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[ GR No.

171897, Oct 14, 2015 ]


PHILIPPINE TRUST COMPANY v. FLORO ROXAS +
DECISION

JARDELEZA, J.:
We consider whether the principle of legal compensation may be applied to offset the judgment debt of
petitioner Philippine Trust Company ("PTC") and the loan obligation of private respondents Floro and Eufemia
Roxas ("Spouses Roxas").

The Spouses Roxas procured loans from PTC in the amount of Php 2,523,200 to finance their real estate
business.[1] These loans were secured by real estate mortgages on the Spouses Roxas' real properties. On April
10, 1979, the Spouses Roxas, PTC, and Roben Construction and Furnishing Group, Inc. entered into "a
contract of building construction," under which PTC granted an additional loan of Php 900,000 to the
Spouses Roxas to enable them to finish their ongoing housing projects located at Cabcaben, Mariveles,
Bataan. This was superseded by a new "contract of building construction" executed by and among PTC,
Spouses Roxas, and Rosendo P. Dominguez, Jr. ("Dominguez"). Dominguez substituted Roben Construction
as the contractor under the same terms and conditions of the contract dated April 10, 1979. The new contract
stipulated that the money loaned from PTC shall be devoted to the funding of the housing projects, the rentals
of which when finished, would then be used to liquidate the loan. It also provided that PTC may only release
the proceeds of the loan for the purchase of materials and supplies when requested by Dominguez and with
the conformity of the Spouses Roxas.[2] Invoices covering materials previously purchased with the funds
should also be submitted to PTC before any subsequent release of funds is made. [3] PTC, however, released to
Dominguez the sum of Php 870,000 out of the Php 900,000 although the Spouses Roxas had agreed only to
the release of not more than Php 450,000, as evidenced by a promissory note dated April 11, 1979. [4]

Due to financial difficulties, however, the Spouses Roxas did not finish the housing project. As a result, they
did not receive monthly rentals from prospective lessees of the houses, which led to missed amortization
payments in their loans from PTC.[5]

On March 28, 1980, Dominguez filed a complaint against PTC and the Spouses Roxas with the Court of First
Instance (CFI) of Manila,[6] Branch XL for breach of the contract of building construction. This was docketed
as Civil Case No. 130783. The Spouses Roxas in turn filed Civil Case No. 130892 with the CFI of Manila
against Dominguez and the insurance company that issued his performance bond. These two cases were later
consolidated.[7]

When the Spouses Roxas filed their answer in Civil Case No. 130783, they included a cross-claim against
PTC.[8] In response, PTC filed a counterclaim against the Spouses Roxas on their unpaid loan obligation
amounting to Php 3,053,738.50[9] plus interest and the amount of Php 245,720 as attorney's fees; and, in
default of such payments, the foreclosure of the real estate mortgages executed by the Spouses Roxas in favor
of PTC. After trial on the merits, the trial court rendered a decision in favor of Dominguez. It denied PTC's
counterclaim for lack of sufficient proof, without prejudice to the filing of a collection suit against the Spouses
Roxas. Both PTC and the Spouses Roxas appealed to the Court of Appeals, docketed as CA-G.R. CV No.
30340. To this date, the same remains pending.[10]

In a parallel development, while Civil Case No. 130783 was still pending in the trial court, PTC, on August 31,
1981, filed with the provincial sheriff of Bataan a petition for extrajudicial foreclosure of the same real estate
mortgages, The Spouses Roxas opposed the petition and filed a verified complaint against PTC for damages
with preliminary injunction in the Regional Trial Court of Bataan docketed as Civil Case No. 4809 ("Main
Case"). The complaint sought to restrain and enjoin the sheriff from proceeding with the foreclosure sale while
Civil Case No. 130783 is still pending.[11]  On December 26, 1988, the Bataan RTC rendered a Decision in
favor of the Spouses Roxas, the dispositive portion of which reads as follows:

WHEREFORE, the Court hereby renders judgment (a) Ordering the issuance of a writ of permanent injunction
perpetually enjoining defendant Philippine Trust Company and defendant provincial sheriff of Bataan or any
of his deputies from foreclosing extrajudicially the real estate mortgage(s) executed in its favor by plaintiffs
covering the real properties subject of this action;
(b) Condemning said defendant bank to pay to plaintiffs: (1) Ordinary damages for breach of the provisions of
the contract of building construction (Exhs. "B" & "26"), in the sum of One Hundred Thousand Pesos
(P100,000.00); (2) Moral damages for the improvident extrajudicial foreclosure of plaintiffs' mortgage(s) after it
had elected judicial foreclosure thereof, in the amount of Three Hundred Thousand Pesos (P300,000.00) for
both plaintiffs; (3) Exemplary damages by way of example or correction for the public good in the sum of Fifty
Thousand Pesos (P50,000.00); (4) Attorney's fees in the amount of Fifty Thousand Pesos (P50,000.00); and (5)
Double costs of suit

SO ORDERED.[12]

The Court of Appeals affirmed the decision of the Bataan RTC. The decision became final and executory,
prompting the Spouses Roxas to file a Motion for Execution. PTC responded by filing an Opposition to the
Motion for Execution, where it raised for the first time legal compensation to offset the judgment debt due to
the Spouses Roxas.

On January 25, 1994, the trial court denied PTC's Opposition and issued a writ of execution, holding that
PTC is deemed to have waived legal compensation as a defense because it failed to invoke the same as an
affirmative defense in its answer. PTC filed a motion for reconsideration of the order, which was denied by the
trial court on April 19, 1994.[13] PTC filed another motion for reconsideration, which was again denied by the
trial court on June 7, 1994.[14]

PTC filed a Petition for Certiorari[15] under Rule 65 with the Court of Appeals seeking the annulment of the
trial court's order issuing the writ of execution and its subsequent orders denying PTC's motions for
reconsideration. On November 17, 2005, the Court of Appeals dismissed the petition for lack of merit. It found
that not all requisites of legal compensation under Article 1279 of the Civil Code were present and that the
defense of legal compensation was belatedly raised by PTC, considering that it was raised for the first time at
the execution stage.[16] The Court of Appeals denied PTC's motion for reconsideration on March 9, 2006. [17]

PTC then filed this Petition for Review on Certiorari[18] under Rule 45, arguing that the Court of Appeals erred
in not finding that all the requisites of legal compensation were present and in ruling that the defense of
compensation was belatedly raised. PTC claims it did not raise legal compensation as a defense before the
Bataan RTC because the judgment debt was not yet due at the time it filed its answer. Furthermore, it had
already set up as a compulsory counterclaim the loan obligation of the Spouses Roxas in Civil Case No.
130783, which was pending with the former CFI of Manila. But because the Manila court denied PTC's
counterclaims, PTC argues there is a change in the situation of the parties that makes execution inequitable.

In response, the Spouses Roxas assert that the execution of the Bataan RTC decision is proper because the
prevailing party is entitled to a writ of execution as a matter of right once a judgment becomes final.
[19]
 Moreover, the decision in Civil Case No. 130873 is not a supervening event that warrants the stay of
execution.[20] The Spouses Roxas also dispute the applicability of legal compensation because both the
demandability of the loan as well as the exact amount due had been put in issue in Civil Case No. 130873,
which is now pending appeal with the Court of Appeals as CA-G.R. CV No. 30340. [21] The Spouses Roxas
maintain that PTC is deemed to have waived compensation as a defense because it did not raise
compensation either in a motion to dismiss or as an affirmative defense in its answer to the Main Case.
[22]
 Finally, the Spouses Roxas point out that the orders of the Bataan RTC were challenged by PTC through a
Rule 65 petition. Thus, it was incumbent upon PTC to prove lack or grave abuse of discretion on the part of
the Bataan RTC, which PTC ultimately failed to do.[23]

The petition has no merit.

II

We agree with the Court of Appeals that it was too late for PTC to set up legal compensation as a defense
because the Main Case had already reached the execution stage. The rule is that once a decision becomes
final and executory, execution shall issue as a matter of right, [24] and the issuance of a writ of execution is the
court's ministerial duty, compellable by mandamus.[25] This is in accordance with the doctrine of immutability
of final judgments, which states that a judgment that has become final and executory is immutable and
unalterable, and may no longer be modified in any respect, even if the modification is meant to correct what is
perceived to be an erroneous conclusion of fact or law, and regardless of whether the modification is
attempted to be made by the court rendering it or by the highest Court of the land. [26] Although there are
recognized exceptions to this doctrine, one of which is where there is a supervening event that renders
execution inequitable or unjust,[27] none obtains in this case.

First, there is nothing unjust or inequitable in the issuance of the writ of execution in this case because
execution will have no effect on the unpaid loan obligation of the Spouses Roxas to PTC. The Spouses Roxas'
unpaid loan obligation to PTC is the subject of a separate case now pending before the Court of Appeals, CA-
G.R. CV No. 30340. Thus, there exists a proper forum where PTC may be allowed to recover whatever is due
from the Spouses Roxas. What is inequitable is to allow PTC to recover its credit in full in CA-G.R. CV No.
30340 while concurrently being allowed to offset its judgment debt in this case. In such instance, there would
effectively be double recovery on the part of PTC—which we cannot sanction because of the fundamental
proscription against unjust enrichment.[28]

Second, it would be more unjust to stay the execution of a decision that had become final and executory
twenty three (23) years ago. There should be an end to litigation, for public policy dictates that once a
judgment becomes final, executory, and unappealable, the prevailing party should not be denied the fruits of
his victory by some subterfuge devised by the losing party.[29] Unjustified delay in the enforcement of a
judgment sets at naught the role and purpose of the courts to resolve justiciable controversies with finality.
[30]
 To accept PTC's contentions would not only be unfair to private respondents but, more importantly, would
defeat a vital  poliey consideration behind the doctrine of immutability of final judgments.

The Bataan RTC and the Court of Appeals also correctly ruled that PTC should have raised the argument on
legal compensation at the trial stage. The 1964 Rules of Court, which was then in effect at the time the Main
Case was filed by the Spouses Roxas in 1980, provides that:

RULE 9. Effect of Pleadings

Sec. 2. Defenses and objections not pleaded deemed waived.— Defenses and objections not pleaded either
in a motion to dismiss or in the answer are deemed waived;  except the failure to state a cause of action
which may be alleged in a later pleading, if one is permitted, or by motion for judgment on the pleadings, or at
the trial on the merits; but in the last instance, the motion shall be disposed of as provided in section 5 of
Rule 10 in the light of any evidence which may have been received. Whenever it appears that the court has no
jurisdiction over the subject-matter, it shall dismiss the action. [31] (Emphasis added)

Although legal compensation takes place by operation of law, it must be alleged and proved as a defense by
the debtor who claims its benefits. Only after it is proved will its effects retroact to the moment when all the
requisites under Article 1279 of the Civil Code have concurred.[32]

PTC's contention that it could not have raised legal compensation as a defense because it was not yet a debtor
of the Spouses Roxas when it filed its answer is unconvincing. Under Rule 8, Section 2 of the 1964 Rules of
Court, "[a] party may set forth two or more statements of a claim or defense alternatively or
hypothetically, either in one cause of action or defense or in separate causes of action or defenses." [33] Thus,
the defense of compensation would have been proper and allowed under the rules even if PTC disclaimed any
liability at the time it filed its answer. In Marquez v. Valencia,[34] we held that when a defendant failed to set
up such alternative defenses and chosen or elected to rely on one only, the overruling thereof was a complete
determination of the controversy between the parties, which bars a subsequent action based upon an
unpleaded defense. Unmistakably, the rationale behind this is the proscription against the splitting of causes
of action.

In any case, even if PTC were excused from pleading compensation as a defense in its answer, we note that
PTC still failed to raise this defense in its motion for reconsideration of the Bataan RTC decision and in its
subsequent appeal. Hence, there can be no other conclusion than that PTC is already estopped from raising
the issue of legal compensation.

It is fairly clear to us that the reason why PTC did not raise legal compensation as a defense in the Main Case
is because it was banking on a favorable ruling on its counterclaim in the other case, Civil Case No. 130873.
It was presumably an informed choice arrived at by PTC and its counsel, with full knowledge of the
consequences of its failure to plead this specific claim/defense in the Main Case. Unfortunately for PTC, its
counterclaim in the other case was disallowed. Having adopted the wrong legal strategy, PTC cannot now
expediently change its theory of the case or its defense at the execution stage of the Main Case. Following the
doctrine of election of remedies,[35] PTC's choice of setting up the Spouses Roxas' unpaid loan obligation as a
counterclaim in Civil Case No. 130873, which has gone to judgment on the merits but is pending appeal,
precludes it from raising compensation of the same loan obligation for the purpose of opposing the writ of
execution in the Main Case. Equitable in nature, the doctrine of election of remedies is designed to mitigate
possible unfairness to both parties. It rests on the moral premise that it is fair to hold people responsible for
their choices. The purpose of the doctrine is not to prevent any recourse to any remedy, but to prevent a
double redress for a single wrong.[36]

III

Even if we assume that legal compensation was not waived and was otherwise timely raised, we find that not
all requisites of legal compensation are present in this case. Under Article 1279, in order for legal
compensation to take place, the following requisites must concur: (a) that each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other; (b) that both debts consist in a
sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if
the latter has been stated; (c) that the two debts be due; (d) that they be liquidated and demandable; and (e)
that over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

Here, the fourth requisite is absent. A debt is liquidated when its existence and amount are determined.
[37]
 Compensation can only take place between certain and liquidated debts; it cannot extend to unliquidated,
disputed claims.[38] Since the loan obligation, including its amount and demandability, is still being disputed
in CA-G.R. CVNo. 30340, PTC's credit cannot be considered liquidated as of yet. Consequently, no legal
compensation could have taken place between PTC's loan credit and the Spouses Roxas' judgment credit.

IV

Finally, we observe that PTC appears to have willfully engaged in forum shopping. PTC, in its own words,
opposed the execution of the Bataan RTC decision because '"the Decision promulgated on September 4, 1990
by the RTC of Manila, Branch 40 [in Civil Case No. 130783] denied Petitioner's counterclaims." [39] Forum
shopping is committed by a party who, having received an adverse judgment in one forum, seeks another
opinion in another court, other than by appeal or the special civil action of certiorari. More accurately, forum
shopping is the institution of two or more suits in different courts, either simultaneously or successively, in
order to ask the courts to rule on the same or related causes and/or to grant the same or substantially the
same reliefs.[40]

The relief PTC now seeks is compensation of its judgment debt with the Spouses Roxas' loan obligation. In the
other case, Civil Case No. 130783 (now CA-G.R. CV No. 30340), PTC asks for the payment of the same loan
obligation of the Spouses Roxas. Essentially, PTC is seeking the same relief in both cases: the extinguishment
of the Spouses Roxas' loan obligation. Under Article 1231 of the Civil Code, payment and compensation are
modes of extinguishing an obligation. Although legally distinct, both must be pleaded in the same case if the
obligation sought to be extinguished and the parties thereto arc identical; otherwise, it would constitute
splitting of causes of action.

Forum shopping exists when the elements of litis pendentia are present, viz.: (a) identity of parties, or at least
such parties as those representing the same interests in both actions; (b) identity of rights assered and relief
prayed for, the relief being founded on the same facts; and (c) the identity of the two preceding particulars is
such that any judgment rendered in the other action, will, regardless of which party is successful, amount
to res judicata in the action under consideration.[41]

We find that the elements of litis pendentia—and, as a consequence, forum shopping—exist in this case. PTC's
claim for legal compensation is founded on the same unpaid loan obligation now being litigated in CA-G.R. CV
No. 30340. Although that case originated from a complaint filed by Dominguez for breach of contract, PTC
counterclaimed the entire unpaid loan obligation, plus interest, owed to it by the Spouses Roxas. In other
words, PTC had squarely put in issue the matter of the Spouses Roxas' indebtedness arising from the loans
the latter obtained from PTC. It is immaterial that PTC's cause of action in the other case was set forth by way
of a counterclaim, since the latter partakes of the nature of a complaint by the defendant against the plaintiff.
[42]
 On the other hand, while the Main Case originally involved a different subject matter and cause of action
(i.e., the injunction against PTC's extrajudicial foreclosure and the Spouses Roxas' claim for damages) as that
embraced in CA-G.R. CV No. 30340, the primary issue raised by PTC in its Opposition to the Motion for
Execution, and subsequently in the petition for certiorari with the Court of Appeals and the present petition,
pertained to the same loan obtained by the Spouses Roxas. Thus, with respect to the Spouses Roxas'
indebtedness to PTC, there is a clear identity of parties, of subject matter, and of cause of action.
Consequently, once a final decision in CA-G.R. CV No. 30340 is rendered, it will constitute res judicata and
bar further litigation on the same loan obligation, including any dispute on the applicability or non-
applicability of legal compensation.

Forum shopping is an act of malpractice that is prohibited and condemned because it trifles with the courts
and abuses their processes, and degrades the administration of justice and adds to the already congested
court dockets.[43] Under Section 5 of Rule 8, willful and deliberate forum shopping is a ground for summary
dismissal of the case and constitutes direct contempt of court, as well as a cause for administrative sanctions.
The litigation could have ended promptly if PTC had simply paid its judgment debt and awaited the final
decision in the other case to recover whatever is due from the Spouses Roxas. Instead, this plainly
unmeritorious case had to clog our docket and take up the valuable time of this Court.

WHEREFORE, the petition for review is DENIED for lack of merit. The Decision dated November 17, 2005 and
Resolution dated March 9, 2006 of the Court of Appeals in CA-G.R. SP No. 35203 are hereby AFFIRMED.
Costs against petitioner.

SO ORDERED.

Velasco, Jr., (Chairperson), Villarama, Jr., Mendoza,* and Perlas-Bernabe,** JJ., concur.

[ GR No. 189081, Aug 10, 2016 ]


GLORIA S. DY v. PEOPLE +
RESOLUTION

JARDELEZA, J.:
Our law states that every person criminally liable for a felony is also civilly liable. This civil liability ex
delicto may be recovered through a civil action which, under our Rules of Court, is deemed instituted with the
criminal action. While they are actions mandatorily fused,[1] they are, in truth, separate actions whose
existences are not dependent on each other. Thus, civil liability ex delicto survives an acquittal in a criminal
case for failure to prove guilt beyond reasonable doubt. However, the Rules of Court limits this mandatory
fusion to a civil action for the recovery of civil liability ex delicto. It, by no means, includes a civil liability
arising from a different source of obligation, as in the case of a contract. Where the civil liability is ex
contractu, the court hearing the criminal case has no authority to award damages.

The Case

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. Petitioner Gloria S. Dy
(petitioner) seeks the reversal of the decision of the Court of Appeals (CA) dated February 25, 2009 (Assailed
Decision)[2] ordering her to pay Mandy Commodities Company, Inc. (MCCI) in the amount of P21,706,281.00. [3]

The Facts

Petitioner was the former General Manager of MCCL. In the course of her employment, petitioner assisted
MCCI in its business involving several properties. One such business pertained to the construction of
warehouses over a property (Numancia Property) that MCCI leased from the Philippine National Bank (PNB).
Sometime in May 1996, in pursuit of MCCI's business, petitioner proposed to William Mandy (Mandy),
President of MCCI, the purchase of a property owned by Pantranco. As the transaction involved a large
amount of money, Mandy agreed to obtain a loan from the International China Bank of Commerce (ICBC).
Petitioner represented that she could facilitate the approval of the loan. True enough, ICBC granted a loan to
MCCI in the amount of P20,000,000.00, evidenced by a promissory note. As security, MCCI also executed a
chattel mortgage over the warehouses in the Numancia Property. Mandy entrusted petitioner with the
obligation to manage the payment of the loan.[4]

In February 1999, MCCI received a notice of foreclosure over the mortgaged property due to its default in
paying the loan obligation.[5]In order to prevent the foreclosure, Mandy instructed petitioner to facilitate the
payment of the loan. MCCI, through Mandy, issued 13 Allied Bank checks and 12 Asia Trust Bank checks in
varying amounts and in different dates covering the period from May 18, 1999 to April 4, 2000. [6] The total
amount of the checks, which were all payable to cash, was P21,706,281.00. Mandy delivered the checks to
petitioner. Mandy claims that he delivered the checks with the instruction that petitioner use the checks to
pay the loan.[7] Petitioner, on the other hand, testified that she encashed the checks and returned the money
to Mandy.[8] ICBC eventually foreclosed the mortgaged property as MCCI continued to default in its obligation
to pay. Mandy claims that it was only at this point in time that he discovered that not a check was paid to
ICBC.[9]

Thus, on October 7, 2002, MCCI, represented by Mandy, filed a Compiamt-Affidavit for Estafa[10] before the
Office of the City Prosecutor of Manila. On March 3, 2004, an Information [11] was filed against petitioner before
the Regional Trial Court (RTC) Manila.

After a full-blown trial, the RTC Manila rendered a decision [12] dated November 11, 2005 (RTC Decision)
acquitting petitioner. The RTC Manila found that while petitioner admitted that she received the checks, the
prosecution failed to establish that she was under any obligation to deliver them to ICBC in payment of
MCCFs loan. The trial court made this finding on the strength of Mandy's admission that he gave the checks
to petitioner with the agreement that she would encash them. Petitioner would then pay ICBC using her own
checks. The trial court further made a finding that Mandy and petitioner entered into a contract of loan.
[13]
 Thus, it held that the prosecution failed to establish an important element of the crime of estafa—
misappropriation or conversion. However, while the RTC Manila acquitted petitioner, it ordered her to pay the
amount of the checks. The dispositive portion of the RTC Decision states —

WHEREFORE, the prosecution having failed to establish the guilt of the accused beyond reasonable doubt,
judgment is hereby rendered ACQUITTING the accused of the offense charged. With costs de officio.

The accused is however civilly liable to the complainant for the amount of P21,706,281.00.

SO ORDERED.[14]
Petitioner filed an appeal[15] of the civil aspect of the RTC Decision with the CA. In the Assailed Decision, [16] the
CA found the appeal without merit. It held that the acquittal of petitioner does not necessarily absolve her of
civil liability. The CA said that it is settled that when an accused is acquitted on the basis of reasonable
doubt, courts may still find him or her civilly liable if the evidence so warrant. The CA explained that the
evidence on record adequately prove that petitioner received the checks as a loan from MCCI. Thus,
preventing the latter from recovering the amount of the checks would constitute unjust enrichment. Hence,
the Assailed Decision ruled

WHEREFORE, in view of the foregoing, the appeal is DENIED. The Decision dated November 11, 2005 of the
Regional Trial Court, Manila, Branch 33 in Criminal Case No. 04-224294 which found Gloria Dy civilly liable
to William Mandy is AFFIRMED.

SO ORDERED.[17]
The CA also denied petitioner's motion for reconsideration in a resolution [18] dated August 3, 2009.

Hence, this Petition for Review on Certiorari (Petition). Petitioner argues that since she was acquitted for
failure of the prosecution to prove all the elements of the crime charged, there was therefore no crime
committed.[19] As there was no crime, any civil liability ex delicto cannot be awarded.

The Issues

The central issue is the propriety of making a finding of civil liability in a criminal case for estafa when the
accused is acquitted for failure of the prosecution to prove all the elements of the crime charged.

The Ruling of the Court

We grant the petition.

Civil Liability Arising From Crime

Our laws recognize a bright line distinction between criminal and civil liabilities. A crime is a liability against
the state. It is prosecuted by and for the state. Acts considered criminal are penalized by law as a means to
protect the society from dangerous transgressions. As criminal liability involves a penalty affecting a person's
liberty, acts are only treated criminal when the law clearly says so. On the other hand, civil liabilities take a
less public and more private nature. Civil liabilities are claimed through civil actions as a means to enforce or
protect a right or prevent or redress a wrong.[20] They do not carry with them the imposition of imprisonment
as a penalty. Instead, civil liabilities are compensated in the form of damages.

Nevertheless, our jurisdiction recognizes that a crime has a private civil component. Thus, while an act
considered criminal is a breach of law against the State, our legal system allows for the recovery of civil
damages where there is a private person injured by a criminal act. It is in recognition of this dual nature of a
criminal act that our Revised Penal Code provides that every person criminally liable is also civilly liable.
[21]
 This is the concept of civil liability ex delicto.

This is echoed by the New Civil Code when it recognizes acts or omissions punished by law as a separate
source of obligation.[22] This is reinforced by Article 30 of the same code which refers to the filing of a separate
civil action to demand civil liability arising from a criminal offense. [23]

The Revised Penal Code fleshes out this civil liability in Article 104 [24] which states that it includes restitution,
reparation of damage caused and indemnification for consequential damages.

Rules of procedure for criminal and civil actions involving the same act or omission

The law and the rules of procedure provide for a precise mechanism in instituting a civil action pertaining to
an act or omission which is also subject of a criminal case. Our Rules of Court prescribes a kind of fusion
such that, subject to certain defined qualifications, when a criminal action is instituted, the civil action for the
recovery of the civil liability arising from the offense is deemed instituted as well. [25]

However, there is an important difference between civil and criminal proceedings that require a fine
distinction as to how these twin actions shall proceed. These two proceedings involve two different standards
of proof. A criminal action requires proof of guilt beyond reasonable doubt while a civil action requires a lesser
quantum of proof, that of preponderance of evidence. This distinction also agrees with the essential principle
in our legal system that while a criminal liability carries with it a corresponding civil liability, they are
nevertheless separate and distinct. In other words, these two liabilities may co-exist but their existence is not
dependent on each other.[26]

The Civil Code states that when an accused in a criminal prosecution is acquitted on the ground that his guilt
has not been proven beyond reasonable doubt, a civil action for damages for the same act or omission may be
filed. In the latter case, only preponderance of evidence is required. [27] This is supported by the Rules of Court
which provides that the extinction of the criminal action does not result in the extinction of the corresponding
civil action.[28] The latter may only be extinguished when there is a "finding in a final judgment in the criminal
action that the act or omission from which the civil liability may arise did not exist." [29] Consistent with this,
the Rules of Court requires that in judgments of acquittal the court must state whether "the evidence of the
prosecution absolutely failed to prove the guilt of the accused or merely failed to prove his guilt beyond
reasonable doubt. In either case, the judgment shall determine if the act or omission from which the civil
liability might arise did not exist."[30]

Thus, whether an exoneration from the criminal action should affect the corresponding civil action depends
on the varying kinds of acquittal. In Manantan v. Court of Appeals,[31] we explained —
Our law recognizes two kinds of acquittal, with different effects on the civil liability of the accused. First is an
acquittal on the ground that the accused is not the author of the act or omission complained of. This instance
closes the door to civil liability, for a person who has been found to be not the perpetrator of any act or
omission cannot and can never be held liable for such act or omission. There being no delict civil liability ex
delicto is out of the question, and the civil action, if any, which may be instituted must be based on grounds
other than the delict complained of. This is the situation contemplated in Rule 111 of the Rules of Court. The
second instance is an acquittal based on reasonable doubt on the guilt of the accused. In this case, even if the
guilt of the accused has not been satisfactorily established, he is not exempt from civil liability which may be
proved by preponderance of evidence only. This is the situation contemplated in Article 29 of the Civil Code,
where the civil action for damages is "for the same act or omission." Although the two actions have different
purposes, the matters discussed in the civil case are similar to those discussed in the criminal case. However,
the judgment In the criminal proceeding cannot be read in evidence In the civil action to establish any fact
there determined, even though both actions involve the same act or omission. The reason for this rule is that
the parties are not the same and secondarily, different rules of evidence are applicable. Hence,
notwithstanding herein petitioner's acquittal, the Court of Appeals in determining whether Article 29 applied,
was not precluded from looking into the question of petitioner's negligence or reckless imprudence. [32]
In Dayap v. Sendiong,[33] we further said —

The acquittal of the accused does not automatically preclude a judgment against him on the civil aspect of the
case. The extinction of the penal action does not carry with it the extinction of the civil liability where: (a) the
acquittal is based on reasonable doubt as only preponderance of evidence is required; (b) the court declares
that the liability of the accused is only civil; and (c) the civil liability of the accused does not arise from or is
not based upon the crime of which the accused is acquitted. However, the civil action based on delict may be
deemed extinguished if mere is a finding on the final judgment in the criminal action that the act or omission
from which the civil liability may arise did not exist or where the accused did not commit the acts or omission
imputed to him.[34]
Hence, a civil action filed for the purpose of enforcing civil liability ex delicto, even if mandatorily instituted
with the corresponding criminal action, survives an acquittal when it is based on the presence of reasonable
doubt. In these instances, while the evidence presented does not establish the fact of the crime with moral
certainty, the civil action still prevails for as long as the greater weight of evidence tilts in favor of a finding of
liability. This means that while the mind of the court cannot rest easy in penalizing the accused for the
commission of a crime, it nevertheless finds that he or she committed or omitted to perform acts which serve
as a separate source of obligation. There is no sufficient proof that the act or omission is criminal beyond
reasonable doubt, but there is a preponderance of evidence to show that the act or omission caused injury
which demands compensation.

Civil Liability Ex Delicto in Estafa Cases

Our laws penalize criminal fraud which causes damage capable of pecuniary estimation through estafa under
Article 315 of the Revised Penal Code. In general, the elements of estafa are:

(1)  That the accused defrauded another (a) by abuse of confidence, or (b) by means of deceit; and

That damage or prejudice capable of pecuniary estimation is caused to the offended party or third
(2) 
person.
The essence of the crime is the unlawful abuse of confidence or deceit in order to cause damage. As this Court
previously held, "the element of fraud or bad faith is indispensable." [35] Our law abhors the act of defrauding
another person by abusing his trust or deceiving him, such that, it criminalizes this kind of fraud.

Article 315 of the Revised Penal Code identifies the circumstances which constitute estafa. Article 315,
paragraph 1 (b) states that estafais committed by abuse of confidence —

Art. 315. Swindling (estafa) - x x x (b) By misappropriating or converting, to the prejudice of another, money,
goods, or any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to return the same,
even though such obligation be totally or partially guaranteed by a bond; or by denying having received such
money, goods, or other property.
In this kind of estafa, the fraud which the law considers as criminal is the act of misappropriation or
conversion. When the element of misappropriation or conversion is missing, there can be no estafa. In such
case, applying the foregoing discussions on civil liability ex delicto, there can be no civil liability as there is no
act or omission from which any civil liability may be sourced. However, when an accused is acquitted because
a reasonable doubt exists as to the existence of misappropriation or conversion, then civil liability may still be
awarded. This means that, while there is evidence to prove fraud, such evidence does not suffice to convince
the court to the point of moral certainty that the act of fraud amounts to estafa. As the act was nevertheless
proven, albeit without sufficient proof justifying the imposition of any criminal penalty, civil liability exists.

In this case, the RTC Manila acquitted petitioner because the prosecution failed to establish by sufficient
evidence the element of misappropriation or conversion. There was no adequate evidence to prove that Mandy
gave the checks to petitioner with the instruction that she will use them to pay the ICBC loan. Citing Mandy's
own testimony in open court, the RTC Manila held that when Mandy delivered the checks to petitioner, their
agreement was that it was a "sort of loan."[36] In the dispositive portion of the RTC Decision, the RTC Manila
ruled that the prosecution "failed to establish the guilt of the accused beyond reasonable doubt." [37] It then
proceeded to order petitioner to pay the amount of the loan.

The ruling of the RTC Manila was affirmed by the CA. It said that "[t]he acquittal of Gloria Dy is anchored on
the ground that her guilt was not proved beyond reasonable doubt - not because she is not the author of the
act or omission complained of. x x x The trial court found no trickery nor deceit in obtaining money from the
private complainant; instead, it concluded that the money obtained was undoubtedly a loan." [38]

Our jurisprudence on this matter diverges.

Earlier cases ordered the dismissal of the civil action for recovery of civil liability ex delicto whenever there is a
finding that there was no estafa but rather an obligation to pay under a contract. In People v. Pantig,[39] this
Court affirmed the ruling of the lower court acquitting Pantig, but revoked the portion sentencing him to pay
the offended party the amount of money alleged to have been obtained through false and fraudulent
representations, thus —

The trial court found as a fact that the sum of P1,200, ordered to be paid in the judgment of acquittal, was
received by the defendant-appellant as loan. This finding is inconsistent with the existence of the criminal act
charged in the information. The liability of the defendant for the return of the amount so received arises
from a civil contract, not from a criminal act, and may not be enforced in the criminal case.

The portion of the judgment appealed from, which orders the defendant-appellant to pay the sum of Pi ,200 to
the offended party, is hereby revoked, without prejudice to the filing of a civil action for the recovery of the
said amount.[40]
This was also the import of the ruling in People v. Singson.[41] In that case, this Court found that "the evidence
[was] not sufficient to establish the existence of fraud or deceit on the part of the accused. x x x And when
there is no proven deceit or fraud, there is no crime of estafa."[42] While we also said that the established facts
may prove Singson's civil liability (obligation to pay under a contract of sale), we nevertheless made no finding
of civil liability because "our mind cannot rest easy on the certainty of guilt" [43] considering the above finding.
The dispositive portion stated that Singson is acquitted "without prejudice to any civil liability which may be
established in a civil case against her."[44]

However, our jurisprudence on the matter appears to have changed in later years.

In Eusebio-Calderon v. People,[45] this Court affirmed the finding of the CA that Calderon "did not employ
trickery or deceit in obtaining money from the private complainants, instead, it concluded that the money
obtained was undoubtedly loans for which [Calderon] paid interest."[46] Thus, this Court upheld Calderon's
acquittal of estafa, but found her civilly liable for the principal amount borrowed from the private
complainants.[47]

The ruling was similar in People v. Cuyugan.[48] In that case, we acquitted Cuyugan of estafa for failure of the
prosecution to prove fraud. We held that the transaction between Cuyugan and private complainants was a
loan to be used by Cuyugan in her business. Thus, this Court ruled that Cuyugan has the obligation, which
is civil in character, to pay the amount borrowed.[49]

We hold that the better rule in ascertaining civil liability in estafa cases is that pronounced
in Pantig and Singson. The rulings in these cases are more in accord with the relevant provisions of the Civil
Code, and the Rules of Court. They are also logically consistent with this Court's pronouncement
in Manantan.

Under Pantig and Singson, whenever the elements of estafa are not established, and that the delivery of any
personal property was made pursuant to a contract, any civil liability arising from the estafa cannot be
awarded in the criminal case. This is because the civil liability arising from the contract is not civil liability ex
delicto, which arises from the same act or omission constituting the crime. Civil liability ex delicto is the
liability sought to be recovered in a civil action deemed instituted with the criminal case.

The situation envisioned in the foregoing cases, as in this case, is civil liability ex contractu where the civil
liability arises from an entirely different source of obligation. Therefore, it is not the type of civil action deemed
instituted in the criminal case, and consequently must be filed separately. This is necessarily so because
whenever the court makes a finding that the elements of estafa do not exist, it effectively says that there is no
crime. There is no act or omission that constitutes criminal fraud. Civil liability ex delictocannot be awarded
as it cannot be sourced from something that does not exist.

When the court finds that the source of obligation is in fact, a contract, as in a contract of loan, it takes a
position completely inconsistent with the presence of estafa. In estafa, a person parts with his money because
of abuse of confidence or deceit. In a contract, a person willingly binds himself or herself to give something or
to render some service.[50] In estafa, the accused's failure to account for the property received amounts to
criminal fraud. In a contract, a party's failure to comply with his obligation is only a contractual breach.
Thus, any finding that the source of obligation is a contract negates estafa. The finding, in turn, means that
there is no civil liability ex delicto. Thus, the rulings in the foregoing cases are consistent with the concept of
fused civil and criminal actions, and the different sources of obligations under our laws.

We apply this doctrine to the facts of this case. Petitioner was acquitted by the RTC Manila because of the
absence of the element of misappropriation or conversion. The RTC Manila, as affirmed by the CA, found that
Mandy delivered the checks to petitioner pursuant to a loan agreement. Clearly, there is no crime of estafa.
There is no proof of the presence of any act or omission constituting criminal fraud. Thus, civil liability ex
delicto cannot be awarded because there is no act or omission punished by law which can serve as the source
of obligation. Any civil liability arising from the loan takes the nature of a civil liability ex contractu. It does
not pertain to the civil action deemed instituted with the criminal case.

In Manantan, this Court explained the effects of this result on the civil liability deemed instituted with the
criminal case. At the risk of repetition, Manantan held that when there is no delict, "civil liability ex delicto is
out of the question, and the civil action, if any, which may be instituted must be based on grounds other than
the delict complained of."[51] In Dy's case, the civil liability arises out of contract—a different source of
obligation apart from an act or omission punished by law—and must be claimed in a separate civil action.

Violation of Due Process

We further note that the evidence on record never fully established the terms of this loan contract. As the trial
before the RTC Manila was focused on proving estafa, the loan contract was, as a consequence, only
tangentially considered. This provides another compelling reason why the civil liability arising from the loan
should be instituted in a separate civil case. A civil action for collection of sum of money filed before the
proper court will provide for a better venue where the terms of the loan and other relevant details may be
received. While this may postpone a warranted recovery of the civil liability, this Court deems it more
important to uphold the principles underlying the inherent differences in the various sources of obligations
under our law, and the rule that fused actions only refer to criminal and civil actions involving the same act
or omission. These legal tenets play a central role in this legal system. A confusion of these principles will
ultimately jeopardize the interests of the parties involved. Actions focused on proving estafa is not the proper
vehicle to thresh out civil liability arising from a contract. [52] The Due Process Clause of the Constitution
dictates that a civil liability arising from a contract must be litigated in a separate civil action.

Section 1 of the Bill of Rights states that no person shall be deprived of property without due process of law.
This provision protects a person's right to both substantive and procedural due process. Substantive due
process looks into the validity of a law and protects against arbitrariness. [53] Procedural due process, on the
other hand, guarantees procedural fairness.[54] It requires an ascertainment of "what process is due, when it is
due, and the degree of what is due."[55] This aspect of due process is at the heart of this case.

In general terms, procedural due process means the right to notice and hearing. [56] More specifically, our
Rules of Court provides for a set of procedures through which a person may be notified of the claims against
him or her as well as methods through which he or she may be given the adequate opportunity to be heard.

The Rules of Court requires that any person invoking the power of the judiciary to protect or enforce a right or
prevent or redress a wrong[57] must file an initiatory pleading which embodies a cause of action, [58] which is
defined as the act or omission by which a party violates a right of another. [59] The contents of an initiatory
pleading alleging a cause of action will vary depending on the source of the obligation involved. In the case of
an obligation arising from a contract, as in this case, the cause of action in an initiatory pleading will involve
the duties of the parties to the contract, and what particular obligation was breached. On the other hand,
when the obligation arises from an act or omission constituting a crime, the cause of action must necessarily
be different. In such a case, the initiatory pleading will assert as a cause of action the act or omission of
respondent, and the specific criminal statute he or she violated. Where the initiatory pleading fails to state a
cause of action, the respondent may file a motion to dismiss even before trial. [60] These rules embody the
fundamental right to notice under the Due Process Clause of the Constitution.

In a situation where a court (in a fused action for the enforcement of criminal and civil liability) may validly
order an accused-respondent to pay an obligation arising from a contract, a person's right to be notified of the
complaint, and the right to have the complaint dismissed if there is no cause of action, are completely
defeated. In this event, the accused-respondent is completely unaware of the nature of the liability claimed
against him or her at the onset of the case. The accused-respondent will not have read any complaint stating
the cause of action of an obligation arising from a contract. All throughout the trial, the accused-respondent
is made to believe that should there be any civil liability awarded against him or her, this liability is rooted
from the act or omission constituting the crime. The accused-respondent is also deprived of the remedy of
having the complaint dismissed through a motion to dismiss before trial. In a fused action, the accused-
respondent could not have availed of this remedy because he or she was not even given an opportunity to
ascertain what cause of action to look for in the initiatory pleading. In such a case, the accused-respondent is
blindsided. He or she could not even have prepared the appropriate defenses and evidence to protect his or
her interest. This is not the concept of fair play embodied in the Due Process Clause. It is a clear violation of a
person's right to due process.

The Rules of Court also allows a party to a civil action certain remedies that enable him or her to effectively
present his or her case. A party may file a cross-claim, a counterclaim or a third-party complaint. [61] The Rules
of Court prohibits these remedies in a fused civil and criminal case. [62] The Rules of Court requires that any
cross-claim, counterclaim or third-party complaint must be instituted in a separate civil action. [63] In a legal
regime where a court may order an accused in a fused action to pay civil liability arising from a contract, the
accused-respondent is completely deprived of the remedy to file a cross-claim, a counterclaim or a third-party
complaint. This—coupled with an accused-respondent's inability to adequately prepare his or her defense
because of lack of adequate notice of the claims against him or her—prevents the accused-respondent from
having any right to a meaningful hearing. The right to be heard under the Due Process Clause requires not
just any kind of an opportunity to be heard. It mandates that a party to a case must have the chance to be
heard in a real and meaningful sense. It does not require a perfunctory hearing, but a court proceeding where
the party may adequately avail of the procedural remedies granted to him or her. A court decision resulting
from this falls short of the mandate of the Due Process Clause.

Indeed, the language of the Constitution is clear. No person shall be deprived of property without due process
of law. Due Process, in its procedural sense, requires, in essence, the right to notice and hearing. These rights
are further fleshed out in the Rules of Court. The Rules of Court enforces procedural due process because, to
repeat the words of this Court in Secretary of Justice v. Lantion, it provides for "what process is due, when it
is due, and the degree of what is due."[64] A court ordering an accused in a fused action to pay his or her
contractual liability deprives him or her of his or her property without the right to notice and hearing as
expressed in the procedures and remedies under the Rules of Court. Thus, any court ruling directing an
accused in a fused action to pay civil liability arising from a contract is one that completely disregards the
Due Process Clause. This ruling must be reversed and the Constitution upheld.

Conclusion

The lower courts erred when they ordered petitioner to pay her civil obligation arising from a contract of loan
in the same criminal case where she was acquitted on the ground that there was no crime. Any contractual
obligation she may have must be litigated in a separate civil action involving the contract of loan. We clarify
that in cases where the accused is acquitted on the ground that there is no crime, the civil action deemed
instituted with the criminal case cannot prosper precisely because there is no delict from which any civil
obligation may be sourced. The peculiarity of this case is the finding that petitioner, in fact, has an obligation
arising from a contract. This civil action arising from the contract is not necessarily extinguished. It can be
instituted in the proper court through the proper civil action.

We note that while there is no written contract of loan in this case, there is an oral contract of loan which
must be brought within six years.[65] Under the facts of the case, it appears that any breach in the obligation
to pay the loan may have happened between 1996 and 1999, or more than six years since this case has been
instituted. This notwithstanding, we find that the civil action arising from the contract of loan has not yet
prescribed. Article 1150 of the Civil Code states —

Art. 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains
otherwise, shall be counted from the day they may be brought.
We held in numerous cases that it is the legal possibility of bringing the action that determines the starting
point for the computation of the period of prescription.[67] We highlight the unique circumstances surrounding
this case. As discussed in this decision, there has been diverse jurisprudence as to the propriety of ordering
an accused to pay an obligation arising from a contract in the criminal case where the accused was acquitted
on the ground that there is no crime. Litigants, such as MCCI, cannot be blamed for relying on prior rulings
where the recovery on a contract of loan in a criminal case for estafa was allowed. We have found the
opportunity to clarify this matter through this decision. As it is only now that we delineate the rules governing
the fusion of criminal and civil actions pertaining to estafa, it is only upon the promulgation of this judgment
that litigants have a clear understanding of the proper recourse in similar cases. We therefore rule that
insofar as MCCI is concerned, the filing of an action, if any (that may be sourced from the contract of loan),
becomes a legal possibility only upon the finality of this decision which definitively ruled upon the principles
on fused actions.

We add, however, that upon finality of this decision, prospective litigants should become more circumspect in
ascertaining their course of action in similar cases. Whenever a litigant erroneously pursues an estafa case,
and the accused is subsequently acquitted because the obligation arose out of a contract, the prescriptive
period will still be counted from the time the cause of action arose. In this eventuality, it is probable that the
action has already prescribed by the time the criminal case shall have been completed. This possibility
demands that prospective litigants do not haphazardly pursue the filing of an estafa case in order to force an
obligor to pay his or her obligation with the threat of criminal conviction. It compels litigants to be honest and
fair in their judgment as to the proper action to be filed. This ruling should deter litigants from turning to
criminal courts as their collection agents, and should provide a disincentive to the practice of filing of criminal
cases based on unfounded grounds in order to provide a litigant a bargaining chip in enforcing contracts.

WHEREFORE, in view of the foregoing, the Petition is GRANTED. The Decision of the CA dated February 25,
2009 is REVERSED. This is however, without prejudice to any civil action which may be filed to claim civil
liability arising from the contract.

SO ORDERED.

Velasco, Jr., (Chairperson), Peralta, Perez, and Reyes, JJ., concur.

3. UCPB VS DBP (x)


[ G.R. No. 190080, June 11, 2014 ]
GOLDEN VALLEY EXPLORATION, INC., PETITIONER, VS. PINKIAN MINING COMPANY AND COPPER
VALLEY, INC., RESPONDENTS.

DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] are the Decision[2] dated July 23, 2009 and the
Resolution[3] dated October 23, 2009 of the Court of Appeals (CA) in CA-G.R. CV. No. 90682 which reversed
the Decision[4] dated August 18, 2006 of the Regional Trial Court of Makati City, Branch 145 (RTC) in Civil
Case No. 01-324 and, consequently, affirmed the validity of the rescission of the Operating Agreement
between petitioner Golden Valley Exploration, Inc. (GVEI) and respondent Pinkian Mining Company (PMC)
covering various mining claims in Kayapa, Nueva Vizcaya, as well as the Memorandum of Agreement between
PMC and respondent Copper Valley, Inc. (CVI).
The Facts

PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were covered by Mining
Lease Contract (MLC) No. MRD-56,[5] while the remaining 66 had pending applications for lease.[6] On October
30, 1987, PMC entered into an Operating Agreement[7] (OA) with GVEI, granting the latter "full, exclusive and
irrevocable possession, use, occupancy, and control over the [mining claims], and every matter pertaining to
the examination, exploration, development and mining of the [mining claims] and the processing and
marketing of the products x x x,"[8] for a period of 25 years.[9]

In a Letter[10] dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEI's violation of Section
5.01,[11] Article V thereof. Cited as further justification for its action were reasons such as: (a) violation of
Section 2.03, Article II of the OA, or the failure of GVEI to advance the actual cost for the perfection of the
mining claims or for the acquisition of mining rights, cost of lease applications, lease surveys and legal
expenses incidental thereto; (b) GVEI's non-reimbursement of the expenses incurred by PMC General
Manager Benjamin Saguid in connection with the visit of a financier to the mineral property in 1996; (c) its
non-remittance of the US$300,000.00 received from Excelsior Resources, Ltd.; (d) its non- disclosure of
contracts entered into with other mining companies with respect to the mining claims; (e) its being a mere
"promoter/broker" of PMC's mining claims instead of being the operator thereof; and (f) its non- performance
of the necessary works on the mining claims.[12]

GVEI contested PMC's extra-judicial rescission of the OA through a Letter dated December 7, 1999, averring
therein that its obligation to pay royalties to PMC arises only when the mining claims are placed in
commercial production which condition has not yet taken place. It also reminded PMC of its prior payment of
the amount of P185,000.00 as future royalties in exchange for PMC's express waiver of any breach or default
on the part of GVEI.[13]

PMC no longer responded to GVEI's letter. Instead, it entered into a Memorandum of Agreement dated May 2,
2000 (MOA) with CVI, whereby the latter was granted the right to "enter, possess, occupy and control the
mining claims" and "to explore and develop the mining claims, mine or extract the ores, mill, process and
beneficiate and/or dispose the mineral products in any method or process," among others, for a period of 25
years.[14]

Due to the foregoing, GVEI filed a Complaint[15] for Specific Performance, Annulment of Contract and Damages
against PMC and CVI before the RTC, docketed as Civil Case No. 01-324.

The RTC Ruling

On August 18, 2006, the RTC rendered a Decision[16] in favor of GVEI, holding that since the mining claims
have not been placed in commercial production, there is no demandable obligation yet for GVEI to pay
royalties to PMC. It further declared that no fault or negligence may be attributed to GVEI for the delay in the
commercial production of the mining claims because the non-issuance of the requisite Mineral Production
Sharing Agreement (MPSA) and other government permits, licenses, and consent were all affected by factors
beyond GVEI's control. [17] The RTC, thus, declared the rescission of the OA void and the execution of the MOA
between PMC and CVI without force and effect. In this relation, it ordered PMC to comply with the terms and
conditions of the OA until the expiration of its period.[18]

At odds with the RTC's ruling, PMC elevated the case on appeal to the CA.

The CA Ruling

In a Decision[19] dated July 23, 2009, the CA reversed the RTC ruling, finding that while the OA gives PMC the
right to rescind only on the ground of (GVEI's) failure to pay the stipulated royalties, Article 1191 of the Civil
Code allows PMC the right to rescind the agreement based on a breach of any of its provisions. [20] It further
held that the inaction of GVEI for a period of more than seven (7) years to operate the areas that were already
covered by a perfected mining lease contract and to acquire the necessary permits and licenses amounted to a
substantial breach of the OA, the very purpose of which was the mining and commercial distribution of
derivative products that may be recovered from the mining property. [21] For the foregoing reasons, the CA
upheld the validity of PMC's rescission of the OA and its subsequent execution of the MOA with CVI. [22]

Dissatisfied with the CA's ruling, GVEI filed a motion for reconsideration which was, however, denied by the
CA in a Resolution[23]dated October 23, 2009, hence, this petition.

The Issue Before the Court

The central issue for the Court's resolution is whether or not there was a valid rescission of the OA.

The Court's Ruling

The Court resolves the issue in the affirmative.

In reciprocal obligations, either party may rescind the contract upon the other's substantial breach of the
obligation/s he had assumed thereunder. The basis therefor is Article 1191 of the Civil Code which states as
follows:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.

More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a breach
of faith that violates the reciprocity between parties to the contract. [24] This retaliatory remedy is given to the
contracting party who suffers the injurious breach on the premise that it is "unjust that a party be held
bound to fulfill his promises when the other violates his." [25]

As a general rule, the power to rescind an obligation must be invoked judicially and cannot be
exercised solely on a party's own judgment that the other has committed a breach of the obligation.
[26]
 This is so because rescission of a contract will not be permitted for a slight or casual breach, but only for
such substantial and fundamental violations as would defeat the very object of the parties in making the
agreement.[27] As a well-established exception, however, an injured party need not resort to court action
in order to rescind a contract when the contract itself provides that it may be revoked or cancelled
upon violation of its terms and conditions.[28] As elucidated in Froilan v. Pan Oriental Shipping Co.,[29] "there
is x x x nothing in the law that prohibits the parties from entering into agreement that violation of the terms
of the contract would cause cancellation thereof, even without court intervention." [30] Similarly, in Dela Rama
Steamship Co., Inc. v. Tan,[31] it was held that judicial permission to rescind an obligation is not necessary if a
contract contains a special provision granting the power of cancellation to a party. [32]

With this in mind, the Court therefore affirms the correctness of the CA's Decision upholding PMC's unilateral
rescission of the OA due to GVEI's non-payment of royalties considering the parties' express stipulation in the
OA that said agreement may be cancelled on such ground. This is found in Section 8.01, Article VIII [33] in
relation to Section 5.01, Article V[34] of the OA which provides:

ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT
8.01 This Agreement may be cancelled or terminated prior to the expiration of the period, original or
renewal mentioned in the next preceding Section only in either of the following ways:

a. By written advance notice of sixty (60) days from OPERATOR to PINKIAN with or without cause by
registered mail or personal delivery of the notice to PINKIAN.

b. By written notice from PINKIAN by registered or personal deliver of the notice to OPERATOR based on the
failure to OPERATOR to make any payments determined to be due PINKIAN under Section 5.01
hereof after written demand for payment has been made on OPERATOR: Provided that OPERATOR shall have
a grace period of ninety (90) days from receipt of such written demand within which to make the said
payments to PINKIAN.

ARTICLE V
ROYALTIES

5.01 Should the PROPERTIES be placed in commercial production the PINKIAN shall be entitled to a Royalty
computed as follows:

(a) For gold 3.0 percent of net realizable value of gold


(b) For copper and others 2.0 percent of net realizable value
"Net REALIZABLE Value" is gross value less the sum of the following:

(1) marketing expenses including freight and insurance;


(2) all smelter charges and deductions;
(3) royalty payments to the government;
(4) ad valorem and export taxes, if any, paid to the government.
The aforesaid royalties shall be paid to PINKIAN within five (5) days after receipt of the smelter or refinery
returns. (Emphases and underscoring supplied)

By expressly stipulating in the OA that GVEI's non-payment of royalties would give PMC sufficient cause to
cancel or rescind the OA, the parties clearly had considered such violation to be a substantial breach of their
agreement. Thus, in view of the above-stated jurisprudence on the matter, PMC's extra-judicial rescission of
the OA based on the said ground was valid.

In this relation, the Court finds it apt to clarify that the following defenses raised by GVEI in its petition would
not impel a different conclusion:

First, GVEI cannot excuse its non-payment of royalties on the argument that no commercial mining was yet
in place. This is precisely because the obligation to develop the mining areas and put them in
commercial operation also belonged to GVEI as it expressly undertook "to explore, develop, and equip the
Claims to mine and beneficiate the ore thereof by any method or process" [35]and "to enter into contract,
agreement, assignments, conveyances and understandings of any kind whatsoever with reference to the
exploration, development, equipping and operation of the Claims, and the mining and beneficiation of the ore
derived therefrom, and marketing the resulting marketable products." [36]

Records reveal that when the OA was signed on October 30, 1987, 15 mining claims were already covered by
a perfected mining lease contract, i.e., MLC No. MRD-56, granting to the holder thereof "the right to extract all
mineral deposits found on or underneath the surface of his mining claims x x x; to remove, process and
otherwise utilize the mineral deposits for his own benefit." [37] This meant that GVEI could have immediately
extracted mineral deposits from the covered mineral land and carried out commercial mining operations from
the very start. However, despite earlier demands made by PMC, no meaningful steps were taken by GVEI
towards the commercial production of the 15 perfected mining claims and the beneficial exploration of those
remaining. Consequently, seven years into the life of the OA, no royalties were paid to PMC. Compounding its
breach, GVEI not only failed to pay royalties to PMC but also did not carry out its obligation to conduct
operations on and/or commercialize the mining claims already covered by MLC No. MRD-56. Truth be told,
GVEI's non-performance of the latter obligation under the OA actually made the payment of royalties to PMC
virtually impossible. Hence, GVEI cannot blame anyone but itself for its breach of the OA, which, in turn,
gave PMC the right to unilaterally rescind the same.
Second, neither can GVEI successfully oppose PMC's rescission of the OA on the argument that the ground to
rescind the OA was only limited to its non-payment of royalties precisely because said ground was actually
among the reasons for PMC's rescission thereof. Considering the stipulations above-cited, the ground for non-
payment of royalties was in itself sufficient for PMC to extra-judicially rescind the OA.

In any event, even discounting the ground of non-payment of royalties, PMC still had the right to rescind the
OA based on the other grounds it had invoked therefor, namely, (a) violation of Section 2.03, Article II of the
OA, or the failure of GVEI to advance the actual cost for the perfection of the mining claims or for the
acquisition of mining rights, cost of lease applications, lease surveys and legal expenses incidental thereto, (b)
GVEI's non-reimbursement of the expenses incurred by PMC General Manager Benjamin Saguid in
connection with the visit of a financier to the mineral property in 1996, (c) its non-remittance of the
US$300,000.00 received from Excelsior Resources, Ltd., (d) its non-disclosure of contracts entered into with
other mining companies with respect to the mining claims, (e) its being a mere "promoter/broker" of PMC's
mining claims instead of being the operator thereof, and (f) its non-performance of the necessary works on the
mining claims, albeit the said grounds should have been invoked judicially since the court would still
need to determine if the same would constitute substantial breach and not merely a slight or casual
breach of the contract. While Section 8.01, Article VIII of the OA as above-cited appears to expressly restrict
the availability of an extra-judicial rescission only to the grounds stated thereunder, the Court finds that the
said stipulation does not negate PMC's implied statutory right to judicially rescind the contract for other
unspecified acts that may actually amount to a substantial breach of the contract. This is based on Article
1191 of the Civil Code (also above-cited) which pertinently provides that the "power to rescind obligations
is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon
him" and that "[t]he court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period."

While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this case, the
only recognizable effect, however, is with respect to the reckoning point as to when the contract would be
formally regarded as rescinded. Where parties agree to a stipulation allowing extra-judicial rescission, no
judicial decree is necessary for rescission to take place; the extra-judicial rescission immediately
releases the party from its obligation under the contract, subject only to court reversal if found improper.
On the other hand, without a stipulation allowing extra-judicial rescission, it is the judicial decree that
rescinds, and not the will of the rescinding party. This may be gathered from previous Court rulings on
the matter.

For instance, in Ocejo, Perez & Co. v. International Banking Corporation,[38] where the seller, without having
reserved title to the thing sold, sought to re-possess the subject matter of the sale through an action for
replevin after the buyer failed to pay its purchase price, the Court ruled that the action of replevin (which
operates on the assumption that the plaintiff is the owner of the thing subject of the suit) "will not lie upon
the theory that the rescission has already taken place and that the seller has recovered title to the thing sold."
It held that the title which had already passed by delivery to the buyer is not ipso facto re-vested in the seller
upon the latter's own determination to rescind the sale because it is the judgment of the court that produces
the rescission.

On the other hand, in De Luna v. Abrigo [39] (De Luna), the Court upheld the validity of a stipulation providing
for the automatic reversion of donated property to the donor upon non-compliance of certain conditions
therefor as the same was akin to an agreement granting a party the right to extra-judicially rescind the
contract in case of breach. The Court ruled, in effect, that a subsequent court judgment does not rescind the
contract but merely declares the fact that the same has been rescinded, viz.:

[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a


contract already deemed rescinded by virtue of an agreement providing for rescission even without judicial
intervention, but in order to determine whether or not the rescission was proper.[40] (Emphases and
underscoring supplied)

A similar agreement in Roman Catholic Archbishop of Manila v. CA[41] allowing the ipso facto reversion of the
donated property upon non- compliance with the conditions was likewise upheld, with the Court
reiterating De Luna and declaring in unmistakable terms that:[42]
Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the revocatory act. (Emphasis and underscoring
supplied)

This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds not
specified in the contract would not preclude a party to treat the same as rescinded. The rescinding
party, however, by such course of action, subjects himself to the risk of being held liable for damages when
the extra-judicial rescission is questioned by the opposing party in court. This was made clear in the case
of U.P. v. De Los Angeles,[43] wherein the Court held as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on
account of infractions by the other contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court. If the other party denies
that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter
to court. Then, should the court, after due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law.
x x x.[44] (Emphases and underscoring supplied)

The pronouncement, which was also reiterated in the case of Angeles v. Calasanz, [45] sought to explain
various rulings that continued to require judicial confirmation even in cases when the rescinding party has a
proven contractual right to extra-judicially rescind the contract. The observation then was mainly on the
practical effect of a stipulation allowing extra-judicial rescission being merely "to transfer to the defaulter the
initiative on instituting suit, instead of the rescinder." [46]

Proceeding from the foregoing, the Court has determined that the other grounds raised by PMC in its Letter
dated June 8, 1999 to GVEI (the existence of which had not been convincingly disputed herein) amounts to
the latter's substantial breach of the OA. To the Court's mind, said infractions, when taken together,
ultimately resulted in GVEI's failure to faithfully perform its primordial obligation under the OA to explore and
develop PMC's mining claims as well as to put the same into commercial operation. Accordingly, PMC's
rescission of the OA on the foregoing grounds, in addition to the ground of non-payment of royalties, is
equally valid.

Finally, the Court cannot lend credence to GVEI's contention that when PMC entered into an agreement with
CVI covering the mining claims, it was committing a violation of the terms and conditions of the OA. As above-
explained, the invocation of a stipulation allowing extra-judicial rescission effectively puts an end to the
contract and, thus, releases the parties from the obligations thereunder, notwithstanding the lack of a judicial
decree for the purpose. In the case at bar, PMC, through its Letter dated June 8, 1999 to GVEI, invoked
Section 8.01, Article VIII in relation to Section 5.01, Article V of the OA which allows it to extra-judicially
rescind the contract for GVEI's non-payment of royalties. Thus, at that point in time, PMC had effectively
rescinded the OA and was then considered to have been released from its legal effects. Accordingly, there
stood no legal impediment so as to hinder PMC from entering into a contract with CVI covering the same
mining claims subject of this case.

In fine, the Court denies the instant petition and affirms the assailed

CA Decision and Resolution.

WHEREFORE, the petition is DENIED. The Decision dated July 23, 2009 and the Resolution dated October
23, 2009 of the Court of Appeals in CA-G.R. CV. No. 90682 are hereby AFFIRMED.

SO ORDERED.

Carpio, (Chairperson), Brion, Del Castillo, and Perez, JJ., concur.


[ GR No. 178184, Jan 29, 2014 ]
GRAND ASIAN SHIPPING LINES v. WILFREDO GALVEZ +
DECISION

DEL CASTILLO, J.:


The employer has broader discretion in dismissing managerial employees on the ground of loss of trust and
confidence than those occupying ordinary ranks.  While plain accusations are not sufficient to justify the
dismissal of rank and file employees, the mere existence of a basis for believing that managerial employees
have breached the trust reposed on them by their employer would suffice to justify their dismissal. [1]

Before us is a Petition for Review on Certiorari[2] assailing the September 12, 2006 Decision[3] of the Court of
Appeals (CA) in CA-G.R. SP No. 82379, which annulled the September 10, 2003 Decision [4] and January 14,
2004 Resolution[5] of the National Labor Relations Commission (NLRC), thereby reinstating the August 30,
2001 Decision[6] of the Labor Arbiter for having attained finality as a result of petitioners' failure to post the
correct amount of bond in their appeal before the NLRC.  Likewise assailed is the May 23, 2007
Resolution[7] of the CA which denied petitioners' Motion for Reconsideration.[8]

Factual Antecedents

Petitioner Grand Asian Shipping Lines, Inc. (GASLI) is a domestic corporation engaged in transporting
liquified petroleum gas (LPG) from Petron Corporation's refinery in Limay, Bataan to Petron's Plant in Ugong,
Pasig and Petron's Depot in Rosario, Cavite.  Petitioners William How and Eduardo Francisco are its President
and General Manager, respectively.  Respondents, on the other hand, are crewmembers of one of GASLI's
vessels, M/T Dorothy Uno, with the following designations: Wilfredo Galvez (Galvez) as Captain; Joel Sales
(Sales) as Chief Mate; Cristito Gruta (Gruta) as Chief Engineer; Danilo Arguelles (Arguelles) as Radio Operator;
Renato Batayola (Batayola), Patricio Fresmillo (Fresmillo) and Jovy Noble (Noble) as Able Seamen; Emilio
Dominico (Dominico) and Benny Nilmao (Nilmao) as Oilers; and Jose Austral (Austral) as 2 nd Engineer.

Sometime in January 2000, one of the vessel's Oilers, Richard Abis (Abis), reported to GASLI's Office and
Crewing Manager, Elsa Montegrico (Montegrico), an alleged illegal activity being committed by respondents
aboard the vessel.  Abis revealed that after about four to five voyages a week, a substantial volume of fuel oil
is unconsumed and stored in the vessel's fuel tanks.  However, Gruta would misdeclare it as consumed fuel
in the Engineer's Voyage Reports.  Then, the saved fuel oil is siphoned and sold to other vessels out at sea
usually at nighttime.  Respondents would then divide among themselves the proceeds of the sale.  Abis added
that he was hesitant at first to report respondents' illegal activities for fear for his life.

An investigation on the alleged pilferage was conducted.  After audit and examination of the Engineer's
Voyage Reports, GASLI's Internal Auditor, Roger de la Rama (De la Rama), issued a Certification of
Overstatement of Fuel Oil Consumption[9] for M/T Dorothy Uno stating that for the period June 30, 1999 to
February 15, 2000 fuel oil consumption was overstated by 6,954.3 liters amounting to P74,737.86. [10]

On February 11, 2000, a formal complaint[11] for qualified theft was filed with the Criminal Investigation and
Detection Group (CIDG) at Camp Crame against respondents, with Montegrico's Complaint-
Affidavit[12] attached.  On February 14, 2000, Abis submitted his Sinumpaang Salaysay,[13] attesting to the
facts surrounding respondents' pilferage of fuel oil while on board the vessel, which he alleged started in
August of 1999.  On March 22, 2000, GASLI's Port Captain, Genaro Bernabe (Bernabe), and De la Rama
submitted a Complaint-Joint Affidavit,[14] stating that in Gruta's Engineer's Voyage Reports, particularly for
the period June 30, 1999 to February 15, 2000, he overstated the number of hours the vessel's main and
auxiliary engines, as well as its generators, were used resulting in the exaggerated fuel consumption.  They
also stated that according to independent surveyor Jade Sea-Land Inspection Services, the normal diesel fuel
consumption of M/T Dorothy Uno for Petron Ugong Bataan Refinery Petron Ugong route averaged 1,021 liters
only.  Thus, comparing this with the declared amount of fuel consumed by the vessel when manned by the
respondents, Bernabe and De la Rama concluded that the pilferage was considerable. [15]  In her
Supplementary Complaint Affidavit,[16] Montegrico implicated respondents except Sales, in the illegal activity. 
Bernabe, in his Reply-Affidavit,[17] further detailed their analysis of the voyage reports vis-a-vis the report of
Jade Sea-Land Inspection Services to strengthen the accusations.

In their Joint Counter-Affidavit[18] and Joint Rejoinder-Affidavit,[19] respondents denied the charge.  They


alleged that the complaint was based on conflicting and erroneous computation/estimates of fuel
consumption; that the complaint was fabricated as borne out by its failure to specify the exact time the
alleged pilferage took place; that the allegations that the pilferage has been going on since August 1999 and
that Austral and Sales acted as lookouts are not true because both embarked on the vessel only on December
28, 1999 and January of 2000, respectively; that four other officers who were on board the vessel much
longer than Austral and Sales were not included in the charge; and, that the complaint was intended as a
mere leverage.

In a letter[20] dated April 14, 2000, the CIDG referred the case to the Office of the City Prosecutor of Manila,
which, after finding a prima facie case, filed the corresponding Information for Qualified Theft[21] dated August
18, 2000 with the Regional Trial Court (RTC) of Manila.

Meanwhile, GASLI placed respondents under preventive suspension.  After conducting administrative
hearings, petitioners decided to terminate respondents from employment.  Respondents (except Sales) were
thus served with notices[22] informing them of their termination for serious misconduct, willful breach of trust,
and commission of a crime or offense against their employer.

It appears that several other employees and crewmembers of GASLI's two other vessels were likewise
suspended and terminated from employment.  Nine seafarers of M/T Deborah Uno were charged and
terminated for insubordination, defying orders and refusal to take responsibility of cargo products/fuel. [23] 
For vessel M/T Coral Song, two crewmembers were dismissed for serious act of sabotage and grave
insubordination.[24]

Proceedings before the Labor Arbiter

Respondents and the other dismissed crewmembers of M/T Deborah Uno and M/T Coral Song (complainants)
filed with the NLRC separate complaints[25] for illegal suspension and dismissal, underpayment/non-payment
of salaries/ wages, overtime pay, premium pay for holiday and rest day, holiday pay, service incentive leave
pay, hazard pay, tax refunds and indemnities for damages and attorney's fees against petitioners.  The
complaints, docketed as NLRC NCR Case Nos. 00-04-02026-00, 00-04-02062-00, 00-05-02620-00 and 00-
07-03769-00, were consolidated.

On August 30, 2001, the Labor Arbiter rendered a Decision[26] finding the dismissal of all 21 complainants
illegal.  As regards the dismissal of herein respondents, the Labor Arbiter ruled that the filing of a criminal
case for qualified theft against them did not justify their termination from employment.  The Labor Arbiter
found it abstruse that the specific date and time the alleged pilferage took place were not specified and that
some crewmembers who boarded the vessel during the same period the alleged pilferage transpired were not
included in the charge.  With regard to the other complainants, petitioners likewise failed to prove the legality
of their dismissal.

The Labor Arbiter ordered petitioners to reinstate complainants with full backwages and to pay their money
claims for unpaid salary, overtime pay, premium pay for holidays and rest days, holiday and service incentive
leave pay, as indicated in the Computation of Money Claims.  Complainants were likewise awarded damages
due to the attending bad faith in effecting their termination, double indemnity prescribed by Republic Act (RA)
No. 8188[27] in view of violation of the Minimum Wage Law, as well as 10% attorney's fee.  With respect to the
claim for tax refund, the same was referred to the Bureau of Internal Revenue, while the claim for hazard pay
was dismissed for lack of basis.  The Labor Arbiter modified and recomputed the money claims of respondents,
as follows:

1. Wilfredo Galvez (Dismissed in Mar.


2000)
----------- P 121,225.16
Backwages from Mar. 2000 to
May 2001 (P8,658.74 x 14 mos.)

13th Month Pay for the period ----------- 8,658.94

Unpaid Salary from Feb 16 to 29, 2000 ----------- 3,985.38


Non-payment of Premium Pay for
Holiday;
Restday and Non-payment of Holiday
----------- 22,188.70
Pay;
(limited to 3 years' only = P7,372.90 x 3
yrs.)

Non-payment of (5 days) Service


Incentive
Leave Pay (for every year of service, but ----------- P 4,270.05
Limited to 3 years only): = P1,423.35 x
3 yrs.)

Actual Moral Exemplary &


Compensatory ----------- P 100,000.00
Damages
(P260,258.23)
Ten (10%) Percent Attorney's Fees P 26,025.82
TOTAL P 286,284.05

2. JOEL SALES (Dismissed in Mar.


2000)
Backwages from Mar. 2000 to May ----------- P 115,840.76
2001
(P8,274.14 x 14 mos.)

13th Month Pay for the period ----------- 8,274.34

Actual, Moral, Exemplary &


----------- P 100,000.00
Compensatory Damages
(P224,115.10)
Ten (10%) Percent Attorney's Fees P 22,411.51
TOTAL P 246,526.61

3. CRISTITO G. GRUTA (Dismissed in


Mar. 2000)
Backwages from Mar. 200[0] to May ----------- P 115,840.76
2001
(P8,274.14 x 14 mos.)

13th Month Pay for the period ----------- 8,274.34


Non-payment of Premium Pay for
Holiday; Restday and
Non-payment of Holiday Pay:
14,091.51
(P7,045.57 x 2 yrs.)
Non-payment of (5 days) Service
Incentive Leave Pay
(for every year of service = P1,360.15 x
---------- 2,720.30
2 yrs.)

Actual, Moral, Exemplary &


---------- P 100,000.00
Compensatory Damages
(P240,926.91)
Ten (10%) Percent Attorney's Fees ---------- P 24,092.69
TOTAL P 265,019.60

4. DANILO ARGUELLES (Dismissed in


Feb. 2000)
Backwages from Mar. 2000 to May ---------- [P]110,109.30
2001
(P7,340.62 x 15 mos.)

13th Month Pay for the period ---------- 7,340.62

Unpaid Salary from Feb. 16 to 29,


2000 ---------- 3,150.00
(P225.00 x 14 days)

Underpayment/Non-payment of
Salary/Wages:
A. From April 98 to Nov. 98 (7 mos.)
Minimum Wage P198 x 391.5 [/]
P 6,459.75
12 =
Actual Basic Wage for the period 4,320.00
Difference P 2,139.75
x 7 mos.
P 14,978.25

Double Indemnity prescribed by Rep.


P 29,956.50
Act 8188, Sec. 4
B. From Dec. 98 to Mar. 2000 (16
mos.)
Minimum Wage P225 391.5 [/]
P 7,340.62
12 =
Actual Basic Wage for the period 6,240.00
Difference P 1,100.62
x 16 mos .
P 17,609.92

Double Indemnity prescribed by Rep.


P 35,219.84
Act 8188, Sec. 4

Underpayment/Non-payment of
Overtime Pay:
A. From Apr. 98 to Nov. 98 (7 mos.)
30% of Minimum Wage
(P6,459.75 x 30%) P 1,937.92
30% of Salary Actually Paid
(P4,320.00 x 30%) 1,872.00
Difference P 641.92
x 7 mos.
P 4,493.44 P 4,493.44

B. From Dec. 98 to Mar. 2000 (16


mos.)
30% of Minimum Wage 2,202.18
(P7,340.62 x 30%)
30% of Salary Actually Paid 1,872.00
(P6,240.00 x 30%) P 330.18
Difference x 16 mos.
P 5,282.88 P 5,282.88

Non-payment of Premium Pay for


P 11,655.00
Holiday; Restday and
Non-payment of Holiday Pay
(P5,872.50 x 2 yrs.)
Non-payment of (5 days) Service
Incentive Leave Pay
(for every year of service/but limited to
2,250.00
2 yrs. only):
= P 1,125.00 x 2 yrs. P 100,000.00
Actual, Moral, Exemplary &
Compensatory Damages
(P309,457.58)
Ten (10%) Percent Attorney's Fees P 30,945.75
TOTAL P 340,403.33

5. RENATO BATAYOLA
6. PATRICIO FRESNILLO
7. JOVY NOBLE
8. EMILIO DOMINICO
9. BENNY NILMAO (All dismissed in
Feb. 2001)

Backwages from Mar. 2000 to May


2001
(P7,340.62 x 15 mos.) P 110,109.30
13  Month Pay for the period
th
---------- 7,340.62
Unpaid Salary from Feb. 16 to 29,
P 3,150.00
2000
(P225.00 x 14 days)
Underpayment/Non-payment of
Salary/Wages:
A. From Apr. 97 to Jan. 98 ([9] mos.)
Minimum Wage P185 x 391.5 [/]
P 6,035.62
12 =
Actual Basic Wage for the period 4,098.24
Difference P 1,932.58
x 9 mos.
P 17,436.42

Double Indemnity prescribed by Rep.


P 34,872.84
Act 8188, Sec. 4
B. From Feb. 98 to Nov. 98 (10 mos.)
Minimum Wage P198 x 391.5 [/]
P 6,459.75
12 =
Actual Basic Wage for the period 4,098.24
Difference P 2,361.51
x 10 mos.
P 23,615.10

Double Indemnity prescribed by Rep.


P 47,230.20
Act 8188, Sec. 4
C. From Dec. 98 to Mar. 2000 (16
mos.)
Minimum Wage P225 x 391.5 [/]
7,340.62
12 =
Actual Basic Wage for the period 6,022.00
Difference P 1,318.62
x 16 mos.
P 21,098.00

Double Indemnity prescribed by Rep.


P 42,196.00
Act 8188, Sec. 4
Underpayment/Non-payment of
Overtime Pay:
A. From Apr. 97 to Jan. 98 (9 mos.)
30% Minimum Wage
(P6,035.62 x 30%) P 1,810.68
30% of Salary Actually Paid
(P4,098.24 x 30%) 1,226.77
Difference P 583.91
x 9 mos.
P 5,255.19 - P 5,255.19
B. From Feb. 98 to Nov. 98 (10 mos.)
30% Minimum Wage
(P6,459.75 x 30%) P 1,937.92
30% of Salary Actually Paid
(P4,098.24 x 30%) 1,226.72
Difference P 711.15
x 10 mos.
P 7,111.70 - P 7,111.70

C. From Dec. 98 to Mar. 2000 (16


mos.)
30% Minimum Wage P 2,202.18
(P7,340.62 x 30%)
30% of Salary Actually Paid P 1,806.75
(P6,022.50 x 30%) P 395.43
Difference x 16 mos.
P 6,326.97 - P 6,326.97

Non-Payment of Premium Pay for


Holiday & Restday; and
Non-Payment of Holiday Pay:
P 17,482.50
(P5,827.50 x 3 yrs.)
Non-Payment of (5 days) Service
Incentive Leave Pay
(for every year of service/but limited to
3 years only)
= P1,125.00 x 3 yrs.) 3,375.00
Actual, Moral, Exemplary &
Compensatory Damages ---------- 100,000.00
(P384,450.12)
Ten (10%) Percent Attorney's Fees P 38, 445.01
TOTAL (each) P 422,895.13
(Total for 5 above-named Complainants P2,114,475.00)

10. JOSE AUSTRAL (Dismissed in Feb.


2000)
Backwages from Mar. 2000 to May
2001
(P8,900.00 x 15 mos.) P 133.500.00
13th Month Pay for the period 8,900.00
Unpaid Salary from Feb. 16 to 29,
2000
(P8,900.00 x 12 mos. / 365 days =
4,096.40
(P292.60 x 14 days)
Actual, [M]oral, Exemplary &
Compensatory Damages ---------- P 100,000.00
(P246,496.40)
Ten (10%) Percent Attorney's Fees P 24,679.64
TOTAL P 271, 146.04[28]

The dispositive portion of the Labor Arbiter's Decision reads:

WHEREFORE, premises all considered, judgment is hereby rendered finding the dismissal of all 21
complainants herein as illegal and ordering  respondents Grand Asian Shipping Lines, Inc., Eduardo P.
Franscisco and William How to pay, jointly and severally, each complainant the amounts, as follows, to wit:

1. Wilfredo Galvez P 286,284.05


2. Joel Sales 246,526.61
3. Cristito G. Gruta 265,019.60
4. Danilo Arguelles 340,403.33
5. Renato Batayola 422,895.13
6. Patricio Fresnillo 422,895.13
7. Jovy Noble 422,895.13
8. Emilio Dominico 422,895.13
9. Benny Nilmao 422,895.13
10. Jose Austral 271,146.04
A)11. Nobelito Rivas 281,900.13
12. Elias Facto 259,471.41
13. Jeremias Bonlagua 316,683.53
14. Rannie Canon 391,816.70
15. Fernando Malia 411,355.45
16. Calixto Flores 411,355.45
17. Necito Llanzana 411,355.45
18. Ramie Barrido 411,355.45
19. Albert Faulan 265,982.28
20. Magno Tosalem 419,352.79
21. Rolando Dela Guardia 419,352.79
(Grand Total) P 7,104,483.84
   
The awards of P100,000.00 each, as indemnity for damages and ten percent (10%) of the total amount,
B)
as attorney's fees, are included in the above-individual amount so awarded.
Respondents should immediately reinstate all the complainants to their former position without loss of
C) seniority [sic] and other benefits; and to pay them full backwages up to the time of their actual
reinstatement.

All other claims of complainants, not included in the above awards, are hereby ordered dismissed for lack of
merit.

SO ORDERED.[29]

Proceedings before the National Labor Relations Commission

Petitioners filed a Notice of Appeal With A Very Urgent Motion to Reduce Bond [30] before the NLRC and posted
a cash bond in the amount of P500,000.00.  In a Supplemental Motion to Reduce Bond,[31] petitioners cited
economic depression, legality of the employees' termination, compliance with labor standards, and wage
increases as grounds for the reduction of appeal bond.

The NLRC issued an Order[32] dated February 20, 2002 denying petitioners' motion to reduce bond and
directing them to post an additional bond in the amount of P4,084,736.70 in cash or surety within an
unextendible period of 10 days; otherwise, their appeal would be dismissed.  Petitioners failed to comply with
the Order.  Thus, on February 3, 2003, complainants moved for the dismissal of the appeal since petitioners
had thus far posted only P1.5 million supersedeas bond and P500,000.00 cash bond, short of the amount
required by the NLRC.[33]

In a Decision[34] dated September 10, 2003, the NLRC, despite its earlier Order denying petitioners' motion for
the reduction of bond, reduced the amount of appeal bond to P1.5 million and gave due course to petitioners'
appeal.  It also found the appeal meritorious and ruled that petitioners presented sufficient evidence to show
just causes for terminating complainants' employment and compliance with due process.  Accordingly,
complainants' dismissal was valid, with the exception of Sales.  The NLRC adjudged petitioners to have
illegally dismissed Sales as there was absence of any record that the latter received any notice of suspension,
administrative hearing, or termination.

The NLRC struck down the monetary awards given by the Labor Arbiter, which, it ruled, were based merely on
the computations unilaterally prepared by the complainants.  It also ruled that Galvez, a ship captain, is
considered a managerial employee not entitled to premium pay for holiday and rest day, holiday pay and
service incentive leave pay.  As for the other complainants, the award for premium pay, holiday pay, rest day
pay and overtime pay had no factual basis because no proof was adduced to show that work was performed
on a given holiday or rest day or beyond the eight hours normal work time.  Even then, the NLRC opined that
these claims had already been given since complainants' salaries were paid on a 365-day basis.  Likewise,
service incentive leave pay, awards for damages and double indemnity were deleted.  Further, the NLRC
sustained respondents' contention that it is the Secretary of Labor or the Regional Director who has
jurisdiction to impose the penalty of double indemnity for violations of the Minimum Wage Laws and not the
Labor Arbiter.  The NLRC disposed of the case as follows:

WHEREFORE, premises considered, the assailed Decision is hereby reversed as to all complainants but
modified with respect to Joel Sales.  Respondents are adjudged not guilty of illegal dismissal with respect to
all complainants except complainant Joel Sales.  With the exception of Joel Sales, all the monetary awards to
all complainants are deleted from the decision.

Respondents are ordered to pay, jointly and severally complainant Joel Sales his backwages in the amount of
P124,115.10 as computed in the assailed decision plus ten (10%) thereof as attorney's fees.

We also sustain the order to reinstate him to his former position without loss of seniority rights and other
benefits and to pay him backwages up to the time of his actual reinstatement.

SO ORDERED.[35]

Complainants filed Motions for Reconsideration while petitioners filed a Motion for Partial Reconsideration.  In
a Resolution[36] dated January 14, 2004, the NLRC reconsidered its ruling with respect to Sales, absolving
petitioners from the charge of illegally dismissing him as Sales was neither placed under preventive
suspension nor terminated from the service.  The NLRC upheld petitioners' claim that it was Sales who
abandoned his work by failing to report back for re-assignment.  The dispositive portion of the Resolution
reads:

WHEREFORE, premises considered, the Motions for Reconsideration filed by complainants are denied for lack
of merit.  The Motion for Partial Reconsideration filed by respondents is granted.  The assailed decision is
reconsidered in that Respondents are likewise adjudged not guilty of illegal dismissal with respect to
complainant Joel Sales. The monetary awards in favor of complainant Joel Sales as well as the reinstatement
order are hereby deleted from the Decision.

SO ORDERED.[37]

Proceedings before the Court of Appeals

Respondents, excluding the other complainants, filed a Petition for Certiorari [38] with the CA, attributing grave
abuse of discretion on the part of the NLRC in entertaining the appeal despite the insufficiency of petitioners'
appeal bond.  Respondents also assailed the NLRC's ruling upholding the validity of their dismissal.  They
posited that the charge of pilferage is not supported by clear, convincing and concrete evidence.  In fact, the
RTC, Branch 15 of Manila already rendered a Decision[39] on December 19, 2003 acquitting them of the crime
of qualified theft lodged by the petitioners.  Respondents further prayed for the reinstatement of the Labor
Arbiter's monetary awards in their favor.

In a Decision[40] dated September 12, 2006, the CA set aside the NLRC's Decision and Resolution.  It held that
the NLRC's act of entertaining the appeal is a jurisdictional error since petitioners' failure to post additional
bond rendered the Labor Arbiter's Decision final, executory and immutable.  The CA, nonetheless, proceeded
to discuss the merits of the case insofar as the illegal dismissal charge is concerned.  The CA conformed with
the Labor Arbiter's ruling that petitioners' evidence was inadequate to support the charge of pilferage and
justify respondents' termination.  The CA ruled that Sales was also illegally dismissed, stating that Sales'
active participation in the labor case against petitioners belies the theory that he was not terminated from
employment.  The dispositive portion of the CA Decision reads:

WHEREFORE, the petition is GRANTED and the assailed September 10, 2003 Decision and January 14, 2003
Resolution are, accordingly, ANNULLED and SET ASIDE.  In lieu thereof, the Labor Arbiter's August 30, 2001
Decision is ordered REINSTATED.

SO ORDERED.[41]
Petitioners filed a Motion for Reconsideration,[42] questioning the CA in finding that respondents were illegally
dismissed, in reinstating the monetary awards granted by the Labor Arbiter without passing upon the merits
of these money claims and in ascribing grave abuse of discretion on the part of the NLRC in taking cognizance
of the appeal before it.

On May 23, 2007, the CA issued a Resolution[43] denying petitioners' Motion for Reconsideration.  Hence, the
instant Petition.

Issues

Petitioners assign the following errors:

I.

THE HONORABLE COURT OF APPEALS RULED CONTRARY TO APPLICABLE JURISPRUDENCE WHEN IT


CONCLUDED THAT RESPONDENTS WERE ILLEGALLY DISMISSED.

A. THIS HONORABLE COURT OF APPEAL[S] OF APPEALS [sic] DISREGARDED THE FACT THAT THE
OFFICE OF THE CITY PROSECUTOR OF MANILA DETERMINED THAT THERE WAS A PRIMA FACIE
CASE FOR QUALIFIED THEFT AGAINST PETITIONERS, CONTRARY TO DECISIONS THIS MOST
HONORABLE COURT OF APPEAL[S] HAS HELD WHERE SIMILAR FINDINGS OF THE INVESTIGATING
PUBLIC PROSECUTOR HAD BEEN CONSIDERED SUBSTANTIAL EVIDENCE TO JUSTIFY
TERMINATION OF EMPLOYMENT BASED ON LOSS OF TRUST AND CONFIDENCE.

B. THIS HONORABLE COURT OF APPEAL[S] GRIEVOUSLY ERRED IN DISCREDITING PRIVATE


RESPONDENTS' EVIDENCE ONE BY ONE WHEN, TAKEN TOGETHER, SUCH EVIDENCE PROVIDED
ADEQUATE BASIS FOR THE DISMISSAL OF PETITIONERS IN ACCORDANCE WITH RELEVANT
SUPREME COURT OF APPEAL [sic] DECISIONS.

C. IN SUM, PETITIONERS WERE NOT ILLEGALLY DISMISSED SINCE THE SUBSTANTIVE AND
PROCEDURAL REQUIREMENTS FOR THE TERMINATION OF THEIR EMPLOYMENT WERE
SATISFIED IN THIS CASE.

D. THIS HONORABLE COURT OF APPEAL[S] GRIEVOUSLY ERRED IN RULING THAT PETITIONER JOEL
SALES WAS ILLEGALLY DISMISSED.
II.

THE HONORABLE COURT OF APPEALS RULED CONTRARY TO APPLICABLE JURISPRUDENCE WHEN IT


CONCLUDED THAT PETITIONERS WERE NOT ABLE TO VALIDLY PERFECT [THEIR] APPEAL OF THE LABOR
ARBITER'S DECISION.[44]

Petitioners claim that the NLRC properly took cognizance of their appeal and properly granted their motion for
reduction of the appeal bond, explaining that strict implementation of the rules may be relaxed in certain
cases so as to avoid a miscarriage of justice.  Petitioners also claim that there was adequate basis to render
respondents' dismissal from service valid, as correctly ruled by the NLRC.

Our Ruling

The assailed CA Decision must be vacated and set aside.

There was substantial compliance with


the rules on appeal bonds.

In order to perfect an appeal from the Decision of the Labor Arbiter granting monetary award, the Labor Code
requires the posting of a bond, either in cash or surety bond, in an amount equivalent to the monetary
award.  Article 223 of the Labor Code provides:

ART. 223. Appeal. Decisions, awards, or orders of the Labor Arbiter are final and executory unless appealed to
the Commission by any or both parties within ten (10) calendar days from receipt of such decisions, awards,
or orders. x x x

xxxx

In case of a judgment involving a monetary award, an appeal by the employer [may] be perfected only upon
the posting of a cash or surety bond issued by a reputable bonding company duly accredited by the
Commission in the amount equivalent to the monetary award in the judgment appealed from.

Nonetheless, we have consistently held that rules should not be applied in a very rigid and strict sense. [45] 
This is especially true in labor cases wherein the substantial merits of the case must accordingly be decided
upon to serve the interest of justice.[46]  When there has been substantial compliance, relaxation of the Rules
is warranted.[47]

In Mendoza v. HMS Credit Corporation,[48] we held that the posting of an appeal bond in the amount of
P650,000.00 instead of P1,025,081.82 award stated in the Decision of the Labor Arbiter is substantial
compliance with the requirement under Article 223.  Likewise, in Pasig Cylinder Mfg. Corp. v.
Rollo,0);">[49] we ruled that the filing of a reduced appeal bond of P100,000.00 is not fatal in an appeal from
the labor arbiter's ruling awarding P3,132,335.57 to the dismissed employees. In Rosewood Processing, Inc. v.
National Labor Relations Commission,[50] we allowed the filing of a reduced bond of P50,000.00, accompanied
with a motion, in an appeal from the Labor Arbiter's award of P789,154.39.

In the case at bench, petitioners appealed from the Decision of the Labor Arbiter awarding to crewmembers
the amount of P7,104,483.84 by filing a Notice of Appeal with a Very Urgent Motion to Reduce Bond and
posting a cash bond in the amount of P500,000.00 and a supersedeas bond in the amount of P1.5 million. 
We find this to be in substantial compliance with Article 223 of the Labor Code.  It is true that the NLRC
initially denied the request for reduction of the appeal bond.  However, it eventually allowed its reduction and
entertained petitioners' appeal.  We disagree with the CA in holding that the NLRC acted with grave abuse of
discretion as the granting of a motion to reduce appeal bond lies within the sound discretion of the NLRC
upon showing of the reasonableness of the bond tendered and the merits of the grounds relied upon. [51] 
Hence, the NLRC did not err or commit grave abuse of discretion in taking cognizance of petitioners' appeal
before it.

Galvez and Gruta were validly dismissed


on the ground of loss of trust and
confidence; there were no valid grounds
for the dismissal of Arguelles, Batayola,
Fresnillo, Noble, Dominico, Nilmao and
Austral .

We do not, however, agree with the findings of the NLRC that all respondents were dismissed for just causes. 
In termination disputes, the burden of proving that the dismissal is for a just or valid cause rests on the
employers.  Failure on their part to discharge such burden will render the dismissal illegal. [52]

As specified in the termination notice, respondents were dismissed on the grounds of (i) serious misconduct,
particularly in engaging in pilferage while navigating at sea, (ii) willful breach of the trust reposed by the
company, and (iii) commission of a crime or offense against their employer.  Petitioners claim that based on
the sworn statement of Abis, joint affidavit of Bernabe and De la Rama, letter of petitioner Francisco
requesting assistance from the CIDG, formal complaint sheet, complaint and supplementary complaint
affidavit of Montegrico, CIDG's letter referring respondents' case to the Office of the City Prosecutor of Manila,
resolution of the City Prosecutor finding a prima facie case of qualified theft, and the Information for qualified
theft, there is a reasonable ground to believe that respondents were responsible for the pilferage of diesel fuel
oil at M/T Dorothy Uno, which renders them unworthy of the trust and confidence reposed on them.

After examination of the evidence presented, however, we find that petitioners failed to substantiate
adequately the charges of pilferage against respondents.  "[T]he quantum of proof which the employer must
discharge is substantial evidence. x x x  Substantial evidence is that amount of relevant evidence as a
reasonable mind might accept as adequate to support a conclusion, even if other minds, equally reasonable,
might conceivably opine otherwise."[53]  Here, the mere filing of a formal charge, to our mind, does not
automatically make the dismissal valid.  Evidence submitted to support the charge should be evaluated to see
if the degree of proof is met to justify respondents' termination.  The affidavit executed by Montegrico simply
contained the accusations of Abis that respondents committed pilferage, which allegations remain
uncorroborated.  "Unsubstantiated suspicions, accusations, and conclusions of employers do not provide for
legal justification for dismissing employees."[54]  The other bits of evidence were also inadequate to support the
charge of pilferage.  The findings made by GASLI's port captain and internal auditor and the resulting
certification executed by De la Rama merely showed an overstatement of fuel consumption as revealed in the
Engineer's Voyage Reports.  The report of Jade Sea Land Inspection Services only declares the actual usage
and amount of fuel consumed for a particular voyage.  There are no other sufficient evidence to show that
respondents participated in the commission of a serious misconduct or an offense against their employer.

As for the second ground for respondents' termination, which is loss of trust and confidence, distinction
should be made between managerial and rank and file employees.  "[W]ith respect to rank-and-file personnel,
loss of trust and confidence, as ground for valid dismissal, requires proof of involvement in the alleged events
x x x [while for] managerial employees, the mere existence of a basis for believing that such employee has
breached the trust of his employer would suffice for his dismissal." [55]

In the case before us, Galvez, as the ship captain, is considered a managerial employee since his duties
involve the governance, care and management of the vessel.[56]  Gruta, as chief engineer, is also a managerial
employee for he is tasked to take complete charge of the technical operations of the vessel. [57]  As captain and
as chief engineer, Galvez and Gruta perform functions vested with authority to execute management policies
and thereby hold positions of responsibility over the activities in the vessel.  Indeed, their position requires
the full trust and confidence of their employer for they are entrusted with the custody, handling and care of
company property and exercise authority over it.

Thus, we find that there is some basis for the loss of confidence reposed on Galvez and Gruta.  The
certification issued by De la Rama stated that there is an overstatement of fuel consumption.  Notably, while
respondents made self-serving allegations that the computation made therein is erroneous, they never
questioned the competence of De la Rama to make such certification.  Neither did they question the
authenticity and validity of the certification.  Thus, the fact that there was an overstatement of fuel
consumption and that there was loss of a considerable amount of diesel fuel oil remained unrefuted.  Their
failure to account for this loss of company property betrays the trust reposed and expected of them.  They had
violated petitioners' trust and for which their dismissal is justified on the ground of breach of confidence.

As for Arguelles, Batayola, Fresnillo, Noble, Dominico, Nilmao and Austral, proof of involvement in the loss of
the vessel's fuel as well as their participation in the alleged theft is required for they are ordinary rank and file
employees.  And as discussed above, no substantial evidence exists in the records that would establish their
participation in the offense charged.  This renders their dismissal illegal, thus, entitling them to reinstatement
plus full backwages, inclusive of allowances and other benefits, computed from the time of their dismissal up
to the time of actual reinstatement.

No evidence of Sales' dismissal from


employment.

The rule that the employer bears the burden of proof in illegal dismissal cases finds no application when the
employer denies having dismissed the employee.[58]  The employee must first establish by substantial evidence
the fact of dismissal[59] before shifting to the employer the burden of proving the validity of such dismissal.

We give credence to petitioners' claim that Sales was not dismissed from employment.  Unlike the other
respondents, we find no evidence in the records to show that Sales was preventively suspended, that he was
summoned and subjected to any administrative hearing and that he was given termination notice.  From the
records, it appears Sales was not among those preventively suspended on February 26, 2000.  To bolster this
fact, petitioners presented the Payroll Journal Register for the period March 1-15, 2000 [60] showing that Sales
was still included in the payroll and was not among those who were charged with an offense to warrant
suspension.  In fact, Sales' signature in the Semi-Monthly Attendance Report for February 26, 2000 to March
10, 2000[61] proves that he continued to work as Chief Mate for the vessel M/T Dorothy Uno along with a new
set of crewmembers.  It is likewise worth noting that in the Supplemental Complaint Affidavit of Montegrico,
Sales was not included in the list of those employees who were accused of having knowledge of the alleged
pilferage.  This only shows that he was never subjected to any accusation or investigation as a prelude to
termination.  Hence, it would be pointless to determine the legality or illegality of his dismissal because, in the
first place, he was not dismissed from employment.

Respondents are not entitled to their


money claims except 13th month pay for
the period of their illegal dismissal,
unpaid salaries, salary differentials,
double indemnity for violation of the
Minimum Wage Law and attorney's fees.

As for the money claims of respondents, we note that petitioners did not bring this issue before us or assign it
as error in this Petition.  It was raised by the petitioners only in their Memorandum of Appeal filed with the
NLRC and in their Motion for Reconsideration of the CA's Decision reinstating the Labor Arbiter's award. 
Nonetheless, in order to arrive at a complete adjudication of the case and avoid piecemeal dispensation of
justice, we deem it necessary to resolve the validity of respondents' money claims and to discuss the propriety
of the Labor Arbiter's award.

Galvez and Gruta, as managerial employees, are not entitled to their claims for holiday pay, service incentive
leave pay and premium pay for holiday and restday.  Article 82 of the Labor Code specifically excludes
managerial employees from the coverage of the law regarding conditions of employment which include hours
of work, weekly rest periods, holidays, service incentive leaves and service charges. [62]

As for Arguelles, Batayola, Fresnillo, Noble, Dominico, Nilmao and Austral, we cannot sustain the argument
that they are classified as field personnel under Article 82 of the Labor Code who are likewise excluded. 
Article 82 defines field personnel as referring to "non-agricultural employees who regularly perform their
duties away from the principal place of business or branch office of the employer and whose actual hours of
work in the field cannot be determined with reasonable certainty."  They are those who perform functions
which "cannot be effectively monitored by the employer or his representative." [63]  Here, respondents, during
the entire course of their voyage, remain on board the vessel.  They are not field personnel inasmuch as they
were constantly supervised and under the effective control of the petitioners through the vessel's ship captain.

Nevertheless, we cannot grant them their claims for holiday pay, premium pay for holiday and restday,
overtime pay and service incentive leave pay.  Respondents do not dispute petitioners' assertion that in
computing respondents' salaries, petitioners use 365 days as divisor.  In fact, this was the same divisor
respondents used in computing their money claims against petitioners.  Hence, they are paid all the days of
the month, which already include the benefits they claim.[64]  As for overtime pay and premium pay for
holidays and restdays, no evidence was presented to prove that they rendered work in excess of the regular
eight working hours a day or worked during holidays and restdays.  In the absence of such proof, there could
be no basis to award these benefits.[65]
For the claim of service incentive leave pay, respondents did not specify what year they were not paid such
benefit.  In addition, records show that they were paid their vacation leave benefits. [66]  Thus, in accordance
with Article 95 of the Labor Code,[67] respondents can no longer claim service incentive leave pay.

On the other hand, for failure to effectively refute the awards for 13th month pay for the period that
respondents were illegally dismissed, unpaid salaries and salary differentials, [68] we affirm the grant thereof as
computed by the Labor Arbiter.  Petitioners' evidence which consist of a mere tabulation[69] of the amount of
actual benefits paid and given to respondents is self-serving as it does not bear the signatures of the
employees to prove that they had actually received the amounts stated therein.

Next, we come to the legitimacy of the Labor Arbiter's authority to impose the penalty of double indemnity for
violations of the Minimum Wage Law.  Petitioners argue that the authority to issue compliance orders in
relation to underpayment of wages is vested exclusively on the Secretary of Labor or the Regional Director and
that the Labor Arbiter has no jurisdiction thereover.  They cite Section 12 of RA 6727,[70] as amended by RA
8188, which provides:

Sec. 12. Any person, corporation, trust, firm, partnership, association or entity which refuses or fails to pay
any of the prescribed increases or adjustments in the wage rates made in accordance with this Act shall be
punished by a fine [of] not less than Twenty-five thousand pesos (P25,000) nor more than One hundred
thousand pesos (P100,000) or imprisonment of not less than two (2) years nor more than four (4) years or
both such fine and imprisonment at the discretion of the court: Provided, That any person convicted under
this Act shall not be entitled to the benefits provided for under the Probation Law.

The employer concerned shall be ordered to pay an amount equivalent to double the unpaid benefits owing to
the employees: Provided, That payment of indemnity shall not absolve the employer from the criminal liability
under this Act.

If the violation is committed by a corporation, trust or firm, partnership, association or any other entity, the
penalty of imprisonment shall be imposed upon the entity's responsible officers including but not limited to,
the president, vice president, chief executive officer, general manager, managing director or partner.

Petitioners' contention is untenable.  First, there is no provision in RA 6727 or RA 8188 which precludes the
Labor Arbiter from imposing the penalty of double indemnity against employers.  Second, Article 217 of the
Labor Code gives the Labor Arbiter jurisdiction over cases of termination disputes and those cases
accompanied with a claim for reinstatement.  Thus, in Bay Haven, Inc. v. Abuan[71]the Court held that an
allegation of illegal dismissal deprives the Secretary of Labor of jurisdiction over claims to enforce compliance
with labor standards law.  This was also pronounced in People's Broadcasting Service (Bombo Radyo Phils.,
Inc.) v. Secretary of the Department of Labor and Employment,[72] wherein we stated that the Secretary of Labor
has no jurisdiction in cases where employer-employee relationship has been terminated.  We thus sustain the
Labor Arbiter's award of double indemnity.

We also sustain the award of attorney's fees since respondents were compelled to file a complaint for the
recovery of wages and were forced to litigate and incur expenses.[73]

The Labor Arbiter's grant of actual/compensatory, moral and exemplary damages in the amount of
P100,000.00 is, however, incorrect.  In order to recover actual or compensatory damages, it must be capable
of proof and must be necessarily proved with a reasonable degree of certainty. [74]  While moral damages is
given to a dismissed employee when the dismissal is attended by bad faith or fraud or constitutes an act
oppressive to labor, or is done in a manner contrary to good morals, good customs or public policy. 
Exemplary damages, on the other hand, is given if the dismissal is effected in a wanton, oppressive or
malevolent manner.[75]  Here, the Labor Arbiter erred in awarding the damages by lumping actual, moral and
exemplary damages.  Said damages rest on different jural foundations and, hence, must be independently
identified and justified.[76]  Also, there are no competent evidence of actual expenses incurred that would
justify the award of actual damages.  Lastly, respondents were terminated after being accused of the charge of
pilferage of the vessel's fuel oil after examination of the report made by the vessel's chief engineer which
showed a considerable amount of fuel lost.  Although the dismissal of Arguelles, Batayola, Fresnillo, Noble,
Dominico, Nilmao and Austral is illegal, based on the circumstances surrounding their dismissal, petitioners
could not have been motivated by bad faith in deciding to terminate their services.

Lastly, this Court exculpates petitioners Francisco and How from being jointly and severally liable with GASLI
for the illegal dismissal and payment of money claims of herein respondents.  In order to hold them liable, it
must first be shown by competent proof that they have acted with malice and bad faith in directing the
corporate affairs.[77]  For want of such proof, Francisco and How should not be held liable for the corporate
obligations of GASLI.

WHEREFORE, the Court of Appeals' Decision dated September 12, 2006 and the Resolution dated May 23,
2007 in CA-G.R. SP No. 82379 are ANNULLED and SET ASIDE.  Respondents Wilfredo Galvez and Cristito
Gruta are hereby DECLARED dismissed from employment for just cause while respondent Joel Sales was not
dismissed from employment.  Respondents Danilo Arguelles, Renato Batayola, Patricio Fresmillo, Jovy Noble,
Emilio Dominico, Benny Nilmao, and Jose Austral are DECLARED to have been illegally dismissed; hence,
petitioners are ordered to reinstate them to their former position or its equivalent without loss of seniority
rights and to pay them full backwages, inclusive of allowances and other benefits, computed from the time of
dismissal up to the time of actual reinstatement, as well as 13th month pay for the period of their illegal
dismissal.

Petitioner Grand Asian Shipping Lines, Inc. is also ordered to pay respondents Wilfredo Galvez, Danilo
Arguelles, Renato Batayola, Patricio Fresnillo, Jovy Noble, Emilio Dominico, Benny Nilmao and Jose Austral
unpaid salaries from February 16 to 29, 2000, as computed by the Labor Arbiter; and to pay respondents
Danilo Arguelles, Renato Batayola, Patricio Fresmillo, Jovy Noble, Emilio Dominico and Benny Nilmao salary
differentials plus double indemnity, as computed by the Labor Arbiter.  Ten percent (10%) of the monetary
award should be added as and by way of attorney's fees.  Interest at the rate of six percent (6%) per
annum shall be imposed on all monetary awards from date of finality of this Decision until full payment
pursuant to Nacar v. Gallery Frames.[78]

Petitioners Eduardo P. Francisco and William How are absolved from the liability adjudged against petitioner
Grand Asian Shipping Lines, Inc.

SO ORDERED.

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

6. GONZALO VS PCIB (x)


[ GR No. 220399, Aug 22, 2016 ]
ENRIQUE Y. SAGUN v. ANZ GLOBAL SERVICES & OPERATIONS  +
RESOLUTION

PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] are the Decision[2] dated May 25, 2015 and the
Resolution[3] dated August 27, 2015 of the Court of Appeals (CA) in CA-G.R. SP No. 127777, which affirmed
the Decision[4] dated July 31, 2012 and the Resolution[5] dated September 28, 2012 of the National Labor
Relations Commission RC) in NLRC LAC No. 07-001962-12, dismissing petitioner Enrique Y. Sagun's
(petitioner) complaint for illegal dismissal for lack of merit.

The Facts

Petitioner was employed at Hongkong and Shanghai Banking Corporation Electronic Data Processing
(Philippines), Inc. (HSBC-EDPI) when he applied online for the position of Payments and Cash Processing
Lead at respondent ANZ Global Services and Operations (Manila), Inc. (ANZ), a domestic corporation whose
businesses involve a full range of banking products and services.[6]

After passing the interview and online examination, ANZ, through its Senior Vice President for Operations,
Gay Cruzada (Cruzada), offered petitioner the position of Customer Service Officer, Payments and Cash
Resolution,[7] which the latter accepted on June 8, 2011.[8]

In the letter of confirmation of the offer[9] which constituted petitioner's employment agreement with ANZ, the
terms and conditions of his employment required, among others, a satisfactory result of his pre-employment
screening.[10] The pertinent portions of which read as follows:

13. Pre-employment screening & ongoing screening

In accordance with its legal and regulatory obligations, and in accordance with ANZ policy, you may be
required to undergo a police record check prior to commencing work with ANZ, or at other times during your
employment.

You may also be required to undergo other checks (e.g. bankruptcy checks, sanctions screening, reference
checks, etc.). ANZ may engage the services of an external provider to conduct these checks.

Your initial and ongoing employment is conditional on ANZ being satisfied that the results of:

 a police record check are compatible with the inherent requirements of your position; and
 any other required background or other checks are to the satisfaction of ANZ (keeping in mind
your position and ANZ's role as a financial institution).

ANZ may use any information you provide to conduct reference checks and any other background
checks.

Your employment is also conditional upon you holding all necessary visas and meeting all immigration
requirements necessary for you to work in Philippines in this position.

If, in the opinion of ANZ, any of your background checks, reference checks or visas are not
satisfactory, ANZ may choose not to commence your employment, or where you have already
started, to end your employment immediately, with no liability to pay compensation to you.
[11]
 (Emphases supplied)
In addition, the Schedules,[12] which likewise formed part of the employment agreement, provided that
petitioner was to be placed on a probationary status for a period of six (6) months [13] and that his appointment
would take effect from the date of reporting, which was to be not later than July 11, 2011. [14]

Accordingly, on June 11, 2011, petitioner tendered his resignation[15] at HSBC-EDPI and the acknowledged
copy thereof was transmitted to ANZ together with his other pre-employment documentary requirements. [16]
On July 11, 2011, petitioner was instructed to report to ANZ [17] and was handed a letter of retraction[18] signed
by ANZ's Human Resources Business Partner, Paula Alcaraz (Alcaraz), informing him that the job offer had
been withdrawn on the ground that the company found material inconsistencies in his declared information
and documents provided after conducting a background check with his previous employer, particularly at
Siemens.[19]

Asserting that his employment contract had already been perfected upon his acceptance of the offer on June
8, 2011, and as such, was already deemed an employee of ANZ who can only be dismissed for cause,
petitioner filed a complaint for illegal dismissal with money claims against ANZ, Cruzada, and Alcaraz
(respondents) before the NLRC, National Capital Region, docketed as NLRC NCR Case No. 08-11752-11.

For their part, respondents countered that the NLRC had no jurisdiction over the complaint as they have no
employer-employee relationship with petitioner. They contended that their offer was conditional and the
effectivity of petitioner's employment contract was subject to a term or period. [20] They claimed that petitioner
made material misrepresentations in his job application and interview that prompted them to withdraw the
offer. They pointed out that the discrepancies in his declarations, namely: (a) that he only held the position of
a Level 1 and not a Level 2 Technical Support Representative at Siemens; and (b) that he was terminated for
cause due to his absence without official leave (AWOL) and not because of his resignation, were not
satisfactorily explained despite the opportunity accorded to him. They added that petitioner likewise failed to
report for work on or before July 11, 2011; hence, his employment never took effect and no employer-
employee relationship was created. Thus, they asserted that petitioner was never dismissed, more so, illegally.
Finally, they denied his money claims for lack of basis and further averred that the impleaded officers cannot
be held personally liable under the circumstances.[21]

The LA Ruling

In a Decision[22] dated April 23, 2012, the Labor Arbiter (LA) dismissed the complaint, holding that there was
no perfected employment contract between petitioner and respondents since there was a valid cause for the
withdrawal of the offer that was made prior to the commencement of petitioner's service with the company.
The LA held that the material misrepresentation committed by petitioner was a reasonable ground to
withdraw the employment offer and as such, no employer-employee relationship was created between them. [23]

Aggrieved, petitioner appealed to the NLRC.[24]

The NLRC Ruling

In a Decision[25] dated July 31, 2012, the NLRC affirmed the findings of the LA, ruling that no employer-
employee relationship existed between petitioner and respondents. It held that petitioner's employment with
ANZ never took effect since its effectivity was dependent on his reporting for work on or before July 11, 2011,
which he admittedly failed to comply. The NLRC added that the withdrawal of job offer was valid and
reasonable, there being substantial evidence to show that petitioner committed misrepresentations in his job
application.[26]

Petitioner filed a motion for reconsideration,[27] which was, however, denied in a Resolution[28] dated September
28, 2012, prompting him to elevate his case to the CA via a petition for certiorari,[29] docketed as CA G.R. SP.
No. 127777.

The CA Ruling

In a Decision[30] dated May 25, 2015, the CA found no grave abuse of discretion to have been committed by
the NLRC in upholding the dismissal of the complaint. The CA distinguished between the perfection of an
employment contract and the commencement of the employer-employee relationship, citing the case
of Santiago v. CF Sharp Crew Management, Inc. (Santiago).[31] It held that the contract was perfected on June
8, 2011 when it was signed by the parties. However, it ruled that the employment contract did not commence
since respondents did not allow petitioner to begin work due to the misrepresentations he made in his
application form. The CA also pointed out that since the employment offer was conditioned on the satisfactory
completion of his background check, his failure to comply with the same rendered the withdrawal of the offer
justified. Hence, no employeremployee relationship was created between the parties.[32] Lastly, relying on
the Santiago case, it clarified that even if there was no employer-employee relationship, the NLRC still had
jurisdiction over the complaint since the LA's jurisdiction was not limited to claims arising from employer-
employee relationship.

Dissatisfied, petitioner moved for reconsideration,[33] but was denied in a Resolution[34] dated August 27, 2015;
hence, this petition.

The Issue Before the Court

The core issue for the Court's resolution is whether or not the CA erred in not finding grave abuse of
discretion on the part of the NLRC in holding that no employer-employee relationship existed between
petitioner and respondent.

The Court's Ruling

The petition lacks merit.

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to
give something or to render some service.[35] There is no contract unless the following essential requisites
concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of the contract;
and (c) cause of the obligation which is established.[36]

In general, contracts undergo three distinct stages. These are negotiation, perfection or birth, and
consummation. Negotiation begins from the time the prospective contracting parties manifest their interest in
the contract and ends at the moment of their agreement. Thereafter, perfection or birth of the contract takes
place when the parties agree upon the essential elements of the contract. Finally, consummation occurs when
the parties fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment
thereof.[37]

An employment contract, like any other contract, is perfected at the moment the parties come to agree upon
its terms and conditions, and thereafter, concur in the essential elements thereof. [38] In this relation, the
contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order or public policy. [39]

In this case, the Court agrees with the finding of the CA that there was already a perfected contract of
employment when petitioner signed ANZ's employment offer and agreed to the terms and conditions that were
embodied therein. Nonetheless, the offer of employment extended to petitioner contained several conditions
before he may be deemed an employee of ANZ. Among those conditions for employment was the "satisfactory
completion of any checks (e.g. background, bankruptcy, sanctions and reference checks) that may be required
by ANZ."[40]

Accordingly, petitioner's employment with ANZ depended on the outcome of his background check, which
partakes of the nature of a suspensive condition, and hence, renders the obligation of the would-be
employer, i.e., ANZ in this case, conditional. Article 1181 of the Civil Code provides:

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition.
In the realm of civil law, a condition is defined as "every future and uncertain event upon which an obligation
or provision is made to depend. It is a future and uncertain event upon which the acquisition or resolution of
rights is made to depend by those who execute the juridical act."[41] Jurisprudence states that when a contract
is subject to a suspensive condition, its effectivity shall take place only if and when the event which
constitutes the condition happens or is fulfilled.[42] A contract is one of the five (5) sources of obligations as
stated in the Civil Code.[43] An obligation is defined as the juridical necessity to give, to do or not to do.
[44]
 While a contract may be perfected in the manner of operation described above, the efficacy of the
obligations created thereby may be held in suspense pending the fulfillment of particular conditions agreed
upon. In other words, a perfected contract may exist, although the obligations arising therefrom if premised
upon a suspensive condition would yet to be put into effect.
Here, the subject employment contract required a satisfactory completion of petitioner's background check
before he may be deemed an employee of ANZ. Considering, however, that petitioner failed to explain the
discrepancies in his declared information and documents that were required from him relative to his work
experience at Siemens, namely: (a) that he was only a Level 1 and not a Level 2 Technical Support
Representative that conducts troubleshooting for both computer hardware and software problems; and (b)
that he was found to have been terminated for cause and not merely resigned from his post, that rendered his
background check unsatisfactory, ANZ's obligations as a would-be employer were held in suspense and thus,
had yet to acquire any obligatory force.[45] To reiterate, in a contract with a suspensive condition, if the
condition does not happen, the obligation does not come into effect. Thus, until and unless petitioner
complied with the satisfactory background check, there exists no obligation on the part of ANZ to recognize
and fully accord him the rights under the employment contract. In fact, records also show that petitioner
failed to report for work on or before July 11, 2011, which was also a suspensive condition mandated under
sub-paragraph 4 of Schedule 1 of the contract.

Consequently, no employer-employee relationship was said to have been created between petitioner and ANZ
under the circumstances, and the dismissal of the former's complaint for illegal termination from work, as
held by the NLRC, was correctly sustained by the CA.

WHEREFORE, the petition is DENIED. The Decision dated May 25, 2015 and the Resolution dated August
27, 2015 of the Court of Appeals in CA-G.R. SP No. 127777 are hereby AFFIRMED.

SO ORDERED.

Sereno. C. J., (Chairperson), Leonardo-De Castro, Bersamin, and Caguioa, JJ., concur.

[ G.R. No. 190755, November 24, 2010 ]


LAND BANK OF THE PHILIPPINES, PETITIONER, VS. ALFREDO ONG, RESPONDENT.
DECISION

VELASCO JR., J.:


This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No.
84445 entitled Alfredo Ong v. Land Bank of the Philippines, which affirmed the Decision of the Regional Trial
Court (RTC), Branch 17 in Tabaco City.

The Facts

On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi City in the
amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo trucks, and a
warehouse. Under the loan agreement, PhP 6 million of the loan would be short-term and would mature on
February 28, 1997, while the balance of PhP 10 million would be payable in seven (7) years. The Notice of
Loan Approval dated February 22, 1996 contained an acceleration clause wherein any default in payment of
amortizations or other charges would accelerate the maturity of the loan. [1]

Subsequently, however, the Spouses Sy found they could no longer pay their loan.  On December 9, 1996,
they sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, Evangeline's
mother, under a Deed of Sale with Assumption of Mortgage. The relevant portion of the document[2] is quoted
as follows:

WHEREAS, we are no longer in a position to settle our obligation with the bank;

NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00) Philippine Currency, we hereby these presents SELL, CEDE, TRANSFER and CONVEY, by way
of sale unto ANGELINA GLORIA ONG, also of legal age, Filipino citizen, married to Alfredo Ong, and also a
resident of Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned debt with the said LAND
BANK OF THE PHILIPPINES, and by reason hereof they can make the necessary representation with the bank
for the proper restructuring of the loan with the said bank in their favor;
That as soon as our obligation has been duly settled, the bank is authorized to release the mortgage in favor
of the vendees and for this purpose VENDEES can register this instrument with the Register of Deeds for the
issuance of the titles already in their names.

IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9 th day of December 1996 at Tabaco,
Albay, Philippines.

(signed) (signed)
EVANGELINE O. SY JOHNSON B. SY
Vendor Vendor

Evangeline's father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale and
assumption of mortgage.[3]  Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, told Alfredo and his
counsel Atty. Ireneo de Lumen that there was nothing wrong with the agreement with the Spouses Sy but
provided them with requirements for the assumption of mortgage. They were also told that Alfredo should pay
part of the principal which was computed at PhP 750,000 and to update due or accrued interests on the
promissory notes so that Atty. Hingco could easily approve the assumption of mortgage. Two weeks later,
Alfredo issued a check for PhP 750,000 and personally gave it to Atty. Hingco. A receipt was issued for his
payment. He also submitted the other documents required by Land Bank, such as financial statements for
1994 and 1995.  Atty. Hingco then informed Alfredo that the certificate of title of the Spouses Sy would be
transferred in his name but this never materialized. No notice of transfer was sent to him. [4]

Alfredo later found out that his application for assumption of mortgage was not approved by Land Bank. The
bank learned from its credit investigation report that the Ongs had a real estate mortgage in the amount of
PhP 18,300,000 with another bank that was past due. Alfredo claimed that this was fully paid later on.
Nonetheless, Land Bank foreclosed the mortgage of the Spouses Sy after several months. Alfredo only learned
of the foreclosure when he saw the subject mortgage properties included in a Notice of Foreclosure of
Mortgage and Auction Sale at the RTC in Tabaco, Albay. Alfredo's other counsel, Atty. Madrilejos,
subsequently talked to Land Bank's lawyer and was told that the PhP 750,000 he paid would be returned to
him.[5]

On December 12, 1997, Alfredo initiated an action for recovery of sum of money with damages against Land
Bank in Civil Case No. T-1941, as Alfredo's payment was not returned by Land Bank.  Alfredo maintained
that Land Bank's foreclosure without informing him of the denial of his assumption of the mortgage was done
in bad faith. He argued that he was lured into believing that his payment of PhP 750,000 would cause Land
Bank to approve his assumption of the loan of the Spouses Sy and the transfer of the mortgaged properties in
his and his wife's name.[6] He also claimed incurring expenses for attorney's fees of PhP 150,000, filing fee of
PhP 15,000, and PhP 250,000 in moral damages.[7]

Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager she had no authority to
approve loans and could not assure anybody that their assumption of mortgage would be approved. She
testified that the breakdown of Alfredo's payment was as follows:

PhP 101,409.59          applied to principal


       216,246.56          accrued interests receivable
       396,571.77          interests
         18,766.10            penalties
         16,805.98            accounts receivable
  ----------------
Total: 750,000.00

According to Atty. Hingco, the bank processes an assumption of mortgage as a new loan, since the new
borrower is considered a new client. They used character, capacity, capital, collateral, and conditions in
determining who can qualify to assume a loan.  Alfredo's proposal to assume the loan, she explained, was
referred to a separate office, the Lending Center. [8]

During cross-examination, Atty. Hingco testified that several months after Alfredo made the tender of
payment, she received word that the Lending Center rejected Alfredo's loan application. She stated that it was
the Lending Center and not her that should have informed Alfredo about the denial of his and his wife's
assumption of mortgage.  She added that although she told Alfredo that the agreement between the spouses
Sy and Alfredo was valid between them and that the bank would accept payments from him, Alfredo did not
pay any further amount so the foreclosure of the loan collaterals ensued. She admitted that Alfredo demanded
the return of the PhP 750,000 but said that there was no written demand before the case against the bank
was filed in court. She said that Alfredo had made the payment of PhP 750,000 even before he applied for the
assumption of mortgage and that the bank received the said amount because the subject account was past
due and demandable; and the Deed of Assumption of Mortgage was not used as the basis for the payment. [9]

The Ruling of the Trial Court

The RTC held that the contract approving the assumption of mortgage was not perfected as a result of the
credit investigation conducted on Alfredo. It noted that Alfredo was not even informed of the disapproval of
the assumption of mortgage but was just told that the accounts of the spouses Sy had matured and gone
unpaid. It ruled that under the principle of equity and justice, the bank should return the amount Alfredo
had paid with interest at 12% per annum computed from the filing of the complaint. The RTC further held
that Alfredo was entitled to attorney's fees and litigation expenses for being compelled to litigate. [10]

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, a decision is rendered, ordering defendant bank to pay plaintiff, Alfredo
Ong the amount of P750,000.00 with interest at 12% per annum computed from Dec. 12, 1997 and attorney's
fees and litigation expenses of P50,000.00.

Costs against defendant bank.

SO ORDERED.[11]

The Ruling of the Appellate Court

On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP 750,000 made by Ong
was one of the requirements for the approval of his proposal to assume the mortgage of the Sy spouses; (2)
erroneously ordering Land Bank to return the amount of PhP 750,000 to Ong on the ground of its failure to
effect novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as attorney's fees and litigation
expenses.

The CA affirmed the RTC Decision.[12] It held that Alfredo's recourse is not against the Sy spouses.  According
to the appellate court, the payment of PhP 750,000 was for the approval of his assumption of mortgage and
not for payment of arrears incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider
Alfredo a third person with no interest in the fulfillment of the obligation under Article 1236 of the Civil
Code. Although Land Bank was not bound by the Deed between Alfredo and the Spouses Sy, the appellate
court found that Alfredo and Land Bank's active preparations for Alfredo's assumption of mortgage essentially
novated the agreement.

On January 5, 2010, the CA denied Land Bank's motion for reconsideration for lack of merit.  Hence, Land
Bank appealed to us.

The Issues

Whether the Court of Appeals erred in holding that Art. 1236 of the Civil Code does not apply and in finding
that there is no novation.
II

Whether the Court of Appeals misconstrued the evidence and the law when it affirmed the trial court
decision's ordering Land Bank to pay Ong the amount of Php750,000.00 with interest at 12% annum.

III

Whether the Court of Appeals committed reversible error when it affirmed the award of Php50,000.00 to Ong
as attorney's fees and expenses of litigation.

The Ruling of this Court

We affirm with modification the appealed decision.

Recourse is against Land Bank

Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought
recourse against the Spouses Sy instead of Land Bank.  Art. 1236 provides:

The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor.

We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not
bound to accept Alfredo's payment, since as far as the former was concerned, he did not have an interest in
the payment of the loan of the Spouses Sy.  However, in the context of the second part of said paragraph,
Alfredo was not making payment to fulfill the obligation of the Spouses Sy. Alfredo made a conditional
payment so that the properties subject of the Deed of Sale with Assumption of Mortgage would be titled in his
name.  It is clear from the records that Land Bank required Alfredo to make payment before his assumption of
mortgage would be approved.  He was informed that the certificate of title would be transferred accordingly. 
He, thus, made payment not as a debtor but as a prospective mortgagor.  But the trial court stated:

[T]he contract was not perfected or consummated because of the adverse finding in the credit investigation
which led to the disapproval of the proposed assumption. There was no evidence presented that plaintiff was
informed of the disapproval. What he received was a letter dated May 22, 1997 informing him that the
account of spouses Sy had matured but there [were] no payments. This was sent even before the conduct of
the credit investigation on June 20, 1997 which led to the disapproval of the proposed assumption of the
loans of spouses Sy.[13]

Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the
Spouses Sy, since his interest hinged on Land Bank's approval of his application, which was denied. The
circumstances of the instant case show that the second paragraph of Art. 1236 does not apply.  As Alfredo
made the payment for his own interest and not on behalf of the Spouses Sy, recourse is not against the
latter.  And as Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy, what
he has paid.

Novation of the loan agreement

Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a
substitution of debtors was made without its consent; thus, it was not bound to recognize the substitution
under the rules on novation.
On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation[14] provides the
following discussion:

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation
is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An
extinctive novation results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or
personal). Under this mode, novation would have dual functions â"€ one to extinguish an existing obligation,
the other to substitute a new one in its place â"€ requiring a conflux of four essential requisites: (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. x x x

In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other. The test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. x x x (Emphasis supplied.)

Furthermore, Art. 1293 of the Civil Code states:

Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor.  Payment
by the new debtor gives him rights mentioned in articles 1236 and 1237.

We do not agree, then, with the CA in holding that there was a novation in the contract between the parties.
Not all the elements of novation were present.  Novation must be expressly consented to.  Moreover, the
conflicting intention and acts of the parties underscore the absence of any express disclosure or
circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.[15] Land Bank is thus correct when it argues that there was no novation in the following:

[W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge or
consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the amount of
P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and between Spouses
Sy and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on
December 9, 1996. And since the substitution of debtors was made without the consent of Land Bank - a
requirement which is indispensable in order to effect a novation of the obligation, it is therefore not bound to
recognize the substitution of debtors. Land Bank did not intervene in the contract between Spouses Sy and
Spouses Ong and did not expressly give its consent to this substitution.[16]

Unjust enrichment

Land Bank maintains that the trial court erroneously applied the principle of equity and justice in ordering it
to return the PhP 750,000 paid by Alfredo. Alfredo was allegedly in bad faith and in estoppel. Land Bank
contends that it enjoyed the presumption of regularity and was in good faith when it accepted Alfredo's tender
of PhP 750,000. It reasons that it did not unduly enrich itself at Alfredo's expense during the foreclosure of
the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sy's
outstanding loan obligation. Alfredo's recourse then, according to Land Bank, is to have his payment
reimbursed by the Spouses Sy.

We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of unjust
enrichment. Land Bank is correct in arguing that it has no obligation as creditor to recognize Alfredo as a
person with interest in the fulfillment of the obligation. But while Land Bank is not bound to accept the
substitution of debtors in the subject real estate mortgage, it is estopped by its action of accepting Alfredo's
payment from arguing that it does not have to recognize Alfredo as the new debtor. The elements of estoppel
are:
First, the actor who usually must have knowledge, notice or suspicion of the true facts, communicates
something to another in a misleading way, either by words, conduct or silence; second, the other in fact relies,
and relies reasonably or justifiably, upon that communication; third, the other would be harmed materially if
the actor is later permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor
knows, expects or foresees that the other would act upon the information given or that a reasonable person in
the actor's position would expect or foresee such action.[17]

By accepting Alfredo's payment and keeping silent on the status of Alfredo's application, Land Bank misled
Alfredo to believe that he had for all intents and purposes stepped into the shoes of the Spouses Sy.

The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the bank's Lending Center
that should have notified Alfredo of his assumption of mortgage disapproval is unavailing. The Lending
Center's lack of notice of disapproval, the Tabaco Branch's silence on the disapproval, and the bank's
subsequent actions show a failure of the bank as a whole, first, to notify Alfredo that he is not a recognized
debtor in the eyes of the bank; and second, to apprise him of how and when he could collect on the payment
that the bank no longer had a right to keep.

We turn then on the principle upon which Land Bank must return Alfredo's payment. Unjust enrichment
exists "when a person unjustly retains a benefit to the loss of another, or when a person retains money or
property of another against the fundamental principles of justice, equity and good conscience." [18] There is
unjust enrichment under Art. 22 of the Civil Code when (1) a person is unjustly benefited, and (2) such
benefit is derived at the expense of or with damages to another.[19]

Additionally, unjust enrichment has been applied to actions called accion in rem verso. In order that
the accion in rem verso may prosper, the following conditions must concur: (1) that the defendant has been
enriched; (2) that the plaintiff has suffered a loss; (3) that the enrichment of the defendant is without just or
legal ground; and (4) that the plaintiff has no other action based on contract, quasi-contract, crime, or quasi-
delict.[20] The principle of unjust enrichment essentially contemplates payment when there is no duty to pay,
and the person who receives the payment has no right to receive it.[21]

The principle applies to the parties in the instant case, as, Alfredo, having been deemed disqualified from
assuming the loan, had no duty to pay petitioner bank and the latter had no right to receive it.

Moreover, the Civil Code likewise requires under Art. 19 that "[e]very person must, in the exercise of his rights
and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith."  Land Bank, however, did not even bother to inform Alfredo that it was no longer approving his
assumption of the Spouses Sy's mortgage. Yet it acknowledged his interest in the loan when the branch head
of the bank wrote to tell him that his daughter's loan had not been paid. [22] Land Bank made Alfredo believe
that with the payment of PhP 750,000, he would be able to assume the mortgage of the Spouses Sy. The act
of receiving payment without returning it when demanded is contrary to the adage of giving someone what is
due to him. The outcome of the application would have been different had Land Bank first conducted the
credit investigation before accepting Alfredo's payment. He would have been notified that his assumption of
mortgage had been disapproved; and he would not have taken the futile action of paying PhP 750,000. The
procedure Land Bank took in acting on Alfredo's application cannot be said to have been fair and proper.

As to the claim that the trial court erred in applying equity to Alfredo's case, we hold that Alfredo had no other
remedy to recover from Land Bank and the lower court properly exercised its equity jurisdiction in resolving
the collection suit. As we have held in one case:

Equity, as the complement of legal jurisdiction, seeks to reach and complete justice where courts of law,
through the inflexibility of their rules and want of power to adapt their judgments to the special
circumstances of cases, are incompetent to do so.  Equity regards the spirit and not the letter, the intent and
not the form, the substance rather than the circumstance, as it is variously expressed by different courts. [23]

Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in good faith
when it accepted Alfredo's tender of PhP 750,000.
The defense of good faith fails to convince given Land Bank's actions.  Alfredo was not treated as a mere
prospective borrower.  After he had paid PhP 750,000, he was made to sign bank documents including a
promissory note and real estate mortgage. He was assured by Atty. Hingco that the titles to the properties
covered by the Spouses Sy's real estate mortgage would be transferred in his name, and upon payment of the
PhP 750,000, the account would be considered current and renewed in his name.[24]

Land Bank posits as a defense that it did not unduly enrich itself at Alfredo's expense during the foreclosure
of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sy's
outstanding loan obligation. It is observed that this is the first time Land Bank is revealing this defense.
However, issues, arguments, theories, and causes not raised below may no longer be posed on appeal. [25] Land
Bank's contention, thus, cannot be entertained at this point.

Land Bank further questions the lower court's decision on the basis of the inconsistencies made by Alfredo on
the witness stand. It argues that Alfredo was not a credible witness and his testimony failed to overcome the
presumption of regularity in the performance of regular duties on the part of Land Bank.

This claim, however, touches on factual findings by the trial court, and we defer to these findings of the trial
court as sustained by the appellate court.  These are generally binding on us.  While there are exceptions to
this rule, Land Bank has not satisfactorily shown that any of them is applicable to this issue. [26] Hence, the
rule that the trial court is in a unique position to observe the demeanor of witnesses should be applied and
respected[27] in the instant case.

In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it had already foreclosed
on the mortgaged lands.

Interest and attorney's fees

As to the applicable interest rate, we reiterate the guidelines found in Eastern Shipping Lines, Inc. v. Court of
Appeals:[28]

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. 
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty.  Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.

No evidence was presented by Alfredo that he had sent a written demand to Land Bank before he filed the
collection suit.  Only the verbal agreement between the lawyers of the parties on the return of the payment
was mentioned.[29] Consequently, the obligation of Land Bank to return the payment made by Alfredo upon
the former's denial of the latter's application for assumption of mortgage must be reckoned from the date of
judicial demand on December 12, 1997, as correctly determined by the trial court and affirmed by the
appellate court.
The next question is the propriety of the imposition of interest and the proper imposable rate of applicable
interest.  The RTC granted the rate of 12% per annum which was affirmed by the CA.  From the above-quoted
guidelines, however, the proper imposable interest rate is 6% per annum pursuant to Art. 2209 of the Civil
Code.  Sunga-Chan v. Court of Appeals is illuminating in this regard:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB)
Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of
money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest.  Art. 2209 pertinently provides:

Art. 2209.  If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

The term "forbearance," within the context of usury law, has been described as a contractual obligation of a
lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the
loan or debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable
rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance
of money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or
credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves
the payment of indemnities in the concept of damage arising from the breach or a delay in the
performance of obligations in general," with the application of both rates reckoned "from the time the
complaint was filed until the [adjudged] amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition "that the courts are vested
with discretion, depending on the equities of each case, on the award of interest." [30]  (Emphasis supplied.)

Based on our ruling above, forbearance of money refers to the contractual obligation of the lender or creditor
to desist for a fixed period from requiring the borrower or debtor to repay the loan or debt then due and for
which 12% per annum is imposed as interest in the absence of a stipulated rate.  In the instant case,
Alfredo's conditional payment to Land Bank does not constitute forbearance of money, since there was no
agreement or obligation for Alfredo to pay Land Bank the amount of PhP 750,000, and the obligation of Land
Bank to return what Alfredo has conditionally paid is still in dispute and has not yet been determined. Thus,
it cannot be said that Land Bank's alleged obligation has become a forbearance of money.

On the award of attorney's fees, attorney's fees and expenses of litigation were awarded because Alfredo was
compelled to litigate due to the unjust refusal of Land Bank to refund the amount he paid. There are
instances when it is just and equitable to award attorney's fees and expenses of litigation. [31]  Art. 2208 of the
Civil Code pertinently states:

In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be
recovered, except:

xxxx

(2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest.

Given that Alfredo was indeed compelled to litigate against Land Bank and incur expenses to protect his
interest, we find that the award falls under the exception above and is, thus, proper given the circumstances.

On a final note. The instant case would not have been litigated had Land Bank been more circumspect in
dealing with Alfredo. The bank chose to accept payment from Alfredo even before a credit investigation was
underway, a procedure worsened by the failure to even inform him of his credit standing's impact on his
assumption of mortgage.  It was, therefore, negligent to a certain degree in handling the transaction with
Alfredo.  It should be remembered that the business of a bank is affected with public interest and it should
observe a higher standard of diligence when dealing with the public.[32]

WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No. 84445
is AFFIRMED with MODIFICATION in that the amount of PhP 750,000 will earn interest at 6% per annum
reckoned from December 12, 1997, and the total aggregate monetary awards will in turn earn 12% per
annum from the finality of this Decision until fully paid.

SO ORDERED.

Corona, C.J., (Chairperson), Leonardo-De Castro, Peralta, * and Perez, JJ., concur,

[ G.R. No. 169144, January 26, 2011 ]


IN RE: IN THE MATTER OF THE PETITION TO APPROVE THE WILL OF RUPERTA PALAGANAS WITH
PRAYER FOR THE APPOINTMENT OF SPECIAL ADMINISTRATOR, MANUEL MIGUEL PALAGANAS AND
BENJAMIN GREGORIO PALAGANAS, PETITIONERS, VS. ERNESTO PALAGANAS, RESPONDENT.
DECISION

ABAD, J.:
This case is about the probate before Philippine court of a will executed abroad by a foreigner although it has
not been probated in its place of execution.

The Facts and the Case

On November 8, 2001 Ruperta C. Palaganas (Ruperta), a Filipino who became a naturalized United States
(U.S.) citizen, died single and childless.  In the last will and testament she executed in California, she
designated her brother, Sergio C. Palaganas (Sergio), as the executor of her will for she had left properties in
the Philippines and in the U.S.

On May 19, 2003 respondent Ernesto C. Palaganas (Ernesto), another  brother of Ruperta, filed with the
Regional Trial Court (RTC) of Malolos, Bulacan, a petition for the probate of Ruperta's will and for his
appointment as special administrator of her estate.[1]  On October 15, 2003, however, petitioners Manuel
Miguel Palaganas (Manuel) and Benjamin Gregorio Palaganas (Benjamin), nephews of Ruperta, opposed the
petition on the ground that Ruperta's will should not be probated in the Philippines but in the U.S. where she
executed it.  Manuel and Benjamin added that, assuming Ruperta's will could be probated in the Philippines,
it is invalid nonetheless for having been executed under duress and without the testator's full understanding
of the consequences of such act.  Ernesto, they claimed, is also not qualified to act as administrator of the
estate.

Meantime, since Ruperta's foreign-based siblings, Gloria Villaluz and Sergio, were on separate occasions in
the Philippines for a short visit, respondent Ernesto filed a motion with the RTC for leave to take their
deposition, which it granted. On April, 13, 2004 the RTC directed the parties to submit their memorandum on
the issue of whether or not Ruperta's U.S. will may be probated in and allowed by a court in the Philippines.

On June 17, 2004 the RTC issued an order:[2] (a) admitting to probate Ruperta's last will; (b) appointing
respondent Ernesto as special administrator at the request of Sergio, the U.S.-based executor designated in
the will; and (c) issuing the Letters of Special Administration to Ernesto.

Aggrieved by the RTC's order, petitioner nephews Manuel and Benjamin appealed to the Court of Appeals
(CA),[3] arguing that an unprobated will executed by an American citizen in the U.S. cannot be probated for
the first time in the Philippines.

On July 29, 2005 the CA rendered a decision,[4] affirming the assailed order of the RTC,[5] holding that the RTC
properly allowed the probate of the will, subject to respondent Ernesto's submission of the authenticated
copies of the documents specified in the order and his posting of required bond.  The CA pointed out that
Section 2, Rule 76 of the Rules of Court does not require prior probate and allowance of the will in the
country of its execution, before it can be probated in the Philippines.  The present case, said the CA, is
different from reprobate, which refers to a will already probated and allowed abroad.  Reprobate is governed
by different rules or procedures.  Unsatisfied with the decision, Manuel and Benjamin came to this Court.

The Issue Presented

The key issue presented in this case is whether or not a will executed by a foreigner abroad may be probated
in the Philippines although it has not been previously probated and allowed in the country where it was
executed.

The Court's Ruling

Petitioners Manuel and Benjamin maintain that wills executed by foreigners abroad must first be probated
and allowed in the country of its execution before it can be probated here.  This, they claim, ensures prior
compliance with the legal formalities of the country of its execution.  They insist that local courts can only
allow probate of such wills if the proponent proves that: (a) the testator has been admitted for probate in such
foreign country, (b) the will has been admitted to probate there under its laws, (c) the probate court has
jurisdiction over the proceedings, (d) the law on probate procedure in that foreign country and proof of
compliance with the same, and (e) the legal requirements for the valid execution of a will.

But our laws do not prohibit the probate of wills executed by foreigners abroad although the same have not as
yet been probated and allowed in the countries of their execution. A foreign will can be given legal effects in
our jurisdiction.  Article 816 of the Civil Code states that the will of an alien who is abroad produces effect in
the Philippines if made in accordance with the formalities prescribed by the law of the place where he resides,
or according to the formalities observed in his country.[6]

In this connection, Section 1, Rule 73 of the 1997 Rules of Civil Procedure provides that if the decedent is an
inhabitant of a foreign country, the RTC of the province where he has an estate may take cognizance of the
settlement of such estate.  Sections 1 and 2 of Rule 76 further state that the executor, devisee, or legatee
named in the will, or any other person interested in the estate, may, at any time after the death of the
testator, petition the court having jurisdiction to have the will allowed, whether the same be in his possession
or not, or is lost or destroyed.

Our rules require merely that the petition for the allowance of a will must show, so far as known to the
petitioner: (a)the jurisdictional facts; (b) the names, ages, and residences of the heirs, legatees, and devisees of
the testator or decedent; (c) the probable value and character of the property of the estate; (d) the name of the
person for whom letters are prayed; and (e) if the will has not been delivered to the court, the name of the
person having custody of it.  Jurisdictional facts refer to the fact of death of the decedent, his residence at the
time of his death in the province where the probate court is sitting, or if he is an inhabitant of a foreign
country, the estate he left in such province.[7]  The rules do not require proof that the foreign will has already
been allowed and probated in the country of its execution.

In insisting that Ruperta's will should have been first probated and allowed by the court of California,
petitioners Manuel and Benjamin obviously have in mind the procedure for the reprobate of will before
admitting it here.  But, reprobate or re-authentication of a will already probated and allowed in a foreign
country is different from that probate where the will is presented for the first time before a competent court. 
Reprobate is specifically governed by Rule 77 of the Rules of Court.  Contrary to petitioners' stance, since this
latter rule applies only to reprobate of a will, it cannot be made to apply to the present case. In reprobate, the
local court acknowledges as binding the findings of the foreign probate court provided its jurisdiction over the
matter can be established.

Besides, petitioners' stand is fraught with impractically.  If the instituted heirs do not have the means to go
abroad for the probate of the will, it is as good as depriving them outright of their inheritance, since our law
requires that no will shall pass either real or personal property unless the will has been proved and allowed
by the proper court.[8]

Notably, the assailed RTC order of June 17, 2004 is nothing more than an initial ruling that the court can
take cognizance of the petition for probate of Ruperta's will and that, in the meantime, it was designating
Ernesto as special administrator of the estate.  The parties have yet to present evidence of the due execution
of the will, i.e. the testator's state of mind at the time of the execution and compliance with the formalities
required of wills by the laws of California. This explains the trial court's directive for Ernesto to submit the
duly authenticated copy of Ruperta's will and the certified copies of the Laws of Succession and Probate of
Will of California.

WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Appeals decision in CA-G.R. CV


83564 dated July 29, 2005.

SO ORDERED.

Carpio, (Chairperson), Nachura, Mendoza, and Sereno,* JJ., concur.

[ GR No. 187769, Jun 04, 2014 ]


ALVIN PATRIMONIO v. NAPOLEON GUTIERREZ +
DECISION

BRION, J.:
Assailed in this petition for review on certiorari[1] under Rule 45 of the Revised Rules of Court is the
decision[2] dated September 24, 2008 and the resolution[3] dated April 30, 2009 of the Court of Appeals (CA) in
CA-G.R. CV No. 82301. The appellate court affirmed the decision of the Regional Trial Court (RTC) of Quezon
City, Branch 77, dismissing the complaint for declaration  of nullity of loan filed by petitioner Alvin
Patrimonio and ordering him to pay respondent Octavio 1arasigan III (Marasigan) the sum of P200,000.00.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture under the
name of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-concerts and shows
related to basketball. Petitioner was already then a decorated professional basketball player while Gutierrez
was a well-known sports columnist.

In the course of their business, the petitioner pre-signed several checks to answer for the expenses of Slam
Dunk. Although signed, these checks had no payee's name, date or amount. The blank checks were entrusted
to Gutierrez with the specific instruction not to fill them out without previous notification to and approval by
the petitioner. According to petitioner, the arrangement was made so that he could verify the validity of the
payment and make the proper arrangements to fund the account.

In the middle of 1993, without the petitioner's knowledge and consent, Gutierrez went to Marasigan (the
petitioner's former teammate), to secure a loan in the amount of P200,000.00 on the excuse that the
petitioner needed the money for the construction of his house. In addition to the payment of the principal,
Gutierrez assured Marasigan that he would be paid an interest of 5% per month from March to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez,
Marasigan acceded to Gutierrez' request and gave him P200,000.00 sometime in February 1994. Gutierrez
simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank,
Greenhills Branch, Check No. 21001764 with the blank portions filled out with the words "Cash" "Two
Hundred Thousand Pesos Only", and the amount of "P200,000.00". The upper right portion of the check
corresponding to the date was also filled out with the words "May 23, 1994" but the petitioner contended that
the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT
CLOSED."  It was later revealed that petitioner's account with the bank had been closed since May 28, 1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the
petitioner asking for the payment of P200,000.00, but his demands likewise went unheeded. Consequently,
he filed a criminal case for violation of B.P. 22 against the petitioner, docketed as Criminal Case No. 42816.
On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for Declaration
of Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He completely
denied authorizing the loan or the check's negotiation, and asserted that he was not privy to the parties' loan
agreement.

Only Marasigan filed his answer to the complaint. In the RTC's order dated December 22, 1997, Gutierrez was
declared in default.

The Ruling of the RTC

The RTC ruled on February 3, 2003 in favor of Marasigan.[4]  It found that the petitioner, in issuing the pre-
signed blank checks, had the intention of issuing a negotiable instrument, albeit with specific instructions to
Gutierrez not to negotiate or issue the check without his approval. While under Section 14 of the Negotiable
Instruments Law Gutierrez had the prima facie authority to complete the checks by filling up the blanks
therein, the RTC ruled that he deliberately violated petitioner's specific instructions and took advantage of the
trust reposed in him by the latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the petitioner's
complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the
check with a right to claim reimbursement from Gutierrez.

The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a holder in due
course. He contended that when Marasigan received the check, he knew that the same was without a date,
and hence, incomplete. He also alleged that the loan was actually between Marasigan and Gutierrez with his
check being used only as a security.

The Ruling of the CA

On September 24, 2008, the CA affirmed the RTC ruling, although premised on different factual findings.
After careful analysis, the CA agreed with the petitioner that Marasigan is not a holder in due course as he
did not receive the check in good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the
petitioner's authority. It held that the loan may not be nullified since it is grounded on an obligation arising
from law and ruled that the petitioner is still liable to pay Marasigan the sum of P200,000.00.

After the CA denied the subsequent motion for reconsideration that followed, the petitioner filed the present
petition for review on certiorari under Rule 45 of the Revised Rules of Court.

The Petition

The petitioner argues that: (1) there was no loan between him and  Marasigan since he never authorized the
borrowing of money nor the check's negotiation to the latter; (2) under Article 1878 of the Civil Code, a special
power of attorney is necessary for an individual to make a loan or borrow money in behalf of another; (3) the
loan transaction was between Gutierrez and Marasigan, with his check being used only as a security; (4) the
check had not been completely and strictly filled out in accordance with his authority since the condition that
the subject check can only be used provided there is prior approval from him, was not complied with; (5) even
if the check was strictly filled up as instructed by the petitioner, Marasigan is still not entitled to claim the
check's value as he was not a holder in due course; and (6) by reason of the bad faith in the dealings between
the respondents, he is entitled to claim for damages.

The Issues

Reduced to its basics, the case presents to us the following issues:


1. Whether the contract of loan in the amount of P200,000.00 granted by respondent Marasigan to
petitioner, through respondent Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the P200,000.00 loan;

3. Whether respondent Gutierrez has completely filled out the subject check strictly under the authority
given by the petitioner; and

4. Whether Marasigan is a holder in due course.

The Court's Ruling

The petition is impressed with merit.

We note at the outset that the issues raised in this petition are essentially factual in nature. The main point of
inquiry of whether the contract of loan may be nullified, hinges on the very existence of the contract of loan a
question that, as presented, is essentially, one of fact. Whether the petitioner authorized the borrowing;
whether Gutierrez completely filled out the subject check strictly under the petitioner's authority; and
whether Marasigan is a holder in due course are also questions of fact, that, as a general rule, are beyond the
scope of a Rule 45 petition.

The rule that questions of fact are not the proper subject of an appeal by certiorari, as a petition for review
under Rule 45 is limited only to questions of law, is not an absolute rule that admits of no exceptions. One
notable exception is when the findings of fact of both the trial court and the CA are conflicting, making their
review necessary.[5] In the present case, the tribunals below arrived at two conflicting factual findings, albeit
with the same conclusion, i.e., dismissal of the complaint for nullity of the loan. Accordingly, we will examine
the parties' evidence presented.

I. Liability Under the Contract of Loan

The petitioner seeks to nullify the contract of loan on the ground that he never authorized the borrowing of
money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly requires a written authority
when the loan is contracted through an agent. The petitioner contends that absent such authority in writing,
he should not be held liable for the face value of the check because he was not a party or privy to the
agreement.

Contracts of Agency May be Oral Unless


The Law Requires a Specific Form

Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds himself to
render some service or to do something in representation or on behalf of another, with the consent or
authority of the latter." Agency may be express, or implied from the acts of the principal, from his silence or
lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf
without authority.

As a general rule, a contract of agency may be oral.[6]  However, it must be written when the law requires a
specific form, for example, in a sale of a piece of land or any interest therein through an agent.

Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an agent can
loan or borrow money in behalf of the principal, to wit:
Art. 1878. Special powers of attorney are necessary in the following cases:

xxxx

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the
things which are under administration. (emphasis supplied)

Article 1878 does not state that the authority be in writing. As long as the mandate is express, such authority
may be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al.,[7] that the requirement
under Article 1878 of the Civil Code refers to the nature of the authorization and not to its form. Be that as it
may, the authority must be duly established by competent and convincing evidence other than the self
serving assertion of the party claiming that such authority was verbally given, thus:

The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special
authority in Rule 138 of the Rules of Court refer to the nature of the authorization and not its
form. The requirements are met if there is a clear mandate from the principal specifically authorizing the
performance of the act. As early as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated that such
a mandate may be either oral or written, the one vital thing being that it shall be express. And more
recently, We stated that, if the special authority is not written, then it must be duly established by evidence:

x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And
while the same does not state that the special authority be in writing the Court has every reason to expect
that, if not in writing, the same be duly established by evidence other than the self-serving assertion of
counsel himself that such authority was verbally given him. (Home Insurance Company vs. United States
lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225). (emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf


of the Petitioner Should be Nullified for Being Void;
Petitioner is Not Bound by the Contract of Loan.

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf of the
petitioner. Records do not show that the petitioner executed any special power of attorney (SPA) in favor of
Gutierrez. In fact, the petitioner's testimony confirmed that he never authorized Gutierrez (or anyone for that
matter), whether verbally or in writing, to borrow money in his behalf, nor was he aware of any such
transaction:

ALVIN PATRIMONIO (witness)

Did you give Nap Gutierrez any Special Power of Attorney in writing authorizing
ATTY. DE VERA:
him to borrow using your money?

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105) [8]

xxxx
Marasigan however submits that the petitioner's acts of pre-signing the blank checks and releasing them to
Gutierrez suffice to establish that the petitioner had authorized Gutierrez to fill them out and contract the
loan in his behalf.

Marasigan's submission fails to persuade us.

In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf of the
petitioner. As held in Yasuma v. Heirs of De Villa,[9] involving a loan contracted by de Villa secured by real
estate mortgages in the name of East Cordillera Mining Corporation, in the absence of an SPA conferring
authority on de Villa, there is no basis to hold the corporation liable, to wit:
The power to borrow money is one of those cases where corporate officers as agents of the corporation need a
special power of attorney. In the case at bar, no special power of attorney conferring authority on de Villa
was ever presented. x x x There was no showing that respondent corporation ever authorized de Villa to
obtain the loans on its behalf.

xxxx

Therefore, on the first issue, the loan was personal to de Villa. There was no basis to hold the
corporation liable since there was no authority, express, implied or apparent, given to de Villa to
borrow money from petitioner. Neither was there any subsequent ratification of his act.

xxxx

The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after his death).
(citations omitted; emphasis supplied).

This principle was also reiterated in the case of Gozun v. Mercado,[10] where this court held:

Petitioner submits that his following testimony suffices to establish that respondent had authorized Lilian to
obtain a loan from him.

xxxx

Petitioner's testimony failed to categorically state, however, whether the loan was made on behalf of
respondent or of his wife. While petitioner claims that Lilian was authorized by respondent, the statement of
account marked as Exhibit "A" states that the amount was received by Lilian "in behalf of Mrs. Annie
Mercado.

It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she was
acting for and in behalf of respondent. She thus bound herself in her personal capacity and not as an
agent of respondent or anyone for that matter.

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face purport to be made, signed and sealed in the name of
the principal, otherwise, it will bind the agent only. It is not enough merely that the agent was in fact
authorized to make the mortgage, if he has not acted in the name of the principal. x x x (emphasis supplied).

In the absence of any showing of any agency relations or special authority to act for and in behalf of the
petitioner, the loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the petitioner is
not bound by the parties' loan agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally sufficient
because the authority to enter into a loan can never be presumed. The contract of agency and the special
fiduciary relationship inherent in this contract must exist as a matter of fact. The person alleging it has the
burden of proof to show, not only the fact of agency, but also its nature and extent. [11] As we held in People v.
Yabut:[12]

Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in Caloocan
City cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of the checks to the
complainant Alicia P. Andan at Caloocan City to fix the venue there. He did not take delivery of the checks as
holder, i.e., as "payee" or "indorsee." And there appears to be no contract of agency between Yambao and
Andan so as to bind the latter for the acts of the former. Alicia P. Andan declared in that sworn testimony
before the investigating fiscal that Yambao is but her "messenger" or "part-time employee." There was no
special fiduciary relationship that permeated their dealings. For a contract of agency to exist, the
consent of both parties is essential, the principal consents that the other party, the agent, shall act on
his behalf, and the agent consents so to act. It must exist as a fact. The law makes no presumption
thereof. The person alleging it has the burden of proof to show, not only the fact of its existence, but
also its nature and extent. This is more imperative when it is considered that the transaction dealt
with involves checks, which are not legal tender, and the creditor may validly refuse the same as
payment of obligation. (at p. 630). (emphasis supplied)

The records show that Marasigan merely relied on the words of Gutierrez without securing a copy of the SPA
in favor of the latter and without verifying from the petitioner whether he had authorized the borrowing of
money or release of the check. He was thus bound by the risk accompanying his trust on the mere
assurances of Gutierrez.

No Contract of Loan Was Perfected Between


Marasigan And Petitioner, as The Latter's
Consent Was Not Obtained.

Another significant point that the lower courts failed to consider is that a contract of loan, like any other
contract, is subject to the rules governing the requisites and validity of contracts in general. [13] Article 1318 of
the Civil Code[14] enumerates the essential requisites for a valid contract, namely:

1. consent of the contracting parties;


2. object certain which is the subject matter of the contract; and
3. cause of the obligation which is established.
In this case, the petitioner denied liability on the ground that the contract lacked the essential element of
consent. We agree with the petitioner. As we explained above, Gutierrez did not have the petitioner's
written/verbal authority to enter into a contract of loan. While there may be a meeting of the minds between
Gutierrez and Marasigan, such agreement cannot bind the petitioner whose consent was not obtained and
who was not privy to the loan agreement. Hence, only Gutierrez is bound by the contract of loan.

True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the hands of
Marasigan. This act, however, does not constitute sufficient authority to borrow money in his behalf and
neither should it be construed as petitioner's grant of consent to the parties' loan agreement. Without any
evidence to prove Gutierrez' authority, the petitioner's signature in the check cannot be taken, even remotely,
as sufficient authorization, much less, consent to the contract of loan. Without the consent given by one party
in a purported contract, such contract could not have been perfected; there simply was no contract to speak
of.[15]

With the loan issue out of the way, we now proceed to determine whether the petitioner can be made liable
under the check he signed.

II.  Liability Under the Instrument

The answer is supplied by the applicable statutory provision found in

Section 14 of the Negotiable Instruments Law (NIL) which states:

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person
in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any
amount. In order, however, that any such instrument when completed may be enforced against any person
who became a party thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time. But if any such instrument, after completion, is negotiated
to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority given and within a reasonable time.

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer
delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable
instrument, that person is deemed to have prima facieauthority to fill it up. It merely requires that the
instrument be in the possession of a person other than the drawer or maker and from such possession,
together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill
up the blanks.[16]

In order however that one who is not a holder in due course can enforce the instrument against a party prior
to the instrument's completion, two requisites must exist: (1) that the blank must be filled strictly in
accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was proven
that the instrument had not been filled up strictly in accordance with the authority given and within a
reasonable time, the maker can set this up as a personal defense and avoid liability. However, if the holder is
a holder in due course, there is a conclusive presumption that authority to fill it up had been given and that
the same was not in excess of authority.[17]

In the present case, the petitioner contends that there is no legal basis to hold him liable both under the
contract and loan and under the check because: first, the subject check was not completely filled out strictly
under the authority he has given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

The Negotiable Instruments Law (NIL) defines a holder in due course, thus:

Sec. 52 A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. (emphasis supplied)

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and
for value." It also provides in Section 52(d) that in order that one may be a holder in due course, it is
necessary that at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which could be set
up against a prior holder of the instrument.[18] It means that he does not have any knowledge of fact which
would render it dishonest for him to take a negotiable paper. The absence of the defense, when the
instrument was taken, is the essential element of good faith.[19]

As held in De Ocampo v. Gatchalian:[20]

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant
had notice that there was something wrong about his assignor's acquisition of title, although he did
not have notice of the particular wrong that was committed.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with
fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all
that is required is knowledge of such facts that his action in taking the note amounted bad faith.

The term 'bad faith' does not necessarily involve furtive motives, but means bad faith in a commercial sense.
The manner in which the defendants conducted their Liberty Loan department provided an easy way for
thieves to dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not
of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust
the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately
to obvious facts. (emphasis supplied).

In the present case, Marasigan's knowledge that the petitioner is not a party or a privy to the contract of loan,
and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad faith. The
following exchange is significant on this point:

WITNESS: AMBET NABUS

Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?
Since I celebrated my birthday in that place where Nap and I live together with the other crew,
there were several visitors that included Danny Espiritu. So a week after my birthday, Bong
A: Marasigan called me up again and he was fuming mad. Nagmumura na siya. Hinahanap niya si…
hinahanap niya si Nap, dahil pinagtataguan na siya at sinabi na niya na kailangan I-settle na niya
yung utang ni Nap, dahil…
xxxx
Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang tsekeng
WITNESS:
tumalbog… (He told me that we have to fix it up before it…) mauwi pa kung saan…
xxxx
Q: What was your reply, if any?
I actually asked him. Kanino ba ang tseke na sinasabi mo? (Whose check is it that you are
A:
referring to or talking about?)
Q: What was his answer?
A: It was Alvin's check.
Q: What was your reply, if any?
I told him do you know that it is not really Alvin who borrowed money from you or what you
A:
want to appear…
xxxx
Q: What was his reply?
Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito. (T.S.N.,
A:
Ambet Nabus, July 27, 2000; pp.65-71; emphasis supplied)[21]

Since he knew that the underlying obligation was not actually for the petitioner, the rule that a possessor of
the instrument is prima facie a holder in due course is inapplicable. As correctly noted by the CA, his inaction
and failure to verify, despite knowledge of that the petitioner was not a party to the loan, may be construed as
gross negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally
barred from recovery. The NIL does not provide that a holder who is not a holder in due course may not in any
case recover on the instrument.[22] The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. [23] Among such defenses is the filling
up blank not within the authority.

On this point, the petitioner argues that the subject check was not filled up strictly on the basis of the
authority he gave. He points to his instruction not to use the check without his prior approval and argues
that the check was filled up in violation of said instruction.

Check Was Not Completed Strictly Under


The Authority Given by The Petitioner
Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the blanks
and use the check. To repeat, petitioner gave Gutierrez pre-signed checks to be used in their business
provided that he could only use them upon his approval.  His instruction could not be any clearer as
Gutierrez' authority was limited to the use of the checks for the operation of their business, and on the
condition that the petitioner's prior approval be first secured.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima
facie authority does not extend to its use (i.e., subsequent transfer or negotiation) once the check is
completed. In other words, only the authority to complete the check is presumed. Further, the law used the
term "prima facie" to underscore the fact that the authority which the law accords to a holder is a
presumption juris tantum only; hence, subject to subject to contrary proof. Thus, evidence that there was no
authority or that the authority granted has been exceeded may be presented by the maker in order to avoid
liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever secured prior approval from the petitioner to
fill up the blank or to use the check. In his testimony, petitioner asserted that he never authorized nor
approved the filling up of the blank checks, thus:

Did you authorize anyone including Nap Gutierrez to write the date, May 23, 1994?
ATTY. DE VERA:
WITNESS: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?
A: No, sir.
Did you authorize anyone including Nap Gutierrez to write the figure P200,000 in this
Q:
check?
A: No, sir.
And lastly, did you authorize anyone including Nap Gutierrez to write the words
Q:
P200,000 only xx in this check?
A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999). [24]

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the
authority when he used the check to pay the loan he supposedly contracted for the construction of petitioner's
house. This is a clear violation of the petitioner's instruction to use the checks for the expenses of Slam Dunk.
It cannot therefore be validly concluded that the check was completed strictly in accordance with the
authority given by the petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal
defense that the blanks were not filled up in accordance with the authority he gave. Consequently, Marasigan
has no right to enforce payment against the petitioner and the latter cannot be obliged to pay the face value of
the check.

WHEREFORE,  in view of the foregoing, judgment is hereby rendered GRANTING the petitioner Alvin


Patrimonio's petition for review on certiorari. The appealed Decision dated September 24, 2008 and the
Resolution dated April 30, 2009 of the Court of Appeals are consequently ANNULLED AND SET ASIDE. Costs
against the respondents.

SO ORDERED.

Carpio, (Chairperson), Del Castillo, Perez, and Perlas-Bernabe, JJ., concur.

[ G.R. No. 174433, February 24, 2014 ]


PHILIPPPINE NATIONAL BANK, PETITIONER, VS. SPOUSES ENRIQUE MANALO & ROSALINDA
JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO, AND ARMA J. MANALO, RESPONDENTS.
DECISION
BERSAMIN, J.:
Although banks are free to determine the rate of interest they could impose on their borrowers, they can do so
only reasonably, not arbitrarily. They may not take advantage of the ordinary borrowers' lack of familiarity
with banking procedures and jargon. Hence, any stipulation on interest unilaterally imposed and increased by
them shall be struck down as violative of the principle of mutuality of contracts.

Antecedents

Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo) applied for an All-Purpose
Credit Facility in the amount of P1,000,000.00 with Philippine National Bank (PNB) to finance the
construction of their house. After PNB granted their application, they executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over their property covered by Transfer Certificate of Title No. S- 23191 as
security for the loan.[1] The credit facility was renewed and increased several times over the years. On
September 20, 1996, the credit facility was again renewed for P7,000,000.00. As a consequence, the parties
executed a Supplement to and Amendment of Existing Real Estate Mortgage whereby the property covered by
TCT No. 171859 was added as security for the loan. The additional security was registered in the names of
respondents Arnold, Arnel, Anthony, and Arma, all surnamed Manalo, who were their children. [2]

It was agreed upon that the Spouses Manalo would make monthly payments on the interest. However, PNB
claimed that their last recorded payment was made on December, 1997. Thus, PNB sent a demand letter to
them on their overdue account and required them to settle the account. PNB sent another demand letter
because they failed to heed the first demand.[3]

After the Spouses Manalo still failed to settle their unpaid account despite the two demand letters, PNB
foreclose the mortgage. During the foreclosure sale, PNB was the highest bidder for P15,127,000.00 of the
mortgaged properties of the Spouses Manalo. The sheriff issued to PNB the Certificate of Sale dated November
13, 2000.[4]

After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo instituted
this action for the nullification of the foreclosure proceedings and damages. They alleged that they had
obtained a loan for P1,000,000.00 from a certain Benito Tan upon arrangements made by Antoninus
Yuvienco, then the General Manager of PNB's Bangkal Branch where they had transacted; that they had been
made to understand and had been assured that the P1,000,000.00 would be used to update their account,
and that their loan would be restructured and converted into a long-term loan; [5] that they had been surprised
to learn, therefore, that had been declared in default of their obligations, and that the mortgage on their
property had been foreclosed and their property had been sold; and that PNB did not comply with Section 3 of
Act No. 3135, as amended.[6]

PNB and Antoninus Yuvienco countered that the P1,000,000.00 loan obtained by the Spouses Manalo from
Benito Tan had been credited to their account; that they did not make any assurances on the restructuring
and conversion of the Spouses Manalo's loan into a long-term one;[7] that PNB's right to foreclose the mortgage
had been clear especially because the Spouses Manalo had not assailed the validity of the loans and of the
mortgage; and that the Spouses Manalo did not allege having fully paid their indebtedness. [8]

Ruling of the RTC

After trial, the RTC rendered its decision in favor of PNB, holding thusly:

In resolving this present case, one of the most significant matters the court has noted is that while during the
pre-trial held on 8 September 2003, plaintiff-spouses Manalo with the assistance counsel had agreed to
stipulate that defendants had the right to foreclose upon the subject properties and that the plaintiffs['] main
thrust was to prove that the foreclosure proceedings were invalid, in the course of the presentation of their
evidence, they modified their position and claimed [that] the loan document executed were contracts of
adhesion which were null and void because they were prepared entirely under the defendant bank's
supervision. They also questioned the interest rates and penalty charges imposed arguing that these were
iniquitous, unconscionable and therefore likewise void.

Not having raised the foregoing matters as issues during the pre-trial, plaintiff-spouses are presumably
estopped from allowing these matters to serve as part of their evidence, more so because at the pre-trial they
expressly recognized the defendant bank's right to foreclose upon the subject property (See Order, pp. 193-
195).

However, considering that the defendant bank did not interpose any objection to these matters being made
part of plaintiff's evidence so much so that their memorandum contained discussions rebutting plaintiff
spouses arguments on these issues, the court must necessarily include these matters in the resolution of the
present case.[9]
The RTC held, however, that the Spouses Manalo's "contract of adhesion" argument was unfounded because
they had still accepted the terms and conditions of their credit agreement with PNB and had exerted efforts to
pay their obligation;[10] that the Spouses Manalo were now estopped from questioning the interest rates
unilaterally imposed by PNB because they had paid at those rates for three years without protest; [11] and that
their allegation about PNB violating the notice and publication requirements during the foreclosure
proceedings was untenable because personal notice to the mortgagee was not required under Act No. 3135. [12]

The Spouses Manalo appealed to the CA by assigning a singular error, as follows:

THE COURT A QUO SERIOUSLY ERRED IN DISMISSING PLAINTIFF-APPELLANTS' COMPLAINT FOR BEING
(sic) LACK OF MERIT NOTWITHSTANDING THE FACT THAT IT WAS CLEARLY SHOWN THAT THE
FORECLOSURE PROCEEDINGS WAS INVALID AND ILLEGAL.[13]
The Spouses Manalo reiterated their arguments, insisting that: (1) the credit agreements they entered into
with PNB were contracts of adhesion;[14] (2) no interest was due from them because their credit agreements
with PNB did not specify the interest rate, and PNB could not unilaterally increase the interest rate without
first informing them;[15] and (3) PNB did not comply with the notice and publication requirements under
Section 3 of Act 3135.[16] On the other hand, PNB and Yuvienco did not file their briefs despite notice. [17]

Ruling of the CA

In its decision promulgated on March 28, 2006,[18] the CA affirmed the decision of the RTC insofar as it upheld
the validity of the foreclosure proceedings initiated by PNB, but modified the Spouses Manalo's liability for
interest. It directed the RTC to see to the recomputation of their indebtedness, and ordered that should the
recomputed amount be less than the winning bid in the foreclosure sale, the difference should be immediately
returned to the Spouses Manalo.

The CA found it necessary to pass upon the issues of PNB's failure to specify the applicable interest and the
lack of mutuality in the execution of the credit agreements considering the earlier cited observation made by
the trial court in its decision. Applying Article 1956 of the Civil Code, the CA held that PNB's failure to
indicate the rate of interest in the credit agreements would not excuse the Spouses Manalo from their
contractual obligation to pay interest to PNB because of the express agreement to pay interest in the credit
agreements. Nevertheless, the CA ruled that PNB's inadvertence to specify the interest rate should be
construed against it because the credit agreements were clearly contracts of adhesion due to their having
been prepared solely by PNB.

The CA further held that PNB could not unilaterally increase the rate of interest considering that the credit
agreements specifically provided that prior notice was required before an increase in interest rate could be
effected. It found that PNB did not adduce proof showing that the Spouses Manalo had been notified before
the increased interest rates were imposed; and that PNB's unilateral imposition of the increased interest rate
was null and void for being violative of the principle of mutuality of contracts enshrined in Article 1308 of
the Civil Code. Reinforcing its "contract of adhesion" conclusion, it added that the Spouses Manalo's being in
dire need of money rendered them to be not on an equal footing with PNB. Consequently, the CA, relying
on Eastern Shipping Lines, v. Court of Appeals,[19] fixed the interest rate to be paid by the Spouses Manalo at
12% per annum, computed from their default.

The CA deemed to be untenable the Spouses Manalo's allegation that PNB had failed to comply with the
requirements for notice and posting under Section 3 of Act 3135. The CA stated that Sheriff Norberto
Magsajo's testimony was sufficient proof of his posting of the required Notice of Sheriff's Sale in three public
places; that the notarized Affidavit of Publication presented by Sheriff Magsajo was prima facie proof of the
publication of the notice; and that the Affidavit of Publication enjoyed the presumption of regularity, such that
the Spouses Manalo's bare allegation of non-publication without other proof did not overcome the
presumption.
On August 29, 2006, the CA denied the Spouses Manalo's Motion for Reconsideration and PNB's Partial
Motion for Reconsideration.[20]

Issues

In its Memorandum,[21] PNB raises the following issues:

WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN NULLIFYING THE INTEREST RATES
IMPOSED ON RESPONDENT SPOUSES' LOAN AND IN FIXING THE SAME AT TWELVE PERCENT (12%)
FROM DEFAULT, DESPITE THE FACT THAT (i) THE SAME WAS RAISED BY THE RESPONDENTS ONLY FOR
THE FIRST TIME ON APPEAL (ii) IT WAS NEVER PART OF THEIR COMPLAINT (iii) WAS EXLUDED AS AN
ISSUE DURING PRE-TRIAL, AND WORSE, (iv) THERE WAS NO FORMALLY OFFERED PERTAINING TO THE
SAME DURING TRIAL.

II

WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THERE WAS NO MUTUALITY OF
CONSENT IN THE IMPOSITION OF INTEREST RATES ON THE RESPONDENT SPOUSES' LOAN DESPITE THE
EXISTENCE OF FACTS AND CIRCUMSTANCES CLEARLY SHOWING RESPONDENTS' ASSENT TO THE
RATES OF INTEREST SO IMPOSED BY PNB ON THE LOAN.
Anent the first issue, PNB argues that by passing upon the issue of the validity of the interest rates, and in
nullifying the rates imposed on the Spouses Manalo, the CA decided the case in a manner not in accord with
Section 15, Rule 44 of the Rules of Court, which states that only questions of law or fact raised in the trial
court could be assigned as errors on appeal; that to allow the Spouses Manalo to raise an issue for the first
time on appeal would "offend the basic rules of fair play, justice and due process;" [22] that the resolution of the
CA was limited to the issues agreed upon by the parties during pre-trial; [23] that the CA erred in passing upon
the validity of the interest rates inasmuch as the Spouses Manalo did not present evidence thereon; and that
the Judicial Affidavit of Enrique Manalo, on which the CA relied for its finding, was not offered to prove the
invalidity of the interest rates and was, therefore, inadmissible for that purpose. [24]

As to the substantive issues, PNB claims that the Spouses Manalo's continuous payment of interest without
protest indicated their assent to the interest rates imposed, as well as to the subsequent increases of the
rates; and that the CA erred in declaring that the interest rates and subsequent increases were invalid for
lack of mutuality between the contracting parties.

Ruling

The appeal lacks merit.

1.

Procedural Issue

Contrary to PNB's argument, the validity of the interest rates and of the increases, and on the lack of
mutuality between the parties were not raised by the Spouses Manalo's for the first time on appeal. Rather,
the issues were impliedly raised during the trial itself, and PNB's lack of vigilance in voicing out a timely
objection made that possible.

It appears that Enrique Manalo's Judicial Affidavit introduced the issues of the validity of the interest rates
and the increases, and the lack of mutuality between the parties in the following manner, to wit:

5. True to his words, defendant Yuvienco, after several days, sent us a document through a personnel of
defendant PNB, Bangkal, Makati City Branch, who required me and my wife to affix our signature on the said
document;

6. When the document was handed over me, I was able to know that it was a Promissory Note which was in
ready made form and prepared solely by the defendant PNB;

xxxx

21. As above-noted, the rates of interest imposed by the defendant bank were never the subject of any
stipulation between us mortgagors and the defendant PNB as mortgagee;

22. The truth of the matter is that defendant bank imposed rate of interest which ranges from 19% to as high
as 28% and which changes from time to time;

23. The irregularity, much less the invalidity of the imposition of iniquitous rates of interest was aggravated
by the fact that we were not informed, notified, nor the same had our prior consent and acquiescence
therefor. x x x[25]
PNB cross-examined Enrique Manalo upon his Judicial Affidavit. There is no showing that PNB raised any
objection in the course of the cross examination.[26] Consequently, the RTC rightly passed upon such issues in
deciding the case, and its having done so was in total accord with Section 5, Rule 10 of the Rules of Court,
which states:

Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the
pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if
they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them
to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even
after judgment; but failure to amend does not affect the result of the trial of these issues. If evidence is
objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may
allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action
and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable
the amendment to be made.
In Bernardo Sr. v. Court of Appeals,[27] we held that:

It is settled that even if the complaint be defective, but the parties go to trial thereon, and the plaintiff,
without objection, introduces sufficient evidence to constitute the particular cause of action which it intended
to allege in the original complaint, and the defendant voluntarily produces witnesses to meet the cause of
action thus established, an issue is joined as fully and as effectively as if it had been previously joined by the
most perfect pleadings. Likewise, when issues not raised by the pleadings are tried by express or implied
consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.
The RTC did not need to direct the amendment of the complaint by the Spouses Manalo. Section 5, Rule 10 of
the Rules of Courtspecifically declares that the "failure to amend does not affect the result of the trial of these
issues." According to Talisay-Silay Milling Co., Inc. v. Asociacion de Agricultores de Talisay-Silay, Inc.:[28]

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not preclude
an adjudication by the court on the basis of such evidence which may embody new issues not raised in the
pleadings, or serve as a basis for a higher award of damages. Although the pleading may not have been
amended to conform to the evidence submitted during trial, judgment may nonetheless be rendered, not
simply on the basis of the issues alleged but also on the basis of issues discussed and the assertions of fact
proved in the course of trial. The court may treat the pleading as if it had been amended to conform to the
evidence, although it had not been actually so amended. Former Chief Justice Moran put the matter in this
way:

When evidence is presented by one party, with the expressed or implied consent of the adverse party, as
to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall
be considered as if they have been raised in the pleadings. There is implied, consent to the evidence thus
presented when the adverse party fails to object thereto." (Emphasis supplied)
Clearly, a court may rule and render judgment on the basis of the evidence before it even though the relevant
pleading had not been previously amended, so long as no surprise or prejudice is thereby caused to the
adverse party. Put a little differently, so long as the basic requirements of fair play had been met, as where
litigants were given full opportunity to support their respective contentions and to object to or refute each
other's evidence, the court may validly treat the pleadings as if they had been amended to conform to the
evidence and proceed to adjudicate on the basis of all the evidence before it.
There is also no merit in PNB's contention that the CA should not have considered and ruled on the issue of
the validity of the interest rates because the Judicial Affidavit of Enrique Manalo had not been offered to prove
the same but only "for the purpose of identifying his affidavit." [29] As such, the affidavit was inadmissible to
prove the nullity of the interest rates.

We do not agree.

Section 5, Rule 10 of the Rules of Court is applicable in two situations. The first is when evidence is
introduced on an issue not alleged in the pleadings and no objection is interposed by the adverse party. The
second is when evidence is offered on an issue not alleged in the pleadings but an objection is raised against
the offer.[30] This case comes under the first situation. Enrique Manalo's Judicial Affidavit would introduce the
very issues that PNB is now assailing. The question of whether the evidence on such issues was admissible to
prove the nullity of the interest rates is an entirely different matter. The RTC accorded credence to PNB's
evidence showing that the Spouses Manalo had been paying the interest imposed upon them without protest.
On the other hand, the CA's nullification of the interest rates was based on the credit agreements that the
Spouses Manalo and PNB had themselves submitted.

Based on the foregoing, the validity of the interest rates and their increases, and the lack of mutuality
between the parties were issues validly raised in the RTC, giving the Spouses Manalo every right to raise them
in their appeal to the CA. PNB's contention was based on its wrong appreciation of what transpired during the
trial. It is also interesting to note that PNB did not itself assail the RTC's ruling on the issues obviously
because the RTC had decided in its favor. In fact, PNB did not even submit its appellee's brief despite notice
from the CA.

2.

Substantive Issue

The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate
"determined by the Bank to be its prime rate plus applicable spread, prevailing at the current month." [31] This
stipulation was carried over to or adopted by the subsequent renewals of the credit agreement. PNB thereby
arrogated unto itself the sole prerogative to determine and increase the interest rates imposed on the Spouses
Manalo. Such a unilateral determination of the interest rates contravened the principle of mutuality of
contracts embodied in Article 1308 of the Civil Code.[32]

The Court has declared that a contract where there is no mutuality between the parties partakes of the nature
of a contract of adhesion,[33] and any obscurity will be construed against the party who prepared the contract,
the latter being presumed the stronger party to the agreement, and who caused the obscurity. [34] PNB should
then suffer the consequences of its failure to specifically indicate the rates of interest in the credit agreement.
We spoke clearly on this in Philippine Savings Bank v. Castillo,[35] to wit:

The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of
contracts under Article 1308 of the Civil Code, which provides that '[t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them.' A perusal of the Promissory Note
will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner. It
does not require the conformity of the maker before a new interest rate could be enforced. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus
partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or
compliance of the contract left solely to the will of one of the parties is likewise invalid. (Emphasis
supplied)
PNB could not also justify the increases it had effected on the interest rates by citing the fact that the Spouses
Manalo had paid the interests without protest, and had renewed the loan several times. We rule that the CA,
citing Philippine National Bank v. Court of Appeals,[36] rightly concluded that "a borrower is not estopped from
assailing the unilateral increase in the interest made by the lender since no one who receives a proposal to
change a contract, to which he is a party, is obliged to answer the same and said party's silence cannot be
construed as an acceptance thereof."[37]
Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that prior notice
would be necessary before PNB could increase the interest rates. In failing to notify the Spouses Manalo
before imposing the increased rates of interest, therefore, PNB violated the stipulations of the very contract
that it had prepared. Hence, the varying interest rates imposed by PNB have to be vacated and declared null
and void, and in their place an interest rate of 12% per annum computed from their default is fixed pursuant
to the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.[38]

The CA's directive to PNB (a) to recompute the Spouses Manalo's indebtedness under the oversight of the
RTC; and (b) to refund to them any excess of the winning bid submitted during the foreclosure sale over their
recomputed indebtedness was warranted and equitable. Equally warranted and equitable was to make the
amount to be refunded, if any, bear legal interest, to be reckoned from the promulgation of the CA's decision
on March 28, 2006.[39] Indeed, the Court said in Eastern Shipping Lines, Inc. v. Court of Appeals[40] that interest
should be computed from the time of the judicial or extrajudicial demand. However, this case presents a
peculiar situation, the peculiarity being that the Spouses Manalo did not demand interest either judicially or
extrajudicially. In the RTC, they specifically sought as the main reliefs the nullification of the foreclosure
proceedings brought by PNB, accounting of the payments they had made to PNB, and the conversion of their
loan into a long term one.[41] In its judgment, the RTC even upheld the validity of the interest rates imposed by
PNB.[42] In their appellant's brief, the Spouses Manalo again sought the nullification of the foreclosure
proceedings as the main relief.[43] It is evident, therefore, that the Spouses Manalo made no judicial or
extrajudicial demand from which to reckon the interest on any amount to be refunded to them. Such demand
could only be reckoned from the promulgation of the CA's decision because it was there that the right to the
refund was first judicially recognized. Nevertheless, pursuant to Eastern Shipping Lines, Inc. v. Court of
Appeals,[44] the amount to be refunded and the interest thereon should earn interest to be computed from the
finality of the judgment until the full refund has been made.

Anent the correct rates of interest to be applied on the amount to be refunded by PNB, the Court, in Nacar v.
Gallery Frames[45] and S.C. Megaworld Construction v. Parada,[46] already applied Monetary Board Circular No.
799 by reducing the interest rates allowed in judgments from 12% per annum to 6% per annum.[47] According
to Nacar v. Gallery Frames, MB Circular No. 799 is applied prospectively, and judgments that became final
and executory prior to its effectivity on July 1, 2013 are not to be disturbed but continue to be implemented
applying the old legal rate of 12% per annum. Hence, the old legal rate of 12% per annum applied to
judgments becoming final and executory prior to July 1, 2013, but the new rate of 6% per annum applies to
judgments becoming final and executory after said dater.

Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v. Parada, therefore, the proper
interest rates to be imposed in the present case are as follows:

1. Any amount to be refunded to the Spouses Manalo shall bear interest of 12% per annum computed
from March 28, 2006, the date of the promulgation of the CA decision, until June 30, 2013; and
6% per annum computed from July 1, 2013 until finality of this decision; and

2. The amount to be refunded and its accrued interest shall earn interest of 6% per annum until full
refund.
WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of Appeals on March 28, 2006 in
CA-G.R. CV No. 84396, subject to the MODIFICATION that any amount to be refunded to the respondents
shall bear interest of 12% per annum computed from March 28, 2006 until June 30, 2013, and 6% per
annum computed from July 1, 2013 until finality hereof; that the amount to be refunded and its accrued
interest shall earn interest at 6% per annum until full refund; and DIRECTS the petitioner to pay the costs of
suit.

SO ORDERED.

Sereno, C.J., Leonardo-De Castro, Villarama, Jr., and Reyes, JJ., concur.

[ GR No. 182128, Feb 19, 2014 ]


PHILIPPINE NATIONAL BANK v. TERESITA TAN DEE +
DECISION
REYES, J.:
This is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the Decision[2] dated August 13,
2007 and Resolution[3]dated March 13, 2008 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 86033,
which affirmed the Decision[4] dated August 4, 2004 of the Office of the President (OP) in O.P. Case No. 04-D-
182 (HLURB Case No. REM-A-030724-0186).

Facts of the Case

Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties
Inc.[5] (PEPI) on an installment basis a residential lot located in Binangonan, Rizal, with an area of 204 square
meters[6] and covered by Transfer Certificate of Title (TCT) No. 619608. Subsequently, PEPI assigned its rights
over a 213,093-sq m property on August 1996 to respondent Armed Forces of the Philippines-Retirement and
Separation Benefits System, Inc. (AFP-RSBS), which included the property purchased by Dee.

Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from petitioner Philippine
National Bank (petitioner), secured by a mortgage over several properties, including Dee's property. The
mortgage was cleared by the Housing and Land Use Regulatory Board (HLURB) on September 18, 1996. [7]

After Dee's full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP-
RSBS on July 1998 in Dee's favor. Consequently, Dee sought from the petitioner the delivery of the owner's
duplicate title over the property, to no avail. Thus, she filed with the HLURB a complaint for specific
performance to compel delivery of TCT No. 619608 by the petitioner, PEPI and AFP-RSBS, among others. In
its Decision[8] dated May 21, 2003, the HLURB ruled in favor of Dee and disposed as follows:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21-A, Village East Executive
Homes covered by Transfer Certificate of Title No. -619608- (TCT No. -619608-), and accordingly,
surrender/release the title thereof to [Dee];

2. Immediately upon receipt by [Dee] of the owner's duplicate of Transfer Certificate of Title No. -619608-
(TCT No. -619608-), respondents PEPI and AFP-RSBS are hereby ordered to deliver the title of the
subject lot in the name of [Dee] free from all liens and encumbrances;

3. Directing respondents PEPI and AFP-RSBS to pay [the petitioner] the redemption value of Lot 12,
Block 21-A, Village East Executive Homes covered by Transfer Certificate of Title No. -619608- (TCT
No. -619608-) as agreed upon by them in their Real Estate Mortgage within six (6) months from the
time the owner's duplicate of Transfer Certificate of Title No. -619608- (TCT No. -619608-) is actually
surrendered and released by [the petitioner] to [Dee];

4. In the alternative, in case of legal and physical impossibility on the part of [PEPI, AFP-RSBS, and the
petitioner] to comply and perform their respective obligation/s, as above-mentioned, respondents PEPI
and AFP-RSBS are hereby ordered to jointly and severally pay to [Dee] the amount of FIVE HUNDRED
TWENTY THOUSAND PESOS ([P]520,000.00)plus twelve percent (12%) interest to be computed from
the filing of complaint on April 24, 2002 until fully paid; and

5. Ordering [PEPI, AFP-RSBS, and the petitioner] to pay jointly and severally [Dee] the following sums:

a) The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as attorney's fees;

b) The cost of litigation[;] and

An administrative fine of TEN THOUSAND PESOS ([P]10,000.00) payable to this Office fifteen (15) days
c)
upon receipt of this decision, for violation of Section 18 in relation to Section 38 of PD 957.
SO ORDERED.[9]
The HLURB decision was affirmed by its Board of Commissioners per Decision dated March 15, 2004, with
modification as to the rate of interest.[10]

On appeal, the Board of Commissioners' decision was affirmed by the OP in its Decision dated August 4,
2004, with modification as to the monetary award.[11]

Hence, the petitioner filed a petition for review with the CA, which, in turn, issued the assailed Decision dated
August 13, 2007, affirming the OP decision. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated August 4, 2004 rendered
by the Office of the President in O. P. Case No. 04-D-182 (HLURB Case No. REM-A-030724-0186) is
hereby AFFIRMED.

SO ORDERED.[12]
Its motion for reconsideration having been denied by the CA in the Resolution dated March 13, 2008, the
petitioner filed the present petition for review on the following grounds:

I. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING OUTRIGHT RELEASE OF TCT NO.
619608 DESPITE PNB'S DULY REGISTERED AND HLURB[-] APPROVED MORTGAGE ON TCT NO.
619608.

II. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING CANCELLATION OF


MORTGAGE/RELEASE OF TITLE IN FAVOR OF RESPONDENT DEE DESPITE THE LACK OF
PAYMENT OR SETTLEMENT BY THE MORTGAGOR (API/PEPI and AFP-RSBS) OF ITS EXISTING
LOAN OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT OF REDEMPTION BY THE
MORTGAGOR AS MANDATED BY SECTION 25 OF PD 957 OR DIRECT PAYMENT MADE BY
RESPONDENT DEE TO PNB PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD
WARRANT RELEASE OF THE SAME.[13]
The petitioner claims that it has a valid mortgage over Dee's property, which was part of the property
mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are bound by such mortgage. The
petitioner also argues that it is not privy to the transactions between the subdivision project buyers and PEPI,
and has no obligation to perform any of their respective undertakings under their contract. [14]

The petitioner also maintains that Presidential Decree (P.D.) No. 957 [15] cannot nullify the subsisting
agreement between it and PEPI, and that the petitioner's rights over the mortgaged properties are protected by
Act 3135[16]. If at all, the petitioner can be compelled to release or cancel the mortgage only after the
provisions of P.D. No. 957 on redemption of the mortgage by the owner/developer (Section 25) are complied
with. The petitioner also objects to the denomination by the CA of the provisions in the Affidavit of
Undertaking as stipulations pour autrui,[17] arguing that the release of the title was conditioned on Dee's direct
payment to it.[18]

Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the obligation under
the mortgage contract between PEPI and the petitioner as it is merely an investor in the subdivision project
and is not privy to the mortgage.[19]

Respondent PEPI, on the other hand, claims that the title over the subject property is one of the properties
due for release by the petitioner as it has already been the subject of a Memorandum of Agreement
and dacion en pago entered into between them.[20] The agreement was reached after PEPI filed a petition for
rehabilitation, and contained the stipulation that the petitioner agreed to release the mortgage lien on fully
paid mortgaged properties upon the issuance of the certificates of title over the dacioned properties.[21]

For her part, respondent Dee adopts the arguments of the CA in support of her prayer for the denial of the
petition for review.[22]

Ruling of the Court

The petition must be DENIED.

The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI
and AFP-RSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity of
contracts is that contracts can only bind the parties who entered into it, [23] and cannot favor or prejudice a
third person, even if he is aware of such contract and has acted with knowledge thereof. [24] "Where there is no
privity of contract, there is likewise no obligation or liability to speak about." [25]

The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-RSBS. In this case,
there are two phases involved in the transactions between respondents PEPI and Dee the first phase is the
contract to sell, which eventually became the second phase, the absolute sale, after Dee's full payment of the
purchase price. In a contract of sale, the parties' obligations are plain and simple. The law obliges the vendor
to transfer the ownership of and to deliver the thing that is the object of sale. [26] On the other hand, the
principal obligation of a vendee is to pay the full purchase price at the agreed time. [27] Based on the final
contract of sale between them, the obligation of PEPI, as owners and vendors of Lot 12, Block 21-A, Village
East Executive Homes, is to transfer the ownership of and to deliver Lot 12, Block 21-A to Dee, who, in turn,
shall pay, and has in fact paid, the full purchase price of the property. There is nothing in the decision of the
HLURB, as affirmed by the OP and the CA, which shows that the petitioner is being ordered to assume the
obligation of any of the respondents. There is also nothing in the HLURB decision, which validates the
petitioner's claim that the mortgage has been nullified. The order of cancellation/release of the mortgage is
simply a consequence of Dee's full payment of the purchase price, as mandated by Section 25 of P.D. No. 957,
to wit:

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full
payment of the lot or unit. No fee, except those required for the registration of the deed of sale in the Registry
of Deeds, shall be collected for the issuance of such title. In the event a mortgage over the lot or unit is
outstanding at the time of the issuance of the title to the buyer, the owner or developer shall redeem the
mortgage or the corresponding portion thereof within six months from such issuance in order that the title
over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith.
It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory
contract to the principal three-year loan takeout from the petitioner by PEPI for its expansion project. It need
not be belaboured that "[a] mortgage is an accessory undertaking to secure the fulfillment of a principal
obligation,"[28] and it does not affect the ownership of the property as it is nothing more than a lien thereon
serving as security for a debt.[29]

Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between
respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the
property. On this point, PEPI was acting fully well within its right when it mortgaged the property to the
petitioner, for in a contract to sell, ownership is retained by the seller and is not to pass until full payment of
the purchase price.[30] In other words, at the time of the mortgage, PEPI was still the owner of the property.
Thus, in China Banking Corporation v. Spouses Lozada,[31] the Court affirmed the right of the owner/developer
to mortgage the property subject of development, to wit: "[P.D.] No. 957 cannot totally prevent the owner or
developer from mortgaging the subdivision lot or condominium unit when the title thereto still resides in the
owner or developer awaiting the full payment of the purchase price by the installment buyer." [32] Moreover, the
mortgage bore the clearance of the HLURB, in compliance with Section 18 of P.D. No. 957, which provides
that "[n]o mortgage on any unit or lot shall be made by the owner or developer without prior written approval
of the [HLURB]."

Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still
bound to respect the transactions between respondents PEPI and Dee. The petitioner was well aware that the
properties mortgaged by PEPI were also the subject of existing contracts to sell with other buyers. While it
may be that the petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as
against the installment buyers. This is because the contract between the respondents is protected by P.D. No.
957, a social justice measure enacted primarily to protect innocent lot buyers. [33] Thus, in Luzon Development
Bank v. Enriquez,[34] the Court reiterated the rule that a bank dealing with a property that is already subject of
a contract to sell and is protected by the provisions of P.D. No. 957, is bound by the contract to sell. [35]

However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquez's rights
thereunder. This is because the Contract to Sell, involving a subdivision lot, is covered and protected
by PD 957.  x x x.

xxxx
x x x Under these circumstances, the BANK knew or should have known of the possibility and risk that the
assigned properties were already covered by existing contracts to sell in favor of subdivision lot buyers. As
observed by the Court in another case involving a bank regarding a subdivision lot that was already subject of
a contract to sell with a third party:

"[The Bank] should have considered that it was dealing with a property subject of a real estate development
project. A reasonable person, particularly a financial institution x x x, should have been aware that, to finance
the project, funds other than those obtained from the loan could have been used to serve the purpose, albeit
partially. Hence, there was a need to verify whether any part of the property was already intended to be the
subject of any other contract involving buyers or potential buyers. In granting the loan, [the Bank] should not
have been content merely with a clean title, considering the presence of circumstances indicating the need for
a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be
deemed to be an innocent mortgagee. x x x"[36] (Citation omitted)
More so in this case where the contract to sell has already ripened into a contract of absolute sale.

Moreover, PEPI brought to the attention of the Court the subsequent execution of a Memorandum of
Agreement dated November 22, 2006 by PEPI and the petitioner. Said agreement was executed pursuant to
an Order dated February 23, 2004 by the Regional Trial Court (RTC) of Makati City, Branch 142, in SP No.
02-1219, a petition for Rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation filed
by PEPI. The RTC order approved PEPI's modified Rehabilitation Plan, which included the settlement of the
latter's unpaid obligations to its creditors by way of dacion of real properties. In said order, the RTC also
incorporated certain measures that were not included in PEPI's plan, one of which is that "[t]itles to the lots
which have been fully paid shall be released to the purchasers within 90 days after the dacion to the secured
creditors has been completed."[37] Consequently, the agreement stipulated that as partial settlement of PEPI's
obligation with the petitioner, the former absolutely and irrevocably conveys by way of "dacion en pago" the
properties listed therein,[38] which included the lot purchased by Dee. The petitioner also committed to

[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the
Dacioned Properties in the name of the [petitioner]. The request for release of a Mortgaged Property shall be
accompanied with: (i) proof of full payment by the buyer, together with a certificate of full payment issued by
the Borrower x x x. The [petitioner] hereby undertakes to cause the transfer of the certificates of title over the
Dacioned Properties and the release of the Mortgaged Properties with reasonable dispatch. [39]
Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. [40] It is a mode of extinguishing an
existing obligation[41] and partakes the nature of sale as the creditor is really buying the thing or property of
the debtor, the payment for which is to be charged against the debtor's debt. [42] Dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement express or implied, or by their silence consider
the thing as equivalent to the obligation, in which case the obligation is totally extinguished. [43]

There is nothing on record showing that the Memorandum of Agreement has been nullified or is the subject of
pending litigation; hence, it carries with it the presumption of validity. [44] Consequently, the execution of the
dation in payment effectively extinguished respondent PEPI's loan obligation to the petitioner insofar as it
covers the value of the property purchased by Dee. This negates the petitioner's claim that PEPI must first
redeem the property before it can cancel or release the mortgage. As it now stands, the petitioner already
stepped into the shoes of PEPI and there is no more reason for the petitioner to refuse the cancellation or
release of the mortgage, for, as stated by the Court in Luzon Development Bank, in accepting the assigned
properties as payment of the obligation, "[the bank] has assumed the risk that some of the assigned
properties are covered by contracts to sell which must be honored under PD 957." [45] Whatever claims the
petitioner has against PEPI and AFP-RSBS, monetary or otherwise, should not prejudice the rights and
interests of Dee over the property, which she has already fully paid for.

As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is
obvious that the law as an instrument of social justice must favor the weak. [46] (Emphasis omitted)
Finally, the Court will not dwell on the arguments of AFP-RSBS given the finding of the OP that "[b]y its non-
payment of the appeal fee, AFP-RSBS is deemed to have abandoned its appeal and accepts the decision of the
HLURB."[47] As such, the HLURB decision had long been final and executory as regards AFP-RSBS and can no
longer be altered or modified.[48]

WHEREFORE, the petition for review is DENIED for lack of merit. Consequently, the Decision dated August
13, 2007 and Resolution dated March 13, 2008 of the Court of Appeals in CA-G.R. SP No. 86033
are AFFIRMED.

Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed Forces of the
Philippines-Retirement and Separation Benefits System, Inc. are hereby ENJOINED to strictly comply with
the Housing and Land Use Regulatory Board Decision dated May 21, 2003, as modified by its Board of
Commissioners Decision dated March 15, 2004 and Office of the President Decision dated August 4, 2004.

SO ORDERED.

Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Villarama, Jr., JJ., concur.

[ GR No. 171590, Feb 12, 2014 ]


BIGNAY EX-IM PHILIPPINES v. UNION BANK OF PHILIPPINES +
DECISION

DEL CASTILLO, J.:


The gross negligence of the seller in defending its title to the property subject matter of the sale thereby
contravening the express undertaking under the deed of sale to protect its title against the claims of third
persons resulting in the buyer's eviction from the property amounts to bad faith, and the buyer is entitled to
the remedies afforded under Article 1555 of the Civil Code.

Before us are consolidated Petitions for Review on Certiorari[1] assailing the August 25, 2005 Decision[2] of the
Court of Appeals (CA) in CA-G.R. CV No. 67788 as well as its February 10, 2006 Resolution [3] denying the
parties' respective motions for reconsideration.

Factual Antecedents

In 1984, Alfonso de Leon (Alfonso) mortgaged in favor of Union Bank of the Philippines (Union Bank) real
property situated at Esteban Abada, Loyola Heights, Quezon City, which was registered in his and his wife
Rosario's name and covered by Transfer Certificate of Title (TCT) No. 286130 (TCT 286130).

The property was foreclosed and sold at auction to Union Bank. After the redemption period expired, the bank
consolidated its ownership, whereupon TCT 362405 was issued in its name in 1987.

In 1988, Rosario filed against Alfonso and Union Bank, Civil Case No. Q-52702 for annulment of the 1984
mortgage, claiming that Alfonso mortgaged the property without her consent, and for reconveyance.

In a September 6, 1989 Letter-Proposal,[4] Bignay Ex-Im Philippines, Inc. (Bignay), through its President,
Milagros Ong Siy (Siy), offered to purchase the property. The written offer stated, among others, that

The property is the subject of a pending litigation between Rosario de Leon and Union Bank for nullification of
the foreclosure before the Regional Trial Court of Quezon City. Should this offer be approved by your
management, we suggest that instead of the usual conditional sale, a deed of absolute sale be executed to
document the transaction in our favor subject to a mortgage in favor of the bank to secure the balance.

This documentation is intended to isolate the property from any lis pendens that the former owner may
annotate on the title and to allow immediate reconstitution thereof since the original Torrens title was burned
in 1988 when the City Hall housing the Register of Deeds of Quezon City was gutted by fire. [5]
On December 20, 1989, a Deed of Absolute Sale[6] was executed by and between Union Bank and Bignay
whereby the property was conveyed to Bignay for P4 million. The deed of sale was executed by the parties
through Bignay's Siy and Union Bank's Senior Vice President Anthony Robles (Robles). One of the terms of
the deed of sale is quoted below:

Section 1. The VENDEE hereby recognizes that the Parcel/s of Land with improvements thereon is acquired
through foreclosure proceedings and agrees to buy the Parcel/s of Land with improvement[s] thereon in its
present state and condition. The VENDOR therefore does not make any x x x representations or warranty with
respect to the Parcel/s of Land but that it will defend its title to the Parcel/s of Land with improvement[s]
thereon against the claims of any person whomsoever.[7]
On December 27, 1989, Bignay mortgaged the property to Union Bank, presumably to secure a loan obtained
from the latter.

On December 12, 1991, a Decision[8] was rendered in Civil Case No. Q-52702, decreeing as follows:

WHEREFORE, premises above considered, finding that defendant Alfonso de Leon, Jr. had alone executed the
mortgage (Exh. 7) on their conjugal property with T.C.T. No. 286130 (Exh. L) upon a forged signature (Exh. M-
1) of his wife plaintiff Rosario T. de Leon, the Court hereby declares NULL and VOID the following documents:

1. Said Mortgage Contract dated April 11, 1984 (Exh. 7) executed by and between defendants Alfonso de
Leon, Jr. alone and Union Bank of the Philippines;

2. Sheriff's Sale dated June 12, 1985 (Exh. F);

3. T.C.T. No. 362405 (Exh. O) issued in the name of defendant Union Bank on June 10, 1987 which
replaced the said T.C.T. No. 286130;

4. Sale and mortgage by and between Union Bank and Bignay Ex-Im Phil. Inc. on December 27, 1989
over the subject conjugal property as annotated on T.C.T. No. 362405 (Exh. O).
Further, the Court hereby declares plaintiff Rosario T. de Leon the owner still of the undivided ONE HALF
(1/2) of the subject property covered by T.C.T. No. 286130.

The order dated February 2, 1988 granting a writ of possession in favor of Union Bank is hereby SET ASIDE
and QUASHED.

Defendant Alfonso de Leon, Jr. is hereby ordered to pay his co-defendant Union Bank of the Philippines the
sum of his P1M loan with interest from the time the same was extended to him which is hereby charged
against his other undivided share of ONE HALF (½) of the subject property with T.C.T. No. 286130.

No damages is [sic], however, adjudicated against defendant Union Bank of the Philippines there being no
substantial evidence that it is in complicity with defendant Alfonso de Leon, Jr. in the presentation of the
forged signature of his wife plaintiff on the Special Power of Attorney (Exh. M).

Without cost, except for the professional fee, if any, for the examination of the forged signature (Exh. M-1)
which shall be paid by defendant Alfonso de Leon, Jr.

SO ORDERED.[9]
Union Bank appealed the above Decision with the CA. It likewise sought a new trial of the case, which the
trial court denied. The CA appeal was dismissed for failure to file appellant's brief; the ensuing Petition for
Review with this Court was similarly denied for late filing and payment of legal fees. [10]

Union Bank next filed with the CA an action to annul the trial court's December 12, 1991 judgment. [11] In a
September 9, 1993 Resolution, however, the CA again dismissed the Petition [12] for failure to comply with
Supreme Court Circular No. 28-91.[13] The bank's Motion for Reconsideration was once more denied.[14]

This time, Bignay filed a Petition for annulment of the December 12, 1991 Decision, docketed as CA-G.R. SP
No. 33901. In a July 15, 1994 Decision,[15] the CA dismissed the Petition. Bignay's resultant Petition
for Certiorari with this Court suffered the same fate.[16]

Meanwhile, as a result of the December 12, 1991 Decision in Civil Case No. Q-52702, Bignay was evicted from
the property; by then, it had demolished the existing structure on the lot and begun construction of a new
building.

Ruling of the Regional Trial Court 

On March 21, 1994, Bignay filed Civil Case No. 94-1129 for breach of warranty against eviction under Articles
1547 and 1548 of the Civil Code, with damages, against Union Bank and Robles. The case was assigned to
Branch 141 of the Makati Regional Trial Court (RTC). Bignay alleged in its Complaint [17] that at the time of the
sale, the title to the property was lost due to fire at the Register of Deeds; that at the time of the sale, Union
Bank represented that there were no liens or encumbrances over the property other than those annotated on
the title, and that a reconstitution of the lost title would be made; that on these assurances, Bignay began
and completed construction of a building on the property; that it turned out that the property was the subject
of a case by Rosario, and Bignay began to receive copies of court orders and pleadings relative to the case;
that it issued a demand to Union Bank for the latter to make good on its warranties; that despite such
demands, it appeared that Bignay was in jeopardy of losing the property as a result of Union Bank's lack of
candor and bad faith in not disclosing the pending case. Bignay prayed to be awarded the following:

1. P 54,000,000.00 as actual damages;

2. P 2,000,000.00 as exemplary damages;

3. P 1,000,000.00 by way of attorney's fees; and

4. Costs of suit.
In a March 10, 1995 Order[18] of the trial court, Robles was dropped as party defendant upon agreement of the
parties and in view of Union Bank's admission and confirmation that it

had authorized all of Robles's acts relative to the sale.

Union Bank interposed a Motion to Dismiss[19] grounded on lack of or failure to state a cause of action,
claiming that it made no warranties in favor of Bignay when it sold the property to the latter on December 20,
1989. The trial court deferred the resolution of the motion on finding that the ground relied upon did not
appear to be indubitable. Union Bank thus filed its Answer Ad Cautelam,[20]where it alleged that Bignay was
not an innocent purchaser for value, knowing the condition of the property as evidenced by Siy's September
6, 1989 letter-proposal to purchase the same. It interposed a counterclaim as well, grounded on two
promissory notes signed by Siy in favor of the bank 1) Promissory Note No. 90-1446 dated December 20, 1990
for the amount of P1.5 million payable on demand with annual interest of 33%, and 2) Promissory Note No.
91-0286 dated February 26, 1991 for the amount of P2 million payable on demand with annual interest of
30% which resulted in outstanding liabilities, inclusive of interest and penalties, in the total amount of more
than P10.4 million as of December 20, 1996.

During trial, Siy testified that she was a client of Union Bank, and that she was a regular buyer of some of the
bank's acquired assets. She admitted that she maintained a close business relationship with Robles, who
would identify cheap bank properties for her and then facilitate or assist her in the acquisition thereof. To do
this, she claimed that she signed papers in blank and left them with Robles, who would then use the same in
preparing the necessary documents, such as the supposed September 6, 1989 letter-proposal, which Siy
claimed she knew nothing about.[21]

Siy further testified that for his services, Robles was given a 3% commission each time she obtained a loan
from Union Bank. Moreover, she claimed that she gifted Robles with shares of stock in one of her
corporations, International General Auto Parts Corporation (IGAPC), and made him an incorporator and
director thereof.[22]

Finally, Siy testified that the existing structure on the subject property was demolished and a new one was
constructed at a cost of P20 million. From the new structure, Bignay earned monthly rental income of
P60,000.00, until the lessee was evicted on account of the execution of the Decision in Civil Case No. Q-
52702.[23]

On the other hand, Robles testifying for Union Bank denied that he prepared the September 6, 1989 letter-
proposal. He added that Siy was apprised of the then pending Civil Case No. Q-52702. He also admitted that
Siy gave him shares of stock in IGAPC and made him an incorporator and director thereof. [24]

Evidence on Union Bank's counterclaim was likewise received by the trial court.

On March 21, 2000, the trial court rendered its Decision[25] in Civil Case No. 94-1129, which decreed thus:

WHEREFORE, decision is hereby rendered ordering the defendant to pay plaintiff the sum of Four Million
( P4,000,000.00) Pesos representing the cost of the land and Twenty Million ( P20,000,000.00) Pesos
representing the value of the building constructed on the subject land, and the costs of this suit.

The counterclaim interposed by defendant is hereby dismissed without prejudice.


SO ORDERED.[26]
The trial court found that Union Bank's Senior Vice President, Robles, maintained a secret alliance and
relationship of trust with Bignay's Siy, whereby Robles would look out for desirable properties from the bank's
asset inventory, recommend them to Siy, then facilitate the negotiation, sale and documentation for her. In
return, he would receive a 3% commission from Siy, or some other benefit; in fact, Siy made him an
incorporator and director of one of her corporations, IGAPC. The trial court believed Siy's claim that she
signed papers in blank and left them with Robles in order to facilitate the negotiation and purchase of bank
properties which they both considered to be cheap and viable. In this connection, the trial court concluded
that it was Robles and not Siy who prepared the September 6, 1989 letter-proposal on a piece of paper signed
in blank by Siy, and that even though the pending Civil Case No. Q-52702 was mentioned in the letter-
proposal, Siy in fact had no knowledge thereof. This is proved by the fact that she proceeded to construct a
costly building on the property; if Siy knew of the pending Civil Case No. Q-52702, it is highly doubtful that
she would do so.

The trial court thus declared that Union Bank, through Robles, acted in bad faith in selling the subject
property to Bignay; for this reason, the stipulation in the December 20, 1989 deed of sale limiting Union
Bank's liability in case of eviction cannot apply, because under Article 1553 of the Civil Code, "[a]ny
stipulation exempting the vendor from the obligation to answer for eviction shall be void, if he acted in bad
faith." Moreover, it held that in its handling of Civil Case No. Q-52702, the bank was guilty of gross negligence
amounting to bad faith, which thus contravened its undertaking in the deed of sale to "defend its title to the
Parcel/s of Land with improvement thereon against the claims of any person whatsoever."

In resolving the controversy, the trial court applied Article 1555 of the Civil Code, which provides thus:

Art. 1555. When the warranty has been agreed upon or nothing has been stipulated on this point, in case
eviction occurs, the vendee shall have the right to demand of the vendor:

(1) The return of the value which the thing sold had at the time of the eviction, be it greater or less than the
price of the sale;

(2) The income or fruits, if he has been ordered to deliver them to the party who won the suit against him;

(3) The costs of the suit which caused the eviction, and, in a proper case, those of the suit brought against the
vendor for the warranty;

(4) The expenses of the contract, if the vendee has paid them;

(5) The damages and interests, and ornamental expenses, if the sale was made in bad faith.
Thus, it held that Bignay was entitled to the return of the value of the property ( P4 million), as well as the
cost of the building erected thereon ( P20 million), since Union Bank acted in bad faith. At the same time, the
trial court held that the bank's counterclaim was not at all connected with Bignay's Complaint, which makes
it a permissive counterclaim for which the docket fees should accordingly be paid. Since the bank did not pay
the docket fees, the trial court held that it did not acquire jurisdiction over its counterclaim; thus, it
dismissed the same.

Ruling of the Court of Appeals

Union Bank took the trial court's March 21, 2000 Decision to the CA on appeal. On August 25, 2005, the CA
issued the assailed Decision, decreeing as follows:

WHEREFORE, the instant Appeal is PARTLY GRANTED. Judgment is hereby rendered ordering defendant-
appellant to pay plaintiff-appellee the sum of P4,000,000.00 representing the cost of the land and
P20,000,000.00 representing the value of the building constructed on the subject land.

On the Counterclaim, judgment is rendered ordering plaintiff-appellee to pay defendant-appellant the


principal amount of P1,500,000.00 under Promissory Note No. 90-1446 dated December 18, 1990, plus the
stipulated interests and stipulated penalty charges from date of maturity of the loan or from June 6, 1991
until its full payment and also to pay the principal amount of P2,000,000.00 under Promissory Note No. 90-
0286 dated February 25, 1991, plus the stipulated interests and stipulated penalty charges from date of
maturity of the loan or from August 26, 1991 until full payment thereof.
No pronouncement as to costs.

SO ORDERED.[27]
Applying Articles 1548 and 1549 of the Civil Code,[28] the CA held that Union Bank is liable pursuant to its
commitment under the December 20, 1989 deed of sale to defend the title to the property against the claims
of third parties. It shared the trial court's opinion that the bank was guilty of negligence in the handling and
prosecution of Civil Case No. Q-52702, for which reason it should be made answerable, since it lost its title to
the whole property when it could have protected its right to Alfonso's share therein considering that the
Decision in Civil Case No. Q-52702 merely awarded Rosario's conjugal share. In other words, the CA
intimated that if Union Bank exercised prudence, it could have maintained at least its rights and title to
Alfonso's one-half share in the property, and the trial court's Decision completely nullifying the Alfonso-Union
Bank mortgage, the bank's new title TCT 362405, and the Union Bank-Bignay sale could have been avoided.

The CA added that the declaration contained in the September 6, 1989 letter-proposal to the effect that Siy
knew about the pending Civil Case No. Q-52702 cannot bind Bignay because the proposal was supposedly
prepared and signed by Siy in her personal capacity, and not for and in behalf of Bignay. It further affirmed
the trial court's view that it was Robles and not Siy who prepared the said letter-proposal on a piece of paper
which she signed in blank and left with Robles to facilitate her transactions with Union Bank.

Regarding the bank's counterclaim, the CA held that Union Bank timely paid the docket fees therefor
amounting to P32,940.00 at the time it filed its Answer Ad Cautelam on November 4, 1994, as shown by
Official Receipt Nos. 4272579 and 4271965 to such effect and the rubberstamped mark on the face of the
answer itself. It added that since the trial court received the bank's evidence on the counterclaim during trial,
it should have made a ruling thereon.

Bignay filed its Motion for Partial Reconsideration[29] questioning the appellate court's ruling on Union Bank's
counterclaim. On the other hand, Union Bank in its Motion for Reconsideration [30] took exception to the CA's
application of Articles 1548 and 1549 of the Civil Code, as well as its finding that the bank was negligent in
the handling and prosecution of Civil Case No. Q-52702.

On February 10, 2006, the CA issued the second assailed Resolution denying the parties' respective motions
for reconsideration.

Thus, the present Petitions were filed. G.R. No. 171590 was initiated by Bignay, while G.R. No. 171598 was
filed by Union Bank. In a June 21, 2006 Resolution[31] of the Court, both Petitions were ordered consolidated.

Issues

The following issues are raised:

By Bignay as petitioner in G.R. No. 171590

1. IN A PERMISSIVE COUNTERCLAIM, WHEN SHOULD THE DOCKET FEES BE PAID TO ENABLE THE
TRIAL COURT TO ACQUIRE JURISDICTION OVER THE CASE?

2. IN THE EVENT OF NON-PAYMENT OF DOCKET FEES FOR PERMISSIVE COUNTERCLAIMS, CAN


THE COURT DISMISS THE SAID COUNTERCLAIMS?[32]
By Union Bank as petitioner in G.R. No. 171598   

The portion of the [D]ecision of the Honorable Court of Appeals dated August 25, 2005 ordering petitioner to
pay private respondent the total amount of P24.0 million should be set aside for it has altogether ignored:

I. THE TESTIMONY OF ROBLES;

II. THAT THE LETTER-PROPOSAL DATED SEPTEMBER 6, 1989 WAS SIGNED BY SIY IN BEHALF OF
(BIGNAY);
III. THE FACT THAT THE APPLICATION OF ARTS. 1548 AND 1549 OF THE CIVIL CODE WAS PATENTLY
ERRONEOUS.[33]
The Parties' Respective Arguments 

G.R. No. 171590. As petitioner in G.R. No. 171590, Bignay registers its doubts as to whether Union Bank
indeed paid the docket fees on its permissive counterclaim, arguing that if the bank indeed paid the docket
fees, the trial court would have so held in its March 21, 2000 Decision; instead, it specifically declared therein
that the docket fees on the counterclaim remained unpaid at that point in time. In other words, Bignay
appears to insinuate that there was an irregularity surrounding the bank's alleged payment of the docket fees
on its counterclaim. It adds that since Union Bank is guilty of negligence and bad faith in transacting with
Bignay, it should be penalized through the proper dismissal of its counterclaim; the Court should instead
require Union Bank to prosecute its claims in a separate action.

In the alternative, Bignay claims that the amount of P1,039,457.33 should be deducted from its adjudged
liabilities to Union Bank, as it has been proved during trial that it paid such amount to the bank, as shown
by receipts duly marked and offered in evidence as Exhibits "H" to "H-6."

Bignay thus prays in its Petition that the assailed dispositions of the CA be modified to the extent that Union
Bank's counterclaim should be denied and dismissed.

In its Comment[34] praying that the CA's ruling on its counterclaim be affirmed, Union Bank insists that it
timely paid the docket fees on its counterclaim, arguing that the official receipts proving payment as well as
the rubber stamp-mark on the face of its answer may not be overturned by Bignay's baseless suspicions,
claims and insinuations not supported by controverting evidence or proof. It adds that, contrary to Bignay's
assertion, a separate case for the prosecution of its counterclaim is unnecessary since the same may
sufficiently be tried in Civil Case No. 94-1129 precisely as a permissive counterclaim; and by allowing its
permissive counterclaim, multiplicity of suits is avoided.

In a Reply[35] to the bank's Comment, Bignay among others vehemently insists that at the time of the rendition
of the trial court's judgment in Civil Case No. 94-1129, Union Bank had not yet paid the docket fees on its
counterclaim; the bank's claim that it paid the docket fees when it filed its Answer Ad Cautelam is absolutely
questionable. If indeed the bank paid the docket fees, then it should have questioned the trial court's
dismissal of its counterclaim in a motion for reconsideration and attached the receipts showing its payment of
the fees; yet it did not. Besides, if indeed the fact of payment of docket fees was stamped on the face of the
bank's Answer Ad Cautelam when it filed the same, the trial court should have noticed it, or at least its
attention would have been directed to the fact; but it was not. And if indeed the docket fees were paid as early
as 1994, it is incredible how Union Bank never informed the trial court of its payment, even after the adverse
Decision in the case was rendered. Bignay adds that in a September 12, 2005 letter [36] to the Clerk of Court of
the Makati City RTC, its counsel inquired into the circumstances surrounding the sudden appearance of
official receipts copies of which were attached to the letter indicating that Union Bank paid the docket fees on
its permissive counterclaim, when it appears that no such payment was in fact made; up to now, however, it
has not received any reply from the said office.

G.R. No. 171598. In its Petition in G.R. No. 171598, Union Bank insists that the September 6, 1989 letter-
proposal effectively limited its liability for eviction since from said letter it is seen that Bignay knew
beforehand of the pendency of Civil Case No. Q-52702. It insists that under the December 20, 1989 deed of
sale, it did not make any representations or warranty with respect to the property; thus, the application of
Articles 1548 and 1549 of the Civil Code by the CA was erroneous. Thus, the bank seeks a partial reversal of
the CA's disposition particularly the portion of the Decision which holds it liable to pay Bignay the respective
sums of P4 million for the cost of the land, and P20 million for the cost of the building.

In its Comment,[37] Bignay claims that in urging the Court to consider the testimony of Robles and Siy's
declaration in the September 6, 1989 letter-proposal, Union Bank is raising questions of fact in its Petition
which this Court may not resolve. It likewise reiterates its argument relating to the bank's counterclaim; only
this time, Bignay claims that the official receipts evidencing the bank's supposed payment of the docket fees
were falsified.

Our Ruling

The Court finds for Bignay.


Indeed, this Court is convinced from an examination of the evidence and by the concurring opinions of the
courts below that Bignay purchased the property without knowledge of the pending Civil Case No. Q-52702.
Union Bank is therefore answerable for its express undertaking under the December 20, 1989 deed of sale to
"defend its title to the Parcel/s of Land with improvement thereon against the claims of any person
whatsoever." By this warranty, Union Bank represented to Bignay that it had title to the property, and by
assuming the obligation to defend such title, it promised to do so at least in good faith and with sufficient
prudence, if not to the best of its abilities.

The record reveals, however, that Union Bank was grossly negligent in the handling and prosecution of Civil
Case No. Q-52702. Its appeal of the December 12, 1991 Decision in said case was dismissed by the CA for
failure to file the required appellant's brief. Next, the ensuing Petition for Review on Certiorari filed with this
Court was likewise denied due to late filing and payment of legal fees. Finally, the bank sought the annulment
of the December 12, 1991 judgment, yet again, the CA dismissed the petition for its failure to comply with
Supreme Court Circular No. 28-91. As a result, the December 12, 1991 Decision became final and executory,
and Bignay was evicted from the property. Such negligence in the handling of the case is far from
coincidental; it is decidedly glaring, and amounts to bad faith. "[N]egligence may be occasionally so gross as to
amount to malice [or bad faith]."[38] Indeed, in culpa contractual or breach of contract, gross negligence of a
party amounting to bad faith is a ground for the recovery of damages by the injured party. [39]

Eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable
to the vendor, the vendee is deprived of the whole or of a part of the thing purchased. [40] In case eviction
occurs, the vendee shall have the right to demand of the vendor, among others, the return of the value which
the thing sold had at the time of the eviction, be it greater or less than the price of the sale; the expenses of
the contract, if the vendee has paid them; and the damages and interests, and ornamental expenses, if the
sale was made in bad faith.[41] There appears to be no dispute as to the value of the building constructed on
the property by Bignay; the only issue raised by Union Bank in these Petitions is the propriety of the award of
damages, and the amount thereof is not in issue. The award in favor of Bignay of P4 million, or the
consideration or cost of the property, and P20 million the value of the building it erected thereon is no longer
in issue and is thus in order.

However, the Court disagrees with the CA on the issue of Union Bank's counterclaim. Bignay correctly
observes that if the bank indeed paid the docket fees therefor, the trial court would have so held in its March
21, 2000 Decision; yet in its judgment, the trial court specifically declared that the docket fees remained
unpaid at the time of its writing, thus

Anent the counterclaims interposed by defendant for the collection of certain sum of money adverted earlier
hereof [sic], this Court could not exercise jurisdiction over the same as defendant did not pay the docket fees
therefor. Although the counterclaims were denominated as compulsory in the answer, the matters therein
alleged were not connected with the plaintiff's complaint. The counterclaims could stand independently from
the plaintiff's complaint hence they are a [sic] permissive counterclaims. During the pre-trial, this Court had
already ruled that the counterclaims were permissive yet the records showed that defendant had not paid the
docket fees. This Court therefore has not acquired jurisdiction over said case. [42]
And if it is true that the bank paid the docket fees on its counterclaim as early as in 1994, it would have
vigorously insisted on such fact after being apprised of the trial court's March 21, 2000 Decision. It is indeed
surprising that the supposed payment was never raised by the bank in a timely motion for reconsideration,
considering that the trial court dismissed its counterclaim; if there is any opportune time to direct the court's
attention to such payment and cause the counterclaim to be reinstated, it was at that point and no other. All
it had to do was prove payment by presenting to the court the official receipts or any other acceptable
documentary evidence, and thus secure the proper reversal of the ruling on its counterclaim. Still, nothing
was heard from the bank on the issue, until it filed its brief with the CA on appeal. Indeed, "whatever is
repugnant to the standards of human knowledge, observation and experience becomes incredible and must
lie outside judicial cognizance."[43]

More than the above, this Court finds true and credible the trial court's express declaration that no docket
fees have been paid on the bank's counterclaim; the trial court's pronouncement enjoys the presumption of
regularity. Indeed, the sudden appearance of the receipts supposedly evidencing payment of the docket fees is
highly questionable and irregular, and deserves to be thoroughly investigated; the actuations of the bank
relative thereto go against the common experience of mankind, if they are not entirely anomalous.

WHEREFORE, the Court resolves as follows:


1. The Petition in G.R. No. 171590 is GRANTED. The August 25, 2005 Decision and February 10, 2006
Resolution of the Court of Appeals in CA-G.R. CV No. 67788 are MODIFIED, in that Union Bank of the
Philippines's counterclaim is ordered DISMISSED.

2. The Petition in G.R. No. 171598 is DENIED.

SO ORDERED.

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

[ G.R. No. 207176, June 18, 2014 ]


SPOUSES VICTOR AND EDNA BINUA, PETITIONERS, VS. LUCIA P. ONG, RESPONDENT.
DECISION

REYES, J.:
Spouses Victor and Edna Binua (petitioners) seek the declaration of the nullity of the real estate mortgages
executed by petitioner Victor in favor of Lucia P. Ong (respondent), on the ground that these were executed
under fear, duress and threat.

Facts of the Case

In a Joint Decision[1] dated January 10, 2006 by the Regional Trial Court of Tuguegarao City, Branch 2 (RTC-
Branch 2), in Criminal Cases Nos. 8230, 8465-70, petitioner Edna was found guilty of Estafa and was
sentenced to imprisonment from six (6) years and one (1) day of prision mayor, as minimum, to thirty (30)
years of reclusion perpetua, as maximum, for each conviction.  Petitioner Edna was also ordered to pay the
respondent the amount of P2,285,000.00, with ten percent (10%) interest, and damages. [2]

Petitioner Edna sought to avoid criminal liability by settling her indebtedness through the execution of
separate real estate mortgages over petitioner Victor's properties on February 2, 2006, and covering the total
amount of P7,000,000.00.  Mortgaged were portions of Lot No. 1319 covered  by  Transfer  Certificate  of 
Title  (TCT)  No.  T-15232  and  Lot No. 2399 covered by TCT No. T-15227, both located in Tuguegarao City.[3]

Thereafter, petitioner Edna filed a motion for new trial, which was granted by the RTC-Branch 2. 
Consequently, the RTC-Branch 2 rendered a Decision[4] on February 24, 2006, ordering petitioner Edna to pay
the respondent the amount of P2,285,000.00 as actual damages, with ten percent (10%) interest, and other
damages.[5]  The RTC-Branch 2 ruled that the presentation of a promissory note dated March 4, 1997 novated
the original agreement between them into a civil obligation.  The decision further reads:

During the hearing of the motion [for new trial], [petitioner Edna's] counsel presented [petitioner Edna].  In
the course of her testimony, she narrated that a promissory note (Exhibit "1") dated March 4, 1997 was
executed by her in favor of Lucia P. Ong, the herein private complainant.

xxxx

With the surfacing and finally the introduction of Exhibit "1", the nature of the liability of [petitioner
Edna] changed from both criminal and civil in nature to purely civil in character.

The Promissory Note novated the complexity of the nature of the course of action the [respondent] had
from the beginning against [petitioner Edna].

xxxx

However, after the Promissory Note (Exh. "1") was executed by the parties, the whole scenario was novated
into purely civil in nature.  It was the intention of both [the respondent] and [petitioner Edna] to turn the debt
into a mere loan, hence, this agreement of theirs being the law that binds them must be respected.
[Petitioner Edna] nonetheless, admits in Exhibit "1," that, she is indebted to [the respondent].  Thus, she
must pay her just debt.[6]  (Emphasis ours)

Petitioner Edna, however, failed to settle her obligation, forcing the respondent to foreclose the mortgage on
the properties, with the latter as the highest bidder during the public sale.

The petitioners then filed the case for the Declaration of Nullity of Mortgage Contracts, alleging that the
mortgage documents were "executed under duress, as the [petitioners] at the time of the execution of said
deeds were still suffering from the effect of the conviction of [petitioner] Edna, and could not have been freely
entered into said contracts."[7]

On  December  12,  2008,  the  RTC  of  Tuguegarao  City,  Branch  5 (RTC-Branch 5), rendered a
Decision[8] dismissing the complaint for lack of factual and legal merit. [9]  The RTC-Branch 5 ruled:

When the [petitioners] executed the Deeds of Mortgage, did they act under fear, or duress, or threat?  Quite
clearly, they did because a judgment of conviction was hanging over Edna's head sentencing her to a prison
term x x x.  However, Article 1335 of the Civil Code is equally unmistakable.  The last paragraph of the article
reads: "A threat to enforce one's claim through competent authority, if the claim is just or legal, does not
vitiate consent."

The Court cannot see its way to an agreement with the [petitioners].  They asked for a "compromise"
consisting in the execution of a promissory note by deeds of mortgage.  Edna profited from it she did not go to
jail. She was in fact acquitted.  The judgment of Branch 2 of this Court attained finality for failure of the
accused to perfect a seasonable appeal.  And now they come to Court asking it to set aside the very deeds of
mortgage they had signed to keep Edna away from prison?[10]

The petitioners brought their case to the Court of Appeals (CA) and in the assailed Decision [11] dated November
13, 2012 and Resolution[12] dated May 14, 2013, the RTC-Branch 5 decision was affirmed.  The CA ruled that:

[T]he claim of [petitioner] Victor that he executed the real estate mortgages for fear that his wife would go to
jail is obviously not the intimidation referred to by law.  In asserting that the above-mentioned circumstance
constituted fear, duress and threat, [the petitioners] missed altogether the essential ingredient that would
qualify the act complained of as intimidation, that the threat must be of an unjust act. [13]

In the present petition for review under Rule 45 of the Rules of Court, the petitioners claim that:

I.

THE LOWER COURT ERRED IN GIVING FULL FAITH AND CREDENCE TO THE DECISION OF THE COURT A
QUO BASED ON FINDINGS OF FACTS NOT SUPPORTED BY THE EVIDENCE ON RECORD

II.

THE LOWER COURT ERRED IN REFUSING TO DECLARE NULL AND VOID THE MORTGAGE CONTRACTS
DESPITE ITS FINDING THAT SAID CONTRACTS WERE EXECUTED UNDER FEAR, DURESS AND THREAT

III.

THE LOWER COURT ERRED IN REFUSING TO DECLARE NULL AND VOID THE MORTGAGE CONTRACTS
DESPITE THE FACT THAT THEY WERE EXECUTED TO SECURE A MONETARY OBLIGATION THAT
IMPOSES A MONTHLY INTEREST OF TEN PERCENT[14]

The petitioners contend that the CA erred when it sustained the findings of the RTC that the execution of the
promissory note changed petitioner Edna's obligation to a civil one.  According to the petitioners, the RTC's
findings are not in accord with the RTC-Branch 2 Decision dated February 24, 2006, which ruled that
petitioner Edna's liability is purely civil and not based on the compromise agreement with the respondent. 
The petitioners insist that the RTC-Branch 2 decision allegedly show "the lack of criminal liability of x x x
Edna Binua due to novation."  The petitioners also contend that there was no evidence during trial regarding
the existence of the promissory note or that the basis of petitioner Edna's exoneration from criminal liability
was the execution of the mortgage.[15]

The petitioners also claim that the threat and coercion levelled by the respondent against petitioner Victor,
i.e., the wrongful criminal conviction of petitioner Edna, and which resulted into the signing of the mortgages,
do not fall within the coverage of Article 1335 of the Civil Code. [16]  Finally, the petitioners argue that the CA
committed an error when it refused to rule on the legality of the ten percent (10%) monthly interest rate
imposed on petitioner Edna's loan obligation.[17]

Ruling of the Court

First, the Court must emphasize that in a Rule 45 petition for review, only questions of law may be raised
because the Court is not a trier of facts and is not to review or calibrate the evidence on record; and when
supported by substantial evidence, the findings of fact by the CA are conclusive and binding on the parties
and are not reviewable by this Court,[18] unless the case falls under any of the exceptions.[19]

In this case, the Court notes that the petitioners' arguments are exact repetitions of the issues raised in the
CA, and the petitioners failed to advance any convincing reason that would alter the resolution in this case. 
Not only that, the petitioners' arguments are also downright inaccurate, if not maliciously misleading.

The decisive factor in this case is the RTC-Branch 2 Decision dated February 24, 2006 in Criminal Case Nos.
8230, 8465, 8466, 8467, 8468, 8469 & 8470.  This was the decision that overturned petitioner Edna's
previous conviction for estafa and adjudged her only to be civilly liable to the respondent.  Said RTC decision
is already final and executory,[20] and this was not refuted by the petitioners.  The Court has consistently
ruled that "once a decision attains finality, it becomes the law of the case regardless of any claim that it is
erroneous.  Having been rendered by a court of competent jurisdiction acting within its authority, the
judgment may no longer be altered even at the risk of occasional legal infirmities or errors it may contain." [21] 
Thus, said RTC decision bars a rehash, not only of the issues raised therein but also of other issues that
might have been raised, and this includes the existence of the promissory note upon which petitioner Edna's
exoneration rested.  As a matter of fact, the RTC decision embodied petitioner Edna's own admission that she
is indebted to the respondent.  The issue of whether petitioner Edna's liability under the note was, from the
very beginning, civil and not criminal in nature has no relevance in this case as the only issue to be resolved
is whether the mortgage contracts were executed under duress.  Any other discussion pertinent to the RTC
decision will transgress the principle of immutability of a final judgment. [22]

The petitioners claim that they were compelled by duress or intimidation when they executed the mortgage
contracts.  According to them, they "were still suffering from the effect of the conviction of [petitioner] Edna,
and could not have been freely entered into said contracts."[23]  The petitioners also allege that the respondent
subsequently "rammed the two (2) mortgage contracts involving two (2) prime properties on [petitioner
Victor's] throat, so to speak[,] just so to make him sign the said documents," [24] and that the respondent took
advantage of the misfortune of the petitioners and was able to secure in her favor the real estate mortgages. [25]

Article 1390(2) of the Civil Code provides that contracts where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud are voidable or annullable.  Article 1335 of the Civil Code,
meanwhile, states that "[t]here is intimidation when one of the contracting parties is compelled by
a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or
upon the person or property of his spouse, descendants or ascendants, to give his consent."  The same article,
however, further states that "[a] threat to enforce one's claim through competent authority, if the claim
is just or legal, does not vitiate consent."

In De Leon v. Court of Appeals,[26] the Court held that in order that intimidation may vitiate consent and
render the contract invalid, the following requisites must concur: (1) that the intimidation must be the
determining cause of the contract, or must have caused the consent to be given; (2) that the threatened act be
unjust or unlawful; (3) that the threat be real and serious, there being an evident disproportion between the
evil and the resistance which all men can offer, leading to the choice of the contract as the lesser evil; and (4)
that it produces a reasonable and well-grounded fear from the fact that the person from whom it comes has
the necessary means or ability to inflict the threatened injury. [27]
In cases involving mortgages, a preponderance of the evidence is essential to establish its invalidity, and in
order to show fraud, duress, or undue influence of a mortgage, clear and convincing proof is necessary. [28]

Based on the petitioners' own allegations, what the respondent did was merely inform them of petitioner
Edna's conviction in the criminal cases for estafa.  It might have evoked a sense of fear or dread on the
petitioners' part, but certainly there is nothing unjust, unlawful or evil in the respondent's act.  The
petitioners also failed to show how such information was used by the respondent in coercing them into
signing the mortgages.  The petitioners must remember that petitioner Edna's conviction was a result of a
valid judicial process and even without the respondent allegedly "ramming it into petitioner Victor's throat,"
petitioner Edna's imprisonment would be a legal consequence of such conviction.  In Callanta v. National
Labor Relations Commission,[29] the Court stated that the threat to prosecute for estafa not being an unjust
act, but rather a valid and legal act to enforce a claim, cannot at all be considered as intimidation. [30]  As
correctly ruled by the CA, "[i]f the judgment of conviction is the only basis of the [petitioners] in saying that
their consents were vitiated, such will not suffice to nullify the real estate mortgages and the subsequent
foreclosure of the mortgaged properties.  No proof was adduced to show that [the respondent] used [force],
duress, or threat to make [petitioner] Victor execute the real estate mortgages." [31]

Finally, the petitioners assail the ten percent (10%) imposed by the RTC-Branch 2 in the criminal cases for
estafa.  As previously stated, however, the decision in said case is already final and executory. [32]  The Court
will not even consider the petitioners' arguments on such issue for to do so would sanction the petitioners' act
of subverting the immutability of a final judgment.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.

Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Villarama, Jr., JJ., concur.

[ G.R. No. 185798, January 13, 2014 ]


FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK, INC., PETITIONERS, VS. SPOUSES
CONRADO AND MARIA VICTORIA RONQUILLO, RESPONDENTS.
DECISION

PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure
assailing the Decision[1] of the Court of Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the
Office of the President in O.P. Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-
petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria
Victoria Ronquillo purchased from petitioners an 82-square meter condominium unit at Central Park Place
Tower in Mandaluyong City for a pre-selling contract price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR
THOUSAND ONLY (P5,174,000.00). On 29 August 1997, respondents executed and signed a Reservation
Application Agreement wherein they deposited P200,000.00 as reservation fee. As agreed upon, respondents
paid the full downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations
until September 1998.
Upon learning that construction works had stopped, respondents likewise stopped paying their monthly
amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents through two (2)
successive letters, demanded a full refund of their payment with interest. When their demands went
unheeded, respondents were constrained to file a Complaint for Refund and Damages before the Housing and
Land Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund of P2,198,949.96
representing the total amortization payments, P200,000.00 as and by way of moral damages, attorney's fees
and other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their Answer
within the reglementary period despite service of summons.[2]
Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in
construction to the 1997 Asian financial crisis. Petitioners denied committing fraud or misrepresentation
which could entitle respondents to an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering
petitioners to jointly and severally pay respondents the following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE HUNDRED FORTY NINE
PESOS & 96/100 (P2,198,949.96) with interest thereon at twelve percent (12%) per annum to be computed
from the time of the complainants' demand for refund on October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages,
c) FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable to this Office fifteen (15) days upon
receipt of this decision, for violation of Section 20 in relation to Section 38 of PD 957. [3]
The Arbiter considered petitioners' failure to develop the condominium project as a substantial breach of their
obligation which entitles respondents to seek for rescission with payment of damages. The Arbiter also stated
that mere economic hardship is not an excuse for contractual and legal delay.
Petitioners appealed the Arbiter's Decision through a petition for review pursuant to Rule XII of the 1996
Rules of Procedure of HLURB. On 17 February 2005, the Board of Commissioners of the HLURB denied [4] the
petition and affirmed the Arbiter's Decision. The HLURB reiterated that the depreciation of the peso as a
result of the Asian financial crisis is not a fortuitous event which will exempt petitioners from the performance
of their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied [5] on 8 May 2006. Thereafter, petitioners filed a
Notice of Appeal with the Office of the President. On 18 April 2007, petitioners' appeal was dismissed [6] by the
Office of the President for lack of merit. Petitioners moved for a reconsideration but their motion was
denied[7] on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for review under Rule 43 containing the
same arguments they raised before the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HONORABLE HOUSING AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERS-
APPELLANTS TO REFUND RESPONDENTS-APPELLEES THE SUM OF P2,198,949.96 WITH 12% INTEREST
FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF
ACTION AGAINST PETITIONERS-APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE OFFICE
BELOW ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES THE SUM OF
P100,000.00 AS MORAL DAMAGES AND P50,000.00 AS ATTORNEY'S FEES CONSIDERING THE ABSENCE
OF ANY FACTUAL OR LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HOUSING
AND LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO PAY P10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH
FINDING.[8]
On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The appellate court
echoed the HLURB Arbiter's ruling that "a buyer for a condominium/subdivision unit/lot unit which has not
been developed in accordance with the approved condominium/subdivision plan within the time limit for
complying with said developmental requirement may opt for reimbursement under Section 20 in relation to
Section 23 of Presidential Decree (P.D.) 957 x x x."[9] The appellate court supported the HLURB Arbiter's
conclusion, which was affirmed by the HLURB Board of Commission and the Office of the President, that
petitioners' failure to develop the condominium project is tantamount to a substantial breach which warrants
a refund of the total amount paid, including interest. The appellate court pointed out that petitioners failed to
prove that the Asian financial crisis constitutes a fortuitous event which could excuse them from the
performance of their contractual and statutory obligations. The appellate court also affirmed the award of
moral damages in light of petitioners' unjustified refusal to satisfy respondents' claim and the legality of the
administrative fine, as provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a Resolution[10] dated 11 December 2008 by the Court
of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF THE
OFFICE OF THE PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN FAVOR OF THE
RESPONDENTS DESPITE LACK OF CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE PREMISES,
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF INTEREST
OF TWELVE PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF
THE OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT OF P100,000.00 AS MORAL DAMAGES,
P50,000.00 AS ATTORNEY'S FEES AND P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY
FACTUAL OR LEGAL BASIS TO SUPPORT SUCH CONCLUSIONS.[11]
Petitioners insist that the complaint states no cause of action because they allegedly have not committed any
act of misrepresentation amounting to bad faith which could entitle respondents to a refund. Petitioners claim
that there was a mere delay in the completion of the project and that they only resorted to "suspension and
reformatting as a testament to their commitment to their buyers." Petitioners attribute the delay to the 1997
Asian financial crisis that befell the real estate industry. Invoking Article 1174 of the New Civil Code,
petitioners maintain that they cannot be held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account of suspension of development on a
project. They liken their situation to a bank which this Court, in Overseas Bank v. Court of Appeals,
[12]
 adjudged as not liable to pay interest on deposits during the period that its operations are ordered
suspended by the Monetary Board of the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral damages because they never intended to
cause delay, and again blamed the Asian economic crisis as the direct, proximate and only cause of their
failure to complete the project. Petitioners submit that moral damages should not be awarded unless so
stipulated except under the instances enumerated in Article 2208 of the New Civil Code. Lastly, petitioners
refuse to pay the administrative fine because the delay in the project was caused not by their own deceptive
intent to defraud their buyers, but due to unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian financial crisis constitute a
fortuitous event which would justify delay by petitioners in the performance of their contractual obligation; 2)
assuming that petitioners are liable, whether or not 12% interest was correctly imposed on the judgment
award, and 3) whether the award of moral damages, attorney's fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The rulings were
consistent that first, the Asian financial crisis is not a fortuitous event that would excuse petitioners from
performing their contractual obligation; second, as a result of the breach committed by petitioners,
respondents are entitled to rescind the contract and to be refunded the amount of amortizations paid
including interest and damages; and third, petitioners are likewise obligated to pay attorney's fees and the
administrative fine.
This petition did not present any justification for us to deviate from the rulings of the HLURB, the Office of the
President and the Court of Appeals.
Indeed, the non-performance of petitioners' obligation entitles respondents to rescission under Article 1191 of
the New Civil Code which states:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of condominiums,
which provides:
Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or
condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or
developer when the buyer, after due notice to the owner or developer, desists from further payment due to the
failure of the owner or developer to develop the subdivision or condominium project according to the approved
plans and within the time limit for complying with the same. Such buyer may, at his option, be reimbursed
the total amount paid including amortization interests but excluding delinquency interests, with
interest thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to rescind the contract and demand
reimbursement for the payments they had made to petitioners.
Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties, Inc. v. Spouses
Go[13] promulgated on 17 August 2007, where the Court stated that the Asian financial crisis is not an
instance of caso fortuito. Bearing the same factual milieu as the instant case, G.R. No. 165164 involves the
same company, Fil-Estate, albeit about a different condominium property. The company likewise reneged on
its obligation to respondents therein by failing to develop the condominium project despite substantial
payment of the contract price. Fil-Estate advanced the same argument that the 1997 Asian financial crisis is
a fortuitous event which justifies the delay of the construction project. First off, the Court classified the issue
as a question of fact which may not be raised in a petition for review considering that there was no variance in
the factual findings of the HLURB, the Office of the President and the Court of Appeals. Second, the Court
cited the previous rulings of Asian Construction and Development Corporation v. Philippine Commercial
International Bank[14] and Mondragon Leisure and Resorts Corporation v. Court of Appeals[15] holding that the
1997 Asian financial crisis did not constitute a valid justification to renege on obligations. The Court
expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of
a business corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g.
increase cost of materials and labor, even before the scheduled commencement of its real estate project as
early as 1995. However, a real estate enterprise engaged in the pre-selling of condominium units is
concededly a master in projections on commodities and currency movements and business risks. The
fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, and
fluctuations in currency exchange rates happen everyday, thus, not an instance of caso fortuito.[16]
The aforementioned decision becomes a precedent to future cases in which the facts are substantially the
same, as in this case. The principle of stare decisis, which means adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6% legal
interest computed from the date of demand. The Court also awarded attorney's fees. We follow that ruling in
the case before us.
The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar v.
Gallery Frames,[17]embodying the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board
in BSP-MB Circular No. 799 which pegged the interest rate at 6% regardless of the source of obligation.
We likewise affirm the award of attorney's fees because respondents were forced to litigate for 14 years and
incur expenses to protect their rights and interest by reason of the unjustified act on the part of petitioners.
[18]
 The imposition of P10,000.00 administrative fine is correct pursuant to Section 38 of Presidential Decree
No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten thousand
pesos for violations of the provisions of this Decree or of any rule or regulation thereunder. Fines shall be
payable to the Authority and enforceable through writs of execution in accordance with the provisions of the
Rules of Court.
Finally, we sustain the award of moral damages. In order that moral damages may be awarded in breach of
contract cases, the defendant must have acted in bad faith, must be found guilty of gross negligence
amounting to bad faith, or must have acted in wanton disregard of contractual obligations. [19] The Arbiter
found petitioners to have acted in bad faith when they breached their contract, when they failed to address
respondents' grievances and when they adamantly refused to refund respondents' payment.
In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with
the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed
from the time of respondents' demand for refund on 8 October 1998.
SO ORDERED.
Carpio, (Chairperson), Brion, Del Castillo, and Perlas-Bernabe, JJ., concur.

[ G.R. No. 160110, June 18, 2014 ]


MARIANO C. MENDOZA AND ELVIRA LIM, PETITIONERS, VS. SPOUSES LEONORA J. GOMEZ AND
GABRIEL V. GOMEZ RESPONDENTS.
DECISION

PEREZ, J.:
Assailed in the present appeal by certiorari is the Decision[1] dated 29 September 2003 of the Special Fourth
Division of the Court of Appeals (CA) in CA-G.R. CV No. 71877, which affirmed with modification the
Decision[2] dated 31 January 2001 of the Regional Trial Court (RTC), Branch 172, Valenzuela City in Civil
Case No. 5352-V-97, and which effectively allowed the award of actual, moral, and exemplary damages, as
well as attorney's fees and costs of the suit in favor of respondent Spouses Leonora and Gabriel Gomez
(respondents).

Antecedent Facts

On 7 March 1997, an Isuzu Elf truck (Isuzu truck) with plate number UAW 582, [3] owned by respondent
Leonora J. Gomez (Leonora)[4] and driven by Antenojenes Perez (Perez),[5] was hit by a Mayamy Transportation
bus (Mayamy bus) with temporary plate number 1376-1280,[6] registered under the name of petitioner Elvira
Lim (Lim)[7] and driven by petitioner Mariano C. Mendoza (Mendoza).[8]

Owing to the incident, an Information for reckless imprudence resulting in damage to property and multiple
physical injuries was filed against Mendoza.[9] Mendoza, however, eluded arrest, thus, respondents filed a
separate complaint for damages against Mendoza and Lim, seeking actual damages, compensation for lost
income, moral damages, exemplary damages, attorney's fees and costs of the suit. [10] This was docketed as
Civil Case No. 5352-V-97.

According to PO1 Melchor F. Rosales (PO1 Rosales), investigating officer of the case, at around 5:30 a.m., the
Isuzu truck, coming from Katipunan Road and heading towards E. Rodriguez, Sr. Avenue, was travelling
along the downward portion of Boni Serrano Avenue when, upon reaching the corner of Riviera Street,
fronting St. Ignatius Village, its left front portion was hit by the Mayamy bus. [11]According to PO1 Rosales, the
Mayamy bus, while traversing the opposite lane, intruded on the lane occupied by the Isuzu truck. [12]

PO1 Rosales also reported that Mendoza tried to escape by speeding away, but he was apprehended in
Katipunan Road corner C. P. Garcia Avenue by one Traffic Enforcer Galante and a security guard of St.
Ignatius Village.[13]

As a result of the incident, Perez, as well as the helpers on board the Isuzu truck, namely Melchor V. Anla
(Anla), Romeo J. Banca (Banca), and Jimmy Repisada (Repisada), sustained injuries necessitating medical
treatment amounting to P11,267.35, which amount was shouldered by respondents. Moreover, the Isuzu
truck sustained extensive damages on its cowl, chassis, lights and steering wheel, amounting to P142,757.40.
[14]

Additionally, respondents averred that the mishap deprived them of a daily income of P1,000.00. Engaged in
the business of buying plastic scraps and delivering them to recycling plants, respondents claimed that the
Isuzu truck was vital in the furtherance of their business.

For their part, petitioners capitalized on the issue of ownership of the bus in question. Respondents argued
that although the registered owner was Lim, the actual owner of the bus was SPO1 Cirilo Enriquez (Enriquez),
who had the bus attached with Mayamy Transportation Company (Mayamy Transport) under the so-called
"kabit system." Respondents then impleaded both Lim and Enriquez.

Petitioners, on the other hand, presented Teresita Gutierrez (Gutierrez), whose testimony was offered to prove
that Mayamy Bus or Mayamy Transport is a business name registered under her name, and that such
business is a sole proprietorship. Such was presented by petitioners to rebut the allegation of respondents
that Mayamy Transport is a corporation;[15] and to show, moreover, that although Gutierrez is the sole
proprietor of Mayamy Transport, she was not impleaded by respondents in the case at bar. [16]

After weighing the evidence, the RTC found Mendoza liable for direct personal negligence under Article 2176
of the Civil Code, and it also found Lim vicariously liable under Article 2180 of the same Code.

As regards Lim, the RTC relied on the Certificate of Registration issued by the Land Transportation Office on 9
December 1996[17] in concluding that she is the registered owner of the bus in question. Although actually
owned by Enriquez, following the established principle in transportation law, Lim, as the registered owner, is
the one who can be held liable.

Thus, the RTC disposed of the case as follows:

WHEREFORE, judgment is hereby rendered in favor of the [respondents] and against the [petitioners]:

1. Ordering the [petitioners] except Enriquez to pay [respondents], jointly and severally, the costs of
repair of the damaged vehicle in the amount of P142,757.40;
2. Ordering the defendants except Enriquez to pay [respondents], jointly and severally, the amount of
P1,000.00 per day from March 7, 1997 up to November 1997 representing the unrealized income of
the [respondents] when the incident transpired up to the time the damaged Isuzu truck was repaired;
3. Ordering the [petitioners] except Enriquez to pay [respondents], jointly and severally, the amount of
P100,000.00 as moral damages, plus a separate amount of P50,000.00 as exemplary damages;
4. Ordering the [petitioners] except Enriquez to pay [respondents], jointly and severally, the amount of
P50,000.00 as attorney's fees;
5. Ordering the [petitioners] except Enriquez to pay [respondents] the costs of suit. [18]

Displeased, petitioners appealed to the CA, which appeal was docketed as CA-G.R. CV No. 71877. After
evaluating the damages awarded by the RTC, such were affirmed by the CA with the exception of the award of
unrealized income which the CA ordered deleted, viz:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The judgment of the Regional Trial
Court of Valenzuela City, Branch 172 dated January 31, 2001, is MODIFIED, in that the award of P1,000.00
per day from March 1997 up to November 1997 representing unrealized income is DELETED. The award of
P142,757.40 for the cost of repair of the damaged vehicle, the award of P100,000.00 as moral damages, the
award of P50,000.00 as exemplary damages, the award of P50,000.00 as attorney's fees and the costs of the
suit are hereby MAINTAINED.[19]

The Present Petition

Unsatisfied with the CA ruling, petitioners filed an appeal by certiorari before the Court, raising the following
issues:[20]

1. The court a quo has decided questions of substance in a way not in accord with law or with the
applicable decisions of the Supreme Court when it awarded:

a. Moral damages in spite of the fact that the [respondents'] cause of action is clearly based on quasi-
delict and [respondents] did not sustain physical injuries to be entitled thereto pursuant to Article
2219 (2) of the New Civil Code and pertinent decisions of the Supreme Court to that effect. The court a
quo erroneously concluded that the driver acted in bad faith and erroneously applied the provision of
Article 21 of the same code to justify the award for bad faith is not consistent with quasi-delict which
is founded on fault or negligence.

b. Exemplary damages in spite of the fact that there is no finding that the vehicular accident was due
to petitioner-driver's gross negligence to be entitled thereto pursuant to Article 2231 of the New Civil
Code and pertinent decisions of the Supreme Court to that effect. The factual basis of the court a quo
that "the act of the driver of the bus in attempting to escape after causing the accident in wanton
disregard of the consequences of his negligent act is such gross negligence that justifies an award of
exemplary damages" is an act after the fact which is not within the contemplation of Article 2231 of
the New Civil Code.

c. Attorney's fees in spite of the fact that the assailed decisions of the trial court and the court a quo
are bereft with jurisdictions for the award of attorney's fees pursuant to the pertinent decisions of the
Supreme Court on the matter and provision Article 2208 of the New Civil Code. The court a quo
erroneously applied the decision of the Supreme Court in Bañas, Jr. vs. Court of Appeals, 325 SCRA
259.
The Court's Ruling

The petition is partially meritorious.

Respondents anchor their claim for damages on Mendoza's negligence, banking on Article 2176 of the Civil
Code, to wit:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for
the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties,
is called a quasi-delict and is governed by the provisions of this Chapter.

In impleading Lim, on the other hand, respondents invoke the latter's vicarious liability as espoused in Article
2180 of the same Code:
The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for
those of persons for whom one is responsible.

xxxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the
scope of their assigned tasks, even though the former are not engaged in any business of industry.

The first question to address, then, is whether or not Mendoza's negligence was duly proven. Negligence is
defined as the failure to observe for the protection of the interests of another person, that degree of care,
precaution and vigilance which the circumstances justly demand, whereby such other person suffers injury.
[21]

As found by the RTC, and affirmed by the CA, Mendoza was negligent in driving the subject Mayamy bus, as
demonstrated by the fact that, at the time of the collision, the bus intruded on the lane intended for the Isuzu
truck. Having encroached on the opposite lane, Mendoza was clearly in violation of traffic laws. Article 2185 of
the Civil Code provides that unless there is proof to the contrary, it is presumed that a person driving a motor
vehicle has been negligent if at the time of the mishap, he was violating any traffic regulation. In the case at
bar, Mendoza's violation of traffic laws was the proximate cause of the harm.

Proximate cause is defined as that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have occurred. And
more comprehensively, the proximate legal cause is that acting first and producing the injury, either
immediately or by setting other events in motion, all constituting a natural and continuous chain of events,
each having a close causal connection with its immediate predecessor, the final event in the chain
immediately effecting the injury as a natural and probable result of the cause which first acted, under such
circumstances that the person responsible for the first event should, as an ordinary prudent and intelligent
person, have reasonable ground to expect at the moment of his act or default that an injury to some person
might probably result therefrom.[22]

The evidence on record shows that before the collision, the Isuzu truck was in its rightful lane, and was even
at a stop, having been flagged down by a security guard of St. Ignatius Village. [23] The mishap occurred when
the Mayamy bus, travelling at a fast speed as shown by the impact of the collision, and going in the opposite
direction as that of the Isuzu truck, encroached on the lane rightfully occupied by said Isuzu truck, and
caused the latter to spin, injuring Perez, Anla, Banca, and Repisada, and considerably damaging the Isuzu
truck.

Having settled the fact of Mendoza's negligence, then, the next question that confronts us is who may be held
liable. According to Manresa, liability for personal acts and omissions is founded on that indisputable
principle of justice recognized by all legislations that when a person by his act or omission causes damage or
prejudice to another, a juridical relation is created by virtue of which the injured person acquires a right to be
indemnified and the person causing the damage is charged with the corresponding duty of repairing the
damage. The reason for this is found in the obvious truth that man should subordinate his acts to the
precepts of prudence and if he fails to observe them and causes damage to another, he must repair the
damage.[24] His negligence having caused the damage, Mendoza is certainly liable to repair said damage.

Additionally, Mendoza's employer may also be held liable under the doctrine of vicarious liability or imputed
negligence. Under such doctrine, a person who has not committed the act or omission which caused damage
or injury to another may nevertheless be held civilly liable to the latter either directly or subsidiarily under
certain circumstances.[25] In our jurisdiction, vicarious liability or imputed negligence is embodied in Article
2180 of the Civil Code and the basis for damages in the action under said article is the direct and primary
negligence of the employer in the selection or supervision, or both, of his employee. [26]

In the case at bar, who is deemed as Mendoza's employer? Is it Enriquez, the actual owner of the bus or Lim,
the registered owner of the bus?

In Filcar Transport Services v. Espinas,[27] we held that the registered owner is deemed the employer of the
negligent driver, and is thus vicariously liable under Article 2176, in relation to Article 2180, of the Civil Code.
Citing Equitable Leasing Corporation v. Suyom,[28] the Court ruled that in so far as third persons are
concerned, the registered owner of the motor vehicle is the employer of the negligent driver, and the actual
employer is considered merely as an agent of such owner. Thus, whether there is an employer-employee
relationship between the registered owner and the driver is irrelevant in determining the liability of the
registered owner who the law holds primarily and directly responsible for any accident, injury or death caused
by the operation of the vehicle in the streets and highways.[29]

As early as Erezo v. Jepte,[30] the Court, speaking through Justice Alejo Labrador summarized the justification
for holding the registered owner directly liable, to wit:

x x x The main aim of motor vehicle registration is to identify the owner so that if any accident happens, or
that any damage or injury is caused by the vehicles on the public highways, responsibility therefore can be
fixed on a definite individual, the registered owner. Instances are numerous where vehicle running on public
highways caused accidents or injuries to pedestrians or other vehicles without positive identification of the
owner or drivers, or with very scant means of identification. It is to forestall these circumstances, so
inconvenient or prejudicial to the public, that the motor vehicle registration is primarily ordained, in the
interest of the determination of persons responsible for damages or injuries caused on public highways.

"'One of the principal purposes of motor vehicles legislation is identification of the vehicle and of the operator,
in case of accident; and another is that the knowledge that means of detection are always available may act as
a deterrent from lax observance of the law and of the rules of conservative and safe operation. Whatever
purpose there may be in these statutes, it is subordinate at the last to the primary purpose of rendering it
certain that the violator of the law or of the rules of safety shall not escape because of lack of means to
discover him." The purpose of the statute is thwarted, and the displayed number becomes a "snare and
delusion," if courts will entertain such defenses as that put forward by appellee in this case. No responsible
person or corporation could be held liable for the most outrageous acts of negligence, if they should be
allowed to place a "middleman" between them and the public, and escape liability by the manner in which
they recompense their servants.[31]

Generally, when an injury is caused by the negligence of a servant or employee, there instantly arises a
presumption of law that there was negligence on the part of the master or employer either in the selection of
the servant or employee (culpa in eligiendo) or in the supervision over him after the selection (culpa vigilando),
or both. The presumption is juris tantum and not juris et de jure; consequently, it may be rebutted.
Accordingly, the general rule is that if the employer shows to the satisfaction of the court that in the selection
and supervision of his employee he has exercised the care and diligence of a good father of a family, the
presumption is overcome and he is relieved of liability.[32] However, with the enactment of the motor vehicle
registration law, the defenses available under Article 2180 of the Civil Code - that the employee acts beyond
the scope of his assigned task or that it exercised the due diligence of a good father of a family to prevent
damage are no longer available to the registered owner of the motor vehicle, because the motor vehicle
registration law, to a certain extent, modified Article 2180. [33]

As such, there can be no other conclusion but to hold Lim vicariously liable with Mendoza.

This does not mean, however, that Lim is left without any recourse against Enriquez and Mendoza. Under the
civil law principle of unjust enrichment, the registered owner of the motor vehicle has a right to be
indemnified by the actual employer of the driver; and under Article 2181 of the Civil Code, whoever pays for
the damage caused by his dependents or employees may recover from the latter what he has paid or delivered
in satisfaction of the claim.

Having identified the persons liable, our next question is what may be awarded.

Actual or Compensatory Damages. Actual or compensatory damages are those awarded in satisfaction of, or
in recompense for, loss or injury sustained. They simply make good or replace the loss caused by the wrong.
[34]

Article 2202 of the Civil Code provides that in crimes and quasi- delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or omission complained of. It is not
necessary that such damages have been foreseen or could have reasonably been foreseen by the defendant.
Article 2199 of the same Code, however, sets the limitation that, except as provided by law or by stipulation,
one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly
proved. As such, to warrant an award of actual or compensatory damages, the claimant must prove that the
damage sustained is the natural and probable consequences of the negligent act and, moreover, the claimant
must adequately prove the amount of such damage.

In the case at bar, the RTC, basing on the receipts submitted by respondents and which receipts petitioners
had the opportunity to examine, found that the total repairs on the Isuzu truck amounted to P142,757.40,
and that the full hospitalization and medical expenses of Perez, Anla, Banca, and Repisada amounted to
P11,267.35. As such, these are the amounts that respondents are entitled to as actual and compensatory
damages.

Although respondents alleged in their complaint that the damage to their Isuzu truck caused them the loss of
a daily income of P1,000.00, such claim was not duly substantiated by any evidence on record, and thus
cannot be awarded in their favor.

Moral Damages. Moral damages are awarded to enable the injured party to obtain means, diversions or
amusements that will serve to alleviate the moral suffering he has undergone, by reason of the defendant's
culpable action.[35]

In prayers for moral damages, however, recovery is more an exception rather than the rule. Moral damages
are not meant to be punitive but are designed to compensate and alleviate the physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar harm unjustly caused to a person. To be entitled to such an award, the claimant must
satisfactorily prove that he has suffered damages and that the injury causing it has sprung from any of the
cases listed in Articles 2219 and 2220 of the Civil Code. Moreover, the damages must be shown to be the
proximate result of a wrongful act or omission. The claimant must thus establish the factual basis of the
damages and its causal tie with the acts of the defendant.[36]

In fine, an award of moral damages calls for the presentation of 1) evidence of besmirched reputation or
physical, mental or psychological suffering sustained by the claimant; 2) a culpable act or omission factually
established; 3) proof that the wrongful act or omission of the defendant is the proximate cause of the damages
sustained by the claimant; and 4) the proof that the act is predicated on any of the instances expressed or
envisioned by Article 2219 and Article 2220 of the Civil Code.[37]

A review of the complaint and the transcript of stenographic notes yields the pronouncement that
respondents neither alleged nor offered any evidence of besmirched reputation or physical, mental or
psychological suffering incurred by them. All that Leonora and her counsel had to say on the matter of
damages other than actual or compensatory damages is this:[38]

Q: Did you ever spend covering attorney's fees?


A: Yes, sir. P50,000.00.
Q: Aside from the actual damage that you have mentioned x x x, how much more would you like this Court to
award you by way of moral damages?
A: P100,000.00, sir.
Q: How about exemplary damages?
A: P50,000.00, sir.
Q: What happened to you, what did you feel when the defendants failed to immediately repair your vehicle
that was damaged Madam Witness?
A: I have incurred expenses and I was forced to apply for a loan, sir.

In Kierulf v. CA,[39] we observed that this Court cannot remind the bench and the bar often enough that in
order that moral damages may be awarded, there must be pleading and proof of moral suffering, mental
anguish, fright and the like. Citing Francisco v. GSIS,[40]the Court held that there must be clear testimony on
the anguish and other forms of mental suffering. Thus, if the plaintiff fails to take the witness stand and
testify as to his social humiliation, wounded feelings and anxiety, moral damages cannot be awarded.

Moreover, respondents were not able to show that their claim properly falls under Articles 2219 and 2220 of
the Civil Code. Respondents cannot rely on Article 2219 (2) of the Civil Code which allows moral damages
in quasi-delicts causing physical injuries because in physical injuries, moral damages are recoverable only by
the injured party,[41] and in the case at bar, herein respondents were not the ones who were actually injured.

In B.F. Metal (Corp.) v. Sps. Lomotan, et al.,[42] the Court, in a claim for damages based on quasi-delict causing
physical injuries, similarly disallowed an award of moral damages to the owners of the damaged vehicle, when
neither of them figured in the accident and sustained injuries.

Neither can respondents rely on Article 21 of the Civil Code as the RTC erroneously did. Article 21 deals with
acts contra bonus mores, and has the following elements: (1) There is an act which is legal; (2) but which is
contrary to morals, good custom, public order, or public policy; (3) and it is done with intent to injure. [43] In
the present case, it can hardly be said that Mendoza's negligent driving and violation of traffic laws are legal
acts. Moreover, it was not proven that Mendoza intended to injure Perez, et al. Thus, Article 21 finds no
application to the case at bar.

All in all, we find that the RTC and the CA erred in granting moral damages to respondents.

Exemplary Damages. Article 2229 of the Civil Code provides that exemplary or corrective damages are
imposed, by way of example or correction for the public good, in addition to moral, temperate, liquidated or
compensatory damages. Article 2231 of the same Code further states that in quasi-delicts, exemplary damages
may be granted if the defendant acted with gross negligence.

Our jurisprudence sets certain conditions when exemplary damages may be awarded: First, they may be
imposed by way of example or correction only in addition, among others, to compensatory damages, and
cannot be recovered as a matter of right, their determination depending upon the amount of compensatory
damages that may be awarded to the claimant. Second, the claimant must first establish his right to moral,
temperate, liquidated or compensatory damages. Third, the wrongful act must be accompanied by bad faith,
and the award would be allowed only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner.[44]

In motor vehicle accident cases, exemplary damages may be awarded where the defendant's misconduct is so
flagrant as to transcend simple negligence and be tantamount to positive or affirmative misconduct rather
than passive or negative misconduct. In characterizing the requisite positive misconduct which will support a
claim for punitive damages, the courts have used such descriptive terms as willful, wanton, grossly negligent,
reckless, or malicious, either alone or in combination.[45]

Gross negligence is the absence of care or diligence as to amount to a reckless disregard of the safety of
persons or property. It evinces a thoughtless disregard of consequences without exerting any effort to avoid
them.[46]

In the case at bar, having established respondents' right to compensatory damages, exemplary damages are
also in order, given the fact that Mendoza was grossly negligent in driving the Mayamy bus. His act of
intruding or encroaching on the lane rightfully occupied by the Isuzu truck shows his reckless disregard for
safety.

In Baño v. Bachelor Express, Inc., et al.,[47] where an erring bus, in the process of overtaking a jeepney, also
encroached on the opposite lane, and consequently collided with a dump truck, the Court held the driver of
the bus grossly negligent and affirmed the award of exemplary damages.

Attorney's Fees. Article 2208 of the Civil Code enumerates the instances when attorney's fees may be
recovered:

Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs,
cannot be recovered, except:

(1) When exemplary damages are awarded;


When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
(2)
incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's valid and
(5)
demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8) In actions for indemnity under workmen's compensation and employer's liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
In any other case where the court deems it just and equitable that attorney's fees and expenses of
(11)
litigation should be recovered;

In all cases, the attorney's fees and expenses of litigation must be reasonable.

From the very opening sentence of Article 2208 of the Civil Code, it is clearly intended to retain the award of
attorney's fees as the exception in our law, as the general rule remains that attorney's fees are not recoverable
in the absence of a stipulation thereto, the reason being that it is not sound policy to set a premium on the
right to litigate.[48]

As such, in Spouses Agustin v. CA,[49] we held that, the award of attorney's fees being an exception rather than
the general rule, it is necessary for the court to make findings of facts and law that would bring the case
within the exception and justify the grant of such award. Thus, the reason for the award of attorney's fees
must be stated in the text of the court's decision; otherwise, if it is stated only in the dispositive portion of the
decision, the same must be disallowed on appeal.

In the case at bar, the RTC Decision had nil discussion on the propriety of attorney's fees, and it merely
awarded such in the dispositive. The CA Decision, on the other hand, merely stated that the award of
attorney's fees is merited as such is allowed when exemplary damages are awarded. [50] Following established
jurisprudence,[51] however, the CA should have disallowed on appeal said award of attorney's fees as the RTC
failed to substantiate said award.

Costs of suit. The Rules of Court provide that, generally, costs shall be allowed to the prevailing party as a
matter of course, thus:[52]

Section 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these rules, costs shall be
allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons, to
adjudge that either party shall pay the costs of an action, or that the same be divided, as may be equitable.
No costs shall be allowed against the Republic of the Philippines, unless otherwise provided by law.

In the present case, the award of costs of suit to respondents, as the prevailing party, is in order.

Interests. Interest by way of damages has been defined as interest allowed in actions for breach of contract or
tort for the unlawful detention of money already due. This type of interest is frequently called "moratory
interest." Interest as a part of damage, is allowed, not by application of arbitrary rules, but as a result of the
justice of the individual case and as compensation to the injured party. [53]

The legal provision on interests in quasi-delicts is Article 2211 of the Civil Code which provides that in crimes
and quasi-delicts, interest as part of the damage, may, in a proper case, be adjudicated in the discretion of
the court.

Generally, interest is allowed as a matter of right for failure to pay liquidated claims when due. [54] For
unliquidated claims, however, Article 2213 of the Civil Code provides that interest cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable certainty.

In the case at bar, although the award of exemplary damages is unliquidated in the sense that petitioners
cannot know for sure, before judgment, the exact amount that they are required to pay to respondents, the
award of actual or compensatory damages, however, such as the truck repairs and medical expenses, is
arguably liquidated in that they can be measured against a reasonably certain standard. [55] Moreover, justice
would seem to require that the delay in paying for past losses which can be made reasonably certain should
be compensated through an award of interest.[56]
WHEREFORE, premises considered, the Court Resolves to PARTIALLY GRANT the appeal by certiorari, as
follows:

DECLARE Mariano Mendoza and Elvira Lim solidarily liable to respondent Spouses Leonora and Gabriel
1)
Gomez ;
MAINTAIN the award of actual or compensatory damages in the amount of Pl42,757.40 for the repair of
2)
the Isuzu Elf truck, with legal interest beginning 31 January 2001 until fully paid;
GRANT additional actual or compensatory damages in the amount of P11,267.35 for the medical
3) expenses shouldered by respondent Spouses Leonora and Gabriel Gomez, with legal interest beginning
31 January 2001 until fully paid;
4) DELETE the award of moral damages;
5) MAINTAIN the award of exemplary damages at P50,000.00;
6) DELETE the award of attorney's fees; and
7) MAINTAIN the award of costs of suit.

SO ORDERED.

Brion,* (Acting Chairperson), Del Castillo, Mendoza,** and Perlas-Bernabe, JJ., concur.

[ GR No. 206806, Jun 25, 2014 ]


ARCO PULP v. DAN T. LIM +
DECISION

LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed
and may be implied only if the old and new contracts are incompatible on every point.

Before us is a petition for review on certiorari[1] assailing the Court of Appeals' decision[2] in CA-G.R. CV No.
95709, which stemmed from a complaint[3] filed in the Regional Trial Court of Valenzuela City, Branch 171,
for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business. [4] From
February 2007 to March 2007, he delivered scrap papers worth P7,220,968.31 to Arco Pulp and Paper
Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos.
[5]
 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent value. [6]

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check
dated April 18, 2007[7] in the amount of P1,487,766.68 as partial payment, with the assurance that the check
would not bounce.[8] When he deposited the check on April 18, 2007, it was dishonored for being drawn
against a closed account.[9]

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement [10] where
Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation,
owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by
Dan T. Lim, through his company, Quality Paper and Plastic Products. The memorandum of agreement reads
as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of
P18.50 per kg. to Megapack Container for Mr. Eric Sy's account. Schedule of deliveries are as follows:
....

It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners
will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg. (price
subject to change per advance notice). Quantity of Local OCC delivery will be based on the quantity of Test
Liner delivered to Megapack Container Corp. based on the above production schedule. [11]

On May 5, 2007, Dan T. Lim sent a letter[12] to Arco Pulp and Paper demanding payment of the amount of ?
7,220,968.31, but no payment was made to him.[13]

Dan T. Lim filed a complaint[14] for collection of sum of money with prayer for attachment with the Regional
Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer [15] but failed
to have its representatives attend the pre-trial hearing. Hence, the trial court allowed Dan T. Lim to present
his evidence ex parte.[16]

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished Arco Pulp and Paper's obligation to Dan T. Lim. [17]

Dan T. Lim appealed[18] the judgment with the Court of Appeals. According to him, novation did not take place
since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private
agreement between them. He argued that if his name was mentioned in the contract, it was only for supplying
the parties their required scrap papers, where his conformity through a separate contract was indispensable.
[19]

On January 11, 2013, the Court of Appeals[20] rendered a decision[21] reversing and setting aside the judgment
dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the
amount of P7,220,968.31 with interest at 12% per annum from the time of demand; P50,000.00 moral
damages; P50,000.00 exemplary damages; and P50,000.00 attorney's fees.[22]

The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an
alternative obligation.[23] It also ruled that Dan T. Lim was entitled to damages and attorney's fees due to the
bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking. [24]

Its motion for reconsideration[25] having been denied,[26] Arco Pulp and Paper and its President and Chief
Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation of
the original obligation since Eric Sy became the new debtor of respondent. They also argue that there is no
legal basis to hold petitioner Candida A. Santos personally liable for the transaction that petitioner
corporation entered into with respondent. The Court of Appeals, they allege, also erred in awarding moral and
exemplary damages and attorney's fees to respondent who did not show proof that he was entitled to
damages. [27]

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no
proper novation in this case. He argues that the Court of Appeals was correct in ordering the payment of ?
7,220,968.31 with damages since the debt of petitioners remains unpaid. [28] He also argues that the Court of
Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime
mover for such outstanding corporate liability."[29]

In their reply, petitioners reiterate that novation took place since there was nothing in the memorandum of
agreement showing that the obligation was alternative. They also argue that when respondent allowed them to
deliver the finished products to Eric Sy, the original obligation was novated. [30]

A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.[31]

The issues to be resolved by this court are as follows:


1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorney's fees can be awarded

The petition is denied.

The obligation between the


parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:

Article 1199. A person alternatively bound by different prestations shall completely perform one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined
by the choice of the debtor who generally has the right of election." [32] The right of election is extinguished
when the party who may exercise that option categorically and unequivocally makes his or her choice known.
[33]
 The choice of the debtor must also be communicated to the creditor who must receive notice of it since:

The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the election take legal effect when consented by
the creditor, or if impugned by the latter, when declared proper by a competent court. [34]

According to the factual findings of the trial court and the appellate court, the original contract between the
parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner Arco Pulp and Paper.
The payment for this delivery became petitioner Arco Pulp and Paper's obligation. By agreement, petitioner
Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or (2) deliver the finished
products of equivalent value to respondent.[35]

The appellate court, therefore, correctly identified the obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent, would
either pay him the price of the raw materials or, in the alternative, deliver to him the finished products of
equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers,
they exercised their option to pay the price. Respondent's receipt of the check and his subsequent act of
depositing it constituted his notice of petitioner Arco Pulp and Paper's option to pay.

This choice was also shown by the terms of the memorandum of agreement, which was executed on the same
day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Paper's finished
products would be to a third person, thereby extinguishing the option to deliver the finished products of
equivalent value to respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation
of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished
products to a third person, it did not novate the original obligation between the parties.

The rules on novation are outlined in the Civil Code, thus:


Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;


(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other. (1204)

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or
when there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on every point incompatible with each other." [36]

Novation was extensively discussed by this court in Garcia v. Llamas:[37]

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by


substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made
even without the knowledge or against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion.
In expromision, the initiative for the change does not come from and may even be made without the knowledge
of the debtor, since it consists of a third person's assumption of the obligation. As such, it logically requires
the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a
third person who consents to the substitution and assumes the obligation; thus, the consent of these three
persons are necessary. Both modes of substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or
modificatory, novation is made either by changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. For novation to take place, the
following requisites must concur:

1) There must be a previous valid obligation.


2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms
that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one
on every point. The test of incompatibility is whether the two obligations can stand together, each one
with its own independent existence.[38] (Emphasis supplied)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman
Law jurisprudence, the principle novatio non praesumitur that novation is never presumed. At bottom,
for novation to be a jural reality, its animus must be ever present, debitum pro debito basically extinguishing
the old obligation for the new one.[39] (Emphasis supplied)

There is nothing in the memorandum of agreement that states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy
somehow substituted petitioner Arco Pulp and Paper as respondent's debtor. It merely shows that petitioner
Arco Pulp and Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid:

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear and
unequivocal intent by the parties to novate the old agreement.[40] (Emphasis supplied)

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract
need not be secured. This is clear from the first line of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy. . . .[41]

If the memorandum of agreement was intended to novate the original agreement between the parties,
respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal terms that it has replaced the original obligation of
petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case.

Petitioner Arco Pulp and Paper's act of tendering partial payment to respondent also conflicts with their
alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner
Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to the
latter as his new debtor. These acts, when taken together, clearly show that novation did not take place.

Since there was no novation, petitioner Arco Pulp and Paper's obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
P7,220,968.31.

Petitioners are liable for damages 

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the
breach is due to fraud or bad faith:

Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court should
find that, under the circumstances, such damages are justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it proved that the breach
was due to fraud or bad faith. As this court stated:

Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if
the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. [42]

Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1) first, there must be an
injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there must be
culpable act or omission factually established; (3) third, the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is predicated
on any of the cases stated in Article 2219 of the Civil Code.[43]

Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper's act of refusing to
pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a third person in an effort to evade its liability. This
proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the
following instances:

Article 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;


(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of the Civil Code, which states:

Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right with honesty and good
faith. Failure to do so results in an abuse of that right, which may become the basis of an action for damages.
Article 19, however, cannot be its sole basis:

Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an
actionable tort. Article 19 describes the degree of care required so that an actionable tort may arise when it is
alleged together with Article 20 or Article 21.[44]

Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.

Article 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that are
contrary to morals, good customs, and public policy:

Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have
been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve the outcome
which is considered by the plaintiff in tort action as injurious. Negligence may refer to a situation where the
act was consciously done but without intending the result which the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily
proscribed by law. This article requires that the act be willful, that is, that there was an intention to do the act
and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around whether such
outcome should be considered a legal injury on the part of the plaintiff or whether the commission of the act
was done in violation of the standards of care required in Article 19. [45]

When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the
risk of violating Article 1159 of the Civil Code:

Article 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered since
it only specifies, among others, Article 21. When a party reneges on his or her obligations arising from
contracts in bad faith, the act is not only contrary to morals, good customs, and public policy; it is also a
violation of Article 1159. Breaches of contract become the basis of moral damages, not only under Article
2220, but also under Articles 19 and 20 in relation to Article 1159.

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that
the breach be done fraudulently or in bad faith. In Adriano v. Lasala:[46]

To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless
and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must prove its
existence by clear and convincing evidence for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or
interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which
can be inferred from one's conduct and/or contemporaneous statements.[47] (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the
circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was
presumably with the knowledge that it was being drawn against a closed account. Worse, it attempted to shift
their obligations to a third person without the consent of respondent.

Petitioner Arco Pulp and Paper's actions clearly show "a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes
of the nature of fraud."[48] Moral damages may, therefore, be awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following
circumstances:

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or
not they should be adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show that he
is entitled to moral, temperate or compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded.

In Tankeh v. Development Bank of the Philippines,[49] we stated that:


The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the
commission of a similar offense. The case of People v. Rante citing People v. Dalisay held that:

Also known as 'punitive' or 'vindictive' damages, exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These
terms are generally, but not always, used interchangeably. In common law, there is preference in the use of
exemplary damages when the award is to account for injury to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an injury that has been maliciously and wantonly inflicted, the
theory being that there should be compensation for the hurt caused by the highly reprehensible conduct of
the defendant associated with such circumstances as willfulness, wantonness, malice, gross negligence or
recklessness, oppression, insult or fraud or gross fraud that intensifies the injury. The terms punitive or
vindictive damages are often used to refer to those species of damages that may be awarded against a person
to punish him for his outrageous conduct. In either case, these damages are intended in good measure to
deter the wrongdoer and others like him from similar conduct in the future. [50] (Emphasis supplied; citations
omitted)

The requisites for the award of exemplary damages are as follows:

they may be imposed by way of example in addition to compensatory damages, and only after the
(1)
claimant's right to them has been established;
that they cannot be recovered as a matter of right, their determination depending upon the amount of
(2)
compensatory damages that may be awarded to the claimant; and
the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent
(3)
manner.[51]

Business owners must always be forthright in their dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were freely entered into by them. Exemplary damages may also
be awarded in this case to serve as a deterrent to those who use fraudulent means to evade their liabilities.

Since the award of exemplary damages is proper, attorney's fees and cost of the suit may also be recovered.
Article 2208 of the Civil Code states:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs,
cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos


is solidarily liable with petitioner
corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to prove
that the transaction was also a personal undertaking of petitioner Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,[52] we stated that:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally
not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may
be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of
an existing obligation, the circumvention of statutes, or to confuse legitimate issues.
....

Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for review
on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the lower court
are not supported by the evidence on record or are based on a misapprehension of facts. [53] (Emphasis
supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for
obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant
is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence
or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner
corporation's obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face of
the check bearing the account name, "Arco Pulp & Paper, Co., Inc." [54] Any obligation arising from these acts
would not, ordinarily, be petitioner Santos' personal undertaking for which she would be solidarily liable with
petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:[55]

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine,
the corporate existence may be disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud
or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which
case, the fiction will be disregarded and the individuals composing it and the two corporations will be
treated as identical.[56] (Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper,
stating that:

In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor
their undertaking in favor of the [respondent]. After the check in the amount of P1,487,766.68 issued by
[petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation denied
any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies provided by law
in order to protect his rights.[57]

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil.
When petitioner Arco Pulp and Paper's obligation to respondent became due and demandable, she not only
issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and
Paper's liability. She unjustifiably refused to honor petitioner corporation's obligations to respondent. These
acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos
may be held solidarily liable with petitioner Arco Pulp and Paper.

The rate of interest due on


the obligation must be reduced
in view of Nacar v. Gallery
Frames[58]

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery
Frames,[59] the rate of interest due on the obligation must be modified from 12% per annum to 6% per annum
from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,[60] and we have laid
down the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not
be disturbed and shall continue to be implemented applying the rate of interest fixed therein. [61] (Emphasis
supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at 6% per
annum, computed from May 5, 2007, when respondent sent his letter of demand to petitioners. This interest
shall continue to be due from the finality of this decision until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent
Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the time of demand until finality
of judgment and its full satisfaction, with moral damages in the amount of P50,000.00, exemplary damages in
the amount of P50,000.00, and attorney's fees in the amount of P50,000.00.

SO ORDERED.

Peralta, (Acting Chairperson),* Villarama, Jr.** Mendoza, and Reyes*** JJ., concur.

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