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Republic of the Philippines

SUPREME COURT
Manila
 
THIRD DIVISION
 
GENERAL MILLING   G.R. No. 193723
CORPORATION,  
Petitioner, Present:
   
  CARPIO, J.,*
  VELASCO, JR., Chairperson,
- versus - LEONARDO-DE CASTRO,**
  ABAD, and
  MENDOZA, JJ.
   
SPS. LIBRADO RAMOS and Promulgated:
REMEDIOS RAMOS,  
Respondents. July 20, 2011
x-----------------------------------------------------------------------------------------x
 
 
DECISION
VELASCO, JR., J.:
 
The Case
 
This is a petition for review of the April 15, 2010 Decision of the Court of Appeals
(CA) in CA-G.R. CR-H.C. No. 85400 entitled Spouses Librado Ramos &
Remedios Ramos v. General Milling Corporation, et al., which affirmed the May
31, 2005 Decision of the Regional Trial Court (RTC), Branch 12 in Lipa City, in
Civil Case No. 00-0129 for Annulment and/or Declaration of Nullity of
Extrajudicial Foreclosure Sale with Damages.
 
 
The Facts
 
On August 24, 1989, General Milling Corporation (GMC) entered into a Growers
Contract with spouses Librado and Remedios Ramos (Spouses Ramos). Under the
contract, GMC was to supply broiler chickens for the spouses to raise on their land
in Barangay Banaybanay, Lipa City, Batangas.[1] To guarantee full compliance, the
Growers Contract was accompanied by a Deed of Real Estate Mortgage over a
piece of real property upon which their conjugal home was built. The spouses
further agreed to put up a surety bond at the rate of PhP 20,000 per 1,000 chicks
delivered by GMC. The Deed of Real Estate Mortgage extended to Spouses Ramos
a maximum credit line of PhP 215,000 payable within an indefinite period with an
interest of twelve percent (12%) per annum.[2]
The Deed of Real Estate Mortgage contained the following provision:
 
WHEREAS, the MORTGAGOR/S has/have agreed to guarantee and secure the
full and faithful compliance of [MORTGAGORS] obligation/s with the
MORTGAGEE by a First Real Estate Mortgage in favor of the MORTGAGEE,
over a 1 parcel of land and the improvements existing thereon, situated in the
Barrio/s of Banaybanay, Municipality of Lipa City, Province of Batangas,
Philippines, his/her/their title/s thereto being evidenced by Transfer Certificate/s
No./s T-9214 of the Registry of Deeds for the Province of Batangas in the amount
of TWO HUNDRED FIFTEEN THOUSAND (P 215,000.00), Philippine
Currency, which the maximum credit line payable within a x x x day term and to
secure the payment of the same plus interest of twelve percent (12%) per annum.
 
 
Spouses Ramos eventually were unable to settle their account with GMC.
They alleged that they suffered business losses because of the negligence of GMC
and its violation of the Growers Contract.[3]
 
 
On March 31, 1997, the counsel for GMC notified Spouses Ramos that GMC
would institute foreclosure proceedings on their mortgaged property.[4]
 
On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage.
On June 10, 1997, the property subject of the foreclosure was subsequently sold by
public auction to GMC after the required posting and publication. [5] It was
foreclosed for PhP 935,882,075, an amount representing the losses on chicks and
feeds exclusive of interest at 12% per annum and attorneys fees.[6] To complicate
matters, on October 27, 1997, GMC informed the spouses that its Agribusiness
Division had closed its business and poultry operations.[7]
 
On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or
Declaration of Nullity of the Extrajudicial Foreclosure Sale with Damages. They
contended that the extrajudicial foreclosure sale on June 10, 1997 was null and
void, since there was no compliance with the requirements of posting and
publication of notices under Act No. 3135, as amended, or An Act to Regulate the
Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages. They likewise claimed that there was no sheriffs affidavit to prove
compliance with the requirements on posting and publication of notices. It was
further alleged that the Deed of Real Estate Mortgage had no fixed term. A prayer
for moral and exemplary damages and attorneys fees was also included in the
complaint.[8] Librado Ramos alleged that, when the property was foreclosed, GMC
did not notify him at all of the foreclosure.[9]
 
During the trial, the parties agreed to limit the issues to the following: (1) the
validity of the Deed of Real Estate Mortgage; (2) the validity of the extrajudicial
foreclosure; and (3) the party liable for damages.[10]
 
In its Answer, GMC argued that it repeatedly reminded Spouses Ramos of their
liabilities under the Growers Contract. It argued that it was compelled to foreclose
the mortgage because of Spouses Ramos failure to pay their obligation. GMC
insisted that it had observed all the requirements of posting and publication of
notices under Act No. 3135.[11]
The Ruling of the Trial Court
Holding in favor of Spouses Ramos, the trial court ruled that the Deed of Real
Estate Mortgage was valid even if its term was not fixed. Since the duration of the
term was made to depend exclusively upon the will of the debtors-spouses, the trial
court cited jurisprudence and said that the obligation is not due and payable until
an action is commenced by the mortgagee against the mortgagor for the purpose of
having the court fix the date on and after which the instrument is payable and the
date of maturity is fixed in pursuance thereto.[12]
 
The trial court held that the action of GMC in moving for the foreclosure of the
spouses properties was premature, because the latters obligation under their
contract was not yet due.
 
The trial court awarded attorneys fees because of the premature action taken by
GMC in filing extrajudicial foreclosure proceedings before the obligation of the
spouses became due.
 
 
 
The RTC ruled, thus:
 
 
WHEREFORE, premises considered, judgment is rendered as follows:
 
1.                  The Extra-Judicial Foreclosure Proceedings under docket no. 0107-97 is
hereby declared null and void;
 
2.              The Deed of Real Estate Mortgage is hereby declared valid and legal for
all intents and puposes;
 
3.                  Defendant-corporation General Milling Corporation is ordered to pay
Spouses Librado and Remedios Ramos attorneys fees in the total amount of P
57,000.00 representing acceptance fee of P30,000.00 and P3,000.00 appearance
fee for nine (9) trial dates or a total appearance fee of P 27,000.00;
 
4.                  The claims for moral and exemplary damages are denied for lack of
merit.
 
IT IS SO ORDERED.[13]
 
 
The Ruling of the Appellate Court
 
On appeal, GMC argued that the trial court erred in: (1) declaring the extrajudicial
foreclosure proceedings null and void; (2) ordering GMC to pay Spouses Ramos
attorneys fees; and (3) not awarding damages in favor of GMC.
 
The CA sustained the decision of the trial court but anchored its ruling on a
different ground. Contrary to the findings of the trial court, the CA ruled that the
requirements of posting and publication of notices under Act No. 3135 were
complied with. The CA, however, still found that GMCs action against Spouses
Ramos was premature, as they were not in default when the action was filed on
May 7, 1997.[14]
 
 
 
The CA ruled:
 
In this case, a careful scrutiny of the evidence on record shows that defendant-
appellant GMC made no demand to spouses Ramos for the full payment of their
obligation. While it was alleged in the Answer as well as in the Affidavit
constituting the direct testimony of Joseph Dominise, the principal witness of
defendant-appellant GMC, that demands were sent to spouses Ramos, the
documentary evidence proves otherwise. A perusal of the letters presented and
offered as evidence by defendant-appellant GMC did not demand but only request
spouses Ramos to go to the office of GMC to discuss the settlement of their
account.[15]
 
 
According to the CA, however, the RTC erroneously awarded attorneys fees to
Spouses Ramos, since the presumption of good faith on the part of GMC was not
overturned.
 
The CA disposed of the case as follows:
 
WHEREFORE, and in view of the foregoing considerations, the Decision of
the Regional Trial Court of Lipa City, Branch 12, dated May 21, 2005 is hereby
AFFIRMED with MODIFICATION by deleting the award of attorneys fees to
plaintiffs-appellees spouses Librado Ramos and Remedios Ramos.[16]
 
 
Hence, We have this appeal.
 
The Issues
 
A.    WHETHER [THE CA] MAY CONSIDER ISSUES NOT ALLEGED AND
DISCUSSED IN THE LOWER COURT AND LIKEWISE NOT RAISED
BY THE PARTIES ON APPEAL, THEREFORE HAD DECIDED THE
CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS
OF THE SUPREME COURT.
 
B.     WHETHER [THE CA] ERRED IN RULING THAT PETITIONER GMC
MADE NO DEMAND TO RESPONDENT SPOUSES FOR THE FULL
PAYMENT OF THEIR OBLIGATION CONSIDERING THAT THE
LETTER DATED MARCH 31, 1997 OF PETITIONER GMC TO
RESPONDENT SPOUSES IS TANTAMOUNT TO A FINAL DEMAND TO
PAY, THEREFORE IT DEPARTED FROM THE ACCEPTED AND
USUAL COURSE OF JUDICIAL PROCEEDINGS.[17]
 
 
The Ruling of this Court
Can the CA consider matters not alleged?
 
GMC asserts that since the issue on the existence of the demand letter was not
raised in the trial court, the CA, by considering such issue, violated the basic
requirements of fair play, justice, and due process.[18]
 
In their Comment,[19] respondents-spouses aver that the CA has ample authority to
rule on matters not assigned as errors on appeal if these are indispensable or
necessary to the just resolution of the pleaded issues.
 
In Diamonon v. Department of Labor and Employment,[20] We explained that an
appellate court has a broad discretionary power in waiving the lack of assignment
of errors in the following instances:
 
(a) Grounds not assigned as errors but affecting the jurisdiction of the
court over the subject matter;
 
(b) Matters not assigned as errors on appeal but are evidently plain or
clerical errors within contemplation of law;
 
(c) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case or to
serve the interests of a justice or to avoid dispensing piecemeal justice;
 
(d) Matters not specifically assigned as errors on appeal but raised in the
trial court and are matters of record having some bearing on the issue submitted
which the parties failed to raise or which the lower court ignored;
 
(e) Matters not assigned as errors on appeal but closely related to an error
assigned;
 
(f) Matters not assigned as errors on appeal but upon which the
determination of a question properly assigned, is dependent.
 
Paragraph (c) above applies to the instant case, for there would be a just and
complete resolution of the appeal if there is a ruling on whether the Spouses
Ramos were actually in default of their obligation to GMC.
 
Was there sufficient demand?
 
We now go to the second issue raised by GMC. GMC asserts error on the part of
the CA in finding that no demand was made on Spouses Ramos to pay their
obligation. On the contrary, it claims that its March 31, 1997 letter is akin to a
demand.
 
We disagree.
 
There are three requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; and third, the
creditor judicially or extrajudicially requires the debtors performance.[21]
 
According to the CA, GMC did not make a demand on Spouses Ramos but merely
requested them to go to GMCs office to discuss the settlement of their account. In
spite of the lack of demand made on the spouses, however, GMC proceeded with
the foreclosure proceedings. Neither was there any provision in the Deed of Real
Estate Mortgage allowing GMC to extrajudicially foreclose the mortgage without
need of demand.
 
 
 
Indeed, Article 1169 of the Civil Code on delay requires the following:
 
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfilment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay
may exist:
 
(1)   When the obligation or the law expressly so declares; x x x
 
 
As the contract in the instant case carries no such provision on demand not being
necessary for delay to exist, We agree with the appellate court that GMC should
have first made a demand on the spouses before proceeding to foreclose the real
estate mortgage.
 
Development Bank of the Philippines v. Licuanan finds application to the instant
case:
 
The issue of whether demand was made before the foreclosure was
effected is essential. If demand was made and duly received by the respondents
and the latter still did not pay, then they were already in default and foreclosure
was proper. However, if demand was not made, then the loans had not yet become
due and demandable. This meant that respondents had not defaulted in their
payments and the foreclosure by petitioner was premature. Foreclosure is valid
only when the debtor is in default in the payment of his obligation.[22]
 
In turn, whether or not demand was made is a question of fact.[23] This petition filed
under Rule 45 of the Rules of Court shall raise only questions of law. For a
question to be one of law, it must not involve an examination of the probative
value of the evidence presented by the litigants or any of them. The resolution of
the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence
presented, the question posed is one of fact. [24] It need not be reiterated that this
Court is not a trier of facts. [25] We will defer to the factual findings of the trial
court, because petitioner GMC has not shown any circumstances making this case
an exception to the rule.
 
WHEREFORE, the petition is DENIED. The CA Decision in CA-G.R.
CR-H.C. No. 85400 is AFFIRMED.
 
SO ORDERED.
FIRST DIVISION

G.R. No. 153004             November 5, 2004

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, 


vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.

DECISION

QUISUMBING, J.:

Subject of the present petition for review on certiorari is the Decision, dated January 30, 2002, as

well as the April 12, 2002, Resolution of the Court of Appeals in CA-G.R. CV No. 55122. The

appellate court reversed the Decision, dated October 4, 1996, of the Regional Trial Court of Makati
3

City, Branch 148, in Civil Case No. 95-811, and likewise denied petitioner's Motion for
Reconsideration.

The facts of this case are undisputed.

Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and
defendant, respectively, in several civil cases filed in different courts in the Philippines. On October
26, 1990, the parties executed a Compromise Agreement which amicably ended all their pending

litigations. The pertinent portions of the Agreement read as follows:

1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:

a. P1.5 Million immediately upon the execution of this agreement;

b. The balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more than two
(2) years from the execution of this agreement; provided, however, that in the event
that the Foundation does not pay the whole or any part of such balance, the same
shall be paid with the corresponding portion of the land or real properties subject of
the aforesaid cases and previously covered by the notices of lis pendens, under such
terms and conditions as to area, valuation, and location mutually acceptable to both
parties; but in no case shall the payment of such balance be later than two (2) years
from the date of this agreement; otherwise, payment of any unpaid portion shall only
be in the form of land aforesaid;

2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million),
plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR,
TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968
(C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the
immediate lifting of the aforesaid various notices of lis pendens on the real properties
aforementioned (by signing herein attached corresponding documents, for such lifting);
provided, however, that in the event that defendant Foundation shall sell or dispose of any of
the lands previously subject of lis pendens, the proceeds of any such sale, or any part
thereof as may be required, shall be partially devoted to the payment of the Foundation's
obligations under this agreement as may still be subsisting and payable at the time of any
such sale or sales;

...

5. Failure of compliance of any of the foregoing terms and conditions by either or both
parties to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved
party to a writ of execution for the enforcement of this agreement. [Emphasis supplied] 5

In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the
aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties
involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of
P13 million.

Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real
properties, which were previously subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining
P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial
Court of Makati City, Branch 62, issued a Decision approving the compromise agreement.
6

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay
the balance of P13 million. There was no response from petitioner. Consequently, respondent
Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of
execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus,
on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly
subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement of
the said writ. The challenge of the execution of the aforesaid compromise judgment even reached
the Supreme Court. All these efforts, however, were futile.

On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were
auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of the auction sale. Subsequently,
another auction sale was held on February 8, 1995, for the sale of real properties of petitioner in
Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both
properties provided for the right of redemption within one year from the date of registration of the
said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages alleging that there was delay on the part of petitioner in paying the balance of P13 million.

They further alleged that under the Compromise Agreement, the obligation became due on October
26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus,
respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty,
attorney's fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared
final and not subject to legal redemption.

In its Answer, petitioner countered that respondents have no cause of action against it since it had

fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the
balance was due to its valid exercise of its rights to protect its interests as provided under the Rules.
Petitioner counterclaimed for attorney's fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision dismissing herein respondents' complaint

and ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then
appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and
judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and
Riverland, Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per
annum from the date of demand on October 28, 1992 up to the date of actual payment of the
whole obligation; and (2) P20,000 as attorney's fees and costs of suit.

SO ORDERED.

Hence this petition for review on certiorari where petitioner assigns the following issues:

WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR


WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR.
SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN
THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON.
JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT

II

WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL


IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO
RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN
OBLIGATION TO PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY THE
PETITIONER – WHICH HAD BEEN FULLY PERFORMED

III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF


INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE
AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES 10

The only issue to be resolved is whether the respondents are entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not
provide for the payment of interest, the legal interest by way of penalty on account of fault or delay
shall not be due and payable, considering that the obligation or loan, on which the payment of legal
interest could be based, has been superseded by the compromise agreement. Furthermore, the
11 

petitioner argues that the respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise agreement. Article 4 of the
12 

compromise agreement provides:

Plaintiff Santos waives and renounces any and all other claims that he and his family may
have on the defendant Foundation arising from and in connection with the aforesaid civil
cases, and defendant Foundation, on the other hand, also waives and renounces any and all
claims that it may have against plaintiff Santos in connection with such cases. [Emphasis
13 

supplied.]

Lastly, petitioner alleges that since the compromise agreement did not provide for a period within
which the obligation will become due and demandable, it is incumbent upon respondent Santos to
ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists that
the legal interests can be computed.

Respondents profer that their right to damages is based on delay in the payment of the obligation
provided in the Compromise Agreement. The Compromise Agreement provides that payment must
be made within the two-year period from its execution. This was approved by the trial court and
became the law governing their contract. Respondents posit that petitioner's failure to comply
entitles them to damages, by way of interest. 14

The petition lacks merit.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced. It is an agreement between two or more persons, who,
15 

for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the
danger of losing. 16

The general rule is that a compromise has upon the parties the effect and authority of res judicata,
with respect to the matter definitely stated therein, or which by implication from its terms should be
deemed to have been included therein. This holds true even if the agreement has not been judicially
17 

approved. 18

In the case at bar, the Compromise Agreement was entered into by the parties on October 26,
1990. It was judicially approved on September 30, 1991. Applying existing jurisprudence, the
19  20 

compromise agreement as a consensual contract became binding between the parties upon its
execution and not upon its court approval. From the time a compromise is validly entered into, it
becomes the source of the rights and obligations of the parties thereto. The purpose of the
compromise is precisely to replace and terminate controverted claims. 21

In accordance with the compromise agreement, the respondents asked for the dismissal of the
pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution
of the agreement. This act of the petitioner showed that it acknowledges that the agreement was
immediately executory and enforceable upon its execution.

As to the remaining P13 million, the terms and conditions of the compromise agreement are clear
and unambiguous. It provides:
...

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at
the discretion of the Foundation, within a period of not more than two (2) years from the
execution of this agreement… [Emphasis supplied.]
22

...

The two-year period must be counted from October 26, 1990, the date of execution of the
compromise agreement, and not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter to petitioner on October 28, 1992,
the obligation was already due and demandable. When the petitioner failed to pay its due obligation
after the demand was made, it incurred delay.

Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]

Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of
obligations. It is the non-fulfillment of the obligation with respect to time.23

In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.24

In the case at bar, the obligation was already due and demandable after the lapse of the two-year
period from the execution of the contract. The two-year period ended on October 26, 1992. When
the respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was
already due and demandable. Furthermore, the obligation is liquidated because the debtor knows
precisely how much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle
its outstanding balance only on February 8, 1995, which is more than two years after the extra-
judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate
court to hinder the execution of a final and executory judgment, and further delay the fulfillment of its
obligation.

Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extra-
judicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is
provided for in Article 1170 of the New Civil Code.
25 

When the debtor knows the amount and period when he is to pay, interest as damages is generally
allowed as a matter of right. The complaining party has been deprived of funds to which he is
26 

entitled by virtue of their compromise agreement. The goal of compensation requires that the
complainant be compensated for the loss of use of those funds. This compensation is in the form of
interest. In the absence of agreement, the legal rate of interest shall prevail. The legal interest for
27  28 

loan as forbearance of money is 12% per annum to be computed from default, i.e., from judicial or
29 

extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 30
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the
Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs
against petitioner.

SO ORDERED.

Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.


Azcuna, J., on leave.
Republic of the Philippines
Supreme Court
Manila
 
SECOND DIVISION
 

SOLAR HARVEST, INC., G.R. No. 176868


Petitioner,  
  Present:
   
  CARPIO, J.,
  Chairperson,
- versus - NACHURA,
  PERALTA,
  ABAD, and
  MENDOZA, JJ.
   
DAVAO CORRUGATED CARTON  
CORPORATION, Promulgated:
Respondent.  
  July 26, 2010
 
x------------------------------------------------------------------------------------x
 
 

DECISION
 
NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated September
21, 2006 and Resolution[2] dated February 23, 2007, which denied petitioners
motion for reconsideration. The assailed Decision denied petitioners claim for
reimbursement for the amount it paid to respondent for the manufacture of
corrugated carton boxes.
 
The case arose from the following antecedents:
 
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an
agreement with respondent, Davao Corrugated Carton Corporation, for the
purchase of corrugated carton boxes, specifically designed for petitioners business
of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into
writing. To get the production underway, petitioner deposited, on March 31, 1998,
US$40,150.00 in respondents US Dollar Savings Account with Westmont Bank, as
full payment for the ordered boxes.
 
Despite such payment, petitioner did not receive any boxes from respondent. On
January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount
paid.[3] On February 19, 2001, respondent replied that the boxes had been
completed as early as April 3, 1998 and that petitioner failed to pick them up from
the formers warehouse 30 days from completion, as agreed upon. Respondent
mentioned that petitioner even placed an additional order of 24,000 boxes, out of
which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes
and P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes
will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged
 
6. That repeated follow-up was made by the plaintiff for the immediate
production of the ordered boxes, but every time, defendant [would] only
show samples of boxes and ma[k]e repeated promises to deliver the said
ordered boxes.
7. That because of the failure of the defendant to deliver the ordered
boxes, plaintiff ha[d] to cancel the same and demand payment and/or
refund from the defendant but the latter refused to pay and/or refund the
US$40,150.00 payment made by the former for the ordered boxes. [4]
In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3,
1998, it had already completed production of the 36,500 boxes, contrary to
petitioners allegation. According to respondent, petitioner, in fact, made an
additional order of 24,000 boxes, out of which, 14,000 had been completed without
waiting for petitioners payment. Respondent stated that petitioner was to pick up
the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent
averred that, on October 8, 1998, petitioners representative, Bobby Que (Que),
went to the factory and saw that the boxes were ready for pick up. On February 20,
1999, Que visited the factory again and supposedly advised respondent to sell the
boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioners
transaction to ship bananas to China did not materialize. Respondent claimed that
the boxes were occupying warehouse space and that petitioner should be made to
pay storage fee at P60.00 per square meter for every month from April 1998. As
counterclaim, respondent prayed that judgment be rendered ordering petitioner to
pay $15,400.00, plus interest, moral and exemplary damages, attorneys fees, and
costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500
boxes and 14,000 boxes out of the secondorder. It maintained that

respondent only manufactured a sample of the ordered boxes and that respondent
could not have produced 14,000 boxes without the required pre-payments.[6]
During trial, petitioner presented Que as its sole witness. Que testified that he
ordered the boxes from respondent and deposited the money in respondents
account.[7] He specifically stated that, when he visited respondents factory, he saw
that the boxes had no print of petitioners logo. [8] A few months later, he followed-
up the order and was told that the company had full production, and thus, was
promised that production of the order would be rushed. He told respondent that it
should indeed rush production because the need for the boxes was urgent.
Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was
already late for them to meet their commitment to ship the bananas to China.[9] On
cross-examination, Que further testified that China Zero Food, the Chinese
company that ordered the bananas, was sending a ship to Davao to get the bananas,
but since there were no cartons, the ship could not proceed. He said that, at that
time, bananas from Tagum Agricultural Development Corporation (TADECO)
were already there. He denied that petitioner made an additional order of 24,000
boxes. He explained that it took three years to refer the matter to counsel because
respondent promised to pay.[10]
 
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que
in Davao in October 1998 to inspect the boxes and that the latter got samples of
them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship
did not arrive.[11] Jaime Tan (Tan), president of respondent, also testified that his
company finished production of the 36,500 boxes on April 3, 1998 and that
petitioner made a second order of 24,000 boxes. He said that the agreement was for
respondent to produce the boxes and for petitioner to pick them up from the
warehouse.[12] He also said that the reason why petitioner did not pick up the boxes
was that the ship that was to carry the bananas did not arrive. [13] According to him,
during the last visit of Que and Estanislao, he asked them to withdraw the boxes
immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes
at P20.00 each for a total of P100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that
respondent did not commit any breach of faith that would justify rescission of the
contract and the consequent reimbursement of the amount paid by petitioner. The
RTC said that respondent was able to produce the ordered boxes but petitioner
failed to obtain possession thereof because its ship did not arrive. It thus dismissed
the complaint and respondents counterclaims, disposing as follows:
 
WHEREFORE, premises considered, judgment is hereby rendered in
favor of defendant and against the plaintiff and, accordingly, plaintiffs
complaint is hereby ordered DISMISSED without pronouncement as to
cost. Defendants counterclaims are similarly dismissed for lack of merit.
SO ORDERED.[14]
 
Petitioner filed a notice of appeal with the CA.
 
On September 21, 2006, the CA denied the appeal for lack of merit. [15] The
appellate court held that petitioner failed to discharge its burden of proving what it
claimed to be the parties agreement with respect to the delivery of the boxes.
According to the CA, it was unthinkable that, over a period of more than two
years, petitioner did not even demand for the delivery of the boxes. The CA added
that even assuming that the agreement was for respondent to deliver the boxes,
respondent would not be liable for breach of contract as petitioner had not yet
demanded from it the delivery of the boxes.[16]
Petitioner moved for reconsideration,[17] but the motion was denied by the CA in its
Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely manufacture
the boxes and that it was respondent which was obliged to deliver the boxes to
TADECO.
We find no reversible error in the assailed Decision that would justify the grant of
this petition.
Petitioners claim for reimbursement is actually one for rescission (or resolution) of
contract under Article 1191 of the Civil Code, which reads:
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.
 
 
The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Art. 1191
should be taken in conjunction with Art. 1169 of the same law, which provides:
 
Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exist:
 
(1)               When the obligation or the law expressly so declares; or
 
(2)               When from the nature and the circumstances of the
obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
 
(3)               When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins.
 
In reciprocal obligations, as in a contract of sale, the general rule is that the
fulfillment of the parties respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed, the default for each
obligation must be determined by the rules given in the first paragraph of the
present article,[19] that is, the other party would incur in delay only from the
moment the other party demands fulfillment of the formers obligation. Thus, even
in reciprocal obligations, if the period for the fulfillment of the obligation is fixed,
demand upon the obligee is still necessary before the obligor can be considered in
default and before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the
lack of demand by petitioner upon respondent to fulfill its obligation to
manufacture and deliver the boxes. The Complaint only alleged that petitioner
made a follow-up upon respondent, which, however, would not qualify as a
demand for the fulfillment of the obligation. Petitioners witness also testified that
they made a follow-up of the boxes, but not a demand. Note is taken of the fact
that, with respect to their claim for reimbursement, the Complaint alleged and the
witness testified that a demand letter was sent to respondent. Without a previous
demand for the fulfillment of the obligation, petitioner would not have a cause of
action for rescission against respondent as the latter would not yet be considered in
breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present
case, petitioners claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.[20] The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of
fact made by the trial court, especially when reiterated by the CA, must be given
great respect if not considered as final. [21] In dealing with this petition, we will not
veer away from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record.
 
As correctly observed by the CA, aside from the pictures of the finished boxes and
the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who
accompanied Que to the factory, attesting that, during their first visit to the
company, they saw the pile of petitioners boxes and Que took samples
thereof. Que, petitioners witness, himself confirmed this incident. He testified that
Tan pointed the boxes to him and that he got a sample and saw that it was
blank. Ques absolute assertion that the boxes were not manufactured is, therefore,
implausible and suspicious.
 
In fact, we note that respondents counsel manifested in court, during trial, that his
client was willing to shoulder expenses for a representative of the court to visit the
plant and see the boxes.[22] Had it been true that the boxes were not yet completed,
respondent would not have been so bold as to challenge the court to conduct an
ocular inspection of their warehouse. Even in its Comment to this petition,
respondent prays that petitioner be ordered to remove the boxes from its factory
site,[23] which could only mean that the boxes are, up to the present, still in
respondents premises.
 
We also believe that the agreement between the parties was for petitioner to pick
up the boxes from respondents warehouse, contrary to petitioners allegation. Thus,
it was due to petitioners fault that the boxes were not delivered to TADECO.
 
Petitioner had the burden to prove that the agreement was, in fact, for respondent
to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its
sole witness, Que, was not even competent to testify on the terms of the agreement
and, therefore, we cannot give much credence to his testimony. It appeared from
the testimony of Que that he did not personally place the order with Tan, thus:
 
Q. No, my question is, you went to Davao City and placed your order
there?
A. I made a phone call.
 
Q. You made a phone call to Mr. Tan?
A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a
contact with Mr. Tan.
 
Q. So, your first statement that you were the one who placed the order is
not true?
A. Thats true. The Solar Harvest made a contact with Mr. Tan and I
deposited the money in the bank.
 
Q. You said a while ago [t]hat you were the one who called Mr. Tan and
placed the order for 36,500 boxes, isnt it?
A. First time it was Mr. Alfred Ong.
 
Q. It was Mr. Ong who placed the order[,] not you?
A. Yes, sir.[24]
 
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
Estanislao?
A. Yes, sir.[25]
 
Moreover, assuming that respondent was obliged to deliver the boxes, it
could not have complied with such obligation. Que, insisting that the boxes had not
been manufactured, admitted that he did not give respondent the authority to
deliver the boxes to TADECO:
 
Q. Did you give authority to Mr. Tan to deliver these boxes to
TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the
carton, the quantity and quality. But I have not seen a single
carton.
 
Q. Are you trying to impress upon the [c]ourt that it is only after the
boxes are completed, will you give authority to Mr. Tan to deliver
the boxes to TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I
asked Mr. Tan to rush the carton but not [26]
 
Q. Did you give any authority for Mr. Tan to deliver these boxes to
TADECO?
A. Because I have not seen any of my carton.
 
Q. You dont have any authority yet given to Mr. Tan?
A. None, your Honor.[27]
 
Surely, without such authority, TADECO would not have allowed respondent to
deposit the boxes within its premises.
 
In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any breach
of its contractual obligation. As previously stated, the subject boxes are still within
respondents premises. To put a rest to this dispute, we therefore relieve respondent
from the burden of having to keep the boxes within its premises and, consequently,
give it the right to dispose of them, after petitioner is given a period of time within
which to remove them from the premises.
 
WHEREFORE, premises considered, the petition is DENIED. The Court of
Appeals Decision dated September 21, 2006 and Resolution dated February 23,
2007 are AFFIRMED. In addition, petitioner is given a period
of 30 days from notice within which to cause the removal of the 36,500
boxes from respondents warehouse. After the lapse of said period and petitioner
fails to effect such removal, respondent shall have the right to dispose of the boxes
in any manner it may deem fit.
 
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73345. April 7, 1993.

SOCIAL SECURITY SYSTEM, petitioner, 


vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U.
ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of
Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro
Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.

The Solicitor General for petitioner.


K.V. Faylona & Associates for private respondents.

DECISION

CAMPOS, JR., J p:

Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court
affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District,
Branch XXIX, Pasay City.

The facts as found by the Appellate Court are as follows:

"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of
First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short,
alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk — resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the
said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.

Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.

The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving
both parties thirty (30) days within which to submit a stipulation of facts.

The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;

"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.

"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;

"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to
defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE
MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita
U. Alberto;

"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid
its obligations to SSS;

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the
plaintiff are admitted.

"Manila for Pasay City, September 2, 1980." 2

On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by
the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk.
The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter.

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished
and affirmed the trial court.

Hence, this Petition wherein SSS raises the following grounds for review:

"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the
appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear
and unequivocal manner. There is no evidence in the case at bar to show that SSS made a clear,
positive waiver of the penalties, made with full knowledge of the circumstances.

Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee,
cannot perform acts affecting the same, including condonation of penalties, that would diminish
property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).

Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.

Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4

The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?

The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It
reasoned, thus:

"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what
is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for
failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of
the contract entered into between the parties.

Now, what is a penal clause. A penal clause has been defined as

"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled" (3 Castan 8th Ed. p. 118).

Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Peña Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If
therefore the principal obligation does not exist the penalty being accessory cannot exist.

Now then when is the penalty demandable? A penalty is demandable in case of non performance or
late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment in
point of time which is called mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-
appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.

However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing
the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made several payments on
September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a
complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G
and H). For all purposes therefore the principal obligation of defendant-appellee was deemed
extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for
the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered
extinguished, and the penal clause being an accessory obligation. That being the case, the demand
for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28,
1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands
for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of the
obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2)
the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after
demand, Moonwalk would be in mora and therefore liable for the penalty.

Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.

3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be
modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:

"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."

If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no demand for payment of the
penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.

Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was paid
on time, for then the penal clause, under the terms of the contract would not apply. Payment of the
penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied with and extinguished, the
penal clause has lost its raison d' entre." 5

We find no reason to depart from the appellate court's decision. We, however, advance the following
reasons for the denial of this petition.

Article 1226 of the Civil Code provides:

"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code." (Emphasis Ours.)

A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is
clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his
obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the
Civil Code wrote:

"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code?
We must make a distinction between a positive and a negative obligation. With regard to obligations
which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence,
the necessity of demand by the debtor unless the same is excused . . ." 8

When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.

"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."

There are only three instances when demand is not necessary to render the obligor in default. These
are the following:

"(1) When the obligation or the law expressly so declares;


(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or

(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9

This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition or status which has its
own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that
the debtor delays performance; and (3) that the creditor requires the performance judicially and
extrajudicially. 12 Default generally begins from the moment the creditor demands the performance
of the obligation. 13

Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was
that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate
mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never
in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with on time.
Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation
— payment of the loan — SSS was never entitled to recover any penalty, not at the time it made the
Statement of Account and certainly, not after the extinguishment of the principal obligation because
then, all the more that SSS had no reason to ask for the penalties. Thus, there could never be any
occasion for waiver or even mistake in the application for payment because there was nothing for
SSS to waive as its right to enforce the penalty did not arise.

SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the
case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not with
the right of the SSS to collect penalties which were provided for in contracts which it entered into but
with its right to collect premiums and its duty to collect the penalty for delayed payment or non-
payment of premiums. The Supreme Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to the
System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to assure that employers do
not take lightly the State's exercise of the police power in the implementation of the Republic's
declared policy "to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and death . . ."

Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:

"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what
was sought to be condoned was the penalty provided for by law for non remittance of premium for
coverage under the Social Security Act.

The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff and
defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of
law is involved in this case, nor is there any penalty imposed by law nor a case about non-remittance
of premium required by law. The present case refers to a contract of loan payable in installments not
provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case of
United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security Commission, which is a creature of the Social
Security Act cannot condone a mandatory provision of law providing for the payment of premiums
and for penalties for non remittance. The life of the Social Security Act is in the premiums because
these are the funds from which the Social Security Act gets the money for its purposes and the non-
remittance of the premiums is penalized not by the Social Security Commission but by law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on
a loan but premiums required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to
remit premiums required by law, but a penalty for non payment provided for by the agreement of the
parties in the contract between them . . ." 15

WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 191431               March 13, 2013

RODOLFO G. CRUZ and ESPERANZA IBIAS, Petitioners, 


vs.
ATTY. DELFIN GRUSPE, Respondent.

DECISION

BRION, J.:

Before the Court is the petition for review on certiorari 1 filed under Rule 45 of the Rules of Court,
assailing the decision2 dated July 30, 2009 and the resolution 3 dated February 19, 2010 of the Court
of Appeals (CA) in CA-G.R. CV No. 86083. The CA rulings affirmed with modification the decision
dated September 27, 2004 of the Regional Trial Court (RTC) of Bacoor, Cavite, Branch 19, in Civil
Case No. BCV-99-146 which granted respondent Atty. Delfin Grupe’s claim for payment of sum of
money against petitioners Rodolfo G. Cruz and Esperanza Ibias. 4

THE FACTUAL BACKGROUND

The claim arose from an accident that occurred on October 24, 1999, when the mini bus owned and
operated by Cruz and driven by one Arturo Davin collided with the Toyota Corolla car of Gruspe;
Gruspe’s car was a total wreck. The next day, on October 25, 1999, Cruz, along with Leonardo Q.
Ibias went to Gruspe’s office, apologized for the incident, and executed a Joint Affidavit of
Undertaking promising jointly and severally to replace the Gruspe’s damaged car in 20 days, or until
November 15, 1999, of the same model and of at least the same quality; or, alternatively, they would
pay the cost of Gruspe’s car amounting to ₱350,000.00, with interest at

12% per month for any delayed payment after November 15, 1999, until fully paid. 5 When Cruz and
Leonardo failed to comply with their undertaking, Gruspe filed a complaint for collection of sum of
money against them on November 19, 1999 before the RTC.

In their answer, Cruz and Leonardo denied Gruspe’s allegation, claiming that Gruspe, a lawyer,
prepared the Joint Affidavit of Undertaking and forced them to affix their signatures thereon, without
explaining and informing them of its contents; Cruz affixed his signature so that his mini bus could be
released as it was his only means of income; Leonardo, a barangay official, accompanied Cruz to
Gruspe’s office for the release of the mini bus, but was also deceived into signing the Joint Affidavit
of Undertaking.

Leonardo died during the pendency of the case and was substituted by his widow, Esperanza.
Meanwhile, Gruspe sold the wrecked car for ₱130,000.00.

In a decision dated September 27, 2004, the RTC ruled in favor of Gruspe and ordered Cruz and
Leonardo to pay ₱220,000.00,6 plus 15% per annum from November 15, 1999 until fully paid, and
the cost of suit.
On appeal, the CA affirmed the RTC decision, but reduced the interest rate to 12% per annum
pursuant to the Joint Affidavit of Undertaking.7 It declared that despite its title, the Joint Affidavit of
Undertaking is a contract, as it has all the essential elements of consent, object certain, and
consideration required under Article 1318 of the Civil

Code. The CA further said that Cruz and Leonardo failed to present evidence to support their
contention of vitiated consent. By signing the Joint Affidavit of Undertaking, they voluntarily assumed
the obligation for the damage they caused to Gruspe’s car; Leonardo, who was not a party to the
incident, could have refused to sign the affidavit, but he did not.

THE PETITION

In their appeal by certiorari with the Court, Cruz and Esperanza assail the CA ruling, contending that
the Joint Affidavit of Undertaking is not a contract that can be the basis of an obligation to pay a sum
of money in favor of Gruspe. They consider an affidavit as different from a contract: an affidavit’s
purpose is simply to attest to facts that are within his knowledge, while a contract requires that there
be a meeting of the minds between the two contracting parties.

Even if the Joint Affidavit of Undertaking was considered as a contract, Cruz and Esperanza claim
that it is invalid because Cruz and Leonardo’s consent thereto was vitiated; the contract was
prepared by Gruspe who is a lawyer, and its contents were never explained to them. Moreover, Cruz
and Leonardo were simply forced to affix their signatures, otherwise, the mini van would not be
released.

Also, they claim that prior to the filing of the complaint for sum of money, Gruspe did not make any
demand upon them. Hence, pursuant to Article 1169 of the Civil Code, they could not be considered
in default. Without this demand, Cruz and Esperanza contend that Gruspe could not yet take any
action.

THE COURT’S RULING

The Court finds the petition partly meritorious and accordingly modifies the judgment of the CA.

Contracts are obligatory no matter what their forms may be, whenever the essential requisites for
their validity are present. In determining whether a document is an affidavit or a contract, the Court
looks beyond the title of the document, since the denomination or title given by the parties in their
document is not conclusive of the nature of its contents. 8 In the construction or interpretation of an
instrument, the intention of the parties is primordial and is to be pursued. If the terms of the
document are clear and leave no doubt on the intention of the contracting parties, the literal meaning
of its stipulations shall control. If the words appear to be contrary to the parties’ evident intention, the
latter shall prevail over the former.9

A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses that it contains
stipulations characteristic of a contract. As quoted in the CA decision, 10 the Joint Affidavit of
Undertaking contained a stipulation where Cruz and Leonardo promised to replace the damaged car
of Gruspe, 20 days from October 25, 1999 or up to November 15, 1999, of the same model and of at
least the same quality. In the event that they cannot replace the car within the same period, they
would pay the cost of Gruspe’s car in the total amount of ₱350,000.00, with interest at 12% per
month for any delayed payment after November 15, 1999, until fully paid. These, as read by the CA,
are very simple terms that both Cruz and Leonardo could easily understand.
There is also no merit to the argument of vitiated consent.  An allegation of vitiated consent must be
1âwphi1

proven by preponderance of evidence; Cruz and Leonardo failed to support their allegation.

Although the undertaking in the affidavit appears to be onerous and lopsided, this does not
necessarily prove the alleged vitiation of consent. They, in fact, admitted the genuineness and due
execution of the Joint Affidavit and Undertaking when they said that they signed the same to secure
possession of their vehicle. If they truly believed that the vehicle had been illegally impounded, they
could have refused to sign the Joint Affidavit of Undertaking and filed a complaint, but they did not.
That the release of their mini bus was conditioned on their signing the Joint Affidavit of Undertaking
does not, by itself, indicate that their consent was forced – they may have given it grudgingly, but it is
not indicative of a vitiated consent that is a ground for the annulment of a contract.

Thus, on the issue of the validity and enforceability of the Joint Affidavit of Undertaking, the CA did
not commit any legal error that merits the reversal of the assailed decision.

Nevertheless, the CA glossed over the issue of demand which is material in the computation of
interest on the amount due. The RTC ordered Cruz and Leonardo to pay Gruspe "₱350,000.00 as
cost of the car xxx plus fifteen percent (15%) per annum from November 15, 1999 until fully
paid."11 The 15% interest (later modified by the CA to be 12%) was computed from November 15,
1999 – the date stipulated in the Joint Affidavit of Undertaking for the payment of the value of
Gruspe’s car. In the absence of a finding by the lower courts that Gruspe made a demand prior to
the filing of the complaint, the interest cannot be computed from November 15, 1999 because until a
demand has been made, Cruz and Leonardo could not be said to be in default. 12 "In order that the
debtor may be in default, it is necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially and extrajudicially." 13 Default generally begins
from the moment the creditor demands the performance of the obligation. In this case, demand
could be considered to have been made upon the filing of the complaint on November 19, 1999, and
it is only from this date that the interest should be computed.

Although the CA upheld the Joint Affidavit of Undertaking, we note that it imposed interest rate on a
per annum basis, instead of the per month basis that was stated in the Joint Affidavit of Undertaking
without explaining its reason for doing so.14 Neither party, however, questioned the change.
Nonetheless, the Court affirms the change in the interest rate from 12% per month to 12% per
annum, as we find the interest rate agreed upon in the Joint Affidavit of Undertaking excessive. 15

WHEREFORE, we AFFIRM the decision dated July 30, 2009 and the resolution dated February 19,
2010 of the Court of Appeals in CA-G.R. CV No. 86083, subject to the Modification that the twelve
percent (12%) per annum interest imposed on the amount due shall accrue only from November 19,
1999, when judicial demand was made.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 184458               January 14, 2015

RODRIGO RIVERA, Petitioner, 
vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.

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

G.R. No. 184472

SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners, 


vs.
RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision  of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with
1

modification the separate rulings of the Manila City trial courts, the Regional Trial Court, Branch 17
in Civil Case No. 02-105256  and the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No.
2

163661,  a case for collection of a sum of money due a promissory note. While all three (3) lower
3

courts upheld the validity and authenticity of the promissory note as duly signed by the obligor,
Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified the trial courts’
consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent
(12%) per annumcomputed from the date of judicial or extrajudicial demand, and (2) reinstatement of
the award of attorney’s fees also in a reduced amount of ₱50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and
questions the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472,
Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate court’s
reduction of the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

PROMISSORY NOTE

120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and
VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (₱120,000.00)
on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to
twenty percent (20%) of the total amount due and payable as and for attorney’s fees which in no
case shall be less than ₱5,000.00 and to pay in addition the cost of suit and other incidental litigation
expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the
City of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA 4

In October 1998, almost three years from the date of payment stipulated in the promissory note,
Rivera, as partial payment for the loan, issued and delivered to the SpousesChua, as payee, a
check numbered 012467, dated 30 December 1998, drawn against Rivera’s current account with the
Philippine Commercial International Bank (PCIB) in the amount of ₱25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera,
likewise drawn against Rivera’s PCIB current account, numbered 013224, duly signed and dated,
but blank as to payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No.
013224 was issued in the amount of ₱133,454.00 with "cash" as payee. Purportedly, both checks
were simply partial payment for Rivera’s loan in the principal amount of ₱120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason "account closed."

As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00 covering the
principal of ₱120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May
1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on
11 June 1999. The case was raffled before the MeTC, Branch 30, Manila and docketed as Civil
Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the
subject Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the
loans were always covered by a security; (3) at the time of the filing of the complaint, he still had an
existing indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in
default; (4) PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21
December 1998, should have been issued in the amount of only 1,300.00, representing the amount
he received from the Spouses Chua’s saleslady; (5) contrary to the supposed agreement, the
Spouses Chua presented the check for payment in the amount of ₱133,454.00; and (6) there was no
demand for payment of the amount of ₱120,000.00 prior to the encashment of PCIB Check No.
0132224. 5

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness
thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses:

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of
the testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x
x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document
examiner (1989); NBI Senior Document Examiner (1994 to the date he testified); registered
criminologist; graduate of 18th Basic Training Course [i]n Questioned Document Examination
conducted by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by
the US Embassy in Manila; attended a seminar on Effective Methodology in Teaching and
Instructional design conducted by the NBI Academy; seminar lecturer on Questioned Documents,
Signature Verification and/or Detection; had examined more than a hundred thousand questioned
documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in
the Promissory Note and compared the signature thereon with the specimen signatures of [Rivera]
appearing on several documents. After a thorough study, examination, and comparison of the
signature on the questioned document (Promissory Note) and the specimen signatures on the
documents submitted to him, he concluded that the questioned signature appearing in the
Promissory Note and the specimen signatures of [Rivera] appearing on the other documents
submitted were written by one and the same person. In connection with his findings, Magbojos
prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following
conclusion: "The questioned and the standard specimen signatures RODGRIGO RIVERA were
written by one and the same person."

[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he
obtained a loan from [respondent] Salvador and executed a real estate mortgage over a parcel of
land in favor of [respondent Salvador] as collateral; aside from this loan, in October, 1998 he
borrowed ₱25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30 December 1998;
he expressly denied execution of the Promissory Note dated 24 February 1995 and alleged that the
signature appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB Check
No. 0132224 was partial payment for the Promissory Note was not true, the truth being that he
delivered the check to [respondent Salvador] with the space for amount left blank as he and
[respondent] Salvador had agreed that the latter was to fill it in with the amount of ₱1,300.00 which
amount he owed [the spouses Chua]; however, on 29 December 1998 [respondent] Salvador called
him and told him that he had written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the testimony
of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the signature
appearing on the Promissory Note was not his signature and that he did not execute the Promissory
Note.6

After trial, the MeTC ruled in favor of the Spouses Chua:


WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus stipulated interest
at the rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per
annum from 11 June 1999, as actual and compensatory damages; 20% of the whole amount due as
attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but
deleted the award of attorney’s fees to the Spouses Chua:

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the
Decision dated October 21, 2002 is hereby AFFIRMED. 8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.
Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the
Promissory Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and
reinstated the award of attorney’s fees in favor of the Spouses Chua:

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION
that the interest rate of 60% per annum is hereby reduced to12% per annum and the award of
attorney’s fees is reinstated atthe reduced amount of ₱50,000.00 Costs against [Rivera]. 9

Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the
Spouses Chua in G.R. No. 184472, respectively raising the following issues:

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN


UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE WAS A
VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN


HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE
PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN


AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO
BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT [THE SPOUSES
CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE
AWARD OF ATTORNEY’S FEES. 10

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL


ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST
RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA
NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF
INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL,
IMMORAL OR VOID. 11

As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition, via
a Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate
court specifically concerning the correct rate of interest on Rivera’s indebtedness under the
Promissory Note. 12

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the
entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship
withthe Spouses Chua who were money lenders, he has been able to maintain a loan account with
them. However, each of these loan transactions was respectively "secured by checks or sufficient
collateral."

Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof
(sic) from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after
December 31, 1995]." 13

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the
lower courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged,
only that the signature is not his and varies from his usual signature. He likewise makes a confusing
defense of having previously obtained loans from the Spouses Chua who were money lenders and
who had allowed him a period of "almost four (4) years" before demanding payment of the loan
under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National
Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory note. On that
score, the appellate court aptly disabled Rivera’s contention:

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is
a forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and
convincing evidence. Mere variance of signatures cannot be considered as conclusive proof that the
same was forged. Save for the denial of Rivera that the signature on the note was not his, there is
nothing in the records to support his claim of forgery. And while it is true that resort to experts is not
mandatory or indispensable to the examination of alleged forged documents, the opinions of
handwriting experts are nevertheless helpful in the court’s determination of a document’s
authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and
the testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in
evidence would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means "evidence which is of greater weight, or more
convincing than that which is offered in opposition to it."

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a
prima faciecase in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his
allegation of forgery. Unfortunately for [Rivera], he failed to substantiate his defense.  Well-
14

entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed
by the appellate court, are accorded the highest degree of respect and are considered conclusive
between the parties.  A review of such findings by this Court is not warranted except upon a
15

showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are
grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from
its factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the findings of the appellate court go beyond the
issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a
different conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are
conclusions without mention of the specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on record.  None of these exceptions obtains
16

in this instance. There is no reason to depart from the separate factual findings of the three (3) lower
courts on the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer to
the plaintiff’s claim or cause of action, upon which issue is joined, whether they relate to the whole
case or only to certain issues in the case. 17

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or
indispensable to the examination or the comparison of handwriting, the trial courts in this case, on its
own, using the handwriting expert testimony only as an aid, found the disputed document valid. 18

Hence, the MeTC ruled that:

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of
[respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house;
the conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the
Promissory Note) and standard specimen signatures "Rodrigo Rivera" "were written by one and the
same person"; actual view at the hearing of the enlarged photographs of the questioned signature
and the standard specimen signatures. 19

Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a money
lender to extend another loan on May 4, 1998 secured by a real estate mortgage, when he was
already in default and has not been paying any interest for a loan incurred in February 1995." 20

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as
"kumpadres," Rivera was allowed another loan, albeit this time secured by a real estate mortgage,
which will cover Rivera’s loan should Rivera fail to pay. There is nothing inconsistent with the
Spouses Chua’s two (2) and successive loan accommodations to Rivera: one, secured by a real
estate mortgage and the other, secured by only a Promissory Note.

Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a
substantial amount of time before the Spouses Chua demanded payment of the obligation due under
the Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a
discordant defense to assail the authenticity and validity of the Promissory Note. Although the
burden of proof rested on the Spouses Chua having instituted the civil case and after they
established a prima facie case against Rivera, the burden of evidence shifted to the latter to
establish his defense.  Consequently, Rivera failed to discharge the burden of evidence, refute the
21
existence of the Promissory Note duly signed by him and subsequently, that he did not fail to pay his
obligation thereunder. On the whole, there was no question left on where the respective evidence of
the parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even
assuming the validity of the Promissory Note, demand was still necessary in order to charge him
liable thereunder. Rivera argues that it was grave error on the part of the appellate court to apply
Section 70 of the Negotiable Instruments Law (NIL). 22

We agree that the subject promissory note is not a negotiable instrument and the provisions of the
NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the following
elements to be a negotiable instrument:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise


indicated therein with reasonable certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION
184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to
bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses
Chua, and not to order or to bearer, or to the order of the Spouses Chua as payees. However, even
if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the coverage of
Section 70 of the NIL which provides that presentment for payment is not necessary to charge the
person liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he
issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes
demandable—31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when
he failed to pay the amount of ₱120,000.00 due to the Spouses Chua on 31 December 1995 under
the Promissory Note.

Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or


(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was
a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when
there is an express stipulation to that effect; (2) where the law so provides; (3) when the period is the
controlling motive or the principal inducement for the creation of the obligation; and (4) where
demand would be useless. In the first two paragraphs, it is not sufficient that the law or obligation
fixes a date for performance; it must further state expressly that after the period lapses, default will
commence.

We refer to the clause in the Promissory Note containing the stipulation of interest:

It is agreed and understood that failure on my part to pay the amount of (₱120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for. 23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of default"
until the entire obligation is fully paid for. The parties evidently agreed that the maturity of the
obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest. The
Promissory Note expressly provided that after 31 December 1995, default commences and the
stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December
1995, the due date of the obligation. On that date, Rivera became liable for the stipulated interest
which the Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995,
demand was not necessary before Rivera could be held liable for the principal amount of
₱120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses
Chua damages, in the form of stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the
performance of their obligations is laid down on Article 1170  of the Civil Code.
24

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for
damages when the obligor incurs in delay:

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

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money;
(2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and
(3) the Promissory Note provides for an indemnity for damages upon default of Rivera which is the
payment of a 5%monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although
Rivera, as obligor, assumed to pay additional 5% monthly interest on the principal amount of
₱120,000.00 upon default.

Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there isno stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.

The penal clause is generally undertaken to insure performance and works as either, or both,
punishment and reparation. It is an exception to the general rules on recovery of losses and
damages. As an exception to the general rule, a penal clause must be specifically set forth in the
obligation.25

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a
penal clause, and is simply an indemnity for damages incurred by the Spouses Chua because
Rivera defaulted in the payment of the amount of ₱120,000.00. The measure of damages for the
Rivera’s delay is limited to the interest stipulated in the Promissory Note. In apt instances, in default
of stipulation, the interest is that provided by law.
26

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5%
a month or 60% per annum. On this score, the appellate court ruled:

It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe
31 December 1995. Given this circumstance, demand by the creditor isno longer necessary in order
that delay may exist since the contract itself already expressly so declares. The mere failure of
[Spouses Chua] to immediately demand or collect payment of the value of the note does not
exonerate [Rivera] from his liability therefrom. Verily, the trial court committed no reversible error
when it imposed interest from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved
from making demand under Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to
legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest
rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when
necessary. Since the interest rate agreed upon is void, the parties are considered to have no
stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed
from the date of judicial or extrajudicial demand. 27

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal
interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472
denying the petition of the Spouses Chua for failure to sufficiently showany reversible error in the
ruling of the appellate court, specifically the reduction of the interest rate imposed on Rivera’s
indebtedness under the Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is
res judicata in its concept of "bar by prior judgment" on whether the Court of Appeals correctly
reduced the interest rate stipulated in the Promissory Note.

Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1)
the former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the
decision must have been rendered by a court having jurisdiction over the subject matter and the
parties; and (4) there must be, between the first and the second action, identity of parties, of subject
matter and of causes of action. 28

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject
matter raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’
disposition on the propriety of the reduction of the interest rate was raised by the Spouses Chua in
G.R. No. 184472, our ruling thereon affirming the Court of Appeals is a "bar by prior judgment."

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the
then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416
in cases involving the loan or for bearance of money.  Thus, the legal interest accruing from the
29

Promissory Note is 12% per annum from the date of default on 1 January 1996. However, the 12%
per annumrate of legal interest is only applicable until 30 June 2013, before the advent and
effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,  BSP Circular No.
30

799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this Decision becomes final and
executor is divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1
January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this
Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date
when this Decision becomes final and executory, such is likewise divided into two periods: (1) 12%
per annum from 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum
from 1 July 2013 to date when this Decision becomes final and executor.  We base this imposition of
31

interest on interest due earning legal interest on Article 2212 of the Civil Code which provides that
"interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent on this point."

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses
Chua could already be determined with reasonable certainty given the wording of the Promissory
Note.32

We cite our recent ruling in Nacar v. Gallery Frames: 33

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or for bearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be computed from default, i.e., from judicial
or extra judicial demand under and subject to the provisions ofArticle 1169 of the
Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,


an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum.  No interest, however, shall be adjudged on
1âwphi1

unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged. 3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an equivalent to a
for bearance of credit. And, in addition to the above, judgments that have become
final and executory prior to July 1, 2013, shall not be disturbed and shall continue to
be implemented applying the rate of interest fixed therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note,
weagree with the reduction thereof but not the ratiocination of the appellate court that the attorney’s
fees are in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note
already answers as liquidated damages for Rivera’s default in paying his obligation. We award
attorney’s fees, albeit in a reduced amount, in recognition that the Spouses Chua were compelled to
litigate and incurred expenses to protect their interests.  Thus, the award of ₱50,000.00 as
34

attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to
the Spouses Chua:

Face value of the Stipulated Interest A & Interest due earning Attorney’s Total
Promissory Note B legal interest A & B fees Amount
February 24, 1995 A. January 1, 1996 to A. June 11, 1999 (date Wholesale  
to June 30, 2013 of judicial demand) to Amount
December 31, June 30, 2013
1995 B. July 1 2013 to date B. July 1, 2013 to date
when this Decision when this Decision
becomes final and becomes final and
executory executory
₱120,000.00 A. 12 % per annumon A. 12% per annumon ₱50,000.00 Total amount
the principal amount of the total amount of of Columns 1-
₱120,000.00 column 2 4
B. 6% per annumon the B. 6% per annumon the
principal amount of total amount of column
₱120,000.00 2 35

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal
interest at the rate of 6% per annum computed from its finality until full payment thereof, the interim
period being deemed to be a forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in
CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents
Spouse Salvador and Violeta Chua the following:

(1) the principal amount of ₱120,000.00;

(2) legal interest of 12% per annumof the principal amount of ₱120,000.00 reckoned from 1
January 1996 until 30 June 2013;

(3) legal interest of 6% per annumof the principal amount of ₱120,000.00 form 1 July 2013 to
date when this Decision becomes final and executory;

(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of
judicial demand, to 30 June 2013, as interest due earning legal interest;

(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date
when this Decision becomes final and executor, asinterest due earning legal interest;

(6) Attorney’s fees in the amount of ₱50,000.00; and

(7) 6% per annum interest on the total of the monetary awards from the finality of this
Decision until full payment thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED.
SECOND DIVISION

[G.R. No. 145483. November 19, 2004]

LORENZO SHIPPING CORP., petitioner, vs. BJ MARTHEL


INTERNATIONAL, INC., respondent.

DECISION
CHICO-NAZARIO, J.:

This is a petition for review seeking to set aside the Decision [1] of the Court
of Appeals in CA-G.R. CV No. 54334 and its Resolution denying petitioners
motion for reconsideration.
The factual antecedents of this case are as follows:
Petitioner Lorenzo Shipping Corporation is a domestic corporation
engaged in coastwise shipping.  It used to own the cargo vessel M/V
Dadiangas Express.
Upon the other hand, respondent BJ Marthel International, Inc. is a
business entity engaged in trading, marketing, and selling of various industrial
commodities.  It is also an importer and distributor of different brands of
engines and spare parts.
From 1987 up to the institution of this case, respondent supplied petitioner
with spare parts for the latters marine engines.  Sometime in 1989, petitioner
asked respondent for a quotation for various machine parts. Acceding to this
request, respondent furnished petitioner with a formal quotation,[2] thus:

May 31, 1989


MINQ-6093

LORENZO SHIPPING LINES


Pier 8, North Harbor
Manila

SUBJECT: PARTS FOR ENGINE MODEL


MITSUBISHI 6UET 52/60
Dear Mr. Go:

We are pleased to submit our offer for your above subject requirements.

Description               Qty.                 Unit Price           Total Price

Nozzle Tip                6 pcs.            P 5,520.00               33,120.00


Plunger & Barrel       6 pcs.              27,630.00            165,780.00
Cylinder Head           2 pcs.         1,035,000.00        2,070,000.00
Cylinder Liner           1 set                                            477,000.00
 TOTAL PRICE FOB         P2,745,900.00
 MANILA                              ___________
DELIVERY: Within 2 months after receipt of firm order.
TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal
Installment[s] not to exceed 90 days.

We trust you find our above offer acceptable and look forward to your most valued
order.

Very truly yours,

(SGD) HENRY PAJARILLO


 Sales Manager
Petitioner thereafter issued to respondent Purchase Order No. 13839,
[3]
 dated 02 November 1989, for the procurement of one set of cylinder liner,
valued at P477,000, to be used for M/V Dadiangas Express.  The purchase
order was co-signed by Jose Go, Jr., petitioners vice-president, and Henry
Pajarillo.  Quoted hereunder is the pertinent portion of the purchase order:

Name of Description                           Qty.                   Amount

CYL. LINER M/E                   1 SET              P477,000.00

NOTHING FOLLOW
INV. #

TERM OF PAYMENT: 25% DOWN PAYMENT


5 BI-MONTHLY INSTALLMENT[S]
Instead of paying the 25% down payment for the first cylinder liner,
petitioner issued in favor of respondent ten postdated checks[4] to be drawn
against the formers account with Allied Banking Corporation.  The checks
were supposed to represent the full payment of the aforementioned cylinder
liner.
Subsequently, petitioner issued Purchase Order No. 14011,[5] dated 15
January 1990, for yet another unit of cylinder liner.  This purchase order
stated the term of payment to be 25% upon delivery, balance payable in 5 bi-
monthly equal installment[s].[6] Like the purchase order of 02 November 1989,
the second purchase order did not state the date of the cylinder liners
delivery.
On 26 January 1990, respondent deposited petitioners check that was
postdated 18 January 1990, however, the same was dishonored by the
drawee bank due to insufficiency of funds.  The remaining nine postdated
checks were eventually returned by respondent to petitioner.
The parties presented disparate accounts of what happened to the check
which was previously dishonored.  Petitioner claimed that it replaced said
check with a good one, the proceeds of which were applied to its other
obligation to respondent.  For its part, respondent insisted that it returned said
postdated check to petitioner.
Respondent thereafter placed the order for the two cylinder liners with its
principal in Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23
February 1990 under its own name with the First Interstate Bank of Tokyo.
On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioners
warehouse in North Harbor, Manila.  The sales invoices[7] evidencing the
delivery of the cylinder liners both contain the notation subject to verification
under which the signature of Eric Go, petitioners warehouseman, appeared.
Respondent thereafter sent a Statement of Account dated 15 November
1990[8] to petitioner.  While the other items listed in said statement of account
were fully paid by petitioner, the two cylinder liners delivered to petitioner on
20 April 1990 remained unsettled.  Consequently, Mr. Alejandro Kanaan, Jr.,
respondents vice-president, sent a demand letter dated 02 January 1991[9] to
petitioner requiring the latter to pay the value of the cylinder liners subjects of
this case.  Instead of heeding the demand of respondent for the full payment
of the value of the cylinder liners, petitioner sent the former a letter dated 12
March 1991[10] offering to pay only P150,000 for the cylinder liners.  In said
letter, petitioner claimed that as the cylinder liners were delivered late and due
to the scrapping of the M/V Dadiangas Express, it (petitioner) would have to
sell the cylinder liners in Singapore and pay the balance from the proceeds of
said sale.
Shortly thereafter, another demand letter dated 27 March 1991[11] was
furnished petitioner by respondents counsel requiring the former to settle its
obligation to respondent together with accrued interest and attorneys fees.
Due to the failure of the parties to settle the matter, respondent filed an
action for sum of money and damages before the Regional Trial Court (RTC)
of Makati City.  In its complaint,[12]respondent (plaintiff below) alleged that
despite its repeated oral and written demands, petitioner obstinately refused
to settle its obligations.  Respondent prayed that petitioner be ordered to pay
for the value of the cylinder liners plus accrued interest of P111,300 as of May
1991 and additional interest of 14% per annum to be reckoned from June
1991 until the full payment of the principal; attorneys fees; costs of suits;
exemplary damages; actual damages; and compensatory damages.
On 25 July 1991, and prior to the filing of a responsive pleading,
respondent filed an amended complaint with preliminary attachment pursuant
to Sections 2 and 3, Rule 57 of the then Rules of Court. [13] Aside from the
prayer for the issuance of writ of preliminary attachment, the amendments
also pertained to the issuance by petitioner of the postdated checks and the
amounts of damages claimed.
In an Order dated 25 July 1991,[14] the court a quo granted respondents
prayer for the issuance of a preliminary attachment.  On 09 August 1991,
petitioner filed an Urgent Ex-Parte Motion to Discharge Writ of
Attachment[15] attaching thereto a counter-bond as required by the Rules of
Court.  On even date, the trial court issued an Order [16] lifting the levy on
petitioners properties and the garnishment of its bank accounts.
Petitioner afterwards filed its Answer[17] alleging therein that time was of
the essence in the delivery of the cylinder liners and that the delivery on 20
April 1990 of said items was late as respondent committed to deliver said
items within two (2) months after receipt of firm order [18] from petitioner.
Petitioner likewise sought counterclaims for moral damages, exemplary
damages, attorneys fees plus appearance fees, and expenses of litigation.
Subsequently, respondent filed a Second Amended Complaint with
Preliminary Attachment dated 25 October 1991.[19] The amendment introduced
dealt solely with the number of postdated checks issued by petitioner as full
payment for the first cylinder liner it ordered from respondent.  Whereas in the
first amended complaint, only nine postdated checks were involved, in its
second amended complaint, respondent claimed that petitioner actually
issued ten postdated checks.  Despite the opposition by petitioner, the trial
court admitted respondents Second Amended Complaint with Preliminary
Attachment.[20]
Prior to the commencement of trial, petitioner filed a Motion (For Leave To
Sell Cylinder Liners)[21] alleging therein that [w]ith the passage of time and with
no definite end in sight to the present litigation, the cylinder liners run the risk
of obsolescence and deterioration[22] to the prejudice of the parties to this
case.  Thus, petitioner prayed that it be allowed to sell the cylinder liners at
the best possible price and to place the proceeds of said sale in escrow.  This
motion, unopposed by respondent, was granted by the trial court through the
Order of 17 March 1991.[23]
After trial, the court a quo dismissed the action, the decretal portion of the
Decision stating:

WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff,
which is ordered to pay P50,000.00 to the defendant as and by way of attorneys fees.
[24]

The trial court held respondent bound to the quotation it submitted to


petitioner particularly with respect to the terms of payment and delivery of the
cylinder liners. It also declared that respondent had agreed to the cancellation
of the contract of sale when it returned the postdated checks issued by
petitioner. Respondents counterclaims for moral, exemplary, and
compensatory damages were dismissed for insufficiency of evidence.
Respondent moved for the reconsideration of the trial courts Decision but
the motion was denied for lack of merit.[25]
Aggrieved by the findings of the trial court, respondent filed an appeal with
the Court of Appeals[26] which reversed and set aside the Decision of the
court a quo.  The appellate court brushed aside petitioners claim that time was
of the essence in the contract of sale between the parties herein considering
the fact that a significant period of time had lapsed between respondents offer
and the issuance by petitioner of its purchase orders.  The dispositive portion
of the Decision of the appellate court states:

WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE.  The
appellee is hereby ORDERED to pay the appellant the amount of P954,000.00, and
accrued interest computed at 14% per annum reckoned from May, 1991. [27]

The Court of Appeals also held that respondent could not have incurred
delay in the delivery of cylinder liners as no demand, judicial or extrajudicial,
was made by respondent upon petitioner in contravention of the express
provision of Article 1169 of the Civil Code which provides:
Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

Likewise, the appellate court concluded that there was no evidence of the
alleged cancellation of orders by petitioner and that the delivery of the cylinder
liners on 20 April 1990 was reasonable under the circumstances.
On 22 May 2000, petitioner filed a motion for reconsideration of the
Decision of the Court of Appeals but this was denied through the resolution of
06 October 2000.[28] Hence, this petition for review which basically raises the
issues of whether or not respondent incurred delay in performing its obligation
under the contract of sale and whether or not said contract was validly
rescinded by petitioner.
That a contract of sale was entered into by the parties is not disputed.
Petitioner, however, maintains that its obligation to pay fully the purchase
price was extinguished because the adverted contract was validly terminated
due to respondents failure to deliver the cylinder liners within the two-month
period stated in the formal quotation dated 31 May 1989.
The threshold question, then, is: Was there late delivery of the subjects of
the contract of sale to justify petitioner to disregard the terms of the contract
considering that time was of the essence thereof?
In determining whether time is of the essence in a contract, the ultimate
criterion is the actual or apparent intention of the parties and before time may
be so regarded by a court, there must be a sufficient manifestation, either in
the contract itself or the surrounding circumstances of that intention.
[29]
 Petitioner insists that although its purchase orders did not specify the dates
when the cylinder liners were supposed to be delivered, nevertheless,
respondent should abide by the term of delivery appearing on the quotation it
submitted to petitioner.[30]Petitioner theorizes that the quotation embodied the
offer from respondent while the purchase order represented its (petitioners)
acceptance of the proposed terms of the contract of sale. [31] Thus, petitioner is
of the view that these two documents cannot be taken separately as if there
were two distinct contracts.[32] We do not agree.
It is a cardinal rule in interpretation of contracts that if the terms thereof are
clear and leave no doubt as to the intention of the contracting parties, the
literal meaning shall control.[33]However, in order to ascertain the intention of
the parties, their contemporaneous and subsequent acts should be
considered.[34] While this Court recognizes the principle that contracts are
respected as the law between the contracting parties, this principle is
tempered by the rule that the intention of the parties is primordial [35] and once
the intention of the parties has been ascertained, that element is deemed as
an integral part of the contract as though it has been originally expressed in
unequivocal terms.[36]
In the present case, we cannot subscribe to the position of petitioner that
the documents, by themselves, embody the terms of the sale of the cylinder
liners.  One can easily glean the significant differences in the terms as stated
in the formal quotation and Purchase Order No. 13839 with regard to the due
date of the down payment for the first cylinder liner and the date of its delivery
as well as Purchase Order No. 14011 with respect to the date of delivery of
the second cylinder liner.  While the quotation provided by respondent
evidently stated that the cylinder liners were supposed to be delivered within
two months from receipt of the firm order of petitioner and that the 25% down
payment was due upon the cylinder liners delivery, the purchase orders
prepared by petitioner clearly omitted these significant items.  The petitioners
Purchase Order No. 13839 made no mention at all of the due dates of delivery
of the first cylinder liner and of the payment of 25% down payment.  Its
Purchase Order No. 14011 likewise did not indicate the due date of delivery of
the second cylinder liner.
In the case of Bugatti v. Court of Appeals,[37] we reiterated the principle
that [a] contract undergoes three distinct stages preparation or negotiation, its
perfection, and finally, its consummation.  Negotiation begins from the time
the prospective contracting parties manifest their interest in the contract and
ends at the moment of agreement of the parties.  The perfection or birth of the
contract takes place when the parties agree upon the essential elements of
the contract.  The last stage is the consummation of the contract wherein the
parties fulfill or perform the terms agreed upon in the contract, culminating in
the extinguishment thereof.
In the instant case, the formal quotation provided by respondent
represented the negotiation phase of the subject contract of sale between the
parties.  As of that time, the parties had not yet reached an agreement as
regards the terms and conditions of the contract of sale of the cylinder liners.
Petitioner could very well have ignored the offer or tendered a counter-offer to
respondent while the latter could have, under the pertinent provision of the
Civil Code,[38] withdrawn or modified the same.  The parties were at liberty to
discuss the provisions of the contract of sale prior to its perfection. In this
connection, we turn to the testimonies of Pajarillo and Kanaan, Jr., that the
terms of the offer were, indeed, renegotiated prior to the issuance of Purchase
Order No. 13839.
During the hearing of the case on 28 January 1993, Pajarillo testified as
follows:
Q:   You testified Mr. Witness, that you submitted a quotation with defendant Lorenzo
Shipping Corporation dated rather marked as Exhibit A stating the terms of
payment and delivery of the cylinder liner, did you not?
A:    Yes sir.
Q:   I am showing to you the quotation which is marked as Exhibit A there appears in
the quotation that the delivery of the cylinder liner will be made in two months time
from the time you received the confirmation of the order.  Is that correct?
A:    Yes sir.
Q:   Now, after you made the formal quotation which is Exhibit A how long a time did
the defendant make a confirmation of the order?
A:    After six months.
Q:   And this is contained in the purchase order given to you by Lorenzo Shipping
Corporation?
A:    Yes sir.
Q:   Now, in the purchase order dated November 2, 1989 there appears only the date
the terms of payment which you required of them of 25% down payment, now, it is
stated in the purchase order the date of delivery, will you explain to the court why
the date of delivery of the cylinder liner was not mentioned in the purchase order
which is the contract between you and Lorenzo Shipping Corporation?
A:    When Lorenzo Shipping Corporation inquired from us for that cylinder liner, we
have inquired [with] our supplier in Japan to give us the price and delivery of that
item.  When we received that quotation from our supplier it is stated there that they
can deliver within two months but we have to get our confirmed order within June.
Q:   But were you able to confirm the order from your Japanese supplier on June of
that year?
A:    No sir.
Q:   Why? Will you tell the court why you were not able to confirm your order with your
Japanese supplier?
A:    Because Lorenzo Shipping Corporation did not give us the purchase order for that
cylinder liner.
Q:   And it was only on November 2, 1989 when they gave you the purchase order?
A:    Yes sir.
Q:   So upon receipt of the purchase order from Lorenzo Shipping Lines in 1989 did
you confirm the order with your Japanese supplier after receiving the purchase
order dated November 2, 1989?
A:    Only when Lorenzo Shipping Corporation will give us the down payment of 25%.[39]
For his part, during the cross-examination conducted by counsel for
petitioner, Kanaan, Jr., testified in the following manner:
WITNESS:  This term said 25% upon delivery. Subsequently, in the final contract, what
was agreed upon by both parties was 25% down payment.
Q:   When?
A:    Upon confirmation of the order.
...
Q:   And when was the down payment supposed to be paid?
A:    It was not stated when we were supposed to receive that. Normally, we expect to
receive at the earliest possible time. Again, that would depend on the customers.
Even after receipt of the purchase order which was what happened here, they re-
negotiated the terms and sometimes we do accept that.
Q:   Was there a re-negotiation of this term?
A:    This offer, yes. We offered a final requirement of 25% down payment upon
delivery.
Q:   What was the re-negotiated term?
A:    25% down payment
Q:   To be paid when?
A:    Supposed to be paid upon order.[40]

The above declarations remain unassailed.  Other than its bare assertion
that the subject contracts of sale did not undergo further renegotiation,
petitioner failed to proffer sufficient evidence to refute the above testimonies of
Pajarillo and Kanaan, Jr.
Notably, petitioner was the one who caused the preparation of Purchase
Orders No. 13839 and No. 14011 yet it utterly failed to adduce any justification
as to why said documents contained terms which are at variance with those
stated in the quotation provided by respondent.  The only plausible reason for
such failure on the part of petitioner is that the parties had, in fact,
renegotiated the proposed terms of the contract of sale.  Moreover, as the
obscurity in the terms of the contract between respondent and petitioner was
caused by the latter when it omitted the date of delivery of the cylinder liners
in the purchase orders and varied the term with respect to the due date of the
down payment,[41] said obscurity must be resolved against it.[42]
Relative to the above discussion, we find the case of Smith, Bell & Co.,
Ltd. v. Matti,[43] instructive.  There, we held that
When the time of delivery is not fixed or is stated in general and indefinite terms, time
is not of the essence of the contract. . . .

In such cases, the delivery must be made within a reasonable time.

The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery
intended. . . .

We also find significant the fact that while petitioner alleges that the
cylinder liners were to be used for dry dock repair and maintenance of its M/V
Dadiangas Express between the later part of December 1989 to early January
1990, the record is bereft of any indication that respondent was aware of such
fact.  The failure of petitioner to notify respondent of said date is fatal to its
claim that time was of the essence in the subject contracts of sale.
In addition, we quote, with approval, the keen observation of the Court of
Appeals:

. . . It must be noted that in the purchase orders issued by the appellee, dated
November 2, 1989 and January 15, 1990, no specific date of delivery was indicated
therein.  If time was really of the essence as claimed by the appellee, they should have
stated the same in the said purchase orders, and not merely relied on the quotation
issued by the appellant considering the lapse of time between the quotation issued by
the appellant and the purchase orders of the appellee.

In the instant case, the appellee should have provided for an allowance of time and
made the purchase order earlier if indeed the said cylinder liner was necessary for the
repair of the vessel scheduled on the first week of January, 1990.  In fact, the appellee
should have cancelled the first purchase order when the cylinder liner was not
delivered on the date it now says was necessary.  Instead it issued another purchase
order for the second set of cylinder liner.  This fact negates appellees claim that time
was indeed of the essence in the consummation of the contract of sale between the
parties.[44]

Finally, the ten postdated checks issued in November 1989 by petitioner


and received by the respondent as full payment of the purchase price of the
first cylinder liner supposed to be delivered on 02 January 1990 fail to
impress.  It is not an indication of failure to honor a commitment on the part of
the respondent.  The earliest maturity date of the checks was 18 January
1990.  As delivery of said checks could produce the effect of payment only
when they have been cashed,[45] respondents obligation to deliver the first
cylinder liner could not have arisen as early as 02 January 1990 as claimed by
petitioner since by that time, petitioner had yet to fulfill its undertaking to fully
pay for the value of the first cylinder liner.  As explained by respondent, it
proceeded with the placement of the order for the cylinder liners with its
principal in Japan solely on the basis of its previously harmonious business
relationship with petitioner.
As an aside, let it be underscored that [e]ven where time is of the essence,
a breach of the contract in that respect by one of the parties may be waived
by the other partys subsequently treating the contract as still in force.
[46]
 Petitioners receipt of the cylinder liners when they were delivered to its
warehouse on 20 April 1990 clearly indicates that it considered the contract of
sale to be still subsisting up to that time.  Indeed, had the contract of sale
been cancelled already as claimed by petitioner, it no longer had any business
receiving the cylinder liners even if said receipt was subject to verification.  By
accepting the cylinder liners when these were delivered to its warehouse,
petitioner indisputably waived the claimed delay in the delivery of said items.
We, therefore, hold that in the subject contracts, time was not of the
essence.  The delivery of the cylinder liners on 20 April 1990 was made within
a reasonable period of time considering that respondent had to place the
order for the cylinder liners with its principal in Japan and that the latter was,
at that time, beset by heavy volume of work.[47]
There having been no failure on the part of the respondent to perform its
obligation, the power to rescind the contract is unavailing to the petitioner. 
Article 1191 of the New Civil Code runs as follows:

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

The law explicitly gives either party the right to rescind the contract only
upon the failure of the other to perform the obligation assumed thereunder.
[48]
 The right, however, is not an unbridled one.  This Court in the case
of University of the Philippines v. De los Angeles,[49] speaking through the
eminent civilist Justice J.B.L. Reyes, exhorts:
Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved on account of infractions by the other
contracting party must be made known to the other and is always provisional,
being ever subject to scrutiny and review by the proper court.  If the other
party denied that rescission is justified, it is free to resort to judicial action in its
own behalf, and bring the matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.  (Emphasis supplied)
In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk.  For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law.  But the law definitely does not require
that the contracting party who believes itself injured must first file suit and wait
for a judgment before taking extrajudicial steps to protect its interest. 
Otherwise, the party injured by the others breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages.[50]
Here, there is no showing that petitioner notified respondent of its intention
to rescind the contract of sale between them.  Quite the contrary, respondents
act of proceeding with the opening of an irrevocable letter of credit on 23
February 1990 belies petitioners claim that it notified respondent of the
cancellation of the contract of sale.  Truly, no prudent businessman would
pursue such action knowing that the contract of sale, for which the letter of
credit was opened, was already rescinded by the other party.
WHEREFORE, premises considered, the instant Petition for Review
on Certiorari is DENIED.  The Decision of the Court of Appeals, dated 28 April
2000, and its Resolution, dated 06 October 2000, are hereby AFFIRMED.  No
costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, 


vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

PADILLA, J.:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-70245,
entitled "Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of
the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C.
Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio
Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The
telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the
required fees or charges.

The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in
attendance. Neither the husband nor any of the other children of the deceased, then all residing in
the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the
defendant to send, had not been received. She and the other plaintiffs thereupon brought action for
damages arising from defendant's breach of contract. The case was filed in the Court of First
Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the
defendant was that it was unable to transmit the telegram because of "technical and atmospheric
factors beyond its control."   No evidence appears on record that defendant ever made any attempt
1

to advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay
the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and


P20,000.00 as moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.


3. Ignacio Castro Jr., P20,000.00 as moral damages.

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as
moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also
reduced to P120,000. 00 for each.  3

Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges
paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof.

Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable
for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract
whereby, for a fee, petitioner undertook to send said private respondent's message overseas by
telegram. This, petitioner did not do, despite performance by said private respondent of her
obligation by paying the required charges. Petitioner was therefore guilty of contravening its
obligation to said private respondent and is thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in
this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.

We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of
the suffering private respondents had to undergo.

As the appellate court properly observed:

[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother after
she had already been interred, without being given the opportunity to even make a
choice on whether they wanted to pay her their last respects? There is no doubt that
these emotional sufferings were proximately caused by appellant's omission and
substantive law provides for the justification for the award of moral damages.  4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in
the amount of P1,000.00 for each of the private respondents, as a warning to all telegram
companies to observe due diligence in transmitting the messages of their customers.

WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:

(1) P10,000.00 as moral damages, to each of private respondents;

(2) P1,000.00 as exemplary damages, to each of private respondents;

(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.
FIRST DIVISION

[G.R. No. 133107. March 25, 1999]

RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs.


COURT OF APPEALS and FELIPE LUSTRE, respondents.

DECISION
KAPUNAN, J.:

A simple telephone call and an ounce-of good faith on the part of petitioner could have
prevented the present controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from
Toyota Shaw, Inc. for which he made a down payment of P164,620.00, the balance of the
purchase price to be paid in 24 equal monthly installments. Private respondent thus issued 24
postdated checks for the amount of P14,976.00 each. The first was dated April 10, 1991;
subsequent checks were dated every 10  day of each succeeding month.
th

To secure the balance, private respondent executed a promissory note [1] and a contract of
chattel mortgage[2] over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel
mortgage, in paragraph 11 thereof, provided for an acceleration clause stating that should the
mortgagor default in the payment of any installment, the whole amount remaining unpaid shall
become due. In addition, the mortgagor shall be liable for 25% of the principal due as liquidated
damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel
mortgage to petitioner Rizal Commercial Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and
debited by RCBC from private respondent's account, except for RCBC Check No. 279805
representing the payment for August 10, 1991, which was unsigned. Previously, the amount
represented by RCBC Check No. 279805 was debited from private respondent's account but was
later recalled and re-credited to him.Because of the recall, the last two checks, dated February
10, 1993 and March 10, 1993, were no longer presented for payment. This was purportedly in
conformity with petitioner bank's procedure that once a client's account was forwarded to its
account representative, all remaining checks outstanding as of the date the account was
forwarded were no longer presented for payment.
On the theory that respondent defaulted in his payments, the check representing the payment
for August 10, 1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded
from private respondent the payment of the balance of the debt, including liquidated
damages. The latter refused, prompting petitioner to file an action for replevin and damages
before the Pasay City Regional Trial Court (RTC). Private respondent, in his Answer, interposed
a counterclaim for damages.
After trial, the RTC[3] rendered a decision disposing of the case as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:

I. The complaint, for lack of cause of action, is hereby DISMISSED and plaintiff
RCBC is hereby ordered,

A. To accept the payment equivalent to the three checks amounting to a total of P44,938.00,
without interest
B. To release/cancel the mortgage on the car xxx upon payment of the amount of
P44,938.00 without interest.
C. To pay the cost of suit

II. On The Counterclaim

A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral damages.


B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is not entitled to
any fee for lawyering for himself.

All awards for damages are subject to payment of fees to be assessed by the Clerk
of Court, RTC, Pasay City.

SO ORDERED.

On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:

We xxx concur with the trial court's ruling that the Chattel Mortgage contract being a
contract of adhesion that is, one wherein a party, usually a corporation, prepares the
stipulations the contract, while the other party merely affixes his signature or his
"adhesion" thereto xxx - is to be strictly construed against appellant bank which
prepared the form Contract xxx. Hence xxx paragraph 11 of the Chattel Mortgage
contract [containing the acceleration clause] should be construed to cover only
deliberate and advertent failure on the part of the mortgagor to pay an amortization as
it became due in line with the consistent holding of the Supreme Court construing
obscurities and ambiguities in the restrictive sense against the drafter thereof xxx in
the light of

Article 1377 of the Civil Code.


In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee
rested solely on the fact that the 5th check issued by appellee xxx was recalled for lack
of signature. However, the check was recalled only after the amount covered thereby
had been deducted from defendant-appellee's account, as shown by the testimony of
plaintiff's own witness Francisco Bulatao who was in charge of the preparation of the
list and trial balances of bank customers xxx. The "default" was therefore not a case of
failure to pay, the check being sufficiently funded, and which amount was in fact
already debitted [sic] from appellee's account by the appellant bank which
subsequently re-credited the amount to defendant-appellee's account for lack of
signature. All these actions RCBC did on its own without notifying defendant until
sixteen (16) months later when it wrote its demand letter dated January 21, 1993.

Clearly, appellant bank was remiss in the performance of its functions for it could
have easily called the defendant's attention to the lack of signature on the check and
sent the check to, or summoned, the latter to affix his signature. It is also to be noted
that the demand letter contains no explanation as to how defendant-appellee incurred
arrearages in the amount of P66,255.70, which is why defendant-appellee made a
protest notation thereon.

Notably, all the other checks issued by the appellee dated subsequent to August 10,
1991 and dated earlier than the demand letter, were duly encashed. This fact should
have already prompted the appellant bank to review its action relative to the unsigned
check. xxx[4]

We take exception to the application by both the trial and appellate courts of Article 1377 of
the Civil Code, which states:

The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.

It bears stressing that a contract of adhesion is just as binding as ordinary contracts. [5] It is
true that we have, on occasion, struck down such contracts as void when the weaker party is
imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of
taking it or leaving it, completely deprived of the opportunity to bargain on equal footing.
[6]
 Nevertheless, contracts of adhesion are not invalid per se;[7] they are not entirely prohibited.
[8]
 The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives
his consent.[9]
While ambiguities in a contract of adhesion are to be construed against the party that
prepared the same,[10] this rule applies only if the stipulations in such contract are obscure or
ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control. [11] In the latter case, there would be no
need for construction.[12]
Here, the terms of paragraph 11 of the Chattel Mortgage Contract[13] are clear. Said
paragraph states:

11. In case the MORTGAGOR fails to pay any of the installments, or to pay the
interest that may be due as provided in the said promissory note, the whole amount
remaining unpaid therein shall immediately become due and payable and the
mortgage on the property (ies) herein-above described may be foreclosed by the
MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce
collection of the obligation hereby secured, and in either case the MORTGAGOR
further agrees to pay the MORTGAGEE an additional sum of 25% of the principal
due and unpaid, as liquidated damages, which said sum shall become part thereof. The
MORTGAGOR hereby waives reimbursement of the amount heretofore paid by
him/it to the MORTGAGEE.

The above terms leave no room for construction. All that is required is the application
thereof.
Petitioner claims that private respondent's check representing the fifth installment was "not
encashed,[14] such that the installment for August 1991 was not paid. By virtue of paragraph 11
above, petitioner submits that it "was justified in treating the entire balance of the obligation as
due and demandable."[15] Despite demand by petitioner, however, private respondent refused to
pay the balance of the debt. Petitioner, in sum, imputes delay on the part of private respondent.
We do not subscribe to petitioner's theory.
Article 1170 of the Civil Code states that those who in the performance of their obligations
are guilty of delay are liable for damages. The delay in the performance of the obligation,
however, must be either malicious or negligent. [16] Thus, assuming that private respondent was
guilty of delay in the payment of the value of the unsigned check, private respondent cannot be
held liable for damages. There is no imputation, much less evidence, that private respondent
acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of
Appeals' finding that such omission was mere "inadvertence" on the part of private
respondent. Toyota salesperson Jorge Geronimo testified that he even verified whether private
respondent had signed all the checks and in fact returned three or four unsigned checks to him
for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, I found out when he issued to me the 24 checks, I found
out 3 to 4 checks are unsigned and I asked him to sign these checks.
Atty. Obispo:
What did you do?
A: I asked him to sign the checks. After signing the checks, I reviewed again all the documents, after I
reviewed all the documents and found out that all are completed and the downpayments was
completed, we released to him the car. [17]
Even when the checks, were delivered to petitioner, it did not object to the unsigned check. In
view of the lack of malice or negligence on the part of private respondent, petitioner's blind and
mechanical invocation of paragraph 11 of the contract of chattel mortgage was unwarranted.
Petitioners conduct, in the light of the circumstances of this case, can only be described as
mercenary. Petitioner had already debited the value of the unsigned check from private
respondent's account only to re-credit it much later to him. Thereafter, petitioner encashed
checks subsequently dated, then abruptly refused to encash the last two. More than a year after
the date of the unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded
from private respondent payment of the value of said check and. that of the last two checks,
including liquidated damages. As pointed out by the trial court, this whole controversy could
have been avoided if only petitioner bothered to call up private respondent and ask him to sign
the check. Good faith not only in compliance with its contractual obligations, [18] but also in
observance of the standard in human relations, for every person "to act with justice, give
everyone his due, and observe honesty and good faith."[19] behooved the bank to do so.
Failing thus, petitioner is liable for damages caused to private respondent. [20] These include
moral damages for the mental anguish, serious anxiety, besmirched reputation, wounded feelings
and social humiliation suffered by the latter.[21] The trial court found that private respondent was

[a] client who has shared transactions for over twenty years with a bank xxx. The
shabby treatment given the defendant is unpardonable since he was put to shame and
embarrassment after the case was filed in Court. He is a lawyer in his own right,
married to another member of the bar. He sired children who are all professionals in
their chosen field. He is known to the community of golfers with whom he
gravitates. Surely, the filing of the case made defendant feel so bad and bothered.

To deter others from emulating petitioners callous example, we affirm the award of
exemplary damages.[22] As exemplary damages are warranted, so are attorney's fees.[23]
We, however, find excessive the amount of damages awarded by the trial court in favor of
private respondent with respect to his counterclaims and, accordingly, reduce the same as
follows:

(a) Moral damages - fromP200,000.00 to P100,000.00,

(b) (b)Exemplarydamages from P100,000.00 to P75,000.00,

(c) (c) Attorney's fees - from P 50,000,00 to P 30,000.00.

WHEREFORE, subject to these modifications, the decision of the Court of Appeals


is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Melo, and Pardo, JJ., concur.