOR "IN CASE OF UNREASONABLE
On August 15, 1986, petitioner filed a Motion to Remand Records to the Court of DELAY OR NON-RECEIPT OF ASSIGNEE OF THE AFOREMENTIONED FUNDS AND/OR
Appeals in view of the resolution of this Court dated May 30, 1986 in the Habaluyas REFUND OF SPECIAL FUND IMPORT PAYMENT FROM THE GOVERNMENT DUE TO ANY
case which reconsidered and set aside its decision dated August 5, 1985 by giving it CAUSE OR REASON WHATSOEVER"
prospective application beginning one month after the promulgation of said
Resolution. This motion was opposed by private Respondent. On September 22, 1986, IV.
petitioner filed its Reply to Opposition to which private respondent filed its rejoinder.
In a Resolution dated December 3, 1986, the motion to remand records was denied.

Petitioner’s Brief raised six (6) assignment of errors, to wit:chanrob1es virtual 1aw THE IAC ERRED IN FAILING TO TAKE INTO ACCOUNT THE CONTEMPORANEOUS AND
library SUBSEQUENT ACTS OF THE PARTIES WHICH ALSO CLEARLY SHOW THAT THEY DID
NOT INTEND THE DEED OF ASSIGNMENT TO HAVE EFFECT OF DATION IN PAYMENT.
I.
V.

THE IAC ERRED IN APPLYING THE NEW POLICY OF NOT GRANTING ANY EXTENSION OF
TIME TO FILE MOTION FOR RECONSIDERATION. IF THE DEED OF ASSIGNMENT HAD THE EFFECT OF A DATION IN PAYMENT, THEN THE
IAC ERRED IN NOT RULING THAT PETITIONER HAS A RIGHT TO RETAIN THE ENTIRE
II. CREDIT ASSIGNED TO IT IN LIEU OF PAYMENT OF RESPONDENT’S OBLIGATIONS
INSTEAD OF BEING REQUIRED TO RETURN PORTION OF THE CREDIT WHICH IS
CLAIMED TO BE IN EXCESS OF RESPONDENT’S OBLIGATION.

THE IAC ERRED IN RULING THAT THE OBLIGATION OF RESPONDENT WAS LIMITED TO VI.
P4,072,682.13 NOTWITHSTANDING THE FACT THAT THE DEED OF ASSIGNMENT (THE
CONTRACT SUED UPON) ITSELF EXPRESSLY AND REPEATEDLY SPEAKS OF
RESPONDENT’S OBLIGATIONS AS "THE AMOUNT OF P4,072,682.13 AS OF JUNE 30,
1986 PLUS APPLICABLE INTEREST CHARGES ON OVERDUE ACCOUNT AND OTHER ASSUMING THAT PETITIONER IS LIABLE TO MAKE A RETURN OF A PORTION OF THE
AVTURBO FUEL LIFTING AND DELIVERIES THAT ASSIGNOR MAY FROM TIME TO TIME CREDIT ASSIGNED, THE IAC ERRED IN AWARDING "INTEREST AT THE LEGAL RATE OF
RECEIVE FROM THE ASSIGNEE" . 14% PER ANNUM FROM THE FILING OF THE COMPLAINT" .

III. We find merit in the instant petition.

202
 The two vital issues presented to the Court for resolution are as follows:cralawnad
In Singh v. IAC, (148 SCRA 277 [1987]), this Court applying the aforesaid ruling in the
1. Whether or not the Urgent Motion for Extension of Time to File a Motion for Habaluyas case, held:jgc:chanrobles.com.ph
Reconsideration filed by petitioner on September 20, 1985, as well as the Motion for
Reconsideration filed on September 26, 1985 (within the period of extension prayed "In other words, there is a one month grace period from the promulgation on May
for), may be validly granted; and 30, 1986, of this Court’s Resolution in the clarificatory Habaluyas case, or up to June
30, 1986, within which the rule barring extensions of time to file motions for new trial
2. Whether or not the Deed of Assignment entered into by the parties herein on July or reconsideration is, as yet, not strictly enforceable (Bayaca v. IAC, G.R. No. 74824,
31, 1980 constituted dacion en pago, as ruled by the appellate court, such that the September 15, 1986).
obligation is totally extinguished, hence after said date, no interest and service
charges could anymore be imposed on private respondent, so that petitioner was not "Since petitioners herein filed their Motion for Extension on August 6, 1985, it was
legally authorized to deduct the amount of P510,550.63 as interest and service still within the grace period, which expired on June 30, 1986, and may still be
charges on the unpaid and overdue accounts of private Respondent. allowed."cralaw virtua1aw library

Anent the first issue, we rule in the affirmative. Similarly, when petitioner herein filed its Motion for Extension of time to file motion
for reconsideration on September 20, 1985, the said motion was filed within the one-
We held in the case of Habaluyas Enterprises, Inc., et. al. v. Japson et. al. (138 SCRA month grace period, which expired on June 30, 1986, and may still be allowed.
46 [1985]) promulgated August 5, 1985), that the "15-day period for appealing or for Consequently, the Motion for Reconsideration filed by petitioner on September 26,
filing a motion for reconsideration cannot be extended." Subsequently, the Court, 1985, was also filed on time.
acting on respondent’s motion for reconsideration in the same entitled case (142
SCRA 208 [1986]), restated and clarified the rule on this point for the guidance of the With respect to the second issue, We rule that the Deed of Assignment executed by
Bench and Bar by giving the rule prospective application in its resolution dated May the parties on July 31, 1980 is not a dation in payment and did not totally extinguish
30, 1986:jgc:chanrobles.com.ph respondent’s obligations as stated therein.chanrobles lawlibrary : rednad

"After considering the able arguments of counsels for petitioners and respondents, The then Intermediate Appellate Court ruled that the three (3) requisites of dacion en
the Court resolved that the interest of justice would be better served if the ruling in pago * are all present in the instant case, and concluded that the Deed of Assignment
the original decision were applied prospectively from the time herein stated. The of July 31, 1980 (Annex "C" of Partial Stipulation of Facts) constitutes a dacion in
reason is that it would be unfair to deprive parties of the right to appeal simply payment provided for in Article 1245 ** of the Civil Code which has the effect of
because they availed themselves of a procedure which was not expressly prohibited extinguishing the obligation, thus supporting the claim of private respondent for the
or allowed by the law or the Rules. On the otherhand, a motion for new trial or return of the amount retained by petitioner.
reconsideration is not a pre-requisite to an appeal, a petition for review or a petition
for review on certiorari, and since the purpose of the amendments above referred to This Court, speaking of the concept of dation in payment, in the case of Lopez v.
is to expedite the final disposition of cases, a strict but prospective application of the Court of Appeals (114 SCRA 671, 685 [1982], among others,
said ruling is in order. Hence, for the guidance of the Bench and Bar, the Court stated:jgc:chanrobles.com.ph
restates and clarifies the rules on this point, as follows:chanrob1es virtual 1aw library
"‘The dation in payment extinguishes the obligation to the extent of the value of the
1.) Beginning one month after the promulgation of this Resolution, the rule shall be thing delivered, either as agreed upon by the parties or as may be proved, unless the
strictly enforced that no motion for extension of time to file a motion for new trial or parties by agreement, express or implied, or by their silence, consider the thing as
reconsideration may be filed with the Metropolitan or Municipal Trial Courts, the equivalent to the obligation, in which case the obligation is totally extinguished.’ (8
Regional Trial Courts, and the Intermediate Appellate Court. Such a motion may be Manresa 324; 3 Valverde 174 fn.)"
filed only in cases pending with the Supreme Court as the court of last resort, which
203

may in its sound discretion either grant or deny the extension requested."cralaw From the above, it is clear that a dation in payment does not necessarily mean total
virtua1aw library extinguishment of the obligation. The obligation is totally extinguished only when the
 parties, by agreement, express or implied, or by their silence, consider the thing as respondent question or take exception to the interest; and (2) In its letter of February
equivalent to the obligation. 16, 1981 (Annex "J", Partial Stipulation of Facts), respondent addressed the following
request to petitioner:jgc:chanrobles.com.ph
In the instant case, the then Intermediate Appellate Court failed to take into account
the following express recitals of the Deed of Assignment — "Moreover, we would also like to request for a consideration in the
following:chanrob1es virtual 1aw library
"That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in the
amount of P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue 1. Interest charges be limited up to December 31, 1980 only; and
account. (p. 2, Deed of Assignment).
2. Reduction of 2% on 18% interest rate p.a.
"Now therefore in consideration of the foregoing premises, ASSIGNOR by virtue of
these presents, does hereby irrevocably assign and transfer unto ASSIGNEE any and "We are hoping for your usual kind consideration on this matter."cralaw virtua1aw
all funds and/or Refund of Special Fund Payments, including all its rights and benefits library
accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and
pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR’s In order to judge the intention of the contracting parties, their contemporaneous and
outstanding obligation plus any applicable interest charges on overdue account and subsequent acts shall be principally considered (Art. 1253, Civil Code). The foregoing
other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive subsequent acts of the parties clearly show that they did not intend the Deed of
from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its favor." Assignment to have the effect of totally extinguishing the obligations of private
(p. 2, Deed of Assignment) (Emphasis supplied). respondent without payment of the applicable interest charges on the overdue
account.
Hence, it could easily be seen that the Deed of Assignment speaks of three (3)
obligations — (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2) Finally, the payment of applicable interest charges on overdue account, separate
the applicable interest charges on overdue accounts; and (3) the other avturbo fuel from the principal obligation of P4,072,682.13 was expressly stipulated in the Deed of
lifting and deliveries that assignor (private respondent) may from time to time receive Assignment. The law provides that "if the debt produces interest, payment of the
from assignee (Petitioner). As aptly argued by petitioner, if it were the intention of principal shall not be deemed to have been made until the interests have been
the parties to limit or fix respondent’s obligation to P4,072.682.13, they should have covered." (Art. 1253, Civil Code).chanrobles.com.ph : virtual law library
so stated and there would have been no need for them to qualify the statement of
said amount with the clause "as of June 30, 1980 plus any applicable interest charges WHEREFORE, the decision of the then Intermediate Appellate Court dated August 27,
on overdue account" and the clause "and other avturbo fuel lifting and deliveries that 1985 is hereby SET ASIDE, and the November 7, 1983 decision of the trial court is
ASSIGNOR may from time to time receive from the ASSIGNEE." The terms of the Deed REINSTATED.
of Assignment being clear, the literal meaning of its stipulations should control (Art.
1370, Civil Code). In the construction of an instrument where there are several SO ORDERED.
provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all (Rule 130, Sec. 9, Rules of Court).chanrobles.com:cralaw:red Gutierrez, Jr., Davide, Jr., Romero and Melo, JJ., concur.

Likewise, the then Intermediate Appellate Court failed to take into consideration the
subsequent acts of the parties which clearly show that they did not intend the Deed
of Assignment to totally extinguish the obligation — (1) After the execution of the
Deed of Assignment on July 31, 1980, petitioner continued to charge respondent with
interest on its overdue account up to January 31, 1981 (Annexes "H", "I", "J" and "K"
of the Partial Stipulation of Facts). This was pursuant to the Deed of Assignment
204

which provides for respondent’s obligation for "applicable interest charges on

overdue account." The charges for interest were made every month and not once did
 ART 1249
51. G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, Petitioners, vs. THE HONORABLE
COURT OF APPEALS and EDEN TAN, Respondents.chanrobles virtual law library
PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court
assailing the decision * of respondent appellate court dated 24 April 1991 in CA-G.R.
SP No. 24164 denying their petition for certiorari prohibition, and injunction which
sought to annul the order of Judge Eutropio Migriño of the Regional Trial Court,
Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps.
Norberto and Carmen Tibajia."chanrobles virtual law library
Stated briefly, the relevant facts are as follows:chanrobles virtual law library
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against
the Tibajia spouses. A writ of attachment was issued by the trial court on 17 August
1987 and on 17 September 1987, the Deputy Sheriff filed a return stating that a
deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan City in the
amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos
(P442,750.00) in another case, had been garnished by him. On 10 March 1988, the
Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its decision in Civil
Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay
her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal,
the Court of Appeals modified the decision by reducing the award of moral and
exemplary damages. The decision having become final, Eden Tan filed the
corresponding motion for execution and thereafter, the garnished funds which by
then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro
Manila, were levied upon.chanroblesvirtualawlibrarychanrobles virtual law library
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo
Bolima the total money judgment in the following form:
Cashier's Check P262,750.00
Cash 135,733.70
----
Total P398,483.70
205
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia
spouses and instead insisted that the garnished funds deposited with the cashier of
the Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy the judgment
obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion to lift
the writ of execution on the ground that the judgment debt had already been paid.
On 29 January 1991, the motion was denied by the trial court on the ground that
payment in cashier's check is not payment in legal tender and that payment was
made by a third party other than the defendant. A motion for reconsideration was
denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition
for certiorari, prohibition and injunction in the Court of Appeals. The appellate court
dismissed the petition on 24 April 1991 holding that payment by cashier's check is not
payment in legal tender as required by Republic Act No. 529. The motion for
reconsideration was denied on 27 May 1991.chanroblesvirtualawlibrarychanrobles
virtual law library
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF
P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS
"LEGAL TENDER".chanroblesvirtualawlibrarychanrobles virtual law library
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER
OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU
AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY
OBLIGATION OF PETITIONERS-SPOUSES. 1chanrobles virtual law library
The only issue to be resolved in this case is whether or not payment by means of
check (even by cashier's check) is considered payment in legal tender as required by
the Civil Code, Republic Act No. 529, and the Central Bank
Act.chanroblesvirtualawlibrarychanrobles virtual law library
It is contended by the petitioners that the check, which was a cashier's check of the
Bank of the Philippine Islands, undoubtedly a bank of good standing and reputation,
and which was a crossed check marked "For Payee's Account Only" and payable to
private respondent Eden Tan, is considered legal tender, payment with which
operates to discharge their monetary obligation. 2Petitioners, to support their
contention, cite the case of New Pacific Timber and Supply Co., Inc. v. Señeris 3where
this Court held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-
known and accepted practice in the business sector that a cashier's check is deemed
as cash".chanroblesvirtualawlibrarychanrobles virtual law library
 The provisions of law applicable to the case at bar are the following:chanrobles
virtual law library
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.chanroblesvirtualawlibrarychanrobles virtual law library
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been
impaired.chanroblesvirtualawlibrarychanrobles virtual law library
In the meantime, the action derived from the original obligation shall be held in
abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any obligation which
purports to give the obligee the right to require payment in gold or in any particular
kind of coin or currency other than Philippine currency or in an amount of money of
the Philippines measured thereby, shall be as it is hereby declared against public
policy null and void, and of no effect, and no such provision shall be contained in, or
made with respect to, any obligation thereafter incurred. Every obligation heretofore
and hereafter incurred, whether or not any such provision as to payment is contained
therein or made with respect thereto, shall be discharged upon payment in any coin
or currency which at the time of payment is legal tender for public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character - Checks representing deposit money do not have legal
tender power and their acceptance in the payment of debts, both public and private,
is at the option of the creditor: Provided, however, that a check which has been
cleared and credited to the account of the creditor shall be equivalent to a delivery to
the creditor of cash in an amount equal to the amount credited to his account.
From the aforequoted provisions of law, it is clear that this petition must
fail.chanroblesvirtualawlibrarychanrobles virtual law library
206
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals4and Roman Catholic
Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 5this Court held that -
A check, whether a manager's check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay
down the rule that a check is not legal tender and that a creditor may validly refuse
payment by check, whether it be a manager's, cashier's or personal
check.chanroblesvirtualawlibrarychanrobles virtual law library
Petitioners erroneously rely on one of the dissenting opinions in the Philippine
Airlines case 6to support their cause. The dissenting opinion however does not in any
way support the contention that a check is legal tender but, on the contrary, states
that "If the PAL checks in question had not been encashed by Sheriff Reyes, there
would be no payment by PAL and, consequently, no discharge or satisfaction of its
judgment obligation." 7Moreover, the circumstances in the Philippine Airlines case are
quite different from those in the case at bar for in that case the checks issued by the
judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who encashed
the checks but failed to deliver the proceeds of said encashment to the judgment
creditor.chanroblesvirtualawlibrarychanrobles virtual law library
In the more recent case of Fortunado vs. Court of Appeals, 8this Court stressed that,
"We are not, by this decision, sanctioning the use of a check for the payment of
obligations over the objection of the creditor."chanrobles virtual law library
WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with
costs against the petitioners.chanroblesvirtualawlibrarychanrobles virtual law library
SO ORDERED.
Narvasa, C.J., Regalado and Nocon, JJ., concur.
 52. G.R. No. 105188. January 23, 1998.
MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, Petitioner,
v. A.U. VALENCIA and CO. INC., FELIX PEÑARROYO, SPS. ARSENIO B. REYES &
AMANDA SANTOS, and DELFIN JAO, Respondents.
Quijano and Padilla, for Petitioners.
Padilla Jimenez Kintanar and Asuncion Law Offices, for Private Respondent.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PAYMENT BY CHECK WHEN
CONDITIONED ON ITS BEING CASHED EXCEPT THROUGH THE FAULT OF THE
CREDITOR THE INSTRUMENT IS IMPAIRED; WHERE NON-PAYMENT IS CAUSED BY HIS
NEGLIGENCE, PAYMENT IS DEEMED EFFECTED. — While it is true that the delivery of
a cheek produces the effect of payment only when it is cashed, pursuant to Art. 1249
of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor’s
unreasonable delay in presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given. It has, likewise, been held
that if no presentment is made at all, the drawer cannot be held liable irrespective of
loss or injury unless presentment is otherwise excused. This is in harmony with Article
1249 of the Civil Code under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through the fault of the
creditor, the instrument is impaired. The payee of a check would be a creditor under
this provision and if its non-payment is caused by his negligence, payment will be
deemed effected and the obligation for which the check was given as conditional
payment will be discharged.
2. REMEDIAL LAW; ACTIONS; APPROPRIATE ACTION MAY BE FILLED TO ENFORCE A
LIEN ON AN ASSIGNMENT OF MORTGAGE RIGHTS; ACTION DIFFERENT FROM
SPECIFIC PERFORMANCE; CASE AT BAR. — We regard to the alleged assignment of
mortgage rights, respondent Court of Appeals has found that the conditions under
which said mortgage rights of the bank were assigned are not clear. Indeed, a perusal
of the original records of the case would show that there is nothing there that could
shed light on the transactions leading to the said assignment of rights; nor is there
any evidence on record of the conditions under which said mortgage rights were
assigned. What is certain is that despite the said assignment of mortgage rights, the
title to the subject property has remained in the name of the late Angela M. Butte.
207
This much is admitted by petitioner himself in his answer to respondents’ complaint
as well as in the third party complaint that petitioner filed against respondent-
spouses Arsenio B. Reyes and Amanda Santos. Assuming arguendo that the mortgage
rights of the Associated Citizens Bank had been assigned to the estate of Ramon
Papa, Jr., and granting that the assigned Mortgage rights validly exist and constitute a
lien on the property, the estate may file the appropriate action to enforce such lien.
The cause of action for specific performance which respondents Valencia and
Peñarroyo have against petitioner is different from the cause of action which estate
of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on the
property by reason of its being an alleged assignee of the bank’s rights of mortgage.
3. ID.; ID.; REPRESENTATIVE PARTIES; AN EXECUTOR OR ADMINISTRATOR MAY BE
SUED WITHOUT GOING THE STATE OF THE DECEASED. — Finally, the estate of Angela
M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the Rules of
Court, an executor or administrator may sue or be sued without joining the party for
whose benefit the action is presented or defended.
4. ID.; ID.; SUBSISTING AND PRIOR MORTGAGE RIGHTS MAY BE ENFORCED
REGARDLESS OF CHANGE OF OWNERSHIP. — Neither is the estate of Ramon Papa, Jr.
an indispensable party without whom, no final determination of the action can be
had. Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has
over the property may still be enforced regardless of the change in ownership
thereof.
DECISION
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Myron C. Papa seeks to reverse and set aside 1) the Decision dated 27 January 1992
of the Court of Appeals which affirmed with modification the decision of the trial
court; and 2) the Resolution dated 22 April 1992 of the same court, which denied
petitioner’s motion for reconsideration of the above
decision.chanrobles.com:cralaw:red

The antecedent facts of this case are as follows:chanrob1es virtual 1aw library
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc.
(hereinafter referred to as respondent Valencia, for brevity) and Felix Peñarroyo
(hereinafter called respondent Peñarroyo), filed with the Regional Trial Court of Pasig,
Branch 151, a complaint for specific performance against herein petitioner Myron C.
Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as
attorney-in-fact of Angela M. Butte, sold to respondent Peñarroyo, through
respondent Valencia, a parcel of land, consisting of 286.60 square meters, located at
corner Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer
Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior to
the alleged sale, the said property, together with several other parcels of land
likewise owned by Angela M. Butte, had been mortgaged by her to the Associated
Banking Corporation (now Associated Citizens Bank); that after the alleged sale, but
before the title to the subject property had been released, Angela M. Butte passed
away; that despite representations made by herein respondents to the bank to
release the title to the property sold to respondent Peñarroyo, the bank refused to
release it unless and until all the mortgaged properties of the late Angela M. Butte
were also redeemed; that in order to protect his rights and interests over the
property, respondent Peñarroyo caused the annotation on the title of an adverse
claim as evidenced by Entry No. PE. — 6118/T-28993, inscribed on 18 January 1977.
The complaint further alleged that it was only upon the release of the title to the
property, sometime in April 1977, that respondents Valencia and Peñarroyo
discovered that the mortgage rights of the bank had been assigned to one Tomas L.
Parpana (now deceased), as special administrator of the Estate of Ramon Papa. Jr., on
12 April 1977; that since then, herein petitioner had been collecting monthly rentals
in the amount of P800.00 from the tenants of the property, knowing that said
property had already been sold to private respondents on 15 June 1973; that despite
repeated demands from said respondents, petitioner refused and failed to deliver the
title to the property. Thereupon, respondents Valencia and Peñarroyo filed a
complaint for specific performance, praying that petitioner be ordered to deliver to
respondent Peñarroyo the title to the subject property (TCT 28993); to turn over to
the latter the sum of P72,000.00 as accrued rentals as of April 1982, and the monthly
rental of P800.00 until the property is delivered to respondent Peñarroyo; to pay
respondents the sum of P20,000.00 as attorney’s fees; and to pay the costs of the
suit.
208
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated
Banking Corporation (now Associated Citizens Bank). He contended, however, that
the complaint did not state a cause of action; that the real property in interest was
the Testate Estate of Angela M. Butte, which should have been joined as a party
defendant; that the case amounted to a claim against the Estate of Angela M. Butte
and should have been filed in Special Proceedings No. A-17910 before the Probate
Court in Quezon City; and that, if as alleged in the complaint, the property had been
assigned to Tomas L. Parpana, as special administrator of the Estate of Ramon Papa,
Jr., said estate should be impleaded. Petitioner, likewise, claimed that he could not
recall in detail the transaction which allegedly occurred in 1973; that he did not have
TCT No. 28993 in his possession; that he could not be held personally liable as he
signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally, petitioner
asseverated that as a result of the filing of the case, he was compelled to hire the
services of counsel for a fee of P20,000.00, for which respondents should be held
liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in
the case. Making common cause with respondents Valencia and Peñarroyo,
respondent Jao alleged that the subject lot which had been sold to respondent
Peñarroyo through respondent Valencia was in turn sold to him on 20 August 1973
for the sum of P71,500.00, upon his paying earnest money in the amount of
P5,000.00. He, therefore, prayed that judgment be rendered in favor of respondents
Valencia and Peñarroyo; and, that after the delivery of the title to said respondents,
the latter in turn be ordered to execute in his favor the appropriate deed of
conveyance covering the property in question and to turn over to him the rentals
which aforesaid respondents sought to collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of petitioner’s refusal to deliver the
title to the property to respondents Valencia and Peñarroyo, who in turn failed to
deliver the said title to him, he suffered mental anguish and serious anxiety for which
he sought payment of moral damages; and, additionally, the payment of attorney’s
fees and costs.
For his part, Petitioner, as administrator of the Testate Estate of Angela M. Butte,
filed a third-party complaint against herein private respondents, spouses Arsenio B.
Reyes and Amanda Santos (respondent Reyes spouses, for short). He averred, among
others, that the late Angela M. Butte was the owner of the subject property; that due
to non-payment of real estate tax said property was sold at public auction by the City
Treasurer of Quezon City to the respondent Reyes spouses on 21 January 1980 for
the sum of P14,000.00; that the one-year period of redemption had expired; that
respondents Valencia and Peñarroyo had sued petitioner Papa as administrator of the
estate of Angela M. Butte, for the delivery of the title to the property; that the same
aforenamed respondents had acknowledged that the price paid by them was
insufficient, and that they were willing to add a reasonable amount or a minimum of
P55,000.00 to the price upon delivery of the property, considering that the same was
 estimated to be worth P143,000.00; that petitioner was willing to reimburse 4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorney’s
respondent Reyes spouses whatever amount they might have paid for taxes and fees and litigation expenses.
other charges, since the subject property was still registered in the name of the late
Angela M. Butte; that it was inequitable to allow respondent Reyes spouses to SO ORDERED. 1
acquire property estimated to be worth P143,000.00, for a measly sum of
P14,000.00. Petitioner prayed that judgment be rendered cancelling the tax sale to Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals,
respondent Reyes spouses; restoring the subject property to him upon payment by alleging among others that the sale was never "consummated" as he did not encash
him to said respondent Reyes spouses of the amount of P14,000.00, plus legal the check (in the amount of P40,000.00) given by respondents Valencia and
interest; and, ordering respondents Valencia and Peñarroyo to pay him at least Peñarroyo in payment of the full purchase price of the subject lot. He maintained that
P55,000.00 plus everything they might have to pay the Reyes spouses in recovering what said respondents had actually paid was only the amount of P5,000.00 (in cash)
the property. as earnest money.

Respondent Reyes spouses in their Answer raised the defense of prescription of Respondent Reyes spouses, likewise, appealed the above decision. However, their
petitioner’s right to redeem the property. appeal was dismissed because of failure to file their appellants’ brief.

At the trial, only respondent Peñarroyo testified. All the other parties only submitted On 27 January 1992, the Court of Appeals rendered a decision, affirming with
documentary proof. modification the trial court’s decision, thus:chanrob1es virtual 1aw library

On 29 June 1987, the trial court rendered a decision, the dispositive portion of which
reads.
WHEREUPON, judgment is hereby rendered as follows:chanrob1es virtual 1aw library
1) Allowing defendant to redeem from third-party defendants and ordering the latter
to allow the former to redeem the property in question, by paying the sum of
P14,000.00 plus legal interest of 12% thereon from January 2, 1980;
WHEREFORE, the second paragraph of the dispositive portion of the appealed
decision is MODIFIED, by ordering the defendant-appellant to deliver to plaintiff-
appellees the owner’s duplicate of TCT No. 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question or, if the owner’s duplicate
certificate cannot be produced, to authorize the Register of Deeds to cancel it and
issue a certificate of title in the name of Felix Peñarroyo. In all other respects, the
decision appealed from is AFFIRMED. Costs against defendant-appellant Myron C.
Papa.

2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix SO ORDERED. 2
Peñarroyo covering the property in question and to deliver peaceful possession and
enjoyment of the said property to the said plaintiff, free from any liens and In affirming the trial court’s decision, respondent court held that contrary to
encumbrances; petitioner’s claim that he did not encash the aforesaid check, and therefore, the sale
was not consummated, there was no evidence at all that petitioner did not, in fact,
Should this not be possible, for any reason not attributable to defendant, said encash said check. On the other hand, respondent Peñarroyo testified in court that
defendant is ordered to pay to plaintiff Felix Peñarroyo the sum of P45,000.00 plus petitioner Papa had received the amount of P45,000.00 and issued receipts therefor.
legal interest of 12% from June 15, 1973; According to respondent court, the presumption is that the check was encashed,
especially since the payment by check was not denied by defendant-appellant (herein
3) Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a deed of petitioner) who, in his Answer, merely alleged that he "can no longer recall the
absolute sale over the same property, upon the latter’s payment to the former of the transaction which is supposed to have happened 10 years ago." 3
balance of the purchase price of P71,500.00;
On petitioner’s claim that he cannot be held personally liable as he had acted merely
Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay intervenor the as attorney-in-fact of the owner, Angela M. Butte, respondent court held that such
209

sum of P5,000.00 plus legal interest of 12% from August 23, 1973; and contention is without merit. This action was not brought against him in his personal
capacity, but in his capacity as the administrator of the Testate Estate of Angela M.
 Butte. 4 had issued receipts for the payments, asserts that said receipts, particularly the
On petitioner’s contention that the estate of Angela M. Butte should have been
joined in the action as the real party in interest, respondent court held that pursuant
to Rule 3, Section 3 of the Rules of Court, the estate of Angela M. Butte does not have
to be joined in the action. Likewise, the estate of Ramon Papa, Jr., is not an
indispensable party under Rule 3, Section 7 of the same Rules. For the fact is that
Ramon Papa, Jr., or his estate, was not a party to the Deed of Absolute Sale, and it is
basic law that contracts bind only those who are parties thereto. 5
Respondent court observed that the conditions under which the mortgage rights of
the bank were assigned are not clear. In any case, any obligation which the estate of
Angela M. Butte might have to the estate of Ramon Papa, Jr. is strictly between them.
Respondents Valencia and Peñarroyo are not bound by any such
obligation.chanrobles virtual lawlibrary
Petitioner filed a motion for reconsideration of the above decision, which motion was
denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:chanrob1es virtual
1aw library
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN
QUESTION WAS CONSUMMATED IS GROUNDED ON SPECULATION OR CONJECTURE,
AND IS CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT,
ERRED BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE
SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A
PARTY IN THIS CASE.chanroblesvirtualawlibrary
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF ANGELA M.
BUTTE AND THE ESTATE OF RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
CASE. 6 While it is true that the delivery of a check produces the effect of payment only when
Petitioner argues that respondent Court of Appeals erred in concluding that the
alleged sale of the subject property had been consummated. He contends that such a
conclusion is based on the erroneous presumption that the check (in the amount of
P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in
part, that payment by checks shall produce the effect of payment only when they
have been cashed or when through the fault of the creditor they have been impaired.
210
7 Petitioner insists that he never cashed said check; and, such being the case, its
delivery never produced the effect of payment. Petitioner, while admitting that he
receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not prove
payment. He avers that there must be a showing that said check had been encashed.
If, according to petitioner, the check had been encashed, respondent Peñarroyo
should have presented PCIB Check No. 761025 duly stamped received by the payee,
or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the
hands of respondents Valencia and Peñarroyo, as evidenced by a letter addressed to
him in which said respondents wrote, in part:chanrob1es virtual 1aw library
. . . Please be informed that I had been authorized by Dr. Ramon Papa Jr., heir of Mrs.
Angela M. Butte to pay you the aforementioned amount of P75,000.00 for the
release and cancellation of subject property’s mortgage. The money is with me and if
it is alright with you, I would like to tender the payment as soon as possible. . . 8
We find no merit in petitioner’s arguments.
It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner
Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May
1973, and Forty Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment
of the purchase price of the subject lot. Petitioner himself admits having received said
amounts, 9 and having issued receipts therefor. 10 Petitioner’s assertion that he
never encashed the aforesaid check is not substantiated and is at odds with his
statement in his answer that "he can no longer recall the transaction which is
supposed to have happened 10 years ago." After more than ten (10) years from the
payment in part by cash and in part by check, the presumption is that the check had
been encashed. As already stated, he even waived the presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for more
than ten (10) years undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay.
it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor
is prejudiced by the creditor’s unreasonable delay in presentment. The acceptance of
a cheek implies an undertaking of due diligence in presenting it for payment, and if he
from whom it is received sustains loss by want of such diligence, it will be held to
operate as actual payment of the debt or obligation for which it was given. 11 It has,
likewise, been held that if no presentment is made at all, the drawer cannot be held
liable irrespective of loss or injury 12 unless presentment is otherwise excused. This is
in harmony with Article 1249 of the Civil Code under which payment by way of check
or other negotiable instrument is conditioned on its being cashed, except when
 through the fault of the creditor, the instrument is impaired. The payee of a check Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no
would be a creditor under this provision and if its non-payment is caused by his final determination of the action can be had. Whatever prior and subsisting mortgage
negligence, payment will be deemed effected and the obligation for which the check rights the estate of Ramon Papa, Jr. has over the property may still be enforced
was given as conditional payment will be discharged. 13 regardless of the change in ownership thereof.

Considering that respondents Valencia and Peñarroyo had fulfilled their part of the WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court
contract of sale by delivering the payment of the purchase price, said respondents, of Appeals, dated 27 January 1992 is AFFIRMED.
therefore, had the right to compel petitioner to deliver to them the owner’s duplicate
of TCT No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of SO ORDERED.
the lot in question.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
With regard to the alleged assignment of mortgage rights, respondent Court of
Appeals has found that the conditions under which said mortgage rights of the bank
were assigned are not clear. Indeed, a perusal of the original records of the case
would show that there is nothing there that could shed light on the transactions
leading to the said assignment of rights; nor is there any evidence on record of the
conditions under which said mortgage rights were assigned. What is certain is that
despite the said assignment of mortgage rights, the title to the subject property has
remained in the name of the late Angela M. Butte. 14 This much is admitted by
petitioner himself in his answer to respondents’ complaint as well as in the third-
party complaint that petitioner filed against respondent-spouses Arsenio B. Reyes
and Amanda Santos. 15 Assuming arguendo that the mortgage rights of the
Associated Citizens Bank had been assigned to the estate of Ramon Papa, Jr., and
granting that the assigned mortgage rights validly exist and constitute a lien on the
property, the estate may file the appropriate action to enforce such lien. The cause of
action for specific performance which respondents Valencia and Peñarroyo have
against petitioner is different from the cause of action which the estate of Ramon
Papa, Jr. may have to enforce whatever rights or liens it has on the property by
reason of its being an alleged assignee of the bank’s rights of mortgage.

Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3
of Rule 3 of the Rules of Court, an executor or administrator may sue or be sued
without joining the party for whose benefit the action is presented or defended,
thus:chanrob1es virtual 1aw library

Sec. 3. Representative parties. — A trustee of an express trust, a guardian, executor

or administrator, or a party authorized by statute, may sue or be sued without joining
the party for whose benefit the action is presented or defended; but the court may,
at any stage of the proceedings, order such beneficiary to be made a party. An agent
acting in his own name and for the benefit of an undisclosed principal may sue or be
sued without joining the principal except when the contract involves things belonging
211

to the principal. 16
 53. G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., Petitioner, vs. HON. COURT OF APPEALS, HON. JUDGE
RICARDO D. GALANO, Court of First Instance of Manila, Branch XIII, JAIME K. DEL
ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN, Respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in this case is a more
fundamental question. Should the Court allow a too literal interpretation of the Rules
with an open invitation to knavery to prevail over a more discerning and just
approach? Should we not apply the ancient rule of statutory construction that laws
are to be interpreted by the spirit which vivifies and not by the letter which
killeth?chanrobles virtual law library
This is a petition to review on certiorari the decision of the Court of Appeals in CA-
G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et
al.", dismissing the petition for certiorari against the order of the Court of First
Instance of Manila which issued an alias writ of execution against the
petitioner.chanroblesvirtualawlibrarychanrobles virtual law library
The petition involving the alias writ of execution had its beginnings on November 8,
1967, when respondent Amelia Tan, under the name and style of Able Printing Press
commenced a complaint for damages before the Court of First Instance of Manila.
The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v.
Philippine Airlines, Inc.chanroblesvirtualawlibrary chanrobles virtual law library
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the
late Judge Jesus P. Morfe rendered judgment on June 29, 1972, in favor of private
respondent Amelia Tan and against petitioner Philippine Airlines, Inc. (PAL) as
follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air
Lines: chanrobles virtual law library
1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as
actual damages, with legal interest thereon from plaintiffs extra-judicial demand
made by the letter of July 20, 1967; chanrobles virtual law library
212
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00,
representing the unrealized profit of 10% included in the contract price of
P200,000.00 plus legal interest thereon from July 20,1967; chanrobles virtual law
library
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as
and for moral damages, with legal interest thereon from July 20, 1 967; chanrobles
virtual law library
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00
damages as and for attorney's fee.chanroblesvirtualawlibrary chanrobles virtual law
library
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are
dismissed.chanroblesvirtualawlibrarychanrobles virtual law library
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case
was docketed as CA-G.R. No. 51079-R.chanroblesvirtualawlibrarychanrobles virtual
law library
On February 3, 1977, the appellate court rendered its decision, the dispositive portion
of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the
sum of P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is affirmed,
with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates
subsequent thereto, a motion for reconsideration was filed by respondent Amelia
Tan, duly opposed by petitioner PAL.chanroblesvirtualawlibrarychanrobles virtual law
library
On May 23,1977, the Court of Appeals rendered its resolution denying the
respondent's motion for reconsideration for lack of
merit.chanroblesvirtualawlibrarychanrobles virtual law library
No further appeal having been taken by the parties, the judgment became final and
executory and on May 31, 1977, judgment was correspondingly entered in the
case.chanroblesvirtualawlibrarychanrobles virtual law library
 The case was remanded to the trial court for execution and on September 2,1977,
respondent Amelia Tan filed a motion praying for the issuance of a writ of execution
of the judgment rendered by the Court of Appeals. On October 11, 1977, the trial
court, presided over by Judge Galano, issued its order of execution with the
corresponding writ in favor of the respondent. The writ was duly referred to Deputy
Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for
enforcement.chanroblesvirtualawlibrary chanrobles virtual law library
Four months later, on February 11, 1978, respondent Amelia Tan moved for the
issuance of an alias writ of execution stating that the judgment rendered by the lower
court, and affirmed with modification by the Court of Appeals, remained
unsatisfied.chanroblesvirtualawlibrarychanrobles virtual law library
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of
an alias writ of execution stating that it had already fully paid its obligation to plaintiff
through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by
cash vouchers properly signed and receipted by said Emilio Z.
Reyes.chanroblesvirtualawlibrary chanrobles virtual law library
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being
premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return
and explain the reason for his failure to surrender the amounts paid to him by
petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared.chanroblesvirtualawlibrarychanrobles virtual law
library
On March 28, 1978, motion for the issuance of a partial alias writ of execution was
filed by respondent Amelia Tan.chanroblesvirtualawlibrarychanrobles virtual law
library
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for
Partial Alias Writ of Execution" with Substitute Motion for Alias Writ of Execution. On
May 1, 1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial
Alias Writ of Execution with Substitute Motion for Alias Writ of Execution is hereby
granted, and the motion for partial alias writ of execution is considered
withdrawn.chanroblesvirtualawlibrary chanrobles virtual law library
Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of
213
the judgment rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed
Special Sheriff for the enforcement thereof. (CA Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution
issued on the same day directing Special Sheriff Jaime K. del Rosario to levy on
execution in the sum of P25,000.00 with legal interest thereon from July 20,1967
when respondent Amelia Tan made an extra-judicial demand through a letter. Levy
was also ordered for the further sum of P5,000.00 awarded as attorney's
fees.chanroblesvirtualawlibrary chanrobles virtual law library
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of
execution stating that no return of the writ had as yet been made by Deputy Sheriff
Emilio Z. Reyes and that the judgment debt had already been fully satisfied by the
petitioner as evidenced by the cash vouchers signed and receipted by the server of
the writ of execution, Deputy Sheriff Emilio Z.
Reyes.chanroblesvirtualawlibrary chanrobles virtual law library
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment
on the depository bank of petitioner, Far East Bank and Trust Company, Rosario
Branch, Binondo, Manila, through its manager and garnished the petitioner's deposit
in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this
petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:
I chanrobles virtual law library
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE
ORIGINAL WRIT BY THE IMPLEMENTING
OFFICER.chanroblesvirtualawlibrarychanrobles virtual law library
II chanrobles virtual law library
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT
OF EXECUTION CONSTITUTES SATISFACTION OF
JUDGMENT.chanroblesvirtualawlibrary chanrobles virtual law library
III chanrobles virtual law library
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT
THEREOF.chanroblesvirtualawlibrary chanrobles virtual law library
IV chanrobles virtual law library
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT
DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.
 Can an alias writ of execution be issued without a prior return of the original writ by Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that
the implementing officer?chanrobles virtual law library he who cannot prosecute his judgment with effect, sues his case
vainly.chanroblesvirtualawlibrarychanrobles virtual law library
We rule in the affirmative and we quote the respondent court's decision with
approval: More important in the determination of the propriety of the trial court's issuance of
an alias writ of execution is the issue of satisfaction of
The issuance of the questioned alias writ of execution under the circumstances here judgment.chanroblesvirtualawlibrarychanrobles virtual law library
obtaining is justified because even with the absence of a Sheriffs return on the
original writ, the unalterable fact remains that such a return is incapable of being Under the peculiar circumstances surrounding this case, did the payment made to the
obtained (sic) because the officer who is to make the said return has absconded and absconding sheriff by check in his name operate to satisfy the judgment debt? The
cannot be brought to the Court despite the earlier order of the court for him to Court rules that the plaintiff who has won her case should not be adjudged as having
appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking sued in vain. To decide otherwise would not only give her an empty but a pyrrhic
cognizance of this circumstance, the order of May 11, 1978 directing the issuance of victory.chanroblesvirtualawlibrarychanrobles virtual law library
an alias writ was therefore issued. (Annex D. Petition). The need for such a return as a
condition precedent for the issuance of an alias writ was justifiably dispensed with by It should be emphasized that under the initial judgment, Amelia Tan was found to
the court below and its action in this regard meets with our concurrence. A contrary have been wronged by PAL.chanroblesvirtualawlibrarychanrobles virtual law library
view will produce an abhorent situation whereby the mischief of an erring officer of
the court could be utilized to impede indefinitely the undisputed and awarded rights She filed her complaint in 1967.chanroblesvirtualawlibrarychanrobles virtual law
which a prevailing party rightfully deserves to obtain and with dispatch. The final library
judgment in this case should not indeed be permitted to become illusory or incapable
of execution for an indefinite and over extended period, as had already transpired.
After ten (10) years of protracted litigation in the Court of First Instance and the
(Rollo, pp. 35-36)
Court of Appeals, Ms. Tan won her case.chanroblesvirtualawlibrarychanrobles virtual
law library
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought
not to be illusory it ought to have its proper
It is now 1990.chanroblesvirtualawlibrary chanrobles virtual law library
effect).chanroblesvirtualawlibrarychanrobles virtual law library
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the
Indeed, technicality cannot be countenanced to defeat the execution of a judgment
courts have solemnly declared as rightfully hers. Through absolutely no fault of her
for execution is the fruit and end of the suit and is very aptly called the life of the law
own, Ms. Tan has been deprived of what, technically, she should have been paid from
(Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59 [1963];
the start, before 1967, without need of her going to court to enforce her rights. And
Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A
all because PAL did not issue the checks intended for her, in her
judgment cannot be rendered nugatory by the unreasonable application of a strict
name.chanroblesvirtualawlibrarychanrobles virtual law library
rule of procedure. Vested rights were never intended to rest on the requirement of a
return, the office of which is merely to inform the court and the parties, of any and all
Under the peculiar circumstances of this case, the payment to the absconding sheriff
actions taken under the writ of execution. Where such information can be
by check in his name did not operate as a satisfaction of the judgment
established in some other manner, the absence of an executing officer's return will
debt.chanroblesvirtualawlibrary chanrobles virtual law library
not preclude a judgment from being treated as discharged or being executed through
an alias writ of execution as the case may be. More so, as in the case at bar. Where
the return cannot be expected to be forthcoming, to require the same would be to In general, a payment, in order to be effective to discharge an obligation, must be
compel the enforcement of rights under a judgment to rest on an impossibility, made to the proper person. Article 1240 of the Civil Code provides:
thereby allowing the total avoidance of judgment debts. So long as a judgment is not
214

satisfied, a plaintiff is entitled to other writs of execution (Government of the

 Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive
it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority,
express or implied, to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58
[2d] 446, 111 ALR 65). Payment made to one having apparent authority to receive the
money will, as a rule, be treated as though actual authority had been given for its
receipt. Likewise, if payment is made to one who by law is authorized to act for the
creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA
283). The receipt of money due on ajudgment by an officer authorized by law to
accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa
supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS]
1275).chanroblesvirtualawlibrarychanrobles virtual law library
The theory is where payment is made to a person authorized and recognized by the
creditor, the payment to such a person so authorized is deemed payment to the
creditor. Under ordinary circumstances, payment by the judgment debtor in the case
at bar, to the sheriff should be valid payment to extinguish the judgment
debt.chanroblesvirtualawlibrary chanrobles virtual law library
There are circumstances in this case, however, which compel a different
conclusion.chanroblesvirtualawlibrary chanrobles virtual law library
The payment made by the petitioner to the absconding sheriff was not in cash or
legal tender but in checks. The checks were not payable to Amelia Tan or Able
Printing Press but to the absconding sheriff.chanroblesvirtualawlibrary chanrobles
virtual law library
Did such payments extinguish the judgment debt? chanrobles virtual law library
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.chanroblesvirtualawlibrarychanrobles virtual law library
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been
215
impaired.chanroblesvirtualawlibrary chanrobles virtual law library
In the meantime, the action derived from the original obligation shall be held in
abeyance.
In the absence of an agreement, either express or implied, payment means the
discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed.
257) and unless the parties so agree, a debtor has no rights, except at his own peril,
to substitute something in lieu of cash as medium of payment of his debt (Anderson
v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless
authorized to do so by law or by consent of the obligee a public officer has no
authority to accept anything other than money in payment of an obligation under a
judgment being executed. Strictly speaking, the acceptance by the sheriff of the
petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the
judgment debt.chanroblesvirtualawlibrary chanrobles virtual law library
Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (See. 189, Act
2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil.
255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's
check or ordinary cheek, is not legal tender, and an offer of a check in payment of a
debt is not a valid tender of payment and may be refused receipt by the obligee or
creditor. Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par.
3).chanroblesvirtualawlibrarychanrobles virtual law library
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's,
there would have been no payment. After dishonor of the checks, Ms. Tan could have
run after other properties of PAL. The theory is that she has received no value for
what had been awarded her. Because the checks were drawn in the name of Emilio Z.
Reyes, neither has she received anything. The same rule should
apply.chanroblesvirtualawlibrarychanrobles virtual law library
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been
payment in full legal contemplation. The reasoning is logical but is it valid and proper?
Logic has its limits in decision making. We should not follow rulings to their logical
extremes if in doing so we arrive at unjust or absurd
results.chanroblesvirtualawlibrarychanrobles virtual law library
In the first place, PAL did not pay in cash. It paid in
cheeks.chanroblesvirtualawlibrary chanrobles virtual law library
 And second, payment in cash always carries with it certain cautions. Nobody hands
over big amounts of cash in a careless and inane manner. Mature thought is given to
the possibility of the cash being lost, of the bearer being waylaid or running off with
what he is carrying for another. Payment in checks is precisely intended to avoid the
possibility of the money going to the wrong party. The situation is entirely different
where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way
to experience and to reality. Having paid with checks, PAL should have done so
properly.chanroblesvirtualawlibrarychanrobles virtual law library
Payment in money or cash to the implementing officer may be deemed absolute
payment of the judgment debt but the Court has never, in the least bit, suggested
that judgment debtors should settle their obligations by turning over huge amounts
of cash or legal tender to sheriffs and other executing officers. Payment in cash would
result in damage or interminable litigations each time a sheriff with huge amounts of
cash in his hands decides to abscond.chanroblesvirtualawlibrarychanrobles virtual
law library
As a protective measure, therefore, the courts encourage the practice of payments by
cheek provided adequate controls are instituted to prevent wrongful payment and
illegal withdrawal or disbursement of funds. If particularly big amounts are involved,
escrow arrangements with a bank and carefully supervised by the court would be the
safer procedure. Actual transfer of funds takes place within the safety of bank
premises. These practices are perfectly legal. The object is always the safe and
incorrupt execution of the judgment.chanroblesvirtualawlibrary chanrobles virtual
law library
It is, indeed, out of the ordinary that checks intended for a particular payee are made
out in the name of another. Making the checks payable to the judgment creditor
would have prevented the encashment or the taking of undue advantage by the
sheriff, or any person into whose hands the checks may have fallen, whether
wrongfully or in behalf of the creditor. The issuance of the checks in the name of the
sheriff clearly made possible the misappropriation of the funds that were
withdrawn.chanroblesvirtualawlibrary chanrobles virtual law library
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party
respondent Amelia Tan, the petitioner corporation, utilizing the services of its
personnel who are or should be knowledgeable about the accepted procedures and
resulting consequences of the checks drawn, nevertheless, in this instance, without
prudence, departed from what is generally observed and done, and placed as payee
216
in the checks the name of the errant Sheriff and not the name of the rightful payee.
Petitioner thereby created a situation which permitted the said Sheriff to personally
encash said checks and misappropriate the proceeds thereof to his exclusive personal
benefit. For the prejudice that resulted, the petitioner himself must bear the fault.
The judicial guideline which we take note of states as follows: chanrobles virtual law
library
As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of confidence must bear the
loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor
whose act made possible the loss had but itself to
blame.chanroblesvirtualawlibrarychanrobles virtual law library
The attention of this Court has been called to the bad practice of a number of
executing officers, of requiring checks in satisfaction of judgment debts to be made
out in their own names. If a sheriff directs a judgment debtor to issue the checks in
the sheriff's name, claiming he must get his commission or fees, the debtor must
report the sheriff immediately to the court which ordered the execution or to the
Supreme Court for appropriate disciplinary action. Fees, commissions, and salaries
are paid through regular channels. This improper procedure also allows such officers,
who have sixty (60) days within which to make a return, to treat the moneys as their
personal finds and to deposit the same in their private accounts to earn sixty (60)
days interest, before said finds are turned over to the court or judgment creditor (See
Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up
the defense that said checks had been issued to them in their private or personal
capacity. Without a receipt evidencing payment of the judgment debt, the
misappropriation of finds by such officers becomes clean and complete. The practice
is ingenious but evil as it unjustly enriches court personnel at the expense of litigants
and the proper administration of justice. The temptation could be far greater, as
proved to be in this case of the absconding sheriff. The correct and prudent thing for
the petitioner was to have issued the checks in the intended payee's
name.chanroblesvirtualawlibrary chanrobles virtual law library
The pernicious effects of issuing checks in the name of a person other than the
intended payee, without the latter's agreement or consent, are as many as the ways
that an artful mind could concoct to get around the safeguards provided by the law
on negotiable instruments. An angry litigant who loses a case, as a rule, would not
want the winning party to get what he won in the judgment. He would think of ways
to delay the winning party's getting what has been adjudged in his favor. We cannot
condone that practice especially in cases where the courts and their officers are
 involved. We rule against the petitioner.chanroblesvirtualawlibrary chanrobles virtual
law library
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. - The officer must enforce an execution of
a money judgment by levying on all the property, real and personal of every name
and nature whatsoever, and which may be disposed of for value, of the judgment
debtor not exempt from execution, or on a sufficient amount of such property, if they
be sufficient, and selling the same, and paying to the judgment creditor, or his
attorney, so much of the proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered satisfied and
therefore the orders of the respondent judge granting the alias writ of execution may
not be pronounced as a nullity.chanroblesvirtualawlibrary chanrobles virtual law
library
xxx xxx xxxchanrobles virtual law library
It is clear and manifest that after levy or garnishment, for a judgment to be executed
there is the requisite of payment by the officer to the judgment creditor, or his
attorney, so much of the proceeds as will satisfy the judgment and none such
payment had been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete the execution of
the judgment not having been performed by the City Sheriff, the judgment debt
legally and factually remains unsatisfied.
sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve.
Section 15, Rule 39 merely provides the sheriff with his duties as executing officer
including delivery of the proceeds of his levy on the debtor's property to satisfy the
judgment debt. It is but to stress that the implementing officer's duty should not stop
at his receipt of payments but must continue until payment is delivered to the obligor
or creditor.chanroblesvirtualawlibrary chanrobles virtual law library
Finally, we find no error in the respondent court's pronouncement on the inclusion of
interests to be recovered under the alias writ of execution. This logically follows from
our ruling that PAL is liable for both the lost checks and interest. The respondent
court's decision in CA-G.R. No. 51079-R does not totally supersede the trial court's
judgment in Civil Case No. 71307. It merely modified the same as to the principal
amount awarded as actual damages.chanroblesvirtualawlibrary chanrobles virtual
law library
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The
judgment of the respondent Court of Appeals is AFFIRMED and the trial court's
issuance of the alias writ of execution against the petitioner is upheld without
prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The
Court Administrator is ordered to follow up the actions taken against Emilio Z.
Reyes.chanroblesvirtualawlibrary chanrobles virtual law library
SO ORDERED.
Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado, JJ., concur.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under

unusual circumstances as those obtaining in this petition, the distinction comes out
clearly.chanroblesvirtualawlibrarychanrobles virtual law library

Execution is the process which carries into effect a decree or judgment (Painter v.
Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE
2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a judgment is the
payment of the amount of the writ, or a lawful tender thereof, or the conversion by
sale of the debtor's property into an amount equal to that due, and, it may be done
otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an
execution officer are not prerequisites to the satisfaction of a judgment when the
217

same has already been realized in fact (Section 47, Rule 39). Execution is for the
 54. G.R. NO. 176664 : July 21, 2008 respondents refused to pay on the ground that they had already paid their obligation
to FEBTC.
BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. SPOUSES REYNALDO AND VICTORIA
ROYECA,Respondents. On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the
respondents with the Metropolitan Trial Court (MeTC) of Manila praying for the
DECISION delivery of the vehicle, with an alternative prayer for the payment of P48,084.00 plus
interest and/or late payment charges at the rate of 36% per annum from May 18,
NACHURA, J.: 1997 until fully paid. The complaint likewise prayed for the payment of P24,462.73 as
attorney's fees, liquidated damages, bonding fees and other expenses incurred in the
seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff
Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA)
when it merged with and absorbed FEBTC.7
Decision1 dated July 12, 2006, and Resolution2 dated February 13, 2007, which
dismissed its complaint for replevin and damages and granted the respondents'
counterclaim for damages. In their Answer, respondents alleged that on May 20, 1997, they delivered to the
Auto Financing Department of FEBTC eight (8) postdated checks in different amounts
totaling P97,281.78. The Acknowledgment Receipt,8 which they attached to the
The case stems from the following undisputed facts:
Answer, showed that FEBTC received the following checks:
On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed
and delivered to Toyota Shaw, Inc. a Promissory Note3 for P577,008.00 payable in 48 DATE BANK CHECK NO. AMOUNT
equal monthly installments of P12,021.00, with a maturity date of August 18, 1997.
26 May 97 Landbank #610945 P13,824.15
The Promissory Note provides for a penalty of 3% for every month or fraction of a
month that an installment remains unpaid. 6 June 97 Head Office #610946 12,381.63
30 May 97 FEBTC #17A00-11550P 12,021.00
To secure the payment of said Promissory Note, respondents executed a Chattel
Mortgage4 in favor of Toyota over a certain motor vehicle, more particularly 15 June 97 Shaw Blvd. #17A00-11549P 12,021.00
described as follows:
30 June 97 " #17A00-11551P 12,021.00
p>Make and Type 1993 Toyota Corolla 1.3 XL 18 June 97 Landbank #610947 11,671.00

Motor No. 2E-2649879 18 July 97 Head Office #610948 11,671.00

18 August 97 #610949 11,671.00
Serial No. EE100-9512571

Color D.B. Gray Met.
Toyota, with notice to respondents, executed a Deed of Assignment 5 transferring all
its rights, title, and interest in the Chattel Mortgage to Far East Bank and Trust
Company (FEBTC).
The respondents further averred that they did not receive any notice from the
drawee banks or from FEBTC that these checks were dishonored. They explained that,
considering this and the fact that the checks were issued three years ago, they
believed in good faith that their obligation had already been fully paid. They alleged
that the complaint is frivolous and plainly vexatious. They then prayed that they be
awarded moral and exemplary damages, attorney's fees and costs of suit.9

Claiming that the respondents failed to pay four (4) monthly amortizations covering During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC
the period from May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to
218

since 1994 and had assumed the position of Account Analyst since its merger with
respondents on March 14, 2000 asking for the payment thereof, plus penalty. 6 The
 BPI. He admitted that they had, in fact, received the eight checks from the
respondents. However, two of these checks (Landbank Check No. 0610947 and FEBTC
Check No. 17A00-11551P) amounting to P23,692.00 were dishonored. He recalled
that the remaining two checks were not deposited anymore due to the previous
dishonor of the two checks. He said that after deducting these payments, the total
outstanding balance of the obligation was P48,084.00, which represented the last
four monthly installments.
On February 23, 2005, the MeTC dismissed the case and granted the respondents'
counterclaim for damages, thus:
WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause
of action, and on the counterclaim, plaintiff is ordered to indemnify the defendants as
follows:
a) The sum of PhP30,000.00 as and by way of moral damages;
b) The sum of PhP30,000.00 as and by way of exemplary damages;
c) The sum of PhP20,000.00 as and by way of attorney's fees; and
d) To pay the costs of the suit.
SO ORDERED.10
On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered
the respondents to pay the amount claimed by the petitioner. The dispositive portion
of its Decision11 dated August 11, 2005 reads:
WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court,
Branch 9 dated February 23, 2005 is REVERSED and a new one entered directing the
defendants-appellees to pay the plaintiff-appellant, jointly and severally,
1. The sum of P48,084.00 plus interest and/or late payment charges thereon at the
rate of 36% per annum from May 18, 1997 until fully paid;
2. The sum of P10,000.00 as attorney's fees; andcralawlibrary
3. The costs of suit.
219
SO ORDERED.12
The RTC denied the respondents' motion for reconsideration. 13
The respondents elevated the case to the Court of Appeals (CA) through a Petition for
Review . They succeeded in obtaining a favorable judgment when the CA set aside the
RTC's Decision and reinstated the MeTC's Decision on July 12, 2006. 14 On February 13,
2007, the CA denied the petitioner's motion for reconsideration. 15
The issues submitted for resolution in this Petition for Review are as follows:
I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF THEIR
OBLIGATION AS ONE OF THEIR AFFIRMATIVE DEFENSES.
II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.
III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY'S FEES.16
The petitioner insists that the respondents did not sufficiently prove the alleged
payment. It avers that, under the law and existing jurisprudence, delivery of checks
does not constitute payment. It points out that this principle stands despite the fact
that there was no notice of dishonor of the two checks and the demand to pay was
made three years after default.
On the other hand, the respondents postulate that they have established payment of
the amount being claimed by the petitioner and, unless the petitioner proves that the
checks have been dishonored, they should not be made liable to pay the obligation
again.17
The petition is partly meritorious.
In civil cases, the party having the burden of proof must establish his case by a
preponderance of evidence, or evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto. 18 Thus, the party,
whether plaintiff or defendant, who asserts the affirmative of an issue has the onus
to prove his assertion in order to obtain a favorable judgment. For the plaintiff, the
burden to prove its positive assertions never parts. For the defendant, an affirmative
defense is one which is not a denial of an essential ingredient in the plaintiff's cause
of action, but one which, if established, will be a good defense - i.e. an "avoidance" of
the claim.19
 In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who,
between the plaintiff and defendant, has the burden to prove the affirmative defense
of payment:
As a general rule, one who pleads payment has the burden of proving it. Even where
the plaintiff must allege non-payment, the general rule is that the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment. The
debtor has the burden of showing with legal certainty that the obligation has been
discharged by payment.
When the existence of a debt is fully established by the evidence contained in the
record, the burden of proving that it has been extinguished by payment devolves
upon the debtor who offers such a defense to the claim of the creditor. Where the
debtor introduces some evidence of payment, the burden of going forward with the
evidence - as distinct from the general burden of proof - shifts to the creditor, who is
then under a duty of producing some evidence to show non-payment.21
In applying these principles, the CA and the RTC, however, arrived at different
conclusions. While both agreed that the respondents had the burden of proof to
establish payment, the two courts did not agree on whether the respondents were
able to present sufficient evidence of payment - enough to shift the burden of
evidence to the petitioner. The RTC found that the respondents failed to discharge
this burden because they did not introduce evidence of payment, considering that
mere delivery of checks does not constitute payment. 22 On the other hand, the CA
concluded that the respondents introduced sufficient evidence of payment, as
opposed to the petitioner, which failed to produce evidence that the checks were in
fact dishonored. It noted that the petitioner could have easily presented the
dishonored checks or the advice of dishonor and required respondents to replace the
dishonored checks but none was presented. Further, the CA remarked that it is
absurd for a bank, such as petitioner, to demand payment of a failed amortization
only after three years from the due date.
The divergence in this conflict of opinions can be narrowed down to the issue of
whether the Acknowledgment Receipt was sufficient proof of payment. As correctly
observed by the RTC, this is only proof that respondents delivered eight checks in
payment of the amount due. Apparently, this will not suffice to establish actual
payment.
Settled is the rule that payment must be made in legal tender. A check is not legal
tender and, therefore, cannot constitute a valid tender of payment.23 Since a
negotiable instrument is only a substitute for money and not money, the delivery of
220
such an instrument does not, by itself, operate as payment. Mere delivery of checks
does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is
actually realized.24
To establish their defense, the respondents therefore had to present proof, not only
that they delivered the checks to the petitioner, but also that the checks were
encashed. The respondents failed to do so. Had the checks been actually encashed,
the respondents could have easily produced the cancelled checks as evidence to
prove the same. Instead, they merely averred that they believed in good faith that
the checks were encashed because they were not notified of the dishonor of the
checks and three years had already lapsed since they issued the checks.chanrobles
virtual law library
Because of this failure of the respondents to present sufficient proof of payment, it
was no longer necessary for the petitioner to prove non-payment, particularly proof
that the checks were dishonored. The burden of evidence is shifted only if the party
upon whom it is lodged was able to adduce preponderant evidence to prove its
claim.25
To stress, the obligation to prove that the checks were not dishonored, but were in
fact encashed, fell upon the respondents who would benefit from such fact. That
payment was effected through the eight checks was the respondents' affirmative
allegation that they had to establish with legal certainty. If the petitioner were
seeking to enforce liability upon the check, the burden to prove that a notice of
dishonor was properly given would have devolved upon it.26 The fact is that the
petitioner's cause of action was based on the original obligation as evidenced by the
Promissory Note and the Chattel Mortgage, and not on the checks issued in payment
thereof.
Further, it should be noted that the petitioner, as payee, did not have a legal
obligation to inform the respondents of the dishonor of the checks. A notice of
dishonor is required only to preserve the right of the payee to recover on the check.
It preserves the liability of the drawer and the indorsers on the check. Otherwise, if
the payee fails to give notice to them, they are discharged from their liability thereon,
and the payee is precluded from enforcing payment on the check. The respondents,
therefore, cannot fault the petitioner for not notifying them of the non-payment of
the checks because whatever rights were transgressed by such omission belonged
only to the petitioner.
In all, we find that the evidence at hand preponderates in favor of the petitioner. The
petitioner's possession of the documents pertaining to the obligation strongly
buttresses its claim that the obligation has not been extinguished. The creditor's
 possession of the evidence of debt is proof that the debt has not been discharged by
payment.27 A promissory note in the hands of the creditor is a proof of indebtedness
rather than proof of payment.28 In an action for replevin by a mortgagee, it is prima
facieevidence that the promissory note has not been paid.29 Likewise, an uncanceled
mortgage in the possession of the mortgagee gives rise to the presumption that the
mortgage debt is unpaid.30

Finally, the respondents posit that the petitioner's claim is barred by laches since it
has been three years since the checks were issued. We do not agree. Laches is a
recourse in equity. Equity, however, is applied only in the absence, never in
contravention, of statutory law. Thus, laches cannot, as a rule, abate a collection suit
filed within the prescriptive period mandated by the New Civil Code. 31 The
petitioner's action was filed within the ten-year prescriptive period provided under
Article 1144 of the New Civil Code. Hence, there is no room for the application of
laches.

Nonetheless, the Court cannot ignore what the respondents have consistently raised
- that they were not notified of the non-payment of the checks. Reasonable banking
practice and prudence dictates that, when a check given to a creditor bank in
payment of an obligation is dishonored, the bank should immediately return it to the
debtor and demand its replacement or payment lest it causes any prejudice to the
drawer. In light of this and the fact that the obligation has been partially paid, we
deem it just and equitable to reduce the 3% per month penalty charge as stipulated
in the Promissory Note to 12% per annum.32Although a court is not at liberty to
ignore the freedom of the parties to agree on such terms and conditions as they see
fit, as long as they contravene no law, morals, good customs, public order or public
policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it
is iniquitous or unconscionable, or if the principal obligation has been partly or
irregularly complied with.33

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of

Appeals Decision dated July 12, 2006, and Resolution dated February 13, 2007, are
REVERSED and SET ASIDE. The Decision of the Regional Trial Court, dated August 11,
2005, is REINSTATED with the MODIFICATION that respondents are ordered to deliver
the possession of the subject vehicle, or in the alternative, pay the
petitioner P48,084.00 plus late penalty charges/interest thereon at the rate of 12%
per annum from May 18, 1997 until fully paid.

SO ORDERED.
221
 ART 1250 Appeals. However, finding that the principal purpose of the action was to secure a
judicial declaration that there exists ‘extraordinary inflation’ within the meaning of
55. G.R. No. L-43446. May 3, 1988. Article 1250 of the New Civil Code to warrant the application of that provision, the
Court of Appeals, pursuant to Section 3, Rule 50 of the Rules of Court, certified the
FILIPINO PIPE AND FOUNDRY CORPORATION, Plaintiff-Appellant, v. NATIONAL case to this Court for proper disposition.
WATERWORKS AND SEWERAGE AUTHORITY, Defendant-Appellee.
On June 12, 1961, the NAWASA entered into a contract with the plaintiff FPFC for the
latter to supply it with 4" and 6" diameter centrifugally cast iron pressure pipes worth
P270,187.50 to be used in the construction of the Anonoy Waterworks in Masbate
and the Barrio San Andres-Villareal Waterworks in Samar. Defendant NAWASA paid in
installments on various dates, a total of One Hundred Thirty-Four Thousand and Six
SYLLABUS
Hundred Eighty Pesos (P134,680.00) leaving a balance of One Hundred Thirty-Five
Thousand, Five Hundred Seven Pesos and Fifty centavos (P135,507.50) excluding
interest. Having completed the delivery of the pipes, the plaintiff demanded payment
from the defendant of the unpaid balance of the price with interest in accordance
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTRA-ORDINARY INFLATION, with the terms of their contract. When the NAWASA failed to pay the balance of its
DEFINED. — Extraordinary inflation exists when "there is a decrease or increase in the account, the plaintiff filed a collection suit on March 16, 1967 which was docketed as
purchasing power of the Philippine currency which is unusual or beyond the common Civil Case No. 66784 in the Court of First Instance of Manila.
fluctuation in the value of said currency, and such decrease or increase could not
have been reasonably foreseen or was manifestly beyond the contemplation of the On November 23, 1967, the trial court rendered judgment in Civil Case No. 66784
parties at the time of the establishment of the obligation. ordering the defendant to pay the unpaid balance of P135,507.50 in NAWASA
negotiable bonds, redeemable after ten years from their Issuance with interest at 6%
2. ID.; ID.; ID.; DOWNWARD FALL OF CURRENCY, NOT CONSIDERED EXTRA-ORDINARY. per annum, P40,944.73 as interest up to March 15, 1966 and the interest accruing
— While appellant’s voluminous records and statistics proved that there has been a thereafter to the issuance of the bonds at 6% per annum and the costs. Defendant,
decline in the purchasing power of the Philippine peso, this downward fall of the however, failed to satisfy the decision. It did not deliver the bonds to the judgment
currency cannot be considered "extraordinary." It is simply a universal trend that has creditor.
not spared our country.
On February 18, 1971, the plaintiff FPFC filed another complaint which was docketed
as Civil Case No. 82296, seeking an adjustment of the unpaid balance in accordance
with the value of the Philippine peso when the decision in Civil Case No. 66784 was
rendered on November 23, 1967.
DECISION
On May 3, 1971, the defendant filed a motion to dismiss the complaint on the ground
that it is barred by the 1967 decision in Civil Case No. 66784.

GRIÑO-AQUINO, J.:
The plaintiff Filipino Pipe and Foundry Corporation (hereinafter referred to as "FPFC"
for brevity) appealed the dismissal of its complaint against defendant National
Waterworks and Sewerage Authority (NAWASA) by the Court of First Instance of
222
The trial court, in its order dated May 26, 1971, denied the motion to dismiss on the
ground that the bar by prior judgment did not apply to the case because the causes
of action in the two cases are different: the first action being for collection of the
defendant’s indebtedness for the pipes, while the second case is for adjustment of
the value of said judgment due to alleged supervening extraordinary inflation of the
Philippine peso which has reduced the value of the bonds paid to the

plaintiff.chanrobles.com:cralaw:red
Manila on September 5, 1973. The appeal was originally brought to the Court of
 Article 1250 of the Civil Code provides:jgc:chanrobles.com.ph by October 1923, it had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas
& Victor R. Abola, Economics, An Introduction [Third Edition].
"In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the As reported, "prices were going up every week, then every day, then every hour.
obligation shall be the basis of payment, unless there is an agreement to the Women were paid several times a day so that they could rush out and exchange their
contrary."cralaw virtua1aw library money for something of value before what little purchasing power was left dissolved
in their hands. Some workers tried to beat the constantly rising prices by throwing
The court suggested to the parties during the trial that they present expert testimony their money out of the windows to their waiting wives, who would rush to unload the
to help it in deciding whether the economic conditions then, and still prevailing, nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread,
would justify the application of Article 1250 of the Civil Code. The plaintiff presented billions." (Sidney Rutherg, "The Money Balloon" New York: Simon and Schuster, 1975,
voluminous records and statistics showing that a spiralling inflation has marked the p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd Ed.)
progress of the country from 1962 up to the present. There is no denying that the
price index of commodities, which is the usual evidence of the value of the currency While appellant’s voluminous records and statistics proved that there has been a
has been rising. decline in the purchasing power of the Philippine peso, this downward fall of the
currency cannot be considered "extraordinary." It is simply a universal trend that has
The trial court pointed out, however, that this is a worldwide occurrence, but hardly not spared our country.
proof that the inflation is extraordinary in the sense contemplated by Article 1250 of
the Civil Code, which was adopted by the Code Commission to provide "a just WHEREFORE, finding no reversible error in the appealed decision of the trial court,
solution" to the ‘uncertainty and confusion as a result of contracts entered into or We affirm it in toto. No costs.
payments made during the last war." (Report of the Code Commission, 132-133.)
SO ORDERED.
Noting that the situation during the Japanese Occupation "cannot be compared with
the economic conditions today," the trial court, on September 5, 1973, rendered Narvasa, Cruz and Gancayco, JJ., concur.
judgment dismissing the complaint.

The only issue before Us is whether, on the basis of the continuously spiralling price
index indisputably shown by the plaintiff, there exists an extraordinary inflation of
the currency justifying an adjustment of defendant appellee’s unpaid judgment
obligation to the plaintiff-appellant.

Extraordinary inflation exists when "there is a decrease or increase in the purchasing

power of the Philippine currency which is unusual or beyond the common fluctuation
in the value of said currency, and such decrease or increase could not have been
reasonably foreseen or was manifestly beyond the contemplation of the parties at
the time of the establishment of the obligation. (Tolentino Commentaries and
Jurisprudence on the Civil Code Vol. IV, p. 284.)

An example of extraordinary inflation is the following description of what happened

to the Deutschmark in 1920:chanrobles law library : red

"More recently, in the 1920’s Germany experienced a case of hyperinflation. In early

223

1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same
year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that
 ART 1258
56. G.R. No. 72110. November 16, 1990
ROMAN CATHOLIC BISHOP OF MALOLOS, INC., Petitioner, v. INTERMEDIATE
APPELLATE COURT, and ROBES-FRANCISCO REALTY AND DEVELOPMENT
CORPORATION, Respondents.
Rodrigo Law Office for Petitioner.
Antonio P. Barredo and Napoleon M. Malinas for Private Respondent.
SYLLABUS
1. CIVIL LAW; CONTRACTS; TENDER OF PAYMENT; CANNOT BE PRESUMED BY MERE
INFERENCE FROM SURROUNDING CIRCUMSTANCES. — We agree with the petitioner
that a finding that the private respondent had sufficient available funds on or before
the grace period for the payment of its obligation does not constitute proof of tender
of payment by the latter for its obligation within the said period. Tender of payment
involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former’s obligation and demanding that
the latter accept the same. Thus, tender of payment cannot be presumed by a mere
inference from surrounding circumstances. At most, sufficiency of available funds is
only affirmative of the capacity or ability of the obligor to fulfill his part of the
bargain. But whether or not the obligor avails himself of such funds to settle his
outstanding account remains to be proven by independent and credible evidence.
Tender of payment presupposes not only that the obligor is able, ready, and willing,
but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio.
"A proof that an act could have been done is no proof that it was actually done." The
respondent court was therefore in error to have concluded from the sheer proof of
sufficient available funds on the part of the private respondent to meet more than
the total obligation within the grace period, the alleged truth of tender of payment.
The same is a classic case of non-sequitur.
2. ID.; ID.; ID.; NOT VALIDLY CONSTITUTED BY PAYMENT OF A CERTIFIED PERSONAL
CHECK. — With regard to the third issue, granting arguendo that we would rule
affirmatively on the two preceding issues, the case of the private respondent still can
not succeed in view of the fact that the latter used a certified personal check which is
not legal tender nor the currency stipulated, and therefore, can not constitute valid
224
tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that
"the payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in the
Philippines. The Court en banc in the recent case of Philippine Airlines v. Court of
Appeals, (Promulgated on January 30, 1990) G.R. No. L-49188, stated thus: Since a
negotiable instrument is only a substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031
on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255;
Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check
or ordinary check, is not legal tender, and an offer of a check in payment of a debt is
not a valid tender of payment and may be refused receipt by the obligee or creditor.
Hence, where the tender of payment by the private respondent was not valid for
failure to comply with the requisite payment in legal tender or currency stipulated
within the grace period and as such, was validly refused receipt by the petitioner, the
subsequent consignation did not operate to discharge the former from its obligation
to the latter.
3. ID.; ID.; OBLIGATIONS ARISING THEREFROM HAVE THE FORCE OF LAW BETWEEN
THE CONTRACTING PARTIES. — Art. 1159 of the Civil Code of the Philippines provides
that "obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." And unless the
stipulations in said contract are contrary to law, morals, good customs, public order,
or public policy, the same are binding as between the parties. (Article 1409, Civil
Code, par. 1). What the private respondent should have done if it was indeed
desirous of complying with its obligations would have been to pay the petitioner
within the grace period and obtain a receipt of such payment duly issued by the
latter. Thereafter, or, allowing a reasonable time, the private respondent could have
demanded from the petitioner the execution of the necessary documents. In case the
petitioner refused, the private respondent could have had always resorted to judicial
action for the legitimate enforcement of its right. For the failure of the private
respondent to undertake this more judicious course of action, it alone shall suffer the
consequences.
4. REMEDIAL LAW; APPEAL; FACTUAL FINDINGS OF TRIAL COURT AS A RULE, SHOULD
BE ACCORDED FULL CONSIDERATION AND RESPECT. — On the contrary, the
respondent court finds itself remiss in overlooking or taking lightly the more
important findings of fact made by the trial court which we have earlier mentioned
and which as a rule, are entitled to great weight on appeal and should be accorded
full consideration and respect and should not be disturbed unless for strong and
cogent reasons. (Natividad del Rosario Vda. de Alberto v. Court of Appeals, G.R.
29759, May 18, 1989; Matabuena v. Court of Appeals, G.R. 76542, May 5, 1989).
5. ID.; SUPREME COURT; INSTANCES WHEN THE COURT HAS TO REVIEW THE
EVIDENCE. — While the Court is not a trier of facts, yet, when the findings of fact of
 the Court of Appeals are at variance with those of the trial court, (Robleza v. Court of
Appeals, G.R. 80364, June 28, 1989) or when the inference of the Court of Appeals
from its findings of fact is manifestly mistaken, (Reynolds Philippine Corporation v.
Court of Appeals, G.R. 38187, January 17, 1987) the Court has to review the evidence
in order to arrive at the correct findings based on the record.
private respondent with the provision for payment to the petitioner of the principal
balance of P100,000.00 and the accrued interest of P24,000.00 within the grace
period.
A chronological narration of the antecedent facts is as follows:chanrob1es virtual 1aw
library

On July 7, 1971, the subject contract over the land in question was executed between
the petitioner as vendor and the private respondent through its then president, Mr.
DECISION Carlos F. Robes, as vendee, stipulating for a downpayment of P23,930.00 and the
balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years
from execution of the contract, that is, on or before July 7, 1975. The contract
SARMIENTO, J.:
likewise provides for cancellation, forfeiture of previous payments, and reconveyance
of the land in question in case the private respondent would fail to complete
payment within the said period.
This is a petition for review on certiorari which seeks the reversal and setting aside of
the decision 1 of the Court of Appeals, 2 the dispositive portion of which
On March 12, 1973, the private respondent, through its new president, Atty. Adalia
reads:chanrobles law library : red
Francisco, addressed a letter 6 to Father Vasquez, parish priest of San Jose Del
Monte, Bulacan, requesting to be furnished with a copy of the subject contract and
WHEREFORE, the decision appealed from is hereby reversed and set aside and
the supporting documents.
another one entered for the plaintiff ordering the defendant-appellee Roman
Catholic Bishop of Malolos, Inc. to accept the balance of P124,000.00 being paid by
On July 17, 1975, admittedly after the expiration of the stipulated period for
plaintiff-appellant and thereafter to execute in favor of Robes-Francisco Realty
payment, the same Atty. Francisco wrote the petitioner a formal request 7 that her
Corporation a registerable Deed of Absolute Sale over 20,655 square meters portion
company be allowed to pay the principal amount of P100,000.00 in three (3) equal
of that parcel of land situated in San Jose del Monte, Bulacan described in OCT No.
installments of six (6) months each with the first installment and the accrued interest
575 (now Transfer Certificates of Title Nos. T-169493, 169494,169495 and 169496) of
of P24,000.00 to be paid immediately upon approval of the said request.
the Register of Deeds of Bulacan. In case of refusal of the defendant to execute the
Deed of Final Sale, the clerk of court is directed to execute the said document.
On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez,
Without pronouncement as to damages and attorney’s fees. Costs against the
formally denied the said request of the private respondent, but granted the latter a
defendant-appellee. 3
grace period of five (5) days from the receipt of the denial 8 to pay the total balance
of P124,000.00, otherwise, the provisions of the contract regarding cancellation,
The case at bar arose from a complaint filed by the private respondent, then plaintiff,
forfeiture, and reconveyance would be implemented.
against the petitioner, then defendant, in the Court of First Instance (now Regional
Trial Court) of Bulacan, at Sta. Maria, Bulacan, 4 for specific performance with
On August 4, 1975, the private respondent, through its president, Atty. Francisco,
damages, based on a contract 5 executed on July 7, 1971.
wrote 9 the counsel of the petitioner requesting an extension of 30 days from said
date to fully settle its account. The counsel for the petitioner, Atty. Fernandez,
The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of
received the said letter on the same day. Upon consultation with the petitioner in
the 30,655 sq.m. total area, of a parcel of land covered by Original Certificate of Title
Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private respondent a
No. 575 of the Province of Bulacan, issued and registered in the name of the
letter 10 dated August 7, 1975 informing the latter of the denial of the request for an
petitioner which it sold to the private respondent for and in consideration of
extension of the grace period.
P123,930.00.chanrobles virtual lawlibrary
225

Consequently, Atty. Francisco, the private respondent’s president, wrote a letter 11

The crux of the instant controversy lies in the compliance or non-compliance by the
dated August 22, 1975, directly addressed to the petitioner, protesting the alleged
 refusal of the latter to accept tender of payment purportedly made by the former on
August 5, 1975, the last day of the grace period. In the same letter of August 22,
1975, received on the following day by the petitioner, the private respondent
demanded the execution of a deed of absolute sale over the land in question and
after which it would pay its account in full, otherwise, judicial action would be
resorted to.chanrobles.com.ph : virtual law library
account deposit of P64,840.00, and although the latter had a money-market
placement of P300,000.00, the same was to mature only after the expiration of the 5-
day grace period.
Based on the above considerations, the trial court rendered a decision in favor of the
petitioner, the dispositive portion of which reads:chanrobles virtual lawlibrary

On August 27, 1975, the petitioner’s counsel, Atty. Fernandez, wrote a reply 12 to the WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby
private respondent stating the refusal of his client to execute the deed of absolute declares the subject contract cancelled and plaintiff’s downpayment of P23,930.00
sale due to its (private respondent’s) failure to pay its full obligation. Moreover, the forfeited in favor of defendant, and hereby dismisses the complaint; and on the
petitioner denied that the private respondent had made any tender of payment counterclaim, the Court orders plaintiff to pay defendant.
whatsoever within the grace period. In view of this alleged breach of contract, the
petitioner cancelled the contract and considered all previous payments forfeited and (1) Attorney’s fees of P10,000.00;
the land as ipso facto reconveyed.
(2) Litigation expenses of P2,000.00; and
From a perusal of the foregoing facts, we find that both the contending parties have
conflicting versions on the main question of tender of payment. (3) Judicial costs.

The trial court, in its ratiocination, preferred not to give credence to the evidence
presented by the private Respondent. According to the trial court:chanrob1es virtual
1aw library
. . . What made Atty. Francisco suddenly decide to pay plaintiff’s obligation on August
5, 1975, go to defendant’s office at Malolos, and there tender her payment, when her
request of August 4, 1975 had not yet been acted upon until August 7, 1975? If Atty.
Francisco had decided to pay the obligation and had available funds for the purpose
on August 5, 1975, then there would have been no need for her to write defendant
on August 4, 1975 to request an extension of time. Indeed, Atty. Francisco’s claim
that she made a tender of payment on August 5, 1975 — such alleged act, considered
in relation to the circumstances both antecedent and subsequent thereto, being not
in accord with the normal pattern of human conduct — is not worthy of credence. 13
The trial court likewise noted the inconsistency in the testimony of Atty. Francisco,
president of the private respondent, who earlier testified that a certain Mila
Policarpio accompanied her on August 5, 1975 to the office of the petitioner. Another
person, however, named Aurora Oracion, was presented to testify as the secretary-
companion of Atty. Francisco on that same occasion.
Furthermore, the trial court considered as fatal the failure of Atty. Francisco to
present in court the certified personal check allegedly tendered as payment or, at
least, its xerox copy, or even bank records thereof. Finally, the trial court found that
226
SO ORDERED. 14
Not satisfied with the said decision, the private respondent appealed to the
respondent Intermediate Appellate Court (now Court of Appeals) assigning as
reversible errors, among others, the findings of the trial court that the available funds
of the private respondent were insufficient and that the latter did not effect a valid
tender of payment and consignation.
The respondent court, in reversing the decision of the trial court, essentially relies on
the following findings:chanrob1es virtual 1aw library
. . . We are convinced from the testimony of Atty. Adalia Francisco and her witnesses
that in behalf of the plaintiff-appellant they have a total available sum of P364,840.00
at her and at the plaintiff’s disposal on or before August 4, 1975 to answer for the
obligation of the plaintiff-appellant. It was not correct for the trial court to conclude
that the plaintiff-appellant had only about P64,840.00 in savings deposit on or before
August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00.
The plaintiff-appellant, through Atty. Francisco proved and the trial court even
acknowledged that Atty. Adalia Francisco had about P300,000.00 in money market
placement. The error of the trial court has in concluding that the money market
placement of P300,000.00 was out of reach of Atty. Francisco. But as testified to by
Mr. Catalino Estrella, a representative of the Insular Bank of Asia and America, Atty.
Francisco could withdraw anytime her money market placement and place it at her

the private respondent had insufficient funds available to fulfill the entire obligation disposal, thus proving her financial capability of meeting more than the whole of
considering that the latter, through its president, Atty. Francisco, only had a savings P124,000.00 then due per contract. This situation, We believe, proves the truth that
 Atty. Francisco apprehensive that her request for a 30-day grace period would be With respect to the first issue, we agree with the petitioner that a finding that the
denied, she tendered payment on August 4, 1975 which offer defendant through its private respondent had sufficient available funds on or before the grace period for
representative and counsel refused to receive. . .15 (Emphasis supplied) the payment of its obligation does not constitute proof of tender of payment by the
latter for its obligation within the said period. Tender of payment involves a positive
In other words, the respondent court, finding that the private respondent had and unconditional act by the obligor of offering legal tender currency as payment to
sufficient available funds, ipso facto concluded that the latter had tendered payment. the obligee for the former’s obligation and demanding that the latter accept the
Is such conclusion warranted by the facts proven? The petitioner submits that it is same. Thus, tender of payment cannot be presumed by a mere inference from
not.cralawnad surrounding circumstances. At most, sufficiency of available funds is only affirmative
of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or
Hence, this petition. 16 not the obligor avails himself of such funds to settle his outstanding account remains
to be proven by independent and credible evidence. Tender of payment presupposes
The petitioner presents the following issues for resolution:chanrob1es virtual 1aw not only that the obligor is able, ready, and willing, but more so, in the act of
library performing his obligation. Ab posse ad actu non vale illatio. "A proof that an act could
have been done is no proof that it was actually done."cralaw virtua1aw library
x x x
The respondent court was therefore in error to have concluded from the sheer proof
of sufficient available funds on the part of the private respondent to meet more than
the total obligation within the grace period, the alleged truth of tender of payment.
A. Is a finding that private respondent had sufficient available funds on or before the The same is a classic case of non-sequitur.chanrobles virtual lawlibrary
grace period for the payment of its obligation proof that it (private respondent) did
tender of (sic) payment for its said obligation within said period? On the contrary, the respondent court finds itself remiss in overlooking or taking
lightly the more important findings of fact made by the trial court which we have
earlier mentioned and which as a rule, are entitled to great weight on appeal and
x x x
should be accorded full consideration and respect and should not be disturbed unless
for strong and cogent reasons. 18

While the Court is not a trier of facts, yet, when the findings of fact of the Court of
B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute
Appeals are at variance with those of the trial court, 19 or when the inference of the
sale in favor of the private respondent (as vendee) before the latter has actually paid
Court of Appeals from its findings of fact is manifestly mistaken, 20 the Court has to
the complete consideration of the sale — where the contract between and executed
review the evidence in order to arrive at the correct findings based on the record.
by the parties stipulates —
Apropos the second issue raised, although admittedly the documents for the deed of
"That upon complete payment of the agreed consideration by the herein VENDEE,
absolute sale had not been prepared, the subject contract clearly provides that the
the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the
full payment by the private respondent is an a priori condition for the execution of
VENDEE."cralaw virtua1aw library
the said documents by the petitioner.
x x x.
That upon complete payment of the agreed consideration by the herein VENDEE, the
VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.
C. Is an offer of a check a valid tender of payment of an obligation under a contract
21
which stipulates that the consideration of the sale is in Philippine Currency? 17
The private respondent is therefore in estoppel to claim otherwise as the latter did in
We find the petition impressed with merit.
227

the testimony in cross-examination of its president, Atty. Francisco, which

reads:chanrob1es virtual 1aw library
 Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a
Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute manager’s check or ordinary check, is not legal tender, and an offer of a check in
the final deed of sale before you would given (sic) the personal certified check in payment of a debt is not a valid tender of payment and may be refused receipt by the
payment of your balance, is that correct? obligee or creditor.

A Yes, sir. 22 Hence, where the tender of payment by the private respondent was not valid for
failure to comply with the requisite payment in legal tender or currency stipulated
x x x within the grace period and as such, was validly refused receipt by the petitioner, the
subsequent consignation did not operate to discharge the former from its obligation
to the latter.

Art. 1159 of the Civil Code of the Philippines provides that "obligations arising from In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant
contracts have the force of law between the contracting parties and should be to the subject contract, did validly order therefore the cancellation of the said
complied with in good faith." And unless the stipulations in said contract are contrary contract, the forfeiture of the previous payment, and the reconveyance ipso facto of
to law, morals, good customs, public order, or public policy, the same are binding as the land in question.chanrobles lawlibrary : rednad
between the parties.23
WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of
What the private respondent should have done if it was indeed desirous of complying the respondent court promulgated on April 25, 1985 is hereby SET ASIDE and
with its obligations would have been to pay the petitioner within the grace period ANNULLED and the DECISION of the trial court dated May 25, 1981 is hereby
and obtain a receipt of such payment duly issued by the latter. Thereafter, or, REINSTATED. Costs against the private Respondent.
allowing a reasonable time, the private respondent could have demanded from the
petitioner the execution of the necessary documents. In case the petitioner refused, SO ORDERED.
the private respondent could have had always resorted to judicial action for the
legitimate enforcement of its right. For the failure of the private respondent to Melencio-Herrera, Paras and Regalado, JJ., concur.
undertake this more judicious course of action, it alone shall suffer the
consequences.chanrobles.com:cralaw:red Padilla, J., took no part.

With regard to the third issue, granting arguendo that we would rule affirmatively on
the two preceding issues, the case of the private respondent still can not succeed in
view of the fact that the latter used a certified personal check which is not legal
tender nor the currency stipulated, and therefore, can not constitute valid tender of
payment. The first paragraph of Art. 1249 of the Civil Code provides that "the
payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the
Philippines.

The Court en banc in the recent case of Philippine Airlines v. Court of Appeals, 24 G.R.
No. L-49188, stated thus:chanrob1es virtual 1aw library

Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citing Sec.
228

189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American
 57. G.R. No. 150913. February 20, 2003. an equitable mortgage. 3

SPOUSES TEOFILO and SIMEONA RAYOS, and GEORGE RAYOS, Petitioners, v. On 9 May 1960 Francisco Tazal filed a complaint with the Court of First Instance of
DONATO REYES, SATURNINO REYES, TOMASA R. BUSTAMANTE and TORIBIA R. Pangasinan against Mamerto Reyes, docketed as Civil Case No. A-245, for the
CAMELO, Respondents. declaration of the 1 September 1957 transaction as a contract of equitable mortgage.
He also prayed for an order requiring defendant Mamerto Reyes to accept the
DECISION amount of P724.00 which he had deposited on 31 May 1960 with the trial court as
full payment for his debt, and canceling the supposed mortgage on the three (3)
parcels of land with the execution of the corresponding documents of reconveyance
in his favor. 4 Defendant denied plaintiff’s allegations and maintained that their
contract was a sale with right of repurchase that had long expired.
BELLOSILLO, J.:
On 22 June 1961 Francisco Tazal again sold the third parcel of land previously
purchased by Mamerto Reyes to petitioner-spouses Teofilo and Simeona Rayos for
P400.00. On 1 July 1961 petitioner spouses bought from Blas Rayos for P400.00 the
two (2) lots that Tazal had sold at the first instance to Mamerto Reyes and thereafter
to Blas Rayos. Curiously, these contracts of sale in favor of petitioner-spouses were
AT STAKE IN THIS PETITION FOR REVIEW is the ownership of three (3) parcels of
perfected while Civil Case No. A-245 was pending before the trial court.
unregistered land with an area of approximately 130,947 square meters situated in
Brgy. Sapa, Burgos, Pangasinan, the identities of which are not disputed.chanrob1es
On 26 September 1962 the parties in Civil Case No. A-245 submitted a stipulation of
virtua1 1aw 1ibrary
facts upon which the Court of First Instance would decide the case. They admitted
the genuineness and due execution of the 1 September 1957 deed of sale with right
The three (3) parcels were formerly owned by the spouses Francisco and Asuncion
of repurchase although they were in disagreement as to its true character. They also
Tazal who on 1 September 1957 sold them for P724.00 to respondents’ predecessor-
acknowledged the consignation of P724.00 in the Court of First Instance on 31 May
in-interest, one Mamerto Reyes, with right to repurchase within two (2) years from
1960 and the payment of taxes by Mamerto Reyes on the three (3) parcels of land
date thereof by paying to the vendee the purchase price and all expenses incident to
from 1958 to 1962. 5
their reconveyance. After the sale the vendee a retro took physical possession of the
properties and paid the taxes thereon. 1
On 5 January 1963 the trial court in Civil Case No. A-245 rejected the contention of
Francisco Tazal that the deed of sale executed on 1 September 1957 was an equitable
The otherwise inconsequential sale became controversial when two (2) of the three
mortgage but held that Tazal could nonetheless redeem the three (3) parcels of land
(3) parcels were again sold on 24 December 1958 by Francisco Tazal for P420.00 in within thirty (30) days from finality of judgment by paying to Mamerto Reyes the
favor of petitioners’ predecessor-in-interest Blas Rayos without first availing of his
purchase price of P724.00 and all expenses to execute the reconveyance, i.e., the
right to repurchase the properties.
expenses of the contract and the necessary and useful expenses made on the
properties as required by Art. 1616 of the Civil Code. The dispositive portion of the
In the meantime, on 1 September 1959 the conventional right of redemption in favor
trial court’s decision reads —
of spouses Francisco and Asuncion Tazal expired without the right being exercised by
either the Tazal spouses or the vendee Blas Rayos.
WHEREFORE, the Court, hereby renders judgment declaring the contract . . . entered
into by the plaintiffs and the defendant and captioned ‘Deed of Sale with Right to
After the expiration of the redemption period, Francisco Tazal attempted to
Repurchase’ as a true sale with right to repurchase . . . and not an equitable mortgage
repurchase the properties from Mamerto Reyes by asserting that the 1 September
. . . and declaring the plaintiffs entitled to repurchase the property in question within
1957 deed of sale with right of repurchase was actually an equitable mortgage and
thirty (30) days from finality of this decision, without pronouncement as to cost. 6
offering the amount of P724.00 to pay for the alleged debt. 2 But Mamerto Reyes
229

refused the tender of payment and vigorously claimed that their agreement was not
Mamerto Reyes appealed the Decision to the Court of Appeals, 7 which in turn
 elevated the appeal to this Court 8 since only questions of law were involved. 9 When
Mamerto Reyes died in 1986, petitioner-spouses Teofilo and Simeona Rayos wrested
physical possession of the disputed properties from Reyes’s heirs.
On 16 May 1990 this Court considered the case closed and terminated for failure of
the parties therein to manifest their interest to further prosecute the case. On 20
June 1990 the judgment in Civil Case No. A-245 became final and executory.
Subsequent to the finality of judgment in Civil Case No. A-245 petitioner-spouses did
nothing to repurchase the three (3) parcels of land within the thirty (30)-day grace
period from finality of judgment since, according to them, they believed that the
consignation of P724.00 in the civil case had perfected the repurchase of the disputed
properties.
On 6 July 1992 respondents as heirs of Mamerto Reyes executed an affidavit
adjudicating to themselves the ownership of the parcels of land and declared the
properties in their names for assessment and collection of real estate taxes. On 19
January 1993 respondents registered the 1 September 1957 deed of sale with right of
repurchase with the register of deeds.
On 8 July 1993 respondents filed a complaint for damages and recovery of ownership
and possession of the three (3) parcels of land in dispute against herein petitioner-
spouses Teofilo and Simeona Rayos and petitioner George Rayos as administrator
thereof before the Regional Trial Court of Alaminos, Pangasinan. 10 It was
respondents’ theory that neither petitioners nor their predecessors-in-interest
Francisco Tazal and Blas Rayos repurchased the properties before buying them in
1958 and 1961 or when the judgment in Civil Case No. A-245 became final and
executory in 1990, hence the sale of the three (3) parcels of land to petitioner-
spouses did not transfer ownership thereof to them.
Petitioners argued on the other hand that the consignation of P724.00 in Civil Case
No. A-245 had the full effect of redeeming the properties from respondents and their
predecessor-in-interest, and that respondents were guilty of estoppel and laches
since Mamerto Reyes as their predecessor-in-interest did not oppose the sale to Blas
Rayos and to petitioner-spouses Teofilo and Simeona Rayos. The parties then filed
their respective memoranda after which the case was submitted for decision.
On 15 November 1996 the trial court promulgated its Decision in Civil Case No. A-
2032 finding merit in respondents’ claim for damages as well as ownership and
possession of the disputed parcels of land from petitioners. 11 The court declared
void the separate deeds of absolute sale thereof executed by Francisco Tazal in favor
230
of Blas Rayos and to spouses Teofilo and Simeona Rayos and by Blas Rayos to the
same spouses, and ordered herein petitioners and Francisco Tazal to vacate and
reconvey the lands to respondents as heirs of Mamerto Reyes and to pay actual
damages for litigation expenses in the sum of P20,000.00, attorney’s fees of
P10,000.00, and exemplary damages of P50,000.00 plus costs. The court a quo
rationalized that petitioners did not present evidence to prove that they and their
predecessor-in-interest were able to repurchase the property within the period of
redemption set forth by the Court of First Instance in Civil Case No. A-245. 12
Petitioners appealed the Decision to the Court of Appeals. 13
On 31 May 2001 the appellate court promulgated its Decision affirming in toto the
judgment appealed from. 14 The Court of Appeals held that the deposit of P724.00
on 31 May 1960 in Civil Case No. A-245 was done belatedly, i.e., after the two (2)
year-period from 1 September 1957, the date of the sale as stated in the deed of sale
between the spouses Francisco and Asuncion Tazal and Mamerto Reyes, and did not
cover the entire redemption price, i.e., the selling price of P724.00 plus the expenses
of executing the contract and the necessary and useful expenses made on the
properties. The appellate court further ruled that estoppel and laches did not bar the
cause of action of respondents as plaintiffs in Civil Case No. A-2032 since Mamerto
Reyes as their predecessor-in-interest actively resisted the claim of Francisco Tazal in
Civil Case No. A-245 to treat the 1 September 1957 sale as an equitable mortgage and
to authorize the redemption of the parcels of land in dispute beyond the two (2)-year
period stipulated in the sale with right to repurchase. Hence, the instant petition for
review.
Petitioners argue that the consignation of P724.00 in Civil Case No. A-245 provides
the best evidence of the repurchase of the three (3) parcels of land; that the
consignation was admitted by Mamerto Reyes himself in the stipulation of facts and
approved implicitly by the Court of First Instance when it held the 1 September 1957
transaction as a contract of sale with right of repurchase; that respondents failed to
prove the existence of other expenses, i.e., the expenses of the contract and the
necessary and useful expenses made on the properties, required by Art. 1616 of the
Civil Code to be paid in addition to the purchase price of P724.00 so that petitioners
may validly exercise the right to repurchase the real estate; that Mamerto Reyes as
respondents’ predecessor-in-interest was guilty of estoppel and laches for not
seeking the annulment of the contracts of sale in favor of Blas Rayos and petitioner-
spouses Teofilo and Simeona Rayos; that petitioner-spouses are buyers in good faith
and for value of the three (3) parcels of land; and finally, that there is no legal basis
for awarding damages since Civil Case No. A-2032 was decided solely on the basis of
the parties’ memoranda and not upon any evidence offered.
It appears that petitioners hinge their arguments upon the validity of the
consignation of P724.00 and accept the proposition that if the consignation is
declared void the subsequent sales to Blas Rayos and petitioner-spouses would be
ineffective to transfer ownership of the disputed parcels and concomitantly would
 vest respondents with the ownership and possession thereof.
On the other hand, respondents maintain that the absence of an express or at least
discernible court approval of the consignation of P724.00 in Civil Case No. A-245
prevented the repurchase of the parcels of land in question; that the deposit of only
P724.00 did not cover all the expenses required by Art. 1616 of the Civil Code for a
valid repurchase of the properties; that Mamerto Reyes as their predecessor-in-
interest was not guilty of estoppel and laches in not filing a complaint to annul the
contracts of sale in favor of Blas Rayos and petitioner-spouses Teofilo and Simeona
Rayos since during that time Civil Case No. A-245 was pending before the courts; that
petitioner-spouses are not buyers in good faith and for value since they knew that the
parcels of land had been previously sold to Mamerto Reyes and that, in any event,
the rule protecting buyers in good faith and for value applies only to transactions
involving registered lands and not to unregistered lands as in the instant case; and
finally, that the award of damages is amply supported by their pleadings in the trial
court.
We deny the instant petition for review and affirm the decision of the court a quo,
except for the sole modification to delete and set aside the award of damages. There
is no evidence to prove that petitioners paid at any time the repurchase price for the
three (3) parcels of land in dispute except for the deposit of P724.00 in the Court of
First Instance which however fell short of all the acts necessary for a valid
consignation and discharge of their obligation to respondents.
In order that consignation may be effective the debtor must show that (a) there was
a debt due; (b) the consignation of the obligation had been made because the
creditor to whom a valid tender of payment was made refused to accept it; (c)
previous notice of the consignation had been given to the person interested in the
performance of the obligation; (d) the amount due was placed at the disposal of the
court; and, (e) after the consignation had been made the person interested was
notified thereof. 15
In the instant case, petitioners failed, first to offer a valid and unconditional tender of
payment; second, to notify respondents of the intention to deposit the amount with
the court; and third, to show the acceptance by the creditor of the amount deposited
as full settlement of the obligation, or in the alternative, a declaration by the court of
the validity of the consignation. The failure of petitioners to comply with any of these
requirements rendered the consignation ineffective. 16
Consignation and tender of payment must not be encumbered by conditions if they
are to produce the intended result of fulfilling the obligation. 17 In the instant case,
231
the tender of payment of P724.00 was conditional and void as it was predicated upon
the argument of Francisco Tazal that he was paying a debt which he could do at any
time allegedly because the 1 September 1957 transaction was a contract of equitable
mortgage and not a deed of sale with right to repurchase. The ostensible purposes of
offering the amount in connection with a purported outstanding debt were to evade
the stipulated redemption period in the deed of sale which had already expired when
the tender of payment was made and Civil Case No. A-245 was instituted, and as a
corollary, to avail of the thirty (30)-day grace period under Art. 1606 of the Civil Code
within which to exercise the right to repurchase. 18 Mamerto Reyes was therefore
within his right to refuse the tender of payment offered by petitioners because it was
conditional upon his waiver of the two (2)-year redemption period stipulated in the
deed of sale with right to repurchase.
Moreover, petitioners failed to prove in Civil Cases Nos. A-245 and A-2032 that any
form of notice regarding their intention to deposit the amount of P724.00 with the
Court of First Instance had been served upon respondents. This requirement is not
fulfilled by the notice which could have ensued from the filing of the complaint in
Civil Case No. A-245 or the stipulation made between Francisco Tazal and Mamerto
Reyes regarding the consignation of P724.00. The latter constitutes the second notice
required by law as it already concerns the actual deposit or consignation of the
amount and is different from the first notice that makes known the debtor’s intention
to deposit the amount, a requirement missing in the instant case. 19 Without any
announcement of the intention to resort to consignation first being made to the
persons interested in the fulfillment of the obligation, the consignation as a means of
payment is void. 20
It is also futile to argue that the deposit of P724.00 with the Court of First Instance
could have perfected the redemption of the three (3) parcels of land because it was
not approved by the trial court, much less accepted by Mamerto Reyes or his heirs,
herein respondents. The dispositive portion of the Decision in Civil Case No. A-245,
which reads." . . the Court, hereby renders judgment declaring the contract . . .
entered into by the plaintiffs and the defendant and captioned ‘Deed of Sale with
Right to Repurchase’ as a true sale with right to repurchase . . . and not an equitable
mortgage . . . and declaring the plaintiffs entitled to repurchase the property in
question within thirty (30) days from finality of this decision . . ." plainly rejected the
complaint for lack of merit and necessarily also the consignation done pursuant
thereto. This conclusion is buttressed by the directive of the trial court in the body of
the Decision that Francisco Tazal "may still exercise the right to repurchase the
property in question by returning to the [Mamerto Reyes] the purchase price of
P724.00 plus all expenses incident to the reconveyance within the period of thirty
(30)-days from the time this decision becomes final . . ." 21 The obvious reference of
this statement was the stipulation made by the parties therein that "the defendant
[Mamerto Reyes] has been paying the taxes on said properties from 1958 to 1969 . .
." 22 where the taxes paid constituted necessary expenses that petitioners had to
reimburse to respondents’ predecessor-in-interest aside from the P724.00 earlier
 deposited by Tazal.
To be sure, while it has been held that approval of the court or the obligee’s
acceptance of the deposit is not necessary where the obligor has performed all acts
necessary to a valid consignation such that court approval thereof cannot be
doubted, Sia v. Court of Appeals 23 clearly advises that this ruling is applicable only
where there is unmistakable evidence on record that the prerequisites of a valid
consignation are present, especially the conformity of the proffered payment to the
terms of the obligation which is to be paid. 24 In the instant case, since there is no
clear and preponderant evidence that the consignation of P724.00 satisfied all the
requirements for validity and enforceability, and since Mamerto Reyes vehemently
contested the propriety of the consignation, petitioners cannot rely upon sheer
speculation and unfounded inference to construe the Decision of the Court of First
Instance as one impliedly approving the consignation of P724.00 and perfecting the
redemption of the three (3) parcels of land.
It should be recalled that one of the requisites of consignation is the filing of the
complaint by the debtor against the creditor. Hence it is the judgment on the
complaint where the court declares that the consignation has been properly made
that will release the debtor from liability. Should the consignation be disapproved by
the court and the case dismissed, there is no payment and the debtor is in mora and
he shall be liable for the expenses and bear the risk of loss of the thing.25cralaw:red
To sanction the argument of petitioners and in the process excuse them from their
responsibility of securing from the trial court in Civil Case No. A-245 a categorical
declaration that the consignation of P724.00 had complied with all the essential
elements for its validity would only dilute the rule requiring absolute compliance with
the requisites of consignation. 26 It also disturbs a steady and stable status of
proprietary rights, i.e.,." . . el acreedor tan solo, y no el juez, puede autorizar la
variacion que para los derechos de aquel suponga la que se intente en el objeto,
cuantia o forma de las obligaciones," 27 since parties are left guessing on whether the
repurchase of the properties had been effected. In a broader sense, this uncertain
state will only depress the market value of the land and virtually paralyze efforts of
the landowner to meet his needs and obligations and realize the full value of his land.
Moreover, we do not think that respondents’ causes of action in Civil Case No. A-
2032 are now barred by estoppel and laches. The essence of estoppel and laches is
the failure or neglect for an unreasonable and unexplained length of time to do that
which by exercising due diligence could or should have been done earlier; it is the
negligence or omission to assert a right within a reasonable time warranting a
presumption that the party entitled to assert it either has abandoned or declined to
232
assert it although there is no absolute rule as to what constitutes staleness of
demand as each case is to be determined according to its particular circumstances.
28
In the instant case, it was prudent and discerning for respondents and their
predecessor-in-interest Mamerto Reyes that they deferred any action against
petitioners, i.e., Civil Case No. A-2032, to recover ownership and possession of the
three (3) pieces of real estate, until the finality of judgment in Civil Case No. A-245.
For patiently electing not to inundate our courts of justice with cases the outcome of
which may well depend upon the then pending civil suit, respondents cannot now be
penalized by barring their complaint in Civil Case No. A-2032 on the equitable
grounds of estoppel and laches.
We also find no reason to disturb our findings upon petitioners’ assertion that they
were purchasers of the three (3) parcels of land in good faith and for value. As we
held in David v. Bandin, "the issue of good faith or bad faith of the buyer is relevant
only where the subject of the sale is registered land and the purchaser is buying the
same from the registered owner whose title to the land is clean . . . in such case the
purchaser who relies on the clean title of the registered owner is protected if he is a
purchaser in good faith for value." 29 Since the properties in question are
unregistered lands, petitioners as subsequent buyers thereof did so at their peril.
Their claim of having bought the land in good faith, i.e., without notice that some
other person has a right to or interest in the property, would not protect them if it
turns out, as it actually did in this case, that their seller did not own the property at
the time of the sale.
At any rate, petitioners failed to discharge their burden of proof that they were
purchasers of the three (3) parcels of land in good faith. For, as we ruled in Embrado
v. Court of Appeals, 30 the burden of proving the status of a purchaser in good faith
and for value lies upon him who asserts that status, which is not discharged by simply
invoking the ordinary presumption of good faith, i.e., that everyone is presumed to
act in good faith, since the good faith that is here essential is integral with the very
status which must be established.
In the proceedings a quo, what is evident is the admitted fact of payment made by
Mamerto Reyes as respondents’ predecessor-in-interest of the taxes on the
properties prior to and at the time when the contracts of sale in favor of petitioner-
spouses were perfected, which undoubtedly confirms the precedence of
respondents’ possession of the parcels of land in question. This situation should have
compelled petitioners to investigate the right of respondents over the properties
before buying them, and in the absence of such inquiry, the rule is settled that a
buyer in the same circumstances herein involved cannot claim to be a purchaser in
good faith.
The absence of good faith on the part of petitioner-spouses Teofilo and Simeona
 Rayos in purchasing the three (3) parcels of unregistered land precludes the the award of actual damages for litigation expenses, attorney’s fees and exemplary
application of the rule on double sales enunciated in Art. 1544 of the Civil Code. 31 In damages plus costs is DELETED and SET ASIDE. No costs.chanrob1es virtua1 1aw
any event, even if we apply Art. 1544, the facts would nonetheless show that 1ibrary
respondents and their predecessor-in-interest registered first the source of their
ownership and possession, i.e., the 1 September 1957 deed of sale with right to SO ORDERED.
repurchase, held the oldest title, and possessed the real properties at the earliest
time. Applying the doctrine of "priority in time, priority in rights" or "prius tempore, Mendoza, Quisumbing, Austria-Martinez and Callejo, Sr., JJ., concur.
potior jure," respondents are entitled to the ownership and possession of the parcels
of land in dispute.

Finally, on the issue of damages, we agree with petitioners that respondents failed to
prove their entitlement to actual damages for litigation expenses of P20,000.00,
attorney’s fees of P10,000.00 and exemplary damages of P50,000.00 plus costs. No
evidence to prove actual damages was offered in Civil Case No. A-2032 since the
parties therein submitted the case for decision on the basis of their respective
memoranda, hence no actual damages can be awarded. 32 In the same manner,
there is no clear and convincing showing that petitioners acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner to warrant the imposition of
exemplary damages in respondents’ favor. 33 In any event, exemplary damages
cannot be adjudicated in the instant case since there is no award of moral, temperate
or compensatory damages. 34

Similarly, we cannot award attorney’s fees since there is no stipulation to grant the
same nor were exemplary damages awarded or were improperly imposed as in the
instant case. 35 It is appropriate to stress that the mere filing of a complaint does not
ipso facto entitle a party to attorney’s fees since this act is a means sanctioned by law
to protect rights and interests even if found subsequently to be unmeritorious.

WHEREFORE, the instant Petition for Review is DENIED. The assailed Decision of the
Court of Appeals in CA-G.R. CV No. 55789 affirming in toto the Decision of the
Regional Trial Court, Branch 54, Alaminos, Pangasinan in Civil Case No. A-2032, i.e.,
declaring void the Deeds of Absolute Sale executed by Francisco Tazal in favor of Blas
Rayos, and by the latter in favor of Teofilo Rayos, and by Francisco Tazal in favor of
Teofilo Rayos dated 22 June 1961, all encompassing the three (3) parcels of land sold
under the Deeds of Sale with the Right to Repurchase, insofar as they authorized the
transfer of ownership and possession thereof to petitioner-spouses Teofilo and
Simeona Rayos; proclaiming respondents Donato Reyes, Saturnino Reyes, Tomasa R.
Bustamante and Toribia R. Camelo who are heirs of Mamerto Reyes as absolute
owners of the property in question free from all liens and encumbrances; and,
ordering petitioner-spouses Teofilo and Simeona Rayos, petitioner George Rayos and
Francisco Tazal and/or their agents or representatives to vacate and surrender the
233

parcels of land in favor of respondents Donato Reyes, Saturnino Reyes, Tomasa R.

Bustamante and Toribia R. Camelo, are AFFIRMED with the SOLE MODIFICATION that
 58. G.R. No. 172577 : January 19, 2011
SOLEDAD DALTON, Petitioner, v. FGR REALTY AND DEVELOPMENT CORPORATION,
FELIX NG, NENITA NG, and FLORA R. DAYRIT or FLORA REGNER, Respondents.
RESOLUTION
CARPIO, J.:
The Case
This is a petition1cralaw for review on certiorari under Rule 45 of the Rules of Court.
The petition challenges the 9 November 2005 Decision2cralaw and 10 April 2006
Resolution3cralaw of the Court of Appeals in CA-G.R. CV No. 76536. The Court of
Appeals affirmed the 26 February 2002 Decision 4cralaw of the Regional Trial Court
(RTC), Judicial Region 7, Branch 13, Cebu City, in Civil Case No. CEB 4218.
The Facts
Flora R. Dayrit (Dayrit) owned a 1,811-square meter parcel of land located at the
corner of Rama Avenue and Velez Street in Cebu City. Petitioner Soledad Dalton
(Dalton), Clemente Sasam, Romulo Villalonga, Miguela Villarente, Aniceta Fuentes,
Perla Pormento, Bonifacio Cabajar, Carmencita Yuson, Angel Ponce, Pedro Regudo,
Pedro Quebedo, Mary Cabanlit, Marciana Encabo and Dolores Lim (Sasam, et al.)
leased portions of the property.
In June 1985, Dayrit sold the property to respondent FGR Realty and Development
Corporation (FGR). In August 1985, Dayrit and FGR stopped accepting rental
payments because they wanted to terminate the lease agreements with Dalton and
Sasam, et al.
In a complaint5cralaw dated 11 September 1985, Dalton and Sasam, et al. consigned
the rental payments with the RTC. They failed to notify Dayrit and FGR about the
consignation. In motions dated 27 March 1987,6cralaw10 November 1987,7cralaw 8
July 1988,8cralaw and 28 November 1994,9cralaw Dayrit and FGR withdrew the rental
payments. In their motions, Dayrit and FGR reserved the right to question the validity
of the consignation.
Dayrit, FGR and Sasam, et al. entered into compromise agreements dated 25 March
199710cralaw and 20 June 1997.11cralaw In the compromise agreements, they agreed
234
to abandon all claims against each other. Dalton did not enter into a compromise
agreement with Dayrit and FGR.
The RTC's Ruling
In its 26 February 2002 Decision, the RTC dismissed the 11 September 1985 complaint
and ordered Dalton to vacate the property. The RTC held
that: chanrob1esvirtwallawlibrary
Soledad Dalton built a house which she initially used as a dwelling and store space.
She vacated the premises when her children got married. She transferred her
residence near F. Ramos Public Market, Cebu City.
She constructed the 20 feet by 20 feet floor area house sometime in 1973. The last
monthly rental was P 69.00. When defendants refused to accept rental and
demanded vacation of the premises, she consignated [sic] her monthly rentals in
court.
xxx
It is very clear from the facts that there was no valid consignation made.
The requisites of consignation are as follows: chanrob1esvirtwallawlibrary
1. The existence of a valid debt.
2. Valid prior tender, unless tender is excuse [sic]; chanroblesvirtualawlibrary
3. Prior notice of consignation (before deposit)
4. Actual consignation (deposit); chanroblesvirtualawlibrary
5. Subsequent notice of consignation; chanroblesvirtualawlibrary
Requisite Nos. 3 and 5 are absent or were not complied with. It is very clear that
there were no prior notices of consignation (before deposit) and subsequent notices
of consignation (after deposit)
Besides, the last deposit was made on December 21, 1988. At the time Dalton
testified on December 22, 1999, she did not present evidence of payment in 1999.
She had not, therefore, religiously paid her monthly obligation.
 By clear preponderance of evidence, defendants have established that plaintiff was
no longer residing at Eskina Banawa at the time she testified in court. She vacated her
house and converted it into a store or business establishment. This is buttressed by
the testimony of Rogelio Capacio, the court's appointed commissioner, who
submitted a report, the full text of which reads as
follows: chanrob1esvirtwallawlibrary
REPORT AND/OR OBSERVATION
"The store and/or dwelling subject to ocular inspection is stuated [sic] on the left
portion of the road which is about fifty-five (55) meters from the corner of Banawa-
Guadalupe Streets, when turning right heading towards the direction of Guadalupe
Church, if travelling from the Capitol Building.
I observed that when we arrived at the ocular inspection site, Mrs. Soledad Dalton
with the use of a key opened the lock of a closed door. She claimed that it was a part
of the dwelling which she occupies and was utilized as a store. There were few
saleable items inside said space." chanroblesvirtualawlibrary
Soledad Dalton did not take exception to the said report.
Two witnesses who were former sub-lessees testified and clearly established that
Mrs. Dalton use the house for business purposes and not for dwelling. 12cralawredlaw
Dalton appealed to the Court of Appeals.
The Court of Appeals' Ruling
In its 9 November 2005 Decision, the Court of Appeals affirmed the RTC's 26 February
2002 Decision. The Court of Appeals held that: chanrob1esvirtwallawlibrary
After a careful review of the facts and evidence in this case, we find no basis for
overturning the decision of the lower court dismissing plaintiffs-appellants'
complaint, as we find that no valid consignation was made by the plaintiff-appellant.
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment and
generally requires a prior tender of payment. In order that consignation may be
effective, the debtor must show that: (1) there was a debt due; (2) the consignation
of the obligation had been made because the creditor to whom tender of payment
235
was made refused to accept it, or because he was absent or incapacitated, or because
several persons claimed to be entitled to receive the amount due or because the title
to the obligation has been lost; (3) previous notice of the consignation had been
given to the person interested in the performance of the obligation; (4) the amount
due was placed at the disposal of the court; and (5) after the consignation had been
made the person interested was notified thereof. Failure in any of these
requirements is enough ground to render a consignation ineffective.
Consignation is made by depositing the proper amount to the judicial authority,
before whom the tender of payment and the announcement of the consignation shall
be proved. All interested parties are to be notified of the consignation. It had been
consistently held that compliance with these requisites is mandatory.
No error, therefore, can be attributed to the lower court when it held that the
consignation made by the plaintiff-appellant was invalid for failure to meet requisites
3 and 5 of a valid consignation (i.e., previous notice of the consignation given to the
person interested in the performance of the obligation and, after the consignation
had been made, the person interested was notified thereof).
Plaintiff-appellant failed to notify defendants-appellees of her intention to consign
the amount due to them as rentals. She, however, justifies such failure by claiming
that there had been substantial compliance with the said requirement of notice upon
the service of the complaint on the defendants-appellees together with the
summons.
We do not agree with such contention.
The prevailing rule is that substantial compliance with the requisites of a valid
consignation is not enough. In Licuanan vs. Diaz, reiterating the ruling in Soco vs.
Militante, the Supreme Court had the occasion to rule
thus: chanrob1esvirtwallawlibrary
"In addition, it must be stated that in the case of Soco v. Militante (123 SCRA 160,
166-167 [1983]), this Court ruled that the codal provisions of the Civil Code dealing
with consignation (Articles 1252-1261) should be accorded mandatory construction -
We do not agree with the questioned decision. We hold that the essential requisites
of a valid consignation must be complied with fully and strictly in accordance with the
law. Articles 1256-1261, New Civil Code. That these Articles must be accorded a
mandatory construction is clearly evident and plain from the very language of the
codal provisions themselves which require absolute compliance with the essential
requisites therein provided. Substantial compliance is not enough for that would
render only directory construction of the law. The use of the words "shall" and "must
 [sic] which are imperative, operating to impose a duty which may be enforced,
positively indicated that all the essential requisites of a valid consignation must be
complied with. The Civil Code Articles expressly and explicitly direct what must be
essentially done in order that consignation shall be valid and
effectual..." chanroblesvirtualawlibrary
Clearly then, no valid consignation was made by the plaintiff-appellant for she did not
give notice to the defendants-appellees of her intention to so consign her rental
payments. Without any announcement of the intention to resort to consignation first
having been made to persons interested in the fulfillment of the obligation, the
consignation as a means of payment is void.
As to the other issues raised by the plaintiff-appellant in her second and third
assigned errors, we hold that the ruling of the lower court on such issues is supported
by the evidence adduced in this case.
That plaintiff-appellant is not residing at the leased premises in Eskina Banawa and
that she is using the same for business purposes, not as dwelling place, is amply
supported by the testimony of two of plaintiff-appellant's sub-lessees. The
Commissioner's Report submitted by Rogelio Capacio, who was commissioned by the
lower court to conduct an ocular inspection of the leased premises, further lends
support to the lower court's findings. On the other hand, plaintiff-appellant only has
her self-serving claims that she is residing at the leased premises in Eskina Banawa to
prove her continued use of the leased premises as dwelling place.
There is thus no merit to plaintiff-appellant's fourth assigned error. The lower court
acted within its authority in ordering the plaintiff-appellant to vacate the leased
premises. The evidence shows that plaintiff-appellant had failed to continuously pay
the rentals due to the defendants-appellees. It was therefore within the powers of
the lower court to grant such other relief and remedies equitable under the
circumstances.
In sum, there having been no valid consignation and with the plaintiff-appellant
having failed to pay the rentals due to the defendants-appellees, no error can be
attributed to the lower court in rendering its assailed decision. 13cralawredlaw
Hence, the present petition. Dalton raises as issues that the Court of Appeals erred in
ruling that (1) the consignation was void, and (2) Dalton failed to pay rent.
The Court's Ruling
236
The petition is unmeritorious.
Dalton claims that, "the issue as to whether the consignation made by the petitioner
is valid or not for lack of notice has already been rendered moot and academic with
the withdrawal by the private respondents of the amounts consigned and deposited
by the petitioner as rental of the subject premises."14cralawredlaw
The Court is not impressed. First, in withdrawing the amounts consigned, Dayrit and
FGR expressly reserved the right to question the validity of the consignation.
In Riesenbeck v. Court of Appeals,15cralaw the Court held
that: chanrob1esvirtwallawlibrary
A sensu contrario, when the creditor's acceptance of the money consigned is
conditional and with reservations, he is not deemed to have waived the claims he
reserved against his debtor . Thus, when the amount consigned does not cover the
entire obligation, the creditor may accept it, reserving his right to the balance
(Tolentino, Civil Code of the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263). The
same factual milieu obtains here because the respondent creditor accepted with
reservation the amount consigned in court by the petitioner-debtor. Therefore, the
creditor is not barred from raising his other claims , as he did in his answer with
special defenses and counterclaim against petitioner-debtor.
As respondent-creditor's acceptance of the amount consigned was with reservations,
it did not completely extinguish the entire indebtedness of the petitioner-debtor. It is
apposite to note here that consignation is completed at the time the creditor
accepts the same without objections, or, if he objects, at the time the court
declares that it has been validly made in accordance with law . 16cralaw (Emphasis
supplied)
Second, compliance with the requisites of a valid consignation is mandatory. Failure
to comply strictly with any of the requisites will render the consignation void.
Substantial compliance is not enough.
In Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc.,17cralaw the Court
enumerated the requisites of a valid consignation: (1) a debt due; (2) the creditor to
whom tender of payment was made refused without just cause to accept the
payment, or the creditor was absent, unknown or incapacitated, or several persons
claimed the same right to collect, or the title of the obligation was lost; (3) the person
interested in the performance of the obligation was given notice before
consignation was made; (4) the amount was placed at the disposal of the court; and
(5) the person interested in the performance of the obligation was given notice
after the consignation was made.
 Articles 1257 and 1258 of the Civil Code state,
respectively: chanrob1esvirtwallawlibrary
Art. 1257. In order that the consignation of the thing due may release the obligor, it
must first be announced to the persons interested in the fulfillment of the
obligation .
The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.
Art. 1258. Consignation shall be made by depositing the things due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a proper
case, and the announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be notified
thereof. (Emphasis supplied)
The giving of notice to the persons interested in the performance of the obligation is
mandatory. Failure to notify the persons interested in the performance of the
obligation will render the consignation void. In Ramos v. Sarao,18cralaw the Court
held that, "All interested parties are to be notified of the consignation. Compliance
with [this requisite]is mandatory."19cralaw In Valdellon v. Tengco, 20cralaw the Court
held that: chanrob1esvirtwallawlibrary
Under Art. 1257 of our Civil Code, in order that consignation of the thing due may
release the obligor, it must first be announced to the persons interested in the
fulfillment of the obligation. The consignation shall be ineffectual if it is not made
strictly in consonance with the provisions which regulate payment . In said Article
1258,it is further stated that the consignation having been made, the interested
party shall also be notified thereof. 21cralaw (Emphasis supplied)
In Soco v. Militante, et al.,22cralaw the Court held that: chanrob1esvirtwallawlibrary
We hold that the essential requisites of a valid consignation must be complied with
fully and strictly in accordance with the law, Articles 1256 to 1261, New Civil Code.
That these Articles must be accorded a mandatory construction is clearly evident and
plain from the very language of the codal provisions themselves which require
absolute compliance with the essential requisites therein provided. Substantial
compliance is not enough for that would render only a directory construction to the
law. The use of the words "shall" and "must" which are imperative, operating to
237
impose a duty which may be enforced, positively indicate that all the essential
requisites of a valid consignation must be complied with. The Civil Code Articles
expressly and explicitly direct what must be essentially done in order that
consignation shall be valid and effectual. 23cralaw(Emphasis supplied)
Dalton claims that the Court of Appeals erred in ruling that she failed to pay rent. The
Court is not impressed. Section 1, Rule 45 of the Rules of Court states that petitions
for review on certiorari "shall raise only questions of law which must be distinctly set
forth." In Pagsibigan v. People,24cralaw the Court held
that: chanrob1esvirtwallawlibrary
A petition for review under Rule 45 of the Rules of Court should cover only questions
of law. Questions of fact are not reviewable. A question of law exists when the doubt
centers on what the law is on a certain set of facts. A question of fact exists when the
doubt centers on the truth or falsity of the alleged facts.
There is a question of law if the issue raised is capable of being resolved without need
of reviewing the probative value of the evidence. The issue to be resolved must be
limited to determining what the law is on a certain set of facts. Once the issue invites
a review of the evidence, the question posed is one of fact.25cralawredlaw
Whether Dalton failed to pay rent is a question of fact. It is not reviewable.
The factual findings of the lower courts are binding on the Court. The exceptions to
this rule are (1) when there is grave abuse of discretion; (2) when the findings are
grounded on speculation; (3) when the inference made is manifestly mistaken; (4)
when the judgment of the Court of Appeals is based on a misapprehension of facts;
(5) when the factual findings are conflicting; (6) when the Court of Appeals went
beyond the issues of the case and its findings are contrary to the admissions of the
parties; (7) when the Court of Appeals overlooked undisputed facts which, if properly
considered, would justify a different conclusion; (8) when the facts set forth by the
petitioner are not disputed by the respondent; and (9) when the findings of the Court
of Appeals are premised on the absence of evidence and are contradicted by the
evidence on record. 26cralaw Dalton did not show that any of these circumstances is
present.
WHEREFORE, the Court DENIES the petition. The Court AFFIRMS the 9 November
2005 Decision and 10 April 2006 Resolution of the Court of Appeals in CA-G.R. CV No.
76536.
SO ORDERED.
 ANTONIO T. CARPIO
Associate Justice

WE CONCUR: chanrob1esvirtwallawlibrary

NACHURA, PERALTA, ABAD, and MENDOZA, JJ.

238
 ART 1267
2. To pay [Santos]:
59. G.R. No. 202989, March 25, 2015
a) Php200,000.00 as attorney’s fees;
COMGLASCO CORPORATION/AGUILA GLASS, Petitioner, v. SANTOS CAR CHECK b) [Php]50,000.00 as litigation expenses;
CENTER CORPORATION, Respondent. c) [Php]400,000.00 as exemplary damages.

DECISION 3. Costs of the suit.

REYES, J.: SO ORDERED.7

On August 16, 2000, respondent Santos Car Check Center Corporation (Santos),
owner of a showroom located at 75 Delgado Street, in Iloilo City, leased out the said
space to petitioner Comglasco Corporation (Comglasco), an entity engaged in the
sale, replacement and repair of automobile windshields, for a period of five years at a
monthly rental of P60,000.00 for the first year, P66,000.00 on the second year, and
P72,600.00 on the third through fifth years.1
On October 4, 2001, Comglasco advised Santos through a letter2 that it was pre-
terminating their lease contract effective December 1, 2001. Santos refused to
accede to the pre-termination, reminding Comglasco that their contract was for five
years. On January 15, 2002, Comglasco vacated the leased premises and stopped
paying any further rentals. Santos sent several demand letters, which Comglasco
completely ignored. On September 15, 2003, Santos sent its final demand
letter,3 which Comglasco again ignored. On October 20, 2003, Santos filed suit for
breach of contract.4
Summons and a copy of the complaint, along with the annexes, were served on
Comglasco on January 21, 2004, but it moved to dismiss the complaint for improper
service. The Regional Trial Court (RTC) of Iloilo City, Branch 37, dismissed the motion
and ordered the summons served anew. On June 28, 2004, Comglasco filed its
Answer.5 Santos moved for a judgment on the pleadings, which the RTC granted. On
August 18, 2004, the trial court rendered its judgment,6 the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of [Santos] and against
[Comglasco]:
1. Ordering [Comglasco] to faithfully comply with [its] obligation under the Contract
of Lease and pay its unpaid rentals starting January 16, 2002 to August 15, 2003 in the
total amount of Php1,333,200.00, plus 12% interest per annum until fully paid;
239
On February 14, 2005, Santos moved for execution pending Comglasco’s appeal,
which the trial court granted on May 12, 2005. In its appeal, Comglasco interposed
the following issues for resolution:
1. Whether or not judgment on the pleadings was properly invoked by
the trial court as basis for rendering its decision;
2. Whether or not material issues were raised in [Comglasco’s]
Answer;
3. Whether or not damages may be granted by the trial court without
proof and legal basis.8
In its Decision9 dated August 10, 2011, the Court of Appeals (CA) affirmed the
judgment of the RTC but reduced the award of attorney’s fees to P100,000.00 and
deleted the award of litigation expenses and exemplary damages.
Petition for Review to the Supreme Court
In this petition, Comglasco raises the following issues:
1. Whether or not judgment on the pleadings was properly invoked by
the trial court as basis for rendering its decision?
2. Whether or not material issues were raised in [Comglasco’s]
answer?
3. Whether or not summary judgment or judgment on the pleadings is
the proper remedy for [Santos] under the circumstances of the
present case?
 4. Whether or not the amount deposited for advance rental and Comglasco maintains that the RTC was wrong to rule that its answer to Santos’
deposit should be credited to [Comglasco’s] account? complaint tendered no issue, or admitted the material allegations therein; that the
5. Whether or not attorney’s fees may be granted by the trial court court should have heard it out on the reason it invoked to justify its action to pre-
without proof and legal basis?10 terminate the parties’ lease; that therefore a summary judgment would have been
the proper recourse, after a hearing.

Paragraph 15 of the parties’ lease contract11 permits pre-termination with cause in
the first three years and without cause after the third year. Citing business reverses
which it ascribed to the 1997 Asian financial crisis, Comglasco insists that under
Article 1267 of the Civil Code it is exempted from its obligation under the contract,
because its business setback is the “cause” contemplated in their lease which
authorized it to pre-terminate the same. Article 1267 provides:
Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or
in part.
In Philippine National Construction Corporation v. CA12 (PNCC), which also involves
the termination of a lease of property by the lessee “due to financial, as well as
technical, difficulties,”13 the Court ruled:
The obligation to pay rentals or deliver the thing in a contract of lease falls within the
prestation “to give”; hence, it is not covered within the scope of Article 1266. At any
rate, the unforeseen event and causes mentioned by petitioner are not the legal or
physical impossibilities contemplated in said article. Besides, petitioner failed to state
specifically the circumstances brought about by “the abrupt change in the political
climate in the country” except the alleged prevailing uncertainties in government
policies on infrastructure projects.

Comglasco argues that it cannot be said to have admitted in its Answer the material The principle of rebus sic stantibus neither fits in with the facts of the case. Under
allegations of the complaint precisely because it invoked therein a valid cause for its this theory, the parties stipulate in the light of certain prevailing conditions, and once
decision to pre-terminate the lease before the lapse of three years; that therefore, in these conditions cease to exist, the contract also ceases to exist. This theory is said to
view of its pleaded “cause” for reneging on its rentals (the 1997 Asian financial crisis), be the basis of Article 1267 of the Civil Code, which provides:
the RTC should have ordered the reception of evidence for this purpose, after which a
summary judgment would then have been proper, not a judgment on the Art. 1267. When the service has become so difficult as to be manifestly beyond the
pleadings. After all, Santos has claimed in its Motion for Summary Judgment that contemplation of the parties, the obligor may also be released therefrom, in whole or
Comglasco’s cited “cause” for pre-termination was fictitious or a sham, whereas in in part.
truth the prevailing business climate which ensued after the 1997 currency crisis
resulted in great difficulty on its part to comply with the terms of the lease “as to be This article, which enunciates the doctrine of unforeseen events, is not, however, an
manifestly beyond the contemplation of the parties”; thus, Comglasco should be absolute application of the principle of rebus sic stantibus, which would endanger the
deemed released from the lease. security of contractual relations. The parties to the contract must be presumed to
have assumed the risks of unfavorable developments. It is therefore only in
Next, Comglasco insists that its advance rentals and deposit totaling P309,000.00 absolutely exceptional changes of circumstances that equity demands assistance for
should be deducted from any sum awarded to Santos while it also insists that there is the debtor.
no factual and legal basis for the award of damages.
In this case, petitioner wants this Court to believe that the abrupt change in the
Ruling of the Court political climate of the country after the EDSA Revolution and its poor financial
condition “rendered the performance of the lease contract impractical and inimical to
the corporate survival of the petitioner.”
The petition is denied.
This Court cannot subscribe to this argument. As pointed out by private respondents:
The first three issues being related will be discussed together.
240

x x x x

Anent petitioner’s alleged poor financial condition, the same will neither release
petitioner from the binding effect of the contract of lease. As held in Central Bank v.
Court of Appeals, cited by private respondents, mere pecuniary inability to fulfill an
engagement does not discharge a contractual obligation, nor does it constitute a
defense to an action for specific performance. 14
Relying on Article 1267 of the Civil Code to justify its decision to pre-terminate
its lease with Santos, Comglasco invokes the 1997 Asian currency crisis as causing it
much difficulty in meeting its obligations. But in PNCC,15 the Court held that the
payment of lease rentals does not involve a prestation “to do” envisaged in Articles
1266 and 1267 which has been
rendered legally or physically impossible without the fault of the obligor-
lessor. Article 1267 speaks of a prestation involving service which has been rendered
so difficult by unforeseen subsequent events as to be manifestly beyond the
contemplation of the parties. To be sure, the Asian currency crisis befell the region
from July 1997 and for sometime thereafter, but Comglasco cannot be permitted to
blame its difficulties on the said regional economic phenomenon because it entered
into the subject lease only on August 16, 2000, more than three years after it began,
and by then Comglasco had known what business risks it assumed when it opened a
new shop in Iloilo City.
This situation is no different from the Court’s finding in PNCC wherein PNCC cited the
assassination of Senator Benigno Aquino Jr. (Senator Aquino) on August 21, 1983 and
the ensuing national political and economic crises as putting it in such a difficult
business climate that it should be deemed released from its lease contract. The Court
held that the political upheavals, turmoils, almost daily mass demonstrations,
unprecedented inflation, and peace and order deterioration which followed Senator
Aquino’s death were a matter of judicial notice, yet despite this business climate,
PNCC knowingly entered into a lease with therein respondents on November 18,
1985, doing so with open eyes of the deteriorating conditions of the country. The
Court rules now, as in PNCC, that there are no “absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.” 16
As found by the CA, Comglasco’s Answer admitted the material allegations in the
complaint, to wit: a) that Santos holds absolute title to a showroom space; b) that
Comglasco leased the said showroom from Santos; c) that after a little over a year,
Comglasco pre-terminated the lease; d) that, disregarding Santos’ rejection of the
pre-termination of their lease, Comglasco vacated the leased premises on January 15,
2002; e) that Comglasco never denied the existence and validity of the parties’ lease
241
contract. Specifically, the CA noted that Paragraph 2 of the Answer admitted the
allegations in Paragraphs 2, 3 and 4 of the complaint that the lease was for five years,
starting on August 16, 2000 and to expire on August 15, 2005, at a monthly rental of
P60,000.00 on the first year, P66,000.00 on the second year, and P72,600.00 on the
third up to the fifth year.
The RTC acted correctly in resorting to Section 1 of Rule 34, on Judgment on the
Pleadings, to cut short a needless trial. This Court agrees with the CA that Comglasco
cannot cite Article 1267 of the Civil Code, and that it must be deemed to have
admitted the material allegations in the complaint. Section 1, Rule 34 reads:
Sec. 1. Judgment on the pleadings. - Where an answer fails to tender an issue, or
otherwise admits the material allegations of the adverse party’s pleading, the court
may, on motion of that party, direct judgment on such pleading. However, in actions
for declaration of nullity or annulment of marriage or for legal separation, the
material facts alleged in the complaint shall always be proved.
A judgment on the pleadings is a judgment on the facts as pleaded,17 and is based
exclusively upon the allegations appearing in the pleadings of the parties and the
accompanying annexes.18 It is settled that the trial court has the discretion to grant a
motion for judgment on the pleadings filed by a party if there is no controverted
matter in the case after the answer is filed.19 A genuine issue of fact is that which
requires the presentation of evidence, as distinguished from a sham, fictitious,
contrived or false issue.20 Come to think of it, under Rule 35, on Summary
Judgments, Comglasco had recourse to move for summary judgment, wherein it
could have adduced supporting evidence to justify its action on the parties’ lease, but
it did not do so. Section 2 of Rule 35 provides:
Sec. 2. Summary judgment for defending party. - A party against whom a claim,
counterclaim, or cross-claim is asserted or a declaratory relief is sought may, at any
time,move with supporting affidavits, depositions or admissions for a summary
judgment in his favor as to all or any part thereof.
Concerning, now, whether Comglasco’s alleged rental deposit and advance rentals of
P309,000.00 should be credited to Comglasco’s account, let it suffice to state that it
never raised this matter in its answer to the complaint, nor in its appeal to the
CA. Certainly, it cannot do so now.
Finally, as to whether attorney’s fees may be recovered by Santos, Article 2208(2) of
the Civil Code justifies the award thereof, in the absence of stipulation, where the
defendant’s act or omission has compelled the plaintiff to incur expenses to protect
 his interest. The pre-termination of the lease by Comglasco was not due to any fault
of Santos, and Comglasco completely ignored all four demands of Santos to pay the
rentals due from January 16, 2002 to August 15, 2003, thereby compelling Santos to
sue to obtain relief. It is true that the policy of the Court is that no premium should
be placed on the right to litigate,21 but it is also true that attorney’s fees are in the
nature of actual damages, the reason being that litigation costs money.22 But the
Court agrees with the CA that the lesser amount of P100,000.00 it awarded to Santos
instead of P200,000.00 adjudged by the RTC, is more reasonable.

WHEREFORE, premises considered, the petition is DENIED for lack of merit.

SO ORDERED.

Velasco, Jr., (Chairperson), Peralta, Villarama, Jr., and Jardeleza, JJ., concur.
242
 60. G.R. No. 219509, January 18, 2017
ILOILO JAR CORPORATION, Petitioner, v. COMGLASCO CORPORATION/AGUILA
GLASS, Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to reverse and set aside the January
30,2015 Decision1 and June 17,2015 Resolution2 of the Court of Appeals (CA) in CA-
G.R. CV No. 01475, which overturned the February 17, 2005 Amended Order 3 of the
Regional Trial Court, Branch 37, Iloilo City (RTC).
The Antecedents:
On August 16, 2000, petitioner Iloilo Jar Corporation (Iloilo Jar), as lessor, and
respondent Comglasco Corporation/Aguila Glass (Comglasco), as lessee, entered into
a lease contract over a portion of a warehouse building, with an estimated floor area
of 450 square meters, located on a parcel of land identified as Lot 2-G-1-E-2 in
Barangay Lapuz, La Paz District, Iloilo City. The term of the lease was for a period of
three (3) years or until August 15, 2003.4
On December 1, 2001, Comglasco requested for the pre-termination of the lease
effective on the same date. Iloilo Jar, however, rejected the request on the ground
that the pre-termination of the lease contract was not stipulated therein. Despite the
denial of the request for pre-termination, Comglasco still removed all its stock,
merchandise and equipment from the leased premises on January 15, 2002. From the
time of the withdrawal of the equipment, and notwithstanding several demand
letters, Comglasco no longer paid all rentals accruing from the said date.5
On September 14, 2003, Iloilo Jar sent a final demand letter to Comglasco, but it was
again ignored. Consequently, Iloilo Jar filed a civil action for breach of contract and
damages before the RTC on October 10, 2003.6
On June 28, 2004, Comglasco filed its Answer7 and raised an affirmative defense,
arguing that by virtue of Article 1267 of the Civil Code (Article 1267),8 it was released
from its obligation from the lease contract. It explained that the consideration
thereof had become so difficult due to the global and regional economic crisis that
had plagued the economy. Likewise, Comglasco admitted that it had removed its
243
stocks and merchandise but it did not refuse to pay the rentals because the lease
contract was already deemed terminated. Further, it averred that though it received
the demand letters, it did not amount to a refusal to pay the rent because the lease
contract had been pre-terminated in the first place.
On July 15, 2004, Iloilo Jar filed its Motion for Judgment on the Pleadings 9 arguing
that Comglasco admitted all the material allegations in the complaint. It insisted that
Comglasco's answer failed to tender an issue because its affirmative defense was
unavailing.
The RTC Order
In its August 18, 2004 Order,10 the RTC granted the motion for judgment on the
pleadings. It opined that Comglasco's answer admitted the material allegations of the
complaint and that its affirmative defense was unavailing because Article 1267 was
inapplicable to lease contracts.
Comglasco moved for reconsideration but its motion was denied by the RTC in its
January 24, 2005 Order.11 After formal defects in the original order were raised, the
RTC issued the assailed February 17, 2005 Amended Order wherein the total amount
of unpaid rentals to be paid was modified from P1,333,200.00 to P333,300.00.
Further, it changed the following: (a) award of attorney's fees from P200,000.00 to
P75,000.00; (b) litigation expenses from P50,000.00 to P30,000.00; and (c) exemplary
damages from P400,000.00 to P200,000.00.
Aggrieved, Comglasco appealed before the CA.
The CA Ruling
In its January 30, 2015 decision, the CA reversed the amended order of the RTC. The
appellate court was of the view that judgment on the pleadings was improper as
Comglasco's answer tendered an issue considering that Iloilo Jar's material allegations
were specifically denied therein. Further, the CA opined that even if the same were
not specifically denied, the answer raised an affirmative issue which was factual in
nature. It disposed:
IN LIGHT OF ALL THE FOREGOING, the instant appeal is GRANTED. The Order dated
August 18, 2004; the Order dated January 24, 2005; and the Order dated February 17,
2005 of the Regional Trial Court, Branch 37, Iloilo City, in Civil Case No. 03- 27960, are
REVERSED.
Let the records be REMANDED to the RTC for the conduct of further proceedings.
 SO ORDERED.12
Iloilo Jar moved for reconsideration, but its motion was denied by the CA in its
assailed June 17, 2015 resolution.
Hence, this petition.
ISSUES
I
WHETHER OR NOT A DEFENSE RAISED IN THE ANSWER THAT IS NOT APPLICABLE TO
THE CASE AT BAR CAN BE CONSIDERED AS APPROPRIATELY TENDERING AN ISSUE
THAT NEED TO BE TRIED BY THE TRIAL COURT; AND
II
WHETHER OR NOT A JUDGMENT ON THE PLEADINGS IS APPROPRIATE AND VALID
WHEN THE DEFENSE INTERPOSED BY THE DEFENDANT IN THE ANSWER IS NOT
APPLICABLE AS A DEFENSE TO THE CAUSE OF ACTION AS STATED IN THE
COMPLAINT.13
Iloilo Jar argues that Comglasco's answer materially admitted the allegations of the
former's complaint, particularly, that the latter had removed its merchandise from
the lease premises and failed to pay subsequent rentals, after it had received the
demand letters sent. It points out that Comglasco brushed aside its obligation by
merely claiming that it was no longer bound by the lease contract because it was
terminated due to the financial difficulties it was experiencing in light of the
economic crisis. Iloilo Jar insisted that Comglasco cannot rely on Article 1267 because
it does not apply to lease contracts, which involves an obligation to give, and not an
obligation to do.
In its Comment,14 dated February 11, 2016, Comglasco countered that its answer
raised material defenses which rendered judgment on the pleadings improper. It
asserted that judgment on the pleadings may be had only when the answer fails to
tender an issue or otherwise admits the material allegations of the adverse party's
pleading. Comglasco argued that even if the allegations in the complaint were
deemed admitted, the affirmative defenses it raised may give rise to factual
controversies or issues which should be subject to a trial.
244
In its Reply,15 dated September 28, 2016, Iloilo Jar reiterated that judgment on the
pleadings was warranted because Comglasco's answer failed to specifically deny the
allegation in the complaint, and that the affirmative defense alleged therein was
improper because Article 1267 is inapplicable to a lease contract. As such, it stressed
that Comglasco's answer failed to tender an issue.
The Court's Ruling
The Court finds merit in the petition.
Rules of Procedure
strictly complied with;
Exceptions
It must be remembered that the right to appeal is not a natural right but merely a
statutory privilege; a party appealing is, thus, expected to comply with the
requirements of relevant rules otherwise he would lose the statutory right to
appeal.16
A review of the records reveals that Iloilo Jar received the Notice of Resolution of the
assailed CA resolution on July 9, 2015. Pursuant to Section 2 Rule 45 of the Rules of
Court,17 it had fifteen (15) days from receipt of the resolution or until July 24, 2015 to
file its petition for review on certiorari before the Court.
On the said date, however, Iloilo Jar filed a motion for extension to file the said
petition. In its September 2, 2015 Resolution,18 the Court granted that same and
extended for thirty (30) days reckoned from the expiration of the reglementary
period within which to file the petition, with a warning that it would be the last
extension to be given. In other words, Iloilo Jar had until August 23, 2015 to file its
petition for review on certiorari.
On August 24, 2015, Iloilo Jar again filed another motion for extension 19 requesting
an additional thirty (30) days. In its November 25, 2015 Resolution,20 the Court again
granted the same and gave another 30- day extension reckoned from August 24,
2015. Thus, it had until September 23, 2015 to file its petition.
Iloilo Jar, unfortunately, filed its petition for review only on September 24,
2015,21 one day past the twice extended filing period. Again, procedural rules are not
lightly brushed aside as its strict compliance is necessary for the orderly
administration of justice. Thus, even if the filing of the petition was merely late for a
 day, it is still a violation of the rules on appeal, which generally leads to its outright
denial.
The tardy filing, notwithstanding, the Court may still entertain the present appeal.
Procedural rules may be disregarded by the Court to serve the ends of substantial
justice. When a petition for review is filed a few days late, application of procedural
rules may be relaxed, where strong considerations of substantial justice are manifest
in the petition, in the exercise of the Court's equity jurisdiction. 22 In CMTC
International Marketing Corporation v. Bhagis International Trading
Corporation,23 the Court did not strictly apply procedural rules as it would serve the
interest of justice, elucidating:
Time and again, this Court has emphasized that procedural rules should be treated
with utmost respect and due regard, since they are designed to facilitate the
adjudication of cases to remedy the worsening problem of delay in the resolution of
rival claims and in the administration of justice. From time to time, however, we
have recognized exceptions to the Rules, but only for the most compelling reasons
where stubborn obedience to the Rules would defeat rather than serve the ends of
justice.
xxxx
Ergo, where strong considerations of substantive justice are manifest in the
petition, the strict application of the rules of procedure may be relaxed, in the
exercise of its equity jurisdiction. Thus, a rigid application of the rules of procedure
will not be entertained if it will obstruct rather than serve the broader interests of
justice in the light of the prevailing circumstances in the case under
consideration.24 [Emphases supplied]
The merits of Iloilo Jar's petition for review warrant a relaxation of the strict rules of
procedure if only to attain justice swiftly. A denial of its petition will cause the
remand of the case, which based on the circumstances, will unnecessarily delay the
proceedings. Thus, the Court deems it wise to let Iloilo Jar's procedural lapse pass.
Judgment on the
pleadings vis-a-vis
Summary Judgment
Section 1, Rule 34 of the Revised Rules of Court governs motions for judgment on the
pleadings. It reads:
245
SECTION 1. Judgment on the pleadings. - Where an answers fails to tender an issue,
or otherwise admits the material allegations of the adverse party's pleading, the
court may, on motion of that party, direct judgment on such pleading. However, in
actions for declaration of nullity or annulment of marriage or for legal separation, the
material facts alleged in the complaint shall always be proved. [Emphasis supplied]
On the other hand, under Rule 35 of the Rules of Court, a party may move for
summary judgment if there are no genuine issues raised.
In Basbas v. Sayson,25 the Court differentiated judgment on the pleadings from
summary judgment in that the former is appropriate if the answer failed to tender an
issue and the latter may be resorted to if there are no genuine issues raised, to wit:
Simply stated, what distinguishes a judgment on the pleadings from a summary
judgment is the presence of issues in the Answer to the Complaint. When the
Answer fails to tender any issue, that is, if it does not deny the material allegations in
the complaint or admits said material allegations of the adverse party's pleadings by
admitting the truthfulness thereof and/or omitting to deal with them at all, a
judgment on the pleadings is appropriate. On the other hand, when the Answer
specifically denies the material averments of the complaint or asserts affirmative
defenses, or in other words raises an issue, a summary judgment is proper provided
that the issue raised is not genuine. "A 'genuine issue' means an issue of fact which
calls for the presentation of evidence, as distinguished from an issue which is
fictitious or contrived or which does not constitute a genuine issue for trial."
xxx
In this case, we note that while petitioners' Answer to respondents' Complaint
practically admitted all the material allegations therein, it nevertheless asserts the
affirmative defences that the action for revival of judgment is not the proper action
and that petitioners are not the proper parties. As issues obviously arise from these
affirmative defenses, a judgment on the pleadings is clearly improper in this
case.26 [Emphases supplied]
In the case at bench, Comglasco interposed an affirmative defense in its answer.
While it admitted that it had removed its stocks from the leased premises and had
received the demand letter for rental payments, it argued that the lease contract had
been pre-terminated because the consideration thereof had become so difficult to
comply in light of the economic crisis then existing. Thus, judgment on the pleadings
was improper considering that Comglasco's Answer raised an affirmative defense.
 Although resort to judgment on the pleadings might have been improper, there was
still no need to remand the case to the RTC for further proceedings. In Wood
Technology Corporation v. Equitable Banking Corporation (Wood Technology),27 the
Court ruled that summary judgment may be availed if no genuine issue for trial is
raised, viz:
Summary judgment is a procedure aimed at weeding out sham claims or defenses at
an early stage of the litigation. The proper inquiry in this regard would be whether
the affirmative defenses offered by petitioners constitute genuine issues of fact
requiring a full-blown trial. In a summary judgment, the crucial question is: are the
issues raised by petitioners not genuine so as to justify a summary judgment? A
"genuine issue" means an issue of fact which calls for the presentation of evidence,
as distinguished from an issue which is fictitious or contrived, an issue that does not
constitute a genuine issue for trial.28 [Emphasis supplied]
It bears noting that in Wood Technology, the RTC originally rendered a judgment on
the pleadings but was corrected by the Court to be a summary judgment because of
the issue presented by the affirmative defense raised therein. In the said case, the
Court, nonetheless, ruled in favor of the complainant therein because there was no
genuine issue raised.
Similar to Wood Technology, the judgment rendered by the RTC in this case was a
summary judgment, not a judgment on the pleadings, because Comglasco's answer
raised an affirmative defense. Nevertheless, no genuine issue was raised because
there is no issue of fact which needs presentation of evidence, and the affirmative
defense Comglasco invoked is inapplicable in the case at bench.
A full blown trial would needlessly prolong the proceedings where a summary
judgment would suffice. It is undisputed that Comglasco removed its merchandise
from the leased premises and stopped paying rentals thereafter. Thus, there remains
no question of fact which must be resolved in trial. What is to be resolved is whether
Comglasco was justified in treating the lease contract terminated due to the
economic circumstances then prevalent.
To evade responsibility, Comglasco explained that by virtue of Article 1267, it was
released from the lease contract. It cited the existing global and regional economic
crisis for its inability to comply with its obligation.
Comglasco's position fails to impress because Article 1267 applies only to obligations
to do and not to obligations to give. Thus, in Philippine National Construction
Corporation v. Court of Appeals,29 the Court expounded:
246
Petitioner cannot, however, successfully take refuge in the said article, since it is
applicable only to obligations "to do," and not to obligations "to give." An
obligation "to do" includes all kinds of work or service; while an obligation "to give" is
a prestation which consists in the delivery of a movable or an immovable thing in
order to create a real right, or for the use of the recipient, or for its simple
possession, or in order to return it to its owner.
The obligation to pay rentals or deliver the thing in a contract of lease falls within
the prestation "to give"; xxx
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing conditions, and once
these conditions cease to exist, the contract also ceases to exist. xxx
This article, which enunciates the doctrine of unforeseen events, is not, however, an
absolute application of the principle of rebus sic stantibus, which would endanger the
security of contractual relations. The parties to the contract must be presumed to
have assumed the risks of unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that equity demands assistance for
the debtor.30 [Emphases and Underscoring supplied]
Considering that Comglasco's obligation of paying rent is not an obligation to do, it
could not rightfully invoke Article 1267 of the Civil Code. Even so, its position is still
without merit as financial struggles due to an economic crisis is not enough reason
for the courts to grant reprieve from contractual obligations.
In COMGLASCO Corporation/Aguila Glass v. Santos Car Check Center
Corporation,31 the Court ruled that the economic crisis which may have caused
therein petitioner's financial problems is not an absolute exceptional change of
circumstances that equity demands assistance for the debtor. It is noteworthy that
Comglasco was also the petitioner in the above-mentioned case, where it also
involved Article 1267 to pre-terminate the lease contract.
Thus, the RTC was correct in ordering Comglasco to pay the unpaid rentals because
the affirmative defense raised by it was insufficient to free it from its obligations
under the lease contract. In addition, Iloilo Jar is entitled to attorney's fees because it
incurred expenses to protect its interest. The trial court, however, erred in awarding
exemplary damages and litigation expenses.
Exemplary damages may be recovered in contractual obligations if the defendant
acted in wanton or fraudulent, reckless, oppressive or malevolent manner. 32 As
discussed, Comglasco defaulted in its obligation to pay the rentals by reason of its
 erroneous belief that the lease contract was pre-terminated because of the economic
crisis. The same, however, does not prove that Comglasco acted in wanton or
fraudulent, reckless, oppressive or malevolent manner. 33 On the other hand,
attorney's fees may be recovered in case the plaintiff was compelled to incur
expenses to protect his interest because of the defendant's acts or omissions.

Further, the interest rate should be modified pursuant to recent jurisprudence. 34 The
monetary awards shall be subject to 12% interest per annum until June 30, 2013 and
6% per annum from July 1, 2013 until fully satisfied.

A Final Note
ART. 1279

A lawyer, as an officer of the court, is expected to observe utmost respect and

deference to the Court. As such, he must ensure that he faithfully complies with rules
of procedure especially since they are in place to aid in the administration of justice.
This duty to be subservient to the rules of procedure is manifested in numerous
provisions35 of the Code of Professional Responsibility.
The Court admonishes Iloilo Jar' counsel for repeatedly failing to comply with the
rules of procedure and court processes. First, he belatedly filed the petition for
review. Second, Iloilo Jar's counsel failed to file its Reply within the time originally
allotted prompting the Court to require him to show cause why he should not be held
in contempt.36 Personal obligations, heavy workload does not excuse a lawyer from
complying with his obligations particularly in timely filing the pleadings required by
the Court.
WHEREFORE, the January 30, 2015 Decision and June 17, 2015 Resolution of the
Court of Appeals are REVERSED and SET ASIDE. The February 17, 2005 Amended
Order of the Regional Trial Court, Branch 37, Iloilo City, is AFFIRMED WITH
MODIFCATION in that the award of exemplary damages and litigation expenses
is DELETED. The monetary award shall be subject to 12% per annum until June 30,
2013 and 6% per annum from July 1, 2013 until fully satisfied.
Atty. Raleigh Silvino L. Manikan is ADMONISHED for his repeated failure to observe
the rules of procedure, with a WARNING that a repetition to strictly comply with
procedural rules shall be dealt with more severely.
61. G.R. No. L-69560 June 30, 1988
THE INTERNATIONAL CORPORATE BANK INC., petitioner,
vs.
THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as presiding Judge of
the Regional Trial Court of Makati, Branch 143, NATIVIDAD M. FAJARDO, and
SILVINO R. PASTRANA, as Deputy and Special Sheriff, respondents.
PARAS, J.:
This is a petition for review on certiorari of the Decision of the Court of Appeals dated
October 31, 1984 in AC-G.R. SP No. 02912 entitled "THE INTERNATIONAL CORPORATE
BANK, INC. v. Hon. ZOILO AGUINALDO, et al.," dismissing petitioner's petition for
certiorari against the Regional Trial Court of Makati (Branch 143) for lack of merit,
and of its Resolution dated January 7, 1985, denying petitioner's motion for
reconsideration of the aforementioned Decision.
Petitioner also prays that upon filing of the petition, a restraining order be issued ex-
parte, enjoining respondents or any person acting in their behalf, from enforcing or in
any manner implementing the Order of the respondent trial court dated February 13
and March 9, 1984, and January 10 and January 11, 1985.

SO ORDERED. The facts of this case, as found by the trial court and subsequently adopted by the
Court of Appeals, are as follows:

In the early part of 1980, private respondent secured from petitioner's predecessors-
247

in-interest, the then Investment and Underwriting Corp. of the Philippines and Atrium
 Capital Corp., a loan in the amount of P50,000,000.00. To secure this loan, private
respondent mortgaged her real properties in Quiapo, Manila and in San Rafael,
Bulacan, which she claimed have a total market value of P110,000,000.00. Of this
loan, only the amount of P20,000,000.00 was approved for release. The same amount
was applied to pay her other obligations to petitioner, bank charges and fees. Thus,
private respondent's claim that she did not receive anything from the approved loan.
On September 11, 1980, private respondent made a money market placement with
ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of 32
days or until October 13, 1980, its maturity date. Meanwhile, private respondent
allegedly failed to pay her mortgaged indebtedness to the bank so that the latter
refused to pay the proceeds of the money market placement on maturity but applied
the amount instead to the deficiency in the proceeds of the auction sale of the
mortgaged properties. With Atrium being the only bidder, said properties were sold
in its favor for only P20,000,000.00. Petitioner claims that after deducting this
amount, private respondent is still indebted in the amount of P6.81 million.
On November 17, 1982, private respondent filed a complaint with the trial court
against petitioner for annulment of the sheriff's sale of the mortgaged properties, for
the release to her of the balance of her loan from petitioner in the amount of
P30,000,000,00, and for recovery of P1,062,063.83 representing the proceeds of her
money market investment and for damages. She alleges in her complaint, which was
subsequently amended, that the mortgage is not yet due and demandable and
accordingly the foreclosure was illegal; that per her loan agreement with petitioner
she is entitled to the release to her of the balance of the loan in the amount of
P30,000,000.00; that petitioner refused to pay her the proceeds of her money market
placement notwithstanding the fact that it has long become due and payable; and
that she suffered damages as a consequence of petitioner's illegal acts.
In its answer, petitioner denies private respondent's allegations and asserts among
others, that it has the right to apply or set off private respondent's money market
claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of
P5,763,741.23, representing the balance of its deficiency claim after deducting the
proceeds of the money market placement, and for damages.
The trial court subsequently dismissed private respondent's cause of action
concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the
other causes of action to be resolved after trial. Private respondent then filed
separate complaints in Manila and in Bulacan for annulment of the foreclosure sale of
the properties in Manila and in Bulacan, respectively.
248
On December 15, 1983, private respondent filed a motion to order petitioner to
release in her favor the sum of P1,062,063.83, representing the proceeds of the
money market placement, at the time when she had already given her direct
testimony on the merits of the case and was being cross-examined by counsel. On
December 24, 1983, petitioner filed an opposition thereto, claiming that the proceeds
of the money market investment had already been applied to partly satisfy its
deficiency claim, and that to grant the motion would be to render judgment in her
favor without trial and make the proceedings moot and academic. However, at the
hearing on February 9, 1984, counsel for petitioner and private respondent jointly
manifested that they were submitting for resolution said motion as well as the
opposition thereto on the basis of the pleadings and of the evidence which private
respondent had already presented.
On February 13, 1984, respondent judge issued an order granting the motion, as
follows:
IN VIEW OF THE FOREGOING, the defendant International Corporate Bank is
hereby ordered to deliver to the plaintiff Natividad M. Pajardo the amount of
P1,062,063.83 covered by the repurchase agreement with Serial No. AOY-14822
(Exhibit "A'), this amount represented the principal of P1,046,253.77 which the
plaintiff held including its interest as of October 13, 1980, conditioned upon the
plaintiff filing a bond amount to P1,062,063.83 to answer for all damages which
the said defendant bank may suffer in the event that the Court should finally
decide that the plaintiff was not entitled to the said amount.
Petitioner filed a motion for reconsideration to the aforesaid order, asserting among
other things that said motion is not verified, and therefore a mere scrap of paper.
Private respondent however manifested that since she testified in open court and
was cross-examined by counsel for petitioner on the motion for release of the
proceeds of the money market placement, the defect had already been cured. On
March 9, 1984, the respondent judge issued an order denying petitioner's motion for
reconsideration. (CA Decision, Rollo, pp. 109-111).
On March 13, 1984, petitioner filed a special civil action for certiorari and prohibition
with preliminary injunction with the Court of Appeals, (a) for the setting aside and
annulment of the Orders dated February 13, 1984 and March 9,1984, issued by the
respondent trial court, and (b) for an order commanding or directing the respondent
trial judge to desist from enforcing and/or implementing and/or executing the
aforesaid Orders. The temporary restraining order prayed for was issued by
respondent Court of Appeals on March 22, 1984. (Please see CA Decision, Rollo, p.
114, last paragraph).
 In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of Appeals
dismissed said petition finding—(a) that while the Motion for the release of the
proceeds of the money market investment in favor of private respondent was not
verified by her, that defect was cured when she testified under oath to substantiate
her allegations therein: (b) that, petitioner cannot validly claim it was denied due
process for the reason that it was given ample time to be heard, as it was in fact
heard when it filed an Opposition to the motion and a motion for reconsideration; (c)
that the circumstances of this case prevent legal compensation from taking place
because the question of whether private respondent is indebted to petitioner in the
amount of 6.81 million representing the deficiency balance after the foreclosure of
the mortgage executed to secure the loan extended to her, is vigorously disputed; (d)
that the release of the proceeds of the money market investment for private
respondent will not make the causes of action of the case pending before the trial
court moot and academic nor will it cause irreparable damage to petitioner, private
respondent having filed her bond in the amount of P1,062,063.83 to answer for all
damages which the former may suffer in the event that the court should finally
decide that private respondent is not entitled to the return of said amount (CA
Decision, Rello, pp. 112-114).
The dispositive portion of the aforementioned Decision reads:
... We hold that the respondent court cannot be successfully charged with
grave abuse of discretion amounting to lack of jurisdiction when it issued its
Orders of February 13, 1984 and March 9, 1984, based as they are on a correct
appreciation of the import of the parties' evidence and the applicable law.
IN VIEW WHEREOF, the petition is dismissed for lack of merit and the
temporary restraining order issued by this Court on March 22, 1984 is lifted.
(Ibid., p. 114).
Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo, pp.
116-124), but for the reason that the same failed to raise any issue that had not been
considered and passed upon by the respondent Court of Appeals, it was denied in a
Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126).
Having been affirmed by the Court of Appeals, the trial court issued a Writ of
Execution to implement its Order of February 13, 1984 (Annex "BB", Rollo, p. 188)
and by virtue thereof, a levy was made on petitioner's personal property consisting of
20 motor vehicles (Annex "U", Rollo, p. 127).
On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court
249
an ex-parte motion praying that the four branches of the petitioner such as: Baclaran
Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria, Metro Manila; Cubao
Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to pay the
amount of P250,000.00 each, and the main office of the petitioner bank at Paseo de
Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83 in order to
answer for the claim of private respondent amounting to P1,062,063.83.
Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo, p.
129) granting the above-mentioned prayers.
Acting on the ex-parte motion by the plaintiff (now private respondent), the trial
court, on January 11, 1984, ordered the President of defendant International
Corporate Bank (now petitioner) and all its employees and officials concemed to
deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution
dated December 12, 1984 (Annex "W", Rollo, p. 131).
The petitioner having failed to comply with the above-cited Order, the respondent
trial court issued two (2) more Orders: the January 16, 1985 (Annex "CC," Rollo, p.
190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191), directing several
employees mentioned therein to show cause wily they should not be cited in
contempt.
Hence, this petition for review on certiorari with prayer for a restraining order and for
a writ of preliminary injunction.
Three days after this petition was filed, or specifically on January 18, 1985, petitioner
filed an urgent motion reiterating its prayer for the issuance of an ex-parte restraining
order (Rollo, p. 132).
Simultaneous with the filing of the present petition, petitioner, as defendant, filed
with the trial court an ex-partemotion to suspend the implementation of any and all
orders and writs issued pursuant to Civil Case No. 884 (Annex "A", Rollo, p. 135).
This Court's resolution dated January 21, 1985, without giving due course to the
petition, resolved (a) to require the respondents to comment: (b) to issue, effective
immediately and until further orders from this Court, a Temporary Restraining Order
enjoining the respondents from enforcing or in any manner implementing the
questioned Orders dated February 13, 1984, March 9, 1984, January 10, 1985 and
January 11 and 16, 1985, issued in Civil Case No. 884.
The corresponding writ was issued on the same day (Rollo, pp. 139-140).
 As required, the Comment of private respondent was filed on January 28, 1985 (Rollo,
pp. 141- 150).
Thereafter, petitioner moved for leave to file a supplemental petition on the ground
that after it had filed this present petition, petitioner discovered that the bond filed
with, and approved by, the respondent lower court showed numerous material
erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance
company certified as having been done without its authority or consent (Annex "Z",
Rollo, p. 178).
The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154-171).
It pointed out the erasures, alterations and/or additions in the bond as follows:
a. below "Civil Case No. 884" after the words, "Plaintiff's Bond," the phrase "For
Levying of Attachment" was erased or deleted;
b. in lines 2 and 3 after the word "order," the phrase "approving plaintiff's motion
dated Dec. 15, 1983, was inserted or added;
c. in line 3, the phrases "Of attachment" and "ordered that a writ of attachment
issue' were erased or deleted;
d also in line 3 after the words "the court has" the phrase "approved the Motion
was likewise inserted or added;
e. in line 9, the phrase "and of the levying of said attachment" was also erased or
deleted;
f. in line 13, the word "attachment" was likewise erased or deleted;
g. also in line 13 after the deletion of word "attachment" the phrase "release of
the P1,062,063.83 to the plaintiff was similarly inserted or added."
Petitioner contended therein that in view of the foregoing facts, the genuineness,
due execution and authenticity as well as the validity and enforceability of the bond
(Rello, p. 174) is now placed in issue and consequently, the bond may successfully be
repudiated as falsified and, therefore, without any force and effect and the bonding
company may thereby insist that it has been released from any hability thereunder.
Also, petitioner pointed as error the respondent trial court's motu
250
proprio transferring Civil Case No. 884 to the Manila Branch of the same Court
arguing that improper venue, as a ground for, and unless raised in, a Motion to
Dismiss, may be waived by the parties and the court may not pre-empt the right of
the parties to agree between or among themselves as to the venue of their choice in
litigating their justiciable controversy (Supplemental Petition, Rollo, p. 160).
On being required to comment thereon, (Rollo, p. 192) private respondent countered
(Rollo, pp. 193-198) that bond forms are ready-prepared forms and the bonding
company used the form for "Levying of Attachment" because the company has no
ready-prepared form for the kind of bond called for or required in Civil Case 884.
Whatever deletions or additions appear on the bond were made by the Afisco
Insurance Corporation itself for the purpose of accomplishing what was required or
intended.
Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the
respondent trial court in the amount of P1,062,063.83 a xerox copy of which was
furnished this Court (Rollo, p. 219), and noted in the Court's Resolution dated May
29,1985 (Rollo, p. 225).
On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p.
199) which was filed on April 10, 1985 (Rollo, p. 201).
Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on September
18, 1985 after Atty. Advincula, counsel for private respondents was required by this
Court to show cause why he should not be disciplinarily dealt with or held in
contempt for his failure to comply on time (Rollo, p. 226) and on August 19, 1985 said
lawyer was finally admonished (Rollo, p. 229) for his failure to promptly apprise the
Court of his alleged non-receipt of copy of petitioner's reply, which alleged non-
receipt was vehemently denied by petitioner in its Counter Manifestation (Rollo, p.
230) filed on August 5, 1985.
Finally, on October 7, 1985, this petition was given due course and both parties were
required to submit simultaneous memoranda (Rollo, p. 249) but before the same
were filed, petitioner moved for leave to file sur-rejoinder (Rollo, p. 250), the sur-
rejoinder was filed on October 14,1985 (Rollo, pp. 252-254).
Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292) while
that of private respondent was submitted on January 10, 1986 (Rollo, pp. 295-304).
Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which,
despite permission from this Court, was not filed and on August 22, 1986, private
respondent prayed for early resolution of the petition (Rollo, p. 311).
 In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to the
Second Division of this Court, the same being assigned to a member of that Division.
The crucial issue to be resolved in this case is whether or not there can be legal
compensation in the case at bar.
Petitioner contends that after foreclosing the mortgage, there is still due from private
respondent as deficiency the amount of P6.81 million against which it has the right to
apply or set off private respondent's money market claim of P1,062,063.83.
The argument is without merit.
Petitioner now assails the motion of the plaintiff (now private respondent) filed in the
trial court for the release of the proceeds of the money market investment, arguing
that it is deficient in form, the same being unverified (petitioner's Memorandum,
Rollo, p. 266). On this score, it has been held that "as enjoined by the Rules of Court
and the controlling jurisprudence, a liberal construction of the rules and the pleadings
is the controlling principle to effect substantial justice." (Maturan v. Araula, 111 SCRA
615 [1982]).
Finally, the filing of insufficient or defective bond does not dissolve absolutely and
unconditionally the injunction issued. Whatever defect the bond possessed was cured
when private respondent filed another bond in the trial court.

As correctly pointed out by the respondent Court of Appeals — PREMISES CONSIDERED, the questioned Decision and Resolution of the respondent
Court of Appeals are hereby AFFIRMED.
Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (Art. 1278, Civil Code). "When all the SO ORDERED.
requisites mentioned in Art. 1279 of the Civil Code are present, compensation
takes effect by operation of law, even without the consent or knowledge of Yap, C.J., Melencio-Herrera and Padilla, JJ., concur.
the debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires
among others, that in order that legal compensation shall take place, "the two
debts be due" and "they be liquidated and demandable." Compensation is not
proper where the claim of the person asserting the set-off against the other is
not clear nor liquidated; compensation cannot extend to unliquidated,
disputed claim arising from breach of contract. (Compañia General de Tabacos
vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29).

There can be no doubt that petitioner is indebted to private respondent in the

amount of P1,062,063.83 representing the proceeds of her money market
investment. This is admitted. But whether private respondent is indebted to
petitioner in the amount of P6.81 million representing the deficiency balance
after the foreclosure of the mortgage executed to secure the loan extended to
her, is vigorously disputed. This circumstance prevents legal compensation
from taking place. (CA Decision, Rollo, pp. 112-113).

It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC
Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private
respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo,
pp. 181-189). Therefore, the validity of the extrajudicial foreclosure sale and
petitioner's claim for deficiency are still in question, so much so that it is evident, that
the requirement of Article 1279 that the debts must be liquidated and demandable
251

has not yet been met. For this reason, legal compensation cannot take place under
Article 1290 of the Civil Code.

62. G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision
of the Intermediate Appellate Court, to set aside the auction sale of his property
which took place on December 5, 1977, and to allow him to recover a 203 square
meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the
latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro
Manila. The lot, with an area of about 328 square meters, is described and covered by
252
Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00 representing
the estimated amount equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez
was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time
helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new
certificate of title. Upon verification through his lawyer, Francia discovered that a
Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both annotated at
the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing
the amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer
Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739 (37795)
and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00
as attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
 Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I the requirements provided by Article 1279, to wit:
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF
LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS
ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5,
1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and that
the price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the
problems raised in his petition upon himself. While we commiserate with him at the
loss of his property, the law and the facts militate against the grant of his petition.
We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
253
compensation. He claims that the government owed him P4,116.00 when a portion of
his land was expropriated on October 15, 1977. Hence, his tax obligation had been
set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy
(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the
government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated
that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed
to be set-off under the statutes of set-off, which are construed uniformly, in the
light of public policy, to exclude the remedy in an action or any indebtedness of
the state or municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they do not arise
out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule
based on grounds of public policy is well-settled that no set-off admissible
against demands for taxes levied for general or local governmental purposes.
The reason on which the general rule is based, is that taxes are not in the nature
of contracts between the party and party but grow out of duty to, and are the
positive acts of the government to the making and enforcing of which, the
personal consent of individual taxpayers is not required. ..."
 We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in the
tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government
for the 125 square meter portion of his lot was deposited with the Philippine National
Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be
shown later, he claimed that he pocketed the notice of the auction sale without
reading it.
Petitioner contends that "the auction sale in question was made without complying
with the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for
tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of
this issue, the burden of proof therefore rests upon him to show that plaintiff was duly
and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with all the
prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
254
... [D]ue process of law to be followed in tax proceedings must be
established by proof and the general rule is that the purchaser of a
tax title is bound to take upon himself the burden of showing the
regularity of all proceedings leading up to the sale. (emphasis
supplied)
There is no presumption of the regularity of any administrative action which results in
depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil.
437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the
rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that he
did receive the notice for the auction sale. The records sustain the lower court's
finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he
was not properly notified of the auction sale. Surprisingly, however, he
admitted in his testimony that he received the letter dated November 21,
1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He
claimed further that he was not present on December 5, 1977 the date of
the auction sale because he went to Iligan City. As long as there was
substantial compliance with the requirements of the notice, the validity of
the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez
notified you that the property in question shall be sold at public auction to
the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will
you tell the Court whether you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by
mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed
upon receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
 A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his
part when he ignored such notice. By his very own admission that he received the
notice, his now coming to court assailing the validity of the auction sale loses its
force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule,
gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de
Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91
Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388)
we held that "alleged gross inadequacy of price is not material when the law gives the
owner the right to redeem as when a sale is made at public auction, upon the theory
that the lesser the price, the easier it is for the owner to effect redemption."
In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were
sold are unconscionable considering the wide divergence between their
assessed values and the amounts for which they had been actually sold.
However, while in ordinary sales for reasons of equity a transaction may be
invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem, as when a sale is
made at public auction, upon the theory that the lesser the price the easier it
is for the owner to effect the redemption. And so it was aptly said: "When
there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right
to redeem and thus recover the loss he claims to have suffered by reason of
the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v.
De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes,
the collection of taxes in this manner would be greatly embarrassed, if not
rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the inadequacy
of the price given is not a valid objection to the sale." This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be
useless to offer the property. Indeed, it is notorious that the prices habitually
paid by purchasers at tax sales are grossly out of proportion to the value of the
255
land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean,
et al. (267 P. 555):
Like most cases of this character there is here a certain element of
hardship from which we would be glad to relieve, but do so would unsettle
long-established rules and lead to uncertainty and difficulty in the collection of
taxes which are the life blood of the state. We are convinced that the present
rules are just, and that they bring hardship only to those who have invited it by
their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have
gone up in the area. However, the price quoted by the petitioner for a 203 square
meter lot appears quite exaggerated. At any rate, the foregoing reasons which
answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable
grounds, there are no strong considerations of substantial justice in his favor. Mr.
Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction
sale. He claims to have pocketed the notice of sale without reading it which, if true, is
still an act of inexplicable negligence. He did not withdraw from the expropriation
payment deposited with the Philippine National Bank an amount sufficient to pay for
the back taxes. The petitioner did not pay attention to another notice sent by the City
Treasurer on November 3, 1978, during the period of redemption, regarding his tax
delinquency. There is furthermore no showing of bad faith or collusion in the
purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke
equity in his attempt to regain the property by belatedly asking for the annulment of
the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
decision of the respondent court is affirmed.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.
 accountability in the sum of P1,490,091.15 was still subject to reconciliation) and,
together with his wife, bound himself to pay on installment basis the said debt.
63. G.R. No. 174882 : January 21, 2013 Consequently, petitioner withheld the payment of respondent's service fees from
February to April 1995 and applied the same as partial payments to the debt which
MONDRAGON PERSONAL SALES, INC., Petitioner, v. VICTORIANO S. SOLA, he obligated to pay. On April 29, 1995, respondent closed and suspended operation
JR., Respondent. of his office cum bodega where petitioner's products were stored and customers
were being dealt with.
DECISION
On May 24, 1995, respondent filed with the Regional Trial Court (RTC) of Davao, a
Complaint6 for accounting and rescission against petitioner alleging that petitioner
PERALTA, J.:
withheld portions of his service fees covering the months from October 1994 to
January 1995 and his whole service fees for the succeeding months of February to
Before us is a petition for review on certiorari seeking to set aside the Decision 1 dated
April 1995, the total amount of which was P222,202.84; that petitioner's act grossly
February 10, 2006 and the Resolution2 dated September 6, 2006 issued by the Court
hampered, if not paralyzed, his business operation, thus left with no other recourse,
of Appeals (CA) in CA-G.R. CV No. 71690.
he suspended operations to minimize losses. He prayed for the rescission of the
contract of services and for petitioner to render an accounting of his service fees.
Petitioner Mondragon Personal Sales Inc., a company engaged in the business of
selling various consumer products through a network of sales representatives,
In its Answer with Counterclaim7 filed on June 14, 1995, petitioner contended that
entered into a Contract of Services3 with respondent Victoriano S. Sola, Jr. for a
respondents letter dated January 26, 1995 addressed to petitioner's Vice-President
period of three years commencing on October 2, 1994 up to October 1, 1997. Under
for Finance, confirmed and obligated himself to pay on installment basis the
the said contract, respondent, as service contractor, would provide service facilities,
accountability of his wife with petitioner, thus respondent's service fees/commission
i.e., bodega cum office, to petitioner's products, sales force and customers in General
earned for the period of February to April 1995 amounting to P125,040.01 was
Santos City and as such, he was entitled to commission or service fee as
applied by way of compensation to the amounts owing to it; that all the service fees
follows:cralawlibrary
earned by respondent prior to February 1995 were fully paid to him. By way of
counterclaim, petitioner asked for the payment of the amount of P1,547,892.55
MONTHLY SALES SERVICE FEE which respondent obligated to pay plus interest; the delivery of petitioner's products
(net of vat) padlocked in respondent's office cum bodega, the payment for the loss of income in
the amount of P833,600.00 as well as the remaining balance of P45,728.30 from
P50,000.00 to 2,500,000.00 Five percent (5%) the P100,000.00 given by petitioner to respondent as advance money for the
P2,500,001.00 to 3,000.000.00 P125,000.00 purchase of office equipment and the renovation of the bodega cum office.

P3,000,001.00 to 3,500,000.00 150,000.00
P3,500,001.00 UP 200,000.004
The agreement then came into effect when petitioner's goods were delivered to
respondent's bodega and were sold by petitioner's employees. Prior to the execution
of the contract, however, respondents wife, Lina Sola, had an existing obligation with
petitioner arising from her Franchise Distributorship Agreement with the latter. On
January 26, 1995, respondent wrote a letter5 addressed to Renato G. de Leon,
petitioner's Vice-President for Finance, wherein he acknowledged and confirmed his
256
In his Reply and Answer8 to petitioner's counterclaim, respondent averred that he
was made to believe that the sales commission contained in petitioner's
memorandum dated July 5, 1994 would be applicable to him; that it was improper for
petitioner to confuse respondent's transaction with that of his wife as it was
divergent in nature and terms.
Pending trial, petitioner moved for the issuance of a preliminary attachment and
replevin which the RTC granted in its Order dated June 19, 1995 upon the filing of
bonds.9 Respondent filed a Motion to Quash the Writ of Attachment, which the RTC
denied in an Order dated July 24, 1995.10 As respondent's motion for reconsideration

wifes indebtedness to petitioner in the amount of P1,973,154.73 (the other was also denied, he filed with us a petition for certiorari, docketed as G.R. No.
 126427, assailing the RTC orders which we dismissed in a Resolution 11 dated
November 11, 1996 on procedural matters.
Trial thereafter ensued.
On July 6, 2000, the RTC rendered its Decision,12 the dispositive portion of which
reads:cralawlibrary
FOR THE FOREGOING, judgment is hereby rendered in favor of defendant and against
plaintiff, ordering the latter to pay the former:cralawlibrary
1) the sum of P1,543,643.96 representing the principal balance of plaintiff's account
with defendant, plus legal interest from the time of filing of the complaint until fully
paid, at the rate of 6% per annum;
2) attorney's fees in the amount of P25,000.00
3) costs of the suit.13?r?l1 ???ñr?bl?š ??r†??l l?? l?br?rÿ
In so ruling, the RTC found that in computing the service fees/commissions due
respondent, the rate as provided in the contract of service dated January 27, 1995
was controlling, since respondent was a party thereto duly affixing his signature
therein; that petitioner's computation of respondent's service fees for the months of
February to April 1995 in the total amount of P125,040.01 which was based on the
said contract deserved credence. The RTC ruled that while Article 1381 of the Civil
Code provides for the grounds for which a contract may be rescinded, none of these
grounds existed in this case; that there was no showing of fraud which petitioner
employed when it entered into the contract with respondent nor did respondent
agree to such a contract without knowing its content, thus the contract was not
rescissible.
As regards to petitioner's counterclaim that respondent confirmed and assumed the
payment of his wife's account with petitioner, the RTC found that respondent
obligated himself to pay his wife's account as evidenced by his letter dated January
26, 1995; that after deducting from the confirmed amount of P1,668,683.97 the
respondent's service commission for the period from February 1995 to April 1995,
which was in the total amount of P125,040.01, the amount owing to petitioner would
still be P1,543,643.96. The RTC dismissed the other counterclaims, since they were
not substantiated but found petitioner entitled to attorney's fees due to the amount
of money involved and the time spent in pursuing the case.
257
Respondent filed his appeal to the CA to which petitioner filed its appellee's brief. On
February 10, 2006, the CA rendered its assailed decision, the dispositive portion of
which reads as follows:cralawlibrary
WHEREFORE, in the light of the foregoing premises, herein appeal is GRANTED.
Accordingly, the Contract of Services is hereby RESCINDED. Let the case be
REMANDED to the court a quo for the proper determination of the amount of service
fees unlawfully withheld from the appellant.
Furthermore, Appellee is hereby ordered to pay the Appellant attorneys fees in the
amount of twenty-five thousand pesos (P25,000.00).14?r?l1
The CA found that under Article 1191 of the Civil Code, respondent was entitled to
rescind the contract of services as it was petitioner who breached the same by
withholding the service fees lawfully due to the former; that petitioner's act of
unlawfully withholding the service fees due respondent constituted a willful and
deliberate infringement on contractual obligations which would justify rescission
under Article 1191. The CA declared that the contract of services entered into by the
parties did not fall under any of the rescissible contracts enumerated under Article
1381 of the Civil Code but under Article 1191 which pertains to rescission of
reciprocal obligations as in the instant case.
The CA ruled that respondent did not assume his wife's obligation as he did not
substitute himself in the shoes of his wife regarding the payment of the latter's
liability; that there can be no novation as novation was never presumed. Petitioner's
act of withholding respondent's service fee and thereafter applying them to the
obligation of his wife was unlawful, considering that respondent never assumed his
wife's obligation with petitioner; that there could be no legal compensation, since it
was respondent's wife who was principally indebted to petitioner owing from the
franchise distributorship agreement she earlier entered into with petitioner; that
granting the debt redounded to the benefit of the family and incurred with the
consent of respondent, and the spouse, as joint administrators of the community
property are solidarily liable with their separate properties for debts incurred,
however, such liability is only subsidiary, when the community property is not
sufficient to pay for all liabilities, however, in this case, there was no showing that the
community property of the spouses was insufficient to pay the debt.
The CA ordered the deletion of attorney's fees as it was respondent who was entitled
to such award, since he was compelled to litigate to protect his interest for the
unjustified act of petitioner.
 Petitioner's motion for reconsideration was denied in a Resolution dated September
6, 2006.
Hence, this petition where petitioner alleges that the CA erred:cralawlibrary
1. In finding that petitioner breached its contract with respondent and that there is
no compensation in accordance to Article 1279 of the Civil Code;
2. In finding that respondent did not assume the obligation of his wife;
3. In remanding the case to the court a quo for proper determination of service fee
withheld when the same has been determined;
4. In obliterating the award of petitioner's counterclaim when respondent admitted
his obligation to petitioner.15?r?l1 ???ñr?bl?š ??r†??l l?? l?br?rÿ
The CA found that petitioner's act of withholding respondent's service fees and
thereafter applying them as partial payment to the obligation of respondent's wife
with petitioner was unlawful, considering that respondent never assumed his wifes
obligation, thus, there can be no legal compensation under Article 1279 of the Civil
Code.
We do not agree.
In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon, petitioner's
Vice-President for Finance, respondent wrote, and which we quote in
full:cralawlibrary
Gentlemen:cralawlibrary
This refers to the account of my wife, Lina (Beng) Sola, with Mondragon Personal
Sales, Inc. in the amount of P3,463,173.88. Of this total amount, we are initially
confirming the total amount of P1,973,154.73 as due from Lina (Beng) Sola, while the
remaining balance of P1,490,091.15 will be subject to a reconciliation on or before
February 5, 1995.
In recognition of Lina (Beng) Sola's account, we undertake to pay P100,000.00 on or
before February 01, 1995 and the balance of P1,873,154.73 plus interest of 18% per
annum and 2% administrative charge per month on the diminishing balance will be
covered by postdated checks of not less than P100,000.00 per month starting
258
February 28, 1995 and every end of the month thereafter but not to exceed eighteen
(18) months or July 31, 1996.
With regards to the remaining balance of P1,490,019.15, we agree that upon final
verification of these accounts, we will issue additional postdated checks subject to
the same terms and conditions as stated above.
We further agree that all subsequent orders that will be released to us will be
covered by postdated checks.
I fully understand and voluntarily agree to the above undertaking with full knowledge
of the consequences which may arise therefrom.
Very truly yours,
(signed)
Victoriano S. Sola16
A reading of the letter shows that respondent becomes a co-debtor of his wife's
accountabilities with petitioner. Notably, the last paragraph of his letter which states
"I fully understand and voluntarily agree to the above undertaking with full
knowledge of the consequences which may arise therefrom" and which was signed
by respondent alone, shows that he solidarily bound himself to pay such debt. Based
on the letter, respondent's wife had an account with petitioner in the amount
of P3,463,173.88, out of which only the amount of P1,973,154.73 was confirmed
while the remaining amount of P1,490,019.15 would still be subject to reconciliation.
As respondent bound himself to pay the amount of P1,973,154.73, he becomes
petitioner's principal debtor to such amount.
On the other hand, respondent, as petitioner's service contractor, was entitled to a
payment of service fees as provided in their contract of services dated January 26,
1995. We note that respondent never refuted the amount of monthly sales recorded
but only assailed in the RTC the rate of the service fees which he was entitled to.
However, we find that there could be no other computation of the rate of the service
fees other than what was provided in the contract of services dated January 26, 1995
signed by respondent and petitioner. Thus, we give credence to petitioner's
computation of respondent's service fees for the months of February to April 1995 in
the total amount of P125,040.01. Since respondent promised petitioner in his letter
dated January 26, 1995, to monthly pay a certain amount to cover the indebtedness
to petitioner which he failed to do, the latter withheld the payment of respondent's
service fees and applied the same as partial payments of the debt by way of
compensation.
 We find that petitioner's act of withholding respondent's service fees/commissions
and applying them to the latter's outstanding obligation with the former is merely an
acknowledgment of the legal compensation that occurred by operation of law
between the parties.17 Compensation is a mode of extinguishing to the concurrent
amount the obligations of persons who in their own right and as principals are
reciprocally debtors and creditors of each other. Legal compensation takes place by
operation of law when all the requisites are present, as opposed to conventional
compensation which takes place when the parties agree to compensate their mutual
obligations even in the absence of some requisites. 18 Legal compensation requires the
concurrence of the following conditions:cralawlibrary
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.19
We find the presence of all the requisites for legal compensation. Petitioner and
respondent are both principal obligors and creditors of each other. Their debts to
each other consist in a sum of money. Respondent acknowledged and bound himself
to pay petitioner the amount of P1,973,154.73 which was already due, while the
service fees owing to respondent by petitioner become due every month.
Respondent's debt is liquidated and demandable, and petitioner's payments of
service fees are liquidated and demandable every month as they fall due. Finally,
there is no retention or controversy commenced by third persons over either of the
debts. Thus, compensation is proper up to the concurrent amount where petitioner
owes respondent P125,040.01 for service fees, while respondent owes
petitioner P1,973,154.73.
As legal compensation took place in this case, there is no basis for respondent to ask
for rescission since he was the first to breach their contract when, on April 29, 1995,
he suddenly closed and padlocked his bodega cum office in General Santos City
occupied by petitioner.
259
Petitioner claims that the CA erred in obliterating the RTCs award of its counterclaim
which it had alleged and proved during trial and which respondent even admitted.
We agree.
In his letter dated January 6, 1995, respondent confirmed the amount
of P1,973,154.73 owing to petitioner. On September 29, 1997, petitioner wrote
another letter20 to petitioner's Credit and Collection Manager, Rudy Machanco,
wherein he again confirmed the indebtedness in the amount of P1,973,154.73. In the
same letter, he showed the payments he had already made and after deducting the
same from the confirmed indebtedness, the total balance remained to be
at P1,668,683.97. As we have said earlier, respondent's service fees from February to
April 1995 which was in the total amount of P125,040.01 was not assailed at all by
respondent in his appeal with the CA, thus he is bound by such computation. Hence,
the amount of P125,040.01 which petitioner owes respondent shall be offset against
the P1,973,154.73 which respondent owes petitioner, and therefore leaving a
balance of P1,543,643.96 which respondent must pay.
WHEREFORE, the petition for review is GRANTED. The Decision dated February 10,
2006 and the Resolution dated September 6, 2006 of the Court of Appeals are hereby
REVERSED and SET ASIDE. Respondent is hereby ordered to pay petitioner the
amount of P1,543,643.96 with 6% percent per annum from June 14, 1995 until
finality of this Decision and 12% percent per annum thereafter until full payment.
SO ORDERED.
64. G.R. No. 168251
JESUS M. MONTEMAYOR,
Petitioner,
 Present: Factual Antecedents

CORONA, C.J., Chairperson,

On July 24, 1990, respondent Atty. Vicente D. Millora (Vicente) obtained a
- versus - LEONARDO-DE CASTRO BERSAMIN,
loan of P400,000.00 from petitioner Dr. Jesus M. Montemayor (Jesus) as evidenced by a
DEL CASTILLO, and promissory note[5] executed by Vicente. On August 10, 1990, the parties executed a loan
contract[6] wherein it was provided that the loan has a stipulated monthly interest of 2% and
VILLARAMA, JR., JJ. that Vicente had already paid the amount of P100,000.00 as well as the P8,000.00
representing the interest for the period July 24 to August 23, 1990.

VICENTE D. MILLORA, Promulgated:

Respondent. July 27, 2011 Subsequently and with Vicentes consent, the interest rate was increased to 3.5%
or P10,500.00 a month. From March 24, 1991 to July 23, 1991, or for a period of four months,
x-------------------------------------------------------------------x Vicente was supposed to pay P42,000.00 as interest but was able to pay only P24,000.00. This
was the last payment Vicente made. Jesus made several demands[7] for Vicente to settle his
obligation but to no avail.

DECISION

Thus, on August 17, 1993, Jesus filed before the RTC of Quezon City a Complaint[8] for Sum of
Money against Vicente which was docketed as Civil Case No. Q-93-17255. On October 19,
1993, Vicente filed his Answer[9] interposing a counterclaim for attorneys fees of not less
DEL CASTILLO, J.:
than P500,000.00. Vicente claimed that he handled several cases for Jesus but he was
summarily dismissed from handling them when the instant complaint for sum of money was
filed.

When the dispositive portion of a judgment is clear and unequivocal, it must be executed
Ruling of the Regional Trial Court
strictly according to its tenor.
In its Decision[10] dated October 27, 1999, the RTC ordered Vicente to pay Jesus his
monetary obligation amounting to P300,000.00 plus interest of 12% from the time of the filing
of the complaint on August 17, 1993 until fully paid. At the same time, the trial court found
This Petition for Review on Certiorari[1] assails the Decision[2] dated May 19, 2005 of merit in Vicentes counterclaim and thus ordered Jesus to pay Vicente his attorneys fees which
the Court of Appeals (CA) in CA-G.R. SP No. 81075, which dismissed the petition is equivalent to the amount of Vicentes monetary liability, and which shall be set-off with the
for certiorari seeking to annul and set aside the Orders dated September 6, 2002[3] and amount Vicente is adjudged to pay Jesus, viz:
October 2, 2003[4] of the Regional Trial Court (RTC) of Quezon City, Branch 98 in Civil Case No.
Q-93-17255.
260
 WHEREFORE, premises above-considered [sic], JUDGMENT is hereby
rendered ordering defendant Vicente D. Millora to pay plaintiff Jesus M.
Montemayor the sum of P300,000.00 with interest at the rate of 12% per
annum counted from the filing of the instant complaint on August 17, 1993
until fully paid and whatever amount recoverable from defendant shall be
set off by an equivalent amount awarded by the court on the counterclaim
representing attorneys fees of defendant on the basis of quantum meruit
for legal services previously rendered to plaintiff.
September 6, 2002 denying both motions for lack of merit. The Motion for Reconsideration
and Clarification was denied for violating Section 5,[23] Rule 15 of the Rules of Court and
likewise the Motion for the Issuance of a Writ of Execution, for violating Section 6,[24] Rule 15 of
the same Rules.
Jesus filed his Motion for Reconsideration[25] thereto on October 10, 2002 but this was
eventually denied by the trial court through its Order[26] dated October 2, 2003.

No pronouncement as to attorneys fees and costs of suit.

Ruling of the Court of Appeals

SO ORDERED.[11]
Jesus went to the CA via a Petition for Certiorari[27] under Rule 65 of the

Rules of Court.
On December 8, 1999, Vicente filed a Motion for Reconsideration[12] to which Jesus filed an
Opposition.[13] On March 15, 2000, Vicente filed a Motion for the Issuance of a Writ of On May 19, 2005, the CA issued its Decision the dispositive portion of which
Execution[14] with respect to the portion of the RTC Decision which awarded him attorneys fees provides:
under his counterclaim. Jesus filed his Urgent Opposition to Defendants Motion for the
Issuance of a Writ of Execution[15] dated May 31, 2000.
WHEREFORE, the foregoing considered, the petition for certiorari
is DENIED and the assailed Orders are AFFIRMED in toto. No costs.
In an Order[16] dated June 23, 2000, the RTC denied Vicentes Motion for Reconsideration but
granted his Motion for Issuance of a Writ of Execution of the portion of the decision
SO ORDERED.[28]
concerning the award of attorneys fees.

Intending to appeal the portion of the RTC Decision which declared him liable to Jesus for the
sum of P300,000.00 with interest at the rate of 12% per annum counted from the filing of the
complaint on August 17, 1993 until fully paid, Vicente filed on July 6, 2000 a Notice of
Appeal.[17] This was however denied by the RTC in an Order[18] dated July 10, 2000 on the
ground that the Decision has already become final and executory on July 1, 2000.[19] Not satisfied, Jesus is now before this Court via a Petition for Review on Certiorari under Rule
45 of the Rules of Court.

Issue
[20]
Meanwhile, Jesus filed on July 12, 2000 a Motion for Reconsideration and Clarification of the
June 23, 2000 Order granting Vicentes Motion for the Issuance of a Writ of NOTWITHSTANDING THE FINALITY OF THE TRIAL COURTS DECISION OF
Execution. Thereafter, Jesus filed on September 22, 2000 his Motion for the Issuance of a Writ OCTOBER 27, 1999, AS WELL AS THE ORDERS OF SEPTEMBER 6, 2002 AND
261

of Execution.[21] After the hearing on the said motions, the RTC issued an Order[22] dated OCTOBER 2, 2003, THE LEGAL ISSUE TO BE RESOLVED IN THIS CASE IS
 WHETHER X X X [DESPITE] THE ABSENCE OF A SPECIFIC AMOUNT IN THE
DECISION REPRESENTING RESPONDENTS COUNTERCLAIM, THE SAME
COULD BE VALIDLY [OFFSET] AGAINST THE SPECIFIC AMOUNT OF AWARD
MENTIONED IN THE DECISION IN FAVOR OF THE PETITIONER.[29]
Petitioners Arguments
Jesus contends that the trial court grievously erred in ordering the implementation of the RTCs
October 27, 1999 Decision considering that same does fix the amount of attorneys
fees. According to Jesus, such disposition leaves the matter of computation of the attorneys
fees uncertain and, hence, the writ of execution cannot be implemented. In this regard, Jesus
points out that not even the Sheriff who will implement said Decision can compute the
judgment awards. Besides, a sheriff is not clothed with the authority to render judicial
functions such as the computation of specific amounts of judgment awards.
Respondents Arguments
Vicente counter-argues that the October 27, 1999 RTC Decision can no longer be
made subject of review, either by way of an appeal or by way of a special civil action
for certiorari because it had already attained finality when after its promulgation, Jesus did not
even file a motion for reconsideration thereof or interpose an appeal thereto. In fact, it was
Vicente who actually filed a motion for reconsideration and a notice of appeal, which was
eventually denied and disapproved by the trial court.
Our Ruling
The petition lacks merit.
The October 27, 1999 Decision if the RTC is already final and executory, hence,
immutable.
At the outset, it should be stressed that the October 27, 1999 Decision of the RTC is
already final and executory. Hence, it can no longer be the subject of an appeal. Consequently,
Jesus is bound by the decision and can no longer impugn the same. Indeed, well-settled is the
rule that a decision that has attained finality can no longer be modified even if the modification
is meant to correct erroneous conclusions of fact or law.The doctrine of finality of judgment is
262
explained in Gallardo-Corro v. Gallardo:[30]
Nothing is more settled in law than that once a judgment attains
finality it thereby becomes immutable and unalterable. It may no longer be
modified in any respect, even if the modification is meant to correct what is
perceived to be an erroneous conclusion of fact or law, and regardless of
whether the modification is attempted to be made by the court rendering
it or by the highest court of the land. Just as the losing party has the right to
file an appeal within the prescribed period, the winning party also has the
correlative right to enjoy the finality of the resolution of his case. The
doctrine of finality of judgment is grounded on fundamental considerations
of public policy and sound practice, and that, at the risk of occasional
errors, the judgments or orders of courts must become final at some
definite time fixed by law; otherwise, there would be no end to litigations,
thus setting to naught the main role of courts of justice which is to assist in
the enforcement of the rule of law and the maintenance of peace and
order by settling justiciable controversies with finality.[31]
To stress, the October 27, 1999 Decision of the RTC has already attained finality. Such
definitive judgment is no longer subject to change, revision, amendment or reversal. Upon
finality of the judgment, the Court loses its jurisdiction to amend, modify or alter the
same. Except for correction of clerical errors or the making of nunc pro tunc entries which
cause no prejudice to any party, or where the judgment is void, the judgment can neither be
amended nor altered after it has become final and executory. This is the principle of
immutability of final judgment.[32]
The amount of attorney’s fess is ascertainable from the RTC Decision. Thus,
compensation is possible.
Jesus contends that offsetting cannot be made because the October 27, 1999 judgment of the
RTC failed to specify the amount of attorneys fees. He maintains that for offsetting to apply,
the two debts must be liquidated or ascertainable. However, the trial court merely awarded to
Vicente attorneys fees based on quantum meruit without specifying the exact amount thereof.
We do not agree.
For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of
the Civil Code, quoted below, must be present.
 ARTICLE 1278. Compensation shall take place when two persons,
in their own right, are creditors and debtors of each other.
ARTICLE 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time
to the debtor.
A debt is liquidated when its existence and amount are determined. It is not
necessary that it be admitted by the debtor. Nor is it necessary that the credit appear in a final
judgment in order that it can be considered as liquidated; it is enough that its exact amount is
known. And a debt is considered liquidated, not only when it is expressed already in definite
figures which do not require verification, but also when the determination of the exact amount
depends only on a simple arithmetical operation x x x.[33]
In Lao v. Special Plans, Inc.,[34] we ruled that:
When the defendant, who has an unliquidated claim, sets it up by way of
counterclaim, and a judgment is rendered liquidating such claim, it can be
compensated against the plaintiffs claim from the moment it is liquidated
by judgment. We have restated this in Solinap v. Hon. Del Rosario[35] where
we held that compensation takes place only if both obligations are
liquidated.
263
In the instant case, both obligations are liquidated. Vicente has the obligation to pay
his debt due to Jesus in the amount of P300,000.00 with interest at the rate of 12% per annum
counted from the filing of the instant complaint on August 17, 1993 until fully paid. Jesus, on
the other hand, has the obligation to pay attorneys fees which the RTC had already
determined to be equivalent to whatever amount recoverable from Vicente. The said
attorneys fees were awarded by the RTC on the counterclaim of Vicente on the basis
of quantum meruit for the legal services he previously rendered to Jesus.
In its Decision, the trial court elucidated on how Vicente had established his entitlement for
attorneys fees based on his counterclaim in this manner:
Defendant, on his counterclaim, has established the existence of a lawyer-client
relationship between him and plaintiff and this was admitted by the latter.
Defendant had represented plaintiff in several court cases which include
the Laguna property case, the various cases filed by Atty. Romulo Reyes
against plaintiff such as the falsification and libel cases and the disbarment
case filed by plaintiff against Atty. Romulo Reyes before the Commission on
Bar Integration. Aside from these cases, plaintiff had made defendant his
consultant on almost everything that involved legal opinions.
More particularly in the Calamba, Laguna land case alone, plaintiff had
agreed to pay defendant a contingent fee of 25% of the value of the
property for the latters legal services as embodied in the Amended
Complaint signed and verified by plaintiff (Exh. 5). Aside from this
contingent fee, defendant had likewise told plaintiff that his usual
acceptance fee for a case like the Laguna land case is P200,000.00 and his
appearance fee at that time was x x x P2,000.00 per appearance but still
plaintiff paid nothing.
The lawyer-client relationship between the parties was severed because of the
instant case. The court is however fully aware of defendants stature in life a
UP law graduate, Bar topnotcher in 1957 bar examination, former Senior
Provincial Board Member, Vice-Governor and Governor of the province of
Pangasinan, later as Assemblyman of the Batasang Pambansa and is
considered a prominent trial lawyer since 1958. For all his legal services
rendered to plaintiff, defendant deserves to be compensated at least on a
quantum meruit basis.[36]
The above discussion in the RTC Decision was then immediately followed by the dispositive
portion, viz:
 WHEREFORE, premises above-considered, JUDGMENT is hereby rendered
ordering defendant Vicente D. Millora to pay plaintiff Jesus M.
Montemayor the sum of P300.000.00 with interest at the rate of 12% per
annum counted from the filing of the instant complaint on August 17, 1993
until fully paid and whatever amount recoverable from defendant shall be
set off by an equivalent amount awarded by the court on the
counterclaim representing attorneys fees of defendant on the basis of
quantum meruit for legal services previously rendered to plaintiff.
No pronouncement as to attorneys fees and costs of suit.
SO ORDERED.[37] (Emphasis supplied.)
It is therefore clear that in the execution of the RTC Decision, there are two parts to be
executed. The first part is the computation of the amount due to Jesus. This is achieved by
doing a simple arithmetical operation at the time of execution. The principal amount
of P300,000.00 is to be multiplied by the interest rate of 12%. The product is then multiplied by
the number of years that had lapsed from the filing of the complaint on August 17, 1993 up to
the date when the judgment is to be executed. The result thereof plus the principal
of P300,000.00 is the total amount that Vicente must pay Jesus.
The second part is the payment of attorneys fees to Vicente. This is achieved by
following the clear wordings of the above fallo of the RTC Decision which provides that Vicente
is entitled to attorneys fees which is equivalent to whatever amount recoverable from him by
Jesus. Therefore, whatever amount due to Jesus as payment of Vicentes debt is equivalent to
the amount awarded to the latter as his attorneys fees. Legal compensation or set-off then
takes place between Jesus and Vicente and both parties are on even terms such that there is
actually nothing left to execute and satisfy in favor of either party.
In fact, the RTC, in addressing Jesus Motion for Reconsideration and Clarification dated July 12,
2000 had already succinctly explained this matter in its Order dated September 6, 2002, viz:
Notwithstanding the tenor of the said portion of the judgment,
still, there is nothing to execute and satisfy in favor of either of the herein
protagonists because the said decision also states clearly that whatever
amount recoverable from defendant shall be SET-OFF by an equivalent
amount awarded by the Court on the counterclaim representing
attorneys fees of defendant on the basis of quantum meruit for legal
264
services previously rendered to plaintiff x x x.
Said dispositive portion of the decision is free from any
ambiguity. It unequivocably ordered that any amount due in favor of
plaintiff and against defendant is set off by an equivalent amount awarded
to defendant in the form of counterclaims representing attorneys fees for
past legal services he rendered to plaintiff.
It will be an exercise in futility and a waste of so precious time
and unnecessary effort to enforce satisfaction of the plaintiffs claims
against defendant, and vice versa because there is in fact a setting off of
each others claims and liabilities under the said judgment which has long
become final.[38] (Emphasis in the original.)
A reading of the dispositive portion of the RTC Decision would clearly show that no ambiguity
of any kind exists. Furthermore, if indeed there is any ambiguity in the dispositive portion as
claimed by Jesus, the RTC had already clarified it through its Order dated September 6, 2002
by categorically stating that the attorneys fees awarded in the counterclaim of Vicente is of an
amount equivalent to whatever amount recoverable from him by Jesus. This clarification is not
an amendment, modification, correction or alteration to an already final decision as it is
conceded that such cannot be done anymore. What the RTC simply did was to state in
categorical terms what it obviously meant in its decision. Suffice it to say that the dispositive
portion of the decision is clear and unequivocal such that a reading of it can lead to no other
conclusion, that is, any amount due in favor of Jesus and against Vicente is set off by an
equivalent amount in the form of Vicentes attorneys fees for past legal services he rendered
for Jesus.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The assailed Decision of
the Court of Appeals dated May 19, 2005 in CA-G.R. SP No. 81075 which dismissed the petition
for certiorari seeking to annul and set aside the Orders dated September 6, 2002 and October
2, 2003 of the Regional Trial Court of Quezon City, Branch 98 in Civil Case No. Q-93-17255, is
hereby AFFIRMED.
SO ORDERED.
 in favor of petitioner Iloilo Traders Finance, Inc. (ITF). When the Sorianos defaulted on
the notes, ITF, on 23 June 1981, moved for the extrajudicial foreclosure of the
MARIANO C. DEL CASTILLO mortgages. Evidently, in order to forestall the foreclosure, respondent spouses filed,
on 27 August 1981, a complaint for Declaration of a Void Contract, Injunction and
Associate Justice Damages. On 06 January 1982, the trial court issued a writ of preliminary injunction
to suspend the public sale of the hypothecated property. On 16 August 1983, the
parties entered into an Amicable Settlement and, after affixing their signatures
thereon, submitted the agreement before the court. Instead of approving forthwith
the amicable settlement, the trial court required the parties to first give some
clarifications on a number of items. The order read in part -

Paragraph 4 of the compromise agreement dated August 16, 1983 states: That the
plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may
have against herein defendants.

Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether
the words herein defendants include defendants Bernadette Castellano and the
provincial sheriff of Iloilo.

If the plaintiffs desire to dismiss the complaint against defendants Castellano and the
provincial sheriff of Iloilo, they should state it categorically and in writing.

Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo
Traders Finance, Inc., if the writ of preliminary injunction issued on January 6, 1982
should be lifted as to all three defendants.

The clarification herein sought after by the Court shall be made in writing and signed
by the parties concerned, assisted by their respective attorneys.
ART 1291
This Order shall be complied with within a period of ten (10) days from notice
65. G.R. No. 149683. June 16, 2003 hereof.[1]

ILOILO TRADERS FINANCE INC., petitioner, vs. HEIRS OF OSCAR SORIANO JR., and The parties failed to comply with the court order. Resultantly, the trial court
MARTA L. SORIANO, respondents. disapproved the amicable settlement and set the case for pre-trial. Nothing much
could be gleaned from the records about what might have transpired next not until
DECISION seven years later when the Soriano couple filed a motion to submit anew the
amicable settlement. The motion was opposed by ITF on the ground that the amount
expressed in the settlement would no longer be accurate considering the lapse of
VITUG, J.:
seven years, implying in a way that it could be amendable thereto if the computation
were to be revised. The trial court denied the Soriano motion. Significantly, while the
On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and
265

order of denial was made on the thesis that the debtor spouses, without the consent
Marta Soriano executed two promissory notes, secured by real property mortgages,
 of ITF, could not unilaterally resurrect the amicable settlement, the trial court,
nevertheless, made the following observations -
x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF to
agree and abide by the provisions thereof, as evidenced by the signatures thereto of
its President and counsels, cannot be ignored. That intention pervades to the present
time since the disapproval by the court pertains only to a technicality which in no way
intruded into the substance of the agreement reached by the parties. Such being the
case, the Amicable Settlement had novated the original agreement of that parties as
embodied in the promissory note. The rights and obligations of the parties, therefore,
at this time should be based on the provisions of the amicable settlement, these
should pertain to the principal amount as of that date which the parties pegged at
P431,200.00 and the legal rate of interest thereon.
The foregoing should however be a good issue in another forum, not in the present
case.[2]
Taking cue from the court order, the Sorianos withdrew their complaint and, on
16 October 1991, filed a case for novation and specific performance, docketed Civil
Case No. 20047, before the Regional Trial Court, Branch 37, of Iloilo City. The case
ultimately concluded with a finding made by the trial court in favor of herein
respondents. On appeal to it, the Court of Appeals affirmed the judgment of the
court a quo.
The parties have submitted that the issue focuses on whether or not the
amicable settlement entered into between the parties has novated the original
obligation and also, as they would correctly suggest in their argument, on whether
the proposed terms of the amicable settlement were carried out or have been
rendered inefficacious.
The amicable settlement read -
COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their
respective undersigned counsels and to this Honorable Court most respectfully
submit the following Amicable Settlement, thus:
1. That the total of the two (2) accounts of plaintiff to herein defendant as of June 30,
1983 is Two Hundred Ninety Thousand Six Hundred Ninety One Pesos (P290,691.00)
of which amount P10,691.00 shall be paid by plaintiffs to herein defendant at the
time of the signing of this Amicable Settlement;
266
2. That to this amount of P290,691.00 shall be added P151,200.00 by way of interest
for 36 months thus making a total of Four Hundred Thirty One Thousand Two
Hundred Pesos (P431,200.00);
3. That this amount of P431,200.00 shall be paid by plaintiffs to herein defendant in
36 monthly installments as follows, the first installment at P12,005.00 shall be paid
on or before August 16, 1983 and the 2nd to 36th installments at P11,977.00 shall be
paid on the 15th day of each month thereafter until fully paid;
4. That the plaintiffs waive any claims, counterclaims, attorneys fees or damages that
they may have against herein defendants;
5. That should plaintiffs fail to comply with the terms of this Amicable Settlement the
preliminary injunction issued in the case shall be immediately dissolved and the
foreclosure and public auction sale of the properties of the plaintiffs subject of the
mortgage to defendant shall immediately take place and the corresponding writ of
execution shall issue from this Court;
6. That this Amicable Settlement is submitted as the basis for decision in this case.
WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing
Amicable Settlement be approved.[3]
Novation may either be extinctiv or modificatory, much being dependent on the
nature of the change and the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate;[4] in cases where it is
implied, the acts of the parties must clearly demonstrate their intent to dissolve the
old obligation as the moving consideration for the emergence of the new
one.[5] Implied novation necessitates that the incompatibility between the old and
new obligation be total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is whether they can stand
together, each one having an independent existence; if they cannot and are
irreconcilable, the subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing
an existing obligation and, second, creating a new one in its stead. This kind of
novation presupposes a confluence of four essential requisites: (1) a previous valid
obligation, (2) an agreement of all parties concerned to a new contract, (3) the
extinguishment of the old obligation, and (4) the birth of a valid new
obligation.[6] Novation is merely modificatory where the change brought about by any
subsequent agreement is merely incidental to the main obligation (e.g., a change in
interest rates[7] or an extension of time to pay[8]); in this instance, the new agreement
 will not have the effect of extinguishing the first but would merely supplement it or
supplant some but not all of its provisions.
An amicable settlement or a compromise is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an end to one already
commenced.[9] It may be judicial or extrajudicial; the absence of court approval
notwithstanding,[10] the agreement can become the source of rights and obligations
of the parties.
It would appear that the arrangement reached by the Soriano spouses and ITF
would have the original obligation of respondent spouses on two promissory notes
for the sums of P150,000.00 and P80,000.00, both secured by real estate mortgages,
impliedly modified. The amicable settlement contained modificatory changes. Thus,
(1) it increased the indebtedness of the Soriano spouses, merely due to accruing
interest, from P290,691.00 to P431,200.00; (2) it extended the period of payment and
provided for new terms of payment; and (3) it provided for a waiver of claims,
counterclaims, attorneys fees or damages that the debtor-spouses might have against
their creditor, but the settlement neither cancelled, nor materially altered the usual
clauses in, the real estate mortgages, e.g., the foreclosure of the mortgaged property
in case of default.
Verily, the parties entered into the agreement basically to put an end to Civil
Case No. 14007 then pending before the Regional Trial Court. [11] Concededly, the
provisions of the settlement were beneficial to the respondent couple. The
compromise extended the terms of payment and implicitly deferred the extrajudicial
foreclosure of the mortgaged property. It was well to the interest of respondent
spouses to ensure its judicial approval; instead, they went to ignore the order of the
trial court and virtually failed to make any further appearance in court. This conduct
on the part of respondent spouses gave petitioner the correct impression that the
Sorianos did not intend to be bound by the compromise settlement, and its non-
materialization negated the very purpose for which it was executed.
Given the circumstances, the provisions of Article 2041 of the Civil Code come in
point -
If one of the parties fails or refuses to abide by the compromise, the other party may
either enforce the compromise or regard it as rescinded and insist upon his original
demand.
[12]
As so well put in Diongzon vs. Court of Appeals, a supposed new agreement is
deemed not to have taken effect where a debtor never complied with his
267
undertaking. In such a case, the other party is given the option to enforce the
provisions of the amicable settlement or to rescind it[13] and may insist upon the
original demand without the necessity for a prior judicial declaration of rescission.[14]
WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910,
affirming that of the court a quo, is REVERSED and SET ASIDE, and another is entered
dismissing the complaint in Civil Case No. 20047 before the Regional Trial Court,
Branch 37, of Iloilo City. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
66. G.R. No. 118585 September 14, 1995
AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN
YEE, and SPS. MARCIAL SEE and LILIAN TAN, petitioners,
vs.
HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY, and THE
SHERIFF OF MANILA, respondents.
FRANCISCO, J.:
In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial
court's judgment upholding the validity of the extra-judicial foreclosure of the real
estate property of petitioners — spouses Marcial See and Lilian Tan, located at Paco
District, Manila covered by TCT 105233, by private respondent Metropolitan Bank
and Trust Company (Metrobank).1 Petitioners' motion for reconsideration was
denied; hence, this petition for review on certiorari raising the following assignments
of errors:
FIRST: The Honorable Court of Appeals erred in holding that the consolidation of
the three (3) loans granted separately to three entities into a single loan of P1.0
Million was a mere restructuring and did not effect a novation of the loan as to
extinguish the accessory mortgage contracts.
SECOND: The Honorable Court of Appeals erred in not holding that the
consolidated loan of P1.0 Million was not accompanied by the execution of a
new REM, as was done by the Bank in the earlier three (3) loans, and hence,
was, to all legal intents/purposes, unsecured.
 THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the
extra-judicial foreclosure of the admittedly unsecured loan of P970,000.00 is a
mere error that does not invalidated said foreclosure, contrary to the
pronouncement in C & C Commercial Corp. vs. PNB, 175 SCRA 1.
FOURTH: The Honorable Court of Appeals erred in not declaring as null and void
the extra-judicial foreclosure undertaken by Metrobank on the property of Sps.
Marcial See and Lilian Tan.2
The facts as found by public respondent Court of Appeals are as follows:
It is not disputed that Ylang-Ylang Merchandising Company, a partnership
between Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of
P250,000.00 from the Metropolitan Bank and Trust Company, and to secure
payment of the same, spouses Marcial See and Lilian Tan constituted a real
estate mortgage in favor of said bank over their property in the District of Paco,
Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The
mortgage was annotated at the back of the title.
Subsequently, after the partnership had changed its name to Ajax Marketing
Company albeit without changing its composition, it obtained a loan in the sum
of P150,000.00 from Metropolitan Bank and Trust Company. Again to secure the
loan, spouses Marcial See and Lilian Tan executed in favor of said bank a second
real estate mortgage over the same property. As in the first instance, the
mortgage was duly annotated at the back of TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing Company) was
converted into a corporation denominated as Ajax Marketing and Development
Corporation, with the original partners (Angelita Rodriguez and Antonio Tan) as
incorporators and three (3) additional incorporators, namely, Elisa Tan, the wife
of Antonio Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and
Development Corporation obtained from Metropolitan Bank and Trust Company
a loan of P600,000.00, the payment of which was secured by another real estate
mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank
over the same realty located in the District of Paco, Manila. Again, the third real
estate mortgage was annotated at the back of TCT No. 105233.
In December 1980, the three (3) loans with an aggregate amount of
P1,000,000.00 were re-structured and consolidated into one (1) loan and Ajax
Marketing and Development Corporation, represented by Antonio Tan as Board
Chairman/President and in his personal capacity as solidary co-obligor, and Elisa
268
Tan as Vice-President/Treasurer and in her personal capacity as solidary co-
obligor, executed a Promissory Note (PN) No. BDS-3605.3
In their interrelated first and second assignment of errors, petitioners argue that a
novation occurred when their three (3) loans, which are all secured by the same real
estate property covered by TCT No. 105233 were consolidated into a single loan of P1
million under Promissory Note No. BDS-3605, thereby extinguishing their monetary
obligations and releasing the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. Novation is the
extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. 4 Novation, unlike other modes
of extinction of obligations, is a juridical act with a dual function, namely, it
extinguishes an obligation and creates a new one in lieu of the old. It can be
objective, subjective, or mixed. Objective novation occurs when there is a change of
the object or principal conditions of an existing obligation while subjective novation
occurs when there is a change of either the person of the debtor, or of the creditor in
an existing obligation.5 When the change of the object or principal conditions of an
obligation occurs at the same time with the change of either in the person of the
debtor or creditor a mixed novation occurs. 6
The well settled rule is that novation is never presumed. 7 Novation will not be
allowed unless it is clearly shown by express agreement, or by acts of equal import.
Thus, to effect an objective novation it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be
on every point incompatible with the new one. 8 In the same vein, to effect a
subjective novation by a change in the person of the debtor it is necessary that the
old debtor be released expressly from the obligation, and the third person or new
debtor assumes his place in the relation.9 There is no novation without such release
as the third person who has assumed the debtor's obligation becomes merely a co-
debtor or surety.10
The attendant facts herein do not make a case of novation. There is nothing in the
records to show the unequivocal intent of the parties to novate the three loan
agreements through the execution of PN No. BDS-3065. The provisions of PN No.
BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the
three loan agreements secured by the real estate mortgages over TCT No. 105233.
On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and "9.
COLLATERAL. This is wholly/partly secured by: (x) "real estate", 11which strongly
negate petitioners' asseveration that the consolidation of the three loans effected the
 discharge of the mortgaged real estate property. Otherwise, there would be no sense
placing these material provisions. Moreover; the real estate mortgages contained this
common provision, to wit:
That for and in consideration of credit accommodations obtained from the
MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR
and/or AJAX MKTG. DEV. CORP./AJAX MARKETING COMPANY/YLANG-YLANG
MERCHANDISING COMPANY detailed as follows:
Nature Date Granted Due Date Amount or Line
Loans and/or P 600,000.00
Advances in 150,000.00
current account 250,000.00
and to secure the payment of the same and those that may hereafter be obtained
including the renewals or extension thereof.
xxx xxx xxx
the principal of all of which is hereby fixed at (P600,000.00/ P150,000.00/
P250,000.00) . . .as well as those that the MORTGAGEE may have previously
extended or may later extend to the MORTGAGOR, including interest and
expenses or any other obligation owing to the MORTGAGEE, whether direct or
indirect, principal or secondary, as appears in the accounts, books and records
of the MORTGAGEE, the MORTGAGOR hereby transfer and convey by way of
mortgage unto the MORTGAGEE, its successors or assigns, the parcels of land
which are described in the list inserted on page three of this document and/or
appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the
MORTGAGOR declares that he/it is the absolute owner free from all liens and
encumbrances. However, if the MORTGAGOR shall pay to the MORTGAGEE, its
successors or assigns, the obligation secured by this mortgage when due,
together with interest, and shall keep and perform all and singular the
covenants and agreements herein contained for the MORTGAGOR to keep and
perform, then the mortgage shall be void; otherwise, it shall remain in full force
and effect.12
269
The foregoing shows that petitioners agreed to apply the real estate property to
secure obligations that they may thereafter obtain including their renewals or
extensions with the principals fixed at P600,000.00, P150,000.00, and P250,000.00
which when added have an aggregate sum of P1.0 million. PN No. BDS-3605 merely
restructured and renewed the three previous loans to expediently make the loans
current. There was no change in the object of the prior obligations. The consolidation
of the three loans, contrary to petitioners' contention, did not release the mortgaged
real estate property from any liability because the mortgage
annotations at the back of TCT No. 105233, in fact, all remained uncancelled,
thus indicating the continuing subsistence of the real estate mortgages.
Neither can it be validly contended that there was a change, or substitution in the
persons of either the creditor (Metrobank) or more specifically the debtors
(petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact of
petitioners' conversion from a partnership to a corporation, without sufficient
evidence, either testimonial or documentary, that they were expressly released from
their obligations, did not make petitioner AJAX, with its new corporate personality, a
third person or new debtor within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety. Without express release of the
debtor from the obligation, any third party who may thereafter assume the obligation
shall be considered merely as co-debtor or surety. Novation arising from a purported
change in the person of the debtor must be clear and express because, to repeat, it is
never presumed. Clearly then, from the aforediscussed points, neither objective nor
subjective novation occurred here.
Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is
invalid as it included two unsecured loans: one, the consolidated loan of P1.0 million
under PN BDS No. 3605, and two, the P970,000.00 loan under PN BDS No. 3583
subsequently extended by Metrobank.
An action to foreclose a mortgage is usually limited to the amount mentioned in the
mortgage, but where on the four corners of the mortgage contracts, as in this case,
the intent of the contracting parties is manifest that the mortgaged property shall
also answer for future loans or advancements then the same is not improper as it is
valid and binding between the parties. 13 For merely consolidating and expediently
making current the three previous loans, the loan of P1.0 million under PN BDS No.
3605, secured by the real estate property, was correctly included in the foreclosure's
bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO.
3583, however, was found to be improper by public respondent which ruling we shall
not disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of
PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As
 correctly pointed out by the Court of Appeals, the proceeds of the auction sale should
be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests,
expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to
return the surplus in the selling price to the mortgagors.14

Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine

National Bank15 where this Court enjoined the foreclosure proceedings for including
unsecured obligations. Petitioners' reliance on the C & C Commercial
Corp. v. Philippine National Bank case is misplaced. In that case, the foreclosure sale
included previously incurred unsecured obligations in favor of PNB which were not in
the contemplation of the mortgage contract, whereas in the instant case, the
mortgages were one in providing that the mortgaged real estate property shall also
secure future advancements or loans, as well as renewals or extensions of the same.

Prescinding from the above discussions, the fourth assignment of error obviously
needs no further discussion.
67. G.R. No. 147950. December 11, 2003
WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

Narvasa, C.J., Regalado, Puno and Mendoza, JJ., concur.

CALIFORNIA BUS LINES, INC., petitioner, vs.
STATE INVESTMENT HOUSE, INC., respondent.

DECISION
QUISUMBING, J.:

In this petition for review, California Bus Lines, Inc., assails the decision, [1] dated
April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667, reversing the
judgment[2], dated June 3, 1993, of the Regional Trial Court of Manila, Branch 13, in
Civil Case No. 84-28505 entitled State Investment House, Inc. v. California Bus Lines,
Inc., for collection of a sum of money. The Court of Appeals held petitioner California
Bus Lines, Inc., liable for the value of five promissory notes assigned to respondent
State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc. (hereafter SIHI), a
domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend
a credit line to Delta for P25,000,000.00 in three separate credit agreements dated
270

May 11, June 19, and August 22, 1979.[3] On several occasions, Delta availed of the
 credit line by discounting with SIHI some of its receivables, which evidence actual
sales of Deltas vehicles. Delta eventually became indebted to SIHI to the tune
of P24,010,269.32.[4]
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc.
(hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and
two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment
of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas,
executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25,
1980.[5] In each promissory note, CBLI promised to pay Delta or order, P2,314,000
payable in 60 monthly installments starting August 31, 1980, with interest at 14% per
annum. CBLI further promised to pay the holder of the said notes 25% of the amount
due on the same as attorneys fees and expenses of collection, whether actually
incurred or not, in case of judicial proceedings to enforce collection. In addition to the
notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring
agreement with Delta on October 7, 1981, to cover its overdue obligations under the
promissory notes.[6] The restructuring agreement provided for a new schedule of
payments of CBLIs past due installments, extending the period to pay, and stipulating
daily remittance instead of the previously agreed monthly remittance of payments. In
case of default, Delta would have the authority to take over the management and
operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted
and/or updated CBLIs past due account. CBLI and Delta also increased the interest
rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of
Receivables[7] in favor of SIHI as security for the payment of its obligations to SIHI per
the credit agreements. In view of Deltas failure to pay, the loan agreements were
restructured under a Memorandum of Agreement dated March 31, 1982.[8] Delta
obligated itself to pay a fixed monthly amortization of P400,000 to SIHI and to
discount with SIHI P8,000,000 worth of receivables with the understanding that SIHI
shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted
Delta to threaten CBLI with the enforcement of the management takeover clause. To
pre-empt the take-over, CBLI filed on May 3, 1982, a complaint for injunction[9],
docketed as Civil Case No. 0023-P, with the Court of First Instance of Rizal, Pasay City,
(now Regional Trial Court of Pasay City). In due time, Delta filed its amended answer
with applications for the issuance of a writ of preliminary mandatory injunction to
enforce the management takeover clause and a writ of preliminary attachment over
the buses it sold to CBLI.[10] On December 27, 1982,[11] the trial court granted Deltas
271
prayer for issuance of a writ of preliminary mandatory injunction and preliminary
attachment on account of the fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta
executed a Deed of Sale[12] assigning to SIHI five (5) of the sixteen (16) promissory
notes[13] from California Bus Lines, Inc. At the time of assignment, these five
promissory notes, identified and numbered as 80-53, 80-54, 80-55, 80-56, and 80-57,
had a total value of P16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,[14] to CBLI
requiring CBLI to remit the payments due on the five promissory notes directly to
it. CBLI replied informing SIHI of Civil Case No. 0023-P and of the fact that Delta had
taken over its management and operations.[15]
As regards Deltas remaining obligation to SIHI, Delta offered its available bus
units, valued at P27,067,162.22, as payment in kind.[16] On December 29, 1983, SIHI
accepted Deltas offer, and Delta transferred the ownership of its available buses to
SIHI, which in turn acknowledged full payment of Deltas remaining
obligation.[17] When SIHI was unable to take possession of the buses, SIHI filed a
petition for recovery of possession with prayer for issuance of a writ
of replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-
23019. The Manila RTC issued a writ of replevin and SIHI was able to take possession
of 17 bus units belonging to Delta. SIHI applied the proceeds from the sale of the said
17 buses amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas
obligation to SIHI was thus reduced to P20,061,898.97. On December 5, 1984, Branch
6 of the RTC of Manila rendered judgment in Civil Case No. 84-23019 ordering Delta
to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24,
1984,[18] in Civil Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI
agreed that Delta would exercise its right to extrajudicially foreclose on the chattel
mortgages over the 35 bus units. The RTC of Pasay approved this compromise
agreement the following day, July 25, 1984.[19] Following this, CBLI vehemently
refused to pay SIHI the value of the five promissory notes, contending that the
compromise agreement was in full settlement of all its obligations to Delta including
its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-
28505, against CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the
five (5) promissory notes with interest at 14% p.a. SIHI also prayed for the issuance of
a writ of preliminary attachment against the properties of CBLI. [20]
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of
chattel mortgages pursuant to its compromise agreement with CBLI. On January 2,
1985, Delta filed in the RTC of Pasay a motion for execution of the judgment based on
 the compromise agreement.[21] The RTC of Pasay granted this motion the following
day.[22]
In view of Deltas petition and motion for execution per the judgment of
compromise, the RTC of Manila granted in Civil Case No. 84-28505 SIHIs application
for preliminary attachment on January 4, 1985.[23]Consequently, SIHI was able to
attach and physically take possession of thirty-two (32) buses belonging to
CBLI.[24] However, acting on CBLIs motion to quash the writ of preliminary
attachment, the same court resolved on January 15, 1986,[25] to discharge the writ of
preliminary attachment. SIHI assailed the discharge of the writ before the
Intermediate Appellate Court (now Court of Appeals) in a petition for certiorari and
prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals
granted SIHIs petition in CA-GR SP No. 08378 and ruled that the writ of preliminary
attachment issued by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should
stay.[26] The decision of the Court of Appeals attained finality on August 22, 1987.[27]
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the
sheriff of Pasay City conducted a public auction and issued a certificate of sheriffs sale
to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses
for P3,920,000.[28] On April 7, 1987, the sheriff of Manila, by virtue of the writ of
execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in Civil Case
No. 84-23019, sold the same 14 buses at public auction in partial satisfaction of the
judgment SIHI obtained against Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the
RTC of Manila in view of the retirement of the presiding judge of Branch
34. Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which had
previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to
the January 4, 1985, Order of the RTC of Manila.[29] SIHIs motion was granted
on December 16, 1987.[30]On November 29, 1988, however, SIHI filed an urgent ex-
parte motion to amend this order claiming that through inadvertence and excusable
negligence of its new counsel, it made a mistake in the list of buses in the Motion to
Sell Attached Properties it had earlier filed.[31] SIHI explained that 14 of the buses
listed had already been sold to Delta on April 2, 1987, by virtue of the January 3, 1985
Order of the RTC of Pasay, and that two of the buses listed had been released to third
party, claimant Pilipinas Bank, by Order dated September 16, 1987[32] of Branch 13 of
the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3,
1989,[33] Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow the sale
of the 16 buses listed in its motion to amend. The trial court ruled that the best
interest of the parties might be better served by denying further sales of the buses
and to go direct to the trial of the case on the merits.[34]
272
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993,
discharging CBLI from liability on the five promissory notes. The trial court likewise
favorably ruled on CBLIs compulsory counterclaim. The trial court directed SIHI to
return the 16 buses or to pay CBLI P4,000,000 representing the value of the seized
buses, with interest at 12% p.a. to begin from January 11, 1985, the date SIHI seized
the buses, until payment is made. In ruling against SIHI, the trial court held that the
restructuring agreement dated October 7, 1981, between Delta and CBLI novated the
five promissory notes; hence, at the time Delta assigned the five promissory notes to
SIHI, the notes were already merged in the restructuring agreement and cannot be
enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as
CA-G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV
No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be
meritorious, We find defendant-appellee CBLI liable for the value of the five (5)
promissory notes subject of the complaint a quo less the proceeds from the attached
sixteen (16) buses. The award of attorneys fees and costs is eliminated. The appealed
decision is hereby REVERSED. No costs.
SO ORDERED.[35]
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE
RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE PETITIONER
DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE FIVE
PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE
AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY
CASE DID NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING
VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING THE
RESPONDENT OF MALEFACTIONS IN PRESERVING AND ASSERTING ITS
RIGHTS THEREUNDER.[36]
Essentially, the issues are (1) whether the Restructuring Agreement dated
October 7, 1981, between petitioner CBLI and Delta Motors, Corp. novated the five
promissory notes Delta Motors, Corp. assigned to respondent SIHI, and (2) whether
the compromise agreement in Civil Case No. 0023-P superseded and/or discharged
 the subject five promissory notes. The issues being interrelated, they shall be jointly
discussed.
CBLI first contends that the Restructuring Agreement did not merely change the
incidental elements of the obligation under all sixteen (16) promissory notes, but it
also increased the obligations of CBLI with the addition of new obligations that were
incompatible with the old obligations in the said notes. [37] CBLI adds that even if the
restructuring agreement did not totally extinguish the obligations under the sixteen
(16) promissory notes, the July 24, 1984, compromise agreement executed in Civil
Case No. 0023-P did.[38] CBLI cites paragraph 5 of the compromise agreement which
states that the agreement between it and CBLI was in full and final settlement,
adjudication and termination of all their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case. According to CBLI, inasmuch as the five
promissory notes were subject matters of the Civil Case No. 0023-P, the decision
approving the compromise agreement operated as res judicata in the present case.[39]
Novation has been defined as the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which terminates the
first, either by changing the object or principal conditions, or by substituting the
person of the debtor, or subrogating a third person in the rights of the creditor. [40]
Novation, in its broad concept, may either be extinctive or modificatory.[41] It is
extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. [42] An
extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). [43] Novation has two
functions: one to extinguish an existing obligation, the other to substitute a new one
in its place.[44] For novation to take place, four essential requisites have to be met,
namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a
new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid
new obligation.[45]
Novation is never presumed,[46] and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that are
too clear and unequivocal to be mistaken.[47]
The extinguishment of the old obligation by the new one is a necessary element
of novation which may be effected either expressly or impliedly.[48] The term
"expressly" means that the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. [49] Upon the other
hand, no specific form is required for an implied novation, and all that is prescribed
by law would be an incompatibility between the two contracts. [50] While there is
273
really no hard and fast rule to determine what might constitute to be a sufficient
change that can bring about novation, the touchstone for contrariety, however,
would be an irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which
substitutes the same. The first is when novation has been explicitly stated and
declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether the two
obligations can stand together, each one having its independent existence.[51] If they
cannot, they are incompatible and the latter obligation novates the
first.[52] Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.[53]
The necessity to prove the foregoing by clear and convincing evidence is
accentuated where the obligation of the debtor invoking the defense of novation has
already matured.[54]
With respect to obligations to pay a sum of money, this Court has consistently
applied the well-settled rule that the obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment, and adds other
obligations not incompatible with the old ones, or where the new contract merely
supplements the old one.[55]
In Inchausti & Co. v. Yulo[56] this Court held 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. In Tible v. Aquino[57] and Pascual v. Lacsamana[58] this Court declared that it is
well settled that a mere extension of payment and the addition of another obligation
not incompatible with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The
restructuring agreement between Delta and CBLI executed on October 7, 1981,
shows that the parties did not expressly stipulate that the restructuring
agreement novated the promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would sustain a finding
of novation by implication.[59] However, our review of its terms yields no
incompatibility between the promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983,
contained the following common stipulations:
 1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining
balance due and payable at the option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker
(its president, Mr. Dionisio O. Llamas, Jr) were solidarily liable of
attorneys fees and expenses of 25% of the amount due in addition
to the costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following
promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due
installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties
hereby agree and covenant as follows:
274
1. That the past due installment referred to above plus the current and/or falling due
amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57
shall be paid by CBL and/or LLAMAS in accordance with the following schedule of
payments:
Daily payments of P11,000.00 from October 1 to December 31, 1981
Daily payments of P12,000.00 from January 1, 1982 to March 31, 1982
Daily payments of P13,000.00 from April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash
payments due to DMC in accordance with the schedule in paragraph 1. DMC may
send a collector to receive the amount due at CBLs premises.All delayed remittances
shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance
with paragraph of the restructured past due installments above mentioned and PN
Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the
operations of CBL pertaining to the financial and field operations and service and
maintenance matters of M.A.N. units. Records needed by the DMC representatives in
monitoring said operations shall be made available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to
57, CBL or LLAMAS shall remit in lump sum whatever balance is left after deducting all
payments made from what is due and payable to DMC in accordance with paragraph
1 of this agreement and PN Nos. 16 to 26 and 52 to 57.
 6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon
and the total accumulated unremitted amount has reached and (sic) equivalent of
Sixty (60) days, DMC and Silverio shall exercise any or all of the following options:
(a) The whole sum remaining then unpaid plus 2% penalty per month and 16%
interest per annum on total past due installments will immediately
become due and payable. In the event of judicial proceedings to enforce
collection, CBL and LLAMAS will pay to DMC an additional sum equivalent
to 25% of the amount due for attorneys fees and expenses of collection,
whether actually incurred or not, in addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel Mortgage
over various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42,
80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time that CBL
and/or LLAMAS have remitted and/or updated their past due account
with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the
M.A.N. Diesel Buses and shall make available to CBL at the price prevailing at the time
of purchase, an inventory of spare parts consisting of at least ninety (90%) percent of
the needs of CBL based on a moving 6-month requirement to be prepared and
submitted by CBL, and acceptable to DMC, within the first week of each month.
8. Except as otherwise modified in this Agreement, the terms and conditions
stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship
between the parties and that the Chattel Mortgage over various M.A.N. Diesel Buses
with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15 as well
as the Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation
until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary
Public Alberto G. Doller and to instruct him not to proceed with the public auction
sale of the shares of stock of CBL subject-matter of the Deed of Pledge of
Shares. LLAMAS, on the other hand, undertakes to move for the immediate dismissal
of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto G. Doller, et al., Court
of First Instance of Pasay, Branch XXIX.[60]
It is clear from the foregoing that the restructuring agreement, instead of
275
containing provisions absolutely incompatible with the obligations of the judgment,
expressly ratifies such obligations in paragraph 8 and contains provisions for
satisfying them. There was no change in the object of the prior obligations. The
restructuring agreement merely provided for a new schedule of payments and
additional security in paragraph 6 (c) giving Delta authority to take over the
management and operations of CBLI in case CBLI fails to pay installments equivalent
to 60 days. Where the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, there can be
no novation.[61] Moreover, this Court has ruled that an agreement subsequently
executed between a seller and a buyer that provided for a different schedule and
manner of payment, to restructure the mode of payments by the buyer so that it
could settle its outstanding obligation in spite of its delinquency in payment, is not
tantamount to novation. [62]
The addition of other obligations likewise did not extinguish the promissory
notes. In Young v. CA[63], this Court ruled that a change in the incidental elements of,
or an addition of such element to, an obligation, unless otherwise expressed by the
parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory
notes.
Neither is there merit in CBLIs argument that the compromise agreement
dated July 24, 1984, in Civil Case No. 0023-P superseded and/or discharged the five
promissory notes. Both Delta and CBLI cannot deny that the five promissory notes
were no longer subject of Civil Case No. 0023-P when they entered into the
compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more
right to compromise the same. Deltas limited authority to collect for SIHI stipulated in
the September 13, 1985, Deed of Sale cannot be construed to include the power to
compromise CBLIs obligations in the said promissory notes. An authority to
compromise, by express provision of Article 1878[64] of the Civil Code, requires a
special power of attorney, which is not present in this case. Incidentally, Deltas
authority to collect in behalf of SIHI was, by express provision of the Continuing Deed
of Assignment,[65] automatically revoked when SIHI opted to collect directly from
CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to
remit the payments directly to SIHI effectively revoked Deltas limited right to collect
in behalf of SIHI. This should have dispelled CBLIs erroneous notion that Delta was
acting in behalf of SIHI, with authority to compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it
covered the rights and obligations only of Delta and CBLI and that it did not refer to,
nor cover the rights of, SIHI as the new creditor of CBLI in the subject promissory
notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:
 5. This COMPROMISE AGREEMENT constitutes the entire understanding by and
between the plaintiffs and the defendants as well as their lawyers, and operates as
full and final settlement, adjudication and termination of all their rights and
obligations as of the date of this agreement, and of the issues in this case. [66]
Even in the absence of such a provision, the compromise agreement still cannot
bind SIHI under the settled rule that a compromise agreement determines the rights
and obligations of only the parties to it.[67]Therefore, we hold that the compromise
agreement covered the rights and obligations only of Delta and CBLI and only with
respect to the eleven (11) other promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise
agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI
informed it of the takeover by Delta of CBLIsmanagement and operations and the
resultant impossibility for CBLI to comply with its obligations in the subject
promissory notes. CBLI also adds that SIHIs failure to intervene in Civil Case No. 0023-
P is proof that Delta continued to act in SIHIs behalf in effecting collection under the
notes.
The contention is untenable. As a result of the assignment, Delta relinquished all
its rights to the subject promissory notes in favor of SIHI. This had the effect of
separating the five promissory notes from the 16 promissory notes subject of Civil
Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied in the five
promissory notes became separate and distinct from CBLIs obligations in eleven (11)
other promissory notes that remained with Delta. Thus, any breach of these
independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Deltas assignment to SIHI of these five promissory
notes had the effect of removing the said notes from Civil Case No. 0023-P, there was
no reason for SIHI to intervene in the said case. SIHI did not have any interest to
protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and
permissive.[68] Notably, Section 2,[69] Rule 12 of the then 1988 Revised Rules of
Procedure uses the word may in defining the right to intervene.The present rules
maintain the permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules
of Civil Procedure, which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property
in the custody of the court or of an officer thereof may, with leave of court, be
allowed to intervene in the action. The court shall consider whether or not the
276
intervention will unduly delay or prejudice the adjudication of the rights of the
original parties, and whether or not the intervenor's rights may be fully protected in a
separate proceeding.[70]
Also, recall that Delta transferred the five promissory notes to SIHI
on September 13, 1983 while Civil Case No. 0023-P was pending. Then as now, the
rule in case of transfer of interest pendente lite is that the action may be continued
by or against the original party unless the court, upon motion, directs the person to
whom the interest is transferred to be substituted in the action or joined with the
original party.[71] The non-inclusion of a necessary party does not prevent the court
from proceeding in the action, and the judgment rendered therein shall be without
prejudice to the rights of such necessary party.[72]
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in
another court does not amount to an estoppel that may prevent SIHI from instituting
a separate and independent action of its own. [73] This is especially so since it does not
appear that a separate proceeding would be inadequate to protect
fully SIHIs rights.[74] Indeed, SIHIs refusal to intervene is precisely because it
considered that its rights would be better protected in a separate and independent
suit.
The judgment on compromise in Civil Case No. 0023-P did not operate
as res judicata to prevent SIHI from prosecuting its claims in the present case. As
previously discussed, the compromise agreement and the judgment on compromise
in Civil Case No. 0023-P covered only Delta and CBLI and their respective rights under
the 11 promissory notes not assigned to SIHI. In contrast, the instant case involves
SIHI and CBLI and the five promissory notes. There being no identity of parties and
subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject
promissory notes is no longer allowed by Article 1484(3)[75] of the Civil Code, which
prohibits a creditor from suing for the deficiency after it has foreclosed on the chattel
mortgages. SIHI, being the successor-in-interest of Delta, is no longer allowed to
recover on the promissory notes given as security for the purchase price of the 35
buses because Delta had already extrajudicially foreclosed on the chattel mortgages
over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial
foreclosure of the chattel mortgages Delta effected cannot prejudice SIHIs rights. As
stated earlier, the assignment of the five notes operated to create a separate and
independent obligation on the part of CBLI to SIHI, distinct and separate
from CBLIs obligations to Delta. And since there was a previous revocation of Deltas
authority to collect for SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn,
 knew of the assignment and Deltas lack of authority to compromise the subject Finally, in the light of the justness of SIHIs claim against CBLI, we cannot
notes, yet it readily agreed to the foreclosure. To sanction CBLIsargument and to sustain CBLIs contention that the Court of Appeals erred in dismissing its
apply Article 1484 (3) to this case would work injustice to SIHI by depriving it of its counterclaim for lost income and the value of the 16 buses over which SIHI obtained
right to collect against CBLI who has not paid its obligations. a writ of preliminary attachment. Where the party who requested the attachment
acted in good faith and without malice, the claim for damages resulting from the
That SIHI later on levied on execution and acquired in the ensuing public sale in
attachment of property cannot be sustained.[82]
Civil Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on April 2,
1987, in Civil Case No. 0023-P, did not operate to render the compromise agreement WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-
and the foreclosure binding on SIHI. At the time SIHI effected the levy on execution to G.R. CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to
satisfy its judgment credit against Delta in Civil Case No. 84-23019, the said buses pay respondent State Investment House, Inc., the value of the five (5) promissory
already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer notes subject of the complaint in Civil Case No. 84-28505 less the proceeds from the
had any interest in the said buses. Under the circumstances, we cannot see sale of the attached sixteen (16) buses. No pronouncement as to costs.
how SIHIs belated acquisition of the foreclosed buses operates to hold the
compromise agreementand consequently Article 1484(3)applicable to SIHI as CBLI SO ORDERED.
contends. CBLIs last contention must, therefore, fail. We hold that the writ of Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
execution to enforce the judgment of compromise in Civil Case No. 0023-P and the
foreclosure sale of April 2, 1987, done pursuant to the said writ of execution affected
only the eleven (11) other promissory notes covered by the compromise agreement
and the judgment on compromise in Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no
basis for SIHIs application for a writ of preliminary attachment. [76] According to CBLI,
it committed no fraud in contracting its obligation under the five promissory notes
because it was financially sound when it issued the said notes on April 25,
1980.[77] CBLI also asserts that at no time did it falsely represent to SIHI that it would
be able to pay its obligations under the five promissory notes. [78] According to CBLI, it
was not guilty of fraudulent concealment, removal, or disposal, or of fraudulent
intent to conceal, remove, or dispose of its properties to defraud its creditors; [79] and
that SIHIs bare allegations on this matter were insufficient for the preliminary
attachment of CBLIs properties.[80]
The question whether the attachment of the sixteen (16) buses was valid and in
accordance with law, however, has already been resolved with finality by the Court of
Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the Court of Appeals
upheld the legality of the writ of preliminary attachment SIHI obtained and ruled that
the trial court judge acted with grave abuse of discretion in discharging the writ of
attachment despite the clear presence of a determined scheme on the part of CBLI to
dispose of its property. Considering that the said Court of Appeals decision has
already attained finality on August 22, 1987, there exists no reason to resolve this
question anew. Reasons of public policy, judicial orderliness, economy and judicial
time and the interests of litigants as well as the peace and order of society, all require
that stability be accorded the solemn and final judgments of courts or tribunals of
competent jurisdiction.[81]
277
 x x x. Soriano is the chairman and president of LISAM, she is also the authorized
signatory in all LISAM’s Transactions with [PNB].

On various dates, LISAM made several availments of the FSL in the total amount of
Twenty Nine Million Six Hundred Forty Five Thousand Nine Hundred Forty Four Pesos
and Fifty Five Centavos (₱ 29,645,944.55), the proceeds of which were credited to its
current account with [PNB]. For each availment, LISAM through [Soriano], executed
52 Trust Receipts (TRs). In addition to the promissory notes, showing its receipt of the
items in trust with the duty to turn-over the proceeds of the sale thereof to [PNB].

Sometime on January 21-22, 1998, [PNB’s] authorized personnel conducted an actual

physical inventory of LISAM’s motor vehicles and motorcycles and found that only
four (4) units covered by the TRs amounting to One Hundred Forty Thousand Eight
ART 1292
Hundred Pesos (₱158,100.00) (sic) remained unsold.

68. G.R. No. 164051 October 3, 2012

Out of the Twenty Nine Million Six Hundred Forty Four Thousand Nine Hundred Forty
Four Pesos and Fifty Five Centavos (₱29,644,944.55) as the outstanding principal
PHILIPPINE NATIONAL BANK, Petitioner, balance [of] the total availments on the line covered by TRs, [LISAM] should have
vs. remitted to [PNB], Twenty Nine Million Four Hundred Eighty Seven Thousand Eight
LILIAN S. SORIANO, Respondent. Hundred Forty Four Pesos and Fifty Five Centavos (₱29,487,844.55). Despite several
formal demands, respondent Soriano failed and refused to turn over the said
DECISION [amount to] the prejudice of [PNB].3

PEREZ, J.: Given the terms of the TRs which read, in pertinent part:

We arc urged in this petition for review on certiorari to reverse and set aside the
Decision of the Court of Appeals in C A-G.R. SP No. 762431 finding no grave abuse of
discretion in the ruling of the Secretary of the Department of Justice ( DOJ) which, in
turn, dismissed the criminal complaint for Estafa, i.e., violation of Section 13 of
Presidential Decree No. 1 15 (Trust Receipts Law), in relation to Article 315,
paragraph (b) of the Revised Penal Code, filed by petitioner Philippine National Bank
(PNB) against respondent Lilian S. Soriano (Soriano).2
First, the ostensibly simple facts as found by the Court of Appeals and adopted by
PNB in its petition and memorandum:
RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor
vehicles ("Motor Vehicles") specified and described in the Invoice/s issued by HONDA
PHILIPPINES, INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee") hereto attached as
Annex "A" hereof, and in consideration thereof, the trustee hereby agrees to hold the
Motor Vehicles in storage as the property of PNB, with the liberty to sell the same for
cash for the Trustee’s account and to deliver the proceeds thereof to PNB to be
applied against its acceptance on the Trustee’s account. Under the terms of the
Invoices and (sic) the Trustee further agrees to hold the said vehicles and proceeds of
the sale thereof in Trust for the payment of said acceptance and of any [of] its other
indebtedness to PNB.

On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line
(FSL) in the increased amount of Thirty Million Pesos (₱30 Million) to Lisam
Enterprises, Inc. [LISAM], a family-owned and controlled corporation that maintains
Current Account No. 445830099-8 with petitioner PNB.
278
xxxx
For the purpose of effectively carrying out all the terms and conditions of the Trust
herein created and to insure that the Trustee will comply strictly and faithfully with all

undertakings hereunder, the Trustee hereby agrees and consents to allow and permit
PNB or its representatives to inspect all of the Trustee’s books, especially those
 pertaining to its disposition of the Motor Vehicles and/or the proceeds of the sale
hereof, at any time and whenever PNB, at its discretion, may find it necessary to do
so.
The Trustee’s failure to account to PNB for the Motor Vehicles received in Trust
and/or for the proceeds of the sale thereof within thirty (30) days from demand
made by PNB shall constitute prima facie evidence that the Trustee has converted or
misappropriated said vehicles and/or proceeds thereof for its benefit to the
detriment and prejudice of PNB.4
and Soriano’s failure to account for the proceeds of the sale of the motor vehicles,
PNB, as previously adverted to, filed a complaint-affidavit before the Office of the
City Prosecutor of Naga City charging Soriano with fifty two (52) counts of violation of
the Trust Receipts Law, in relation to Article 315, paragraph 1(b) of the Revised Penal
Code.
In refutation, Soriano filed a counter-affidavit asserting that:
1. The obligation of [LISAM] which I represent, and consequently[,] my obligation, if
any, is purely civil in nature. All of the alleged trust receipt agreements were
availments made by the corporation [LISAM] on the PNB credit facility known as
"Floor Stock Line" (FSL), which is just one of the several credit facilities granted to
[LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive, [LISAM]
submitted proposals to PNB for the restructuring of all of [LISAM’s] credit facilities.
After exchanges of several letters and telephone calls, Mr. Josefino Gamboa, Senior
Vice President of PNB on 12 May 1998 wrote [LISAM] informing PNB’s lack of
objection to [LISAM’s] proposal of restructuring all its obligations. x x x.
2. On September 22, 1998 Mr. Avengoza sent a letter to [LISAM], complete with
attached copy of PNB Board’s minutes of meeting, with the happy information that
the Board of Directors of PNB has approved the conversion of [LISAM’s] existing
credit facilities at PNB, which includes the FSL on which the Trust receipts are
availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL),
Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills Purchased
Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL (which is the Floor
Stock Line on which the trust receipts are availments) and Time Loan. x x x.
3. The [FSL] and the availments thereon allegedly secured by Trust Receipts,
therefore, was (sic) already converted into[,] and included in[,] an Omnibus Line (OL)
of ₱106 million on September 22, 1998, which was actually a Revolving Credit Line
(RCL)[.]5
279
PNB filed a reply-affidavit maintaining Soriano’s criminal liability under the TRs:
2. x x x. While it is true that said restructuring was approved, the same was never
implemented because [LISAM] failed to comply with the conditions of approval stated
in B/R No. 6, such as the payment of the interest and other charges and the
submission of the title of the 283 sq. m. of vacant residential lot, x x x Tandang Sora,
Quezon City, as among the common conditions stated in paragraph V, of B/R 6. The
nonimplementation of the approved restructuring of the account of [LISAM] has the
effect of reverting the account to its original status prior to the said approval.
Consequently, her claim that her liability for violation of the Trust Receipt Agreement
is purely civil does not hold water.6
In a Resolution,7 the City Prosecutor of Naga City found, thus:
WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN
SORIANO is probably guilty of violation of [the] Trust Receipt Law, in relation to
Article 315 par. 1 (b) of the Revised Penal Code, let therefore 52 counts of ESTAFA be
filed against the respondent.8
Consequently, on 1 August 2001, the same office filed Informations against Soriano
for fifty two (52) counts of Estafa (violation of the Trust Receipts Law), docketed as
Criminal Case Nos. 2001-0641 to 2001-0693, which were raffled to the Regional Trial
Court (RTC), Branch 21, Naga City.
Meanwhile, PNB filed a petition for review of the Naga City Prosecutor’s Resolution
before the Secretary of the DOJ.
In January 2002, the RTC ordered the dismissal of one of the criminal cases against
Soriano, docketed as Criminal Case No. 2001-0671. In March of the same year,
Soriano was arraigned in, and pled not guilty to, the rest of the criminal cases.
Thereafter, on 16 October 2002, the RTC issued an Order resetting the continuation
of the pre-trial on 27 November 2002.
On the other litigation front, the DOJ, in a Resolution 9 dated 25 June 2002, reversed
and set aside the earlier resolution of the Naga City Prosecutor:
WHEREFORE, the questioned resolution is REVERSED and SET ASIDE and the City
Prosecutor of Naga City is hereby directed to move, with leave of court, for the
withdrawal of the informations for estafa against Lilian S. Soriano in Criminal Case
Nos. 2001-0641 to 0693 and to report the action taken thereon within ten (10) days
from receipt thereof.10
 On various dates the RTC, through Pairing Judge Novelita Villegas Llaguno, issued the
following Orders:
1. 27 November 200211
When this case was called for continuation of pre-trial, [Soriano’s] counsel appeared.
However, Prosecutor Edgar Imperial failed to appear.
Records show that a copy of the Resolution from the Department of Justice
promulgated on October 28, 2002 was received by this Court, (sic) denying the
Motion for Reconsideration of the Resolution No. 320, series of 2002 reversing that
of the City Prosecutor of Naga City and at the same time directing the latter to move
with leave of court for the withdrawal of the informations for Estafa against Lilian
Soriano.
Accordingly, the prosecution is hereby given fifteen (15) days from receipt hereof
within which to comply with the directive of the Department of Justice.
2. 21 February 200312
Finding the Motion to Withdraw Informations filed by Pros. Edgar Imperial duly
approved by the City Prosecutor of Naga City to be meritorious the same is hereby
granted. As prayed for, the Informations in Crim. Cases Nos. RTC 2001-0641 to 2001-
0693 entitled, People of the Philippines vs. Lilian S. Soriano, consisting of fifty-two
(52) cases except for Crim. Case No. RTC 2001-0671 which had been previously
dismissed, are hereby ordered WITHDRAWN.
3. 15 July 200313
The prosecution of the criminal cases herein filed being under the control of the City
Prosecutor, the withdrawal of the said cases by the Prosecution leaves this Court
without authority to re-instate, revive or refile the same.
Wherefore, the Motion for Reconsideration filed by the private complainant is hereby
DENIED.
With the denial of its Motion for Reconsideration of the 25 June 2002 Resolution of
the Secretary of the DOJ, PNB filed a petition for certiorari before the Court of
Appeals alleging that:
280
A. THE SECRETARY OF THE DOJ COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO WANT OR EXCESS OF JURISDICTION IN REVERSING AND SETTING
ASIDE THE RESOLUTON OF THE CITY PROSECUTOR OF NAGA CITY FINDING A PRIMA
FACIE CASE AGAINST PRIVATE RESPONDENT [SORIANO], FOR THE SAME HAS NO
LEGAL BASES AND IS NOT IN ACCORD WITH THE JURISPRUDENTIAL RULINGS ON THE
MATTER.14
As stated at the outset, the appellate court did not find grave abuse of discretion in
the questioned resolution of the DOJ, and dismissed PNB’s petition for certiorari.
Hence, this appeal by certiorari.
Before anything else, we note that respondent Soriano, despite several opportunities
to do so, failed to file a Memorandum as required in our Resolution dated 16 January
2008. Thus, on 8 July 2009, we resolved to dispense with the filing of Soriano’s
Memorandum.
In its Memorandum, PNB posits the following issues:
I. Whether or not the Court of Appeals gravely erred in concurring with the finding of
the DOJ that the approval by PNB of [LISAM’s] restructuring proposal of its account
with PNB had changed the status of [LISAM’s] obligations secured by Trust Receipts
to one of an ordinary loan, non-payment of which does not give rise to a criminal
liability.
II. Whether or not the Court of Appeals gravely erred in concluding and concurring
with the June 25, 2002 Resolution of the DOJ directing the withdrawal of the
Information for Estafa against the accused in Criminal Case Nos. 2001-0641 up to
0693 considering the well-established rule that once jurisdiction is vested in court, it
is retained up to the end of the litigation.
III. Whether or not the reinstatement of the 51 counts (Criminal Case No. 2001-0671
was already dismissed) of criminal cases for estafa against Soriano would violate her
constitutional right against double jeopardy.15
Winnowed from the foregoing, we find that the basic question is whether the Court
of Appeals gravely erred in affirming the DOJ’s ruling that the restructuring of LISAM’s
loan secured by trust receipts extinguished Soriano’s criminal liability therefor.
It has not escaped us that PNB’s second and third issues delve into the three (3)
Orders of the RTC which are not the subject of the petition before us. To clarify, the
 instant petition assails the Decision of the appellate court in CA-G.R. SP No. 76243
which, essentially, affirmed the ruling of the DOJ in I.S. Nos. 2000-1123, 2000-1133
and 2000-1184. As previously narrated, the DOJ Resolution became the basis of the
RTC’s Orders granting the withdrawal of the Informations against Soriano. From these
RTC Orders, the remedy of PNB was to file a petition for certiorari before the Court of
Appeals alleging grave abuse of discretion in the issuance thereof.
However, for clarity and to obviate confusion, we shall first dispose of the peripheral
issues raised by PNB:
1. Whether the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 against
Soriano as directed by the DOJ violates the well-established rule that once the trial
court acquires jurisdiction over a case, it is retained until termination of litigation.
2. Whether the reinstatement of Criminal Cases Nos. 2001-0641 to 2001-0693 violate
the constitutional provision against double jeopardy.
We rule in the negative.
Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was
ordered by the RTC. In particular, the Secretary of the DOJ directed City Prosecutor of
Naga City to move, with leave of court, for the withdrawal of the Informations
for estafa against Soriano. Significantly, the trial court gave the prosecution fifteen
(15) days within which to comply with the DOJ’s directive, and thereupon, readily
granted the motion. Indeed, the withdrawal of the criminal cases did not occur, nay,
could not have occurred, without the trial court’s imprimatur. As such, the DOJ’s
directive for the withdrawal of the criminal cases against Soriano did not divest nor
oust the trial court of its jurisdiction.
Regrettably, a perusal of the RTC’s Orders reveals that the trial court relied solely on
the Resolution of the DOJ Secretary and his determination that the Informations
for estafa against Soriano ought to be withdrawn. The trial court abdicated its judicial
power and refused to perform a positive duty enjoined by law. On one occasion, we
have declared that while the recommendation of the prosecutor or the ruling of the
Secretary of Justice is persuasive, it is not binding on courts. 16 We shall return to this
point shortly.
In the same vein, the reinstatement of the criminal cases against Soriano will not
violate her constitutional right against double jeopardy.
281
Section 7,17 Rule 117 of the Rules of Court provides for the requisites for double
jeopardy to set in: (1) a first jeopardy attached prior to the second; (2) the first
jeopardy has been validly terminated; and (3) a second jeopardy is for the same
offense as in the first. A first jeopardy attaches only (a) after a valid indictment; (b)
before a competent court; (c) after arraignment; (d) when a valid plea has been
entered; and (e) when the accused has been acquitted or convicted, or the case
dismissed or otherwise terminated without his express consent.18
In the present case, the withdrawal of the criminal cases did not include a categorical
dismissal thereof by the RTC. Double jeopardy had not set in because Soriano was not
acquitted nor was there a valid and legal dismissal or termination of the fifty one (51)
cases against her. It stands to reason therefore that the fifth requisite which requires
conviction or acquittal of the accused, or the dismissal of the case without the
approval of the accused, was not met.
On both issues, the recent case of Cerezo v. People,19 is enlightening. In Cerezo, the
trial court simply followed the prosecution’s lead on how to proceed with the libel
case against the three accused. The prosecution twice changed their mind on
whether there was probable cause to indict the accused for libel. On both occasions,
the trial court granted the prosecutor’s motions. Ultimately, the DOJ Secretary
directed the prosecutor to re-file the Information against the accused which the trial
court forthwith reinstated. Ruling on the same issues raised by PNB in this case, we
emphasized, thus:
x x x. In thus resolving a motion to dismiss a case or to withdraw an Information, the
trial court should not rely solely and merely on the findings of the public prosecutor
or the Secretary of Justice. It is the court’s bounden duty to assess independently the
merits of the motion, and this assessment must be embodied in a written order
disposing of the motion. x x x.
In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the
criminal case, that the RTC judge failed to make his own determination of whether or
not there was a prima facie case to hold respondents for trial. He failed to make an
independent evaluation or assessment of the merits of the case. The RTC judge
blindly relied on the manifestation and recommendation of the prosecutor when he
should have been more circumspect and judicious in resolving the Motion to Dismiss
and Withdraw Information especially so when the prosecution appeared to be
uncertain, undecided, and irresolute on whether to indict respondents.
The same holds true with respect to the October 24, 2006 Order, which reinstated
the case. The RTC judge failed to make a separate evaluation and merely awaited the
 resolution of the DOJ Secretary. This is evident from the general tenor of the Order
and highlighted in the following portion thereof:
As discussed during the hearing of the Motion for Reconsideration, the Court will
resolve it depending on the outcome of the Petition for Review. Considering the
findings of the Department of Justice reversing the resolution of the City Prosecutor,
the Court gives favorable action to the Motion for Reconsideration.
By relying solely on the manifestation of the public prosecutor and the resolution of
the DOJ Secretary, the trial court abdicated its judicial power and refused to perform
a positive duty enjoined by law. The said Orders were thus stained with grave abuse
of discretion and violated the complainant’s right to due process. They were void, had
no legal standing, and produced no effect whatsoever.
xxxx
It is beyond cavil that double jeopardy did not set in. Double jeopardy exists when the
following requisites are present: (1) a first jeopardy attached prior to the second; (2)
the first jeopardy has been validly terminated; and (3) a second jeopardy is for the
same offense as in the first. A first jeopardy attaches only (a) after a valid indictment;
(b) before a competent court; (c) after arraignment; (d) when a valid plea has been
entered; and (e) when the accused has been acquitted or convicted, or the case
dismissed or otherwise terminated without his express consent.
Since we have held that the March 17, 2004 Order granting the motion to dismiss was
committed with grave abuse of discretion, then respondents were not acquitted nor
was there a valid and legal dismissal or termination of the case. Ergo, the fifth
requisite which requires the conviction and acquittal of the accused, or the dismissal
of the case without the approval of the accused, was not met. Thus, double jeopardy
has not set in.20 (Emphasis supplied)
We now come to the crux of the matter: whether the restructuring of LISAM’s loan
account extinguished Soriano’s criminal liability.
PNB admits that although it had approved LISAM’s restructuring proposal, the actual
restructuring of LISAM’s account consisting of several credit lines was never reduced
into writing. PNB argues that the stipulations therein such as the provisions on the
schedule of payment of the principal obligation, interests, and penalties, must be in
writing to be valid and binding between the parties. PNB further postulates that
assuming the restructuring was reduced into writing, LISAM failed to comply with the
282
conditions precedent for its effectivity, specifically, the payment of interest and other
charges, and the submission of the titles to the real properties in Tandang Sora,
Quezon City. On the whole, PNB is adamant that the events concerning the
restructuring of LISAM’s loan did not affect the TR security, thus, Soriano’s criminal
liability thereunder subsists.
On the other hand, the appellate court agreed with the ruling of the DOJ Secretary
that the approval of LISAM’s restructuring proposal, even if not reduced into writing,
changed the status of LISAM’s loan from being secured with Trust Receipts (TR’s) to
one of an ordinary loan, non-payment of which does not give rise to criminal liability.
The Court of Appeals declared that there was no breach of trust constitutive
of estafa through misappropriation or conversion where the relationship between
the parties is simply that of creditor and debtor, not as entruster and entrustee.
We cannot subscribe to the appellate court’s reasoning. The DOJ Secretary’s and the
Court of Appeals holding that, the supposed restructuring novated the loan
agreement between the parties is myopic.
To begin with, the purported restructuring of the loan agreement did not constitute
novation.
Novation is one of the modes of extinguishment of obligations;21 it is a single juridical
act with a diptych function. The substitution or change of the obligation by a
subsequent one extinguishes the first, resulting in the creation of a new obligation in
lieu of the old.22 It is not a complete obliteration of the obligor-obligee relationship,
but operates as a relative extinction of the original obligation.
Article 1292 of the Civil Code which provides:
Art. 1292. In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.
contemplates two kinds of novation: express or implied. The extinguishment of the
old obligation by the new one is a necessary element of novation, which may be
effected either expressly or impliedly.
In order for novation to take place, the concurrence of the following requisites is
indispensable:
(1) There must be a previous valid obligation;
(2) There must be an agreement of the parties concerned to a new contract;
 (3) There must be the extinguishment of the old contract; and
(4) There must be the validity of the new contract.23
Novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear
and unmistakable. The contracting parties must incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other
hand, no specific form is required for an implied novation, and all that is prescribed
by law would be an incompatibility between the two contracts. 24 Nonetheless, both
kinds of novation must still be clearly proven. 25
In this case, without a written contract stating in unequivocal terms that the parties
were novating the original loan agreement, thus undoubtedly eliminating an express
novation, we look to whether there is an incompatibility between the Floor Stock Line
secured by TR’s and the subsequent restructured Omnibus Line which was
supposedly approved by PNB.
Soriano is confident with her assertion that PNB’s approval of her proposal to
restructure LISAM’s loan novated the loan agreement secured by TR’s. Soriano relies
on the following:
1. x x x. All the alleged trust receipt agreements were availments made by [LISAM] on
the PNB credit facility known as "Floor Stock Line," (FSL) which is just one of the
several credit facilities granted to [LISAM] by PNB. When my husband Leandro A.
Soriano, Jr. was still alive, [LISAM] submitted proposals to PNB for the restructuring of
all of [LISAM’s] credit facilities. After exchanges of several letters and telephone calls,
Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote [LISAM]
informing PNB’s lack of objection to [LISAM’s] proposal of restructuring all its
obligations. x x x.
2. On September 22, 1998, Mr. Avengoza sent a letter to [LISAM], complete with
attached copy of PNB’s Board’s minutes of meeting, with the happy information that
the Board of Directors of PNB has approved the conversion of [LISAM’s] existing
credit facilities at PNB, which includes the FSL on which the trust receipts are
availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL),
Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills Purchased
Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL (which is the Floor
Stock Line on which the trust receipts are availments) and Time Loan. x x x. 26
283
Soriano’s reliance thereon is misplaced. The approval of LISAM’s restructuring
proposal is not the bone of contention in this case. The pith of the issue lies in
whether, assuming a restructuring was effected, it extinguished the criminal liability
on the loan obligation secured by trust receipts, by extinguishing the entruster-
entrustee relationship and substituting it with that of an ordinary creditor-debtor
relationship. Stated differently, we examine whether the Floor Stock Line is
incompatible with the purported restructured Omnibus Line.
The test of incompatibility is whether the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first. Corollarily, changes that breed incompatibility must
be essential in nature and not merely accidental. The incompatibility must take place
in any of the essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory in nature
and insufficient to extinguish the original obligation.27
We have scoured the records and found no incompatibility between the Floor Stock
Line and the purported restructured Omnibus Line. While the restructuring was
approved in principle, the effectivity thereof was subject to conditions precedent
such as the payment of interest and other charges, and the submission of the titles to
the real properties in Tandang Sora, Quezon City. These conditions precedent
imposed on the restructured Omnibus Line were never refuted by Soriano who, oddly
enough, failed to file a Memorandum. To our mind, Soriano’s bare assertion that the
restructuring was approved by PNB cannot equate to a finding of an implied novation
which extinguished Soriano’s obligation as entrustee under the TR’s.
Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to
penalty charges on the Floor Stock Line. There is no showing that the waiver
extinguished Soriano’s obligation to "sell the [merchandise] for cash for [LISAM’s]
account and to deliver the proceeds thereof to PNB to be applied against its
acceptance on [LISAM’s] account." Soriano further agreed to hold the "vehicles and
proceeds of the sale thereof in Trust for the payment of said acceptance and of any of
its other indebtedness to PNB." Well-settled is the rule that, with respect to
obligations to pay a sum of money, the obligation is not novated by an instrument
that expressly recognizes the old, changes only the terms of payment, adds other
obligations not incompatible with the old ones, or the new contract merely
supplements the old one.28 Besides, novation does not extinguish criminal liability. 29 It
stands to reason therefore, that Soriano’s criminal liability under the TR’s subsists
considering that the civil obligations under the Floor Stock Line secured by TR’s were
not extinguished by the purported restructured Omnibus Line.
In Transpacific Battery Corporation v. Security Bank and Trust Company,30 we held
that the restructuring of a loan agreement secured by a TR does not per se novate or
extinguish the criminal liability incurred thereunder:
 x x x Neither is there an implied novation since the restructuring agreement is not The Resolution of the Secretary of Justice dated 25 June 2002, directing the City
incompatible with the trust receipt transactions. Prosecutor of Naga City to move for the withdrawal of the Informations for estafa in
relation to the Trust Receipts Law against respondent Lilian S. Soriano, and his 29
Indeed, the restructuring agreement recognizes the obligation due under the trust October 2002 Resolution, denying petitioner's Motion for Reconsideration,
receipts when it required "payment of all interest and other charges prior to are ANNULLED and SET ASIDE for having been issued with grave abuse of discretion;
restructuring." With respect to Michael, there was even a proviso under the and the Resolution or the Naga City Prosecutor's Office dated 19 March 2001, finding
agreement that the amount due is subject to "the joint and solidary liability of probable cause against herein respondent, is REINSTATED. Consequently, the Orders
Spouses Miguel and Mary Say and Michael Go Say." While the names of Melchor and of the Regional Trial Court, Branch 21 of Naga City in Criminal Cases Nos. 2001-0641
Josephine do not appear on the restructuring agreement, it cannot be presumed that to 2001-0693, except Criminal Case No. 2001-0671, dated 27 November 2002, 21
they have been relieved from the obligation. The old obligation continues to subsist February 2003 and 15 July 2003 are SET ASIDE and its Order of 16 October 2002
subject to the modifications agreed upon by the parties. resetting the continuation or the pre-trial is REINSTATED. The RTC is further ordered
to conduct the pretrial with dispatch.
The circumstance that motivated the parties to enter into a restructuring agreement
was the failure of petitioners to account for the goods received in trust and/or deliver SO ORDERED.
the proceeds thereof. To remedy the situation, the parties executed an agreement to
restructure Transpacific's obligations. JOSE PORTUGAL PEREZ
Associate Justice
The Bank only extended the repayment term of the trust receipts from 90 days to one
year with monthly installment at 5% per annum over prime rate or 30% per annum
whichever is higher. Furthermore, the interest rates were flexible in that they are
subject to review every amortization due. Whether the terms appeared to be more
onerous or not is immaterial.1âwphi1 Courts are not authorized to extricate parties
from the necessary consequences of their acts. The parties will not be relieved from
their obligations as there was absolutely no intention by the parties to supersede or
abrogate the trust receipt transactions. The intention of the new agreement was
precisely to revive the old obligation after the original period expired and the loan
remained unpaid. Well-settled is the rule that, with respect to obligations to pay a
sum of money, the obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones, or the new contract merely supplements the old
one.31

Based on all the foregoing, we find grave error in the Court of Appeals dismissal of
PNB’s petition for certiorari. Certainly, while the determination of probable cause to
indict a respondent for a crime lies with the prosecutor, the discretion must not be
exercised in a whimsical or despotic manner tantamount to grave abuse of discretion.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-
G.R. SP No. 76243 finding no grave abuse of discretion on the part of the Secretary of
Justice is REVERSED and SET ASIDE.
284

ART 1293
 69. G.R. No. 183804, September 11, 2013 The petitioner in its answer denied liability, claiming that it was released from its
indebtedness to the respondent by reason of the novation of their contract, which, it
S.C. MEGAWORLD CONSTRUCTION AND DEVELOPMENT reasoned, took place when the latter accepted the partial payment of Enviro Kleen in
CORPORATION, Petitioner, v. ENGR. LUIS U. PARADA, REPRESENTED BY ENGR. its behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new
LEONARDO A. PARADA OF GENLITE INDUSTRIES,Respondent. debtor in the petitioner’s place.

DECISION After trial, the RTC rendered judgment6 on May 28, 2004 in favor of the respondent,
the fallo of which reads, as follows:chanrobles virtua1aw 1ibrary
REYES, J.:
WHEREFORE, judgment is hereby rendered for the [respondent].
1 2
Before us on appeal by certiorari is the Decision dated April 30, 2008 of the Court of
[The petitioner] is hereby ordered to pay the [respondent] the following:
Appeals (CA) in CA-G.R. CV No. 83811 which upheld the Decision3 dated May 28, 2004
of the Regional Trial Court (RTC) of Quezon City, Branch 100, in Civil Case No. Q-01-
45212. 1. A. the sum of [P]816,627.00 representing the principal obligation
due;
Factual Antecedents
2. B. the sum equivalent to twenty percent (20%) per month of the
principal obligation due from date of judicial demand until fully paid
as and for interest; and
S.C. Megaworld Construction and Development Corporation (petitioner) bought
electrical lighting materials from Genlite Industries, a sole proprietorship owned by 3. C. the sum equivalent to twenty[-]five [percent] (25%) of the
Engineer Luis U. Parada (respondent), for its Read-Rite project in Canlubang, Laguna. principal sum due as and for attorney’s fees and other costs of suits.
The petitioner was unable to pay for the above purchase on due date, but blamed it
on its failure to collect under its sub-contract with the Enviro Kleen Technologies, Inc.
The compulsory counterclaim interposed by the [petitioner] is hereby ordered
(Enviro Kleen). It was however able to persuade Enviro Kleen to agree to settle its
dismissed for lack of merit.
above purchase, but after paying the respondent P250,000.00 on June 2,
1999,4 Enviro Kleen stopped making further payments, leaving an outstanding
SO ORDERED.7 (Emphasis supplied)
balance of P816,627.00. It also ignored the various demands of the respondent, who
then filed a suit in the RTC, docketed as Civil Case No. Q-01-45212, to collect from the
petitioner the said balance, plus damages, costs and expenses, as summarized in the On appeal to the CA, the petitioner maintained that the trial court erred in ruling that
RTC’s decision, as follows:chanrobles virtua1aw 1ibrary no novation of the contract took place through the substitution of Enviro Kleen as the
new debtor. But for the first time, it further argued that the trial court should have
dismissed the complaint for failure of the respondent to implead Genlite Industries as
According to the statement of account prepared by the [respondent], the total
“a proper party in interest”, as provided in Section 2 of Rule 3 of the 1997 Rules of
obligation due to the [petitioner] is [P]816,627.00 as of 31 January 2001 (Exh[s]. E &
Civil Procedure. The said section provides:chanrobles virtua1aw 1ibrary
E-1). Despite several demands made by the [respondent] (Exhs. F & G, inclusive of
their submarkings), the [petitioner’s] obligation remain[s] unpaid. [The respondent]
was constrained to file the instant action in which it is claiming the unpaid balance of SEC. 2. Parties in interest. — A real party in interest is the party who stands to be
[P]816,627.00, two (2) percent thereof as monthly interest, twenty-five (25) percent benefited or injured by the judgment in the suit, or the party entitled to the avails of
of the amount due as attorney’s fees (Exhs. C-8 to C-15), [P]100,000.00 as litigation the suit. Unless otherwise authorized by law or these Rules, every action must be
expenses and [P]100,000.00 as exemplary damages.5 prosecuted or defended in the name of the real party in interest.

In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant
285

may move to dismiss the suit on the ground that it was not brought in the name of or
 against the real party in interest, with the effect that the complaint is then deemed to
state no cause of action.
In dismissing the appeal, the CA noted that the petitioner in its answer below raised
only the defense of novation, and that at no stage in the proceedings did it raise the
question of whether the suit was brought in the name of the real party in interest.
Moreover, the appellate court found from the sales invoices and receipts that the
respondent is the sole proprietor of Genlite Industries, and therefore the real party-
plaintiff. Said the CA:chanrobles virtua1aw 1ibrary
Settled is the rule that litigants cannot raise an issue for the first time on appeal as
this would contravene the basic rules of fair play and justice.
In any event, there is no question that [respondent] Engr. Luis U. Parada is the
proprietor of Genlite Industries, as shown on the sales invoice and delivery receipts.
There is also no question that a special power of attorney was executed by
[respondent] Engr. Luis U. Parada in favor of Engr. Leonardo A. Parada authorizing the
latter to file a complaint against [the petitioner]. 8 (Citations omitted)
The petitioner also contended that a binding novation of the purchase contract
between the parties took place when the respondent accepted the partial payment
of Enviro Kleen of P250,000.00 in its behalf, and thus acquiesced to the substitution
by Enviro Kleen of the petitioner as the new debtor. But the CA noted that there is
nothing in the two (2) letters of the respondent to Enviro Kleen, dated April 14, 1999
and June 16, 1999, which would imply that he consented to the alleged novation,
and, particularly, that he intended to release the petitioner from its primary
obligation to pay him for its purchase of lighting materials. The appellate court cited
the RTC’s finding9 that the respondent informed Enviro Kleen in his first letter that he
had served notice to the petitioner that he would take legal action against it for its
overdue account, and that he retained his option to pull out the lighting materials
and charge the petitioner for any damage they might sustain during the pull-
out:chanrobles virtua1aw 1ibrary
[Respondent] x x x has served notice to the [petitioner] that unless the overdue
account is paid, the matter will be referred to its lawyers and there may be a pull-out
of the delivered lighting fixtures. It was likewise stated therein that incidental
damages that may result to the structure in the course of the pull-out will be to the
account of the [petitioner].10
The CA concurred with the RTC that by retaining his option to seek satisfaction from
the petitioner, any acquiescence which the respondent had made was limited to
286
merely accepting Enviro Kleen as an additional debtor from whom he could demand
payment, but without releasing the petitioner as the principal debtor from its debt to
him.
On motion for reconsideration,11 the petitioner raised for the first time the issue of
the validity of the verification and certification of non-forum shopping attached to
the complaint. On July 18, 2008, the CA denied the said motion for lack of
merit.12cralaw virtualaw library
Petition for Review in the Supreme Court
In this petition, the petitioner insists, firstly, that the complaint should have been
dismissed outright by the trial court for an invalid non-forum shopping certification;
and, secondly, that the appellate court erred in not declaring that there was a
novation of the contract between the parties through substitution of the debtor,
which resulted in the release of the petitioner from its obligation to pay the
respondent the amount of its purchase.13cralaw virtualaw library
Our Ruling
The petition is devoid of merit.
The verification and certification of non-forum shopping in the complaint is not a
jurisdictional but a formal requirement, and any objection as to non-compliance
therewith should be raised in the proceedings below and not for the first time on
appeal.
“It is well-settled that no question will be entertained on appeal unless it has been
raised in the proceedings below. Points of law, theories, issues and arguments not
brought to the attention of the lower court, administrative agency or quasi-judicial
body, need not be considered by a reviewing court, as they cannot be raised for the
first time at that late stage. Basic considerations of fairness and due process impel
this rule. Any issue raised for the first time on appeal is barred by estoppel.”14cralaw
virtualaw library
Through a Special Power of Attorney (SPA), the respondent authorized Engr.
Leonardo A. Parada (Leonardo), the eldest of his three children, to perform the
following acts in his behalf: a) to file a complaint against the petitioner for sum of
money with damages; and b) to testify in the trial thereof and sign all papers and
documents related thereto, with full powers to enter into stipulation and
compromise.15 Incidentally, the respondent, a widower, died of cardio-pulmonary
 arrest on January 21, 2009, 16 survived by his legitimate children, namely, Leonardo, Failure to comply with the foregoing requirements shall not be curable by mere
Luis, Jr., and Lalaine, all surnamed Parada. They have since substituted him in this amendment of the complaint or other initiatory pleading but shall be cause for the
petition, per the Resolution of the Supreme Court dated September 2, 2009. 17 Also, dismissal of the case without prejudice, unless otherwise provided, upon motion and
on July 23, 2009, Luis, Jr. and Lalaine Parada executed an SPA authorizing their after hearing.
brother Leonardo to represent them in the instant petition. 18cralaw virtualaw library
The petitioner’s argument is untenable. The petitioner failed to reckon that any
In the verification and certification of non-forum shopping attached to the complaint objection as to compliance with the requirement of verification in the complaint
in Civil Case No. Q01-45212, Leonardo as attorney-in-fact of his father acknowledged should have been raised in the proceedings below, and not in the appellate court for
as follows:chanrobles virtua1aw 1ibrary the first time.20 In KILUSAN-OLALIA v. CA,21 it was held that verification is a formal,
not a jurisdictional requisite:chanrobles virtua1aw 1ibrary
x x x x
We have emphasized, time and again, that verification is a formal, not a jurisdictional
That I/we am/are the Plaintiff in the above-captioned case; requisite, as it is mainly intended to secure an assurance that the allegations therein
made are done in good faith or are true and correct and not mere speculation. The
That I/we have caused the preparation of this Complaint; Court may order the correction of the pleading, if not verified, or act on the
unverified pleading if the attending circumstances are such that a strict compliance
That I/we have read the same and that all the allegations therein are true and correct with the rule may be dispensed with in order that the ends of justice may be served.
to the best of my/our knowledge;
Further, in rendering justice, courts have always been, as they ought to be,
x x x x.19 conscientiously guided by the norm that on the balance, technicalities take a
backseat vis-à-vissubstantive rights, and not the other way around. x x x. 22 (Citations
In this petition, the petitioner reiterates its argument before the CA that the above omitted)
verification is invalid, since the SPA executed by the respondent did not specifically
include an authority for Leonardo to sign the verification and certification of non- In Young v. John Keng Seng,23 it was also held that the question of forum shopping
forum shopping, thus rendering the complaint defective for violation of Sections 4 cannot be raised in the CA and in the Supreme Court, since such an issue must be
and 5 of Rule 7. The said sections provide, as follows:chanrobles virtua1aw 1ibrary raised at the earliest opportunity in a motion to dismiss or a similar pleading. The
high court even warned that “[i]nvoking it in the later stages of the proceedings or on
Sec. 4. Verification. — A pleading is verified by an affidavit that the affiant has read appeal may result in the dismissal of the action x x x.” 24cralaw virtualaw library
the pleading and that the allegations therein are true and correct of his personal
knowledge or based on authentic records. Moreover, granting that Leonardo has no personal knowledge of the transaction
subject of the complaint below, Section 4 of Rule 7 provides that the verification need
Sec. 5. Certification against forum shopping. –– The plaintiff or principal party shall not be based on the verifier’s personal knowledge but even only on authentic
certify under oath in the complaint or other initiatory pleading asserting a claim for records. Sales invoices, statements of accounts, receipts and collection letters for the
relief, or in a sworn certification annexed thereto and simultaneously filed therewith: balance of the amount still due to the respondent from the petitioner are such
(a) that he has not theretofore commenced any action or filed any claim involving the records. There is clearly substantial compliance by the respondent’s attorney-in-fact
same issues in any court, [or] tribunal x x x and, to the best of his knowledge, no such with the requirement of verification.
other action or claim is pending therein; (b) if there is such other pending action or
claim, a complete statement of the present status thereof; and (c) if he should Lastly, it is well-settled that a strict compliance with the rules may be dispensed with
thereafter learn that the same or similar action or claim has been filed or is pending, in order that the ends of substantial justice may be served. 25 It is clear that the
he shall report that fact x x x to the court wherein his aforesaid complaint or initiatory present controversy must be resolved on its merits, lest for a technical oversight the
pleading has been filed. respondent should be deprived of what is justly due him.
287
 A sole proprietorship has no juridical personality separate and distinct from that of
its owner, and need not be impleaded as a party-plaintiff in a civil case.
On the question of whether Genlite Industries should have been impleaded as a
party-plaintiff, Section 1 of Rule 3 of the Rules of Court provides that only natural or
juridical persons or entities authorized by law may be parties in a civil case. Article 44
of the New Civil Code enumerates who are juridical persons:chanrobles virtua1aw
1ibrary
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose,
created by law; their personality begins as soon as they have been constituted
according to law;
(3) Corporations, partnerships and associations for private interest or purpose to
which the law grants a juridical personality, separate and distinct from that of each
shareholder, partner or member.
Genlite Industries is merely the DTI-registered trade name or style of the respondent
by which he conducted his business. As such, it does not exist as a separate entity
apart from its owner, and therefore it has no separate juridical personality to sue or
be sued.26 As the sole proprietor of Genlite Industries, there is no question that the
respondent is the real party in interest who stood to be directly benefited or injured
by the judgment in the complaint below. There is then no necessity for Genlite
Industries to be impleaded as a party-plaintiff, since the complaint was already filed
in the name of its proprietor, Engr. Luis U. Parada. To heed the petitioner’s sophistic
reasoning is to permit a dubious technicality to frustrate the ends of substantial
justice.
Novation is never presumed but must be clearly and unequivocally shown.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor.27 It is “the substitution of a new contract,
debt, or obligation for an existing one between the same or different
parties.”28 Article 1293 of the Civil Code defines novation as follows:chanrobles
virtua1aw 1ibrary
288
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him rights mentioned in Articles 1236 and 1237.
Thus, in order to change the person of the debtor, the former debtor must be
expressly released from the obligation, and the third person or new debtor must
assume the former’s place in the contractual relation.29 Article 1293 speaks of
substitution of the debtor, which may either be in the form
of expromision or delegacion, as seems to be the case here. In both cases, the old
debtor must be released from the obligation, otherwise, there is no valid novation. As
explained in Garcia30:chanrobles virtua1aw 1ibrary
In general, there are two modes of substituting the person of the debtor:
(1) expromisionand (2) delegacion. In expromision, the initiative for the change does
not come from—and may even be made without the knowledge of—the debtor,
since it consists of a third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor. 31 (Citations
omitted)
From the circumstances obtaining below, we can infer no clear and unequivocal
consent by the respondent to the release of the petitioner from the obligation to pay
the cost of the lighting materials. In fact, from the letters of the respondent to Enviro
Kleen, it can be said that he retained his option to go after the petitioner if Enviro
Kleen failed to settle the petitioner’s debt. As the trial court held:chanrobles
virtua1aw 1ibrary
The fact that Enviro Kleen Technologies, Inc. made payments to the [respondent] and
the latter accepted it does not ipso facto result in novation. Novation to be given its
legal effect requires that the creditor should consent to the substitution of a new
debtor and the old debtor be released from its obligation (Art. 1293, New Civil Code).
A reading of the letters dated 14 April 1999 (Exh. 1) and dated 16 June 1999 (Exh[s]. 4
& 4-a) sent by the [respondent] to Enviro Kleen Technologies, Inc. clearly shows that
there was nothing therein that would evince that the [respondent] has consented to
the exchange of the person of the debtor from the [petitioner] to Enviro Kleen
Technologies, Inc.
x x x x
 Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the
[respondent] expressly stated that it has served notice to the [petitioner] that unless
the overdue account is paid, the matter will be referred to its lawyers and there may
be a pull-out of the delivered lighting fixtures. It was likewise stated therein that
incident damages that may result to the structure in the course of the pull-out will be
to the account of the [petitioner].
It is evident from the two (2) aforesaid letters that there is no indication of the
[respondent’s] intention to release the [petitioner] from its obligation to pay and to
transfer it to Enviro Kleen Technologies, Inc. The acquiescence of Enviro Kleen
Technologies, Inc. to assume the obligation of the [petitioner] to pay the unpaid
balance of [P]816,627.00 to the [respondent] when there is clearly no agreement to
release the [petitioner] will result merely to the addition of debtors and not novation.
Hence, the creditor can still enforce the obligation against the original debtor x x x. A
fact which points strongly to the conclusion that the [respondent] did not assent to
the substitution of Enviro Kleen Technologies, Inc. as the new debtor is the present
action instituted by [the respondent] against the [petitioner] for the fulfilment of its
obligation. A mere recital that the [respondent] has agreed or consented to the
substitution of the debtor is not sufficient to establish the fact that there was a
novation. x x x.32
The settled rule is that novation is never presumed, 33 but must be clearly and
unequivocally shown.34 In order for a new agreement to supersede the old one, the
parties to a contract must expressly agree that they are abrogating their old contract
in favor of a new one.35 Thus, the mere substitution of debtors will not result in
novation,36 and the fact that the creditor accepts payments from a third person, who
has assumed the obligation, will result merely in the addition of debtors and not
novation, and the creditor may enforce the obligation against both debtors. 37 If there
is no agreement as to solidarity, the first and new debtors are considered obligated
jointly.38 As explained in Reyes v. CA39:chanrobles virtua1aw 1ibrary
The consent of the creditor to a novation by change of debtor is as indispensable as
the creditor’s consent in conventional subrogation in order that a novation shall
legally take place. The mere circumstance of AFP-MBAI receiving payments from
respondent Eleazar who acquiesced to assume the obligation of petitioner under the
contract of sale of securities, when there is clearly no agreement to release petitioner
from her responsibility, does not constitute novation. At most, it only creates a
juridical relation of co-debtorship or suretyship on the part of respondent Eleazar to
the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce
the obligation against the petitioner. In Ajax Marketing and Development Corporation
vs. Court of Appeals which is relevant in the instant case, we stated that —
289
“In the same vein, to effect a subjective novation by a change in the person of the
debtor, it is necessary that the old debtor be released expressly from the obligation,
and the third person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the debtor’s
obligation becomes merely a co-debtor or surety. xxx. Novation arising from a
purported change in the person of the debtor must be clear and express xxx.”
In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle – novatio non praesumitur —
that novation is never presumed. At bottom, for novation to be a jural reality,
its animus must be ever present, debitum pro debito — basically extinguishing the old
obligation for the new one.40(Citation omitted)
The trial court found that the respondent never agreed to release the petitioner from
its obligation, and this conclusion was upheld by the CA. We generally accord utmost
respect and great weight to factual findings of the trial court and the CA, unless there
appears in the record some fact or circumstance of weight and influence which has
been overlooked, or the significance of which has been misinterpreted, that if
considered would have affected the result of the case. 41 We find no such oversight in
the appreciation of the facts below, nor such a misinterpretation thereof, as would
otherwise provide a clear and unequivocal showing that a novation has occurred in
the contract between the parties resulting in the release of the petitioner.
Pursuant to Article 2209 of the Civil Code, except as provided under Central Bank
Circular No. 905, and now under Bangko Sentral ng Pilipinas Circular No. 799, which
took effect on July 1, 2013, the respondent may be awarded interest of six percent
(6%) of the judgment amount by way of actual and compensatory damages.
It appears from the recital of facts in the trial court’s decision that the respondent
demanded interest of two percent (2%) per month upon the balance of the purchase
price of P816,627.00, from judicial demand until full payment. There is then an
obvious clerical error committed in the fallo of the trial court’s decision, for it
incorrectly ordered the defendant therein to pay “the sum equivalent to twenty
percent (20%) per month of the principal obligation due from date of judicial demand
until fully paid as and for interest.”42cralaw virtualaw library
A clerical mistake is one which is visible to the eyes or obvious to the understanding;
an error made by a clerk or a transcriber; a mistake in copying or writing. 43 The Latin
maxims Error placitandi aequitatem non tollit (“A clerical error does not take away
equity”), and Error scribentis nocere non debit (“An error made by a clerk ought not to
injure; a clerical error may be corrected”) are apt in this case. 44 Viewed against the
landmark case of Medel v. CA45, an award of interest of 20% per month on the
 amount due is clearly excessive and iniquitous. It could not have been the intention
of the trial court, not to mention that it is way beyond what the plaintiff had prayed
for below.
It is settled that other than in the case of judgments which are void ab initio for lack
of jurisdiction, or which are null and void per se, and thus may be questioned at any
time, when a decision is final, even the court which issued it can no longer alter or
modify it, except to correct clerical errors or mistakes. 46cralaw virtualaw library
The foregoing notwithstanding, of more important consideration in the case before
us is the fact that it is nowhere stated in the trial court’s decision that the parties had
in fact stipulated an interest on the amount due to the respondent. Even granting
that there was such an agreement, there is no finding by the trial court that the
parties stipulated that the outstanding debt of the petitioner would be subject to two
percent (2%) monthly interest. The most that the decision discloses is that the
respondent demanded a monthly interest of 2% on the amount outstanding.
Article 2209 of the Civil Code provides that “[i]f the obligation consists in the payment
of a sum of money, and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six percent per
annum.” Pursuant to the said provision, then, since there is no finding of a stipulation
by the parties as to the imposition of interest, only the amount of 12% per
annum47 may be awarded by the court by way of damages in its discretion, not two
percent (2%) per month, following the guidelines laid down in the landmark case
of Eastern Shipping Lines v. Court of Appeals,48 to wit:chanrobles virtua1aw 1ibrary
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.
290
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money,
goods or credit describes a contractual obligation whereby a lender or creditor has
refrained during a given period from requiring the borrower or debtor to repay the
loan or debt then due and payable.51 Thus:chanrobles virtua1aw 1ibrary
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per
annum under Central Bank (CB) Circular No. 416 shall be adjudged only in cases
involving the loan or forbearance of money. And for transactions involving payment
of indemnities in the concept of damages arising from default in the performance of
obligations in general and/or for money judgment not involving a loan or forbearance
of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code
prescribing a yearly 6% interest. Art. 2209 pertinently provides:chanrobles virtua1aw
1ibrary
“Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.”
The term “forbearance,” within the context of usury law, has been described as a
contractual obligation of a lender or creditor to refrain, during a given period of time,
 from requiring the borrower or debtor to repay the loan or debt then due and CIRCULAR NO. 799
payable. Series of 2013

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows: The 12% per annum rate under CB Circular Subject: Rate of interest in the absence of stipulation
No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well
as to judgments involving such loan or forbearance of money, goods, or credit, while The monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
the 6% per annum under Art. 2209 of the Civil Code applies “when the transaction following revisions governing the rate of interest in the absence of stipulation in loan
involves the payment of indemnities in the concept of damage arising from the contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
breach or a delay in the performance of obligations in general,” with the application
of both rates reckoned “from the time the complaint was filed until the [adjudged] Section 1. The rate of interest for the loan or forbearance of any money, goods or
amount is fully paid.” In either instance, the reckoning period for the commencement credits and the rate allowed in judgments, in the absence of an express contract as to
of the running of the legal interest shall be subject to the condition “that the courts such rate of interest, shall be six percent (6%) per annum.
are vested with discretion, depending on the equities of each case, on the award of
interest.”52 (Citations omitted and emphasis ours) Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Pursuant, then, to Central Bank Circular No. 416, issued on July 29, 1974, 53 in the Non-Bank Financial Institutions are hereby amended accordingly.
absence of a written stipulation, the interest rate to be imposed in judgments
involving a forbearance of credit shall be 12% per annum, up from 6% under Article This Circular shall take effect on 1 July 2013.
2209 of the Civil Code. This was reiterated in Central Bank Circular No. 905, which
suspended the effectivity of the Usury Law from January 1, 1983.54 But if the FOR THE MONETARY BOARD:
judgment refers to payment of interest as damages arising from a breach or delay in
general, the applicable interest rate is 6% per annum, following Article 2209 of the DIWA C. GUINIGUNDO
Civil Code.55 Both interest rates apply from judicial or extrajudicial demand until Officer-In-Charge
finality of the judgment. But from the finality of the judgment awarding a sum of
money until it is satisfied, the award shall be considered a forbearance of credit, The award of attorney’s fees is not proper.
regardless of whether the award in fact pertained to one, and therefore during this
period, the interest rate of 12% per annum for forbearance of money shall Other than to say that the petitioner “unjustifiably failed and refused to pay the
apply.56cralaw virtualaw library respondent,” the trial court did not state in the body of its decision the factual or
legal basis for its award of attorney’s fees to the respondent, as required under
But notice must be taken that in Resolution No. 796 dated May 16, 2013, the Article 2208 of the New Civil Code, for which reason we have resolved to delete the
Monetary Board of the Bangko Sentral ng Pilipinas approved the revision of the same. The rule is settled that the trial court must state the factual, legal or equitable
interest rate to be imposed for the loan or forbearance of any money, goods or justification for its award of attorney’s fees.57 Indeed, the matter of attorney’s fees
credits and the rate allowed in judgments, in the absence of an express contract as to cannot be stated only in the dispositive portion, but the reasons must be stated in the
such rate of interest. Thus, under BSP Circular No. 799, issued on June 21, 2013 and body of the court’s decision.58 This failure or oversight of the trial court cannot even
effective on July 1, 2013, the said rate of interest is now back at six percent be supplied by the CA. As concisely explained in Frias v. San Diego-Sison59:chanrobles
(6%), viz:chanrobles virtua1aw 1ibrary virtua1aw 1ibrary

Bangko Sentral ng Pilipinas Article 2208 of the New Civil Code enumerates the instances where such may be
OFFICE OF THE GOVERNOR awarded and, in all cases, it must be reasonable, just and equitable if the same were
to be granted. Attorney’s fees as part of damages are not meant to enrich the
291

winning party at the expense of the losing litigant. They are not awarded every time a
 party prevails in a suit because of the policy that no premium should be placed on the
right to litigate. The award of attorney’s fees is the exception rather than the general
rule. As such, it is necessary for the trial court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award. The
matter of attorney’s fees cannot be mentioned only in the dispositive portion of the
decision. They must be clearly explained and justified by the trial court in the body of
its decision. On appeal, the CA is precluded from supplementing the bases for
awarding attorney’s fees when the trial court failed to discuss in its Decision the
reasons for awarding the same. Consequently, the award of attorney’s fees should be
deleted.60 (Citations omitted)

WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of
Appeals in CA-G.R. CV No. 83811 is AFFIRMED with MODIFICATION. Petitioner S.C.
Megaworld Construction and Development Corporation is ordered to pay respondent
Engr. Luis A. Parada, represented by Engr. Leonardo A. Parada, the principal amount
due of P816,627.00, plus interest at twelve percent (12%) per annum, reckoned from PART II. CONTRACTS
judicial demand until June 30, 2013, and six percent (6%) per annum from July 1, 2013
until finality hereof, by way of actual and compensatory damages. Thereafter, the 70. G.R. No. 173622 March 11, 2013
principal amount due as adjusted by interest shall likewise earn interest at six percent
(6%) per annum until fully paid. The award of attorney’s fees ROBERN DEVELOPMENT CORPORATION and RODOLFO M. BERNARDO,
is DELETED.chanroblesvirtualawlibrary JR., Petitioners,
vs.
SO ORDERED. PEOPLE'S LANDLESS ASSOCIATION represented by FLORIDA RAMOS and NARDO
LABORA, Respondent.
Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Villarama, Jr., JJ.,
concur. DECISION

DEL CASTILLO, J.:

"This Court cannot presume the existence of a sale of land, absent any direct proof of
it."1

Challenged in this Petition for Review on Certiorari are the August 16, 2005
Decision2 and May 30, 2006 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV
No. 66071, which ordered petitioner Robern Development Corporation (Robern) to
reconvey the 2,000-square meter lot it bought from Al-Amanah Islamic Development
Bank of the Philippines (Al-Amanah) to respondent People's Landless Association
(PELA).

Factual Antecedents
292
 Al-Amanah owned a 2000-square meter lot located in Magtu-od, Davao City and
covered by Transfer Certificate of Title (TCT) No. 138914.4 On December 12, 1992, Al-
Amanah Davao Branch, thru its officer-in-charge Febe O. Dalig (OIC Dalig),
asked5 some of the members of PELA6 to desist from building their houses on the lot
and to vacate the same, unless they are interested to buy it. The informal settlers
thus expressed their interest to buy the lot at ₱100.00 per square meter, which Al-
Amanah turned down for being far below its asking price. 7 Consequently, Al-Amanah
reiterated its demand to the informal settlers to vacate the lot.8
In a letter9 dated March 18, 1993, the informal settlers together with other members
comprising PELA offered to purchase the lot for ₱300,000.00, half of which shall be
paid as down payment and the remaining half to be paid within one year. In the
lower portion of the said letter, Al-Amanah made the following annotation:
Note:
Subject offer has been acknowledged/received but processing to take effect upon
putting up of the partial amt. of ₱150,000.00 on or before April 15, 1993.
By May 3, 1993, PELA had deposited ₱150,000.00 as evidenced by four bank
receipts.10 For the first three receipts, the bank labelled the payments as "Partial
deposit on sale of TCT No. 138914", while it noted the 4th receipt as "Partial/Full
payment on deposit on sale of A/asset TCT No. 138914."
In the meantime, the PELA members remained in the property and introduced
further improvements.
On November 29, 1993, Al-Amanah, thru Davao Branch Manager Abraham D.
Ututalum-Al Haj, wrote then PELA President Bonifacio Cuizon, Sr. informing him of
the Head Office’s disapproval of PELA’s offer to buy the said 2,000-square meter lot,
viz:
Dear Mr. Cuizon, Sr.,
Please be inform[ed] that your offer to purchase the lot covered by TCT No. T-
138914, containing an area of 2,000 square meters, located at Bakingan, Barangay
Magtuod, Davao City for ₱300,000.00 has been turned down by the top
management, due to the reason that your offered price is way below the selling price
of the Bank which is ₱500.00 per square meter, or negotiate but on Cash basis only.
293
You had been told regarding this matter, but you failed to counter offer since you
have [conferred] with the Bank’s local management. Despite x x x the time given to
you to counter offer or to vacate the lot presently and illegally occupied by you and
the members of the association, still you refrain to hear our previous notices. You
even deliberately construct more residential structures without our permission. As
such, you are finally instructed to vacate the lot and remove all the house structures
erected on the said lot within 15 days upon receipt of this letter. Failure on your part
including that of the members, the Bank will be constrained to take legal action
against you.
Furthermore, you can withdraw the amount deposited in the name of your
association anytime during banking hours.11
Subsequently, Al-Amanah sent similarly worded letters,12 all dated December 14,
1993, to 19 PELA members demanding that they vacate the lot.
In a letter13 dated December 20, 1993, PELA, through Atty. Pedro S. Castillo, replied
that it had already reached an agreement with Al-Amanah regarding the sale of the
subject lot based on their offered price:
Dear Mr. Ututalum-Al-Haj,
The People’s Landless Association, Inc., through Mr. Bonifacio Cuizon, Sr. has
requested us to assist them in communicating with you anent your letter of 29
November 1993. According to Mr. Cuizon the present occupants of the lot covered by
T.C.T. No. T-138914 with an area of 2,000 square meters, had a definite agreement
with the Islamic Bank through its previous Manager or
Officer-in-Charge to buy this foreclosed property at ₱300,000.00. As a matter of fact
their deposit of ₱150,000.00 was on that basis. For this reason, the occupants, who
are members of the association, have already made lot allocations among themselves
and have improved their respective houses.
It would be most unfair if the Bank would now renege on its commitment and eject
these occupants. In line with the national policy of granting landless members of our
society the opportunity of owning land and providing shelter to their families, it
would be equitable and socially justifiable to grant these occupants their occupied
areas pursuant to the earlier agreement with the Bank.
For the foregoing reasons we hope that the Islamic Bank, for legal, moral and social
grounds would reconsider.
 Meanwhile, acting on Robern’s undated written offer, 14 Al-Amanah issued a
Recommendation Sheet15 dated December 27, 1993 addressed to its Board
Operations Committee, indicating therein that Robern is interested to buy the lot for
₱400,000.00; that it has already deposited 20% of the offered purchase price; that it
is buying the lot on "as is" basis; and, that it is willing to shoulder the relocation of all
informal settlers therein. On December 29, 1993, the Head Office informed the Davao
Branch Manager that the Board Operations Committee had accepted Robern’s
offer.16
Eight days later, Robern was informed of the acceptance. Al-Amanah stressed that it
is Robern’s responsibility to eject the occupants in the subject lot, if any, as well as
the payment of the remaining amount within 15 days; otherwise, the ₱80,000.00
deposit shall be forfeited.17
In a letter18 dated January 13, 1994, Robern expressed to Al-Amanah its uncertainty
on the status of the subject lot, viz.:
This is in connection with TCT No. 138914 which your bank offered to sell to us and
which we committed to buy.
A group calling itself PEOPLE’S LANDLESS ASSOCIATION, INC. made representation
with our office bringing with them copies of official receipts totalling ₱150,000.00
issued by your bank which stated---"PARTIAL PAYMENT/DEPOSIT on sale of TCT
#138914".
While condition no. 6 in the sale of property to us states that the buyer shall be
responsible for ejecting the squatters of the property, the occupants of the said lot
could hardly be categorized as squatters considering the supposed transaction
previously entered by your bank with them. We were greatly appalled that we should
learn about this not from the bank but from outside sources.1âwphi1
My company is ready to finalize our transaction provided, however, that the problem
with this group is cleared. In this connection, we are requesting for a definite
statement from your bank on whether the official receipts being brandished by this
group are genuine or not, and if they were, were they ever invalidated by virtue of
the return of their deposit and whether there was a cancellation of your agreement
with them.
In the meantime, please consider the 15-day period for us to pay the amount of
₱320,000.00 imposed by your bank suspended until such time that the legal problem
294
with the lot occupants is settled.
To convince Robern that it has no existing contract with PELA, Al-Amanah furnished it
with copies of the Head Office’s rejection letter of PELA’s bid, the demand letters to
vacate, and the proof of consignment of PELA’s ₱150,000.00 deposit to the Regional
Trial Court (RTC) of Davao City that PELA refused to withdraw.19 Thereafter, on
February 2, 1994, it informed Robern that should the latter fail to pay the balance by
February 9, 1994, its ₱80,000.00 deposit will be forfeited and the lot shall be up for
sale to other prospective buyers.20 Meanwhile, Al-Amanah requested for assistance
for the removal of the houses not only from the Office of the City Engineer of Davao
City21 but also from Mayor Rodrigo Duterte. Gaining a favorable legal opinion from
the City Legal Officer, the matter was indorsed to the Chief of Demolition Consensus
of the Department of Public Services for action.22
On March 4, 1994, Robern paid the balance of the purchase price.23 The Deed of
Sale24 over the realty was executed on April 6, 1994 and TCT No. T-21298325 was
issued in Robern’s name the following day.
A week later, PELA consigned ₱150,000.00 in the RTC of Davao City. 26 Then on April
14, 1994, it wrote27 Al-Amanah asking the latter to withdraw the amount consigned.
Part of the letter states:
xxxx
On March 21, 1994 (almost one month before the April 15, 1994 deadline) we came
to your bank to remit the balance and full payment [for] the abovementioned lot.
[Inasmuch] as you refuse[d] to accept the payment, we have decided to deposit the
amount consigned to your bank.
In our dialogue at your office in 1993, we have agreed that documents will be
processed as soon as we pay the ₱150,000.00 initial deposit. [Inasmuch] as we have
not only paid the deposit but have also made full payment of the account, kindly
facilitate processing of the documents to finalize transaction.
We have not been remiss in doing our part of the transaction; please do your share.
Thank you.
Very truly yours,
For the occupants/claimants
T.C.T. No. T-13891428
 Three months later, as its members were already facing eviction and possible
demolition of their houses, and in order to protect their rights as vendees, PELA filed
a suit for Annulment and Cancellation of Void Deed of Sale 29against Al-Amanah, its
Director Engr. Farouk Carpizo (Engr. Carpizo), OIC Dalig, Robern, and Robern’s
President and General Manager, petitioner Rodolfo Bernardo (Bernardo) before the
RTC of Davao City. It insisted that as early as March 1993 it has a perfected contract
of sale with Al-Amanah. However, in an apparent act of bad faith and in cahoots with
Robern, Al-Amanah proceeded with the sale of the lot despite the prior sale to PELA.
Incidentally, the trial court granted PELA’s prayer for a temporary restraining
order.30 Subsequently, it issued on August 12, 1994 an Order 31 finding merit in the
issuance of the writ of preliminary injunction, inter alia. The RTC’s grant of injunctive
relief was affirmed by the CA in CA-G.R. SP No. 3523832 when the factual and legal
bases for its issuance were questioned before the appellate court.
The respondents in the annulment case filed their respective Answers. 33 Al-Amanah
and Engr. Carpizo claimed that the bank has every right to sell its lot to any interested
buyer with the best offer and thus they chose Robern. They clarified that the
₱150,000.00 PELA handed to them is not part of the payment but merely a deposit in
connection with its offer. They asserted that PELA was properly apprised that its offer
to buy was subject to the approval of Al-Amanah’s Head Office. They stressed that Al-
Amanah never entered into a sale with PELA for there was no perfected agreement as
to the price since the Head Office rejected
PELA’s offer.
For their part, Robern and Bernardo asserted the corporation’s standing as a
purchaser in good faith and for value in the sale of the property, having relied on the
clean title of Al-Amanah. They also alleged that the purported sale to PELA is violative
of the Statute of Frauds34 as there is no written agreement covering the same.
Ruling of the Regional Trial Court
In its August 10, 1999 Decision,35 the RTC dismissed PELA’s Complaint. It opined that
the March 18, 1993 letter PELA has been relying upon as proof of a perfected
contract of sale was a mere offer which was already rejected.
Furthermore, the annotation appearing in the bottom part of the said letter could not
be construed as an acceptance because the same is a mere acknowledgment of
receipt of the letter (not the offer) which will still be subject to processing. The RTC
295
likewise ruled that being a corporation, only Al-Amanah’s board of directors can bind
the bank with third persons involving the sale of its property. Thus, the purported
offer made by Al-Amanah’s OIC, who was never conferred authority by the board of
directors to sell the lot, cannot bind the bank. In contrast, when the Head Office
accepted Robern’s offered price, it was duly approved by the board of directors,
giving birth to a perfected contract of sale between Al-Amanah and Robern.
Refusing to accept the Decision, PELA elevated its case to the CA. 36
Ruling of the Court of Appeals
Reversing the RTC in its assailed Decision 37 of August 16, 2005, the CA ruled that
there was already a perfected contract of sale between PELA and Al-Amanah. It held
that the annotationon the lower portion of the March 18, 1993 letter could be
construed to mean that for Al-Amanah to accept PELA’s offer, the sum of
₱150,000.00 must be first put up. The CA also observed that the subsequent receipt
by Al-Amanah of the amounts totalling ₱150,000.00, and the annotation of "deposit
on sale of TCT No. 138914," on the receipts it issued explicitly indicated an
acceptance of the association’s offer to buy. Consequently, the CA invalidated the
sale between Robern and Al-Amanah.
The CA also concluded that Al-Amanah is guilty of bad faith in dealing with PELA
because it took Al-Amanah almost seven months to reject PELA’s offer while holding
on to the ₱150,000.00 deposit. The CA thus adjudged PELA entitled to moral and
exemplary damages as well as attorney’s fees.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the assailed Decision is SET ASIDE. Judgment is
hereby rendered:
1. DECLARING the contract of sale between PELA and defendant Bank valid
and subsisting.
2. ORDERING the defendant Bank to receive the balance of ₱150,000.00 of
the purchase price from PELA as consigned in court.
3. DECLARING the deed of sale executed by defendant Bank in favor or
Robern Development Corporation as invalid and, therefore, void.
4. ORDERING defendant Bank to return to Robern the full amount of
₱400,000.00 which Robern paid as the purchase price of the subject
property within ten (10) days from finality of this decision. It shall earn a
 legal interest of twelve percent (12%) per annum from the tenth (10th) day
aforementioned if there is delay in payment.
5. ORDERING Robern Development Corporation to reconvey the land
covered by T.C.T. No. 212983 in favor of People’s Landless Association within
a similar period of ten (10) days from finality of this decision.
6. ORDERING defendant Bank to pay plaintiffs-appellants the following:
a. The sum of ₱100,000.00 as moral damages;
b. The sum of ₱30,000.00 as exemplary damages;
c. The sum of ₱30,000.00 as attorney’s fees;
d. A legal interest of SIX PERCENT (6%) per annum on the sums
awarded in (a), (b), and (c) from the date of this Decision up to the
time of full payment thereof.
SO ORDERED.38
Robern and Bernardo filed a Motion for Reconsideration 39 which Al-Amanah adopted.
The CA, however, was firm in its disposition and thus denied 40 the same. Aggrieved,
Robern and Al-Amanah separately filed Petitions for Review on Certiorari before us.
However, Al-Amanah’s Petition docketed as G.R. No. 173437, was denied on
September 27, 2006 on procedural grounds.41 Al-Amanah’s Motion for
Reconsideration of the said Resolution of dismissal was
denied with finality on December 4, 2006.42
Hence, only the Petition of Robern and Bernardo subsists.
Petitioners’ Arguments
Petitioners stress that there was no sale between PELA and Al-Amanah, for neither a
deed nor any written agreement was executed. They aver that Dalig was a mere OIC
of Al-Amanah’s Davao Branch, who was never vested with authority by the board of
directors of Al-Amanah to sell the lot. With regard to the notation on the March 18,
1993 letter and the four bank receipts, Robern contends that these are only in
connection with PELA’s offer.
296
Petitioners likewise contend that Robern is a purchaser in good faith. The PELA
members are mere informal settlers. The title to the lot was clean on its face, and at
the time Al-Amanah accepted Robern’s offer, the latter was unaware of the alleged
transaction with PELA. And when PELA later represented to Robern that it entered
into a transaction with Al-Amanah regarding the subject lot, Robern even wrote Al-
Amanah to inquire about PELA’s claim over the property. And when informed by Al-
Amanah that it rejected the offer of PELA and of its action of requesting assistance
from the local government to remove the occupants from the subject property, only
then did Robern push through with the sale.
Respondent’s Arguments
PELA, on the other hand, claims that petitioners are not the proper parties who can
assail the contract of sale between it and the bank. It likewise argues that the Petition
should be dismissed because the petitioners failed to attach the material portions of
the records that would support its allegations, as required by Section 4, Rule 45 of the
Rules of Court.43
Aside from echoing the finding of the CA that Al-Amanah has a perfected contract of
sale with PELA, the latter further invokes the reasoning of the RTC and the CA (CA-
G.R. SP No. 35238) in finding merit in the issuance of the writ of preliminary
injunction, that is, that there was ‘an apparent perfection of contract (of sale)
between the Bank and PELA.’44 Furthermore, PELA claims that Al-Amanah accepted
its offered price and the ₱150,000.00, thus barring the application of the Statute of
Frauds as the contract was already partially executed. As to the non-existence of a
written contract evidencing the same, PELA ascribes fault on the bank claiming that
nothing happened despite its repeated follow-ups for the OIC of Al-Amanah to
execute the deed after payment of the ₱150,000.00 in May 1993.
Issue
At issue before us is whether there was a perfected contract of sale between PELA
and Al-Amanah, the resolution of which will decide whether the sale of the lot to
Robern should be sustained or not.
Our Ruling
We shall first briefly address some matters raised by PELA.
PELA’s contention that Robern cannot assail the alleged sale between PELA and Al-
Amanah is untenable. Robern is one of the parties who claim title to the disputed lot.
 As such, it is a real party in interest since it stands to be benefited or injured by the
judgment.45
Petitioners’ failure to attach the material portions of the record that would support
the allegations in the Petition is not fatal. We ruled in F.A.T. Kee Computer Systems,
Inc. v. Online Networks International, Inc.,46 thus:
x x x However, such a requirement failure to attach material portions of the record
was not meant to be an ironclad rule such that the failure to follow the same would
merit the outright dismissal of the petition. In accordance with Section 7 of Rule 45,
‘the Supreme Court may require or allow the filing of such pleadings, briefs,
memoranda or documents as it may deem necessary within such periods and under
such conditions as it may consider appropriate.’ More importantly, Section 8 of Rule
45 declares that ‘[i]f the petition is given due course, the Supreme Court may require
the elevation of the complete record of the case or specified parts thereof within
fifteen (15) days from notice.’ x x x47
Anent the statement of the courts below that there was ‘an apparent perfection of
contract (of sale) between Al-Amanah and PELA’, we hold that the same is strictly
confined to the resolution of whether a writ of preliminary injunction should issue
since the PELA members were then about to be evicted. PELA should not rely on such
statement as the same is not decisive of the rights of the parties and the merits of
this case.
We shall now delve into the crucial issue of whether there was a perfected contract
of sale between PELA and Al-Amanah.
Essential Elements of a Contract of Sale
A contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. 48 Thus, for a contract of
sale to be valid, all of the following essential elements must concur: "a) consent or
meeting of the minds; b) determinate subject matter; and c) price certain in money or
its equivalent."49
In the case at bench, there is no controversy anent the determinate subject matter,
i.e., the 2,000-square meter lot. This leaves us to resolve whether there was a
concurrence of the remaining elements.
297
As for the price, fixing it can never be left to the decision of only one of the
contracting parties.50 "But a price fixed by one of the contracting parties, if accepted
by the other, gives rise to a perfected sale."51
As regards consent, "when there is merely an offer by one party without acceptance
of the other, there is no contract."52 The decision to accept a bidder’s proposal must
be communicated to the bidder.53 However, a binding contract may exist between
the parties whose minds have met, although they did not affix their signatures to any
written document,54 as acceptance may be expressed or implied.55 It "can be inferred
from the contemporaneous and subsequent acts of the contracting parties." 56 Thus,
we held:
x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be made either in a formal or an
informal manner, and may be shown by acts, conduct, or words of the accepting
party that clearly manifest a present intention or determination to accept the offer to
buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party
recognizing the existence of the contract of sale.57
There is no perfected contract of sale between PELA and Al-Amanah for want of
consent and agreement on the price.
After scrutinizing the testimonial and documentary evidence in the records of the
case, we find no proof of a perfected contract of sale between Al-Amanah and PELA.
The parties did not agree on the price and no consent was given, whether express or
implied.
When PELA Secretary Florida Ramos (Ramos) testified, she referred to the March 18,
1993 letter which PELA sent to Al-Amanah as the document supposedly embodying
the perfected contract of sale.58 However, we find that the March 18, 1993 letter
referred to was merely an offer to buy, viz:
March 18, 1993
The Manager
Islamic Bank
Davao Branch
Davao City
 Sir/Madam: WITNESS:

This has reference to the offer made by Messrs. Alejandro Padilla, Leonardo Labora, A: x x x, we normally request an offeror to submit or make deposit, actually the bank
Boy Bartiana, Francisco Paig, and Mr. Asterio Aki for the purchase of the acquired does not entertain any offer without any deposit and just like that, during my time x x
asset of the bank with an area of 2,000 square meters and covered by T.C.T. No. T- x in buying the property for those interested the bank does not entertain any offer
138914, portions of which are occupied by their houses. These occupants have unless they make a deposit.
formed and registered a group of x x x landless families who have occupied shoulders
of National Highways, to be able to raise an amount that would meet the approval of xxxx
the Bank as the consideration for the purchase of the property. The group which is
known as PELA or People’s Landless Association, is offering the bank the amount of Q: Why do you issue receipts as officer-in-charge stating only partial deposits?
THREE HUNDRED THOUSAND PESOS (₱300,000.00) for the whole 2,000 sq. meters. Of
this amount the buyers will pay a down payment of ONE HUNDRED FIFTY THOUSAND
A: Because there was no sale, there was no consu[m]mated sale, so any amount
PESOS (₱150,000.00) and the balance payable in one (1) year.
which you will give as a deposit will be accepted by the bank for the offer and that if
their offer will be disapproved we will return the deposit because their offer was very
According to the plan of PELA, about 24 landless families can be accommodated in low and this might be disapproved by the head office in Manila. 60
the property. We hope the Bank can help these families own even a small plot for
their shelter. This would be in line with the government’s program of housing which
xxxx
the present administration promised to put in high gear this year.59 (Emphasis
supplied)
Atty. Taasan:
Neither can the note written by the bank that "subject offer has been
Do you confirm that based on the interest of the plaintiff to acquire the property they
acknowledged/received but processing to take effect upon putting up of the partial
made a deposit with said bank, as evidenced by the receipts that were shown to you
amount of ₱150,000.00 on or before April 15, 1993" be construed as acceptance of
by your counsel, correct?
PELA’s offer to buy. Taken at face value, the annotation simply means that the bank
merely acknowledged receipt of PELA’s letter-offer. Furthermore, by ‘processing,’ Al-
Amanah only meant that it will ‘act on the offer’, i.e., it still has to evaluate whether A: Yes, sir.
PELA’s offer is acceptable. Until and unless Al-Amanah accepts, there is as yet no
perfected contract of sale. Notably here, the bank never signified its ‘approval’ or Q: And according to you, the bank does not entertain any offer to buy the property
‘acceptance’ of the offer. without deposits?

We cannot agree with the CA’s ratiocination that receipt of the amount, coupled with A: Yes, sir.
the phrase written on the four receipts as "deposit on sale of TCT No. 138914,"
signified a tacit acceptance by Al-Amanah of PELA’s offer. For sure, the money PELA Q: In this case since the plaintiffs made a deposit x x x they were properly
gave was not in the concept of an earnest money. Besides, as testified to by then OIC entertained, correct?
Dalig, it is the usual practice of Al-Amanah to require submission of a bid deposit
which is acknowledged by way of bank receipts before it entertains offers. Thus: A: Yes because it is under negotiation, now while their offer price is below the selling
price of the bank.61
Atty. Bolcan:
The absence of a perfected contract of sale was further buttressed by the testimony
Now, as far as you can remember, these receipts state that these are partial deposits, of PELA Secretary Ramos on cross examination, viz:
what do you mean by that?
298

Atty. Rabor:
 Since it was x x x hard earned money you did not require the Amanah Bank when you And now, if there are interested persons making offer x x x what would you do?
gave that ₱150,000.00 to reduce your agreement into writing regarding the sale of
this property? A: Well, we have to screen the offer before we forward the offer to Manila for
approval because…
A: I insisted but she will not issue that.62
Court:
xxxx
What would you do before you forward that to Manila?
Atty. Bolcan:
A: We will be screening the offer x x x.
Now, on April 15, 1993 when the deposit was made, you were present?
Atty. Bolcan:
A: Yes, sir.
And you said that it is referred to Manila?
Q: Now, after making the deposit of One Hundred Fifty Thousand (₱150,000.00)
Pesos on April 15, 1993 did you not request for the bank to execute a document to A: Yes, sir.
prove that actually you are buying the property?
Q: Who will eventually approve the offer made by the interested persons to buy the
A: I even said to the OIC or the manager that ma’am, now that you have received our property?
money, where is our paper that we were the ones to buy that property, sir.
A: We have a committee in Manila to approve the sale of the property.
Q: To whom are you referring to?
Q: Do you have any idea who will approve the offer of the property?
A: Febe Dalig, the OIC, sir.
A: I have no idea but the president, rather it consists of the president I think and then
Q: And this OIC Febe Dalig informed you that the Offer on your part to buy the signed also by the vice-president and some officers in the office, sir.
property is subject for approval by the head office in Manila, is that correct?
xxxx
A: Yes she told me that it would be subject to approval in Manila x x x.
Q: Now, in case of offers of the property of the bank, x x x the officer-in-charge of the
Q: And later on you were informed by the bank that your offer was not accepted by bank, Al-Amanah Bank branch, usually refers this matter to the head office in Manila?
the head office in Manila, is that correct?
A: Yes, sir.
A: She did not inform us but we kept on following it up with their office and she told
us that it did not arrive yet, sir.63(Emphasis supplied) Q: And it is the head office that will decide whether the offer will be approved or not?

PELA Secretary Ramos’ testimony thus corroborated OIC Dalig’s consistent stand that A: Yes as head of the branch, we have to forward the offer whether it was acceptable
it is the Head Office which will decide whether Al-Amanah would accept PELA’s offer: or not.64
299

Atty. Bolcan:
 It is thus undisputed, and PELA even acknowledges, that OIC Dalig made it clear that SO ORDERED.
the acceptance of the offer, notwithstanding the deposit, is subject to the approval of
the Head Office. Recognizing the corporate nature of the bank and that the power to MARIANO C. DEL CASTILLO
sell its real properties is lodged in the higher authorities, 65 she never falsely Associate Justice
represented to the bidders that she has authority to sell the bank’s property. And
regardless of PELA’s insistence that she execute a written agreement of the sale, she
refused and told PELA to wait for the decision of the Head Office, making it clear that
she has no authority to execute any deed of sale.

Contracts undergo three stages: "a) negotiation which begins from the time the
prospective contracting parties indicate interest in the contract and ends at the
moment of their agreement[; b) perfection or birth, x x x which takes place when the
parties agree upon all the essential elements of the contract x x x; and c)
consummation, which occurs when the parties fulfill or perform the terms agreed
upon, culminating in the extinguishment thereof."66

In the case at bench, the transaction between Al-Amanah and PELA remained in the
negotiation stage. The offer never materialized into a perfected sale, for no oral or
documentary evidence categorically proves that Al-Amanah expressed amenability to
the offered ₱300,000.00 purchase price. Before the lapse of the 1-year period PELA
had set to pay the remaining ‘balance,’ Al-Amanah expressly rejected its offered
purchase price, although it took the latter around seven months to inform the former
and this entitled PELA to award of damages.67 Al-Amanah’s act of selling the lot to
another buyer is the final nail in the coffin of the negotiation with PELA. Clearly, there
is no double sale, thus, we find no reason to disturb the consummated sale between
Al-Amanah and Robern.

At this juncture, it is well to stress that Al-Amanah’s Petition before this Court
docketed as G.R. No. 173437 was already denied with finality on December 4, 2006.
Hence, we see no reason to disturb paragraph 6 of the CA’s Decision ordering Al-
Amanah to pay damages to PELA.

WHEREFORE, we PARTIALLY GRANT the Petition. Except for paragraph 6 of the Court
of Appeals Decision which had already been long settled, 68 the rest of the judgment
in the assailed August 16, 2005 Decision and May 30, 2006 Resolution of the Court of
Appeals in CA-G.R. No. CV No. 66071 are hereby ANNULLED and SET ASIDE. The
August 10, 1999 Decision of the Regional Trial Court of Davao City, Branch 12,
dismissing the Complaint for Annulment and Cancellation of Void Deed of Sale filed
by respondent People's Landless Association is REINSTATED and AFFIRMED. The
amount of Pesos: Three Hundred Thousand (₱300,000.00) consigned with the
Regional Trial Court of Davao City may now be withdrawn by People's Landless
300

Association.
 PHILIPPINE SAVINGS BANK, 71 .G.R. No.
193178
Petitioner,

Present:

CARPIO, J.,
- versus -
Chairperson,

NACHURA,

PERALTA,

ABAD, and
SPOUSES ALFREDO M. CASTILLO AND
ELIZABETH C. CASTILLO, and SPOUSES MENDOZA, JJ.
ROMEO B. CAPATI and AQUILINA M.
LOBO,

Respondents. Promulgated:

May 30, 2011

x------------------------------------------------------------------------------------x
MUTUALITY OF CONTRACTS

DECISION

NACHURA, J.:
301
 This is a petition for review on certiorari[1] under Rule 45 of the Rules of Court,
seeking to partially reconsider and modify the Decision [2] dated August 27, 2009 and
the Resolution[3] dated August 4, 2010 of the Court of Appeals (CA) in CA-G.R. CV No.
86445.
Respondent spouses Alfredo M. Castillo and Elizabeth Capati-Castillo were the
registered owners of a lot located in Tondo, Manila, covered by Transfer Certificate of
Title (TCT) No. 233242.Respondent spouses Romeo B. Capati and Aquilina M. Lobo
were the registered owners of another lot, covered by TCT No. 227858, also located
in Tondo, Manila.
On May 7, 1997, respondents obtained a loan, with real estate mortgage over the
said properties, from petitioner Philippine Savings Bank, as evidenced by a
Promissory Note with a face value of P2,500,000.00. The Promissory Note, in part,
reads:
FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise
to pay to the order of PHILIPPINE SAVINGS BANK, at its head office or at the
above stated Branch the sum of TWO MILLION FIVE HUNDRED THOUSAND
PESOS ONLY (P2,500,000.00), Philippine currency, with interest at the rate of
seventeen per centum (17%) per annum, from date until paid, as follows:
P43,449.41 (principal and interest) monthly for fifty nine (59)
months starting June 07, 1997 and every 7th day of the month thereafter
with balloon payment on May 07, 2002.
Also, the rate of interest herein provided shall be subject to review
and/or adjustment every ninety (90) days.
All amortizations which are not paid on due date shall bear a
penalty equivalent to three percent (3%) of the amount due for every
month or fraction of a months delay.
The rate of interest and/or bank charges herein stipulated, during
302
the terms of this promissory note, its extensions, renewals or other
modifications, may be increased, decreased or otherwise changed from
time to time within the rate of interest and charges allowed under present
or future law(s) and/or government regulation(s) as the PHILIPPINE
SAVINGS BANK may prescribe for its debtors.
Upon default of payment of any installment and/or interest when
due, all other installments and interest remaining unpaid shall immediately
become due and payable. Also, said interest not paid when due shall be
added to, and become part of the principal and shall likewise bear interest
at the same rate herein provided.[4]
From the release of the loan in May 1997 until December 1999, petitioner had
increased and decreased the rate of interest, the highest of which was 29% and the
lowest was 15.5% per annum, per the Promissory Note.
Respondents were notified in writing of these changes in the interest rate. They
neither gave their confirmation thereto nor did they formally question the
changes. However, respondent Alfredo Castillo sent several letters to petitioner
requesting for the reduction of the interest rates.[5] Petitioner denied these requests.
Respondents regularly paid their amortizations until December 1999, when they
defaulted due to financial constraints. Per petitioners table of application of payment,
respondents outstanding balance was P2,231,798.11.[6] Petitioner claimed that as of
February 11, 2000, respondents had a total outstanding obligation
of P2,525,910.29.[7] Petitioner sent them demand letters. Respondents failed to pay.
Thus, petitioner initiated an extrajudicial foreclosure sale of the mortgaged
properties. The auction sale was conducted on June 16, 2000, with the properties
sold for P2,778,611.27 and awarded to petitioner as the only bidder. Being the
mortgagee, petitioner no longer paid the said amount but rather credited it to the
loan amortizations and arrears, past due interest, penalty charges, attorneys fees, all
legal fees and expenses incidental to the foreclosure and sale, and partial payment of
the mortgaged debt. On even date, a certificate of sale was issued and submitted to
the Clerk of Court and to the Ex-Officio Sheriff of Manila.
 On July 3, 2000, the certificate of sale, sans the approval of the Executive Judge of the
Regional Trial Court (RTC), was registered with the Registry of Deeds of Manila.
Respondents failed to redeem the property within the one-year redemption
period. However, on July 18, 2001, Alfredo Castillo sent a letter to petitioner
requesting for an extension of 60 days before consolidation of its title so that they
could redeem the properties, offering P3,000,000.00 as redemption price. Petitioner
conceded to Alfredo Castillos request, but respondents still failed to redeem the
properties.
On October 1, 2001, respondents filed a case for Reformation of Instruments,
Declaration of Nullity of Notarial Foreclosure Proceedings and Certificate of Sale,
Cancellation of Annotations on TCT Nos. 233242 and 227858, and Damages, with a
plea for the issuance of a temporary restraining order (TRO) and/or writ of
preliminary prohibitory injunction, with the RTC, Branch 14, Manila.
On October 5, 2001, the RTC issued a TRO. Eventually, on October 25, 2001, it issued
a writ of preliminary injunction.
After trial, the RTC rendered its decision dated July 30, 2005, the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs, and against the defendants in the following manner:
1. Declaring the questioned increases of interest as
unreasonable, excessive and arbitrary and ordering the
defendant Philippine Savings Bank to refund to the plaintiffs,
the amount of interest collected in excess of seventeen
percent (17%) per annum;
2. Declaring the Extrajudicial Foreclosure conducted by the
defendants on June 16, 2000 and the subsequent
proceedings taken thereafter to be void ab initio. In this
connection, defendant Register of Deeds is hereby ordered to
cause the cancellation of the corresponding annotations at
303
the back of Transfer Certificates of Title No. 227858 and
233242 in the name of Spouses Alfredo and Elizabeth Castillo
and Spouses Romeo Capati and Aquilina M. Lobo;
3. Defendant Philippine Savings Bank is adjudged to pay
plaintiffs the amount of Php50,000.00 as moral damages;
Php50,000.00 as exemplary damages; and attorneys fees in
the amount of Php30,000.00 and Php3,000.00 per
appearance.
4. Defendants counterclaims are hereby DISMISSED for lack of
merit.
With costs against the defendant Philippine Savings Bank, Inc.
SO ORDERED.[8]
Petitioner filed a motion for reconsideration. The RTC partially granted the motion in
its November 30, 2005 Order, modifying the interest rate from 17% to 24% per
annum.[9]
Petitioner appealed to the CA. The CA modified the decision of the RTC, thus
WHEREFORE, in view of the foregoing, the Decision of the Regional Trial
Court is hereby AFFIRMED WITH MODIFICATIONS. The fallo shall now read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendants in the following manner:
1. Declaring the questioned increases of interest as unreasonable,
excessive and arbitrary and ordering the defendant Philippine Savings
Bank to refund to the plaintiffs, the amount of interest collected in
excess of seventeen percent (17%) per annum;
2. Declaring the Extrajudicial Foreclosure conducted by the defendants
on June 16, 2000 and the subsequent proceedings taken thereafter to
be valid[;]
3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the
amount of Php 25,000.00 as moral damages; Php 50,000.00 as
 exemplary damages; and attorneys fees in the amount of Php
30,000.00 and Php 3,000.00 per appearance;
4. Defendants counterclaims are hereby DISMISSED for lack of merit.
With costs against the defendant Philippine Savings Bank,
Inc.
SO ORDERED.[10]
Hence, this petition anchored on the contention that the CA erred in: (1) declaring
that the modifications in the interest rates are unreasonable; and (2) sustaining the
award of damages and attorneys fees.
The petition should be partially granted.
The unilateral determination and imposition of the increased rates is violative of the
principle of mutuality of contracts under Article 1308 of the Civil Code, which
provides that [t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.[11] A perusal of the Promissory
Note will readily show that the increase or decrease of interest rates hinges solely on
the discretion of petitioner. It does not require the conformity of the maker before a
new interest rate could be enforced. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result, thus
partaking of the nature of a contract of adhesion, is void. Any stipulation regarding
the validity or compliance of the contract left solely to the will of one of the parties is
likewise invalid.
Petitioner contends that respondents acquiesced to the imposition of the
modified interest rates; thus, there was no violation of the principle of mutuality of
contracts. To buttress its position, petitioner points out that the exhibits presented by
respondents during trial contained a uniform provision, which states:
304
The interest rate adjustment is in accordance with the
Conformity Letter you have signed amending your accounts interest
rate review period from ninety (90) to thirty days.[12]
It further claims that respondents requested several times for the reduction of the
interest rates, thus, manifesting their recognition of the legality of the said rates. It
also asserts that the contractual provision on the interest rates cannot be said to be
lopsided in its favor, considering that it had, on several occasions, lowered the
interest rates.
We disagree. The above-quoted provision of respondents exhibits readily
shows that the conformity letter signed by them does not pertain to the modification
of the interest rates, but rather only to the amendment of the interest rate review
period from 90 days to 30 days. Verily, the conformity of respondents with respect to
the shortening of the interest rate review period from 90 days to 30 days is separate
and distinct from and cannot substitute for the required conformity of respondents
with respect to the modification of the interest rate itself.
Moreover, respondents assent to the modifications in the interest rates
cannot be implied from their lack of response to the memos sent by petitioner,
informing them of the amendments. The said memos were in the nature of a
proposal to change the contract with respect to one of its significant
components, i.e., the interest rates. As we have held, no one receiving a proposal to
change a contract is obliged to answer the proposal. [13] Therefore, respondents could
neither be faulted, nor could they be deemed to have assented to the modified
interest rates, for not replying to the said memos from petitioner.
 We likewise disagree with petitioners assertion that respondents recognized
the legality of the imposed interest rates through the letters requesting for the
reduction of the rates. The request for reduction of the interest does not translate to
consent thereto. To be sure, a cursory reading of the said letters would clearly show
that Alfredo Castillo was, in fact, questioning the propriety of the interest rates The undersigned is a mortgagor of Philippine Savings Bank
imposed on their loan, viz.: with an outstanding balance of TWO MILLION FOUR HUNDRED
THIRTY THREE THOUSAND EIGHTY FOUR and 73/100
(P2,433,084.73) at an interest rate of 22.5% per annum (as per April
24, 1998 memo faxed to us) and with a monthly amortization of
The undersigned is a mortgagor of Philippine Savings Bank FIFTY TWO THOUSAND FIVE HUNDRED FIFTY EIGHT AND 01/100
with an outstanding balance of TWO MILLION FOUR HUNDRED (P52,55[8].01).
THIRTY EIGHT THOUSAND SIX HUNDRED SIX and 63/100
(P2,438,606.63) at an interest rate of 26% per annum (as per April
6, 1997 inquiry to Leo of the Accounting Dept.) and with a monthly
amortization of FIFTY EIGHT THOUSAND THREE HUNDRED FIFTY Such reduction of interest rate is an effect of our currencys
EIGHT AND 38/100 (P58,358.38). development. But based on our inquiries and research to different
financial institutions, the rate your bank is imposing to us is still
higher compared to the eighteen and a half percent (18.5%) others
are asking. With this situation, we are again requesting for a
I understand that the present interest rate is lower than decrease on the interest rate, that is, from 22.5% to 18.5%. This
the last months 27%. However, it does not give our company any figure stated is not fictitious since other banks advertising are
break from coping with our receivables. Our clients, Mercure published to leading newspapers. The difference between your rate
Philippine Village Hotel, Puerto Azul Beach Hotel, Grand Air Caterer, is visibly greater and has an immense effect on our financial
to name a few, did not settle their obligation to us inspite of what obligations.[15]
was agreed upon during our meeting held last February 1998. Their
pledge of paying us at least ONE MILLION PESOS PER AFFILIATION,
which we allocate to pay our balance to your bank, was not a
reliable deal to foresee because, as of this very day, not even half of
the amount assured to us was settled. This situation puts the
company in critical condition since we will again shoulder all the
interests imposed on our loans, while, we ourselves, did not impose
any surcharge with our receivables.
The undersigned is a mortgagor at Philippine Savings Bank
with an outstanding balance of TWO MILLION FOUR HUNDRED
THOUSAND EIGHT HUNDRED ELEVEN and 03/100 (Php
2,40[0],811.03) at an interest rate of 21% per annum.
In connection with this, may I request for a reduction of
interest rate, in my favor, i.e., from 26% to 21% per annum. If such
appeal is granted to us, we are assuring you of our prompt payment
and keen observance to your rules and regulations.[14]
Letters of reconsideration were constantly sent to you to
grant us lower interest rate. However, no assistance with regard to
305

that request has been extended to us. In view of this, I am

 requesting for a transfer of our loan from PSBank Head Office to
PSBank Mabini Branch. This transfer is purposely intended for an
appeal [for] a lower interest rate.[16]
Being a mortgagor of PSBank, I have [been] repeatedly
asking for a reduction of your interest rate. However, my request
has been denied since the term I started. Many banks offer a much
lower interest rate and fair business transactions (e.g. Development
Bank of Singapore [which] offers 13% p.a. interest rate).
In this connection, once more, I am requesting for a
reduction of the interest rate applied to my loan to maintain our
business relationship.[17]
Basic is the rule that there can be no contract in its true sense without the mutual
assent of the parties. If this consent is absent on the part of one who contracts, the
act has no more efficacy than if it had been done under duress or by a person of
unsound mind. Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the proposed
modification, especially when it affects an important aspect of the agreement. In the
case of loan contracts, the interest rate is undeniably always a vital component, for it
can make or break a capital venture. Thus, any change must be mutually agreed
upon, otherwise, it produces no binding effect.[18]
Escalation clauses are generally valid and do not contravene public policy. They are
common in credit agreements as means of maintaining fiscal stability and retaining
306
the value of money on long-term contracts. To prevent any one-sidedness that these
clauses may cause, we have held in Banco Filipino Savings and Mortgage Bank v.
Judge Navarro[19] that there should be a corresponding de-escalation clause that
would authorize a reduction in the interest rates corresponding to downward
changes made by law or by the Monetary Board. As can be gleaned from the parties
loan agreement, a de-escalation clause is provided, by virtue of which, petitioner had
lowered its interest rates.
Nevertheless, the validity of the escalation clause did not give petitioner the
unbridled right to unilaterally adjust interest rates. The adjustment should have still
been subjected to the mutual agreement of the contracting parties. In light of the
absence of consent on the part of respondents to the modifications in the interest
rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-
escalation clause in the loan agreement.
The order of refund was based on the fact that the increases in the interest
rate were null and void for being violative of the principle of mutuality of
contracts. The amount to be refunded refers to that paid by respondents when they
had no obligation to do so. Simply put, petitioner should refund the amount of
interest that it has illegally imposed upon respondents. Any deficiency in the payment
of the obligation can be collected by petitioner in a foreclosure proceeding, which it
already did.
On the matter of damages, we agree with petitioner. Moral damages are not
recoverable simply because a contract has been breached. They are recoverable only
if the party from whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract
may give rise to exemplary damages only if the guilty party acted in a fraudulent or
malevolent manner.[20]
In this case, we are not sufficiently convinced that fraud, bad faith, or wanton
disregard of contractual obligations can be imputed to petitioner simply because it
unilaterally imposed the changes in interest rates, which can be attributed merely to
 bad business judgment or attendant negligence. Bad faith pertains to a dishonest
purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a
known duty attributable to a motive, interest or ill will that partakes of the nature of
fraud. Respondents failed to sufficiently establish this requirement. Thus, the award
of moral and exemplary damages is unwarranted. In the same vein, respondents
cannot recover attorneys fees and litigation expenses. Accordingly, these awards
should be deleted.[21]

However, as regards the above mentioned award for refund to respondents of their
interest payments in excess of 17% per annum, the same should include legal
interest. In Eastern Shipping Lines, Inc. v. Court of Appeals,[22] we have held that when
an obligation is breached, and it consists in the payment of a sum of money, the
interest on the amount of damages shall be at the rate of 12% per annum, reckoned
from the time of the filing of the complaint.[23]

WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Decision dated

August 27, 2009 and the Resolution dated August 4, 2010 of the Court of Appeals in
CA-G.R. CV No. 86445 are AFFIRMED WITH MODIFICATIONS, such that the award for
moral damages, exemplary damages, attorneys fees, and litigation expenses
is DELETED, and the order of refund in favor of respondents of interest payments PRINCIPLE OF RELATIVITY OF CONTRACTS
made in excess of 17% per annum shall bear interest of 12% per annum from the time
of the filing of the complaint until its full satisfaction. 72. G.R. No. 179382 January 14, 2013

SPOUSES BENJAMIN C. MAMARIL AND SONIA P. MAMARIL, Petitioners,

vs.
SO ORDERED. THE BOY SCOUT OF THE PHILIPPINES, AIB SECURITY AGENCY, INC., CESARIO
PEÑA,* AND VICENTE GADDI, Respondents.

DECISION

ANTONIO EDUARDO B. NACHURA PERLAS-BERNABE, J.:

Associate Justice
This is a Petition for Review on Certiorari assailing the May 31, 2007 Decision 1 and
August 16, 2007 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 75978.
The dispositive portion of the said Decision reads:
307
 WHEREFORE, the Decision dated November 28, 2001 and the Order dated June 11,
2002 rendered by the Regional Trial Court of Manila, Branch 39 is hereby MODIFIED
to the effect that only defendants AIB Security Agency, Inc., Cesario Peña and Vicente
Gaddi are held jointly and severally liable to pay plaintiffs-appellees Spouses
Benjamin C. Mamaril and Sonia P. Mamaril the amount of Two Hundred Thousand
Pesos (₱200,000.00) representing the cost of the lost vehicle, and to pay the cost of
suit. The other monetary awards are DELETED for lack of merit and/or basis.
Defendant-Appellant Boy Scout of the Philippines is absolved from any liability.
SO ORDERED.3
The Antecedent Facts
Spouses Benjamin C. Mamaril and Sonia P. Mamaril (Sps. Mamaril) are jeepney
operators since 1971. They would park their six (6) passenger jeepneys every night at
the Boy Scout of the Philippines' (BSP) compound located at 181 Concepcion Street,
Malate, Manila for a fee of ₱300.00 per month for each unit. On May 26, 1995 at 8
o'clock in the evening, all these vehicles were parked inside the BSP compound. The
following morning, however, one of the vehicles with Plate No. DCG 392 was missing
and was never recovered.4 According to the security guards Cesario Peña (Peña) and
Vicente Gaddi (Gaddi) of AIB Security Agency, Inc. (AIB) with whom BSP had
contracted5 for its security and protection, a male person who looked familiar to
them took the subject vehicle out of the compound.
On November 20, 1996, Sps. Mamaril filed a complaint6 for damages before the
Regional Trial Court (RTC) of Manila, Branch 39, against BSP, AIB, Peña and Gaddi. In
support thereof, Sps. Mamaril averred that the loss of the subject vehicle was due to
the gross negligence of the above-named security guards on-duty who allowed the
subject vehicle to be driven out by a stranger despite their agreement that only
authorized drivers duly endorsed by the owners could do so. Peña and Gaddi even
admitted their negligence during the ensuing investigation. Notwithstanding, BSP and
AIB did not heed Sps. Mamaril's demands for a conference to settle the matter. They
therefore prayed that Peña and Gaddi, together with AIB and BSP, be held liable for:
(a) the value of the subject vehicle and its accessories in the aggregate amount of
₱300,000.00; (b) ₱275.00 representing daily loss of income/boundary reckoned from
the day the vehicle was lost; (c) exemplary damages; (d) moral damages; (e)
attorney's fees; and (f) cost of suit.
In its Answer,7 BSP denied any liability contending that not only did Sps. Mamaril
directly deal with AIB with respect to the manner by which the parked vehicles would
308
be handled, but the parking ticket8 itself expressly stated that the "Management shall
not be responsible for loss of vehicle or any of its accessories or article left therein." It
also claimed that Sps. Mamaril erroneously relied on the Guard Service Contract.
Apart from not being parties thereto, its provisions cover only the protection of BSP's
properties, its officers, and employees.
In addition to the foregoing defenses, AIB alleged that it has observed due diligence
in the selection, training and supervision of its security guards while Peña and Gaddi
claimed that the person who drove out the lost vehicle from the BSP compound
represented himself as the owners' authorized driver and had with him a key to the
subject vehicle. Thus, they contended that Sps. Mamaril have no cause of action
against them.
The RTC Ruling
After due proceedings, the RTC rendered a Decision 9 dated November 28, 2001 in
favor of Sps. Mamaril. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered ordering the defendants Boy Scout of the
Philippines and AIB Security Agency, with security guards Cesario Pena and Vicente
Gaddi: -
1. To pay the plaintiffs jointly and severally the cost of the vehicle which is
₱250,000.00 plus accessories of ₱50,000.00;
2. To pay jointly and severally to the plaintiffs the daily loss of the
income/boundary of the said jeepney to be reckoned fromits loss up to the
final adjudication of the case, which is ₱275.00 a day;
3. To pay jointly and severally to the plaintiffs moral damages in the amount
of ₱50,000.00;
4. To pay jointly and severally to the plaintiffs exemplary damages in the
amount of ₱50,000.00;
5. To pay jointly and severally the attorney's fees of ₱50,000.00 and
appearances in court the amount of ₱1,500.00 per appearance; and
6. To pay cost.
SO ORDERED.10
 The RTC found that the act of Peña and Gaddi in allowing the entry of an unidentified I.
person and letting him drive out the subject vehicle in violation of their internal
agreement with Sps. Mamaril constituted gross negligence, rendering AIB and its THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN ABSOLVING
security guards liable for the former's loss. BSP was also adjudged liable because the RESPONDENT BOY SCOUT OF THE PHILIPPINES FROM ANY LIABILITY.
Guard Service Contract it entered into with AIB offered protection to all properties
inside the BSP premises, which necessarily included Sps. Mamaril's vehicles. II.
Moreover, the said contract stipulated AIB's obligation to indemnify BSP for all losses
or damages that may be caused by any act or negligence of its security guards.
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS MISTAKE WHEN
Accordingly, the BSP, AIB, and security guards Peña and Gaddi were held jointly and
IT RULED THAT THE GUARD SERVICE CONTRACT IS PURELY BETWEEN BOY
severally liable for the loss suffered by Sps. Mamaril.
SCOUT OF THE

On June 11, 2002, the RTC modified its decision reducing the cost of the stolen
vehicle from ₱250,000.00 to ₱200,000.00.11
Only BSP appealed the foregoing disquisition before the CA.
PHILIPPINES AND AIB SECURITY AGENCY, INC., AND IN HOLDING THAT THERE
IS ABSOLUTELY NOTHING IN THE SAID CONTRACT THAT WOULD INDICATE
ANY OBLIGATION AND/OR LIABILITY ON THE PART OF THE PARTIES THEREIN
IN FAVOR OF THIRD PERSONS, SUCH AS PETITIONERS HEREIN.

The CA Ruling III.

In its assailed Decision,12 the CA affirmed the finding of negligence on the part of
security guards Peña and Gaddi. However, it absolved BSP from any liability, holding
that the Guard Service Contract is purely between BSP and AIB and that there was
nothing therein that would indicate any obligation and/or liability on the part of BSP
in favor of third persons, such as Sps. Mamaril. Nor was there evidence sufficient to
establish that BSP was negligent.
It further ruled that the agreement between Sps. Mamaril and BSP was substantially a
contract of lease whereby the former paid parking fees to the latter for the lease of
parking slots. As such, the lessor, BSP, was not an insurer nor bound to take care
and/or protect the lessees' vehicles.
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR IN THE
INTERPRETATION OF LAW WHEN IT CONSIDERED THE AGREEMENT
BETWEEN BOY SCOUT OF THE PHILIPPINES AND PETITIONERS A CONTRACT
OF LEASE, WHEREBY THE BOY SCOUT IS NOT DUTY BOUND TO PROTECT OR
TAKE CARE OF PETITIONERS' VEHICLES.
IV.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED WHEN IT RULED
THAT PETITIONERS ARE NOT ENTITLED TO DAMAGES AND ATTORNEY'S
FEES.14

On the matter of damages, the CA deleted the award of ₱50,000.00 representing the
In fine, Sps. Mamaril maintain that: (1) BSP should be held liable for the loss of their
value of the accessories inside the lost vehicle and the ₱275.00 a day for loss of
vehicle based on the Guard Service Contract and the parking ticket it issued; and (2)
income in the absence of proof to support them. It also deleted the award of moral
the CA erred in deleting the RTC awards of damages and attorney's fees.
and exemplary damages and attorney's fees for lack of factual and legal bases.
The Court's Ruling
Sps. Mamaril's motion for reconsideration thereof was denied in the August 16, 2007
Resolution.13
The petition lacks merit.
Issues Before the Court
Article 20 of the Civil Code provides that every person, who, contrary to law, willfully
or negligently causes damage to another, shall indemnify the latter for the same.
309

Hence, the instant petition based on the following assignment of errors, to wit:
Similarly, Article 2176 of the Civil Code states:
 Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is
no preexisting contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.
In this case, it is undisputed that the proximate cause of the loss of Sps. Mamaril's
vehicle was the negligent act of security guards Peña and Gaddi in allowing an
unidentified person to drive out the subject vehicle. Proximate cause has been
defined as that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury or loss, and without which the result
would not have occurred.15
Moreover, Peña and Gaddi failed to refute Sps. Mamaril's contention16 that they
readily admitted being at fault during the investigation that ensued.
On the other hand, the records are bereft of any finding of negligence on the part of
BSP. Hence, no reversible error was committed by the CA in absolving it from any
liability for the loss of the subject vehicle based on fault or negligence.
Neither will the vicarious liability of an employer under Article 218017 of the Civil
Code apply in this case. It is uncontested that Peña and Gaddi were assigned as
security guards by AIB to BSP pursuant to the Guard Service Contract. Clearly,
therefore, no employer-employee relationship existed between BSP and the security
guards assigned in its premises. Consequently, the latter's negligence cannot be
imputed against BSP but should be attributed to AIB, the true employer of Peña and
Gaddi.18
In the case of Soliman, Jr. v. Tuazon,19 the Court enunciated thus:
It is settled that where the security agency, as here, recruits, hires and assigns the
work of its watchmen or security guards, the agency is the employer of such guards
and watchmen. Liability for illegal or harmful acts committed by the security guards
attaches to the employer agency, and not to the clients or customers of such agency.
As a general rule, a client or customer of a security agency has no hand in selecting
who among the pool of security guards or watchmen employed by the agency shall
be assigned to it; the duty to observe the diligence of a good father of a family in the
selection of the guards cannot, in the ordinary course of events, be demanded from
the client whose premises or property are protected by the security guards. The fact
that a client company may give instructions or directions to the security guards
assigned to it, does not, by itself, render the client responsible as an employer of the
security guards concerned and liable for their wrongful acts or omissions. Those
310
instructions or directions are ordinarily no more than requests commonly envisaged
in the contract for services entered into with the security agency. 20
Nor can it be said that a principal-agent relationship existed between BSP and the
security guards Peña and Gaddi as to make the former liable for the latter's
complained act. Article 1868 of the Civil Code states that "by the contract of agency, a
person binds himself to render some service or to do something in representation or
on behalf of another, with the consent or authority of the latter." The basis for
agency therefore is representation,21 which element is absent in the instant case.
Records show that BSP merely hired the services of AIB, which, in turn, assigned
security guards, solely for the protection of its properties and premises. Nowhere can
it be inferred in the Guard Service Contract that AIB was appointed as an agent of
BSP. Instead, what the parties intended was a pure principal-client relationship
whereby for a consideration, AIB rendered its security services to BSP.
Notwithstanding, however, Sps. Mamaril insist that BSP should be held liable for their
loss on the basis of the Guard Service Contract that the latter entered into with AIB
and their parking agreement with BSP.
Such contention cannot be sustained.
Article 1311 of the Civil Code states:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.
Thus, in order that a third person benefited by the second paragraph of Article 1311,
referred to as a stipulation pour autrui, may demand its fulfillment, the following
requisites must concur: (1) There is a stipulation in favor of a third person; (2) The
stipulation is a part, not the whole, of the contract; (3) The contracting parties clearly
and deliberately conferred a favor to the third person - the favor is not merely
incidental; (4) The favor is unconditional and uncompensated; (5) The third person
communicated his or her acceptance of the favor before its revocation; and (6) The
 contracting parties do not represent, or are not authorized, by the third
party.22 However, none of the foregoing elements obtains in this case.
It is undisputed that Sps. Mamaril are not parties to the Guard Service
Contract.1âwphi1 Neither did the subject agreement contain any stipulation pour
autrui. And even if there was, Sps. Mamaril did not convey any acceptance thereof.
Thus, under the principle of relativity of contracts, they cannot validly claim any rights
or favor under the said agreement.23 As correctly found by the CA:
First, the Guard Service Contract between defendant-appellant BSP and defendant
AIB Security Agency is purely between the parties therein. It may be observed that
although the whereas clause of the said agreement provides that defendant-
appellant desires security and protection for its compound and all properties therein,
as well as for its officers and employees, while inside the premises, the same should
be correlated with paragraph 3(a) thereof which provides that the security agency
shall indemnify defendant-appellant for all losses and damages suffered by it
attributable to any act or negligence of the former's guards.
Otherwise stated, defendant-appellant sought the services of defendant AIB Security
Agency for the purpose of the security and protection of its properties, as well as that
of its officers and employees, so much so that in case of loss of [sic] damage suffered
by it as a result of any act or negligence of the guards, the security agency would then
be held responsible therefor. There is absolutely nothing in the said contract that
would indicate any obligation and/or liability on the part of the parties therein in
favor of third persons such as herein plaintiffs-appellees.24
Moreover, the Court concurs with the finding of the CA that the contract between the
parties herein was one of lease25 as defined under Article 164326 of the Civil Code. It
has been held that the act of parking a vehicle in a garage, upon payment of a fixed
amount, is a lease.27 Even in a majority of American cases, it has been ruled that
where a customer simply pays a fee, parks his car in any available space in the lot,
locks the car and takes the key with him, the possession and control of the car,
necessary elements in bailment, do not pass to the parking lot operator, hence, the
contractual relationship between the parties is one of lease.28
In the instant case, the owners parked their six (6) passenger jeepneys inside the BSP
compound for a monthly fee of ₱300.00 for each unit and took the keys home with
them. Hence, a lessor-lessee relationship indubitably existed between them and BSP.
On this score, Article 1654 of the Civil Code provides that "the lessor (BSP) is obliged:
(1) to deliver the thing which is the object of the contract in such a condition as to
render it fit for the use intended; (2) to make on the same during the lease all the
311
necessary repairs in order to keep it suitable for the use to which it has been devoted,
unless there is a stipulation to the contrary; and (3) to maintain the lessee in the
peaceful and adequate enjoyment of the lease for the entire duration of the
contract." In relation thereto, Article 1664 of the same Code states that "the lessor is
not obliged to answer for a mere act of trespass which a third person may cause on
the use of the thing leased; but the lessee shall have a direct action against the
intruder." Here, BSP was not remiss in its obligation to provide Sps. Mamaril a
suitable parking space for their jeepneys as it even hired security guards to secure the
premises; hence, it should not be held liable for the loss suffered by Sps. Mamaril.
It bears to reiterate that the subject loss was caused by the negligence of the security
guards in allowing a stranger to drive out plaintiffs-appellants' vehicle despite the
latter's instructions that only their authorized drivers may do so. Moreover, the
agreement with respect to the ingress and egress of Sps. Mamaril's vehicles were
coordinated only with AIB and its security guards, 29 without the knowledge and
consent of BSP. Accordingly, the mishandling of the parked vehicles that resulted in
herein complained loss should be recovered only from the tort feasors (Peña and
Gaddi) and their employer, AIB; and not against the lessor, BSP. 30
Anent Sps. Mamaril's claim that the exculpatory clause: "Management shall not be
responsible for loss of vehicle or any of its accessories or article left
therein"31 contained in the BSP issued parking ticket was void for being a contract of
adhesion and against public policy, suffice it to state that contracts of adhesion are
not void per se. It is binding as any other ordinary contract and a party who enters
into it is free to reject the stipulations in its entirety. If the terms thereof are accepted
without objection, as in this case, where plaintiffs-appellants have been leasing BSP's
parking space for more or less 20 years,32 then the contract serves as the law
between them.33 Besides, the parking fee of ₱300.00 per month or ₱10.00 a day for
each unit is too minimal an amount to even create an inference that BSP undertook
to be an insurer of the safety of plaintiffs-appellants' vehicles.
On the matter of damages, the Court noted that while Sonia P. Mamaril testified that
the subject vehicle had accessories worth around !J50,000.00, she failed to present
any receipt to substantiate her claim.34 Neither did she submit any record or journal
that would have established the purported ₱275.0035 daily earnings of their jeepney.
It is axiomatic that actual damages must be proved with reasonable degree of
certainty and a party is entitled only to such compensation for the pecuniary loss that
was duly proven. Thus, absent any competent proof of the amount of damages
sustained, the CA properly deleted the said awards.36
Similarly, the awards of moral and exemplary damages and attorney's fees were
properly disallowed by the CA for lack of factual and legal bases. While the RTC
 granted these awards in the dispositive portion of its November 28, 2001 decision, it pertinent facts have been stipulated and/or, admitted by the parties at the hearing of
failed to provide sufficient justification therefor.37 the case in the trial court, to dispense with the presentation of evidence therein.

WHEREFORE premises considered, the instant petition is DENIED. The May 31, 2007
Decision and August 16, 2007 Resolution of the Court of Appeals in CA-G.R. CV No.
75978 are AFFIRMFED.
SO ORDERED.
It appears that on December 1, 1961, appellant Fieldmen's Insurance Company, Inc.
— hereinafter referred to as the Company — issued, in favor of the Manila Yellow
Taxicab Co., Inc. — hereinafter referred to as the Insured — a common carrier
accident insurance policy, covering the period from December 1, 1961 to December
1, 1962. It was stipulated in said policy that:

ESTELA M. PERLAS-BERNABE The Company will, subject to the Limits of Liability and under the Terms of
Associate Justice this Policy, indemnify the Insured in the event of accident caused by or
arising out of the use of Motor Vehicle against all sums which the Insured
will become legally liable to pay in respect of: Death or bodily injury to any
fare-paying passenger including the Driver, Conductor and/or Inspector who
is riding in the Motor Vehicle insured at the time of accident or injury. 1

While the policy was in force, or on February 10, 1962, a taxicab of the Insured,
driven by Carlito Coquia, met a vehicular accident at Mangaldan, Pangasinan, in
consequence of which Carlito died. The Insured filed therefor a claim for P5,000.00 to
which the Company replied with an offer to pay P2,000.00, by way of compromise.
The Insured rejected the same and made a counter-offer for P4,000.00, but the
Company did not accept it. Hence, on September 18, 1962, the Insured and Carlito's
parents, namely, Melecio Coquia and Maria Espanueva — hereinafter referred to as
the Coquias — filed a complaint against the Company to collect the proceeds of the
aforementioned policy. In its answer, the Company admitted the existence thereof,
EN BANC but pleaded lack of cause of action on the part of the plaintiffs.

73. G.R. No. L-23276 November 29, 1968 After appropriate proceedings, the trial court rendered a decision sentencing the
Company to pay to the plaintiffs the sum of P4,000.00 and the costs. Hence, this
MELECIO COQUIA, MARIA ESPANUEVA and MANILA YELLOW TAXICAB CO., appeal by the Company, which contends that plaintiffs have no cause of action
INC., plaintiffs-appellees, because: 1) the Coquias have no contractual relation with the Company; and 2) the
vs. Insured has not complied with the provisions of the policy concerning arbitration.
FIELDMEN'S INSURANCE CO., INC., defendant-appellant.
As regards the first defense, it should be noted that, although, in general, only parties
Antonio de Venecia for plaintiffs-appellees. to a contract may bring an action based thereon, this rule is subject to exceptions,
Rufino Javier for defendant-appellant. one of which is found in the second paragraph of Article 1311 of the Civil Code of the
Philippines, reading:
CONCEPCION, C.J.:
If a contract should contain some stipulation in favor of a third person, he
This is an appeal from a decision of the Court of First Instance of Manila, certified to may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a
312

us by the Court of Appeals, only questions of law being involved therein. Indeed, the
 person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.2
This is but the restatement of a well-known principle concerning contracts pour
autrui, the enforcement of which may be demanded by a third party for whose
benefit it was made, although not a party to the contract, before the stipulation in his
favor has been revoked by the contracting parties. Does the policy in question belong
to such class of contracts pour autrui?
In this connection, said policy provides, inter alia:
Section I — Liability to Passengers. 1. The Company will, subject to the Limits
of Liability and under the Terms of this Policy, indemnify the Insured in the
event of accident caused by or arising out of the use of Motor Vehicle
against all sums which the Insured will become legally liable to pay in respect
of: Death or bodily injury to any fare-paying passenger including the Driver ...
who is riding in the Motor Vehicle insured at the time of accident or injury.
Section II — Liability to the Public
xxx xxx xxx
3. In terms of and subject to the limitations of and for the purposes of this
Section, the Company will indemnify any authorized Driver who is driving the
Motor Vehicle....
Conditions
xxx xxx xxx
7. In the event of death of any person entitled to indemnity under this
Policy, the Company will, in respect of the liability incurred by such person,
indemnify his personal representatives in terms of and subject to the
limitations of this Policy, provided, that such representatives shall, as though
they were the Insured, observe, fulfill and be subject to the Terms of this
Policy insofar as they can apply.
8. The Company may, at its option, make indemnity payable directly to the
claimants or heirs of claimants, with or without securing the consent of or
prior notification to the Insured, it being the true intention of this Policy to
313
protect, to the extent herein specified and subject always to the Terms Of
this Policy, the liabilities of the Insured towards the passengers of the Motor
Vehicle and the Public.
Pursuant to these stipulations, the Company "will indemnify any authorized
Driver who is driving the Motor Vehicle" of the Insured and, in the event of death of
said driver, the Company shall, likewise, "indemnify his personal representatives." In
fact, the Company "may, at its option, make indemnity payable directly to
the claimants or heirs of claimants ... it being the true intention of this Policy to
protect ... the liabilities of the Insured towards the passengers of the Motor Vehicle
and the Public" — in other words, third parties.
Thus, the policy under consideration is typical of contracts pour autrui, this character
being made more manifest by the fact that the deceased driver paid fifty percent
(50%) of the corresponding premiums, which were deducted from his weekly
commissions. Under these conditions, it is clear that the Coquias — who, admittedly,
are the sole heirs of the deceased — have a direct cause of action against the
Company,3 and, since they could have maintained this action by themselves, without
the assistance of the Insured, it goes without saying that they could and did properly
join the latter in filing the complaint herein.4
The second defense set up by the Company is based upon Section 17 of the policy
reading:
If any difference or dispute shall arise with respect to the amount of the
Company's liability under this Policy, the same shall be referred to the
decision of a single arbitrator to be agreed upon by both parties or failing
such agreement of a single arbitrator, to the decision of two arbitrators, one
to be appointed in writing by each of the parties within one calendar month
after having been required in writing so to do by either of the parties and in
case of disagreement between the arbitrators, to the decision of an umpire
who shall have been appointed in writing by the arbitrators before entering
on the reference and the costs of and incident to the reference shall be dealt
with in the Award. And it is hereby expressly stipulated and declared that it
shall be a condition precedent to any right of action or suit upon this Policy
that the award by such arbitrator, arbitrators or umpire of the amount of the
Company's liability hereunder if disputed shall be first obtained.
The record shows, however, that none of the parties to the contract invoked this
section, or made any reference to arbitration, during the negotiations preceding the
institution of the present case. In fact, counsel for both parties stipulated, in the trial
court, that none of them had, at any time during said negotiations, even suggested
the settlement of the issue between them by arbitration, as provided in said section.
 Their aforementioned acts or omissions had the effect of a waiver of their respective
right to demand an arbitration. Thus, in Kahnweiler vs. Phenix Ins. Co. of Brooklyn, 5 it
was held:
Another well-settled rule for interpretation of all contracts is that the court
will lean to that interpretation of a contract which will make it reasonable
and just. Bish. Cont. Sec. 400. Applying these rules to the tenth clause of this
policy, its proper interpretation seems quite clear. When there is a
difference between the company and the insured as to the amount of the
loss the policy declares: "The same shall then be submitted to competent
and impartial arbitrators, one to be selected by each party ...". It will be
observed that the obligation to procure or demand an arbitration is not, by
this clause, in terms imposed on either party. It is not said that either the
company or the insured shall take the initiative in setting the arbitration on
foot. The company has no more right to say the insured must do it than the
insured has to say the company must do it. The contract in this respect is
neither unilateral nor self-executing. To procure a reference to arbitrators,
the joint and concurrent action of both parties to the contract is
indispensable. The right it gives and the obligation it creates to refer the
differences between the parties to arbitrators are mutual. One party to the
contract cannot bring about an arbitration. Each party is entitled to demand
a reference, but neither can compel it, and neither has the right to insist that
the other shall first demand it, and shall forfeit any right by not doing so. If
the company demands it, and the insured refuses to arbitrate, his right of
action is suspended until he consents to an arbitration; and if the insured
demands an arbitration, and the company refuses to accede to the demand,
the insured may maintain a suit on the policy, notwithstanding the language
of the twelfth section of the policy, and, where neither party demands an
arbitration, both parties thereby waive it.6
The test for determining whether there has been a waiver in a particular
case is stated by the author of an exhaustive annotation in 117 A.L.R. p. 304,
as follows: "Any conduct of the parties inconsistent with the notion that they
treated the arbitration provision as in effect, or any conduct which might be
reasonably construed as showing that they did not intend to avail
themselves of such provision, may amount to a waiver thereof and estop the
party charged with such conduct from claiming its benefits".
xxx xxx xxx
The decisive facts here are that both parties from the inception of their
dispute proceeded in entire disregard of the provisions of the contract
relating to arbitration and that neither at any stage of such dispute, either
before or after commencement of the action, demanded arbitration, either
by oral or written demand, pleading, or otherwise. Their conduct was as
effective a rejection of the right to arbitrate as if, in the best Coolidge
tradition, they had said, "We do not choose to arbitrate". As arbitration
under the express provisions of article 40 was "at the choice of either party,"
and was chosen by neither, a waiver by both of the right to arbitration
followed as a matter of law.
WHEREFORE, the decision appealed from should be as it is hereby affirmed in toto,
with costs against the herein defendant-appellant, Fieldmen's Insurance Co., Inc. It is
so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando and Capistrano,
JJ., concur.

To the same effect was the decision of the Supreme Court of Minnesota in
Independent School Dist. No. 35, St. Louis County vs. A. Hedenberg & Co., Inc. 7 from
which we quote:

This rule is not new in our state. In Meyer v. Berlandi, 53 Minn. 59, 54 N.W.
937, decided in 1893, this court held that the parties to a construction
contract, having proceeded throughout the entire course of their dealings
with each other in entire disregard of the provision of the contract regarding
the mode of determining by arbitration the value of the extras, thereby
waived such provision.
314

xxx xxx xxx

 DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 17, 2013
and the Resolution3 dated September 2, 2013 rendered by the Court of Appeals (CA)
in CA-G.R. CV. No. 93407, which affirmed the Decision4 dated January 28, 2009 of the
Regional Trial Court of Mandaluyong City, Branch 214 (RTC) in Civil Case No. MC06-
2928, finding petitioner Fort Bonifacio Development Corporation (FBDC) liable to
respondent Valentin L. Fong (Fong), as proprietor of VF Industrial Sales, for the
amount of P1,577,115.90 with legal interest computed from February 13, 2006.

The Facts

On June 5, 2000, FBDC, a domestic corporation engaged in the real estate

development business,5entered into a Trade Contract6 with MS Maxco Company, Inc.
(MS Maxco), then operating under the name “L&M Maxco, Specialist Engineering
Construction,” for the execution of the structural and partial architectural works of
one of its condominium projects in Taguig City, the Bonifacio Ridge Condominium
(Project).7 Records show that FBDC had the right to withhold five percent (5%) of the
contract price as retention money.8

Under the Trade Contract, FBDC had the option to hire other contractors to rectify
any errors committed by MS Maxco by reason of its negligence, act, omission, or
default, as well as to deduct or set-off any amount from the contract price in such
cases.9Hence, when MS Maxco incurred delays and failed to comply with the terms of
the Trade Contract, FBDC took over and hired other contractors to complete the
unfinished construction.10 Unfortunately, corrective work had to likewise be done on
the numerous defects and irregularities caused by MS Maxco, which cost
P11,567,779.12.11 Pursuant to the Trade Contract, FBDC deducted the said amount
from MS Maxco’s retention money.12

The Trade Contract likewise provided that MS Maxco is prohibited from assigning or
transferring any of its rights, obligations, or liabilities under the said Contract without
the written consent of FBDC.13

Sometime in April 2005, FBDC received a letter14 dated April 18, 2005 (April 18, 2005
74. G.R. No. 209370, March 25, 2015 letter) from the counsel of Fong informing it that MS Maxco had already assigned its
receivables from FBDC to him (Fong) by virtue of a notarized Deed of
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, v. VALENTIN L. Assignment15 dated February 28, 2005.16 Under the Deed of Assignment, MS Maxco
315

FONG, Respondent. assigned the amount of P1,577,115.90 to Fong as payment of the former’s obligation
 to the latter, which amount was to be taken from the retention money with
FBDC.17 In its letter-reply18 dated October 11, 2005, FBDC acknowledged the five
percent (5%) retention money of MS Maxco, but asserted that the same was not yet
due and demandable and that it was already the subject of garnishment 19 by MS
Maxco’s other creditors.
Despite Fong’s repeated requests, 20 FBDC refused to deliver to Fong the amount
assigned by MS Maxco. Finally, in a letter21 dated January 31, 2006, FBDC informed
Fong that after the rectification of the defects in the Project, as well as the
garnishment made by MS Maxco’s creditors, nothing was left of its retention money
with FBDC from which Fong’s claims may be satisfied. This prompted Fong, doing
business under the name “VF Industrial Sales” to file the instant civil case, 22 before
the RTC, against MS Maxco or FBDC for the payment of the sum of P1,577,115.90,
with legal interest due, costs of suit, and litigation expenses.23
In its defense,24 FBDC reiterated its position that,since MS Maxco incurred delays and
rendered defective works on the Project, FBDC was constrained to hire other
contractors to repair the defects and complete the work therein, the cost of which it
deducted from MS Maxco’s retention money, pursuant to the express stipulations in
the Trade Contract.25 Likewise, the said retention money was due only in January
2006, and was already garnished in favor of MS Maxco’s other creditors.26 As a result
of the deductions and the garnishment, no amount due to MS Maxco was left from
the retention money; and, FBDC was, therefore, under no obligation to satisfy Fong’s
claim.27 FBDC likewise asserted, inter alia, that it was not bound by the Deed of
Assignment between Fong and MS Maxco, not being a party thereto. 28 However,
Fong, being a mere substitute or assignee of MS Maxco, was bound to observe the
terms and conditions of the Trade Contract.29 FBDC also stressed that it paid the
creditors of MS Maxco in compliance with valid court orders.30
The RTC Ruling
In a Decision31 dated January 28, 2009, the RTC found FBDC liable to pay Fong the
amount of P1,577,115.90, with legal interest computed from the time of the filing of
the complaint on February 13, 2006.32
In so ruling, the RTC held that the instant case was one of assignment of credit under
Article 162433 of the Civil Code, hence, did not require FBDC’s consent as debtor for
its validity and enforceability.34 What the law requires is not the consent of the
debtor, but merely notice to him, as the assignment takes effect only from the time
of his knowledge thereof.35 With respect to third persons without notice of the
316
assignment, the same becomes effective only if the assignment appears in a public
instrument.36
Also, the RTC observed that FBDC did not dispute the genuineness and due execution
of the Deed of Assignment between MS Maxco and Fong. As such, FBDC became
bound thereby upon its receipt of Fong’s April 18, 2005 letter informing it of the
assignment. Effectively, Fong became subrogated to the right of MS Maxco to collect
from FBDC the credit assigned to him.37 Likewise, FBDC was bound to recognize the
assignment, which appears in a public instrument. 38
With respect to the garnishment of the retention money, the RTC held that it could
not adversely affect Fong’s rights as assignee of MS Maxco, considering that the
amount indicated in the Deed of Assignment was no longer MS Maxco’s property, but
Fong’s. Effectively, when MS Maxco assigned the sum of P1,577,115.90 to Fong, the
said amount can no longer be considered MS Maxco’s property that could be
garnished or attached by its creditors. As records show that the garnishment of the
retention money was made on July 30, 2005 and January 26, 2006, or after FBDC was
notified of MS Maxco’s assignment in favor of Fong on April 18, 2005, for all intents
and purposes, FBDC must be considered to have paid MS Maxco’s other creditors out
of its own funds.39
Finally, with regard to the provision in the Trade Contract requiring the written
consent of FBDC before MS Maxco may validly assign or transfer any of its rights,
obligations, or liabilities thereunder, the RTC held that Fong was not bound thereby.
It ruled that Fong did not automatically become party to the provisions of the Trade
Contract by virtue of its being the assignee of MS Maxco, as the said provisions are
matters which exclusively pertain to the parties thereto. 40
In any event, however, the RTC recognized FBDC’s right of recourse against its co-
defendant MS Maxco for the latter’s breach of undertaking under the Trade
Contract.41
Aggrieved, FBDC appealed42 to the CA, assailing the RTC’s conclusion that the Deed of
Assignment was binding upon it and that it was liable to satisfy Fong’s claims.
The CA Ruling
In a Decision43 dated May 17, 2013, the CA denied FBDC’s appeal and affirmed the
RTC ruling,44concurring with the latter’s finding that when FBDC was notified of the
assignment through the April 18, 2005 letter, the assignment produced legal effects
and operated as a transfer of a portion of the receivables of MS Maxco to
Fong.45Considering that FBDC’s consent as debtor is not required under the law, as
 mere notice to it is sufficient, and taking into account the fact that the Deed of
Assignment was a public instrument, the assignment therefore bound FBDC and third The reason that a contracting party’s assignees, although seemingly a third party to
persons as well.46 the transaction, remain bound by the original party’s transaction under the relativity
principle further lies in the concept of subrogation, which inheres in assignment.
Likewise, upon a review of the evidence offered by FBDC, the CA found that as of
December 6, 2005, there was still sufficient amount left in the retention money with Case law states that when a person assigns his credit to another person, the latter is
which to pay Fong even after the deduction of the rectification costs for the Project. deemed subrogated to the rights as well as to the obligations of the former. 52 By
As correctly held by the RTC, the payments made by FBDC to MS Maxco’s judgment virtue of the Deed of Assignment, the assignee is deemed subrogated to the rights
creditors cannot prejudice Fong since the Deed of Assignment was valid and and obligations of the assignor and is bound by exactly the same conditions as those
enforceable against FBDC and the said creditors. 47 which bound the assignor.53 Accordingly, an assignee cannot acquire greater rights
than those pertaining to the assignor.54 The general rule is that an assignee of a non-
FBDC’s motion for reconsideration48 was denied in a Resolution49 dated September 2, negotiable chose in action acquires no greater right than what was possessed by his
2013, hence, this petition. assignor and simply stands into the shoes of the latter.55

The Issues Before the Court Applying the foregoing, the Court finds that MS Maxco, as the Trade Contractor,
cannot assign or transfer any of its rights, obligations, or liabilities under the Trade
Contract without the written consent of FBDC, the Client, in view of Clause 19.0 on
The issues for the Court’s resolution are whether or not the CA erred in ruling that “Assignment and Sub-letting” of the Trade Contract between FBDC and MS Maxco
FBDC was bound by the Deed of Assignment between MS Maxco and Fong, and even which explicitly provides that:
assuming that it was, whether or not FBDC was liable to pay Fong the amount of
?1,577,115.90, representing a portion of MS Maxco’s retention money. 19.0 ASSIGNMENT AND SUB-LETTING

The Court’s Ruling 19.1 The Trade Contractor [Ms Maxco] shall not, without written consent of the
Client [FBDC], assign or transfer any of his rights, obligations or liabilities under this
Contract. The Trade Contractor shall not, without the written consent of the Client,
sub-let any portion of the Works and such consent, if given, shall not relieve the
The petition is meritorious.
Trade Contractor from any liability or obligation under this Contract. 56 (Emphases
supplied)
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.50 As such, the stipulations in
contracts are binding on them unless the contract is contrary to law, morals, good
customs, public order or public policy.51 Fong, as mere assignee of MS Maxco’s rights under the Trade Contract it had
previously entered with FBDC, i.e., the right to recover any credit owing to any
The same principle on obligatory force applies by extension to the contracting party’s unutilized retention money, is equally bound by the foregoing provision and hence,
assignees, in turn, by virtue of the principle of relativity of contracts which is fleshed cannot validly enforce the same without FBDC’s consent.
out in Article 1311 of the Civil Code, viz.:
Without any proof showing that FBDC had consented to the assignment, Fong cannot
validly demand from FBDC the delivery of the sum of P1,577,115.90 that was
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
supposedly assigned to him by MS Maxco as a portion of its retention money with
except in case where the rights and obligations arising from the contract are not
FBDC. The practical efficacy of the assignment, although valid between Fong and MS
transmissible by their nature, or by stipulation or by provision of law. The heir is not
Maxco, remains contingent on FBDC’s consent. Without the happening of said
liable beyond the value of the property he received from the decedent.
condition, only MS Maxco, and not Fong, can collect on the credit. Note, however,
317

that this finding does not preclude any recourse that Fong may take against MS
x x x x (Emphasis supplied)
 Maxco. After all, an assignment of credit for a consideration and covering a
demandable sum of money is considered as a sale of personal property. 57To this,
Article 1628 of the Civil Code provides:
Art. 1628. The vendor in good faith shall be responsible for the existence and legality
of the credit at the time of the sale, unless it should have been sold as doubtful; but
not for the solvency of the debtor, unless it has been so expressly stipulated or unless
the insolvency was prior to the sale and of common knowledge.
Even in these cases he shall only be liable for the price received and for the expenses
specified in No. 1 of Article 1616.58
The vendor in bad faith shall always be answerable for the payment of all expenses,
and for damages.
WHEREFORE, the petition is GRANTED. The assailed Decision dated May 17, 2013 and
the Resolution dated September 2, 2013 rendered by the Court of Appeals in CA-G.R.
CV. No. 93407 are hereby REVERSED and SET ASIDE, and a new one is
entered DISMISSING the instant complaint against petitioner Fort Bonifacio
Development Corporation.
SO ORDERED.
Sereno, C.J., (Chairperson,) Leonardo-De Castro, Bersamin, and Perez, JJ., concur.
318
5. PRINCIPLE OF TORTIOUS INTERFERENCE WITH CONTRACTUAL RELATIONS
75. G.R. No. L-9356 February 18, 1915
C. S. GILCHRIST, plaintiff-appellee,
vs.
E. A. CUDDY, ET AL., defendants.
JOSE FERNANDEZ ESPEJO and MARIANO ZALDARRIAGA, appellants.
C. Lozano for appellants.
Bruce, Lawrence, Ross and Block for appellee.
TRENT, J.:
An appeal by the defendants, Jose Fernandez Espejo and Mariano Zaldarriaga, from a
judgment of the Court of First Instance of Iloilo, dismissing their cross-complaint upon
the merits for damages against the plaintiff for the alleged wrongful issuance of a
mandatory and a preliminary injunction.
Upon the application of the appellee an ex parte mandatory injunction was issued on
the 22d of May, 1913, directing the defendant, E. A. Cuddy, to send to the appellee a
certain cinematograph film called "Zigomar" in compliance with an alleged contract
which had been entered into between these two parties, and at the time an ex
partepreliminary injunction was issued restraining the appellants from receiving and
exhibiting in their theater the Zigomar until further orders of the court. On the 26th
of that month the appellants appeared and moved the court to dissolve the
preliminary injunction. When the case was called for trial on August 6, the appellee
moved for the dismissal of the complaint "for the reason that there is no further
necessity for the maintenance of the injunction." The motion was granted without
objection as to Cuddy and denied as to the appellants in order to give them an
opportunity to prove that the injunction were wrongfully issued and the amount of
damages suffered by reason thereof.
The pertinent part of the trial court's findings of fact in this case is as follows:
It appears in this case that Cuddy was the owner of the film Zigomar and
that on the 24th of April he rented it to C. S. Gilchrist for a week for P125,
and it was to be delivered on the 26th of May, the week beginning that day.
A few days prior to this Cuddy sent the money back to Gilchrist, which he
had forwarded to him in Manila, saying that he had made other
arrangements with his film. The other arrangements was the rental to these
 defendants Espejo and his partner for P350 for the week and the injunction
was asked by Gilchrist against these parties from showing it for the week
beginning the 26th of May.
It appears from the testimony in this case, conclusively, that Cuddy willfully
violated his contract, he being the owner of the picture, with Gilchrist
because the defendants had offered him more for the same period. Mr.
Espejo at the trial on the permanent injunction on the 26th of May admitted
that he knew that Cuddy was the owner of the film. He was trying to get it
through his agents Pathe Brothers in Manila. He is the agent of the same
concern in Iloilo. There is in evidence in this case on the trial today as well as
on the 26th of May, letters showing that the Pathe Brothers in Manila
advised this man on two different occasions not to contend for this film
Zigomar because the rental price was prohibitive and assured him also that
he could not get the film for about six weeks. The last of these letters was
written on the 26th of April, which showed conclusively that he knew they
had to get this film from Cuddy and from this letter that the agent in Manila
could not get it, but he made Cuddy an offer himself and Cuddy accepted it
because he was paying about three times as much as he had contracted with
Gilchrist for. Therefore, in the opinion of this court, the defendants failed
signally to show the injunction against the defendant was wrongfully
procured.
The appellants duly excepted to the order of the court denying their motion for new
trial on the ground that the evidence was insufficient to justify the decision rendered.
There is lacking from the record before us the deposition of the defendant Cuddy,
which apparently throws light upon a contract entered into between him and the
plaintiff Gilchrist. The contents of this deposition are discussed at length in the brief
of the appellants and an endeavor is made to show that no such contract was
entered into. The trial court, which had this deposition before it, found that there
was a contract between Cuddy and Gilchrist. Not having the deposition in question
before us, it is impossible to say how strongly it militates against this findings of fact.
By a series of decisions we have construed section 143 and 497 (2) of the Code of Civil
Procedure to require the production of all the evidence in this court. This is the duty
of the appellant and, upon his failure to perform it, we decline to proceed with a
review of the evidence. In such cases we rely entirely upon the pleadings and the
findings of fact of the trial court and examine only such assigned errors as raise
questions of law. (Ferrer vs. Neri Abejuela, 9 Phil. Rep., 324; Valle vs. Galera, 10 Phil.
Rep., 619; Salvacion vs. Salvacion, 13 Phil. Rep., 366; Breta vs. Smith, Bell & Co., 15
Phil. Rep., 446; Arroyo vs. Yulo, 18 Phil. Rep., 236; Olsen & Co. vs. Matson, Lord &
Belser Co., 19 Phil. Rep., 102; Blum vs. Barretto, 19 Phil. Rep., 161; Cuyugan vs. Aguas,
319
19 Phil. Rep., 379; Mapa vs. Chaves, 20 Phil. Rep., 147; Mans vs. Garry, 20 Phil. Rep.,
134.) It is true that some of the more recent of these cases make exceptions to the
general rule. Thus, in Olsen & Co. vs.Matson, Lord & Belser Co., (19 Phil. Rep., 102),
that portion of the evidence before us tended to show that grave injustice might
result from a strict reliance upon the findings of fact contained in the judgment
appealed from. We, therefore, gave the appellant an opportunity to explain the
omission. But we required that such explanation must show a satisfactory reason for
the omission, and that the missing portion of the evidence must be submitted within
sixty days or cause shown for failing to do so. The other cases making exceptions to
the rule are based upon peculiar circumstances which will seldom arise in practice
and need not here be set forth, for the reason that they are wholly inapplicable to the
present case. The appellants would be entitled to indulgence only under the doctrine
of the Olsen case. But from that portion of the record before us, we are not inclined
to believe that the missing deposition would be sufficient to justify us in reversing the
findings of fact of the trial court that the contract in question had been made. There
is in the record not only the positive and detailed testimony of Gilchrist to this effect,
but there is also a letter of apology from Cuddy to Gilchrist in which the former enters
into a lengthy explanation of his reasons for leasing the film to another party. The
latter could only have been called forth by a broken contract with Gilchrist to lease
the film to him. We, therefore, fail to find any reason for overlooking the omission of
the defendants to bring up the missing portion of the evidence and, adhering to the
general rule above referred to, proceed to examine the questions of law raised by the
appellants.
From the above-quoted findings of fact it is clear that Cuddy, a resident of Manila,
was the owner of the "Zigomar;" that Gilchrist was the owner of a cinematograph
theater in Iloilo; that in accordance with the terms of the contract entered into
between Cuddy and Gilchrist the former leased to the latter the "Zigomar" for
exhibition in his (Gilchrist's) theater for the week beginning May 26, 1913; and that
Cuddy willfully violate his contract in order that he might accept the appellant's offer
of P350 for the film for the same period. Did the appellants know that they were
inducing Cuddy to violate his contract with a third party when they induced him to
accept the P350? Espejo admitted that he knew that Cuddy was the owner of the
film. He received a letter from his agents in Manila dated April 26, assuring him that
he could not get the film for about six weeks. The arrangement between Cuddy and
the appellants for the exhibition of the film by the latter on the 26th of May were
perfected after April 26, so that the six weeks would include and extend beyond May
26. The appellants must necessarily have known at the time they made their offer to
Cuddy that the latter had booked or contracted the film for six weeks from April 26.
Therefore, the inevitable conclusion is that the appellants knowingly induced Cuddy
to violate his contract with another person. But there is no specific finding that the
appellants knew the identity of the other party. So we must assume that they did not
know that Gilchrist was the person who had contracted for the film.
 The appellants take the position that if the preliminary injunction had not been
issued against them they could have exhibited the film in their theater for a number
of days beginning May 26, and could have also subleased it to other theater owners
in the nearby towns and, by so doing, could have cleared, during the life of their
contract with Cuddy, the amount claimed as damages. Taking this view of the case, it
will be unnecessary for us to inquire whether the mandatory injunction against Cuddy
was properly issued or not. No question is raised with reference to the issuance of
that injunction.
The right on the part of Gilchrist to enter into a contract with Cuddy for the lease of
the film must be fully recognized and admitted by all. That Cuddy was liable in an
action for damages for the breach of that contract, there can be no doubt. Were the
appellants likewise liable for interfering with the contract between Gilchrist and
Cuddy, they not knowing at the time the identity of one of the contracting parties?
The appellants claim that they had a right to do what they did. The ground upon
which the appellants base this contention is, that there was no valid and binding
contract between Cuddy and Gilchrist and that, therefore, they had a right to
compete with Gilchrist for the lease of the film, the right to compete being a
justification for their acts. If there had been no contract between Cuddy and Gilchrist
this defense would be tenable, but the mere right to compete could not justify the
appellants in intentionally inducing Cuddy to take away the appellee's contractual
rights.
Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right
to enjoy the fruits and advantages of his own enterprise, industry, skill and credit. He
has no right to be free from malicious and wanton interference, disturbance or
annoyance. If disturbance or loss come as a result of competition, or the exercise of
like rights by others, it is damnum absque injuria, unless some superior right by
contract or otherwise is interfered with."
In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling, J.,
said: "I think the plaintiff has a cause of action against the defendants, unless the
court is satisfied that, when they interfered with the contractual rights of plaintiff, the
defendants had a sufficient justification for their interference; . . . for it is not a
justification that `they acted bona fide in the best interests of the society of masons,'
i. e., in their own interests. Nor is it enough that `they were not actuated by improper
motives.' I think their sufficient justification for interference with plaintiff's right must
be an equal or superior right in themselves, and that no one can legally excuse
himself to a man, of whose contract he has procured the breach, on the ground that
he acted on a wrong understanding of his own rights, or without malice, or bona fide,
or in the best interests of himself, or even that he acted as an altruist, seeking only
320
good of another and careless of his own advantage." (Quoted with approval in
Beekman vs. Marsters, 195 Mass., 205.)
It is said that the ground on which the liability of a third party for interfering with a
contract between others rests, is that the interference was malicious. The contrary
view, however, is taken by the Supreme Court of the United States in the case of
Angle vs. Railway Co. (151 U. S., 1). The only motive for interference by the third
party in that case was the desire to make a profit to the injury of one of the parties of
the contract. There was no malice in the case beyond the desire to make an unlawful
gain to the detriment of one of the contracting parties.
In the case at bar the only motive for the interference with the Gilchrist — Cuddy
contract on the part of the appellants was a desire to make a profit by exhibiting the
film in their theater. There was no malice beyond this desire; but this fact does not
relieve them of the legal liability for interfering with that contract and causing its
breach. It is, therefore, clear, under the above authorities, that they were liable to
Gilchrist for the damages caused by their acts, unless they are relieved from such
liability by reason of the fact that they did not know at the time the identity of the
original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual
obligations, as they were under no such obligations to induce Cuddy to violate his
contract with Gilchrist. So that if the action of Gilchrist had been one for damages, it
would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that
code provides that a person who, by act or omission, causes damages to another
when there is fault or negligence, shall be obliged to repair the damage do done.
There is nothing in this article which requires as a condition precedent to the liability
of a tort-feasor that he must know the identity of a person to whom he causes
damages. In fact, the chapter wherein this article is found clearly shows that no such
knowledge is required in order that the injured party may recover for the damage
suffered.
But the fact that the appellants' interference with the Gilchrist contract was
actionable did not of itself entitle Gilchrist to sue out an injunction against them. The
allowance of this remedy must be justified under section 164 of the Code of Civil
Procedure, which specifies the circumstance under which an injunction may issue.
Upon the general doctrine of injunction we said in Devesa vs. Arbes (13 Phil. Rep.,
273):
An injunction is a "special remedy" adopted in that code (Act No. 190) from
American practice, and originally borrowed from English legal procedure,
which was there issued by the authority and under the seal of a court of
 equity, and limited, as in order cases where equitable relief is sought, to
cases where there is no "plain, adequate, and complete remedy at law,"
which "will not be granted while the rights between the parties are
undetermined, except in extraordinary cases where material and irreparable
injury will be done," which cannot be compensated in damages, and where
there will be no adequate remedy, and which will not, as a rule, be granted,
to take property out of the possession of one party and put it into that of
another whose title has not been established by law.
We subsequently affirmed the doctrine of the Devesa case in Palafox vs. Madamba
(19 Phil., Rep., 444), and we take this occasion of again affirming it, believing, as we
do, that the indiscriminate use of injunctions should be discouraged.
Does the fact that the appellants did not know at the time the identity of the original
lessee of the film militate against Gilchrist's right to a preliminary injunction, although
the appellant's incurred civil liability for damages for such interference? In the
examination of the adjudicated cases, where in injunctions have been issued to
restrain wrongful interference with contracts by strangers to such contracts, we have
been unable to find any case where this precise question was involved, as in all of
those cases which we have examined, the identity of both of the contracting parties
was known to the tort-feasors. We might say, however, that this fact does not seem
to have a controlling feature in those cases. There is nothing in section 164 of the
Code of Civil Procedure which indicates, even remotely, that before an injunction may
issue restraining the wrongful interference with contrast by strangers, the strangers
must know the identity of both parties. It would seem that this is not essential, as
injunctions frequently issue against municipal corporations, public service
corporations, public officers, and others to restrain the commission of acts which
would tend to injuriously affect the rights of person whose identity the respondents
could not possibly have known beforehand. This court has held that in a proper case
injunction will issue at the instance of a private citizen to restrain ultra vires acts of
public officials. (Severino vs. Governor-General, 16 Phil. Rep., 366.) So we proceed to
the determination of the main question of whether or not the preliminary injunction
ought to have been issued in this case.
As a rule, injunctions are denied to those who have an adequate remedy at law.
Where the choice is between the ordinary and the extraordinary processes of law,
and the former are sufficient, the rule will not permit the use of the latter. (In
re Debs, 158 U. S., 564.) If the injury is irreparable, the ordinary process is
inadequate. In Wahle vs.Reinbach (76 Ill., 322), the supreme court of Illinois approved
a definition of the term "irreparable injury" in the following language: "By
`irreparable injury' is not meant such injury as is beyond the possibility of repair, or
321
beyond possible compensation in damages, nor necessarily great injury or great
damage, but that species of injury, whether great or small, that ought not to be
submitted to on the one hand or inflicted on the other; and, because it is so large on
the one hand, or so small on the other, is of such constant and frequent recurrence
that no fair or reasonable redress can be had therefor in a court of law." (Quoted
with approval in Nashville R. R. Co. vs. McConnell, 82 Fed., 65.)
The case at bar is somewhat novel, as the only contract which was broken was that
between Cuddy and Gilchrist, and the profits of the appellee depended upon the
patronage of the public, for which it is conceded the appellants were at liberty to
complete by all fair does not deter the application of remarked in the case of the
"ticket scalpers" (82 Fed., 65), the novelty of the facts does not deter the application
of equitable principles. This court takes judicial notice of the general character of a
cinematograph or motion-picture theater. It is a quite modern form of the play
house, wherein, by means of an apparatus known as a cinematograph or
cinematograph, a series of views representing closely successive phases of a moving
object, are exhibited in rapid sequence, giving a picture which, owing to the
persistence of vision, appears to the observer to be in continuous motion. (The
Encyclopedia Britanica, vol. 6, p. 374.) The subjects which have lent themselves to the
art of the photographer in this manner have increased enormously in recent years, as
well as have the places where such exhibition are given. The attendance, and,
consequently, the receipts, at one of these cinematograph or motion-picture theaters
depends in no small degree upon the excellence of the photographs, and it is quite
common for the proprietor of the theater to secure an especially attractive exhibit as
his "feature film" and advertise it as such in order to attract the public. This feature
film is depended upon to secure a larger attendance that if its place on the program
were filled by other films of mediocre quality. It is evident that the failure to exhibit
the feature film will reduce the receipts of the theater.
Hence, Gilchrist was facing the immediate prospect of diminished profits by reason of
the fact that the appellants had induced Cuddy to rent to them the film Gilchrist had
counted upon as his feature film. It is quite apparent that to estimate with any decree
of accuracy the damages which Gilchrist would likely suffer from such an event would
be quite difficult if not impossible. If he allowed the appellants to exhibit the film in
Iloilo, it would be useless for him to exhibit it again, as the desire of the public to
witness the production would have been already satisfied. In this extremity, the
appellee applied for and was granted, as we have indicated, a mandatory injunction
against Cuddy requiring him to deliver the Zigomar to Gilchrist, and a preliminary
injunction against the appellants restraining them from exhibiting that film in their
theater during the weeks he (Gilchrist) had a right to exhibit it. These injunction saved
the plaintiff harmless from damages due to the unwarranted interference of the
defendants, as well as the difficult task which would have been set for the court of
estimating them in case the appellants had been allowed to carry out their illegal
 plans. As to whether or not the mandatory injunction should have been issued, we
are not, as we have said, called upon to determine. So far as the preliminary
injunction issued against the appellants is concerned, which prohibited them from
exhibiting the Zigomar during the week which Gilchrist desired to exhibit it, we are of
the opinion that the circumstances justified the issuance of that injunction in the
discretion of the court.
We are not lacking in authority to support our conclusion that the court was justified
in issuing the preliminary injunction against the appellants. Upon the precise question
as to whether injunction will issue to restrain wrongful interference with contracts by
strangers to such contracts, it may be said that courts in the United States have
usually granted such relief where the profits of the injured person are derived from
his contractual relations with a large and indefinite number of individuals, thus
reducing him to the necessity of proving in an action against the tort-feasor that the
latter was responsible in each case for the broken contract, or else obliging him to
institute individual suits against each contracting party and so exposing him to a
multiplicity of suits. Sperry & Hutchinson Co. vs.Mechanics' Clothing Co. (128 Fed.,
800); Sperry & Hutchinson Co. vs. Louis Weber & Co. (161 Fed., 219); Sperry &
Hutchinson Co. vs. Pommer (199 Fed., 309); were all cases wherein the respondents
were inducing retail merchants to break their contracts with the company for the sale
of the latters' trading stamps. Injunction issued in each case restraining the
respondents from interfering with such contracts.
In the case of the Nashville R. R. Co. vs. McConnell (82 Fed., 65), the court, among
other things, said: "One who wrongfully interferes in a contract between others, and,
for the purpose of gain to himself induces one of the parties to break it, is liable to
the party injured thereby; and his continued interference may be ground for an
injunction where the injuries resulting will be irreparable."
In Hamby & Toomer vs. Georgia Iron & Coal Co. (127 Ga., 792), it appears that the
respondents were interfering in a contract for prison labor, and the result would be, if
they were successful, the shutting down of the petitioner's plant for an indefinite
time. The court held that although there was no contention that the respondents
were insolvent, the trial court did not abuse its discretion in granting a preliminary
injunction against the respondents.
In Beekman vs. Marsters (195 Mass., 205), the plaintiff had obtained from the
Jamestown Hotel Corporation, conducting a hotel within the grounds of the
Jamestown Exposition, a contract whereby he was made their exclusive agent for the
New England States to solicit patronage for the hotel. The defendant induced the
hotel corporation to break their contract with the plaintiff in order to allow him to act
322
also as their agent in the New England States. The court held that an action for
damages would not have afforded the plaintiff adequate relief, and that an injunction
was proper compelling the defendant to desist from further interference with the
plaintiff's exclusive contract with the hotel company.
In Citizens' Light, Heat & Power Co. vs. Montgomery Light & Water Power Co. (171
Fed., 553), the court, while admitting that there are some authorities to the contrary,
held that the current authority in the United States and England is that:
The violation of a legal right committed knowingly is a cause of action, and
that it is a violation of a legal right to interfere with contractual relations
recognized by law, if there be no sufficient justification for the interference.
(Quinn vs. Leatham, supra, 510; Angle vs. Chicago, etc., Ry. Co., 151 U. S., 1;
14 Sup. Ct., 240; 38 L. Ed., 55; Martens vs. Reilly, 109 Wis., 464, 84 N. W.,
840; Rice vs. Manley, 66 N. Y., 82; 23 Am. Rep., 30; Bitterman vs. L. & N. R. R.
Co., 207 U. S., 205; 28 Sup. Ct., 91; 52 L. Ed., 171; Beekman vs. Marsters, 195
Mass., 205; 80 N. E., 817; 11 L. R. A. [N. S.] 201; 122 Am. St. Rep., 232; South
Wales Miners' Fed. vs.Glamorgan Coal Co., Appeal Cases, 1905, p. 239.)
See also Nims on Unfair Business Competition, pp. 351- 371.
In 3 Elliot on Contracts, section 2511, it is said: "Injunction is the proper remedy to
prevent a wrongful interference with contract by strangers to such contracts where
the legal remedy is insufficient and the resulting injury is irreparable. And where
there is a malicious interference with lawful and valid contracts a permanent
injunction will ordinarily issue without proof of express malice. So, an injunction may
be issued where the complainant to break their contracts with him by agreeing to
indemnify who breaks his contracts of employment may be adjoined from including
other employees to break their contracts and enter into new contracts with a new
employer of the servant who first broke his contract. But the remedy by injunction
cannot be used to restrain a legitimate competition, though such competition would
involve the violation of a contract. Nor will equity ordinarily enjoin employees who
have quit the service of their employer from attempting by proper argument to
persuade others from taking their places so long as they do not resort to force or
intimidations on obstruct the public thoroughfares."
Beekman vs. Marster, supra, is practically on all fours with the case at bar in that
there was only one contract in question and the profits of the injured person
depended upon the patronage of the public. Hamby & Toomer vs.Georgia Iron & Coal
Co., supra, is also similar to the case at bar in that there was only one contract, the
interference of which was stopped by injunction.
 For the foregoing reasons the judgment is affirmed, with costs, against the
appellants.
Arellano, C.J., Torres, Carson and Araullo, JJ., concur.
Separate Opinions
MORELAND, J., concurring:
The court seems to be of the opinion that the action is one for a permanent
injunction; whereas, under my view of the case, it is one for specific performance.
The facts are simple. C. S. Gilchrist, the plaintiff, proprietor of the Eagle Theater of
Iloilo, contracted with E. A. Cuddy, one of the defendants, of Manila, for a film
entitled "Zigomar or Eelskin, 3d series," to be exhibited in his theater in Iloilo during
the week beginning May 26, 1913. Later, the defendants Espejo and Zaldarriaga, who
were also operating a theater in Iloilo, representing Pathe Freres, also obtained from
Cuddy a contract for the exhibition of the film aforesaid in their theater in
Iloilo during the same week.
The plaintiff commenced this action against Cuddy and the defendants Espejo and
Zaldarriaga for the specific performance of the contract with Cuddy. The complaint
prays "that the court, by a mandatory injunction, order Cuddy to deliver, on the 24th
of May, 1913, in accordance with the aforesaid contract, the said film 'Zigomar, 3d
series, or Eelskin,' to the plaintiff Gilchrist, in accordance with the terms of the
agreement, so that plaintiff can exhibit the same during the last week beginning May
26, 1913, in the Eagle Theater, in Iloilo; that the court issue a preliminary injunction
against the defendants Espejo and Zaldarriaga prohibiting them from receiving,
exhibiting, or using said film in Iloilo during the last week of May, 1913, or at any
other time prior to the delivery to the plaintiff ; that, on the trial, said injunction be
made perpetual and that Cuddy be ordered and commanded to specifically perform
his contract with the plaintiff ."
On the filing of the complaint the plaintiff made an application for a mandatory
injunction compelling the defendant Cuddy to deliver to plaintiff the film in question
by mailing it to him from Manila on the 24th of May so that it would reach Iloilo for
exhibition on the 26th; and for a preliminary restraining order against the order two
defendants prohibiting them from receiving or exhibiting the said film prior to its
323
exhibition by plaintiff.
The court, on this application, entered an order which provided that Cuddy should
"not send said film 'Zigomar, 3d series, or Eelskin,' to the defendants Espejo and
Zaldarriaga and that he should send it to the plaintiff, Gilchrist, on the 24th day of
May, 1913, in the mail for Iloilo," This order was duly served on the defendants,
including Cuddy, in whose possession the film still was, and, in compliance therewith
Cuddy mailed the film to the plaintiff at Iloilo on the 24th of May. The latter duly
received it and exhibited it without molestation during the week beginning the 26th
of May in accordance with the contract which he claimed to have made with Cuddy.
The defendants Espejo and Zaldarriaga having received due notice of the issuance of
the mandatory injunction and restraining order of the 22d of May, appeared before
the court on the 26th of May and moved that the court vacate so much of the order
as prohibited them from receiving and exhibiting the film. In other words, while the
order of the 22d of May was composed of two parts, one a mandatory order for
immediate specific performance of the plaintiff's contract with the defendant Cuddy,
and the other a preliminary restraining order directed to Espejo and Zaldarriaga
prohibiting them from receiving and exhibiting the film during the week beginning
the 26th of May, their motion of the 26th of May referred exclusively to the injunction
against them and touched in no way that portion of the order which required the
immediate performance by Cuddy of his contract with Gilchrist. Indeed, the
defendants Espejo and Zaldarriaga did not even except to the order requiring Cuddy
to specifically perform his agreement with the plaintiff nor did they in any way make
an objection to or show their disapproval of it. It was not excepted to or appealed
from and is not before this court for review.
The motion of Espejo and Zaldarriaga to vacate the injunction restraining them from
receiving the film was denied on the 26th of May. After the termination of the week
beginning May 26th, and after the exhibition of the film by the plaintiff in accordance
with the alleged contract with Cuddy, the plaintiff came into court and moved that, in
view of the fact that he had already obtained all that he desired to obtain or could
obtain by his action, namely, the exhibition of the film in question during the week
beginning May 26th, there was no reason for continuing it and moved for its
dismissal. To this motion Cuddy consented and the action was dismissed as to him.
But the other defendants objected to the dismissal of the action on the ground that
they desired to present to the court evidence showing the damages which they had
suffered by reason of the issuance of the preliminary injunction prohibiting them
from receiving and exhibiting the film in question during the week beginning May 26.
The court sustained their objection and declined to dismiss the action as to them,
and, on the 8th of August, heard the evidence as to damages. He denied defendants
the relief asked for and dismissed their claim for damages. They thereupon took an
appeal from that order, and that is the appeal which we have now before us and
which is the subject of the opinion of the court with which I am concurring.
 We thus have this strange condition:
An action for specific performance of a contract to deliver a film for exhibition during
a given time. A preliminary mandatory injunction ordering the delivery of the film in
accordance with the contract. The delivery of the film in accordance with the
preliminary mandatory injunction. The actual exhibition of the film during the time
specified in the contract. No objection to the issuance of the mandatory injunction, to
the delivery of the film, or to the ground that the plaintiff had obtained full relief by
means of the so-called preliminary remedy by virtue of which the contract
was actually specifically performed before the action was tried. No objection or
exception to the order requiring the specific performance of the contract.
Under such conditions it is possible for the defendant Espejo and Zaldarriaga to
secure damages for the wrongful issuance of the preliminary injunction directed
against them even though it be admitted that it was erroneously issued and that
there was no ground therefor whatever? It seems to me that it is not. At the time this
action was begun the film, as we have seen, was in the possession of Cuddy and,
while in his possession, he complied with a command of the court to deliver it to
plaintiff. In pursuance of that command he delivered it to plaintiff, who used it during
the time specified in his contract with Cuddy; or, in other words, he made such use of
it as he desired and then returned it to Cuddy. This order and the delivery of the film
under it were made in an action in which the defendants Espejo and Zaldarriaga were
parties, without objection on their part and without objection or exception to the
order. The film having been delivered to defendants' competitor, the plaintiff, under
a decree of the court to which they made no objection and took no exception and
from which they have not appealed, what injury can they show by reason of the
injunction restraining them from making use of the film? If they themselves, by their
conduct, permitted the plaintiff to make it impossible for them to gain possession of
the film and to use it, then the preliminary injunction produced no injury for the
reason that no harm can result from restraining a party from doing a thing which,
without such restraint, it would be impossible for him to do. Moreover, the order for
the delivery of the film to plaintiff was a complete determination of the rights of the
parties to the film which, while the court had no right to make, nevertheless, was
valid and binding on all the parties, none of them objecting or taking exception
thereto. Being a complete determination of the rights of the parties to the action, it
should have been the first point attacked by the defendants, as it foreclosed them
completely and, if left in force, eliminating every defense. This order was made on
May 22d and was not excepted to or appealed from. On the 8th of August following
the defendants appealed from the order dismissing their claim to damages but the
order for the delivery of the film to plaintiff was final at that time and is now
conclusive on this court.
324
Section 143 of the Code of Civil Procedure, providing for appeals by bill of exceptions,
provides that "upon the rendition of final judgment disposing of the action, either
party shall have the right to perfect a bill of exceptions for a review by the Supreme
Court of all rulings, orders, and judgment made in the action, to which the party has
duly excepted at the time of making such ruling, order, or judgment." While the order
for the delivery of the film to plaintiff was in one sense a preliminary order, it was in
reality a final determination of the rights of the parties to the film, as it ordered the
delivery thereof to plaintiff for his use. If it had been duly excepted to, its validity
could have been attacked in an appeal from the final judgment thereafter entered in
the action. Not having been excepted to as required by the section just referred to, it
became final and conclusive on all the parties to the action, and when, on the 8th day
of August following, the defendants presented their claim for damages based on the
alleged wrongful issuance of a temporary restraining order, the whole foundation of
their claim had disappeared by virtue of the fact that the execution of the order of
the 22d of May had left nothing for them to litigate. The trial court, on the 8th of
August, would have been fully justified in refusing to hear the defendants on their
claim for damages. Their right thereto had been adjudicated on the 22d of May and
that adjudication had been duly put into execution without protest, objection or
exception, and was, therefore, final and conclusive on them on the 8th of August.
I have presented this concurring opinion in an attempt to prevent confusion, if any,
which might arise from the theory on which the court decides this case. It seems to
me impossible that the action can be one for a permanent injunction. The very nature
of the case demonstrates that a permanent injunction is out of the question. The only
thing that plaintiff desired was to be permitted to use the film for the week beginning
the 26th of May. With the termination of that week his rights expired. After that time
Cuddy was perfectly free to turn the film over to the defendants Espejo and
Zaldarriaga for exhibition at any time. An injunction permanently prohibiting the
defendants from exhibiting the film in Iloilo would have been unjustifiable, as it was
something that plaintiff did not ask and did not want; and would have been an
invasion of the rights of Cuddy as, after the termination of the week beginning May
26, he was at liberty, under his contract with plaintiff, to rent the film to the
defendants Espejo and Zaldarriaga and permit its exhibition in Iloilo at any time. The
plaintiff never asked to have defendants permanently enjoined from exhibiting the
film in Iloilo and no party to the action has suggested such thing.
The action is one for specific performance purely; and while the court granted
plaintiff rights which should have been granted only after a trial of the action,
nevertheless, such right having been granted before trial and none of the defendants
having made objection or taken exception thereto, and the order granting them
having become final, such order became a final determination of the action, by
reason of the nature of the action itself, the rights of the parties became thereby
 finally determined and the defendants Espejo and Zaldarriaga, being parties to the
action, were precluded from further litigation relative to the subject matter of the
controversy.

No damages are claimed by reason of the issuance of the mandatory injunction under
which the film was delivered to plaintiff and used by him during the week beginning
the 26th of May. While the opinion says in the first paragraph that the action is "for
damages against the plaintiff for the alleged wrongful issuance of a mandatory and
preliminary injunction," the opinion also says in a latter portion that "It will be
unnecessary for us to inquire whether the mandatory injunction against Cuddy was
properly issued or not. No question is raised with reference to the issuance of that
injunction;" and still later it is also stated that "as to whether or not the mandatory
injunction should have been issued, we are not, as we have said, called upon to
determine." I repeat that no objection was made by the defendants to the issuance of
the mandatory injunction, no exception was taken to the order on which it was issued
and no appeal has been taken therefrom. That order is now final and conclusive and
was at the time this appeal was taken. That being so, the rights of the defendants
were foreclosed thereby. The defendants Espejo and Zaldarriaga cannot now be
heard to say that they were damaged by the issuance of the preliminary restraining
injunction issued on the same day as the mandatory injunction.

From what has been said it is clear, it seems to me, that the question of a breach of
contract by inducement, which is substantially the only question discussed and
decided, is not in the case in reality and, in my judgment, should not be touched
upon. Courts will not proceed with a litigation and discuss and decided question
which might possibly be involved in the case when it clearly appears that there
remains nothing about which to litigate, the whole subject matter of the original
action having been settled and the parties having no real controversy to present. At
the time the defendants Espejo and Zaldarriaga offered their claim for damages
arising out of the wrongful issuance of the restraining order, there was nothing
between them and the plaintiff to litigate, the rightfulness of plaintiff's demand
having already been finally adjudicated and determined in the same action.

76. G.R. No. 86683 January 21, 1993

PHILIP S. YU, petitioner,

325

vs.
 THE HONORABLE COURT OF APPEALS, THE HONORABLE PRESIDING JUDGE, RTC OF
MANILA, BRANCH XXXIV (34) and UNISIA MERCHANDISING CO., INC., respondents.
Oscar M. Manahan for petitioner.
Ruben L. Pasamonte collaborating counsel for petitioner.
Alfredo G. De Guzman for private respondent.
MELO, J.:
Petitioner, the exclusive distributor of the House of Mayfair wallcovering products in
the Philippines, cried foul when his former dealer of the same goods, herein private
respondent, purchased the merchandise from the House of Mayfair in England
through FNF Trading in West Germany and sold said merchandise in the Philippines.
Both the court of origin and the appellate court rejected petitioner's thesis that
private respondent was engaged in a sinister form of unfair competition within the
context of Article 28 of the New Civil Code (pp. 23 and 64, Rollo). Hence, the petition
at bar.
There is no dispute that petitioner has had an exclusive sales agency agreement with
the House of Mayfair since 1987 to promote and procure orders for Mayfair
wallcovering products from customers in the Philippines (Annex "B", Petition; p.
30, Rollo). Even as petitioner was such exclusive distributor, private respondent,
which was then petitioner's dealer, imported the some goods via the FNF Trading
which eventually sold the merchandise in the domestic market (TSN, September 20,
1988, p. 9; p. 117, Rollo). In the suit for injunction which petitioner filed before the
Regional Trial Court of the National Capital Judicial Region stationed at Manila,
petitioner pressed the idea that he was practically by-passed and that private
respondent acted in concert with the FNF Trading in misleading Mayfair into believing
that the goods ordered by the trading firm were intended for shipment to Nigeria
although they were actually shipped to and sold in the Philippines (Paragraph 5,
Complaint: p. 34, Rollo). Private respondent professed ignorance of the exclusive
contract in favor of petitioner. Even then, private respondent responded by asserting
that petitioner's understanding with Mayfair is binding only between the parties
thereto (Paragraph 5, Answer; p. 50, Rollo).
In the course of hearing the arguments for and against the issuance of the requested
326
writ of preliminary injunction, petitioner impressed before the lower court that he is
seeking to enjoin the sale and distribution by private respondent of the same goods
in the market (TSN, September 20, 1988, p. 35; p. 142, Rollo) but the Honorable Cesar
V. Alejandria, Presiding Judge of Branch 34 was unperturbed, thusly:
Resolving plaintiff's motion embodied in the complaint for the
issuance of a writ of preliminary injunction after hearing, but
without prejudging the merits of the case, and finding from the
evidences adduced by the plaintiff, that the terms and conditions of
the agency agreement, Exhibit "A-inj." between the plaintiff and
The House of Mayfair of England for the exclusive distributorship by
the plaintiff of the latter's goods, apertain to them; that there is no
privity of contract between the plaintiff and the defendant; that the
controversy in this case arose from a breach of contract by the FNF
Trading of Germany, for having shipped goods it had purchased
from The House of Mayfair to the Philippines: that as shown in Exh.
"J-inj.", the House of Mayfair was demanding payment of 4,500.00
from the FNF Trading for restitution of plaintiff's alleged loss on
account of the shipment of the goods in question here in the
Philippines and now in the possession of the defendant; it appears
to the Court that to restrain the defendant from selling the goods it
has ordered from the FNF Trading of Germany, would be without
legal justification.
WHEREFORE, the motion for the issuance of a writ of preliminary
injunction to restrain the defendant from selling the goods it has
ordered from the FNF Trading of Germany is hereby DENIED. (p.
64, Rollo.)
The indifference of the trial court towards petitioner's supplication occasioned the
filing of a petition for review on certiorari with the Court of Appeals but Justice
Ordoñez-Benitez, with whom Justices Bellosillo and Kalalo concurred, reacted in the
same nonchalant fashion. According to the appellate court, petitioner was not able to
demonstrate the unequivocal right which he sought to protect and that private
respondent is a complete stranger vis-a-vis the covenant between petitioner and
Mayfair. Apart from these considerations, the reviewing authority noted that
petitioner could be fully compensated for the prejudice he suffered judging from the
tenor of Mayfair's correspondence to FNF Trading wherein Mayfair took the cudgels
for petitioner in seeking compensation for the latter's loss as a consequence of
private respondent's scheme (p. 79, Rollo; pp. 23-29, Rollo).
In the petition at hand, petitioner anchors his plea for redress on his perception that
private respondent has distributed and continues to sell Mayfair covering products in
 contravention of petitioner's exclusive right conferred by the covenant with the
House of Mayfair.
On March 13, 1989, a temporary restraining order was issued to last until further
notice from this Court directed against private respondent (p. 188, Rollo).
Notwithstanding such proscription, private respondent persisted in the distribution
and sole (p. 208; 228-229, Rollo), triggering petitioner's motion to cite private
respondent's manager in contempt of court (p. 223, Rollo). Considering that private
respondent's manager, Frank Sia, admitted the acts complained of, a fine of P500.00
was imposed on him but he failed to pay the same within the five-day period
provided in Our Resolution of June 21, 1989
(p. 236, Rollo).
Did respondent appellate court correctly agree with the lower court in disallowing
the writ solicited by herein petitioner?
That the exclusive sales contract which links petitioner and the House of Mayfair is
solely the concern of the privies thereto and cannot thus extend its chain as to bind
private respondent herein is, We believe, beside the point. Verily, injunction is the
appropriate remedy to prevent a wrongful interference with contracts by strangers to
such contracts where the legal remedy is insufficient and the resulting injury is
irreparable (Gilchrist vs. Cuddy, 29 Phil. 542 [1915]; 4-A Padilla, Civil Code Annotated,
1988 Ed., p. 90). The liability of private respondent, if any, does not emanate from the
four corners of the contract for undoubtedly, Unisia Merchandising Co., Inc. is not a
party thereto but its accountability is "an independent act generative of civil liability"
(Daywalt vs. Corporacion de PP. Agustinos Recoletos, 39 Phil. 587 [1919]; 4 Paras,
Civil Code of the Philippines Annotated, 1981 10th Ed., p. 439; 4 Tolentino,
Commentaries and Jurisprudence on the Civil Code, 1986 Ed.,
p. 439). These observations, however, do not in the least convey the message that
We have placed the cart ahead of the horse, so to speak, by pronouncing private
respondent's liability at this stage in view of the pendency of the main suit for
injunction below. We are simply rectifying certain misperceptions entertained by the
appellate court as regards the feasibility of requesting a preliminary injunction to
enjoin a stranger to an agreement.
To Our mind, the right to perform an exclusive distributorship agreement and to reap
the profits resulting from such performance are proprietary rights which a party may
protect (30 Am. Jur. Section 19, pp. 71-72: Jurado, Comments and Jurisprudence
on Obligations and Contracts, 1983 8th Rev. Ed., p. 336) which may otherwise not be
diminished, nay, rendered illusory by the expedient act of utilizing or interposing a
person or firm to obtain goods from the supplier to defeat the very purpose for which
327
the exclusive distributorship was conceptualized, at the expense of the sole
authorized distributor (43 C.J.S. 597).
Another circumstance which respondent court overlooked was petitioner's
suggestion, which was not disputed by herein private respondent in its comment,
that the House of Mayfair in England was duped into believing that the goods
ordered through the FNF Trading were to be shipped to Nigeria only, but the goods
were actually sent to and sold in the Philippines. A ploy of this character is akin to the
scenario of a third person who induces a party to renege on or violate his undertaking
under a contract, thereby entitling the other contracting party to relief therefrom
(Article 1314, New Civil Code). The breach caused by private respondent was even
aggravated by the consequent diversion of trade from the business of petitioner to
that of private respondent caused by the latter's species of unfair competition as
demonstrated no less by the sales effected inspite of this Court's restraining order.
This brings Us to the irreparable mischief which respondent court misappreciated
when it refused to grant the relief simply because of the observation that petitioner
can be fully compensated for the damage. A contrario, the injury is irreparable where
it is continuous and repeated since from its constant and frequent recurrence, no fair
and reasonable redress can be had therefor by petitioner insofar as his goodwill and
business reputation as sole distributor are concerned. Withal, to expect petitioner to
file a complaint for every sale effected by private respondent will certainly court
multiplicity of suits (3 Francisco, Revised Rules of Court, 1985 Edition, p. 261).
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals
dated January 13, 1989 in CA-G.R. SP No. 16019 and the Order dated October 16,
1988 issued by the magistrate at the court of origin are hereby REVERSED and SET
ASIDE. Let this case be remanded to the court of origin for issuance of a writ of
preliminary injunction upon petitioner's posting of a bond in the sum of Fifty
Thousand (P50,000.00) Pesos to be approved by said court, to remain effective during
the trial on the merits until final determination of the case. The manager of private
respondent. Frank Sia, is hereby ordered to pay to the Clerk of Court within five (5)
days from notice hereof the fine of P500.00, as previously imposed on him, with a
warning that failure to do so will be dealt with more severely.
Upon issuance of the writ of preliminary injunction, the restraining order issued on
March 13, 1989 by this Court shall be deemed automatically lifted.
SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
 REYES, JJ.

PIONEER INSURANCE & SURETY CORPORATION,

WILFREDO C. AGUSTIN and HERNANDO G.
MINIMO,

Respondents.

Promulgated:

February 15, 2012

x ----------------------------------------------------------------------------------------x

ART 1315- CONSENSUAL CONTRACTS DECISION

C.F. SHARP & CO. INC. and JOHN J. ROCHA, G.R. No. 179469 PEREZ, J.:

Petitioners, Whether a local private employment agency may be held liable for breach of contract
for failure to deploy a seafarer, is the bone of contention in this case.

Assailed in this petition for review are the Decision [1] dated 30 October 2003 and the
Present: 29 August 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 53336 finding
petitioners C.F. Sharp Co. Inc. (C.F. Sharp) and John J. Rocha (Rocha) liable for
damages.

CARPIO, J., Responding to a newspaper advertisement of a job opening for sandblasters and
painters in Libya, respondents Wilfredo C. Agustin and Hernando G. Minimo applied
with C.F. Sharp sometime in August 1990. After passing the interview, they were
-versus- Chairperson,
required to submit their passports, seamans book, National Bureau of Investigation
clearance, employment certificates, certificates of seminars attended, and results of
VILLARAMA, JR.,*
medical examination. Upon submission of the requirements, a Contract of
Employment was executed between respondents and C.F. Sharp. Thereafter,
PEREZ, respondents were required to attend various seminars, open a bank account with the
corresponding allotment slips, and attend a pre-departure orientation. They were
SERENO, and then advised to prepare for immediate deployment and to report to C.F. Sharp to
328

ascertain the schedule of their deployment.

 After a month, respondents were yet to be deployed prompting them to request for
the release of the documents they had submitted to C.F. Sharp. C.F. Sharp allegedly
refused to surrender the documents which led to the filing of a complaint by
respondents before the Philippine Overseas Employment Administration (POEA) on
21 January 1991.
On 30 October 1991, POEA issued an Order finding C.F. Sharp guilty of violation of
Article 34(k) of the Labor Code, which makes it unlawful for any entity to withhold or
deny travel documents from applicant workers before departure for monetary or
financial considerations other than those authorized under this Code and its
implementing rules and regulations. Consequently, C.F. Sharps license was suspended
until the return of the disputed documents to respondents. POEA likewise declared
that it has no jurisdiction to adjudicate the monetary claims of respondents.
On 10 March 1995, respondents filed a Complaint for breach of contract and
damages against C.F. Sharp and its surety, Pioneer Insurance and Surety Corporation
(Pioneer Insurance), before the Regional Trial Court (RTC) of Pasay City. Respondents
claimed that C.F. Sharp falsely assured them of deployment and that its refusal to
release the disputed documents on the ground that they were already bound by
reason of the Contract of Employment, denied respondents of employment
opportunities abroad and a guaranteed income. Respondents also prayed for
damages. Pioneer Insurance filed a cross claim against C.F. Sharp and John J. Rocha,
the executive vice-president of C.F. Sharp, based on an Indemnity Agreement which
substantially provides that the duo shall jointly and severally indemnify Pioneer
Insurance for damages, losses, and costs which the latter may incur as surety. The
RTC rendered judgment on 27 June 1996 favoring respondents, to wit:
WHEREFORE, plaintiffs causes of action having been
proved with a preponderance of evidence, judgment is hereby
ordered as follows:
a. Declaring the non-deployment of plaintiffs and the
refusal to release documents as breach of contract;
b. By way of compensatory damages, awarding $450
per month and $439 overtime per month, which
should have been received by plaintiffs from other
employers, making a joint and solidary obligation on
the part of the two defendants C.F. Sharp and
329
Pioneer for the period covered by the employment
contracts;
c. Ordering each defendant to pay each
plaintiff P50,000.00 as moral damages and
another P50,000.00 each as exemplary damages;
d. Ordering defendants to share in the payment to
plaintiffs of P50,000.00 attorneys fees;
e. Defendants to pay litigation expenses and costs of
suit.[2]
The trial court ruled that there was a violation of the contract when C.F.
Sharp failed to deploy and release the papers and documents of respondents, hence,
they are entitled to damages. The trial court likewise upheld the cause of action of
respondents against Pioneer Insurance, the former being the actual beneficiaries of
the surety bond.
On appeal, C.F. Sharp and Rocha raise a jurisdictional issue that the RTC has
no jurisdiction over the instant case pursuant to Section 4(a) of Executive Order No.
797 which vests upon the POEA the jurisdiction over all cases, including money
claims, arising out of or by virtue of any contract involving workers for overseas
employment. C.F. Sharp and Rocha refuted the findings of the trial court and
maintained that the perfection and effectivity of the Contract of Employment depend
upon the actual deployment of respondents.
The Court of Appeals upheld the jurisdiction of the trial court by ruling that
petitioners are now estopped from raising such question because they have actively
participated in the proceedings before the trial court. The Court of Appeals further
held that since there is no perfected employment contract between the parties, it is
the RTC and not the POEA, whose jurisdiction pertains only to claims arising from
contracts involving Filipino seamen, which has jurisdiction over the instant case.
Despite the finding that no contract was perfected between the parties, the
Court of Appeals adjudged C.F. Sharp and Rocha liable for damages, to wit:
WHEREFORE, the Appeal of C.F. Sharp Co Inc. and John J.
Rocha is PARTIALLY GRANTED only insofar as We declare that there
is no breach of contract because no contract of employment was
perfected. However, We find appellants C.F. Sharp Co. Inc. and John
 J. Rocha liable to plaintiff-appellees for damages pursuant to Article
21 of the Civil Code and award each plaintiff-appellees temperate
damages amounting to P100,000.00, and moral damages in the
increased amount of P100,000.00. The award of exemplary
damages and attorneys fees amounting to P50,000.00, respectively,
is hereby affirmed.[3]
The Court of Appeals limited the liability of Pioneer Insurance to the amount
of P150,000.00 pursuant to the Contract of Suretyship between C.F. Sharp and
Pioneer Insurance.
Rocha filed the instant petition on the submission that there is no basis to
hold him liable for damages under Article 21 of the Civil Code because C.F. Sharp has
signified its intention to return the documents and had in fact informed respondents
that they may, at any time of the business day, withdraw their documents. Further,
respondents failed to establish the basis for which they are entitled to moral
damages. Rocha refuted the award of exemplary damages because the act of
requiring respondents to sign a quitclaim prior to the release of their documents
could not be considered bad faith. Rocha also questions the award of temperate
damages on the ground that the act of withholding respondents documents could not
be considered chronic and continuing.[4]
Right off, insofar as Pioneer Insurance is concerned, the petition should be dismissed
against it because the ruling of the Court of Appeals limited its liability to P150,000.00
was not assailed by Rocha, hence the same has now attained finality.
Before us, respondents maintain that they are entitled to damages under
Article 21 of the Civil Code for C.F. Sharps unjustified refusal to release the
documents to them and for requiring them to sign a quitclaim which would
effectively bar them from seeking redress against petitioners. Respondents justify the
award of other damages as they suffered pecuniary losses attributable to petitioners
malice and bad faith.
In his Reply, Rocha introduced a new argument, i.e., that he should not be held jointly
330
liable with C.F. Sharp considering that the company has a separate personality. Rocha
argues that there is no showing in the Complaint that he had participated in the
malicious act complained. He adds that his liability only stems from the Indemnity
Agreement with Pioneer Insurance and does not extend to respondents.
Records disclose that Rocha was first impleaded in the case by Pioneer
Insurance. Pioneer Insurance, as surety, was sued by respondents together with C.F.
Sharp. Pioneer Insurance in turn filed a third party complaint against Rocha on the
basis of an Indemnity Agreement whereby he bound himself to indemnify and hold
harmless Pioneer Insurance from and against any and all damages which the latter
may incur in consequence of having become a surety.[5] The third party complaint
partakes the nature of a cross-claim.
C.F. Sharp, as defendant-appellant and Rocha, as third-party defendant-
appellant, filed only one brief before the Court of Appeals essentially questioning the
declaration of the trial court that non-deployment is tantamount to breach of
contract and the award of damages. The Court of Appeals found them both liable for
damages. Both C.F. Sharp and Rocha sought recourse before this Court via a Motion
for Extension of Time (To File a Petition for Review) on 19 September 2007. [6] In the
Petition for Review, however, C.F. Sharp was noticeably dropped as petitioner. Rocha
maintains essentially the same argument that he and C.F. Sharp were wrongfully
adjudged liable for damages.
It was only in its Reply dated 25 March 2008 that Rocha, through a new
representation, suddenly forwarded the argument that he should not be held liable
as an officer of C.F. Sharp. It is too late in the day for Rocha to change his theory. It is
doctrinal that defenses not pleaded in the answer may not be raised for the first time
on appeal. A party cannot, on appeal, change fundamentally the nature of the issue in
the case. When a party deliberately adopts a certain theory and the case is decided
upon that theory in the court below, he will not be permitted to change the same on
appeal, because to permit him to do so would be unfair to the adverse party. [7] More
so in this case, where Rocha introduced a new theory at the Reply
stage.Disingenuousness may even be indicated by the sudden exclusion of the name
of C.F. Sharp from the main petition even as Rocha posited arguments not just for
himself and also in behalf of C.F. Sharp.
 The core issue pertains to damages.
The bases of the lower courts award of damages differ. In upholding the
perfection of contract between respondents and C.F. Sharp, the trial court stated that
the unjustified failure to deploy and subsequently release the documents of
respondents entitled them to compensatory damages, among others. Differently, the
appellate court found that no contract was perfected between the parties that will
give rise to a breach of contract. Thus, the appellate court deleted the award of
actual damages.However, it adjudged other damages against C.F. Sharp for its
unlawful withholding of documents from respondents.
We sustain the trial courts ruling.
On the issue of whether respondents are entitled to relief for failure to deploy them,
the RTC ruled in this wise:
The contract of employment entered into by the plaintiffs and the
defendant C.F. Sharp is an actionable document, the same contract
having the essential requisites for its validity. It is worthy to note
that there are three stages of a contract: (1) preparation,
conception, or generation which is the period of negotiation and
bargaining ending at the moment of agreement of the parties.
(2) Perfection or birth of the contract, which is the moment when
the parties come to agree on the terms of the contract. (3)
Consummation or death, which is the fulfillment or performance of
the terms agreed upon in the contract.
Hence, it is imperative to know the stage reached by the
contract entered into by the plaintiffs and C.F. sharp. Based on the
testimonies of the witnesses presented in this Court, there was
already a perfected contract between plaintiffs and defendant C.F.
Sharp. Under Article 1315 of the New Civil Code of the Philippines,
it states that:
331
xxxx
Thus, when plaintiffs signed the contract of employment with
C.F. Sharp (as agent of the principal WB Slough) consequently, the
latter is under obligation to deploy the plaintiffs, which is the
natural effect and consequence of the contract agreed by them.[8]
We agree.
As correctly ruled at the trial, contracts undergo three distinct stages, to wit:
negotiation; perfection or birth; and consummation. Negotiation begins from the
time the prospective contracting parties manifest their interest in the contract and
ends at the moment of agreement of the parties. Perfection or birth of the contract
takes place when the parties agree upon the essential elements of the contract.
Consummation occurs when the parties fulfill or perform the terms agreed upon in
the contract, culminating in the extinguishment thereof.[9]
Under Article 1315 of the Civil Code, a contract is perfected by mere consent
and from that moment the parties are bound not only to the fulfillment of what has
been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law.[10]
An employment contract, like any other contract, is perfected at the
moment (1) the parties come to agree upon its terms; and (2) concur in the essential
elements thereof: (a) consent of the contracting parties, (b) object certain which is
the subject matter of the contract and (c) cause of the obligation.[11]
We have scoured through the Contract of Employment and we hold that it is
a perfected contract of employment. We reproduce below the terms of the Contract
of Employment for easy reference:
WITNESSETH
That the Seafarer shall be employed on board under the
following terms and conditions:
1.1 Duration of Contract: 3 month/s
1.2 Position: SANDBLASTER/PAINTER
 1.3 Basic Monthly Salary: $450.00 per month CBA and this contract which constitute his entire agreement with
the employer.
1.4 Living Allowances: $0.00 per month

1.5 Hours of Work: 48 per week

The Employee also confirms that no verbal or other written
1.6 Overtime Rate: $439.00 per month promises other than the terms and conditions of this Contract as
well as the POEA Revised Employment Contract, the CBA and/or
1.7 Vacation Leave with Pay: 30.00 day/s per month on board company terms and conditions had been given to the
Employee. Therefore, the Employee cannot claim any additional
benefits or wages of any kind except those which have been
The terms and conditions of the Revised Employment
provided in this Contract Agreement.[12]
Contract for seafarers governing the employment of all Filipino
seafarers approved by the POEA/DOLE on July 14, 1989 under
Memorandum Circular No. 41 series of 1989 and amending circulars By the contract, C.F. Sharp, on behalf of its principal, International Shipping
relative thereto shall be strictly and faithfully observed. Management, Inc., hired respondents as Sandblaster/Painter for a 3-month contract,
with a basic monthly salary of US$450.00. Thus, the object of the contract is the
service to be rendered by respondents on board the vessel while the cause of the
Any alterations or changes, in any part of this Contract
contract is the monthly compensation they expect to receive. These terms were
shall be evaluated, verified, processed and approved by the
embodied in the Contract of Employment which was executed by the parties. The
Philippine Overseas Employment Administration (POEA). Upon
agreement upon the terms of the contract was manifested by the consent freely
approval, the same shall be deemed an integral part of the
given by both parties through their signatures in the contract. Neither parties
Standard Employment Contract (SEC) for seafarers.
disavow the consent they both voluntarily gave. Thus, there is a perfected contract of
employment.
All claims, complaints or controversies relative to the
implementation and interpretation of this overseas employment
The Court of Appeals agreed with the submission of C.F. Sharp that the
contract shall be exclusively resolved through the established
perfection and effectivity of the Contract of Employment depend upon the actual
Grievance Machinery in the Revised Employment Contract for
deployment of respondents. It based its conclusion that there was no perfected
seafarers, the adjudication procedures of the Philippine Overseas
contract based on the following rationale:
Employment Administration and the Philippine Courts of Justice, in
that order.

Violations of the terms and conditions of this Contract with

its approved addendum shall warrant the imposition of appropriate The commencement of the employer-employee
disciplinary or administrative sanctions against the erring party. relationship between plaintiffs-appellees and the foreign employer,
as correctly represented by C.F. Sharp requires that conditions
under Sec. D be met. The Contract of Employment was duly Verified
The Employee hereby certifies that he had received, read
and approved by the POEA. Regrettably, We have painfully
or has had explained to him and fully understood this contract as
scrutinized the Records and find no evidence that plaintiffs-
well as the POEA revised Employment Contract of 1989 and the
appellees were cleared for travel and departure to their port of
Collective Bargaining Agreement (CBA) and/or company terms and
embarkation overseas by government authorities. Consequently,
conditions of employment covering this vessel and that he is fully
non-fulfillment of this condition negates the commencement and
aware of and has head or has had explained to him the terms and
existence of employer-employee relationship between the
332

conditions including those in the POEA Employment Contract, the

plaintiffs-appellees and C.F. Sharp. Accordingly, no contract
 between them was perfected that will give rise to plaintiffs-
appellees right of action. There can be no breach of contract when
in the first place, there is no effective contract to speak of. For the
same reason, and finding that the award of actual damages has no
basis, the same is hereby deleted.[13]
The Court of Appeals erred.
The commencement of an employer-employee relationship must be treated
separately from the perfection of an employment contract. Santiago v. CF Sharp Crew
Management, Inc.,[14] which was promulgated on 10 July 2007, is an instructive
precedent on this point. In said case, petitioner was hired by respondent on board
MSV Seaspread for US$515.00 per month for nine (9) months, plus overtime
pay. Respondent failed to deploy petitioner from the port of Manila to Canada. We
made a distinction between the perfection of the employment contract and the
commencement of the employer-employee relationship, thus:
The perfection of the contract, which in this case coincided
with the date of execution thereof, occurred when petitioner and
respondent agreed on the object and the cause, as well as the rest
of the terms and conditions therein. The commencement of the
employer-employee relationship, as earlier discussed, would have
taken place had petitioner been actually deployed from the point of
hire. Thus, even before the start of any employer-employee
relationship, contemporaneous with the perfection of the
employment contract was the birth of certain rights and obligations,
the breach of which may give rise to a cause of action against the
erring party.[15]
Despite the fact that the employer-employee relationship has not
commenced due to the failure to deploy respondents in this case, respondents are
entitled to rights arising from the perfected Contract of Employment, such as the
right to demand performance by C.F. Sharp of its obligation under the contract.
The right to demand performance was a categorical pronouncement
in Santiago which ruled that failure to deploy constitutes breach of contract, thereby
entitling the seafarer to damages:
333
Respondents act of preventing petitioner from departing
the port of Manila and boarding MSV Seaspread constitutes a
breach of contract, giving rise to petitioners cause of action.
Respondent unilaterally and unreasonably reneged on its obligation
to deploy petitioner and must therefore answer for the actual
damages he suffered.
We take exception to the Court of Appeals conclusion that
damages are not recoverable by a worker who was not deployed by
his agency. The fact that the POEA Rules are silent as to the
payment of damages to the affected seafarer does not mean that
the seafarer is precluded from claiming the same. The sanctions
provided for non-deployment do not end with the suspension or
cancellation of license or fine and the return of all documents at no
cost to the worker. They do not forfend a seafarer from instituting
an action for damages against the employer or agency which has
failed to deploy him.[16]
The appellate court could not be faulted for its failure to adhere
to Santiago considering that the Court of Appeals Decision was promulgated way
back in 2003 while Santiago was decided in 2007. We now reiterate Santiago and,
accordingly, decide the case at hand.
We respect the lower courts findings that C.F. Sharp unjustifiably refused to
return the documents submitted by respondent. The finding was that C.F. Sharp
would only release the documents if respondent would sign a quitclaim. On this
point, the trial court was affirmed by the Court of Appeals. As a consequence, the
award by the trial court of moral damages must likewise be affirmed.
Moral damages may be recovered under Article 2219 of the Civil Code in
relation to Article 21. The pertinent provisions read:
Art. 2219. Moral damages may be recovered in the following
and analogous cases:
xxxx
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34, and 35.
xxxx
 Art. 21. Any person who wilfully causes loss or injury to another
in a manner that is contrary to morals, good customs or public
policy shall compensate the latter for the damage.
We agree with the appellate court that C.F. Sharp committed an actionable
wrong when it unreasonably withheld documents, thus preventing respondents from
seeking lucrative employment elsewhere. That C.F. Sharp arbitrarily imposed a
condition that the documents would only be released upon signing of a quitclaim is
tantamount to bad faith because it effectively deprived respondents of resort to legal
remedies.
Furthermore, we affirm the award of exemplary damages and attorneys
fees. Exemplary damages may be awarded when a wrongful act is accompanied by
bad faith or when the defendant acted in a wanton, fraudulent, reckless, oppressive,
or malevolent manner which would justify an award of exemplary damages under
Article 2232 of the Civil Code. Since the award of exemplary damages is proper in this
case, attorneys fees and cost of the suit may also be recovered as provided under
Article 2208 of the Civil Code.[17]
WHEREFORE, the petition is DENIED. The Decision dated 27 June 1996 of the
Regional Trial Court of Pasay City is REINSTATED. Accordingly, the Decision dated 30
October 2003 of the Court of Appeals is MODIFIED.
SO ORDERED.
7 ELEMENTS OF CONTRACTS
CONSENT
334
78. G.R. No. 177783 : January 23, 2013
HEIRS OF FAUSTO C. IGNACIO, namely MARFEL D. IGNACIO-MANALO, MILFA D.
IGNACIO-MANALO AND FAUSTINO D. IGNACIO, Petitioners, v. HOME BANKERS
SAVINGS AND TRUST COMPANY, SPOUSES PHILLIP AND THELMA RODRIGUEZ,
CATHERINE, REYNOLD & JEANETTE, all surnamed ZUNIGA, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 assailing the
Decision1 dated July 18, 2006 and Resolution2 dated May 2, 2007 of the Court of
Appeals (CA) in CA-G.R. CV No. 73551. The CA reversed the Decision 3 dated June 15,
1999 of the Regional Trial Court (RTC) of Pasig City, Branch 151 in Civil Case No.
58980.
The factual antecedents:cralawlibrary
In August 1981, petitioner Fausto C. Ignacio mortgaged two parcels of land to Home
Savings Bank and Trust Company, the predecessor of respondent Home Bankers
Savings and Trust Company, as security for the P500,000.00 loan extended to him by
said bank. These properties which are located in Cabuyao, Laguna are covered by
Transfer Certificate of Title Nos. (T-40380) T-8595 and (T-45804) T-8350 containing an
area of 83,303 square meters and 120,110 square meters, respectively.4?r?l1
When petitioner defaulted in the payment of his loan obligation, respondent bank
proceeded to foreclose the real estate mortgage. At the foreclosure sale held on
January 26, 1983, respondent bank was the highest bidder for the sum
of P764,984.67. On February 8, 1983, the Certificate of Sale issued to respondent
bank was registered with the Registry of Deeds of Calamba, Laguna. With the failure
of petitioner to redeem the foreclosed properties within one year from such
registration, title to the properties were consolidated in favor of respondent bank.
Consequently, TCT Nos. T-8595 and T-8350 were cancelled and TCT Nos. 111058 and
111059 were issued in the name of respondent bank.5?r?l1
Despite the lapse of the redemption period and consolidation of title in respondent
bank, petitioner offered to repurchase the properties. While the respondent bank
considered petitioner's offer to repurchase, there was no repurchase contract
executed. The present controversy was fuelled by petitioner's stance that a verbal
 repurchase/compromise agreement was actually reached and implemented by the
parties.
In the meantime, respondent bank made the following dispositions of the foreclosed
properties already titled in its name:cralawlibrary
TCT No. 111059 (Subdivided into six lots with individual titles - TCT Nos. 117771,
117772, 117773, 117774, 117775 and 117776)
A. TCT No. 117771 (16,350 sq.ms.) - Sold to Fermin Salvador and Bella Salvador under
Deed of Absolute Sale dated May 23, 1984 for the price of P150,000.00
B. TCT No. 11772 (82,569 sq.ms. subdivided into 2 portions
1) Lot 3-B-1 (35,447 sq.ms.) - Sold to Dr. Oscar Remulla and Natividad Pagtakhan, Dr.
Edilberto Torres and Dra. Rebecca Amores under Deed of Absolute Sale dated April
17, 1985 for the price of P150,000.00
2) Lot 3-B-2 covered by separate title TCT No. 124660 (Subdivided into 3 portions -
Lot 3-B-2-A (15,000 sq.ms.) - Sold to Dr. Myrna del Carmen Reyes under Deed of
Absolute Sale dated March 23, 1987 for the price of P150,000.00
Lot 3-B-2-B (15,000 sq.ms.) - Sold to Dr. Rodito Boquiren under Deed of Absolute Sale
dated March 23, 1987 for the price of P150,000.00
Lot 3-B-2-C (17,122 sq.ms.) covered by TCT No. T-154568 -
C. TCT No.117773 (17,232 sq.ms.) - Sold to Rizalina Pedrosa under Deed of Absolute
Sale dated June 4, 1984 for the price of P150,000.00 ???ñr?bl?š ??r†??l l?? l?br?rÿ
The expenses for the subdivision of lots covered by TCT No. 111059 and TCT No.
117772 were shouldered by petitioner who likewise negotiated the above-mentioned
sale transactions. The properties covered by TCT Nos. T-117774 to 117776 are still
registered in the name of respondent bank.6?r?l1
In a letter addressed to respondent bank dated July 25, 1989, petitioner expressed his
willingness to pay the amount of P600,000.00 in full, as balance of the repurchase
price, and requested respondent bank to release to him the remaining parcels of land
covered by TCT Nos. 111058 and T-154658 ("subject properties").7 Respondent bank
335
however, turned down his request. This prompted petitioner to cause the annotation
of an adverse claim on the said titles on September 18, 1989. 8?r?l1
Prior to the annotation of the adverse claim, on August 24, 1989, the property
covered by TCT No. 154658 was sold by respondent bank to respondent spouses
Phillip and Thelma Rodriguez, without informing the petitioner. On October 6, 1989,
again without petitioner's knowledge, respondent bank sold the property covered by
TCT No T-111058 to respondents Phillip and Thelma Rodriguez, Catherine M. Zuñiga,
Reynold M. Zuñiga and Jeannette M. Zuñiga.9?r?l1
On December 27, 1989, petitioner filed an action for specific performance and
damages in the RTC against the respondent bank. As principal relief, petitioner sought
in his original complaint the reconveyance of the subject properties after his payment
of P600,000.00.10 Respondent bank filed its Answer denying the allegations of
petitioner and asserting that it was merely exercising its right as owner of the subject
properties when the same were sold to third parties.
For failure of respondent bank to appear during the pre-trial conference, it was
declared as in default and petitioner was allowed to present his evidence ex parte on
the same date (September 3, 1990). Petitioner simultaneously filed an "Ex-Parte
Consignation" tendering the amount of P235,000.00 as balance of the repurchase
price.11 On September 7, 1990, the trial court rendered judgment in favor of
petitioner. Said decision, as well as the order of default, were subsequently set aside
by the trial court upon the filing of a motion for reconsideration by the respondent
bank.12?r?l1
In its Order dated November 19, 1990, the trial court granted the motion for
intervention filed by respondents Phillip and Thelma Rodriguez, Catherine Zuñiga,
Reynold Zuñiga and Jeannette Zuñiga. Said intervenors asserted their status as
innocent purchasers for value who had no notice or knowledge of the claim or
interest of petitioner when they bought the properties already registered in the name
of respondent bank. Aside from a counterclaim for damages against the petitioner,
intervenors also prayed that in the event respondent bank is ordered to reconvey the
properties, respondent bank should be adjudged liable to the intervenors and return
all amounts paid to it.13?r?l1
On July 8, 1991, petitioner amended his complaint to include as alternative relief
under the prayer for reconveyance the payment by respondent bank of the prevailing
market value of the subject properties "less whatever remaining obligation due the
bank by reason of the mortgage under the terms of the compromise
agreement.14?r?l1
 On June 15, 1999, the trial court rendered its Decision, the dispositive portion of
which reads:cralawlibrary
WHEREFORE, findings [sic] the facts aver[r]ed in the complaint supported by
preponderance of evidences adduced, judgment is hereby rendered in favor of the
plaintiff and against the defendant and intervenors by:cralawlibrary
1. Declaring the two Deeds of Sale executed by the defendant in favor of the
intervenors as null and void and the Register of Deeds in Calamba, Laguna is ordered
to cancel and/or annul the two Transfer Certificate of Titles No. T-154658 and TCT
No. T-111058 issued to the intervenors.
2. Ordering the defendant to refund the amount of P1,004,250.00 to the intervenors
as the consideration of the sale of the two properties.
3. Ordering the defendant to execute the appropriate Deed of Reconveyance of the
two (2) properties in favor of the plaintiff after the plaintiff pays in full the amount
of P600,000.00 as balance of the repurchase price.
4. Ordering the defendant bank to pay plaintiff the sum of P50,000.00 as attorney's
fees.
5. Dismissing the counterclaim of the defendant and intervenors against the
plaintiff. ???ñr?bl?š ??r†??l l?? l?br?rÿ
Costs against the defendant.
SO ORDERED.15?r?l1
The trial court found that respondent bank deliberately disregarded petitioner's
substantial payments on the total repurchase consideration. Reference was made to
the letter dated March 22, 1984 (Exhibit "I")16as the authority for petitioner in making
the installment payments directly to the Universal Properties, Inc. (UPI), respondent
bank's collecting agent. Said court concluded that the compromise agreement
amounts to a valid contract of sale between petitioner, as Buyer, and respondent
bank, as Seller. Hence, in entertaining other buyers for the same properties already
sold to petitioner with intention to increase its revenues, respondent bank acted in
bad faith and is thus liable for damages to the petitioner. Intervenors were likewise
found liable for damages as they failed to exercise due diligence before buying the
subject properties.
336
Respondent bank appealed to the CA which reversed the trial court's ruling, as
follows:cralawlibrary
WHEREFORE, the foregoing premises considered, the instant appeal is hereby
GRANTED. Accordingly, the assailed decision is hereby REVERSED and SET ASIDE.
SO ORDERED.17?r?l1
The CA held that by modifying the terms of the offer contained in the March 22, 1984
letter of respondent bank, petitioner effectively rejected the original offer with his
counter-offer. There was also no written conformity by respondent bank's officers to
the amended conditions for repurchase which were unilaterally inserted by
petitioner. Consequently, no contract of repurchase was perfected and respondent
bank acted well within its rights when it sold the subject properties to herein
respondents-intervenors.
As to the receipts presented by petitioner allegedly proving the installment payments
he had completed, the CA said that these were not payments of the repurchase price
but were actually remittances of the payments made by petitioner's buyers for the
purchase of the foreclosed properties already titled in the name of respondent bank.
It was noted that two of these receipts (Exhibits "K" and "K-1")18 were issued to
Fermin Salvador and Rizalina Pedrosa, the vendees of two subdivided lots under
separate Deeds of Absolute Sale executed in their favor by the respondent bank. In
view of the attendant circumstances, the CA concluded that petitioner acted merely
as a broker or middleman in the sales transactions involving the foreclosed
properties. Lastly, the respondents-intervenors were found to be purchasers who
bought the properties in good faith without notice of petitioner's interest or claim.
Nonetheless, since there was no repurchase contract perfected, the sale of the
subject properties to respondents-intervenors remains valid and binding, and the
issue of whether the latter were innocent purchasers for value would be of no
consequence.
Petitioner's motion for reconsideration was likewise denied by the appellate court.
Hence, this petition alleging that:cralawlibrary
A.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
REVERSING THE FINDING OF THE TRIAL COURT THAT THERE WAS A PERFECTED
CONTRACT TO REPURCHASE BETWEEN PETITIONER AND RESPONDENT-BANK.
 B.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
REVERSING THE FINDING OF THE TRIAL COURT THAT PETITIONER DID NOT ACT AS
BROKER IN THE SALE OF THE FORECLOSED PROPERTIES AND THUS FAILED TO
CONSIDER THE EXISTENCE OF OFFICIAL RECEIPTS ISSUED IN THE NAME OF THE
PETITIONER THAT ARE DULY NOTED FOR HIS ACCOUNT.
C.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
REVERSING THE FINDING OF THE TRIAL COURT THAT RESPONDENT-BANK DID NOT
HAVE THE RIGHT TO DISPOSE THE SUBJECT PROPERTIES.
D.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
REVERSING THE FINDING OF THE TRIAL COURT THAT RESPONDENTS-INTERVENORS
ARE NOT INNOCENT PURCHASERS FOR VALUE IN GOOD
FAITH.19?r?l1 ???ñr?bl?š ??r†??l l?? l?br?rÿ
It is to be noted that the above issues raised by petitioner alleged grave abuse of
discretion committed by the CA, which is proper in a petition for certiorari under Rule
65 of the 1997 Rules of Civil Procedure, as amended, but not in the present petition
for review on certiorari under Rule 45.
The core issue for resolution is whether a contract for the repurchase of the
foreclosed properties was perfected between petitioner and respondent bank.
The Court sustains the decision of the CA.
Contracts are perfected by mere consent, which is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to constitute the
contract.20 The requisite acceptance of the offer is expressed in Article 1319 of the
Civil Code which states:cralawlibrary
ART. 1319. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified acceptance constitutes a counter-
offer.
337
In Palattao v. Court of Appeals,21 this Court held that if the acceptance of the offer
was not absolute, such acceptance is insufficient to generate consent that would
perfect a contract. Thus:cralawlibrary
Contracts that are consensual in nature, like a contract of sale, are perfected upon
mere meeting of the minds. Once there is concurrence between the offer and the
acceptance upon the subject matter, consideration, and terms of payment, a contract
is produced. The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort from the
proposal. A qualified acceptance, or one that involves a new proposal, constitutes a
counter-offer and is a rejection of the original offer. Consequently, when something is
desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms
of the offer annuls the offer.22?r?l1
The acceptance must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds.23 Where a party sets a different purchase
price than the amount of the offer, such acceptance was qualified which can be at
most considered as a counter-offer; a perfected contract would have arisen only if
the other party had accepted this counter-offer.24 In Villanueva v. Philippine National
Bank25 this Court further elucidated on the meaning of unqualified acceptance, as
follows:cralawlibrary
While it is impossible to expect the acceptance to echo every nuance of the offer, it is
imperative that it assents to those points in the offer which, under the operative facts
of each contract, are not only material but motivating as well. Anything short of that
level of mutuality produces not a contract but a mere counter-offer awaiting
acceptance. More particularly on the matter of the consideration of the contract, the
offer and its acceptance must be unanimous both on the rate of the payment and on
its term. An acceptance of an offer which agrees to the rate but varies the term is
ineffective.26 (Emphasis supplied)
Petitioner submitted as evidence of a perfected contract of repurchase the March 22,
1984 letter (Exhibit "I")27 from Rita B. Manuel, then President of UPI, a corporation
formed by respondent bank to dispose of its acquired assets, with notations
handwritten by petitioner himself. Said letter reads:cralawlibrary
March 22, 1984
 Honorable Judge Fausto Ignacio for payments made by petitioner who shall shoulder the expenses for subdivision of
412 Bagumbayan Street, Pateros the land; (2) in case any portion of the subdivided land is sold by petitioner, a
Metro Manila separate document of sale would be executed directly to the buyer; (3) the remaining
portion of the properties shall not be subject of respondent bank's transaction
Dear Judge Ignacio:cralawlibrary without the consent and authority of petitioner; (4) the petitioner shall continue in
possession of the properties and whatever portion still remaining, and attending to
Your proposal to repurchase your foreclosed properties located at Cabuyao, Laguna the needs of its tenants; and (5) payments shall be made directly to UPI. 29?r?l1
consisting of a total area of 203,413 square meters has been favorably considered
subject to the following terms and conditions:cralawlibrary The foregoing clearly shows that petitioner's acceptance of the respondent bank's
terms and conditions for the repurchase of the foreclosed properties was not
1) Total Selling Price shall be P950,000.00 absolute. Petitioner set a different repurchase price and also modified the terms of
payment, which even contained a unilateral condition for payment of the balance
(P600,000), that is, depending on petitioner's "financial position." The CA thus
2) Downpayment of P150,00000 with the balance
considered the qualified acceptance by petitioner as a counter-proposal which must
Payable in Three (3) equal installments
be accepted by respondent bank. However, there was no evidence of any document
as follows:cralawlibrary
or writing showing the conformity of respondent bank's officers to this counter-
proposal.
1st Installment - P 266,667 - on or before May 31, '84
Petitioner contends that the receipts issued by UPI on his installment payments are
2nd Installment - P 266,667 - on or before Sept. 31, '84
concrete proof -- despite denials to the contrary by respondent bank -- that there was
an implied acceptance of his counter-proposal and that he did not merely act as a
3rd Installment - P 266,666 - on or before Jan. 30, '85 broker for the sale of the subdivided portions of the foreclosed properties to third
parties. Since all these receipts, except for two receipts issued in the name of Fermin
TOTAL - P 800,000.00 ???ñr?bl?š ??r†??l l?? l?br?rÿ Salvador and Rizalina Pedrosa, were issued in the name of petitioner instead of the
buyers themselves, petitioner emphasizes that the payments were made for his
3) All expenses pertinent to the subdivision of the parcel of land consisting of 120,110 account. Moreover, petitioner asserts that the execution of the separate deeds of
square meters shall be for your account. ???ñr?bl?š ??r†??l l?? l?br?rÿ sale directly to the buyers was in pursuance of the perfected repurchase agreement
with respondent bank, such an arrangement being "an accepted practice to save on
Thank you, taxes and shortcut paper works."???ñr?bl?š ??r†??l l?? l?br?rÿ

Very truly yours, The Court is unconvinced.

RITA B. MANUEL
President ???ñr?bl?š ??r†??l l?? l?br?rÿ
According to petitioner, he wrote the notations in the presence of a certain Mr.
Lazaro, the representative of Mrs. Manuel (President), and a certain Mr. Fajardo,
which notations supposedly represent their "compromise agreement."28 These
notations indicate that the repurchase price would be P900,000.00 which shall be
paid as follows: P150,000 - end of May '84; P150,000 - end of June '84; Balance -
"Depending on financial position". Petitioner further alleged the following conditions
338
In Adelfa Properties, Inc. v. CA,30 the Court ruled that:cralawlibrary
x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be made either in a formal or an
informal manner, and may be shown by acts, conduct, or words of the accepting
party that clearly manifest a present intention or determination to accept the offer to
buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party
recognizing the existence of the contract of sale. 31?r?l1

of the verbal agreement: (1) respondent bank shall release the equivalent land area
 Even assuming that the bank officer or employee whom petitioner claimed he had
talked to regarding the March 22, 1984 letter had acceded to his own modified terms
for the repurchase, their supposed verbal exchange did not bind respondent bank in
view of its corporate nature. There was no evidence that said Mr. Lazaro or Mr.
Fajardo was authorized by respondent bank's Board of Directors to accept
petitioner's counter-proposal to repurchase the foreclosed properties at the price
and terms other than those communicated in the March 22, 1984 letter. As this Court
ruled in AF Realty & Development, Inc. v. Dieselman Freight Services, Co. 32?r?l1
Section 23 of the Corporation Code expressly provides that the corporate powers of
all corporations shall be exercised by the board of directors. Just as a natural person
may authorize another to do certain acts in his behalf, so may the board of directors
of a corporation validly
delegate some of its functions to individual officers or agents appointed by it. Thus,
contracts or acts of a corporation must be made either by the board of directors or by
a corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of, or connected with,
the performance of authorized duties of such director, are held not binding on the
corporation.33?r?l1
Thus, a corporation can only execute its powers and transact its business through its
Board of Directors and through its officers and agents when authorized by a board
resolution or its by-laws.34?r?l1
In the absence of conformity or acceptance by properly authorized bank officers of
petitioner's counter-proposal, no perfected repurchase contract was born out of the
talks or negotiations between petitioner and Mr. Lazaro and Mr. Fajardo. Petitioner
therefore had no legal right to compel respondent bank to accept the P600,000 being
tendered by him as payment for the supposed balance of repurchase price.
A contract of sale is consensual in nature and is perfected upon mere meeting of the
minds. When there is merely an offer by one party without acceptance of the other,
there is no contract.35 When the contract of sale is not perfected, it cannot, as an
independent source of obligation, serve as a binding juridical relation between the
parties.36?r?l1
In sum, we find the ruling of the CA more in accord with the established facts and
applicable law and jurisprudence. Petitioner's claim of utmost accommodation by
respondent bank of his own terms for the repurchase of his foreclosed properties are
339
simply contrary to normal business practice. As aptly observed by the appellate
court:cralawlibrary
The submission of the plaintiff-appellee is unimpressive.
First, if the counter-proposal was mutually agreed upon by both the plaintiff-appellee
and defendant-appellant, how come not a single signature of the representative of
the defendant-appellant was affixed thereto. Second, it is inconceivable that an
agreement of such great importance, involving two personalities who are both aware
and familiar of the practical and legal necessity of reducing agreements into writing,
the plaintiff-appellee, being a lawyer and the defendant-appellant, a banking
institution, not to formalize their repurchase agreement. Third, it is quite absurd and
unusual that the defendant-appellant could have acceded to the condition that the
balance of the payment of the repurchase price would depend upon the financial
position of the plaintiff-appellee. Such open[-]ended and indefinite period for
payment is hardly acceptable to a banking institution like the defendant-appellant
whose core existence fundamentally depends upon its financial arrangements and
transactions which, most, if not all the times are intended to bear favorable outcome
to its business. Last, had there been a repurchase agreement, then, there should have
been titles or deeds of conveyance issued in favor of the plaintiff-appellee. But as it
turned out, the plaintiff-appellee never had any land deeded or titled in his name as a
result of the alleged repurchase agreement. All these, reinforce the conclusion that
the counter-proposal was unilaterally made and inserted by the plaintiff-appellee in
Exhibit "I" and could not have been accepted by the defendant-appellant, and that a
different agreement other than a repurchase agreement was perfected between
them.37?r?l1
Petitioner Fausto C. Ignacio passed away on November 11, 2008 and was substituted
by his heirs, namely: Marfel D. Ignacio-Manalo, Milfa D. Ignacio-Manalo and Faustino
D. Ignacio.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated July
18, 2006 and Resolution dated May 2, 2007 of the Court of Appeals in CA-G.R. CV No.
73551 are hereby AFFIRMED.
With costs against the petitioners.
SO ORDERED.
 79 G.R. No. 16530 March 31, 1922

MAMERTO LAUDICO and FRED M. HARDEN, plaintiffs-appellants,

vs.
MANUEL ARIAS RODRIGUEZ, ET AL., defendants-appellants.

Crossfield and O'Brien for plaintiff-appellants.

Fisher and DeWitt for defendants-appellants.

AVANCEÑA, J.:

On February 5, 1919, the defendant, Vicente Arias, who, with his codefendants,
owned the building Nos. 205 to 221 on Carriedo Street, on his behalf and that of his
coowners, wrote a letter to the plaintiff, Mamerto Laudico, giving him an option to
lease the building to a third person, and transmitting to him for that purpose a
tentative contract in writing containing the conditions upon which the proposed lease
should be made. Later Mr. Laudico presented his coplaintiff, Mr. Fred. M. Harden, as
the party desiring to lease the building. On one hand, other conditions were added to
those originally contained in the tentative contract, and, on the other, counter-
propositions were made and explanations requested on certain points in order to
make them clear. These negotiations were carried on by correspondence and verbally
at interviews held with Mr. Vicente Arias, no definite agreement having been arrived
at until the plaintiff, Mr. Laudico, finally wrote a letter to Mr. Arias on March 6, 1919,
advising him that all his propositions, as amended and supplemented, were accepted.
It is admitted that this letter was received by Mr. Arias by special delivery at 2.53 p.m.
of that day. On that same day, at 11.25 in the morning, Mr. Arias had, in turn, written
a letter to the plaintiff, Mr. Laudico, withdrawing the offer to lease the building.

The chief prayer of the plaintiff in this action is that the defendants be compelled to
execute the contract of lease of the building in question. It thus results that when
340

Arias sent his letter of withdrawal to Laudico, he had not yet received the letter of
 acceptance, and when it reached him, he had already sent his letter of withdrawal.
Under these facts we believe that no contract was perfected between the plaintiffs
and the defendants.
The parties agree that the circumstances under which that offer was made were such
that the offer could be withdrawn at any time before acceptance.
Under article 1262, paragraph 2, of the Civil Code, an acceptance by letter does not
have any effect until it comes to the knowledge of the offerer. Therefore, before he
learns of the acceptance, the latter is not yet bound by it and can still withdraw the
offer. Consequently, when Mr. Arias wrote Mr. Laudico, withdrawing the offer, he
had the right to do so, inasmuch as he had not yet receive notice of the acceptance.
And when the notice of the acceptance was received by Mr. Arias, it no longer had
any effect, as the offer was not then in existence, the same having already been
withdrawn. There was no meeting of the minds, through offer and acceptance, which
is the essence of the contract. While there was an offer, there was no acceptance,
and when the latter was made and could have a binding effect, the offer was then
lacking. Though both the offer and the acceptance existed, they did not meet to give
birth to a contract.
Our attention has been called to a doctrine laid down in some decisions to the effect
that ordinarily notice of the revocation of an offer must be given to avoid an
acceptance which may convert in into a binding contract, and that no such notice can
be deemed to have been given to the person to whom the offer was made unless the
revocation was in fact brought home to his knowledge.
This, however, has no application in the instant case, because when Arias received
the letter of acceptance, his letter of revocation had already been received. The latter
was sent through a messenger at 11.25 in the morning directly to the office of
Laudico and should have been received immediately on that same morning, or at
least, before Arias received the letter of acceptance. On this point we do not give any
credence to the testimony of Laudico that he received this letter of revocation at 3.30
in the afternoon of that day. Laudico is interested in destroying the effect of this
revocation so that the acceptance may be valid, which is the principal ground of his
complaint.
But even supposing Laudico's testimony to be true, still the doctrine invoked has no
application here. With regard to contracts between absent persons there are two
principal theories, to wit, one holding that an acceptance by letter of an offer has no
effect until it comes to the knowledge of the offerer, and the other maintaining that
it is effective from the time the letter is sent.
341
The Civil Code, in paragraph 2 of article 1262, has adopted the first theory and,
according to its most eminent commentators, it means that, before the acceptance is
known, the offer can be revoked, it not being necessary, in order for the revocation
to have the effect of impeding the perfection of the contract, that it be known by the
acceptant. Q. Mucius Scaevola says apropros: "To our mind, the power to revoke is
implied in the criterion that no contract exists until the acceptance is known. As the
tie or bond springs from the meeting or concurrence of the minds, since up to that
moment there exists only a unilateral act, it is evident that he who makes it must
have the power to revoke it by withdrawing his proposition, although with the
obligation to pay such damages as may have been sustained by the person or persons
to whom the offer was made and by whom it was accepted, if he in turn failed to give
them notice of the withdrawal of the offer. This view is confirmed by the provision of
article 1257, paragraph 2, concerning the case where a stipulation is made in favor of
a third person, which provision authorizes the contracting parties to revoke the
stipulation before the notice of its acceptance. That case is quite similar to that under
comment, as said stipulation in favor of a third person (who, for the very reason of
being a third person, is not a contracting party) is tantamount to an offer made by the
makers of the contract which may or may not be accepted by him, and which does
not have any effect until the obligor is notified, and may, before it is accepted, be
revoked by those who have made it; therefore, the case being similar, the same rule
applies."
Under the second theory, the doctrine invoked by the plaintiffs is sound, because if
the sending of the letter of acceptance in itself really perfects the contract, the
revocation of the offer, in order to prevent it, must be known to the acceptor. But
this consideration has no place in the first theory under which the forwarding of the
letter of acceptance, in itself, does not have any effect until the acceptance is known
by the person who has made the offer.
The judgment appealed from is reversed and the defendants are absolved from the
complaint, without special finding as to costs. So ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.
 alleging, among others, that plaintiffs are tenants or lessees of
residential and commercial spaces owned by defendants described
as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have
occupied said spaces since 1935 and have been religiously paying
the rental and complying with all the conditions of the lease
contract; that on several occasions before October 9, 1986,
defendants informed plaintiffs that they are offering to sell the
premises and are giving them priority to acquire the same; that
during the negotiations, Bobby Cu Unjieng offered a price of P6-
million while plaintiffs made a counter offer of P5-million; that
plaintiffs thereafter asked the defendants to put their offer in
writing to which request defendants acceded; that in reply to
defendant's letter, plaintiffs wrote them on October 24, 1986 asking
A. OPTION CONTRACT that they specify the terms and conditions of the offer to sell; that
when plaintiffs did not receive any reply, they sent another letter
80 G.R. No. 109125 December 2, 1994 dated January 28, 1987 with the same request; that since
defendants failed to specify the terms and conditions of the offer to
ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners, sell and because of information received that defendants were
vs. about to sell the property, plaintiffs were compelled to file the
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT complaint to compel defendants to sell the property to them.
CORPORATION, respondents.
Defendants filed their answer denying the material allegations of
Antonio M. Albano for petitioners. the complaint and interposing a special defense of lack of cause of
action.
Umali, Soriano & Associates for private respondent.
After the issues were joined, defendants filed a motion for
summary judgment which was granted by the lower court. The trial
court found that defendants' offer to sell was never accepted by the
plaintiffs for the reason that the parties did not agree upon the
VITUG, J.:
terms and conditions of the proposed sale, hence, there was no
contract of sale at all. Nonetheless, the lower court ruled that
Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 should the defendants subsequently offer their property for sale at
December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force a price of P11-million or below, plaintiffs will have the right of first
and effect the orders of execution of the trial court, dated 30 August 1991 and 27 refusal. Thus the dispositive portion of the decision states:
September 1991, in Civil Case No. 87-41058.
WHEREFORE, judgment is hereby rendered in
The antecedents are recited in good detail by the appellate court thusly: favor of the defendants and against the plaintiffs
summarily dismissing the complaint subject to the
On July 29, 1987 a Second Amended Complaint for Specific aforementioned condition that if the defendants
Performance was filed by Ang Yu Asuncion and Keh Tiong, et al., subsequently decide to offer their property for
against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the sale for a purchase price of Eleven Million Pesos
342

Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058, or lower, then the plaintiffs has the option to
 purchase the property or of first refusal,
otherwise, defendants need not offer the
property to the plaintiffs if the purchase price is
higher than Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. In a decision promulgated on September 21,
1990 (penned by Justice Segundino G. Chua and concurred in by
Justices Vicente V. Mendoza and Fernando A. Santiago), this Court
affirmed with modification the lower court's judgment, holding:
In resume, there was no meeting of the minds
between the parties concerning the sale of the
property. Absent such requirement, the claim for
specific performance will not lie. Appellants'
demand for actual, moral and exemplary damages
will likewise fail as there exists no justifiable
ground for its award. Summary judgment for
defendants was properly granted. Courts may
render summary judgment when there is no
genuine issue as to any material fact and the
moving party is entitled to a judgment as a matter
of law (Garcia vs. Court of Appeals, 176 SCRA
815). All requisites obtaining, the decision of the
court a quo is legally justifiable.
WHEREFORE, finding the appeal unmeritorious,
the judgment appealed from is hereby AFFIRMED,
but subject to the following modification: The
court a quo in the aforestated decision gave the
plaintiffs-appellants the right of first refusal only if
the property is sold for a purchase price of Eleven
Million pesos or lower; however, considering the
mercurial and uncertain forces in our market
economy today. We find no reason not to grant
the same right of first refusal to herein appellants
in the event that the subject property is sold for a
price in excess of Eleven Million pesos. No
pronouncement as to costs.
343
SO ORDERED.
The decision of this Court was brought to the Supreme Court by
petition for review on certiorari. The Supreme Court denied the
appeal on May 6, 1991 "for insufficiency in form and substances"
(Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was pending
consideration by this Court, the Cu Unjieng spouses executed a
Deed of Sale (Annex D, Petition) transferring the property in
question to herein petitioner Buen Realty and Development
Corporation, subject to the following terms and conditions:
1. That for and in consideration of the sum of
FIFTEEN MILLION PESOS (P15,000,000.00), receipt
of which in full is hereby acknowledged, the
VENDORS hereby sells, transfers and conveys for
and in favor of the VENDEE, his heirs, executors,
administrators or assigns, the above-described
property with all the improvements found therein
including all the rights and interest in the said
property free from all liens and encumbrances of
whatever nature, except the pending ejectment
proceeding;
2. That the VENDEE shall pay the Documentary
Stamp Tax, registration fees for the transfer of
title in his favor and other expenses incidental to
the sale of above-described property including
capital gains tax and accrued real estate taxes.
As a consequence of the sale, TCT No. 105254/T-881 in the name of
the Cu Unjieng spouses was cancelled and, in lieu thereof, TCT No.
195816 was issued in the name of petitioner on December 3, 1990.
On July 1, 1991, petitioner as the new owner of the subject
property wrote a letter to the lessees demanding that the latter
vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner stating that
petitioner brought the property subject to the notice of lis
 pendens regarding Civil Case No. 87-41058 annotated on TCT No.
105254/T-881 in the name of the Cu Unjiengs.
The lessees filed a Motion for Execution dated August 27, 1991 of
the Decision in Civil Case No. 87-41058 as modified by the Court of
Appeals in CA-G.R. CV No. 21123.
On August 30, 1991, respondent Judge issued an order (Annex A,
Petition) quoted as follows:
Presented before the Court is a Motion for
Execution filed by plaintiff represented by Atty.
Antonio Albano. Both defendants Bobby Cu
Unjieng and Rose Cu Unjieng represented by Atty.
Vicente Sison and Atty. Anacleto Magno
respectively were duly notified in today's
consideration of the motion as evidenced by the
rubber stamp and signatures upon the copy of the
Motion for Execution.
The gist of the motion is that the Decision of the
Court dated September 21, 1990 as modified by
the Court of Appeals in its decision in CA G.R. CV-
21123, and elevated to the Supreme Court upon
the petition for review and that the same was
denied by the highest tribunal in its resolution
dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As
a consequence, there was an Entry of Judgment
by the Supreme Court as of June 6, 1991, stating
that the aforesaid modified decision had already
become final and executory.
It is the observation of the Court that this
property in dispute was the subject of the Notice
of Lis Pendens and that the modified decision of
this Court promulgated by the Court of Appeals
which had become final to the effect that should
the defendants decide to offer the property for
sale for a price of P11 Million or lower, and
considering the mercurial and uncertain forces in
344
our market economy today, the same right of first
refusal to herein plaintiffs/appellants in the event
that the subject property is sold for a price in
excess of Eleven Million pesos or more.
WHEREFORE, defendants are hereby ordered to
execute the necessary Deed of Sale of the
property in litigation in favor of plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the
consideration of P15 Million pesos in recognition
of plaintiffs' right of first refusal and that a new
Transfer Certificate of Title be issued in favor of
the buyer.
All previous transactions involving the same
property notwithstanding the issuance of another
title to Buen Realty Corporation, is hereby set
aside as having been executed in bad faith.
SO ORDERED.
On September 22, 1991 respondent Judge issued another order, the
dispositive portion of which reads:
WHEREFORE, let there be Writ of Execution issue
in the above-entitled case directing the Deputy
Sheriff Ramon Enriquez of this Court to
implement said Writ of Execution ordering the
defendants among others to comply with the
aforesaid Order of this Court within a period of
one (1) week from receipt of this Order and for
defendants to execute the necessary Deed of Sale
of the property in litigation in favor of the
plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur
Go for the consideration of P15,000,000.00 and
ordering the Register of Deeds of the City of
Manila, to cancel and set aside the title already
issued in favor of Buen Realty Corporation which
was previously executed between the latter and
defendants and to register the new title in favor
of the aforesaid plaintiffs Ang Yu Asuncion, Keh
Tiong and Arthur Go.
 SO ORDERED.
On the same day, September 27, 1991 the corresponding writ of
execution (Annex C, Petition) was issued.1
On 04 December 1991, the appellate court, on appeal to it by private respondent, set
aside and declared without force and effect the above questioned orders of the
court a quo.
In this petition for review on certiorari, petitioners contend that Buen Realty can be
held bound by the writ of execution by virtue of the notice of lis pendens, carried over
on TCT No. 195816 issued in the name of Buen Realty, at the time of the latter's
purchase of the property on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court.
A not too recent development in real estate transactions is the adoption of such
arrangements as the right of first refusal, a purchase option and a contract to sell. For
ready reference, we might point out some fundamental precepts that may find some
relevance to this discussion.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code).
The obligation is constituted upon the concurrence of the essential elements
thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause
established by the various sources of obligations (law, contracts, quasi-contracts,
delicts and quasi-delicts); (b) the object which is the prestation or conduct; required
to be observed (to give, to do or not to do); and (c) the subject-persons who, viewed
from the demandability of the obligation, are the active (obligee) and the passive
(obligor) subjects.
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a
meeting of minds between two persons whereby one binds himself, with respect to
the other, to give something or to render some service (Art. 1305, Civil Code). A
contract undergoes various stages that include its negotiation or preparation, its
perfection and, finally, its consummation. Negotiation covers the period from the
time the prospective contracting parties indicate interest in the contract to the time
the contract is concluded (perfected). The perfection of the contract takes place upon
the concurrence of the essential elements thereof. A contract which is consensual as
to perfection is so established upon a mere meeting of minds, i.e., the concurrence of
offer and acceptance, on the object and on the cause thereof. A contract which
345
requires, in addition to the above, the delivery of the object of the agreement, as in a
pledge or commodatum, is commonly referred to as a real contract. In
a solemn contract, compliance with certain formalities prescribed by law, such as in a
donation of real property, is essential in order to make the act valid, the prescribed
form being thereby an essential element thereof. The stage of consummation begins
when the parties perform their respective undertakings under the contract
culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an independent source of obligation,
serve as a binding juridical relation. In sales, particularly, to which the topic for
discussion about the case at bench belongs, the contract is perfected when a person,
called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter
agrees. Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where
invariably the ownership of the thing sold is retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the purchase price), the breach of
the condition will prevent the obligation to convey title from acquiring an obligatory
force.2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although
denominated a "Deed of Conditional Sale," a sale is still absolute where the contract
is devoid of any proviso that title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to
the buyer upon actual or constructive delivery (e.g., by the execution of a public
document) of the property sold. Where the condition is imposed upon the perfection
of the contract itself, the failure of the condition would prevent such perfection.3 If
the condition is imposed on the obligation of a party which is not fulfilled, the other
party may either waive the condition or refuse to proceed with the sale (Art. 1545,
Civil Code).4
An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted.5
An accepted unilateral promise which specifies the thing to be sold and the price to
be paid, when coupled with a valuable consideration distinct and separate from the
price, is what may properly be termed a perfected contract of option. This contract is
 legally binding, and in sales, it conforms with the second paragraph of Article 1479 of during the agreed period. The option, however, is an independent contract by itself,
the Civil Code, viz: and it is to be distinguished from the projected main agreement (subject matter of
the option) which is obviously yet to be concluded. If, in fact, the optioner-
Art. 1479. . . . offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed
An accepted unilateral promise to buy or to sell a determinate thing contract ("object" of the option) since it has failed to reach its own stage of
for a price certain is binding upon the promissor if the promise is perfection. The optioner-offeror, however, renders himself liable for damages for
supported by a consideration distinct from the price. (1451a)6 breach of the option. In these cases, care should be taken of the real nature of
the consideration given, for if, in fact, it has been intended to be part of the
consideration for the main contract with a right of withdrawal on the part of the
Observe, however, that the option is not the contract of sale itself.7 The optionee has
optionee, the main contract could be deemed perfected; a similar instance would be
the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the
an "earnest money" in a contract of sale that can evidence its perfection (Art. 1482,
offer is accepted before a breach of the option, a bilateral promise to sell and to buy
Civil Code).
ensues and both parties are then reciprocally bound to comply with their respective
undertakings.8
In the law on sales, the so-called "right of first refusal" is an innovative juridical
relation. Needless to point out, it cannot be deemed a perfected contract of sale
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
under Article 1458 of the Civil Code. Neither can the right of first refusal, understood
promise (policitacion) is merely an offer. Public advertisements or solicitations and
in its normal concept, per se be brought within the purview of an option under the
the like are ordinarily construed as mere invitations to make offers or only as
second paragraph of Article 1479, aforequoted, or possibly of an offer under Article
proposals. These relations, until a contract is perfected, are not considered binding
13199 of the same Code. An option or an offer would require, among other things, 10 a
commitments. Thus, at any time prior to the perfection of the contract, either
clear certainty on both the object and the cause or consideration of the envisioned
negotiating party may stop the negotiation. The offer, at this stage, may be
contract. In a right of first refusal, while the object might be made determinate, the
withdrawn; the withdrawal is effective immediately after its manifestation, such as by
exercise of the right, however, would be dependent not only on the grantor's
its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs.
eventual intention to enter into a binding juridical relation with another but also on
Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the
terms, including the price, that obviously are yet to be later firmed up. Prior thereto,
offer, the following rules generally govern:
it can at best be so described as merely belonging to a class of preparatory juridical
relations governed not by contracts (since the essential elements to establish
(1) If the period is not itself founded upon or supported by a consideration, the
the vinculum juris would still be indefinite and inconclusive) but by, among other laws
offeror is still free and has the right to withdraw the offer before its acceptance, or, if
of general application, the pertinent scattered provisions of the Civil Code on human
an acceptance has been made, before the offeror's coming to know of such fact, by conduct.
communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also
Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a
Even on the premise that such right of first refusal has been decreed under a final
unilateral promise to sell under Art. 1479, modifying the previous decision in South
judgment, like here, its breach cannot justify correspondingly an issuance of a writ of
Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank
execution under a judgment that merely recognizes its existence, nor would it
of Parañaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The
sanction an action for specific performance without thereby negating the
right to withdraw, however, must not be exercised whimsically or arbitrarily;
indispensable element of consensuality in the perfection of contracts. 11 It is not to
otherwise, it could give rise to a damage claim under Article 19 of the Civil Code
say, however, that the right of first refusal would be inconsequential for, such as
which ordains that "every person must, in the exercise of his rights and in the
already intimated above, an unjustified disregard thereof, given, for instance, the
performance of his duties, act with justice, give everyone his due, and observe
circumstances expressed in Article 1912 of the Civil Code, can warrant a recovery for
honesty and good faith."
damages.
(2) If the period has a separate consideration, a contract of "option" is
346

deemed perfected, and it would be a breach of that contract to withdraw the offer
 The final judgment in Civil Case No. 87-41058, it must be stressed, has merely Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,
accorded a "right of first refusal" in favor of petitioners. The consequence of such a Puno and Mendoza, JJ., concur.
declaration entails no more than what has heretofore been said. In fine, if, as it is
here so conveyed to us, petitioners are aggrieved by the failure of private Kapunan, J., took no part.
respondents to honor the right of first refusal, the remedy is not a writ of execution
on the judgment, since there is none to execute, but an action for damages in a Feliciano, J., is on leave.
proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation,

the alleged purchaser of the property, has acted in good faith or bad faith and
whether or not it should, in any case, be considered bound to respect the registration
of the lis pendens in Civil Case No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not having been impleaded in
Civil Case No. 87-41058, cannot be held subject to the writ of execution issued by
respondent Judge, let alone ousted from the ownership and possession of the
property, without first being duly afforded its day in court.

We are also unable to agree with petitioners that the Court of Appeals has erred in
holding that the writ of execution varies the terms of the judgment in Civil Case No.
87-41058, later affirmed in CA-G.R. CV-21123. The Court of Appeals, in this regard,
has observed:

Finally, the questioned writ of execution is in variance with the

decision of the trial court as modified by this Court. As already
stated, there was nothing in said decision 13 that decreed the
execution of a deed of sale between the Cu Unjiengs and
respondent lessees, or the fixing of the price of the sale, or the
cancellation of title in the name of petitioner (Limpin vs. IAC, 147
SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA
311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA
885).

It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not
have decreed at the time the execution of any deed of sale between the Cu Unjiengs
and petitioners.

WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the

questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a
quo. Costs against petitioners.

SO ORDERED.
347

B. MISTAKE AS A VICE OF CONSENT

 the lot sold to Pante, effectively blocking Pante and his familys access from their
THE ROMAN CATHOLIC CHURCH, represented G.R. No. 174118 family home to the municipal road. As no settlement could be reached between the
by the Archbishop of Caceres, parties, Pante instituted with the RTC an action to annul the sale between the Church
Petitioner, Present: and the spouses Rubi, insofar as it included the lot previously sold to him. [7]

CARPIO, J., Chairperson, The Church filed its answer with a counterclaim, seeking the annulment of its
BRION, contract with Pante. The Church alleged that its consent to the contract was obtained
PEREZ, by fraud when Pante, in bad faith, misrepresented that he had been an actual
- versus - SERENO, and occupant of the lot sold to him, when in truth, he was merely using the 32-square
REYES, JJ. meter lot as a passageway from his house to the town proper. It contended that it
was its policy to sell its lots only to actual occupants. Since the spouses Rubi and their
Promulgated: predecessors-in-interest have long been occupying the 215-square meter lot that
April 11, 2012 included the 32-square meter lot sold to Pante, the Church claimed that the spouses
Rubi were the rightful buyers.
REGINO PANTE, During pre-trial, the following admissions and stipulations of facts were made:
Respondent.
1. The lot claimed by Pante is a strip of land measuring only 2x16 meters;
x--------------------------------------------------------------------------------------------------------------x 2. The lot had been sold by the Church to Pante on September 25, 1992;
3. The lot was included in the sale to the spouses Rubi by the Church; and
DECISION 4. Pante expressly manifested and represented to the Church that he had been
actually occupying the lot he offered to buy.[8]
BRION, J.:
In a decision dated July 30, 1999,[9] the RTC ruled in favor of the Church,
[1] finding that the Churchs consent to the sale was secured through Pantes
Through a petition for review on certiorari, the petitioner Roman Catholic Church
(Church) seeks to set aside the May 18, 2006 decision[2] and the August 11, 2006 misrepresentation that he was an occupant of the 32-square meter lot. Contrary to
resolution[3] of the Court of Appeals (CA) in CA-G.R.-CV No. 65069. The CA reversed his claim, Pante was only using the lot as a passageway; the Churchs policy, however,
the July 30, 1999 decision[4] of the Regional Trial Court (RTC) of Naga City, Branch 24, was to sell its lots only to those who actually occupy and reside thereon. As the
in Civil Case No. 94-3286. Churchs consent was secured through its mistaken belief that Pante was a qualified
occupant, the RTC annulled the contract between the Church and Pante, pursuant to
THE FACTUAL ANTECEDENTS Article 1390 of the Civil Code.[10]

The Church, represented by the Archbishop of Caceres, owned a 32-square
meter lot that measured 2x16 meters located in Barangay Dinaga, Canaman,
Camarines Sur.[5] On September 25, 1992, the Church contracted with respondent
Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy [6]) on the
belief that the latter was an actual occupant of the lot. The contract between them
fixed the purchase price at P11,200.00, with the initial P1,120.00 payable as down
payment, and the remaining balance payable in three years or until September 25,
1995.
The RTC further noted that full payment of the purchase price was made only on
September 23, 1995, when Pante consigned the balance of P10,905.00 with the RTC,
after the Church refused to accept the tendered amount. It considered the three-year
delay in completing the payment fatal to Pantes claim over the subject lot; it ruled
that if Pante had been prompt in paying the price, then the Church would have been
estopped from selling the lot to the spouses Rubi. In light of Pantes delay and his
admission that the subject lot had been actually occupied by the spouses Rubis
predecessors, the RTC upheld the sale in favor of the spouses Rubi.

On June 28, 1994, the Church sold in favor of the spouses Nestor and Fidela Rubi Pante appealed the RTCs decision with the CA. In a decision dated May 18,
2006,[11] the CA granted Pantes appeal and reversed the RTCs ruling. The CA
348

(spouses Rubi) a 215-square meter lot that included the lot previously sold to
Pante. The spouses Rubi asserted their ownership by erecting a concrete fence over characterized the contract between Pante and the Church as a contract of sale, since
 the Church made no express reservation of ownership until full payment of the price
is made. In fact, the contract gave the Church the right to repurchase in case Pante
fails to pay the installments within the grace period provided; the CA ruled that the
right to repurchase is unnecessary if ownership has not already been transferred to
the buyer.
Even assuming that the contract had been a contract to sell, the CA declared
that Pante fulfilled the condition precedent when he consigned the balance within
the three-year period allowed under the parties agreement; upon full payment, Pante
fully complied with the terms of his contract with the Church.
After recognizing the validity of the sale to Pante and noting the subsequent
sale to the spouses Rubi, the CA proceeded to apply the rules on double sales in
Article 1544 of the Civil Code:
Article 1544. If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who may
have first taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership shall belong to the
person acquiring it who in good faith first recorded it in the Registry
of Property.
Should there be no inscription, the ownership shall pertain to the
person who in good faith was first in the possession; and, in the
absence thereof, to the person who presents the oldest title,
provided there is good faith. [Emphasis ours.]
Since neither of the two sales was registered, the CA upheld the full effectiveness of
the sale in favor of Pante who first possessed the lot by using it as a passageway since
1963.
The Church filed the present petition for review on certiorari under Rule 45 of the
Rules of Court to contest the CAs ruling.
THE PETITION
The Church contends that the sale of the lot to Pante is voidable under Article 1390 of
the Civil Code, which states:
Article 1390. The following contracts are voidable or
349
annullable, even though there may have been no damage to the
contracting parties:
(1) Those where one of the parties is incapable of giving
consent to a contract;
(2) Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a
proper action in court. They are susceptible of ratification.
[Emphasis ours.]
It points out that, during trial, Pante already admitted knowing that the spouses Rubi
have been residing on the lot. Despite this knowledge, Pante misrepresented himself
as an occupant because he knew of the Churchs policy to sell lands only to occupants
or residents thereof. It thus claims that Pantes misrepresentation effectively vitiated
its consent to the sale; hence, the contract should be nullified.
For the Church, the presence of fraud and misrepresentation that would
suffice to annul the sale is the primary issue that the tribunals below should have
resolved. Instead, the CA opted to characterize the contract between the Church and
Pante, considered it as a contract of sale, and, after such characterization, proceeded
to resolve the case in Pantes favor. The Church objects to this approach, on the
principal argument that there could not have been a contract at all considering that
its consent had been vitiated.
THE COURTS RULING
The Court resolves to deny the petition.
No misrepresentation existed vitiating the
sellers consent and invalidating the contract
Consent is an essential requisite of contracts[12] as it pertains to the meeting
of the offer and the acceptance upon the thing and the cause which constitute the
contract.[13] To create a valid contract, the meeting of the minds must be free,
voluntary, willful and with a reasonable understanding of the various obligations the
parties assumed for themselves.[14] Where consent, however, is given through
mistake, violence, intimidation, undue influence, or fraud, the contract is deemed
voidable.[15] However, not every mistake renders a contract voidable. The Civil Code
clarifies the nature of mistake that vitiates consent:
Article 1331. In order that mistake may invalidate consent,
it should refer to the substance of the thing which is the object of
 the contract, or to those conditions which have principally moved
one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
[Emphasis ours.]
For mistake as to the qualification of one of the parties to vitiate consent, two
requisites must concur:
1. the mistake must be either with regard to the identity or with regard to the
qualification of one of the contracting parties; and
2. the identity or qualification must have been the principal consideration for
the celebration of the contract.[16]
In the present case, the Church contends that its consent to sell the lot was given on
the mistaken impression arising from Pantes fraudulent misrepresentation that he
had been the actual occupant of the lot. Willful misrepresentation existed because of
its policy to sell its lands only to their actual occupants or residents. Thus, it considers
the buyers actual occupancy or residence over the subject lot a qualification
necessary to induce it to sell the lot.
Whether the facts, established during trial, support this contention shall
determine if the contract between the Church and Pante should be annulled. In the
process of weighing the evidentiary value of these established facts, the courts
should consider both the parties objectives and the subjective aspects of the
transaction, specifically, the parties circumstances their condition, relationship, and
other attributes and their conduct at the time of and subsequent to the contract.
These considerations will show what influence the alleged error exerted on the
parties and their intelligent, free, and voluntary consent to the contract. [17]
Contrary to the Churchs contention, the actual occupancy or residency of a
buyer over the land does not appear to be a necessary qualification that the Church
requires before it could sell its land. Had this been indeed its policy, then neither
Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot, as
none of them actually occupied or resided on the lot. We note in this regard that the
lot was only a 2x16-meter strip of rural land used as a passageway from Pantes
house to the municipal road.
We find well-taken Pantes argument that, given the size of the lot, it could
350
serve no other purpose than as a mere passageway; it is unthinkable to consider that
a 2x16-meter strip of land could be mistaken as anyones residence. In fact, the
spouses Rubi were in possession of the adjacent lot, but they never asserted
possession over the 2x16-meter lot when the 1994 sale was made in their favor; it
was only then that they constructed the concrete fence blocking the passageway.
We find it unlikely that Pante could successfully misrepresent himself as the actual
occupant of the lot; this was a fact that the Church (which has a parish chapel in the
same barangay where the lot was located) could easily verify had it conducted an
ocular inspection of its own property. The surrounding circumstances actually
indicate that the Church was aware that Pante was using the lot merely as a
passageway.
The above view is supported by the sketch plan, [18] attached to the contract
executed by the Church and Pante, which clearly labeled the 2x16-meter lot as a
RIGHT OF WAY; below these words was written the name of Mr. Regino Pante. Asked
during cross-examination where the sketch plan came from, Pante answered that it
was from the Archbishops Palace; neither the Church nor the spouses Rubi
contradicted this statement.[19]
The records further reveal that the sales of the Churchs lots were made after
a series of conferences with the occupants of the lots. [20] The then parish priest of
Canaman, Fr. Marcaida, was apparently aware that Pante was not an actual occupant,
but nonetheless, he allowed the sale of the lot to Pante, subject to the approval of
the Archdioceses Oeconomous. Relying on Fr. Marcaidas recommendation and
finding nothing objectionable, Fr. Ragay (the Archdioceses Oeconomous) approved
the sale to Pante.
The above facts, in our view, establish that there could not have been a
deliberate, willful, or fraudulent act committed by Pante that misled the Church
into giving its consent to the sale of the subject lot in his favor. That Pante was not
an actual occupant of the lot he purchased was a fact that the Church either ignored
or waived as a requirement. In any case, the Church was by no means led to believe
or do so by Pantes act; there had been no vitiation of the Churchs consent to the
sale of the lot to Pante.
From another perspective, any finding of bad faith, if one is to be made,
should be imputed to the Church. Without securing a court ruling on the validity of its
contract with Pante, the Church sold the subject property to the spouses Rubi. Article
1390 of the Civil Code declares that voidable contracts are binding, unless annulled by
a proper court action. From the time the sale to Pante was made and up until it sold
the subject property to the spouses Rubi, the Church made no move to reject the
contract with Pante; it did not even return the down payment he paid. The Churchs
bad faith in selling the lot to Rubi without annulling its contract with Pante negates its
claim for damages.

In the absence of any vitiation of consent, the contract between the Church
and Pante stands valid and existing. Any delay by Pante in paying the full price could
not nullify the contract, since (as correctly observed by the CA) it was a contract of
sale. By its terms, the contract did not provide a stipulation that the Church retained
ownership until full payment of the price.[21] The right to repurchase given to the
Church in case Pante fails to pay within the grace period provided[22] would have been
unnecessary had ownership not already passed to Pante.
The rule on double sales
The sale of the lot to Pante and later to the spouses Rubi resulted in a
double sale that called for the application of the rules in Article 1544 of the Civil
Code:
Article 1544. If the same thing should have been sold to
different vendees, the ownership shall be transferred to the person
who may have first taken possession thereof in good faith, if it
should be movable property.
Should it be immovable property, the ownership shall
belong to the person acquiring it who in good faith first recorded it
in the Registry of Property.
Should there be no inscription, the ownership shall
pertain to the person who in good faith was first in the
possession; and, in the absence thereof, to the person who
presents the oldest title, provided there is good faith. [Emphasis
ours.]
As neither Pante nor the spouses Rubi registered the sale in their favor, the question
now is who, between the two, was first in possession of the property in good faith.
Jurisprudence has interpreted possession in Article 1544 of the Civil Code to
mean both actual physical delivery and constructive delivery.[23] Under either mode of
delivery, the facts show that Pante was the first to acquire possession of the lot.
Actual delivery of a thing sold occurs when it is placed under the control and
possession of the vendee.[24] Pante claimed that he had been using the lot as a
351
passageway, with the Churchs permission, since 1963. After purchasing the lot in
1992, he continued using it as a passageway until he was prevented by the spouses
Rubis concrete fence over the lot in 1994. Pantes use of the lot as a passageway after
the 1992 sale in his favor was a clear assertion of his right of ownership that preceded
the spouses Rubis claim of ownership.
Pante also stated that he had placed electric connections and water pipes on
the lot, even before he purchased it in 1992, and the existence of these connections
and pipes was known to the spouses Rubi.[25] Thus, any assertion of possession over
the lot by the spouses Rubi (e.g., the construction of a concrete fence) would be
considered as made in bad faith because works had already existed on the lot
indicating possession by another. [A] buyer of real property in the possession of
persons other than the seller must be wary and should investigate the rights of those
in possession. Without such inquiry, the buyer can hardly be regarded as a buyer in
good faith and cannot have any right over the property."[26]
Delivery of a thing sold may also be made constructively. Article 1498 of the
Civil Code states that:
Article 1498. When the sale is made through a public
instrument, the execution thereof shall be equivalent to the
delivery of the thing which is the object of the contract, if from the
deed the contrary does not appear or cannot clearly be inferred.
Under this provision, the sale in favor of Pante would have to be upheld since the
contract executed between the Church and Pante was duly notarized, converting the
deed into a public instrument.[27] In Navera v. Court of Appeals,[28] the Court ruled
that:
[A]fter the sale of a realty by means of a public instrument, the
vendor, who resells it to another, does not transmit anything to the
second vendee, and if the latter, by virtue of this second sale, takes
material possession of the thing, he does it as mere detainer, and it
would be unjust to protect this detention against the rights of the
thing lawfully acquired by the first vendee.
Thus, under either mode of delivery, Pante acquired prior possession of the lot.
WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the
decision of the Court of Appeals dated May 18, 2006, and its resolution dated August
11, 2006, issued in CA-G.R.-CV No. 65069. Costs against the Roman Catholic Church.
SO ORDERED.
 CARMELA BROBIO MANGAHAS, G.R. No. 183852

Petitioner,

Present:

CORONA, C.J.,*

CARPIO,

- versus - Chairperson,

NACHURA,

LEONARDO-DE CASTRO,**and

MENDOZA, JJ.

EUFROCINA A. BROBIO, Promulgated:

Respondent.

October 20, 2010

x------------------------------------------------------------------------------------x

C. VIOLENCE/INTIMIDATION RESOLUTION
352
 NACHURA, J.:
This petition for review on certiorari seeks to set aside the Court of Appeals (CA)
Decision[1] dated February 21, 2008, which dismissed petitioners action to enforce
payment of a promissory note issued by respondent, and Resolution[2] dated July 9,
2008, which denied petitioners motion for reconsideration.
The case arose from the following facts:
On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate, leaving three parcels
of land. He was survived by his wife, respondent Eufrocina A. Brobio, and four
legitimate and three illegitimate children; petitioner Carmela Brobio Mangahas is one
of the illegitimate children.
On May 12, 2002, the heirs of the deceased executed a Deed of Extrajudicial
Settlement of Estate of the Late Pacifico Brobio with Waiver. In the Deed, petitioner
and Pacificos other children, in consideration of their love and affection for
respondent and the sum of P150,000.00, waived and ceded their respective shares
over the three parcels of land in favor of respondent. According to petitioner,
respondent promised to give her an additional amount for her share in her fathers
estate. Thus, after the signing of the Deed, petitioner demanded from respondent the
promised additional amount, but respondent refused to pay, claiming that she had no
more money.[3]
A year later, while processing her tax obligations with the Bureau of Internal Revenue
(BIR), respondent was required to submit an original copy of the Deed. Left with no
more original copy of the Deed, respondent summoned petitioner to her office on
May 31, 2003 and asked her to countersign a copy of the Deed. Petitioner refused to
countersign the document, demanding that respondent first give her the additional
amount that she promised. Considering the value of the three parcels of land (which
she claimed to be worth P20M), petitioner asked for P1M, but respondent begged
her to lower the amount. Petitioner agreed to lower it to P600,000.00. Because
respondent did not have the money at that time and petitioner refused to
countersign the Deed without any assurance that the amount would be paid,
respondent executed a promissory note. Petitioner agreed to sign the Deed when
respondent signed the promissory note which read
353
31 May 2003
This is to promise that I will give a Financial Assistance to CARMELA
B. MANGAHAS the amount of P600,000.00 Six Hundred Thousand
only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO[4]
When the promissory note fell due, respondent failed and refused to pay despite
demand. Petitioner made several more demands upon respondent but the latter kept
on insisting that she had no money.
On January 28, 2004, petitioner filed a Complaint for Specific Performance with
Damages[5] against respondent, alleging in part
2. That plaintiff and defendant are legal heirs of the deceased,
Pacifico S. Brobio[,] who died intestate and leaving without a
will, on January 10, 2002, but leaving several real and personal
properties (bank deposits), and some of which were the subject
of the extra-judicial settlement among them, compulsory heirs
of the deceased, Pacifico Brobio. x x x.
3. That in consideration of the said waiver of the plaintiff over the
listed properties in the extra-judicial settlement, plaintiff
received the sum of P150,000.00, and the defendant executed
a Promissory Note on June 15, 2003, further committing herself
to give plaintiff a financial assistance in the amount
of P600,000.00. x x x.
4. That on its due date, June 15, 2003, defendant failed to make
good of her promise of delivering to the plaintiff the sum
of P600,000.00 pursuant to her Promissory Note dated May 31,
2003, and despite repeated demands, defendant had
 maliciously and capriciously refused to deliver to the plaintiff
the amount [of] P600,000.00, and the last of which demands
was on October 29, 2003. x x x.[6]
In her Answer with Compulsory Counterclaim,[7] respondent admitted that she signed
the promissory note but claimed that she was forced to do so. She also claimed that
the undertaking was not supported by any consideration. More specifically, she
contended that
10. Defendant was practically held hostage by the demand of the
plaintiff. At that time, defendant was so much pressured and was in
[a] hurry to submit the documents to the Bureau of Internal
Revenue because of the deadline set and for fear of possible
penalty if not complied with. Defendant pleaded understanding but
plaintiff was adamant. Her hand could only move in exchange for 1
million pesos.
11. Defendant, out of pressure and confused disposition, was
constrained to make a promissory note in a reduced amount in
favor of the plaintiff. The circumstances in the execution of the
promissory note were obviously attended by involuntariness and
the same was issued without consideration at all or for illegal
consideration.[8]
On May 15, 2006, the Regional Trial Court (RTC) rendered a decision in favor of
petitioner. The RTC found that the alleged pressure and confused disposition
experienced by respondent and the circumstances that led to the execution of the
promissory note do not constitute undue influence as would vitiate respondents
consent thereto. On the contrary, the RTC observed that
It is clear from all the foregoing that it is the defendant who took
improper advantage of the plaintiffs trust and confidence in her by
resorting to a worthless written promise, which she was intent on
reneging. On the other hand, plaintiff did not perform an unlawful
conduct when she insisted on a written commitment from the
defendant, as embodied in the promissory note in question, before
354
affixing her signature that was asked of her by the defendant
because, as already mentioned, that was the only opportunity
available to her or which suddenly and unexpectedly presented
itself to her in order to press her demand upon the defendant to
satisfy the correct amount of consideration due to her. In other
words, as the defendant had repeatedly rebuffed her plea for
additional consideration by claiming lack of money, it is only natural
for the plaintiff to seize the unexpected opportunity that suddenly
presented itself in order to compel the defendant to give to her
[what is] due [her]. And by executing the promissory note which the
defendant had no intention of honoring, as testified to by her, the
defendant clearly acted in bad faith and took advantage of the trust
and confidence that plaintiff had reposed in her.[9]
The RTC also brushed aside respondents claim that the promissory note was not
supported by valuable consideration. The court maintained that the promissory note
was an additional consideration for the waiver of petitioners share in the three
properties in favor of respondent. Its conclusion was bolstered by the fact that the
promissory note was executed after negotiation and haggling between the parties.
The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering the defendant to pay to plaintiff the sum of
Six Hundred Thousand Pesos (P600,000.00) which she
committed to pay to plaintiff under the promissory
note in question, plus interest thereon at the rate of
12% per annum computed from the date of the filing
of the complaint;
2. Ordering the defendant to pay to plaintiff the sum
of P50,000.00 as attorneys fees; and
3. Ordering the defendant to pay to plaintiff the costs of
this suit.
SO ORDERED.[10]
 On February 21, 2008, the CA reversed the RTC decision and dismissed the
complaint.[11] The CA found that there was a complete absence of consideration in
the execution of the promissory note, which made it inexistent and without any legal
force and effect. The court noted that financial assistance was not the real reason
why respondent executed the promissory note, but only to secure petitioners
signature. The CA held that the waiver of petitioners share in the three properties, as
expressed in the deed of extrajudicial settlement, may not be considered as the
consideration of the promissory note, considering that petitioner signed the Deed
way back in 2002 and she had already received the consideration of P150,000.00 for
signing the same. The CA went on to hold that if petitioner disagreed with the
amount she received, then she should have filed an action for partition.
Further, the CA found that intimidation attended the signing of the
promissory note. Respondent needed the Deed countersigned by petitioner in order
to comply with a BIR requirement; and, with petitioners refusal to sign the said
document, respondent was forced to sign the promissory note to assure petitioner
that the money promised to her would be paid.
Petitioner moved for the reconsideration of the CA Decision. In a Resolution dated
July 9, 2008, the CA denied petitioners motion.[12]
In this petition for review, petitioner raises the following issues:
1. The Honorable Court of Appeals erred in the appreciation of
the facts of this case when it found that intimidation attended
the execution of the promissory note subject of this case.
2. The Honorable Court of Appeals erred when it found that the
promissory note was without consideration.
3. The Honorable Court of Appeals erred when it stated that
petitioner should have filed [an action] for partition instead of
a case for specific performance.[13]
The petition is meritorious.
355
Contracts are voidable where consent thereto is given through mistake,
violence, intimidation, undue influence, or fraud. In determining whether consent is
vitiated by any of these circumstances, courts are given a wide latitude in weighing
the facts or circumstances in a given case and in deciding in favor of what they
believe actually occurred, considering the age, physical infirmity, intelligence,
relationship, and conduct of the parties at the time of the execution of the contract
and subsequent thereto, irrespective of whether the contract is in a public or private
writing.[14]
Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the
execution of the promissory note. Still, respondent insists that she was forced into
signing the promissory note because petitioner would not sign the document
required by the BIR. In one case, the Court in characterizing a similar argument by
respondents therein held that such allegation is tantamount to saying that the other
party exerted undue influence upon them. However, the Court said that the fact that
respondents were forced to sign the documents does not amount to vitiated
consent.[15]
There is undue influence when a person takes improper advantage of his
power over the will of another, depriving the latter of a reasonable freedom of
choice.[16] For undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy his free
agency, making him express the will of another rather than his own.[17]
Respondent may have desperately needed petitioners signature on the Deed, but
there is no showing that she was deprived of free agency when she signed the
promissory note. Being forced into a situation does not amount to vitiated consent
where it is not shown that the party is deprived of free will and choice. Respondent
still had a choice: she could have refused to execute the promissory note and
resorted to judicial means to obtain petitioners signature. Instead, respondent chose
to execute the promissory note to obtain petitioners signature, thereby agreeing to
pay the amount demanded by petitioner.
The fact that respondent may have felt compelled, under the circumstances,
to execute the promissory note will not negate the voluntariness of the act. As rightly
observed by the trial court, the execution of the promissory note in the amount
of P600,000.00 was, in fact, the product of a negotiation between the parties.
Respondent herself testified that she bargained with petitioner to lower the amount:
 ATTY. VILLEGAS:
Q And is it not that there was even a bargaining from P1-M
to P600,000.00 before you prepare[d] and [sign[ed] that
promissory note marked as Exhibit C?
A Yes, sir.
Q And in fact, you were the one [who] personally wrote the amount
of P600,000.00 only as indicated in the said
promissory note?
A Yes, sir.
COURT:
Q So, just to clarify. Carmela was asking an additional amount of P1-
M for her to sign this document but you negotiated with
her and asked that it be lowered to P600,000.00 to which
she agreed, is that correct?
A Yes, Your Honor. Napilitan na po ako.
Q But you negotiated and asked for its reduction from P1-M
to P600,000.00?
A Yes, Your Honor.[18]
356
Contrary to the CAs findings, the situation did not amount to intimidation that
vitiated consent. There is intimidation when one of the contracting parties is
compelled to give his consent by a reasonable and well-grounded fear of an imminent
and grave evil upon his person or property, or upon the person or property of his
spouse, descendants, or ascendants.[19] Certainly, the payment of penalties for
delayed payment of taxes would not qualify as a reasonable and well-grounded fear
of an imminent and grave evil.
We join the RTC in holding that courts will not set aside contracts merely because
solicitation, importunity, argument, persuasion, or appeal to affection was used to
obtain the consent of the other party. Influence obtained by persuasion or argument
or by appeal to affection is not prohibited either in law or morals and is not
obnoxious even in courts of equity.[20]
On the issue that the promissory note is void for not being supported by a
consideration, we likewise disagree with the CA.
A contract is presumed to be supported by cause or consideration. [21] The
presumption that a contract has sufficient consideration cannot be overthrown by a
mere assertion that it has no consideration. To overcome the presumption, the
alleged lack of consideration must be shown by preponderance of evidence. [22] The
burden to prove lack of consideration rests upon whoever alleges it, which, in the
present case, is respondent.
Respondent failed to prove that the promissory note was not supported by any
consideration. From her testimony and her assertions in the pleadings, it is clear that
the promissory note was issued for a cause or consideration, which, at the very least,
was petitioners signature on the document.
It may very well be argued that if such was the consideration, it was
inadequate. Nonetheless, even if the consideration is inadequate, the contract would
not be invalidated, unless there has been fraud, mistake, or undue influence. [23] As
previously stated, none of these grounds had been proven present in this case.
 The foregoing discussion renders the final issue insignificant. Be that as it
may, we would like to state that the remedy suggested by the CA is not the proper
one under the circumstances. An action for partition implies that the property is still
owned in common.[24] Considering that the heirs had already executed a deed of
extrajudicial settlement and waived their shares in favor of respondent, the
properties are no longer under a state of co-ownership; there is nothing more to be
partitioned, as ownership had already been merged in one person.

WHEREFORE, premises considered, the CA Decision dated February 21, 2008

and its Resolution dated July 9, 2008 are REVERSED and SET ASIDE. The RTC decision
dated May 15, 2006 is REINSTATED.

SO ORDERED.
D. SIMULATED CONTRACTS

G.R. No. 173211 October 11, 2012

HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC, Petitioners,

vs.
COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA MENDOZA-ROY
and SPOUSES DOMINADOR LOZADA and MARTINA MENDOZA-
LOZADA, Respondents.

DECISION

MENDOZA, J.:

This is a Petition for Review on Certiorari under Rule 45 assailing the February 16,
2006 Decision1 of the Court of Appeals (CA), in CA G.R. CV No. 75982, which modified
the April 30, 2002 Decision2 of the Regional Trial Court, Branch 220, Quezon City (
RTC), in Civil Case No. Q-94-19452, an action for cancellation of transfer certificate of
title and reconveyance of property.

The Facts

From the records, it appears that Ireneo Mendoza (Ireneo), married to Salvacion
Fermin (Salvacion), was the owner of the subject property, presently covered by TCT
No. 242655 of the Registry of Deeds of Quezon City and situated at No. 36, Road 8,
357

Bagong Pag-asa, Quezon City, which he purchased in 1954. Ireneo had two children:
respondents Josefina and Martina (respondents), Salvacion being their stepmother.
 When he was still alive, Ireneo, also took care of his niece, Angelina, since she was
three years old until she got married. The property was then covered by TCT No.
106530 of the Registry of Deeds of Quezon City. On October 25, 1977, Ireneo, with
the consent of Salvacion, executed a deed of absolute sale of the property in favor of
Angelina and her husband, Mario (Spouses Intac). Despite the sale, Ireneo and his
family, including the respondents, continued staying in the premises and paying the
realty taxes. After Ireneo died intestate in 1982, his widow and the respondents
remained in the premises.3 After Salvacion died, respondents still maintained their
residence there. Up to the present, they are in the premises, paying the real estate
taxes thereon, leasing out portions of the property, and collecting the rentals. 4
The Dispute
The controversy arose when respondents sought the cancellation of TCT No. 242655,
claiming that the sale was only simulated and, therefore, void. Spouses Intac resisted,
claiming that it was a valid sale for a consideration.
On February 22, 1994, respondents filed the Complaint for Cancellation of Transfer
Certificate of Title (TCT) No. 2426555 against Spouses Intac before the RTC. The
complaint prayed not only for the cancellation of the title, but also for its
reconveyance to them. Pending litigation, Mario died on May 20, 1995 and was
substituted by his heirs, his surviving spouse, Angelina, and their children, namely,
Rafael, Kristina, Ma. Tricia Margarita, Mario, and Pocholo, all surnamed Intac
(petitioners).
Averments of the Parties
In their Complaint, respondents alleged, among others, that when Ireneo was still
alive, Spouses Intac borrowed the title of the property (TCT No. 106530) from him to
be used as collateral for a loan from a financing institution; that when Ireneo
informed respondents about the request of Spouses Intac, they objected because the
title would be placed in the names of said spouses and it would then appear that the
couple owned the property; that Ireneo, however, tried to appease them, telling
them not to worry because Angelina would not take advantage of the situation
considering that he took care of her for a very long time; that during his lifetime, he
informed them that the subject property would be equally divided among them after
his death; and that respondents were the ones paying the real estate taxes over said
property.
It was further alleged that after the death of Ireneo in 1982, a conference among
relatives was held wherein both parties were present including the widow of Ireneo,
358
Salvacion; his nephew, Marietto Mendoza (Marietto); and his brother, Aurelio
Mendoza (Aurelio). In the said conference, it was said that Aurelio informed all of
them that it was Ireneo’s wish to have the property divided among his heirs; that
Spouses Intac never raised any objection; and that neither did they inform all those
present on that occasion that the property was already sold to them in 1977. 6
Respondents further alleged that sometime in 1993, after the death of Salvacion,
rumors spread in the neighborhood that the subject property had been registered in
the names of Spouses Intac; that upon verification with the Office of the Register of
Deeds of Quezon City, respondents were surprised to find out that TCT No. 106530
had indeed been cancelled by virtue of the deed of absolute sale executed by Ireneo
in favor of Spouses Intac, and as a result, TCT No. 242655 was issued in their names;
that the cancellation of TCT No. 106530 and the subsequent issuance of TCT No.
242655 were null and void and had no legal effect whatsoever because the deed of
absolute sale was a fictitious or simulated document; that the Spouses Intac were
guilty of fraud and bad faith when said document was executed; that Spouses Intac
never informed respondents that they were already the registered owners of the
subject property although they had never taken possession thereof; and that the
respondents had been in possession of the subject property in the concept of an
owner during Ireneo’s lifetime up to the present.
In their Answer,7 Spouses Intac countered, among others, that the subject property
had been transferred to them based on a valid deed of absolute sale and for a
valuable consideration; that the action to annul the deed of absolute sale had already
prescribed; that the stay of respondents in the subject premises was only by
tolerance during Ireneo’s lifetime because they were not yet in need of it at that
time; and that despite respondents’ knowledge about the sale that took place on
October 25, 1977, respondents still filed an action against them.
Ruling of the RTC
On April 30, 2002, the RTC rendered judgment in favor of respondents and against
Spouses Intac. The dispositive portion of its Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered:
(1) Declaring the Deed of Absolute Sale executed by Ireneo Mendoza in favor
of Mario and Angelina Intac dated October 25, 1977 as an equitable
mortgage;
(2) Ordering the Register of Deeds of Quezon City to cancel Transfer
Certificate Title No. 242655 and, in lieu thereof, issue a new Transfer
Certificate of Title in the name of Ireneo Mendoza; and
 (3) Ordering defendants to pay plaintiffs the amount of Thirty Thousand
Pesos (Php30,000.00) as and for attorney’s fees.
The other claims for damages are hereby denied for lack of merit.
SO ORDERED.8
The RTC ruled, among others, that the sale between Ireneo and Salvacion, on one
hand, and Spouses Intac was null and void for being a simulated one considering that
the said parties had no intention of binding themselves at all. It explained that the
questioned deed did not reflect the true intention of the parties and construed the
said document to be an equitable mortgage on the following grounds: 1 the signed
document did not express the real intention of the contracting parties because Ireneo
signed the said document only because he was in urgent need of funds; 2 the amount
of ₱60,000.00 in 1977 was too inadequate for a purchase price of a 240-square meter
lot located in Quezon City; 3 Josefina and Martina continued to be in possession of the
subject property from 1954 and even after the alleged sale took place in 1977 until
this case was filed in 1994; and 4 the Spouses Intac started paying real estate taxes
only in 1999. The RTC added that the Spouses Intac were guilty of fraud because they
effected the registration of the subject property even though the execution of the
deed was not really intended to transfer the ownership of the subject property.
Ruling of the CA
On appeal, the CA modified the decision of the RTC. The CA ruled that the RTC erred
in first declaring the deed of absolute sale as null and void and then interpreting it to
be an equitable mortgage. The CA believed that Ireneo agreed to have the title
transferred in the name of the Spouses Intac to enable them to facilitate the
processing of the mortgage and to obtain a loan. This was the exact reason why the
deed of absolute sale was executed. Marietto testified that Ireneo never intended to
sell the subject property to the Spouses Intac and that the deed of sale was executed
to enable them to borrow from a bank. This fact was confirmed by Angelina herself
when she testified that she and her husband mortgaged the subject property
sometime in July 1978 to finance the construction of a small hospital in Sta. Cruz,
Laguna.
The CA further observed that the conduct of Spouses Intac belied their claim of
ownership. When the deed of absolute sale was executed, Spouses Intac never
asserted their ownership over the subject property, either by collecting rents, by
informing respondents of their ownership or by demanding possession of the land
from its occupants. It was not disputed that it was respondents who were in
359
possession of the subject property, leasing the same and collecting rentals. Spouses
Intac waited until Ireneo and Salvacion passed away before they disclosed the
transfer of the title to respondents. Hence, the CA was of the view that the veracity of
their claim of ownership was suspicious.
Moreover, wrote the CA, although Spouses Intac claimed that the purchase of the
subject property was for a valuable consideration (P60,000.00), they admitted that
they did not have any proof of payment. Marietto, whose testimony was assessed by
the RTC to be credible, testified that there was no such payment because Ireneo
never sold the subject property as he had no intention of conveying its ownership
and that his only purpose in lending the title was to help Spouses Intac secure a loan.
Thus, the CA concluded that the deed of absolute sale was a simulated document and
had no legal effect.
Finally, the CA stated that even assuming that there was consent, the sale was still
null and void because of lack of consideration. The decretal portion of the CA
Decision reads:
WHEREFORE, in view of the foregoing premises, the decision of the Regional Trial
Court of Quezon City, Branch 220, is AFFIRMED with modifications, as follows:
1. The Deed of Absolute Sale dated October 25, 1977 executed by Ireneo
Mendoza and Salvacion Fermen in favor of Spouses Mario and Angelina Intac
is hereby declared NULL AND VOID;
2. the Register of Deed[s] of Quezon City is ordered to cancel TCT No.
242655 and, in lieu thereof, issue a new one and reinstate Ireneo Mendoza
as the registered owner;
3. The defendant appellants are hereby ordered to pay the plaintiff
appellees the amount of thirty thousand pesos (Php30,000.00) as and for
attorney’s fees; and
4. The other claims for damages are denied for lack of merit.
SO ORDERED.9
Not in conformity, petitioners filed this petition for review anchored on the following
ASSIGNMENT OF ERRORS
I
 THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT AFFIRMED
THE DECISION OF THE REGIONAL TRIAL COURT DATED FEBRUARY 16, 2006
WHICH WAS CONTRARY TO THE APPLICABLE LAWS AND EXISTING
JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT CLEARLY
OVERLOOKED, MISUNDERSTOOD AND/OR MISAPPLIED THE EVIDENCE
PRESENTED IN THE COURT A QUO.10
Petitioners’ position
Petitioners primarily argue that the subject deed of sale was a valid and binding
contract between the parties. They claim that all the elements of a valid contract of
sale were present, to wit: [a] consent or meeting of the minds, that is, consent to
transfer ownership in exchange of price; [b] determinate subject matter; and [c] price
certain in money or its equivalent.
Petitioners claim that respondents have validly gave their consent to the questioned
sale of the subject property. In fact, it was Ireneo and Salvacion who approached
them regarding their intention to sell the subject property. Ireneo and Salvacion
affixed their signatures on the questioned deed and never brought any action to
invalidate it during their lifetime. They had all the right to sell the subject property
without having to inform their children of their intention to sell the same. Ordinary
human experience dictates that a party would not affix his or her signature on any
written instrument which would result in deprivation of one’s property right if there
was really no intention to be bound by it. A party would not keep silent for several
years regarding the validity and due execution of a document if there was an issue on
the real intention of the vendors. The signatures of Ireneo and Salvacion meant that
they had knowingly and willfully entered into such agreement and that they were
prepared for the consequences of their act.
Respondents’ Position
Respondents are of the position that the RTC and the CA were correct in ruling that
the questioned deed of absolute sale was a simulated one considering that Ireneo
and Salvacion had no intention of selling the subject property. The true intention
rather was that Spouses Intac would just borrow the title of the subject property and
offer it as a collateral to secure a loan. No money actually changed hands.
360
According to respondents, there were several circumstances which put in doubt the
validity of the deed of absolute sale. First, the parties were not on equal footing
because Angelina was a doctor by profession while Ireneo and Salvacion were less
educated people who were just motivated by their trust, love and affection for her
whom they considered as their own child. Second, if there was really a valid sale, it
was just and proper for Spouses Intac to divulge the conveyance to respondents,
being compulsory heirs, but they did not. Third, Ireneo and Salvacion did nothing to
protect their interest because they banked on the representation of Spouses Intac
that the title would only be used to facilitate a loan with a bank. Fourth, Ireneo and
Salvacion remained in possession of the subject property without being disturbed by
Spouses Intac. Fifth, the price of the sale was inadequate and inequitable for a prime
property located in Pag-asa, Quezon City. Sixth, Ireneo and Salvacion had no intention
of selling the subject property because they had heirs who would inherit the same.
Seventh, the Spouses Intac abused the trust and affection of Ireneo and Salvacion by
arrogating unto themselves the ownership of the subject property to the prejudice of
his own children, Josefina and Martina.
Finally, petitioners could not present a witness to rebut Marietto’s testimony which
was straightforward and truthful.
The Court’s Ruling
Basically, the Court is being asked to resolve the issue of whether the Deed of
Absolute Sale,11 dated October 25, 1977, executed by and between Ireneo Mendoza
and Salvacion Fermin, as vendors, and Mario Intac and Angelina Intac, as vendees,
involving the subject real property in Pagasa, Quezon City, was a simulated contract
or a valid agreement.
The Court finds no merit in the petition.
A contract, as defined in the Civil Code, is a meeting of minds, with respect to the
other, to give something or to render some service. Article 1318 provides:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
 Accordingly, for a contract to be valid, it must have three essential elements: (1)
consent of the contracting parties; (2) object certain which is the subject matter of
the contract; and (3) cause of the obligation which is established.12
All these elements must be present to constitute a valid contract. Consent is essential
to the existence of a contract; and where it is wanting, the contract is non-existent. In
a contract of sale, its perfection is consummated at the moment there is a meeting of
the minds upon the thing that is the object of the contract and upon the price.
Consent is manifested by the meeting of the offer and the acceptance of the thing
and the cause, which are to constitute the contract.
In this case, the CA ruled that the deed of sale executed by Ireneo and Salvacion was
absolutely simulated for lack of consideration and cause and, therefore, void. Articles
1345 and 1346 of the Civil Code provide:
Art. 1345. Simulation of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation,
when it does not prejudice a third person and is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds the parties
to their real agreement.
If the parties state a false cause in the contract to conceal their real agreement, the
contract is only relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors in
interest.13
In absolute simulation, there is a colorable contract but it has no substance as the
parties have no intention to be bound by it. "The main characteristic of an absolute
simulation is that the apparent contract is not really desired or intended to produce
legal effect or in any way alter the juridical situation of the parties." 14 "As a result, an
absolutely simulated or fictitious contract is void, and the parties may recover from
each other what they may have given under the contract." 15
In the case at bench, the Court is one with the courts below that no valid sale of the
subject property actually took place between the alleged vendors, Ireneo and
361
Salvacion; and the alleged vendees, Spouses Intac. There was simply no consideration
and no intent to sell it.
Critical is the testimony of Marietto, a witness to the execution of the subject
absolute deed of sale. He testified that Ireneo personally told him that he was going
to execute a document of sale because Spouses Intac needed to borrow the title to
the property and use it as collateral for their loan application. Ireneo and Salvacion
never intended to sell or permanently transfer the full ownership of the subject
property to Spouses Intac. Marietto was characterized by the RTC as a credible
witness.
Aside from their plain denial, petitioners failed to present any concrete evidence to
disprove Marietto’s testimony. They claimed that they actually paid P150,000.00 for
the subject property. They, however, failed to adduce proof, even by circumstantial
evidence, that they did, in fact, pay it. Even for the consideration of P60,000.00 as
stated in the contract, petitioners could not show any tangible evidence of any
payment therefor. Their failure to prove their payment only strengthened Marietto’s
story that there was no payment made because Ireneo had no intention to sell the
subject property.
Angelina’s story, except on the consideration, was consistent with that of Marietto.
Angelina testified that she and her husband mortgaged the subject property
sometime in July 1978 to finance the construction of a small hospital in Sta. Cruz,
Laguna. Angelina claimed that Ireneo offered the property as he was in deep financial
need.
Granting that Ireneo was in financial straits, it does not prove that he intended to sell
the property to Angelina. Petitioners could not adduce any proof that they lent
money to Ireneo or that he shared in the proceeds of the loan they had obtained.
And, if their intention was to build a hospital, could they still afford to lend money to
Ireneo? And if Ireneo needed money, why would he lend the title to Spouses Intac
when he himself could use it to borrow money for his needs? If Spouses Intac took
care of him when he was terminally ill, it was not surprising for Angelina to
reciprocate as he took care of her since she was three (3) years old until she got
married. Their caring acts for him, while they are deemed services of value, cannot be
considered as consideration for the subject property for lack of quantification and the
Filipino culture of taking care of their elders.
Thus, the Court agrees with the courts below that the questioned contract of sale was
only for the purpose of lending the title of the property to Spouses Intac to enable
them to secure a loan. Their arrangement was only temporary and could not give rise
to a valid sale. Where there is no consideration, the sale is null and void ab initio. In
the case of Lequin v. Vizconde,16 the Court wrote:
 There can be no doubt that the contract of sale or Kasulatan lacked the essential
element of consideration. It is a well-entrenched rule that where the deed of sale
states that the purchase price has been paid but in fact has never been paid, the deed
of sale is null and void ab initio for lack of consideration. Moreover, Art. 1471 of the
Civil Code, which provides that "if the price is simulated, the sale is void," also applies
to the instant case, since the price purportedly paid as indicated in the contract of
sale was simulated for no payment was actually made.
Consideration and consent are essential elements in a contract of
sale.1âwphi1 Where a party’s consent to a contract of sale is vitiated or where there
is lack of consideration due to a simulated price, the contract is null and void ab initio.
[Emphases supplied]
More importantly, Ireneo and his family continued to be in physical possession of the
subject property after the sale in 1977 and up to the present. They even went as far
as leasing the same and collecting rentals. If Spouses Intac really purchased the
subject property and claimed to be its true owners, why did they not assert their
ownership immediately after the alleged sale took place? Why did they have to assert
their ownership of it only after the death of Ireneo and Salvacion? One of the most
striking badges of absolute simulation is the complete absence of any attempt on the
part of a vendee to assert his right of dominion over the property.17
On another aspect, Spouses Intac failed to show that they had been paying the real
estate taxes of the subject property. They admitted that they started paying the real
estate taxes on the property for the years 1996 and 1997 only in 1999. They could
only show two (2) tax receipts (Real Property Tax Receipt No. 361105, dated April 21,
1999, and Real Property Tax Receipt No. 361101, dated April 21, 1999).18 Noticeably,
petitioners’ tax payment was just an afterthought. The non-payment of taxes was
also taken against the alleged vendees in the case of Lucia Carlos Aliño v. Heirs of
Angelica A. Lorenzo.19 Thus,
Furthermore, Lucia religiously paid the realty taxes on the subject lot from 1980 to
1987.While tax receipts and declarations of ownership for taxation purposes are not,
in themselves, incontrovertible evidence of ownership, they constitute at least proof
that the holder has a claim of title over the property, particularly when accompanied
by proof of actual possession. They are good indicia of the possession in the concept
of owner, for no one in his right mind would be paying taxes for a property that is not
in his actual or at least constructive possession. The voluntary declaration of a piece
of property for taxation purposes manifests not only one's sincere and honest desire
to obtain title to the property and announces his adverse claim against the State and
all other interested parties, but also the intention to contribute needed revenues to
362
the Government. Such an act strengthens one's bona fide claim of acquisition of
ownership.
On the other hand, respondent heirs failed to present evidence that Angelica, during
her lifetime, paid the realty taxes on the subject lot. They presented only two tax
receipts showing that Servillano, Sr. belatedly paid taxes due on the subject lot for
the years 1980-1981 and part of year 1982 on September 8, 1989, or about a month
after the institution of the complaint on August 3, 1989, a clear indication that
payment was made as an afterthought to give the semblance of truth to their claim.
Thus, the subsequent acts of the parties belie the intent to be bound by the deed of
sale. [Emphases supplied]
The primary consideration in determining the true nature of a contract is the
intention of the parties. If the words of a contract appear to contravene the evident
intention of the parties, the latter shall prevail. Such intention is determined not only
from the express terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties.20 As heretofore shown, the contemporaneous and
subsequent acts of both parties in this case, point to the fact that the intention of
Ireneo was just to lend the title to the Spouses Intac to enable them to borrow
money and put up a hospital in Sta. Cruz, Laguna. Clearly, the subject contract was
absolutely simulated and, therefore, void.
In view of the foregoing, the Court finds it hard to believe the claim of the Spouses
Intac that the stay of Ireneo and his family in the subject premises was by their mere
tolerance as they were not yet in need of it. As earlier pointed out, no convincing
evidence, written or testimonial, was ever presented by petitioners regarding this
matter. It is also of no moment that TCT No. 106530 covering the subject property
was cancelled and a new TCT (TCT No. 242655)21 was issued in their names. The
Spouses Intac never became the owners of the property despite its registration in
their names. After all, registration does not vest title.
As a logical consequence, petitioners did not become the owners of the subject
property even after a TCT had been issued in their names. After all, registration does
not vest title. Certificates of title merely confirm or record title already existing and
vested. They cannot be used to protect a usurper from the true owner, nor can they
be used as a shield for the commission of fraud, or to permit one to enrich oneself at
the expense of others. Hence, reconveyance of the subject property is warranted. 22
The Court does not find acceptable either the argument of the Spouses Intac that
respondents’ action for cancellation of TCT No. 242655 and the reconveyance of the
subject property is already barred by the Statute of Limitations. The reason is that the
 respondents are still in actual possession of the subject property. It is a well-settled
doctrine that "if the person claiming to be the owner of the property is in actual
possession thereof, the right to seek reconveyance, which in effect seeks to quiet title
to the property, does not prescribe."23 In Lucia Carlos Aliño, it was also written:

The lower courts fault Lucia for allegedly not taking concrete steps to recover the
subject lot, demanding its return only after 10 years from the registration of the title.
They, however, failed to consider that Lucia was in actual possession of the property.

It is well-settled that an action for reconveyance prescribes in 10 years, the reckoning

point of which is the date of registration of the deed or the date of issuance of the
certificate of title over the property. In an action for reconveyance, the decree of
registration is highly regarded as incontrovertible. What is sought instead is the
transfer of the property or its title, which has been erroneously or wrongfully
registered in another person's name, to its rightful or legal owner or to one who has a
better right.

However, in a number of cases in the past, the Court has consistently ruled that if the 8. FORM OF CONTRACTS
person claiming to he the owner of the property is in actual possession thereof, the
right to seek reconveyance, which in effect seeks to quiet title to the property, does G.R. No. L-27010 April 30, 1969
not prescribe. The reason for this is that one who is in actual possession of a piece of
land claiming to be the owner thereof may wait until his possession is disturbed or his MARLENE DAUDEN-HERNAEZ, petitioner,
title is attacked before taking steps to vindicate his right. The reason being, that his vs.
undisturbed possession gives him the continuing right to seek the aid of a court of HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Quezon
equity to ascertain the nature of the adverse claim of a third party and its effect on City, HOLLYWOOD FAR EAST PRODUCTIONS, INC., and RAMON
his title, which right can be claimed only by one who is in possession. Thus, VALENZUELA, respondents.
considering that Lucia continuously possessed the subject lot, her right to institute a
suit to clear the cloud over her title cannot he barred by the statute of R. M. Coronado and Associates for petitioner.
limitations.:24[Emphases supplied] Francisco Lavides for respondent.

WHEREFORE, the petition is DENIED. REYES, J.B.L., Acting C.J.:

SO ORDERED. Petition for a writ of certiorari to set aside certain orders of the Court of First Instance
of Quezon City (Branch IV), in its Civil Case No. Q-10288, dismissing a complaint for
breach of contract and damages, denying reconsideration, refusing to admit an
amended complaint, and declaring the dismissal final and unappealable.

The essential facts are the following:

Petitioner Marlene Dauden-Hernaez, a motion picture actress, had filed a complaint

363

against herein private respondents, Hollywood Far East Productions, Inc., and its
 President and General Manager, Ramon Valenzuela, to recover P14,700.00
representing a balance allegedly due said petitioner for her services as leading actress
in two motion pictures produced by the company, and to recover damages. Upon
motion of defendants, the respondent court (Judge Walfrido de los Angeles presiding)
ordered the complaint dismissed, mainly because the "claim of plaintiff was not
evidenced by any written document, either public or private", and the complaint
"was defective on its face" for violating Articles 1356 and 1358 of the Civil, Code of
the Philippines, as well as for containing defective allege, petitions. Plaintiff sought
reconsideration of the dismissal and for admission of an amended complaint,
attached to the motion. The court denied reconsideration and the leave to amend;
whereupon, a second motion for reconsideration was filed. Nevertheless, the court
also denied it for being pro forma, as its allegations "are, more or less, the same as
the first motion", and for not being accompanied by an affidavit of merits, and
further declared the dismissal final and unappealable. In view of the attitude of the
Court of First Instance, plaintiff resorted to this Court.
The answer sets up the defense that "the proposed amended complaint did not vary
in any material respect from the original complaint except in minor details, and
suffers from the same vital defect of the original complaint", which is the violation of
Article 1356 of the Civil Code, in that the contract sued upon was not alleged to be in
writing; that by Article 1358 the writing was absolute and indispensable, because the
amount involved exceeds five hundred pesos; and that the second motion for
reconsideration did not interrupt the period for appeal, because it was not served on
three days' notice.
We shall take up first the procedural question. It is a well established rule in our
jurisprudence that when a court sustains a demurrer or motion to dismiss it is error
for the court to dismiss the complaint without giving the party plaintiff an
opportunity to amend his complaint if he so chooses. 1 Insofar as the first order of
dismissal (Annex D, Petition) did not provide that the same was without prejudice to
amendment of the complaint, or reserve to the plaintiff the right to amend his
complaint, the said order was erroneous; and this error was compounded when the
motion to accept the amended complaint was denied in the subsequent order of 3
October 1966 (Annex F, Petition). Hence, the petitioner-plaintiff was within her rights
in filing her so-called second motion for reconsideration, which was actually a first
motion against the refusal to admit the amended complaint.
It is contended that the second motion for reconsideration was merely pro forma and
did not suspend the period to appeal from the first order of dismissal (Annex D)
because (1) it merely reiterated the first motion for reconsideration and (2) it was
filed without giving the counsel for defendant-appellee the 3 days' notice provided by
364
the rules. This argument is not tenable, for the reason that the second motion for
reconsideration was addressed to the court' refusal to allow an amendment to the
original complaint, and this was a ground not invoked in the first motion for
reconsideration. Thus, the second motion to reconsider was really not pro forma, as it
was based on a different ground, even if in its first part it set forth in greater detail
the arguments against the correctness of the first order to dismiss. And as to the lack
of 3 days' notice, the record shows that appellees had filed their opposition (in detail)
to the second motion to reconsider (Answer, Annex 4); so that even if it were true
that respondents were not given the full 3 days' notice they were not deprived of any
substantial right. Therefore, the claim that the first order of dismissal had become
final and unappealable must be overruled.
It is well to observe in this regard that since a motion to dismiss is not a responsive
pleading, the plaintiff-petitioner was entitled as of right to amend the original
dismissed complaint. In Paeste vs. Jaurigue 94 Phil. 179, 181, this Court ruled as
follows:
Appellants contend that the lower court erred in not admitting their
amended complaint and in holding that their action had already prescribed.
Appellants are right on both counts.
Amendments to pleadings are favored and should be liberally allowed in the
furtherance of justice. (Torres vs. Tomacruz, 49 Phil. 913). Moreover, under
section 1 of Rule 17, Rules of Court, a party may amend his pleading once as
a matter of course, that is, without leave of court, at any time before a
responsive pleading is served. A motion to dismiss is not a "responsive
pleading". (Moran on the Rules of Court, vol. 1, 1952, ed., p. 376). As
plaintiffs amended their complaint before it was answered, the motion to
admit the amendment should not have been denied. It is true that the
amendment was presented after the original complaint had been ordered
dismissed. But that order was not yet final for it was still under
reconsideration.
The foregoing observations leave this Court free to discuss the main issue in this
petition. Did the court below abuse its discretion in ruling that a contract for personal
services involving more than P500.00 was either invalid of unenforceable under the
last paragraph of Article 1358 of the Civil Code of the Philippines?
We hold that there was abuse, since the ruling herein contested betrays a basic and
lamentable misunderstanding of the role of the written form in contracts, as ordained
in the present Civil Code.
 In the matter of formalities, the contractual system of our Civil Code still follows that
of the Spanish Civil Code of 1889 and of the "Ordenamiento de Alcala" 2 of upholding
the spirit and intent of the parties over formalities: hence, in general, contracts are
valid and binding from their perfection regardless of form whether they be oral or
written. This is plain from Articles 1315 and 1356 of the present Civil Code. Thus, the
first cited provision prescribes:
ART. 1315. Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. (Emphasis supplied)
Concordantly, the first part of Article 1356 of the Code Provides:
ART. 1356. Contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present.... (Emphasis supplied)
These essential requisites last mentioned are normally (1) consent (2) proper subject
matter, and (3) consideration or causa for the obligation assumed (Article 1318). 3 So
that once the three elements exist, the contract is generally valid and obligatory,
regardless of the form, oral or written, in which they are couched.lawphi1.nêt
To this general rule, the Code admits exceptions, set forth in the second portion of
Article 1356:
However, when the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be proved in a certain
way, that requirement is absolute and indispensable....
It is thus seen that to the general rule that the form (oral or written) is irrelevant to
the binding effect inter partes of a contract that possesses the three validating
elements of consent, subject matter, and causa, Article 1356 of the Code establishes
only two exceptions, to wit:
(a) Contracts for which the law itself requires that they be in some particular form
(writing) in order to make them valid and enforceable (the so-
called solemn contracts). Of these the typical example is the donation of immovable
property that the law (Article 749) requires to be embodied in a public instrument in
order "that the donation may be valid", i.e., existing or binding. Other instances are
365
the donation of movables worth more than P5,000.00 which must be in writing,
"otherwise the donation shall be void" (Article 748); contracts to pay interest on
loans (mutuum) that must be "expressly stipulated in writing" (Article 1956); and the
agreements contemplated by Article 1744, 1773, 1874 and 2134 of the present Civil
Code.
(b) Contracts that the law requires to be proved by some writing (memorandum) of its
terms, as in those covered by the old Statute of Frauds, now Article 1403(2) of the
Civil Code. Their existence not being provable by mere oral testimony (unless wholly
or partly executed), these contracts are exceptional in requiring a writing embodying
the terms thereof for their enforceability by action in court.
The contract sued upon by petitioner herein (compensation for services) does not
come under either exception. It is true that it appears included in Article 1358, last
clause, providing that "all other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one." But Article 1358 nowhere
provides that the absence of written form in this case will make the agreement
invalid or unenforceable. On the contrary, Article 1357 clearly indicates that contracts
covered by Article 1358 are binding and enforceable by action or suit despite the
absence of writing.
ART. 1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article, the contracting
parties may compel each other to observe that form, once the contract has
been perfected. This right may be exercised simultaneously with the action
the contract. (Emphasis supplied) .
It thus becomes inevitable to conclude that both the court a quo as well as the
private respondents herein were grossly mistaken in holding that because petitioner
Dauden's contract for services was not in writing the same could not be sued upon, or
that her complaint should be dismissed for failure to state a cause of action because
it did not plead any written agreement.
The basic error in the court's decision lies in overlooking that in our contractual
system it is not enough that the law should require that the contract be in writing, as
it does in Article 1358. The law must further prescribe that without the writing the
contract is not valid or not enforceable by action.
WHEREFORE, the order dismissing the complaint is set aside, and the case is ordered
remanded to the court of origin for further proceedings not at variance with this
decision.
 Costs to be solidarity paid by private respondents Hollywood Far East Productions,
Inc., and Ramon Valenzuela.

Dizon, Makalintal, Zaldivar, Sanchez, Fernando, Teehankee and Barredo, JJ., concur.
Concepcion, C.J. and Castro, J., are on leave.
Capistrano, J., took no part.

RESCISSIBLE CONTRACTS
ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners,
vs. PATERNO INQUING, IRENE GUILLERMO, FEDERICO BANTUGAN,
FERNANDO MAGBANUA and LIZZA TIANGCO, respondents.
366
 DECISION
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking reversal of the Decision[1] of the Court of Appeals dated June 25, 1999 in CA-
G.R. CV No. 53963. The Court of Appeals decision reversed and set aside the
Decision[2]dated May 13, 1996 of Branch 217 of the Regional Trial Court of Quezon
City in Civil Case No. Q-93-18582.
The case was originally filed on December 10, 1993 by Paterno Inquing, Irene
Guillermo and Federico Bantugan, herein respondents, against Rosencor
Development Corporation (hereinafter Rosencor), Rene Joaquin, and Eufrocina de
Leon. Originally, the complaint was one for annulment of absolute deed of sale but
was later amended to one for rescission of absolute deed of sale. A complaint-for
intervention was thereafter filed by respondents Fernando Magbanua and Danna
Lizza Tiangco. The complaint-in-intervention was admitted by the trial court in an
Order dated May 4, 1994.[3]
The facts of the case, as stated by the trial court and adopted by the appellate
court, are as follows:
This action was originally for the annulment of the Deed of Absolute Sale dated
September 4, 1990 between defendants Rosencor and Eufrocina de Leon but later
amended (sic) praying for the rescission of the deed of sale.
Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of a
two-story residential apartment located at No. 150 Tomas Morato Ave., Quezon City
covered by TCT No. 96161 and owned by spouses Faustino and Cresencia
Tiangco. The lease was not covered by any contract. The lessees were renting the
premises then for P150.00 a month and were allegedly verbally granted by the lessors
the pre-emptive right to purchase the property if ever they decide to sell the same.
Upon the death of the spouses Tiangcos in 1975, the management of the property
was adjudicated to their heirs who were represented by Eufrocina de Leon. The
lessees were allegedly promised the same pre-emptive right by the heirs of Tiangcos
since the latter had knowledge that this right was extended to the former by the late
spouses Tiangcos. The lessees continued to stay in the premises and allegedly spent
their own money amounting from P50,000.00 to P100,000.00 for its upkeep. These
expenses were never deducted from the rentals which already increased to
P1,000.00.
367
In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding that
they vacate the premises so that the demolition of the building be undertaken. They
refused to leave the premises. In that same month, de Leon refused to accept the
lessees rental payment claiming that they have run out of receipts and that a new
collector has been assigned to receive the payments. Thereafter, they received a
letter from Eufrocina de Leon offering to sell to them the property they were leasing
for P2,000,000.00. xxx.
The lessees offered to buy the property from de Leon for the amount of
P1,000,000.00. De Leon told them that she will be submitting the offer to the other
heirs. Since then, no answer was given by de Leon as to their offer to buy the
property. However, in November 1990, Rene Joaquin came to the leased premises
introducing himself as its new owner.
In January 1991, the lessees again received another letter from Atty. Aguila
demanding that they vacate the premises. A month thereafter, the lessees received a
letter from de Leon advising them that the heirs of the late spouses Tiangcos have
already sold the property to Rosencor. The following month Atty. Aguila wrote them
another letter demanding the rental payment and introducing herself as counsel for
Rosencor/Rene Joaquin, the new owners of the premises.
The lessees requested from de Leon why she had disregarded the pre-emptive right
she and the late Tiangcos have promised them. They also asked for a copy of the
deed of sale between her and the new owners thereof but she refused to heed their
request. In the same manner, when they asked Rene Joaquin a copy of the deed of
sale, the latter turned down their request and instead Atty. Aguila wrote them
several letters demanding that they vacate the premises. The lessees offered to
tender their rental payment to de Leon but she refused to accept the same.
In April 1992 before the demolition can be undertaken by the Buiding Official, the
barangay interceded between the parties herein after which Rosencor raised the
issue as to the rental payment of the premises. It was also at this instance that the
lessees were furnished with a copy of the Deed of Sale and discovered that they were
deceived by de Leon since the sale between her and Rene Joaquin/Rosencor took
place in September 4, 1990 while de Leon made the offer to them only in October
1990 or after the sale with Rosencor had been consummated. The lessees also noted
that the property was sold only for P726,000.00.
The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an
additional P274,000.00 to complete their P1,000.000.00 earlier offer. When their
offer was refused, they filed the present action praying for the following: a) rescission
of the Deed of Absolute Sale between de Leon and Rosencor dated September 4,
 1990; b) the defendants Rosencor/Rene Joaquin be ordered to reconvey the property
to de Leon; and c) de Leon be ordered to reimburse the plaintiffs for the repairs of
the property, or apply the said amount as part of the price for the purchase of the
property in the sum of P100,000.00.[4]
After trial on the merits, the Regional Trial Court rendered a Decision [5] dated
May 13, 1996 dismissing the complaint. The trial court held that the right of
redemption on which the complaint was based was merely an oral one and as such, is
unenforceable under the law. The dispositive portion of the May 13, 1996 Decision is
as follows:
WHEREFORE, in view of the foregoing, the Court DISMISSES the instant
action. Plaintiffs and plaintiffs-intervenors are hereby ordered to pay their respective
monthly rental of P1,000.00 per month reckoned from May 1990 up to the time they
leave the premises. No costs.
SO ORDERED.[6]
Not satisfied with the decision of the trial court, respondents herein filed a
Notice of Appeal dated June 3, 1996. On the same date, the trial court issued an
Order for the elevation of the records of the case to the Court of Appeals. On August
8, 1997, respondents filed their appellate brief before the Court of Appeals.
[7]
On June 25, 1999, the Court of Appeals rendered its decision reversing the
decision of the trial court. The dispositive portion of the June 25, 1999 decision is as
follows:
WHEREFORE, premises considered, the appealed decision (dated May 13, 1996) of
the Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93-18582 is hereby
REVERSED and SET ASIDE. In its stead, a new one is rendered ordering:
(1) The rescission of the Deed of Absolute Sale executed between the
appellees on September 4, 1990;
(2) The reconveyance of the subject premises to appellee Eufrocina de
Leon;
(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina
de Leon, to afford the appellants thirty days within which to exercise
their right of first refusal by paying the amount of ONE MILLION PESOS
(P1,000,000.00) for the subject property; and
368
(4) The appellants to, in turn, pay the appellees back rentals from May
1990 up to the time this decision is promulgated.
No pronouncement as to costs.
SO ORDERED.[8]
Petitioners herein filed a Motion for Reconsideration of the decision of the
Court of Appeals but the same was denied in a Resolution dated October 15, 1999. [9]
Hence, this petition for review on certiorari where petitioners Rosencor
Development Corporation and Rene Joaquin raise the following assignment of
errors[10]:
I.
THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE RESCISSION
OF THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA DE LEON AND
PETITIONER ROSENCOR.
II.
THE COURT OF APPEALS COMMITTED MANIFEST ERROR IN MANDATING THAT
EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY TO EXERCISE
THEIR RIGHT OF FIRST REFUSAL.
III.
THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT
RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL DESPITE
PETITIONERS RELIANCE ON THEIR DEFENSE BASED ON THE STATUTE OF
FRAUDS.
Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and
Crescencia Tiangco, did not appeal the decision of the Court of Appeals.
At the onset, we note that both the Court of Appeals and the Regional Trial
Court relied on Article 1403 of the New Civil Code, more specifically the provisions on
the statute of frauds, in coming out with their respective decisions. The trial court, in
denying the petition for reconveyance, held that right of first refusal relied upon by
petitioners was not reduced to writing and as such, is unenforceable by virtue of the
said article. The Court of Appeals, on the other hand, also held that the statute of
 frauds governs the right of first refusal claimed by respondents. However, the
appellate court ruled that respondents had duly proven the same by reason of
petitioners waiver of the protection of the statute by reason of their failure to object
to the presentation of oral evidence of the said right.
Both the appellate court and the trial court failed to discuss, however, the
threshold issue of whether or not a right of first refusal is indeed covered by the
provisions of the New Civil Code on the statute of frauds. The resolution of the issue
on the applicability of the statute of frauds is important as it will determine the type
of evidence which may be considered by the trial court as proof of the alleged right of
first refusal.
The term statute of frauds is descriptive of statutes which require certain classes
of contracts to be in writing. This statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the
formalities of the contract necessary to render it enforceable. Thus, they are included
in the provisions of the New Civil Code regarding unenforceable contracts, more
particularly Art. 1403, paragraph 2. Said article provides, as follows:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In
the following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its
contents:
a) An agreement that by its terms is not to be performed within a year from the
making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to
marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less
than five hundred pesos, unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things in action, or pay at the
369
time some part of the purchase money; but when a sale is made by auction and entry
is made by the auctioneer in his sales book, at the time of the sale, of the amount and
kind of property sold, terms of sale, price, names of purchasers and person on whose
account the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of
real property or of an interest therein;
f) A representation to the credit of a third person.
The purpose of the statute is to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witnesses by
requiring certain enumerated contracts and transactions to be evidenced by a writing
signed by the party to be charged.[11]Moreover, the statute of frauds refers to specific
kinds of transactions and cannot apply to any other transaction that is not
enumerated therein.[12] The application of such statute presupposes the existence of
a perfected contract.[13]
The question now is whether a right of first refusal is among those enumerated
in the list of contracts covered by the Statute of Frauds. More specifically, is a right of
first refusal akin to an agreement for the leasing of a longer period than one year, or
for the sale of real property or of an interest therein as contemplated by Article 1403,
par. 2(e) of the New Civil Code.
We have previously held that not all agreements affecting land must be put into
writing to attain enforceability[14]. Thus, we have held that the setting up of
boundaries,[15] the oral partition of real property[16], and an agreement creating a
right of way[17] are not covered by the provisions of the statute of frauds. The reason
simply is that these agreements are not among those enumerated in Article 1403 of
the New Civil Code.
A right of first refusal is not among those listed as unenforceable under the
statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New
Civil Code presupposes the existence of a perfected, albeit unwritten, contract of
sale.[18] A right of first refusal, such as the one involved in the instant case, is not by
any means a perfected contract of sale of real property. At best, it is a contractual
grant, not of the sale of the real property involved, but of the right of first refusal
over the property sought to be sold[19]
It is thus evident that the statute of frauds does not contemplate cases involving
a right of first refusal. As such, a right of first refusal need not be written to be
enforceable and may be proven by oral evidence.
The next question to be ascertained is whether or not respondents have
satisfactorily proven their right of first refusal over the property subject of the Deed
 of Absolute Sale dated September 4, 1990 between petitioner Rosencor and
Eufrocina de Leon.
On this point, we agree with the factual findings of the Court of Appeals that
respondents have adequately proven the existence of their right of first
refusal. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified
that they were promised by the late spouses Faustino and Crescencia Tiangco and,
later on, by their heirs a right of first refusal over the property they were currently
leasing should they decide to sell the same. Moreover, respondents presented a
letter[20] dated October 9, 1990 where Eufrocina de Leon, the representative of the
heirs of the spouses Tiangco, informed them that they had received an offer to buy
the disputed property for P2,000,000.00 and offered to sell the same to the
respondents at the same price if they were interested. Verily, if Eufrocina de Leon did
not recognize respondents right of first refusal over the property they were leasing,
then she would not have bothered to offer the property for sale to the respondents.
It must be noted that petitioners did not present evidence before the trial court
contradicting the existence of the right of first refusal of respondents over the
disputed property. They only presented petitioner Rene Joaquin, the vice-president
of petitioner Rosencor, who admitted having no personal knowledge of the details of
the sales transaction between Rosencor and the heirs of the spouses Tiangco[21] They
also dispensed with the testimony of Eufrocina de Leon [22] who could have denied the
existence or knowledge of the right of first refusal. As such, there being no evidence
to the contrary, the right of first refusal claimed by respondents was substantially
proven by respondents before the lower court.
Having ruled upon the question as to the existence of respondents right of first
refusal, the next issue to be answered is whether or not the Court of Appeals erred in
ordering the rescission of the Deed of Absolute Sale dated September 4, 1990
between Rosencor and Eufrocina de Leon and in decreeing that the heirs of the
spouses Tiangco should afford respondents the exercise of their right of first
refusal. In other words, may a contract of sale entered into in violation of a third
partys right of first refusal be rescinded in order that such third party can exercise
said right?
The issue is not one of first impression.
In Guzman, Bocaling and Co, Inc. vs. Bonnevie [23], the Court upheld the decision
of a lower court ordering the rescission of a deed of sale which violated a right of first
refusal granted to one of the parties therein. The Court held:
xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381 (3)
of the Civil Code, a contract otherwise valid may nonetheless be subsequently
370
rescinded by reason of injury to third persons, like creditors. The status of creditors
could be validly accorded the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting
parties and even to third persons, to secure reparations for damages caused to them
by a contract, even if this should be valid, by means of the restoration of things to
their condition at the moment prior to the celebration of said contract. It is a relief
allowed for the protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause, or to protect some incompatible
and preferent right created by the contract. Rescission implies a contract which, even
if initially valid, produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract
is an obstacle to the action for its rescission where it is shown that such third person
is in lawful possession of the subject of the contract and that he did not act in bad
faith. However, this rule is not applicable in the case before us because the petitioner
is not considered a third party in relation to the Contract of Sale nor may its
possession of the subject property be regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover,
the petitioner cannot be deemed a purchaser in good faith for the record shows that
it categorically admitted that it was aware of the lease in favor of the Bonnevies, who
were actually occupying the subject property at the time it was sold to it. Although
the Contract of Lease was not annotated on the transfer certificate of title in the
name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual
knowledge of such lease which was equivalent to and indeed more binding than
presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another
without notice that some other person has a right to or interest in such property
without and pays a full and fair price for the same at the time of such purchase or
before he has notice of the claim or interest of some other person in the
property. Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another. Tested by these principles, the petitioner
cannot tenably claim to be a buyer in good faith as it had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look
deeper into the agreement to determine if it involved stipulations that would
prejudice its own interests.
 Subsequently[24] in Equatorial Realty and Development, Inc. vs. Mayfair Theater,
Inc. , the Court, en banc, with three justices dissenting,[26] ordered the rescission of
[25]
a contract entered into in violation of a right of first refusal. Using the ruling
in Guzman Bocaling & Co., Inc. vs. Bonnevie as basis, the Court decreed that since
respondent therein had a right of first refusal over the said property, it could only
exercise the said right if the fraudulent sale is first set aside or rescinded. Thus:
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that
Mayfair will have the right of first refusal in the event Carmelo sells the leased
premises. It is undisputed that Carmelo did recognize this right of Mayfair, for it
informed the latter of its intention to sell the said property in 1974. There was an
exchange of letters evidencing the offer and counter-offers made by both
parties. Carmelo, however, did not pursue the exercise to its logical end. While it
initially recognized Mayfairs right of first refusal, Carmelo violated such right when
without affording its negotiations with Mayfair the full process to ripen to at least an
interface of a definite offer and a possible corresponding acceptance within the 30-
day exclusive option time granted Mayfair, Carmelo abandoned negotiations, kept a
low profile for some time, and then sold, without prior notice to Mayfair, the entire
Claro M. Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the
property in question, rescissible. We agree with respondent Appellate Court that the
records bear out the fact that Equatorial was aware of the lease contracts because its
lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot
tenably claim that to be a purchaser in good faith, and, therefore, rescission lies.
XXX
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the
rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of
Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior
to the sale. Equatorials knowledge of the stipulations therein should have cautioned
it to look further into the agreement to determine if it involved stipulations that
would prejudice its own interests.
Since Mayfair had a right of first refusal, it can exercise the right only if the fraudulent
sale is first set aside or rescinded. All of these matters are now before us and so there
should be no piecemeal determination of this case and leave festering sores to
deteriorate into endless litigation. The facts of the case and considerations of justice
and equity require that we order rescission here and now. Rescission is a relief
371
allowed for the protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause or to protect some incompatible
and preferred right by the contract. The sale of the subject real property should now
be rescinded considering that Mayfair, which had substantial interest over the subject
property, was prejudiced by the sale of the subject property to Equatorial without
Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day
stipulate period.[27]
In Paranaque Kings Enterprises, Inc. vs. Court of Appeals,[28] the Court held that
the allegations in a complaint showing violation of a contractual right of first option
or priority to buy the properties subject of the lease constitute a valid cause of action
enforceable by an action for specific performance. Summarizing the rulings in the two
previously cited cases, the Court affirmed the nature of and concomitant rights and
obligations of parties under a right of first refusal. Thus:
We hold however, that in order to have full compliance with the contractual right
granting petitioner the first option to purchase, the sale of the properties for the
amount of P9,000,000.00, the price for which they were finally sold to respondent
Raymundo, should have likewise been offered to petitioner.
The Court has made an extensive and lengthy discourse on the concept of, and
obligations under, a right of first refusal in the case of Guzman, Bocaling & Co. vs.
Bonnevie. In that case, under a contract of lease, the lessees (Raul and Christopher
Bonnevie) were given a "right of first priority" to purchase the leased property in case
the lessor (Reynoso) decided to sell. The selling price quoted to the Bonnevies was
600,000.00 to be fully paid in cash, less a mortgage lien of P100,000.00. On the other
hand, the selling price offered by Reynoso to and accepted by Guzman was only
P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to be
paid only when the property was cleared of occupants. We held that even if the
Bonnevies could not buy it at the price quoted (P600,000.00), nonetheless, Reynoso
could not sell it to another for a lower price and under more favorable terms and
conditions without first offering said favorable terms and price to the Bonnevies as
well. Only if the Bonnevies failed to exercise their right of first priority could Reynoso
thereafter lawfully sell the subject property to others, and only under the same terms
and conditions previously offered to the Bonnevies.
XXX
This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair
Theater, Inc. which was decided en banc. This Court upheld the right of first refusal of
the lessee Mayfair, and rescinded the sale of the property by the lessor Carmelo to
Equatorial Realty "considering that Mayfair, which had substantial interest over the
 subject property, was prejudiced by its sale to Equatorial without Carmelo conferring
to Mayfair every opportunity to negotiate within the 30-day stipulated period"
In that case, two contracts of lease between Carmelo and Mayfair provided "that if
the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30
days exclusive option to purchase the same." Carmelo initially offered to sell the
leased property to Mayfair for six to seven million pesos. Mayfair indicated interest in
purchasing the property though it invoked the 30-day period. Nothing was heard
thereafter from Carmelo. Four years later, the latter sold its entire Recto Avenue
property, including the leased premises, to Equatorial for P11,300,000.00 without
priorly informing Mayfair. The Court held that both Carmelo and Equatorial acted in
bad faith: Carmelo for knowingly violating the right of first option of Mayfair, and
Equatorial for purchasing the property despite being aware of the contract
stipulation. In addition to rescission of the contract of sale, the Court ordered
Carmelo to allow Mayfair to buy the subject property at the same price of
P11,300,000.00.
In the recent case of Litonjua vs. L&R Corporation,[29] the Court, also citing the
case of Guzman, Bocaling & Co. vs. Bonnevie, held that the sale made therein in
violation of a right of first refusal embodied in a mortgage contract, was
rescissible. Thus:
While petitioners question the validity of paragraph 8 of their mortgage contract,
they appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9
grants upon L&R Corporation the right of first refusal over the mortgaged property in
the event the mortgagor decides to sell the same. We see nothing wrong in this
provision. The right of first refusal has long been recognized as valid in our
jurisdiction. The consideration for the loan mortgage includes the consideration for
the right of first refusal. L&R Corporation is in effect stating that it consents to lend
out money to the spouses Litonjua provided that in case they decide to sell the
property mortgaged to it, then L&R Corporation shall be given the right to match the
offered purchase price and to buy the property at that price. Thus, while the spouses
Litonjua had every right to sell their mortgaged property to PWHAS without securing
the prior written consent of L&R Corporation, they had the obligation under
paragraph 9, which is a perfectly valid provision, to notify the latter of their intention
to sell the property and give it priority over other buyers. It is only upon the failure of
L&R Corporation to exercise its right of first refusal could the spouses Litonjua validly
sell the subject properties to the others, under the same terms and conditions
offered to L&R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporation's
372
contractual right of first refusal? On this score, we agree with the Amended Decision
of the Court of Appeals that the sale made to PWHAS is rescissible. The case
of Guzman, Bocaling & Co. v. Bonnevie is instructive on this point.
XXX
It was then held that the Contract of Sale there, which violated the right of first
refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted
to L & R Corporation over the subject properties since the Deed of Real Estate
Mortgage containing such a provision was duly registered with the Register of
Deeds. As such, PWHAS is presumed to have been notified thereof by registration,
which equates to notice to the whole world.
XXX
All things considered, what then are the relative rights and obligations of the
parties? To recapitulate: the sale between the spouses Litonjua and PWHAS is valid,
notwithstanding the absence of L & R Corporation's prior written consent
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender
of the redemption price, as successor-in-interest of the spouses Litonjua, within the
one-year period should have been accepted as valid by the L & R
Corporation. However, while the sale is, indeed, valid, the same is rescissible because
it ignored L & R Corporation's right of first refusal.
Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract
of sale entered into in violation of a right of first refusal of another person, while
valid, is rescissible.
There is, however, a circumstance which prevents the application of this
doctrine in the case at bench. In the cases cited above, the Court ordered the
rescission of sales made in violation of a right of first refusal precisely because the
vendees therein could not have acted in good faith as they were aware or should
have been aware of the right of first refusal granted to another person by the
vendors therein. The rationale for this is found in the provisions of the New Civil Code
on rescissible contracts. Under Article 1381 of the New Civil Code, paragraph 3, a
contract validly agreed upon may be rescinded if it is undertaken in fraud of creditors
when the latter cannot in any manner collect the claim due them. Moreover, under
Article 1385, rescission shall not take place when the things which are the object of
the contract are legally in the possession of third persons who did not act in bad
faith.[30]
 It must be borne in mind that, unlike the cases cited above, the right of first
refusal involved in the instant case was an oral one given to respondents by the
deceased spouses Tiangco and subsequently recognized by their heirs. As such, in
order to hold that petitioners were in bad faith, there must be clear and convincing
proof that petitioners were made aware of the said right of first refusal either by the
respondents or by the heirs of the spouses Tiangco.
It is axiomatic that good faith is always presumed unless contrary evidence is
adduced.[31] A purchaser in good faith is one who buys the property of another
without notice that some other person has a right or interest in such a property and
pays a full and fair price at the time of the purchase or before he has notice of the
claim or interest of some other person in the property. [32] In this regard, the rule on
constructive notice would be inapplicable as it is undisputed that the right of first
refusal was an oral one and that the same was never reduced to writing, much less
registered with the Registry of Deeds. In fact, even the lease contract by which
respondents derive their right to possess the property involved was an oral one.
On this point, we hold that the evidence on record fails to show that petitioners
acted in bad faith in entering into the deed of sale over the disputed property with
the heirs of the spouses Tiangco. Respondents failed to present any evidence that
prior to the sale of the property on September 4, 1990, petitioners were aware or
had notice of the oral right of first refusal.
Respondents point to the letter dated June 1, 1990[33] as indicative of petitioners
knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila demanded
that respondent Irene Guillermo vacate the structure they were occupying to make
way for its demolition.
We fail to see how the letter could give rise to bad faith on the part of the
petitioner. No mention is made of the right of first refusal granted to
respondents. The name of petitioner Rosencor or any of it officers did not appear on
the letter and the letter did not state that Atty. Aguila was writing in behalf of
petitioner. In fact, Atty. Aguila stated during trial that she wrote the letter in behalf of
the heirs of the spouses Tiangco. Moreover, even assuming that Atty. Aguila was
indeed writing in behalf of petitioner Rosencor, there is no showing that Rosencor
was aware at that time that such a right of first refusal existed.
Neither was there any showing that after receipt of this June 1, 1990 letter,
respondents notified Rosencor or Atty. Aguila of their right of first refusal over the
property. Respondents did not try to communicate with Atty. Aguila and inform her
about their preferential right over the disputed property. There is even no showing
that they contacted the heirs of the spouses Tiangco after they received this letter to
remind them of their right over the property.
373
Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de
Leon, where she recognized the right of first refusal of respondents, as indicative of
the bad faith of petitioners. We do not agree. Eufrocina de Leon wrote the letter on
her own behalf and not on behalf of petitioners and, as such, it only shows that
Eufrocina de Leon was aware of the existence of the oral right of first refusal. It does
not show that petitioners were likewise aware of the existence of the said
right. Moreover, the letter was made a month after the execution of the Deed of
Absolute Sale on September 4, 1990 between petitioner Rosencor and the heirs of
the spouses Tiangco. There is no showing that prior to the date of the execution of
the said Deed, petitioners were put on notice of the existence of the right of first
refusal.
Clearly, if there was any indication of bad faith based on respondents evidence,
it would only be on the part of Eufrocina de Leon as she was aware of the right of first
refusal of respondents yet she still sold the disputed property to Rosencor. However,
bad faith on the part of Eufrocina de Leon does not mean that petitioner Rosencor
likewise acted in bad faith. There is no showing that prior to the execution of the
Deed of Absolute Sale, petitioners were made aware or put on notice of the existence
of the oral right of first refusal. Thus, absent clear and convincing evidence to the
contrary, petitioner Rosencor will be presumed to have acted in good faith in
entering into the Deed of Absolute Sale over the disputed property.
Considering that there is no showing of bad faith on the part of the petitioners,
the Court of Appeals thus erred in ordering the rescission of the Deed of Absolute
Sale dated September 4, 1990 between petitioner Rosencor and the heirs of the
spouses Tiangco. The acquisition by Rosencor of the property subject of the right of
first refusal is an obstacle to the action for its rescission where, as in this case, it was
shown that Rosencor is in lawful possession of the subject of the contract and that it
did not act in bad faith.[34]
This does not mean however that respondents are left without any remedy for
the unjustified violation of their right of first refusal. Their remedy however is not an
action for the rescission of the Deed of Absolute Sale but an action for damages
against the heirs of the spouses Tiangco for the unjustified disregard of their right of
first refusal[35].
WHEREFORE, premises considered, the decision of the Court of Appeals dated
June 25, 1999 is REVERSED and SET ASIDE. The Decision dated May 13, 1996 of the
Quezon City Regional Trial Court, Branch 217 is hereby REINSTATED insofar as it
dismisses the action for rescission of the Deed of Absolute Sale dated September 4,
1990 and orders the payment of monthly rentals of P1,000.00 per month reckoned
from May 1990 up to the time respondents leave the premises.
SO ORDERED.
 G.R. No. 86150 March 2, 1992

GUZMAN, BOCALING & CO., petitioner,

vs.
RAOUL S. V. BONNEVIE, respondent.

E. Voltaire Garcia for petitioner.

Guinto Law Office for private respondent.

CRUZ, J.:

The subject of the controversy is a parcel of land measuring six hundred (600) square
meters, more or less, with two buildings constructed thereon, belonging to the
Intestate Estate of Jose L. Reynoso.

This property was leased to Raoul S. Bonnevie and Christopher Bonnevie by the
administratrix, Africa Valdez de Reynoso, for a period of one year beginning August 8,
1976, at a monthly rental of P4,000.00.

The Contract of lease contained the following stipulation:

20. — In case the LESSOR desire or decides to sell the lease

property, the LESSEES shall be given a first priority to purchase the
same, all things and considerations being equal.

On November 3, 1976 according to Reynoso, she notified the private respondents by

374

registered mail that she was selling the leased premises for P600.000.00 less a
 mortgage loan of P100,000.00, and was giving them 30 days from receipt of the letter
within which to exercise their right of first priority to purchase the subject property.
She said that in the event that they did not exercise the said right, she would expect
them to vacate the property not later then March, 1977.
On January 20, 1977, Reynoso sent another letter to private respondents advising
them that in view of their failure to exercise their right of first priority, she had
already sold the property.
Upon receipt of this letter, the private respondents wrote Reynoso informing her that
neither of them had received her letter dated November 3, 1976; that they had
advised her agent to inform them officially should she decide to sell the property so
negotiations could be initiated; and that they were "constrained to refuse (her)
request for the termination of the lease.
On March 7, 1977, the leased premises were formally sold to petitioner Guzman,
Bocaling & Co. The Contract of Sale provided for immediate payment of P137,500.00
on the purchase price, the balance of P262,500.00 to be paid only when the premises
were vacated.
On April 12, 1977, Reynoso wrote a letter to the private respondents demanding that
they vacate the premises within 15 days for their failure to pay the rentals for four
months. When they refuse, Reynoso filed a complaint for ejectment against them
which was docketed as Civil Case No. 043851-CV in the then City Court of Manila.
On September 25, 1979, the parties submitted a Compromise Agreement, which
provided inter alia that "the defendant Raoul S.V. Bonnevie shall vacate the premises
subject of the Lease Contract, Voluntarily and Peacefully not later than October 31,
1979."
This agreement was approved by the City Court and became the basis of its decision.
However, as the private respondents failed to comply with the above-qouted
stipulation, Reynoso filed a motion for execution of the judgment by compromise,
which was granted on November 8, 1979.
On November 12, 1979, private respondent Raoul S. Bonnevie filed a motion to set
aside the decision of the City Court as well as the Compromise Agreement on the sole
ground that Reynoso had not delivered to him the "records of payments and receipts
of all rentals by or for the account of defendant ..." The motion was denied and the
case was elevated to the then Court of First Instance. That Court remanded the case
375
to the City Court of Manila for trial on the merits after both parties had agreed to set
aside the Compromise Agreement.
On April 29, 1980, while the ejectment case was pending in the City Court, the private
respondents filed an action for annulment of the sale between Reynoso and herein
petitioner Guzman, Bocaling & Co. and cancellation of the transfer certificate of title
in the name of the latter. They also asked that Reynoso be required to sell the
property to them under the same terms ands conditions agreed upon in the Contract
of Sale in favor of the petitioner This complaint was docketed as Civil Case No.
131461 in the then Court of First Instance of Manila.
On May 5, 1980, the City Court decided the ejectment case, disposing as follows:
WHEREFORE, judgment is hereby rendered ordering defendants
and all persons holding under them to vacate the premises at No.
658 Gen. Malvar Street, Malate, Manila, subject of this action, and
deliver possession thereof to the plaintiff, and to pay to the latter;
(1) The sum of P4,000.00 a month from April 1, 1977 to August 8,
1977; (2) The sum of P7,000.00 a month, as reasonable
compensation for the continued unlawful use and occupation of
said premises, from August 9, 1977 and every month thereafter
until defendants actually vacate and deliver possession thereof to
the plaintiff; (3) The sum of P1,000.00 as and for attorney's fees;
and (4) The costs of suit.
The decision was appealed to the then Court of First Instance of Manila, docketed as
Civil Case No. 132634 and consolidated with Civil Case No. 131461. In due time, Judge
Tomas P. Maddela, Jr., decided the two cases as follows:
WHEREFORE, premises considered, this Court in Civil Case No.
132634 hereby modifies the decision of the lower court as follows:
1 Ordering defendants Raoul S.V. Bonnevie and Christopher
Bonnevie and all persons holding under them to vacate the
premises at No. 658 Gen. Malvar St., Malate, Manila subject of this
action and deliver possessions thereof to the plaintiff; and
2 To pay the latter the sum of P4,000.00 a month from April 1, 1977
up to September 21, 1980 (when possession of the premises was
turned over to the Sheriff) after deducting whatever payments
were made and accepted by Mrs. Africa Valdez Vda. de Reynoso
during said period, without pronouncement as to costs.
As to Civil Case No. 131461, the Court hereby renders judgment in
favor of the plaintiff Raoul Bonnevie as against the defendants
 Africa Valdez Vda. de Reynoso and Guzman and Bocaling & Co.
declaring the deed of sale with mortgage executed by defendant
Africa Valdez Vda. de Reynoso in favor of defendant Guzman and
Bocaling null and void; cancelling the Certificate of Title No. 125914
issued by the Register of Deeds of Manila in the name of Guzman
and Bocaling & Co.,; the name of Guzman and Bocaling & Co.,;
ordering the defendant Africa Valdez Vda. de Reynoso to execute
favor of the plaintiff Raoul Bonnevie a deed of sale with mortgage
over the property leased by him in the amount of P400,000.00
under the same terms and conditions should there be any other
occupants or tenants in the premises; ordering the defendants
jointly and severally to pay the plaintiff Raoul Bonnevie the amount
of P50,000.00 as temperate damages; to pay the plaintiff jointly and
severally the of P2,000.00 per month from the time the property
was sold to defendant Guzman and Bocaling by defendant Africa
Valdez Vda de Reynoso on March 7, 1977, up to the execution of a
deed of sale of the property by defendant Africa Valdez Vda. de
Reynoso in favor of plaintiff Bonnevie; to pay jointly and severally
the plaintiff Bonnevie the amount of P20,000.00 as exemplary
damages, for attorney's fees in the amount of P10,000.00, and to
pay the cost of suit.
Both Reynoso and the petitioner company filed with the Court of Appeals a petition
for review of this decision. The appeal was eventually resolved against them in a
decision promulgated on March 16, 1988, where the respondent court substantially
affirmed the conclusions of the lower court but reduced the award of damages. 1
Its motion for reconsideration having been denied on December 14, 1986, the
petitioner has come to this Court asserting inter alia that the respondent court erred
in ruling that the grant of first priority to purchase the subject properties by the
judicial administratrix needed no authority from the probate court; holding that the
Contract of Sale was not voidable but rescissible; considering the petitioner as a
buyer in bad faith ordering Reynoso to execute the deed of sale in favor of the
Bonnevie; and not passing upon the counterclaim. Reynoso has not appealed.
The Court has examined the petitioner's contentions and finds them to be untenable.
Reynoso claimed to have sent the November 3, 1976 letter by registered mail, but the
registry return card was not offered in evidence. What she presented instead was a
copy of the said letter with a photocopy of only the face of a registry return card
claimed to refer to the said letter. A copy of the other side of the card showing the
376
signature of the person who received the letter and the data of the receipt was not
submitted. There is thus no satisfactory proof that the letter was received by the
Bonnevies.
Even if the letter had indeed been sent to and received by the private respondent and
they did not exercise their right of first priority, Reynoso would still be guilty of
violating Paragraph 20 of the Contract of Lease which specifically stated that the
private respondents could exercise the right of first priority, "all things and conditions
being equal." The Court reads this mean that there should be identity of the terms
and conditions to be offered to the Bonnevies and all other prospective buyers, with
the Bonnevies to enjoy the right of first priority.
The selling price qouted to the Bonnevies was P600,000.00, to be fully paid in cash
less only the mortgage lien of P100,000.00. 2 On the other hand, the selling price
offered to and accepted by the petitioner was only P400,000.00 and only
P137,500.00 was paid in cash while the balance of P272,500.00 was to be paid "when
the property (was) cleared of tenants or occupants. 3
The fact that the Bonnevies had financial problems at that time was no justification
for denying them the first option to buy the subject property. Even if the Bonnevies
could not buy it at the price qouted, Reynoso could not sell it to another for a lower
price and under more favorable terms and conditions. Only if the Bonnevies failed to
exercise their right of first priority could Reynoso lawfully sell the subject property to
others, and at that only under the same terms and conditions offered to the
Bonnevies.
The Court agrees with the respondent court that it was not necessary to secure the
approval by the probate court of the Contract of Lease because it did not involve an
alienation of real property of the estate nor did the term of the lease exceed one year
so as top make it fall under Article 1878(8) of the Civil Code. Only if Paragraph 20 of
the Contract of Lease was activated and the said property was intended to be sold
would it be required of the administratrix to secure the approval of the probate court
pursuant to Rule 89 of the Rules of Court.
As a strict legal proposition, no judgment of the probate court was reviewed and
eventually annuled collaterally by the respondent court as contended by the
petitioner. The order authorizing the sale in its favor was duly issued by the probate
court, which thereafter approved the Contract of Sale resulting in the eventual
issuance if title in favor of the petitioner. That order was valid insofar as it recognized
the existence of all the essential elements of a valid contract of sale, but without
regard to the special provision in the Contract of Lease giving another party the right
of first priority.
 Even if the order of the probate court was valid, the private respondents still had a
right to rescind the Contract of Sale because of the failure of Reynoso to comply with
her duty to give them the first opportunity to purchase the subject property.
The petitioner argues that assuming the Contract of Sale to be voidable, only the
parties thereto could bring an action to annul it pursuant to Article 1397 of the Civil
Code. It is stressed that private respondents are strangers to the agreement and
therefore have no personality to seek its annulment.
The respondent court correctly held that the Contract of Sale was not
voidable rescissible. Under Article 1380 to 1381 (3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury to
third persons, like creditors. The status of creditors could be validly accorded the
Bonnevies for they had substantial interests that were prejudiced by the sale of the
subject property to the petitioner without recognizing their right of first priority
under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting
parties and even to third persons, to secure reparation for damages caused to them
by a contract, even if this should be valid, by means of the restoration of things to
their condition at the moment prior to the celebration of said contract. 4 It is a relief
allowed for the protection of one of the contracting parties and even third
persons from all injury and damage the contract may cause, or to protect some
incompatible and preferent right created by the contract. 5 Recission implies a
contract which, even if initially valid, produces a lesion or pecuniary damage to
someone that justifies its invalidation for reasons of equity. 6
It is true that the acquisition by a third person of the property subject of the contract
is an obstacle to the action for its rescission where it is shown that such third person
is in lawful possession of the subject of the contract and that he did not act in bad
faith. 7 However, this rule is not applicable in the case before us because the
petitioner is not considered a third party in relation to the Contract of Sale nor may
its possession of the subject property be regarded as acquired lawfully and in good
faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover,
the petitioner cannot be deemed a purchaser in good faith for the record shows that
its categorically admitted it was aware of the lease in favor of the Bonnevies, who
were actually occupying the subject property at the time it was sold to it. Although
the Contract of Lease was not annotated on the transfer certificate of title in the
name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual
377
knowledge of such lease which was equivalent to and indeed more binding than
presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another
without notice that some other person has a right to or interest in such property and
pays a full and fair price for the same at the time of such purchase or before he has
notice of the claim or interest of some other person in the property. 8 Good faith
connotes an honest intention to abstain from taking unconscientious advantage of
another. 9 Tested by these principles, the petitioner cannot tenably claim to be a
buyer in good faith as it had notice of the lease of the property by the Bonnevies and
such knowledge should have cautioned it to look deeper into the agreement to
determine if it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the
Contract of Lease, Assuming this to be true, we nevertherless agree with the
observation of the respondent court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease
Contract, which includes Par. 20 on priority right given to the
Bonnevies, it had only itself to blame. Having known that the
property it was buying was under lease, it behooved it as a prudent
person to have required Reynoso or the broker to show to it the
Contract of Lease in which Par. 20 is contained.
Finally, the petitioner also cannot invoke the Compromise Agreement which it says
canceled the right of first priority granted to the Bonnevies by the Contract of Lease.
This agreement was set side by the parties thereto, resulting in the restoration of the
original rights of the private respondents under the Contract of Lease. The Joint
Motion to Remand filed by Reynoso and the private respondents clearly
declared inter alia:
That without going into the merits of instant petition, the parties
have agreed to SET ASIDE the compromise agreement, dated
September 24, 1979 and remand Civil Case No. 043851 of the City
Court of Manila to Branch IX thereof for trial on the merits. 10
We find, in sum, that the respondent court did not commit the errors imputed to it by
the petitioner. On the contrary, its decision is conformable to the established facts
and the applicable law and jurisprudence and so must be sustained.
WHEREFORE, the petition in DENIED, with costs against the petitioner. The challeged
decision is AFFIRMED in toto. It is so ordered.
 Narvasa, C.J., Griño-Aquino and Medialdea, JJ., concur. BENJAMIN F. CID, BERNARD G. BANTA, and DEL CASTILLO, and
ARMANDO GABRIEL, JR.,
PEREZ, JJ.
Respondents.

Promulgated:

June 29, 2010

x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

In this Petition for Review[1] under Rule 45 of the Rules of

Court, Anthony Ordua, Dennis Ordua and Antonita Ordua assail and seek to set aside
the Decision[2] of the Court of Appeals (CA) dated December 4, 2006 in CA-G.R. CV No.
79680, as reiterated in its Resolution of March 6, 2007, which affirmed the May 26,
2003 Decision[3] of the Regional Trial Court (RTC), Branch 3 in Baguio City, in Civil Case
No. 4984-R, a suit for annulment of title and reconveyance commenced by herein
UNENFORCABLE CONTRACTS
petitioners against herein respondents.
ANTHONY ORDUA, DENNIS ORDUA, and ANTONITA G.R. No. 176841
Central to the case is a residential lot with an area of 74 square meters
ORDUA,
located at Fairview Subdivision, Baguio City, originally registered in the name of
Armando Gabriel, Sr. (Gabriel Sr.) under Transfer Certificate of Title (TCT) No. 67181
Petitioners, of the Registry of Deeds of Baguio City.[4]
Present:
As gathered from the petition, with its enclosures, and the comments
thereon of four of the five respondents, [5] the Court gathers the following relevant
- versus - facts:
CORONA, C.J., Chairperson,
Sometime in 1996 or thereabouts, Gabriel Sr. sold the subject lot to
VELASCO, JR., petitioner Antonita Ordua (Antonita), but no formal deed was executed to document
the sale. The contract price was apparently payable in installments as Antonita
LEONARDO-DE CASTRO, remitted from time to time and Gabriel Sr. accepted partial payments. One of the
378

EDUARDO J. FUENTEBELLA, MARCOS S. CID,

 Orduas would later testify that Gabriel Sr. agreed to execute a final deed of sale upon
full payment of the purchase price.[6]
As early as 1979, however, Antonita and her sons, Dennis and Anthony
Ordua, were already occupying the subject lot on the basis of some arrangement
undisclosed in the records and even constructed their house thereon. They also paid
real property taxes for the house and declared it for tax purposes, as evidenced by
Tax Declaration No. (TD) 96-04012-111087[7] in which they place the assessed value
of the structure at PhP 20,090.
After the death of Gabriel Sr., his son and namesake, respondent Gabriel Jr.,
secured TCT No. T-71499[8] over the subject lot and continued accepting payments
from the petitioners. On December 12, 1996, Gabriel Jr. wrote Antonita authorizing
her to fence off the said lot and to construct a road in the adjacent lot.[9] On
December 13, 1996, Gabriel Jr. acknowledged receipt of a PhP 40,000 payment from
petitioners.[10] Through a letter[11] dated May 1, 1997, Gabriel Jr. acknowledged that
petitioner had so far made an aggregate payment of PhP 65,000, leaving an
outstanding balance of PhP 60,000. A receipt Gabriel Jr. issued dated November 24,
1997 reflected a PhP 10,000 payment.
Despite all those payments made for the subject lot, Gabriel Jr. would later
sell it to Bernard Banta (Bernard) obviously without the knowledge of petitioners, as
later developments would show.
As narrated by the RTC, the lot conveyance from Gabriel Jr. to Bernard was
effected against the following backdrop: Badly in need of money, Gabriel Jr.
borrowed from Bernard the amount of PhP 50,000, payable in two weeks at a fixed
interest rate, with the further condition that the subject lot would answer for the
loan in case of default. Gabriel Jr. failed to pay the loan and this led to the execution
of a Deed of Sale[12] dated June 30, 1999 and the issuance later of TCT No. T-
72782[13] for subject lot in the name of Bernard upon cancellation of TCT No. 71499 in
the name of Gabriel, Jr. As the RTC decision indicated, the reluctant Bernard agreed
to acquire the lot, since he had by then ready buyers in respondents Marcos Cid and
Benjamin F. Cid (Marcos and Benjamin or the Cids).
Subsequently, Bernard sold to the Cids the subject lot for PhP 80,000. Armed
with a Deed of Absolute Sale of a Registered Land[14] dated January 19, 2000, the Cids
were able to cancel TCT No. T-72782 and secure TCT No. 72783[15] covering the
subject lot. Just like in the immediately preceding transaction, the deed of sale
379
between Bernard and the Cids had respondent Eduardo J. Fuentebella (Eduardo) as
one of the instrumental witnesses.
Marcos and Benjamin, in turn, ceded the subject lot to Eduardo through a
Deed of Absolute Sale[16] dated May 11, 2000. Thus, the consequent cancellation of
TCT No. T-72782 and issuance on May 16, 2000 of TCT No. T-3276[17] over subject lot
in the name of Eduardo.
As successive buyers of the subject lot, Bernard, then Marcos and Benjamin,
and finally Eduardo, checked, so each claimed, the title of their respective
predecessors-in-interest with the Baguio Registry and discovered said title to be free
and unencumbered at the time each purchased the property. Furthermore,
respondent Eduardo, before buying the property, was said to have inspected the
same and found it unoccupied by the Orduas.[18]
Sometime in May 2000, or shortly after his purchase of the subject lot,
Eduardo, through his lawyer, sent a letter addressed to the residence of Gabriel Jr.
demanding that all persons residing on or physically occupying the subject lot vacate
the premises or face the prospect of being ejected.[19]
Learning of Eduardos threat, petitioners went to the residence of Gabriel Jr.
at No. 34 Dominican Hill, Baguio City. There, they met Gabriel Jr.s estranged wife,
Teresita, who informed them about her having filed an affidavit-complaint against
her husband and the Cids for falsification of public documents on March 30, 2000.
According to Teresita, her signature on the June 30, 1999 Gabriel Jr.Bernard deed of
sale was a forgery. Teresita further informed the petitioners of her intent to honor
the aforementioned 1996 verbal agreement between Gabriel Sr. and Antonita and
the partial payments they gave her father-in-law and her husband for the subject lot.
On July 3, 2001, petitioners, joined by Teresita, filed a
Complaint[20] for Annulment of Title, Reconveyance with Damages against the
respondents before the RTC, docketed as Civil Case No. 4984-R, specifically praying
that TCT No. T-3276 dated May 16, 2000 in the name of Eduardo be annulled.
Corollary to this prayer, petitioners pleaded that Gabriel Jr.s title to the lot be
reinstated and that petitioners be declared as entitled to acquire ownership of the
same upon payment of the remaining balance of the purchase price therefor agreed
upon by Gabriel Sr. and Antonita.
While impleaded and served with summons, Gabriel Jr. opted not to submit
an answer.
 Ruling of the RTC
By Decision dated May 26, 2003, the RTC ruled for the respondents, as
defendants a quo, and against the petitioners, as plaintiffs therein, the dispositive
portion of which reads:
4. Petitioners right of action to assail Eduardos title prescribes in one year
from date of the issuance of such title and the one-year period has already lapsed.
From the above decision, only petitioners appealed to the CA, their appeal
docketed as CA-G.R. CV No. 79680.

WHEREFORE, the instant complaint is hereby DISMISSED for lack of The CA Ruling
merit. The four (4) plaintiffs are hereby ordered by this Court to
pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, On December 4, 2006, the appellate court rendered the assailed Decision
and Eduardo J. Fuentebella who did not testify on these affirming the RTC decision. The fallo reads:
damages), Moral Damages of Twenty Thousand (P20,000.00) Pesos,
so that each defendant shall receive Moral Damages of Eighty WHEREFORE, premises considered, the instant appeal is
Thousand (P80,000.00) Pesos each. Plaintiffs shall also pay all hereby DISMISSED and the 26 May 2003 Decision of the Regional
defendants (except Armando Gabriel, Jr., Benjamin F. Cid, and Trial Court, Branch 3 of Baguio City in Civil Case No. 4989-R is
Eduardo J. Fuentebella who did not testify on these damages), hereby AFFIRMED.
Exemplary Damages of Ten Thousand (P10,000.00) Pesos each so
that each defendant shall receive Forty Thousand (P40,000.00)
SO ORDERED.[25]
Pesos as Exemplary Damages. Also, plaintiffs are ordered to
pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid,
Hence, the instant petition on the submission that the appellate court committed
and Eduardo J. Fuentebella who did not testify on these damages),
reversible error of law:
Fifty Thousand (P50,000.00) Pesos as Attorneys Fees, jointly and
solidarily.
1. xxx WHEN IT HELD THAT THE SALE OF THE
SUBJECT LOT BY ARMANDO GABRIEL, SR. AND
Cost of suit against the plaintiffs.[21]
RESPONDENT ARMANDO GABRIEL, JR. TO THE
PETITIONERS IS UNENFORCEABLE
On the main, the RTC predicated its dismissal action on the basis of the following
grounds and/or premises:
2. xxx IN NOT FINDING THAT THE SALE OF THE
SUBJECT LOT BY RESPONDENT ARMANDO GABRIEL, JR. TO
RESPONDENT BERNARD BANTA AND ITS
SUBSEQUENT SALE BY THE LATTER TO HIS CO-
RESPONDENTS ARE NULL AND VOID.

1. Eduardo was a purchaser in good faith and, hence, may avail himself of 3. xxx IN NOT FINDING THAT THE RESPONDENTS
the provision of Article 1544[22] of the Civil Code, which provides that in case of ARE BUYERS IN BAD FAITH
double sale, the party in good faith who is able to register the property has better
right over the property;
4. xxx IN FINDING THAT THE SALE OF THE SUBJECT
LOT BETWEEN GABRIEL, SR. AND RESPONDENT GABRIEL,
2. Under Arts. 1356[23] and 1358[24] of the Code, conveyance of real property JR. AND THE PETITIONERS HAS NO ADEQUATE
must be in the proper form, else it is unenforceable; CONSIDERATION.
380

3. The verbal sale had no adequate consideration; and

 5. xxx IN RULING THAT THE INSTANT ACTION HAD
ALREADY PRESCRIBED.
6. xxx IN FINDING THAT THE PLAINTIFFS-
APPELLANTS ARE LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEYS FEES.[26]
The Courts Ruling
The core issues tendered in this appeal may be reduced to four and
formulated as follows, to wit: first, whether or not the sale of the subject lot by
Gabriel Sr. to Antonita is unenforceable under the Statute of Frauds; second, whether
or not such sale has adequate consideration; third, whether the instant action has
already prescribed; and, fourth, whether or not respondents are purchasers in good
faith.
The petition is meritorious.
Statute of Frauds Inapplicable
to Partially Executed Contracts
It is undisputed that Gabriel Sr., during his lifetime, sold the subject property
to Antonita, the purchase price payable on installment basis. Gabriel Sr. appeared to
have been a recipient of some partial payments. After his death, his son duly
recognized the sale by accepting payments and issuing what may be considered as
receipts therefor. Gabriel Jr., in a gesture virtually acknowledging the petitioners
dominion of the property, authorized them to construct a fence around it. And no
less than his wife, Teresita, testified as to the fact of sale and of payments received.
Pursuant to such sale, Antonita and her two sons established their residence
on the lot, occupying the house they earlier constructed thereon. They later declared
the property for tax purposes, as evidenced by the issuance of TD 96-04012-111087
in their or Antonitas name, and paid the real estates due thereon, obviously as sign
that they are occupying the lot in the concept of owners.
381
Given the foregoing perspective, Eduardos assertion in his Answer that
persons appeared in the property[27] only after he initiated ejectment
proceedings[28] is clearly baseless. If indeed petitioners entered and took possession
of the property after he (Eduardo) instituted the ejectment suit, how could they
explain the fact that he sent a demand letter to vacate sometime in May 2000?
With the foregoing factual antecedents, the question to be resolved is
whether or not the Statute of Frauds bars the enforcement of the verbal sale contract
between Gabriel Sr. and Antonita.
The CA, just as the RTC, ruled that the contract is unenforceable for non-
compliance with the Statute of Frauds.
We disagree for several reasons. Foremost of these is that the Statute of
Frauds expressed in Article 1403, par. (2),[29] of the Civil Code applies only to
executory contracts, i.e., those where no performance has yet been made. Stated a
bit differently, the legal consequence of non-compliance with the Statute does not
come into play where the contract in question is completed, executed, or partially
consummated.[30]
The Statute of Frauds, in context, provides that a contract for the sale of real
property or of an interest therein shall be unenforceable unless the sale or some note
or memorandum thereof is in writing and subscribed by the party or his
agent.However, where the verbal contract of sale has been partially executed
through the partial payments made by one party duly received by the vendor, as in
the present case, the contract is taken out of the scope of the Statute.
The purpose of the Statute is to prevent fraud and perjury in the
enforcement of obligations depending for their evidence on the unassisted memory
of witnesses, by requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged.[31] The Statute requires
certain contracts to be evidenced by some note or memorandum in order to be
enforceable. The term Statute of Frauds is descriptive of statutes that require certain
classes of contracts to be in writing. The Statute does not deprive the parties of the
right to contract with respect to the matters therein involved, but merely regulates
the formalities of the contract necessary to render it enforceable.[32]
 Since contracts are generally obligatory in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present,[33] the Statute simply provides the method by which the contracts
enumerated in Art. 1403 (2) may be proved but does not declare them
invalid because they are not reduced to writing. In fine, the form required under the
Statute is for convenience or evidentiary purposes only.
There can be no serious argument about the partial execution of the sale in
question. The records show that petitioners had, on separate occasions, given Gabriel
Sr. and Gabriel Jr. sums of money as partial payments of the purchase price. These
payments were duly receipted by Gabriel Jr. To recall, in his letter of May 1, 1997,
Gabriel, Jr. acknowledged having received the aggregate payment of PhP 65,000 from
petitioners with the balance of PhP 60,000 still remaining unpaid. But on top of the
partial payments thus made, possession of the subject of the sale had been
transferred to Antonita as buyer. Owing thus to its partial execution, the subject sale
is no longer within the purview of the Statute of Frauds.
Lest it be overlooked, a contract that infringes the Statute of Frauds is
ratified by the acceptance of benefits under the contract. [34] Evidently, Gabriel, Jr., as
his father earlier, had benefited from the partial payments made by the petitioners.
Thus, neither Gabriel Jr. nor the other respondentssuccessive purchasers of subject
lotscould plausibly set up the Statute of Frauds to thwart petitioners efforts towards
establishing their lawful right over the subject lot and removing any cloud in their
title. As it were, petitioners need only to pay the outstanding balance of the purchase
price and that would complete the execution of the oral sale.
There was Adequate Consideration
Without directly saying so, the trial court held that the petitioners cannot
sue upon the oral sale since in its own words: x x x for more than a decade,
[petitioners] have not paid in full Armando Gabriel, Sr. or his estate, so that the sale
transaction between Armando Gabriel Sr. and [petitioners] [has] no adequate
consideration.
The trial courts posture, with which the CA effectively concurred, is patently
flawed. For starters, they equated incomplete payment of the purchase price with
inadequacy of price or what passes as lesion, when both are different civil law
concepts with differing legal consequences, the first being a ground to rescind an
otherwise valid and enforceable contract. Perceived inadequacy of price, on the other
hand, is not a sufficient ground for setting aside a sale freely entered into, save
perhaps when the inadequacy is shocking to the conscience. [35]
382
The Court to be sure takes stock of the fact that the contracting parties to
the 1995 or 1996 sale agreed to a purchase price of PhP 125,000 payable on
installments. But the original lot owner, Gabriel Sr., died before full payment can be
effected. Nevertheless, petitioners continued remitting payments to Gabriel, Jr., who
sold the subject lot to Bernard on June 30, 1999. Gabriel, Jr., as may be noted, parted
with the property only for PhP 50,000. On the other hand, Bernard sold it for PhP
80,000 to Marcos and Benjamin. From the foregoing price figures, what is abundantly
clear is that what Antonita agreed to pay Gabriel, Sr., albeit in installment, was very
much more than what his son, for the same lot, received from his buyer and the
latters buyer later. The Court, therefore, cannot see its way clear as to how the RTC
arrived at its simplistic conclusion about the transaction between Gabriel Sr. and
Antonita being without adequate consideration.
The Issues of Prescription and the Bona
Fides of the Respondents as Purchasers
Considering the interrelation of these two issues, we will discuss them
jointly.
There can be no quibbling about the fraudulent nature of the conveyance of
the subject lot effected by Gabriel Jr. in favor of Bernard. It is understandable that
after his fathers death, Gabriel Jr. inherited subject lot and for which he was issued
TCT No. No. T-71499. Since the Gabriel Sr. Antonita sales transaction called for
payment of the contract price in installments, it is also understandable why the title
to the property remained with the Gabriels. And after the demise of his father,
Gabriel Jr. received payments from the Orduas and even authorized them to enclose
the subject lot with a fence. In sum, Gabriel Jr. knew fully well about the sale and is
bound by the contract as predecessor-in-interest of Gabriel Sr. over the property thus
sold.
Yet, the other respondents (purchasers of subject lot) still maintain that they
are innocent purchasers for value whose rights are protected by law and besides
which prescription has set in against petitioners action for annulment of title and
reconveyance.
 The RTC and necessarily the CA found the purchaser-respondents thesis on
prescription correct stating in this regard that Eduardos TCT No. T-3276 was issued on
May 16, 2000 while petitioners filed their complaint for annulment only on July 3,
2001. To the courts below, the one-year prescriptive period to assail the issuance of a
certificate of title had already elapsed.
We are not persuaded.
The basic complaint, as couched, ultimately seeks the reconveyance of a
fraudulently registered piece of residential land. Having possession of the subject lot,
petitioners right to the reconveyance thereof, and the annulment of the covering
title, has not prescribed or is not time-barred. This is so for an action for annulment
of title or reconveyance based on fraud is imprescriptible where the suitor is in
possession of the property subject of the acts,[36] the action partaking as it does of a
suit for quieting of title which is imprescriptible.[37] Such is the case in this instance.
Petitioners have possession of subject lots as owners having purchased the same
from Gabriel, Sr. subject only to the full payment of the agreed price.
The prescriptive period for the reconveyance of fraudulently registered real
property is 10 years, reckoned from the date of the issuance of the certificate of title,
if the plaintiff is not in possession, but imprescriptible if he is in possession of the
property.[38] Thus, one who is in actual possession of a piece of land claiming to be
the owner thereof may wait until his possession is disturbed or his title is attacked
before taking steps to vindicate his right.[39] As it is, petitioners action for
reconveyance is imprescriptible.
This brings us to the question of whether or not the respondent-
purchasers, i.e., Bernard, Marcos and Benjamin, and Eduardo, have the status of
innocent purchasers for value, as was the thrust of the trial courts disquisition and
disposition.
We are unable to agree with the RTC.
It is the common defense of the respondent-purchasers that they each
checked the title of the subject lot when it was his turn to acquire the same and
found it clean, meaning without annotation of any encumbrance or adverse third
party interest. And it is upon this postulate that each claims to be an innocent
purchaser for value, or one who buys the property of another without notice that
383
some other person has a right to or interest in it, and who pays therefor a full and fair
price at the time of the purchase or before receiving such notice. [40]
The general rule is that one dealing with a parcel of land registered under
the Torrens System may safely rely on the correctness of the certificate of title issued
therefor and is not obliged to go beyond the certificate. [41] Where, in other words, the
certificate of title is in the name of the seller, the innocent purchaser for value has
the right to rely on what appears on the certificate, as he is charged with notice only
of burdens or claims on the res as noted in the certificate. Another formulation of the
rule is that (a) in the absence of anything to arouse suspicion or (b) except where the
party has actual knowledge of facts and circumstances that would impel a reasonably
cautious man to make such inquiry or (c) when the purchaser has knowledge of a
defect of title in his vendor or of sufficient facts to induce a reasonably prudent man
to inquire into the status of the title of the property, [42] said purchaser is without
obligation to look beyond the certificate and investigate the title of the seller.
Eduardo and, for that matter, Bernard and Marcos and Benjamin, can hardly
claim to be innocent purchasers for value or purchasers in good faith. For each knew
or was at least expected to know that somebody else other than Gabriel, Jr. has a
right or interest over the lot. This is borne by the fact that the initial seller, Gabriel Jr.,
was not in possession of subject property. With respect to Marcos and Benjamin,
they knew as buyers that Bernard, the seller, was not also in possession of the same
property. The same goes with Eduardo, as buyer, with respect to Marcos and
Benjamin.
Basic is the rule that a buyer of a piece of land which is in the actual
possession of persons other than the seller must be wary and should investigate the
rights of those in possession. Otherwise, without such inquiry, the buyer can hardly
be regarded as a buyer in good faith. When a man proposes to buy or deal with
realty, his duty is to read the public manuscript, i.e., to look and see who is there
upon it and what his rights are. A want of caution and diligence which an honest man
of ordinary prudence is accustomed to exercise in making purchases is, in
contemplation of law, a want of good faith. The buyer who has failed to know or
discover that the land sold to him is in adverse possession of another is a buyer in bad
faith.[43]
Where the land sold is in the possession of a person other than the vendor,
the purchaser must go beyond the certificates of title and make inquiries concerning
the rights of the actual possessor.[44] And where, as in the instant case, Gabriel Jr. and
the subsequent vendors were not in possession of the property, the prospective
vendees are obliged to investigate the rights of the one in possession. Evidently,
Bernard, Marcos and Benjamin, and Eduardo did not investigate the rights over the
subject lot of the petitioners who, during the period material to this case, were in
actual possession thereof. Bernard, et al. are, thus, not purchasers in good faith and,
as such, cannot be accorded the protection extended by the law to such
 purchasers.[45]Moreover, not being purchasers in good faith, their having registered
the sale, will not, as against the petitioners, carry the day for any of them under Art.
1544 of the Civil Code prescribing rules on preference in case of double sales of
immovable property. Occea v. Esponilla[46] laid down the following rules in the
application of Art. 1544: (1) knowledge by the first buyer of the second sale cannot G.R. No. L-41132 April 27, 1988
defeat the first buyers rights except when the second buyer first register in good faith
the second sale; and (2) knowledge gained by the second buyer of the first sale VICTORINO HERNANDEZ, petitioner,
defeats his rights even if he is first to register, since such knowledge taints his vs.
registration with bad faith. HONORABLE COURT OF APPEALS and SUBSTITUTED HEIRS OF REV. FR. LUCIO V.
GARCIA (DECEASED). respondents.
Upon the facts obtaining in this case, the act of registration by any of the
three respondent-purchasers was not coupled with good faith. At the minimum, each
was aware or is at least presumed to be aware of facts which should put him upon
such inquiry and investigation as might be necessary to acquaint him with the defects
NARVASA, J.:
in the title of his vendor.
To those prevented by fraud from proving their title to land subject of registration
The award by the lower courts of damages and attorneys fees to some of the
proceedings in another's name, the law affords the remedy of review of the decree of
herein respondents was predicated on the filing by the original plaintiffs of what the
registration by petition in the land registration court within one year from its issuance
RTC characterized as an unwarranted suit. The basis of the award, needless to stress,
of the order. 1 This was the remedy availed of by Victorino Hernandez, but as he
no longer obtains and, hence, the same is set aside.
could convince neither the Court of First Instance of Rizal nor the Court of
Appellants 2 of the merits of his petition, he failed in his bid to reopen and correct the
decree in Land Registration Case No. N-2488 Fr. Lucio V. Garcia the absolute owner of
three parcels of land in Parañaque. 3 This Court however finds that upon the recorded
WHEREFORE, the petition is hereby GRANTED. The appealed December 4, facts, the petitioner is entitled to the relief sought.
2006 Decision and the March 6, 2007 Resolution of the Court of Appeals in CA-G.R.
CV No. 79680 affirming the May 26, 2003 Decision of the Regional Trial Court, Branch Fr. Garcia 4 applied in 1959 for the registration in his name of Lots 1-A, 1-B, and 2 of
3 in Baguio City are hereby REVERSED and SET ASIDE. Accordingly, petitioner Plan Psu-172410-B in Bo. San Dionisio, Parañaque. His property adjoined that of
Antonita Ordua is hereby recognized to have the right of ownership over subject lot Hernandez, and since both estates were once owned by one Andres San
covered by TCT No. T-3276 of the Baguio Registry registered in the name of Eduardo Buenaventura, 5 no dividing boundaries existed thereon until cadastral surveyors
J. Fuentebella. The Register of Deeds of Baguio City is hereby ORDERED to from the Bureau of Lands laid down official monuments to mark the separation of the
cancel said TCT No. T-3276 and to issue a new one in the name of Armando Gabriel, lots. These monuments were set along a line which the landowners had previously
Jr. with the proper annotation of the conditional sale of the lot covered by said title in agreed upon as representing the correct boundary between their estates. This was in
favor of Antonita Ordua subject to the payment of the PhP 50,000 outstanding 1956. 6
balance. Upon full payment of the purchase price by Antonita Ordua, Armando
Gabriel, Jr. is ORDERED to execute a Deed of Absolute Sale for the transfer of title of
Unknown to Hernandez, the Advance Plan Psu-172410-B submitted in Fr. Garcia's
subject lot to the name of Antonita Ordua, within three (3) days from receipt of said
behalf to the land registration court in 1959 included 220 square meters of land now
payment.
disputed — Lots ABC and 4057-A of Lot 1-B. This area fell beyond the stipulated
boundaries of Fr. Garcia's land and encroached pro tanto on the land of Hernandez
No pronouncement as to costs. (on which, it should be mentioned, his tenants had been living for many years
[decades, in fact] before the date of Fr. Garcia's application). 7 Allegedly lulled into
SO ORDERED.
384

complacency by the recentness of their agreement as to the limits of their respective

properties, and confident that the visible landmarks installed by the government
 surveyors precluded any overstepping of those limits, Hernandez proffered no
opposition to Fr. Garcia's application, leaving the heirs of Andres San Buenaventura
as the only oppositors thereto.
It was not until the court had already ordered the registration of the lots in Fr.
Garcia's name that Hernandez discovered the anomaly in the application. He at once
filed a petition for review of the decree, but in view of the new trial ordered by the
court upon motion of the heirs-oppositors, the petition was dismissed on the ground
of prematurity. 8 The court thereafter adjudged Fr. Garcia as the owner of Lots 1-A
and 2 and the heirs-oppositors as owners of Lot 1-B.
On appeal, however, the Court of Appeals declared Fr. Garcia absolute owner, by
acquisitive prescription, of an the lots. This judgment became final on December 9,
1970; Decree No. 132620 was issued by the CFI of Rizal, and the Register of Deeds
issued OCT No. 8664 in Fr. Garcia's name. 9
Hernandez promptly refiled his petition for the reopening of the decree. He argued
that the decree covered a substantial portion of his land to which Fr. Garcia could
claim no title. He averred anew that the Advance Plan supporting the application was
"irregular, because it disregarded the existing Bureau of Lands monuments
designating the actual possessions of the petitioner and the applicant" and "falsely
designates (other) ... boundaries ... not actually marked by any ... monuments, thus
fraudulently giving the false impression to petitioner that no alteration has actually
been made in originally agreed-upon boundaries in the course of the preparation of
(the) Plan." Thus having been "misled to believe that no encroachment has been
made by applicant," and "conscious of the previous agreement and the fact that the
Bureau of Lands monuments have not been altered." Hernandez had put up no
objection to the application. 10
As stated at the outset, the trial court dismissed Hernandez's petition, 11 and the
appellate court gave his appeal short shrift. 12 Both courts were of the view
essentially that the evidence did not bear out the claim of fraud; that under the
Statute of Frauds, the parties' covenant as to their properties' metes and bounds was
unenforceable since it was not reduced to writing; and that Hernandez's parents and
predecessors-in-interest, 13 Victorino and Tranquilino, acquired title by purchase from
San Buenaventura to only 516 square meters of land, which could not have included
the disputed property. 14
Ordinarily, the Appellate Court's factual conclusions are not reviewable by this
Court, 15 and since here those conclusions are decidedly adverse to Hernandez, the
application of the rule should result in a verdict against him. The rule admits of
385
exceptions, however, as when facts of substance were overlooked by the appellate
court which, if correctly considered, might have changed the outcome of the case. 16
In this case there are several pivotal facts — about which there is no controversy
whatever, it may be added — which clearly should have been weighed by the court a
quo in Hernandez's favor, but inexplicably were not. It is of record, to begin with, that
concrete monuments or "majones" were laid out by government surveyors in 1956
between the properties of Hernandez and Fr. Garcia. Hernandez avows that these
structures were purposely installed to mark the limits of their estates; his opponents
could only let this statement pass with telling silence. Neither did they seriously
dispute that these "mojones" were installed along the line agreed upon by the parties
as marking their properties' boundaries. All they averred in their defense is that the
agreement did not bind them. Lastly, they freely conceded the presence of a fence
along this line, but were quick to point out that they had merely "permitted"
Hernandez to put up this "temporary" structure "to stop the public (from) using ...
this place as a common madden shed." The excuse is lamentably feeble.
Hernandez argues that if indeed the Advance Plan, basis of Fr. Garcia's application,
was prepared without regard to the boundary indicated by the fence and the
surveyors markers, and worse, "falsely designate(d) as boundaries the lines marked
by ... corners not actually marked by any Bureau of Lands monuments" which
purposely left the mistaken impression that the exact limits of the adjoining estates
had been faithfully drawn, then he was truly a victim of fraud, deftly cheated of the
chance to vindicate his claim to the land. The respondents again did not care to
refute the premises on which the argument is predicated. In any event, the argument
is entirely in accord with the evidence and the norms of logic.
Lastly, the Appellate Court may have been convinced of the impossibility of the
inclusion of the disputes lot in the 516 square meters stated as sold to Hernandez's
parents in the deed of sale in their favor, 17 but only because the Court missed sight
of the fact that the adjoining lots sold to the spouses and to Fr. Garcia were
unregistered and unsurveyed at the time of the transfer. This explains the
discrepancy between the area of the land purportedly conveyed to the Hernandezes
in the instrument (516 square meters) and the actual area falling within the
boundaries described in the same document, which, after the survey, was found to
be 716 square meters. The respondents cannot hold Hernandez to the approximate
area fixed in the deed and claim ownership over the excess. All the land embraced
within the stated boundaries was sold. 18 If the respondent insist on the figures
named in the deeds of sale, then they themselves stand to lose 736 square meters of
land. San Buenaventura had only sold 1,545 square meters to Fr. Garcia, 19 but the
estate was later found to be actually 2,328 square meters in area. 20
 Given the weight they deserve, the recorded facts prove Hernandez's entitlement to
the relief sought. The respondents' reliance on the Statute of Frauds to secure a
contrary judgment is misplaced. The Statute of Frauds finds no application to this
case. Not every agreement "affecting land" must be put in writing to attain
enforceability. Under the Statute of Frauds, Article 1403(2) (e) of the Civil Code, such
formality is only required of contracts involving leases for longer than one year, or for
the sale of real property or of an interest therein. Hernandez's testimony is thus
admissible to establish his agreement with Fr. Garcia as to the boundary of their
estates. It is also to be noted that the presence of Hernandez's tenants on the land
within his side of the border, were this to be reckoned from the "mojones," further
buttresses his claim.

The foregoing considerations demonstrate more than adequately that the inclusion
of the 220-square-meter area in the Original Certificate of Title No. 8664 of the
Register of Deeds of Rizal is null and void.

ACCORDINGLY, the appealed decision of the Court of Appeals is hereby REVERSED

and set aside and another one entered, ordering the Register of Deeds of Rizal to
register the 220 square meters in question in favor of petitioner Victorino Hernandez;
and to cancel Original Certificate of Title No. 8664 and issue a new one in favor of the
private respondents excluding said 220-square-meter area belonging to the
petitioner. No pronouncement as to costs.

SO ORDERED.

Cruz, Gancayco and Griño-Aquino, JJ., concur.

89. G.R. No. L-45142 April 26, 1991

SIMPROSA VDA. DE ESPINA, RECAREDO ESPINA, TIMOTEO ESPINA, CELIA ESPINA,

GAUDIOSA ESPINA and NECIFORA ESPINA, petitioners,
vs.
THE HON. OTILIO ABAYA and SOFIA ESPINA and JOSE ESPINA, respondents.

Cipriano C. Alvizo, Sr. for private respondents.

386

MEDIALDEA, J.:
This is a petition for certiorari with prayer for the issuance of a writ of preliminary
injunction seeking the nullification of the orders issued by the respondent Judge
Otilio Abaya, in his capacity as the presiding judge of the Court of First Instance of
Surigao del Sur, Branch II, Lianga, Surigao del Sur in Civil Case No. L-108, entitled
"Simprosa Vda. de Espina, et. al. v. Sofia Espina, et. al." dated May 9, 1975 dismissing
the complaint for partition; July 25, 1975 denying the motion for reconsideration;
August 13, 1975 denying the second motion for reconsideration and March 15, 1976
denying plaintiffs' notice of appeal.
The antecedent facts are as follows:
Marcos Espina died on February 14, 1953 and was survived by his spouses, Simprosa
Vda. de Espina and their children namely, Recaredo, Timoteo, Celia, Gaudiosa,
Necifora, Sora and Jose, all surnamed Espina. Decedent's estate comprises of four (4)
parcels of land located at the Municipality of Barobo Province of Surigao del Sur.
On August 23, 1973 an action for partition of the aforementioned parcels of land was
filed by petitioners Simprosa and her children Recaredo, Timoteo, Celia, Gaudencia
and Necifora.
The complaint alleges that parcel No. 1 is the exclusive property of the deceased,
hence the same is owned in common by petitioners and private respondents in eight
(8) equal parts, while the other three (3) parcels of land being conjugal properties,
are also owned in common, one-half (1/2) belongs to the widow Simprosa and the
other half is owned by her and her children in eight (8) equal parts.
It also alleges that parcel No. 1 has been subdivided into two lots. Lot No. 994 PL8-44
is covered by Original Certificate of Title No. 5570 in the name of one of the heirs,
Sofia Espina, who acquired the title as a trustee for the beneficiaries or heirs of
Marcos Espina, while lot No. 1329 PCS-44 is covered by Original Certificate of Title
No. 3732 issued in the name of one of the heirs, Jose Espina as trustee for the heirs of
Marcos Espina. Said parcel of land is in the possession of petitioners and private
respondents who have their respective houses thereon.
387
Simprosa presently occupies parcel No. 2 while parcel No. 3 is occupied by Timoteo,
although the same is actually titled in the name of Sofia. Parcel No. 4 is occupied by
Recaredo.
Petitioners have several times demanded the partition of the aforementioned
properties, but notwithstanding such demands private respondents refused to
accede.
Private respondents alleged in their answer that in or about April, 1951, the late
Marcos Espina and his widow, Simprosa, together with their children made a
temporary verbal division and assignment of shares among their children. After the
death of Marcos, the temporary division was finalized by the heirs. Thereafter the
heirs took immediate possession of their respective shares on April 20, 1952. Private
respondents took actual physical possession of their respective shares including the
portions ceded to them by Simprosa upon their payment of P50.00 each per quarter
starting April, 1952 until the latter's death pursuant to their contract of procession
The assignment of shares was as follows:
(a) To the surviving spouses, (sic) Simprosa Vda. de Espina, herein plaintiffs,
one-half (1/2) of the parcel of land adjudicated to each of said plaintiffs-heirs
and defendants;
(b) To each of the following compulsory heirs, to wit:
1. To Recaredo (sic) Espina, one-half (1/2) portion which contains an area of
one and three-fourths (1 3/4) hectares and which forms part of Parcel 4
whose description is given in paragraph III of the complaint, the said Parcel
IV has been in the possession of both Recaredo Espina and plaintiff Simprosa
Vda. de Espina from April 20, 1952 until the present time;
2. To Timoteo Espina, one half (1/2) portion which contains an area of not
less than one-half (1/2) hectare and which forms part of Parcel 3 whose
description is given in paragraph III of the complaint, the said Parcel III was
originally assigned by Marcos Espina who thereupon obtained an Original
Certificate of Title in her (sic) name but was finally adjudicated to said
Timoteo Espina in April, 1952, the other half (1/2) portion of which parcel III
was the share of the surviving spouses (sic), Simprosa Vda. de Espina, and
said Parcel III has been in the possession of said Timoteo Espina and
Simprosa Vda. de Espina from April, 1952 until the present time as their
share;
 3. To Cecilia (sic) Espina, Gaudiosa Espina and Necifora Espina, one-half (1/2) xxx xxx xxx
portion, share and share alike which contains two (2) hectares and which
forms part of Parcel II whose description is given in paragraph III of the II
complaint, the other half (1/2) of said Parcel III (sic) is the share of the
surviving spouses (sic) Simprosa Vda. de Espina, and said Parcel III (sic) has THAT THE CAUSE OF ACTION IS BARRED BY . . . . STATUTE OF LIMITATIONS.
been in the possession of said Cecilia. (sic) Espina, Gaudiosa Espina and
Necifora Espina and Simprosa Vda. de Espina from April, 1952 until the
xxx xxx xxx
present time;
III
4. To Sofia Espina, one-half (1/2) portion of the parcel of land included in the
deception of Parcel 1 in paragraph III of the complaint, the other half (1/2) of
THAT THE PLAINTIFFS HAS NO LEGAL CAPACITY TO SUE, (Motion to Dismiss
said parcel being the share of the surviving spouses (sic) Simprosa Vda. de
Complaint, pp. 1-5; Rollo, pp. 34-38)
Espina and having been ceded by said Simprosa Vda. de Espina to said Sofia
Espina for a valuable consideration payable quarterly at the rate of P50.00
beginning April, 1952 until her death, and said Sofia Espina has been xxx xxx xxx
regularly paying to said Simprosa Vda. de Espina quarterly from April, 1952
the said amount of P50.00 until the present time, and by virtue of said On May 9, 1975 the trial court granted the motion and thereafter dismissed the
agreement, Sofia Espina obtained Original Certificate of Title in her name of complaint. On May 23, 1975 petitioners filed a motion for reconsideration on the
said parcel of land which is included in the description of said parcel 1, as her following grounds, to wit:
exclusive property;
1. THAT THE ORDER OF DISMISSAL HAS NO LEGAL BASIS IN FACT AND IN
5. To Jose Espina, one-half (1/2) portion of the other parcel of land included LAW.
in the description of Parcel 1 in paragraph 1 of the complaint, the other half
(1/2) of said parcel being the share of the surviving spouses (sic) Simprosa 2. THAT THE STATUTE OF LIMITATIONS IS NOT APPLICABLE IN THE CASE AT
Vda. de Espina and having been coded (sic) by said Simprosa Vda. de Espina BAR. (Rollo, p. 50)
to said Jose Espina for a valuable consideration payable quarterly at the rate
of P50.00 beginning April, 1952 until her death, and said Jose Espina has However, petitioners' motion was denied in an order dated July 23, 1975. On August
been regularly quarterly paying to said Simprosa Vda. de Espina from April, 11, 1975 petitioners filed another motion for reconsideration stressing that they were
1952 until the present time, the said amount of P50.00, and by virtue of said denied due process when their motion was not heard. Again said motion was denied
agreement, Jose Espina obtained Original Certificate of Title in his name of on August 13, 1975.
said parcel of land which is included in the description of said Parcel 1 as his
exclusive property. (Rollo, pp. 27-28) Thereafter, petitioners filed their notice of appeal on September 11, 1975 and a
motion for extension of time to file their Record on Appeal on September 18, 1975.
On February 13, 1974 private respondents filed a motion to dismiss the complaint
alleging the following grounds, to wit: On March 15, 1976, the respondent judge disapproved petitioners' Record on Appeal
and appeal bond on the ground that the notice of appeal was filed out of time.
I Hence, this petition. The petitioners raised four (,41) assignment of errors:

THAT THE FACTS ALLEGED IN THE COMPLAINT FAIL TO CONFER UPON THE 1. Whether or not an action for partition among co-heirs prescribes.
COURT COMPLETE AND LAWFUL JURISDICTION OVER THE CASE FOR NON-
COMPLIANCE WITH THE CONDITION SINE QUA NON CONCERNING SUIT
388

2. Whether or not an oral partition among co-heirs is valid.

BETWEEN MEMBERS OF THE SAME FAMILY.
 3. Whether or not a hearing on a motion for reconsideration is indispensable
the lack of which is a deal of due process.
4. Whether or not the second motion for reconsideration is pro forma Rollo,
p. 10)
Petitioners maintain that the present action is not for reconveyance but one for
partition. Hence, the rule insisted by the private respondents on prescriptibility of an
action for reconcile conveyance of real property based on an implied trust is not
applicable in the case at bar. In addition, petitioners, argue that private respondents
cannot set up the defense of prescription or laches because their possession of the
property no matter how long cannot ripen into ownership. (Memorandum for
Petitioners, p. 7)
However, the private respondents stress that 'any supposed right of the petitioners
to demand a new division or partition of said estate of Marcos Espina has long been
barred by the Statute of Limitations and has long prescribed." (Memorandum for
Private Respondents, p. 5)
The petitioners claim that the alleged oral partition is invalid and strictly under the
coverage of the statute of Frauds on two grounds, to wit:
Firstly, parcel No. 1 being an exclusive property of the deceased should have been
divided into eight (8) equal parts. Therefore, Simprosa . could only cede her share of
the land which is 1/8 portion thereof and cannot validly cede the shares of her then
minor children without being duly appointed as guardian.
Secondly, under Article 1358 of the New Civil Code, Simprosa could not have ceded
her right and that of her other children except by a public document. (Memorandum
of Petitioners, pp. 8-9)
On the other hand, private respondents insist that the oral partition is valid and
binding and does not fall under the coverage of the Statute of Frauds.
Petitioners claim that they were denied due process when the motion for
reconsideration was denied without any hearing.
However, private respondents maintain that the hearing of a motion for
reconsideration in oral argument is a matter which rest upon the sound discretion of
the Court.
389
Finally, petitioners stress that the second motion for reconsideration is not pro
forma, thus, it suspends the running of the period of appeal. Hence, the notice of
appeal was timely filed.
On this point, private respondent maintain that the order of respondent judge dated
March 1 5, 1976 disapproving petitioners' Record on Appeal and appeal bond may
not properly be a subject of a petition for certiorari. (Memorandum of Private
Respondents, p. 13)
We find the petition devoid of merit.
We already ruled in Lebrilla, et al. v. Intermediate Appellate Court (G.R. No. 72623,
December 18, 1989, 180 SCRA 188; 192) that an action for partition is imprescriptible.
However, an action for partition among co-heirs ceases to be such, and becomes one
for title where the defendants allege exclusive ownership.
In the case at bar, the imprescriptibility of the action for partition cannot be invoked
because two of the co-heirs, namely private respondents Sora and Jose Espina
possessed the property as exclusive owners and their possession for a period of
twenty one (21) years is sufficient to acquire it by prescription. Hence, from the
moment these co-heirs claim that they are the absolute and exclusive owners of the
properties and deny the others any share therein, the question involved is no longer
one of partition but of ownership.
Anent the issue of oral partition, We sustain the validity of said partition.1âwphi1 "An
agreement of partition may be made orally or in writing. An oral agreement for the
partition of the property owned in common is valid and enforceable upon the parties.
The Statute of Frauds has no operation in this kind of agreements, for partition is not
a conveyance of property but simply a segregation and designation of the part of the
property which belong to the co-owners." (Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines, Vol. II, 1983 Edition, 182-
183 citing Hernandez v. Andal, et. al., G.R. No. L275, March 29, 1957)
Time and again, the Court stresses that the hearing of a motion for reconsideration in
oral argument is a matter which rests upon the sound discretion of the Court. Its
refusal does not constitute a denial of due process in the absence of a showing of
abuse of discretion. (see Philippine Manufacturing Co. v. Ang Bisig ng PMC et. al., 118
Phil. 431, 434)
The absence of a formal hearing on the petitioners' motion for reconsideration is
thoroughly explained in the order of the respondent judge dated August 13, 1975,
which is hereunder quoted as follows:
 When the court issued its order of June 5, 1975 requiring counsel for
defendants to answer plaintiffs' motion for reconsideration, the court opted
to resolve plaintiffs' motion based on the pleadings of the parties, without
further oral arguments. The court considered the arguments of the parties
stated in their pleadings as already sufficient to apprise the court of the
issues involved in said motion.
Plaintiffs' allegation that the Clerk of Court failed to calendar their motion
for reconsideration for oral argument has not deprived the plaintiffs of any
substantial right or his right to due process.
committed no error when it held that the notice of appeal was filed after the lapse of
thirty five (35) days, which is clearly beyond the period of thirty (30) days allowed by
the rules.
Finally, it has been a basic rule that certiorari is not a substitute for appeal which had
been lost. (see Edra v. Intermediate Appellate Court, G.R. No. 75041, November 13,
1989, 179 SCRA 344) A special civil action under Rule 65 of the Rules of Court will not
be a substitute or cure for failure to file a timely petition for review
on certiorari(appeal) under Rule 45 of the Rules of Court. (Escudero v. Dulay, G.R. No.
60578, February 23, 1988, 158 SCRA 69, 77)

SO ORDERED. (Memorandum of Private Respondents, pp. 1213)
A cursory reading of the aforequoted order will show that there was indeed no
formal hearing on the motion for reconsideration. There is no question however, that
the motion is grounded on the lack of basis in fact and in law of the order of dismissal
and the existence or lack of it is determined by a reference to the facts alleged in the
challenged pleading. The issue raised in the motion was fully discussed therein and in
the opposition thereto. Under such circumstances, oral argument on the motion is
reduced to an unnecessary ceremony and should be overlooked (see Ethel Case, et al.
v. Jugo, 77 Phil. 517, 522).
The application of the abovecited rule should be relaxed where it is shown that it will
result in a manifest failure or miscarriage of justice. (Ibid, p. 77) However, as
emphasized earlier, the case at bar is totally devoid of merit, thus, the strict
application of the said file will not in any way override sub-substantial justice.
Therefore, the delay of five (5) days in filing a notice of appeal and a motion for
extension to file a record on appeal cannot be excused on the basis of equity.

We adhere to the findings of the trial court that the second motion for
reconsideration dated August 11, 1975 is pro forma, to it

The grounds stated in said motion being in reiteration of the same grounds
alleged in his first motion, the same is pro-forma. (Order dated March 15,
1976, p. 2, Rollo, p. 74)

xxx xxx xxx

Furthermore, the second motion for reconsideration has not stated new
grounds considering that the alleged failure of the Clerk of Court to set
plaintiffs' motion for reconsideration, although seemingly a different ground
than those alleged in their first motion for reconsideration, is only incidental
to the issues raised in their first motion for reconsideration, as it only refers
to the right of plaintiffs' counsel to argue his motion in court just to amplify
the same grounds already deed by the court. (Ibid, p. 3, Rollo, p. 75)

Therefore, it is very evident that the second motion for reconsideration being pro-
390

forma did not suspend the running of the period of appeal. Thus, the lower court