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Notwithstanding three extensions granted by plaintiff

to defendant Pacific, the latter failed to finish the contracted


FILINVEST LAND, INC., G.R. No.138980 works. (Annexes G, I and K, Complaint). On 16 October 1979,
P e t i t i o n e r, plaintiff wrote defendant Pacific advising the latter of its
Present: intention to takeover the project and to hold said defendant
liable for all damages which it had incurred and will incur to
PUNO, finish the project. (Annex L, Complaint).
- versus - Chairman,
AUSTRIA-MARTINEZ, On 26 October 1979, plaintiff submitted its claim
CALLEJO, SR., against defendant Philamgen under its performance and
TINGA and guarantee bond (Annex M, Complaint) but Philamgen refused
HON. COURT OF APPEALS, CHICO-NAZARIO, JJ. to acknowledge its liability for the simple reason that its
PHILIPPINE AMERICAN principal, defendant Pacific, refused to acknowledge liability
GENERAL INSURANCE therefore. Hence, this action.
COMPANY, and PACIFIC Promulgated:
EQUIPMENT CORPORATION, In defense, defendant Pacific claims that its failure to
R e s p o n d e n t s. September 20, 2005 finish the contracted work was due to inclement weather and
x--------------------------------------------------x the fact that several items of finished work and change order
which plaintiff refused to accept and pay for caused the
disruption of work. Since the contractual relation between
plaintiff and defendant Pacific created a reciprocal obligation,
DECISION the failure of the plaintiff to pay its progressing bills estops it
from demanding fulfillment of what is incumbent upon
CHICO-NAZARIO, J.: defendant Pacific. The acquiescence by plaintiff in granting
This is a petition for review on certiorari of the Decision[1] of the Court three extensions to defendant Pacific is likewise a waiver of
of Appeals dated 27 May 1999 affirming the dismissal by the Regional Trial the formers right to claim any damages for the delay. Further,
Court of Makati, Branch 65,[2]of the complaint for damages filed by Filinvest the unilateral and voluntary action of plaintiff in preventing
Land, Inc. (Filinvest) against herein private respondents Pacific Equipment defendant Pacific from completing the work has relieved the
Corporation (Pecorp) and Philippine American General Insurance Company. latter from the obligation of completing the same.

The essential facts of the case, as recounted by the trial court, are as On the other hand, Philamgen contends that the
follows: various amendments made on the principal contract and the
deviations in the implementation thereof which were resorted
On 26 April 1978, Filinvest Land, Inc. (FILINVEST, for to by plaintiff and co-defendant Pacific without its (defendant
brevity), a corporation engaged in the development and sale Philamgens) written consent thereto, have automatically
of residential subdivisions, awarded to defendant Pacific released the latter from any or all liability within the purview
Equipment Corporation (PACIFIC, for brevity) the and contemplation of the coverage of the surety bonds it has
development of its residential subdivisions consisting of two issued. Upon agreement of the parties to appoint a
(2) parcels of land located at Payatas, Quezon City, the terms commissioner to assist the court in resolving the issues
and conditions of which are contained in an Agreement. confronting the parties, on 7 July 1981, an order was issued
(Annex A, Complaint). To guarantee its faithful compliance by then Presiding Judge Segundo M. Zosa naming Architect
and pursuant to the agreement, defendant Pacific posted two Antonio Dimalanta as Court Commissioner from among the
(2) Surety Bonds in favor of plaintiff which were issued by nominees submitted by the parties to conduct an ocular
defendant Philippine American General Insurance inspection and to determine the amount of work accomplished
(PHILAMGEN, for brevity). (Annexes B and C, Complaint). by the defendant Pacific and the amount of work done by
plaintiff to complete the project.
November 1983. And even assuming that a joint survey were
On 28 November 1984, the Court received the conducted, it would have been an exercise in futility because
findings made by the Court Commissioner. In arriving at his all physical traces of the actual conditions then obtaining at
findings, the Commissioner used the construction documents the time relevant to the case had already been obliterated by
pertaining to the project as basis. According to him, no better plaintiff.
basis in the work done or undone could be made other than
the contract billings and payments made by both parties as On 15 August 1990, a Motion for Judgment Based on
there was no proper procedure followed in terminating the the Commissioners Resolution was filed by defendant Pacific.
contract, lack of inventory of work accomplished, absence of
appropriate record of work progress (logbook) and inadequate On 11 October 1990, plaintiff filed its opposition
documentation and system of construction management. thereto which was but a rehash of objections to the
commissioners report earlier filed by said plaintiff.[3]
Based on the billings of defendant Pacific and the
payments made by plaintiff, the work accomplished by the
former amounted to P11,788,282.40 with the exception of the
last billing (which was not acted upon or processed by plaintiff) On the basis of the commissioners report, the trial court dismissed
in the amount of P844,396.42. The total amount of work left to Filinvests complaint as well as Pecorps counterclaim. It held:
be accomplished by plaintiff was based on the original
contract amount less value of work accomplished by In resolving this case, the court observes that the
defendant Pacific in the amount of P681,717.58 (12,470,000- appointment of a Commissioner was a joint undertaking
11,788,282.42). among the parties. The findings of facts of the Commissioner
should therefore not only be conclusive but final among the
As regards the alleged repairs made by plaintiff on the parties. The court therefore agrees with the commissioners
construction deficiencies, the Court Commissioner found no findings with respect to
sufficient basis to justify the same. On the other hand, he
found the additional work done by defendant Pacific in the 1. Cost to repair deficiency or defect P532,324.02
amount of P477,000.00 to be in order. 2. Unpaid balance of work done by defendant
- P1,939,191.67
On 01 April 1985, plaintiff filed its objections to the 3. Additional work/change order (due to
Commissioners Resolution on the following grounds: defendant) P475,000.00

a) Failure of the commissioner to conduct a joint The unpaid balance due defendant therefore
survey which according to the latter is indispensable to arrive is P1,939,191.67. To this amount should be added additional
at an equitable and fair resolution of the issues between the work performed by defendant at plaintiffs instance in the sum
parties; of P475,000.00. And from this total of P2,414,191.67 should
be deducted the sum of P532,324.01 which is the cost to
b) The cost estimates of the commissioner were repair the deficiency or defect in the work done by defendant.
based on pure conjectures and contrary to the evidence; and, The commissioner arrived at the figure of P532,324.01 by
getting the average between plaintiffs claim of P758,080.37
c) The commissioner made conclusions of law and defendants allegation of P306,567.67. The amount due
which were beyond his assignment or capabilities. to defendant per the commissioners report is
therefore P1,881,867.66.
In its comment, defendant Pacific alleged that the
failure to conduct joint survey was due to plaintiffs refusal to Although the said amount of P1,881,867.66 would be
cooperate. In fact, it was defendant Pacific who initiated the owing to defendant Pacific, the fact remains that said
idea of conducting a joint survey and inventory dating back 27 defendant was in delay since April 25, 1979. The third
extension agreement of September 15, 1979 is very clear in anticipated damages which Filinvest may suffer by reason of such failure; and
this regard. The pertinent paragraphs read: (c) the total liquidated damages sought is only 32% of the total contract price,
and the same was freely and voluntarily agreed upon by the parties.
a) You will complete all the unfinished works
not later than Oct. 15, 1979. It is agreed At the outset, it should be stressed that as only the issue of liquidated
and understood that this date shall damages has been elevated to this Court, petitioner Filinvest is deemed to
DEFINITELY be the LAST and FINAL have acquiesced to the other matters taken up by the courts below. Section 1,
extension & there will be no further Rule 45 of the 1997 Rules of Court states in no uncertain terms that this Courts
extension for any cause whatsoever. jurisdiction in petitions for review on certiorari is limited to questions of law
which must be distinctly set forth.[5] By assigning only one legal issue, Filinvest
b) We are willing to waive all penalties for has effectively cordoned off any discussion into the factual issue raised before
delay which have accrued since April 25, the Court of Appeals.[6] In effect, Filinvest has yielded to the decision of the
1979 provided that you are able to finish Court of Appeals, affirming that of the trial court, in deferring to the factual
all the items of the contracted works as findings of the commissioner assigned to the parties case. Besides, as a
per revised CPM; otherwise you shall general rule, factual matters cannot be raised in a petition for review
continue to be liable to pay the penalty up on certiorari. This Court at this stage is limited to reviewing errors of law that
to the time that all the contracted works may have been committed by the lower courts.[7] We do not perceive here any
shall have been actually finished, in of the exceptions to this rule; hence, we are restrained from conducting further
addition to other damages which we may scrutiny of the findings of fact made by the trial court which have been affirmed
suffer by reason of the delays incurred. by the Court of Appeals. Verily, factual findings of the trial court, especially
when affirmed by the Court of Appeals, are binding and conclusive on the
Defendant Pacific therefore became liable for delay when it Supreme Court.[8] Thus, it is settled that:
did not finish the project on the date agreed on October 15,
1979. The court however, finds the claim of P3,990,000.00 in (a) Based on Pecorps billings and the payments made by
the form of penalty by reason of delay (P15,000.00/day from Filinvest, the balance of work to be accomplished by
April 25, 1979 to Jan. 15, 1980) to be excessive. A forfeiture Pecorp amounts to P681,717.58 representing
of the amount due defendant from plaintiff appears to be a 5.47% of the contract work. This means to say that
reasonable penalty for the delay in finishing the project Pecorp, at the time of the termination of its contract,
considering the amount of work already performed and the accomplished 94.53% of the contract work;
fact that plaintiff consented to three prior extensions.
(b) The unpaid balance of work done by Pecorp amounts
The foregoing considered, this case is dismissed. The to P1,939,191.67;
counterclaim is likewise dismissed.
(c) The additional work/change order due Pecorp amounts
No Costs.[4] to P475,000.00;

(d) The cost to repair deficiency or defect, which is for the


account of Pecorp, is P532,324.02; and
The Court of Appeals, finding no reversible error in the appealed
decision, affirmed the same. (e) The total amount due Pecorp is P1,881,867.66.

Hence, the instant petition grounded solely on the issue of whether or


not the liquidated damages agreed upon by the parties should be reduced
considering that: (a) time is of the essence of the contract; (b) the liquidated Coming now to the main matter, Filinvest argues that the penalty in its entirety
damages was fixed by the parties to serve not only as penalty in case Pecorp should be respected as it was a product of mutual agreement and it represents
fails to fulfill its obligation on time, but also as indemnity for actual and only 32% of the P12,470,000.00 contract price, thus, not shocking and
unconscionable under the circumstances. Moreover, the penalty was fixed to In herein case, the trial court ruled that the penalty charge for delay
provide for actual or anticipated liquidated damages and not simply to ensure pegged at P15,000.00 per day of delay in the aggregate amount
compliance with the terms of the contract; hence, pursuant to Laureano v. of P3,990,000.00 -- was excessive and accordingly reduced it
Kilayco,[9] courts should be slow in exercising the authority conferred by Art. to P1,881,867.66 considering the amount of work already performed and the
1229 of the Civil Code. fact that [Filinvest] consented to three (3) prior extensions. The Court of
Appeals affirmed the ruling but added as well that the penalty was
We are not swayed. unconscionable as the construction was already not far from completion. Said
the Court of Appeals:
There is no question that the penalty of P15,000.00 per day of delay
was mutually agreed upon by the parties and that the same is sanctioned by Turning now to plaintiffs appeal, We likewise agree
law. A penal clause is an accessory undertaking to assume greater liability in with the trial court that a penalty interest of P15,000.00 per
case of breach.[10] It is attached to an obligation in order to insure day of delay as liquidated damages or P3,990,000.00
performance[11] and has a double function: (1) to provide for liquidated (representing 32% penalty of the P12,470,000.00 contract
damages, and (2) to strengthen the coercive force of the obligation by the price) is unconscionable considering that the construction was
threat of greater responsibility in the event of breach.[12] Article 1226 of the Civil already not far from completion. Penalty interests are in the
Code states: nature of liquidated damages and may be equitably reduced
by the courts if they are iniquitous or unconscionable (Garcia
Art. 1226. In obligations with a penal clause, the v. Court of Appeals, 167 SCRA 815, Lambert v. Fox, 26 Phil.
penalty shall substitute the indemnity for damages and the 588). The judge shall equitably reduce the penalty when the
payment of interests in case of noncompliance, if there is no principal obligation has been partly or irregularly complied with
stipulation to the contrary. Nevertheless, damages shall be by the debtor. Even if there has been no performance, the
paid if the obligor refuses to pay the penalty or is guilty of fraud penalty may also be reduced by the courts if it is iniquitous or
in the fulfillment of the obligation. unconscionable (Art. 1229, New Civil Code). Moreover,
plaintiffs right to indemnity due to defendants delay has been
The penalty may be enforced only when it is cancelled by its obligations to the latter consisting of unpaid
demandable in accordance with the provisions of this Code. works.

This Court finds no fault in the cost estimates of the


court-appointed commissioner as to the cost to repair
As a general rule, courts are not at liberty to ignore the freedom of the deficiency or defect in the works which was based on the
parties to agree on such terms and conditions as they see fit as long as they average between plaintiffs claim of P758,080.37 and
are not contrary to law, morals, good customs, public order or public defendants P306,567.67 considering the following factors:
policy.[13] Nevertheless, courts may equitably reduce a stipulated penalty in the that plaintiff did not follow the standard practice of joint survey
contract in two instances: (1) if the principal obligation has been partly or upon take over to establish work already accomplished,
irregularly complied; and (2) even if there has been no compliance if the balance of work per contract still to be done, and estimate and
penalty is iniquitous or unconscionable in accordance with Article 1229 of the inventory of repair (Exhibit H). As for the cost to finish the
Civil Code which provides: remaining works, plaintiffs estimates were brushed aside by
the commissioner on the reasoned observation that plaintiffs
Art. 1229. The judge shall equitably reduce the cost estimate for work (to be) done by the plaintiff to complete
penalty when the principal obligation has been partly or the project is based on a contract awarded to another
irregularly complied with by the debtor. Even if there has been contractor (JPT), the nature and magnitude of which appears
no performance, the penalty may also be reduced by the to be inconsistent with the basic contract between defendant
courts if it is iniquitous or unconscionable. PECORP and plaintiff FILINVEST.[14]
We are hamstrung to reverse the Court of Appeals as it is rudimentary clause imposed as indemnity for damages should be made in cases where
that the application of Article 1229 is essentially addressed to the sound there has been neither partial nor irregular compliance with the terms of the
discretion of the court.[15] As it is settled that the project was contract. In cases where there has been partial or irregular compliance, as in
already 94.53% complete and that Filinvest did agree to extend the period for this case, there will be no substantial difference between a penalty and
completion of the project, which extensions Filinvest included in computing the liquidated damages insofar as legal results are concerned.[18] The distinction
amount of the penalty, the reduction thereof is clearly warranted. is thus more apparent than real especially in the light of certain provisions of
Filinvest, however, hammers on the case of Laureano v. the Civil Code of the Philippines which provides in Articles 2226 and Article
Kilayco,[16] decided in 1915, which cautions courts to distinguish between two 2227 thereof:
kinds of penalty clauses in order to better apply their authority in reducing the
amount recoverable. We held therein that: Art. 2226. Liquidated damages are those agreed
upon by the parties to a contract to be paid in case of breach
. . . [I]n any case wherein there has been a partial or thereof.
irregular compliance with the provisions in a contract for
special indemnification in the event of failure to comply with Art. 2227. Liquidated damages, whether intended as
its terms, courts will rigidly apply the doctrine of strict an indemnity or a penalty, shall be equitably reduced if they
construction against the enforcement in its entirety of the are iniquitous or unconscionable.
indemnification, where it is clear from the terms of the
contract that the amount or character of the indemnity is fixed
without regard to the probable damages which might be
anticipated as a result of a breach of the terms of the contract; Thus, we lamented in one case that (t)here is no justification for the Civil Code
or, in other words, where the indemnity provided for is to make an apparent distinction between a penalty and liquidated damages
essentially a mere penalty having for its principal object the because the settled rule is that there is no difference between penalty and
enforcement of compliance with the contract. But the courts liquidated damages insofar as legal results are concerned and that either may
will be slow in exercising the jurisdiction conferred upon be recovered without the necessity of proving actual damages and both may
them in article 1154[17] so as to modify the terms of an agreed be reduced when proper.[19]
upon indemnification where it appears that in fixing such
indemnification the parties had in mind a fair and reasonable Finally, Filinvest advances the argument that while it may be true that courts
compensation for actual damages anticipated as a result of a may mitigate the amount of liquidated damages agreed upon by the parties on
breach of the contract, or, in other words, where the principal the basis of the extent of the work done, this contemplates a situation where
purpose of the indemnification agreed upon appears to have the full amount of damages is payable in case of total breach of contract. In
been to provide for the payment of actual anticipated and the instant case, as the penalty clause was agreed upon to answer for delay
liquidated damages rather than the penalization of a breach in the completion of the project considering that time is of the essence, the
of the contract. (Emphases supplied) parties thus clearly contemplated the payment of accumulated liquidated
damages despite, and precisely because of, partial performance. [20] In effect,
it is Filinvests position that the first part of Article 1229 on partial performance
should not apply precisely because, in all likelihood, the penalty clause would
Filinvest contends that the subject penalty clause falls under the kick in in situations where Pecorp had already begun work but could not finish
second type, i.e., the principal purpose for its inclusion was to provide for it on time, thus, it is being penalized for delay in its completion.
payment of actual anticipated and liquidated damages rather than the
penalization of a breach of the contract. Thus, Filinvest argues that had Pecorp The above argument, albeit sound,[21] is insufficient to reverse the ruling of the
completed the project on time, it (Filinvest) could have sold the lots sooner and Court of Appeals. It must be remembered that the Court of Appeals not only
earned its projected income that would have been used for its other projects. held that the penalty should be reduced because there was partial compliance
but categorically stated as well that the penalty was unconscionable.
Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein Otherwise stated, the Court of Appeals affirmed the reduction of the penalty
case. The Supreme Court in Laureano instructed that a distinction between a not simply because there was partial compliance per se on the part of Pecorp
penalty clause imposed essentially as penalty in case of breach and a penalty
[9]
with what was incumbent upon it but, more fundamentally, because it deemed 32 Phil. 194
[10]
Social Security System v. Moonwalk Development and Housing Corporation, G.R. No. 73345, 07 April 1993,
the penalty unconscionable in the light of Pecorps 94.53% completion rate. 221 SCRA 119, 127, citing 4 Tolentino, Civil Code of the Philippines, p. 259 (1991 ed.).
In Ligutan v. Court of Appeals,[22] we pointed out that the question of [11]
H.L. Carlos Construction, Inc. v. Marina Properties Corporation, G.R. No. 147614, 29 January 2004, 421
SCRA 428, 445.
whether a penalty is reasonable or iniquitous can be partly subjective and [12]
Social Security System v. Moonwalk Development and Housing Corporation, supra, note 10.
partly objective as its resolution would depend on such factors as, but not [13]
Lo v. Court of Appeals, G.R. No. 141434, 23 September 2003, 411 SCRA 523, 526.
[14]
Rollo, pp. 42-43.
necessarily confined to, the type, extent and purpose of the penalty, the nature [15]
Cf. Ligutan v. Court of Appeals, G.R. No. 138677, 12 February 2002, 376 SCRA 560, 568.
of the obligation, the mode of breach and its consequences, the supervening [16]
Supra, note 9, pp. 200-201.
[17]
realities, the standing and relationship of the parties, and the like, the Civil Code of Spain.
[18]
Laureano, v. Kilayco, supra, note 9, citing Lambert v. Fox, 26 Phil. Rep. 588.
application of which, by and large, is addressed to the sound discretion of the [19]
Pamintual v. Court of Appeals, 94 Phil. 556, 562 (1979).
court.[23] [21]
Thus, in H.L. Carlos Construction, Inc. v. Marina Properties Corporation (supra, note 11 at 443-445), we
affirmed the Court of Appeals ruling imposing the penalty in its entirety as against the building
contractor in favor of the real estate developer. As in this case, the penalty in the H.L. Construction
In herein case, there has been substantial compliance in good faith on the part case was to answer for delay in the accomplishment of the contract work.
[22]
G.R. No. 138677, 12 February 2002, 376 SCRA 560, 568.
of Pecorp which renders unconscionable the application of the full force of the [23]
See also Lo v. Court of Appeals, supra, note 13.
penalty especially if we consider that in 1979 the amount of P15,000.00 as
penalty for delay per day was quite steep indeed. Nothing in the records
suggests that Pecorps delay in the performance of 5.47% of the contract was
due to it having acted negligently or in bad faith. Finally, we factor in the fact
that Filinvest is not free of blame either as it likewise failed to do that which
was incumbent upon it, i.e., it failed to pay Pecorp for work actually performed Republic of the Philippines
by the latter in the total amount of P1,881,867.66. Thus, all things considered,
we find no reversible error in the Court of Appeals exercise of discretion in the
Supreme Court
instant case. Baguio City

Before we write finis to this legal contest that had spanned across two
and a half decades, we take note of Pecorps own grievance. From its FIRST DIVISION
Comment and Memorandum, Pecorp, likewise, seeks affirmative relief from
this Court by praying that not only should the instant case be dismissed for DORIE ABESA NICOLAS, G.R. No. 158026
lack of merit, but that Filinvest should likewise be made to pay what the Court Petitioner,
Commissioner found was due defendant in the total amount of P2,976,663.65 Present:
plus 12% interest from 1979 until full payment thereof plus attorneys PUNO, C.J., Chairperson,
fees.[24] Pecorp, however, cannot recover that which it seeks as we had CARPIO,
already denied, in a Resolution dated 21 June 2000, its own petition for review - versus - *CORONA,
of the 27 May 1999 decision of the Court of Appeals. Thus, as far as Pecorp AZCUNA, and
is concerned, the ruling of the Court of Appeals has already attained finality LEONARDO-DE CASTRO, JJ.
and can no longer be disturbed.

WHEREFORE, premises considered, the Decision of the Court of DEL-NACIA CORPORATION, Promulgated:
Appeals dated 27 May 1999 is AFFIRMED. No pronouncement as to costs. Respondent. April 23, 2008
SO ORDERED.
[1]
Penned by Associate Justice Portia Alio-Hormachuelos with Associate Justices Buenaventura J. Guerrero x --------------------------------------------------------------------------------------- x
and Eloy R. Bello, Jr., concurring.
[2]
Penned by Judge Salvador S. Abad Santos.
[3]
Rollo, pp. 114-116. DECISION
[4]
Id., pp. 116-117.
[5]
Section 1. Filing of petition with the Supreme Court. A party desiring to appeal by certiorari from a judgment
or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or PUNO, C.J.:
other courts whenever authorized by law, may file with the Supreme Court a verified petition for
review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.
[6]
Cf Ponce, et al. v. National Labor Relations Commission, et al., G.R. No. 158244, 09 August 2005.
[7]
Alvarez v. Court of Appeals, G.R. No. 142843, 06 August 2003, 408 SCRA 419, 429 (citations omitted).
This case arose from a complaint for unfair business practice [1] filed by
(4) Only the PURCHASER shall be deemed for all legal purposes to take
petitioner Dorie Abesa Nicolas (Mrs. Nicolas) against respondent Del-Nacia possession of the parcel of land upon payment of the down payment
Corporation (Del-Nacia) before the Housing and Land Use Regulatory Board provided, however, that his/her possession under this section shall be only
(HLURB). that of a tenant or lessee, and subject to ejectment proceedings during all the
period of this agreement.
xxxx
On February 20, 1988, the spouses Armando Nicolas and Dorie (7) In case the PURCHASER fails to comply with any conditions of
Abesa Nicolas (Spouses Nicolas) and Del-Nacia entered into a Land Purchase this contract and/or to pay any payments herein agreed upon, the
Agreement[2] (Agreement) for the sale by the latter to the former of a parcel of PURCHASER shall be granted a period or periods of grace which in no case
land, covered by Transfer Certificate of Title No. 233702, consisting of 10,000 shall exceed (60) days to be counted from the condition breached ought to
be complied with or the said payments ought have been made, during which
square meters, situated at Lot No. 3-B-4, Del Nacia Ville No. 5, San Jose del period of grace the PURCHASER must comply with the said condition or
Monte, Bulacan. satisfy all due monetary obligations including those which correspond to the
period of grace. OTHERWISE, the Contract shall be automatically cancelled
The relevant parts of the Agreement are: and rescinded and of no force and effect, and as a consequence therefore,
the OWNER may dispose of the parcels of land covered by this Contract in
favor of other persons, as if this Contract had never been entered into. In case
(1) The PURCHASER agrees to pay to the OWNER upon execution of this of such cancellation of this Contract all amounts paid in accordance with this
Contract the sum of FORTY THOUSAND PESOS (P40,000) as first payment agreement, together with all the improvements introduced in the premises,
on account of the purchase price and agrees to pay the balance of FIVE shall be considered as rents for the use and occupation of the
HUNDRED TEN THOUSAND PESOS (P510,000) at the office of the OWNER abovementioned premises and as payments for the damages suffered on the
in the City of Quezon, Philippines, or such other office as the OWNER may OWNER on account of the failure of the PURCHASER to fulfill his part of this
designate in 120 equal monthly installment of NINE THOUSAND ONE Contract and the PURCHASER hereby renounces all his rights to demand or
HUNDRED EIGHTY NINE AND 45/100 PESOS (P9,189.45) interest being reclaim the return of the same and further obligates himself to peacefully
included on successive monthly balance at 18% per annum, and payments vacate the premises and deliver the same to the OWNER; PROVIDED,
to be made on the _____ day of each month thereafter beginning April 20, HOWEVER, that any consideration, concession, tolerance or relaxation of
1988. provisions shall not be interpreted as a renunciation on the part of OWNER
of any rights granted in this Contract.[4]
xxxx

(5) In the event that any of the payments as stipulated be not paid Upon signing of the Agreement, the Spouses Nicolas paid the down payment
when, where, and as the same become due; it is agreed that sums in arrears of P40,000. Thereupon, the Spouses Nicolas took possession of the land, and
shall bear interest at the rate of EIGHTEEN (18%) per centum per annum for several months thereafter, paid on or before the 20th of each month, the
payable monthly from the date on which said sums is due and payable.
monthly amortizations.[5]
(6) If any such payment or payments shall continue in arrears for more than
sixty-days, or if the PURCHASER shall violate any of the conditions herein Unfortunately, however, Armando Nicolas died shortly after the signing of the
set forth then the entire unpaid balance due under this contract, with any Agreement and Mrs. Nicolas began to falter in her payments. As found by
interest which may have attached shall at once become due and payable and
shall bear interest at the rate of TWELVE (12%) per centum per annum until Arbiter Jose A. Atencio, Jr. (HLURB Arbiter) of the Office of Appeals,
paid, and in such case, the PURCHASER further agrees to pay to the Adjudication and Legal Affairs (OAAL), HLURB Region III, the records of Del-
OWNER a sum equal to ten (10%) per centum of the amount due as attorneys Nacia indicate that Mrs. Nicolas is delinquent in her monthly amortization for
fees.[3] the following months: November 1988; March 1989; May 1989; June 1989-
July 1989; September 1989; October 1989; November 1989-December 1989;
Under the Agreement, the ownership of the land remains with Del-Nacia until February 1990-September 1990; October 1990-November 1990; December
full payment of the stipulated purchase price under the following terms and 1990-April 1991. The last payment of Mrs. Nicolas was made on July 19,
conditions: 1991.[6]
(3) Title to said parcel of land shall remain in the name of the OWNER until
complete payment by the PURCHASER of all obligations herein stipulated, at Del-Nacia sent Mrs. Nicolas notice to pay her arrearages with a grace period
which time the OWNER agree to execute a final deed of sale in favor of the of sixty (60) days within which to make payment but to no avail. Del-Nacia then
PURCHASER and cause the issuance of a certificate of title in the name of caused the notarial cancellation of the Agreement on December 3, 1991.[7]
the latter, free from liens and encumbrances except those provided in the
Land Registration Act, those imposed by the authorities, and those contained
in Clauses (10) and (16) of this agreement. Registration fees and Subsequently, Del-Nacia verbally informed Mrs. Nicolas to get the
documentary stamps of the deed of sale shall be paid by the PURCHASER. cash surrender value of her payment at its office. However, Mrs. Nicolas did
not claim the same. Del-Nacia prepared a check in the amount of P270,651.88
FIFTH ASSIGNMENT OF ERROR
representing the cash surrender value of Mrs. Nicolass payment and sent it to THE HON. ARBITER ERRED IN NOT GRANTING THE PRAYER OF
her by registered mail. The check was received by Mrs. Nicolas and until now COMPLAINANT-APPELLANT IN HER COMPLAINT.[12]
it remains in her possession.[8]

On February 23, 1993, Mrs. Nicolas filed a Complaint [9] against Del-Nacia The HLURB Board was partly receptive of the appeal and, on December 1,
before the HLURB. On December 15, 1994, the HLURB Arbiter rendered a 1995, it handed down a Decision[13] (HLURB Board Decision) adjudging that:
WHEREFORE, in light of the foregoing premises, we hereby
Decision[10] (Arbiter Decision) with the following disposition: MODIFY the Decision dated 15 December 1994 of the Office a Quo, insofar
as paragraph (b) of the dispositive portion is concerned and an additional
PREMISES considered, judgment is hereby rendered as follows: paragraph e, to wit:
a. Declaring the notarial cancellation of the contract on December
3, 1991 as null and void. (b) Ordering complainant to pay respondent within sixty (60) days from
b. Ordering respondent to fortwith furnish complainant accounting receipt hereof the amount of one hundred seventy three thousand
of the paid and unpaid amortizations including interests and penalty interests nine hundred fifty seven pesos and 29/1000 (P173,957.29)
and other stipulated fees or charges covering the period or delinquent representing the remaining balance of the installment purchase
payments, as a consequence of the latters default stating clearly and price of the land inclusive of legal interests at the rate of twelve
specifically the bases as stated in the contract and for the complainant to pay percent (12%) per annum.
her unpaid obligations within forty five (45) days from receipt of the said
computation/accounting. (e) Ordering respondent to pay this Board the amount of ten thousand
c. Ordering the same respondent to execute the pertinent deed in (P10,000) as an administrative fine for violation of Section 5 of P.D.
favor of the complainant within fifteen (15) days from receipt of complainants 957 within thirty (30) days from finality hereof.
full payment under paragraph b aforementioned and thereafter to deliver to
the latter the Transfer Certificate of Title of the lot in question. SO ORDERED. Quezon City.[14]
d. Remedies provided under R.A. 6552 and other legal remedies
may be resorted to, at the option of the respondent, if complainant fails or
refuses to pay within the period provided under paragraph b. Del-Nacia filed a Motion for Reconsideration[15] and a Supplement to Motion
So Ordered.[11] for Reconsideration.[16] Meanwhile, Mrs. Nicolas filed a motion for the
consignment of P173,957.29, representing the balance of the purchase price
of the land as found by the HLURB Board.
Mrs. Nicolas sought review of the Arbiter Decision by the HLURB Board of
Commissions (HLURB Board) on the following assignment of errors: On June 21, 1996, the HLURB Board resolved to deny Del-Nacias motion for
reconsideration and ordered Mrs. Nicolas to deposit with it for safekeeping the
FIRST ASSIGNMENT OF ERROR amount indicated in its Decision until Del-Nacia is willing to accept the same.[17]
THE HON. ARBITER ERRED IN ORDERING THE INCLUSION OF
INTERESTS, PENALTY INTERESTS AND OTHER STIPULATED FEES OR
CHARGES IN THE UNILATERAL COMPUTATION TO BE MADE BY THE Consequently, Del-Nacia appealed to the Office of the President which,
RESPONDENT-APPELLEE AS THE UNPAID OBLIGATION OF however, was dismissed by its Decision dated March 4, 1998 (O.P. Original
COMPLAINANT-APPELLANT. Decision).[18] Upon motion for reconsideration, however, the Office of the
President, in a Resolution dated January 5, 2001[19] (O.P. Resolution), set
SECOND ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN ORDERING THE COMPLAINANT- aside the O.P. Original Decision and affirmed the Arbiter Decision in toto.
APPELLANT TO PAY HER SUPPOSED UNPAID OBLIGATION BASED
UPON THE UNILATERAL COMPUTATION OF RESPONDENT-APPELLEE Unsuccessful in her bid at overturning the O.P. Resolution, Mrs. Nicolas filed
WITHIN FORTY FIVE (45) DAYS FROM RECEIPT OF SAID a Petition for Review[20] with the Court of Appeals (CA) docketed as CA-G.R.
COMPUTATION/ACCOUNTING.
SP No. 68407. The CA initially dismissed her petition for failing to comply with
THIRD ASSIGNMENT OF ERROR the procedural requirements of Section 6(c) of Rule 43 of the Revised Rules
THE HON. ARBITER ERRED IN GIVING RESPONDENT-APPELLEE THE of Court.[21] Mrs. Nicolas filed an omnibus motion praying that the CA
RIGHT TO RESORT TO REMEDIES PROVIDED UNDER R.A. 6552 AND reconsider and set aside the dismissal of her petition and to admit her
OTHER LEGAL REMEDIES.
amended petition.[22] The CA then required Del-Nacia to submit its comment
FOURTH ASSIGNMENT OF ERROR to the petition.[23]
THE HON. ARBITER ERRED IN NOT AWARDING ATTORNEYS FEES IN
THE SUM OF P50,000.00 TO COMPLAINANT-APPELLANT.
On January 23, 2003, the CA rendered its Decision,[24] affirming the O.P. technicalities that tend to frustrate rather than promote substantial justice,
must be avoided. In fact, Section 6 of Rule 1 states that the Rules shall be
Resolution, to wit:
liberally construed in order to promote their objective of ensuring the just,
speedy and inexpensive disposition of every action and
WHEREFORE, finding no flaw in the appealed O.P. Resolution, the same is proceeding.[31]
hereby AFFIRMED in toto, with costs against Mrs. Nicolas.

SO ORDERED. Now on the merits of the case. The issue is whether Mrs. Nicolas is
liable to pay interests, penalty interests and other stipulated charges to Del-
Nacia.
The Motion for Reconsideration[25] filed by Mrs. Nicolas was denied by the CA
in its Resolution dated April 29, 2003.[26] We rule in the affirmative.

Hence, this Petition for Review on Certiorari[27], raising the lone issue Mrs. Nicolas contends that based on the payments she already made, she has
of: overpaid the purchase price due under the Agreement.[32] She assails the
application of her payments made by Del-Nacia since the latter applied the
WHETHER OR NOT complainant (now petitioner) is bound to pay the bulk of her payments to interest rather than the principal. [33] According to her,
interests, penalty interests and other stipulated charges based on the therefore, the penalties, interests and surcharges being collected by Del-Nacia
unilateral accounting or computation made by respondent.[28]
have no basis in fact or in law.[34] In this regard, she urges this Court to affirm
the HLURB Board Decision[35] which reads:
The instant petition prays that the O.P. Original Decision, which
affirmed the HLURB Board Decision, be reinstated by this Court. Cursory reading of the abovementioned document reveal that there is indeed
no specific date indicated, as to when complainant should pay her monthly
In its Comment, Del-Nacia argues that the instant petition be denied installments. It is clear that that the space provided for in Paragraph 1 of said
for the following reasons: (1) failure to comply with section 4, Rule 45, and document for the date or day of the month on which payment is to be made
has been left blank.
(2) failure to advance any special reason that would warrant the exercise by
this Court of its discretionary power of review. Considering that the Land Purchase Agreement is a pro-forma document
prepared by respondent, any ambiguity therein should be interpreted in favor
Before discussing the merits of the case, we shall first discuss its procedural of the complainant.
aspect. On the basis of the foregoing, we find that complainant did not incur any delay,
hence, the imposition of surcharges and penalty interests are unjustified.[36]
Del-Nacia urges this Court to dismiss the instant petition for failing to
attach material portions of the records of the case that will support the same According to Del-Nacia, however, Mrs. Nicolas disregarded paying the regular
as required under Section 6 of Rule 46 of the Revised Rules of Court, such as, rate of interest, overdue interest and penalty interest which were voluntarily
for instance, copies of her own pleadings filed before the proceedings agreed upon under paragraphs (1), (5) and (6), respectively, of their
below.[29] It appears that the Agreement of the parties, subject of the dispute, Agreement.[37] Del-Nacia contends that the records clearly establish that Mrs.
was not attached to the petition. Nevertheless, since the Agreement and the Nicolas was in delay in her payments of the monthly amortizations and she
other documents that were not attached to the petition are already part of the has not disputed the same.[38]
records of this case, and could easily be referred to by this Court if necessary,
a dismissal of the instant petition purely on technical grounds is not As found by the HLURB Arbiter, the records of Del-Nacia shows that Mrs.
warranted. Indeed, the Court has, in past cases, granted relief in favor of the Nicolas incurred delay in the payment of her monthly amortizations. [39] It is a
petitioner despite this procedural infirmity.[30] Thus, we explained the rationale well-settled rule that factual findings of administrative agencies are conclusive
behind the Courts liberal stance as follows: and binding on the Court when supported by substantial evidence. We agree
with the O.P. Resolution,[40] which was adopted and affirmed by the
We must stress that cases should be determined on the merits, CA, to wit:
after all parties have been given full opportunity to ventilate their causes and
defenses, rather than on technicalities or procedural imperfections. In that
way, the ends of justice would be served better. Rules of procedure are mere Appellants [Del-Nacia] submission, however, that appellee [Mrs. Nicolas]
tools designed to expedite the decision or resolution of cases and other incurred delay in the manner of payment of her monthly installment
matters pending in court. A strict and rigid application of rules, resulting in obligations is impressed with merit. The Housing Arbiter, in his evaluation as
trier of facts of appellees records of payment, was of the same view. Under In Bachrach Motor Company v. Espiritu,[44] the Court ruled that the
#1 of the basic purchase agreement, supra, appellee undertook to pay 120
equal monthly installments of P9,189.45, payments to be made on the __ day
Civil Code permits the agreement upon a penalty apart from the interest.
of each month thereafter beginning April 20, 1988. A fair understanding of this Should there be such an agreement, the penalty does not include the interest,
provision would simply mean that payment should be made effected every and as such the two are different and distinct things which may be demanded
20th day of each month following April 20, 1988. Based on the records, one separately. The same principle was reiterated in Equitable Banking Corp. v.
can safely presume that the same was fully understood by appellee, as she
Liwanag et al.,[45] where this Court held that the stipulation about payment of
had repeatedly paid her monthly amortization on the 20th day of each, or a
few days thereafter. Neither did she question the interest imposed by such additional rate partakes of the nature of a penalty clause, which is
appellant for her payments made after the 20th. Be that as it may, this Office sanctioned by law.
is at a loss to understand the HLURBs conclusion about appellee not having
defaulted in her installment payments. The explanation given by the HLURB
On Mrs. Nicolas contention that she should not pay interest and the
Proper why it considered appellee not to have been in delay, i. e., because no
specific date [ is] indicated [in the purchase agreement] as to when other charges based on the unilateral accounting or computation made by Del-
complainant should pay her monthly installments adding that the space Nacia, a perusal of the formula[46] for the computation of regular interest,
provided for . . . the date or day of the month which payment is to be made overdue interest and penalty interest used by Del-Nacia reveal that the same
has been left blank, strikes this Office as too simplistic to be accorded
cogency. The adverted fact of a space in blank is of no moment for, to
is in accord with the provisions of the Agreement and cannot be said to have
reiterate, the agreement was for appellee to [the] pay the balance been unilaterally imposed by Del-Nacia.
(P510,000.00) of the purchase price in 120 equal monthly installments, the Moreover, the case of Relucio v. Brillante-Garfin (Relucio),[47] involves
installment period to start from April 20, 1988. The use of the phrase 120 similar facts to the case at bar where we ruled as follows:
equal monthly installments and thereafter beginning April 20, 1988 can mean
only one thing that after April 20, 1988, the monthly installment is to fall due
Examination of the record shows that the questioned Contract to
and be payable on the 20th day of the succeeding months. The explanation
Buy and Sell the subdivision lots provided for payment by private respondent
adverted to above of the HLURB, if pursued to its logical conclusion, would
of the sum of P200.00 as downpayment, and that "the balance [of
virtually allow appellee to perpetually withhold installment payment without
P10,600.00] shall be paid in 180 monthly installments at P89.45 per month,
risk of being considered in default. The absurdity of this explanation needs no
including interest rate at six percent (6%) per annum, until the purchase price
belaboring.[41]
is fully paid." This stipulation clearly specified that an interest charge of six
percent (6%) per annum was included in the monthly installment price: private
Clearly, under paragraphs (1), (5) and (6) of the respondent could not have helped noticing that P89.45 multiplied by 180
Agreement, supra, Mrs. Nicolas was bound to pay regular interest, and in case monthly installments equals P16,101.00, and not P10,600.00. The contract
of delay, overdue interest and penalty. It cannot be overemphasized that a price of P10,800.00 may thus be seen to be the cash price of the subdivision
lots, that is, the amount payable if the price of the lots were to be paid in cash
contract is the law between the parties,[42] and courts have no choice but to and in full at the execution of the contract; it is not the amount that the vendor
enforce such contract so long as they are not contrary to law, morals, good will have received in the aggregate after fifteen (15) years if the vendee shall
customs or public policy.[43] have religiously paid the monthly installments. The installment price, upon the
other hand, of the subdivision lots the sum total of the monthly installments
(i.e., P16,101.00) typically, as in the instant case, has an interest component
In this connection, a stipulation for the payment of interest and penalty apart which compensates the vendor for waiting fifteen (15) years before receiving
from interest in case of delay is not contrary to law, moral, good customs or the total principal amount of P10,600.00. Economically or financially,
public policy. To be sure, the same is sanctioned by the following provisions P10,600.00 delivered in full today is simply worth much more than a long
series of small payments totalling, after fifteen (15) years, P10,600.00. For
of the Civil Code: the vendor, upon receiving the full cash price, could have deposited that
amount in a bank, for instance, and earned interest income which at six
Article 1956. No interest shall be due unless it has been expressly stipulated percent (6%) per year and for fifteen (15) years, would precisely total
in writing. P5,501.00 (the difference between the installment price of P16,101.00 and
Article 1226. In obligations with a penal clause, the penalty shall substitute the cash price of P10,600.00 ) To suppose, as private respondent argues,
the indemnity for damages and the payment of interests in case of non- that mere prompt payment of the monthly installments as they fell due would
compliance, if there is no stipulation to the contrary. obviate application of the interest charge of six percent (6%) per annum, is to
ignore that simple economic fact. That economic fact is, of course, recognized
Article 2209. If the obligation consists in the payment of a sum of money, and by law, which authorizes the payment of interest when contractually stipulated
the debtor incurs in delay, the indemnity for damages, there being no for by the parties or when implied in recognized commercial custom or usage.
stipulation to the contrary, shall be the payment of the interest agreed upon x
x x. Vendor and vendee are legally free to stipulate for the payment
of either the cash price of a subdivision lot or its installment price.
Should the vendee opt to purchase a subdivision lot via the installment
payment system, he is in effect paying interest on the cash price,
whether the fact and rate of such interest payment is disclosed in the
contract or not. The contract for the purchase and sale of a piece of land
on the installment payment system in the case at bar is not only quite b. Overdue interest of 18% per annum under par. 5 of the Land Purchase Agreement:
lawful; it also reflects a very wide spread usage or custom in our present
18% Overdue Interest = Monthly amortization x 18% x days delayed/ 360
day commercial life.[48]
In Relucio, the Court also sustained the sellers theory of declining balance
whereby the seller credited a bigger sum of the monthly amortization to interest c. Penalty interest of 12% per annum under par. 6 of the Land Purchase Agreement:

rather than the principal, such that in [During] the succeeding monthly 12% Penalty Interest = Overdue Interest + Regular Interest + Previous Running Balance x
payments, however, as the outstanding balance on the principal gradually 12% x days delayed/360
declined, the interest component (in absolute terms) correspondingly fell while [47]
G.R. No. 76518, July 13, 1990, 187 SCRA 405.
the component credited to the principal increased proportionately, thus
[51]
Antonia Torres v. Court of Appeals, et al., 378 Phil. 170, 179 (1999).
amortizing the balance of the principal purchase price as that balance
gradually declined.[49]

In the same vein, an examination of the application of Mrs. Nicolas payments


by Del-Nacia in the table[50] the latter prepared as reflected in the records of
the case, shows that the same is in accord with the theory of declining balance
which was affirmed by this Court in Relucio. THIRD DIVISION
Given the foregoing, it appears that the only dilemma which Mrs.
Nicolas currently finds herself in is that the obligations which she voluntary
undertook under the Agreement turned out to be more onerous than what she ERMINDA F. FLORENTINO, G.R. No. 172384
expected. Doctrinal is the rule that courts may not extricate parties from the Petitioner,
necessary consequences of their acts.[51] That the terms of a contract turn out
to be financially disadvantageous to them will not relieve them of their Present:
obligations therein.[52]
YNARES-SANTIA
IN VIEW WHEREOF, the petition is DISMISSED. The decision of the Chairperson,
Court of Appeals is affirmed. Costs against the petitioner. - versus - AUSTRIA-MARTINEZ
SO ORDERED. CHICO-NAZARIO,
NACHURA, and
[1]
Docketed as Case No. REM-C-03-4-974, CA rollo, pp. 88-92. REYES, JJ.
[30]
Paredes, et al. v. Verano, et al, G.R. No. 164375, October 12, 2006, 504 SCRA 264; Cortez-Estrada v.
Heirs of Samut, G.R. No. 154407, February 14, 2005, 451 SCRA 275.
[31]
Posadas-Moya and Associates Construction Co., Inc v. Greenfield Development Corporation et al., 451
Phil. 647, 661 (2003).
SUPERVALUE, INC.,
[42]
CIVIL CODE, Art. 1159.
Respondent. Promulgated:
[43]
CIVIL CODE, Art. 1306.
[44]
52 Phil. 347 (1928).
[45]
143 Phil. 102 (1970). September 12, 2007
[46]
The formula used by Del-Nacia is as follows (CA rollo, p. 234): x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
a. Regular interest of 18% per annum under par. 1 of the Land Purchase Agreement: - - -x
18% Regular Interest = Running Balance x 18% x 30 days/360
properties seized by [respondent] after the former settled her
obligation with the latter is however MAINTAINED.[3]
DECISION
The factual and procedural antecedents of the instant petition
CHICO-NAZARIO, J.: are as follows:

Petitioner is doing business under the business name


Before this Court is a Petition for Review on Certiorari under Rule 45 Empanada Royale, a sole proprietorship engaged in the retail
of the Revised Rules of Court, filed by of empanada with outlets in different malls and business
petitioner Erminda F. Florentino, seeking to reverse and set aside establishments within Metro Manila.[4]
the Decision,[1] dated 10 October 2003 and the
Resolution, dated 19 April 2006 of the Court of Appeals in CA-G.R.
[2] Respondent, on the other hand, is a domestic corporation
CV No. 73853. The appellate court, in its assailed Decision and engaged in the business of leasing stalls and commercial store
Resolution, modified the Decision dated 30 April 2001 of the spaces located inside SM Malls found all throughout the country.[5]
Regional Trial Court (RTC) of Makati, Branch 57, in Civil Case No.
00-1015, finding the respondent Supervalue, Inc., liable for the sum On 8 March 1999, petitioner and respondent executed three
of P192,000.00, representing the security deposits made by the Contracts of Lease containing similar terms and conditions over the
petitioner upon the commencement of their Contract of cart-type stalls at SM North Edsa and SM Southmall and a store
Lease. The dispositive portion of the assailed appellate courts space at SM Megamall. The term of each contract is for a period of
Decision thus reads: four months and may be renewed upon agreement of the parties.[6]

WHEREFORE, premises considered, the appeal is Upon the expiration of the original Contracts of Lease, the parties
PARTLY GRANTED. The April 30, 2001 Decision of the Regional
Trial Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) agreed to renew the same by extending their terms until 31 March
the portion ordering the [herein respondent] to pay the amount 2000.[7]
of P192,000.00 representing the security deposits and P50,000.00
as attorneys fees in favor of the [herein petitioner] as well as giving
Before the expiration of said Contracts of Lease, or on 4 February
[respondent] the option to reimburse [petitioner] of the value of the 2000, petitioner received two letters from the respondent, both
improvements introduced by the [petitioner] on the leased [premises] dated 14 January 2000, transmitted through facsimile
should [respondent] choose to appropriate itself or require the
[petitioner] to remove the improvements, is hereby REVERSED and transmissions.[8]
SET ASIDE; and (b) the portion ordering the return to [petitioner] the
In the first letter, petitioner was charged with violating Section 8 of confiscated the equipment and personal belongings of the petitioner
the Contracts of Lease by not opening on 16 December 1999 and 26 found therein after the expiration of the lease contract.[14]
December 1999.[9]
In a letter dated 8 May 2000, petitioner demanded that the
Respondent also charged petitioner with selling a new variety respondent release the equipment and personal belongings it seized
of empanada called mini-embutido and of increasing the price of her from the SM Megamall store space and return the security deposits,
merchandise from P20.00 to P22.00, without the prior approval of in the sum of P192,000.00, turned over by the petitioner upon
the respondent.[10] signing of the Contracts of Lease. On 15 June 2000, petitioner sent
respondent another letter reiterating her previous demands, but the
Respondent observed that petitioner was frequently closing latter failed or refused to comply therewith. [15]
earlier than the usual mall hours, either because of non-delivery or
delay in the delivery of stocks to her outlets, again in violation of the On 17 August 2000, an action for Specific Performance, Sum of
terms of the contract. A stern warning was thus given to petitioner to Money and Damages was filed by the petitioner against the
refrain from committing similar infractions in the future in order to respondent before the RTC of Makati, Branch 57.[16]
avoid the termination of the lease contract.[11]
In her Complaint docketed as Civil Case No. 00-1015,
In the second letter, respondent informed the petitioner that it will no petitioner alleged that the respondent made verbal representations
longer renew the Contracts of Lease for the three outlets, upon their that the Contracts of Lease will be renewed from time to time and,
expiration on 31 March 2000.[12] through the said representations, the petitioner was induced to
introduce improvements upon the store space at SM Megamall in
In a letter-reply dated 11 February 2000, petitioner explained that the sum of P200,000.00, only to find out a year later that the
the mini-embutido is not a new variety of empanada but had similar respondent will no longer renew her lease contracts for all three
fillings, taste and ingredients as those of pork empanada; only, its outlets.[17]
size was reduced in order to make it more affordable to the
buyers.[13] In addition, petitioner alleged that the respondent, without justifiable
cause and without previous demand, refused to return the security
Such explanation notwithstanding, respondent still refused to renew deposits in the amount of P192,000.00.[18]
its Contracts of Lease with the petitioner. To the contrary, Further, petitioner claimed that the respondent seized her equipment
respondent took possession of the store space in SM Megamall and and personal belongings found inside the store space in
SM Megamall after the lease contract for the said outlet expired and
despite repeated written demands from the petitioner, respondent agreements; and since petitioner committed several infractions
continuously refused to return the seized items.[19] thereof, respondent was justified in forfeiting the security deposits in
the latters favor.
Petitioner thus prayed for the award of actual damages in the sum
of P472,000.00, representing the sum of security deposits, cost of On 30 April 2001, the RTC rendered a Judgment[22] in favor of the
improvements and the value of the personal properties petitioner and found that the physical takeover by the respondent of
seized. Petitioner also asked for the award of P300,000.00 as moral the leased premises and the seizure of petitioners equipment and
damages; P50,000.00 as exemplary damages; and P80,000.00 as personal belongings without prior notice were
attorneys fees and expenses of litigation.[20] illegal. The decretal part of the RTC Judgment reads:

For its part, respondent countered that petitioner committed several WHEREFORE, premises duly considered, judgment is
hereby rendered ordering the [herein respondent] to pay [herein
violations of the terms of their Contracts of Lease by not opening petitioner] the amount of P192,000.00 representing the security
from 16 December 1999 to 26 December 1999, and by introducing deposits made by the [petitioner] and P50,000.00 as and for
attorneys fees.
a new variety of empanada without the prior consent of the
respondent, as mandated by the provision of Section 2 of the The [respondent] is likewise ordered to return to the
[petitioner] the various properties seized by the former after settling
Contract of Lease. Respondent also alleged that petitioner infringed her account with the [respondent].
the lease contract by frequently closing earlier than the agreed
closing hours. Respondent finally averred that petitioner is liable for Lastly, the [respondent] may choose either to reimburse the
[petitioner] one half (1/2) of the value of the improvements introduced
the amount P106,474.09, representing the penalty for selling a new by the plaintiff at SM Megamall should [respondent] choose to
variety of empanada, electricity and water bills, and rental appropriate the improvements to itself or require the [petitioner] to
remove the improvements, even though the principal thing may
adjustment, among other charges incidental to the lease suffer damage thereby. [Petitioner] shall not, however, cause
agreements. Respondent claimed that the seizure of petitioners anymore impairment upon the said leased premises than is
necessary.
personal belongings and equipment was in the exercise of its
retaining lien, considering that the petitioner failed to settle the said The other damages claimed by the plaintiff are denied for
obligations up to the time the complaint was filed.[21] lack of merit.

Considering that petitioner already committed several breaches of


Aggrieved, the respondent appealed the adverse RTC Judgment to
contract, the respondent thus opted not to renew its Contracts of
the Court of Appeals.
Lease with her anymore. The security deposits were made in order
to ensure faithful compliance with the terms of their lease
In a Decision[23] dated 10 October 2003, the Court of Appeals III. Whether or not the respondent is liable for attorneys fees.[27]
modified the RTC Judgment and found that the respondent was
justified in forfeiting the security deposits and was not liable to The appellate court, in finding that the respondent is authorized to
reimburse the petitioner for the value of the improvements forfeit the security deposits, relied on the provisions of Sections 5
introduced in the leased premises and to pay for attorneys fees. In and 18 of the Contract of Lease, to wit:
modifying the findings of the lower court, the appellate court
declared that in view of the breaches of contract committed by the Section 5. DEPOSIT. The LESSEE shall make a cash deposit in
petitioner, the respondent is justified in forfeiting the security the sum of SIXTY THOUSAND PESOS (P60,000.00) equivalent to
three (3) months rent as security for the full and faithful
deposits. Moreover, since the petitioner did not obtain the consent performance to each and every term, provision, covenant and
of the respondent before she introduced improvements on the condition of this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is increased[,] the LESSEE
SM Megamall store space, the respondent has therefore no on demand shall make an additional deposit equal to the increase in
obligation to reimburse the petitioner for the amount expended in rent. The LESSOR shall not be required to keep the deposit separate
from its general funds and the deposit shall not be entitled to
connection with the said improvements.[24] The Court of Appeals, interest. The deposit shall remain intact during the entire term and
however, maintained the order of the trial court for respondent to shall not be applied as payment for any monetary obligations of the
return to petitioner her properties after she has settled her LESSEE under this contract. If the LESSEE shall faithfully perform
every provision of this lease[,] the deposit shall be refunded to the
obligations to the respondent. The appellate court denied petitioners LESSEE upon the expiration of this Lease and upon satisfaction of
Motion for Reconsideration in a Resolution[25] dated 19 April 2006. all monetary obligation to the LESSOR.

xxxx
Hence, this instant Petition for Review on Certiorari[26] filed by the
petitioner assailing the Court of Appeals Decision. For the resolution Section 18. TERMINATION. Any breach, non-performance or
of this Court are the following issues: non-observance of the terms and conditions herein provided
shall constitute default which shall be sufficient ground to
terminate this lease, its extension or renewal. In which event, the
LESSOR shall demand that LESSEE immediately vacate the
I. Whether or not the respondent is liable to return the security premises, and LESSOR shall forfeit in its favor the deposit
tendered without prejudice to any such other appropriate action
deposits to the petitions. as may be legally authorized.[28]
Since it was already established by the trial court that the
II. Whether or not the respondent is liable to reimburse the petitioner petitioner was guilty of committing several breaches of contract, the
for the sum of the improvements she introduced in the leased Court of Appeals decreed that she cannot therefore rightfully
premises. demand the return of the security deposits for the same are deemed
forfeited by reason of evident contractual violations.
if there has been no compliance if the penalty is iniquitous or
It is undisputed that the above-quoted provision found in all unconscionable in accordance with Article 1229 of the Civil Code
Contracts of Lease is in the nature of a penal clause to ensure which clearly provides:
petitioners faithful compliance with the terms and conditions of the
said contracts. 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
A penal clause is an accessory undertaking to assume greater performance, the penalty may also be reduced by the courts if it is
liability in case of breach. It is attached to an obligation in order to iniquitous or unconscionable.[31]
insure performance and has a double function: (1) to provide for
liquidated damages, and (2) to strengthen the coercive force of the In ascertaining whether the penalty is unconscionable or not, this
obligation by the threat of greater responsibility in the event of court set out the following standard in Ligutan v. Court of
breach.[29] The obligor would then be bound to pay the stipulated Appeals,[32] to wit:
indemnity without the necessity of proof of the existence and the
measure of damages caused by the breach.[30] Article 1226 of the The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its resolution
Civil Code states: would depend on such factor as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the obligation,
Art. 1226. In obligations with a penal clause, the penalty the mode of breach and its consequences, the supervening realities,
shall substitute the indemnity for damages and the payment of the standing and relationship of the parties, and the like, the
interests in case of noncompliance, if there is no stipulation to the application of which, by and large, is addressed to the sound
contrary. Nevertheless, damages shall be paid if the obligor refuses discretion of the court. xxx.
to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
In the instant case, the forfeiture of the entire amount of the
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code. security deposits in the sum of P192,000.00 was excessive and
unconscionable considering that the gravity of the breaches
committed by the petitioner is not of such degree that the respondent
As a general rule, courts are not at liberty to ignore the freedoms of
was unduly prejudiced thereby. It is but equitable therefore to reduce
the parties to agree on such terms and conditions as they see fit as
the penalty of the petitioner to 50% of the total amount of security
long as they are not contrary to law, morals, good customs, public
deposits.
order or public policy. Nevertheless, courts may equitably reduce a
stipulated penalty in the contracts in two instances: (1) if the principal
obligation has been partly or irregularly complied with; and (2) even
It is in the exercise of its sound discretion that this court contracts from time to time after their expirations, and that the
tempered the penalty for the breaches committed by the petitioner petitioner was so induced thereby that she expended the sum
to 50% of the amount of the security deposits. The forfeiture of the of P200,000.00 for the improvement of the store space leased.
entire sum of P192,000.00 is clearly a usurious and iniquitous
penalty for the transgressions committed by the petitioner. The This argument was squarely addressed by this court in Fernandez
respondent is therefore under the obligation to return the 50% v. Court of Appeals,[33] thus:
of P192,000.00 to the petitioner. The Court ruled that the stipulation of the parties in their lease
contract to be renewable at the option of both parties stresses that
the faculty to renew was given not to the lessee alone nor to
Turning now to the liability of the respondent to reimburse the the lessor by himself but to the two simultaneously; hence, both must
agree to renew if a new contract is to come about.
petitioner for one-half of the expenses incurred for the improvements
on the leased store space at SM Megamall, the following provision Petitioners contention that respondents had verbally
agreed to extend the lease indefinitely is inadmissible to qualify the
in the Contracts of Lease will enlighten us in resolving this issue: terms of the written contract under the parole evidence rule, and
unenforceable under the statute of frauds.[34]
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS,
ETC. The LESSEE shall not make any alterations, additions, or
improvements without the prior written consent of LESSOR; and all
alterations, additions or improvements made on the leased Moreover, it is consonant with human experience that lessees,
premises, except movable or fixtures put in at LESSEEs expense before occupying the leased premises, especially store spaces
and which are removable, without defacing the buildings or
damaging its floorings, shall become LESSORs property without
located inside malls and big commercial establishments, would
compensation/reimbursement but the LESSOR reserves the right to renovate the place and introduce improvements thereon according
require the removal of the said alterations, additions or to the needs and nature of their business and in harmony with their
improvements upon expiration of the lease.
trademark designs as part of their marketing ploy to attract
The foregoing provision in the Contract of Lease mandates that customers. Certainly, no inducement or misrepresentation from
before the petitioner can introduce any improvement on the leased the lessor is necessary for this purpose, for it is not only a matter of
premises, she should first obtain respondents consent.In the case at necessity that a lessee should re-design its place of business but a
bar, it was not shown that petitioner previously secured the consent business strategy as well.
of the respondent before she made the improvements on the leased
space in SM Megamall. It was not even alleged by the petitioner that In ruling that the respondent is liable to reimburse petitioner one half
she obtained such consent or she at least attempted to secure the of the amount of improvements made on the leased store space
same. On the other hand, the petitioner asserted that respondent should it choose to appropriate the same, the RTC relied on the
allegedly misrepresented to her that it would renew the terms of the provision of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful the expenses or of paying the increase in value which the thing may
improvements which are suitable to the use for which the lease is have acquired by reason thereof.
intended, without altering the form or substance of the property Thus, to be entitled to reimbursement for improvements
leased, the lessor upon the termination of the lease shall pay the
lessee one-half of the value of the improvements at that time. Should introduced on the property, the petitioner must be considered a
the lessor refuse to reimburse said amount, the lessee may remove builder in good faith. Further, Articles 448 and 546 of the Civil Code,
the improvements, even though the principal thing may suffer
damage thereby. He shall not, however, cause any more impairment which allow full reimbursement of useful improvements and retention
upon the property leased than is necessary. of the premises until reimbursement is made, apply only to a
While it is true that under the above-quoted provision of the Civil possessor in good faith, i.e., one who builds on land with the belief
Code, the lessor is under the obligation to pay the lessee one-half of that he is the owner thereof. A builder in good faith is one who is
the value of the improvements made should the lessor choose to unaware of any flaw in his title to the land at the time he builds on
appropriate the improvements, Article 1678 however should be read it.[35] In this case, the petitioner cannot claim that she was not aware
together with Article 448 and Article 546 of the same statute, which of any flaw in her title or was under the belief that she is the owner
provide: of the subject premises for it is a settled fact that she is merely a
lessee thereof.
Art. 448. The owner of the land on which anything has been
built, sown or planted in good faith, shall have the right to appropriate
as his own the works, sowing or planting, after payment of the In Geminiano v. Court of Appeals,[36] this Court was
indemnity provided for in articles 546 and 548, or to oblige the one emphatic in declaring that lessees are not possessors or builders in
who built or planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter cannot be good faith, thus:
obliged to buy the land if its value is considerably more than that of
the building or trees. In such case, he shall pay reasonable rent, if Being mere lessees, the private respondents knew that
the owner of the land does not choose to appropriate the building or their occupation of the premises would continue only for the life
trees after proper indemnity. The parties shall agree upon the terms of the lease. Plainly, they cannot be considered as
of the lease and in case of disagreement, the court shall fix the terms possessors nor builders in good faith.
thereof.
In a plethora of cases, this Court has held that Article 448
xxxx of the Civil Code, in relation to Article 546 of the same Code, which
allows full reimbursement of useful improvements and retention of
Art. 546. Necessary expenses shall be refunded to every possessor; the premises until reimbursement is made, applies only to a
but only possessor in good faith may retain the thing until he has possessor in good faith, i.e., one who builds on land with the belief
been reimbursed therefor. that he is the owner thereof. It does not apply where one's only
interest is that of a lessee under a rental contract; otherwise, it
Useful expenses shall be refunded only to the possessor in good would always be in the power of the tenant to "improve" his
faith with the same right of retention, the person who has defeated landlord out of his property.
him in the possession having the option of refunding the amount of
Since petitioners interest in the store space is merely that of the MINITA V. CHICO-
lessee under the lease contract, she cannot therefore be considered NAZARIO
a builder in good faith. Consequently, respondent may appropriate Associate Justice
the improvements introduced on the leased premises without any
obligation to reimburse the petitioner for the sum expended.

Anent the claim for attorneys fees, we resolve to likewise deny the
award of the same. Attorneys fees may be awarded when a party is
compelled to litigate or to incur expenses to protect its interest by
reason of unjustified act of the other.[37] WE CONCUR:

In the instant petition, it was not shown that the respondent


unjustifiably refused to grant the demands of the petitioner so as to CONSUELO YNARES-SANTIAGO
compel the latter to initiate legal action to enforce her right. As we Associate Justice
have found herein, there is basis for respondents refusal to return to Chairperson
petitioner the security deposits and to reimburse the costs of the
improvements in the leased premises. The award of attorneys fees
is therefore not proper in the instant case.
MA. ALICIA AUSTRIA-MARTINEZ ANTONIO
WHEREFORE, premises considered, the instant Petition EDUARDO B. NACHURA
Associate Justice Associate Justice
is PARTLY GRANTED. The Court of Appeals Decision dated 10
October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED with
the MODIFICATION that the respondent may forfeit only 50% of the
total amount of the security deposits in the sum of P192,000.00, and RUBEN T. REYES
must return the remaining 50% to the petitioner. No costs. Associate Justice

SO ORDERED.
ATTESTATION
I attest that the conclusions in the above Decision were reached in
[29]
Filinvest Land, Inc. v. Court of Appeals, G.R. No. 138980, 20 September 2005, 470
SCRA 260, 269.
consultation before the case was assigned to the writer of the [30]
Ligutan v. Court of Appeals, 427 Phil. 42, 51 (2002).
opinion of the Courts Division. [31]
[32]
Filinvest Land, Inc. v. Court of Appeals, supra note 29 at 269-270.
Supra note 30 at 52.
[33]
G.R. No. L-80231, 18 October 1988, 166 SCRA 577, 587-588.
[34]
Josefa v. San Buenaventura, G.R. No. 163429, 3 March 2006, 484 SCRA 49, 60.
[35]
Lopez v. Sarabia, G.R. No. 140357, 24 September 2004, 439 SCRA 35, 49.
[36]
328 Phil. 682, 689-690 (1996).
CONSUELO YNARES-SANTIAGO [37]
Philippine Air Lines, Inc. v. Court of Appeals, 193 Phil. 560, 580 (1981).
Associate Justice
Chairperson, Third Division

CERTIFICATION THIRD DIVISION

Pursuant to Section 13, Article VIII of the Constitution, and the DIAMOND BUILDERS CONGLOMERATION, G.R. No. 171820
Division Chairpersons Attestation, it is hereby certified that the ROGELIO S. ACIDRE, TERESITA P. ACIDRE,
GRACE C. OSIAS, VIOLETA S. FAIYAZ and Present:
conclusions in the above Decision were reached in consultation EMMA S. CUTILLAR,
before the case was assigned to the writer of the opinion of the Petitioners, YNARES-SANTIAGO, J.,
Courts Division. Chairperson,
CHICO-NAZARIO,
- versus - VELASCO,*
NACHURA, and
REYES, JJ.
REYNATO S. PUNO COUNTRY BANKERS INSURANCE
CORPORATION, Promulgated:
Chief Justice Respondent.
December 13, 2007

x---------------------------------------------------------------------
---------------x
[1]
Penned by Associate Justice Elvi John S. Asuncion with Associate
Justices Godardo A. Jacinto and Lucas P. Bersamin, concurring. Rollo, pp.
8-17.
[2]
Id. at 9.
[3]
Id. at 16-17. DECISION
[4]
Records, p. 1.
[5]
[6]
Id.
Id. at 55-56.
NACHURA, J.:
[7]
Id. at 58.
works therein specified for the added consideration of P100,000.00
as alleged in paragraphs 2 and 3 of the complaint, Annex C hereof.

b. [Petitioner Rogelio] admits full payment of plaintiff to him the


amount of P1,530,000.00 leaving the balance of P570,000.00 of the
Before us is a petition for review on certiorari to annul the contractual price of P2,100,000.00 for the construction of the
Decision[1] of the Court of Appeals (CA) in CA-G.R. C.V. No. 48603, buildings aforementioned.
which reversed the Decision[2] of the Regional Trial Court, Branch 7,
c. [Petitioner Rogelio] agrees to fully complete the construction of the
Manila (RTC Manila) in Civil Case No. 92-62029 and granted residential/commercial building mentioned in paragraph 1 hereof
respondent Country Bankers Insurance Corporations (Country provided plaintiff would pay to him, subject to hereunder terms, the
aforesaid amount of P570,000.00.
Bankers) prayer for a sum of money against the petitioners.
d. The plaintiff agrees to pay [petitioner Rogelio] the amount
of P570,000.00 subject to the terms hereunder set forth and subject
The controversy originated from a civil case[3] pending before the strictly to the condition that [petitioner Rogelio] will finish the building
Regional Trial Court, Branch 125, Caloocan City (RTC Caloocan) above-described pursuant to the agreements [Annex(es) A and B]
filed by Marceliano Borja (Borja) against Rogelio S. Acidre (Rogelio) set forth in paragraph 1 hereof.

for the latters breach of his obligation to construct a residential and e. Plaintiff shall pay [petitioner Rogelio] the amount of P570,000.00
commercial building. Rogelio is the sole proprietor of petitioner as follows:
Diamond Builders Conglomeration (DBC). i. P370,000.00 the 5th day from approval of this
compromise agreement by this Honorable
Court and to coincide (with) the start of the 75
To put an end to the foregoing litigation, the parties entered days for [petitioner Rogelio] to complete the
into a Compromise Agreement[4] which provided, in part: construction of the building.

COMPROMISE AGREEMENT ii. P200,000.00 When the aforedescribed building


is fully constructed pursuant to agreements stated
1. x x x in paragraph 1 hereof.

a. In lieu of rescission, the parties have mutually agreed, subject to iii. Said building must be fully finished
the provisions hereunder, to fully implement the building contract pursuant to the agreement stated in paragraph
dated October 1, 1990 and supplemented on October 2, 1990 with 1 hereof within 75 days (excluding Sundays
an additional scope of work marked as Annex A of the complaint and and Holidays) counted from receipt of payment
the Letter-Agreement dated November 16, 1991 signed by the of P370,000.00. The date of receipt to be issued
[petitioner Rogelio] and plaintiffs son(,) Ferdinand A. Borja, marked by [petitioner Rogelio] will control. The 75th day will
as Annex B of the complaint, which required full compliance of the be 12:00 noon of the 75th day.
structural design of Engr. Ramos and explicit reminders in the
constructing of the residential/commercial building and the additional iv. From receipt of the aforesaid amount
of P370,000.00, [petitioner Rogelio] shall
submit in favor of plaintiff a performance or The RTC Caloocan approved the Compromise Agreement and
surety bond in the equivalent amount
of P370,000.00 to answer or indemnify plaintiff rendered a Decision[5] in accordance with the terms and conditions
in the event the building is not finished on the contained therein.
75th day.

v. In the event the building is finished within 75 In compliance with the Compromise Agreement, Rogelio obtained a
days as heretofore stated and pursuant to the
agreements set forth in paragraph 1 hereof, in
Surety Bond[6] from Country Bankers in favor of the spouses
addition to the amount of P200,000.00, the plaintiff Borja.[7] In this regard, Rogelio and his spouse, petitioner Teresita P.
shall also pay [petitioner Rogelio] the amount Acidre, together with DBC employees Grace C. Osias, Violeta S.
of P90,000.00 by way of [bonus]. However, in the
event [petitioner Rogelio] shall fail to fully Faiyaz and Emma S. Cutillar (the other petitioners herein), signed
complete the construction of the building an Indemnity Agreement[8]consenting to their joint and several
pursuant to the agreements set forth in
paragraph 1 hereof within 75 days as liability to Country Bankers should the surety bond be executed
heretofore stated, [petitioner Rogelio] shall not upon.
be entitled to any further payments and the
performance or surety bond above-mentioned
shall be fully implemented by way of On April 23, 1992, Country Bankers received a Motion for
penalizing [petitioner Rogelio] and/or as award Execution[9] of the surety bond filed by Borja with the RTC Caloocan
for damages in favor of plaintiff.
for Rogelios alleged violation of the Compromise Agreement.
xxxx Consequently, Country Bankers, in a letter[10] dated May 13, 1992,
f. x x x advised petitioners that in the event it is constrained to pay under
the surety bond to Borja, it shall proceed against petitioners for
g. That the construction herein contemplated shall not extend
beyond 75 days. Said period shall commence five days from the date
reimbursement.
of the final approval hereof by this Honorable Court.
In turn, petitioners wrote Country Bankers informing the latter of the
i. That any violation and/or avoidance of the terms and
conditions of this Compromise Agreement by either of the filing of an Opposition to Borjas Motion for Execution.[11] In spite
parties herein shall forthwith entitle the aggrieved party to an of the opposition, however, the RTC Caloocan issued a Writ of
immediate execution hereof and to the necessary and
corresponding reliefs and remedies therefore. (Emphasis Execution[12] on May 25, 1992. Petitioners then filed a motion for
supplied.) reconsideration.

On May 29, 1992, Sheriff Perceverando Pangan of RTC Caloocan


served Country Bankers a copy of the writ. Posthaste, Country
Bankers, in writing, requested Sheriff Pangan for a 10-day grace In the meantime, after Country Bankers was compelled to pay the
period within which to settle the claim.[13] amount of the surety bond, it demanded reimbursement from the
petitioners under the Indemnity Agreement.[20]However, petitioners
Subsequently, Rogelio filed an Urgent Omnibus Motion[14] to refused to reimburse Country Bankers.
suspend the Writ of Execution and to resolve the Motion for
Reconsideration dated June 3, 1992. Upon receipt of the Omnibus In addition, upon the dismissal of their petition in CA-G.R. SP No.
Motion, Country Bankers forthwith wrote Sheriff Pangan and 28205, petitioners wrote Country Bankers and informed the latter
requested that the implementation of the Writ of Execution be held that the voluntary payment of the bond effectively prevented them
in abeyance so as not to render moot and academic the RTC from contesting the validity of the issuance of the Writ of
Caloocans resolution on the Omnibus Motion.[15] Execution.[21]

Nonetheless, on June 9, 1992, Country Bankers was served As a result, Country Bankers filed a complaint for sum of money
a Notice of Levy/Sheriffs Sale[16] with a list of its personal properties against the petitioners which, as previously stated, the RTC Manila
to be sold at the scheduled public auction on June 15, 1992. dismissed. It disposed of the case, thus:

The next day, or on June 10, 1992, Country Bankers verified WHEREFORE, and considering the foregoing, judgment is hereby
rendered:
with the RTC Caloocan the status of petitioners Omnibus Motion. It
was informed that the motion had yet to be acted upon. On the same 1. Dismissing the complaint for lack of merit;
date, Sheriff Pangan arrived at Country Bankers office, and the latter
was thus constrained to pay the amount of the surety bond.[17]
2. On the counterclaim, ordering [Country Bankers] to pay
[petitioners] attorneys fees of P50,000.00, plus the costs of suit.
Significantly, on June 22, 1992, twelve (12) days after the
satisfaction of judgment in Civil Case No. C-14745, Rogelio filed a SO ORDERED.
Petition for Certiorari and Prohibition with Preliminary Injunction and
Restraining Order[18] with the CA, docketed as CA-G.R. SP No. On appeal, the CA reversed and set aside the decision of the
28205. Although the appellate court issued a Temporary Restraining RTC Manila, to wit:
Order (TRO), the petition was eventually denied due course and
dismissed outright for being fait accompli, as what it sought to enjoin WHEREFORE, premises considered, the Appeal is GRANTED and
or prohibit had already been fully satisfied and executed.[19] the Decision dated November 2, 1992 of Branch 7 of the Regional
Trial Court of Manila is hereby REVERSED and a new one entered,
ordering [petitioners] to pay [Country Bankers] the sum of THREE In impugning the CAs decision, petitioners invoke their pending
HUNDRED SEVENTY THOUSAND PESOS (P370,000.00), as
reimbursement or actual damages, plus interest thereon at the rate Omnibus Motion to stay the execution of the compromise judgment.
of 12% per annum computed from the date of judicial demand, or Petitioners theory is that, although the RTC Caloocan had already
from July 24, 1992, the date of filing of the complaint until the said
amount has been fully paid. issued a writ of execution and Country Bankers had been served a
Notice of Levy/Sheriffs Sale of its properties at the impending public
SO ORDERED.
auction, the payment made by Country Bankers to Borja is a
voluntary act. Petitioners push their theory even further, and deign
In reversing the trial court, the CA ruled that Country Bankers, as to suggest that Country Bankers should have itself intervened in the
surety of Rogelios loan obligation, did not effect voluntary payment proceedings before the RTC Caloocan to stay the writ of execution.
on the bond. The appellate court found that what Country Bankers
paid was an obligation legally due and demandable. It declared that We reject this preposterous suggestion. Petitioners ought to be
Country Bankers acted upon compulsion of a writ of execution, reminded of the nature of a judgment on a compromise and a writ of
which appears to have been regularly, and validly issued, and, by its execution issued in connection therewith.
very nature, is immediately enforceable.
A compromise judgment is a decision rendered by a court
Hence, this appeal positing a sole issue for our resolution, to wit: sanctioning the agreement between the parties concerning the
determination of the controversy at hand. Essentially, it is a contract,
Whether petitioners should indemnify Country Bankers for the stamped with judicial imprimatur, between two or more persons,
payment of the surety bond.
who, for preventing or putting an end to a lawsuit, adjust their
difficulties by mutual consent in the manner which they agree on,
In fine, petitioners contend that Country Bankers is not entitled to and which each of them prefers in the hope of gaining, balanced by
reimbursement when it voluntarily paid the surety bond considering the danger of losing.[22] Upon court approval of a compromise
it knew full well the remedies availed of by petitioners to stay the agreement, it transcends its identity as a mere contract binding only
execution of the compromise judgment. Thus, Country Bankers upon the parties thereto, as it becomes a judgment that is subject to
must bear the loss or damage arising from its voluntary act. execution in accordance with Rule 39 of the Rules of Court.[23]

We deny the appeal and affirm the appellate courts ruling. Country Ordinarily, a judgment based on compromise is not appealable. It
Bankers should be reimbursed for the P370,000.00 it paid to Borja should not be disturbed except upon a showing of vitiated consent
under the surety bond. or forgery. The reason for the rule is that when both parties enter
into an agreement to end a pending litigation and request that a
decision be rendered approving said agreement, it is only natural to proper, as failure to pay would have amounted to contumacious
presume that such action constitutes an implicit, as undeniable as disobedience of a valid court order.
an express, waiver of the right to appeal against said
decision.[24] Thus, a decision on a compromise agreement is final Clearly, even without the aforesaid default clause, the compromise
and executory, and is conclusive between the parties.[25] judgment remained executory as against Rogelio, as the principal
obligor (co-debtor), and Country Bankers as surety of the obligation.
It is beyond cavil that if a party fails or refuses to abide by a Section 4, Rule 39 of the Rules of Court provides:
compromise agreement, the other party may either enforce the
compromise or regard it as rescinded and insist upon his original SEC. 4. Judgments not stayed by appeal. Judgments in actions for
injunction, receivership, accounting and support, and such other
demand.[26] Following this mandatory rule, the RTC Caloocan judgments as are now or may hereafter be declared to be
granted Borjas motion, and subsequently issued an order to the immediately executory, shall be enforceable after their rendition and
shall not be stayed by an appeal taken therefrom, unless otherwise
sheriff to execute the compromise judgment. Notwithstanding the ordered by the trial court. On appeal therefrom, the appellate court
foregoing, petitioners still maintain that since they had taken steps in its discretion may make an order suspending, modifying, restoring
or granting the injunction, receivership, accounting, or award of
to stay the execution of the compromise judgment, Country Bankers, support.
with full knowledge of their active opposition to the execution thereof,
should not have readily complied with the RTC Caloocan Order. The stay of execution shall be upon such terms as to bind or
otherwise as may be considered proper for the security or protection
of the rights of the adverse party.
Petitioners argument contemplates a brazen defiance of a validly
issued court order, which had not been restrained by the appellate
Other judgments in actions declared to be immediately executory
court or this Court. The argument is unacceptable.
and not stayed by the filing of an appeal are for: (1)
compromise,[28] (2) forcible entry and unlawful detainer,[29] (3) direct
The Compromise Agreement between Borja and Rogelio explicitly
contempt,[30] and (4) expropriation.[31]
provided that the latters failure to complete construction of the
building within the stipulated period[27] shall cause the full
Likewise, Section 9, paragraph (a),[32] of the same Rule outlines the
implementation of the surety bond as a penalty for the default, and
procedure for execution of judgments for money, thus:
as an award of damages to Borja. Furthermore, the Compromise
Agreement contained a default executory clause in case of a SEC. 9 Execution of judgments for money, how enforced.
violation or avoidance of the terms and conditions thereof.
(a) Immediate payment on demand. The officer shall enforce an
Therefore, the payment made by Country Bankers to Borja was execution of a judgment for money by demanding from the judgment
obligor the immediate payment of the full amount stated in the writ of with the CA, ostensibly to stop the execution of the compromise
execution and all lawful fees. The judgment obligor shall pay in case,
certified bank check payable to the judgment oblige, or any other judgment. Not only was the filing thereof late, it was done twelve (12)
form of payment acceptable to the latter, the amount of the judgment days after the satisfaction of the compromise judgment. We are,
debt under proper receipt directly to the judgment oblige or his
authorized representative if present at the time of payment. The therefore, perplexed why, despite the urgency of the matter,
lawful fees shall be handed under proper receipt to the executing petitioners merely banked on a pending motion for reconsideration
sheriff who shall turn over the said amount within the same day to
the clerk of court of the court that issued the writ.
to stay the enforcement of an already issued writ of execution.
Petitioners total reliance thereon was certainly misplaced.

As Rogelios obligation under the compromise agreement, and Admittedly, the general rule is that certiorari will not lie unless a
approved by the RTC Caloocan, had a penal clause[33] which is motion for reconsideration is first filed before the respondent tribunal
monetary in nature,[34] the writ of execution availed of by Borja, and to allow it an opportunity to correct the imputed
paid by Country Bankers, strictly complied with the rules on errors.[35] Nonetheless, the rule admits of exceptions, thus:
execution of money judgments.
(a) where the order is a patent nullity, as where the court a
It is true that the petitioners did not directly question the compromise quo has no jurisdiction;

judgment. What was pending before the Caloocan RTC was (b) where the questions raised in the certiorari proceedings
petitioners Omnibus Motion praying for a stay in the implementation have been duly raised and passed upon by the lower court, or are
the same as those raised and passed upon in the lower court;
of the writ of execution. However, the bottom line issue raised in the
Omnibus Motion is, actually, a question on the compromise (c) where there is an urgent necessity for the resolution of
the question and any further delay would prejudice the interests of
judgment, since its resolution would require an inquiry into the the Government or of the petitioner or the subject matter of the action
stipulations contained in the Compromise Agreement, particularly is perishable;
the provision on immediate execution.
(d) where, under the circumstances, a motion for
reconsideration would be useless;
Thus, when the RTC Manila ruled that the payment on the bond
(e) where petitioner was deprived of due process and there
made by Country Bankers was voluntary, the lower court effectively is extreme urgency for relief;
disregarded the rule on the non-appealable nature and the
(f) where, in a criminal case, relief from an order of arrest is
immediately executory character of a judgment on a compromise. urgent and the granting of such relief by the trial court is improbable;

Moreover, it has not escaped our attention that petitioners belatedly (g) where the proceedings in the lower court are a nullity for
lack of due process;
filed a Petition for Certiorari and Prohibition with prayer for a TRO
(h) where the proceedings was ex-parte or in which the Still, petitioners stubbornly refuse to pay Country Bankers,
petitioner had no opportunity to object; and
contending that the CA itself, in CA-G.R. SP No. 28205, declared
(i) where the issue raised is one purely of law or where that the payment effected was voluntary.
public interest is involved.[36]

We are not persuaded.


Evidently, it would not have been premature for petitioners to have
filed a petition before the CA, upon the issuance by the RTC Article 2047 of the Civil Code specifically calls for the application of
Caloocan of a writ of execution, because the RTC Caloocan already the provisions on solidary obligations to suretyship contracts. In
denied their Opposition to Borjas Motion for Execution on the surety particular, Article 1217 of the Civil Code recognizes the right of
bond. If, as petitioners insist, they had a meritorious challenge to the reimbursement from a co-debtor (the principal co-debtor, in case of
satisfaction of the writ of execution, they should have immediately suretyship) in favor of the one who paid (i.e., the surety).[38] In
filed a Petition for Certiorari with the CA and therein alleged the contrast, Article 1218 of the Civil Code is definitive on when
exceptional circumstance warranting the non-filing of a motion for reimbursement is unavailing, such that only those payments
reconsideration. Petitioners should not have persisted on waiting for made after the obligation has prescribed or became illegal shall
the resolution of their Omnibus Motion. not entitle a solidary debtor to reimbursement. Nowhere in the
invoked CA Decision does it declare that a surety who pays, by virtue
We have consistently ruled that an order for the issuance of of a writ of execution, is not entitled to reimbursement from the
a writ of execution is ordinarily not appealable. The reason for this is principal co-debtor. The CA Decision was confined to the mootness
that the merits of the case should not be delved into anew after a of the issue presented and petitioners preclusion from the relief it
determination has been made thereon with finality.[37] Otherwise, prayed for, i.e., a stay of the writ of execution, considering that the
there would be practically no end to litigation since the losing party writ had already been satisfied.
would always try to thwart execution by appealing from every order
granting the writ. In this case, this aphorism should apply. Rogelio, More importantly, the Indemnity Agreement signed by Rogelio and
after agreeing to an amicable settlement with Borja to put an end to the other petitioners explicitly provided for an incontestability clause
the case before the RTC Caloocan, cannot flout compliance of the on payments made by Country Bankers. The said clause reads:
court order of execution by refusing to reimburse Country Bankers,
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY:
the surety of his obligation in the compromise agreement. - Any payment or disbursement made by [Country Bankers] on
account of the above-mentioned Bond, its renewals, extensions,
alterations or substitutions either in the belief that [Country Bankers]
was obligated to make such payment or in the belief that said
payment was necessary or expedient in order to avoid greater losses In the recent case of Escaňo v. Ortigas,[39] we elucidated on
or obligations for which [Country Bankers] might be liable by virtue
of the terms of the above-mentioned Bond, its renewals, extensions, the distinction between a surety as a co-debtor under a suretyship
alterations, or substitutions, shall be final and shall not be disputed agreement and a joint and solidary co-debtor, thus:
by the undersigned, who hereby jointly and severally bind
themselves to indemnify [Country Bankers] of any and all such
payments, as stated in the preceding clauses. (A)s indicated by Article 2047, a suretyship requires a principal
debtor to whom the surety is solidarily bound by way of an ancillary
In case [Country Bankers] shall have paid, settled or compromised obligation of segregate identity from the obligation between the
any liability, loss, costs, damages, attorneys fees, expenses, claims, principal debtor and the creditor. The suretyship does not bind the
demands, suits, or judgments as above-stated, arising out of or in surety to the creditor, inasmuch as the latter is vested with the right
connection with said bond, an itemized statement thereof, signed by to proceed against the former to collect the credit in lieu of
an officer of [Country Bankers] and other evidence to show said proceeding against the principal debtor for the same obligation. At
payment, settlement or compromise, shall be prima facie evidence the same time, there is also a legal tie created between the surety
of said payment, settlement or compromise, as well as the liability of and the principal debtor to which the creditor is not privy or party to.
[petitioners] in any and all suits and claims against [petitioners] The moment the surety fully answers to the creditor for the obligation
arising out of said bond or this bond application. created by the principal debtor, such obligation is extinguished. At
the same time, the surety may seek reimbursement from the
principal debtor for the amount paid, for the surety does in fact
become subrogated to all the rights and remedies of the creditor.
Ineluctably, petitioners are obligated to reimburse Country Bankers
the amount of P370,000.00.
WHEREFORE, the Petition is DENIED. The Decision of the Court of
Finally, petitioners desperately attempt to inveigle out of this burden, Appeals in CA-G.R. C.V. No. 48603 is hereby AFFIRMED. Costs
which is of their own making, by imputing a lack of initiative on against the petitioner.
Country Bankers part to intervene in the execution proceedings
before the RTC. SO ORDERED.

This contention, as with the rest of petitioners arguments,


deserves scant consideration. Suffice it to state that Country ANTONIO EDUARDO B. NACHURA
Associate Justice
Bankers is a surety of the obligation with a penal clause, constituted
in the compromise judgment; it is not a joint and solidary co-debtor
of Rogelio.

WE CONCUR:
Pursuant to Section 13, Article VIII of the Constitution and the
Division Chairperson's Attestation, I certify that the conclusions in
CONSUELO YNARES-SANTIAGO the above Decision had been reached in consultation before the
Associate Justice case was assigned to the writer of the opinion of the Courts Division.
Chairperson

REYNATO S. PUNO
MINITA V. CHICO-NAZARIO PRESBITERO J. VELASCO, Chief Justice
Associate Justice JR. Associate Justice

*
As replacement of Associate Justice Ma. Alicia Austria-Martinez who was the
ponente in the Court of Appeals Decision in CA-G.R. SP No. 28205.
RUBEN T. REYES [1]
Penned by Associate Justice Edgardo F. Sundiam, with Associate Justices Portia
Associate Justice Aliňo- Hormachuelos and Elvi John S. Asuncion, concurring, rollo, pp. 27-38.
[2]
Penned by Judge Enrico A. Lanzanas, id. at 39-47.
[3]
Docketed as Civil Case No. C-14745.
[4]
Records, pp. 101-111.
[5]
Penned by Judge Geronimo S. Mangay, dated February 12, 1992, id. at 112-117.
ATTESTATION [6]
[7]
Surety Bond G (16) No. 38037, dated February 14, 1992, id. at 119-120.
Mrs. Borja was joined in the suit before RTC Caloocan.
[8]
I attest that the conclusions in the above Decision were reached in [9]
Records, p. 121.
Id. at 122-125.
consultation before the case was assigned to the writer of the [10]
Id. at 126.
opinion of the Courts Division. [11]
[12]
Id. at 128.
Id. at 133.
[13]
Id. at 134.
[14]
Id. at 135-137.
[15]
Id. at 138.
[16]
Id. at 139-140.
CONSUELO YNARES-SANTIAGO [17]
Cash Voucher No. 75545, id. at 141; Manifestation of Satisfaction of
Associate Justice Judgment/Execution, id. at 142.
[18]
Dated June 3, 1992, id. at 147-156.
Chairperson, Third Division [19]
Rollo, pp. 51-52. Decision penned by Justice Alicia Austria-Martinez (now SC
Justice).
[20]
Demand Letter, dated June 17, 1992; records, pp. 143-144.
[21]
Rollo, pp. 53-54.
CERTIFICATION [22]
Santos Ventura Hocorma Foundation, Inc. v. Santos, G.R. No. 153004, November
5, 2004, 441 SCRA 472, 479-480; see Martir v. Verano, G.R. No. 170395, July 28,
2006, 497 SCRA 120, 126-127.
[23]
Martir v. Verano, supra, at 127.
[24]
World Machine Enterprise v. Intermediate Appellate Court, G.R. No. 72019,
December 20, 1990, 192 SCRA 459, 465.
[25]
Martir v. Verano, supra note 22, at 127. THIRD DIVISION
[26]
Id. at 128.
[27]
Seventy-five (75) days from receipt of payment of the P370,000.00 exclusive of
PREMIERE DEVELOPMENT BANK, G.R. No. 176246
Sundays and holidays. Petitioner,
Present:
[28]
See Armed Forces of the Philippines Mutual Benefit Association, Inc. v. Court of
Appeals, 370 Phil. 150 (1999); Domingo v. Court of Appeals, 325 Phil. 469 (1996).
[29]
RULES OF COURT, Rule 70, Sec. 19.
[30]
RULES OF COURT, Rule 71, Sec. 2. YNARES-SANTIAGO, J.,
[31]
[32]
RULES OF COURT, Rule 67, Sec. 11. Chairperson,
Paragraph 1.
[33]
See Art. 1226 of the Civil Code. - versus - AUSTRIA-MARTINEZ,
[34]
The forfeiture of the amount of the surety bond, i.e., P370,000.00. CHICO-NAZARIO,
[35]
PAL Employees Savings and Loan Association, Inc. v. Philippine Airlines, Inc.,
NACHURA, and
G.R. No. 161110, March 30, 2006, 485 SCRA 632, 641-642. LEONARDO-DE CASTRO,* JJ.
[36]
PAL Employees Savings and Loan Association, Inc. v. Philippine Airlines, Inc.,
G.R. No. 161110, March 30, 2006, 485 SCRA 632, 642, citing Metro Transit
Organization, Inc. v. Court of Appeals, 440 Phil. 743, 751 (2002). CENTRAL SURETY & INSURANCE Promulgated:
COMPANY, INC.,
[37]
Shugo Noda & Co., Ltd. v. Court of Appeals, G.R. No. 107404, March 30, 1994,
231 SCRA 620, 625.
[38]
Escaňo v. Ortigas, G.R. No. 151953, June 29, 2007. See Lapanday Agricultural v. Respondent. February 13, 2009
Court of Appeals, 381 Phil. 41, 52 (2000). Art. 1217 reads in part: Payment made by
one of the solidary debtors extinguishes the obligation. If two or more solidary debtors
offer to pay, the creditor may choose which offer to accept xxx. x---------------------------------------------------------------------
He who made payment may claim from his co-debtors only on the share which ---------------x
corresponds to each, with interest for the payment already made. If the payment is
made before the debt is due, no interest for the intervening period may be demanded
xxx.
DECISION
[39]
Supra note 38.
NACHURA, J.:

Before us is a petition for review on certiorari assailing the Court of


Appeals (CA) Decision[1] in CA-G.R. CV No. 85930, which reversed
and set aside the decision of the Regional Trial Court (RTC), Branch numbered 376-X[5] and secured by a real estate mortgage over
132, Makati City in Civil Case No. 0051306.[2] Condominium Certificate of Title No. 8804, Makati City. PN No. 376-
X was availed of through a renewal of Central Suretys prior loan,
On August 20, 1999, respondent Central Surety & Insurance then covered by PN No. 367-Z.[6] As with the P6,000,000.00 loan
Company (Central Surety) obtained an industrial loan and the constituted pledge over the Wack Wack Membership,
of P6,000,000.00 from petitioner Premiere Development Bank the P40,898,000.00 loan with real estate mortgage was transacted
(Premiere Bank) with a maturity date of August 14, by Constancio and Engracio Castaeda on behalf of Central Surety.
2000. This P6,000,000.00 loan, evidenced by Promissory Note (PN)
No. 714-Y,[3] stipulates payment of 17% interest per annum payable It appears that on August 22, 2000, Premiere Bank sent a letter to
monthly in arrears and the principal payable on due date. In addition, Central Surety demanding payment of the P6,000,000.00 loan, to
PN No. 714-Y provides for a penalty charge of 24% wit:
interest per annum based on the unpaid amortization/installment or
the entire unpaid balance of the loan. In all, should Central Surety August 22, 2000
CENTRAL SURETY AND INSURANCE CO.
fail to pay, it would be liable to Premiere Bank for: (1) unpaid interest 2nd Floor Universalre Bldg.
up to maturity date; (2) unpaid penalties up to maturity date; and (3) No. 106 Paseo de Roxas, Legaspi Village
Makati City
unpaid balance of the principal.
Attention: Mr. Constancio T. Castaneda, Jr.
President
To secure payment of the P6,000,000.00 loan, Central Surety
executed in favor of Premiere Bank a Deed of Assignment with Mr. Engracio T. Castaneda
Pledge[4] covering Central Suretys Membership Fee Certificate No. Vice President
-------------------------------------------------
217 representing its proprietary share in Wack Wack Golf and
Country Club Incorporated (Wack Wack Membership). In both PN Gentlemen:
No. 714-Y and Deed of Assignment, Constancio T. Castaeda, Jr. This has reference to your overdue loan of P6.0 Million.
and Engracio T. Castaeda, president and vice-president of Central
We regret to inform you that despite efforts to restructure the same,
Surety, respectively, represented Central Surety and solidarily you have failed up to this time, to submit the required documents and
bound themselves to the payment of the obligation. come up with equity necessary to implement the restructuring
scheme.
In view thereof, we regret that unless the above loan is settled on or
Parenthetically, Central Surety had another commercial loan with before five (5) days from the date hereof, we shall exercise our option
Premiere Bank in the amount of P40,898,000.00 maturing on to have the Stock Certificate No. 217 with Serial No. 1793 duly issued
by Wack Wack Golf and Country Club, Inc. transferred in the name
October 10, 2001. This loan was, likewise, evidenced by a PN
of Premiere Development Bank in accordance with the terms and Very truly yours,
conditions of the Deed of Assignment with Pledge executed in favor
of Premiere Development Bank. (sgd.)
ENGRACIO T. CASTANEDA
We shall appreciate your prompt compliance. Vice-President[8]

Very truly yours,


Accordingly, by September 20, 2000, Central Surety issued Bank of
(sgd.) Commerce (BC) Check No. 08114[9] dated September 22, 2000 in
IGNACIO R. NEBRIDA, JR. the amount of P6,000,000.00 and payable to Premiere Bank. The
Senior Asst. Vice President/
Business Development Group - Head[7] check was received by Premiere Banks Senior Account Manager,
Evangeline Veloira, with the notation full payment of loan-Wack
Wack, as reflected in Central Suretys Disbursement
Posthaste, Central Surety responded and sent the following letter Voucher.[10] However, for undisclosed reasons, Premiere Bank
dated August 24, 2000: returned BC Check No. 08114 to Central Surety, and in its letter
24 August 2000
dated September 28, 2000, demanded from the latter, not just
payment of the P6,000,000.00 loan, but also the P40,898,000.00
Mr. Ignacio R. Nebrida, Jr. loan which was originally covered by PN No. 367-Z.[11] In the same
Senior Asst. Vice President/
Business Development Group Head letter, Premiere Bank threatened foreclosure of the loans respective
Premiere Bank securities, the pledge and real estate mortgage, should Central
EDSA cor. Magallanes Avenue
Makati City Surety fail to pay these within ten days from date, thus:

Sir: 28
September
With reference to this 6.0 Million loan account, we have informed Ms. 2000
Evangeline Veloira that we are intending to settle the account by the
end of September. As of 14 August 2000 we made payment to your CENTRAL SURETY & INSURANCE CO.
bank as per receipt attached. By: Constancio T. Castaeda Jr. President
Engracio T. Castaeda Vice President
As you may know, present conditions have been difficult for the 2nd Floor Universalre Bldg. No. 106
insurance industry whose performance is so closely linked to the Paseo de Roxas, Legaspi Village, Makati City
nations economic prosperity; and we are now asking for some
consideration and leeway on your very stiff and immediate demands. RE: YOUR COMMERCIAL LOAN OF P40,898,000.00 &
P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
Kindly extend to us your favorable approval. UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y
**************************************************
EDSA cor. Magallanes Avenue
Dear Sirs: Makati City

We write on behalf of our client, Premiere Development Bank, in Attention: Mr. Ignacio R. Nebrida, Jr.
connection with your above-captioned loan account. Senior Asst. Vice President/
Business Development Group Head
While our client has given you all the concessions, facilities and
opportunities to service your loans, we regret to inform you that you Re : Promissory Note No. 714-Y
have failed to settle the same despite their past due status.
Sir:
In view of the foregoing and to protect the interest of our client,
please be advised that unless the outstanding balances of your loan This is further to our clients letter to you dated 24 August 2000,
accounts as of date plus interest, penalties and other fees and informing you that it would settle its account by the end of September
charges are paid in full or necessary arrangements acceptable to our 2000.
client is made by you within ten (10) days from date hereof, we shall
be constrained much to our regret, to file foreclosure proceedings Please be advised that on 20 September 2000 our client delivered to
against the collateral of the loan mortgaged to the Bank or pursue your bank BC cheque no. 08114 payable to Premiere Bank in the
such action necessary in the premises. amount of SIX MILLION PESOS (P6,000,000.00), which was
received by your Senior Account Manager, Ms. Evangeline
Veloira. However, for unexplained reasons the cheque was returned
to us.
We trust, therefore, that you will give this matter your preferential
attention. We are again tendering to you the said cheque of SIX MILLION
PESOS (P6,000,000.00), in payment of PN#714-Y. Please accept
Very truly yours, the cheque and issue the corresponding receipt thereof. Should you
again refuse to accept this cheque, then I shall advise my client to
(sgd.) deposit it in court for proper disposition.
PACITA M. ARAOS[12]

(italics supplied)
Thank you.

The very next day, on September 29, 2000, Central Surety, through Very truly yours,

its counsel, wrote Premiere Bank and re-tendered payment of the (sgd.)
check: EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company[13]
29 (italics supplied)
September 2000

PREMIERE BANK
On even date, a separate letter with another BC Check No. 08115 TOTAL P8,600,000.00

in the amount of P2,600,000.00 was also tendered to Premiere Bank We are enclosing Xerox copy each of four (4) official receipts
as payment for the Spouses Engracio and Lourdes Castaedas covering the above payments. The originals are with us which your
clients or their duly authorized representative may pick-up anytime
(Spouses Castaedas) personal loan covered by PN No. 717-X and during office hours.
secured by Manila Polo Club, Inc. membership shares.
We shall appreciate the settlement in full of the accounts of your
client or necessary arrangements for settlement thereof be made as
On October 13, 2000, Premiere Bank responded and signified soon as possible to put the accounts on up to-date status.
acceptance of Central Suretys checks under the following
Thank you.
application of payments:
Very truly yours,
13 October
2000 (sgd.)
MS. ELSA M. SAPAPO
ATTY. EPIFANIO E. CUA Manager
2/F Universalre Condominium Loans Accounting and
106 Paseo de Roxas Control Department[16]
Legaspi Village, Makati City

Dear Atty. Cua: Significantly, the P8,600,000.00 check payments were not applied
Thank you for your two (2) letters both dated 29 September 2000 on
in full to Central Suretys P6,000,000.00 loan under PN No. 714-Y
behalf of your clients with the enclosed check nos. 0008114 and and the Spouses Castaedas personal loan of P2,600,000.00 under
0008115 for the total of P8,600,000.00. PN No. 717-X. Premiere Bank also applied proceeds thereof to a
As previously relayed to your client, Premiere Bank cannot accept commercial loan under PN No. 235-Z taken out by Casent Realty
the two (2) checks as full settlement of the obligation under Account and Development Corporation (Casent Realty),[17] and to Central
Nos. PN #714-Y and PN # 717-X, as the amount is insufficient.
Suretys loan originally covered by PN No. 367-Z, renewed under PN
In accordance with the terms and conditions of the Promissory Notes No. 376-X, maturing on October 20, 2001.
executed by your clients in favor of Premiere Development Bank, we
have applied the two (2) checks to the due obligations of your clients
as follows: Strongly objecting to Premiere Banks application of payments,
Central Suretys counsel wrote Premiere Bank and reiterated Central
1) Account No.: COM 235-Z[14] P1,044,939.45
2) Account No.: IND 717-X P1,459,693.15 Suretys demand for the application of the check payments to the
3) Account No.: COM 367-Z[15] P4,476,200.18 loans covered by PN Nos. 714-X and 714-Y. Additionally, Central
4) Account No.: COM 714-Y P1,619,187.22
Surety asked that the Wack Wack Membership pledge, the security Now that the issue as to the validity of the stipulation is settled,
[Premiere Bank] was right in contending that it had the right to apply
for the P6,000,000.00 loan, should be released. [Central Suretys] payment to the most onerous obligation or to the
one it sees fit to be paid first from among the several obligations. The
application of the payment to the other two loans of Central Surety
In the final exchange of correspondence, Premiere Bank, namely, account nos. COM 367-Z and IND 714-Y was within
through its SAVP/Acting Head-LGC, Atty. Pacita Araos, responded [Premiere Banks] valid exercise of its right according the stipulation.
However, [Premiere Bank] erred in applying the payment to the loan
and refused to accede to Central Suretys demand. Premiere Bank of Casent Realty and to the personal obligation of Mr. Engracio
insisted that the PN covering the P6,000,000.00 loan granted Castaeda despite their connection with one another. Therefore,
Premiere Bank sole discretion respecting: (1) debts to which [Premiere Bank] cannot apply the payment tendered by Central
Surety to the other two entities capriciously and expressly violating
payments should be applied in cases of several obligations by an the law and pertinent Central Bank rules and regulations. Hence, the
obligor and/or debtor; and (2) the initial application of payments to application of the payment to the loan of Casent Realty
(Account No. COM 236-Z) and to the loan of Mr. Engracio
other costs, advances, expenses, and past due interest stipulated Castaeda (Account No. IND 717-X) is void and must be annulled.
thereunder.
As to the issue of whether or not [Central Surety] is entitled to the
release of Membership Fee Certificate in the Wack Wack Golf and
As a result, Central Surety filed a complaint for damages and Country Club, considering now that [Central Surety] cannot compel
release of security collateral, specifically praying that the court [Premiere Bank] to release the subject collateral.

render judgment: (1) declaring Central Suretys P6,000,000.00 loan With regard to the issue of damages and attorneys fees, the court
covered by PN No. 714-Y as fully paid; (2) ordering Premiere Bank finds no basis to grant [Premiere Banks] prayer for moral and
exemplary damages but deems it just and equitable to award in its
to release to Central Surety its membership certificate of shares in favor attorneys fees in the sum of Php 100,000.00.
Wack Wack; (3) ordering Premiere Bank to pay Central Surety
WHEREFORE, judgment is hereby rendered dismissing the
compensatory and actual damages, exemplary damages, attorneys complaint and ordering [Central Surety] to pay [Premiere Bank] Php
fees, and expenses of litigation; and (4) directing Premiere Bank to 100,000.00 as attorneys fees.[18] (emphasis supplied)
pay the cost of suit.
On appeal by Central Surety, the CA reversed and set aside the trial
On July 12, 2005, the RTC rendered a decision dismissing
courts ruling. The appellate court held that with Premiere Banks
Central Suretys complaint and ordering it to pay Premiere
letter dated August 22, 2000 specifically demanding payment of
Bank P100,000.00 as attorneys fees. The RTC ruled that the
Central Suretys P6,000,000.00 loan, it was deemed to have waived
stipulation in the PN granting Premiere Bank sole discretion in the
the stipulation in PN No. 714-Y granting it the right to solely
application of payments, although it partook of a contract of
determine application of payments, and was, consequently,
adhesion, was valid. It disposed of the case, to wit:
estopped from enforcing the same. In this regard, with the holding of
full settlement of Central Suretys P6,000,000.00 loan under PN No. PROMISSORY NOTES AUTHORIZING [PREMIERE BANK] TO
MAKE SUCH APPLICATION OF PAYMENTS
714-Y, the CA ordered the release of the Wack Wack Membership
pledged to Premiere Bank. WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER
COURT [PREMIERE BANK] IS ENTITLED TO AN AWARD OF
DAMAGES AS OCCASIONED BY THE MALICIOUS FILING OF
THIS SUIT.[19]

Hence, this recourse by Premiere Bank positing the following issues:


At the outset, we qualify that this case deals only with the
WHETHER OR NOT THE HONORABLE COURT OF APPEALS extinguishment of Central Suretys P6,000,000.00 loan secured by
COMMITTED REVERSIBLE AND PALPABLE ERROR WHEN IT the Wack Wack Membership pledge. We do not dispose herein the
APPLIED THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE
PRESENT CASE INSOFAR AS THE DEMAND LETTER SENT TO matter of the P2,600,000.00 loan covered by PN No. 717-X subject
[CENTRAL SURETY] IS CONCERNED NULLIFYING THE of BC Check No. 08115.
APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE
BANK]
We note that both lower courts were one in annulling Premiere
Banks application of payments to the loans of Casent Realty and the
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL Spouses Castaeda under PN Nos. 235-Z and 717-X, respectively,
BY THE HONORABLE COURT OF APPEALS COULD PREVAIL
OVER THE CLEAR AND UNMISTAKABLE STATUTORY AND thus:
CONTRACTUAL RIGHT OF [PREMIERE BANK] TO EXERCISE
APPLICATION OF PAYMENT AS WARRANTED BY THE It bears stressing that the parties to PN No. 714-Y secured by Wack
PROMISSORY NOTE Wack membership certificate are only Central Surety, as debtor and
[Premiere Bank], as creditor. Thus, when the questioned stipulation
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE speaks of several obligations, it only refers to the obligations of
APPLIED TO THE SUBJECT LOAN OF RESPONDENT, [Central Surety] and nobody else.
WHETHER OR NOT THE SUBJECT WACK-WACK SHARES
COULD BE RELEASE[D] DESPITE THE CROSS DEFAULT AND [I]t is plain that [Central Surety] has only two loan obligations,
CROSS GUARANTEE PROVISIONS OF THE DEED OF namely: 1.) Account No. 714-Y secured by Wack Wack
ASSIGNMENT WITH PLEDGE AND RELEVANT REAL ESTATE membership certificate; and 2.) Account No. 367-Z secured
MORTGAGE CONTRACTS EXECUTED BY [CENTRAL SURETY], by Condominium Certificate of Title. The two loans are secured
CASENT REALTY AND SPS. CASTAEDA. by separate and different collaterals. The collateral for Account No.
714-Y, which is the Wack Wack membership certificate answers only
WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT for that account and nothing else. The collateral for Account No. 367-
AND CONSIGNATION OF THE SUBJECT TWO CHECK Z, which is the Condominium Certificate of Title, is answerable only
PAYMENTS BY [CENTRAL SURETY]. for the said account.

WHETHER OR NOT, AS CORRECTLY FOUND BY THE The fact that the loan obligations of [Central Surety] are secured by
COURT A QUO [CENTRAL SURETY] IS ESTOPPED FROM separate and distinct collateral simply shows that each collateral
CONTESTING THE STIPULATIONS OR PROVISIONS OF THE
secures only a particular loan obligation and does not cover loans payments concerning the loans to Casent Realty and the Spouses
including future loans or advancements.
Castaeda.
As regards the loan covered by Account No. 235-Z, this was Thus, we sift through the issues posited by Premiere Bank and
obtained by Casent Realty, not by [Central Surety]. Although Mr.
Engracio Castaeda is the vice-president of [Central Surety], and restate the same, to wit:
president of Casent Realty, it does not follow that the two
corporations are one and the same. Both are invested by law with a 1. Whether Premiere Bank waived its right of application of payments
personality separate and distinct from each other. on the loans of Central Surety.

Thus, [Central Surety] cannot be held liable for the obligation of 2. In the alternative, whether the P6,000,000.00 loan of Central
Casent Realty, absent evidence showing that the latter is being used Surety was extinguished by the encashment of BC Check No.
to defeat public convenience, justify wrong, protect fraud or defend 08114.
crime; or used as a shield to confuse the legitimate issues, or when
it is merely an adjunct, a business conduit or an alter ego of [Central 3. Corollarily, whether the release of the Wack Wack Membership
Surety] or of another corporation; or used as a cloak to cover for pledge is in order.
fraud or illegality, or to work injustice, or where necessary to achieve
equity or for the protection of creditors.

Likewise, [Central Surety] cannot be held accountable for the loan


The Petition is meritorious.
obligation of spouses Castaeda under Account No. IND 717-X.
Settled is the rule that a corporation is invested by law with a We shall take the first and the second issues in tandem.
personality separate and distinct from those of the persons
composing it. The corporate debt or credit is not the debt or credit of
the stockholder nor is the stockholders debt or credit that of the
corporation.

The mere fact that a person is a president of the corporation does


Creditor given right
not render the property he owns or possesses the property of the to apply payments
corporation, since that president, as an individual, and the
corporation are separate entities.[20]

At the hub of the controversy is the statutory provision on application


In fact, Premiere Bank did not appeal or question the RTCs ruling of payments, specifically Article 1252 of the Civil Code, viz.:
specifically annulling the application of the P6,000,000.00 check
Article 1252. He who has various debts of the same kind in
payment to the respective loans of Casent Realty and the Spouses favor of one and the same creditor, may declare at the time of
Castaeda. Undoubtedly, Premiere Bank cannot be allowed, through making the payment, to which of them the same must be
this petition, to surreptitiously include the validity of its application of applied.Unless the parties so stipulate, or when the application of
payment is made by the party for whose benefit the term has been
constituted, application shall not be made as to debts which are not
yet due.
Rights may be waived, unless the waiver is contrary to law,
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot complain of public order, public policy, morals or good customs, or prejudicial to
the same, unless there is a cause for invalidating the contract. a third person with a right recognized by law.[23]
A debtor, in making a voluntary payment, may at the time of
The debtors right to apply payment is not mandatory. This is clear payment direct an application of it to whatever account he chooses,
from the use of the word may rather than the word shall in the unless he has assigned or waived that right. If the debtor does not
provision which reads: He who has various debts of the same kind do so, the right passes to the creditor, who may make such
in favor of one and the same creditor, may declare at the time of application as he chooses. But if neither party has exercised its
making the payment, to which of the same must be applied. option, the court will apply the payment according to the justice and
equity of the case, taking into consideration all its circumstances.[24]
Indeed, the debtors right to apply payment has been
considered merely directory, and not mandatory,[21] following this Verily, the debtors right to apply payment can be waived and even
Courts earlier pronouncement that the ordinary acceptation of the granted to the creditor if the debtor so agrees.[25] This was explained
terms may and shall may be resorted to as guides in ascertaining by former Senator Arturo M. Tolentino, an acknowledged expert on
the mandatory or directory character of statutory provisions.[22] the Civil Code, thus:

The following are some limitations on the right of the debtor to apply
Article 1252 gives the right to the debtor to choose to which of his payment:
several obligations to apply a particular payment that he tenders to
xxxx
the creditor. But likewise granted in the same provision is the right 5) when there is an agreement as to the debts which are to be paid
of the creditor to apply such payment in case the debtor fails to direct first, the debtor cannot vary this agreement.[26]
its application. This is obvious in Art. 1252, par. 2, viz.: If the debtor
accepts from the creditor a receipt in which an application of
Relevantly, in a Decision of the Supreme Court of Kansas in a case
payment is made, the former cannot complain of the same. It is the
with parallel facts, it was held that:
directory nature of this right and the subsidiary right of the creditor
to apply payments when the debtor does not elect to do so that make The debtor requested Planters apply the payments to the 1981 loan
this right, like any other right, waivable. rather than to the 1978 loan. Planters refused. Planters notes it
was expressly provided in the security agreement on the 1981 loan
that Planters had a legal right to direct application of payments in its
sole discretion. Appellees do not refute this. Hence, the debtors
had no right by agreement to direct the payments. This also
precludes the application of the U.S. Rule, which applies only in
absence of a statute or specific agreement. Thus the trial stage. By its terms, Premiere Bank was entitled to declare said Note
court erred. Planters was entitled to apply the Hi-Plains payments as
it saw fit.[27] and all sums payable thereunder immediately due and payable,
without need of presentment, demand, protest or notice of any
kind. The subsequent demand made by Premiere Bank was,
In the case at bench, the records show that Premiere Bank
therefore, merely a superfluity, which cannot be equated with a
and Central Surety entered into several contracts of loan, securities
waiver of the right to demand payment of all the matured obligations
by way of pledges, and suretyship agreements. In at least two (2)
of Central Surety to Premiere Bank.
promissory notes between the parties, Promissory Note No. 714-Y
and Promissory Note No. 376-X, Central Surety expressly agreed to Moreover, this Court may take judicial notice that the
grant Premiere Bank the authority to apply any and all of Central standard practice in commercial transactions to send demand letters
Suretys payments, thus: has become part and parcel of every collection effort, especially in
In case I/We have several obligations with [Premiere Bank], I/We
light of the legal requirement that demand is a prerequisite before
hereby empower [Premiere Bank] to apply without notice and in any default may set in, subject to certain well-known exceptions,
manner it sees fit, any or all of my/our deposits and payments to any including the situation where the law or the obligations expressly
of my/our obligations whether due or not. Any such application of
deposits or payments shall be conclusive and binding upon us. declare it unnecessary.[28]

Neither can it be said that Premiere Bank waived its right to


This proviso is representative of all the other Promissory Notes
apply payments when it specifically demanded payment of
involved in this case. It is in the exercise of this express authority
the P6,000,000.00 loan under Promissory Note No. 714-Y. It is an
under the Promissory Notes, and following Bangko Sentral ng
elementary rule that the existence of a waiver must be positively
Pilipinas Regulations, that Premiere Bank applied payments made
demonstrated since a waiver by implication is not normally
by Central Surety, as it deemed fit, to the several debts of the latter.
countenanced. The norm is that a waiver must not only be voluntary,
but must have been made knowingly, intelligently, and with sufficient
All debts were due; There was no
waiver on the part of petitioner awareness of the relevant circumstances and likely
consequences. There must be persuasive evidence to show an
actual intention to relinquish the right. Mere silence on the part of the
Undoubtedly, at the time of conflict between the parties holder of the right should not be construed as a surrender thereof;
material to this case, Promissory Note No. 714-Y dated August 20, the courts must indulge every reasonable presumption against the
1999, in the amount of P6,000,000.00 and secured by the pledge of existence and validity of such waiver.[29]
the Wack Wack Membership, was past the due and demand
Besides, in this case, any inference of a waiver of Premiere
Banks, as creditor, right to apply payments is eschewed by the the bank shall be entitled to declare this Note and all sums payable
hereunder to be immediately due and payable, without need of
express provision of the Promissory Note that: no failure on the part presentment, demand, protest or notice of nay kind, all of which I/We
of [Premiere Bank] to exercise, and no delay in exercising any right hereby expressly waive, upon occurrence of any of the following
events: x x x (ii) My/Our failure to pay any amortization or
hereunder, shall operate as a waiver thereof. installment due hereunder; (iii) My/Our failure to pay money due
under any other document or agreement evidencing obligations
for borrowed money x x x.[32]
Thus, we find it unnecessary to rule on the applicability of the
equitable principle of waiver that the Court of Appeals ascribed to
the demand made by Premiere Bank upon Central Surety to pay the by virtue of which, it follows that the obligation under Promissory
amount of P6,000,000.00, in the face of both the express provisions Note 367-Z had become past due and demandable, with further
of the law and the agreements entered into by the parties. After all, notice expressly waived, when Central Surety defaulted on its
a diligent creditor should not needlessly be interfered with in the obligations under Promissory Note No. 714-Y.
prosecution of his legal remedies.[30]
Mendoza v. Court of Appeals[33] forecloses any doubt that an
When Central Surety directed the application of its payment acceleration clause is valid and produces legal effects. In fact,
to a specific debt, it knew it had another debt with Premiere Bank, in Selegna Management and Development Corporation v. United
that covered by Promissory Note 367-Z, which had been renewed Coconut Planters Bank,[34] we held that:
under Promissory Note 376-X, in the amount of P40.898
Million. Central Surety is aware that Promissory Note 367-Z (or 376- Considering that the contract is the law between the parties,
respondent is justified in invoking the acceleration clause declaring
X) contains the same provision as in Promissory Note No 714-Y the entire obligation immediately due and payable. That clause
which grants the Premiere Bank authority to apply payments made obliged petitioners to pay the entire loan on January 29, 1999, the
date fixed by respondent.
by Central Surety, viz.:

In case I/We have several obligations with [Premiere Bank], I/We It is worth noting that after the delayed payment
hereby empower [Premiere Bank] to apply without notice and in any
manner it sees fit, any or all of my/our deposits and payments to any of P6,000,000.00 was tendered by Central Surety, Premiere Bank
of my/our obligations whether due or not. Any such application of returned the amount as insufficient, ostensibly because there was,
deposits or payments shall be conclusive and binding upon us.[31]
at least, another account that was likewise due. Obviously, in its
demand of 28 September 2000, petitioner sought payment, not just
Obviously, Central Surety is also cognizant that Promissory Note of the P6,000,000.00, but of all these past due accounts.There is
367-Z contains the proviso that:
extant testimony to support this claim, as the transcript of
stenographic notes on the testimony of Atty. Araos reveals: Being in receipt of amounts tendered by Central Surety,
which were insufficient to cover its more onerous obligations,
Atty. Opinion: Q. But you accepted this payment of Six Million Premiere Bank cannot be faulted for exercising the authority granted
(P6,000,000.00) later on when together with this was paid another
check for 1.8 Million? to it under the Promissory Notes, and applying payment to the
obligations as it deemed fit. Subject to the caveat that our ruling
Witness: A. We accepted. herein shall be limited only to the transactions entered into by the
Atty. Opinion: Q. And you applied this to four (4) other accounts three parties to this case, the Court will not disturb the finding of the lower
(3) other accounts or to four (4) accounts mentioned in Exhibit J. Is court that Premiere Bank rightly applied the payments that Central
that correct?
Surety had tendered. Corollary thereto, and upon the second issue,
Atty. Tagalog: We can stipulate on that. Your Honor. the tender of the amount of P6,000,000.00 by Central Surety, and
Court: This was stipulated?
the encashment of BC Check No. 08114 did not totally extinguish
the debt covered by PN No. 714-Y.
Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation
that we confirm that those are the applications of payments made by Release of the pledged
the defendant Bank on those loan accounts.
Wack Wack Membership
Atty. Opinion: Q. Were these accounts due already when you made
this application, distribution of payments?
Contract of Adhesion
Witness: A. Yes sir.[35]

Conversely, in its evidence-in-chief, Central Surety did not present To the extent that the subject promissory notes were
any witness to testify on the payment of its obligations. In fact, the prepared by the Premiere Bank and presented to Central Surety for
record shows that after marking its evidence, Central Surety signature, these agreements were, indeed, contracts of
proceeded to offer its evidence immediately. Only on the rebuttal adhesion. But contracts of adhesion are not invalid per se. Contracts
stage did Central Surety present a witness; but even then, no of adhesion, where one party imposes a ready-made form of
evidence was adduced of payment of any other obligation. In this contract on the other, are not entirely prohibited. The one who
light, the Court is constrained to rule that all obligations of Central adheres to the contract is, in reality, free to reject it entirely; if he
Surety to Premiere Bank were due; and thus, the application of adheres, he gives his consent.
payments was warranted.
In interpreting such contracts, however, courts are expected A tally of the facts shows the following transactions between
to observe greater vigilance in order to shield the unwary or weaker Premiere Bank and Central Surety:
party from deceptive schemes contained in ready-made
covenants.[36] Thus, Article 24 of the Civil Code pertinently states:

In all contractual, property or other relations, when one of the parties Date Instrument Amount Stipulation
is at a disadvantage on account of his moral dependence, ignorance, covered
indigence, mental weakness, tender age or other handicap, the
courts must be vigilant for his protection. August 20, 1999 PN 714-Y P6M

August 29, 1999 Deed of P 15 M As security for PN 714-Y an


Assignment such Promissory Note/s w
But in this case, Central Surety does not appear so weak as to be with Pledge the ASSIGNOR / PLEDG
placed at a distinct disadvantage vis--vis the bank. As found by the shall hereafter execute in f
of the ASSIGNEE/PLEDGEE
lower court:

Considering that [Central Surety] is a known business entity, the


[Premiere Bank] was right in assuming that the [Central Surety] could From these transactions and the proviso in the Deed of
not have been cheated or misled in agreeing thereto, it could have Assignment with Pledge, it is clear that the security, which peculiarly
negotiated with the bank on a more favorable term considering that
it has already established a certain reputation with the [Premiere specified an amount at P15,000,000.00 (notably greater than the
Bank] as evidenced by its numerous transactions. It is therefore amount of the promissory note it secured), was intended to
absurd that an established company such as the [Central Surety] has
no knowledge of the law regarding bank practice in loan transactions. guarantee not just the obligation under PN 714-Y, but also future
advances. Thus, the said deed is explicit:
The Dragnet Clause. As security for the payment of loan obtained by the
ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached hereto
The factual circumstances of this case showing the chain of and made an integral part hereof as Annex A and/or such
transactions and long-standing relationship between Premiere Bank Promissory Note/s which the ASSIGNOR/PLEDGOR shall hereafter
execute in favor of the ASSIGNEE/PLEDGEE, the
and Central Surety militate against the latters prayer in its complaint ASSIGNOR/PLEDGOR hereby transfers, assigns, conveys,
for the release of the Wack Wack Membership, the security attached endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain
to Promissory Note 714-Y. Membership fee Certificate Share in Wack Wack Golf and Country
Club Incorporate covered by Stock Certificate No. 217 with Serial
No. 1793 duly issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the name of the ASSIGNOR. favor
(Emphasis made in the Petition.) ASSIGNEE/PL

Notarized, Continuing P40,898,000.00 In consideratio


Then, a Continuing Guaranty/Comprehensive Surety Sept. 22, 1999 Guaranty/Comprehensive and/or a
Surety Agreement accommodatio
Agreement was later executed by Central Surety as follows: (petitioner) ha
and/or will ext
Surety and Ins

October 10, 2000 Promissory Note 376-X P40,898,000.00


Date Instrument Amount Stipulation (PN 367-Z)

Notarized, Sept. Continuing P40,898,000.00 In consideration of the


22, 1999 Guaranty/Comprehensive loan and/or any credit
Surety Agreement From the foregoing, it is more than apparent that when, on
accommodation which
you (petitioner) have
extended August
and/or 29,
will 1999, the parties executed the Deed of Assignment with
extend Pledge (of the Wack Wack Membership), to serve as security for an
to Central
Surety and Insurance
obligation in the amount of P15,000,000.00 (when the actual loan
Co.
covered by PN No. 714-Y was only P6,000,000.00), the intent of the
parties was for the Wack Wack Membership to serve as security also
And on October 10, 2000, Promissory Note 376-X was for future advancements. The subsequent loan was nothing more
entered into, a renewal of the prior Promissory Note 367-Z, in the than a fulfillment of the intention of the parties. Of course, because
amount of P40,898,000.00. In all, the transactions that transpired the subsequent loan was for a much greater amount
between Premiere Bank and Central Surety manifest themselves, (P40,898,000.00), it became necessary to put up another security,
thusly: in addition to the Wack Wack Membership. Thus, the subsequent
surety agreement and the specific security for PN No. 367-X were,
Date Instrument Amount covered like the Wack Wack Membership, meant to secure the ballooning
Stipulation

August 20, 1999 PN 714-Y P6M debt of the Central Surety.

August 29, 1999 Deed of Assignment with P 15 M As security for PN 714-Y


The above-quoted provision in the Deed of Assignment, also
Pledge and/or such Promissory
Note/s known asthethe dragnet clause in American jurisprudence, would
which
ASSIGNOR subsume
/ PLEDGOR all debts of respondent of past and future origins. It is a
shall hereafter execute in
valid and legal undertaking, and the amounts specified as
consideration in the contracts do not limit the amount for which the which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine
pledge or mortgage stands as security, if from the four corners of the Currency, as well as those that the Mortgagee
instrument, the intent to secure future and other indebtedness can may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other
be gathered. A pledge or mortgage given to secure future obligation owing to the Mortgagee, whether
advancements is a continuing security and is not discharged by the direct or indirect, principal or secondary as
appears in the accounts, books and records of the
repayment of the amount named in the mortgage until the full Mortgagee, the Mortgagor does hereby
amount of all advancements shall have been paid.[37] 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
Our ruling in Prudential Bank v. Alviar[38] is instructive: the back of this document, and/or appended
hereto, together with all the buildings and
A blanket mortgage clause, also known as a dragnet clause in improvements now existing or which may
American jurisprudence, is one which is specifically phrased to hereafter be erected or constructed thereon, of
subsume all debts of past or future origins. Such clauses are which the Mortgagor declares that he/it is the
carefully scrutinized and strictly construed. Mortgages of this absolute owner free from all liens and
character enable the parties to provide continuous dealings, the incumbrances. . . .
nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing a xxxx
new security on each new transaction. A dragnet clause operates
as a convenience and accommodation to the borrowers as it makes In the case at bar, the subsequent loans obtained by
available additional funds without their having to execute additional respondents were secured by other securities, thus: PN BD#76/C-
security documents, thereby saving time, travel, loan closing costs, 345, executed by Don Alviar was secured by a hold-out on his
costs of extra legal services, recording fees, et cetera. Indeed, it foreign currency savings account, while PN BD#76/C-430, executed
has been settled in a long line of decisions that mortgages given to by respondents for Donalco Trading, Inc., was secured by Clean-
secure future advancements are valid and legal contracts, and the Phase out TOD CA 3923 and eventually by a deed of assignment on
amounts named as consideration in said contracts do not limit the two promissory notes executed by Bancom Realty Corporation with
amount for which the mortgage may stand as security if from the four Deed of Guarantee in favor of A.U. Valencia and Co., and by a
corners of the instrument the intent to secure future and other chattel mortgage on various heavy and transportation
indebtedness can be gathered. equipment. The matter of PN BD#76/C-430 has already been
discussed. Thus, the critical issue is whether the blanket mortgage
The blanket mortgage clause in the instant case states: clause applies even to subsequent advancements for which other
securities were intended, or particularly, to PN BD#76/C-345.
That for and in consideration of certain loans,
overdraft and other credit accommodations Under American jurisprudence, two schools of thought have
obtained from the Mortgagee by the Mortgagor emerged on this question. One school advocates that a dragnet
and/or ________________ hereinafter referred to, clause so worded as to be broad enough to cover all other debts in
irrespective of number, as DEBTOR, and to addition to the one specifically secured will be construed to cover a
secure the payment of the same and those that different debt, although such other debt is secured by another
may hereafter be obtained, the principal or all of mortgage. The contrary thinking maintains that a mortgage with
such a clause will not secure a note that expresses on its face that it
is otherwise secured as to its entirety, at least to anything other than Indeed, in some instances, it has been held that in the
a deficiency after exhausting the security specified therein, such absence of clear, supportive evidence of a contrary intention, a
deficiency being an indebtedness within the meaning of the mortgage containing a dragnet clause will not be extended to cover
mortgage, in the absence of a special contract excluding it from the future advances unless the document evidencing the subsequent
arrangement. advance refers to the mortgage as providing security therefor.

The latter school represents the better position. The parties having conformed to the It was therefore improper for petitioner in this case to seek
blanket mortgage clause or dragnet clause, it is reasonable to conclude that they also agreed
to an implied understanding that subsequent loans need not be secured by other securities, foreclosure of the mortgaged property because of non-payment of all
as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency the three promissory notes. While the existence and validity of
of the first security is a corollary component of the dragnet clause. But of course, there is no
prohibition, as in the mortgage contract in issue, against contractually requiring other securities
the dragnet clause cannot be denied, there is a need to respect the
for the subsequent loans. Thus, when the mortgagor takes another loan for which another existence of the other security given for PN BD#76/C-345. The
security was given it could not be inferred that such loan was made in reliance solely on the foreclosure of the mortgaged property should only be for
original security with the dragnet clause, but rather, on the new security given. This is the
reliance on the security test.
the P250,000.00 loan covered by PN BD#75/C-252, and for any
amount not covered by the security for the second promissory
Hence, based on the reliance on the security test, note. As held in one case, where deeds absolute in form were
the California court in the cited case made an inquiry whether the executed to secure any and all kinds of indebtedness that might
second loan was made in reliance on the original security containing subsequently become due, a balance due on a note, after exhausting
a dragnet clause. Accordingly, finding a different security was taken the special security given for the payment of such note, was in the
for the second loan no intent that the parties relied on the security of absence of a special agreement to the contrary, within the protection
the first loan could be inferred, so it was held. The rationale involved, of the mortgage, notwithstanding the giving of the special
the court said, was that the dragnet clause in the first security security. This is recognition that while the dragnet clause subsists,
instrument constituted a continuing offer by the borrower to secure the security specifically executed for subsequent loans must first be
further loans under the security of the first security instrument, and exhausted before the mortgaged property can be resorted to.
that when the lender accepted a different security he did not accept
the offer.
The security clause involved in the case at bar shows that,
In another case, it was held that a mortgage with a dragnet
clause is an offer by the mortgagor to the bank to provide the security by its terms:
of the mortgage for advances of and when they were made. Thus,
it was concluded that the offer was not accepted by the bank when As security for the payment of loan obtained by the
a subsequent advance was made because (1) the second note was ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
secured by a chattel mortgage on certain vehicles, and the clause amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
therein stated that the note was secured by such chattel mortgage; Currency in accordance with the Promissory Note attached hereto
(2) there was no reference in the second note or chattel mortgage and made an integral part hereof as Annex A and/or such Promissory
indicating a connection between the real estate mortgage and the Note/s which the ASSIGNOR/PLEDGOR shall hereafter execute in
advance; (3) the mortgagor signed the real estate mortgage by her favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR
name alone, whereas the second note and chattel mortgage were hereby transfers, assigns, conveys, endorses, encumbers and
signed by the mortgagor doing business under an assumed name; delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its
and (4) there was no allegation by the bank, and apparently no proof, successors and assigns, that certain Membership fee Certificate
that it relied on the security of the real estate mortgage in making Share in Wack Wack Golf and Country Club Incorporated covered
the advance. by Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack
Wack Golf and Country Club Incorporated on August 27, 1996 in the allows the creditor to hold on to the first security in case of deficiency
name of the ASSIGNOR.
after foreclosure on the special security for the subsequent loans.

it is comparable with the security clause in the case In Prudential, we disallowed the petitioners attempt at
of Prudential, viz.:
multiple foreclosures, as it foreclosed on all of the mortgaged
properties serving as individual securities for each of the three
That for and in consideration of certain loans, overdraft and other loans. This Court then laid down the rule, thus:
credit accommodations obtained from the Mortgagee by the
Mortgagor and/or ________________ hereinafter referred to, where deeds absolute in form were executed to secure any and all
irrespective of number, as DEBTOR, and to secure the payment of kinds of indebtedness that might subsequently become due, a
the same and those that may hereafter be obtained, the principal or balance due on a note, after exhausting the special security given for
all of which is hereby fixed at Two Hundred Fifty Thousand the payment of such note, was, in the absence of a special
(P250,000.00) Pesos, Philippine Currency, as well as those that the agreement to the contrary, within the protection of the mortgage,
Mortgagee may extend to the Mortgagor and/or DEBTOR, including notwithstanding the giving of the special security. This is recognition
interest and expenses or any other obligation owing to that while the dragnet clause subsists, the security specifically
the Mortgagee, whether direct or indirect, principal or secondary as executed for subsequent loans must first be exhausted before the
appears in the accounts, books and records of the Mortgagee, the mortgaged property can be resorted to.
Mortgagor does 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 the back of this document,
and/or appended hereto, together with all the buildings and However, this does not prevent the creditor from foreclosing
improvements now existing or which may hereafter be erected or on the security for the first loan if that loan is past due, because there
constructed thereon, of which the Mortgagor declares that he/it is the
absolute owner free from all liens and incumbrances. . . .
is nothing in law that prohibits the exercise of that right. Hence, in
the case at bench, Premiere Bank has the right to foreclose on the
Wack Wack Membership, the security corresponding to the first
and there is no substantive difference between the terms utilized in promissory note, with the deed of assignment that originated the
both clauses securing future advances. dragnet clause. This conforms to the doctrine in Prudential, as, in
fact, acknowledged in the decisions penultimate paragraph, viz.:
To recall, the critical issue resolved in Prudential was
whether the blanket mortgage clause applies even to subsequent Petitioner, however, is not without recourse. Both the Court
advancements for which other securities were intended. We then of Appeals and the trial court found that respondents have not yet
paid the P250,000.00 and gave no credence to their claim that they
declared that the special security for subsequent loans must first be paid the said amount when they paid
exhausted in a situation where the creditor desires to foreclose on petitioner P2,000,000.00. Thus, the mortgaged property could still
be properly subjected to foreclosure proceedings for the
the subsequent loans that are due. However, the dragnet clause unpaid P250,000.00 loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security for PN BD#76/c-345, has instituting this case against Premiere Bank. We find no malice on the
been exhausted, subject of course to defenses which are available
to respondents. part of Central Surety; indeed, we are convinced that Central Surety
filed the case in the lower court in good faith, upon the honest belief
that it had the prerogative to choose to which loan its payments
In any event, even without this Courts prescription
should be applied.
in Prudential, the release of the Wack Wack Membership as the
pledged security for Promissory Note 714-Y cannot yet be done as
Malicious prosecution, both in criminal and civil cases,
sought by Central Surety. The chain of contracts concluded between
requires the presence of two elements, to wit: (a) malice and (b)
Premiere Bank and Central Surety reveals that the Wack Wack
absence of probable cause. Moreover, there must be proof that the
Membership, which stood as security for Promissory Note 714-Y,
prosecution was prompted by a sinister design to vex and humiliate
and which also stands as security for subsequent debts of Central
a person; and that it was initiated deliberately, knowing that the
Surety, is a security in the form of a pledge. Its return to Central
charge was false and baseless. Hence, the mere filing of what turns
Surety upon the pretext that Central Surety is entitled to pay only the
out to be an unsuccessful suit does not render a person liable for
obligation in Promissory Note No. 714-Y, will result in the
malicious prosecution, for the law could not have meant to impose a
extinguishment of the pledge, even with respect to the subsequent
penalty on the right to litigate.[40]Malice must be proved with clear
obligations, because Article 2110 of the Civil Code provides:
and convincing evidence, which we find wanting in this case.
(I)f the thing pledged is returned by the pledgor or owner, the pledge
is extinguished. Any stipulation to the contrary is void. WHEREFORE, the instant petition
is PARTIALLY GRANTED. The assailed Decision of the Court of
This is contrary to the express agreement of the parties, something Appeals in CA-G.R. CV No. 85930 dated July 31, 2006, as well as
which Central Surety wants this Court to undo. We reiterate that, as its Resolution dated January 4, 2007, are REVERSED and SET
a rule, courts cannot intervene to save parties from disadvantageous ASIDE. The Decision of the Regional Trial Court of Makati City,
provisions of their contracts if they consented to the same freely and Branch 132, in Civil Case No. 00-1536, dated July 12, 2005,
voluntarily.[39] is REINSTATED with the MODIFICATION that the award of
attorneys fees to petitioner is DELETED. No pronouncement as to
Attorneys Fees costs.

The final issue is the propriety of attorneys fees. The trial SO ORDERED.
court based its award on the supposed malice of Central Surety in
ANTONIO EDUARDO B. NACHURA Associate Justice
Associate Justice Chairperson, Third Division

WE CONCUR: CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the


Division Chairperson's Attestation, I certify that the conclusions in
CONSUELO YNARES-SANTIAGO the above Decision had been reached in consultation before the
Associate Justice case was assigned to the writer of the opinion of the Courts Division.
Chairperson

REYNATO S. PUNO
MA. ALICIA AUSTRIA- MINITA V. CHICO-NAZARIO Chief Justice
MARTINEZ Associate Justice
Associate Justice
*
Per Raffle dated February 18, 2008.
[1]
Penned by Presiding Justice Ruben T. Reyes (now a retired member of this Court),
with Associate Justices Rebecca de Guia-Salvador and Monina Arevalo-Zenarosa,
TERESITA J. LEONARDO-DE CASTRO concurring; rollo, pp. 45-69.
[2]
Associate Justice [3]
Penned by Judge Rommel O. Baybay.
Annex A of the Complaint, records, p. 11.
[4]
Annex B of the Complaint, id. at 12-13.
[5]
Annex E, formal offer of exhibits, id. at 206.
[6]
Rollo, p. 11.
ATTESTATION [7]
[8]
Annex D of the Complaint, records, p. 15. (Italics supplied.)
Annex E of the Complaint, id. at 16. (Italics supplied.)
[9]
Annex G of the Complaint, id. at 18.
I attest that the conclusions in the above Decision were reached in [10]
Annex G-1 of the Complaint, id. at 18.
consultation before the case was assigned to the writer of the [11]
[12]
Now covered by PN No. 376-X to mature on October 20, 2001.
opinion of the Courts Division. [13]
Annex H of the Complaint, records, p. 19.
Annex I of the Complaint, id. at 20.
[14]
Loan of P40,000,000.00 to Casent Realty and Development Corporation with
Engracio Castaeda signing the PN as president thereof.
[15]
Supra notes 3, 4.
[16]
Annexes J, J-1 of the Complaint, records, pp. 21-22.
CONSUELO YNARES-SANTIAGO
[17]
An affiliate company of Central Surety with Engracio Castaeda as president
thereof.
[18]
Rollo, pp. 79-80. Republic of the Philippines
[19]
Id. at 9-10.
[20]
[21]
Id. at 61-64. Supreme Court
Baltazar v. Lingayen Gulf Electric Power Co., Inc., 121 Phil. 1308, 1321 (1965). Manila
[22]
Social Security Commission v. Court of Appeals, G.R. No. 152058, September 27,
2004, 439 SCRA 239. FIRST DIVISION
[23]
CIVIL CODE, Art. 6.
[24]
Allen & Robinson v. F. H. Redward and Hawaiian Lodge, No. 21, of Free and
Accepted Masons, April 25, 1896, 10 Haw. 273, 1896 WL 1624 (Hawaii Rep.). HEIRS OF G.R. No. 159709
[25]
IV Tolentino, Commentaries and Jurisprudence on the Civil Code of the SERVANDO FRANCO,
Philippines, 311 (1985), citing Salvat 104-105, 7 Planiol & Ripert 542, De Buen, 3 Petitioners, Present:
Colin & Capitant, 188, 296.
[26]
Id.
[27]
The Ram Company, Inc. v. The Estate of Clyde K. Kobbeman, et al. and Planters LEONARDO-DE
Bank and Trust Company, Appellant, No. 56408, March 2, 1985, 236 Kan. 751, 696
P. 2d 936, citing Gray v. Amoco Production Company, 1 Kan. App. 2d 338, P 11, 564
CASTRO,
P. 2d 579 (1977) affd in part, revd in part 223 Kan. 441, 573 P. 2d 1080 (1978), - versus - Acting Chairperson,
[28]
CIVIL CODE, Art. 1169. BERSAMIN,
[29]
Valderama v. Macalde, G.R. No. 165005, September 16, 2005, 470 SCRA 168,
183, citing People v. Bodoso, 446 Phil. 838 (2003). DEL CASTILLO,
[30]
Francis Saul II, Trustee, et al. v. Vaughn & Co., Ltd., Nos. 32433, 32462, VILLARAMA, JR, and
December 5, 1977, 240 Ga. 301, 241 S.e. 2d 180.
[31]
Emphasis supplied.
PERLAS-BERNABE, JJ.
[32]
Emphasis supplied. SPOUSES VERONICA Promulgated:
[33]
G.R. No. 116216, June 20, 1997, 274 SCRA 527. AND DANILO
[34]
G.R. No. 165662, May 3, 2006, 489 SCRA 125.
[35] TSN, July 9, 2004, pp. 42-43. GONZALES, June 27, 2012
[36]
Everett Steamship Corporation v. Court of Appeals, 358 Phil. 129, 137 (1998), Respondents.
citing Ong Yiu v. Court of Appeals, 91 SCRA 223 (1979).
[37]
Republic Planters Bank v. Sarmiento, G.R. No. 170785, October 19, 2007, 537 x------------------------------------------------------------------------
SCRA 303, 314.
[38]
-----------------x
G.R. No. 150197, July 28, 2005, 464 SCRA 353.
[39]
Development Bank of the Philippines v. Court of Appeals, G.R. No. 138703, June
30, 2006, 494 SCRA 25, 46. DECISION
[40]
Ceballos v. Intestate Estate of the Late Emigdio Mercado, G.R. No. 155856, May
28, 2004, 430 SCRA 323, 336, citing China Banking Corporation v. Court of
Appeals, 231 SCRA 472 (1994). BERSAMIN, J.:
There is novation when there is an irreconcilable
incompatibility between the old and the new obligations.
There is no novation in case of only slight modifications;
hence, the old obligation prevails.
The petitioners challenge the decision promulgated on March
On June 11, 1986, Servando and Leticia secured
19, 2003,[1] whereby the Court of Appeals (CA) upheld the from Veronica still another loan in the amount
issuance of a writ of execution by the Regional Trial Court of P300,000.00, maturing in one month, secured by a real
(RTC), Branch 16, in Malolos, Bulacan. 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
Antecedents given to them out of the proceeds of the loan.
The Court adopts the following summary of the Like the previous loans, Servando and Medel failed
antecedents rendered by the Court in Medel v. Court of to pay the third loan on maturity.
Appeals,[2] the case from which this case originated, to wit:
On July 23, 1986, Servando and Leticia with the
latter's husband, Dr. Rafael Medel, consolidated all their
On November 7, 1985, Servando Franco and
previous unpaid loans totaling P440,000.00, and sought
Leticia Medel (hereafter Servando and Leticia) obtained
from Veronica another loan in the amount
a loan from Veronica R. Gonzales (hereafter Veronica),
of P60,000.00, bringing their indebtedness to a total
who was engaged in the money lending business under
of P500,000.00, payable on August 23, 1986. They
the name Gonzales Credit Enterprises, in the amount
executed a promissory note, reading as follows:
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 Baliwag, Bulacan July 23, 1986
6% per month. Servado and Leticia executed a
promissory note for P50,000.00, to evidence the loan, Maturity Date August 23, 1986
payable on January 7, 1986.
P500,000.00
On November 19, 1985, Servando and Leticia
obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6% interest per
FOR VALUE RECEIVED, I/WE
month. They executed a promissory note to evidence the jointly and severally promise to pay to the
loan, maturing on January 19, 1986. They received order of VERONICA R. GONZALES
only P84,000.00, out of the proceeds of the loan. doing business in the business style of
GONZALES CREDIT ENTERPRISES,
On maturity of the two promissory notes, the Filipino, of legal age, married to Danilo
borrowers failed to pay the indebtedness. G. Gonzales, Jr., of Baliwag Bulacan, the
sum of PESOS ........ FIVE HUNDRED the Philippines, the holder shall have the
THOUSAND ..... (P500,000.00) option to apply and collect the increased
Philippine interest charges without notice although
Currency with interest thereon at the rate the original interest have already been
of 5.5 PER CENT per month plus 2% ser collected wholly or partially unless the
vice charge per annum from date hereof contrary is required by law.
until fully paid according to the
amortization schedule contained It is also a special condition of this
herein. (Underscoring supplied) contract that the parties herein agree that
the amount of peso-obligation under this
Payment will be made in full at the agreement is based on the present value of
maturity date. peso, and if there be any change in the
value thereof, due to extraordinary
Should I/WE fail to pay any amortizat inflation or deflation, or any other cause
ion or portion hereof when due, all the or reason, then the peso-obligation herein
other installments together with all contracted shall be adjusted in accordance
interest accrued shall immediately be due with the value of the peso then prevailing
and payable and I/WE hereby agree to pay at the time of the complete fulfillment of
an additional amount equivalent to one p obligation.
er cent (1%) per month of the amount du
e and demandable as penalty charges in t Demand and notice of dishonor
he form of liquidated damages until fully waived. Holder may accept partial
paid; and the payments and grant renewals of this note
further sum of TWENTY FIVE PER CE or extension of payments, reserving rights
NT (25%) thereof in full, without against each and all indorsers and all
deductions as Attorney's Fee whether parties to this note.
actually incurred or not, of the total
amount due and demandable, exclusive of IN CASE OF JUDICIAL Execution of
costs and judicial or extra judicial this obligation, or any part of it, the
expenses. (Underscoring supplied) debtors waive all his/their rights under the
provisions of Section 12, Rule 39, of the
I, WE further agree that in the event Revised Rules of Court.
the present rate of interest on loan is
increased by law or the Central Bank of 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 interest for loan or forbearance of money, goods or credit
note. is 12% per annum."

On February 20, 1990, Veronica R. Gonzales, Accordingly, on December 9, 1991, the trial court
joined by her husband Danilo G. Gonzales, filed with the rendered judgment, the dispositive portion of which
Regional Trial Court of Bulacan, Branch 16, at Malolos, reads as follows:
Bulacan, a complaint for collection of the full amount of
the loan including interests and other charges. WHEREFORE, premises considered,
judgment is hereby rendered, as follows:
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 1. Ordering the defendants Servando
defendants Leticia and Dr. Rafael Medel who borrowed Franco and Leticia Medel, jointly and
from the plaintiffs the sum of P500,000.00, and actually severally, to pay plaintiffs the amount
received the amount and benefited therefrom; that the of P47,000.00 plus 12% interest per
loan was secured by a real estate mortgage executed in annum from November 7, 1985 and 1%
favor of the plaintiffs, and that he (Servando Franco) per month as penalty, until the entire
signed the promissory note only as a witness. amount is paid in full.
In their separate answer filed on April 10,1990,
defendants Leticia and Rafael Medel alleged that the 2. Ordering the defendants Servando
loan was the transaction of Leticia Yaptinchay, who Franco and Leticia Y. Medel to plaintiffs,
executed a mortgage in favor of the plaintiffs over a jointly and severally the amount
parcel of real estate situated in San Juan, Batangas; that of P84,000.00 with 12% interest per
the interest rate is excessive at 5.5% per month with annum and 1% per cent per month as
additional service charge of 2% per annum, and penalty penalty from November 19,1985 until the
charge of 1% per month; that the stipulation for whole amount is fully paid;
attorney's fees of 25% of the amount due is
unconscionable, illegal and excessive, and that
substantial payments made were applied to interest, 3. Ordering the defendants to pay the
penalties and other charges. plaintiffs, jointly and severally, the
amount of P285,000.00 plus 12% interest
After due trial, the lower court declared that the due per annum and 1% per month as penalty
execution and genuineness of the four promissory notes from July 11, 1986, until the whole
had been duly proved, and ruled that although the Usury amount is fully paid;
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
4. Ordering the defendants to pay WHEREFORE, the appealed
plaintiffs, jointly and severally, the judgment is hereby MODIFIED such that
amount of P50,000.00 as attorney's fees; defendants are hereby ordered to pay the
plaintiffs the sum of P500,000.00, plus
5. All counterclaims are hereby 5.5% per month interest and 2% service
dismissed. charge per annum effective July 23, 1986,
plus 1% per month of the total amount due
With costs against the defendants. and demandable as penalty charges
effective August 24, 1986, until the entire
In due time, both plaintiffs and defendants amount is fully paid.
appealed to the Court of Appeals.
The award to the plaintiffs
In their appeal, plaintiffs-appellants argued that the
promissory note, which consolidated all the unpaid loans of P50,000.00 as attorney's fees is
of the defendants, is the law that governs the affirmed. And so is the imposition of
parties. They further argued that Circular No. 416 of the costs against the defendants.
Central Bank prescribing the rate of interest for loans or
forbearance of money, goods or credit at 12% per annum, SO ORDERED.
applies only in the absence of a stipulation on interest
rate, but not when the parties agreed thereon. On April 15, 1997, defendants-appellants filed a
motion for reconsideration of the said decision. By
The Court of Appeals sustained the plaintiffs- resolution dated November 25, 1997, the Court of
appellants' contention. It ruled that the Usury Law Appeals denied the motion.[3]
having become legally inexistent with the promulgation On review, the Court in Medel v. Court of
by the Central Bank in 1982 of Circular No. 905, the
lender and borrower could agree on any interest that may Appeals struck down as void the stipulation on the interest for
be charged on the loan. The Court of Appeals further being iniquitous or unconscionable, and revived the judgment
held that "the imposition of an additional amount of the RTC rendered on December 9, 1991, viz:
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. WHEREFORE, the Court hereby REVERSES and
SETS ASIDE the decision of the Court of Appeals
Accordingly, on March 21, 1997, the Court of promulgated on March 21, 1997, and its resolution dated
Appeals promulgated it decision reversing that of the November 25, 1997. Instead, we render judgment
Regional Trial Court, disposing as follows: REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of
Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No.
134-M-90, involving the same parties.
liability is of no moment. Primarily, the decision was for
No pronouncement as to costs in this instance. him and Leticia Medel to pay the plaintiffs jointly and
severally the amounts stated in the Decision. In other
SO ORDERED.[4] words, the liability of the defendants thereunder is
solidary. Based on this aspect alone, the new defense
raised by defendant Franco is unavailing.
Upon the finality of the decision in Medel v. Court of
Appeals, the respondents moved for execution.[5] Servando WHEREFORE, in the light of all the foregoing, the
Franco opposed,[6] claiming that he and the respondents had Court hereby grants the Motion for Execution of
Judgment.
agreed to fix the entire obligation
[7]
at P775,000.00. According to Servando, their agreement,
which was allegedly embodied in a receipt dated February 5,
1992,[8] whereby he made an initial payment of P400,000.00
Accordingly, let a writ of execution be issued for
and promised to pay the balance of P375,000.00 on February implementation by the Deputy Sheriff of this Court.
29, 1992, superseded the July 23, 1986 promissory note.
SO ORDERED.[9]
The RTC granted the motion for execution over
Servandos opposition, thus: On March 8, 2001, the RTC issued the writ of execution.[10]

There is no doubt that the decision dated December Servando moved for reconsideration,[11] but the RTC
9, 1991 had already been affirmed and had already denied his motion.[12]
become final and executory. Thus, in accordance with
Sec. 1 of Rule 39 of the 1997 Rules of Civil Procedure,
execution shall issue as a matter of right. It has likewise On March 19, 2003, the CA affirmed the RTC through its
been ruled that a judgment which has acquired finality assailed decision, ruling that the execution was proper
becomes immutable and unalterable and hence may no
because of Servandos failure to comply with the terms of the
longer be modified at any respect except only to correct
clerical errors or mistakes (Korean Airlines Co. Ltd. vs. compromise agreement, stating:[13]
C.A., 247 SCRA 599). In this respect, the decision
deserves to be respected. Petitioner cannot deny the fact that there was no
full compliance with the tenor of the compromise
The argument about the modification of the agreement. Private respondents on their part did not
contract or non-participation of defendant Servando disregard the payments made by the petitioner. They
Franco in the proceedings on appeal on the alleged belief even offered that whatever payments made by petitioner,
that the payment he made had already absolved him from it can be deducted from the principal obligation
including interest. However, private respondents posit intervening death. The substitution was pursuant to
that the payments made cannot alter, modify or revoke
the decision of the Supreme Court in the instant case. the resolution dated June 15, 2005.[15]

In the case of Prudence Realty and Development Issue


Corporation vs. Court of Appeals, the Supreme Court
ruled that:
The petitioners submit that the CA erred in ruling that:
When the terms of the compromise
judgment is violated, the aggrieved party must I
move for its execution, not its invalidation. THE 9 DECEMBER 1991 DECISION OF BRANCH 16
OF THE REGIONAL TRIAL COURT OF MALOLOS,
It is clear from the aforementioned jurisprudence BULACAN WAS NOT NOVATED BY THE
that even if there is a compromise agreement and the COMPROMISE AGREEMENT BETWEEN THE
terms have been violated, the aggrieved party, such as PARTIES ON 5 FEBRUARY 1992.
the private respondents, has the right to move for the
issuance of a writ of execution of the final judgment II
subject of the compromise agreement. THE LIABILITY OF THE PETITIONER TO
RESPONDENTS SHOULD BE BASED ON THE
Moreover, under the circumstances of this case, DECEMBER 1991 DECISION OF BRANCH 16 OF
petitioner does not stand to suffer any harm or prejudice THE REGIONAL TRIAL COURT OF MALOLOS,
for the simple reason that what has been asked by private BULACAN AND NOT ON THE COMPROMISE
respondents to be the subject of a writ of execution is AGREEMENT EXECUTED IN 1992.
only the balance of petitioners obligation after deducting
the payments made on the basis of the compromise
agreement. The petitioners insist that the RTC could not validly enforce
a judgment based on a promissory note that had been already
novated; that the promissory note had been impliedly novated
when the principal obligation of P500,000.00 had been fixed
WHEREFORE, premises considered, the instant
petition is hereby DENIED DUE COURSE and at P750,000.00, and the maturity date had been extended from
consequently DISMISSED for lack of merit. August 23, 1986 to February 29, 1992.
SO ORDERED.
In contrast, the respondents aver that the petitioners seek to
His motion for reconsideration having been
alter, modify or revoke the final and executory decision of the
denied,[14] Servando appealed. He was eventually substituted
Court; that novation did not take place because there was no
by his heirs, now the petitioners herein, on account of his
complete incompatibility between the promissory note and
the memorandum receipt; that Servandos previous payment changing the object or the principal conditions, or by
would be deducted from the total liability of the debtors based substituting the person of the debtor, or by subrogating a third
on the RTCs decision. person in the rights of the creditor.[16] For a valid novation to
take place, there must be, therefore: (a) a previous valid
Issue obligation; (b) an agreement of the parties to make a new
Was there a novation of the August 23, 1986 contract; (c) an extinguishment of the old contract; and (d) a
promissory note when respondent Veronica Gonzales issued valid new contract.[17] In short, the new obligation
the February 5, 1992 receipt? extinguishes the prior agreement only when the substitution
is unequivocally declared, or the old and the new obligations
Ruling are incompatible on every point. A compromise of a final
judgment operates as a novation of the judgment obligation
The petition lacks merits. upon compliance with either of these two conditions.[18]

I
The receipt dated February 5, 1992, excerpted below, did not
Novation did not transpire because no
irreconcilable incompatibility existed create a new obligation incompatible with the old one under
between the promissory note and the receipt the promissory note, viz:

February 5, 1992
To buttress their claim of novation, the petitioners rely on the
receipt issued on February 5, 1992 by respondent Veronica Received from SERVANDO FRANCO BPI
whereby Servandos obligation was fixed at P750,000.00. Managers Check No. 001700 in the amount
of P400,00.00 as partial payment of loan. Balance
They insist that even the maturity date was extended until of P375,000.00 to be paid on or before FEBRUARY 29,
February 29, 1992. Such changes, they assert, were 1992. In case of default an interest will be charged as
incompatible with those of the original agreement under the stipulated in the promissory note subject of this case.
promissory note.
(Sgd)
V. Gonzalez[19]
The petitioners assertion is wrong.
To be clear, novation is not presumed. This means that the
A novation arises when there is a substitution of an obligation parties to a contract should expressly agree to abrogate the old
by a subsequent one that extinguishes the first, either by contract in favor of a new one. In the absence of the express
agreement, the old and the new obligations must be loan involving the P500,000.00 extended to
incompatible on every point.[20] According to California Bus Servando. Advertence to the interest stipulated in the
Lines, Inc. v. State Investment House, Inc.:[21] promissory note indicated that the contract still subsisted, not
replaced and extinguished, as the petitioners claim.
The extinguishment of the old obligation by the new one
is a necessary element of novation which may be effected
either expressly or impliedly. The term expressly means The receipt dated February 5, 1992 was only the proof of
that the contracting parties incontrovertibly disclose that Servandos payment of his obligation as confirmed by the
their object in executing the new contract is to extinguish decision of the RTC. It did not establish the novation of his
the old one. Upon the other hand, no specific form is
required for an implied novation, and all that is
agreement with the respondents. Indeed, the Court has ruled
prescribed by law would be an incompatibility between that an obligation to pay a sum of money is not novated by an
the two contracts. While there is really no hard and fast instrument that expressly recognizes the old, or changes only
rule to determine what might constitute to be a sufficient the terms of payment, or adds other obligations not
change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatible with the old ones, or the new contract merely
incompatibility between the old and the new obligations. supplements the old one.[24] A new contract that is a mere
There is incompatibility when the two obligations cannot reiteration, acknowledgment or ratification of the old contract
stand together, each one having its independent existence. If with slight modifications or alterations as to the cause or
the two obligations cannot stand together, the latter obligation object or principal conditions can stand together with the
novates the first.[22] Changes that breed incompatibility must former one, and there can be no incompatibility between
be essential in nature and not merely accidental. The them.[25] Moreover, a creditors acceptance of payment after
incompatibility must affect any of the essential elements of demand does not operate as a modification of the original
the obligation, such as its object, cause or principal conditions contract.[26]
thereof; otherwise, the change is merely modificatory in
nature and insufficient to extinguish the original obligation.[23] Worth noting is that Servandos liability was joint and solidary
with his co-debtors. In a solidary obligation, the creditor may
In light of the foregoing, the issuance of the receipt created no proceed against any one of the solidary debtors or some or all
new obligation. Instead, the respondents only thereby of them simultaneously.[27] The choice to determine against
recognized the original obligation by stating in the receipt that whom the collection is enforced belongs to the creditor until
the P400,000.00 was partial payment of loan and by referring the obligation is fully satisfied.[28] Thus, the obligation was
to the promissory note subject of the case in imposing the being enforced against Servando, who, in order to escape
interest. The loan mentioned in the receipt was still the same liability, should have presented evidence to prove that his
obligation had already been cancelled by the new obligation WHEREFORE, the Court AFFIRMS the decision of
or that another debtor had assumed his place. In case of the Court of Appeals promulgated on March 19,
change in the person of the debtor, the substitution must be 2003; ORDERS the Regional Trial Court, Branch 16, in
clear and express,[29] and made with the consent of the Malolos, Bulacan to proceed with the execution based on its
creditor.[30] Yet, these circumstances did not obtain herein, decision rendered on December 9, 1991, deducting the
proving precisely that Servando remained a solidary debtor amount of P400,000.00 already paid by the late Servando
against whom the entire or part of the obligation might be Franco; and DIRECTS the petitioners to pay the costs of suit.
enforced.
SO ORDERED.
Lastly, the extension of the maturity date did not constitute a
novation of the previous agreement. It is settled that an
extension of the term or period of the maturity date does not
result in novation.[31] LUCAS P. BERSAMIN
II Associate Justice
Total liability to be reduced by P400,000.00

WE CONCUR:
The petitioners argue that Servandos remaining liability
amounted to only P375,000.00, the balance indicated in the
February 5, 1992 receipt. Accordingly, the balance was not
yet due because the respondents did not yet make a demand
for payment. TERESITA J. LEONARDO-DE CASTRO
Associate Justice
The petitioners cannot be upheld. Acting Chairperson, First Division

The balance of P375,000.00 was premised on the taking place


of a novation. However, as found now, novation did not take
place. Accordingly, Servandos obligation, being solidary,
remained to be that decreed in the December 9, 1991 decision
of the RTC, inclusive of interests, less the amount
of P400,000.00 that was meanwhile paid by him.
conclusions in the above Decision had been reached in
MARIANO C. DEL CASTILLO MARTIN S. consultation before the case was assigned to the writer of the
VILLARAMA, JR. opinion of the Courts Division.
Associate Justice Associate Justice

ANTONIO T. CARPIO
Senior Associate Justice
ESTELA M. PERLAS-BERNABE (Per Section 12, R.A. 296,
Associate Justice The Judiciary Act of 1948, as
amended)

ATTESTATION

I attest that the conclusions in the above Decision had been


[1]
Rollo, pp. 103-110; penned by Associate Justice Bernardo P. Abesamis (retired),
reached in consultation before the case was assigned to the with Associate Justice Juan Q. Enriquez, Jr. (retired) and Associate Justice Edgardo F.
writer of the opinion of the Courts Division. Sundiam (deceased) concurring.
[2]
G.R. No. 131622, November 27, 1998, 299 SCRA 481.
[3]
Id., pp. 483-488.
[4]
Id., p. 490.
[5]
Records, pp. 202-204.
[6]
Id., pp. 211-218.
TERESITA J. [7]
Rollo, pp. 5-6
LEONARDO-DE CASTRO [8]
Id., p. 20.
[9]
Associate Justice Records, pp. 238-239.
[10]
Id., pp. 240-241.
Acting Chairperson, First [11]
Id., pp. 245-253.
Division [12]
Id., pp. 316-317.
[13]
Rollo, pp. 108-109.
[14]
CA rollo, p. 246.
[15]
Rollo, p. 181.
[16]
CERTIFICATION Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc., G.R. No. 170674,
August 24, 2009, 596 SCRA 697, 706-707.
[17]
Valenzuela v. Kalayaan Development & Industrial Corporation, G.R. No. 163244,
June 22, 2009, 590 SCRA 380, 391; Bautista v. Pilar Development Corporation, G.R.
No. 135046, August 17, 1999, 312 SCRA 611, 618.
Pursuant to Section 13, Article VII of the Constitution and the [18]
Magbanua v. Uy, G.R. No. 161003, May 6, 2005, 458 SCRA 184, 197.
Division Acting Chairpersons Attestation, I certify that the [19]
Rollo, p. 20.
[20]
Valenzuela v. Kalayaan Development & Industrial Corporation, supra, note 17,
pp. 390-391.
[21]
G.R. No. 147950, December 11, 2003, 418 SCRA 297, 309-310.
[22]
Valenzuela v. Kalayaan Development & Industrial Corporation, supra, note FIRST DIVISION
17; California Bus Lines, Inc. v. State Investment House, Inc., supra, note 21; Kwong
v. Gargantos, G.R. No. 152984, November 22, 2006, 507 SCRA 540, 548. [G.R. No. 112329. January 28, 2000]
[23]
Transpacific Battery Corporation v. Security Bank & Trust Co., G.R. No. 173565,
May 8, 2009, 587 SCRA 536, 546.
[24]
Aguilar v. Manila Banking Corporation, G.R. No. 157911, September 19, 2006, VIRGINIA A. PEREZ, petitioner, vs. COURT OF
502 SCRA 354; Spouses Reyes v. BPI Family Savings Bank, Inc., G.R. Nos. 149840- APPEALS and BF LIFEMAN INSURANCE
41, March 31, 2006, 486 SCRA 276.
[25]
Jurado, Comments and Jurisprudence on Obligations and Contracts (2002 ed.), p.
CORPORATION, respondents.
331.
[26]
[27]
Valenzuela v. Kalayaan Development & Industrial Corporation, supra, note 17. DECISION
Article 1216, Civil Code.
[28]
Ang v. Associated Bank, G.R. No. 146511, September 5, 2007, 532 SCRA 244,
276; Inciong, Jr. v. Court of Appeals, G.R. No. 96405, June 26, 1996, 257 SCRA 578, YNARES-SANTIAGO, J.:
588.
[29]
Garcia v. Llamas, G.R. No. 154127, December 8, 2003, 417 SCRA 292, 302. A contract of insurance, like all other contracts, must be assented to by
[30]
Article 1293, Civil Code. both parties, either in person or through their agents and so long as an
[31]
California Bus Lines, Inc. v. State Investment House, Inc., supra, note 21; Garcia, application for insurance has not been either accepted or rejected, it is
Jr. v. Court of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA 493, 502.
merely a proposal or an offer to make a contract.

Petitioner Virginia A. Perez assails the decision of respondent Court of


Appeals dated July 9, 1993 in CA-G.R. CV 35529 entitled, "BF Lifeman
Insurance Corporations, Plaintiff-Appellant versus Virginia A. Perez,
Defendant-Appellee," which declared Insurance Policy 056300
for P50,000.00 issued by private respondent corporation in favor of the
deceased Primitivo B. Perez, null and void and rescinded, thereby
reversing the decision rendered by the Regional Trial Court of Manila,
Branch XVI.

The facts of the case as summarized by respondent Court of Appeals are


not in dispute.

Primitivo B. Perez had been insured with the BF Lifeman Insurance


Corporation since 1980 for P20,000.00. Sometime in October 1987, an
agent of the insurance corporation, Rodolfo Lalog, visited Perez in
Guinayangan, Quezon and convinced him to apply for additional
insurance coverage of P50,000.00, to avail of the ongoing promotional
discount of P400.00 if the premium were paid annually.
On October 20, 1987, Primitivo B. Perez accomplished an application On September 21, 1990, private respondent BF Lifeman Insurance
form for the additional insurance coverage of P50,000.00. On the same Corporation filed a complaint against Virginia A. Perez seeking the
day, petitioner Virginia A. Perez, Primitivos wife, paid P2,075.00 to rescission and declaration of nullity of the insurance contract in
Lalog. The receipt issued by Lalog indicated the amount received was a question.
"deposit."[1] Unfortunately, Lalog lost the application form
accomplished by Perez and so on October 28, 1987, he asked the latter Petitioner Virginia A. Perez, on the other hand, averred that the deceased
to fill up another application form.[2] On November 1, 1987, Perez was had fulfilled all his prestations under the contract and all the elements
made to undergo the required medical examination, which he passed.[3] of a valid contract are present. She then filed a counterclaim against
private respondent for the collection of P150,000.00 as actual
Pursuant to the established procedure of the company, Lalog forwarded damages, P100,000.00 as exemplary damages, P30,000.00 as attorneys
the application for additional insurance of Perez, together with all its fees and P10,000.00 as expenses for litigation.
supporting papers, to the office of BF Lifeman Insurance Corporation at
Gumaca, Quezon which office was supposed to forward the papers to On October 25, 1991, the trial court rendered a decision in favor of
the Manila office. petitioner, the dispositive portion of which reads as follows:

On November 25, 1987, Perez died in an accident. He was riding in a WHEREFORE PREMISES CONSIDERED, judgment is
banca which capsized during a storm. At the time of his death, his hereby rendered in favor of defendant Virginia A. Perez,
application papers for the additional insurance of P50,000.00 were still ordering the plaintiff BF Lifeman Insurance Corporation
with the Gumaca office. Lalog testified that when he went to follow up to pay to her the face value of BF Lifeman Insurance
the papers, he found them still in the Gumaca office and so he personally Policy No. 056300, plus double indemnity under the
brought the papers to the Manila office of BF Lifeman Insurance SARDI or in the total amount of P150,000.00 (any
Corporation. It was only on November 27, 1987 that said papers were refund made and/or premium deficiency to be deducted
received in Manila. therefrom).

Without knowing that Perez died on November 25, 1987, BF Lifeman SO ORDERED.[5]
Insurance Corporation approved the application and issued the
corresponding policy for the P50,000.00 on December 2, 1987.[4] The trial court, in ruling for petitioner, held that the premium for the
additional insurance of P50,000.00 had been fully paid and even if the
Petitioner Virginia Perez went to Manila to claim the benefits under the sum of P2,075.00 were to be considered merely as partial payment, the
insurance policies of the deceased. She was paid P40,000.00 under the same does not affect the validity of the policy. The trial court further
first insurance policy for P20,000.00 (double indemnity in case of stated that the deceased had fully complied with the requirements of the
accident) but the insurance company refused to pay the claim under the insurance company. He paid, signed the application form and passed the
additional policy coverage of P50,000.00, the proceeds of which medical examination. He should not be made to suffer the subsequent
amount to P150,000.00 in view of a triple indemnity rider on the delay in the transmittal of his application form to private respondents
insurance policy. In its letter of January 29, 1988 to Virginia A. Perez, head office since these were no longer within his control.
the insurance company maintained that the insurance for P50,000.00
had not been perfected at the time of the death of Primitivo Perez. The Court of Appeals, however, reversed the decision of the trial court
Consequently, the insurance company refunded the amount saying that the insurance contract for P50,000.00 could not have been
of P2,075.00 which Virginia Perez had paid. perfected since at the time that the policy was issued, Primitivo was
already dead.[6] Citing the provision in the application form signed by Consent must be manifested by the meeting of the offer and the
Primitivo which states that: acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute.
"x x x there shall be no contract of insurance unless and
until a policy is issued on this application and that the When Primitivo filed an application for insurance, paid P2,075.00 and
policy shall not take effect until the first premium has submitted the results of his medical examination, his application was
been paid and the policy has been delivered to and subject to the acceptance of private respondent BF Lifeman Insurance
accepted by me/us in person while I/we, am/are in good Corporation. The perfection of the contract of insurance between the
health" deceased and respondent corporation was further conditioned upon
compliance with the following requisites stated in the application form:
the Court of Appeals held that the contract of insurance had to be
assented to by both parties and so long as the application for insurance "there shall be no contract of insurance unless and until
has not been either accepted or rejected, it is merely an offer or proposal a policy is issued on this application and that the said
to make a contract. policy shall not take effect until the premium has been
paid and the policy delivered to and accepted by me/us
Petitioners motion for reconsideration having been denied by in person while I/We, am/are in good health."[9]
respondent court, the instant petition for certiorari was filed on the
ground that there was a consummated contract of insurance between the The assent of private respondent BF Lifeman Insurance Corporation
deceased and BF Lifeman Insurance Corporation and that the condition therefore was not given when it merely received the application form
that the policy issued by the corporation be delivered and received by and all the requisite supporting papers of the applicant. Its assent was
the applicant in good health, is potestative, being dependent upon the given when it issues a corresponding policy to the applicant. Under the
will of the insurance company, and is therefore null and void. abovementioned provision, it is only when the applicant pays the
premium and receives and accepts the policy while he is in good health
The petition is bereft of merit. that the contract of insurance is deemed to have been perfected.

Insurance is a contract whereby, for a stipulated consideration, one party It is not disputed, however, that when Primitivo died on November 25,
undertakes to compensate the other for loss on a specified subject by 1987, his application papers for additional insurance coverage were still
specified perils.[7] A contract, on the other hand, is a meeting of the with the branch office of respondent corporation in Gumaca and it was
minds between two persons whereby one binds himself, with respect to only two days later, or on November 27, 1987, when Lalog personally
the other to give something or to render some service.[8] Under Article delivered the application papers to the head office in Manila.
1318 of the Civil Code, there is no contract unless the following Consequently, there was absolutely no way the acceptance of the
requisites concur: application could have been communicated to the applicant for the latter
to accept inasmuch as the applicant at the time was already dead. In the
(1).......Consent of the contracting parties; case of Enriquez vs. Sun Life Assurance Co. of Canada,[10] recovery on
the life insurance of the deceased was disallowed on the ground that the
(2).......Object certain which is the subject matter of the contract for annuity was not perfected since it had not been proved
contract; satisfactorily that the acceptance of the application ever reached the
knowledge of the applicant.
(3).......Cause of the obligation which is established.
Petitioner insists that the condition imposed by respondent corporation it is merely an offer or proposal to make a contract. The contract, to be
that a policy must have been delivered to and accepted by the proposed binding from the date of application, must have been a completed
insured in good health is potestative being dependent upon the will of contract, one that leaves nothing to be done, nothing to be completed,
the corporation and is therefore null and void. nothing to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the parties
We do not agree. have met in agreement.[11]

A potestative condition depends upon the exclusive will of one of the Prescinding from the foregoing, respondent corporation cannot be held
parties. For this reason, it is considered void. Article 1182 of the New liable for gross negligence. It should be noted that an application is a
Civil Code states: When the fulfillment of the condition depends upon mere offer which requires the overt act of the insurer for it to ripen into
the sole will of the debtor, the conditional obligation shall be void. a contract. Delay in acting on the application does not constitute
acceptance even though the insured has forwarded his first premium
In the case at bar, the following conditions were imposed by the with his application. The corporation may not be penalized for the delay
respondent company for the perfection of the contract of insurance: in the processing of the application papers. Moreover, while it may have
taken some time for the application papers to reach the main office, in
(a).......a policy must have been issued; the case at bar, the same was acted upon less than a week after it was
received. The processing of applications by respondent corporation
(b).......the premiums paid; and normally takes two to three weeks, the longest being a month.[12] In this
case, however, the requisite medical examination was undergone by the
(c).......the policy must have been delivered to and deceased on November 1, 1987; the application papers were forwarded
accepted by the applicant while he is in good health. to the head office on November 27, 1987; and the policy was issued on
December 2, 1987. Under these circumstances, we hold that the delay
The condition imposed by the corporation that the policy must have could not be deemed unreasonable so as to constitute gross negligence.
been delivered to and accepted by the applicant while he is in good
health can hardly be considered as a potestative or facultative condition. A final note. It has not escaped our notice that the Court of Appeals
On the contrary, the health of the applicant at the time of the delivery of declared Insurance Policy 056300 for P50,000.00 null and void
the policy is beyond the control or will of the insurance company. and rescinded. The Court of Appeals corrected this in its Resolution of
Rather, the condition is a suspensive one whereby the acquisition of the motion for reconsideration filed by petitioner, thus:
rights depends upon the happening of an event which constitutes the
condition. In this case, the suspensive condition was the policy must "Anent the appearance of the word rescinded in the
have been delivered and accepted by the applicant while he is in good dispositive portion of the decision, to which defendant-
health. There was non-fulfillment of the condition, however, inasmuch appellee attaches undue significance and makes capital
as the applicant was already dead at the time the policy was issued. of, it is clear that the use of the words and rescinded is,
Hence, the non-fulfillment of the condition resulted in the non- as it is hereby declared, a superfluity. It is apparent from
perfection of the contract. the context of the decision that the insurance policy in
question was found null and void, and did not have to be
As stated above, a contract of insurance, like other contracts, must be rescinded."[13]
assented to by both parties either in person or by their agents. So long
as an application for insurance has not been either accepted or rejected,
True, rescission presupposes the existence of a valid contract. A contract
which is null and void is no contract at all and hence could not be the
subject of rescission.

WHEREFORE, the decision rendered by the Court of Appeals in CA-


G.R. CV No. 35529 is AFFIRMED insofar as it declared Insurance
Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance
Corporation of no force and effect and hence null and void. No costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ.,


concur.2/18/00 11:28 AM

[1]
Exh. "B".
[2]
Exh. "A".
[3]
Exh. "C".
[4]
Exh. "D".
[5]
RTC Records, p. 260-A.
[6]
Rollo, pp. 29-37.
[7]
Black, Henry Campbell. Blacks Law Dictionary, 6th Edition, 1990, p. 802.
[8]
Article 1305 of the New Civil Code.
[9]
Exh. "A-5".
[10]
41 Phil. 269 (1920)
[11]
De Lim v. Sun Life Assurance Co. of Canada, 41 Phil. 263 at 266 (1920)
[12]
TSN, May 14, 1991, p. 29.
[13]
Rollo, p. 39.

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