G.R. No.

119729 January 21, 1997

ACE-AGRO DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and COSMOS BOTTLING CORPORATION, respondents.

MENDOZA, J.:
This case originated in a complaint for damages for breach of contract which petitioner filed against private respondent. From the
decision of the Regional Trial Court, Branch 72, Malabon, Metro Manila, finding private respondent guilty of breach of contract and
ordering it to pay damages, private respondent appealed to the Court of Appeals which reversed the trial court's decision and
dismissed the complaint for lack of merit. Petitioner in turn moved for a reconsideration, but its motion was denied. Hence, this
petition for review on certiorari.
The facts are as follows:
Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling Corporation are corporations duly
organized and existing under Philippine laws. Private respondent Cosmos Bottling Corp. is engaged in the manufacture of soft
drinks. Since 1979 petitioner Ace-Agro Development Corp. (Ace-Agro) had been cleaning soft drink bottles and repairing wooden
shells for Cosmos, rendering its services within the company premises in San Fernando, Pampanga. The parties entered into
service contracts which they renewed every year. On January 18, 1990, they signed a contract covering the period January 1,
1990 to December 31, 1990. Private respondent had earlier contracted the services of Aren Enterprises in view of the fact that
petitioner could handle only from 2,000 to 2,500 cases a day and could not cope with private respondent's daily production of
8,000 cases. Unlike petitioner, Aren Enterprises rendered service outside private respondent's plant.
On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places, the area where petitioner did its
work. As a result, petitioner's work was stopped.
On May 15, 1990, petitioner asked private respondent to allow it to resume its service, but petitioner was advised that on account
of the fire, which had "practically burned all . . . old soft drink bottles and wooden shells," private respondent was terminating their
contract.
Petitioner expressed surprise at the termination of the contract and requested private respondent, on June 13, 1990, to reconsider
its decision and allow petitioner to resume its work in order to "cushion the sudden impact of the unemployment of many of [its]
workers." As it received no reply from private respondent, petitioner, on June 20, 1990, informed its employees of the termination
of their employment. Petitioner's memorandum 1 read:
MEMORANDUM TO : All Workers/Union Members
THRU : Mr. Angelito B. Catalan
Local Chapter President
Bisig Manggagawa sa Ace Agro-NAFLU
This is to inform you that the Cosmos Bottling Corp. has sent a letter to Ace Agro-Development Corp. terminating our contract with
them.
However, we are still doing what we can to save our contract and resume our operations, though this might take some time.
We will notify you whatever would be the outcome of our negotiation with them in due time.
Truly yours,
ACE AGRO-DEVELOPMENT CORP.
(Sgd.) ANTONIO L. ARQUIZA
Manager
This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against petitioner and private respondent.
On July 17, 1990, petitioner sent another letter to private respondent, reiterating its request for reconsideration. Its letter 2 read:
COSMOS BOTTLING CORPORATION
San Isidro MacArthur Highway
San Fernando, Pampanga
Attention: Mr. Norman P. Uy
General Services Manager
Gentlemen:
In our letter to you dated June 13, 1990 seeking your kind reconsideration of your sudden drastic decision to terminate our
mutually beneficial contract of long standing, it is more than a month now but our office has not received a reply from you.
Our workers, who have been anxiously waiting for the resumption of the operations and who are the ones most affected by your
sudden decision, are now becoming restless due to the financial difficulties they are now suffering.
We are, therefore, again seeking for the reconsideration of your decision to help alleviate the sufferings of the displaced workers,
which we also have to consider for humanitarian reason.

Yours very truly,

ACE AGRO-DEVELOPMENT CORP.
(Sgd.) ANTONIO I. ARQUIZA
Manager
In response, private respondent advised petitioner on August 28, 1990 that the latter could resume the repair of wooden shells
under terms similar to those contained in its contract but work had to be done outside the company premises. Private
respondent's letter 3 read:
MR. ANTONIO I. ARQUIZA
Manager
ACE-AGRO DEVELOPMENT CORPORATION
165 J.P. Bautista Street
Malabon, Metro Manila
Dear Mr. Arquiza:
We are pleased to inform you that COSMOS BOTTLING CORPORATION, San Fernando Plant is again accepting job-out contract
for the repair of our wooden shells.
Work shall be done outside the premises of the plant and under similar terms you previously had with the company. We intend to
give you priority so please see or contact me at my office soonest for the particulars regarding the job.
Here is looking forward to doing business with you at the earliest possible time.
(Sgd.) DANILO M. DE CASTRO
Plant General Manager
Petitioner refused the offer, claiming that to do its work outside the company's premises would make it (petitioner) incur additional
costs for transportation which "will eat up the meager profits that [it] realizes from its original contract with Cosmos." In subsequent
meetings with Danilo M. de Castro, Butch Cea and Norman Uy of Cosmos, petitioner's manager, Antonio I. Arquiza, asked for an
extension of the term of the contract in view of the suspension of work. But its request was apparently turned down.
On November 7, 1990, private respondent advised petitioner that the latter could then resume its work inside the plant in
accordance with its original contract with Cosmos. Private respondent's letter 4 stated:
MR. ANTONIO I. ARQUIZA
General Manager
Ace-Agro Development Corporation
165 J. P. Bautista St., Malabon
Metro Manila
Dear Mr. Arquiza:
This is to officially inform you that you can now resume the repair of wooden shells inside the plant according to your existing
contract with the Company.
Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in the Plant.
Very truly yours,
COSMOS BOTTLING CORPORATION
(Sgd.) MICHAEL M. ALBINO
VP-Luzon/Plant General Manager
On November 17, 1990, petitioner rejected private respondent's offer, this time, citing the fact that there was a pending labor case.
Its letter 5 to private respondent stated:
Mr. Michael M. Albino
VP-Luzon/Plant General Manager
Cosmos Bottling Corporation
San Fernando, Pampanga
Dear Mr. Albino,
This is in connection with your letter dated November 7, 1990 regarding the resumption of the repair of your wooden shells inside
San Fernando, Pampanga Plant according to the existing contract with your company.
At present, there is a pending case before the Department of Labor and Employment in San Fernando, Pampanga which was a
result of the premature termination of the said existing contract with your company. In view of that, we find it proper for us to work
for the resolution of the said pending case and include in the Compromise Agreement the matter of the resumption of the repair of
wooden shells in your San Fernando, Pampanga Plant.
Thank you very much.

Very truly yours,

ACE AGRO-DEVELOPMENT CORP.
(Sgd.) ANTONIO I. ARQUIZA
Manager
On January 3, 1991, petitioner brought this case against private respondent for breach of contract and damages in the Regional
Trial Court of Malabon. It complained that the termination of its service contract was illegal and arbitrary and that, as a result, it
stood to lose profits and to be held liable to its employees for backwages, damages and/or separation pay.
On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable for the claims of its employees. Petitioner
was ordered to reinstate the employees and pay them backwages. However, private respondent Cosmos was absolved from the
employees' claims on the ground that there was no privity of contract between them and private respondent.
On the other hand, in its decision rendered on November 21, 1991, the RTC found private respondent guilty of breach of contract
and ordered it to pay damages to petitioner. Petitioner's claim for reimbursement for what it had paid to its employees in the labor
case was denied. The dispositive portion of the trial court's decision read:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff Ace-Agro Development Corporation and
against defendant Cosmos Bottling Corporation, ordering the latter to pay to the former the following:
a) The amount of P1,008,418.01 as actual damages;
b) P100,000.00 as corrective or exemplary damages;
c) The amount of P50,000.00 as and for attorney's fees; and
d) Costs and expenses of litigation.
Defendant's counterclaims are dismissed.
SO ORDERED.
Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed the trial court's decision and
dismissed petitioner's complaint. The appellate court found that it was petitioner which had refused to resume work, after failing to
secure an extension of its contract. Petitioner now seeks a review of the Court of Appeals' decision.
First. Petitioner claims that the appellate court erred "in ruling that respondent was justified in unilaterally terminating the contract
on account of a force majeure." Quite possibly it did not understand the appellate court's decision, or it would not be contending
that there was no valid cause for the termination of the contract but only for its suspension. The following is what the appellate
court said: 6
Article 1231 of the New Civil Code on extinguishment of obligations does not specifically mention unilateral termination as a mode
of extinguishment of obligation but, according to Tolentino, "there are other causes of extinguishment of obligations which are not
expressly provided for in this chapter" (Tolentino, Civil Code of the Phils., Vol. IV, 1986 ed., p. 273). He further said:
But in some contracts, either because of its indeterminate duration or because of the nature of the prestation which is its object,
one of the parties may free himself from the contractual tie by his own will (unilateral extinguishment); . . . (p. 274-275, Ibid)
And that was just what defendant-appellant did when it unilaterally terminated the agreement it had with plaintiff-appellee by
sending the May 23, 1990 letter. As per its letter, the reason given by defendant-appellant for unilaterally terminating the
agreement was because the April 25, 1990 fire practically burned all of the softdrink bottles and wooden shells which plaintiffappellee was working on under the agreement. What defendant-appellant was trying to say was that the prestation or the object of
their agreement had been lost and destroyed in the above-described fire. Apparently, the defendant-appellant would like this
situation to fall within what according to Tolentino would be:
. . . (O)bligations may be extinguished by the happening of unforeseen events, under whose influence the obligation would never
have been contracted, because in such cases, the very basis upon which the existence of the obligation is founded would be
wanting.
Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen event and that the same even burned
practically all the softdrink bottles and wooden shells which are the objects of the agreement. But the story did not end there.
It is true that defendant-appellant still had other bottles that needed cleaning and wooden shells that needed repairing (pp . 110111, orig. rec.); therefore, the suspension of the work of the plaintiff-appellee brought about by the fire is, at best, temporary as
found by the trial court. Hence, plaintiff-appellee's letters of reconsideration of the termination of the agreement addressed to
defendant-appellant dated June 13, 1990 and July 17, 1990.
It is obvious that what petitioner thought was the appellate court's ruling is merely its summary of private respondent's allegations.
Precisely the appellate court, does not agree with private respondent, that is why, in the last paragraph of the above excerpt, the
court says that there was no cause for terminating the contract but at most a "temporary suspension of work." The court thus
rejects private respondent's claim that, as a result of the fire, the obligation of contract must be deemed to have been
extinguished.
Nonetheless, the Court of Appeals found that private respondent had reconsidered its decision to terminate the contract and tried
to accommodate the request of petitioner, first, by notifying petitioner on August 28, 1990 that it could resume work provided that
this was done outside the premises and, later, on November 7, 1990, by notifying petitioner that it could then work in its premises,
under the terms of their contract. However, petitioner unjustifiably refused the offer because it wanted an extension of the contract
to make up for the period of inactivity. As the Court of Appeals said in its decision: 7
It took defendant-appellant time to make a reply to plaintiff-appellee's letters. But when it did on August 28, 1990, it granted
plaintiff-appellee priority to resume its work under the terms of their agreement (but outside its premises), and the plaintiff-appellee
refused the same on the ground that working outside the defendant-appellant's San Fernando Plant would mean added
transportation costs that would offset any profit it would earn.

The appellee was without legal ground to refuse resumption of work as offered by the appellant, under the terms of their above
agreement. It could not legally insist on staying inside property it did not own, nor was under lease to
it . . . . In its refusal to resume its work because of the additional transportation costs to be brought about by working outside the
appellant's San Fernando plant, the appellee could be held liable for damages for breach of contract.
xxx xxx xxx
Thereafter, appellant sent its November 7, 1990 letter to appellee, this time specifically stating that plaintiff-appellee can now
resume work in accordance with their existing agreement. This time, it could not be denied that by the tenor of the letter, appellant
was willing to honor its agreement with appellee, that it had finally made a reconsideration of appellee's plea to resume work
under the contract. But again, plaintiff-appellee refused this offer to resume work.
Why did the appellee refuse to resume work? Its November 17, 1990 letter stated that it had something to do with the settlement
of the NLRC case filed against it by its employees. But that was not the real reason. In his cross-examination, the witness for
appellee stated that its real reason for refusing to resume work with the appellant was as in its previous refusal because it
wanted an extension of the period or duration of the contract beyond December 31, 1991, to cover the period within which it was
unable to work.
The agreement between the appellee and the appellant is with a resolutory period, beginning from January 1, 1990 and ending on
December 31, 1990. When the fire broke out on April 25, 1990, there resulted a suspension of the appellee's work as per
agreement. But this suspension of work due to force majeure did not merit an automatic extension of the period of the agreement
between them. According to Tolentino:
The stipulation that in the event of a fortuitous event or force majeure the contract shall be deemed suspended during the said
period does not mean that the happening of any of those events stops the running of the period the contract has been agreed
upon to run. It only relieves the parties from the fulfillment of their respective obligations during that time. If during six of the thirty
years fixed as the duration of a contract, one of the parties is prevented by force majeure to perform his obligation during those
years, he cannot after the expiration of the thirty-year period, be compelled to perform his obligation for six more years to make up
for what he failed to perform during the said six years, because it would in effect be an extension of the term of the contract. The
contract is stipulated to run for thirty years, and the period expires on the thirtieth year; the period of six years during which
performance by one of the parties is prevented by force majeure cannot be deducted from the period stipulated.
In fine, the appellant withdrew its unilateral termination of its agreement with appellee in its letter dated November 7, 1990. But the
appellee's refusal to resume work was, in effect, a unilateral termination of the parties' agreement an act that was without basis.
When the appellee asked for an extension of the period of the contract beyond December 31, 1990 it was, in effect, asking for a
new contract which needed the consent of defendant-appellant. The appellee might be forgiven for its first refusal (pertaining to
defendant-appellant's August 28, 1990 letter), but the second refusal must be construed as a breach of contract by plaintiffappellee. . . .
The Court of Appeals was right that petitioner had no basis for refusing private respondent's offer unless petitioner was allowed to
carry out its work in the company premises. That petitioner would incur additional cost for transportation was not a good reason for
its refusal. Petitioner has not shown that on August 28, 1990, when it was notified of the private respondent's offer, the latter's
premises had so far been restored so as to permit petitioner to resume work there. In fact, even when petitioner was finally
allowed to resume work within the plant, it was not in the former work place but in a new one, which shows that private
respondent's reason for not granting petitioner's request was not just a pretext.
Nor was petitioner justified in refusing to resume work on November 7 when it was again notified by petitioner to work. Although it
cited the pending labor case as reason for turning down private respondent's offer, it would appear that the real reason for
petitioner's refusal was the fact that the term of the contract was expiring in two months and its request for an extension was not
granted. But, as the appellate court correctly ruled, the suspension of work under the contract was brought about by force
majeure. Therefore, the period during which work was suspended did not justify an extension of the term of the contract. 8 For the
fact is that the contract was subject to a resolutory period which relieved the parties of their respective obligations but did not stop
the running of the period of their contract.
The truth of the matter is that while private respondent had made efforts towards accommodation, petitioner was unwilling to make
adjustments as it insisted that it "cannot profitably resume operation under the same terms and conditions [of] the terminated
contract but with an outside work venue [as] transportation costs alone will eat up the meager profit that Ace-Agro realizes from its
original contract." 9 While this so-called "job-out" offer of private respondent had the effect of varying the terms of the contract in
the sense that it could increase its cost, what petitioner did not seem to realize was that the change was brought about by
circumstances not of private respondent's making.
Again when private respondent finally advised petitioner on November 7, 1990 to work under the strict terms of its contract and
inside the plant, petitioner thought only of its interest by insisting that the contract be extended. Petitioner's manager, Antonio I.
Arquiza, testified that he tried to secure a term extension for his company but his request was turned down because the
management of private respondent wanted a new contract after the expiration of the contract on December 31, 1990. Arquiza
testified. 10
A [Butch Cea] told me that Cosmos is agreeable to allow us to resume our operation and when I inquired about the extension of
the contract he told me that I better refer the matter to Mr. Norman Uy.
xxx xxx xxx
Q Did you see Mr. Norman Uy?
A Yes, sir, when I went to see Mr. Norman Uy he asked me why I was there and he told me why I did not start operation I told him
that what we are expecting that Mr. Cea would give me the formal letter regarding the resumption of the operation and honoring
of contract and he said that our price was so high and if we are willing to use said contract and when I said yes he told me that we
will just send you a letter considering that another contractor repairing our damaged shells and cleaning of dirty bottles. When I
asked him that does that mean that the meeting I had with Mr. Cea, he told me that was null and void and he told me that Mr.
Cea want a new contract.
As already stated, because the suspension of work was due to force majeure, there was no justification for petitioner's demand for

an extension of the terms of the contract. Private respondent was justified in insisting that after the expiration of the contract, the
parties must negotiate a new one as they had done every year since the start of their business relations in 1979.
Second. Petitioner slams the Court of Appeals for ruling that "it was [petitioner's] unjustified refusal which finally terminated the
contract between the parties." This contention is likewise without merit. Petitioner may not be responsible for the termination of the
contract, but neither is private respondent, since the question in this case is whether private respondent is guilty of breach of
contract. The trial court held that private respondent committed a breach of contract because, even as its August 28, 1990 letter
allowed petitioner to resume work, private respondent's offer was limited to the repairs of wooden shells and this had to be done
outside the company's premises. On the other hand, the final offer made on November 7, 1990, while allowing the "repair of
wooden shells [to be done] inside the plant according to your contract with the company," was still limited to the repair of the
wooden shells, when the fact was that the parties' contract was both for the repair of wooden crates and for the cleaning of soft
drink bottles.
But this was not the petitioner's complaint. There was never an issue whether the company's offer included the cleaning of bottles.
Both parties understood private respondent's offer as including the cleaning of empty soft drink bottles and the repair of the
wooden crates. Rather, the discussions between petitioner and private respondent's representatives focused first, on the
insistence of petitioner that it be allowed to work inside the company plant and, later, on its request for the extension of the life of
the contract.
Petitioner claims that private respondent had a reason to want to terminate the contract and that was to give the business to Aren
Enterprises, as the latter offered its services at a much lower rate than petitioner. Aren Enterprises' rate was P2.50 per shell while
petitioner's rates were P4.00 and P6.00 per shell for ordinary and super sized bottles, respectively. 11
The contention has no basis in fact. The contract between private respondent and Aren Enterprises had been made on March 29,
1990 before the fire broke out. The contract between petitioner and private respondent did not prohibit the hiring by private
respondent of another service contractor. With private respondent hitting production at 8,000 bottles of soft drinks per day,
petitioner could clearly not handle the business, since it could clean only 2,500 bottles a day. 12 These facts show that although
Aren Enterprises' rate was lower than petitioner's, they did not affect private respondent's business relation with petitioner. Despite
private respondent's contract with Aren Enterprises, private respondent continued doing business with petitioner and would
probably have done so were it not for the fire. On the other hand, Aren Enterprises could not be begrudged for being allowed to
continue rendering service even after the fire because it was doing its work outside private respondent's plant. For that matter,
after the fire, private respondent on August 28, 1990 offered to let petitioner resume its service provided this was done outside the
plant.
Petitioner may not be to blame for the failure to resume work after the fire, but neither is private respondent. Since the question is
whether private respondent is guilty of breach of contract, the fact that private respondent is blameless can only lead to the
conclusion that the appealed decision is correct.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

G.R. No. 177921

December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND
MERCEDES DYCHIAO, AND SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 are the Decision2 dated February 12, 2007 and the Resolution 3 dated May 10,
2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the Decision 4 dated January 17, 2006
of the Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners Metro Concast
Steel Corporation (Metro Concast), Spouses Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and
Spouses Vicente and Filomena Duchiao (individual petitioners) to solidarily pay respondent Allied Bank Corporation (Allied Bank)
the aggregate amount of P51,064,094.28, with applicable interests and penalty charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and by virtue of
Philippine laws and engaged in the business of manufacturing steel, 5 through its officers, herein individual petitioners, obtained
several loans from Allied Bank. These loan transactions were covered by a promissory note and separate letters of credit/trust
receipts, the details of which are as follows:
<<Reference: http://www.scribd.com/doc/196404620/177921>>
Date Document Amount
December 13, 1996 Promissory Note No. 96-213016
P2,000,000.00 November 7, 1995 Trust Receipt No. 96-202365 7
P608,603.04 May 13, 1996 Trust Receipt No. 96-960522 8
P3,753,777.40 May 24, 1996 Trust Receipt No. 96-960524 9
P4,602,648.08 March 21, 1997 Trust Receipt No. 97-204724 10
P7,289,757.79 June 7, 1996 Trust Receipt No. 96-203280 11

P17,340,360.73 July 26, 1995 Trust Receipt No. 95-201943 12

P670,709.24 August 31, 1995 Trust Receipt No. 95-202053 13
P313,797.41 November 16, 1995 Trust Receipt No. 96-202439 14
P13,015,109.87 July 3, 1996 Trust Receipt No. 96-203552 15
P401,608.89 June 20, 1995 Trust Receipt No. 95-201710 16
P750,089.25 December 13, 1995 Trust Receipt No. 96-379089 17
P92,919.00 December 13, 1995 Trust Receipt No. 96/202581 18
P224,713.58
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.), with penalty charge of 3% per
month in case of default; while the twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and 1% penalty
charge. By way of security, the individual petitioners executed several Continuing Guaranty/Comprehensive Surety Agreements 19
in favor of Allied Bank. Petitioners failed to settle their obligations under the aforementioned promissory note and trust receipts,
hence, Allied Bank, through counsel, sent them demand letters, 20 all dated December 10, 1998, seeking payment of the total
amount of P51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint for collection of sum of money 21
(subject complaint) against petitioners before the RTC, docketed as Civil Case No. 00-1563. In their second 22 Amended Answer,23
petitioners admitted their indebtedness to Allied Bank but denied liability for the interests and penalties charged, claiming to have
paid the total sum of P65,073,055.73 by way of interest charges for the period covering 1992 to 1997. 24
They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as the devaluation of the peso
against the US dollar contributed greatly to the downfall of the steel industry, directly affecting the business of Metro Concast and
eventually leading to its cessation. Hence, in order to settle their debts with Allied Bank, petitioners offered the sale of Metro
Concasts remaining assets, consisting of machineries and equipment, to Allied Bank, which the latter, however, refused. Instead,
Allied Bank advised them to sell the equipment and apply the proceeds of the sale to their outstanding obligations. Accordingly,
petitioners offered the equipment for sale, but since there were no takers, the equipment was reduced into ferro scrap or scrap
metal over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling (Camiling), expressed
interest in buying the scrap metal. During the negotiations with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a
member of Allied Banks legal department, acted as the latters agent. Eventually, with the alleged conformity of Allied Bank,
through Atty. Saw, a Memorandum of Agreement 25 dated November 8, 2002 (MoA) was drawn between Metro Concast,
represented by petitioner Jose Dychiao, and Peakstar, through Camiling, under which Peakstar obligated itself to purchase the
scrap metal for a total consideration of P34,000,000.00, payable as follows:
(a) P4,000,000.00 by way of earnest money P2,000,000.00 to be paid in cash and the other P2,000,000.00 to be paid in two (2)
post-dated checks of P1,000,000.00 each;26 and
(b) the balance of P30,000,000.00 to be paid in ten (10) monthly installments of P3,000,000.00, secured by bank guarantees from
Bankwise, Inc. (Bankwise) in the form of separate post-dated checks. 27
Unfortunately, Peakstar reneged on all its obligations under the MoA. In this regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by Peakstar, petitioners must
therefore be deemed to have settled their obligations to Allied Bank. To bolster their defense, petitioner Jose Dychiao (Jose
Dychiao) testified28 during trial that it was Atty. Saw himself who drafted the MoA and subsequently received 29 the P2,000,000.00
cash and the two (2) Bankwise post-dated checks worth P1,000,000.00 each from Camiling. However, Atty. Saw turned over only
the two (2) checks and P1,500,000.00 in cash to the wife of Jose Dychiao. 30
Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral damages in the
amount of P20,000,000.00 in favor of Metro Concast and at least P25,000,000.00 for each individual petitioner, P25,000,000.00
as exemplary damages, P1,000,000.00 as attorneys fees, P500,000.00 for other litigation expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision 31 dated January 17, 2006, dismissed the subject complaint, holding that the
"causes of action sued upon had been paid or otherwise extinguished." It ruled that since Allied Bank was duly represented by its
agent, Atty. Saw, in all the negotiations and transactions with Peakstar considering that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the scrap metal then it stands to reason that the MoA
between Metro Concast and Peakstar was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision 32 dated February 12, 2007, reversed and set aside the ruling of the RTC,
ratiocinating that there was "no legal basis in fact and in law to declare that when Bankwise reneged its guarantee under the
[MoA], herein [petitioners] should be deemed to be discharged from their obligations lawfully incurred in favor of [Allied Bank]." 33
The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and Peakstar, as the buyer thereof, and
found that the same did not indicate that Allied Bank intervened or was a party thereto. It also pointed out the fact that the postdated checks pursuant to the MoA were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient evidence on record
showing that Atty. Saw was duly and legally authorized to act for and on behalf of Allied Bank, opining that the RTC was "indulging
in hypothesis and speculation" 34 when it made a contrary pronouncement. While Atty. Saw received the earnest money from
Peakstar, the receipt was signed by him on behalf of Jose Dychiao. 35
It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.] Saw either as representative of

[petitioners] or as partner of the latters legal counsel, and not in anyway as representative of [Allied Bank]." 36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their corresponding obligations
under the aforementioned promissory note and trust receipts, plus interests, penalty charges and attorneys fees. Petitioners
sought reconsideration37 which was, however, denied in a Resolution38 dated May 10, 2007. Hence, this petition.
The Issue Before the Court
At the core of the present controversy is the sole issue of whether or not the loan obligations incurred by the petitioners under the
subject promissory note and various trust receipts have already been extinguished.
The Courts Ruling
Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due,
the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation.
In the present case, petitioners essentially argue that their loan obligations to Allied Bank had already been extinguished due to
Peakstars failure to perform its own obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstars default as a
form of force majeure in the sense that they have, beyond their control, lost the funds they expected to have received from the
Peakstar (due to the MoA) which they would, in turn, use to pay their own loan obligations to Allied Bank. They further state that
Allied Bank was equally bound by Metro Concasts MoA with Peakstar since its agent, Atty. Saw, actively represented it during the
negotiations and execution of the said agreement. Petitioners arguments are untenable. At the outset, the Court must dispel the
notion that the MoA would have any relevance to the performance of petitioners obligations to Allied Bank. The MoA is a sale of
assets contract, while petitioners obligations to Allied Bank arose from various loan transactions. Absent any showing that the
terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA,
said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one
would not depend on the existence, performance or breach of the other. In the foregoing respect, the issue on whether or not
Allied Bank expressed its conformity to the assets sale transaction between Metro Concast and Peakstar (as evidenced by the
MoA) is actually irrelevant to the issues related to petitioners loan obligations to the bank. Besides, as the CA pointed out, the fact
of Allied Banks representation has not been proven in this case and hence, cannot be deemed as a sustainable defense to
exculpate petitioners from their loan obligations to Allied Bank. Now, anent petitioners reliance on force majeure, suffice it to state
that Peakstars breach of its obligations to Metro Concast arising from the MoA cannot be classified as a fortuitous event under
jurisprudential formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee the same. To constitute a fortuitous event, the following
elements must concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with
obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito
or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the
debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the
injury or loss.40 (Emphases supplied)
While it may be argued that Peakstars breach of the MoA was unforseen by petitioners, the same us clearly not "impossible"to
foresee or even an event which is independent of human will." Neither has it been shown that said occurrence rendered it
impossible for petitioners to pay their loan obligations to Allied Bank and thus, negates the formers force majeure theory
altogether. In any case, as earlier stated, the performance or breach of the MoA bears no relation to the performance or breach of
the subject loan transactions, they being separate and distinct sources of obligations. The fact of the matter is that petitioners loan
obligations to Allied Bank remain subsisting for the basic reason that the former has not been able to prove that the same had
already been paid41 or, in any way, extinguished. In this regard, petitioners liability, as adjudged by the CA, must perforce stand.
Considering, however, that Allied Banks extra-judicial demand on petitioners appears to have been made only on December 10,
1998, the computation of the applicable interests and penalty charges should be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated May 10, 2007 of the Court of
Appeals in CA-G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION reckoning the applicable interests and penalty
charges from the date of the extrajudicial demand or on December 10, 1998. The rest of the appellate courts dispositions stand.
SO ORDERED.

G.R. No. 104819 July 20, 1998

CHONNEY LIM, petitioner,
vs.
COURT OF APPEALS, LEA CASTRO WHELAN and KEITH LAWRENCE WHELAN, respondents.

KAPUNAN, J.:
Before us is a petition for review of the decision of the Court of Appeals 1 affirming in toto the decision of the Regional Trial Court,
Branch V, Baguio City. 2 The bare facts of this case as aptly stated by the Court of Appeals in its decision are as follows:
On March 24, 1984, a conditional deed of sale was executed between appellant Lim and appellee Lea Whelan. It was stipulated
that appellee Whelan would buy from the appellant a parcel of land with an area of 1,000 square meters for the sum of
P600,000.00 or U.S. $30,000.00 in U.S. $100 denomination. The property, however, was mortgaged to the Bank of the Philippine
Islands; the loan which on maturity on August 14, 1984, would be P269,960.88.
Lea Whelan then paid an earnest money of U.S. $9,000.00 consisting of U.S. $8,000.00 in $100.00 bills and U.S. $1,000.00 in
traveller's checks of $100.00; thereafter, she occupied the premises. Subsequently, appellee Whelan allegedly gave appellant Lim
U.S. $8,000.00, a bank draft in the sum of P141,000.00 and later a check for P17,800.00 drawn against PCI Bank. After these

payments, a deed of absolute sale was signed by appellee Whelan and appellant Lim on June 21, 1984, appellant Lim allegedly
gave Whelan xeroxed copies of title, realty tax receipts and bills for light and water.
On August 23, 1984, appellant Lim sent Whelan a telegram demanding her to vacate the subject property. Whelan countered that
she was already the owner thereof. On August 24, 1984, a complaint for ejectment was filed against the, appellee.
Plaintiff-appellee Chonney Lim claimed that he was not paid the U.S. $8,000.00 due him; that the bank draft for the sum of
P141,000.00 was not honored; and that the check for P17,800.00 bounced. Defendant-appellee Lea Whelan, however, replied
that she paid the indebtedness of the appellant in the amount of P210,297.70 inclusive of interests and penalty charges hence,
the mortgage of the property to the Bank of the Philippine Islands was already cancelled. Consequently, appellee stopped the
payment of the bank draft and check in favor of the appellant. Appellee, likewise, claimed that she paid the capital gains tax on the
sale of the property to her in the amount of P14,994.00. Furthermore, appellee Whelan alleged that the house which was built on
the land she bought, had been renovated at her expense for the amount of P180,000.00 to P200.000.00. When, in 1986, the said
house was damaged by a typhoon, it was repaired and had cost appellee P17,000.00. 3
Since the bank draft in the amount of P141,000.00 was dishonored and the PCI Bank check for P17,800.00 bounced, petitioner
Chonney Lim alleged that he was not paid. He therefore instituted an action for rescission of contract which was docketed as Civil
Case No. 423-R.
On the other hand, Lea Whelan filed an action for specific performance demanding from Chonney Lim the delivery of the title of
said property which she has fully paid. This was docketed as Civil Case No. 496-R.
These two (2) cases were consolidated and on June 19, 1989, the Regional Trial Court, Branch V, Baguio City denied Chonney
Lim's action for rescission and granted Lea Whelan's prayer for specific performance. The dispositive portion of the decision reads
as follows:
WHEREFORE, in Civil Case No. 496-R, judgment is hereby rendered:
1. Directing the Register of Deeds of Baguio City to cancel, upon payment of the prescribed fees therefor, Transfer Certificate of
Title No. T-32741 of his Registry and in lieu thereof issue a new one in the name of Lea Castro Whelan, Filipino, of legal age,
married to Keith Lawrence Whelan, an Australian citizen and a resident of 136 Kennon Road, Baguio City, and for this purpose,
the Branch Clerk of Court may release to Lea Castro Whelan, upon proper receipt, the owner's copy of TCT No. T-32741;
2. Ordering Chonney B. Lim to pay Lea Castro Whelan the following amounts:
a. P75,291.70 representing the overpayment made by Lea Castro Whelan;
b. P10,000.00 as moral damages;
c. P5,000.00 as exemplary damages;
d. P15,000.00 as attorney's fees; plus
e. the costs of suit.
3. Dismissing the complaint in Civil Case No. 496-R insofar as defendant Bank of the Philippine Islands is concerned; and
4. Dismissing likewise the complaint of Chonney B. Lim against Lea Castro Whelan and Keith Lawrence Whelan docketed as Civil
Case No. 423-R 4
On appeal, the Court of Appeals affirmed the decision of the Regional Trial Court. The motion for reconsideration was likewise
denied. Hence, this petition.
Petitioner makes the following assignment of errors:
A.
RESPONDENT COURT OF APPEALS ERRED GRAVELY, ON A VERY BASIC AND IMPORTANT QUESTION OF LAW, WHEN IT
CREDITED AS PAYMENT ON THE PURCHASE PRICE UNDER THE DEED OF ABSOLUTE SALE RESPONDENT LEA
WHELAN'S BELATED AND BAD FAITH "PAYMENT" OF PETITIONER CHONNEY LIM'S LOAN WITH THE BANK OF THE
PHILIPPINE ISLANDS (BPI), AND OF THE CAPITAL GAINS TAX, WITHOUT HIS KNOWLEDGE AND CONSENT AND AGAINST
HIS WILL, THEREBY MISUNDERSTANDING AND MISAPPLYING ARTICLE 1236 OF THE CIVIL CODE.
B.
RESPONDENT COURT OF APPEALS ERRED GRAVELY, ON A VERY BASIC AND IMPORTANT QUESTION OF LAW, IN NOT
HOLDING THAT THE DISHONOR OF RESPONDENT LEA WHELAN'S TRB DEMAND DRAFT FOR P141,000.00 AND PCIB
CHECK FOR P17,000.00 DID NOT HAVE THE EFFECT OF PAYMENT ON THE PURCHASE PRICE UNDER THE DEED OF
ABSOLUTE SALE, THEREBY VIOLATING ARTICLE 1249 OF THE CIVIL CODE.
C.
RESPONDENT COURT OF APPEALS ERRED GRAVELY, ON A VERY BASIC AND IMPORTANT QUESTION OF LAW, IN
CONCLUDING THAT THERE WAS PAYMENT BY RESPONDENT LEA WHELAN OF THE SUM OF $8,000.00 IN CASH, EVEN
IN THE ABSENCE OF A RECEIPT THEREFOR AS REQUIRED BY THE DEED OF ABSOLUTE SALE WHICH PROVIDES THAT
PETITIONER CHONNEY LIM SHALL "ISSUE HER A RECEIPT OF THE CONSIDERATION OF THE SALE OF THE SALE OF
THE ABOVE DESCRIBED PROPERTY", THEREBY VIOLATING THE LEGAL PRINCIPLE THAT THE CONTRACT IS THE LAW
BETWEEN THE PARTIES.
D.
RESPONDENT COURT OF APPEALS ERRED GRAVELY, ON A VERY BASIC AND IMPORTANT QUESTION OF LAW, IN
MISUNDERSTANDING AND MISAPPLYING THE PRINCIPLE THAT THE FINDINGS OF TRIAL, COURTS ARE ACCORDED
GREAT WEIGHT IN VIEW OF THEIR OPPORTUNITY TO OBSERVE THE CONDUCT AND DEMEANOR OF WITNESSES, AND
IN ITS GROSS MISAPPREHENSION OF THE RECORD, CONSIDERING THAT IN THE CASE AT BAR THE TRIAL COURT DID
NOT BASE ITS FINDINGS ON THE PERSONAL CREDIBILITY OF RESPONDENT WHELAN'S WITNESSES BUT ON

CONCLUSIONS IT DERIVED FROM DOCUMENTARY EVIDENCE, WHICH ARE THEREFORE CONCLUSIONS OF LAW AS TO
WHICH APPELLATE COURTS ARE NOT AT A DISADVANTAGE.
E.
RESPONDENT COURT OF APPEALS ERRED GRAVELY, ON A VERY BASIC AND IMPORTANT PRINCIPLE OF LAW, IN
OVERLOOKING OR DISREGARDING A LEGION OF UNDISPUTED OR ADMITTED FACTS OF VITAL AND CRUCIAL IMPORT
IN THE CASE AT BAR WHICH WOULD DEFINITELY CHANGE THE RESULT AND MANDATE A JUDGMENT IN FAVOR OF
PETITIONER CHONNEY LIM, SUCH AS EXACT ACCOUNTING AND PRECISE ARITHMETIC WORKING IN FAVOR OF
PETITIONER CHONNEY LIM, THEREBY COMMITTING WHOLESALE AND GROSS MISAPPREHENSION OF THE RECORD
THAT IS EVEN TANTAMOUNT TO GRAVE ABUSE OF DISCRETION IN THE PERFORMANCE OF ITS APPELLATE FUNCTION.
F.
RESPONDENT COURT OF APPEALS THEREFORE ERRED GRAVELY, ON VERY BASIC AND IMPORTANT QUESTION AND
PRINCIPLES OF LAW, IN AFFIRMING AND NOT REVERSING THE DECISION AND JUDGMENT OF THE TRIAL COURT. 5
The issues raised by petitioner are merely factual. Time and again, we have always stated that it is not within the province of this
Court to review the findings of facts especially when the trial court and appellate court have no cause for disagreement. Absent
any whimsical or capricious exercise of judgment, and unless the lack of any basis for the conclusions made by the lower court be
amply demonstrated, the Supreme Court will not disturb their findings. 6 While this rule is not inflexible, the Court finds no sufficient
reason to depart from such rule. The basic issue in the case at bar is whether or not Chonney Lim has been fully paid for the
property in question.
There is no dispute that a Conditional Deed of Sale was executed between Chonney Lim and Lea Whelan covering the former's
property along Kennon Road., Baguio City. The consideration agreed upon was P600,000.00 or $30,000.00. An earnest money of
$14,000.00 was then paid.
Subsequently, Lea Whelan paid Chonney Lim an additional $8,000.00 in cash. She also gave him a bank draft in the sum of
P141,000.00 and a check for P17,800.00 drawn against PCI Bank as full payment for the property.
Unfortunately, however, the bank draft and the PCI Bank check were dishonored upon presentment. Chonney Lim moreover avers
that he was not paid $8,000.00 as evidenced by a promissory note written on the left margin of a copy of the deed of sale in his
possession. Thus, petitioner prayed for the rescission of the contract.
On the other hand, Lea Whelan claims that she has given Chonney Lim the amount of $8,000.00 in cash; the bank draft of
P141,000.00 and the check of P17,800.00. A deed of absolute sale was executed on June 21, 1984, evidencing the full payment
for the house. She however discovered that Chonney Lim failed to pay the mortgage loan over the property to the BPI in the
amount of P210,297.70 inclusive of interest and penalty charges and the capital gains tax to the BIR in the amount of P14,994.00
as promised in the deed of sale so she paid them albeit without the knowledge of Chonney Lim. She also incurred expenses for
the renovation and repair of the house when it was destroyed by a typhoon, all amounting to about P217,000.00. Since she has in
fact overpaid Chonney Lim, Lea Whelan demanded from him the delivery of the title over said property.
The trial court gave credence to the version of Leah Whelan that she indeed has paid Chonney Lim the full amount for the
property. The court ratiocinates:
The Court holds that LEA made the payments she claimed on the balance of the purchase price of die disputed property for which
reason CHONNEY signed the corresponding Deed of Absolute Sale (Exhibit "M" or "4"), albeit for the watered down consideration
of only P300,000.00 which was intended to allow him to minimize his liability for capital gains tax. Being a businessman of long
standing, CHONNEY would surely not have signed the Deed of Absolute Safe if he had not been priorly fully paid. What is more,
in the Deed of Absolute Sale, CHONNEY unqualifiedly bound himself to deliver to LEA before the end of July 1984 the following:
1. Transfer Certificate of Title (TCT No. T-32741) with the mortgage thereon duly cancelled;
2. Real Estate Receipts paid up to date;
3. Receipt of payment of Capital Gains Tax and the clearance thereto;
4. To issue her a receipt of the consideration of the sale of the above-described property. (Exhibit "M" or "4")
Again, CHONNEY would not have assumed such an undertaking unless he has already been fully paid; in fact, each of the things
he imposed upon himself to do presupposes full payment of the agreed purchase price. 7
In maintaining that he was not paid the amount of $8,000 in cash, petitioner alleged that there was no receipt issued as proof of
payment. He even presented a promissory note to the effect, allegedly written by Lea Whelan on the left margin of his copy of the
deed of sale which reads:
I, LEA CASTRO WHELAN PROMISED TO PAY THE VENDOR, MR. CHONNEY LIM THE SUM OF SEVEN THOUSAND THREE
HUNDRED TEN $7,310.00 DOLLARS (ALL IN $100,00 U.S. GREEN MONEY) ON OR BEFORE THE END OF JULY 1984,
THROUGH MY LAWYER ATTY. JOSE S. PADOLINA, AS PART OF MY FULL PAYMENT FOR THE HOUSE & LOT OF MR. LIM
(REF: INFORMATION/AGREEMENT CONTRACT DATED JUNE 21, 1984) FAILURE ON MY PART TO COMPLY WITH SUCH
PROMISE, IS SUFFICIENT GROUND TO TERMINATE OUR DEED OF ABSOLUTE SALE DATED JUNE 20, 1984. I
THEREFORE AFFIX MY SIGNATURE AGAIN ON THE SECOND PAGE OF THIS DEED OF ABSOLUTE SALE, THAT THE
AFOREMENTIONED PROMISED & ARRANGEMENT ARE TRUE & CORRECT, TO THE BEST OF MY KNOWLEDGE. SGD.
LEA CASTRO WHELAN
(WITH MY FULL CONSENT)
SGD. ILLEGIBLE
JUNE 21, 1984 BAGUIO 8
This Court can not, in any way, accept Chonney Lim's assertion. It behooves us to think why a document of so much importance,
such as a promissory note should just be written on the margin of the deed of sale. Considering the important transaction entered
into by the parties and the substantial amount involved, it is highly improbable for Lea Whelan to have merely written a promissory

note in the margin of the deed of sale when this could be conveniently written on a separate sheet of paper a she indeed had
made such an undertaking. Moreover, a close perusal of the note reveals that Lea Whelan's name between the words "I" and
"promised" is handwritten and the rest of the note typewritten and verbose enough to fit into Lea Whelan's signature on the
second page. Her signatures which appeared on the left margin of the two-paged deed of sale were merely intended to
authenticate the document which had alterations in the date and for no other purpose. There is basis to conclude that not only is
the document highly suspect but Chonney Lim's character and credibility, as well.
As to why no receipt was issued for the $8,000.00, the trial court has this explanation:
True it is that no receipt was issued for the payment of the US $8,000.00. LEA, however, has satisfactorily explained that it is for
the reason that the payment was in cash and that the Deed of Absolute Sale is already acknowledgement (sic) enough of full
payment having been made by her. Indeed, a similar mode of conduct had earlier been followed by the parties when LEA paid for
the stipulated earnest money or down payment of US$14,000.00. Only the first payment of UD$9,000.00 (sic), was receipted for
(Exhibit "E" or "2"). When LEA paid the remaining US $5,000.00, CHONNEY did not anymore issue any receipt as the Conditional
Deed of Sale (Exhibit "F" or "3") which the parties executed simultaneously with the payment already served as the receipt. 9
Anent the bank draft and the check which were dishonored upon presentment, Chonney Lim asserts that since this did not effect
payment, he was therefore entitled to a rescission of the contract. While such assertion may be true, the attendant circumstances
of the case, however, do not warrant such action. It is borne out by the records that the draft and the check were properly funded
at the time of presentment. 10 The dishonor of the documents was neither the fault of Chonney Lim nor Lea Whelan. On this point,
the trial court correctly elucidates:
With respect to the bank draft for P141,000.00, the same was duly funded as indubitably shown by the corresponding debit slip
(Exhibit "8") issued by the Traders Royal Bank (TRB). That it was not encashed when CHONNEY presented it for payment at the
TRB, Baguio Casino Branch, was, as explained In TRB's letter to CHONNEY, dated August 16, 1984 (Exhibit "EE"), due to a
management ruling cancelling the authority of the TRB, Baguio Casino Branch, to encash such a draft so the LEA's daughter was
advised to get back the draft to be replaced with another drawn payable at a TRB Branch nearest Baguio City. In the same letter,
CHONNEY was further advised that LEA was in good faith and that he may present the draft for payment at the TRB, Broadcast
City Branch. Unfortunately, LEA's daughter did not get back the draft from CHONNEY to be replaced with another nor did
CHONNEY present it for payment at TRB's Broadcast City Branch. But the fact remains that the bank draft had always been
backed up with sufficient funds. Accordingly, the fault, if any, should be laid at the TRB's doorstep for allowing the draft to be drawn
payable at its Baguio Casino Branch when the latter had no more authority for the purpose.
As to the check for P17,800.00, dated June 21, 1984 ( Exhibit "Q" or "6"), LEA issued it against her current account deposit of
P20,000.00 with the Philippine Commercial International Bank (PCIB) which she opened on June 21, 1984 (Exhibits "12", "13" and
"13-A"). The deposit was reduced to P19,000.00 as of June 22 (Exhibit "13-B") but still sufficient to cover the check. However, the
check was dishonored because CHONNEY presented it for payment on June 27 and before that, or on June 25, he had
prematurely encashed LEA's other check, dated July 25, 1984, for P2,000.00 (Exhibit "F"), thereby further reducing her deposit
was already short of P800.00 to answer for her check of P17,800.00. Demonstrably, the fault was not LEA's but the drawee bank's
and CHONNEY's as evidence by CHONNEY's encashment of LEA's check for P2,000.00 before its due date on July 25, 1984. In
fact, the drawee bank had openly admitted its oversight (Exhibit "14"). 11
Nonetheless, the payment of the mortgage loan and the capital gains tax over the property was enough to cover for the payment
of said property. Chonney Lim asserts that this was done in bad faith, merely an afterthought when the bank draft and the check
were dishonored. It is however for this reason why Lea Whelan eventually caused the "stop payment" of the checks because she
found out that Chonney Lim failed to fulfill his obligations as provided in the deed of sale. She had paid more than enough of what
was required from her for the property.
. . . LEA discovered that, contrary to CHONNEY's representation, he had not yet redeemed the disputed property from the
mortgage indebtedness for which it had been given as security to the Bank of the Philippine Island (BPI) which indebtedness had
already gone up to P210,297.70, inclusive of interest and penalty charges (Exhibit "22"). To protect her interest in the property,
she paid the mortgage indebtedness, and at the same time, stopped the payment of her bank draft and check since what she paid
to the BPI was very much more than their aggregate amount of P158,800.00.
LEA furthermore found out that CHONNEY did not also pay for the capital gains tax on their transaction in the total amount of
P14,944.00 (Exhibits "39" and "40"); she also paid for it.
The recourse taken by LEA is sanctioned by law and jurisprudence and CHONNEY can be bound thereby although he had no
prior knowledge thereof considering that the payments made were clearly to his benefit as he was thus spared of being burdened
with interests and penalty charges (Rehabilitation Finance Corporation vs. Court of Appeals, 94 Phil. 984). 12
Art. 1236 of the Civil Code is applicable in the case at bar which provides in part:
xxx xxx xxx
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against
the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.
Pursuant to the above provision, the respondent Court, thus, ruled that:
The payment of the loan and capital gains tax undoubtedly relieved the appellant from such obligations. The benefit had even
been mutual, both appellant and appellee had obtained advantages on their sides the appellant from his loan and appellee
being secured of the possession. 13
We find no error with the ruling that petitioner Lim is not entitled to rescission of the contract. It cannot be denied that Chonney
Lim is also not without fault in this case. It was Chonney Lim's obligation to see to it that the property was free from all
encumbrances and tax liabilities, 14 among others, which he obviously failed to do. The respondent court's ruling in considering the
payment of the mortgage loan and the capital gains tax by Lea Whelan as her full payment for the property is but a fair disposition
which this Court does not see any cogent reason to reverse.
WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.

G.R. No. 129919

February 6, 2002

DOMINION INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, RODOLFO S. GUEVARRA, and FERNANDO AUSTRIA, respondents.
DECISION
PARDO, J.:
The Case
This is an appeal via certiorari1 from the decision of the Court of Appeals 2 affirming the decision3 of the Regional Trial Court,
Branch 44, San Fernando, Pampanga, which ordered petitioner Dominion Insurance Corporation (Dominion) to pay Rodolfo S.
Guevarra (Guevarra) the sum of P156,473.90 representing the total amount advanced by Guevarra in the payment of the claims
of Dominions clients.
The Facts
The facts, as found by the Court of Appeals, are as follows:
"On January 25, 1991, plaintiff Rodolfo S. Guevarra instituted Civil Case No. 8855 for sum of money against defendant Dominion
Insurance Corporation. Plaintiff sought to recover thereunder the sum of P156,473.90 which he claimed to have advanced in his
capacity as manager of defendant to satisfy certain claims filed by defendants clients.
"In its traverse, defendant denied any liability to plaintiff and asserted a counterclaim for P249,672.53, representing premiums that
plaintiff allegedly failed to remit.
"On August 8, 1991, defendant filed a third-party complaint against Fernando Austria, who, at the time relevant to the case, was its
Regional Manager for Central Luzon area.
"In due time, third-party defendant Austria filed his answer.
"Thereafter the pre-trial conference was set on the following dates: October 18, 1991, November 12, 1991, March 29, 1991,
December 12, 1991, January 17, 1992, January 29, 1992, February 28, 1992, March 17, 1992 and April 6, 1992, in all of which
dates no pre-trial conference was held. The record shows that except for the settings on October 18, 1991, January 17, 1992 and
March 17, 1992 which were cancelled at the instance of defendant, third-party defendant and plaintiff, respectively, the rest were
postponed upon joint request of the parties.
"On May 22, 1992 the case was again called for pre-trial conference. Only plaintiff and counsel were present. Despite due notice,
defendant and counsel did not appear, although a messenger, Roy Gamboa, submitted to the trial court a handwritten note sent to
him by defendants counsel which instructed him to request for postponement. Plaintiffs counsel objected to the desired
postponement and moved to have defendant declared as in default. This was granted by the trial court in the following order:
"ORDER
"When this case was called for pre-trial this afternoon only plaintiff and his counsel Atty. Romeo Maglalang appeared. When
shown a note dated May 21, 1992 addressed to a certain Roy who was requested to ask for postponement, Atty. Maglalang
vigorously objected to any postponement on the ground that the note is but a mere scrap of paper and moved that the defendant
corporation be declared as in default for its failure to appear in court despite due notice.
"Finding the verbal motion of plaintiffs counsel to be meritorious and considering that the pre-trial conference has been repeatedly
postponed on motion of the defendant Corporation, the defendant Dominion Insurance Corporation is hereby declared (as) in
default and plaintiff is allowed to present his evidence on June 16, 1992 at 9:00 oclock in the morning.
"The plaintiff and his counsel are notified of this order in open court.
"SO ORDERED.
"Plaintiff presented his evidence on June 16, 1992. This was followed by a written offer of documentary exhibits on July 8 and a
supplemental offer of additional exhibits on July 13, 1992. The exhibits were admitted in evidence in an order dated July 17, 1992.
"On August 7, 1992 defendant corporation filed a MOTION TO LIFT ORDER OF DEFAULT. It alleged therein that the failure of
counsel to attend the pre-trial conference was due to an unavoidable circumstance and that counsel had sent his representative
on that date to inform the trial court of his inability to appear. The Motion was vehemently opposed by plaintiff.
"On August 25, 1992 the trial court denied defendants motion for reasons, among others, that it was neither verified nor supported
by an affidavit of merit and that it further failed to allege or specify the facts constituting his meritorious defense.
"On September 28, 1992 defendant moved for reconsideration of the aforesaid order. For the first time counsel revealed to the
trial court that the reason for his nonappearance at the pre-trial conference was his illness. An Affidavit of Merit executed by its
Executive Vice-President purporting to explain its meritorious defense was attached to the said Motion. Just the same, in an Order
dated November 13, 1992, the trial court denied said Motion.
"On November 18, 1992, the court a quo rendered judgment as follows:
"WHEREFORE, premises considered, judgment is hereby rendered ordering:
"1. The defendant Dominion Insurance Corporation to pay plaintiff the sum of P156,473.90 representing the total amount
advanced by plaintiff in the payment of the claims of defendants clients;
"2. The defendant to pay plaintiff P10,000.00 as and by way of attorneys fees;
"3. The dismissal of the counter-claim of the defendant and the third-party complaint;

"4. The defendant to pay the costs of suit." 4

On December 14, 1992, Dominion appealed the decision to the Court of Appeals. 5
On July 19, 1996, the Court of Appeals promulgated a decision affirming that of the trial court. 6 On September 3, 1996, Dominion
filed with the Court of Appeals a motion for reconsideration. 7 On July 16, 1997, the Court of Appeals denied the motion. 8
Hence, this appeal.9
The Issues
The issues raised are: (1) whether respondent Guevarra acted within his authority as agent for petitioner, and (2) whether
respondent Guevarra is entitled to reimbursement of amounts he paid out of his personal money in settling the claims of several
insured.
The Court's Ruling
The petition is without merit.
By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of
another, with the consent or authority of the latter. 10 The basis for agency is representation. 11 On the part of the principal, there
must be an actual intention to appoint 12 or an intention naturally inferrable from his words or actions; 13 and on the part of the agent,
there must be an intention to accept the appointment and act on it, 14 and in the absence of such intent, there is generally no
agency.15
A perusal of the Special Power of Attorney 16 would show that petitioner (represented by third-party defendant Austria) and
respondent Guevarra intended to enter into a principal-agent relationship. Despite the word "special" in the title of the document,
the contents reveal that what was constituted was actually a general agency. The terms of the agreement read:
"That we, FIRST CONTINENTAL ASSURANCE COMPANY, INC.,17 a corporation duly organized and existing under and by virtue
of the laws of the Republic of the Philippines, xxx represented by the undersigned as Regional Manager, xxx do hereby appoint
RSG Guevarra Insurance Services represented by Mr. Rodolfo Guevarra xxx to be our Agency Manager in San Fdo., for our
place and stead, to do and perform the following acts and things:
"1. To conduct, sign, manager (sic), carry on and transact Bonding and Insurance business as usually pertain to a Agency Office,
or FIRE, MARINE, MOTOR CAR, PERSONAL ACCIDENT, and BONDING with the right, upon our prior written consent, to
appoint agents and sub-agents.
"2. To accept, underwrite and subscribed (sic) cover notes or Policies of Insurance and Bonds for and on our behalf.
"3. To demand, sue, for (sic) collect, deposit, enforce payment, deliver and transfer for and receive and give effectual receipts and
discharge for all money to which the FIRST CONTINENTAL ASSURANCE COMPANY, INC., 18 may hereafter become due, owing
payable or transferable to said Corporation by reason of or in connection with the above-mentioned appointment.
"4. To receive notices, summons, and legal processes for and in behalf of the FIRST CONTINENTAL ASSURANCE COMPANY,
INC., in connection with actions and all legal proceedings against the said Corporation." 19 [Emphasis supplied]
The agency comprises all the business of the principal,20 but, couched in general terms, it is limited only to acts of administration. 21
A general power permits the agent to do all acts for which the law does not require a special power. 22 Thus, the acts enumerated
in or similar to those enumerated in the Special Power of Attorney do not require a special power of attorney.
Article 1878, Civil Code, enumerates the instances when a special power of attorney is required. The pertinent portion that applies
to this case provides that:
"Article 1878. Special powers of attorney are necessary in the following cases:
"(1) To make such payments as are not usually considered as acts of administration;
"x x x

xxx

xxx

"(15) Any other act of strict dominion."

The payment of claims is not an act of administration. The settlement of claims is not included among the acts enumerated in the
Special Power of Attorney, neither is it of a character similar to the acts enumerated therein. A special power of attorney is
required before respondent Guevarra could settle the insurance claims of the insured.
Respondent Guevarras authority to settle claims is embodied in the Memorandum of Management Agreement 23 dated February
18, 1987 which enumerates the scope of respondent Guevarras duties and responsibilities as agency manager for San Fernando,
Pampanga, as follows:
"x x x

xxx

xxx

"1. You are hereby given authority to settle and dispose of all motor car claims in the amount of P5,000.00 with prior approval of
the Regional Office.
"2. Full authority is given you on TPPI claims settlement.
"xxx

xxx

x x x "24

In settling the claims mentioned above, respondent Guevarras authority is further limited by the written standard authority to pay, 25
which states that the payment shall come from respondent Guevarras revolving fund or collection. The authority to pay is worded
as follows:
"This is to authorize you to withdraw from your revolving fund/collection the amount of PESOS __________________ (P )
representing the payment on the _________________ claim of assured _______________ under Policy No. ______ in that
accident of ___________ at ____________.

"It is further expected, release papers will be signed and authorized by the concerned and attached to the corresponding claim
folder after effecting payment of the claim.
"(sgd.) FERNANDO C. AUSTRIA
Regional Manager"26
[Emphasis supplied]
The instruction of petitioner as the principal could not be any clearer.1wphi1 Respondent Guevarra was authorized to pay the
claim of the insured, but the payment shall come from the revolving fund or collection in his possession.
Having deviated from the instructions of the principal, the expenses that respondent Guevarra incurred in the settlement of the
claims of the insured may not be reimbursed from petitioner Dominion. This conclusion is in accord with Article 1918, Civil Code,
which states that:
"The principal is not liable for the expenses incurred by the agent in the following cases:
"(1) If the agent acted in contravention of the principals instructions, unless the latter should wish to avail himself of the benefits
derived from the contract;
"xxx

xxx

xxx"

However, while the law on agency prohibits respondent Guevarra from obtaining reimbursement, his right to recover may still be
justified under the general law on obligations and contracts.
Article 1236, second paragraph, Civil Code, provides:
"Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against
the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor."
In this case, when the risk insured against occurred, petitioners liability as insurer arose. 1wphi1 This obligation was extinguished
when respondent Guevarra paid the claims and obtained Release of Claim Loss and Subrogation Receipts from the insured who
were paid.
Thus, to the extent that the obligation of the petitioner has been extinguished, respondent Guevarra may demand for
reimbursement from his principal. To rule otherwise would result in unjust enrichment of petitioner.
The extent to which petitioner was benefited by the settlement of the insurance claims could best be proven by the Release of
Claim Loss and Subrogation Receipts27 which were attached to the original complaint as Annexes C-2, D-1, E-1, F-1, G-1, H-1, I-1
and J-l, in the total amount of P116,276.95.
However, the amount of the revolving fund/collection that was then in the possession of respondent Guevarra as reflected in the
statement of account dated July 11, 1990 would be deducted from the above amount.
The outstanding balance and the production/remittance for the period corresponding to the claims was P3,604.84. Deducting this
from P116,276.95, we get P112,672.11. This is the amount that may be reimbursed to respondent Guevarra.
The Fallo
IN VIEW WHEREOF, we DENY the Petition. However, we MODIFY the decision of the Court of Appeals 28 and that of the Regional
Trial Court, Branch 44, San Fernando, Pampanga, 29 in that petitioner is ordered to pay respondent Guevarra the amount of
P112,672.11 representing the total amount advanced by the latter in the payment of the claims of petitioners clients.
No costs in this instance.
SO ORDERED.

JUDICIAL ORDER TO RETAIN DEBT (ART. 1243) and PAYMENT IN LEGAL TENDER (ART. 1249)
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila, Branch XIII, JAIME K.
DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA TAN, respondents.

GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question. Should the Court allow
a too literal interpretation of the Rules with an open invitation to knavery to prevail over a more discerning and just approach?
Should we not apply the ancient rule of statutory construction that laws are to be interpreted by the spirit which vivifies and not by
the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled "Philippine Airlines, Inc.
v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against the order of the Court of First Instance of
Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent Amelia Tan, under the
name and style of Able Printing Press commenced a complaint for damages before the Court of First Instance of Manila. The case
was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P. Morfe rendered

judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner Philippine Airlines, Inc. (PAL) as
follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages, with legal interest thereon from
plaintiffs extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the unrealized profit of 10% included
in the contract price of P200,000.00 plus legal interest thereon from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral damages, with legal interest
thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R. No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as damages and
P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a motion for
reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for reconsideration for lack of
merit.
No further appeal having been taken by the parties, the judgment became final and executory and on May 31, 1977, judgment
was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed a motion praying
for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On October 11, 1977, the trial court,
presided over by Judge Galano, issued its order of execution with the corresponding writ in favor of the respondent. The writ was
duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of execution stating that
the judgment rendered by the lower court, and affirmed with modification by the Court of Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had
already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by
cash vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff
Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner
PAL. However, the order could not be served upon Deputy Sheriff Reyes who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with Substitute
Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution with Substitute Motion
for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered. Deputy Sheriff Jaime
K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day directing Special Sheriff
Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest thereon from July 20,1967 when respondent
Amelia Tan made an extra-judicial demand through a letter. Levy was also ordered for the further sum of P5,000.00 awarded as
attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return of the writ had as
yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been fully satisfied by the petitioner as
evidenced by the cash vouchers signed and receipted by the server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank of petitioner, Far
East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and garnished the petitioner's deposit in
the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed by the Philippine
Airlines, Inc., on the grounds that:
I
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL WRIT BY THE
IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES
SATISFACTION OF JUDGMENT.
III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR AND DISPOSAL OR
SALE THEREOF TO SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with approval:
The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified because even with the
absence of a Sheriffs return on the original writ, the unalterable fact remains that such a return is incapable of being obtained (sic)
because the officer who is to make the said return has absconded and cannot be brought to the Court despite the earlier order of
the court for him to appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this
circumstance, the order of May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex D. Petition). The
need for such a return as a condition precedent for the issuance of an alias writ was justifiably dispensed with by the court below
and its action in this regard meets with our concurrence. A contrary view will produce an abhorent situation whereby the mischief
of an erring officer of the court could be utilized to impede indefinitely the undisputed and awarded rights which a prevailing party
rightfully deserves to obtain and with dispatch. The final judgment in this case should not indeed be permitted to become illusory
or incapable of execution for an indefinite and over extended period, as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought to have its proper
effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and end of the suit and
is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59 [1963]; Commissioner of
Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be rendered nugatory by the
unreasonable application of a strict rule of procedure. Vested rights were never intended to rest on the requirement of a return, the
office of which is merely to inform the court and the parties, of any and all actions taken under the writ of execution. Where such
information can be established in some other manner, the absence of an executing officer's return will not preclude a judgment
from being treated as discharged or being executed through an alias writ of execution as the case may be. More so, as in the case
at bar. Where the return cannot be expected to be forthcoming, to require the same would be to compel the enforcement of rights
under a judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a judgment is not
satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It
is a well known legal maxim that he who cannot prosecute his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is the issue of
satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by check in his name
operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her case should not be adjudged as having
sued in vain. To decide otherwise would not only give her an empty but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as rightfully hers.
Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should have been paid from the start,
before 1967, without need of her going to court to enforce her rights. And all because PAL did not issue the checks intended for
her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did not operate as a
satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article 1240 of the
Civil Code provides:
Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any
person authorized to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular
payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having apparent authority to receive the
money will, as a rule, be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who
by law is authorized to act for the creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The
receipt of money due on ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729,
25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment debtor in the case at bar,
to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The checks were not
payable to Amelia Tan or Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in
the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money (US v.
Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights, except at his own peril, to
substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47
Am. St. Rep. 402). Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no authority
to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the
acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255;
Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary cheek, is not legal tender, and
an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no payment. After
dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she has received no value for
what had been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received anything.
The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The
reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical
extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a careless and
inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being waylaid or running off with what
he is carrying for another. Payment in checks is precisely intended to avoid the possibility of the money going to the wrong party.
The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
experience and to reality. Having paid with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but the Court has
never, in the least bit, suggested that judgment debtors should settle their obligations by turning over huge amounts of cash or
legal tender to sheriffs and other executing officers. Payment in cash would result in damage or interminable litigations each time
a sheriff with huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate controls are
instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly big amounts are involved,
escrow arrangements with a bank and carefully supervised by the court would be the safer procedure. Actual transfer of funds
takes place within the safety of bank premises. These practices are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another. Making the
checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff, or
any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the
checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the petitioner corporation,
utilizing the services of its personnel who are or should be knowledgeable about the accepted procedures and resulting
consequences of the checks drawn, nevertheless, in this instance, without prudence, departed from what is generally observed
and done, and placed as payee in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner
thereby created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds
thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. The judicial
guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible
by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the loss had but
itself to blame.
The attention of this Court has been called to the bad practice of a number of executing officers, of requiring checks in satisfaction
of judgment debts to be made out in their own names. If a sheriff directs a judgment debtor to issue the checks in the sheriff's
name, claiming he must get his commission or fees, the debtor must report the sheriff immediately to the court which ordered the
execution or to the Supreme Court for appropriate disciplinary action. Fees, commissions, and salaries are paid through regular
channels. This improper procedure also allows such officers, who have sixty (60) days within which to make a return, to treat the
moneys as their personal finds and to deposit the same in their private accounts to earn sixty (60) days interest, before said finds
are turned over to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers
could put up the defense that said checks had been issued to them in their private or personal capacity. Without a receipt
evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean and complete. The
practice is ingenious but evil as it unjustly enriches court personnel at the expense of litigants and the proper administration of
justice. The temptation could be far greater, as proved to be in this case of the absconding sheriff. The correct and prudent thing

for the petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the intended payee, without the latter's agreement or
consent, are as many as the ways that an artful mind could concoct to get around the safeguards provided by the law on
negotiable instruments. An angry litigant who loses a case, as a rule, would not want the winning party to get what he won in the
judgment. He would think of ways to delay the winning party's getting what has been adjudged in his favor. We cannot condone
that practice especially in cases where the courts and their officers are involved. We rule against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. The officer must enforce an execution of a money judgment by levying on all the
property, real and personal of every name and nature whatsoever, and which may be disposed of for value, of the judgment debtor
not exempt from execution, or on a sufficient amount of such property, if they be sufficient, and selling the same, and paying to the
judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of the respondent judge
granting the alias writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of payment by the officer
to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment and none such payment had been
concededly made yet by the absconding Sheriff to the private respondent Amelia Tan. The ultimate and essential step to complete
the execution of the judgment not having been performed by the City Sheriff, the judgment debt legally and factually remains
unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances as those obtaining in
this petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360,
363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a judgment is the
payment of the amount of the writ, or a lawful tender thereof, or the conversion by sale of the debtor's property into an amount
equal to that due, and, it may be done otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an execution
officer are not prerequisites to the satisfaction of a judgment when the same has already been realized in fact (Section 47, Rule
39). Execution is for the sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39
merely provides the sheriff with his duties as executing officer including delivery of the proceeds of his levy on the debtor's
property to satisfy the judgment debt. It is but to stress that the implementing officer's duty should not stop at his receipt of
payments but must continue until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered under the alias writ
of execution. This logically follows from our ruling that PAL is liable for both the lost checks and interest. The respondent court's
decision in CA-G.R. No. 51079-R does not totally supersede the trial court's judgment in Civil Case No. 71307. It merely modified
the same as to the principal amount awarded as actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the respondent Court of
Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against the petitioner is upheld without prejudice
to any action it should take against the errant sheriff Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions
taken against Emilio Z. Reyes.
SO ORDERED.

G.R. No. 82233 March 22, 1990

JOSE BARITUA and EDGAR BITANCOR, petitioners,
vs.
HONORABLE COURT OF APPEALS, NICOLAS NACARIO and VICTORIA RONDA NACARIO, respondents.
Domingo Lucenario for petitioners.
Ernesto A. Atienza for private respondents.
SARMIENTO, J.:
This petition for review on certiorari assails as erroneous and contrary to existing relevant laws and applicable jurisprudence the
decision 1 of the Court of Appeals dated December 11, 1987 which reversed and set aside that of the Regional Trial Court, Branch
XXXII, at Pili, Camarines Sur. 2 The challenged decision adjudged the petitioners liable to the private respondents in the total
amount of P20,505.00 and for costs.
The facts are as follows:
In the evening of November 7, 1979, the tricycle then being driven by Bienvenido Nacario along the national highway at Barangay
San Cayetano, in Baao, Camarines Sur, figured in an accident with JB Bus No. 80 driven by petitioner Edgar Bitancor and owned
and operated by petitioner Jose Baritua. 3 As a result of that accident Bienvenido and his passenger died 4 and the tricycle was
damaged. 5 No criminal case arising from the incident was ever instituted. 6
Subsequently, on March 27, 1980, as a consequence of the extra-judicial settlement of the matter negotiated by the petitioners
and the bus insurer Philippine First Insurance Company, Incorporated (PFICI for brevity) Bienvenido Nacario's widow, Alicia
Baracena Vda. de Nacario, received P18,500.00. In consideration of the amount she received, Alicia executed on March 27, 1980
a "Release of Claim" in favor of the petitioners and PFICI, releasing and forever discharging them from all actions, claims, and
demands arising from the accident which resulted in her husband's death and the damage to the tricycle which the deceased was

then driving. Alicia likewise executed an affidavit of desistance in which she formally manifested her lack of interest in instituting
any case, either civil or criminal, against the petitioners. 7
On September 2, 1981, or about one year and ten months from the date of the accident on November 7, 1979, the private
respondents, who are the parents of Bienvenido Nacario, filed a complaint for damages against the petitioners with the then Court
of First Instance of Camarines Sur. 8 In their complaint, the private respondents alleged that during the vigil for their deceased son,
the petitioners through their representatives promised them (the private respondents) that as extra-judicial settlement, they shall
be indemnified for the death of their son, for the funeral expenses incurred by reason thereof, and for the damage for the tricycle
the purchase price of which they (the private respondents) only loaned to the victim. The petitioners, however, reneged on their
promise and instead negotiated and settled their obligations with the long-estranged wife of their late son. The Nacario spouses
prayed that the defendants, petitioners herein, be ordered to indemnify them in the amount of P25,000.00 for the death of their
son Bienvenido, P10,000.00 for the damaged tricycle, P25,000.00 for compensatory and exemplary damages, P5,000.00 for
attorney's fees, and for moral damages. 9
After trial, the court a quo dismissed the complaint, holding that the payment by the defendants (herein petitioners) to the widow
and her child, who are the preferred heirs and successors-in-interest of the deceased Bienvenido to the exclusion of his parents,
the plaintiffs (herein private respondents), extinguished any claim against the defendants (petitioners). 10
The parents appealed to the Court of Appeals which reversed the judgment of the trial court. The appellate court ruled that the
release executed by Alicia Baracena Vda. de Nacario did not discharge the liability of the petitioners because the case was
instituted by the private respondents in their own capacity and not as "heirs, representatives, successors, and assigns" of Alicia;
and Alicia could not have validly waived the damages being prayed for (by the private respondents) since she was not the one
who suffered these damages arising from the death of their son. Furthermore, the appellate court said that the petitioners "failed
to rebut the testimony of the appellants (private respondents) that they were the ones who bought the tricycle that was damaged
in the incident. Appellants had the burden of proof of such fact, and they did establish such fact in their testimony . . . 11 Anent the
funeral expenses, "(T)he expenses for the funeral were likewise shouldered by the appellants (the private respondents). This was
never contradicted by the appellees (petitioners). . . . Payment (for these) were made by the appellants, therefore, the
reimbursement must accrue in their favor. 12
Consequently, the respondent appellate court ordered the petitioners to pay the private respondents P10,000.00 for the damage
of the tricycle, P5,000.00 for "complete" funeral services, P450.00 for cemetery lot, P55.00 for oracion adulto, and P5,000.00 for
attorney's fees. 13 The petitioners moved for
a reconsideration of the appellate court's decision 14 but their motion was denied. 15 Hence, this petition.
The issue here is whether or not the respondent appellate court erred in holding that the petitioners are still liable to pay the
private respondents the aggregate amount of P20,505.00 despite the agreement of extrajudicial settlement between the
petitioners and the victim's compulsory heirs.
The petition is meritorious.
Obligations are extinguished by various modes among them being by payment. Article 1231 of the Civil Code of the Philippines
provides:
Art. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
(Emphasis ours.)
There is no denying that the petitioners had paid their obligation petition arising from the accident that occurred on November 7,
1979. The only question now is whether or not Alicia, the spouse and the one who received the petitioners' payment, is entitled to
it.
Article 1240 of the Civil Code of the Philippines enumerates the persons to whom payment to extinguish an obligation should be
made.
Art 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or
any person authorized to receive it.
Certainly there can be no question that Alicia and her son with the deceased are the successors in interest referred to in law as
the persons authorized to receive payment. The Civil Code states:
Article 887. The following are compulsory heirs:
1. Legitimate children and descendants, with respect to their legitimate parents and ascendants;
2. In default of the foregoing, legitimate parents and ascendants with respect to their legitimate children and decendants;
3. The widow or widower;
4. Acknowledged natural children and natural children by legal fiction;
5. Other illegitimate children referred to in Article 287.
Compulsory heirs mentioned in Nos. 3, 4 and 5 are not excluded by those in Nos. 1 and 2. Neither do they exclude one another.
(Emphasis ours.)

Article 985. In default of legitimate children and descendants of the deceased, his parents and ascendants shall inherit from him,
to the exclusion of collateral relatives.
(Emphasis ours.)
It is patently clear that the parents of the deceased succeed only when the latter dies without a legitimate descendant. On the
other hand, the surviving spouse concurs with all classes of heirs. As it has been established that Bienvenido was married to Alicia
and that they begot a child, the private respondents are not successors-in-interest of Bienvenido; they are not compulsory heirs.
The petitioners therefore acted correctly in settling their obligation with Alicia as the widow of Bienvenido and as the natural
guardian of their lone child. This is so even if Alicia had been estranged from Bienvenido. Mere estrangement is not a legal ground
for the disqualification of a surviving spouse as an heir of the deceased spouse.
Neither could the private respondents, as alleged creditors of Bienvenido, seek relief and compensation from the petitioners.
While it may be true that the private respondents loaned to Bienvenido the purchase price of the damaged tricycle and shouldered
the expenses for his funeral, the said purchase price and expenses are but money claims against the estate of their deceased
son. 16 These money claims are not the liabilities of the petitioners who, as we have said, had been released by the agreement of
the extra-judicial settlement they concluded with Alicia Baracena Vda. de Nacario, the victim's widow and heir, as well as the
natural guardian of their child, her co-heir. As a matter of fact, she executed a "Release Of Claim" in favor of the petitioners.
WHEREFORE, the petition is GRANTED; the decision of the Court of Appeals is REVERSED and SET ASIDE and the decision of
the Regional Trial Court is hereby REINSTATED. Costs against the private respondents.
SO ORDERED.

G.R. No. 125862

April 15, 2004

FRANCISCO CULABA and DEMETRIA CULABA, doing business under the name and style "Culaba Store", petitioners,
vs.
COURT OF APPEALS and SAN MIGUEL CORPORATION, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of the Decision 1 of the Court of Appeals in CAG.R. CV No. 19836 affirming in toto the Decision 2 of the Regional Trial Court of Makati, Branch 138, in Civil Case No. 1033 for
collection of sum of money, and the Resolution3 denying the motion for reconsideration of the said decision.
The Undisputed Facts
The spouses Francisco and Demetria Culaba were the owners and proprietors of the Culaba Store and were engaged in the sale
and distribution of San Miguel Corporations (SMC) beer products. SMC sold beer products on credit to the Culaba spouses in the
amount of P28,650.00, as evidenced by Temporary Credit Invoice No. 42943. 4 Thereafter, the Culaba spouses made a partial
payment of P3,740.00, leaving an unpaid balance of P24,910.00. As they failed to pay despite repeated demands, SMC filed an
action for collection of a sum of money against them before the RTC of Makati, Branch 138.
The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full on four separate occasions. To
substantiate this claim, the defendants presented four (4) Temporary Charge Sales (TCS) Liquidation Receipts, as follows:
April 19, 1983

Receipt No. 27331

for P8,0005

April 22, 1983

Receipt No. 27318

for P9,0006

April 27, 1983

Receipt No. 27339

for P4,5007

April 30, 1983

Receipt No. 27346

for P3,4108

Defendant Francisco Culaba testified that he made the foregoing payments to an SMC supervisor who came in an SMC van. He
was then showed a list of customers accountabilities which included his account. The defendant, in good faith, then paid to the
said supervisor, and he was, in turn, issued genuine SMC liquidation receipts.
For its part, SMC submitted a publishers affidavit 9 to prove that the entire booklet of TCSL Receipts bearing Nos. 27301-27350
were reported lost by it, and that it caused the publication of the notice of loss in the July 9, 1983 issue of the Daily Express, as
follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES LIQUIDATION RECEIPTS WITH SERIAL
NOS. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE RECEIPTS WILL NOT BE HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region10
The Trial Courts Ruling
After trial on the merits, the trial court rendered judgment in favor of SMC, and held the Culaba spouses liable on the balance of its

obligation, thus:
Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:
1. Ordering defendants to pay the amount of P24,910.00 plus legal interest of 6% per annum from April 12, 1983 until the whole
amount is fully paid;
2. Ordering defendants to pay 20% of the amount due to plaintiff as and for attorneys fees plus costs.
SO ORDERED.11
According to the trial court, it was unusual that defendant Francisco Culaba forgot the name of the collector to whom he made the
payments and that he did not require the said collector to print his name on the receipts. The court also noted that although they
were part of a single booklet, the TCS Liquidation Receipts submitted by the defendants did not appear to have been issued in
their natural sequence. Furthermore, they were part of the lost booklet receipts, which the public was duly warned of through the
Notice of Loss the plaintiff caused to be published in a daily newspaper. This confirmed the plaintiffs claim that the receipts
presented by the defendants were spurious ones.
The Case on Appeal
On appeal, the appellants interposed the following assignment of errors:
I
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY DEFENDANTS EVIDENCING HIS
PAYMENTS TO PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.
II
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS SUFFICIENTLY PROVED ITS CAUSE OF
ACTION AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE AMOUNT DUE TO PLAINTIFF AS
ATTORNEYS FEES.12
The appellants asserted that while the trial courts observations were true, it was the usual business practice in previous
transactions between them and SMC. The SMC previously honored receipts not bearing the salesmans name. According to
appellant Francisco Culaba, he even lost some of the receipts, but did not encounter any problems.
According to appellant Francisco, he could not be faulted for paying the SMC collector who came in a van and was in uniform, and
that any regular customer would, without any apprehension, transact with such an SMC employee. Furthermore, the respective
receipts issued to him at the time he paid on the four occasions mentioned had not yet then been declared lost. Thus, the
subsequent publication in a daily newspaper declaring the booklets lost did not affect the validity and legality of the payments
made. Accordingly, by its actuations, the SMC was estopped from questioning the legality of the payments and had no cause of
action against the appellants.
Anent the issue of attorneys fees, the order of the trial court for payment thereof is without basis. According to the appellant, the
provision for attorneys fees is a contingent fee, already provided for in the SMCs contract with the law firm. To further order them
to pay 20% of the amount due as attorneys fees is double payment, tantamount to undue enrichment and therefore improper. 13
The appellee, for its part, contended that the primary issue in the case at bar revolved around the basic and fundamental
principles of agency.14 It was incumbent upon the defendants-appellants to exercise ordinary prudence and reasonable diligence
to verify and identify the extent of the alleged agents authority. It was their burden to establish the true identity of the assumed
agent, and this could not be established by mere representation, rumor or general reputation. As they utterly failed in this regard,
the appellants must suffer the consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the appellants, we cannot fault the lower court for giving more weight
to appellees testimonial and documentary evidence, all of which establish with some degree of preponderance the existence of
the account sued upon.
ALL CONSIDERED, we cannot find any justification to reject the factual findings of the lower court to which we must accord
respect, for which reason, the judgment appealed from is hereby AFFIRMED in all respects.
SO ORDERED.15
Hence, the instant petition.
The petitioners pose the following issues for the Courts resolution:
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT IT HAD PROPERLY AND
TIMELY NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT PETITIONER WAS REMISS IN
THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT.16
According to the petitioners, receiving receipts from the private respondents agents instead of its salesmen was a usual
occurrence, as they had been operating the store since 1979. Thus, on four occasions in April 1983, when an agent of the
respondent came to the store wearing an SMC uniform and driving an SMC van, petitioner Francisco Culaba, without question,
paid his accounts. He received the receipts without fear, as they were similar to what he used to receive before. Furthermore, the
petitioners assert that, common experience will attest that unless the attention of the customers is called for, they would not take
note of the serial number of the receipts.
The petitioners contend that the private respondent advertised its warning to the public only after the damage was done, or on

July 9, 1993. Its belated notice showed its glaring lack of interest or concern for its customers welfare, and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the accounts were paid had all the physical and
material attributes or indications of a representative of the private respondent, leaving no doubt that he was duly authorized by the
latter. Petitioner Francisco Culabas testimony that "he does not necessarily check the contents of the receipts issued to him
except for the amount indicated if [the] same accurately reflects his actual payment" is a common attitude of customers. He could,
thus, not be faulted for paying the private respondents agent on four occasions. Petitioner Francisco Culaba asserts that he made
the payment in good faith, to an agent who issued SMC receipts which appeared to be genuine. Thus, according to the
petitioners, they had duly paid their obligation in accordance with Articles 1240 and 1242 of the New Civil Code.
The private respondent, for its part, avers that the burden of proving payment is with the debtor, in consonance with the express
provision of Article 1233 of the New Civil Code. The petitioners miserably failed to prove the self-serving allegation that they
already paid their liability to the private respondent. Furthermore, under normal circumstances, an obligor would not just pay a
substantial amount to someone whom he saw for the first time, without even asking for the latters name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to whether the payment of the petitioners obligation to the private
respondent was properly made, thus, extinguishing the same. This is clearly a factual issue, and beyond the purview of the Court
to delve into. This is in consonance with the well-settled rule that findings of fact of the trial court, especially when affirmed by the
Court of Appeals, are accorded the highest degree of respect, and generally will not be disturbed on appeal. Such findings are
binding and conclusive on the Court. 17 Furthermore, it is not the Courts function under Rule 45 of the Rules of Court, as amended,
to review, examine and evaluate or weigh the probative value of the evidence presented. 18
To reiterate, the issue being raised by the petitioners does not involve a question of law, but a question of fact, not cognizable by
this Court in a petition for review under Rule 45. The jurisdiction of the Court in such a case is limited to reviewing only errors of
law, unless the factual findings being assailed are not supported by evidence on record or the impugned judgment is based on a
misapprehension of facts.19
A careful study of the records of the case reveal that the appellate court affirmed the trial courts factual findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private respondents lost booklet, which loss was duly
advertised in a newspaper of general circulation; thus, the private respondent could not have officially issued them to the
petitioners to cover the alleged payments on the dates appearing thereon.
Second. There was something amiss in the way the receipts were issued to the petitioners, as one receipt bearing a higher serial
number was issued ahead of another receipt bearing a lower serial number, supposedly covering a later payment. The petitioners
failed to explain the apparent mix-up in these receipts, and no attempt was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the four receipts and that the petitioners could not even
remember the name of the supposed impostor who received the said payments strongly argue against the veracity of the
petitioners claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the merits of the case.
Payment is a mode of extinguishing an obligation. 20 Article 1240 of the Civil Code provides that payment shall be made to the
person in whose favor the obligation has been constituted, or his successor-in-interest, or any person authorized to receive it. 21 In
this case, the payments were purportedly made to a "supervisor" of the private respondent, who was clad in an SMC uniform and
drove an SMC van. He appeared to be authorized to accept payments as he showed a list of customers accountabilities and even
issued SMC liquidation receipts which looked genuine. Unfortunately for petitioner Francisco Culaba, he did not ascertain the
identity and authority of the said supervisor, nor did he ask to be shown any identification to prove that the latter was, indeed, an
SMC supervisor. The petitioners relied solely on the mans representation that he was collecting payments for SMC. Thus, the
payments the petitioners claimed they made were not the payments that discharged their obligation to the private respondent.
The basis of agency is representation. 22 A person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent.23 In the instant case, the petitioners loss could have been avoided if they had simply exercised due
diligence in ascertaining the identity of the person to whom they allegedly made the payments. The fact that they were parting with
valuable consideration should have made them more circumspect in handling their business transactions. Persons dealing with an
assumed agent are bound at their peril to ascertain not only the fact of agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them to establish it. 24 The petitioners in this case failed to discharge this
burden, considering that the private respondent vehemently denied that the payments were accepted by it and were made to its
authorized representative.
Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something, which a prudent and reasonable man would not do. 25 In the case at
bar, the most prudent thing the petitioners should have done was to ascertain the identity and authority of the person who
collected their payments. Failing this, the petitioners cannot claim that they acted in good faith when they made such payments.
Their claim therefor is negated by their negligence, and they are bound by its consequences. Being negligent in this regard, the
petitioners cannot seek relief on the basis of a supposed agency.26
WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated April 16, 1996, and the Resolution dated July
19, 1996 of the Court of Appeals are AFFIRMED. Costs against the petitioners.
SO ORDERED.

G.R. No. 175021

June 15, 2011

REPUBLIC OF THE PHILIPPINES, represented by the Chief of the Philippine National Police, Petitioner,

vs.
THI THU THUY T. DE GUZMAN, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari1 filed by Republic of the Philippines, as represented by the Chief of the Philippine
National Police (PNP), of the September 27, 2006 Decision 2 of the Court of Appeals in CA-G.R. CV No. 80623, which affirmed
with modification the September 8, 2003 Decision 3 of the Regional Trial Court (RTC), Branch 222, of Quezon City in Civil Case
No. Q99-37717.
Respondent is the proprietress of Montaguz General Merchandise (MGM), 4 a contractor accredited by the PNP for the supply of
office and construction materials and equipment, and for the delivery of various services such as printing and rental, repair of
various equipment, and renovation of buildings, facilities, vehicles, tires, and spare parts. 5
On December 8, 1995, the PNP Engineering Services (PNPES), released a Requisition and Issue Voucher 6 for the acquisition of
various building materials amounting to Two Million Two Hundred Eighty-Eight Thousand Five Hundred Sixty-Two Pesos and Sixty
Centavos (P2,288,562.60) for the construction of a four-storey condominium building with roof deck at Camp Crame, Quezon
City.7
Respondent averred that on December 11, 1995, MGM and petitioner, represented by the PNP, through its chief, executed a
Contract of Agreement8 (the Contract) wherein MGM, for the price of P2,288,562.60, undertook to procure and deliver to the PNP
the construction materials itemized in the purchase order 9 attached to the Contract. Respondent claimed that after the PNP Chief
approved the Contract and purchase order,10 MGM, on March 1, 1996, proceeded with the delivery of the construction materials,
as evidenced by Delivery Receipt Nos. 151-153, 11 Sales Invoice Nos. 038 and 041, 12 and the "Report of Public Property
Purchase"13 issued by the PNPs Receiving and Accounting Officers to their Internal Auditor Chief. Respondent asseverated that
following the PNPs inspection of the delivered materials on March 4, 1996, 14 the PNP issued two Disbursement Vouchers; one in
the amount of P2,226,147.26 in favor of MGM, 15 and the other, 16 in the amount of P62,415.34, representing the three percent
(3%) withholding tax, in favor of the Bureau of Internal Revenue (BIR). 17
On November 5, 1997, the respondent, through counsel, sent a letter dated October 20, 1997 18 to the PNP, demanding the
payment of P2,288,562.60 for the construction materials MGM procured for the PNP under their December 1995 Contract.
On November 17, 1997, the PNP, through its Officer-in-Charge, replied 19 to respondents counsel, informing her of the payment
made to MGM via Land Bank of the Philippines (LBP) Check No. 0000530631, 20 as evidenced by Receipt No. 001, 21 issued by
the respondent to the PNP on April 23, 1996.22
On November 26, 1997, respondent, through counsel, responded by reiterating her demand 23 and denying having ever received
the LBP check, personally or through an authorized person. She also claimed that Receipt No. 001, a copy of which was attached
to the PNPs November 17, 1997 letter, could not support the PNPs claim of payment as the aforesaid receipt belonged to
Montaguz Builders, her other company, which was also doing business with the PNP, and not to MGM, with which the contract
was made.
On May 5, 1999, respondent filed a Complaint for Sum of Money against the petitioner, represented by the Chief of the PNP,
before the RTC, Branch 222 of Quezon City.24 This was docketed as Civil Case No. Q99-37717.
The petitioner filed a Motion to Dismiss 25 on July 5, 1999, on the ground that the claim or demand set forth in respondents
complaint had already been paid or extinguished, 26 as evidenced by LBP Check No. 0000530631 dated April 18, 1996, issued by
the PNP to MGM, and Receipt No. 001, which the respondent correspondingly issued to the PNP. The petitioner also argued that
aside from the fact that the respondent, in her October 20, 1997 letter, demanded the incorrect amount since it included the
withholding tax paid to the BIR, her delay in making such demand "[did] not speak well of the worthiness of the cause she
espouse[d]."27
Respondent opposed petitioners motion to dismiss in her July 12, 1999 Opposition 28and September 10, 1999 Supplemental
Opposition to Motion to Dismiss. 29 Respondent posited that Receipt No. 001, which the petitioner claimed was issued by MGM
upon respondents receipt of the LBP check, was, first, under the business name "Montaguz Builders," an entity separate from
MGM. Next, petitioners allegation that she received the LBP check on April 19, 1996 was belied by the fact that Receipt No. 001,
which was supposedly issued for the check, was dated four days later, or April 23, 1996. Moreover, respondent averred, the PNPs
own Checking Account Section Logbook or the Warrant Register, showed that it was one Edgardo Cruz (Cruz) who signed for the
check due to MGM, 30 contrary to her usual practice of personally receiving and signing for checks payable to her companies.
After conducting hearings on the Motion to Dismiss, the RTC issued an Order 31 on May 4, 2001, denying the petitioners motion
for lack of merit. The petitioner thereafter filed its Answer,32 wherein it restated the same allegations in its Motion to Dismiss.
Trial on the merits followed the pre-trial conference, which was terminated on June 25, 2002 when the parties failed to arrive at an
amicable settlement.33
On September 3, 2002, shortly after respondent was sworn in as a witness, and after her counsel formally offered her testimony in
evidence, Atty. Norman Bueno, petitioners counsel at that time, made the following stipulations in open court:
Atty. Bueno (To Court)
Your Honor, in order to expedite the trial, we will admit that this witness was contracted to deliver the construction supplies or
materials. We will admit that she complied, that she actually delivered the materials. We will admit that Land Bank Corporation
check was issued although we will not admit that the check was not released to her, as [a] matter of fact, we have the copy of the
check. We will admit that Warrant Register indicated that the check was released although we will not admit that the check was
not received by the [respondent].
Court (To Atty. Albano)
So, the issues here are whether or not the [respondent] received the check for the payment of the construction materials or
supplies and who received the same. That is all.

Atty. Albano (To Court)

Yes, your Honor.
Court (To Atty. Albano)
I think we have an abbreviated testimony here. Proceed. 34 (Emphasis ours.)
The stipulations made by the petitioner through Atty. Bueno were in consonance with the admissions it had previously made, also
through Atty. Bueno, in its Answer,35 and pre-trial brief36:
Answer:
IX
It ADMITS the allegation in paragraph 9 of the Complaint that [respondent] delivered to the PNP Engineering Service the
construction materials. It also ADMITS the existence of Receipt Nos. 151, 152 and 153 alleged in the same paragraph, copies of
which are attached to the Complaint as Annexes "G," "G-1" and "G-2." 37 (Emphasis ours.)
Pre-trial Brief:
III
ADMISSIONS
3.1. Facts and/or documents admitted
For brevity, [petitioner] admit[s] only the allegations in [respondents] Complaint and the annexes thereto that were admitted in the
Answer.38 (Emphases ours.)
With the issue then confined to whether respondent was paid or not, the RTC proceeded with the trial.
Respondent, in her testimony, narrated that on April 18, 1996, she went to the PNP Finance Center to claim a check due to one of
her companies, Montaguz Builders. As the PNP required the issuance of an official receipt upon claiming its checks, respondent,
in preparation for the PNP check she expected, already signed Montaguz Builders Official Receipt No. 001, albeit the details were
still blank. However, upon arriving at the PNP Finance Center, respondent was told that the check was still with the LBP, which
could not yet release it. Respondent then left for the Engineering Services Office to see Captain Rama, along with Receipt No.
001, which she had not yet issued. 39 Respondent claimed that after some time, she left her belongings, including her receipt
booklet, at a bench in Captain Ramas office when she went around the Engineering Office to talk to some other people. 40 She
reasoned that since she was already familiar and comfortable with the people in the PNPES Office, she felt no need to ask
anyone to look after her belongings, as it was her "normal practice" 41 to leave her belongings in one of the offices there. The next
day, respondent alleged that when she returned for the check due to Montaguz Builders that she was not able to claim the day
before, she discovered for the first time that Receipt No. 001, which was meant for that check, was missing. Since she would not
be able to claim her check without issuing a receipt, she just informed the releaser of the missing receipt and issued Receipt No.
002 in its place.42 After a few months, respondent inquired with the PNP Finance Center about the payment due to MGM under the
Contract of December 1995 and was surprised to find out that the check payable to MGM had already been released. Upon
making some inquiries, respondent learned that the check, payable to MGM, in the amount of P2,226,147.26, was received by
Cruz, who signed the PNPs Warrant Register. Respondent admitted to knowing Cruz, as he was connected with Highland
Enterprises, a fellow PNP-accredited contractor. However, she denied ever having authorized Cruz or Highland Enterprises to
receive or claim any of the checks due to MGM or Montaguz Builders. 43 When asked why she had not filed a case against Cruz or
Herminio Reyes, the owner of Highland Enterprises, considering the admitted fact that Cruz claimed the check due to her,
respondent declared that there was no reason for her to confront them as it was the PNPs fault that the check was released to the
wrong person. Thus, it was the PNPs problem to find out where the money had gone, while her course of action was to go after
the PNP, as the party involved in the Contract.44
On April 29, 2003, petitioner presented Ms. Jesusa Magtira, who was then the "check releaser" 45 of the PNP, to prove that the
respondent received the LBP check due to MGM, and that respondent herself gave the check to Cruz. 46 Ms. Magtira testified that
on April 23, 1996, she released the LBP check payable to the order of MGM, in the amount of P2,226,147.26, to the respondent
herein, whom she identified in open court. She claimed that when she released the check to respondent, she also handed her a
voucher, and a logbook also known as the Warrant Register, for signing. 47 When asked why Cruz was allowed to sign for the
check, Ms. Magtira explained that this was allowed since the respondent already gave her the official receipt for the check, and it
was respondent herself who gave the logbook to Cruz for signing. 48
The petitioner next presented Edgardo Cruz for the purpose of proving that the payment respondent was claiming rightfully
belonged to Highland Enterprises. Cruz testified that Highland Enterprises had been an accredited contractor of the PNP since
1975. In 1995, Cruz claimed that the PNPES was tasked to construct "by administration" a condominium building. This meant that
the PNPES had to do all the work, from the canvassing of the materials to the construction of the building. The PNPES allegedly
lacked the funds to do this and so asked for Highland Enterprisess help. 49 In a meeting with its accredited contractors, the PNPES
asked if the other contractors would agree to the use of their business name 50 for a two percent (2%) commission of the purchase
order price to avoid the impression that Highland Enterprises was monopolizing the supply of labor and materials to the PNP. 51
Cruz alleged that on April 23, 1996, he and the respondent went to the PNP Finance Center to claim the LBP check due to MGM.
Cruz said that the respondent handed him the already signed Receipt No. 001, which he filled up. He claimed that the respondent
knew that the LBP check was really meant for Highland Enterprises as she had already been paid her 2% commission for the use
of her business name in the concerned transaction.52
On September 8, 2003, the RTC rendered its Decision, the dispositive of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of [respondent] and against [petitioner] ordering the
latter to pay [respondent] the following sums:
(1) P2,226,147.26 representing the principal sum plus interest at 14% per annum from April 18, 1996 until the same shall have
been fully paid;
(2) 20% of the sum to be collected as attorneys fees; and,

(3) Costs of suit.53

The RTC declared that while Cruzs testimony seemed to offer a plausible explanation on how and why the LBP check ended up
with him, the petitioner, already admitted in its Answer, and Pre-trial Brief, that MGM, did in fact deliver the construction materials
worth P2,288,562.60 to the PNP. The RTC also pointed out the fact that the petitioner made the same admissions in open court to
expedite the trial, leaving only one issue to be resolved: whether the respondent had been paid or not. Since this was the only
issue, the RTC said that it had no choice but to go back to the documents and the "documentary evidence clearly indicates that
the check subject of this case was never received by [respondent]." 54 In addition, the PNPs own Warrant Register showed that it
was Edgardo Cruz who received the LBP check, and Receipt No. 001 submitted by the petitioner to support its claim was not
issued by MGM, but by Montaguz Builders, a different entity. Finally, the RTC held that Cruzs testimony, which appeared to be an
afterthought to cover up the PNPs blunder, were irreconcilable with the petitioners earlier declarations and admissions, hence,
not credit-worthy.
The petitioner appealed this decision to the Court of Appeals, which affirmed with modification the RTCs ruling on September 27,
2006:
WHEREFORE, the decision appealed from is AFFIRMED with the MODIFICATION that the 14% interest per annum imposed on
the principal amount is ordered reduced to 12%, computed from November 16, 1997 until fully paid. The order for the payment of
attorneys fees and costs of the suit is DELETED.55
The Court of Appeals, in deciding against the petitioner, held that the petitioners admissions and declarations, made in various
stages of the proceedings are express admissions, which cannot be overcome by allegations of respondents implied admissions.
Moreover, petitioner cannot controvert its own admissions and it is estopped from denying that it had a contract with MGM, which
MGM duly complied with. The Court of Appeals agreed with the RTC that the real issue for determination was whether the
petitioner was able to discharge its contractual obligation with the respondent. The Court of Appeals held that while the PNPs own
Warrant Register disclosed that the payment due to MGM was received by Cruz, on behalf of Highland Enterprises, the PNPs
contract was clearly with MGM, and not with Highland Enterprises. Thus, in order to extinguish its obligation, the petitioner should
have directed its payment to MGM unless MGM authorized a third person to accept payment on its behalf.
The petitioner is now before this Court, praying for the reversal of the lower courts decisions on the ground that "the Court of
Appeals committed a serious error in law by affirming the decision of the trial court." 56
THE COURTS RULING:
This case stemmed from a contract executed between the respondent and the petitioner. While the petitioner, in proclaiming that
the respondents claim had already been extinguished, initially insisted on having fulfilled its contractual obligation, it now
contends that the contract it executed with the respondent is actually a fictitious contract to conceal the fact that only one
contractor will be supplying all the materials and labor for the PNP condominium project.
Both the RTC and the Court of Appeals upheld the validity of the contract between the petitioner and the respondent on the
strength of the documentary evidence presented and offered in Court and on petitioners own stipulations and admissions during
various stages of the proceedings.
It is worthy to note that while this petition was filed under Rule 45 of the Rules of Court, the assertions and arguments advanced
herein are those that will necessarily require this Court to re-evaluate the evidence on record.
It is a well-settled rule that in a petition for review under Rule 45, only questions of law may be raised by the parties and passed
upon by this Court.57
This Court has, on many occasions, distinguished between a question of law and a question of fact. We held that when there is
doubt as to what the law is on a certain state of facts, then it is a question of law; but when the doubt arises as to the truth or
falsity of the alleged facts, then it is a question of fact. 58 "Simply put, when there is no dispute as to fact, the question of whether or
not the conclusion drawn therefrom is correct, is a question of law." 59 To elucidate further, this Court, in Hko Ah Pao v. Ting60 said:
One test to determine if there exists a question of fact or law in a given case is whether the Court can resolve the issue that was
raised without having to review or evaluate the evidence, in which case, it is a question of law; otherwise, it will be a question of
fact. Thus, the petition must not involve the calibration of the probative value of the evidence presented. In addition, the facts of
the case must be undisputed, and the only issue that should be left for the Court to decide is whether or not the conclusion drawn
by the CA from a certain set of facts was appropriate.61 (Emphases ours.)
In this case, the circumstances surrounding the controversial LBP check are central to the issue before us, the resolution of which,
will require a perusal of the entire records of the case including the transcribed testimonies of the witnesses. Since this is an
appeal via certiorari, questions of fact are not reviewable. As a rule, the findings of fact of the Court of Appeals are final and
conclusive62 and this Court will only review them under the following recognized exceptions: (1) when the inference made is
manifestly mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely
on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts;
(5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are
contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they
are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion; and (10) when the findings of fact of the Court of Appeals are premised
on the absence of evidence and are contradicted by the evidence on record. 63
Although petitioners sole ground to support this petition was stated in such a manner as to impress upon this Court that the Court
of Appeals committed an error in law, what the petitioner actually wants us to do is to review and re-examine the factual findings of
both the RTC and the Court of Appeals.
Since the petitioner has not shown this Court that this case falls under any of the enumerated exceptions to the rule, we are
constrained to uphold the facts as established by both the RTC and the Court of Appeals, and, consequently, the conclusions
reached in the appealed decision.
Nonetheless, even if we were to exercise utmost liberality and veer away from the rule, the records will show that the petitioner
had failed to establish its case by a preponderance of evidence. 64 Section 1, Rule 133 of the Revised Rules of Court provides the

guidelines in determining preponderance of evidence:

SECTION 1. Preponderance of evidence, how determined. In civil cases, the party having the burden of proof must establish his
case by a preponderance of evidence. In determining where the preponderance or superior weight of evidence on the issues
involved lies, the court may consider all the facts and circumstances of the case, the witnesses manner of testifying, their
intelligence, their means and opportunity of knowing the facts to which they are testifying, the nature of the facts to which they
testify, the probability or improbability of their testimony, their interest or want of interest, and also their personal credibility so far
as the same may legitimately appear upon the trial. The court may also consider the number of witnesses, though the
preponderance is not necessarily with the greater number.
Expounding on the concept of preponderance of evidence, this Court in Encinas v. National Bookstore, Inc., 65 held:
"Preponderance of evidence" is the weight, credit, and value of the aggregate evidence on either side and is usually considered to
be synonymous with the term "greater weight of the evidence" or "greater weight of the credible evidence." Preponderance of
evidence is a phrase which, in the last analysis, means probability of the truth. It is evidence which is more convincing to the court
as worthy of belief than that which is offered in opposition thereto. 66
The petitioner avers that the Court of Appeals should not have relied "heavily, if not solely" 67 on the admissions made by
petitioners former counsel, thereby losing sight of the "secret agreement" between the respondent and Highland Enterprises,
which explains why all the documentary evidence were in respondents name. 68
The petitioner relies mainly on Cruzs testimony to support its allegations. Not only did it not present any other witness to
corroborate Cruz, but it also failed to present any documentation to confirm its story. It is doubtful that the petitioner or the
contractors would enter into any "secret agreement" involving millions of pesos based purely on verbal affirmations. Meanwhile,
the respondent not only presented all the documentary evidence to prove her claims, even the petitioner repeatedly admitted that
respondent had fully complied with her contractual obligations.
The petitioner argued that the Court of Appeals should have appreciated the clear and adequate testimony of Cruz, and should
have given it utmost weight and credit especially since his testimony was a "judicial admission against interest a primary
evidence which should have been accorded full evidentiary value." 69
The trial courts appreciation of the witnesses testimonies is entitled to the highest respect since it was in a better position to
assess their credibility.70 The RTC held Cruzs testimony to be "not credit worthy" 71 for being irreconcilable with petitioners earlier
admissions. Contrary to petitioners contentions, Cruzs testimony cannot be considered as a judicial admission against his
interest as he is neither a party to the case nor was his admission against his own interest, but actually against either the
petitioners or the respondents interest. Petitioners statements on the other hand, were deliberate, clear, and unequivocal and
were made in the course of judicial proceedings; thus, they qualify as judicial admissions. 72 In Alfelor v. Halasan, 73 this Court held
that:
A party who judicially admits a fact cannot later challenge that fact as judicial admissions are a waiver of proof; production of
evidence is dispensed with. A judicial admission also removes an admitted fact from the field of controversy. Consequently, an
admission made in the pleadings cannot be controverted by the party making such admission and are conclusive as to such party,
and all proofs to the contrary or inconsistent therewith should be ignored, whether objection is interposed by the party or not. The
allegations, statements or admissions contained in a pleading are conclusive as against the pleader. A party cannot subsequently
take a position contrary of or inconsistent with what was pleaded. 74
The petitioner admitted to the existence and validity of the Contract of Agreement executed between the PNP and MGM, as
represented by the respondent, on December 11, 1995. It likewise admitted that respondent delivered the construction materials
subject of the Contract, not once, but several times during the course of the proceedings. The only matter petitioner assailed was
respondents allegation that she had not yet been paid. If Cruzs testimony were true, the petitioner should have put respondent in
her place the moment she sent a letter to the PNP, demanding payment for the construction materials she had allegedly delivered.
Instead, the petitioner replied that it had already paid respondent as evidenced by the LBP check and the receipt she supposedly
issued. This line of defense continued on, with the petitioner assailing only the respondents claim of nonpayment, and not the rest
of respondents claims, in its motion to dismiss, its answer, its pre-trial brief, and even in open court during the respondents
testimony. Section 4, Rule 129 of the Rules of Court states:
SECTION 4. Judicial Admissions.An admission, verbal or written, made by a party in the course of the proceedings in the same
case, does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or
that no such admission was made.
Petitioners admissions were proven to have been made in various stages of the proceedings, and since the petitioner has not
shown us that they were made through palpable mistake, they are conclusive as to the petitioner. Hence, the only question to be
resolved is whether the respondent was paid under the December 1995 Contract of Agreement.
The RTC and the Court of Appeals correctly ruled that the petitioners obligation has not been extinguished. The petitioners
obligation consists of payment of a sum of money. In order for petitioners payment to be effective in extinguishing its obligation, it
must be made to the proper person. Article 1240 of the Civil Code states:
Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or
any person authorized to receive it.
In Cembrano v. City of Butuan,75 this Court elucidated on how payment will effectively extinguish an obligation, to wit:
Payment made by the debtor to the person of the creditor or to one authorized by him or by the law to receive it extinguishes the
obligation. When payment is made to the wrong party, however, the obligation is not extinguished as to the creditor who is without
fault or negligence even if the debtor acted in utmost good faith and by mistake as to the person of the creditor or through error
induced by fraud of a third person.
In general, a payment in order to be effective to discharge an obligation, must be made to the proper person. Thus, payment must
be made to the obligee himself or to an agent having authority, express or implied, to receive the particular payment. Payment
made to one having apparent authority to receive the money will, as a rule, be treated as though actual authority had been given
for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge. The
receipt of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy the debt. 76

The respondent was able to establish that the LBP check was not received by her or by her authorized personnel. The PNPs own
records show that it was claimed and signed for by Cruz, who is openly known as being connected to Highland Enterprises,
another contractor. Hence, absent any showing that the respondent agreed to the payment of the contract price to another person,
or that she authorized Cruz to claim the check on her behalf, the payment, to be effective must be made to her. 77
The petitioner also challenged the RTCs findings, on the ground that it "overlooked material fact and circumstance of significant
weight and substance."78 Invoking the doctrine of adoptive admission, the petitioner pointed out that the respondents inaction
towards Cruz, whom she has known to have claimed her check as early as 1996, should be taken against her. Finally, the
petitioner contends that Cruzs testimony should be taken against respondent as well, under Rule 130, Sec. 32 of the Revised
Rules on Evidence, since she has not presented any "controverting evidence x x x notwithstanding that she personally heard it." 79
The respondent has explained her inaction towards Cruz and Highland Enterprises. Both the RTC and the Court of Appeals have
found her explanation sufficient and this Court finds no cogent reason to overturn the assessment by the trial court and the Court
of Appeals of the respondents testimony. It may be recalled that the respondent argued that since it was the PNP who owed her
money, her actions should be directed towards the PNP and not Cruz or Highland Enterprises, against whom she has no
adequate proof.80 Respondent has also adequately explained her delay in filing an action against the petitioner, particularly that
she did not want to prejudice her other pending transactions with the PNP.81
The petitioner claims that the RTC "overlooked material fact and circumstance of significant weight and substance," 82 but it
ignores all the documentary evidence, and even its own admissions, which are evidence of the greater weight and substance, that
support the conclusions reached by both the RTC and the Court of Appeals.
We agree with the Court of Appeals that the RTC erred in the interest rate and other monetary sums awarded to respondent as
baseless. However, we must further modify the interest rate imposed by the Court of Appeals pursuant to the rule laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals83:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit. 84
Since the obligation herein is for the payment of a sum of money, the legal interest rate to be imposed, under Article 2209 of the
Civil Code is six percent (6%) per annum:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum.
Following the guidelines above, the legal interest of 6% per annum is to be imposed from November 16, 1997, the date of the last
demand, and 12% in lieu of 6% from the date this decision becomes final until fully paid.lawphi1
Petitioners allegations of sham dealings involving our own government agencies are potentially disturbing and alarming. If Cruzs
testimony were true, this should be a lesson to the PNP not to dabble in spurious transactions. Obviously, if it can afford to give a
2% commission to other contractors for the mere use of their business names, then the petitioner is disbursing more money than it
normally would in a legitimate transaction. It is recommended that the proper agency investigate this matter and hold the involved
personnel accountable to avoid any similar occurrence in the future.
WHEREFORE, the Petition is hereby DENIED and the Decision of the Court of Appeals in C.A. G.R. CV No. 80623 dated
September 27, 2006 is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) per annum
on the amount of P2,226,147.26, computed from the date of the last demand or on November 16, 1997. A TWELVE PERCENT
(12%) per annum interest in lieu of SIX PERCENT (6%) shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.

G.R. No. 126486 February 9, 1998

BARONS MARKETING CORP., petitioner,
vs.
COURT OF APPEALS and PHELPS DODGE PHILS., INC. respondents.

KAPUNAN, J.:
The instant petition raises two issues: (1) whether or not private respondent is guilty of abuse of right; and (2) whether or not
private respondent is entitled to interest and attorney's fees.
The facts are undisputed:
On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private respondent herein] appointed defendant [petitioner Barons
Marketing, Corporation] as one of its dealers of electrical wires and cables effective September 1, 1973 (Exh. A). As such dealer,
defendant was given by plaintiff 60 days credit for its purchases of plaintiff's electrical products. This credit term was to be
reckoned from the date of delivery by plaintiff of its products to defendant (Exh. 1).
During the period covering December 1986 to August 17, 1987, defendant purchased, on credit, from plaintiff various electrical
wires and cables in the total amount of P4,102,438.30 (Exh. B to K). These wires and cables were in turn sold, pursuant to
previous arrangements, by defendant to MERALCO, the former being the accredited supplier of the electrical requirements of the
latter. Under the sales invoices issued by plaintiff to defendant for the subject purchases, it is stipulated that interest at 12% on the
amount due for attorney's fees and collection (Exh. BB). 1 On September 7, 1987, defendant paid plaintiff the amount of
P300,000.00 out of its total purchases as above-stated (Exh. S), thereby leaving an unpaid account on the aforesaid deliveries of
P3,802,478.20. On several occasions, plaintiff wrote defendant demanding payment of its outstanding obligations due plaintiff
(Exhs. L, M, N, and P). In response, defendant wrote plaintiff on October 5, 1987 requesting the latter if it could pay its outstanding
account in monthly installments of P500,000.00 plus 1% interest per month commencing on October 15, 1987 until full payment
(Exh. O and O-4). Plaintiff, however, rejected defendant's offer and accordingly reiterated its demand for the full payment of
defendant's account (Exh. P). 2
On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before the Pasig Regional Trial Court against
petitioner Barons Marketing Corporation for the recovery of P3,802,478.20 representing the value of the wires and cables the
former had delivered to the latter, including interest. Phelps Dodge likewise prayed that it be awarded attorney's fees at the rate of
25% of the amount demanded, exemplary damages amounting to at least P100,000.00, the expenses of litigation and the costs of
suit.
Petitioner, in its answer, admitted purchasing the wires and cables from private respondent but disputed the amount claimed by
the latter. Petitioner likewise interposed a counterclaim against private respondent, alleging that it suffered injury to its reputation
due to Phelps Dodge's acts. Such acts were purportedly calculated to humiliate petitioner and constituted an abuse of rights.
After hearing, the trial court on 17 June 1991 rendered its decision, the dispositive portion of which reads:
WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to have preponderantly proven its
case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following:
1. P3,108,000.00 constituting the unpaid balance of defendant's purchases from plaintiff and interest thereon at 12% per annum
computed from the respective expiration of the 60 day credit term, vis-a-vis the various sales invoices and/or delivery receipts;
2. 25% of the preceding obligation for and as attorney's fees;
3. P10,000.00 as exemplary damages;
4. Costs of suit. 3
Both parties appealed to respondent court. Private respondent claimed that the trial court should have awarded it the sum of
P3,802,478.20, the amount which appeared in the body of the complaint and proven during the trial rather than P3,1081000.00
The latter amount appears in petitioner's prayer supposedly as a result of a typographical error.
On the other hand, petitioner reiterated its claims for damages as a result of "creditor's abuse." It also alleged that private
respondent failed to prove its cause of action against it.
On 25 June 1996, the Court of Appeals rendered a decision modifying the decision of the trial court, thus:
WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to have preponderantly proven its
case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following:
1. P3,802,478.20 constituting the unpaid balance of defendant's purchases from plaintiff and interest thereon at 12% per annum
computed from the respective expiration of the 60 day credit term, vis-a-vis the various sales invoices and/or delivery receipts; and
2. 5% of the preceding obligation for and as attorney's fees.
No costs. 4
Petitioner Barons Marketing is now before this Court alleging that respondent court erred when it held (1) private respondent
Phelps Dodge not guilty of "creditor's abuse," and (2) petitioner liable to private respondent for interest and attorney's fees.
I
Petitioner does not deny private respondent's rights to institute an action for collection and to claim full payment. Indeed,
petitioner's right to file an action for collection is beyond cavil. 5 Likewise, private respondent's right to reject petitioner's offer to pay
in installments is guaranteed by Article 1248 of the Civil Code which states:
Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations
in which the obligation consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the
payment of the former without waiting for the liquidation of the latter.
Under this provision, the prestation, i.e., the object of the obligation, must be performed in one act, not in parts.
Tolentino concedes that the right has its limitations:

Partial Prestations. Since the creditor cannot be compelled to accept partial performance, unless otherwise stipulated, the
creditor who refuses to accept partial prestations does not incur in delay or mora accipiendi, except when there is abuse of right or
if good faith requires acceptance. 6
Indeed, the law, as set forth in Article 19 of the Civil Code, prescribes a "primordial limitation on all rights" by setting certain
standards that must be observed in the exercise thereof. 7 Thus:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith.
Petitioner now invokes Article 19 and Article 21 8 of the Civil Code, claiming that private respondent abused its rights when it
rejected petitioner's offer of settlement and subsequently filed the action for collection considering:
. . . that the relationship between the parties started in 1973 spanning more than 13 years before the complaint was filed, that the
petitioner had been a good and reliable dealer enjoying a good credit standing during the period before it became delinquent in
1987, that the relationship between the parties had been a fruitful one especially for the private respondent, that the petitioner
exerted its outmost efforts to settle its obligations and avoid a suit, that the petitioner did not evade in the payment of its obligation
to the private respondent, and that the petitioner was just asking a small concession that it be allowed to liquidate its obligation to
eight (8) monthly installments of P500,000.00 plus 1% interest per month on the balance which proposal was supported by postdated checks. 9
Expounding on its theory, petitioner states:
In the ordinary course of events, a suit for collection of a sum of money filed in court is done for the primary purpose of collecting a
debt or obligation. If there is an offer by the debtor to pay its debt or obligation supported by post-dated checks and with provision
for interests, the normal response of a creditor would be to accept the offer of compromise and not file the suit for collection. It is
of common knowledge that proceedings in our courts would normally take years before an action is finally settled. It is always
wiser and more prudent to accept an offer of payment in installment rather than file an action in court to compel the debtor to settle
his obligation in full in a single payment.
xxx xxx xxx
. . . Why then did private respondent elect to file a suit for collection rather than accept petitioner's offer of settlement, supported
by post-dated checks, by paying monthly installments of P500,000.00 plus 1% per month commencing on October 15, 1987 until
full payment? The answer is obvious. The action of private respondent in filling a suit for collection was an abuse of right and
exercised for the sole purpose of prejudicing and injuring the petitioner. 10
Petitioner prays that the Court order private respondent to pay petitioner moral and exemplary damages, attorney's fees, as well
as the costs of suit. It likewise asks that it be allowed to liquidate its obligation to private respondent, without interests, in eight
equal monthly installments.
Petitioner's theory is untenable.
Both parties agree that to constitute an abuse of rights under Article 19 the defendant must act with bad faith or intent to prejudice
the plaintiff. They cite the following comments of Tolentino as their authority:
Test of Abuse of Right. Modern jurisprudence does not permit acts which, although not unlawful, are anti-social. There is
undoubtedly an abuse of right when it is exercised for the only purpose of prejudicing or injuring another . When the objective of
the actor is illegitimate, the illicit act cannot be concealed under the guise of exercising a right. The principle does not permit acts
which, without utility or legitimate purpose cause damage to another, because they violate the concept of social solidarity which
considers law as rational and just. Hence, every abnormal exercise of a right, contrary to its socio-economic purpose, is an abuse
that will give rise to liability. The exercise of a right must be in accordance with the purpose for which it was established, and must
not be excessive or unduly harsh; there must be no intention to injure another. Ultimately, however, and in practice, courts, in the
sound exercise of their discretion, will have to determine all the facts and circumstances when the exercise of a right is unjust, or
when there has been an abuse of right. 11
The question, therefore, is whether private respondent intended to prejudice or injure petitioner when it rejected petitioner's offer
and filed the action for collection.
We hold in the negative. It is an elementary rule in this jurisdiction that good faith is presumed and that the burden of proving bad
faith rests upon the party alleging the same. 12 In the case at bar, petitioner has failed to prove bad faith on the part of private
respondent. Petitioner's allegation that private respondent was motivated by a desire to terminate its agency relationship with
petitioner so that private respondent itself may deal directly with Meralco is simply not supported by the evidence. At most, such
supposition is merely speculative.
Moreover, we find that private respondent was driven by very legitimate reasons for rejecting petitioner's offer and instituting the
action for collection before the trial court. As pointed out by private respondent, the corporation had its own "cash position to
protect in order for it to pay its own obligations." This is not such "a lame and poor rationalization" as petitioner purports it to be.
For if private respondent were to be required to accept petitioner's offer, there would be no reason for the latter to reject similar
offers from its other debtors. Clearly, this would be inimical to the interests of any enterprise, especially a profit-oriented one like
private respondent. It is plain to see that what we have here is a mere exercise of rights, not an abuse thereof Under these
circumstances, we do not deem private respondent to have acted in a manner contrary to morals, good customs or public policy
as to violate the provisions of Article 21 of the Civil Code.
Consequently, petitioner's prayer for moral and exemplary damages must thus be rejected. Petitioner's claim for moral damages is
anchored on Article 2219 (10) of the Civil Code which states:
Art. 2219. Moral damages may be recovered in the following and analogous cases:
xxx xxx xxx
(10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
xxx xxx xxx

Having ruled that private respondent's acts did not transgress the provisions of Article 21, petitioner cannot be entitled to moral
damages or, for that matter, exemplary damages. While the amount of exemplary damages need not be proved, petitioner must
show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or
not exemplary damages should be awarded. 13 As we have observed above; petitioner has failed to discharge this burden.
It may not be amiss to state that petitioner's contract with private respondent has the force of law between them. 14 Petitioner is
thus bound to fulfill what has been expressly stipulated therein. 15 In the absence of any abuse of right, private respondent cannot
be allowed to perform its obligation under such contract in parts. Otherwise, private respondent's right under Article 1248 will be
negated, the sanctity of its contract with petitioner defiled. The principle of autonomy of contracts 16 must be respected.
II
Under said contract, petitioner is liable to private respondent for the unpaid balance of its purchases from private respondent plus
12% interest. Private respondent's sales invoices expressly provide that:
. . . Interest at 12% per annum will be charged on all overdue account plus 25% on said amount for attorney's fees and
collection. . . . 17
It may also be noted that the above stipulation, insofar as it provides for the payment of "25% on said amount for attorney's fees
and collection (sic)," constitutes what is known as a penal clause. 18 Petitioner is thus obliged to pay such penalty in addition to the
12% annual interest, there being an express stipulation to that effect.
Petitioner nevertheless urges this Court to reduce the attorney's fees for being "grossly excessive," "considering the nature of the
case which is a mere action for collection of a sum of money." It may be pointed out however that the above penalty is supposed
to answer not only for attorney's fees but for collection fees as well. Moreover:
. . . the attorneys' fees here provided is not, strictly speaking, the attorneys' fees recoverable as between attorney and client
spoken of and regulated by the Rules of Court. Rather, the attorneys' fees here are in the nature of liquidated damages and the
stipulation therefor is aptly called a penal clause. It has been said that so long as such stipulation does not contravene law,
morals, or public order, it is strictly binding upon defendant. The attorneys' fees so provided are awarded in favor of the litigant, not
his counsel. It is the litigant, not counsel, who is the judgment creditor entitled to enforce the judgment by execution. 19
Nonetheless, courts are empowered to reduce such penalty if the same is "iniquitous or unconscionable." Article 1229 of the Civil
Code states thus:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or been irregularly complied
with by the debtor. Even if there has no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable. (Emphasis supplied.)
The sentiments of the law are echoed in Article 2227 of the same Code:
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
It is true that we have upheld the reasonableness of penalties in the form of attorney's fees consisting of twenty-five percent (25%)
of the principal debt plus interest. 20 In the case at bar, however, the interest alone runs to some four and a half million pesos
(P4.5M), even exceeding the principal debt amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of the
principal and interest amounts to roughly two million pesos (P2M). In real terms, therefore, the attorney's fees and collection fees
are manifestly exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal.
Private respondent, however, argues that petitioner failed to question the award of attorney's fees on appeal before respondent
court and raised the issue only in its motion for reconsideration. Consequently, petitioner should be deemed to have waived its
right to question such award.
Private respondent's attempts to dissuade us from reducing the penalty are futile. The Court is clothed with ample authority to
review matters, even if they are not assigned as errors in their appeal, if it finds that their consideration is necessary in arriving at
a just decision of the case. 21
WHEREFORE, the decision of the Court of Appeals is hereby MODIFIED in that the attorney's and collection fees are reduced to
ten percent (10%) of the principal but is AFFIRMED in all other respects.
SO ORDERED.

G.R. No. 90169. April 7, 1993.

PILAR PAGSIBIGAN, petitioner,
vs.
COURT OF APPEALS and PLANTERS DEVELOPMENT BANK, respondents.
Juanito Cruz for petitioner.
Raymundo S. Senga for private respondent.
SYLLABUS
1. CIVIL LAW; CONTRACT OF LOAN; SUBSTANTIAL PERFORMANCE BY OBLIGOR, RECOGNIZED; CASE AT BAR. From
the conduct of the respondent bank it is clear that it neither enforced its right under the acceleration clause nor its right to
foreclose under the mortgage contract, For more than four years, the respondent bank made petitioner believe that it was applying
her payment on the loan and interest just like before when the respondent bank accepted such payment and issued a receipt
therefor. It is bound by estoppel to apply the same as payment for petitioner's obligation as it did when it received previous
payments on three occasions. Its act of applying said payments to accounts payable is clearly prejudicial to petitioner. We cannot
countenance this act of the bank. We hold that the payment amounting to P8,650.00 for the balance of P3,558.20 as of August 26,

1978 plus the P1,000.00 it was asked to pay on April 24, 1984 would at the very least constitute substantial performance. Article
1234 of the Civil Code, provides: "Article 1234. If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee." Petitioner in this case
has the right to move for the cancellation of the mortgage and the release of the mortgaged property, upon payment of the
balance of the loan. Thus, aside from the fact that the respondent bank was estopped from enforcing its right to foreclose by virtue
of its acceptance of the delayed payments for a period of more than six years, the application of such payment to the interest and
the principal during the first three payments constitutes a virtual waiver of the acceleration clause provided in the contract. We
cannot sustain the legality of the foreclosure under the peculiar facts of this case, because there is substantial performance of the
obligation on the part of petitioner. Under Article 1235 of the Civil Code, when the creditor accepts performance, knowing its
incompleteness and irregularity without protest or objection, the obligation is deemed complied with.
2. ID.; MORAL DAMAGES, WHEN AVAILABLE; CASE AT BAR. This Court cannot ignore the fact that the respondent bank
succeeded in taking advantage of the ignorance of petitioner in transactions such as the one involved in the case at bar by lodging
the bulk of petitioner's payment to account payable based on the flimsy reason that she had been in default, and then considering
the entire debt pursuant to an acceleration clause as earning interest and penalty charges at an exorbitant rate of 19% each from
the date of first default up to the date of foreclosure, thus bringing the obligation to an astronomical amount of P29,554.81. This
indicates bad faith on the part of the respondent bank. For the mental anguish, sleepless nights and serious anxiety this has
caused petitioner, the respondent bank is liable for moral damages which this Court fixes at P50,000.00.
3. ID.; EXEMPLARY DAMAGES; ATTORNEY'S FEES; IMPOSED UPON THE BANK TO DETER REPEATING SIMILAR ACT;
CASE AT BAR. To serve as a deterrent for the respondent bank from repeating similar acts and to set an example and
correction for the public good, this Court likewise awards exemplary damages. In view of its nature, it should be imposed in such
amount as to sufficiently and effectively deter similar acts in the future by the respondent bank and other banks, which amount this
court fixes at P20,000.00 on top of the forfeiture of whatever balance on the loan which the respondent may actually have in its
favor. Attorney's fees by way of damages is likewise awarded for the same reason that exemplary damages is awarded and this is
fixed at P10,000.00.
DECISION
CAMPOS, JR., J p:
This is a petition for review on certiorari of the decision ** of the Court of Appeals in CA-G.R. CV No. 18385 entitled "Pilar
Pagsibigan, Plaintiff-appellee vs. Planters Development Bank, Defendant-appellant," the decretal portion of which reads:
"WHEREFORE, the decision appealed from is hereby reversed and another one entered ordering plaintiff-appellee Norma
Manalili, to pay the deficiency of P21,391.81. No pronouncement is made as to costs.
"SO ORDERED." 1
The undisputed facts are summarized by the respondent court as follows:
"Stripped of non-essentials, it appears that on August 4, 1974, plaintiff-appellee, [petitioner, herein] through her daughter as
attorney-in-fact, obtained an agricultural loan from the Planters Development Bank (formerly Bulacan Development Bank), in the
sum of P4,500.00 secured by a mortgage over a parcel of land covered by Transfer Certificate of Title No. T-129603 (Exhibit "A";
"A-1"), which loan was later fully paid (Exhibits "B"; "B-1" to "B-3". Another loan for the same amount was obtained from the bank
on November 3, 1977 [year 1977 should read 1976 instead] secured by the same parcel of land. The Promissory Note for the
second loan (Exhibit "1") stipulated that for a first payment to be made on May 3, 1977 and payments every six months thereafter
at P1,018.14 with 19% interest for unpaid amortizations. The said Promissory Note, containing an acceleration clause (Exhibit "1A"), was not denied by plaintiff-appellee [petitioner] (TSN, December 10, 1986, pp. 9-10).
Initial payment was made on July 6, 1978 [year 1978 should read 1977 instead] followed by several payments in the total amount
of P11,900.00 (Exhibits "D"; "D-1" to "D-7"). However, only four of these payments were applied to the loan (TSN, March 16, 1987,
pp. 14-16), while the rest were "temporarily lodged to accounts payable since the account was already past due" (TSN, June 1,
1987, pp. 15-16). On the basis of a Petition for Extrajudicial Foreclosure of Mortgage (Exhibit "6") and the statement of Account
(Exhibit "12"), the property was foreclosed extrajudicially on May 7, 1984 for failure to pay an outstanding balance of P29,554.81
(Exhibit "13"). This resulted in the property being sold to the bank for P8,163.00, and the bank thereafter claimed a deficiency of
P21,391.81.
In the action for annulment of sale with damages and writ of preliminary injunction instituted by plaintiff-appellee, the lower court
sustained appellee's [petitioner] theory of overpayment (Decision, p. 3), as against the propriety of the foreclosure." 2 [Bracketed
words Ours].
Petitioner submits the following Issues for resolution:
"1. Whether or not the foreclosure and auction sale of the property is valid and justified under the circumstances; and
2. Whether or not petitioner is entitled to recover damages as well as attorney's fees as a result of the foreclosure and auction
sale." 3
It is petitioner's contention that the bank has no right to foreclose the mortgage, there having been full payment of the principal
obligation. As per their computation 4 the payment which they have made totalling P11,900.00 more than sufficiently covered their
total obligation with respect to their loan, there having been, in fact, an overpayment of either P4,642.38 or P6,106.75 based on
the interest rate used in the computation. Thus, the principal obligation having been extinguished by payment, the accessory
obligation of mortgage is necessarily extinguished, and the foreclosure thereof is improper and not valid.
The respondent bank on the other hand countered that the computation relied upon by petitioner is not in consonance with the
Promissory Note 5 which she signed because the Promissory Note contains an acceleration clause. Respondent bank also
averred that upon petitioner's failure to pay her first installment, the entire obligation became due and demandable and its right to
foreclose the mortgage has accrued. Thus, when it foreclosed the mortgage in 1984, with the outstanding obligation at
P29,554.81, it was acting well within its rights.
We note at this point that the respondent bank does not dispute the fact that petitioner had made several payments in an amount
totalling to P11,900.00. It likewise admits that only part of the amount tendered was applied to the loan and the bulk of such

payment was "temporarily lodged to accounts payable since the account was already past due" 6 [Emphasis Ours]. Petitioner
assails the respondent bank for not applying her payment to the loan. Because of said act, the loan remained outstanding when it
should have been extinguished and should have also extinguished the accessory contract of real estate mortgage.
Petitioner wants Us to rule not only on the regularity or legality of the foreclosure but also on its propriety in the light of the
attending circumstances.
There is no question that the respondent bank has the right to foreclose the mortgage upon the first default of petitioner on May 3,
1977, but the records show that it did not. When it received payment of petitioner on July 6, 1977, which had been 2 months and 3
days delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to penalty. From this act of receiving
delayed payment, it is clear that the respondent bank had waived its right under the acceleration clause so that instead of claiming
penalty charges on the entire amount of P4,500.00, it only computed the penalty based on the defaulted amortization payment
which is P1,018.14. If it computed the penalty charge at 19% of the entire amount of P4,500.00 which would have been due and
demandable by virtue of the acceleration clause, the penalty charges would be much more than P25.20.
This is similarly observed in payments which the respondent bank received on June 6, 1978 and August 26, 1978. We also
noticed that in Exhibit "D-3", the receipt which the respondent bank issued to petitioner for the August 26, 1978 partial payment, it
waived its right under Article 1253 7 of the Civil Code on Application of Payments when it applied the payment to the principal
instead of the interest. Thus, on that date the outstanding obligation of petitioner was already reduced to P3,558.21 after she had
paid a total of P2,200.00 over a period of nine months from the time the loan was obtained.
From this conduct of the respondent bank it is clear that it neither enforced its right under the acceleration clause nor its right to
foreclose under the mortgage contract, For more than four years, the respondent bank made petitioner believe that it was applying
her payment on the loan and interest just like before when the respondent bank accepted such payment and issued a receipt
therefor. It is bound by estoppel to apply the same as payment for petitioner's obligation as it did when it received previous
payments on three occasions. Its act of applying said payments to accounts payable is clearly prejudicial to petitioner. We cannot
countenance this act of the bank.
We hold that the payment amounting to P8,650.00 for the balance of P3,558.20 as of August 26, 1978 8 plus the P1,000.00 it was
asked to pay on April 24, 1984 would at the very least constitute substantial performance.
Article 1234 of the Civil Code, provides:
"Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the obligee."
Petitioner in this case has the right to move for the cancellation of the mortgage and the release of the mortgaged property, upon
payment of the balance of the loan. Definitely, it would not be in the amount demanded by the respondent bank, which the trial
court held to be P29,554.81.
This Court, in Angeles vs. Calasanz 9 held that:
"The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the
initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9)
years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal
obligation was only P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had already paid an aggregate amount of
P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-appellees. It would
unjustly enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
xxx xxx xxx
also militates against the unilateral act of the defendants-appellants in cancelling the contract."
Thus, aside from the fact that the respondent bank was estopped from enforcing its right to foreclose by virtue of its acceptance of
the delayed payments for a period of more than six years, the application of such payment to the interest and the principal during
the first three payments constitutes a virtual waiver of the acceleration clause provided in the contract. We cannot sustain the
legality of the foreclosure under the peculiar facts of this case, because there is substantial performance of the obligation on the
part of petitioner. Under Article 1235 of the Civil Code, when the creditor accepts performance, knowing its incompleteness and
irregularity without protest or objection, the obligation is deemed complied with.
This Court cannot ignore the fact that the respondent bank succeeded in taking advantage of the ignorance of petitioner in
transactions such as the one involved in the case at bar by lodging the bulk of petitioner's payment to account payable based on
the flimsy reason that she had been in default, and then considering the entire debt pursuant to an acceleration clause as earning
interest and penalty charges at an exorbitant rate of 19% each from the date of first default up to the date of foreclosure, thus
bringing the obligation to an astronomical amount of P29,554.81. This indicates bad faith on the part of the respondent bank. For
the mental anguish, sleepless nights and serious anxiety this has caused petitioner, the respondent bank is liable for moral
damages which this Court fixes at P50,000.00.
To serve as a deterrent for the respondent bank from repeating similar acts and to set an example and correction for the public
good, this Court likewise awards exemplary damages. In view of its nature, it should be imposed in such amount as to sufficiently
and effectively deter similar acts in the future 10 by the respondent bank and other banks, which amount this court fixes at
P20,000.00 on top of the forfeiture of whatever balance on the loan which the respondent may actually have in its favor.
This Court likewise orders the annulment of the foreclosure sale and the reconveyance of the property subject of the real estate
mortgage pursuant to the annotation of lis pendens in the certificate of title of the subject property.
Attorney's fees by way of damages is likewise awarded for the same reason that exemplary damages is awarded and this is fixed
at P10,000.00.
WHEREFORE, the appealed decision is hereby SET ASIDE and a new one entered ordering the reconveyance of the foreclosed
property and the payment of moral damages, exemplary damages and attorney's fees as above specified, with costs against
private respondent Planters Development Bank.

SO ORDERED.

G.R. No. 115838

July 18, 2002

CONSTANTE AMOR DE CASTRO and CORAZON AMOR DE CASTRO, petitioners,

vs.
COURT OF APPEALS and FRANCISCO ARTIGO, respondents.
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari 1 seeking to annul the Decision of the Court of Appeals 2 dated May 4, 1994 in CAG.R. CV No. 37996, which affirmed in toto the decision3 of the Regional Trial Court of Quezon City, Branch 80, in Civil Case No.
Q-89-2631. The trial court disposed as follows:
"WHEREFORE, the Court finds defendants Constante and Corazon Amor de Castro jointly and solidarily liable to plaintiff the sum
of:
a) P303,606.24 representing unpaid commission;
b) P25,000.00 for and by way of moral damages;
c) P45,000.00 for and by way of attorney's fees;
d) To pay the cost of this suit.
Quezon City, Metro Manila, December 20, 1991."
The Antecedent Facts
On May 29, 1989, private respondent Francisco Artigo ("Artigo" for brevity) sued petitioners Constante A. De Castro ("Constante"
for brevity) and Corazon A. De Castro ("Corazon" for brevity) to collect the unpaid balance of his broker's commission from the De
Castros.4 The Court of Appeals summarized the facts in this wise:
"x x x. Appellants5 were co-owners of four (4) lots located at EDSA corner New York and Denver Streets in Cubao, Quezon City. In
a letter dated January 24, 1984 (Exhibit "A-1, p. 144, Records), appellee 6 was authorized by appellants to act as real estate broker
in the sale of these properties for the amount of P23,000,000.00, five percent (5%) of which will be given to the agent as
commission. It was appellee who first found Times Transit Corporation, represented by its president Mr. Rondaris, as prospective
buyer which desired to buy two (2) lots only, specifically lots 14 and 15. Eventually, sometime in May of 1985, the sale of lots 14
and 15 was consummated. Appellee received from appellants P48,893.76 as commission.
It was then that the rift between the contending parties soon emerged. Appellee apparently felt short changed because according
to him, his total commission should be P352,500.00 which is five percent (5%) of the agreed price of P7,050,000.00 paid by Times
Transit Corporation to appellants for the two (2) lots, and that it was he who introduced the buyer to appellants and unceasingly
facilitated the negotiation which ultimately led to the consummation of the sale. Hence, he sued below to collect the balance of
P303,606.24 after having received P48,893.76 in advance.1wphi1.nt
On the other hand, appellants completely traverse appellee's claims and essentially argue that appellee is selfishly asking for
more than what he truly deserved as commission to the prejudice of other agents who were more instrumental in the
consummation of the sale. Although appellants readily concede that it was appellee who first introduced Times Transit Corp. to
them, appellee was not designated by them as their exclusive real estate agent but that in fact there were more or less eighteen
(18) others whose collective efforts in the long run dwarfed those of appellee's, considering that the first negotiation for the sale
where appellee took active participation failed and it was these other agents who successfully brokered in the second negotiation.
But despite this and out of appellants' "pure liberality, beneficence and magnanimity", appellee nevertheless was given the largest
cut in the commission (P48,893.76), although on the principle of quantum meruit he would have certainly been entitled to less. So
appellee should not have been heard to complain of getting only a pittance when he actually got the lion's share of the
commission and worse, he should not have been allowed to get the entire commission. Furthermore, the purchase price for the
two lots was only P3.6 million as appearing in the deed of sale and not P7.05 million as alleged by appellee. Thus, even assuming
that appellee is entitled to the entire commission, he would only be getting 5% of the P3.6 million, or P180,000.00."
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the decision of the trial court.
First. The Court of Appeals found that Constante authorized Artigo to act as agent in the sale of two lots in Cubao, Quezon City.
The handwritten authorization letter signed by Constante clearly established a contract of agency between Constante and Artigo.
Thus, Artigo sought prospective buyers and found Times Transit Corporation ("Times Transit" for brevity). Artigo facilitated the
negotiations which eventually led to the sale of the two lots. Therefore, the Court of Appeals decided that Artigo is entitled to the
5% commission on the purchase price as provided in the contract of agency.
Second. The Court of Appeals ruled that Artigo's complaint is not dismissible for failure to implead as indispensable parties the
other co-owners of the two lots. The Court of Appeals explained that it is not necessary to implead the other co-owners since the
action is exclusively based on a contract of agency between Artigo and Constante.
Third. The Court of Appeals likewise declared that the trial court did not err in admitting parol evidence to prove the true amount
paid by Times Transit to the De Castros for the two lots. The Court of Appeals ruled that evidence aliunde could be presented to
prove that the actual purchase price was P7.05 million and not P3.6 million as appearing in the deed of sale. Evidence aliunde is
admissible considering that Artigo is not a party, but a mere witness in the deed of sale between the De Castros and Times
Transit. The Court of Appeals explained that, "the rule that oral evidence is inadmissible to vary the terms of written instruments is
generally applied only in suits between parties to the instrument and strangers to the contract are not bound by it." Besides, Artigo
was not suing under the deed of sale, but solely under the contract of agency. Thus, the Court of Appeals upheld the trial court's

finding that the purchase price was P7.05 million and not P3.6 million.
Hence, the instant petition.
The Issues
According to petitioners, the Court of Appeals erred in I. NOT ORDERING THE DISMISSAL OF THE COMPLAINT FOR FAILURE TO IMPLEAD INDISPENSABLE PARTIES-ININTEREST;
II. NOT ORDERING THE DISMISSAL OF THE COMPLAINT ON THE GROUND THAT ARTIGO'S CLAIM HAS BEEN
EXTINGUISHED BY FULL PAYMENT, WAIVER, OR ABANDONMENT;
III. CONSIDERING INCOMPETENT EVIDENCE;
IV. GIVING CREDENCE TO PATENTLY PERJURED TESTIMONY;
V. SANCTIONING AN AWARD OF MORAL DAMAGES AND ATTORNEY'S FEES;
VI. NOT AWARDING THE DE CASTRO'S MORAL AND EXEMPLARY DAMAGES, AND ATTORNEY'S FEES.
The Court's Ruling
The petition is bereft of merit.
First Issue: whether the complaint merits dismissal for failure to implead other co-owners as indispensable parties
The De Castros argue that Artigo's complaint should have been dismissed for failure to implead all the co-owners of the two lots.
The De Castros claim that Artigo always knew that the two lots were co-owned by Constante and Corazon with their other siblings
Jose and Carmela whom Constante merely represented. The De Castros contend that failure to implead such indispensable
parties is fatal to the complaint since Artigo, as agent of all the four co-owners, would be paid with funds co-owned by the four coowners.
The De Castros' contentions are devoid of legal basis.
An indispensable party is one whose interest will be affected by the court's action in the litigation, and without whom no final
determination of the case can be had. 7 The joinder of indispensable parties is mandatory and courts cannot proceed without their
presence.8 Whenever it appears to the court in the course of a proceeding that an indispensable party has not been joined, it is
the duty of the court to stop the trial and order the inclusion of such party.9
However, the rule on mandatory joinder of indispensable parties is not applicable to the instant case.
There is no dispute that Constante appointed Artigo in a handwritten note dated January 24, 1984 to sell the properties of the De
Castros for P23 million at a 5 percent commission. The authority was on a first come, first serve basis. The authority reads in full:
"24 Jan. 84
To Whom It May Concern:
This is to state that Mr. Francisco Artigo is authorized as our real estate broker in connection with the sale of our property located
at Edsa Corner New York & Denver, Cubao, Quezon City.
Asking price P 23,000,000.00 with 5% commission as agent's fee.
C.C. de Castro
owner & representing
co-owners
This authority is on a first-come
First serve basis CAC"
Constante signed the note as owner and as representative of the other co-owners. Under this note, a contract of agency was
clearly constituted between Constante and Artigo. Whether Constante appointed Artigo as agent, in Constante's individual or
representative capacity, or both, the De Castros cannot seek the dismissal of the case for failure to implead the other co-owners
as indispensable parties. The De Castros admit that the other co-owners are solidarily liable under the contract of
agency,10 citing Article 1915 of the Civil Code, which reads:
Art. 1915. If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable
to the agent for all the consequences of the agency.
The solidary liability of the four co-owners, however, militates against the De Castros' theory that the other co-owners should be
impleaded as indispensable parties. A noted commentator explained Article 1915 thus
"The rule in this article applies even when the appointments were made by the principals in separate acts, provided that they are
for the same transaction. The solidarity arises from the common interest of the principals, and not from the act of
constituting the agency. By virtue of this solidarity, the agent can recover from any principal the whole compensation
and indemnity owing to him by the others. The parties, however, may, by express agreement, negate this solidary
responsibility. The solidarity does not disappear by the mere partition effected by the principals after the accomplishment of the
agency.
If the undertaking is one in which several are interested, but only some create the agency, only the latter are solidarily liable,
without prejudice to the effects of negotiorum gestio with respect to the others. And if the power granted includes various
transactions some of which are common and others are not, only those interested in each transaction shall be liable for it." 11
When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in a contract of agency, each

obligor may be compelled to pay the entire obligation. 12 The agent may recover the whole compensation from any one of the coprincipals, as in this case.
Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of the solidary debtors. This article reads:
Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand
made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected.
Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co., Inc. 13 that
"x x x solidarity does not make a solidary obligor an indispensable party in a suit filed by the creditor. Article 1216 of the
Civil Code says that the creditor `may proceed against anyone of the solidary debtors or some or all of them simultaneously'."
(Emphasis supplied)
Second Issue: whether Artigo's claim has been extinguished by full payment, waiver or abandonment
The De Castros claim that Artigo was fully paid on June 14, 1985, that is, Artigo was given "his proportionate share and no longer
entitled to any balance." According to them, Artigo was just one of the agents involved in the sale and entitled to a "proportionate
share" in the commission. They assert that Artigo did absolutely nothing during the second negotiation but to sign as a witness in
the deed of sale. He did not even prepare the documents for the transaction as an active real estate broker usually does.
The De Castros' arguments are flimsy.
A contract of agency which is not contrary to law, public order, public policy, morals or good custom is a valid contract, and
constitutes the law between the parties. 14 The contract of agency entered into by Constante with Artigo is the law between them
and both are bound to comply with its terms and conditions in good faith.
The mere fact that "other agents" intervened in the consummation of the sale and were paid their respective commissions cannot
vary the terms of the contract of agency granting Artigo a 5 percent commission based on the selling price. These "other agents"
turned out to be employees of Times Transit, the buyer Artigo introduced to the De Castros. This prompted the trial court to
observe:
"The alleged `second group' of agents came into the picture only during the so-called `second negotiation' and it is amusing to
note that these (sic) second group, prominent among whom are Atty. Del Castillo and Ms. Prudencio, happened to be employees
of Times Transit, the buyer of the properties. And their efforts were limited to convincing Constante to 'part away' with the
properties because the redemption period of the foreclosed properties is around the corner, so to speak. (tsn. June 6, 1991).
xxx
To accept Constante's version of the story is to open the floodgates of fraud and deceit. A seller could always pretend rejection of
the offer and wait for sometime for others to renew it who are much willing to accept a commission far less than the original
broker. The immorality in the instant case easily presents itself if one has to consider that the alleged `second group' are
the employees of the buyer, Times Transit and they have not bettered the offer secured by Mr. Artigo for P7 million.
It is to be noted also that while Constante was too particular about the unrenewed real estate broker's license of Mr. Artigo, he did
not bother at all to inquire as to the licenses of Prudencio and Castillo. (tsn, April 11, 1991, pp. 39-40)." 15 (Emphasis supplied)
In any event, we find that the 5 percent real estate broker's commission is reasonable and within the standard practice in the real
estate industry for transactions of this nature.
The De Castros also contend that Artigo's inaction as well as failure to protest estops him from recovering more than what was
actually paid him. The De Castros cite Article 1235 of the Civil Code which reads:
Art. 1235. When the obligee accepts the performance, knowing its incompleteness and irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with.
The De Castros' reliance on Article 1235 of the Civil Code is misplaced. Artigo's acceptance of partial payment of his commission
neither amounts to a waiver of the balance nor puts him in estoppel. This is the import of Article 1235 which was explained in this
wise:
"The word accept, as used in Article 1235 of the Civil Code, means to take as satisfactory or sufficient, or agree to an incomplete
or irregular performance. Hence, the mere receipt of a partial payment is not equivalent to the required acceptance of
performance as would extinguish the whole obligation." 16 (Emphasis supplied)
There is thus a clear distinction between acceptance and mere receipt. In this case, it is evident that Artigo merely received the
partial payment without waiving the balance. Thus, there is no estoppel to speak of.
The De Castros further argue that laches should apply because Artigo did not file his complaint in court until May 29, 1989, or
almost four years later. Hence, Artigo's claim for the balance of his commission is barred by laches.
Laches means the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due
diligence could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time, warranting
a presumption that the party entitled to assert it either has abandoned it or declined to assert it. 17
Artigo disputes the claim that he neglected to assert his rights. He was appointed as agent on January 24, 1984. The two lots
were finally sold in June 1985. As found by the trial court, Artigo demanded in April and July of 1985 the payment of his
commission by Constante on the basis of the selling price of P7.05 million but there was no response from Constante. 18 After it
became clear that his demands for payment have fallen on deaf ears, Artigo decided to sue on May 29, 1989.
Actions upon a written contract, such as a contract of agency, must be brought within ten years from the time the right of action
accrues.19 The right of action accrues from the moment the breach of right or duty occurs. From this moment, the creditor can
institute the action even as the ten-year prescriptive period begins to run. 20
The De Castros admit that Artigo's claim was filed within the ten-year prescriptive period. The De Castros, however, still maintain
that Artigo's cause of action is barred by laches. Laches does not apply because only four years had lapsed from the time of the

sale in June 1985. Artigo made a demand in July 1985 and filed the action in court on May 29, 1989, well within the ten-year
prescriptive period. This does not constitute an unreasonable delay in asserting one's right. The Court has ruled, "a delay within
the prescriptive period is sanctioned by law and is not considered to be a delay that would bar relief." 21 In explaining that
laches applies only in the absence of a statutory prescriptive period, the Court has stated "Laches is recourse in equity. Equity, however, is applied only in the absence, never in contravention, of statutory law.
Thus, laches, cannot, as a rule, be used to abate a collection suit filed within the prescriptive period mandated by the
Civil Code."22
Clearly, the De Castros' defense of laches finds no support in law, equity or jurisprudence.
Third issue: whether the determination of the purchase price was made in violation of the Rules on Evidence
The De Castros want the Court to re-examine the probative value of the evidence adduced in the trial court to determine whether
the actual selling price of the two lots was P7.05 million and not P3.6 million. The De Castros contend that it is erroneous to base
the 5 percent commission on a purchase price of P7.05 million as ordered by the trial court and the appellate court. The De
Castros insist that the purchase price is P3.6 million as expressly stated in the deed of sale, the due execution and authenticity of
which was admitted during the trial.
The De Castros believe that the trial and appellate courts committed a mistake in considering incompetent evidence and
disregarding the best evidence and parole evidence rules. They claim that the Court of Appeals erroneously affirmed sub silentio
the trial court's reliance on the various correspondences between Constante and Times Transit which were mere photocopies that
do not satisfy the best evidence rule. Further, these letters covered only the first negotiations between Constante and Times
Transit which failed; hence, these are immaterial in determining the final purchase price.
The De Castros further argue that if there was an undervaluation, Artigo who signed as witness benefited therefrom, and being
equally guilty, should be left where he presently stands. They likewise claim that the Court of Appeals erred in relying on evidence
which were not offered for the purpose considered by the trial court. Specifically, Exhibits "B", "C", "D" and "E" were not offered to
prove that the purchase price was P7.05 Million. Finally, they argue that the courts a quo erred in giving credence to the perjured
testimony of Artigo. They want the entire testimony of Artigo rejected as a falsehood because he was lying when he claimed at the
outset that he was a licensed real estate broker when he was not.
Whether the actual purchase price was P7.05 Million as found by the trial court and affirmed by the Court of Appeals, or P3.6
Million as claimed by the De Castros, is a question of fact and not of law. Inevitably, this calls for an inquiry into the facts and
evidence on record. This we can not do.
It is not the function of this Court to re-examine the evidence submitted by the parties, or analyze or weigh the evidence again. 23
This Court is not the proper venue to consider a factual issue as it is not a trier of facts. In petitions for review on certiorari as a
mode of appeal under Rule 45, a petitioner can only raise questions of law. Our pronouncement in the case of Cormero vs. Court
of Appeals24 bears reiteration:
"At the outset, it is evident from the errors assigned that the petition is anchored on a plea to review the factual conclusion
reached by the respondent court. Such task however is foreclosed by the rule that in petitions for certiorari as a mode of appeal,
like this one, only questions of law distinctly set forth may be raised. These questions have been defined as those that do not call
for any examination of the probative value of the evidence presented by the parties. (Uniland Resources vs. Development Bank of
the Philippines, 200 SCRA 751 [1991] citing Goduco vs. Court of appeals, et al., 119 Phil. 531; Hernandez vs. Court of Appeals,
149 SCRA 67). And when this court is asked to go over the proof presented by the parties, and analyze, assess and weigh them
to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence and
eventually, to the totality of the evidence of one party or the other, the court cannot and will not do the same. (Elayda vs. Court of
Appeals, 199 SCRA 349 [1991]). Thus, in the absence of any showing that the findings complained of are totally devoid of support
in the record, or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand, for this
court is not expected or required to examine or contrast the oral and documentary evidence submitted by the parties. (Morales vs.
Court of Appeals, 197 SCRA 391 [1991] citing Santa Ana vs. Hernandez, 18 SCRA 973 [1966])."
We find no reason to depart from this principle. The trial and appellate courts are in a much better position to evaluate properly the
evidence. Hence, we find no other recourse but to affirm their finding on the actual purchase price.1wphi1.nt
Fourth Issue: whether award of moral damages and attorney's fees is proper
The De Castros claim that Artigo failed to prove that he is entitled to moral damages and attorney's fees. The De Castros,
however, cite no concrete reason except to say that they are the ones entitled to damages since the case was filed to harass and
extort money from them.
Law and jurisprudence support the award of moral damages and attorney's fees in favor of Artigo. The award of damages and
attorney's fees is left to the sound discretion of the court, and if such discretion is well exercised, as in this case, it will not be
disturbed on appeal.25 Moral damages may be awarded when in a breach of contract the defendant acted in bad faith, or in
wanton disregard of his contractual obligation.26 On the other hand, attorney's fees are awarded in instances where "the defendant
acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." 27 There is no
reason to disturb the trial court's finding that "the defendants' lack of good faith and unkind treatment of the plaintiff in refusing to
give his due commission deserve censure." This warrants the award of P25,000.00 in moral damages and P 45,000.00 in
attorney's fees. The amounts are, in our view, fair and reasonable. Having found a buyer for the two lots, Artigo had already
performed his part of the bargain under the contract of agency. The De Castros should have exercised fairness and good
judgment in dealing with Artigo by fulfilling their own part of the bargain - paying Artigo his 5 percent broker's commission based
on the actual purchase price of the two lots.
WHEREFORE, the petition is denied for lack of merit. The Decision of the Court of Appeals dated May 4, 1994 in CA-G.R. CV No.
37996 is AFFIRMED in toto.
SO ORDERED.

G.R. Nos. L-50405-06 August 5, 1981

VICENTA P. TOLENTINO and JOSE TOLENTINO, petitioners,

vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, CONSUELO B. DE LA CRUZ, et al., respondents.

DE CASTRO, J.:
A petition for review by certiorari of the consolidated decision 1 of the respondent Court of Appeals in CA-G.R. Nos. 53907-R 2 and
54004-R 3 promulgated on February 22, 1978, as well as the Resolution 4 of said Court of Appeals, promulgated on March 30,
1979, denying the Motion for Reconsideration of the aforesaid consolidated decision.
Ceferino de la Cruz died in Davao City on April 19, 1960 leaving as his only heirs his widow, Consuelo de la Cruz, and their
children Hilario, Tarcelo, and Godofredo, all surnamed de la Cruz (hereinafter referred to as the De la Cruzes). At the time of his
demise, Ceferino left a parcel of land (homestead land) containing 131,705 square meters covered by Original Certificate of Title
No. P-16 in his name, issued by virtue of Homestead Patent No. V-1728.
In a deed of sale executed by the De la Cruzes on April 30, 1962, the homestead land was sold to the spouses Jose Tolentino and
Vicenta Tolentino (hereinafter referred to as the Tolentinos). The Tolentinos took immediate possession of the homestead land and
caused the cancellation of O.C.T. No. P-16 and the issuance of T.C.T. No. T-11135 in their names.
In 1963, the Tolentinos constituted a first mortgage over the homestead land, together with two other parcels of land covered by
T.C.T. Nos. 11085 and 11626 in their names, in favor of the Bank of the Philippine Islands, (BPI) Davao Branch, for a loan of
P40,000. Another mortgage was constituted over the said properties in 1964 in favor of Philippine Banking Corporation. The
Tolentinos failed to pay their mortgage indebtedness to the BPI upon maturity in the judicial foreclosure sale that followed,
conducted by the City Sheriff of Davao on July 15, 1967, BPI was the sole and highest bidder. The Sheriff's Certificate of Sale in
favor of BPI was registered only on April 2, 1969 in the Registry of Deeds of Davao.
Meanwhile, on February 4, 1967, the De la Cruzes filed an action 5 with the Court of First Instance of Davao against the Tolentinos
for the repurchase of the homestead land under Section 119 of the Public Land Act (CA 141), with a prayer for damages and
accounting of fruits on the ground that they had tried to repurchase said land extrajudicially for several tunes already but that the
Tolentinos would not heed their request, thus constraining the De la Cruzes to file a court action for the repurchase thereof. BPI
and Philippine Banking Corporation were included in the action as formal party defendants, being the first and second
mortgagees, respectively, of the homestead land. On June 1, 1967, the Tolentinos filed a motion for extension of ten (10) days
"from and after June lst" to file their answer. This motion was granted by the lower court.
On June 14, 1967, the De la Cruzes filed a petition to declare the Tolentinos in default for failure to file an answer. On that same
day, the Tolentinos filed a Motion to Dismiss the repurchase case on the ground that the complaint states no cause of action, but
said motion was denied by the lower court on the ground that the same was filed out of time. Subsequently, the Tolentinos were
declared in default and the De la Cruzes were allowed to present their evidence ex parte.
On November 24, 1967, the Tolentinos filed their answer interposing the defense that the complaint states no cause of action
because from the face of T.C.T. No. T-11135 alone, only the original patentee, Ceferino, is given the right to repurchase the
homestead land and not the De la Cruzes and because the complaint does not allege that there was a bona fide offer to
repurchase or a valid tender of payment, as well as an allegation that the De la Cruzes intended to pay not only the purchase
price but all the other expenses of the sale which includes the necessary and useful expenses made on the thing sold, as required
under Article 1616 of the new Civil Code.
Upon a manifestation filed by the De la Cruzes, the lower court issued an Order dated December 8, 1967 declaring the Tolentinos
as "having no standing" in the proceedings therein, to which the latter filed a motion for its reconsideration. This motion, as well as
their second Motion for Reconsideration, was denied by the lower court.
On March 27, 1969, the lower court rendered a decision allowing the De la Cruzes to repurchase the homestead land. Upon
payment by the De la Cruzes of the amount of P16,000 representing the repurchase price to the BPI, the latter executed a deed of
conveyance over the homestead land on August 25, 1969. On motion, the lower court issued a writ of possession in favor of the
De la Cruzes on September 4, 1969, which was served by the City Sheriff upon the Tolentinos on September 8, 1969. Accordingly,
the possession of the homestead land was delivered to the De la Cruzes on September 13,1969.
On September 19, 1969, the Tolentinos filed a petition for relief from the Decision dated March 27, 1969 on the ground of
excusable mistake in the counting of the reglementary period for the filing of an answer, with a prayer that the Order declaring
them in default be lifted and that they be allowed to present their defense.
On October 1, 1969, the Tolentinos filed a Motion to Quash the writ of possession alleging as principal grounds therefor the
absence of service on their counsel of a copy of the writ of possession, as well as the decision of the lower court declaring the De
la Cruzes entitled to repurchase the homestead land. The De la Cruzes filed an opposition to this Motion and prayed for the
investigation of an alleged tampering of records of the case particularly the page containing the proofs of the service of a copy of
the writ of possession as well as of the decision of the lower court to the Tolentinos. On October 4, 1969, the lower court denied
the Motion to Quash. A motion for reconsideration was likewise denied by the lower court on December 6,1969.
On October 6, 1970, the Tolentinos filed before the respondent Court of Appeals a petition for certiorari (CA-G.R. No. SP-46321)
against the De la Cruzes, wherein the Tolentinos raise the propriety of the issuance of the Writ of Possession alleging that it was
issued improvidently because the decision of the lower court declaring them in default was not served upon them and, therefore,
the judgment has not become final and executory. This petition was denied by the respondent court in a decision rendered on
November 15, 1971 on the ground that the Tolentino were actually and duly served with a copy of the questioned decision.
On March 5, 1973, the trial court issued an Order denying for lack of merit the petition for relief from judgment filed therein by the
Tolentinos. It likewise denied a motion for reconsideration filed subsequently by the Tolentinos in its Order of July 5, 1973.
Consequently, the Tolentinos appealed to the respondent Court of Appeals the above 2 Orders of the lower court, docketed
therein as CA G.R. No. 54004-R, claiming that the lower court erred and abused its discretion in not lifting its Order of default and
in not ordering resumption of trial for the reception of their evidence; and, in finally ordering execution of the default judgment.

In the meantime, on March 2, 1970, petitioner Vicente Tolentino went to see Mr. Ramon Lopez, Branch Manager of BPI Davao
Branch, carrying a letter of even date, offering to redeem the homestead property for P16,000 covered by a check. Upon being
informed that she can no longer redeem the same for the reason that it was already conveyed to the De la Cruzes pursuant to the
decision dated March 27, 1969, Vicenta left the office of the manager, bringing with her the letter which she later on sent to Mr.
Lopez by registered mail, inclosed In another letter dated March 3, 1970, reteirating her desire to redeem the homestead land. Mr.
Lopez sent said letters to the BPI's legal counsel with specific request to inform the Tolentinos that they can still redeem the two
other properties covered by T.C.T. Nos. 11085 and 11626 before the expiration of the redemption period upon payment of the
amount of P75,995.07 the balance remaining after deducting the amount of P16,000 paid by the De la Cruzes for the
homestead property. However, instead of complying with BPI's advice, Vicente consigned with the Office of the City Sheriff of
Davao a crossed PNB check for P91,995.07 drawn against the PNB Kidapawan Branch, Cotabato, on March 31, 1970, allegedly
for the redemption of the 3 lots, including the homestead land. The following day, however, upon advice of their counsel, Vicente
issued a stop-payment order against the said crossed check purportedly to protect her rights and to prevent BPI cashing said
check without returning all the properties which BPI had foreclosed and purchased.
Simultaneously with the consignation of the crossed check with the City Sheriff of Davao on March 31, 1970, the Tolentinos filed a
complaint (redemption case) 6 against BPI, amended on April 15, 1970, with the Davao Court of First Instance for the redemption
of their properties covered by T.C.T. Nos. 11135, 11085 and 11626, which were foreclosed by and sold to BPI, with a prayer for
damages, imputing bad faith on BPI in allegedly refusing to allow them to redeem all three lots and praying that BPI be ordered to
allow the Tolentinos to redeem their properties, to accept the payment consigned by them with the City Sheriff's Office of Davao,
and to pay moral and exemplary damages in the sum of P95,000 plus attorney's fees and costs of suit. BPI seasonably filed an
answer with counterclaim, denying the material averments of the complaint, the truth being that the Tolentinos did not have an
intention to redeem their said properties but only the homestead land. BPI counterclaimed for exemplary damages in the sum of
P5,000 and attorney's fees in the sum of P4,000 plus costs.
On April 10, 1973, the trial court rendered its decision dismissing the complaint of the Tolentinos, with no particular
pronouncement as to attorney's fees but with costs against the Tolentinos. From that decision, both the Tolentinos and BPI
appealed to the respondent Court of Appeals, docketed under CA-G.R. No. 53907- R, the Tolentinos claiming that l. The lower court erred in finding that the title to the land covered by T.C.T. No. 11135 legally passed to the heirs of Ceferino de la
Cruz;
2. The lower court erred in holding that defendant-appellant (herein respondent BPI) was legally justified, in refusing plaintiffsappellants' (Tolentinos) demand to be allowed to redeem the lands in question; and
3. The lower court erred in not granting plaintiffs-appellants' (Tolentinos) claim for damages.
while BPI claims that the trial court erred in not holding the Tolentinos liable for damages and attorney's fees despite its findings
that they acted in evident bad faith in
a. filing the complaint in the redemption case; and
b. issuing a crossed check drawn against the PNB, Kidapawan Branch, and likewise, in depositing said check with the Sheriff's
Office allegedly to redeem the foreclosed properties and, thereafter, the day following the deposit in issuing a stop-payment order
on said check.
Acting upon a written request dated March 26, 1976 filed by the Tolentinos for the consolidation of the two appealed cases, CAG.R. Nos. 53907-R (Civil Case No. 6830) and 54004-R (Civil Case No. 5432), the respondent Court of Appeals resolved, after
considering the comment of the BPI and the opposition of the De la Cruzes, to grant the motion for consolidation by the
Tolentinos.
In a consolidated decision 7 promulgated on February 22, 1978, the respondent Court of Appeals held:
In the Repurchase Case
(1) that "despite the order of the trial court as prayed for by appellants granting them a ten-day period of extension to file their
answer which was to expire on June 12, 1967, extended by operation of law to June 13, 1967, because June 12 was a holiday,
the Tolentinos failed to file their answer. Instead, on June 14, 1967, which was already late, the Tolentinos filed a motion to
dismiss, which is not even a responsive pleading, followed by their answer filed more than five months after, on November 24,
1967. The Tolentinos having failed to observe the requirements of the Rules of Court, no abuse of discretion could be imputed to
the court a quo in ordering them in default." 8 While "default orders are judicially frowned upon, Quirante vs. Verano (L-30207,
February 27, 1971, 37 SCRA 801) explicitly admonishes that such 'is true only in meritorious cases, that is, where the failure to file
answer on time was due to fraud, accident, mistake, or excusable negligence and when the existence of a good and substantial
defense has been shown.' No showing was made in the case at bar, that the Tolentinos' failure to file their answer on time was
due to any of these grounds. The contention and insistence of counsel for the Tolentinos that he filed through his clerk the motion
to dismiss on June 13 but only stamped June 14, 1967, attributing negligence instead to the docket clerk of the lower court was
not believed by the lower court, and we (Court of Appeals) find no cogent reason for believing otherwise. " 9 The Court of Appeals
ruled further that "compounding the errors, is the failure of the Tolentinos and/or their counsel to appear on January 12, 1968, the
date set for hearing of their petition for relief, the reason given by counsel that he was out-of-town when his clerk received the
notice, and that his said clerk did not notify him nor did he note said date on their trial calendar, being clearly a case of
inexcusable negligence. "
(2) that the supposed existence of a good and meritorious defense relied by the Tolentinos consisting of the alleged expiration of
the five-year period for the repurchase of the homestead lot under Commonwealth Act No. 141 is clearly belied by the records of
the case which show that the offer to repurchase the homestead land made by the De la Cruzes was well within the 5-year period
required by law; and
(3) that the Tolentinos' claim that the lower court ordered the execution of the default judgment before its finality due to the
absence of service of the default judgment on them is not well- taken because this issue has already been settled in CA G.R. No.
SP-46321 rendered on November 15, 1971, where it was found, after an investigation was conducted on the alleged
disappearance of that page of the record where the receipts by the respective parties were indicated, that the Tolentinos through
their counsel were duly served with a copy of the default judgment.

In the Redemption Case

(1) in dismissing the Tolentinos' appeal, the respondent court reasoned that although there is no quarrel that the Tolentinos had 12
months within which to redeem the properties sold at the Sheriff's sale counted from the time it was registered on April 2, 1969,
the problem, however, lies in the manner of the tender of payment made by them, granting they made one, "since consignation by
crossed check does not satisfy the requirements set forth in Article 1249 of the New Civil Code governing the payment of debts in
money, which 'shall be made in the Currency stipulate and if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.' Admittedly, a check, even if good when offered, does not satisfy the requirements of a legal
tender, and for that very reason, BPI was not legally bound to accept such tender of payment." Hence, no error was committed by
the court a quo in dismissing the Tolentinos' complaint for redemption with damages.
(2) in dismissing BPI's appeal, the respondent Court stated that "no bad faith should be attributed to the Tolentinos for filing the
instant case for redemption, in the absence of a proven motive to harass the BPI considering that in so filing these cases, the
Tolentinos acted in the belief that they are exercising certain rights under the law, and considering further that they, too, had to
spend in prosecuting their claims, no matter how unfounded they may have proven to be."
On April 24, 1978, the Tolentinos filed a Motion for Reconsideration 10 in the Court of Appeals of the decision rendered in CA-G.R.
No. 53907-R on the ground that "the right to redeem is not an obligation or debt but rather a privilege, hence, the provisions of
Article 1249 N.C.C. governing payment of debts in money" do not apply in this case; and, of the decision rendered in CA-G.R. No.
54004-R on the ground that the respondent court erred in not considering that the trial court abused its discretion in declaring the
Tolentinos in default, and that the period within which the De la Cruzes can repurchase the homestead land had already expired,
This Motion for Reconsideration was denied by the respondent court for lack of merit in a Resolution dated March 30, 1979.
Hence, the instant petition for review from the foregoing consolidated Decision and Resolution raising the following issues:
I
WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE CASE AT BAR;
II
WHETHER OR NOT THE TENDER OF PAYMENT AND CONSIGNATION MADE BY THE TOLENTINOS BEFORE THE CITY
SHERIFF OF DAVAO WERE VALID; and
III
WHETHER THE DEFAULT JUDGMENT AGAINST THE TOLENTINOS IN CIVIL CASE NO. 5432 (CA-G.R. No. 54004-R) HAS
BECOME FINAL AND EXECUTORY.
It is worthwhile to remember that Article 1249 of the new Civil Code deals with a mode of extinction of an obligation and expressly
provides for the medium in the "payment of debts." Thus, it provides that:
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in
the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
We are of the considered view that the aforequoted Article should not be applied in the instant case, hereinafter explained,
together with the exposition on the resolution of the second issue raised in this petition, the first two issues raised hinging
ultimately on whether the Tolentinos may redeem the properties in suit.
To start with, the Tolentinos are not indebted to BPI their mortgage indebtedness having been extinguished with the foreclosure
and sale of the mortgaged properties. After said foreclosure and sale, what remains is the right vested by law in favor of the
Tolentinos to redeem the properties within the prescribed period. This right of redemption is an absolute privilege, the exercise of
which is entirely dependent upon the will and discretion of the redemptioners. There is, thus, no legal obligation to exercise the
right of redemption. 11 Said right, can in no sense, be considered an obligation, for the Tolentinos are under no compulsion to
exercise the same. Should they choose not to exercise it, nobody can compel them to do so nor win such choice give rise to a
cause of action in favor of the purchaser at the auction sale. In fact, the relationship between said purchaser and the
redemptioners is not even that of creditor and debtor. 12
On the other hand, if the redemptioners choose to exercise their right of redemption, it is the policy of the law to aid rather than to
defeat the right of redemption. 13 It stands to reason therefore, that redemptions should be looked upon with favor and where no
injury is to follow, a liberal construction will be given to our redemption laws as well as to the exercise of the right of redemption. In
the instant case, the ends of justice would be better served by affording the Tolentinos the opportunity to redeem the properties in
question other than the homestead land, in line with the policy aforesaid, to which We adhere fully notwithstanding the reason
advanced by the Court of Appeals in its Resolution, denying a reconsideration of its decision, which reads:
We agree that the act of redeeming of a property mortgaged is not an obligation but a privilege, in the sense that the mortgagor
may or may not redeem his property. That of course is a privilege. He may choose to give up the property and have the mortgage
foreclosed, or redeem the property with the obligation of course to pay the loan or indebtedness. But where he elects to redeem
the property and he has to pay the loan for which the mortgage was constituted, then Art. 1249 of the Civil Code applies because
it involves now the 'payment of debts.' It is only the act of redeeming or not that is considered a privilege, but not the act of paying
the obligation once the mortgagor has elected to redeem the property, in which case the check issued or drawn shall produce the
effect of payment only when it has been cashed. 14
Under existing jurisprudence, what the redemptioner should pay, is not the amount of the "loan for which the mortgage was
constituted" as stated by the Court of Appeals, but the auction purchase price plus 1 % interest per month on the said amount up
to the time of redemption, together with the taxes or assessment paid by the purchaser after the purchase, if any. 15 And in this
connection, a formal offer to redeem, accompanied by a bona fide tender of the redemption price, although proper, is not essential
where, as in the instant case, the right to redeem is exercised thru the filing of judicial action, which as noted earlier was made
simultaneously with the deposit of the redemption price with the Sheriff, within the period of redemption. The formal offer to

redeem, accompanied by a bona fide tender of the redemption price within the period of redemption prescribed by law, is only
essential to preserve the right of redemption for future enforcement even beyond such period of redemption. The filing of the
action itself, within the period of redemption, is equivalent to a formal offer to redeem. 16 Should the court allow redemption, the
redemptioners should then pay the amount already adverted to.
Moreover, when the action to redeem was filed, a simultaneous deposit of the redemption money was tendered to the Sheriff and
under the last sentence of Section 31, Rule 39 of the Rules of Court, it is expressly provided that the tender of the redemption
money may be made to the Sheriff who made the sale. 17 And the redemption is not rendered in valid by the fact that the said
officer accepted a check for the amount necessary to make the redemption instead of requiring payment in money. It goes without
saying that if he had seen fit to do so, the officer could have required payment to be made in lawful money, and he undoubtedly, in
accepting a check, placed himself in a position where he could be liable to the purchaser at the public auction if any damage had
been suffered by the latter as a result of the medium in which payment was made. But this cannot affect the validity of the
payment. The check as a medium of payment in commercial transactions is too firmly established by usage to permit of any doubt
upon this point at the present day. 18 No importance may thus be attached to the circumstance that a stop-payment order was
issued against said check the day following the deposit, for the same will not militate against the right of the Tolentinos to redeem,
in the same manner that a withdrawal of the redemption money being deposited cannot be deemed to have forfeited the right to
redeem, such redemption being optional and not compulsory. 19 Withal, it is not clearly shown that said stop payment order was
made in bad faith. But while we uphold the right of redemption of the Tolentinos, the same does not apply to the homestead land,
for the reason that shall be indicated in the discussion of the third issue.
It is a matter beyond dispute that We can review decisions of the Court of Appeals only on errors of law, its findings 6f fact being
generally conclusive. BPI argued that the default judgment in Civil Case No. 5432 (CA-G.R. No. 54004-R) had already become
final and executory; that the lower court found, after an investigation was conducted on the matter, that petitioners were duly
served with the default judgment; that this finding was affirmed by the Court of Appeals in CA G.R. No. SP-46321 rendered on
November 15, 1971, which decision G.R. No. SP-46321 rendered on November 15, 1971, which decision had already been final
and, therefore, the question of whether or not petitioners were duly served with a copy of said judgment should now be considered
closed, said question being factual. 20
As may be expected, the Tolentinos maintain that said question is one of law; that they did not in fact receive a copy of the default
judgment; and that the only reason for the finding of the lower court that there was a valid service of default judgment was the sole
testimony of BPI's counsel, who cannot even recall the date when the alleged service was made, and there is no evidence as to
the mode of such service. 21
In resolving their diametrically opposed propositions, it should be remembered that for a question to be one of law, it must involve
no examination of the probative value of the evidence presented by the litigants or any of them. 22 The query here presented,
necessarily invites calibration of the evidence to determine whether or not there was really such service. As such, the question
must be deemed to be factual in character and content, and as correctly pointed out by BPI, the jurisprudence on the matter is that
findings of facts of the lower court are accorded the highest degree of respect. 23 It is not the function of this Court to analyze or
weight the evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the
lower court. 24
And as already intimated earlier, appreciation of evidence is within the domain of the respondent Court of Appeals because its
findings of facts, as a general rule, are not reviewable by the Supreme Court. 25 This has been the oft-repeated and wellestablished rule which has been reiterated in a long line of cases enumerated in Chan v. Court of Appeals 26 and Tapas v. Court of
Appeals, 27 and in the more recent cases of Baptista v. Carillo 28 and Vda. de Catindig v. Heirs of Catalino Roque, 29 and We find
no circumstance existing in this case, to justify a departure from the said rule, More importantly, the petitioners not having
appealed therefrom, the decision had already attained the character of finality. The question of service cannot now be reopened or
raised again in this proceedings for otherwise, there will be no end to a litigation. Public policy and sound practice demand that
judgment of courts should become final at some definite date fixed by law. 30
Finally, We find no abuse of discretion, much less a grave abuse thereof, committed by the lower court in issuing an order, which
was affirmed by respondent Court of Appeals, denying the Tolentinos' petition for relief from judgment for lack of merit, the same
being supported by substantial evidence.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the appealed consolidated decision and resolution of the Court of Appeals
are hereby MODIFIED and judgment is hereby rendered authorizing the petitioners to redeem the properties subject matter
hereof, other than the homestead land, within thirty (30) days from entry of judgment, and ordering private respondent BPI to
execute a deed of absolute conveyance thereof in favor of the petitioners upon payment by the latter of the purchase price
thereof, with 1% per month interest thereon in addition, up to the time of redemption, together with the amount of any taxes or
assessments which BPI may have paid thereon after purchase, if any. In all other respects, the aforesaid consolidated decision
and resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs at this instance.
SO ORDERED.

G.R. No. 105188 January 23, 1998

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner,
vs.
A.U. VALENCIA and CO. INC., FELIX PEARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and DELFIN JAO,
respondents.

KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa seeks to reverse and set
aside 1) the Decision dated 27 January 1992 of the Court of Appeals which affirmed with modification the decision of the trial
court; and 2) the Resolution dated 22 April 1992 of the same court, which denied petitioner's motion for reconsideration of the
above decision.

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred to as respondent Valencia,
for brevity) and Felix Pearroyo (hereinafter called respondent Pearroyo), filed with the Regional Trial Court of Pasig, Branch
151, a complaint for specific performance against herein petitioner Myron C. Papa, in his capacity as administrator of the Testate
Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to
respondent Pearroyo, through respondent Valencia, a parcel of land, consisting of 286.60 square meters, located at corner
Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer Certificate of Title No. 28993 of the Register of Deeds
of Quezon City; that prior to the alleged sale, the said property, together with several other parcels of land likewise owned by
Angela M. Butte, had been mortgaged by her to the Associated Banking Corporation (now Associated Citizens Bank); that after
the alleged sale, but before the title to the subject property had been released, Angela M. Butte passed away; that despite
representations made by herein respondents to the bank to release the title to the property sold to respondent Pearroyo, the
bank refused to release it unless and until all the mortgaged properties of the late Angela M. Butte were also redeemed; that in
order to protect his rights and interests over the property, respondent Pearroyo caused the annotation on the title of an adverse
claim as evidenced by Entry No. P.E.-6118/T-28993, inscribed on 18 January 1997.
The complaint further alleged that it was only upon the release of the title to the property, sometime in April 1977, that respondents
Valencia and Pearroyo discovered that the mortgage rights of the bank had been assigned to one Tomas L. Parpana (now
deceased), as special administrator of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein petitioner had been
collecting monthly rentals in the amount of P800.00 from the tenants of the property, knowing that said property had already been
sold to private respondents on 15 June 1973; that despite repeated demands from said respondents, petitioner refused and failed
to deliver the title to the property. Thereupon, respondents Valencia and Pearroyo filed a complaint for specific performance,
praying that petitioner be ordered to deliver to respondent Pearroyo the title to the subject property (TCT 28993); to turn over to
the latter the sum of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of P800.00 until the property is
delivered to respondent Pearroyo; to pay respondents the sum of P20,000.00 as attorney's fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking Corporation (now Associated
Citizens Bank). He contended, however, that the complaint did not state a cause of action; that the real property in interest was
the Testate Estate of Angela M. Butte, which should have been joined as a party defendant; that the case amounted to a claim
against the Estate of Angela M. Butte and should have been filed in Special Proceedings No. A-17910 before the Probate Court in
Quezon City; and that, if as alleged in the complaint, the property had been assigned to Tomas L. Parpana, as special
administrator of the Estate of Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise, claimed that he could not
recall in detail the transaction which allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession; that he
could not be held personally liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally, petitioner
asseverated that as a result of the filing of the case, he was compelled to hire the services of counsel for a fee of P20,000.00 for
which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Making common cause with
respondents Valencia and Pearroyo, respondent Jao alleged that the subject lot which had been sold to respondent Pearroyo
through respondent Valencia was in turn sold to him on 20 August 1973 for the sum of P71,500.00, upon his paying earnest
money in the amount of P5,000.00. He, therefore, prayed that judgment be rendered in favor of respondents, the latter in turn be
ordered to execute in his favor the appropriate deed of conveyance covering the property in question and to turn over to him the
rentals which aforesaid respondents sought to collect from petitioner Myron V. Papa.
Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to the property to respondents Valencia
and Pearroyo, who in turn failed to deliver the said title to him, he suffered mental anguish and serious anxiety for which he
sought payment of moral damages; and, additionally, the payment of attorney's fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party complaint against herein private
respondents, spouses Arsenio B. Reyes and Amanda Santos (respondent Reyes spouses, for short). He averred, among other's
that the late Angela M. Butte was the owner of the subject property; that due to non-payment of real estate tax said property was
sold at public auction the City Treasurer of Quezon City to the respondent Reyes spouses on 21 January 1980 for the sum of
P14,000.00; that the one-year period of redemption had expired; that respondents Valencia and Pearroyo had sued petitioner
Papa as administrator of the estate of Angela M. Butte, for the delivery of the title to the property; that the same aforenamed
respondents had acknowledged that the price paid by them was insufficient, and that they were willing to add a reasonable
amount or a minimum of P55,000.00 to the price upon delivery of the property, considering that the same was estimated to be
worth P143,000.00; that petitioner was willing to reimburse respondents Reyes spouses whatever amount they might have paid
for taxes and other charges, since the subject property was still registered in the name of the late Angela M. Butte; that it was
inequitable to allow respondent Reyes spouses to acquire property estimated to be worth P143,000.00, for a measly sum of
P14,000.00. Petitioner prayed that judgment be rendered canceling the tax sale to respondent Reyes spouses; restoring the
subject property to him upon payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus legal interest;
and, ordering respondents Valencia and Pearroyo to pay him at least P55,000.00 plus everything they might have to pay the
Reyes spouses in recovering the property.
Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's right to redeem the property.
At the trial, only respondent Pearroyo testified. All the other parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering the latter to allow the former to redeem the property in
question, by paying the sum of P14,000.00 plus legal interest of 12% thereon from January 21, 1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Pearroyo covering the property in question
and to deliver peaceful possession and enjoyment of the said property to the said plaintiff, free from any liens and encumbrances;
Should this not be possible, for any reason not attributable to defendant, said defendant is ordered to pay to plaintiff Felix
Pearroyo the sum of P45,000.00 plus legal interest of 12% from June 15, 1973;

3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a deed of absolute sale over the same property, upon the
latter's payment to the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay intervenor the sum of P5,000.00 plus legal interest of 12%
from August 23, 1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorney's fees and litigation expenses.
SO ORDERED. 1
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that the sale was never
"consummated" as he did not encash the check (in the amount of P40,000.00) given by respondents Valencia and Pearroyo in
payment of the full purchase price of the subject lot. He maintained that what said respondent had actually paid was only the
amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was dismissed because of failure to
file their appellant's brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial court's decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the appealed decision is MODIFIED, by ordering the defendantappellant to deliver to plaintiff-appellees the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession
and enjoyment of the lot in question or, if the owner's duplicate certificate cannot be produced, to authorize the Register of Deeds
to cancel it and issue a certificate of title in the name of Felix Pearroyo. In all other respects, the decision appealed from is
AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED. 2
In affirming the trial court's decision, respondent court held that contrary to petitioner's claim that he did not encash the aforesaid
check, and therefore, the sale was not consummated, there was no evidence at all that petitioner did not, in fact, encash said
check. On the other hand, respondent Pearroyo testified in court that petitioner Papa had received the amount of P45,000.00
and issued receipts therefor. According to respondent court, the presumption is that the check was encashed, especially since the
payment by check was not denied by defendant-appellant (herein petitioner) who, in his Answer, merely alleged that he "can no
longer recall the transaction which is supposed to have happened 10 years ago." 3
On petitioner's claim that he cannot be held personally liable as he had acted merely as attorney-in-fact of the owner, Angela M.
Butte, respondent court held that such contention is without merit. This action was not brought against him in his personal
capacity, but in his capacity as the administrator of the Testate Estate of Angela M. Butte. 4
On petitioner's contention that the estate of Angela M. Butte should have been joined in the action as the real party in interest,
respondent court held that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of Angela M. Butte does not have to be
joined in the action. Likewise, the estate of Ramon Papa, Jr., is not an indispensable party under Rule 3, Section 7 of the same
Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a party to the Deed of Absolute Sale, and it is basic law that
contracts bind only those who are parties thereto. 5
Respondent court observed that the conditions under which the mortgage rights of the bank were assigned are not clear. In any
case, any obligation which the estate of Angela M. Butte might have to the estate of Ramon Papa, Jr. is strictly between them.
Respondents Valencia and Pearroyo are not bound by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which motion was denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN QUESTION WAS CONSUMMATED IS
GROUNDED ON SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT, ERRED BECAUSE IT, IN EFFECT,
CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF RAMON
PAPA, JR. WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF
RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
CASE. 6
Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of the subject property had been
consummated. He contends that such a conclusion is based on the erroneous presumption that the check (in the amount of
P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in part, that payment by checks shall produce
the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired. 7
Petitioner insists that he never cashed said check; and, such being the case, its delivery never produced the effect of payment.
Petitioner, while admitting that he had issued receipts for the payments, asserts that said receipts, particularly the receipt of PCIB
Check No. 761025 in the amount of P40,000.00, do not prove payment. He avers that there must be a showing that said check
had been encashed. If, according to petitioner, the check had been encashed, respondent Pearroyo should have presented
PCIB Check No. 761025 duly stamped received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of respondents Valencia and Pearroyo, as
evidenced by a letter addressed to him in which said respondents wrote, in part:
. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you the
aforementioned amount of P75,000.00 for the release and cancellation of subject property's mortgage. The money is with me and
if it is alright with you, I would like to tender the payment as soon as possible. . . . 8
We find no merit in petitioner's arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given petitioner Myron C. Papa the amounts of Five

Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on 15 June 1973, in
payment of the purchase price of the subject lot. Petitioner himself admits having received said amounts, 9 and having issued
receipts therefor. 10 Petitioner's assertion that he never encashed the aforesaid check is not substantiated and is at odds with his
statement in his answer that "he can no longer recall the transaction which is supposed to have happened 10 years ago." After
more than ten (10) years from the payment in party by cash and in part by check, the presumption is that the check had been
encashed. As already stated, he even waived the presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in
the impairment of the check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil
Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a
check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by
want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. 11 It has,
likewise, been held that if no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury 12 unless
presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of check or
other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is
impaired. The payee of a check would be a creditor under this provision and if its no-payment is caused by his negligence,
payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. 13
Considering that respondents Valencia and Pearroyo had fulfilled their part of the contract of sale by delivering the payment of
the purchase price, said respondents, therefore, had the right to compel petitioner to deliver to them the owner's duplicate of TCT
No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that the conditions under which
said mortgage rights of the bank were assigned are not clear. Indeed, a perusal of the original records of the case would show that
there is nothing there that could shed light on the transactions leading to the said assignment of rights; nor is there any evidence
on record of the conditions under which said mortgage rights were assigned. What is certain is that despite the said assignment of
mortgage rights, the title to the subject property has remained in the name of the late Angela M. Butte. 14 This much is admitted by
petitioner himself in his answer to respondent's complaint as well as in the third-party complaint that petitioner filed against
respondent-spouses Arsenio B. Reyes and Amanda Santos. 15 Assuming arquendo that the mortgage rights of the Associated
Citizens Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned mortgage rights validly exists
and constitute a lien on the property, the estate may file the appropriate action to enforce such lien. The cause of action for
specific performance which respondents Valencia and Pearroyo have against petitioner is different from the cause of action
which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on the property by reason of its being an
alleged assignee of the bank's rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the Rules of Court, an executor or
administrator may sue or be sued without joining the party for whose benefit the action is presented or defended, thus:
Sec. 3. Representative parties. A trustee of an express trust, a guardian, executor or administrator, or a party authorized by
statute, may sue or be sued without joining the party for whose benefit the action is presented or defended; but the court may, at
any stage of the proceedings, order such beneficiary to be made a party. An agent acting in his own name and for the benefit of an
undisclosed principal may sue or be sued without joining the principal except when the contract involves things belonging to the
principal. 16
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determination of the action can be had.
Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has over the property may still be enforced
regardless of the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Appeals, dated 27 January 1992 is
AFFIRMED.
SO ORDERED.

G.R. Nos. 173090-91

September 7, 2011

UNION BANK OF THE PHILIPPINES, Petitioner,

vs.
SPOUSES RODOLFO T. TIU AND VICTORIA N. TIU, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari seeking to reverse the Joint Decision 1 of the Court of Appeals dated February 21, 2006
in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253, as well as the Resolution 2 dated June 1, 2006 denying the Motion for
Reconsideration.
The factual and procedural antecedents of this case are as follows:
On November 21, 1995, petitioner Union Bank of the Philippines (Union Bank) and respondent spouses Rodolfo T. Tiu and
Victoria N. Tiu (the spouses Tiu) entered into a Credit Line Agreement (CLA) whereby Union Bank agreed to make available to the
spouses Tiu credit facilities in such amounts as may be approved. 3 From September 22, 1997 to March 26, 1998, the spouses Tiu
took out various loans pursuant to this CLA in the total amount of three million six hundred thirty-two thousand dollars
(US$3,632,000.00), as evidenced by promissory notes:
PN No.

Amount in US$

Date Granted

87/98/111

72,000.00

02/16/98

87/98/108

84,000.00

02/13/98

87/98/152

320,000.00

03/02/98

87/98/075

150,000.00

01/30/98

87/98/211

32,000.00

03/26/98

87/98/071

110,000.00

01/29/98

87/98/107

135,000.00

02/13//98

87/98/100

75,000.00

02/12/98

87/98/197

195,000.00

03/19/98

87/97/761

60,000.00

09/26/97

87/97/768

30,000.00

09/29/97

87/97/767

180,000.00

09/29/97

87/97/970

110,000.00

12/29/97

87/97/747

50,000.00

09/22/97

87/96/944

605,000.00

12/19/97

87/98/191

470,000.00

03/16/98

87/98/198

505,000.00

03/19/98

87/98/090

449,000.00

02/09/98

US$3,632,000.004
On June 23, 1998, Union Bank advised the spouses Tiu through a letter 5 that, in view of the existing currency risks, the loans shall
be redenominated to their equivalent Philippine peso amount on July 15, 1998. On July 3, 1998, the spouses Tiu wrote to Union
Bank authorizing the latter to redenominate the loans at the rate of US$1=P41.406 with interest of 19% for one year.7
On December 21, 1999, Union Bank and the spouses Tiu entered into a Restructuring Agreement. 8 The Restructuring Agreement
contains a clause wherein the spouses Tiu confirmed their debt and waived any action on account thereof. To quote said clause:
1. Confirmation of Debt The BORROWER hereby confirms and accepts that as of December 8, 1999, its outstanding principal
indebtedness to the BANK under the Agreement and the Notes amount to ONE HUNDRED FIFTY[-]FIVE MILLION THREE
HUNDRED SIXTY[-]FOUR THOUSAND EIGHT HUNDRED PESOS (PHP 155,364,800.00) exclusive of interests, service and
penalty charges (the "Indebtedness") and further confirms the correctness, legality, collectability and enforceability of the
Indebtedness. The BORROWER unconditionally waives any action, demand or claim that they may otherwise have to dispute the
amount of the Indebtedness as of the date specified in this Section, or the collectability and enforceability thereof. It is the
understanding of the parties that the BORROWERs acknowledgment, affirmation, and waiver herein are material considerations
for the BANKs agreeing to restructure the Indebtedness which would have already become due and payable as of the above date
under the terms of the Agreement and the Notes.9
The restructured amount (P155,364,800.00) is the sum of the following figures: (1) P150,364,800.00, which is the value of the
US$3,632,000.00 loan as redenominated under the above-mentioned exchange rate of US$1=P41.40; and (2) P5,000,000.00, an
additional loan given to the spouses Tiu to update their interest payments. 10
Under the same Restructuring Agreement, the parties declared that the loan obligation to be restructured (after deducting the
dacion price of properties ceded by the Tiu spouses and adding: [1] the taxes, registration fees and other expenses advanced by
Union Bank in registering the Deeds of Dation in Payment; and [2] other fees and charges incurred by the Indebtedness) is one
hundred four million six hundred sixty-eight thousand seven hundred forty-one pesos (P104,668,741.00) (total restructured
amount).11 The Deeds of Dation in Payment referred to are the following:
1. Dation of the Labangon properties Deed executed by Juanita Tiu, the mother of respondent Rodolfo Tiu, involving ten parcels
of land with improvements located in Labangon, Cebu City and with a total land area of 3,344 square meters, for the amount of
P25,130,000.00. The Deed states that these properties shall be leased to the Tiu spouses at a monthly rate of P98,000.00 for a
period of two years.12
2. Dation of the Mandaue property Deed executed by the spouses Tiu involving one parcel of land with improvements located in
A.S. Fortuna St., Mandaue City, covered by TCT No. T-31604 and with a land area of 2,960 square meters, for the amount of
P36,080,000.00. The Deed states that said property shall be leased to the Tiu spouses at a monthly rate of P150,000.00 for a
period of two years.13
As likewise provided in the Restructuring Agreement, the spouses Tiu executed a Real Estate Mortgage in favor of Union Bank
over their "residential property inclusive of lot and improvements" located at P. Burgos St., Mandaue City, covered by TCT No. T11951 with an area of 3,096 square meters.14
The spouses Tiu undertook to pay the total restructured amount (P104,668,741.00) via three loan facilities (payment schemes).
The spouses Tiu claim to have made the following payments: (1) P15,000,000.00 on August 3, 1999; and (2) another
P13,197,546.79 as of May 8, 2001. Adding the amounts paid under the Deeds of Dation in Payment, the spouses Tiu postulate
that their payments added up to P89,407,546.79.15
Asserting that the spouses Tiu failed to comply with the payment schemes set up in the Restructuring Agreement, Union Bank
initiated extrajudicial foreclosure proceedings on the residential property of the spouses Tiu, covered by TCT No. T-11951. The
property was to be sold at public auction on July 18, 2002.

The spouses Tiu, together with Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu, filed with the
Regional Trial Court (RTC) of Mandaue City a Complaint seeking to have the Extrajudicial Foreclosure declared null and void. The
case was docketed as Civil Case No. MAN-4363. 16 Named as defendants were Union Bank and Sheriff IV Veronico C. Ouano
(Sheriff Oano) of Branch 55, RTC, Mandaue City. Complainants therein prayed for the following: (1) that the spouses Tiu be
declared to have fully paid their obligation to Union Bank; (2) that defendants be permanently enjoined from proceeding with the
auction sale; (3) that Union Bank be ordered to return to the spouses Tiu their properties as listed in the Complaint; (4) that Union
Bank be ordered to pay the plaintiffs the sum of P10,000,000.00 as moral damages, P2,000,000.00 as exemplary damages,
P3,000,000.00 as attorneys fees and P500,000.00 as expenses of litigation; and (5) a writ of preliminary injunction or temporary
restraining order be issued enjoining the public auction sale to be held on July 18, 2002. 17
The spouses Tiu claim that from the beginning the loans were in pesos, not in dollars. Their office clerk, Lilia Gutierrez, testified
that the spouses Tiu merely received the peso equivalent of their US$3,632,000.00 loan at the rate of US$1=P26.00. The spouses
Tiu further claim that they were merely forced to sign the Restructuring Agreement and take up an additional loan of
P5,000,000.00, the proceeds of which they never saw because this amount was immediately applied by Union Bank to interest
payments.18
The spouses Tiu allege that the foreclosure sale of the mortgaged properties was invalid, as the loans have already been fully
paid. They also allege that they are not the owners of the improvements constructed on the lot because the real owners thereof
are their co-petitioners, Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu. 19
The spouses Tiu further claim that prior to the signing of the Restructuring Agreement, they entered into a Memorandum of
Agreement with Union Bank whereby the former deposited with the latter several certificates of shares of stock of various
companies and four certificates of title of various parcels of land located in Cebu. The spouses Tiu claim that these properties
have not been subjected to any lien in favor of Union Bank, yet the latter continues to hold on to these properties and has not
returned the same to the former.20
On the other hand, Union Bank claims that the Restructuring Agreement was voluntarily and validly entered into by both parties.
Presenting as evidence the Warranties embodied in the Real Estate Mortgage, Union Bank contends that the foreclosure of the
mortgage on the residential property of the spouses Tiu was valid and that the improvements thereon were absolutely owned by
them. Union Bank denies receiving certificates of shares of stock of various companies or the four certificates of title of various
parcels of land from the spouses Tiu. However, Union Bank also alleges that even if said certificates were in its possession it is
authorized under the Restructuring Agreement to retain any and all properties of the debtor as security for the loan. 21
The RTC issued a Temporary Restraining Order 22 and, eventually, a Writ of Preliminary Injunction 23 preventing the sale of the
residential property of the spouses Tiu. 24
On December 16, 2004, the RTC rendered its Decision 25 in Civil Case No. MAN-4363 in favor of Union Bank. The dispositive
portion of the Decision read:
WHEREFORE, premises considered, judgment is hereby rendered dismissing the Complaint and lifting and setting aside the Writ
of Preliminary Injunction. No pronouncement as to damages, attorneys fees and costs of suit. 26
In upholding the validity of the Restructuring Agreement, the RTC held that the spouses Tiu failed to present any evidence to
prove either fraud or intimidation or any other act vitiating their consent to the same. The exact obligation of the spouses Tiu to
Union Bank is therefore P104,668,741.00, as agreed upon by the parties in the Restructuring Agreement. As regards the
contention of the spouses Tiu that they have fully paid their indebtedness, the RTC noted that they could not present any detailed
accounting as to the total amount they have paid after the execution of the Restructuring Agreement. 27
On January 4, 2005, Union Bank filed a Motion for Partial Reconsideration, 28 protesting the finding in the body of the December
16, 2004 Decision that the residential house on Lot No. 639 is not owned by the spouses Tiu and therefore should be excluded
from the real properties covered by the real estate mortgage. On January 6, 2005, the spouses Tiu filed their own Motion for
Partial Reconsideration and/or New Trial.29 They alleged that the trial court failed to rule on their fourth cause of action wherein
they mentioned that they turned over the following titles to Union Bank: TCT Nos. 30271, 116287 and 116288 and OCT No. 03538. They also prayed for a partial new trial and for a declaration that they have fully paid their obligation to Union Bank. 30
On January 11, 2005, the spouses Tiu received from Sheriff Oano a Second Notice of Extra-judicial Foreclosure Sale of Lot No.
639 to be held on February 3, 2005. To prevent the same, the Tiu spouses filed with the Court of Appeals a Petition for Prohibition
and Injunction with Application for TRO/Writ of Preliminary Injunction. 31 The petition was docketed as CA-G.R. SP No. 00253. The
Court of Appeals issued a Temporary Restraining Order on January 27, 2005. 32
On January 19, 2005, the RTC issued an Order denying Union Banks Motion for Partial Reconsideration and the Tiu spouses
Motion for Partial Reconsideration and/or New Trial.33
Both the spouses Tiu and Union Bank appealed the case to the Court of Appeals. 34 The two appeals were given a single docket
number, CA-G.R. CEB-CV No. 00190. Acting on a motion filed by the spouses Tiu, the Court of Appeals consolidated CA-G.R. SP
No. 00253 with CA-G.R. CEB-CV No. 00190.35
On April 19, 2005, the Court of Appeals issued a Resolution finding that there was no need for the issuance of a Writ of
Preliminary Injunction as the judgment of the lower court has been stayed by the perfection of the appeal therefrom. 36
On May 9, 2005, Sheriff Oano proceeded to conduct the extrajudicial sale. Union Bank submitted the lone bid of
P18,576,000.00.37 On June 14, 2005, Union Bank filed a motion with the Court of Appeals praying that Sheriff Oano be ordered to
issue a definite and regular Certificate of Sale. 38 On July 21, 2005, the Court of Appeals issued a Resolution denying the Motion
and suspending the auction sale at whatever stage, pending resolution of the appeal and conditioned upon the filing of a bond in
the amount of P18,000,000.00 by the Tiu spouses.39 The Tiu spouses failed to file said bond.40
On February 21, 2006, the Court of Appeals rendered the assailed Joint Decision in CA-G.R. CV No. 00190 and CA-G.R. SP No.
00253. The Court of Appeals dismissed the Petition for Prohibition, CA-G.R. SP No. 00253, on the ground that the proper venue
for the same is with the RTC.41
On the other hand, the Court of Appeals ruled in favor of the spouses Tiu in CA-G.R. CV No. 00190. The Court of Appeals held
that the loan transactions were in pesos, since there was supposedly no stipulation the loans will be paid in dollars and since no
dollars ever exchanged hands. Considering that the loans were in pesos from the beginning, the Court of Appeals reasoned that

there is no need to convert the same. By making it appear that the loans were originally in dollars, Union Bank overstepped its
rights as creditor, and made unwarranted interpretations of the original loan agreement. According to the Court of Appeals, the
Restructuring Agreement, which purportedly attempts to create a novation of the original loan, was not clearly authorized by the
debtors and was not supported by any cause or consideration. Since the Restructuring Agreement is void, the original loan of
P94,432,000.00 (representing the amount received by the spouses Tiu of US$3,632,000.00 using the US$1=P26.00 exchange
rate) should subsist. The Court of Appeals likewise invalidated (1) the P5,000,000.00 charge for interest in the Restructuring
Agreement, for having been unilaterally imposed by Union Bank; and (2) the lease of the properties conveyed in dacion en pago,
for being against public policy. 42
In sum, the Court of Appeals found Union Bank liable to the spouses Tiu in the amount of P927,546.79. For convenient reference,
we quote relevant portion of the Court of Appeals Decision here:
To summarize the obligation of the Tiu spouses, they owe Union Bank P94,432,000.00. The Tiu spouses had already paid Union
Bank the amount of P89,407,546.79. On the other hand, Union Bank must return to the Tiu spouses the illegally collected rentals
in the amount of P5,952,000.00. Given these findings, the obligation of the Tiu spouses has already been fully paid. In fact, it is
the Union Bank that must return to the Tiu spouses the amount of NINE HUNDRED TWENTY[-]SEVEN THOUSAND FIVE
HUNDRED FORTY[-]SIX PESOS AND SEVENTY[-]NINE CENTAVOS (P927,546.79).43
With regard to the ownership of the improvements on the subject mortgaged property, the Court of Appeals ruled that it belonged
to respondent Rodolfo Tius father, Jose Tiu, since 1981. According to the Court of Appeals, Union Bank should not have relied on
warranties made by debtors that they are the owners of the property. The appellate court went on to permanently enjoin Union
Bank from foreclosing the mortgage not only of the property covered by TCT No. T-11951, but also any other mortgage over any
other property of the spouses Tiu.44
The Court of Appeals likewise found Union Bank liable to return the certificates of stocks and titles to real properties of the
spouses Tiu in its possession. The appellate court held that Union Bank made judicial admissions of such possession in its Reply
to Plaintiffs Request for Admission. 45 In the event that Union Bank can no longer return these certificates and titles, it was
mandated to shoulder the cost for their replacement.46
Finally, the Court of Appeals took judicial notice that before or during the financial crisis, banks actively convinced debtors to make
dollar loans in the guise of benevolence, saddling borrowers with loans that ballooned twice or thrice their original loans. The
Court of Appeals, noting "the cavalier way with which banks exploited and manipulated the situation," 47 held Union Bank liable to
the spouses Tiu for P100,000.00 in moral damages, P100,000.00 in exemplary damages, and P50,000.00 in attorneys fees.48
The Court of Appeals disposed of the case as follows:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us permanently enjoining Union Bank from
foreclosing the mortgage of the residential property of the Tiu spouses which is covered by Transfer Certificate of Title No. 11951
and from pursuing other foreclosure of mortgages over any other properties of the Tiu spouses for the above-litigated debt that
has already been fully paid. If a foreclosure sale has already been made over such properties, this Court orders the cancellation of
such foreclosure sale and the Certificate of Sale thereof if any has been issued. This Court orders Union Bank to return to the Tiu
spouses the amount of NINE HUNDRED TWENTY[-]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX PESOS AND
SEVENTY[-]NINE CENTAVOS (P927,546.79) representing illegally collected rentals. This Court also orders Union Bank to return
to the Tiu spouses all the certificates of shares of stocks and titles to real properties of the Tiu spouses that were deposited to it or,
in lieu thereof, to pay the cost for the replacement and issuance of new certificates and new titles over the said properties. This
Court finally orders Union Bank to pay the Tiu spouses ONE HUNDRED THOUSAND PESOS (P100,000.00) in moral damages,
ONE HUNDRED THOUSAND PESOS (P100,000.00) in exemplary damages, FIFTY THOUSAND PESOS (P50,000.00) in
attorneys fees and cost, both in the lower court and in this Court. 49
On June 1, 2006, the Court of Appeals rendered the assailed Resolution denying Union Banks Motion for Reconsideration.
Hence, this Petition for Review on Certiorari, wherein Union Bank submits the following issues for the consideration of this Court:
1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT CONCLUDED
THAT THERE WERE NO DOLLAR LOANS OBTAINED BY [THE] TIU SPOUSES FROM UNION BANK DESPITE [THE] CLEAR
ADMISSION OF INDEBTEDNESS BY THE BORROWER-MORTGAGOR TIU SPOUSES.
2. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT NULLIFIED
THE RESTRUCTURING AGREEMENT BETWEEN TIU SPOUSES AND UNION BANK FOR LACK OF CAUSE OR
CONSIDERATION DESPITE THE ADMISSION OF THE BORROWER-MORTGAGOR TIU SPOUSES OF THE DUE AND
VOLUNTARY EXECUTION OF SAID RESTRUCTURING AGREEMENT.
3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT
PERMANENTLY ENJOINED UNION BANK FROM FORECLOSING THE MORTGAGE ON THE RESIDENTIAL PROPERTY OF
THE TIU SPOUSES DESPITE THE ADMISSION OF NON-PAYMENT OF THEIR OUTSTANDING LOAN TO THE BANK BY THE
BORROWER-MORTGAGOR TIU SPOUSES;
4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT FIXED THE
AMOUNT OF THE OBLIGATION OF RESPONDENT SPOUSES CONTRARY TO THE PROVISIONS OF THE PROMISSORY
NOTES, RESTRUCTURING AGREEMENT AND [THE] VOLUNTARY ADMISSIONS BY BORROWER-MORTGAGOR TIU
SPOUSES;
5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT RULED ON
THE ALLEGED RENTALS PAID BY RESPONDENT SPOUSES WITHOUT ANY FACTUAL BASIS;
6. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT HELD
WITHOUT ANY FACTUAL BASIS THAT THE LOAN OBLIGATION OF TIU SPOUSES HAS BEEN FULLY PAID;
7. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT HELD
WITHOUT ANY FACTUAL BASIS THAT THE HOUSE INCLUDED IN THE REAL ESTATE MORTGAGE DID NOT BELONG TO
THE TIU SPOUSES.
8. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR IN ORDERING UNION

BANK TO RETURN THE CERTIFICATES OF SHARES OF STOCK AND TITLES TO REAL PROPERTIES OF TIU SPOUSES
ALLEGEDLY IN THE POSSESSION OF UNION BANK.
9. WHETHER OR NOT THE COURT OF APPEALS VIOLATED THE DOCTRINES AND PRINCIPLES ON APPELLATE
JURISDICTION.
10. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR IN AWARDING
DAMAGES AGAINST UNION BANK.50
Validity of the Restructuring Agreement
As previously discussed, the Court of Appeals declared that the Restructuring Agreement is void on account of its being a failed
novation of the original loan agreements. The Court of Appeals explained that since there was no stipulation that the loans will be
paid in dollars, and since no dollars ever exchanged hands, the original loan transactions were in pesos. 51 Proceeding from this
premise, the Court of Appeals held that the Restructuring Agreement, which was meant to convert the loans into pesos, was
unwarranted. Thus, the Court of Appeals reasoned that:
Be that as it may, however, since the loans of the Tiu spouses from Union Bank were peso loans from the very beginning, there is
no need for conversion thereof. A Restructuring Agreement should merely confirm the loans, not add thereto. By making it appear
in the Restructuring Agreement that the loans were originally dollar loans, Union Bank overstepped its rights as a creditor and
made unwarranted interpretations of the original loan agreement. This Court is not bound by such interpretations made by Union
Bank. When one party makes an interpretation of a contract, he makes it at his own risk, subject to a subsequent challenge by the
other party and a modification by the courts. In this case, that party making the interpretation is not just any party, but a well
entrenched and highly respected bank. The matter that was being interpreted was also a financial matter that is within the
profound expertise of the bank. A normal person who does not possess the same financial proficiency or acumen as that of a bank
will most likely defer to the latters esteemed opinion, representations and interpretations. It has been often stated in our
jurisprudence that banks have a fiduciary duty to their depositors. According to the case of Bank of the Philippine Islands vs. IAC
(G.R. No. 69162, February 21, 1992), "as a business affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of
their relationship." Such fiduciary relationship should also extend to the banks borrowers who, more often than not, are also
depositors of the bank. Banks are in the business of lending while most borrowers hardly know the basics of such business. When
transacting with a bank, most borrowers concede to the expertise of the bank and consider their procedures, pronouncements and
representations as unassailable, whether such be true or not. Therefore, when there is a doubtful banking transaction, this Court
will tip the scales in favor of the borrower.
Given the above ruling, the Restructuring Agreement, therefore, between the Tiu spouses and Union Bank does not operate to
supersede all previous loan documents, as claimed by Union Bank. But the said Restructuring Agreement, as it was crafted by
Union Bank, does not merely confirm the original loan of the Tiu spouses but attempts to create a novation of the said original loan
that is not clearly authorized by the debtors and that is not supported by any cause or consideration. According to Article 1292 of
the New Civil Code, in order that an obligation may by extinguished by another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Such
is not the case in this instance. No valid novation of the original obligation took place. Even granting arguendo that there was a
novation, the sudden change in the original amount of the loan to the new amount declared in the Restructuring Agreement is not
supported by any cause or consideration. Under Article 1352 of the Civil Code, contracts without cause, or with unlawful cause,
produce no effect whatever. A contract whose cause did not exist at the time of the transaction is void. Accordingly, Article 1297 of
the New Civil Code mandates that, if the new obligation is void, the original one shall subsist, unless the parties intended that the
former relation should be extinguished at any event. Since the Restructuring Agreement is void and since there was no intention to
extinguish the original loan, the original loan shall subsist. 52
Union Bank does not dispute that the spouses Tiu received the loaned amount of US$3,632,000.00 in Philippine pesos, not
dollars, at the prevailing exchange rate of US$1=P26.53 However, Union Bank claims that this does not change the true nature of
the loan as a foreign currency loan, 54 and proceeded to illustrate in its Memorandum that the spouses Tiu obtained favorable
interest rates by opting to borrow in dollars (but receiving the equivalent peso amount) as opposed to borrowing in pesos. 55
We agree with Union Bank on this point. Although indeed, the spouses Tiu received peso equivalents of the borrowed amounts,
the loan documents presented as evidence, i.e., the promissory notes, 56 expressed the amount of the loans in US dollars and not
in any other currency. This clearly indicates that the spouses Tiu were bound to pay Union Bank in dollars, the amount stipulated
in said loan documents. Thus, before the Restructuring Agreement, the spouses Tiu were bound to pay Union Bank the amount of
US$3,632,000.00 plus the interest stipulated in the promissory notes, without converting the same to pesos. The spouses Tiu,
who are in the construction business and appear to be dealing primarily in Philippine currency, should therefore purchase the
necessary amount of dollars to pay Union Bank, who could have justly refused payment in any currency other than that which was
stipulated in the promissory notes.
We disagree with the finding of the Court of Appeals that the testimony of Lila Gutierrez, which merely attests to the fact that the
spouses Tiu received the peso equivalent of their dollar loan, proves the intention of the parties that such loans should be paid in
pesos. If such had been the intention of the parties, the promissory notes could have easily indicated the same.
Such stipulation of payment in dollars is not prohibited by any prevailing law or jurisprudence at the time the loans were taken. In
this regard, Article 1249 of the Civil Code provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines.
Although the Civil Code took effect on August 30, 1950, jurisprudence had upheld 57 the continued effectivity of Republic Act No.
529, which took effect earlier on June 16, 1950. Pursuant to Section 1 58 of Republic Act No. 529, any agreement to pay an
obligation in a currency other than the Philippine currency is void; the most that could be demanded is to pay said obligation in
Philippine currency to be measured in the prevailing rate of exchange at the time the obligation was incurred. 59 On June 19, 1964,
Republic Act No. 4100 took effect, modifying Republic Act No. 529 by providing for several exceptions to the nullity of agreements
to pay in foreign currency.60
On April 13, 1993, Central Bank Circular No. 1389 61 was issued, lifting foreign exchange restrictions and liberalizing trade in
foreign currency. In cases of foreign borrowings and foreign currency loans, however, prior Bangko Sentral approval was required.

On July 5, 1996, Republic Act No. 8183 took effect, 62 expressly repealing Republic Act No. 529 in Section 2 63 thereof. The same
statute also explicitly provided that parties may agree that the obligation or transaction shall be settled in a currency other than
Philippine currency at the time of payment.64
Although the Credit Line Agreement between the spouses Tiu and Union Bank was entered into on November 21, 1995, 65 when
the agreement to pay in foreign currency was still considered void under Republic Act No. 529, the actual loans, 66 as shown in the
promissory notes, were taken out from September 22, 1997 to March 26, 1998, during which time Republic Act No. 8183 was
already in effect. In United Coconut Planters Bank v. Beluso, 67 we held that:
[O]pening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory contract to
the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations specified therefor, to lend
to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit line was
opened, but rather when the credit line was availed of. x x x. 68
Having established that Union Bank and the spouses Tiu validly entered into dollar loans, the conclusion of the Court of Appeals
that there were no dollar loans to novate into peso loans must necessarily fail.
Similarly, the Court of Appeals pronouncement that the novation was not supported by any cause or consideration is likewise
incorrect. This conclusion suggests that when the parties signed the Restructuring Agreement, Union Bank got something out of
nothing or that the spouses Tiu received no benefit from the restructuring of their existing loan and was merely taken advantage of
by the bank. It is important to note at this point that in the determination of the nullity of a contract based on the lack of
consideration, the debtor has the burden to prove the same. Article 1354 of the Civil Code provides that "[a]though the cause is
not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary."
In the case at bar, the Restructuring Agreement was signed at the height of the financial crisis when the Philippine peso was
rapidly depreciating. Since the spouses Tiu were bound to pay their debt in dollars, the cost of purchasing the required currency
was likewise swiftly increasing. If the parties did not enter into the Restructuring Agreement in December 1999 and the peso
continued to deteriorate, the ability of the spouses Tiu to pay and the ability of Union Bank to collect would both have immensely
suffered. As shown by the evidence presented by Union Bank, the peso indeed continued to deteriorate, climbing to US$1= P50.01
on December 2000.69 Hence, in order to ensure the stability of the loan agreement, Union Bank and the spouses Tiu agreed in the
Restructuring Agreement to peg the principal loan at P150,364,800.00 and the unpaid interest at P5,000,000.00.
Before this Court, the spouses Tiu belatedly argue that their consent to the Restructuring Agreement was vitiated by fraud and
mistake, alleging that (1) the Restructuring Agreement did not take into consideration their substantial payment in the amount of
P40,447,185.60 before its execution; and (2) the dollar loans had already been redenominated in 1997 at the rate of
US$1=P26.34.70
We have painstakingly perused over the records of this case, but failed to find any documentary evidence of the alleged payment
of P40,447,185.60 before the execution of the Restructuring Agreement. In paragraph 16 of their Amended Complaint, the
spouses Tiu alleged payment of P40,447,185.60 for interests before the conversion of the dollar loan. 71 This was specifically
denied by Union Bank in paragraph 5 of its Answer with Counterclaim. 72 Respondent Rodolfo Tiu testified that they made "50
million plus" in cash payment plus "other monthly interest payments," 73 and identified a computation of payments dated July 17,
2002 signed by himself.74 Such computation, however, was never formally offered in evidence and was in any event, wholly selfserving.
As regards the alleged redenomination of the same dollar loans in 1997 at the rate of US$1=P26.34, the spouses Tiu merely
relied on the following direct testimony of Herbert Hojas, one of the witnesses of Union Bank:
Q: Could you please describe what kind of loan was the loan of the spouses Rodolfo Tiu, the plaintiffs in this case?
A: It was originally an FCDU, meaning a dollar loan.
Q: What happened to this FCDU loan or dollar loan?
A: The dollar loan was re-denominated in view of the very unstable exchange of the dollar and the peso at that time,
Q: Could you still remember what year this account was re-denominated from dollar to peso?
A: I think it was on the year 1997.
Q: Could [you] still remember what was then the prevailing exchange rate between the dollar and the peso at that year 1997?
A: Yes. I have here the list of the dollar exchange rate from January 1987 (sic). It was P26.34 per dollar.75
Neither party presented any documentary evidence of the alleged redenomination in 1997. Respondent Rodolfo Tiu did not even
mention it in his testimony. Furthermore, Hojas was obviously uncertain in his statement that said redenomination was made in
1997.
As pointed out by the trial court, the Restructuring Agreement, being notarized, is a public document enjoying a prima facie
presumption of authenticity and due execution. Clear and convincing evidence must be presented to overcome such legal
presumption.76 The spouses Tiu, who attested before the notary public that the Restructuring Agreement "is their own free and
voluntary act and deed,"77 failed to present sufficient evidence to prove otherwise. It is difficult to believe that the spouses Tiu,
veteran businessmen who operate a multi-million peso company, would sign a very important document without fully
understanding its contents and consequences.
This Court therefore rules that the Restructuring Agreement is valid and, as such, a valid and binding novation of loans of the
spouses Tiu entered into from September 22, 1997 to March 26, 1998 which had a total amount of US$3,632,000.00.
Validity of the Foreclosure of Mortgage
The spouses Tiu challenge the validity of the foreclosure of the mortgage on two grounds, claiming that: (1) the debt had already
been fully paid; and (2) they are not the owners of the improvements on the mortgaged property.
(1) Allegation of full payment of the mortgage debt

In the preceding discussion, we have ruled that the Restructuring Agreement is a valid and binding novation of loans of the
spouses Tiu entered into from September 22, 1997 to March 26, 1998 in the total amount of US$3,632,000.00. Thus, in order that
the spouses Tiu can be held to have fully paid their loan obligation, they should present evidence showing their payment of the
total restructured amount under the Restructuring Agreement which was P104,668,741.00. As we have discussed above,
however, while respondent Rodolfo Tiu appeared to have identified during his testimony a computation dated July 17, 2002 of the
alleged payments made to Union Bank, 78 the same was not formally offered in evidence. Applying Section 34, Rule 132 79 of the
Rules of Court, such computation cannot be considered by this Court. We have held that a formal offer is necessary because
judges are mandated to rest their findings of facts and their judgment only and strictly upon the evidence offered by the parties at
the trial. It has several functions: (1) to enable the trial judge to know the purpose or purposes for which the proponent is
presenting the evidence; (2) to allow opposing parties to examine the evidence and object to its admissibility; and (3) to facilitate
review by the appellate court, which will not be required to review documents not previously scrutinized by the trial court. 80
Moreover, even if such computation were admitted in evidence, the same is self-serving and cannot be given probative weight. In
the case at bar, the records do not contain even a single receipt evidencing payment to Union Bank.
The Court of Appeals, however, held that several payments made by the spouses Tiu had been admitted by Union Bank. Indeed,
Section 11, Rule 8 of the Rules of Court provides that an allegation not specifically denied is deemed admitted. In such a case, no
further evidence would be required to prove the antecedent facts. We should therefore examine which of the payments specified
by the spouses Tiu in their Amended Complaint81 were not specifically denied by Union Bank.
The allegations of payment are made in paragraphs 16 to 21 of the Amended Complaint:
16. Before conversion of the dollar loan into a peso loan[,] the spouses Tiu had already paid the defendant bank the amount of
P40,447,185.60 for interests;
17. On August 3, 1999 and August 12, 1999, plaintiffs made payments in the amount of P15,000,000.00;
18. In order to lessen the obligation of plaintiffs, the mother of plaintiff Rodolfo T. Tiu, plaintiff Juanita T. Tiu, executed a deed of
dacion in payment in favor of defendant involving her 10 parcels of land located in Labangon, Cebu City for the amount of
P25,130,000.00. Copy of the deed was attached to the original complaint as Annex "C";
19. For the same purpose, plaintiffs spouses Tiu also executed a deed of dacion in payment of their property located at A.S.
Fortuna St., Mandaue City for the amount of P36,080,000.00. Copy of the deed was attached to the original complaint as Annex
"D";
20. The total amount of the two dacions in payment made by the plaintiffs was P61,210,000.00;
21. Plaintiffs spouses Tiu also made other payment of the amount of P13,197,546.79 as of May 8, 2001;82
In paragraphs 4 and 5 of their Answer with Counterclaim, 83 Union Bank specifically denied the allegation in paragraph 9 of the
Complaint, but admitted the allegations in paragraphs 17, 18, 19, 20 and 21 thereof. Paragraphs 18, 19 and 20 allege the two
deeds of dacion. However, these instruments were already incorporated in the computation of the outstanding debt (i.e.,
subtracted from the confirmed debt of P155,364,800.00), as can be gleaned from the following provisions in the Restructuring
Agreement:
a.) The loan obligation to the BANK to be restructured herein after deducting from the Indebtedness of the BORROWER the
dacion price of the properties subject of the Deeds of Dacion and adding to the Indebtedness all the taxes, registration fees and
other expenses advanced by the bank in registering the Deeds of Dacion, and also adding to the Indebtedness the interest, and
other fees and charges incurred by the Indebtedness, amounts to ONE HUNDRED FOUR MILLION SIX HUNDRED SIXTYEIGHT THOUSAND SEVEN HUNDRED FORTY-ONE PESOS (PHP104,668,741.00) (the "TOTAL RESTRUCTURED
AMOUNT").84
As regards the allegations of cash payments in paragraphs 17 and 21 of the Amended Complaint, the date of the alleged payment
is critical as to whether they were included in the Restructuring Agreement. The payment of P15,000,000.00 alleged in paragraph
17 of the Amended Complaint was supposedly made on August 3 and 12, 1999. This payment was before the date of execution of
the Restructuring Agreement on December 21, 1999, and is therefore already factored into the restructured obligation of the
spouses.85 On the other hand, the payment of P13,197,546.79 alleged in paragraph 21 of the Amended Complaint was dated May,
8, 2001. Said payment cannot be deemed included in the computation of the spouses Tius debt in the Restructuring Agreement,
which was assented to more than a year earlier. This amount (P13,197,546.79) is even absent 86 in the computation of Union Bank
of the outstanding debt, in contrast with the P15,000,000.00 payment which is included87 therein. Union Bank did not explain this
discrepancy and merely relied on the spouses Tius failure to formally offer supporting evidence. Since this payment of
P13,197,546.79 on May 8, 2001 was admitted by Union Bank in their Answer with Counterclaim, there was no need on the part of
the spouses Tiu to present evidence on the same. Nonetheless, if we subtract this figure from the total restructured amount
(P104,668,741.00) in the Restructuring Agreement, the result is that the spouses Tiu still owe Union Bank P91,471,194.21.
(2) Allegation of third party ownership of the improvements on the mortgaged lot
The Court of Appeals, taking into consideration its earlier ruling that the loan was already fully paid, permanently enjoined Union
Bank from foreclosing the mortgage on the property covered by Transfer Certificate of Title No. 11951 (Lot No. 639) and from
pursuing other foreclosure of mortgages over any other properties of the spouses Tiu. The Court of Appeals ruled:
The prayer, therefore, of the Tiu spouses to enjoin the foreclosure of the real estate mortgage over their residential property has
merit. The loan has already been fully paid. It should also be noted that the house constructed on the residential property of the
Tiu spouses is not registered in the name of the Tiu spouses, but in the name of Jose Tiu (Records, pp. 127-132), the father of
appellant and petitioner Rodolfo Tiu, since 1981. It had been alleged by the Tiu spouses that Jose Tiu died on December 18,
1983, and, that consequently upon his death, Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu
became owners of the house (Records, p. 116). This allegation has not been substantially denied by Union Bank. All that the
Union Bank presented to refute this allegation are a Transfer Certificate of Title and a couple of Tax Declarations which do not
indicate that a residential house is titled in the name of the Tiu spouses. In fact, in one of the Tax Declarations, the market value of
the improvements is worth only P3,630.00. Certainly, Union Bank should have been aware that this Tax Declaration did not cover
the residential house. Union Bank should also not rely on warranties made by debtors that they are the owners of the property.
They should investigate such representations. The courts have made consistent rulings that a bank, being in the business of
lending, is obligated to verify the true ownership of the properties mortgaged to them. Consequently, this Court permanently

enjoins Union Bank from foreclosing the mortgage of the residential property of the Tiu spouses which is covered by Transfer
Certificate of Title No. 11951 and from pursuing other foreclosure of mortgages over any other properties of the Tiu spouses. If a
foreclosure sale has already been made over such properties, this Court orders the cancellation of such foreclosure sale and the
Certificate of Sale thereof if any has been issued, and the return of the title to the Tiu spouses. 88
We disagree. Contrary to the ruling of the Court of Appeals, the burden to prove the spouses Tius allegation that they do not
own the improvements on Lot No. 639, despite having such improvements included in the mortgage is on the spouses Tiu
themselves. The fundamental rule is that he who alleges must prove. 89 The allegations of the spouses Tiu on this matter, which
are found in paragraphs 35 to 39 90 of their Amended Complaint, were specifically denied in paragraph 9 of Union Banks Answer
with Counterclaim.91
Upon careful examination of the evidence, we find that the spouses Tiu failed to prove that the improvements on Lot No. 639 were
owned by third persons. In fact, the evidence presented by the spouses Tiu merely attempt to prove that the improvements on Lot
No. 639 were declared for taxes in the name of respondent Rodolfo Tius father, Jose Tiu, who allegedly died on December 18,
1983. There was no effort to show how their co-plaintiffs in the original complaint, namely Juanita T. Tiu, Rosalinda T. King, Rufino
T. Tiu, Rosalie T. Young and Rosenda T. Tiu, became co-owners of the house. The spouses Tiu did not present evidence as to (1)
who the heirs of Jose Tiu are; (2) if Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu are
indeed included as heirs; and (3) why petitioner Rodolfo Tiu is not included as an heir despite being the son of Jose Tiu. No birth
certificate of the alleged heirs, will of the deceased, or any other piece of evidence showing judicial or extrajudicial settlement of
the estate of Jose Tiu was presented.
In light of the foregoing, this Court therefore sets aside the ruling of the Court of Appeals permanently enjoining Union Bank from
foreclosing the mortgage on Lot No. 639, including the improvements thereon.
Validity of Alleged Rental Payments on the Properties Conveyed to the Bank via Dacion en Pago
The Court of Appeals found the lease contracts over the properties conveyed to Union Bank via dacion en pago to be void for
being against public policy. The appellate court held that since the General Banking Law of 2000 92 mandates banks to immediately
dispose of real estate properties that are not necessary for its own use in the conduct of its business, banks should not enter into
two-year contracts of lease over properties paid to them through dacion. 93 The Court of Appeals thus ordered Union Bank to return
the rentals it collected. To determine the amount of rentals paid by the spouses Tiu to Union Bank, the Court of Appeals simply
multiplied the monthly rental stipulated in the Restructuring Agreement by the stipulated period of the lease agreement:
For the Labangon property, the Tiu spouses paid rentals in the amount of P98,000.00 per month for two years, or a total amount of
P2,352,000.00. For the A.S. Fortuna property, the Tiu spouses paid rentals in the amount of P150,000.00 per month for two years,
or a total amount of P3,600,000.00. The total amount in rentals paid by the Tiu spouses to Union Bank is FIVE MILLION NINE
HUNDRED FIFTY- TWO THOUSAND PESOS (P5,952,000.00). This Court finds that the return of this amount to the Tiu spouses
is called for since it will better serve public policy. These properties that were given by the Tiu spouses to Union Bank as payment
should not be used by the latter to extract more money from the former. This situation is analogous to having a debtor pay interest
for a debt already paid. Instead of leasing the properties, Union Bank should have instructed the Tiu spouses to vacate the said
properties so that it could dispose of them.94
The Court of Appeals committed a serious error in this regard. As pointed out by petitioner Union Bank, the spouses Tiu did not
present any proof of the alleged rental payments. Not a single receipt was formally offered in evidence. The mere stipulation in a
contract of the monthly rent to be paid by the lessee is certainly not evidence that the same has been paid. Since the spouses Tiu
failed to prove their payment to Union Bank of the amount of P5,952,000.00, we are constrained to reverse the ruling of the Court
of Appeals ordering its return.
Even assuming arguendo that the spouses Tiu had duly proven that it had paid rent to Union Bank, we nevertheless disagree with
the finding of the Court of Appeals that it is against public policy for banks to enter into two-year contracts of lease of properties
ceded to them through dacion en pago. The provisions of law cited by the Court of Appeals, namely Sections 51 and 52 of the
General Banking Law of 2000, merely provide:
SECTION 51. Ceiling on Investments in Certain Assets. Any bank may acquire real estate as shall be necessary for its own use
in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof,
including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity
investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total
investment in real estate, unless otherwise provided by the Monetary Board.
SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. Notwithstanding the limitations of the preceding
Section, a bank may acquire, hold or convey real property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall
purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank
within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said
period, continue to hold the property for its own use, subject to the limitations of the preceding Section.
Section 52.2 contemplates a dacion en pago. Thus, Section 52 undeniably gives banks five years to dispose of properties
conveyed to them in satisfaction of debts previously contracted in the course of its dealings, unless another period is prescribed
by the Monetary Board. Furthermore, there appears to be no legal impediment for a bank to lease the real properties it has
received in satisfaction of debts, within the five-year period that such bank is allowed to hold the acquired realty.
We do not dispute the interpretation of the Court of Appeals that the purpose of the law is to prevent the concentration of land
holdings in a few hands, and that banks should not be allowed to hold on to the properties contemplated in Section 52 beyond the
five-year period unless such bank has exerted its best efforts to dispose of the property in good faith but failed. However, inquiries
as to whether the banks exerted best efforts to dispose of the property can only be done if said banks fail to dispose of the same
within the period provided. Such inquiry is furthermore irrelevant to the issues in the case at bar.

Order to Return Certificates Allegedly in Union Banks Possession

In the Amended Complaint, the spouses Tiu alleged 95 that they delivered several certificates and titles to Union Bank pursuant to a
Memorandum of Agreement. These certificates and titles were not subjected to any lien in favor of Union Bank, but the latter
allegedly continued to hold on to said properties.
The RTC failed to rule on this issue. The Court of Appeals, tackling this issue for the first time, ruled in favor of the Tiu spouses
and ordered the return of these certificates and titles. The appellate court added that if Union Bank can no longer return these
certificates or titles, it should shoulder the cost for their replacement. 96
Union Bank, asserting that the Memorandum of Agreement did not, in fact, push through, denies having received the subject
certificates and titles. Union Bank added that even assuming arguendo that it is in possession of said documents, the
Restructuring Agreement itself allows such possession.97
The evidence on hand lends credibility to the allegation of Union Bank that the Memorandum of Agreement did not push through.
The copy of the Memorandum of Agreement attached by the spouses Tiu themselves to their original complaint did not bear the
signature of any representative from Union Bank and was not notarized. 98
We, however, agree with the finding of the Court of Appeals that despite the failure of the Memorandum of Agreement to push
through, the certificates and titles mentioned therein do appear to be in the possession of Union Bank. As held by the Court of
Appeals:
Lastly, this Court will order, as it hereby orders, Union Bank to return to the Tiu spouses all the certificates of shares of stocks and
titles to real properties of the Tiu spouses in its possession. Union Bank cannot deny possession of these items since it had made
judicial admissions of such possession in their document entitled "Reply to Plaintiffs request for Admission" (records, pp. 216217). While in that document, Union Bank only admitted to the possession of four real estate titles, this Court is convinced that all
the certificates and titles mentioned in the unconsummated Memorandum of Agreement (Records, pp. 211-213) were given by the
Tiu spouses to Union Bank for appraisal. This finding is further bolstered by the admission of the Union Bank that it kept the titles
for safekeeping after it rejected the Memorandum of Agreement. Since Union Bank rejected these certificates and titles of
property, it should return the said items to the Tiu spouses. If Union Bank can no longer return these certificates and titles or if it
has misplaced them, it shall shoulder the cost for the replacement and issuance of new certificates and new titles over the said
properties.99
As regards Union Banks argument that it has the right to retain said documents pursuant to the Restructuring Agreement, it is
referring to paragraph 11(b), which provides that:
11. Effects of Default When the BORROWER is in default, such default shall have the following effects, alternative, concurrent
and cumulative with each other:
xxxx
(b) The BANK shall be entitled to all the remedies provided for and further shall have the right to effect or apply against the partial
or full payment of any and all obligations of the BORROWER under this Restructuring Agreement any and all moneys or other
properties of the BORROWER which, for any reason, are or may hereafter come into the possession of the Bank or the Banks
agent. All such moneys or properties shall be deemed in the BANKs possession as soon as put in transit to the BANK by mail or
carrier.100
In the first place, notwithstanding the foregoing provision, there is no clear intention on the part of the spouses Tiu to deliver the
certificates over certain shares of stock and real properties as security for their debt. From the terms of the Memorandum of
Agreement, these certificates were surrendered to Union Bank in order that the said properties described therein be given their
corresponding loan values required for the restructuring of the spouses Tius outstanding obligations. However, in the event the
parties fail to agree on the valuation of the subject properties, Union Bank agrees to release the same. 101 As Union Bank itself
vehemently alleges, the Memorandum of Agreement was not consummated. Moreover, despite the fact that the Bank was aware,
or in possession, of these certificates,102 at the time of execution of the Restructuring Agreement, only the mortgage over the real
property covered by TCT No. T-11951 was expressly mentioned as a security in the Restructuring Agreement. In fact, in its Reply
to Request for Admission,103 Union Bank admitted that (1) the titles to the real properties were submitted to it for appraisal but
were subsequently rejected, and (2) no real estate mortgages were executed over the said properties. There being no agreement
that these properties shall secure respondents obligation, Union Bank has no right to retain said certificates.1avvphi1
Assuming arguendo that paragraph 11(b) of the Restructuring Agreement indeed allows the retention of the certificates (submitted
to the Bank ostensibly for safekeeping and appraisal) as security for spouses Tius debt, Union Banks position still cannot be
upheld. Insofar as said provision permits Union Bank to apply properties of the spouses Tiu in its possession to the full or partial
payment of the latters obligations, the same appears to impliedly allow Union Bank to appropriate these properties for such
purpose. However, said provision cannot be validly applied to the subject certificates and titles without violating the prohibition
against pactum commissorium contained in Article 2088 of the Civil Code, to the effect that "[t]he creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them[;] [a]ny stipulation to the contrary is null and void." Applicable by
analogy to the present case is our ruling in Nakpil v. Intermediate Appellate Court, 104 wherein property held in trust was ceded to
the trustee upon failure of the beneficiary to answer for the amounts owed to the former, to wit:
For, there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondent's manifestations, all the elements of a pactum commissorium were present: there was a
creditor-debtor relationship between the parties; the property was used as security for the loan; and, there was automatic
appropriation by respondent of Pulong Maulap in case of default of petitioner.105 (Emphases supplied.)
This Court therefore affirms the order of the Court of Appeals for Union Bank to return to the spouses Tiu all the certificates of
shares of stock and titles to real properties that were submitted to it or, in lieu thereof, to pay the cost for the replacement and
issuance of new certificates and new titles over the said properties.
Validity of the Award of Damages
The Court of Appeals awarded damages in favor of the spouses Tiu based on its taking judicial notice of the alleged exploitation
by many banks of the Asian financial crisis, as well as the foreclosure of the mortgage of the home of the spouses Tiu despite the
alleged full payment by the latter. As regards the alleged manipulation of the financial crisis, the Court of Appeals held:

As a final note, this Court observes the irregularity in the circumstances [surrounding] dollar loans granted by banks right before or
during the Asian financial crisis. It is of common knowledge that many banks, around that time, actively pursued and convinced
debtors to make dollar loans or to convert their peso loans to dollar loans allegedly because of the lower interest rate of dollar
loans. This is a highly suspect behavior on the part of the banks because it is irrational for the banks to voluntarily and actively
proffer a conversion that would give them substantially less income. In the guise of benevolence, many banks were able to
convince borrowers to make dollar loans or to convert their peso loans to dollar loans. Soon thereafter, the Asian financial crisis
hit, and many borrowers were saddled with loans that ballooned to twice or thrice the amount of their original loans. This court
takes judicial notice of these events or matters which are of public knowledge. It is inconceivable that the banks were unaware of
the looming Asian financial crisis. Being in the forefront of the financial world and having access to financial data that were not
available to the average borrower, the banks were in such a position that they had a higher vantage point with respect to the
financial landscape over their average clients. The cavalier way with which banks exploited and manipulated the situation is
almost too palpable that they openly and unabashedly struck heavy blows on the Philippine economy, industries and businesses.
The banks have a fiduciary duty to their clients and to the Filipino people to be transparent in their dealings and to make sure that
the latters interest are not prejudiced by the formers interest. Article 1339 of the New Civil Code provides that the failure to
disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud.
Undoubtedly, the banks and their clients are bound by confidential relations. The almost perfect timing of the banks in convincing
their clients to shift to dollar loans just when the Asian financial crisis struck indicates that the banks not only failed to disclose
facts to their clients of the looming crisis, but also suggests of the insidious design to take advantage of these undisclosed facts. 106
We have already held that the foreclosure of the mortgage was warranted under the circumstances. As regards the alleged
exploitation by many banks of the Asian financial crisis, this Court rules that the generalization made by the appellate court is
unfounded and cannot be the subject of judicial notice. "It is axiomatic that good faith is always presumed unless convincing
evidence to the contrary is adduced. It is incumbent upon the party alleging bad faith to sufficiently prove such allegation. Absent
enough proof thereof, the presumption of good faith prevails." 107 The alleged insidious design of many banks to betray their clients
during the Asian financial crisis is certainly not of public knowledge. The deletion of the award of moral and exemplary damages in
favor of the spouses Tiu is therefore in order.
WHEREFORE, the Petition is PARTIALLY GRANTED. The Joint Decision of the Court of Appeals in CA-G.R. CV No. 00190 and
CA-G.R. SP No. 00253 dated February 21, 2006 is hereby AFFIRMED insofar as it ordered petitioner Union Bank of the
Philippines to return to the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu all the certificates of shares of stock and titles to
real properties that were submitted to it or, in lieu thereof, to pay the cost for the replacement and issuance of new certificates and
new titles over the said properties. The foregoing Joint Decision is hereby SET ASIDE: (1) insofar as it permanently enjoined
Union Bank of the Philippines from foreclosing the mortgage of the residential property of respondent spouses Rodolfo T. Tiu and
Victoria N. Tiu which is covered by Transfer Certificate of Title No. 11951; (2) insofar as it ordered Union Bank of the Philippines to
return to the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu the amount of P927,546.79 representing illegally collected
rentals; and (3) insofar as it ordered Union Bank of the Philippines to pay the respondent spouses Rodolfo T. Tiu and Victoria N.
Tiu P100,000.00 in moral damages, P100,000.00 in exemplary damages, P50,000.00 in attorneys fees and cost, both in the lower
court and in this Court.
No further pronouncement as to costs.
SO ORDERED.

G.R. No. 98450 July 21, 1993

THE PHILIPPINE MANPOWER SERVICES, INC., ADAWLIAH UNIVERSAL ELECTRONICS and AFISCO INSURANCE
CORPORATION, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION and ARTHUR P. PANGAN, respondents.
Agcaoili Law Offices for petitioners.
Melencio D. Fabros, Jr. for private respondent.

ROMERO, J.:
On August 10, 1990, the Philippine Overseas Employment Administration (POEA) rendered a decision in POEA Cases No. (L) 8807-595 entitled Arthur Pangan v. Philippine Manpower Services, Inc. and Adawliah Universal Electronics and Afisco Insurance
Corporation, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered ordering respondent Philippine Manpower Services
Corporation, jointly and severally with its principal Adawliah Universal Electronics, to pay complainant Arthur F. Pangan the
following amounts:
1. ELEVEN THOUSAND FIVE HUNDRED FIFTY U.S. DOLLARS (US$11,550.), representing his salaries for the unexpired portion
of his contract of employment; and
2. FIVE PERCENT (5%) of the total award as and by way of attorney's fees.
All other claims of complainant as well as respondent's counterclaims are hereby dismissed for lack of merit.
Payment of the above awards shall be made in Philippine Currency at the prevailing rate of exchange at the time of payment.
SO ORDERED. 1
Petitioners herein appealed said POEA decision before public respondent National Labor Relations Commission (NLRC). The
NLRC, in its Resolution of March 4, 1991, modified the decision of the POEA but only insofar as it corrected the POEA on the
proper rate of exchange to be applied in converting the award of US$11,550.00 to its equivalent in Philippine currency. It thus
held:

However, while we are convinced that because Pangan was illegally dismissed, he should be paid the salaries corresponding to
the unexpired portion of his contract, we believe that because of the erratic devaluation of the Philippine Peso vis-a-vis, the US
Dollars, simple fairness dictates that the payment of the awards in the Philippine Currency should not be "at the rate of exchange
at the time of payment," as mandated by the POEA, but rather at the rate of exchange prevailing at the time the complainant's
cause of action accrued or at the time he was illegally dismissed on 21 July 1988. 2
Consequently, said resolution disposed as follows:
WHEREFORE, subject to the modification abovestated, the decision appealed from should be, as it is hereby, AFFIRMED.
SO ORDERED. 3
A motion for reconsideration of NLRC's Resolution of March 4, 1991 was denied in its Resolution of April 24, 1991.
As a final recourse, petitioners filed the instant petition for annulment of the NLRC's Resolutions of March 4, 1991 and April 24,
1991.
The alleged dismissal without cause of private respondent Arthur F. Pangan by his employer Adawliah Union Electronics and
Afisco Insurance Corporation (Adawliah, for short) based in Alkhobar, Saudi Arabia, spawned the present controversy. Pangan
filed with the POEA, a case for illegal dismissal, underpayment of overtime pay, separation pay, actual damages representing his
salaries for the unexpired portion of his contract of employment, and exemplary damages of US$10,000.00 plus attorney's fees.
His complaint alleged that he entered into a two-year contract of employment with Adawliah, as a data entry clerk technician for
US$550.00 a month, commencing on April 30, 1988. He complained that he rendered overtime work of fourteen (14) hours last
May 1988 and another twenty-four (24) hours in June 1988 without having received any compensation therefor; worse, he has
ordered to work as programmer in addition to his work as data entry clerk technician without any offer to correspondingly increase
his salary; that Pangan's demand for salary adjustment irked Mr. Ahmed Yosul, Administrative Manager of Adawliah, who thus
ordered Pangan's termination on grounds of incompetence. Pangan was consequently compelled to accept payment of only
US389.00 dollars, covering his services for July 1-21. All other claims were waived by him after he was threatened to be jailed.
Petitioner Philippine Manpower Services, Inc. (Philman) denied Pangan's allegations in his complaint. Philman justified Pangan's
termination as a valid exercise by his employer Adawliah, of its management prerogative to fire employees who proved to be
incompetent while still under probation. It thus prayed for the dismissal of the instant case.
The POEA, however, found Pangan's complaint meritorious. Though it recognized the management prerogative to select its
employees, it nevertheless ruled that the exercise thereof is not without any qualification. The POEA explained that probationary
employees can only be dismissed for just cause duly proved. In the case at bar, it found that there was no justified dismissal of
complainant Pangan for failure of Adawliah to substantiate its claim of his unsatisfactory performance. General averments on
Pangan's incompetence do not constitute just cause to warrant his termination.
Philman and Adawliah were thus ordered to pay in solidum, the equivalent in Philippine currency of US$11,550.00 representing
Pangan's salary for the unexpired portion of his contract and attorney's fees amounting to five percent (5%) of said award. The
POEA further ruled that in paying the above award in Philippine currency, the conversion rate to be used shall be that prevailing at
the time of payment.
Philman and Adawliah sought a reversal of said POEA ruling by appealing before the National Labor Relations Commission
(NLRC). As aforementioned, the NLRC affirmed, with modification, the POEA ruling appealed from, in its Resolution of March 4,
1991.
Philman and Adawliah moved for reconsideration of the Resolution of March 4, 1991 but were denied by the NLRC for lack of
merit.
Consequently, the instant petition was filed by Philman and Adawliah claiming that:
I
With grave abuse of discretion, the Honorable Commission (Second Division) together with POEA Administrator Jose N.
Sarmiento brushed aside petitioners-appellants submission that complainant-appellee was lawfully dismissed in accordance with
his contract of employment and in consonance with previous POEA and NLRC rulings applicable to the case at bar.
II
With grave abuse of discretion, the Honorable Commission (Second Division) disregarded appellant's contention based on Article
281 of the Labor Code of the Philippines, that workers on probation or trial acquire only transitional rights to the fulfillment of their
employment contracts and therefore the complainant-appellee cannot lawfully be entitled to payment of salary for the period of 21
months after failing to qualify as a regular employee during his three months' trial period.
III
The Honorable Commission (Second Division) gravely erred in holding that appellee's dismissal is sustained by the Supreme
Court ruling in Manila Hotel vs. NLRC, 141 SCRA 169.
IV
With grave abuse of discretion, the Honorable Commission (Second Division) affirmed the findings of the POEA Administrator to
the effect that the dismissal of the complainant-appellee was capricious. 4
Philman and Adawliah insist that during the probationary period, the employer is acting within his rights in dismissing his employee
who failed to meet the qualification standard for continued employment. Moreover, they aver that Pangan's inability to satisfy the
standards set by Adawliah amounts to incompetence which is a just cause for termination of his services pursuant to the first
paragraph of the contract of employment executed between Adawliah and Pangan, to wit:
If during the first three (3) months (probation period) of employment, the EMPLOYER find the EMPLOYEE to be incompetent or
incapable of performing the type of work for which he was hired, then the EMPLOYER may discharge the EMPLOYEE for cause
with no obligation on the part of the EMPLOYER except for payment of accrued pay up to the time of termination. The payment of
economy class air transportation back to the point of hire shall be for the account of EMPLOYEE. 5

On the basis of the foregoing, they argued that the determination of whether Pangan is capable of performing the duties of Data
Entry Clerk Technician rests solely with Adawliah, his employer, who is in the best position to observe Pangan's performance
during the probationary period. There is thus no necessity, contrary to the views of the POEA and NLRC, to cite specific incidents
of Pangan's incompetence in order to prove the legality of the dismissal.
Philman and Adawliah further maintained that as a result of Pangan's failure to qualify as a regular employee, he did not acquire
any rights whatsoever to work out the full term of his employment contract. Accordingly, they concluded that Pangan is not entitled
to an award equivalent to the unexpired portion of his two-year employment contract.
In his Comment to the petition, the Solicitor General considers petitioners' arguments as untenable. He contends that,
notwithstanding Pangan's probationary status, he nonetheless enjoys the constitutional protection on security of tenure unless just
cause exists to justify his termination. He further stressed that the prerogative of management to dismiss Pangan must be
exercised without abuse of discretion. The absence of sufficient evidence to substantiate Pangan's dismissal and the lack of
specific acts or instances to show Pangan's lackluster performance negates the claim of Adawliah that the dismissal was a rightful
exercise of such prerogative. Due to the gross violation of Pangan's security of tenure, the Solicitor General opined that he is
entitled to an award equivalent to his salary for the unexpired portion of his two-year employment contract.
The petition should be dismissed. Jurisprudence is rich in cases guaranteeing the security of tenure, limited though it may be, of
probationary employees. 6 Except for just cause as provided by law or under the employment contract, a probationary employee
cannot be terminated. 7 Petitioners do not view Pangan's termination as a violation of these legal precepts. Rather, they consider
his incompetence as a just cause, sufficient to constitute the basis of his dismissal under the contract.
At first blush, petitioners' position may seem sound, it appearing that their contract, which is the law between them, contains a
stipulation that the employer has the discretion to dismiss its employees for incompetence. However, where the dismissed
employee, Pangan in this instance, challenges his dismissal as illegal, predicating his claim on the absence of a just cause, the
correct issue is not so much Adawliah's discretion to terminate as the existence of Pangan's alleged incompetence as ground for
his termination. Hence, the POEA and NLRC did not commit grave abuse of discretion in requiring petitioners to present proof of
the alleged incompetence of Pangan. Thus, it has been held that:
It is a basic principle in the dismissal of employees that the burden of proof rests upon the employer to show that the dismissal of
the employee is for a just cause, and failure to do so would necessarily mean that the dismissal is not justified [Polymedic General
Hospital v. NLRC, G.R. No. 64190, January 31, 1985, 134 SCRA 420; Asphalt and Cement Pavers, Inc. v. Leogardo, et al., G.R.
No. 74563, June 20, 1988.] Should the employer fail in discharging this duty, the dismissal of the employee cannot be sustained.
This is consonant with the constitutional guarantee of security of tenure, as implemented in what is now Sec. 279 of the Labor
Code, as amended. 8
This same principle applies to probationary employees allegedly terminated without cause during their limited tenure. Thus in
Euro-Linea Philippines Inc. v. NLRC, et al., 9 this Court dismissed the petition on the ground that:
Petitioner not only failed to present sufficient evidence to substantiate the cause of private respondent's dismissal, but likewise
failed to cite particular acts or instances to show the latter's poor performance.
Similarly, no convincing proof establishing Pangan's alleged incompetence was presented. The POEA and NLRC, therefore,
correctly declared the dismissal to be illegal. Pangan's dismissal without cause during the probationary period constitutes a
violation of his Constitutional right to security of tenure. The Constitution, which is built into all contracts entered into in the
Philippines and governed by Philippines law when it provides in Art. XIII,
Sec 3 10 that "they shall be entitled to security of tenure . . ." did not distinguish between probationary and regular employees.
Consequently, Pangan deserves the disputed award of the POEA, entitling him to an amount representing his salary for the
unexpired portion of his employment contract. It was erroneous for petitioners to question the award as improper, theorizing that
he is not entitled to sum equivalent to his salary for the unexpired portion of the contract, he being merely a probationary
employee who has not acquired a vested right to demand fulfillment of his employment contract.
Apparently, petitioners have misread the statutory grant of security of tenure to probationary employees. Under Article 281 of the
Labor Code, 11 a probationary employee may be terminated on two grounds: (a) for just cause or (b) when he fails to qualify as a
regular employee in accordance with reasonable standards made known by the employer to the employee at the time of his
engagement. Since as established in the case at bar, petitioners were unable to prove either ground as a basis for terminating
Pangan's employment, no reason exists to sever the employment relationship between Adawliah and Pangan. Otherwise stated,
absent the grounds for termination of a probationary employee, he is entitled to continued employment even beyond the
probationary period. Accordingly, had not Pangan been compelled to return to the Philippines, he could have demanded
enforcement of the employment contract. In the case of Skillword Management and Marketing Corp., et al. v. NLRC, et al., 12 we
similarly unheld a POEA ruling awarding private respondents therein $6,900.00 or its equivalent in Philippine currency at the time
of actual payment covering complainant's salary for the unexpired portion of twenty-three months due to unjust dismissal as a
probationary employee.
In the case of Republic Resources and Development Corporation v. Court of Appeals, 13 reiterating our decision in Kalalo v. Luz, 14
with regard to obligations incurred after enactment of RA No. 529 15 on June 16, 1950, we also held that the rate of exchange to
be applied should be that prevailing at the time of payment.
As a consequence of our affirmance of the POEA award, we find incorrect the NLRC Resolution of March 4, 1991 to the effect that
the proper rate of exchange to be applied in converting the award of US$11,550.00 to its equivalent in Philippine currency is that
prevailing at the time complainant's cause of action accrued and not at the time of actual payment as ruled by the POEA.
WHEREFORE, finding no grave abuse of discretion on the part of public respondents, the petition is DISMISSED. The decision of
the POEA dated August 10, 1991 is hereby AFFIRMED in toto and the Resolution of the NLRC dated March 4, 1991 is
MODIFIED, insofar as the proper rate of exchange to be applied in converting the award of US$11,550.00 in Philippine currency is
that prevailing at the time of actual payment.
SO ORDERED.

G.R. No. 106685 December 2, 1994

SIMPLICIO A. PALANCA, petitioner,

vs.
COURT OF APPEALS (SPECIAL FORMER ELEVENTH DIVISION), and EDGARDO S. SANICAS, represented by his
Attorney-in-Fact, JOSE S. SANICAS, respondents.
Benjamin C. Santos and Estrella, Remitio & Associates for petitioner.
Rodolfo V. Gumban for private respondent.

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to set aside the Decision of the Court of
Appeals in CA-G.R. CV No. 20245 and its Resolution dated August 12, 1992 denying the motion for reconsideration of said
decision.
We deny the petition.
I
On January 22, 1977, petitioner, as vendor, and Jose S. Sanicas, as vendee, entered into a Contract to Sell on Installment of a
parcel of land covered by TCT No. T-6771766. Under the terms of the contract, private respondent agreed to pay petitioner the
amount of P9,851.00 as downpayment and the balance of P88,659.00 in 120 monthly installments with 14% interest per annum
on the outstanding balance. Jose S. Sanicas further agreed to pay the annual real property taxes, and that should he fail to pay
the said taxes, he would have to pay a yearly surcharge or penalty of 50% of the taxes due plus 12% compounded interest per
annum.
Respondent Edgardo S. Sanicas later assumed the account of his brother Jose and he designated the latter as his authorized
representative in dealing with petitioner.
Paragraph 11 of the contract contained the following provision:
That it is further agreed and understood by the VENDEE that in the event of monetary fluctuation, the unpaid balance account of
the herein VENDEE on the aforecited subdivision lot shall be increased proportionately on the basis of the present value of P6.72
to $1.00 US dollar (Rollo, p. 2).
Following demands from petitioner for the updating of the account, private respondent requested a detailed statement. When
petitioner failed to furnish him with the statement, private respondent hired an accountant to compute his obligations under the
contract. Thereafter, he tendered the amount of P44,955.87 in cash upon petitioner, which amount included interest at 12% per
annum.
Petitioner, however, refused to receive the amount tendered, prompting private respondent to make a judicial consignment of the
amount on May 29, 1987.
Private respondent then filed with the trial court a complaint for reconveyance with preliminary injunction, praying that petitioner be
restrained from cancelling private respondent's rights under the contract and from ejecting him from the property. Private
respondent further prayed that the trial court order petitioner to accept the amount earlier consigned, and subsequently, to declare
as fully paid the purchase price of the parcel of land.
Petitioner justified his refusal to accept the amount of P44,955.87 by asserting that private respondent's actual liability was
P155,630.40, relying on the escalator clause in paragraph 11 of the contract.
Applying Article 1250 of the New Civil Code, the trial court ruled that for an agreement providing for the adjustment of the
purchase price in case of a diminution of the value of the peso to come into effect, there should be an "extraordinary inflation or
deflation." It was the position of the trial court that inasmuch as there was no extraordinary inflation or deflation, paragraph 11 of
the contract should not be taken into account in the computation of the amount payable under the contract (Rollo, pp. 45-46).
Furthermore, the trial court ruled that it was unconscionable to peg the unpaid balance in the event of monetary fluctuation at
100.398% aside from the agreed interest rate of 14% (Rollo, p. 48).
Accordingly, the trial court, in its Decision dated June 17, 1988, disposed as follows:
WHEREFORE, judgment is hereby rendered ordering the defendant to execute a deed of conveyance in favor of plaintiff covering
Lot No. 8, Blk. 1, TCT No. T-77176 considering the payment made by plaintiff of the balance of the purchase price in the sum of
Forty Four Thousand Nine Hundred Seventy Nine Pesos and Eighty Seven Centavos (P44,979.87) thru judicial consignation
effected on May 29, 1987 per Official Receipt No. 4016228 issued by the Provincial Treasurer of Negros Occidental.
Without pronouncement as to attorney's fees and costs (Rollo,
p. 48).
Petitioner appealed to the Court of Appeals.
The Court of Appeals modified the judgment of the trial court. Based on the trial court's record, the appellate court ruled that the
amount payable by private respondent was P70,688.17, broken down as follows:
P45,186.04 Balance on the principal;
P22,604.63 Interest thereon from January 24,
1983 to April 2, 1987 plus, balance
on interest; and
P2,897.00 Land taxes from 1977 to 1986

(Rollo, p. 38).
The Court of Appeals concurred with the trial court's ruling that paragraph 11 of the contract cannot come into effect absent an
actual extraordinary inflation or deflation.
II
Not pleased with the judgment of the appellate court, petitioner comes to this Court raising the sole issue of "whether or not
petitioner is entitled to a proportionate increase in payment on the balance of the purchase price for a piece of real property
bought on installment, pursuant to paragraph 11 of the subject Contract To Sell on Installment" (Rollo, p. 2).
III
We cannot grant the petition but not on the grounds relied upon by the trial court and the Court of Appeals that there should be an
"extraordinary inflation" before a stipulation for an upward adjustment of the purchase price can be enforced.
The specific provision of law applied by the two lower courts is Article 1250 of the Civil Code of the Philippines, which provides:
In case extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
In the case at bench, the clear understanding of the parties is that there should be an upward adjustment of the purchase price the
moment there is a deterioration of the Philippine peso vis-a-vis the U.S. dollar. This is the "monetary fluctuation" contemplated by
them as would justify the adjustment. Under this scenario, it is an idle task to determine whether the contract has been visited by
an "extraordinary inflation" as to trigger the operation of Article 1250.
While the contract may contain an "escalator clause" providing that in the occurrence of certain events, the contract price shall be
increased to a fixed percentage of the base price ("Escalator" price adjustment clauses, 63 ALR 2d 1337 [1959], still the autonomy
of the parties to provide such escalator clauses may be limited by law.
The petition should be dismissed on the ground that the stipulation of the parties is in violation of R.A. No. 529, as amended,
entitled "An Act to Assure Uniform Value To Philippine Coin and Currency," otherwise as the Cuenco Law.
Section 1 of R.A. No. 529, as amended, provides in pertinent part:
Every provision contained in, or made with respect to, any domestic obligation, to wit, any obligation contracted in the Philippines
which provisions purport to give the obligee the right to require payment in gold or in a particular kind of coin or currency other
than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public
policy, and null, void and of no effect, and no such provision shall be contained in, or made with respect to, any obligation
hereafter incurred. . . . (Emphasis supplied)
Often lost sight of is the fact that the said law prohibits two things in all domestic contracts: (1) giving the obligee the right to
require payment in a specified currency other than Philippine currency; and (2) giving the obligee the right to require payment "in
an amount of money of the Philippines measured thereby."
When the parties stipulated that ". . . in the event of monetary fluctuation (meaning any change in the rate of exchange of the
Philippine peso to the U.S. dollar), the unpaid balance account of the herein vendee on the aforesaid subdivision lot shall be
increased proportionately on the basis of the present value of P6.72 to US$ 1.00," the obligee was given the right to demand
payment of the balance of the purchase price "in an amount of money of the Philippines measured" by a foreign coin or currency.
Republic Act No. 529 mandates that the money of obligation or payment to be stipulated in all contracts entered into in the
Philippines shall be in Philippine currency. The authority to legislate on the money of obligation or payment in all transactions
entered into in the Philippines is beyond dispute.
The whereas clause of R.A. No. 529 reads as follows:
WHEREAS, the value of Philippine coin and currency affects public interest and is subject to regulation by the Congress of the
Philippines;
WHEREAS, it has been disclosed that the provisions of certain obligations contracted in the Philippines purport to give the obligee
the right to require payment in gold or in a particular kind of coin or currency or in an amount in money of the Philippines
measured thereby, thus obstructing the power of the Congress to regulate the value of the money of the Philippines and
contravening the policy of the Congress, here declared, to maintain at all times the equal and stable power of every peso coined
or issued by the Philippines, in the markets and in the payment of debts.
Congress passed Republic Act No. 529, having in mind the preservation of the value of the Philippine peso. A currency has value
because people are willing to accept it in exchange for goods and services and in payment for debts. Thus, despite the fact that
money has no value as a commodity, it has value to those willing to use it as a medium of exchange (Cargill, Money, The Financial
System and Monetary Policy 18 [2nd ed., 1983]; Grubel, The International Monetary System 185 [3rd ed.]). If goods and services
are available in return for a definite medium of exchange, the value of all goods and services necessarily will be measured in
terms of that medium. But these functions of money are not capable of performance if there is no confidence in the currency
(Nusbaum, Money in the Law 3-4 [1939 ed.]). It instead of the Philippine currency, the people would use a foreign currency as the
mode of payment or as basis for measuring the amount of money to be paid in Philippine currency, such usage would adversely
affect the confidence of the public on the Philippine monetary system.
The contract in question is a sale of a parcel of land in the Philippines payable in Philippine pesos. While the balance of the
purchase price is payable in Philippine currency measured by a foreign currency, no foreign currency was directly involved in the
transaction. The obligation should therefore be paid in the same amounts of Philippine currency as stipulated in the contract
without any adjustment based on the prevailing exchange rate of the U.S. dollar to the Philippine peso. The transaction does not
involve a loan in a foreign currency stipulated to be payable in Philippine currency but measured by a foreign currency, in which
case the rate of exchange prevailing at the stipulated date of payment shall prevail (Lily San Buenaventura v. Court of Appeals,
181 SCRA 197 [1990]).
The liberalization of the foreign exchange regulations on receipts and disbursements of residents arising from both non-trade and
trade transactions (Resolution of the Monetary Board dated August 7, 1992; Central Bank Circulars No. 1353, Series of 1992; No.

1318 dated January 3, 1992; No. 1338 dated April 28, 1992; No. 1348 dated July 28, 1992) did not repeal or in any way amend
R.A. No. 529. In essence, the said Circulars of the Central Bank merely allowed the free sale and purchase of foreign exchange
outside the banking system and other transactions involving foreign currency previously subject to Central Bank control.
While foreign exchange controls are tools in the maintenance of the value of the Philippine currency, such controls are not the only
means of maintaining that value. The requirements in R.A. No. 529 that the money of obligation or payment in all domestic
transactions must be in Philippine currency are also measures to maintain such value.
Besides, a Central Bank Circular cannot repeal a law. Only a law can repeal another law. Article 7 of the Civil Code of the
Philippines provides:
Laws are repealed only by subsequent ones and their violation or non-observance shall not be excused by disuse, or custom or
practice to the contrary.
WHEREFORE, the petition is DENIED.
SO ORDERED.

G.R. No. 137798

October 4, 2000

LUCIA R. SINGSON, petitioner,

vs.
CALTEX (PHILIPPINES), INC. respondent.
DECISION
GONZAGA-REYES, J.:
Petitioner seeks a review on certiorari of the decision of the former Special Second Division of the Court of Appeals dated
November 27, 1998,1 affirming the decision of the Regional Trial Court of Manila, Branch 25 2 which dismissed petitioner's action
for reformation of contract and adjustment of rentals.
The facts of the case are undisputed --Petitioner and respondent entered into a contract of lease on July 16, 1968 over a parcel of land in Cubao, Quezon City. The land,
which had an area of 1,400 square meters and was covered by Transfer Certificates of Title No. 43329 and 81636 issued by the
Register of Deeds of Quezon City, was to be used by respondent as a gasoline service station.
The contract of lease provides that the lease shall run for a period of twenty (20) years and shall abide by the following rental
rates:
xxx

xxx

xxx

Rental. --- The LESSEE agrees to pay the following rental for said premises:
P2.50/sq.m. per month from the 1st to 10th years and P3.00/sq.m. per month from the 11th to 20th years, payable monthly in
advance within the 1st 15 days of each month; provided that the rentals for the 1st 5 years less a discount of eleven (11) percent
per annum computed on a monthly diminishing balance, shall be paid to LESSOR upon compliance of the three (3) conditions
provided in clause (2) above.
LESSEE also agrees to pay lessor, the sum of Six Thousand Pesos (P6,000.00) as demolition expenses, upon effectivity of this
lease.
The rental herein provided for is in any event the maximum rental which LESSOR may collect during the term of this lease or any
renewal or extension thereof. LESSEE further agrees for thirty (30) days after written notice of such default has actually been
delivered to the General Manager of Caltex (Philippines), Inc. LESSOR shall then have the right to terminate this lease on thirty
(30) days written notice to LESSEE. xxx xxx xxx 3
Thus, based on the foregoing provisions of the lease contract, the monthly rental was fixed at P3,500.00 for the first ten years, and
at P4,200.00 for the succeeding ten years of the lease.
On June 23, 1983, or five years before the expiration of the lease contract, petitioner asked respondent to adjust or increase the
amount of rentals citing that the country was experiencing extraordinary inflation. In a letter dated August 3, 1983, respondent
refused petitioner's request and declared that the terms of the lease contract are clear as to the rental amounts therein provided
being "the maximum rental which the lessor may collect during the term of the lease." 4
On September 21, 1983, petitioner instituted a complaint before the RTC praying for, among other things, the payment by
respondent of adjusted rentals based on the value of the Philippine peso at the time the contract of lease was executed. The
complaint invoked Article 1250 of the Civil Code, stating that since the execution of the contract of lease in 1968 an extraordinary
inflation had supervened resulting from the deterioration of worldwide economic conditions, a circumstance that was not foreseen
and could not have been reasonably foreseen by the parties at the time they entered into contract.
To substantiate its allegation of extraordinary inflation, petitioner presented as witness Mr. Narciso Uy, Assistant Director of the
Supervising and Examining Sector of the Central Bank, who attested that the inflation rate increased abruptly during the period
1982 to 1985, caused mainly by the devaluation of the peso. 5 Petitioner also submitted into evidence a certification of the official
inflation rates from 1966 to 1986 prepared by the National Economic Development Authority ("NEDA") based on consumer price
index, which reflected that at the time the parties entered into the subject contract, the inflation rate was only 2.06%; then, it
soared to 34.51% in 1974, and in 1984, reached a high of 50.34%. 6
In a decision rendered on July 15, 1991, the RTC dismissed the complaint for lack of merit. This judgment was affirmed by the
Court of Appeals. Both courts found that petitioner was unable to prove the existence of extraordinary inflation from 1968 to 1983
(or from the year of the execution of the contract up to the year of the filing of the complaint before the RTC) as to justify an

adjustment or increase in the rentals based upon the provisions of Article 1250 of the Civil Code.
The Court of Appeals declared that although, admittedly, there was an economic inflation during the period in question, it was not
such as to call for the application of Article 1250 which is made to apply only to "violent and sudden changes in the price level or
uncommon or unusual decrease of the value of the currency. (It) does not contemplate of a normal or ordinary decline in the
purchasing power of the peso."7
The Court of Appeals also found similarly with the trial court that the terms of rental in the contract of lease dated July 16, 1968
are clear and unequivocal as to the specific amount of the rental rates and the fact that the rentals therein provided shall be the
"maximum rental" which petitioner as lessor may collect. Absent any showing that such contractual provisions are contrary to law,
morals, good customs, public order or public policy, the Court of Appeals held that there was no basis for not acknowledging their
binding effect upon the parties. It also upheld the application by the trial court of the ruling in Filipino Pipe and Foundry
Corporation vs. National Waterworks and Sewerage Authority, 161 SCRA 32, where the Court held that although there has been a
decline in the purchasing power of the Philippine peso during the period 1961 to 1971, such downward fall of the currency could
not be considered "extraordinary" and was simply a universal trend that has not spared the Philippines.
Thus, the dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, in view of the foregoing, the appeal is hereby DISMISSED and the decision appealed from is hereby AFFIRMED.
SO ORDERED.8
Petitioner's motion for reconsideration of the above decision was denied by the Court of Appeals in a resolution dated March 10,
1999.
Aggrieved, petitioner filed this petition for review on certiorari where she assails as erroneous the decision of the Court of Appeals,
specifically, (1) in ruling that Article 1250 of the Civil Code is inapplicable to the instant case, (2) in not recognizing the applicability
of the principle of rebus sic stantibus, and (3) in applying the ruling in Filipino Pipe and Foundry Corporation vs. NAWASA.
Petitioner contends that the monthly rental of P3.00 per square meter is patently inequitable. Based on the inflation rates supplied
by NEDA, there was an unusual increase in inflation that could not have been foreseen by the parties; otherwise, they would not
have entered into a relatively long-term contract of lease. She argued that the rentals in this case should not be regarded by their
quantitative or nominal value, but as "debts of value", that is, the rental rates should be adjusted to reflect the value of the peso at
the time the lease was contracted.9
Petitioner also insists that the factual milieu of the present case is distinct from that in Filipino Pipe and Foundry Corporation vs.
NAWASA. She pointed out that the inflation experienced by the country during the period 1961 to 1971 (the pertinent time period
in the Filipino Pipe case) had a lowest of 1.35% in 1969 and a highest of 15.03% in 1971, whereas in the instant case, involving
the period 1968 to 1983, there had been highly abnormal inflation rates like 34.51% in 1974 (triggered by the OPEC oil price
increases in 1973) and 50.34% in 1984 (caused by the assassination of Benigno Aquino, Jr. in 1983). Petitioner argues that the
placing of the country under martial rule in 1972, the OPEC oil price increases in 1973, and the Aquino assassination which
triggered the EDSA revolution, were fortuitous events that drastically affected the Philippine economy and were beyond the
reasonable contemplation of the parties.
To further bolster her arguments, petitioner invokes by analogy the principle of rebus sic stantibus in public international law, under
which a vital change of circumstances justifies a state's unilateral withdrawal from a treaty. In the herein case, petitioner posits that
in pegging the monthly rental rates of P2.50 and P3.00 per square meter, respectively, the parties were guided by the economic
conditions prevalent in 1968, when the Philippines faced robust economic prospects. Petitioner contends that between her and
respondent, a corporation engaged in high stakes business and employing economic and business experts, it is the latter who had
the unmistakable advantage to analyze the feasibility of entering into a 20-year lease contract at such meager rates.
The only issue crucial to the present appeal is whether there existed an extraordinary inflation during the period 1968 to 1983 that
would call for the application of Article 1250 of the Civil Code and justify an adjustment or increase of the rentals between the
parties.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of
the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
Article 1250 was inserted in the Civil Code of 1950 to abate the uncertainty and confusion that affected contracts entered into or
payments made during World War II, and to help provide a just solution to future cases. 10 The Court has, in more than one
occasion, been asked to interpret the provisions of Article 1250, and to expound on the scope and limits of "extraordinary
inflation".
We have held extraordinary inflation to exist when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could
not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of
the obligation.11
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry Corporation vs. NAWASA, supra, is that
which happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2
to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by
October 1923, it had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction
[Third Edition]).
As reported, "prices were going up every week, then every day, then every hour.1wphi1 Women were paid several times a day
so that they could rush out and exchange their money for something of value before what little purchasing power was left
dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to
their waiting wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of
bread, billions." (Sidney Rutberg, "The Money Balloon", New York: Simon and Schuster, 1975, p. 19, cited in "Economics, An

Introduction" by Villegas & Abola, 3rd Ed.)

The supervening of extraordinary inflation is never assumed. 12 The party alleging it must lay down the factual basis for the
application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and statistics submitted by plaintiff-appellant
proved that there has been a decline in the purchasing power of the Philippine peso, but this downward fall cannot be considered
"extraordinary" but was simply a universal trend that has not spared our country. 13 Similarly, in Huibonhoa vs. Court of Appeals,14
the Court dismissed plaintiff-appellant's unsubstantiated allegation that the Aquino assassination in 1983 caused building and
construction costs to double during the period July 1983 to February 1984. In Serra vs. Court of Appeals,15 the Court again did not
consider the decline in the peso's purchasing power from 1983 to 1985 to be so great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of Article 1250 the Philippine
economic crisis in the early 1980s --- when, based on petitioner's evidence, the inflation rate rose to 50.34% in 1984. We hold that
there is no legal or factual basis to support petitioner's allegation of the existence of extraordinary inflation during this period, or,
for that matter, the entire time frame of 1968 to 1983, to merit the adjustment of the rentals in the lease contract dated July 16,
1968. Although by petitioner's evidence there was a decided decline in the purchasing power of the Philippine peso throughout
this period, we are hard put to treat this as an "extraordinary inflation" within the meaning and intent of Article 1250. Rather, we
adopt with approval the following observations of the Court of Appeals on petitioner's evidence, especially the NEDA certification
of inflation rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any single year; (b) the highest official
inflation rate recorded was in 1984 which reached only 50.34%; (c) over a twenty one (21) year period, the Philippines
experienced a single-digit inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in
other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines experienced
double-digit inflation rates, the average of those rates was only 20.88%; (e) while there was a decline in the purchasing power of
the Philippine currency from the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is a normal erosion of
the value of the Philippine peso which is a characteristic of most currencies. 16
"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in the past three to four decades.
Unfortunate as this trend may be, it is certainly distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation are not to be applied without an official declaration thereof
by competent authorities.17
Lastly, the provisions on rentals in the lease contract dated July 16, 1968 between petitioner and respondent are clear and
categorical, and we have no reason to suppose that such lease contract does not reflect or express their true intention and
agreement. The contract is the law between the parties and if there is indeed reason to adjust the rent, the parties could have by
themselves negotiated the amendment of the contract. 18
WHEREFORE, the petition seeking the reversal of the decision of the Court of Appeals in CA-G.R. CV No. 54115 is DENIED.
SO ORDERED.

G.R. No. 130972

January 23, 2002

PHILIPPINE LAWIN BUS, CO., MASTER TOURS & TRAVEL CORP., MARCIANO TAN, ISIDRO TAN, ESTEBAN TAN and
HENRY TAN, petitioners,
vs.
COURT OF APPEALS and ADVANCE CAPITAL CORPORATION, respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review via certiorari of the decision of the Court of Appeals, 1 reversing that of the trial court 2 and
sentencing petitioners as follows:
"WHEREFORE, the appealed decision should be, as it is hereby REVERSED and SET ASIDE. In lieu thereof, a new one is
hereby rendered ordering the defendants-appellees to pay, jointly and solidarily, in favor of plaintiff-appellant Advance Capital
Corporation, the following amounts:
"1. P16,484,994.42, the principal obligation under the two promissory note Nos. 003 and 00037 plus interest and penalties;
"2. P100,000.00 for loss of goodwill and good reputation;
"3. An amount equivalent to 10% of the collectible amount, plus P50,000, as acceptance fee and P500 per appearance, as and for
attorneys fees: and
"4. P100,000 as litigation expenses.
"Costs shall be taxed against defendant-appellees.
"SO ORDERED."3
The Facts
The facts, as found by the Court of Appeals, are as follows:
"On 7 August 1990 plaintiff Advance Capital Corporation, a licensed lending investor, extended a loan to defendant Philippine
Lawin Bus Company (hereafter referred to as LAWIN), in the amount of P8,000,000.00 payable within a period of one (1) year, as

evidenced by a Credit Agreement (Exhibits "B" to "B-4-B"). The defendant, through Marciano Tan, its Executive Vice President,
executed Promissory Note No. 003, for the amount of P8,000,000.00 (Exhs. "C" to "C-1").
"To guarantee payment of the loan, defendant Lawin executed in favor of plaintiff the following documents: (1) A Deed of Chattel
Mortgage wherein 9 units of buses were constituted as collaterals (Exhibits "F" to "F-7"): (2) A joint and several UNDERTAKING of
defendant Master Tours and Travel Corporation dated 07 August 1990, signed by Isidro Tan and Marciano Tan (Exhs. "H" to "H-1):
and (3) A joint and several UNDERTAKING dated 21 August 1990, executed and signed by Esteban, Isidro, Marciano and Henry,
all surnamed Tan (Exhs. "I" to "I-6").
"Out of the P8,000,000.00 loan, P1,800,000.00 was paid. Thus, on 02 November 1990, defendant Bus Company was able to avail
an additional loan of P2,000,000.00 for one (1) month under Promissory Note 00028 (Exhs. "J"-"J-1").
"Defendant LAWIN failed to pay the aforementioned promissory note and the same was renewed on 03 December 1990 to
become due on or before 01 February 1991, under Promissory Note 00037 (Exh. "K").
"On 15 May 1991 for failure to pay the two promissory notes, defendant LAWIN was granted a loan re-structuring for two (2)
months to mature on 31 July 1991.
"Despite the restructuring, defendant LAWIN failed to pay. Thus, plaintiff foreclosed the mortgaged buses and as the sole bidder
thereof, the amount of P2,000,000.00 was accepted by the deputy sheriff conducting the sale and credited to the account of
defendant LAWIN.
"Thereafter, on 27 May 1992, identical demand letters were sent to the defendants to pay their obligation (Exhs. "X" to "CC").
Despite repeated demands, the defendants failed to pay their indebtedness which totaled of P16,484,992.42 as of 31 July 1992
(Exhs. "DD"-"DD-1").
"Thus, the suit for sum of money, wherein the plaintiff prays that defendants solidarily pay plaintiff as of July 31, 1992 the sum of
(a) P16,484,994.12 as principal obligation under the two promissory notes Nos. 003 and 00037, plus interests and penalties: (b)
P300,000.00 for loss of good will and good business reputation: (c) attorneys fees amounting to P100,000.00 as acceptance fee
and a sum equivalent to 10% of the collectible amount, and P500.00 as appearance fee; (d) P200,000.00 as litigation expenses;
(e) exemplary damages in an amount to be awarded at the courts discretion; and (f) the costs.
"On 04 September 1993, a writ of preliminary injunction was issued with respect to movable and immovable properties of the
defendants.
"In answer to the complaint, defendants-appellees assert by way of special and affirmative defense, that there was already an
arrangement as to the full settlement of the loan obligation by way of:
"17.A. Sale of the nine (9) units passenger buses the proceeds of which will be credited against the loan amount as full payment
thereof; or in the alternative.
"17.B. Plaintiff will shoulder and bear the cost of rehabilitating the buses, with the amount thereof to be included in the total
obligation of defendant Lawin and the bus operated, with the earnings thereof to be applied to the loan obligation of defendant
Lawin." (p. 4 Answer; p. 166, rec.)
"Defendants further assert that the foreclosure sale was in violation of the aforequoted arrangement and prayed for the
nullification of the same and the dismissal of the complaint." 4
On 28 June 1995, the trial court rendered a decision dismissing the complaint, as follows:
"WHEREFORE, judgment is rendered as follows:
"1. Dismissing the complaint for lack of merit;
"2. Declaring the foreclosure and auction sale null and void;
"3. Declaring the obligation or indebtedness of defendants EXTINGUISHED;
"4. Declaring the writ of attachment issued in this case null and void and, therefore, is hereby declared dissolved; and
"5. Ordering the Sheriff of this Branch or whoever is in possession, to return all the personal properties attached in this case to the
owner/s thereof within one (1) week from the finality of this decision;
"6. Dismissing defendants counterclaim for lack of sufficient merit.
"No pronouncement as to costs.
"SO ORDERED."5
In time, respondent Advance Capital Corporation appealed from the decision to the Court of Appeals. 6
On 30 September 1997, the Court of Appeals promulgated a decision reversing that of the trial court, the dispositive portion of
which is set out in the opening paragraph of this decision.
Hence, this appeal.7
The Issue
The issue raised is whether there was dacion en pago between the parties upon the surrender or transfer of the mortgaged buses
to the respondent.8
The Courts Ruling
We deny the petition, with modification.
The issue raised is factual. In an appeal via certiorari, we may not review the factual findings of the Court of Appeals. 9 When
supported by substantial evidence, the findings of fact of the Court of Appeals are conclusive and binding on the parties and are
not reviewable by this Court,10 unless the case falls under any of the recognized exceptions to the rule. 11

Petitioner failed to prove that the case falls within the exceptions. 12 The Supreme Court is not a trier of facts. 13 It is not our function
to review, examine and evaluate or weigh the probative value of the evidence presented. 14 A question of fact would arise in such
event.15
Nonetheless, we agree with the Court of Appeals that there was no dacion en pago that took place between the parties.
In dacion en pago, property is alienated to the creditor in satisfaction of a debt in money. 16 It is "the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation." 17 It
"extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation,
in which case the obligation is totally extinguished." 18
Article 1245 of the Civil Code provides that the law on sales shall govern an agreement of dacion en pago. A contract of sale is
perfected at the moment there is a meeting of the minds of the parties thereto upon the thing which is the object of the contract
and upon the price.19 In Filinvest Credit Corporation v. Philippine Acetylene Co., Inc., we said:
"x x x. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding obligation. The undertaking really partakes in one sense of the nature of sale, that is, the
creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtors debt. 1wphi1
As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale,
while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or
novation, to have the effect of totally extinguishing the debt or obligation." 20
In this case, there was no meeting of the minds between the parties on whether the loan of the petitioners would be extinguished
by dacion en pago. The petitioners anchor their claim solely on the testimony of Marciano Tan that he proposed to extinguish
petitioners obligation by the surrender of the nine buses to the respondent acceded to as shown by receipts its representative
made.21 However, the receipts executed by respondents representative as proof of an agreement of the parties that delivery of the
buses to private respondent would result in extinguishing petitioners obligation do not in any way reflect the intention of the
parties that ownership thereof by respondent would be complete and absolute. The receipts show that the two buses were
delivered to respondent in order that it would take custody for the purpose of selling the same. The receipts themselves in fact
show that petitioners deemed respondent as their agent in the sale of the two vehicles whereby the proceeds thereof would be
applied in payment of petitioners indebtedness to respondent. Such an agreement negates transfer of absolute ownership over
the property to respondent, as in a sale. Thus, in Philippine National Bank v. Pineda22 we held that where machinery and
equipment were repossessed to secure the payment of a loan obligation and not for the purpose of transferring ownership thereof
to the creditor in satisfaction of said loan, no dacion en pago was ever accomplished.1wphi1
The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of Appeals 23 with MODIFICATION as
follows:
WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE. In lieu thereof, judgment is hereby rendered
ordering defendants-appellees to pay, jointly and severally, plaintiff-appellant Advance Capital Corp. the following amounts:
(1) P16,484,994.42, the principal obligation under the two promissory notes plus 12% per annum from the finality of this decision
until fully paid;
(2) P50,000.00 as attorneys fees;
(3) Costs of suit.
All other monetary awards are deleted.
SO ORDERED.

G.R. No. 168646

January 12, 2011

LUZON DEVELOPMENT BANK, Petitioner,

vs.
ANGELES CATHERINE ENRIQUEZ, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 168666
DELTA DEVELOPMENT and MANAGEMENT SERVICES, INC., Petitioner,
vs.
ANGELES CATHERINE ENRIQUEZ and LUZON DEVELOPMENT BANK, Respondents.
DECISION
DEL CASTILLO, J.:
The protection afforded to a subdivision lot buyer under Presidential Decree (PD) No. 957 or The Subdivision and Condominium
Buyers Protective Decree will not be defeated by someone who is not an innocent purchaser for value. The lofty aspirations of PD
957 should be read in every provision of the statute, in every contract that undermines its objects, in every transaction which
threatens its fruition. "For a statute derives its vitality from the purpose for which it is enacted and to construe it in a manner that
disregards or defeats such purpose is to nullify or destroy the law." 1

These cases involve the separate appeals of Luzon Development Bank 2 (BANK) and Delta Development and Management
Services, Inc.3 (DELTA) from the November 30, 2004 Decision of the Court of Appeals (CA), as well as its June 22, 2005
Resolution in CA-G.R. SP No. 81280. The dispositive portion of the assailed Decision reads:
WHEREFORE, premises considered, the Decision dated June 17, 2003 and Resolution dated November 24, 2003 are
AFFIRMED with [m]odification in so far as Delta Development and Management Services, Inc. is liable and directed to pay
petitioner Luzon Development Bank the value of the subject lot subject matter of the Contract to Sell between Delta Development
and Management Services, Inc. and the private respondent [Catherine Angeles Enriquez].
SO ORDERED.4
Factual Antecedents
The BANK is a domestic financial corporation that extends loans to subdivision developers/owners. 5
Petitioner DELTA is a domestic corporation engaged in the business of developing and selling real estate properties, particularly
Delta Homes I in Cavite. DELTA is owned by Ricardo De Leon (De Leon), 6 who is the registered owner of a parcel of land covered
by Transfer Certificate of Title (TCT) No. T-637183 7 of the Registry of Deeds of the Province of Cavite, which corresponds to Lot 4
of Delta Homes I. Said Lot 4 is the subject matter of these cases.
On July 3, 1995, De Leon and his spouse obtained a P4 million loan from the BANK for the express purpose of developing Delta
Homes I.8 To secure the loan, the spouses De Leon executed in favor of the BANK a real estate mortgage (REM) on several of
their properties,9 including Lot 4. Subsequently, this REM was amended 10 by increasing the amount of the secured loan from P4
million to P8 million. Both the REM and the amendment were annotated on TCT No. T-637183. 11
DELTA then obtained a Certificate of Registration12 and a License to Sell13 from the Housing and Land Use Regulatory Board
(HLURB).
Sometime in 1997, DELTA executed a Contract to Sell with respondent Angeles Catherine Enriquez (Enriquez) 14 over the house
and lot in Lot 4 for the purchase price of P614,950.00. Enriquez made a downpayment of P114,950.00. The Contract to Sell
contained the following provisions:
That the vendee/s offered to buy and the Owner agreed to sell the above-described property subject to the following terms and
conditions to wit:
xxxx
6. That the (sic) warning shall be served upon the Vendee/s for failure to pay x x x Provided, however, that for failure to pay three
(3) successive monthly installment payments, the Owner may consider this Contract to Sell null and void ab initio without further
proceedings or court action and all payments shall be forfeited in favor of the Owner as liquidated damages and expenses for
documentations. x x x
That upon full payment of the total consideration if payable in cash, the Owner shall execute a final deed of sale in favor of the
Vendee/s. However, if the term of the contract is for a certain period of time, only upon full payment of the total consideration that
a final deed of sale shall be executed by the Owner in favor of the Vendee/s. 15
When DELTA defaulted on its loan obligation, the BANK, instead of foreclosing the REM, agreed to a dation in payment or a
dacion en pago. The Deed of Assignment in Payment of Debt was executed on September 30, 1998 and stated that DELTA
"assigns, transfers, and conveys and sets over [to] the assignee that real estate with the building and improvements existing
thereon x x x in payment of the total obligation owing to [the Bank] x x x." 16 Unknown to Enriquez, among the properties assigned
to the BANK was the house and lot of Lot 4, 17 which is the subject of her Contract to Sell with DELTA. The records do not bear out
and the parties are silent on whether the BANK was able to transfer title to its name. It appears, however, that the dacion en pago
was not annotated on the TCT of Lot 4.18
On November 18, 1999, Enriquez filed a complaint against DELTA and the BANK before the Region IV Office of the HLURB 19
alleging that DELTA violated the terms of its License to Sell by: (a) selling the house and lots for a price exceeding that prescribed
in Batas Pambansa (BP) Bilang 220; 20 and (b) failing to get a clearance for the mortgage from the HLURB. Enriquez sought a full
refund of the P301,063.42 that she had already paid to DELTA, award of damages, and the imposition of administrative fines on
DELTA and the BANK.
In his June 1, 2000 Decision, 21 HLURB Arbiter Atty. Raymundo A. Foronda upheld the validity of the purchase price, but ordered
DELTA to accept payment of the balance of P108,013.36 from Enriquez, and (upon such payment) to deliver to Enriquez the title
to the house and lot free from liens and encumbrances. The dispositive portion reads:
WHEREFORE, premises considered, a decision is hereby rendered as follows:
1. Ordering [DELTA] to accept complainant[]s payments in the amount of P108,013.36 representing her balance based on the
maximum selling price of P375,000.00;
2. Upon full payment, ordering Delta to deliver the title in favor of the complainant free from any liens and encumbrances;
3. Ordering [DELTA] to pay complainant the amount of P50,000.00 as and by way of moral damages;
4. Ordering [DELTA] to pay complainant the amount of P50,000.00 as and by way of exemplary damages;
5. Ordering [DELTA] to pay complainant P10,000.00 as costs of suit; and
6. Respondent DELTA to pay administrative fine of P10,000.00[22] for violation of Section 18 of P.D. 957 [23] and another P10,000.00
for violation of Section 22 of P.D. 957.[24
SO ORDERED.25
DELTA appealed the arbiters Decision to the HLURB Board of Commissioners. 26 DELTA questioned the imposition of an
administrative fine for its alleged violation of Section 18 of PD 957. It argued that clearance was not required for mortgages that
were constituted on a subdivision project prior to registration. According to DELTA, it did not violate the terms of its license
because it did not obtain a new mortgage over the subdivision project. It likewise assailed the award of moral and exemplary

damages to Enriquez on the ground that the latter has no cause of action. 27
Ruling of the Board of Commissioners (Board)28
The Board held that all developers should obtain a clearance for mortgage from the HLURB, regardless of the date when the
mortgage was secured, because the law does not distinguish. Having violated this legal requirement, DELTA was held liable to
pay the administrative fine.
The Board upheld the validity of the contract to sell between DELTA and Enriquez despite the alleged violation of the price ceilings
in BP 220. The Board held that DELTA and Enriquez were presumed to have had a meeting of the minds on the object of the sale
and the purchase price. Absent any circumstance vitiating Enriquezconsent, she was presumed to have willingly and voluntarily
agreed to the higher purchase price; hence, she was bound by the terms of the contract.
The Board, however, deleted the arbiters award of damages to Enriquez on the ground that the latter was not free from liability
herself, given that she was remiss in her monthly amortizations to DELTA.
The dispositive portion of the Boards Decision reads:
Wherefore, in view of the foregoing, the Office belows decision dated June 01, 2000 is hereby modified to read as follows:
1. Ordering [Enriquez] to pay [DELTA] the amount due from the time she suspended payment up to filing of the complaint with
12% interest thereon per annum; thereafter the provisions of the Contract to Sell shall apply until full payment is made;
2. Ordering [DELTA] to pay an [a]dministrative [f]ine of P10,000.00 for violation of its license to sell and for violation of Section 18
of P.D. 957.
SO ORDERED. Quezon City.29
Enriquez moved for a reconsideration of the Boards Decision 30 upholding the contractual purchase price. She maintained that the
price for Lot 4 should not exceed the price ceiling provided in BP 220. 31lawph!l
Finding Enriquezs arguments as having already been passed upon in the decision, the Board denied reconsideration. The board,
however, modified its decision, with respect to the period for the imposition of interest payments. The Boards resolution 32 reads:
WHEREFORE, premises considered, to [sic] directive No. 1 of the dispositive portion of the decision of our decision [sic] is
MODIFIED as follows:
1. Ordering complainant to pay respondent DELTA the amount due from the time she suspended (sic) at 12% interest per annum,
reckoned from finality of this decision[,] thereafter the provisions of the Contract to Sell shall apply until full payment is made.
In all other respects, the decision is AFFIRMED.
SO ORDERED.33
Both Enriquez and the BANK appealed to the Office of the President (OP). 34 The BANK disagreed with the ruling upholding
Enriquezs Contract to Sell; and insisted on its ownership over Lot 4. It argued that it has become impossible for DELTA to comply
with the terms of the contract to sell and to deliver Lot 4s title to Enriquez given that DELTA had already relinquished all its rights
to Lot 4 in favor of the BANK35 via the dation in payment.
Meanwhile, Enriquez insisted that the Board erred in not applying the ceiling price as prescribed in BP 220. 36
Ruling of the Office of the President37
The OP adopted by reference the findings of fact and conclusions of law of the HLURB Decisions, which it affirmed in toto.
Enriquez filed a motion for reconsideration, insisting that she was entitled to a reduction of the purchase price, in order to conform
to the provisions of BP 220.38 The motion was denied for lack of merit.39
Only the BANK appealed the OPs Decision to the CA. 40 The BANK reiterated that DELTA can no longer deliver Lot 4 to Enriquez
because DELTA had sold the same to the BANK by virtue of the dacion en pago. 41 As an alternative argument, in case the
appellate court should find that DELTA retained ownership over Lot 4 and could convey the same to Enriquez, the BANK prayed
that its REM over Lot 4 be respected such that DELTA would have to redeem it first before it could convey the same to Enriquez in
accordance with Section 2542 of PD 957.43
The BANK likewise sought an award of exemplary damages and attorneys fees in its favor because of the baseless suit filed by
Enriquez against it.44
Ruling of the Court of Appeals45
The CA ruled against the validity of the dacion en pago executed in favor of the BANK on the ground that DELTA had earlier
relinquished its ownership over Lot 4 in favor of Enriquez via the Contract to Sell. 46
Since the dacion en pago is invalid with respect to Lot 4, the appellate court held that DELTA remained indebted to the BANK to
the extent of Lot 4s value. Thus, the CA ordered DELTA to pay the corresponding value of Lot 4 to the BANK. 47
The CA also rejected the BANKs argument that, before DELTA can deliver the title to Lot 4 to Enriquez, DELTA should first
redeem the mortgaged property from the BANK. The CA held that the BANK does not have a first lien on Lot 4 because its real
estate mortgage over the same had already been extinguished by the dacion en pago. Without a mortgage, the BANK cannot
require DELTA to redeem Lot 4 prior to delivery of title to Enriquez. 48
The CA denied the BANKs prayer for the award of exemplary damages and attorneys fees for lack of factual and legal basis. 49
Both DELTA50 and the BANK51 moved for a reconsideration of the CAs Decision, but both were denied. 52
Hence, these separate petitions of the BANK and DELTA.
Petitioner Deltas arguments53

DELTA assails the CA Decision for holding that DELTA conveyed its ownership over Lot 4 to Enriquez via the Contract to Sell.
DELTA points out that the Contract to Sell contained a condition that ownership shall only be transferred to Enriquez upon the
latters full payment of the purchase price to DELTA. Since Enriquez has yet to comply with this suspensive condition, ownership
is retained by DELTA.54 As the owner of Lot 4, DELTA had every right to enter into a dation in payment to extinguish its loan
obligation to the BANK. The BANKs acceptance of the assignment, without any reservation or exception, resulted in the
extinguishment of the entire loan obligation; hence, DELTA has no more obligation to pay the value of Enriquezs house and lot to
the BANK.55
DELTA prays for the reinstatement of the OP Decision.
The BANKs arguments56
Echoing the argument of DELTA, the BANK argues that the Contract to Sell did not involve a conveyance of DELTAs ownership
over Lot 4 to Enriquez. The Contract to Sell expressly provides that DELTA retained ownership over Lot 4 until Enriquez paid the
full purchase price. Since Enriquez has not yet made such full payment, DELTA retained ownership over Lot 4 and could validly
convey the same to the BANK via dacion en pago. 57
Should the dacion en pago over Lot 4 be invalidated and the property ordered to be delivered to Enriquez, the BANK contends
that DELTA should pay the corresponding value of Lot 4 to the BANK. It maintains that the loan obligation extinguished by the
dacion en pago only extends to the value of the properties delivered; if Lot 4 cannot be delivered to the BANK, then the loan
obligation of DELTA remains to the extent of Lot 4s value. 58
The BANK prays to be declared the rightful owner of the subject house and lot and asks for an award of exemplary damages and
attorneys fees.
Enriquezs waiver
Enriquez did not file comments59 or memoranda in both cases; instead, she manifested that she will just await the outcome of the
case.60
Issues
The following are the issues raised by the two petitions:
1. Whether the Contract to Sell conveys ownership;
2. Whether the dacion en pago extinguished the loan obligation, such that DELTA has no more obligations to the BANK;
3. Whether the BANK is entitled to damages and attorneys fees for being compelled to litigate; and
4. What is the effect of Enriquezs failure to appeal the OPs Decision regarding her obligation to pay the balance on the purchase
price.
Our Ruling
Mortgage contract void
As the HLURB Arbiter and Board of Commissioners both found, DELTA violated Section 18 of PD 957 in mortgaging the
properties in Delta Homes I (including Lot 4) to the BANK without prior clearance from the HLURB. This point need not be
belabored since the parties have chosen not to appeal the administrative fine imposed on DELTA for violation of Section 18.
This violation of Section 18 renders the mortgage executed by DELTA void. We have held before that "a mortgage contract
executed in breach of Section 18 of [PD 957] is null and void." 61 Considering that "PD 957 aims to protect innocent subdivision lot
and condominium unit buyers against fraudulent real estate practices," we have construed Section 18 thereof as "prohibitory and
acts committed contrary to it are void."62
Because of the nullity of the mortgage, neither DELTA nor the BANK could assert any right arising therefrom. The BANKs loan of
P8 million to DELTA has effectively become unsecured due to the nullity of the mortgage. The said loan, however, was eventually
settled by the two contracting parties via a dation in payment. In the appealed Decision, the CA invalidated this dation in payment
on the ground that DELTA, by previously entering into a Contract to Sell, had already conveyed its ownership over Lot 4 to
Enriquez and could no longer convey the same to the BANK. This is error, prescinding from a wrong understanding of the nature
of a contract to sell.
Contract to sell does not transfer ownership
Both parties are correct in arguing that the Contract to Sell executed by DELTA in favor of Enriquez did not transfer ownership
over Lot 4 to Enriquez. A contract to sell is one where the prospective seller reserves the transfer of title to the prospective buyer
until the happening of an event, such as full payment of the purchase price. What the seller obliges himself to do is to sell the
subject property only when the entire amount of the purchase price has already been delivered to him. "In other words, the full
payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from
arising and thus, ownership is retained by the prospective seller without further remedies by the prospective buyer." 63 It does not,
by itself, transfer ownership to the buyer.64
In the instant case, there is nothing in the provisions of the contract entered into by DELTA and Enriquez that would exempt it from
the general definition of a contract to sell. The terms thereof provide for the reservation of DELTAs ownership until full payment of
the purchase price; such that DELTA even reserved the right to unilaterally void the contract should Enriquez fail to pay three
successive monthly amortizations.
Since the Contract to Sell did not transfer ownership of Lot 4 to Enriquez, said ownership remained with DELTA. DELTA could then
validly transfer such ownership (as it did) to another person (the BANK). However, the transferee BANK is bound by the Contract
to Sell and has to respect Enriquezs rights thereunder. This is because the Contract to Sell, involving a subdivision lot, is covered
and protected by PD 957. One of the protections afforded by PD 957 to buyers such as Enriquez is the right to have her contract
to sell registered with the Register of Deeds in order to make it binding on third parties. Thus, Section 17 of PD 957 provides:
Section 17. Registration. All contracts to sell, deeds of sale, and other similar instruments relative to the sale or conveyance of the

subdivision lots and condominium units, whether or not the purchase price is paid in full, shall be registered by the seller in the
Office of the Register of Deeds of the province or city where the property is situated.
x x x x (Emphasis supplied.)
The purpose of registration is to protect the buyers from any future unscrupulous transactions involving the object of the sale or
contract to sell, whether the purchase price therefor has been fully paid or not. Registration of the sale or contract to sell makes it
binding on third parties; it serves as a notice to the whole world that the property is subject to the prior right of the buyer of the
property (under a contract to sell or an absolute sale), and anyone who wishes to deal with the said property will be held bound by
such prior right.
While DELTA, in the instant case, failed to register Enriquezs Contract to Sell with the Register of Deeds, this failure will not
prejudice Enriquez or relieve the BANK from its obligation to respect Enriquezs Contract to Sell. Despite the non-registration, the
BANK cannot be considered, under the circumstances, an innocent purchaser for value of Lot 4 when it accepted the latter
(together with other assigned properties) as payment for DELTAs obligation. The BANK was well aware that the assigned
properties, including Lot 4, were subdivision lots and therefore within the purview of PD 957. It knew that the loaned amounts were
to be used for the development of DELTAs subdivision project, for this was indicated in the corresponding promissory notes. The
technical description of Lot 4 indicates its location, which can easily be determined as included within the subdivision
development. Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned
properties were already covered by existing contracts to sell in favor of subdivision lot buyers. As observed by the Court in another
case involving a bank regarding a subdivision lot that was already subject of a contract to sell with a third party:
[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable
person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those
obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whether any
part of the property was already intended to be the subject of any other contract involving buyers or potential buyers. In granting
the loan, [the Bank] should not have been content merely with a clean title, considering the presence of circumstances indicating
the need for a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be
deemed to be an innocent mortgagee. x x x65
Further, as an entity engaged in the banking business, the BANK is required to observe more care and prudence when dealing
with registered properties. The Court cannot accept that the BANK was unaware of the Contract to Sell existing in favor of
Enriquez. In Keppel Bank Philippines, Inc. v. Adao, 66 we held that a bank dealing with a property that is already subject of a
contract to sell and is protected by the provisions of PD 957, is bound by the contract to sell (even if the contract to sell in that
case was not registered). In the Courts words:
It is true that persons dealing with registered property can rely solely on the certificate of title and need not go beyond it. However,
x x x, this rule does not apply to banks. Banks are required to exercise more care and prudence than private individuals in dealing
even with registered properties for their business is affected with public interest. As master of its business, petitioner should have
sent its representatives to check the assigned properties before signing the compromise agreement and it would have discovered
that respondent was already occupying one of the condominium units and that a contract to sell existed between [the vendee] and
[the developer]. In our view, petitioner was not a purchaser in good faith and we are constrained to rule that petitioner is bound by
the contract to sell.67
Bound by the terms of the Contract to Sell, the BANK is obliged to respect the same and honor the payments already made by
Enriquez for the purchase price of Lot 4. Thus, the BANK can only collect the balance of the purchase price from Enriquez and
has the obligation, upon full payment, to deliver to Enriquez a clean title over the subject property. 68
Dacion en pago extinguished the loan obligation
The BANK then posits that, if title to Lot 4 is ordered delivered to Enriquez, DELTA has the obligation to pay the BANK the
corresponding value of Lot 4. According to the BANK, the dation in payment extinguished the loan only to the extent of the value
of the thing delivered. Since Lot 4 would have no value to the BANK if it will be delivered to Enriquez, DELTA would remain
indebted to that extent.
We are not persuaded. Like in all contracts, the intention of the parties to the dation in payment is paramount and controlling. The
contractual intention determines whether the property subject of the dation will be considered as the full equivalent of the debt and
will therefore serve as full satisfaction for the debt. "The dation in payment extinguishes the obligation to the extent of the value of
the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or
implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished." 69
In the case at bar, the Dacion en Pago executed by DELTA and the BANK indicates a clear intention by the parties that the
assigned properties would serve as full payment for DELTAs entire obligation:
KNOW ALL MEN BY THESE PRESENTS:
This instrument, made and executed by and between:
xxxx
THAT, the ASSIGNOR acknowledges to be justly indebted to the ASSIGNEE in the sum of ELEVEN MILLION EIGHT HUNDRED
SEVENTY-EIGHT THOUSAND EIGHT HUNDRED PESOS (P11,878,800.00), Philippine Currency as of August 25, 1998.
Therefore, by virtue of this instrument, ASSIGNOR hereby ASSIGNS, TRANSFERS, and CONVEYS AND SETS OVER [TO] the
ASSIGNEE that real estate with the building and improvements existing thereon, more particularly described as follows:
xxxx
of which the ASSIGNOR is the registered owner being evidenced by TCT No. x x x issued by the Registry of Deeds of Trece
Martires City.
THAT, the ASSIGNEE does hereby accept this ASSIGNMENT IN PAYMENT OF THE TOTAL OBLIGATION owing to him by the
ASSIGNOR as above-stated;70
Without any reservation or condition, the Dacion stated that the assigned properties served as full payment of DELTAs "total

obligation" to the BANK. The BANK accepted said properties as equivalent of the loaned amount and as full satisfaction of
DELTAs debt. The BANK cannot complain if, as it turned out, some of those assigned properties (such as Lot 4) are covered by
existing contracts to sell. As noted earlier, the BANK knew that the assigned properties were subdivision lots and covered by PD
957. It was aware of the nature of DELTAs business, of the location of the assigned properties within DELTAs subdivision
development, and the possibility that some of the properties may be subjects of existing contracts to sell which enjoy protection
under PD 957. Banks dealing with subdivision properties are expected to conduct a thorough due diligence review to discover the
status of the properties they deal with. It may thus be said that the BANK, in accepting the assigned properties as full payment of
DELTAs "total obligation," has assumed the risk that some of the assigned properties (such as Lot 4) are covered by contracts to
sell which it is bound to honor under PD 957.
A dacion en pago is governed by the law of sales. 71 Contracts of sale come with warranties, either express (if explicitly stipulated
by the parties) or implied (under Article 1547 et seq. of the Civil Code). In this case, however, the BANK does not even point to
any breach of warranty by DELTA in connection with the Dation in Payment. To be sure, the Dation in Payment has no express
warranties relating to existing contracts to sell over the assigned properties. As to the implied warranty in case of eviction, it is
waivable72 and cannot be invoked if the buyer knew of the risks or danger of eviction and assumed its consequences. 73 As we
have noted earlier, the BANK, in accepting the assigned properties as full payment of DELTAs "total obligation," has assumed the
risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957.
Award of damages
There is nothing on record that warrants the award of exemplary damages 74 as well as attorneys fees75 in favor of the BANK.
Balance to be paid by Enriquez
As already mentioned, the Contract to Sell in favor of Enriquez must be respected by the BANK.1avvphi1 Upon Enriquezs full
payment of the balance of the purchase price, the BANK is bound to deliver the title over Lot 4 to her. As to the amount of the
balance which Enriquez must pay, we adopt the OPs ruling thereon which sustained the amount stipulated in the Contract to Sell.
We will not review Enriquezs initial claims about the supposed violation of the price ceiling in BP 220, since this issue was no
longer pursued by the parties, not even by Enriquez, who chose not to file the required pleadings 76 before the Court. The parties
were informed in the Courts September 5, 2007 Resolution that issues that are not included in their memoranda shall be deemed
waived or abandoned. Since Enriquez did not file a memorandum in either petition, she is deemed to have waived the said issue.
WHEREFORE, premises considered, the appealed November 30, 2004 Decision of the Court of Appeals, as well as its June 22,
2005 Resolution in CA-G.R. SP No. 81280 are hereby AFFIRMED with the MODIFICATIONS that Delta Development and
Management Services, Inc. is NOT LIABLE TO PAY Luzon Development Bank the value of the subject lot; and respondent
Angeles Catherine Enriquez is ordered to PAY the balance of the purchase price and the interests accruing thereon, as decreed
by the Court of Appeals, to the Luzon Development Bank, instead of Delta Development and Management Services, Inc., within
thirty (30) days from finality of this Decision. The Luzon Development Bank is ordered to DELIVER a CLEAN TITLE to Angeles
Catherine Enriquez upon the latters full payment of the balance of the purchase price and the accrued interests.
SO ORDERED.

G.R. No. 182128

February 19, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (now PRIME EAST PROPERTIES, INC.) and AFP-RSBS, INC.,
Respondents.
DECISION
REYES, J.:
This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the Decision 2 dated August 13, 2007 and Resolution3
dated March 13, 2008 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 86033, which affirmed the Decision 4 dated
August 4, 2004 of the Office of the President (OP) in O.P. Case No. 04-D-182 (HLURB Case No. REM-A-030724-0186).
Facts of the Case
Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties Inc. 5 (PEPI) on an
installment basis a residential lot located in Binangonan, Rizal, with an area of 204 square meters 6 and covered by Transfer
Certificate of Title (TCT) No. 619608. Subsequently, PEPI assigned its rights over a 213,093-sq m property on August 1996 to
respondent Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc. (AFP-RSBS), which included the
property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from petitioner Philippine National Bank
(petitioner), secured by a mortgage over several properties, including Dees property. The mortgage was cleared by the Housing
and Land Use Regulatory Board (HLURB) on September 18, 1996. 7
After Dees full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP-RSBS on July 1998 in
Dees favor. Consequently, Dee sought from the petitioner the delivery of the owners duplicate title over the property, to no avail.
Thus, she filed with the HLURB a complaint for specific performance to compel delivery of TCT No. 619608 by the petitioner, PEPI
and AFP-RSBS, among others. In its Decision8 dated May 21, 2003, the HLURB ruled in favor of Dee and disposed as follows:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21-A, Village East Executive Homes covered by
Transfer Certificate of Title No. -619608-(TCT No. -619608-), and accordingly, surrender/release the title thereof to [Dee];
2. Immediately upon receipt by [Dee] of the owners duplicate of Transfer Certificate of Title No. -619608- (TCT No. -619608-),
respondents PEPI and AFP-RSBS are hereby ordered to deliver the title of the subject lot in the name of [Dee] free from all liens

and encumbrances;
3. Directing respondents PEPI and AFP-RSBS to pay [the petitioner] the redemption value of Lot 12, Block 21-A, Village East
Executive Homes covered by Transfer Certificate of Title No. -619608- (TCT No. -619608-) as agreed upon by them in their Real
Estate Mortgage within six (6) months from the time the owners duplicate of Transfer Certificate of Title No. -619608- (TCT No.
-619608-) is actually surrendered and released by [the petitioner] to [Dee];
4. In the alternative, in case of legal and physical impossibility on the part of [PEPI, AFP-RSBS, and the petitioner] to comply and
perform their respective obligation/s, as above-mentioned, respondents PEPI and AFP-RSBS are hereby ordered to jointly and
severally pay to [Dee] the amount of FIVE HUNDRED TWENTY THOUSAND PESOS ([P]520,000.00) plus twelve percent (12%)
interest to be computed from the filing of complaint on April 24, 2002 until fully paid; and
5. Ordering [PEPI, AFP-RSBS, and the petitioner] to pay jointly and severally [Dee] the following sums:
a) The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as attorneys fees;
b) The cost of litigation[;] and
c) An administrative fine of TEN THOUSAND PESOS ([P]10,000.00) payable to this Office fifteen (15) days upon receipt of this
decision, for violation of Section 18 in relation to Section 38 of PD 957.
SO ORDERED.9
The HLURB decision was affirmed by its Board of Commissioners per Decision dated March 15, 2004, with modification as to the
rate of interest.10

On appeal, the Board of Commissioners decision was affirmed by the OP in its Decision dated August 4, 2004, with modification
as to the monetary award.11
Hence, the petitioner filed a petition for review with the CA, which, in turn, issued the assailed Decision dated August 13, 2007,
affirming the OP decision. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated August 4, 2004 rendered by the Office of the
President in O. P. Case No. 04-D-182 (HLURB Case No. REM-A-030724-0186) is hereby AFFIRMED.
SO ORDERED.12
Its motion for reconsideration having been denied by the CA in the Resolution dated March 13, 2008, the petitioner filed the
present petition for review on the following grounds:
I. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING OUTRIGHT RELEASE OF TCT NO. 619608 DESPITE
PNBS DULY REGISTERED AND HLURB[-] APPROVED MORTGAGE ON TCT NO. 619608.
II. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING CANCELLATION OF MORTGAGE/RELEASE OF TITLE IN
FAVOR OF RESPONDENT DEE DESPITE THE LACK OF PAYMENT OR SETTLEMENT BY THE MORTGAGOR (API/PEPI and
AFP-RSBS) OF ITS EXISTING LOAN OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT OF REDEMPTION BY
THE MORTGAGOR AS MANDATED BY SECTION 25 OF PD 957 OR DIRECT PAYMENT MADE BY RESPONDENT DEE TO
PNB PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD WARRANT RELEASE OF THE SAME. 13
The petitioner claims that it has a valid mortgage over Dees property, which was part of the property mortgaged by PEPI to it to
secure its loan obligation, and that Dee and PEPI are bound by such mortgage. The petitioner also argues that it is not privy to the
transactions between the subdivision project buyers and PEPI, and has no obligation to perform any of their respective
undertakings under their contract.14
The petitioner also maintains that Presidential Decree (P.D.) No. 957 15 cannot nullify the subsisting agreement between it and
PEPI, and that the petitioners rights over the mortgaged properties are protected by Act 3135 16. If at all, the petitioner can be
compelled to release or cancel the mortgage only after the provisions of P.D. No. 957 on redemption of the mortgage by the
owner/developer (Section 25) are complied with. The petitioner also objects to the denomination by the CA of the provisions in the
Affidavit of Undertaking as stipulations pour autrui, 17 arguing that the release of the title was conditioned on Dees direct payment
to it.18
Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the obligation under the mortgage
contract between PEPI and the petitioner as it is merely an investor in the subdivision project and is not privy to the mortgage. 19
Respondent PEPI, on the other hand, claims that the title over the subject property is one of the properties due for release by the
petitioner as it has already been the subject of a Memorandum of Agreement and dacion en pago entered into between them. 20
The agreement was reached after PEPI filed a petition for rehabilitation, and contained the stipulation that the petitioner agreed to
release the mortgage lien on fully paid mortgaged properties upon the issuance of the certificates of title over the dacioned
properties.21
For her part, respondent Dee adopts the arguments of the CA in support of her prayer for the denial of the petition for review. 22
Ruling of the Court
The petition must be DENIED.
The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI and AFP-RSBS in its
transactions with Dee because it is not a privy thereto. The basic principle of relativity of contracts is that contracts can only bind
the parties who entered into it, 23 and cannot favor or prejudice a third person, even if he is aware of such contract and has acted
with knowledge thereof.24 "Where there is no privity of contract, there is likewise no obligation or liability to speak about." 25
The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-RSBS.1avvphi1 In this case, there are
two phases involved in the transactions between respondents PEPI and Dee the first phase is the contract to sell, which
eventually became the second phase, the absolute sale, after Dees full payment of the purchase price. In a contract of sale, the

parties obligations are plain and simple. The law obliges the vendor to transfer the ownership of and to deliver the thing that is the
object of sale.26 On the other hand, the principal obligation of a vendee is to pay the full purchase price at the agreed time. 27
Based on the final contract of sale between them, the obligation of PEPI, as owners and vendors of Lot 12, Block 21-A, Village
East Executive Homes, is to transfer the ownership of and to deliver Lot 12, Block 21-A to Dee, who, in turn, shall pay, and has in
fact paid, the full purchase price of the property. There is nothing in the decision of the HLURB, as affirmed by the OP and the CA,
which shows that the petitioner is being ordered to assume the obligation of any of the respondents. There is also nothing in the
HLURB decision, which validates the petitioners claim that the mortgage has been nullified. The order of cancellation/release of
the mortgage is simply a consequence of Dees full payment of the purchase price, as mandated by Section 25 of P.D. No. 957, to
wit:
Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or
unit. No fee, except those required for the registration of the deed of sale in the Registry of Deeds, shall be collected for the
issuance of such title. In the event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer,
the owner or developer shall redeem the mortgage or the corresponding portion thereof within six months from such issuance in
order that the title over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith.
It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory contract to the principal
three-year loan takeout from the petitioner by PEPI for its expansion project. It need not be belaboured that "[a] mortgage is an
accessory undertaking to secure the fulfillment of a principal obligation," 28 and it does not affect the ownership of the property as it
is nothing more than a lien thereon serving as security for a debt. 29
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between respondents PEPI and Dee
was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the property. On this point, PEPI was acting fully
well within its right when it mortgaged the property to the petitioner, for in a contract to sell, ownership is retained by the seller and
is not to pass until full payment of the purchase price. 30 In other words, at the time of the mortgage, PEPI was still the owner of the
property. Thus, in China Banking Corporation v. Spouses Lozada, 31 the Court affirmed the right of the owner/developer to
mortgage the property subject of development, to wit: "[P.D.] No. 957 cannot totally prevent the owner or developer from
mortgaging the subdivision lot or condominium unit when the title thereto still resides in the owner or developer awaiting the full
payment of the purchase price by the installment buyer." 32 Moreover, the mortgage bore the clearance of the HLURB, in
compliance with Section 18 of P.D. No. 957, which provides that "[n]o mortgage on any unit or lot shall be made by the owner or
developer without prior written approval of the [HLURB]."
Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still bound to respect
the transactions between respondents PEPI and Dee. The petitioner was well aware that the properties mortgaged by PEPI were
also the subject of existing contracts to sell with other buyers. While it may be that the petitioner is protected by Act No. 3135, as
amended, it cannot claim any superior right as against the installment buyers. This is because the contract between the
respondents is protected by P.D. No. 957, a social justice measure enacted primarily to protect innocent lot buyers. 33 Thus, in
Luzon Development Bank v. Enriquez, 34 the Court reiterated the rule that a bank dealing with a property that is already subject of a
contract to sell and is protected by the provisions of P.D. No. 957, is bound by the contract to sell. 35
However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquezs rights thereunder. This is because
the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957.
x x x.
xxxx
x x x Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned properties
were already covered by existing contracts to sell in favor of subdivision lot buyers. As observed by the Court in another case
involving a bank regarding a subdivision lot that was already subject of a contract to sell with a third party:
"[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable
person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those
obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whether any
part of the property was already intended to be the subject of any other contract involving buyers or potential buyers. In granting
the loan, [the Bank] should not have been content merely with a clean title, considering the presence of circumstances indicating
the need for a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be
deemed to be an innocent mortgagee. x x x"36 (Citation omitted)
More so in this case where the contract to sell has already ripened into a contract of absolute sale.1wphi1
Moreover, PEPI brought to the attention of the Court the subsequent execution of a Memorandum of Agreement dated November
22, 2006 by PEPI and the petitioner. Said agreement was executed pursuant to an Order dated February 23, 2004 by the
Regional Trial Court (RTC) of Makati City, Branch 142, in SP No. 02-1219, a petition for Rehabilitation under the Interim Rules of
Procedure on Corporate Rehabilitation filed by PEPI. The RTC order approved PEPIs modified Rehabilitation Plan, which
included the settlement of the latters unpaid obligations to its creditors by way of dacion of real properties. In said order, the RTC
also incorporated certain measures that were not included in PEPIs plan, one of which is that "[t]itles to the lots which have been
fully paid shall be released to the purchasers within 90 days after the dacion to the secured creditors has been completed." 37
Consequently, the agreement stipulated that as partial settlement of PEPIs obligation with the petitioner, the former absolutely
and irrevocably conveys by way of "dacion en pago" the properties listed therein, 38 which included the lot purchased by Dee. The
petitioner also committed to
[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the Dacioned
Properties in the name of the [petitioner]. The request for release of a Mortgaged Property shall be accompanied with: (i) proof of
full payment by the buyer, together with a certificate of full payment issued by the Borrower x x x. The [petitioner] hereby
undertakes to cause the transfer of the certificates of title over the Dacioned Properties and the release of the Mortgaged
Properties with reasonable dispatch.39
Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation. 40 It is a mode of extinguishing an existing obligation 41 and partakes the
nature of sale as the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the
debtors debt.42 Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed

upon by the parties or as may be proved, unless the parties by agreement express or implied, or by their silence consider the
thing as equivalent to the obligation, in which case the obligation is totally extinguished. 43
There is nothing on record showing that the Memorandum of Agreement has been nullified or is the subject of pending litigation;
hence, it carries with it the presumption of validity. 44 Consequently, the execution of the dation in payment effectively extinguished
respondent PEPIs loan obligation to the petitioner insofar as it covers the value of the property purchased by Dee. This negates
the petitioners claim that PEPI must first redeem the property before it can cancel or release the mortgage. As it now stands, the
petitioner already stepped into the shoes of PEPI and there is no more reason for the petitioner to refuse the cancellation or
release of the mortgage, for, as stated by the Court in Luzon Development Bank, in accepting the assigned properties as payment
of the obligation, "[the bank] has assumed the risk that some of the assigned properties are covered by contracts to sell which
must be honored under PD 957." 45 Whatever claims the petitioner has against PEPI and AFP-RSBS, monetary or otherwise,
should not prejudice the rights and interests of Dee over the property, which she has already fully paid for.
As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law
as an instrument of social justicemust favor the weak. 46 (Emphasis omitted)
Finally, the Court will not dwell on the arguments of AFP-RSBS given the finding of the OP that "[b]y its non-payment of the appeal
fee, AFP-RSBS is deemed to have abandoned its appeal and accepts the decision of the HLURB." 47 As such, the HLURB decision
had long been final and executory as regards AFP-RSBS and can no longer be altered or modified. 48
WHEREFORE, the petition for review is DENIED for lack of merit. Consequently, the Decision dated August 13, 2007 and
Resolution dated March 13, 2008 of the Court of Appeals in CA-G.R. SP No. 86033 are AFFIRMED.
Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed Forces of the Philippines-Retirement
and Separation Benefits System, Inc. are hereby ENJOINED to strictly comply with the Housing and Land Use Regulatory Board
Decision dated May 21, 2003, as modified by its Board of Commissioners Decision dated March 15, 2004 and Office of the
President Decision dated August 4, 2004.
SO ORDERED.

[G.R. No. 55361 : December 10, 1990.]

192 SCRA 163
SPOUSES TEOFILO ERCILLO and TERESITA ERCILLO, Petitioners, vs. COURT OF APPEALS and SPOUSES LUTGARDA
CIFRA and BENJAMIN CIFRA, SR., represented by their son and attorney-in-fact, BENJAMIN CIFRA, JR., and HON. JOSE
P. CASTRO, Respondents.

DECISION
MEDIALDEA, J.:

This is a petition for review of the decision of the Court of Appeals in CA-G.R. No. SP-10524 which affirmed the decision of the
then Court of First Instance of Rizal, Quezon City, Branch IX affirming the judgment of the City Court of Quezon City.
The facts of the case are as follows:
Private respondents spouses Benjamin Cifra and Lutgarda Cifra leased an apartment building located at 11-C Purdue Street,
Cubao, Quezon City, to herein petitioners spouses Teofilo Ercillo and Teresita Ercillo at a monthly rental of P140.00 payable within
the first five (5) days of the month at the residence of private respondents.
On November 23, 1976, private respondents filed an action for unlawful detainer with the City Court of Quezon City. It was alleged
in the complaint that the petitioners failed to pay the rentals for the month of August, 1976 up to the filing of the complaint; that
private respondents demanded from petitioners payment of the accrued rentals and the surrender of the possession of the leased
premises to them before the complaint was filed and that the petitioners neither paid the accrued rentals nor surrendered the
possession of the leased premises.
Petitioners, on the other hand, alleged that they never defaulted in the payment of their rentals; that private respondents refused
to accept their payments; that they deposited the payments with the Family Savings Bank, Account No. 419022473, in the name
of Mrs. Teresita Ercillo or Mrs. Lutgarda Cifra and that the petitioners were advised by the former of the said deposit.: nad
Sometime also in November, 1976, the private respondents filed a complaint against the petitioners with the Office of the Civil
Relations (OCR), Philippine Constabulary at Camp Crame, Quezon City. The petitioners then withdrew the rentals deposited with
the Family Savings Bank and deposited the money and the accruing rentals with the OCR. When the action for ejectment was
pending with the City Court, the petitioners deposited the rentals with the said court.
After trial, the City Court rendered a decision in favor of private respondents, the dispositive portion of the decision provides:
"WHEREFORE, . . . this Court finds the material allegations in the complaint filed in this case to be duly proved with convincing
and satisfactory evidence and rendered judgment in favor of plaintiffs and against defendants spouses TEOFILO ERCILLO and
TERESITA ERCILLO, as follows:
"1. Ordering defendants and all persons claiming rights under them to vacate the premises located at 11-C Purdue Street, Cubao
Quezon City and restore the peaceful possession thereof to plaintiffs;
"2. Ordering defendants, jointly and severally, to pay plaintiffs the sum of P1,680.00 representing accrued monthly rentals for the
period August, 1976 to July, 1977 at P144.00 a month;
"3. Ordering defendants, jointly and severally, to pay plaintiffs the further sum of P144.00 a month commencing on August 1, 1977
and every month thereafter until they and all persons claiming rights under them finally vacate the premises and restore the

peaceful possession thereof to plaintiffs;

"4. Ordering defendants jointly and severally, to pay the sum of P1,500.00, as and for attorney's fees; and
"5. Ordering defendants, jointly and severally, to pay the cost of the suit.
"The counter-claim interposed by the defendants is hereby dismissed for lack of merit.
"SO ORDERED." (pp. 14-15, Rollo).
On appeal to the then Court of First Instance of Rizal, Seventh Judicial District, Quezon City, the decision of the City Court was
affirmed in toto.
The petitioners filed a petition for review with respondent Court of Appeals which dismissed the petition for lack of merit in a
decision promulgated on September 6, 1980 (pp. 14-18, Rollo). The decision of the Court of Appeals stated:
"Since the consignation of the accrued rentals with the Court was made only during the pendency of the ejectment case, although
they (petitioners) had effected deposits with the Office of the Civil Relations, which office as opined by the trial court, "is not a
judicial authority," such act could not have and did not have the effect of discharging petitioners' obligation in the payment of
rentals.chanrobles virtual law library
"Thus, no judicial consignation having been made in accordance with Art. 1256, 1257 and 1258 of the New Civil Code;
"WHEREFORE, for lack of merit the instant petition for review is hereby DISMISSED.
"SO ORDERED." (p. 18, Rollo)
On December 1, 1980, petitioners filed the instant petition with this Court.
The petitioners contend that respondent Court of Appeals committed a legal error when it ruled that the deposit of the rentals with
the bank did not release the petitioners from their obligation to pay the rentals and that LOI 768 which took effect only on
November 16, 1978 cannot apply to this case which was filed on November 23, 1976.
The petition is devoid of merit.
The issue to be resolved in this case is whether or not the private respondents had a valid ground for ejecting petitioners.
The ground raised by private respondents in ejecting petitioners from the leased premises is the latter's failure to pay rents due.
There is no question that this is one of the grounds by which a lessor may judicially eject the lessee under Article 1673 of the New
Civil Code. Further, Section 2, Rule 70 of the Rules of Court requires that a lessor or his legal representative shall bring an action
against a lessee for failure to pay rent due only after the lessee shall have failed to pay such rent for a period of fifteen days after
a written demand therefor had been made. Private respondents assert that there was no payment of the rent due within the fifteen
(15) day period prescribed by the rules nor even after the lapse of the fifteen (15) day period after a written demand to pay and to
vacate was made on petitioners.
The petitioners, for their part, assert that their obligation to pay rent had been extinguished in view of their consignation of the rent
due with the bank after the private respondents refused to accept them.
The law on tender of payment and consignation as a mode of extinguishing an obligation is covered by Article 1256, Article 1257
and Article 1258 of the New Civil Code.
"Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing or sum due.
"x x x
"Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons
interested in the fulfillment of the obligation.
"The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment.
"Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority before whom the tender of
payment shall be proved, in a proper case, and the announcement of the consignation in other cases.
"The consignation having been made, the interested parties shall also be notified thereof."
It is the requirement under Article 1258 which had not been strictly complied with by petitioners. What the law requires is the
deposit of the thing due at the disposal of judicial authority before whom the tender of payment shall be proved, in a proper case.
The deposit of the rentals with the bank is not the consignation contemplated by law. Depositing the rentals in the bank does not
place such rental at the disposal of the judicial authority.chanrobles virtual law library
Petitioners argue further that since the case is still pending, the full legal effect of P.D. 20 together with its implementing
Instructions, LOI 768, should be made to apply in this case.
P.D. 20, issued on October 12, 1972, amended Republic Act No. 6359 regulating rentals for dwelling units. It was not until
November 16, 1978 when Letter of Instruction No. 768 was issued implementing P.D. 20. It provided, among others:
"3. The following shall not constitute grounds for judicial ejectment of lessees:
"a) That the lessee has failed to pay any increased rental not mutually agreed upon; provided, that in case of refusal of the lessor
to accept payment of the rent previously agreed upon, the lessee shall either consignate the amount in court or deposit the said
amount in a bank for the account of the lessor."
Petitioners seek shelter under this provision. However, it should be noted that LOI 768 which allows the deposit of accrued rentals
in a bank as an alternative to consignation in court of rental payments which the lessor refuses to accept, was issued only on
November 16, 1978. The action for ejectment, on the other hand was filed on November 23, 1976 or some two (2) years before
the issuance of LOI 768 when the law in effect then was Article 1257 of the New Civil Code. Clearly, the private respondents had,
at the time of the institution of the complaint, a valid ground for ejecting petitioners.

ACCORDINGLY, the petition is DENIED for lack of merit.

SO ORDERED.

G.R. No. 172346

July 24, 2013

SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners,

vs.
SPOUSES JUAN and CONSTANCIA LUNA, Respondents.
DECISION
DEL CASTILLO, J.:
Questioned in this case is the Court of Appeals' (CA) disquisition on the matter of interest.
Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro) assail through this Petition for Review on Certiorari 1 the
April 15, 2005 Decision2 of the CA in CA-G.R. CV No. 56414 which affirmed with modifications the April 4, 1997 Decision 3 of the
Regional Trial Court (RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895. They likewise question the CA April17, 2006
Resolution4 denying their motion for partial reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to Sell 5 with Bliss Development Corporation
(Bliss) involving a house and lot identified as Lot 19, Block 26 of New Capitol Estates in Diliman, Quezon City. Barely a year after,
Constancia, this time as the seller, entered into another Contract to Sell 6 with petitioner Lourdes Bonrostro (Lourdes) concerning
the same property under the following terms and conditions:
1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:
(a) P200,000.00 upon signing x x x the Contract To Sell,
(b) P300,000.00 payable on or before April 30, 1993,
(c) P330,000.00 payable on or before July 31, 1993,
(d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month,
2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting May 1, 1993 a 2%
interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated
time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price of
P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from
the initial down payment in favor of the VENDOR. 7
Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the property. However,
except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated subsequent amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna), filed before the RTC a Complaint 8 for
Rescission of Contract and Damages against the spouses Bonrostro praying for the rescission of the contract, delivery of
possession of the subject property, payment by the latter of their unpaid obligation, and awards of actual, moral and exemplary
damages, litigation expenses and attorneys fees.
In their Answer with Compulsory Counterclaim, 9 the spouses Bonrostro averred that they were willing to pay their total balance of
P630,000.00 to the spouses Luna after they sought from them a 60-day extension to pay the same. 10 However, during the time
that they were ready to pay the said amount in the last week of October 1993, Constancia and her lawyer, Atty. Arlene Carbon
(Atty. Carbon), did not show up at their rendezvous. On November 24, 1993, Lourdes sent Atty. Carbon a letter 11 expressing her
desire to pay the balance, but received no response from the latter. Claiming that they are still willing to settle their obligation, the
spouses Bonrostro prayed that the court fix the period within which they can pay the spouses Luna.
The spouses Bonrostro likewise belied that they were not paying the monthly amortization to New Capitol Estates and asserted
that on November 18, 1993, they paid Bliss, the developer of New Capitol Estates, the amount of P46,303.44. Later during trial,
Lourdes testified that Constancia instructed Bliss not to accept amortization payments from anyone as evidenced by her March 4,
1993 letter12 to Bliss.
On April 4, 1997, the RTC rendered its Decision 13 focusing on the sole issue of whether the spouses Bonrostros delay in their
payment of the installments constitutes a substantial breach of their obligation under the contract warranting rescission. The RTC
ruled that the delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension within
which to pay; (2) was willing and ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon about this
on November 24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1.) Declaring the Contract to Sell executed by the plaintiff Constancia and defendant Lourdes with respect to the house and lot
located at Blk. 26, Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and effect. And that Lourdes Bonrostro must
remain in the possession of the premises.
2.) Ordering the defendants to pay plaintiffs within 60 days from receipt of this decision the sum of P300,000.00 plus an interest of
2% per month from April 1993 to November 1993.
3.) Ordering the defendants to pay plaintiffs within sixty (60) days from receipt of this decision the sum of P330,000.00 plus an

interest of 2% per month from July 1993 to November 1993.

4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62 which plaintiffs paid to Bliss Development Corporation.
No pronouncement as to Cost.
SO ORDERED.14
As their Motion for Reconsideration 15 was likewise denied in an Order 16 dated July 15, 1997, the spouses Luna appealed to the
CA.17
Ruling of the Court of Appeals
In its Decision18 of April 15, 2005, the CA concluded that since the contract entered into by and between the parties is a Contract
to Sell, rescission is not the proper remedy. Moreover, the subject contract being specifically a contract to sell a real property on
installment basis, it is governed by Republic Act No. 6552 19 or the Maceda Law, Section 4 of which states:
Sec. 4. In case where less than two years of installment were paid, the seller shall give the buyer a grace period of not less than
sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty
days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act.
(Emphases supplied)
The CA held that while the spouses Luna sent the spouses Bonrostro letters 20 rescinding the contract for non-payment of the sum
of P630,000.00, the same could not be considered as valid and effective cancellation under the Maceda Law since they were
made within the 60-day grace period and were not notarized. The CA concluded that there being no cancellation effected in
accordance with the procedure prescribed by law, the contract therefore remains valid and subsisting.
The CA also affirmed the RTCs finding that Lourdes was ready to pay her obligation on November 24, 1993.
However, the CA modified the RTC Decision with respect to interest, viz:
Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of P300,000.00 is
only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per month and is only
for the period July 1993 to November 1993; (iii) it does not impose interest on the amount of P214,492.62 which was paid by
Constancia to BLISS in behalf of Lourdes x x x
The rule is that no interest shall be due unless it has been expressly stipulated in writing (Art. 1956, Civil Code). However, the
contract does not provide for interest in case of default in payment of the sum of P330,000.00 to Constancia and the monthly
amortizations to BLISS.
Considering that Lourdes had incurred x x x delay in the performance of her obligations, she should pay (i) interest at the rate of
2% per month on the sum of P300,000.00 from May 1, 1993 until fully paid and (ii) interest at the legal rate on the amounts of
P330,000.00 and P214,492.62 from the date of default (August 1, 1993 and April 4, 1997 date of the appealed decision,
respectively) until the same are fully paid x x x21
Hence, the dispositive portion of the said Decision:
WHEREFORE, the appealed decision is AFFIRMED with the MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive
portion shall now read:
2.) Ordering the defendants to pay plaintiffs the sum of P300,000.00 plus interest thereon at the rate of 2% per month from May 1,
1993 until fully paid;
3.) Ordering the defendants to pay plaintiffs the sum of P330,000.00 plus interest thereon at the legal rate from August 1, 1993
until fully paid; and
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62, which plaintiffs paid to Bliss Development Corporation,
plus interest thereon at the legal rate from filing of the complaint until fully reimbursed.
SO ORDERED.22
The spouses Luna no longer assailed the ruling. On the other hand, the spouses Bonrostro filed a Partial Motion for
Reconsideration23 questioning the above-mentioned modifications. The CA, however, denied for lack of merit the said motion in a
Resolution24 dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA correctly modified the RTC Decision with respect to interests.
The Parties Arguments
As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive portion of its Decision ordered the spouses Bonrostro to
pay the spouses Luna the sums of P300,000.00 plus interest of 2% per month from April 1993 to November 1993 and
P330,000.00 plus interest of 2% per month from July 1993 to November 1993, respectively. The CA modified these by reckoning
the payment of the 2% interest on the P300,000.00 from May 1, 1993 until fully paid and by imposing interest at the legal rate on
the P330,000.00 reckoned from August 1, 1993 until fully paid.
The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the CA, that Lourdes was willing and ready to pay
her obligation as evidenced by her November 24, 1993 letter to Atty. Carbon. They also assert that the sending of the said letter
constitutes a valid tender of payment on their part. Hence, they argue that they should not be assessed any interest subsequent to
the date of the said letter. Neither should they be ordered to pay interest on the amount of P214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss. They point out that it was Constancia who prevented them from fulfilling their
obligation to pay the amortizations when she instructed Bliss not to accept payment from them. 25

The spouses Luna, on the other hand, aver that the November 24, 1993 letter of Lourdes is not equivalent to tender of payment
since the mere sending of a letter expressing the intention to pay, without the accompanying payment, cannot be considered a
valid tender of payment. Also, if the spouses Bonrostro were really willing and ready to pay at that time and assuming that the
spouses Luna indeed refused to accept payment, the former should have resorted to consignation. Anent the payment of
amortization, the spouses Luna explain that under the parties Contract to Sell, Lourdes was to assume Constancias balance to
Bliss by paying the monthly amortization in order to avoid the cancellation of the earlier Contract to Sell entered into by
Constancia with Bliss.26 However, since Lourdes was remiss in paying the same, the spouses Luna were constrained to pay the
amortization. They thus assert that reimbursement to them of the said amount with interest is proper considering that by reason of
such payment, the spouses Bonrostro were spared from the interests and penalties which would have been imposed by Bliss if
the amortizations remained unpaid.
Our Ruling
The Petition lacks merit.
The spouses Bonrostros reliance on the RTCs factual finding that Lourdes was willing and ready to pay on November 24, 1993 is
misplaced.
As mentioned, the RTC in resolving the Complaint focused on the sole issue of whether the failure of spouses Bonrostro to pay
the installments of P300,000.00 on April 30, 1993 and P330,000.00 on July 31, 1993 is a substantial breach of their obligation
under the contract as to warrant the rescission of the same. 27 The said court ratiocinated, viz:
After careful evaluation of the evidence testimonial and documentary, the Court believes that the defendants delay in the payment
of the two installments is not so substantial as to warrant rescission of contract. Although, the defendant failed to pay the two
installments in due time, she was able to communicate with the plaintiffs through letters requesting for an extension of two months
within which to pay the installments. In fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was ready to
pay the installments and the money is ready for pick-up. However, plaintiff did not bother to get or pick-up the money without any
valid reason. It would be very prejudicial on the part of the defendant if the contract to sell be rescinded considering that she made
a downpayment of P200,000.00 and made partial amortization to the Bliss Development Corporation. In fact, the defendant
testified that she is willing and ready to pay the balance including the interest on November 24, 1993.
The Court is of the opinion that the delay in the payment of the balance of the purchase price of the house and lot is not so
substantial as to warrant the rescission of the contract to sell. The question of whether a breach of contract is substantial depends
upon the attendant circumstance. x x x28
Clearly, the RTC arrived at the above-quoted conclusion based on its mistaken premise that rescission is applicable to the case.
Hence, its determination of whether there was substantial breach. As may be recalled, however, the CA, in its assailed Decision,
found the contract between the parties as a contract to sell, specifically of a real property on installment basis, and as such
categorically declared rescission to be not the proper remedy. This is considering that in a contract to sell, payment of the price is
a positive suspensive condition, failure of which is not a breach of contract warranting rescission under Article 1191 29 of the Civil
Code but rather just an event that prevents the supposed seller from being bound to convey title to the supposed buyer. 30 Also,
and as correctly ruled by the CA, Article 1191 cannot be applied to sales of real property on installment since they are governed by
the Maceda Law.31
There being no breach to speak of in case of non-payment of the purchase price in a contract to sell, as in this case, the RTCs
factual finding that Lourdes was willing and able to pay her obligation a conclusion arrived at in connection with the said courts
determination of whether the non-payment of the purchase price in accordance with the terms of the contract was a substantial
breach warranting rescission therefore loses significance. The spouses Bonrostros reliance on the said factual finding is thus
misplaced. They cannot invoke their readiness and willingness to pay their obligation on November 24, 1993 as an excuse from
being made liable for interest beyond the said date.
The spouses Bonrostro are liable for interest on the installments due from the date of default until fully paid.
The spouses Bonrostro assert that Lourdes letter of November 24, 1993 amounts to tender of payment of the remaining balance
amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be suspended.
Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without just cause,
the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation of the sum due shall
have been made with the proper court." 32 "Consignation is the deposit of the proper amount with a judicial authority in accordance
with rules prescribed by law, after the tender of payment has been refused or because of circumstances which render direct
payment to the creditor impossible or inadvisable." 33
"Tender of payment, without more, produces no effect." 34 "To have the effect of payment and the consequent extinguishment of the
obligation to pay, the law requires the companion acts of tender of payment and consignation." 35
As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows:
When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted
the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the
accrual of interest on the obligation will be suspended from the date of such tender. But when the tender of payment is not
accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then interest is
not suspended from the time of such tender. x x x x36 (Emphasis supplied)
Here, the subject letter merely states Lourdes willingness and readiness to pay but it was not accompanied by payment. She
claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment, but, neither said
lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps to effect payment.
They did not resort to consignation of the payment with the proper court despite knowledge that under the contract, non-payment
of the installments on the agreed date would make them liable for interest thereon. The spouses Bonrostro erroneously assumed
that their notice to pay would excuse them from paying interest. Their claimed tender of payment did not produce any effect
whatsoever because it was not accompanied by actual payment or followed by consignation. Hence, it did not suspend the
running of interest. The spouses Bonrostro are therefore liable for interest on the subject installments from the date of default until
full payment of the sums of P300,000.00 and P330,000.00.

The spouses Bonrostro are likewise liable for interest on the amount paid by the spouses Luna to Bliss as amortization.
The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the spouses Luna paid to
Bliss as amortizations by asserting that they were prevented by the latter from fulfilling such obligation. They invoke Art. 1186 of
the Civil Code which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."
However, the Court finds Art. 1186 inapplicable to this case. The said provision explicitly speaks of a situation where it is the
obligor who voluntarily prevents fulfillment of the condition. Here, Constancia is not the obligor but the obligee. Moreover, even if
this significant detail is to be ignored, the mere intention to prevent the happening of the condition or the mere placing of
ineffective obstacles to its compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186. 37 Two
requisites must concur for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of
compliance.38
In this case, while it is undisputed that Constancia indeed instructed Bliss on March 4, 1994 not to accept payment from anyone
but her, there is nothing on record to show that Bliss heeded the instruction of Constancia as to actually prevent the spouses
Bonrostro from making payments to Bliss. There is no showing that subsequent to the said letter, the spouses Bonrostro
attempted to make payment to and was refused by Bliss. Neither was there a witness presented to prove that Bliss indeed gave
effect to the instruction contained in Constancias letter. While Bliss Project Development Officer, Mr. Ariel Cordero, testified
during trial, nothing could be gathered from his testimony regarding this except for the fact that Bliss received the said letter. 39 In
view of these, the spouses Luna could not be said to have placed an effective obstacle as to actually prevent the spouses
Bonrostro from making amortization payments to Bliss.
On the other hand, there are telling circumstances which militate against the spouses Bonrostros claimed keenness to comply
with their obligation to pay the monthly amortization. After the execution of the contract in January 1993, they immediately took
possession of the property but failed to make amortization payments. It was only after seven months or on November 18, 1993
that they made payments to Bliss in the amount of P46,303.44.40 Whether the same covers previous unpaid amortizations is also
not clear as the receipt does not indicate the same 41 and per Statement of Account42 as of March 8, 1994 issued by Bliss, the
unpaid monthly amortizations for February to November 1993 in the total amount of P78,271.69 remained outstanding. There was
also no payment made of the amortizations due on December 4, 1993 and January 4, 1994 43 before the filing of the Complaint on
January 11, 1994.
On the part of the spouses Luna, it is understandable that they paid the amortizations due.1wphi1 The assumption of payment of
the monthly amortization to Bliss was made part of the obligations of the spouses Bonrostro under their contract with the spouses
Luna precisely to avoid the cancellation of the earlier contract entered into by Constancia with Bliss. But as the spouses Bonrostro
failed in this obligation, the spouses Luna were constrained to pay Bliss to avoid the adverse effect of such failure. This act of the
spouses Luna proved to be even more beneficial to the spouses Bonrostro as the cancellation of the Contract to Sell between
Constancia and Bliss would result in the cancellation of the subsequent Contract to Sell between Constancia and Lourdes. Also,
the spouses Bonrostro were relieved from paying the penalties that would have been imposed by Bliss if the monthly
amortizations covered by the said payment remained unpaid. The Statements of Account 44 issued by Bliss clearly state that each
monthly amortization is due on or before the fourth day of every month and a penalty equivalent to 1/10th of 1% per day of delay
shall be imposed for all payments made after due date. That translates to 3% monthly or 36% per annum rate of interest, three
times higher than the 12% per annum rate of interest correctly imposed by the CA.
Hence, the resulting situation is that the spouses Luna are constrained to part with their money while the spouses Bonrostro,
despite being remiss in their obligation to pay the monthly amortization, are relieved from paying higher penalties at the expense
of the former. This is aside from the fact that the spouses Bonrostro are in continued possession of the subject property and are
enjoying the beneficial use thereof. Under the circumstances and considering that the spouses Bonrostro are obviously in delay in
complying with their obligation to pay the amortizations due from February 1993 to January 1995 for which the spouses Luna paid
P214,492.62,45 the CA correctly ordered the reimbursement to the latter of the said amount with interest. "Delay in the
performance of an obligation is looked upon with disfavor because, when a party to a contract incurs delay, the other party who
performs his part of the contract suffers damages thereby." 46 As discussed, the spouses Luna obviously suffered damages brought
about by the failure of the spouses Bonrostro to comply with their obligation on time. "And, sans elaboration of the matter at hand,
damages take the form of interest x x x."47
Under Article 2209 of the Civil Code, "if the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest x x x." There being no stipulation on interest in case of delay in the payment of
amortization, the CA thus correctly imposed interest at the legal rate which is now 12% per annum.
WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed Decision dated April 15, 2005 and the Resolution
dated April 17, 2006 of the Court of Appeals in CA-G.R. CV No. 56414 are AFFIRMED.
SO ORDERED.

G.R. No. L-80800 April 12, 1989

IMELDA, LEONARDO, FIDELINO, JOSEFINA, ANITA, AZUCENA, and SISA, all surnamed SYJUCO, petitioners,
vs.
COURT OF APPEALS and FILIPINAS BANK, respondents.
Manuel B. Dulay for petitioners.
Vicente G. Ericta & Associates for Filipinas Bank.

PARAS, J.:
Under consideration is a petition for review on certiorari, seeking the reversal of the Decision * (dated 23 July 1987) and Amended
Decision and Resolution * (dated 18 November 1987) of the respondent Court of Appeals' (CA) Eighth Division, the dispositive

portions of which respectively state:

Re-Decision
WHEREFORE, judgment is hereby and now modified as follows:
1. Petitioner is ordered to pay monthly rentals only from the period January 1 to June 30, 1984 in the amount of P25,000.00 or
P150,000.00;
2. Eugenio Trinidad and Kalayaan Development & Industrial Corporation and all persons claiming rights under them are ordered
to vacate the sub-leased premises and surrender possession thereof to private respondents and to pay the latter the sum of
P150,000.00 representing reasonable rental value of the same premises from July to December 1984 at the rate of P25,000.00
and thereafter the same amount of P25,000.00 a month until the premises are finally vacated and possession restored to private
respondents;
3. The private respondents are ordered to pay petitioner P50,000.00 in attorney's fees;
4. The decisions of the respondent courts inconsistent with this decision are hereby set aside and the orders, writs and processes
issued pursuant thereto are permanently enjoined;
5. This case hereby and now remanded to the Regional Trial Court for proceedings consonant with this Decision; and
6. No costs. (pp. 39-40, Rollo)
Re Amended Decision and Resolution
WHEREFORE, with the modification that the rental to be paid by petitioner be P30,000.00 a month, for the period from January to
June 1984 or P180,000.00 for six (6) months amending the questioned Decision adjudging the reduced amount of P25,000.00, as
contained in par. 1 of the dispositive portion; and likewise that the reasonable rentals to be paid by Eugenio Trinidad and Kalayaan
Development & Industrial Corporation and all persons claiming right under them be P30,000.00 a month until the premises are
finally vacated and possession restored to private respondents, the Decision sought to be reconsidered is affirmed. (p. 58, Rollo)
Previously, the Pilipinas Bank had filed with Us a petition to prohibit the enforcement pending appeal of the Regional Trial Court's
(RTC's) decision and on appeal by certiorari from the decision of the then Intermediate Appellate Court denying its petition for
review of the said RTC's decision. We consolidated and, later, remanded both petitions to respondent CA for further proceedings
on the merits, hence, the above rulings.
The facts found by the trial court, and adopted by the CA, are as follows:
On September 29, 963 the petitioner Pilipinas Bank, formerly Filipinas Manufacturers Bank and Trust Company, leased from the
plaintiffs (now private respondents) 1,387 (should be, 1,384) square meters of land commencing from January 1, 1963 and ending
on December 31, 1983 as per written contract Exhibit 'A'.
Paragraph 6 of the Contract of Lease allows the petitioner, as lessee, to "sub-lease any part or portion of the premises or the
whole portion thereof without obtaining the consent of the lessors thereto."
On April 1, 1977, the petitioner sub-leased to Eugenio Trinidad, President of Kalayaan Development and Industrial Corporation, a
portion of 965 square meters with a term that is coterminous with the original lease contract and therefore ending also on
December 31, 1983 which contract of sublease was likewise covered by a written contract (Exhibit 10). The contract of sublease
was subject to the same terms and conditions as of the original contract of lease.'
Sections 3 and 6 of the Contract of Sub-lease prohibited the sublessee Eugenio Trinidad from further subleasing the property
subleased to him by the petitioner.
Sections 3 and 6 of the Contract of Sub-lease provide:
3. That the SUB-LESSEE hereby expressly agrees and warrants that the leased premises shall be used by him exclusively for the
Caloocan City Food and Fruit Terminal store or market and that the SUB-LESSEE is hereby prohibited from using said premises
for any other purpose without the prior consent of the SUB-LESSOR.
6. That the SUB-LESSEE shall not directly or indirectly sub-lease, assign, transfer, convey, mortgage or in any way encumber its
right to sublease over the premises or any portion thereof under any circumstances whatsoever any contract made in violation of
this clause shall be null and void. It is expressly understood and agreed by the herein parties that the personal character of the
SUB-LESSEE as hereinbelow represented and the nature of occupancy of the leased premises as above restricted, constitute
and are special considerations and inducement for the granting of the sublease by the SUB-LESSOR; consequently, any violation,
direct or indirect of any of the stipulations hereof shall automatically and unequivocally terminate this contract of lease effective
from the time such violation occurs.
Inspire of the prohibition to sublease and in violation thereof, Eugenio Trinidad "constructed stalls/stores thereon and leased the
same to 12 persons who conducted their individual business."
On February 10, 1984, after the expiration of the lease on December 31, 1983, private respondents filed an action for unlawful
detainer, against the petitioner, as sole defendant, before the MTC, Caloocan City, which was docketed as Civil Case No. 16193.
The petitioner, as defendant, filed an answer, which in the language of the decision of the MTC "did not oppose the ejectment as it
affirmed the expiration of the lease contract on December 31, 1983 but opposed the increased rentals being demanded by the
plaintiffs after the expiration of the lease contending that the demanded increase is unconscionable and unreasonable."
On July 6,1984, six months after the expiration of the lease and five months after the filing of the complaint, defendant bank'
surrendered the premises it occupied by surrendering to the court the key to the bank structure. (pp. 32-43, Rollo)
Meanwhile, Pilipinas Bank filed an ejectment case against Eugenio Trinidad and Kalayaan Industrial Development Corporation
(Kalayaan, for short) on 26 September 1984 with the same MTC, docketed as Civil Case No. 16617, after the latter court denied
its Motion to Admit Third Party Complaint in Civil Case No. 16193, the original ejectment suit. These two cases were subsequently
consolidated. However, upon motion of the defendants therein, Civil Case No. 16617 was dismissed without prejudice to whatever
liability said defendants may have in the original ejectment suit. The respondent CA narrates further:

The MTC, on December 27, 1984, rendered a decision the dispositive portion of which reads:
WHEREFORE for reasons given, judgment is hereby rendered for the plaintiffs, ordering defendant Pilipinas Bank to pay the
former the sum of P180,000.00 representing the reasonable rental value of the subject premises from January 1, 1984 to June 30,
1984 at the rate of P30,000.00 a month.
Judgment is likewise rendered against Eugenio Trinidad and Kalayaan Development and Industrial Corporation and all persons
claiming right under them to vacate the subleased premises and surrender Possession thereof to the plaintiffs, and to pay the
latter the sum of P180,000.00 representing reasonable rental value of the subject premises from July 1984 to December 1984 at
the rate of P30,000.00 a month up to and until the subleased premises is finally vacated and possession surrendered to the
plaintiffs.
The Pilipinas Bank and Kalayaan Development and Industrial Corporation are likewise ordered to pay, pro rata, the sum of
P10,000.00 as and for attorney's fees plus costs of the suit.
Both petitioner and private respondents appealed from this Decision.
On January 11, 1985, Eugenio Trinidad who was not a party in Civil Case No. 16193 filed a motion for reconsideration assailing
the portion of the decision making him liable to pay a monthly rental on the ground that the sublessee is not a party to the case
and is not in physical or material possession of the leased premises after the expiration of the contract of lease on December 31,
1983. Thus, according to petitioner, when they vacated the premises on July 6, 1984, the only occupants of the premises in
question were the stallholders or vendors with whom neither the petitioner nor the private respondents had any privity of contract.
In addition, petitioner observed, both the MTC and private respondents' counsel referred to the stallholders as squatters, citing the
transcript of the hearing of March 27, 1984.
The motion for reconsideration of Eugenio Trinidad has not been resolved to the present.
On October 29,1985, the RTC in Civil Case No. 11728 modified the MTC decision in Civil Case No. 16193 on appeal, as follows:
WHEREFORE, premises considered, judgment is hereby rendered modifying the decision of the trial court as follows:
1. Ordering the defendant and all persons claiming rights under it, including Kalayaan Development Corporation, to vacate the
premises subject of this case covered by TCT No. 4856 of the Registry of Deeds of Caloocan City and surrender the peaceful
possession thereof to the plaintiffs;
2. Ordering the defendant to pay plaintiffs the sum of P30,000.00 a month as fair rental value of the subject premises from
January 1, 1984 until the same shall have been fully vacated. In case of default of said defendant, ordering the sublessee,
Eugenio Trinidad and/or Kalayaan Development Corp., subsidiarily liable to pay plaintiffs the said fair rental value until the
premises shall have likewise been fully vacated;
3. Ordering defendant to pay P10,000.00 as and for attorney's fees; and
4. The costs of suit.
(pp. 34-36, Rollo)
In this present petition, the Syjucos assign the following errors committed by the CA:
I. That the respondent Court erred in applying Articles 1665, 1651 and 1266 of the Civil Code;
II. That the respondent Court erred in basing its judgment on misapprehension of facts that private respondent has completely
vacated the premises leased consisting of 1,387 sq.m.;
III. The respondent Court erred in applying Article 1652 and Article 1651 of the Civil Code;
IV. That the respondent Court erred in basing its judgment on misapprehension of facts that sublessees, Trinidad and Kalayaan
Development Corporation were parties in the ejectment case in the Metropolitan Trial Court docketed as Civil Case No. 16193
entitled, "Syjuco et al. v. Pilipinas Bank.".
V. The respondent Court erred in ordering herein petitioners to pay respondents attorney's fees in the amount of P50,000.00. (p.
11, Rollo)
After considering the facts and the arguments raised by the parties, We are constrained to dismiss the petition.
1. At the outset, there is no doubt that the lessee in a contract of lease is obliged to return the thing subject of said contract upon
the expiration of the period agreed upon. Article 1665 of the Civil Code expressly requires that the thing leased be returned. And it
stands to reason and the spirit of the law that, as a general rule, not only a portion of the thing leased be returned but the whole of
it. Additionally the law mandates that the thing leased be returned in the same condition.
This leads us to the question of whether or not Pilipinas Bank is deemed to have performed its obligation to return the property to
the Syjucos, the lessors-owners. The answer is in the affirmative. It must be borne in mind that from the start, the contract of sublease between the sub-lessee and the present occupants is null and void. In point is the contract of sublease between Pilipinas
Bank as sub-lessor and Eugenio Trinidad and Kalayaan, Sections 3 and 6 of which provide:
3. That the SUBLESSEE hereby expressly agrees and warrants that the leased premises shall be used by him exclusively for the
Caloocan City Food and Fruit Terminal store or market and that the SUBLESSEE is hereby strictly prohibited from using said
premises for any other purpose without the prior consent of the SUBLESSOR.
xxxxx
6. That the SUB-LESSEE shall not directly or indirectly sublease, assign, transfer, convey, mortgage or in any way encumber its
right to sublease over the premises or any portion thereof under any circumstances whatsoever; any contract made in violation of
this clause shall be null and void. It is expressly understood and agreed by the herein parties that the personal character of the
SUB-LESSEE as hereinbelow represented and the nature of occupancy of the leased premises as above restricted, constitute
and are special considerations and inducement for the granting of the sublease by the SUBLESSOR; consequently, any violation,
direct or indirect of any of the stipulations hereon shall automatically and unequivocably terminate this contract of lease effective

from the time such violation occurs. (pp. 33-34, Rollo)

It is well entrenched in this jurisdiction that the contract is the law between the parties thereof (Phil. American General Insurance v.
Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146 SCRA 360) provided nothing therein is contrary to law, morals, good
customs, public policy, or public order (Lagunsad v. Soto, 92 SCRA 476). In the light of the clear and express provisions of the
abovequoted contract, there is no doubt that the contract entered into by Mr. Trinidad further sub-leasing a portion of the premises
to the present occupants, is null and void.
Considering the above, the present occupants cannot exactly be said to be claiming rights under Pilipinas Bank, such claim of
right merely being apparent. The nullity of the occupants contract of sub-lease with Mr. Trinidad completely negates any juridical
relation between Pilipinas Bank and said occupants. Such nullity leads us to conclude that the present occupants did so occupy
the premises under their own name and responsibility; thus, properly labelled "squatters" by the respondent CA (see Amended
Decision, p. 53, Rollo). Likewise, in view of the further sub- leasing of the premises to the present occupants, Mr. Trinidad and
Kalayaan ceased to be sub-lessees of Pilipinas Bank by virtue of the automatic termination of said contract of sub-lease pursuant
to Section 6 thereof (supra). As correctly found by the respondent CA:
.... Eugenio Trinidad and Kalayaan Development Corporation cannot be accurately considered as claiming rights which emanated
from the original lessor-lessee relationship between the petitioner Bank and the private respondents. It has been clearly
established that such relationship has been tarnished by the violation committed by the sublessee in further subletting the
premises to the squatters. (Amended Decision, p. 53, Rollo)
Hence, when Pilipinas Bank surrendered the key to the premises it physically occupied, it is deemed to have completely returned
the premises leased to it. The obligation then to evict the occupants in the premises could not be attributed to Pilipinas Bank since
any juridical relation between the Bank and the occupants no longer exists and that the original contract of lease had already been
terminated by virtue of said bank's withdrawal from the property. As correctly ruled by the MTC in dismissing the ejectment suit
filed by Pilipinas Bank against Mr. Trinidad, Kalayaan, and the occupants:
Upon the termination or expiration of the lease contract between the Syjucos and Pilipinas Bank on December 31, 1983, the latter
has been dispossessed of any legal right to eject the defendant Kalayaan because there is no more contract between them to
speak of. The authority of the plaintiff bank springs from their sublease contract which already expired. It now devolves upon the
Syjucos, the landowner, to do the ejecting of the defendant, but since the former has already filed an ejectment suit against the
Pilipinas Bank, as the original lessee, there is no more need to file another suit against the sublessee Kalayaan because "a
judgment of eviction against the tenant binds and is enforceable against his sublessee although the latter was not made a party to
the case." (Gozon v. Dela Rosa, 77 Phil. 919; Ng Sui Tan v. Amparo, 80 Phil. 921; Go King v. Geronimo, 81 Phil. 445) (MTC Order,
p. 116, Rollo)
Clearly then, in the light of the foregoing discussion, the present occupants did occupy the premises in question in their own
capacity. They cannot be said to have a claim of right springing from the Pilipinas Bank as original lessee because the lease
agreement between Mr. Trinidad (as president of Kalayaan) and the present occupants is null and void, it being contrary to the
contract of sub-lease. Likewise, the said contract of sub-lease having been automatically ended when Mr. Trinidad further subleased the premises to the occupants, no true claim of right to possess the said premises may be ascribed to said occupants as
emanating from Pilipinas Bank. As such, the latter cannot be considered the proper party to oust said occupants within the
meaning of Section 1, Rule 70 of the Rules of Court.
If anybody is to blame for the Syjucos inability to possess the premises occupied, it should be Mr. Trinidad and the occupants
themselves for having gone against the contract of sublease between the former and Pilipinas Bank. Contrary to the Syjucos
claim, fault cannot be imputed to Pilipinas Bank in sub-leasing part of the property to Mr. Trinidad as president of Kalayaan
precisely because the Syjucos themselves allowed subletting in the original contract of lease. As found by the respondent CA,
"paragraph 6 of the contract of lease allows the petitioner, as lessee, to sublease any part or portion of the premises or the whole
portion thereof without obtaining the consent of the lessors thereto." (p. 33, Rollo). On the contrary, Pilipinas Bank even acted in
herein petitioners' favor in providing for Sections 3 and 6 in the contract of sub-lease (supra).
In connection with the question on the applicability of Articles 1266 and 1651 of the Civil Code in relation to Article 1665, We rule
that, under the circumstances, it should be resolved in the negative. Article 1266 cannot validly apply to the present case since it
makes express reference to obligations to do (or personal obligations). This being so, it may not be invoked in exempting Pilipinas
Bank (as lessee) from returning the whole property to the owners thereof for such obligation to return is in the nature of an
obligation to give (or a real obligation), in which case Article 1262, not Article 1266, applies. Nevertheless, for reasons already
discussed above, Pilipinas is deemed to have fully satisfied its obligation to return the whole property leased.
Similarly, Article 1651 cannot be correctly read with Article 1665 in the latter's application to the case at bar concerning the
propriety of requiring the sub-lessees (i.e., Mr. Trinidad and Kalayaan) to pay rents directly to the lessors, Syjucos. Article 1651
clearly and expressly refers to the use and preservation of the thing leased and not to the matter of payment of rents. This is so
precisely because it is Article 1652 which outlines the sub-lessee's liability for rents.
2. In their second assigned error, the Syjucos assail the respondent CA's finding that Pilipinas Bank had "completely vacated"
(see pp. 49, 52, Rollo) the premises, such being a misapprehension of the facts. They clarify that Pilipinas Bank surrendered only
a portion of the entire 1,387 square meters subject of the lease contract, about 965 square meters of which are still occupied by
the sub-lessees of Mr. Trinidad. On the other hand, Pilipinas Bank insists that it has indeed vacated the place completely, having
physically and actually withdrawn from the premises. We find no cogent reason for Us to deviate from the said finding of fact.
As we had said earlier, Pilipinas Bank actually and physically withdrew from the premises. It has packed up all its properties and
delivered the key to the building it occupied to the trial court. the fact that the sub-lessees of Mr. Trinidad remain in possession of a
larger portion of the property does not change the truth that Pilipinas Bank has completely left the same and that it has performed
its obligation to return the property leased. This is because the occupants cannot be properly considered as claiming rights from
Pilipinas Bank, as already discussed above. They possess the bigger portion of the property in their own name; Pilipinas Bank is
not privy to the fact of their possession. Hence, Pilipinas Bank is not responsible for the acts of the present occupants in entering
the premises although they claim an apparent right from the former.
3. Anent the third and fourth assigned errors, the Syjucos essentially take exception to the respondent CA's ruling making Mr.
Trinidad and Kalayaan and all persons claiming rights under them primarily liable for rents from July 1984, when Pilipinas Bank
left the premises, until the same are finally vacated and possession restored to the Syjucos. They argue that Article 1651 of the

Civil Code does not find application under the circumstances and maintain that Article 1652 should be solely applied. They also
assail the CA's finding that Mr. Trinidad and Kalayaan were parties in the ejectment case before the trial court. On the other hand,
Pilipinas Bank similarly contends that Article 1652 is inapplicable since it assumes the existence of a lease contract between the
parties as well as a contract of sub-lease with Mr. Trinidad and Kalayaan from July 1984. It also maintains that Mr. Trinidad and
Kalayaan are deemed parties to the ejectment case. It is Our considered view that the respondent CA correctly held the sublessees primarily liable.
As regard the application of either Article 1651 or 1652 of the Civil Code, We rule that neither can be properly invoked under the
circumstances. As correctly noted by the Syjucos, and as We have mentioned earlier, Article 1651 refers to the sublessee's liability
to the lessor for acts relating to the use and preservation of the property leased. It may not be resorted to in determining the sublessee's liability for rent since Article 1652 specifically governs that aspect. However, Article 1652 cannot also be applied in
determining Pilipinas Bank's liability for rents from July 1984 onwards precisely because no contract of lease existed from that
time. The original contract of lease expired on December 31, 1983. From then on, as correctly pointed out by Pilipinas Bank on
pages 17 to 18 of its Motion to Dismiss, the lease was renewed from month to month pursuant to Articles 1670 and 1687 of the
Civil Code until it was finally terminated on July 6, 1984 when said Bank left the place. Ergo, the respondent CA did not commit
any error in requiring Pilipinas Bank to pay rents only for the time the latter occupied the premises. Obviously then, it should be
Mr. Trinidad and Kalayaan and all persons claiming rights under them who should be liable to pay rents to the Syjucos from the
time Pilipinas Bank abandoned the premises.
With regard to the question of whether or not Mr. Trinidad and Kalayaan are parties to the ejectment case filed by the Syjucos
against Pilipinas Bank, We hold that they indeed are. Going back to the facts, the Syjucos filed an ejectment case with the MTC
on February 10, 1984 docketed as Civil Case No. 16193. After Pilipinas Bank's Motion to Admit Third Party complaint against Mr.
Trinidad and Kalayaan was denied, the said Bank filed an ejectment suit against the latter on September 26, 1984 (see Complaint,
p. 107, Rollo) and the same was docketed as Civil Case No. 16617. On Motion of Pilipinas Bank, the MTC ordered the
consolidation of Civil Case No. 16617 with Civil Case No. 16193, the original ejectment suit (see p. 177, Rollo). Thereafter, on
motion of Mr. Trinidad and Kalayaan, Civil Case No. 16617 was dismissed on November 15, 1984 with the following reservation
made by the MTC:
This is, however, without prejudice to whatever liability the defendant herein as sub-lessee, may have in the case filed by the
property owner against the Pilipinas Bank since the eviction of the latter binds the defendant. (MTC Order p. 117, Rollo)
While the MTC dismissed Civil Case No. 16617 on the ground that Pilipinas Bank "has been dispossessed of any legal right to
eject the defendant Kalayaan because there is no more contract between them to speak of" (MTC Decision, p. 116, Rollo), it
recognized the impending liability of the defendants therein. Thus, from the above-quoted pronouncement, it is clear that the MTC
did not totally relinquish its jurisdiction over Mr. Trinidad and Kalayaan, enabling it to hold the latter primarily liable for rents from
July 1983. Besides, when a lessee's right to remain terminates, the right of a sub-lessees to continue in possession ceases to
exist, being privies of the lessee.
4. Coming now to the question of Attorney's fees, We are inclined to uphold the CA's finding when it said:
Finally, movants assail the award of attorney's fees to the petitioner bank. No cogent reason has been advanced by movants to
warrant a reversal of the same. We need not point out here that this case emanated from the MTC; that certiorari was filed in the
RTC, and later on an appeal of the MTC Decision was lodged in the RTC and so on and so forth. In fact, this controversy has
come full circle to the IAC, to the Supreme Court and back to this Court. In the Metropolitan Trial Court, private respondents were
apparently unsatisfied by the said Court's Decision, which, for all appearances, already; completely and satisfactorily adjudicated
private respondents' claim and cause of action by ordering ejectment even if the petitioner Bank had long been out of the leased
premises, by ordering full restitution of the premises, by ordering a money judgment favorable to private respondents, with
payment of attorney's fees, and by rendering judgment against the sublessee and all persons claiming rights under him. Yet,
private respondents, assisted by counsel, persevered and prolonged litigation in the process, by lodging an appeal on their
insistence that the sub-lessees are not parties in the case. (p. 57, Rollo)
WHEREFORE, the petition is hereby DENIED and the Orders of the respondent Court of Appeals are AFFIRMED.
SO ORDERED.

G.R. No. 116896 May 5, 1997

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner,
vs.
COURT OF APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S. RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S.
RAYMUNDO, and AMADOR S. RAYMUNDO, respondents.

DAVIDE, JR., J.:

This petition for review on certiorari has its roots in Civil Case No. 53444, which was sparked by petitioner's refusal to pay the
rentals as stipulated in the contract of lease 1 on an undivided portion of 30,000 square meters of a parcel of land owned by
private respondents.
The lease contract, executed on 18 November 1985, reads in part as follows:
1. TERM OF LEASE This lease shall be for a period of five (5) years, commencing on the date of issuance of the industrial
clearance by the Ministry of Human Settlements, renewable for a like or other period at the option of the LESSEE under the same
terms and conditions.
2. RATE OF RENT LESSEE shall pay to the LESSOR rent at the monthly rate of TWENTY THOUSAND PESOS (P20,000.00),
Philippine Currency, in the manner set forth in Paragraph 3 below. This rate shall be increased yearly by Five Percent (5%) based
on the agreed monthly rate of P20,000.00 as follows:

Monthly Rate Period Applicable

P21,000.00 Starting on the 2nd year
P22,000.00 Starting on the 3rd year
P23,000.00 Starting on the 4th year
P24,000.00 Starting on the 5th year
3. TERMS OF PAYMENT The rent stipulated in Paragraph 2 above shall be paid yearly in advance by the LESSEE. The first
annual rent in the amount of TWO HUNDRED FORTY THOUSAND PESOS (P240,000.00), Philippine currency, shall be due and
payable upon the execution of this Agreement and the succeeding annual rents shall be payable every twelve (12) months
thereafter during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY It is understood that the Property shall be used by the LESSEE as the site, grounds and
premises of a rock crushing plant and field office, sleeping quarters and canteen/mess hall. The LESSORS hereby grant to the
LESSEE the right to erect on the Leased Property such structure(s) and/or improvement(s) necessary for or incidental to the
LESSEE's purposes.
xxx xxx xxx
11. TERMINATION OF LEASE This Agreement may be terminated by mutual agreement of the parties. Upon the termination or
expiration of the period of lease without the same being renewed, the LESSEE shall vacate the Leased Property at its expense.
On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary Use Permit
crushing project. The permit was to be valid for two years unless sooner revoked by the Ministry.

for the proposed rock

On 16 January 1986, private respondents wrote petitioner requesting payment of the first annual rental in the amount of P240,000
which was due and payable upon the execution of the contract. They also assured the latter that they had already stopped
considering the proposals of other aggregates plants to lease the property because of the existing contract with petitioner. 3
In its reply-letter, petitioner argued that under paragraph 1 of the lease contract, payment of rental would commence on the date of
the issuance of an industrial clearance by the Ministry of Human Settlements, and not from the date of signing of the contract. It
then expressed its intention to terminate the contract, as it had decided to cancel or discontinue with the rock crushing project
"due to financial, as well as technical, difficulties." 4
Private respondents refused to accede to petitioner's request for the pretermination of the lease contract. They insisted on the
performance of petitioner's obligation and reiterated their demand for the payment of the first annual rental. 5
Petitioner objected to private respondents' claim and argued that it was "only obligated to pay . . . the amount of P20,000.00 as
rental payments for the one-month period of lease, counted from 07 January 1986 when the Industrial Permit was issued by the
Ministry of Human Settlements up to 07 February 1986 when the Notice of Termination was served" 6 on private respondents.
On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig an action against petitioner for Specific
Performance with Damages. 7 The case was docketed as Civil Case No. 53444 at Branch 160 of the said court. After the filing by
petitioner of its Answer with Counterclaim, the case was set for trial on the merits.
What transpired next was summarized by the trial court in this wise:
Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant asked for postponement of the reception of its evidence
scheduled on August 10, 1988 and as prayed for, was reset to August 25, 1988 (p. 91 rec.) Counsel for defendant again asked for
postponement, through representative, as he was presently indisposed. The case was reset, intransferable to September 15 and
26, 1988 (p. 94 rec.) On September 2, 1988, the office of the Government Corporate Counsel entered its appearance for
defendant (p. 95, rec.) and the original counsel later withdrew his appearance. On September 15, 1988 the Government
Corporate Counsel asked for postponement, represented by Atty. Elpidio de Vega, and with his conformity in open court, the
hearing was reset, intransferable to September 26 and October 17, 1988, (p. 98, rec.) On September 26, 1988 during the hearing,
defendant's counsel filed a motion for postponement (urgent) as he had "sore eyes", a medical certificate attached.
Counsel for plaintiffs objected to the postponement and the court considered the evidence of the government terminated or
waived. The case was deemed submitted for decision upon the filing of the memorandum. Plaintiffs filed their memorandum on
October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for reconsideration of the order of the court on September 26,
1988 (p. 107, rec.) The motion was not asked to be set for hearing (p. 110 rec.) There was also no proof of notice and service to
counsel for plaintiff . The court in the interest of justice set the hearing on the motion on November 29, 1988. (p. 120, rec.) but
despite notice, again defendant's counsel was absent (p. 120-A, dorsal side, rec.) without reason. The court reset the motion to
December 16, 1988, in the interest of justice. The motion for reconsideration was denied by the court. A second motion for
reconsideration was filed and counsel set for hearing the motion on January 19, 1989. During the hearing, counsel for the
government was absent. The motion was deemed abandoned but the court at any rate, after a review of the incidents and the
grounds relied upon in the earlier motion of defendant, found no reason to disturb its previous order. 8
On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private respondents the amount of P492,000 which
represented the rentals for two years, with legal interest from 7 January 1986 until the amount was fully paid, plus attorney's fees
in the amount of P20,000 and costs. 9
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in ordering it to pay private respondent the
amount of P492,000 and in denying it the right to be heard.
Upon the affirmance of the trial court's decision 10 and the denial of its motion for reconsideration, petitioner came to this Court
ascribing to respondent Court of Appeals the same alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract, which reads: "This lease shall be for a
period of five (5) years, commencing on the date of issuance of the industrial clearance by the Ministry of Human
Settlements. . . ." It then submits that the issuance of an industrial clearance is a suspensive condition without which the rights

under the contract would not be acquired. The Temporary Use Permit is not the industrial clearance referred to in the contract; for
the said permit requires that a clearance from the National Production Control Commission be first secured, and besides, there is
a finding in the permit that the proposed project does not conform to the Zoning Ordinance of Rodriguez, (formerly Montalban),
Rizal, where the leased property is located. Without the industrial clearance the lease contract could not become effective and
petitioner could not be compelled to perform its obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial clearance contemplated in the
contract. In its letter dated 24 April 1986, petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only obligated to pay your clients the amount of P20,000.00 as
rental payments for the one-month period of the lease, counted from 07 January 1986 when the Industrial Permit was issued by
the Ministry of Human Settlements up to 07 February 1986 when the Notice of Termination was served on your clients. 11
(Emphasis Supplied).
The "Industrial Permit" mentioned in the said letter could only refer to the Temporary Use Permit issued by the Ministry of Human
Settlements on 7 January 1986. And it can be gleaned from this letter that petitioner has considered the permit as industrial
clearance; otherwise, petitioner could have simply told private respondents that its obligation to pay rentals has not yet arisen
because the Temporary Use Permit is not the industrial clearance contemplated by them. Instead, petitioner recognized its
obligation to pay rentals counted from the date the permit was issued.
Also worth noting is petitioner's earlier letter, thus:
[P]lease be advised of PNCC Management's decision to cancel or discontinue with the rock crushing project due to financial as
well as technical difficulties. In view thereof, we would like to terminate our Lease Contract dated 18 November, 1985. Should you
agree to the mutual termination of our Lease Contract, kindly indicate your conformity hereto by affixing your signature on the
space provided below. May we likewise request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and Mrs. Socorro A.
Raymundo as Attorney-in-Fact of Amador S. Raymundo to sign on the spaces indicated below. 12
It can be deduced from this letter that the suspensive condition issuance of industrial clearance has already been fulfilled
and that the lease contract has become operative. Otherwise, petitioner did not have to solicit the conformity of private
respondents to the termination of the contract for the simple reason that no juridical relation was created because of the nonfulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently cancelling the lease contract was "financial
as well as technical difficulties," not the alleged insufficiency of the Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it should be released from the
obligatory force of the contract of lease because the purpose of the contract did not materialize due to unforeseen events and
causes beyond its control, i.e., due to the abrupt change in political climate after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the
force of law between the parties and should be complied with in good faith. 13 But the law recognizes exceptions to the principle of
the obligatory force of contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: "The debtor in
obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the
obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations "to do," and not to
obligations "to give." 14 An obligation "to do" includes all kinds of work or service; while an obligation "to give" is a prestation which
consists in the delivery of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its
simple possession, or in order to return it to its owner. 15
The obligation to pay rentals 16 or deliver the thing in a contract of
lease 17 falls within the prestation "to give"; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen
event and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in the said article. Besides,
petitioner failed to state specifically the circumstances brought about by "the abrupt change in the political climate in the country"
except the alleged prevailing uncertainties in government policies on infrastructure projects.
The principle of rebus sic stantibus 18 neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. 19 This theory is said to
be the basis of Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of rebus
sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have
assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor. 20
In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after the EDSA
Revolution and its poor financial condition "rendered the performance of the lease contract impractical and inimical to the
corporate survival of the petitioner."
This Court cannot subscribe to this argument. As pointed out by private respondents:

21

It is a matter of record that petitioner PNCC entered into a contract with private respondents on November 18, 1985. Prior thereto,
it is of judicial notice that after the assassination of Senator Aquino on August 21, 1983, the country has experienced political
upheavals, turmoils, almost daily mass demonstrations, unprecedented, inflation, peace and order deterioration, the Aquino trial
and many other things that brought about the hatred of people even against crony corporations. On November 3, 1985, Pres.
Marcos, being interviewed live on U.S. television announced that there would be a snap election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract of lease with private respondents
with open eyes of the deteriorating conditions of the country.

Anent petitioner's alleged poor financial condition, the same will neither release petitioner from the binding effect of the contract of
lease. As held in Central Bank v. Court of Appeals, 22 cited by private respondents, mere pecuniary inability to fulfill an
engagement does not discharge a contractual obligation, nor does it constitute a defense to an action for specific performance.
With regard to the non-materialization of petitioner's particular purpose in entering into the contract of lease, i.e., to use the leased
premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause or essential purpose in a contract
of lease is the use or enjoyment of a thing. 23 As a general principle, the motive or particular purpose of a party in entering into a
contract does not affect the validity nor existence of the contract; an exception is when the realization of such motive or particular
purpose has been made a condition upon which the contract is made to depend. 24 The exception does not apply here.
Third. According to petitioner, the award of P492,000.00 representing the rent for two years is excessive, considering that it did not
benefit from the property. Besides, the temporary permit, conformably with the express provision therein, was deemed
automatically revoked for failure of petitioner to use the same within one year from the issuance thereof. Hence, the rent payable
should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary permit was valid for two years but was
automatically revoked because of its non-use within one year from its issuance. The non-use of the permit and the non-entry into
the property subject of the lease contract were both imputable to petitioner and cannot, therefore, be taken advantage of in order
to evade or lessen petitioner's monetary obligation. The damage or prejudice to private respondents is beyond dispute. They
unquestionably suffered pecuniary losses because of their inability to use the leased premises. Thus, in accordance with Article
1659 of the Civil Code, 25 they are entitled to indemnification for damages; and the award of P492,000.00 is fair and just under the
circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in denying petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several postponements
waived the presentation of evidence in petitioner's behalf.

26

to petitioner before it deemed terminated and

It must be recalled that private respondents rested their case on 7 September 1987 yet. 27 Almost a year after, or on 10 August
1988 when it was petitioner's turn to present evidence, petitioner's counsel asked for postponement of the hearing to 25 August
1988 due to conflict of schedules, 28 and this was granted. 29 At the rescheduled hearing, petitioner's counsel, through a
representative, moved anew for postponement, as he was allegedly
indisposed. 30 The case was then reset "intransferable" to September 15 and 26, 1988. 31 On 2 September 1988, the Office of the
Government Corporate Counsel, through Atty. Elpidio J. Vega, entered its appearance for the
petitioner, 32 and later the original counsel withdrew his appearance. 33 On 15 September 1988, Atty. Vega requested for
postponement to enable him to go over the records of the case. 34 With his conformity, the hearing was reset "intransferable" to
September 26 and October 17, 1988. 35 In the morning of 26 September 1988, the court received Atty. Vega's Urgent Motion for
Postponement on the ground that he was afflicted with conjunctivitis or sore eyes. 36 This time, private respondents objected; and
upon their motion, the court deemed terminated and waived the presentation of evidence for the petitioner. 37 Nevertheless, before
the court considered the case submitted for decision, it required the parties to submit their respective memoranda within thirty
days. 38 But petitioner failed to comply.
Likewise, the court was liberal with respect to petitioner's motion for reconsideration. Notwithstanding the lack of request for
hearing and proof of notice and service to private respondents, the court set the hearing of the said motion on 29 November 1988.
39 Upon the denial of the said motion for lack of merit, 40 petitioner filed a second motion for reconsideration. But during the hearing
of the motion on a date selected by him, Atty. Vega was absent for no reason at all, despite due notice. 41
From the foregoing narration of procedural antecedents, it cannot be said that petitioner was deprived of its day in court. The
essence of due process is simply an opportunity to he heard. 42 To be heard does not only mean oral arguments in court; one may
be heard also through pleadings. Where opportunity to be heard, either through oral arguments or pleadings, is accorded, there is
no denial of procedural due process. 43
WHEREFORE, the instant petition is DENIED and the challenge decision of the Court of Appeals is AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II), respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.

NOCON, J.:
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his contract charges himself with
an obligation possible to be performed, he must perform it, unless its performance is rendered impossible by the act of God, by
the law, or by the other party, it being the rule that in case the party desires to be excused from performance in the event of
contingencies arising thereto, it is his duty to provide the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which provides:
When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be

released therefrom, in whole or in part.

In the report of the Code Commission, the rationale behind this innovation was explained, thus:
The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has
become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the
obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as
to have been beyond their contemplation, it would be doing violence to that intention to hold their contemplation, it would be doing
violence to that intention to hold the obligor still responsible. 2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267 in favor of
Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former insists that the complaint should
have been dismissed for failure to state a cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance telephone
service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation
established for the purpose of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation of its telephone
service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of
charge, ten (10) telephone connections for the use by private respondent in the following places:
(a) 3 units The Main Office of (private respondent);
(b) 2 Units The Warehouse of (private respondent);
(c) 1 Unit The Sub-Station of (private respondent) at Concepcion Pequea;
(d) 1 Unit The Residence of (private respondent's) President;
(e) 1 Unit The Residence of (private respondent's) Acting General Manager; &
(f) 2 Units To be determined by the General Manager. 3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the first part has need for the electric light posts of the
party of the second part it being understood that this contract shall terminate when for any reason whatsoever, the party of the
second part is forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to remove the electric
lightpost; (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of the Board of Directors
of private respondent and at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the Regional Trial
Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract with damages, on the ground that it
is too one-sided in favor of petitioners; that it is not in conformity with the guidelines of the National Electrification Administration
(NEA) which direct that the reasonable compensation for the use of the posts is P10.00 per post, per month; that after eleven (11)
years of petitioners' use of the posts, the telephone cables strung by them thereon have become much heavier with the increase
in the volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at which points those
posts were broken during typhoons; that a post now costs as much as P2,630.00; so that justice and equity demand that the
contract be reformed to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319 posts in the
towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any contract with it; that at the rate of
P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of P267,960.00 from 1981 up to
the filing of its complaint; and that petitioners had refused to pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten (10) telephone units
which had caused it great inconvenience and damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does not sufficiently state
a cause of action for reformation of contract; (2) it is barred by prescription, the same having been filed more than ten (10) years
after the execution of the contract; and (3) it is barred by estoppel, since private respondent seeks to enforce the contract in the
same action. Petitioners further alleged that their utilization of private respondent's posts could not have caused their deterioration
because they have already been in use for eleven (11) years; and that the value of their expenses for the ten (10) telephone lines
long enjoyed by private respondent free of charge are far in excess of the amounts claimed by the latter for the use of the posts,
so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines in areas outside
Naga City for which its posts were used by them; and that if petitioners had refused to comply with private respondent's demands
for payment for the use of the posts outside Naga City, it was probably because what is due to them from private respondent is
more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had been categorized by
the National Telecommunication Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was petitioner Maggay who
prepared the contract; that the understanding between private respondent and petitioners was that the latter would only use the
posts in Naga City because at that time, petitioners' capability was very limited and they had no expectation of expansion because

of legal squabbles within the company; that private respondent agreed to allow petitioners to use its posts in Naga City because
there were many subscribers therein who could not be served by them because of lack of facilities; and that while the telephone
lines strung to the posts were very light in 1977, said posts have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared that the posts being
used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili, Canaman, and Magarao, all outside
Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in 1989 are much bigger than those in November,
1977; that in 1987, almost 100 posts were destroyed by typhoon Sisang: around 20 posts were located between Naga City and
the town of Pili while the posts in barangay Concepcion, Naga City were broken at the middle which had been bored by
petitioner's linemen to enable them to string bigger telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines that were strung to
the posts did not follow the minimum vertical clearance required by the National Building Code, so that there were cases in 1988
where, because of the low clearance of the cables, passing trucks would accidentally touch said cables causing the posts to fall
and resulting in brown-outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of Region V of NEA,
declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private telephone systems of electric cooperatives'
posts, they should pay a minimum monthly rental of P4.00 per post, and considering the escalation of prices since 1985, electric
cooperatives have been charging from P10.00 to P15.00 per post, which is what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on the poor service
rendered by petitioner's telephone lines, like the telephone in their Complaints Section which was usually out of order such that
they could not respond to the calls of their customers. In case of disruption of their telephone lines, it would take two to three
hours for petitioners to reactivate them notwithstanding their calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him to study the
contract sometime during the latter part of 1982 or in 1983, as it had appeared very disadvantageous to private respondent.
Notwithstanding his recommendation for the filing of a court action to reform the contract, the former general managers of private
respondent wanted to adopt a soft approach with petitioners about the matter until the term of General Manager Henry Pascual
who, after failing to settle the matter amicably with petitioners, finally agreed for him to file the present action for reformation of
contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private respondent and at the same time the lawyer of petitioner
when the contract was executed, but Atty. Gaudioso Tena, who was also a member of the Board of Directors of private
respondent, was the one who saw to it that the contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long as it wishes
without paying anything therefor except for long distance calls through PLDT out of which the latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have remained erect up to
the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only small holes to pass
through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according to standard and
comparable to those of PLDT. The accidents mentioned by private respondent involved trucks that were either overloaded or had
loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was that the coverage
thereof would include the whole area serviced by petitioners because at that time, they already had subscribers outside Naga City.
Private respondent, in fact, had asked for telephone connections outside Naga City for its officers and employees residing there in
addition to the ten (10) telephone units mentioned in the contract. Petitioners have not been charging private respondent for the
installation, transfers and re-connections of said telephones so that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in accordance with
engineering standards and practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private respondent's first
cause of action, that while the contract appeared to be fair to both parties when it was entered into by them during the first year of
private respondent's operation and when its Board of Directors did not yet have any experience in that business, it had become
disadvantageous and unfair to private respondent because of subsequent events and conditions, particularly the increase in the
volume of the subscribers of petitioners for more than ten (10) years without the corresponding increase in the number of
telephone connections to private respondent free of charge. The trial court concluded that while in an action for reformation of
contract, it cannot make another contract for the parties, it can, however, for reasons of justice and equity, order that the contract
be reformed to abolish the inequities therein. Thus, said court ruled that the contract should be reformed by ordering petitioners to
pay private respondent compensation for the use of their posts in Naga City, while private respondent should also be ordered to
pay the monthly bills for the use of the telephones also in Naga City. And taking into consideration the guidelines of the NEA on
the rental of posts by telephone companies and the increase in the costs of such posts, the trial court opined that a monthly rental
of P10.00 for each post of private respondent used by petitioners is reasonable, which rental it should pay from the filing of the
complaint in this case on January 2, 1989. And in like manner, private respondent should pay petitioners from the same date its
monthly bills for the use and transfers of its telephones in Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract does not mention anything about the use by
petitioners of private respondent's posts outside Naga City. Therefore, the trial court held that for reason of equity, the contract
should be reformed by including therein the provision that for the use of private respondent's posts outside Naga City, petitioners
should pay a monthly rental of P10.00 per post, the payment to start on the date this case was filed, or on January 2, 1989, and
private respondent should also pay petitioners the monthly dues on its telephone connections located outside Naga City beginning

January, 1989.
And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the agreement (Exh. A);
ordering the defendants to pay plaintiff's electric poles in Naga City and in the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00) PESOS
per plaintiff's pole, per month beginning January, 1989 and ordering also the plaintiff to pay defendant NATELCO the monthly
dues of all its telephones including those installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr. Antonio
Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's claim for
attorney's fees and expenses of litigation and defendants' counterclaim are both hereby ordered dismissed. Without
pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision dated May 28,
1992, respondent court affirmed the decision of the trial court, 5 but based on different grounds to wit: (1) that Article 1267 of the
New Civil Code is applicable and (2) that the contract was subject to a potestative condition which rendered said condition void.
The motion for reconsideration was denied in the resolution dated September 10, 1992. 6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced from the time it became
disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the contract does not
involve the rendition of service or a personal prestation and it is not for future service with future unusual change. Instead, the
ruling in the case of Occea, et al. v. Jabson, etc., et al., 7 which interpreted the article, should be followed in resolving this case.
Besides, said article was never raised by the parties in their pleadings and was never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of contract would lie and may prosper, there must be sufficient
allegations as well as proof that the contract in question failed to express the true intention of the parties due to error or mistake,
accident, or fraud. Indeed, in embodying the equitable remedy of reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true intention of the contracting parties may be expressed. The
courts by the reformation do not attempt to make a new contract for the parties, but to make the instrument express their real
agreement. The rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument
which does not reflect or disclose the real meeting of the minds of the parties. The rigor of the legalistic rule that a written
instrument should be the final and inflexible criterion and measure of the rights and obligations of the contracting parties is thus
tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident. (pp. 55-56, Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where through mistake or accident
on the part of either or both of the parties or mistake or fraud on the part of the clerk or typist who prepared the instrument, the
true intention of the parties is not expressed therein, then the instrument may be reformed at the instance of either party if there
was mutual mistake on their part, or by the injured party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a mistake on its part or mutual
mistake on the part of both parties when they entered into the agreement Exh. "A", and that because of this mistake, said
agreement failed to express their true intention. Rather, plaintiff's evidence shows that said agreement was prepared by Atty.
Luciano Maggay, then a member of plaintiff's Board of Directors and its legal counsel at that time, who was also the legal counsel
for defendant-appellant, so that as legal counsel for both companies and presumably with the interests of both companies in mind
when he prepared the aforesaid agreement, Atty. Maggay must have considered the same fair and equitable to both sides, and
this was affirmed by the lower court when it found said contract to have been fair to both parties at the time of its execution. In
fact, there were no complaints on the part of both sides at the time of and after the execution of said contract, and according to 73year old Justino de Jesus, Vice President and General manager of appellant at the time who signed the agreement Exh. "A" in its
behalf and who was one of the witnesses for the plaintiff (sic), both parties complied with said contract "from the very beginning"
(p. 5, tsn, April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff with the expansion of the
business of appellant and the increase in the volume of its subscribers in Naga City and environs through the years, necessitating
the stringing of more and bigger telephone cable wires by appellant to plaintiff's electric posts without a corresponding increase in
the ten (10) telephone connections given by appellant to plaintiff free of charge in the agreement Exh. "A" as consideration for its
use of the latter's electric posts in Naga City, appear, however, undisputed from the totality of the evidence on record and the
lower court so found. And it was for this reason that in the later (sic) part of 1982 or 1983 (or five or six years after the subject
agreement was entered into by the parties), plaintiff's Board of Directors already asked Atty. Luis General who had become their
legal counsel in 1982, to study said agreement which they believed had become disadvantageous to their company and to make
the proper recommendation, which study Atty. General did, and thereafter, he already recommended to the Board the filing of a
court action to reform said contract, but no action was taken on Atty. General's recommendation because the former general
managers of plaintiff wanted to adopt a soft approach in discussing the matter with appellant, until, during the term of General
Manager Henry Pascual, the latter, after failing to settle the problem with Atty. Luciano Maggay who had become the president
and general manager of appellant, already agreed for Atty. General's filing of the present action. The fact that said contract has
become inequitous or disadvantageous to plaintiff as the years went by did not, however, give plaintiff a cause of action for
reformation of said contract, for the reasons already pointed out earlier. But this does not mean that plaintiff is completely without
a remedy, for we believe that the allegations of its complaint herein and the evidence it has presented sufficiently make out a
cause of action under Art. 1267 of the New Civil Code for its release from the agreement in question.

xxx xxx xxx

The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977 and the prevailing
circumstances and conditions at the time, were described by Dioscoro Ragragio, the President of plaintiff in 1977 and one of its
two officials who signed said agreement in its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in the City of Naga
because at that time the capability of NATELCO was very limited, as a matter of fact we do [sic] not expect to be able to expand
because of the legal squabbles going on in the NATELCO. So, even at that time there were so many subscribers in Naga City that
cannot be served by the NATELCO, so as a mater of public service we allowed them to sue (sic) our posts within the Naga City.
(p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very light and that very few
telephone lines were attached to the posts of CASURECO II in 1977, said posts have become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's subscribers and the
corresponding increase in the telephone cables and wires strung by it to plaintiff's electric posts in Naga City for the more 10 years
that the agreement Exh. "A" of the parties has been in effect, there has been no corresponding increase in the ten (10) telephone
units connected by appellant free of charge to plaintiff's offices and other places chosen by plaintiff's general manager which was
the only consideration provided for in said agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even
started using plaintiff's electric posts outside Naga City although this was not provided for in the agreement Exh. "A" as it extended
and expanded its telephone services to towns outside said city. Hence, while very few of plaintiff's electric posts were being used
by appellant in 1977 and they were all in the City of Naga, the number of plaintiff's electric posts that appellant was using in 1989
had jumped to 1,403,192 of which are outside Naga City (Exh. "B"). Add to this the destruction of some of plaintiff's poles during
typhoons like the strong typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the escalation of
the costs of electric poles from 1977 to 1989, and the conclusion is indeed ineluctable that the agreement Exh. "A" has already
become too one-sided in favor of appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it should now be released therefrom under
Art. 1267 of the New Civil Code to avoid appellant's unjust enrichment at its (plaintiff's) expense. As stated by Tolentino in his
commentaries on the Civil Code citing foreign civilist Ruggiero, "equity demands a certain economic equilibrium between the
prestation and the counter-prestation, and does not permit the unlimited impoverishment of one party for the benefit of the other
by the excessive rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although based on a different and wrong premise (i.e.,
reformation of contract), that from the date of the filing of this case, appellant must pay for the use of plaintiff's electric posts in
Naga City at the reasonable monthly rental of P10.00 per post, while plaintiff should pay appellant for the telephones in the same
City that it was formerly using free of charge under the terms of the agreement Exh. "A" at the same rate being paid by the general
public. In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order
not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment
by appellant at the expense of plaintiff, said arrangement to continue only until such time as said parties can re-negotiate another
agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed by the parties, the aforesaid
ruling of the lower court and affirmed by us shall cease to exist and shall be substituted and superseded by their new agreement. .
. .. 8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this provision, 9 the
term "service" should be understood as referring to the "performance" of the obligation. In the present case, the obligation of
private respondent consists in allowing petitioners to use its posts in Naga City, which is the service contemplated in said article.
Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the contract be for future service with
future unusual change. According to Senator Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforseen events.
This is said to be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a
right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occea case filed a complaint against petitioner before the trial court praying for
modification of the terms and conditions of the contract that they entered into by fixing the proper shares that should pertain to
them out of the gross proceeds from the sales of subdivided lots. We ordered the dismissal of the complaint therein for failure to
state a sufficient cause of action. We rationalized that the Court of Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court "render judgment modifying the
terms and conditions of the contract . . . by fixing the proper shares that should pertain to the herein parties out of the gross
proceeds from the sales of subdivided lots of subject subdivision". The cited article (Article 1267) does not grant the courts (the)
authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated
with the force of law between the parties, so as to substitute its own terms for those covenanted by the parties themselves.
Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under
the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant
the relief sought. 11
The ruling in the Occea case is not applicable because we agree with respondent court that the allegations in private
respondent's complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. We,
therefore, release the parties from their correlative obligations under the contract. However, our disposition of the present
controversy does not end here. We have to take into account the possible consequences of merely releasing the parties
therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their
service to the public; while private respondent, in consonance with the contract 12 will return all the telephone units to petitioners,
causing prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1)
petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per

month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same
rate being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished further
from the Occea case, necessitates exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the rationalization of
respondent court that:
. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order not
to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment by
appellant at the expense of plaintiff . . . . 14
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the subject of trial and
evidence has been passed upon by respondent court in its well reasoned resolution, which we hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this case, we have changed its
theory and decided the same on an issue not invoked by plaintiff in the lower court. For basically, the main and pivotal issue in this
case is whether the continued enforcement of the contract Exh. "A" between the parties has, through the years (since 1977),
become too inequitous or disadvantageous to the plaintiff and too one-sided in favor of defendant-appellant, so that a solution
must be found to relieve plaintiff from the continued operation of said agreement and to prevent defendant-appellant from further
unjustly enriching itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears to plaintiffs requests for
renegotiation, constraining the latter to go to court. But although plaintiff cannot, as we have held, correctly invoke reformation of
contract as a proper remedy (there having been no showing of a mistake or error in said contract on the part of any of the parties
so as to result in its failure to express their true intent), this does not mean that plaintiff is absolutely without a remedy in order to
relieve itself from a contract that has gone far beyond its contemplation and has become so highly inequitous and
disadvantageous to it through the years because of the expansion of defendant-appellant's business and the increase in the
volume of its subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in the best way and
manner it can in the light of the proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant court may uphold the
decision below upon some other point which was ignored or erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40
Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has the
discretion to consider an unassigned error that is closely related to an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631;
Hernandez v. Andal, 78 Phil. 196). It has also been held that the Supreme Court (and this Court as well) has the authority to
review matters, even if they are not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving
at a just decision of the case (Saura Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is the
material allegations of fact in the complaint, not the legal conclusion made therein or the prayer, that determines the relief to which
the plaintiff is entitled, and the plaintiff is entitled to as much relief as the facts warrant although that relief is not specifically prayed
for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120).
To quote an old but very illuminating decision of our Supreme Court through the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief to which the parties are shown to be entitled by the
allegations in their pleadings and the facts proven at the trial, and the mere fact that they themselves misconstrue the legal effect
of the facts thus alleged and proven will not prevent the court from placing the just construction thereon and adjudicating the
issues accordingly." (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme Court also held:
We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues, although not raised
before the trial court. The presence of strong consideration of substantial justice has led this Court to relax the well-entrenched
rule that, except questions on jurisdiction, no question will be entertained on appeal unless it has been raised in the court below
and it is within the issues made by the parties in their pleadings (Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the New Civil Code to this
case. Defendant-appellant stresses that the applicability of said provision is a question of fact, and that it should have been given
the opportunity to present evidence on said question. But defendant-appellant cannot honestly and truthfully claim that it (did) not
(have) the opportunity to present evidence on the issue of whether the continued operation of the contract Exh. "A" has now
become too one-sided in its favor and too inequitous, unfair, and disadvantageous to plaintiff. As held in our decision, the
abundant and copious evidence presented by both parties in this case and summarized in said decision established the following
essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that respondent court's
ruling that the right of action "arose only after said contract had already become disadvantageous and unfair to it due to
subsequent events and conditions, which must be sometime during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In
reformation of contracts, what is reformed is not the contract itself, but the instrument embodying the contract. It follows that
whether the contract is disadvantageous or not is irrelevant to reformation and therefore, cannot be an element in the
determination of the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought within ten (10) years
from the time the right of action accrues. Clearly, the ten (10) year period is to be reckoned from the time the right of action
accrues which is not necessarily the date of execution of the contract. As correctly ruled by respondent court, private respondent's
right of action arose "sometime during the latter part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was
asked by (private respondent's) Board of Directors to study said contract as it already appeared disadvantageous to (private
respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint in this case was filed, ten
(10) years had not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either party because
petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private respondent's
permission for free use of its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent under the
allegations of its complaint and the preponderant evidence presented by it:

. . . we believe that the provision in said agreement

(a) That the term or period of this contract shall be as long as the party of the first part [herein appellant] has need for the electric
light posts of the party of the second part [herein plaintiff] it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public service and it becomes
necessary to remove the electric light post [sic]"; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the aforesaid agreement to
the latter's sole and exclusive will as long as plaintiff is in operation. A similar provision in a contract of lease wherein the parties
agreed that the lessee could stay on the leased premises "for as long as the defendant needed the premises and can meet and
pay said increases" was recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150, citing the much earlier case of
Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition because it leaves the effectivity and
enjoyment of leasehold rights to the sole and exclusive will of the lessee." Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say
in the matter. Mutuality does not obtain in such a contract of lease of no equality exists between the lessor and the lessee since
the life of the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh. "A" between the parties in this case. There is no mutuality and equality
between them under the afore-quoted provision thereof since the life and continuity of said agreement is made to depend as long
as appellant needs plaintiff's electric posts. And this is precisely why, since 1977 when said agreement was executed and up to
1989 when this case was finally filed by plaintiff, it could do nothing to be released from or terminate said agreement
notwithstanding that its continued effectivity has become very disadvantageous and inequitous to it due to the expansion and
increase of appellant's telephone services within Naga City and even outside the same, without a corresponding increase in the
ten (10) telephone units being used by plaintiff free of charge, as well as the bad and inefficient service of said telephones to the
prejudice and inconvenience of plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which depends upon
the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on this definition, respondent court's finding
that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for the electric light
posts of the party of the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part (private
respondent) is forced to stop, abandoned (sic) its operation as a public service and it becomes necessary to remove the electric
light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In sum, the contract is subject to
mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person,
which do not invalidate the aforementioned provision. 21 Nevertheless, in view of our discussions under the first and second issues
raised by petitioners, there is no reason to set aside the questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and its resolution dated
September 10, 1992 are AFFIRMED.
SO ORDERED.

G.R. No. 183628

April 7, 2010

DANIEL T. SO, Petitioner,

vs.
FOOD FEST LAND, INC. Respondent
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 183670
FOOD FEST LAND, INC., Petitioner,
vs.
DANIEL T. SO, Respondent.
DECISION
CARPIO MORALES, J.:
Food Fest Land Inc. (Food Fest) entered into a September 14, 1999 Contract of Lease 1 with Daniel T. So (So) over a commercial
space in San Antonio Village, Makati City for a period of three years (1999-2002) on which Food Fest intended to operate a
Kentucky Fried Chicken carry out branch.
Before forging the lease contract, the parties entered into a preliminary agreement dated July 1, 1999, the pertinent portion of
which stated:
The lease shall not become binding upon us unless and until the government agencies concerned shall authorize, permit or
license us to open and maintain our business at the proposed Lease Premises. We shall promptly make an application for
permits, licenses and authority for our business and shall exercise due diligence to obtain it, provided, however, that you shall
assist us by submitting such documents and papers and comply with such other requirements as the governmental agencies may

impose. We shall give notice to you when the permits, license and authorities have been obtained. We shall also notify you if any
of the required permits, licenses and authorities shall not be be (sic) given or granted within fifteen days (15) from your conform
(sic)hereto. In such case, the agreement may be canceled and all rights and obligations hereunder shall cease.2 (underscoring
supplied)
While Food Fest was able to secure the necessary licenses and permits for the year 1999, it failed to commence business
operations. For the year 2000, Food Fests application for renewal of barangay business clearance was "held in abeyance until
further study of [its] kitchen facilities."31avvphi1
As the barangay business clearance is a prerequisite to the processing of other permits, licenses and authority by the city
government, Food Fest was unable to operate. Fearing further business losses, Food Fest, by its claim, communicated its intent
to terminate the lease contract to So who, however, did not accede and instead offered to help Food Fest secure authorization
from the barangay. On Sos advice, Food Fest wrote requests addressed to city officials for assistance to facilitate renewal.
In August 2000, Food Fest, for the second time, purportedly informed So of its intent to terminate the lease, and it in fact stopped
paying rent.
So later sent a November 22, 2000 demand letter to Food Fest for the payment of rental arrearages and reiterated his offer to help
it secure clearance from the barangay. Thus So wrote: "With regard to securing permits from the barangay & the City Hall, [with]
which I am trying to help you, some form of representation, maybe not in cash, would definitely help in forging a longer term
relationship."4 Food Fest demurred to the offer.1avvphi1
By letter of March 26, 2001, 5 So again demanded payment of rentals from Food Fest from September 2000 to March 2001
amounting to P123,200.00. Food Fest denied any liability, however, and started to remove its fixtures and equipment from the
premises.
On April 2, 2001, So sent Food Fest a Final Notice of Termination with demand to pay and to vacate. 6
On April 26, 2001, So filed a complaint for ejectment and damages against Food Fest before the Metropolitan Trial Court (MeTC)
of Makati City.
Branch 64 of the MeTC, by Decision of July 4, 2005,7 rendered judgment in favor of So, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against defendant, Food Fest Land,
Inc., as follows:
a. Ordering the defendant to pay the unpaid rentals from August 2000 until March 2001 with penalties accrued thereon. The
security deposit in the sum of Sixty Four Thousand Pesos (Php64,000.00) is forfeited in favor of the plaintiff;
b. Ordering the defendant to pay liquidated damages in a sum equivalent to 25% of the total sum due and demandable;
c. Ordering the defendant to pay the plaintiff a sum equivalent to 25% of the total claim as and for attorneys fees; and
d. The costs of suit.
SO ORDERED.8
On appeal, Branch 143 of the Regional Trial Court (RTC), by Decision of November 30, 2006, 9 reversed the MeTC Decision,
disposing as follows:
WHEREFORE, premises considered, the judgment of the lower court dated 04 July 2005 is hereby REVERSED and SET ASIDE,
ordering plaintiff Daniel T. So to pay defendant Food Fest the amount of Thirty Two Thousand Pesos ( P32,000.00) as
reimbursement for rentals paid for the months of July and August 2000; Twenty Thousand Pesos (P20,000.00) as exemplary
damages; Twenty Thousand Pesos (P20,000.00) as attorneys fees and costs of suit.
SO ORDERED.10
In reversing the MeTC, the RTC found that Food Fest already vacated the leased premises before So filed the complaint for
ejectment; and whereas possession is the only issue for resolution in an ejectment case, Sos cause of action only pertained to
collection of the rental arrears.
As to Sos claim for payment of arrears, the RTC noted that since the claim exceeded the jurisdictional amount over which it can
cognize, the RTC, applying Sec. 8, Rule 40 of the Rules of Court, 11 treated the case as if it was originally filed with it.
On the merits, the RTC held that Food Fests failure to secure the authority to commence business operations resulted in the
termination of its contractual obligations to So, including the obligation to pay rent.
On petition for review, the Court of Appeals, by Decision of April 18, 2008, 12 upheld the RTCs jurisdiction over the complaint. It,
however, declared that Food Fests obligation to pay rent was not extinguished upon its failure to secure permits to operate. Thus,
it disposed:
WHEREFORE, premises considered, the assailed decision dated November 30, 2006 of the RTC, Branch 143, Makati City is
hereby REVERSED and SET ASIDE, ordering respondent FFLI to pay petitioner Daniel T. So the following:
1. Unpaid rentals from August 2000 until March 31, 2001 with penalties accrued thereon. The security deposit is forfeited in favor
of petitioner So;
2. Temperate damages in the amount of P50,000.00;
3. P20,000.00 as attorneys fees; and
4. Costs of suit.
SO ORDERED.13
The parties respective motions for reconsideration having been denied, they filed their respective petitions before this Court
which, by Resolution of October 6, 2008, resolved to consolidate G.R. No. 183628 (Daniel T. So vs. Food Fest Land, Inc.) with

G.R. No. 183670 (Food Fest Land, Inc. vs. Daniel T. So).
So maintains that the MeTC had jurisdiction over his complaint for ejectment. For, So contends, Food Fest did not vacate the
leased premises before his filing (on April 26, 2001) of the complaint.
So admitted in his Complaint, however, that Food Fest started pulling out equipment and other machineries from the premises
even before the final notice was received by it on April 2, 2001.
13. In or the last few days of March 2001 , defendant FOOD FEST LAND, INC. started to remove and pull out its equipment,
appliances, fittings, furnishings, movable articles and other accessories and facilities that it had earlier placed and installed in the
leased premises, but due to its wanton lack of care in doing so, so much damage and destruction was caused to the leased
premises, resulting in the breakage of and damage to the concrete walls and partition in the building as well as the steel gate
leading to the leased premises and other parts of the building and its premises. 14 (emphasis and underscoring supplied)
Two elements are paramount in possession there must be occupancy, apprehension or taking, and there must be intent to
possess.15 In the present case, given the immediately quoted allegation-admission of So, intent to possess was not present on
Food Fests part.
In another vein, So claims that Food Fest did not exercise care in removing the installations and fixtures, thereby causing
destruction to the premises to thus entitle him to damages, as well as to damages corresponding to unrealized profits (lucrum
cessans) to answer for the period during which the unit was not rented out.
Unrealized profits fall under the category of actual or compensatory damages. If there exists a basis for a reasonable expectation
that profits would have continued to be generated had there been no breach of contract, indemnification for damages based on
such expected profits is proper. This is, however, subject to the rule that a party is entitled to an adequate compensation only for
such pecuniary loss suffered by him as he has duly proved. 16
Other than the photographs evincing damage to the premises, no evidence was proffered to show Sos entitlement to unrealized
profits. That the leased unit was not subsequently leased is not solely attributable to Food Fest. As borne by the records, no
renovation was undertaken by So for almost three years following Food Fests vacation of the premises in 2001. The quotations
issued by construction companies for purposes of renovation were issued only in 2004.
So is not without recourse under the lease contract, however. Thus the pertinent provisions of the lease contract provide:
7. LIABILITY OF LESSEE FOR DAMAGES- LESSEE hereby agrees that any damage to the leased premises or its
appurtenances caused by said LESSEE or its agents, employees, customers, guests or any other person without the fault of
LESSOR shall be LESSEEs sole responsibility and liability, which damage shall, upon demand by LESSOR be repaired promptly
at its expense.
16. TERMINATION OF THE LEASE- LESSEE agrees to return and surrender the leased premises at the expiration of the term of
this lease in as good condition as reasonable wear and tear will permit and without delay whatsoever, devoid of all occupants,
furniture, machinery, equipment and signages, articles and effects of any kind, other than such alterations or improvements which
cannot be removed without damaging the leased premises.
23. PENALTY CLAUSE Any and all accounts payable by LESSEE under this Contract of Lease and other charges which may be
claimed against LESSEE, but not paid by LESSEE to LESSOR within fifteen (15) days from due date shall be subject to penalty
charges of ONE PERCENT (1%) per month from due date until the account is paid in full.
23.1. Should LESSOR be compelled to seek judicial relief against LESSEE the latter shall, in addition to any other claim for
damages pay as liquidated damages to LESSOR an amount equivalent to twenty-five percent (25%) of the amount due, but in no
case less than P500.00: and an attorneys fee in the amount equivalent to 25% of the amount claimed but in no case less than
P3,000.00 as well as all expenses of litigation.17
Respecting Sos claim for renovation expenses, the same must be denied absent proof as to the actual cost of renovation. Only
firm offers or quotations from construction companies are in the records. Following Article 2224 of the Civil Code, 18 however, the
appellate courts award of temperate damages is in order.
This Court notes that the appellate court did not award liquidated damages in contravention of the contract. As for the appellate
courts award of P20,000.00 as attorneys fees, the contractual stipulation should prevail.
As for Food Fests invocation of the principle of rebus sic stantibus as enunciated in Article 1267 of the Civil Code to render the
lease contract functus officio, and consequently release it from responsibility to pay rentals, the Court is not persuaded. Article
1267 provides:
Article 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of
rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to
have assumed the risks of unfavorable developments. It is, therefore, only in absolutely exceptional changes of circumstances
that equity demands assistance for the debtor.19
Food Fest claims that its failure to secure the necessary business permits and licenses rendered the impossibility and nonmaterialization of its purpose in entering into the contract of lease, in support of which it cites the earlier-quoted portion of the
preliminary agreement dated July 1, 1999 of the parties. 20
The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. 21 A partys motive or particular purpose in
entering into a contract does not affect the validity or existence of the contract; an exception is when the realization of such motive
or particular purpose has been made a condition upon which the contract is made to depend. The exception does not apply here.
It is clear that the condition set forth in the preliminary agreement pertains to the initial application of Food Fest for the permits,
licenses and authority to operate. It should not be construed to apply to Food Fests subsequent applications. Consider the
following qualification in the preliminary agreement:
xxx We shall also notify you if any of the required permits, licenses and authorities shall not be be (sic) given or granted within

fifteen days (15) from your conform (sic) hereto. In such case, the agreement may be canceled and all rights and obligations
hereunder shall cease.22 (underscoring supplied)
Food Fest was able to secure the permits, licenses and authority to operate when the lease contract was executed. Its failure to
renew these permits, licenses and authority for the succeeding year, does not, however, suffice to declare the lease functus
officio, nor can it be construed as an unforeseen event to warrant the application of Article 1267.
Contracts, once perfected, are binding between the contracting parties. Obligations arising therefrom have the force of law and
should be complied with in good faith. Food Fest cannot renege from the obligations it has freely assumed when it signed the
lease contract.
WHEREFORE, the Court of Appeals Decision of April 18, 2008 is AFFIRMED with MODIFICATION.
Food Fest is ORDERED to pay So liquidated damages in the amount equivalent to 25% of the total sum due and demandable.
Further, So is ORDERED to pay attorneys fees in the amount equivalent to 25% of the total sum due and demandable. In all other
respects, the decision is AFFIRMED.

G.R. No. 104726 February 11, 1999

VICTOR YAM & YEK SUN LENT, doing business under the name and style of Philippine Printing Works; petitioners,
vs.
THE COURT OF APPEALS and MANPHIL INVESTMENT CORPORATION, respondents.

MENDOZA, J.:
This is a petition for review of the decision 1 of the Court of Appeals affirming in toto the decision of the Regional Trial Court of
Manila (Branch 149), ordering petitioners to pay private respondent the amount of P266,146.88 plus interest, service charge,
penalty fees, and attorney's fees and the costs, otherwise the chattel mortgage given to secure payment of the loan would be
foreclosed.
The following are the facts:
On May 10,1979, the parties in this case entered into a Loan Agreement with Assumption of Solidary Liability whereby petitioners
were given a loan of P500,000.00 by private respondent. The contract provided for the payment of 12% annual interest, 2%
monthly penalty, 1 1/2% monthly service charge, and 10% attorney's fees. 2 Denominated the first Industrial Guarantee and Loan
Fund (IGLF), the loan was secured by a chattel mortgage on the printing machinery in petitioners' establishment. 3
Petitioners subsequently obtained a second IGLF loan of P300,000.00 evidenced by two promissory notes, dated July 3, 1981
and September 30, 1981. For this purpose, a new loan agreement 4 was entered into by the parties containing identical provisions
as the first one, except as to the annual interest which was increased to 14% and the service charge which was reduced to 1%
per annum. The deed of chattel mortgage was amended correspondingly. 5
By April 2, 1985, petitioners had paid their first loan of P500,000.00. On November 4, 1985, private respondent was placed under
receivership by the Central Bank and Ricardo Lirio and Cristina Destajo were appointed as receiver and in-house examiner,
respectively.
On May 17, 1986, petitioners made a partial payment of P50,000.00 on the second loan. They later wrote private respondent a
letter, dated June 18, 1986, proposing to settle their obligation. On July 2, 1986, private respondent, through its counsel, replied
with a counter-offer, namely, that it would reduce the penalty charges up to P140,000.00, provided petitioners can pay their
obligation on or before July 30, 1986. 6
As of July 31, 1986, petitioners' total liability to private respondent was P727,001.35, broken down as follows:

Principal P295,469.47
Interest 165,385.00
Penalties 254,820.55
Service Charges 11,326.33

TOTAL P727,001.35
On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank check, receipt of which was acknowledged by Destajo.
The corresponding voucher for the check bears the following notation: "full payment of IGLF LOAN." 9

The amount of P410,854.47 was the sum of the principal (P295,469.47) and the interest; (P165,385.00) less the partial payment
of P50,000.00. The private respondent sent two demand letters to petitioners, dated September 4, 1986 and September 25, 1986,
seeking payment of the balance of P266,146.88. As petitioners did not respond, private respondent filed this case in the Regional
Trial Court of Metro Manila for the collection of P266,146.88 plus interests, penalties, and service charges or, in the alternative, for
the foreclosure of the mortgaged machineries.
In their Answer, petitioners claimed that they had fully paid their obligation to private respondent. They contended that some time
after receiving private respondent's letter of July 25, 1986 (concerning the conditional offer to reduce their penalty charges),
petitioner Victor Yam and his wife, Elena Yam, met with Carlos Sobrepeas, president of respondent corporation, during which the
latter agreed to waive the penalties and service charges, provided petitioners paid the principal and interest, computed as of July
31, 1986, less the earlier payment of P50,000.00. This is the reason why according to them they only paid P410,854.47.
Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank check they issued,
which bore the notation "full payment of IGLF loan."

On April 30, 1990, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the defendants Victor Yam and Yek Sun Lent are hereby ordered to pay jointly and
severally, the principal loan. balance of P266,146.88 as of September 4, 1986 plus interest at 14% per annum, service charge at
1% per annum and penalty fees at 2% per month and to pay plaintiff attorney's fees equivalent to 10% of the amount to be
recovered, and to pay the costs of suit, failing in which, the chattel mortgage instituted on the printing machineries and equipment
described in the Deed of Chattel Mortgage dated May 10, 1979, as amended, is hereby declared foreclosed and the subject
thereof sold in accordance with law to satisfy the judgment herein rendered.
SO ORDERED. 10
On appeal, the Court of Appeals affirmed the decision of the trial court in toto. Hence, this petition. Petitioners reiterate the same
assignment of errors made by them before the Court of Appeals, to wit: 11
FIRST ASSIGNED ERROR
THAT THE LOWER COURT GRIEVOUSLY ERRED IN FAILING TO GIVE CREDENCE TO THE DOCUMENTARY AS WELL AS
TESTIMONIAL EVIDENCE OF THE PETITIONERS RELATIVE TO THE PAYMENT TO THE RESPONDENT OF THE
ADDITIONAL LOAN UNDER THE AMENDMENT OF DEED OF CHATTEL MORTGAGE: (EXHIBIT K, RESPONDENT) AND AS
AGAINST THE TESTIMONY OF RESPONDENT'S WITNESS, CRISTINA L. DESTAJO.
SECOND ASSIGNED ERROR
THAT THE COURT BELOW ERRED IN NOT TOTALLY DISREGARDING EXHIBITS E AND F OF THE RESPONDENTS.
The question in whether petitioners are liable for the payment of the penalties and service charges on their loan which, as of July
31, 1986, amounted to P266;246.88.
The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms
of donation. 12 Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000,00,
must be made in writing, otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring
to credits, l3 are considered movable property. In the case at bar, it is undisputed than the alleged agreement to condone
P266,196.88 of the second IGLF loan was not reduced in writing. 14
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing the notation that the
amount is in "full payment of IGLF loan," constitutes documentary evidence of such oral agreement. This contention is without
merit. The notation in "full payment of IGLF loan" merely states petitioners' intention in making the payment, but in no way does it
bind private respondent. It would have been a different matter if the notation appeared in a receipt issued by respondent
corporation, through its receiver, because then it would be an admission against interest. Indeed, if private respondent really
condoned the amount in question, petitioners should have asked for a certificate of full payment from respondent corporation, as
they did in the case of their first IGLF loan of P500,000.00. 15
Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation, Cristina Destajo, signed the
voucher in question. Destajo claimed that, when she signed the voucher, she failed to notice the statement that the amount of
P410,854.47 was being given in "full payment of IGLF Loan." She said she merely took note of the amount and the check number
indicated therein. 16 In any event, Destajo, by countersigning the voucher, did no more than acknowledge receipt of the payment.
She cannot be held to have ascented thereby to the payment in full of petitioners' indebtedness to private respondent. It was
obvious she had no authority to condone any indebtedness, her "issuing official receipts, preparing check vouchers and
documentation." 17
Moreover, it is to be noted that the alleged agreement to condone the amount in question was supposedly entered into by the
parties sometime in July 1986, that is, after respondent corporation had been placed under receivership on November 4, 1985. As
held in Villanueva v. Court of Appeals 18 "the appointment of a receiver operates to suspend the authority of a [corporation] and of
its directors and officers over its property and effects, such authority being reposed in the receiver:" 19 Thus, Sobrepeas had no
authority to condone the debt.
Indeed, Mrs. Yam herself testified that when she and her husband sought the release of the chattel mortgage over their property,
they were told that only the Central Bank would authorize the same "because [the CB] the receiver." 20 Considering this,
petitioners cannot feign ignorance and plead good faith.
The second assignment of error pertains to the petitioners' allegation that they did not receive the two letters of demand sent by
private respondent on September 4 and September 25, 1986. Both the lower court and the Court of Appeals found otherwise. We
have no reason to disturb this factual finding. It is settled that findings of fact of trial courts, adopted and confirmed by the Court of
Appeals, are final and conclusive and, as a rule, will not be reviewed on appeal. 21
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

G.R. No. 109172 August 19, 1994

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,
vs.
The COURT OF APPEALS and ASSOCIATED BANK, respondents.
Gancayco Law Offices for petitioners.
Jose A. Soluta, Jr. & Associates for private respondent.

BIDIN, J.:

In this petition for review on certiorari, petitioner Trans-Pacific Industrial Supplies, Inc. seeks the reversal of the decision of
respondent court, the decretal portion of which reads:
WHEREFORE, the decision of June 11, 1991 is SET ASIDE and NULLIFIED; the complaint is dismissed, and on the counterclaim,
Transpacific is ordered to pay Associated attorney's fees of P15,000.00.
Costs against Transpacific.
SO ORDERED. (Rollo, p. 47)
Sometime in 1979, petitioner applied for and was granted several financial accommodations amounting to P1,300,000.00 by
respondent Associated Bank. The loans were evidenced and secured by four (4) promissory notes, a real estate mortgage
covering three parcels of land and a chattel mortgage over petitioner's stock and inventories.
Unable to settle its obligation in full, petitioner requested for, and was granted by respondent bank, a restructuring of the
remaining indebtedness which then amounted to P1,057,500.00, as all the previous payments made were applied to penalties
and interests.
To secure the re-structured loan of P1,213,400.00, three new promissory notes were executed by Trans-Pacific as follows: (1)
Promissory Note No. TL-9077-82 for the amount of P1,050,000.00 denominated as working capital; (2) Promissory Note No. TL9078-82 for the amount of P121,166.00 denominated as restructured interest; (3) Promissory Note No. TL-9079-82 for the amount
of P42,234.00 denominated similarly as restructured interest (Rollo. pp. 113-115).
The mortgaged parcels of land were substituted by another mortgage covering two other parcels of land and a chattel mortgage
on petitioner's stock inventory. The released parcels of land were then sold and the proceeds amounting to P1,386,614.20,
according to petitioner, were turned over to the bank and applied to Trans-Pacific's restructured loan. Subsequently, respondent
bank returned the duplicate original copies of the three promissory notes to Trans-Pacific with the word "PAID" stamped thereon.
Despite the return of the notes, or on December 12, 1985, Associated Bank demanded from Trans-Pacific payment of the amount
of P492,100.00 representing accrued interest on PN No. TL-9077-82. According to the bank, the promissory notes were
erroneously released.
Initially, Trans-Pacific expressed its willingness to pay the amount demanded by respondent bank. Later, it had a change of heart
and instead initiated an action before the Regional Trial Court of Makati, Br. 146, for specific performance and damages. There it
prayed that the mortgage over the two parcels of land be released and its stock inventory be lifted and that its obligation to the
bank be declared as having been fully paid.
After trial, the court a quo rendered judgment in favor of Trans-Pacific, to wit:
WHEREFORE, premises considered and upon a clear preponderance of evidence in support of the stated causes of action, the
Court finds for the plaintiffs and against defendant, and
(a) declares plaintiff's obligations to defendant to have been already fully paid;
(b) orders defendant to execute and deliver to plaintiffs a release on the i September 11, 1981 mortgage over TCT (50858)
S-10086 and TCT (50859) S-109087, and ii December 20, 1983 chattel mortgage, within fifteen (15) days from the finality hereof;
(c) orders defendant to pay plaintiffs Romeo Javier and Romana Bataclan-Javier the sum of P50,000.00 as and for moral
damages; and
(d) orders defendant to pay plaintiffs the sum of P30,000.00 as attorney's fees, plus expenses of the suit.
Defendant's counterclaims are dismissed for lack of merit.
With costs against defendant.
SO ORDERED. (Rollo, p. 101)
Respondent bank elevated the case to the appellate court which, as aforesaid, reversed the decision of the trial court. In this
appeal, petitioner raises four errors allegedly committed by the respondent court, namely:
I
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE ACCRUED INTEREST IN THE AMOUNT OF 492,100.00
HAS NOT BEEN PAID WHEN ARTICLE 1176 OF THE CIVIL CODE PROVIDES THAT SUCH CLAIM FOR INTEREST UPON
RECEIPT OF PAYMENT OF THE PRINCIPAL MUST BE RESERVED OTHERWISE IT IS DEEMED PAID.
II
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT WITH THE DELIVERY OF THE DOCUMENTS EVIDENCING
THE PRINCIPAL OBLIGATION, THE ANCILLARY OBLIGATION OF PAYING INTEREST WAS NOT RENOUNCED CONTRARY
TO THE PROVISIONS OF ART. 1273 OF THE CIVIL CODE AND THE UNDISPUTED EVIDENCE ON RECORD.
III
RESPONDENT APPELLATE COURT ERRED IN NOT HOLDING THAT PETITIONER HAS FULLY PAID ITS OBLIGATION
CONFORMABLY WITH ARTICLE 1234 OF THE CIVIL CODE.
IV
RESPONDENT APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES IN FAVOR OF ASSOCIATED BANK (Rollo, p.
15).
The first three assigned errors will be treated jointly since their resolution border on the common issue, i.e., whether or not
petitioner has indeed paid in full its obligation to respondent bank.
Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial court ruled that petitioner has fully discharged its

obligation by virtue of its possession of the documents (stamped "PAID") evidencing its indebtedness. Respondent court
disagreed and held, among others, that the documents found in possession of Trans-Pacific are mere duplicates and cannot be
the basis of petitioner's claim that its obligation has been fully paid. Accordingly, since the promissory notes submitted by
petitioner were duplicates and not the originals, the delivery thereof by respondent bank to the petitioner does not merit the
application of Article 1271 (1st par.) of the Civil Code which reads:
Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the
renunciation of the action which the former had against the latter.
Respondent court is of the view that the above provision must be construed to mean the original copy of the document evidencing
the credit and not its duplicate, thus:
. . . [W]hen the law speaks of the delivery of the private document evidencing a credit, it must be construed as referring to the
original. In this case, appellees (Trans-Pacific) presented, not the originals but the duplicates of the three promissory notes."
(Rollo, p. 42)
The above pronouncement of respondent court is manifestly groundless. It is undisputed that the documents presented were
duplicate originals and are therefore admissible as evidence. Further, it must be noted that respondent bank itself did not bother to
challenge the authenticity of the duplicate copies submitted by petitioner. In People vs. Tan, (105 Phil. 1242 [1959]), we said:
When carbon sheets are inserted between two or more sheets of writing paper so that the writing of a contract upon the outside
sheet, including the signature of the party to be charged thereby, produces a facsimile upon the sheets beneath, such signature
being thus reproduced by the same stroke of pen which made the surface or exposed impression, all of the sheets so written on
are regarded as duplicate originals and either of them may be introduced in evidence as such without accounting for the
nonproduction of the others.
A duplicate copy of the original may be admitted in evidence when the original is in the possession of the party against whom the
evidence is offered, and the latter fails to produce it after reasonable notice (Sec. 2[b], Rule 130), as in the case of respondent
bank.
This notwithstanding, we find no reversible error committed by the respondent court in disposing of the appealed decision. As
gleaned from the decision of the court a quo, judgment was rendered in favor of petitioner on the basis of presumptions, to wit:
The surrender and return to plaintiffs of the promissory notes evidencing the consolidated obligation as restructured, produces a
legal presumption that Associated had thereby renounced its actionable claim against plaintiffs (Art. 1271, NCC). The presumption
is fortified by a showing that said promissory notes all bear the stamp "PAID", and has not been otherwise overcome. Upon a clear
perception that Associated's record keeping has been less than exemplary . . ., a proffer of bank copies of the promissory notes
without the "PAID" stamps thereon does not impress the Court as sufficient to overcome presumed remission of the obligation visa-vis the return of said promissory notes. Indeed, applicable law is supportive of a finding that in interest bearing obligations-as is
the case here, payment of principal (sic) shall not be deemed to have been made until the interests have been covered (Art. 1253,
NCC). Conversely, competent showing that the principal has been paid, militates against postured entitlement to unpaid interests.
In fine. the Court is satisfied that plaintiffs must be found to have settled their obligations in full.
As corollary, a finding is accordingly compelled that plaintiffs (sic) accessory obligations under the real estate mortgage over two
(2) substituted lots as well as the chattel mortgage, have been extinguished by the renunciation of the principal debt (Art. 1273,
NCC), following the time-honored axiom that the accessory follows the principal. There is, therefore, compelling warrant (sic) to
find in favor of plaintiffs insofar as specific performance for the release of the mortgages on the substituted lots and chattel is
concerned. (Rollo, p. 100)
premised by:
Records show that Associated's Salvador M. Mesina is on record as having testified that all three (3) December 8, 1990
promissory notes for the consolidated principal obligation, interest and penalties had been fully paid (TSN, July 18, 1990, p. 18). It
is, moreover, admitted that said promissory notes were accordingly returned to Romeo Javier. (Ibid.)
The above disquisition finds no factual support, however, per review of the records. The presumption created by the Art. 1271 of
the Civil Code is not conclusive but merely prima facie. If there be no evidence to the contrary, the presumption stands.
Conversely, the presumption loses its legal efficacy in the face of proof or evidence to the contrary. In the case before us, we find
sufficient justification to overthrow the presumption of payment generated by the delivery of the documents evidencing petitioners
indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of payment, but of the renunciation of the
credit where more convincing evidence would be required than what normally would be called for to prove payment. The rationale
for allowing the presumption of renunciation in the delivery of a private instrument is that, unlike that of a public instrument, there
could be just one copy of the evidence of credit. Where several originals are made out of a private document, the intendment of
the law would thus be to refer to the delivery only of the original original rather than to the original duplicate of which the debtor
would normally retain a copy. It would thus be absurd if Article 1271 were to be applied differently.
While it has been consistently held that findings of facts are not reviewable by this Court, this rule does not find application where
both the trial and the appellate courts differ thereon (Asia Brewery, Inc. v. CA, 224 SCRA 437 [1993]).
Petitioner maintains that the findings of the trial court should be sustained because of its advantage in observing the demeanor of
the witnesses while testifying (citing Crisostomo v. Court of Appeals, 197 SCRA 833) more so where it is supported by the records
(Roman Catholic Bishop of Malolos v. Court of Appeals, 192 SCRA 169).
This case, however, does not concern itself with the demeanor of witnesses. As for the records, there is actually none submitted
by petitioner to prove that the contested amount, i.e., the interest, has been paid in full. In civil cases, the party that alleges a fact
has the burden of proving it (Imperial Victory Shipping Agency v. NLRC 200 SCRA 178 [1991]). Petitioner could have easily
adduced the receipts corresponding to the amounts paid inclusive of the interest to prove that it has fully discharged its obligation
but it did not.
There is likewise nothing on the records relied upon by the trial court to support its claim, by empirical evidence, that the amount

corresponding to the interest has indeed been paid. The trial court totally relied on a disputable presumption that the obligation of
petitioner as regards interest has been fully liquidated by the respondent's act of delivering the instrument evidencing the principal
obligation. Rebuttable as they are, the court a quo chose to ignore an earlier testimony of Mr. Mesina anent the outstanding
balance pertaining to interest, as follows:
Court:
Q Notwithstanding, let us go now specifically to promissory note No. 9077-82 in the amount of consolidated principal of
P1,050,000.00. Does the Court get it correctly that this consolidated balance has been fully paid?
A Yes, the principal, yes, sir.
Q Fully settled?
A Fully settled, but the interest of that promissory note has not been paid, Your Honor.
Q In other words, you are saying, fully settled but not truly fully settled?
A The interest was not paid.
Q Not fully settled?
A The interest was not paid, but the principal obligation was removed from our books, Your Honor.
Q And you returned the promissory note?
A We returned the promissory note. (TSN, July 18, 1990, p. 22)
That petitioner has not fully liquidated its financial obligation to the Associated Bank finds more than ample confirmation and selfdefeating posture in its letter dated December 16, 1985, addressed to respondent bank, viz.:
. . . that because of the prevailing unhealthy economic conditions, the business is unable to generate sufficient resources for debt
servicing.
Fundamentally on account of this, we propose that you permit us to fully liquidate the remaining obligations to you of P492,100
through a payment in kind (dacion en pago) arrangement by way of the equipments (sic) and spare parts under chattel mortgage
to you to the extent of their latest appraised values." (Rollo, pp. 153-154; Emphasis supplied)
Followed by its August 20, 1986 letter which reads:
We have had a series of communications with your bank regarding our proposal for the eventual settlement of our remaining
obligations . . .
As you may be able to glean from these letters and from your credit files, we have always been conscious of our obligation to you
which had not been faithfully serviced on account of unfortunate business reverses. Notwithstanding these however, total
payments thus far remitted to you already exceede (sic) the original principal amount of our obligation. But because of interest
and other charges, we find ourselves still obligated to you by P492,100.00. . . .
. . . We continue to find ourselves in a very fluid (sic) situation in as much as the overall outlook of the industry has not
substantially improved. Principally for this reason, we had proposed to settle our remaining obligations to you by way of dacion en
pago of the equipments (sic) and spare parts mortgaged to you to (the) extent of their applicable loan values . (Rollo, p. 155;
Emphasis supplied)
Petitioner claims that the above offer of settlement or compromise is not an admission that anything is due and is inadmissible
against the party making the offer (Sec. 24, Rule 130, Rules of Court). Unfortunately, this is not an iron-clad rule.
To determine the admissibility or non-admissibility of an offer to compromise, the circumstances of the case and the intent of the
party making the offer should be considered. Thus, if a party denies the existence of a debt but offers to pay the same for the
purpose of buying peace and avoiding litigation, the offer of settlement is inadmissible. If in the course thereof, the party making
the offer admits the existence of an indebtedness combined with a proposal to settle the claim amicably, then, the admission is
admissible to prove such indebtedness (Moran, Comments on the Rules of Court, Vol. 5, p. 233 [1980 ed.); Francisco, Rules of
Court, Vol. VII, p. 325 [1973 ed.] citing McNiel v. Holbrook, 12 Pac. (US) 84, 9 L.ed. 1009). Indeed, an offer of settlement is an
effective admission of a borrower's loan balance (L.M. Handicraft Manufacturing Corp. v. Court of Appeals, 186 SCRA 640 [1990]).
Exactly, this is what petitioner did in the case before us for review.
Finally, respondent court is faulted in awarding attorney's fees in favor of Associated Bank. True, attorney's fees may be awarded
in a case of clearly unfounded civil action (Art. 2208 [4], CC). However, petitioner claims that it was compelled to file the suit for
damages in the honest belief that it has fully discharged its obligations in favor of respondent bank and therefore not unfounded.
We believe otherwise. As petitioner would rather vehemently deny, undisputed is the fact of its admission regarding the unpaid
balance of P492,100.00 representing interests. It cannot also be denied that petitioner opted to sue for specific performance and
damages after consultation with a lawyer (Rollo, p. 99) who advised that not even the claim for interests could be recovered;
hence, petitioner's attempt to seek refuge under Art. 1271 (CC). As previously discussed, the presumption generated by Art. 1271
is not conclusive and was successfully rebutted by private respondent. Under the circumstances, i.e., outright and honest letters of
admission vis-a-vis counsel-induced recalcitrance, there could hardly be honest belief. In this regard, we quote with approval
respondent court's observation:
The countervailing evidence against the claim of full payment emanated from Transpacific itself. It cannot profess ignorance of the
existence of the two letters, Exhs. 3 & 4, or of the import of what they contain. Notwithstanding the letters, Transpacific opted to
file suit and insist(ed) that its liabilities had already been paid. There was thus an
ill-advised attempt on the part of Transpacific to capitalize on the delivery of the duplicates of the promissory notes, in complete
disregard of what its own records show. In the circumstances, Art. 2208 (4) and (11) justify the award of attorney's fees. The sum
of P15,000.00 is fair and equitable. (Rollo, pp. 46-47)
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.

SO ORDERED.

G.R. No. L-62169 February 28, 1983

MINDANAO PORTLAND CEMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, PACWELD STEEL CORPORATION and ATTY. CASIANO P. LAQUIHON respondents.
Tolentino, Garcia, Cruz Reyes Law Office for petitioner.
Casiano P. Laquihon for respondents.

TEEHANKEE, J.:
The Court of Appeals (now Intermediate Appellate Court) certified petitioner's appeal therein as defendant-appellant, docketed as
C.A.-G.R. No. 65102 thereof, to this Court as involving only questions of law in its Resolution of August 31, 1982, reading as
follows:
The 'Statement of the Case and the Statement of Facts' contained in appellant's brief follow:
STATEMENT OF FACTS
On January 3, 1978, one Atty. Casiano P. Laquihon, in behalf of third-party defendant Pacweld Steel Corporation (Pacweld for
short) as the latter's attorney, filed a pleading addressed to the defendant & Third-Party Plaintiff Mindanao Portland Cement
Corporation (MPCC) for short), herein appellant, entitled 'motion to direct payment of attorney's fee to counsel' (himself ), invoking
in his motion the fact that in the decision of the court of Sept. 14, 1976, MPCC was adjudged to pay Pacweld the sum of
P10,000.00 as attorney's fees (Record on Appeal, pp. 1, 6-9).
On March 14, 1978, MPCC filed an opposition to Atty. Laquihon's motion, stating, as grounds therefor, that said amount is set-off
by a like sum of P10,000.00 which it MPCC has collectible in its favor from Pacweld also by way of attorney's fees which MPCC
recovered from the same Court of First Instance of Manila (Branch XX) in Civil Case No. 68346, entitled Pacweld Steel
Corporation, et al. writ of execution to this effect having been issued by said court (Record on Appeal, pp, 2,10- 14).
On June 26, 1978 the court issued the order appealed from (Record on Appeal, pp. 24-25) and despite MPCCs motion for
reconsideration of said order, citing the law applicable and Supreme Court decisions (Record on Appeal, pp. 26-33), denied the
same in its order of August 28, 1978 (Record on Appeal, p. 37), also subject matter of this appeal.
The writ of execution referred to above which MPCC has invoked to set- off the amount sought to be collected by Pacweld through
the latter's lawyer, Atty. Casiano P. Laquihon, is hereunder quoted in full.
In his brief, appellee comments that the statements in appellant's brief are 'substantially correct,' as follows:
STATEMENT OF THE CASE
This is an appeal from the Order of the Court of First Instance of Manila (Branch X dated June 26, 1978 ordering the appellant
(MINDANAO PORTLAND CEMENT CORPORATION) to pay the amount of P10,000.00 attorney's fees directly to Atty. Casiano B.
Laquihon (Record on Appeal, pp. 24-25) and from the Order dated August 28, 1978 denying appellant's motion for reconsideration
(Record on Appeal, p. 37).
There was no trial or submission of documentary evidence. Against the orders of June 26. 1978, and August 28, 1978, appellant
has brought this appeal to this Court, contending that:
The lower court erred in not holding that the two obligations are extinguished reciprocally by operation of law.' (p. 6, Appellant's
Brief)
This appeal calls for the application of Arts. 1278, 1279 and 1290 of the Civil Code, as urged by the appellant. Another question is:
The judgment in Civil Case No. 75179 being already final at the time the motion under consideration was filed, does not the order
of June 26, 1976 constitute a change or alteration of the said judgment, though issued by the very same court that rendered the
judgment?
WHEREFORE, since only questions of law are involved and there is no factual issue left for us to determine, let the records of the
appeal in this case be certified to the Honorable Supreme Court for determination.
After considering the briefs of the parties in the appellate court and the additional pleadings required of them by this Court, the
Court finds merit in the appeal and sets aside the appealed orders of June 26 and August 28, 1978 of the Court of First Instance
(now Regional Trial Court) of Manila, Branch XX.
It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent
Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each other consisting in final and
executory judgments of the Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of
P10,000.00 by way of attorney's fees. The two (2) obligations, therefore, respectively offset each other, compensation having
taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions
of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic
compensation "even though the creditors and debtors are not aware of the compensation" were duly present.**
Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the judgment of September
14, 1976 against Mindanao Portland Cement Corporation so as to make the award therein of P10,000.00 as attorney's fees
payable directly to himself as counsel of Pacweld Steel Corporation instead of payable directly to said corporation as provided in
the judgment, which had become final and executory long before the issuance of said "amendatory" order was a void alteration of

judgment. It was a substantial change or amendment beyond the trial court's jurisdiction and authority and it could not defeat the
compensation or set-off of the two (2) obligations of the corporations to each other which had already extinguished both debts by
operation of law.
ACCORDINGLY. the appealed orders are hereby annulled and set aside. No costs.

G.R. No. 120236 July 20, 1999

E.G.V. REALTY DEVELOPMENT CORPORATION and CRISTINA CONDOMINIUM CORPORATION, petitioners,
vs.
COURT OF APPEALS and UNISPHERE INTERNATIONAL, INC. respondents.

KAPUNAN, J.:
This petition for review on certiorari seeks to set aside the decision and resolution of the Court of Appeals rendered on February
17, 1995 and on May 15, 1995, respectively, in CA-G.R. SP No. 22735 reversing the order of the securities and Exchange
Commission (SEC) in SEC-AC No. 271 issued on August 21, 1990.
The following facts are not disputed:
Petitioner E.G.V. Realty Development Corporation (hereinafter referred to as E.G.V. Realty) is the owner/develops of a sevenstorey condominium building known as Cristina Condominium. Cristina Condominium Corporation (hereinafter referred to as
CCC) holds title to all common areas of Cristina Condominium and is in charge of managing, maintaining and administering the
condominium's common areas and providing for the building's security.
Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere) is the owner/occupant of Unit 301 of said
condominium.
On November 28, 1981, respondent Unisphere's Unit 301 was allegedly robbed of various items valued at P6,165.00. The
incident was reported to petitioner CCC.
On July 25, 1982, another robbery allegedly occurred at Unit 301 where the items carted away were valued at P6,130.00, bringing
the total value of items lost to P12,295.00. This incident was likewise reported to petitioner CCC.
On October 5, 1982, respondent Unisphere demanded compensation and reimbursement from petitioner CCC for the losses
incurred as a result of the robbery.1wphi1.nt

Petitioner CCC denied any liability for the losses claimed to have been incurred by respondent Unisphere, stating that the goods
lost belonged to Amtrade, a third party.
As a consequence of the denial, respondent Unisphere withheld payment of its monthly dues starting November 1982.
On September 13, 1983, respondent Unisphere received a letter from petitioner CCC demanding payment of past dues.
On December 5, 1984, petitioner E.G.V. Realty executed a Deed of Absolute Sale over Unit 301 in favor of respondent Unisphere.
Thereafter, Condominium Certificate of Title No. 7010 was issued in respondent Unisphere's name bearing the annotation of a lien
in favor of petitioner E.G.V. Realty for the unpaid condominium dues in the amount of P13,142.67.
On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a petition with the Securities and Exchange Commission
(SEC) for the collection of the unpaid monthly dues in the amount of P13,142.67 against respondent Unisphere.
In its answer, respondent Unisphere alleged that it could not be deemed in default in the payment of said unpaid dues because its
tardiness was occasioned by the petitioners' failure to comply with what was incumbent upon them, that is, to provide security for
the building premises in order to prevent, if not to stop, the robberies taking place therein. It asserted as counterclaim that the
amount of P12,295.00 representing the total value of its loss due to the two robberies be awarded to it by way of damages for the
latter's failure to secure the premises.
On January 11, 1989, SEC Hearing Officer Antero F.L. Villaflor, Jr. rendered a decision which dispositively reads as follows:
WHEREFORE, respondent is hereby ordered to pay petitioner the sum of P13,142.67 within fifteen (15) days from receipt of this
Decision. Further, petitioner is hereby ordered to pay respondent within fifteen (15) days from receipt of this Decision, the sum of
P12,295.00.
Let copy of this Decision be furnished the Register of Deeds of Makati, Metro Manila for the purpose of cancellation of the lien in
favor of Cristina Condominium found at the back of Title for unpaid monthly dues in the sum of P13,142.67, upon full payment of
respondent of said amount unto petitioner.
SO ORDERED. 1
Both parties filed their respective motions for reconsideration.
On July 17, 1989, the decision of Hearing Officer Villaflor was modified and amended by Hearing Officer Enrique L. Flores, Jr. to
read as follows:
WHEREFORE, respondent's motion for reconsideration should be, as it is, hereby DENIED and the petitioners' motion for
reconsideration is hereby GRANTED.
Accordingly, the decision dated January 11, 1989, is partially reconsidered to the effect that petitioners are not made liable for the
value of the items/articles burglarized from respondent's condominium unit.

SO ORDERED. 2
On July 18, 1989, respondent Unisphere filed a notice of appeal with the SEC en banc questioning the above-mentioned decision.
On August 15, 1989, it filed a motion for an extension of thirty (30) days to file its memorandum on appeal thirty (30) days from the
stated deadline of August 18, 1989.
Said motion was granted on August 17, 1989.
On September 18, 1989, respondent Unisphere filed a second motion for extension of time to file its memorandum on appeal for
another twenty (20) days.
The motion was likewise granted on September 26, 1989.
On October 9, 1989, respondent Unisphere filed its memorandum on appeal.
After the petitioners filed their reply thereto, the SEC en banc issued the Order dated February 23, 1990 which is quoted
hereunder:
Before this Commission en banc is an appeal from the Order dated July 17, 1989 of the Hearing Officer in SEC Case No. 3119
entitled "E.G.V. Realty Development Corporation and Cristina Condominium Corporation vs. Unisphere International, Inc."
The records of the case show that respondent-appellant received a copy of the above order on July 18, 1989 and filed its Notice of
Appeal on July 21, 1989. On August 15, 1989, respondent asked for an extension of thirty (30) days to file its Memorandum on
Appeal which was granted on August 17, 1989.
On September 18, 1989, respondent asked for an additional period of twenty (20) days until October 8, 1989 to file his Appeal
which was also granted.
Respondent filed his Memorandum on October 13, 1989, five days after the due date.
The penultimate paragraph of Section 6 of Presidential Decree No. 902-A (as amended) clearly provides:
. . . The decision, ruling or order of any such Commissioner, bodies, boards, committees, and/or officer as may be appealed to the
Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The
Commission shall promulgate rules or procedure to govern the proceedings, hearings and appeals of cases falling within its
jurisdiction.
Pursuant to the above provision, the Commission promulgated the Revised Rules of Procedure of the Securities and Exchange
Commission, Section 3, Rule XVI of said Rules reiterates the thirty (30)-day period provided for under the above provision:
Appeal may be taken by filing with the Hearing Officer who promulgated the decision, order or ruling within thirty (30) days from
notice thereof, and serving upon the adverse party, a notice of appeal and a memorandum on appeal and paying the
corresponding docket fee therefor. The appeal shall be considered perfected upon the filing of the memorandum on appeal and
payment of the docket fee within the period hereinabove fixed.
The Commission en banc notes that respondent had, extensions included, a total of eighty (80) days to file its Appeal
memorandum but failed to do so.
WHEREFORE, premises considered, the instant appeal is hereby dismissed for having been filed out of time.
SO ORDERED. 3
Respondent Unisphere moved for a reconsideration of the above-quoted order but the same was denied, and so was its second
motion for reconsideration.
On September 6, 1990, respondent Unisphere filed a notice of appeal to the SEC en banc in order to question the latter's ruling to
the Court of Appeals pursuant to Rule 43 of the Rules of Court, as amended by Republic Act No. 5434.
On September 10, 1990, it filed a notice of appeal to the Court of Appeals.
The Court of Appeals reversed the SEC en banc in Order of August 21, 1990 in its Decision dated February 17, 1995 which
dispositively reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Order dated August 21, 1989 is hereby REVERSED and SET
ASIDE. Another judgment is entered declaring that the appeal memorandum before the SEC ten (en banc) of appellant Unisphere
was filed on time and that the amount of P13,142.67, the unpaid monthly dues of Unisphere to the Corporation should be offset by
the losses suffered by the Unisphere in the amount of P12,295.00. Unisphere is hereby ordered to pay the Cristina Condominium
Corporation the amount of P847.67 representing the balance after offsetting the amount of P12,295.00 against the said
P13,142.67, with 12% interest per annum from January 28, 1987 when the Joint Petition of the petitioners-appellees was filed
before the SEC (for collection and damages) until fully paid.
No pronouncement as to costs.
SO ORDERED. 4
Petitioners moved for reconsideration of the said decision but the same was denied by the appellate court on May 15, 1995.
Hence, the instant petition for review interposed by petitioners E.G.V. Realty and CCC challenging the decision of the Court of
Appeals on the following grounds: (a) the Court of Appeals did not acquire jurisdiction over respondent Unisphere's appeal
because the latter failed to comply with the prescribed mode of appeal; (b) even if the jurisdictional infirmity is brushed aside, the
SEC en banc Order dated February 23, 1990 has already attained finality; and (c) the ruling of the Court of Appeals on the
offsetting of the parties' claims is unfounded.
A perusal of the foregoing issues readily reveals that petitioners raise two (2) aspects of the case for consideration, that is, the
procedural aspect and the substantive aspect.
We will discuss the procedural aspect first. Petitioners contend that (a) the Court of Appeals did not acquire jurisdiction over the

appeal because respondent failed to comply with the prescribed mode of appeal; and (b) assuming that the Court of Appeals has
jurisdiction, the assailed SEC en banc Order of February 23, 1990 had already become final and executory.
Anent the first contention, petitioners claim that respondent Unisphere erred in merely filing a notice of appeal as in ordinary civil
cases from the regular courts instead of a petition for review with the Court of Appeals.
Contrary to petitioners' contention, respondent Unisphere complied with the prescribed mode of appeal. At the time the appeal
was elevated to the Court of Appeals in 1990, the rule governing recourse to the Court of Appeals from the decision, resolution or
final order of a quasi-judicial body was Rule 43 of the Revised Rules of Court, as amended by Republic Act No. 5434 as
embodied in Batas Pambansa Blg. 129 and its Interim Rules and Guidelines. 5 The rule provided for a uniform procedure for
appeals from the specified administrative tribunals, SEC included, to the Court of Appeals by filing a notice of appeal with the
appellate court and with the court, officer, board, commission or agency that made or rendered the assailed ruling within fifteen
(15) days from notice thereof. Records bear out that respondent Unisphere complied with the foregoing rules when it filed a notice
of appeal with the SEC en banc on September 6, 1990 and with the Court of Appeals on September 10, 1990. Clearly therefore,
respondent Unisphere complied with the proper mode of appeal as mandated by the rules.
With respect to the second contention, petitioners asseverate that the February 23, 1990 order of the SEC en banc has already
become final and unappealable, therefore can no longer be reversed, amended or modified. They maintain that respondent
Unisphere received a copy of said order on February 26, 1990 and that ten (10) days thereafter, it filed its motion for
reconsideration. Said motion was denied by the SEC on May 14, 1990 which was received by respondent Unisphere on May 15,
1990. Consequently, they assert that respondent Unisphere had only the remaining five (5) days or May 20, 1990 within which to
file a notice of appeal. However, instead of appealing therefrom, respondent Unisphere second motion for reconsideration on May
25, 1990 with the SEC en banc. Petitioner contend that no second motion for reconsideration is allowed by SEC Rules unless with
express prior leave of the hearing officer. Said second motion for reconsideration was likewise denied on August 21, 1990. Fifteen
(15) days later on September 5, 1990, respondent Unisphere filed its notice of appeal.
Sec. 8, Rule XII of the Revised Rules of Procedure of the SEC provides that:
Sec. 8. Reconsideration. Within thirty (30) days from receipt of the order or decision of the Hearing Officer, the aggrieved party
may file a motion for reconsideration of such order or decision together with proof of service thereof upon the adverse party. No
more than one motion for reconsideration shall be allowed unless with the express prior leave of the Hearing Officer.
Respondent Unisphere's non-observance of the foregoing rule rendered the February 23, 1990 and the May 14, 1990 orders of
the SEC en banc final and unappealable. Its failure to perfect its appeal in the manner and within the period fixed by law rendered
the decision sought to be appealed final, with the result that no court can exercise appellate jurisdiction to review the decision. 6
Contrary to petitioners' view, the appeal to the Court of Appeals in this case should have been perfected within fifteen (15) days
from the receipt of the order denying the motion for reconsideration on May 15, 1990. But instead of appealing, respondent
Unisphere filed a prohibited second motion for reconsideration without express prior leave of the hearing officer. Consequently,
when it subsequently filed its notice of appeal on September 6, 1990, it was already eighty-two (82) days late. Therefore, the
appeal before the Court of Appeals could have been dismissed outright for being time-barred. Rules of procedure are intended to
ensure the proper administration of justice and the protection of substantive rights in judicial and quasi-judicial proceedings.
Blatant violation of such rules smacks of a dilatory tactic which we simply cannot countenance.
Now, we go to the substantive aspect.1wphi1.nt

It is petitioners' assertion that the ruling of the Court of Appeals to offset the alleged losses as a result of the robberies in the
amount of P12,295.00 from the unpaid monthly dues of P13,142.67 is unfounded because respondent Unisphere is not the owner
of the goods lost but a third party, Amtrade. Respondent Unisphere, on its part, claims that this issue is factual, hence, not a
proper issue to raise before this Court.
Actually, the issue for our consideration is whether or not set-off or compensation has taken place in the instant case. The Court of
Appeals' dissertation on the matter is commendably instructive, but, lamentably, it reached a different conclusion. We quote
pertinent portions of the assailed decision:
Compensation or offset under the New Civil Code takes place only when two persons or entities in their own rights, are creditors
and debtors of each other. (Art. 1278). . . .
A distinction must be made between a debt and a mere claim. A debt is an amount actually ascertained. It is a claim which has
been formally passed upon by the courts or quasi-judicial bodies to which it can in law be submitted and has been declared to be
a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed by
law before it develops into what is properly called a debt. (Vallarta vs. CA, 163 SCRA 587). Absent, however, any such categorical
admission by an obligor or final adjudication, no compensation or off-set can take place. Unless admitted by a debtor himself, the
conclusion that he is in truth indebted to another cannot be definitely and finally pronounced, no matter how convinced he may be
from the examination of the pertinent records of the validity of that conclusion the indebtedness must be one that is admitted by
the alleged debtor or pronounced by final judgment of a competent court or in this case by the Commission (Villanueva vs.
Tantuico, 182 SCRA 263).
There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues in the amount of P13,142,67.
This is admitted. But whether the Corporation is indebted to Unisphere is vigorously disputed by the former.
It appears quite clear that the offsetting of debts does not extend to unliquidated, disputed claims arising from tort or breach of
contract. (Compania General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo and Martinez vs. herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly dues to the Corporation on September 23, 1983 without notifying
the latter. It was only on February 24, 1984, or five months after, that it informed the corporation of its suspension of payment of
the condominium dues to offset the losses it suffered because of the robberies.
In resisting the finding which underscores their negligence, E.G.V. Realty and Cristina condominium corporation, would have this
Court appreciate in their favor the admission of Mr. Alfonso Zamora of Unisphere that there was no such agreement among the
unit owners that any member who incurred losses will be indemnified from the common contribution. (TSN, July 7, 1987, p. 60).

The herein appellees further argue that the cause of action for reimbursement of the value of the items lost because of the
robberies should be against the security agency and not the Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil Code which provides:
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any
manner contravene the tenor thereof, are liable for damages.
There is weight in the initial factual findings of the SEC Hearing Officer with respect to the losses suffered by Unisphere in the
amount of P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that occurred on November 28, 1981 and July 26, 1982 inside 301 Cristina
Condominium.
Plaintiff admits that it had secured the services of Jimenez Protective and Security Agency to safeguard the Condominium
premises under its instructions and supervision, but which failed to detect the robbery incidents that occurred twice at Unit 301 of
respondent, canting (sic) away bulk items.
xxx xxx xxx
From the undisputed facts, plaintiff was remissed (sic) within its obligation to provide safety to respondent inside its unit. This was
demonstrated by the fact that two robbery incidents befell respondents under the negligent eye of plaintiffs hired security guards. It
can be safely pronounced that plaintiff has not complied with what was incumbent upon it to do in a proper manner.
Since it has been determined and proven by the evidence presented before the hearing office of respondent SEC that Unisphere
indeed suffered losses because of the robbery incidents and since it (Unisphere) did not refute its liability to the corporation for the
unpaid monthly dues in the amount of P13,142.67, this amount should be set-off against the aforestated losses of Unisphere. 7
We fully agree with the appellate court's dissertation on the nature and character of a set-off or compensation. However, we
cannot subscribe to its conclusion that a set-off or compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take place when two persons, in their own right, are creditors and
debtors of each other. Compensation is "a mode of extinguishing to the concurrent amount, the obligations of those persons who
in their own right are reciprocally debtors and creditors of each other" and "the offsetting of two obligations which are reciprocally
extinguished if they are of equal value, or extinguished to the concurrent amount if of different values." 8 Article 1279 of the same
Code provides:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time
to the debtor.
Absent any showing that all of these requisites exist, compensation may not take place.
While respondent Unisphere does not deny its liability for its unpaid dues to petitioners, the latter do not admit any responsibility
for the loss suffered by the former occasioned by the burglary. At best, what respondent Unisphere has against petitioners is just a
claim, not a debt. Such being the case, it is not enforceable in court. It is only the debts that are enforceable in court, there being
no apparent defenses inherent in them. 9 Respondent Unisphere's claim for its loss has not been passed upon by any legal
authority so as to elevate it to the level of a debt. So we held in Alfonso Vallarta v. Court of Appeals, et al., 10 that:
Compensation or offset takes place by operation of law when two (2) persons, in their own right, are creditor and debtor of each
other. For compensation to take place, a distinction must be made between a debt and a mere claim. A debt is a claim which has
been formally passed upon by the highest authority to which it can in law be submitted and has been declared to be a debt. A
claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed by law
before it develops into what is properly called a debt. 11
Tested by the foregoing yardstick, it has not been sufficiently established that compensation or set-off is proper here as there is
lack of evidence to show that petitioners E.G.V. Realty and CCC and respondent Unisphere are mutually debtors and creditors to
each other.
Considering the foregoing disquisition, therefore, we find that respondent Court of Appeals committed reversible error in ruling that
compensation or set-off is proper in the instant case.
WHEREFORE, for all the foregoing, the instant petition is hereby GRANTED. The Decision of the Court of Appeals dated
February 17, 1995 is REVERSED and SET ASIDE. The Order of the Securities and Exchange Commission dated August 21,
1990 reiterating the Hearing Officer's Decision dated January 11, 1989, as amended by the Order of July 17, 1989, is hereby
REINSTATED.
SO ORDERED.

G.R. No. 143304

July 8, 2004

SPECIAL STEEL PRODUCTS, INC., petitioner,

vs.

LUTGARDO VILLAREAL AND FREDERICK SO, respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:
May an employer withhold its employees wages and benefits as lien to protect its interest as a surety in the latters car loan and
for expenses incurred in a training abroad? This is the basic issue for our resolution in the instant case.
At bar is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision1 dated October 29, 1999 and Resolution 2 dated May 8, 2000 of the Court of Appeals in CA-G.R. SP No. 50957, entitled
"Special Steel Products, Inc. vs. National Labor Relations Commission, Lutgardo Villareal and Frederick So."
The factual antecedents as borne by the records are:
Special Steel Products, Inc., petitioner, is a domestic corporation engaged in the principal business of importation, sale, and
marketing of BOHLER steel products. Lutgardo C. Villareal and Frederick G. So, respondents, worked for petitioner as assistant
sales manager and salesman, respectively.
Sometime in May 1993, respondent Villareal obtained a car loan from the Bank of Commerce, with petitioner as surety, as shown
by a "continuing suretyship agreement" and "promissory note" wherein they jointly and severally agreed to pay the bank
P786,611.60 in 72 monthly installments. On January 15, 1997, respondent Villareal resigned and thereafter joined Hi-Grade
Industrial and Technical Products, Inc. as executive vice-president.
Sometime in August 1994, petitioner "sponsored" respondent Frederick So to attend a training course in Kapfenberg, Austria
conducted by BOHLER, petitioners principal company. This training was a reward for respondent Sos outstanding sales
performance. When respondent returned nine months thereafter, petitioner directed him to sign a memorandum providing that
BOHLER requires trainees from Kapfenberg to continue working with petitioner for a period of three (3) years after the training.
Otherwise, each trainee shall refund to BOHLER $6,000.00 (US dollars) by way of set-off or compensation. On January 16, 1997
or 2 years and 4 months after attending the training, respondent resigned from petitioner.
Immediately, petitioner ordered respondents to render an accounting of its various Christmas giveaways 3 they received. These
were intended for distribution to petitioners customers.
In protest, respondents demanded from petitioner payment of their separation benefits, commissions, vacation and sick leave
benefits, and proportionate 13th month pay. But petitioner refused and instead, withheld their 13 th month pay and other benefits.
On April 16, 1997, respondents filed with the Labor Arbiter a complaint for payment of their monetary benefits against petitioner
and its president, Augusto Pardo, docketed as NLRC NCR Case No. 04-02820-97.
In due course, the Labor Arbiter rendered a Decision dated February 18, 1998, the dispositive portion of which reads:
"WHEREFORE, decision is hereby rendered ordering the respondents, Special Steel Products, Inc. and Mr. Augusto Pardo to pay,
jointly and severally, complainants Frederick G. So and Lutgardo C. Villareal the amounts of Seventy One Thousand Two Hundred
Seventy Nine Pesos and Fifty Eight Centavos (P71,279.58) and One Hundred Sixty Four Thousand Eight Hundred Seventy Three
Pesos (P164,873.00), respectively, representing their commissions, retirement benefit (for Villareal), proportionate 13 th month,
earned vacation and sick leave benefits, and attorneys fees.
xxx
SO ORDERED."
On appeal, the National Labor Relations Commission (NLRC), in a Decision dated June 29, 1998, affirmed with modification the
Arbiters Decision in the sense that Pardo, petitioners president, was exempted from any liability.
On September 11, 1998, petitioner filed a motion for reconsideration but was denied.
Hence, petitioner filed with the Court of Appeals a petition for certiorari.
On October 29, 1999, the Court of Appeals rendered a Decision dismissing the petition and affirming the assailed NLRC Decision,
thus:
"At the outset, the Court notes that despite its Seventh Assignment of Error, petitioner does not question the NLRCs decision
affirming the labor arbiters award to private respondents of commissions, proportionate 13 th month pay, earned vacation and sick
leave benefits and retirement benefit (for Villareal). It merely asserts that it was withholding private respondents claims by reason
of their pending obligations.
Petitioner justifies its withholding of Villareals monetary benefits as a lien for the protection of its right as surety in the car loan. It
asserts that it would release Villareals monetary benefits if he would cause its substitution as surety by Hi-Grade. It further asserts
that since Villareals debt to the Bank is now due and demandable, it may, pursuant to Art. 2071 of the New Civil Code, demand a
security that shall protect him from any proceeding by the creditor and from the danger of insolvency of the debtor.
Petitioners posture is not sanctioned by law. It may only protect its right as surety by instituting an action x x x to demand a
security (Kuenzle and Streiff vs. Tan Sunco, 16 Phil 670). It may not take the law into its own hands. Indeed, it is unlawful for any
person, directly or indirectly, to withhold any amount from the wages of a worker or induce him to give up any part of his wages by
force, stealth, intimidation, threat or by any other means whatsoever without the workers consent (Art. 116, Labor Code).
Moreover, petitioner has made no payment on the car loan. Consequently, Villareal is not indebted to petitioner. On the other
hand, petitioner owes Villareal for the decreed monetary benefits. The withholding of Villareals monetary benefits had effectively
prevented him from settling his arrearages with the Bank.
With regard to Sos money claims. We find no cogent reason to disturb the findings of the NLRC. x x x.

Sos all-expense paid trip to Austria was a bonus for his outstanding sales performance. Before his sojourn to Austria, petitioner
issued him a memorandum (or memo) stating that Bohler is now imposing that trainees coming to Kapfenberg to stay with the
local representative for at least three (3) years after training, otherwise, a lump sum compensation of not less than US $6,000.00
will have to be refunded to them by the trainee. So did not affix his signature on the memo. However, nine (9) months after
coming back from his training, he was made to sign the memo. In his letter to Augusto Pardo dated July 18, 1997, So stated that
his signature was needed only as a formality and that he was left with no choice but to accommodate Augusto Pardos request.
The labor arbiter gave credence to such explanation.
Assuming arguendo that the memo is binding on So, his more than two years post-training stay with petitioner is a substantial
compliance with the condition. Besides, So tendered his resignation effective February 16, 1997. Instead of asking So to defer his
resignation until the expiration of the three-year period, petitioner advanced its effectivity by one month - as of January 16, 1997.
This means that petitioner no longer needed Sos services, particularly the skill and expertise acquired by him from the training.
More importantly, the party entitled to claim the US $6,000.00 liquidated damages is BOHLER and not petitioner. Consequently,
petitioner has no right to insist on payment of the liquidated damages, much less to withhold Sos monetary benefits in order to
exact payment thereof.
With regard to the Christmas giveaways. We agree with the findings of the labor arbiter (affirmed by the NLRC) that there is no
existing memorandum requiring the accounting of such giveaways and that no actual accounting has ever been required before,
as in the case of then Sales Manager Benito Sayo whose resignation took effect on December 31, 1996 but was not required to
account for the Christmas giveaways. To make So account now for said items would amount to discrimination. In any event, the
matter of accounting of the giveaways may be ventilated in the proper forum.
Finally, petitioner may not offset its claims against private respondents monetary benefits. With respect to its being the
surety of Villareal, two requisites of compensation are lacking, to wit: that each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other and that (the two debts) be liquidated and demandable (Art. 1279 (1) and
(4), New Civil Code). And in respect to its claim for liquidated damages against So, there can be no compensation because his
creditor is not petitioner but BOHLER (Art. 1278, New Civil Code).
Consequently, the NLRC committed no grave abuse of discretion.
WHEREFORE, the petition is DISMISSED while the assailed decision of the NLRC is AFFIRMED.
SO ORDERED."
On December 15, 1999, petitioner filed a motion for reconsideration but was denied by the Appellate Court in a Resolution dated
May 8, 2000.
Hence, this petition for review on certiorari. Petitioner contends that as a guarantor, it could legally withhold respondent Villareals
monetary benefits as a preliminary remedy pursuant to Article 2071 of the Civil Code, as amended. 4 As to respondent So,
petitioner, citing Article 113 of the Labor Code, as amended, 5 in relation to Article 1706 of the Civil Code, as amended, 6 maintains
that it could withhold his monetary benefits being authorized by the memorandum he signed.
Article 116 of the Labor Code, as amended, provides:
"ART. 116. Withholding of wages and kickbacks prohibited. It shall be unlawful for any person, directly or indirectly, to
withhold any amount from the wages (and benefits) of a worker or induce him to give up any part of his wages by force,
stealth, intimidation, threat or by any other means whatsoever without the workers consent."
The above provision is clear and needs no further elucidation. Indeed, petitioner has no legal authority to withhold respondents
13th month pay and other benefits. What an employee has worked for, his employer must pay. 7 Thus, an employer cannot simply
refuse to pay the wages or benefits of its employee because he has either defaulted in paying a loan guaranteed by his employer;
or violated their memorandum of agreement; or failed to render an accounting of his employers property. 8
Nonetheless, petitioner, relying on Article 2071 (earlier cited), contends that the right to demand security and obtain release from
the guaranty it executed in favor of respondent Villareal may be exercised even without initiating a separate and distinct action.
There is no guaranty involved herein and, therefore, the provision of Article 2071 does not apply.
A guaranty is distinguished from a surety in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to
pay if the principal is unable to pay, while a surety is the insurer of the debt, and he obligates himself to pay if the principal
does not pay.9
Based on the above distinction, it appears that the contract executed by petitioner and respondent Villareal (in favor of the Bank of
Commerce) is a contract of surety. In fact, it is denominated as a "continuing suretyship agreement." Hence, petitioner could not
just unilaterally withhold respondents wages or benefits as a preliminary remedy under Article 2071. It must file an action against
respondent Villareal. Thus, the Appellate Court aptly ruled that petitioner "may only protect its right as surety by instituting an
action to demand a security."
As to respondent So, petitioner maintains that there can be a set-off or legal compensation between them. Consequently, it can
withhold his 13th month pay and other benefits.
For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code, quoted below, must
be present.
"ARTICLE 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.
"ARTICLE 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time
to the debtor."
In the present case, set-off or legal compensation cannot take place between petitioner and respondent So because they are not
mutually creditor and debtor of each other.
A careful reading of the Memorandum 10 dated August 22, 1994 reveals that the "lump sum compensation of not less than US
$6,000.00 will have to be refunded" by each trainee to BOHLER, not to petitioner.
In fine, we rule that petitioner has no legal right to withhold respondents 13 th month pay and other benefits to recompense for
whatever amount it paid as security for respondent Villareals car loan; and for the expenses incurred by respondent So in his
training abroad.
WHEREFORE, the petition is DENIED. The Decision dated October 29, 1999 and Resolution dated May 8, 2000 of the Court of
Appeals in CA-G.R. SP No. 50957 are hereby AFFIRMED.
SO ORDERED.

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,
vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and
HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of the Commission on Audit
(COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal
of said Commission's decision denying its claims for recovery of financing charges from the Fund and reimbursement of
underrecovery arising from sales to the National Power Corporation, Atlas Consolidated Mining and Development Corporation
(ATLAS) and Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances
against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the Office of
Energy Affairs (OEA) and the Department of Finance (DOF).
Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3 may be brought to this Court
on certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof. The certiorari referred to is the special
civil action for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings of the
administrator of the fund itself and in disallowing a claim which is still pending resolution at the OEA level, and (b) "grave abuse of
discretion and completely without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it may
be required under the law to remit to the OPSF against any amount that it may receive by way of reimbursement therefrom are
sufficient to bring this petition within Rule 65 of the Rules of Court, and, considering further the importance of the issues raised,
the error in the designation of the remedy pursued will, in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as amended by
Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to be designated as Oil Price
Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes brought about by exchange rate adjustments
and/or changes in world market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund may be
sourced from any of the following:
a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products subject to tax under this
Decree arising from exchange rate adjustment, as may be determined by the Minister of Finance in consultation with the Board of
Energy;
b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as may be determined
by the Minister of Finance in consultation with the Board of Energy;
c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate
Order that may be issued by the Board of Energy requiring payment by persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;
d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using the reference foreign exchange rate as fixed by the Board of
Energy.
The Fund herein created shall be used for the following:
1) To reimburse the oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate
adjustment and/or increase in world market prices of crude oil;
2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the reduction of domestic prices of
petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost

underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.
The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner, directing the latter
to remit to the OPSF its collection, excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum
products authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to
P335,037,649.00 and informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be held in
abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA showed that the grand
total of its unremitted collections of the above tax is P1,287,668,820.00, broken down as follows:
1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the letter; advising it that
the COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF; and directing it to desist from further
offsetting the taxes collected against outstanding claims in 1989 and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates from the OPSF
covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in support thereof COA Circular No.
89-299 on the lifting of pre-audit of government transactions of national government agencies and government-owned or
controlled corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from
the OPSF and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to
facilitate COA's audit action on the reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of the collections and
the recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of
said claims against the OPSF will cause a very serious impairment of its cash position. 10 The proposal reads:
We, therefore, very respectfully propose the following:
(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and reimbursements will be administered
by the ERB/Finance Dept./OEA, as agencies designated by law to administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA will deliver to Caltex
the same amount in cash reimbursement from OPSF.
(3) The COA audit will commence immediately and will be conducted expeditiously.
(4) The review of current claims (1989) will be conducted expeditiously to preclude further accumulation of reimbursement from
OPSF.
On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the above-stated proposal
but prohibiting petitioner from further offsetting remittances and reimbursements for the current and ensuing years. 11 Decision No.
921 reads:
This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation, and Mr. Francis Ablan,
President and Managing Director, Caltex (Philippines) Inc., for reconsideration of this Commission's adverse action embodied in
its letters dated February 2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization Fund
of collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter reiterating the same
directive but further advising the firms to desist from offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for reimbursement from the OPSF."
It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the aforenamed oil companies were
allowed to offset the amounts due to the Oil Price Stabilization Fund against their outstanding claims from the said Fund for the
calendar years 1987 and 1988, pending with the then Ministry of Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to the propriety of the offsetting of all types of reimbursements
from the OPSF against all categories of remittances, advised these oil companies that such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly manifest their intent to make
arrangements for the remittance to the Office of Energy Affairs of the amount of collections equivalent to what has been previously
offset, provided that this Commission authorizes the Office of Energy Affairs to prepare the corresponding checks representing
reimbursement from the OPSF. It is alleged that the implementation of such an arrangement, whereby the remittance of
collections due to the OPSF and the reimbursement of claims from the Fund shall be made within a period of not more than one
week from each other, will benefit the Fund and not unduly jeopardize the continuing daily cash requirements of these firms.
Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no further objectionable feature
in the proposed arrangement, provided that 15% of whatever amount is due from the Fund is retained by the Office of Energy
Affairs, the same to be answerable for suspensions or disallowances, errors or discrepancies which may be noted in the course of
audit and surcharges for late remittances without prejudice to similar future retentions to answer for any deficiency in such

surcharges, and provided further that no offsetting of remittances and reimbursements for the current and ensuing years shall be
allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao R. De la Paz of
the Office of Energy Affairs: 12
Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial verification of documents
submitted to us by your Office in support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its
outstanding claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that
Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906, representing remittances to the OPSF
which were offset against its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby authorize
(sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially allowed in
audit, the details of which are presented hereunder: . . .
As presented in the foregoing computation the disallowances totalled P387,683,535, which included P130,420,235 representing
those claims disallowed by OEA, details of which is (sic) shown in Schedule 1 as summarized as follows:
Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475 /a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

P257,263,300
Disallowances of OEA 130,420,235

Total P387,683,535
The reasons for the disallowances are discussed hereunder:
a. Recovery of Financing Charges
Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of financing charges by oil
companies is not among the items for which the OPSF may be utilized. Therefore, it is our view that recovery of financing charges
has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87.
b. Product Sales Sales to International Vessels/Airlines
BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095 indicating that ( sic) February 7,
1987 as the effectivity date that (sic) oil companies should pay OPSF impost on export sales of petroleum products. Effective
February 7, 1987 sales to international vessels/airlines should not be included as part of its domestic sales. Changing the
effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by subsequent ERB Resolution No. 88-12
dated November 18, 1988 has allowed Caltex to include in their domestic sales volumes to international vessels/airlines and claim
the corresponding reimbursements from OPSF during the period. It is our opinion that the effectivity of the said resolution should
be February 7, 1987.
c. Inventory losses Settlement of Ad Valorem
We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA agreement, as they affect the
claims for reimbursements of ad valorem taxes. We observed that oil companies immediately settle ad valorem taxes for BLA
transaction (sic). Loan balances therefore are not tax paid inventories of Caltex subject to reimbursements but those of the
borrower. Hence, we recommend reduction of the claim for July, August, and November, 1987 amounting to P14,034,786.
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of payment of all taxes, duties, fees,
imposts and other charges whether direct or indirect due and payable by the copper mining companies in distress to the national
and local governments." It is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as
effected by OEA has no legal basis.
Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein authorized shall be subject to
availability of funds of OPSF as of May 31, 1989 and applicable auditing rules and regulations. With regard to the disallowances, it
is further informed that the aggrieved party has 30 days within which to appeal the decision of the Commission in accordance with
law.
On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on the following
grounds: 13
A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS, RESOLUTIONS, CIRCULARS
ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE
ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF
FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS
DECLARED NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.
xxx xxx xxx
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE EXECUTIVE BRANCH OF
GOVERNMENT, REMAINS VALID.
xxx xxx xxx
On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration.

14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez dissenting in part,
handed down Decision No. 1171 affirming the disallowance for recovery of financing charges, inventory losses, and sales to
MARCOPPER and ATLAS, while allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171
reads as follows:
Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to recover financing charges from the
OPSF on the basis of Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil companies to
"recover cost of financing working capital associated with crude oil shipments," and provided a schedule of reimbursement in
terms of peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the President of the Philippines
explaining the nature of these financing charges and justifying their reimbursement as follows:
As part of your program to promote economic recovery, . . . oil companies (were authorized) to refinance their imports of crude oil
and petroleum products from the normal trade credit of 30 days up to 360 days from date of loading . . . Conformably . . ., the oil
companies deferred their foreign exchange remittances for purchases by refinancing their import bills from the normal 30-day
payment term up to the desired 360 days. This refinancing of importations carried additional costs (financing charges) which then
became, due to government mandate, an inherent part of the cost of the purchases of our country's oil requirement.
We beg to disagree with such contention. The justification that financing charges increased oil costs and the schedule of
reimbursement rate in peso per barrel (Exhibit 1) used to support alleged increase (sic) were not validated in our independent
inquiry. As manifested in Exhibit 2, using the same formula which the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies are actually gaining rather than
losing from the extension of credit because such extension enables them to invest the collections in marketable securities which
have much higher rates than those they incur due to the extension. The Data we used were obtained from CPI (CALTEX)
Management and can easily be verified from our records.
With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is believed that export sales
(product sales) are entitled to claim refund from the OPSF.
As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of this Commission that the
OPSF is not liable to refund such surtax on inventory losses because these are paid to BIR and not OPSF, in view of which CPI
(CALTEX) should seek refund from BIR. . . .
Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim recovery from the OPSF
pursuant to LOI 1416 issued on July 17, 1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF
imposts which were added to the selling price.
Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has no authority to claim
reimbursement for this uncollected OPSF impost because LOI 1416 dated July 17, 1984, which exempts distressed mining
companies from "all taxes, duties, import fees and other charges" was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the COA the commission
of the following errors: 16
I
RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES FROM THE OPSF.
II
RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.
III
RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON SALES TO ATLAS AND
MARCOPPER.
IV
RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT TO OFFSET ITS
REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.
V
RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL PENDING RESOLUTION BY (SIC)
THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10) days from notice.

18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of the Solicitor
General, filed their Comment. 19
This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their respective Memoranda
within twenty (20) days from notice. 20
In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6 September 1990 be
considered as the Memorandum for respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:
(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second purpose, to wit:
2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the reduction of domestic prices of
petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may include financing
charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude oil incurred by the oil companies,"
as explained in the 6 November 1989 Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the tax on interest income
increases. The relationship is such that the presence of underrecovery or overrecovery is directly dependent on the amount and
extent of financing charges."
(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of Department of Finance
Circular No.
1-87, dated 18 February 1987, which provides:
To allow oil companies to recover the costs of financing working capital associated with crude oil shipments, the following
guidelines on the utilization of the Oil Price Stabilization Fund pertaining to the payment of the foregoing ( sic) exchange risk
premium and recovery of financing charges will be implemented:
1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the first (6) months and 1/32 of one
percent per month thereafter up to a maximum period of one year, to be applied on crude oil' shipments from January 1, 1987.
Shipments with outstanding financing as of January 1, 1987 shall be charged on the basis of the fee applicable to the remaining
period of financing.
2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to recover financing charges directly from
the OPSF per barrel of crude oil based on the following schedule:
Financing Period Reimbursement Rate
Pesos per Barrel
Less than 180 days None
180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
The above rates shall be subject to review every sixty
days. 22
Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of Energy Affairs as
follows:
HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
Dear Sir:
This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and subsequent discussions held by
the Price Review committee on February 6, 1987.
On the basis of the representations made, the Department of Finance recognizes the necessity to reduce the foreign exchange

risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such a reduction would allow the industry to recover partly
associated financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat
charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of one year, effective
January 1, 1987. In addition, since the prevailing company take would still leave unrecovered financing charges, reimbursement
may be secured from the OPSF in accordance with the provisions of the attached Department of Finance circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the computation of the
foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both crude and product shipments
loaded after January 1, 1987 based on the following rates:
Financing Period Reimbursement Rate
(PBbl.)
Less than 180 days None
180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28
2. The above rates shall be subject to review every sixty days.

24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines on the recoverability
of financing charges, to wit:
Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18, 1987 which allowed the
recovery of financing charges directly from the Oil Price Stabilization Fund. (OPSF):
1. The Claim for reimbursement shall be on a per shipment basis.
2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost differential for a particular shipment
and duly certified supporting documents provided for under Ministry of Finance No. 11-85.
3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued by the Office of Energy Affairs. The
said certificate may be used to offset against amounts payable to the OPSF. The oil companies may also redeem said certificates
in cash if not utilized, subject to availability of funds. 25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017.

26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the determination of
executive agencies. The determination by the Department of Finance and the OEA that financing charges are recoverable from
the OPSF is entitled to great weight and consideration. 27 The function of the COA, particularly in the matter of allowing or
disallowing certain expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and
properties. 28
(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner is gaining, instead
of losing, from the extension of credit, is belatedly raised and not supported by expert analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that:
1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary government expenditures and as
the monetary claims of petitioner are not allowed by law, the COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the OPSF pursuant to E.O. No.
137 can only include "factors which are of the same nature or analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department of Finance violates P.D. No.
1956 and E.O. No. 137; and
5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow reimbursement of financing
charges. 29
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner that such does
not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or use of
government funds and properties, but only to the promulgation of accounting and auditing rules for, among others, such
disallowance to be untenable in the light of the provisions of the 1987 Constitution and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:
Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining
to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations
with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal
autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled

corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from
or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the
general accounts, of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting
papers pertaining thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and
examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.
These present powers, consistent with the declared independence of the Commission, 30 are broader and more extensive than
that conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:
Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues, and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities including government-owned or controlled corporations, keep the general accounts of the
Government and, for such period as may be provided by law, preserve the vouchers pertaining thereto; and promulgate
accounting and auditing rules and regulations including those for the prevention of irregular, unnecessary, excessive, or
extravagant expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General Auditing Office,
were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI thereof provided:
Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues and receipts from whatever
source, including trust funds derived from bond issues; and audit, in accordance with law and administrative regulations, all
expenditures of funds or property pertaining to or held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the duty of the
Auditor General to bring to the attention of the proper administrative officer expenditures of funds or property which, in his opinion,
are irregular, unnecessary, excessive, or extravagant. He shall also perform such other functions as may be prescribed by law.
As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of funds, the 1935
Constitution did not grant the Auditor General the power to issue rules and regulations to prevent the same. His was merely to
bring that matter to the attention of the proper administrative officer.
The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez
no longer controlling as the two (2) were decided in the light of the 1935 Constitution.

32

and Ramos vs. Aquino,

33

are

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and the Commission on
Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds or uses of funds and property. Our
present Constitution retains that same power and authority, further strengthened by the definition of the COA's general jurisdiction
in Section 26 of the Government Auditing Code of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to
promulgate accounting and auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible
for the enforcement of the rules and regulations, it goes without saying that failure to comply with them is a ground for
disapproving the payment of the proposed expenditure. As observed by one of the Commissioners of the 1986 Constitutional
Commission, Fr. Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the Auditor General could not
correct "irregular, unnecessary, excessive or extravagant" expenditures of public funds but could only "bring [the matter] to the
attention of the proper administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the Commission
on Audit can "promulgate accounting and auditing rules and regulations including those for the prevention and disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties."
Hence, since the Commission on Audit must ultimately be responsible for the enforcement of these rules and regulations, the
failure to comply with these regulations can be a ground for disapproving the payment of a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and invested it with broader
and more extensive powers, they did not intend merely to make the COA a toothless tiger, but rather envisioned a dynamic,
effective, efficient and independent watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87, Department of Finance
Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O.
No. 137, authorizing it to determine "other factors" which may result in cost underrecovery and a consequent reimbursement from
the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not included in "cost
underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956, as amended by
E.O. No. 137, does not explicitly define what "cost underrecovery" is. It merely states what it includes. Thus:
. . . "Cost underrecovery" shall include the following:
i. Reduction in oil company takes as directed by the Board of Energy without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
These "other factors" can include only those which are of the same class or nature as the two specifically enumerated in
subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of government mandated price
reductions. Hence, any other factor which seeks to be a part of the enumeration, or which could qualify as a cost underrecovery,
must be of the same class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and unrestricted authority to
determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by words of a
particular and specific meaning, such general words are not to be construed in their widest extent, but are held to be as applying
only to persons or things of the same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily
discloses that they do not have a common characteristic. The first relates to price reduction as directed by the Board of Energy
while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by the
enumeration in these subparagraphs. What should be considered for purposes of determining the "other factors" in subparagraph
(iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost underrecovery only if such were incurred as a
result of the reduction of domestic prices of petroleum products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that such were incurred
as a result of the inability to fully offset financing expenses from yields in money market placements, they do not, however, fall
under the foregoing provision of P.D. No. 1956, as amended, because the same did not result from the reduction of the domestic
price of petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended by Congress, this Court
can do nothing. The duty of this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to
emphasize that as the facts in this case have shown, it was at the behest of the Government that petitioner refinanced its oil
import payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that
owing to the extended period for payment, the financial institution which refinanced said payments charged a higher interest,
thereby resulting in higher financing expenses for the petitioner. It would appear then that equity considerations dictate that
petitioner should somehow be allowed to recover its financing losses, if any, which may have been sustained because it
accommodated the request of the Government. Although under Section 29 of the National Internal Revenue Code such losses
may be deducted from gross income, the effect of that loss would be merely to reduce its taxable income, but not to actually wipe
out such losses. The Government then may consider some positive measures to help petitioner and others similarly situated to
obtain substantial relief. An amendment, as aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of Finance to determine
or define "other factors" is to uphold an undue delegation of legislative power, it clearly appearing that the subject provision does
not provide any standard for the exercise of the authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is provided and that the legislature, in making the delegation,
has prescribed the manner of the exercise of the delegated authority. 39
Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of the foregoing
disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it had in fact gained in the process.
Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being the case, how can petitioner claim for
reimbursement? It cannot have its cake and eat it too.
II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The respondents themselves
admit in their Comment that underrecovery arising from sales to NPC are reimbursable because NPC was granted full exemption
from the payment of taxes; to prove this, respondents trace the laws providing for such exemption. 40 The last law cited is the
Fiscal Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty
exemption privileges of the National Power Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the
President, NPC's tax exemption was confirmed and approved.
Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is evident in the
recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support the OPSF. 41 The pertinent part
of Section 2, Republic Act No. 6952 provides:
Sec. 2. Application of the Fund shall be subject to the following conditions:
(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported crude oil and finished petroleum
products resulting from foreign exchange rate adjustments and/or increases in world market prices of crude oil; (b) cost
underrecovery incurred as a result of fuel oil sales to the National Power Corporation (NPC); and (c) other cost underrecoveries
incurred as may be finally decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on Letter of Instruction (LOI)
1416, dated 17 July 1984, which ordered the suspension of payments of all taxes, duties, fees and other charges, whether direct
or indirect, due and payable by the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas
Consolidated Mining Corporation and Marcopper Mining Corporation are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to Executive Director
Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the exemption from payment of OPSF
imposts as effected by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no
authority to claim reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued when OPSF
was not yet in existence and could not have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that:
"Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry
by stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt said distressed
mining companies from the payment of OPSF dues for the following reasons:
a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the OPSF was promulgated on
October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the government's effort to prevent the
collapse of the copper industry. P.D No. 1956, as amended, was issued for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum product's;
and
c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether direct or indirect, due and
payable by the copper mining companies in distress to the Notional and Local Governments . . ." On the other hand, OPSF dues
are not payable by (sic) distressed copper companies but by oil companies. It is to be noted that the copper mining companies do
not pay OPSF dues. Rather, such imposts are built in or already incorporated in the prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining companies, it does not accord
petitioner the same privilege with respect to its obligation to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI 1416 was never
published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads:
Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise
provided. . . .
In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all unpublished presidential issuances
which are of general application, and unless so published they shall have no binding force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29 December 1986,

47

ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for their
effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative
powers whenever the same are validly delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to enforce or implement existing laws pursuant also
to a valid delegation.
xxx xxx xxx
WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their approval, or as soon thereafter as
possible, be published in full in the Official Gazette, to become effective only after fifteen days from their publication, or on another
date specified by the legislature, in accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its issuance or at any time
after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987. As amended, the
said provision now reads:
Laws shall take effect after fifteen days following the completion of their publication either in the Official Gazette or in a newspaper
of general circulation in the Philippines, unless it is otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax exemptions as a
general rule are construed strictly against the grantee and liberally in favor of the taxing authority. 48 The burden of proof rests
upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. The party claiming exemption
must therefore be expressly mentioned in the exempting law or at least be within its purview by clear legislative intent.
In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and MARCOPPER, to claim
reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the payment of taxes by copper mining
companies, it does not give petitioner the same privilege with respect to the payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of Finance has still to
issue a final and definitive ruling thereon; accordingly, it was premature for COA to disallow it. By doing so, the latter acted beyond
its jurisdiction. 49 Respondents, on the other hand, contend that said amount was already disallowed by the OEA for failure to
substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the abovementioned amount was already
excluded.
An examination of the records of this case shows that petitioner failed to prove or substantiate its contention that the amount of
P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no reason to doubt the submission of
respondents that said amount has already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may be offset against
petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to offset its claims from the OPSF
against its contributions to the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51
Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation and Section 21, Book
V, Title I-B of the Revised Administrative Code which provides for "Retention of Money for Satisfaction of Indebtedness to
Government." 52 Petitioner also mentions communications from the Board of Energy and the Department of Finance that
supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no offsetting of taxes against
the claims that a taxpayer may have against the government, as taxes do not arise from contracts or depend upon the will of the
taxpayer, but are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the COA to withhold payment of a government
indebtedness to a person who is also indebted to the government and apply the government indebtedness to the satisfaction of

the obligation of the person to the government, like authority or right to make compensation is not given to the private person." 54
The reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government, either in
the form of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a
reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's
indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of taxation because "P.D.
1956, amended, did not create a source of taxation; it instead established a special fund . . .," 56 and that the OPSF contributions
do not go to the general fund of the state and are not used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a public purpose behind OPSF exactions
distinguishes such from a tax. Hence, the ruling in the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said law provides in
part that:
Sec. 2. Application of the fund shall be subject to the following conditions:
xxx xxx xxx
(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company which has an outstanding
obligation to the Government without said obligation being offset first, subject to the requirements of compensation or offset under
the Civil Code.
We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because they go to a special
fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of the state. 57 There can be no doubt
that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil
prices could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain
reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern which the state, via its police power, may properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No amount of
semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government. 58 Taxes cannot be
the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 59
We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act as agents for the
Government in the latter's collection since the taxes are, in reality, passed unto the end-users the consuming public. In that
capacity, the petitioner, as one of such companies, has the primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship between the two; petitioner certainly cannot be
considered merely as a debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no
compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under Article 1279 of the
Civil Code, in order that compensation may be proper, it is necessary that:
(1) each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the
debtor.
That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal basis. Lastly, R.A.
No. 6952 does not authorize oil companies to offset their claims against their OPSF contributions. Instead, it prohibits the
government from paying any amount from the Petroleum Price Standby Fund to oil companies which have outstanding obligations
with the government, without said obligation being offset first subject to the rules on compensation in the Civil Code.
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of the Commission on
Audit, except that portion thereof disallowing petitioner's claim for reimbursement of underrecovery arising from sales to the
National Power Corporation, which is hereby allowed.
With costs against petitioner.
SO ORDERED.

G.R. No. 111890 May 7, 1997

CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI SAW, petitioners,
vs.
THE COURT OF APPEALS, (FORMER 13TH DIVISION), THE REGISTER OF DEEDS OF METRO MANILA DISTRICT III
(VALENZUELA), CENTURY-WELL PHIL. CORPORATION, LOURDES CHONG, CHONG TAK KEI and UY CHI KIM,
respondents.

TORRES, JR., J.:

The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul the sale of two parcels of
land, from petitioner CKH Industrial and Development Corporation (CKH, for brevity) to private respondent Century-Well Phil.
Corporation (Century-Well, for brevity), for failure to pay the stipulated price of P800,000.00.
Petitioners specifically assail the Decision 1 of the respondent Court of Appeals, which denied the annulment of the sale. The
appellate court found that there was payment of the consideration by way of compensation, and ordered petitioners to pay moral
damages and attorney's fees to private respondents. The dispositive portion of the questioned decision reads:
WHEREFORE, in view of all the foregoing, the appealed Decision is REVERSED. The complaint is DISMISSED with costs
against the plaintiffs. The plaintiffs jointly and severally are required to pay each of the defendants Lourdes Chong, Chong Tak Kei,
and Uy Chi Kim moral damages of P20,000.00; and further requiring the plaintiffs, jointly and severally, to pay to each of the
defendants Century-Well Phil. Corporation, Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney's fees of P20,000.00.
With costs in this instance against the plaintiffs-appellees.
SO ORDERED. 2
The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil Case No. 2845-V-88
entitled "CKH Industrial & Development Corporation vs. Century-Well Philippine Corporation, Lourdes Chong, Chong Tak Kei, Uy
Chi Kim, and the Register of Deeds of Metro Manila, District III (Valenzuela)." The trial court's decision stated pertinently:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff:
1. Ordering the rescission/annulment of the Deed of Absolute Sale of Reality.
2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in the sum of
P200,000.00;
3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney's fees in the amount of 15% of
the agreed price of P800,000.00 per appearance fees of P500.00 per appearance;
4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit;
5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby ordered to cancel the
certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of Realty and to reissue a new title in the name of
CKH.
The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is likewise dismissed considering that by
his mediation he took it upon himself to assume the damages he allegedly suffered.
SO ORDERED. 3
The records disclosed that petitioner CKH is the owner of two parcels of land, consisting of 4,590 sq. m. and 300 sq. m.
respectively, located in Karuhatan, Valenzuela, and covered by Transfer Certificates of Tittle Nos. 8710 and 8711, Register of
Deeds of Caloocan City (now Register of Deeds District III [Valenzuela]). 4 CKH is a corporation established under Philippine law
by the late Cheng Kim Heng (Cheng), an immigrant of Chinese descent. Upon Cheng's demise, control over the petitioner
corporation was transferred to Rubi Saw, also of Chinese descent, and Cheng's second wife.
It also appear that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah (Wah), who lived in
Hongkong together with their children, Chong Tak Kei (Kie), Chong Tak Choi (Choi), and Chong Tak Yam (Yam). After Cheng
immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he brought his first wife, Heng, and their children to this
country, and established himself and his Chinese family as naturalized Filipino citizens. Heng died in 1984.
On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng's son, Kei, met at the 1266 Soler St., Sta. Cruz, Manila, the
residence of Cheng's friend, Uy Chi Kim, and executed a Deed of Absolute Sale, 5 whereby Rubi Saw, representing CKH, agreed
to sell the subject properties to Century-Well, a corporation owned in part by Lourdes Chong, Kei and Choi. 6
The pertinent portions of the Deed of Sale are hereby reproduced:
KNOW ALL MEN BY THESE PRESENTS:
This Deed of Absolute Sale of Realty executed by and between:
CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing under and by virtue of the laws
of the Republic of the Philippines, with business address at 553 Bermuda St.., Sta. Cruz, Manila, represented in this act by its
authorized representative, Ms. RUBI SAW, hereinafter referred to as VENDOR,
in favor of
CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines at least sixty 60%) percent of the subscribed capital stock of which is owned by Filipino citizens, duly
qualified to own and acquire lands in the Philippines, with office and business address at 66 F Bautista St., Valenzuela, Metro
Manila and represented in this act by its Treasurer and authorized representative, Ms. Lourdes Chong, hereinafter referred to as
VENDEE,
W I T N E S S E T H:
That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of Karuhatan, Municipality of
Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos. B-8710 and B-8711 of the Registry of Deeds for Metro
Manila District III, and more particularly described as follows:
xxx xxx xxx
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by
VENDEE to VENDOR, receipt of which is hereby acknowledged by the letter to its entire satisfaction, said VENDOR, by these

presents, has SOLD, CEDED, TRANSFERRED, and CONVEYED by way of absolute sale unto said VENDEE, its successors and
assigns, the two parcels of land above described and any and all improvements therein;
That the above-described parcels of land are free from liens and encumbrances of whatever kind and nature.
IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their hand on _____at_____.
Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. 7 The document was notarized the day after the
parties signed the same, i.e., March 9, 1988. 8
Claiming that the consideration for the sale of the subject properties was not paid by the private respondent-vendee despite
several demands to do so, Petitioners CKH and Rubi Saw filed the instant complaint 9 on May 23, 1988, with the Regional Trial
Court of Valenzuela, Branch 172, against Century-Well, Lourdes Chong, Chong Tak Kei and Uy Chi Kim. Petitioners prayed for the
annulment/rescission of the Deed of Absolute Sale, and in the meantime, for the issuance of a writ of preliminary injunction
restraining the Register of Deeds of Valenzuela from registering the Certificates of Title over the subject properties in the name of
the private respondent Century-Well.
The trial court synthesized the petitioners' submissions as follows:
The complaint alleges the following:
Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price shall be in the form of a Manager's
Check, to be delivered to Rubi Saw upon the execution of the Deed of Sale, the preparation of which, Lourdes Chong undertook.
On May 8, 1988, the date agreed upon for the execution of the Deed of Sale, plaintiff Rubi Saw, accompanied by her friend Aurora
Chua Ng, went to 1266 Soler St., Sta. Cruz, Manila which is the residence and place of business of defendant Uy Chi Kim, an
elderly man of Chinese ancestry and the place suggested by Lourdes Chong as their meeting place. During the meeting, Uy Chi
Kim who was there presented to Rubi Saw a Deed of Absolute Sale in favor of defendant Century Well for her signature. Before
Rubi Saw signed the Deed of Absolute Sale she inquired about the payment of the P800,000.00. Defendant Uy Chi Kim presented
to her a personal check but she refused the same because it was contrary to her arrangement with Lourdes Chong that the
payment would be in the form of Manager's Check. Uy Chi Kim then explained to Rubi Saw that since it was a Sunday that day,
they were unable to obtain the Manager's Check. He assured her that he had sufficient cash money at the first floor of his
residence which is a store owned by Uy Chi Kim. Before Uy Chi Kim left on the pretext of getting the money, he persuaded plaintiff
Rubi Saw to sign the Deed of Absolute Sale and give the same to Lourdes Chong together with the two Certificates of Title. Since
Uy Chi Kim is an elderly Chinese whom Rubi Saw had no reason to mistrust, following Chinese custom, plaintiff Rubi Saw
acceded to the request of Uy Chi Kim, trusting that he had sufficient cash amounting to P800,000.00 kept in the first floor of his
residence. When Uy Chi Kim returned, he told Rubi Saw that he had only P20,000 on hand. He assured plaintiff, however, that
there was no cause for her to worry (as) he was certain he would have the entire amount ready by the next day when the banks
would be open. Again, trusting the elderly defendant Uy Chi Kim, Rubi Saw did not object and did not insist on the return of the
Deed of Absolute Sale that she signed, together with the Certificate of Title which she delivered to Lourdes Chong. The next day,
May 9, 1988 Rubi Saw called Lourdes Chong and Uy Chi Kim over the telephone but was told they were not around. She could
not go to the residence of Uy Chi Kim because she could not leave her office due to business concerns. On May 10, 1988 Rubi
Saw repeatedly called the two but was informed they were not around. On May 11, 1988 already anxious, she personally went to
the residences and offices of the two defendants but they were not around. On May 12, 1988 Rubi Saw wrote defendant Century
Well advising Lourdes Chong of the rescission and cancellation of the Deed of Absolute Sale because of lack of consideration.
Lourdes Chong refused to receive the letter. Thereafter, several demand letters were sent to the defendants but they refused to
pay plaintiffs. Worried that defendants might surreptitiously transfer the certificates of title to their names, Rubi Saw wrote the
public defendant Register of Deeds on May 16, 1988, giving information about the circumstances of the sale and requesting not to
allow registration of the Deed of Absolute Sale, together with an Affidavit of Adverse Claim. On May 20, 1988, plaintiffs
representative was informed by the Register of Deeds that defendants have made representations with defendant to Register the
Deed of Absolute Sale on May 23, 1988.
Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and Uy Chi Kim maliciously misled her to believe that they
would pay the P800,000 as consideration when in fact they had no intention to pay plaintiffs, and prayed that they should be
awarded moral damages; that defendants be restrained from registering the Deed of Absolute Sale, and be ordered to return to
them the 2 titles of the properties together with the Deed of Absolute Sale. 10
On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei alleged that:
. . . the consideration for the two parcels of land was paid by means of off-setting or legal compensation in the amount of
P700,000 thru alleged promissory notes executed by Cheng Kim Heng in favor of his sons Chong Tak Choi and Chong Tak Kei
(Exh. 6, 7, & 8) and payment of P100,000.00 in cash.
The defendant Century Well filed its Answer stating that during the operation of plaintiff CKH, the latter borrowed from Chong Tak
Choi and Chong Tak Kei the total sum of P700,000.00 paying interest on P300,000.00 while the remaining P400,000.00 was
interest free, and upon the death of Cheng Kim Heng, it stopped making said payments. Defendant tried to prove that the source
of this P700,000 was Hung Yuk Wah while she was still residing in Hongkong, sent via bank draft from Hongkong to Chong Tak
Choi and Chong Tak Kei on a bank to bank transfer. Defendant likewise tried to prove that after the death of Cheng Kim Heng,
Rubi Saw unilaterally arrogated to herself the executive positions in plaintiff corporation such as President, Secretary, Treasurer
and General Manager; thus effectively shunting aside Hung Yuk Wah and her children in the management of plaintiff corporation.
Family differences (arose) between Rubi Saw on one hand, and Hung Yuk Wah and her children on the other hand which turned
to worst after the death of Cheng Kim Heng. This brought about the entry of Chinese mediators between them, one of whom is
defendant Uy Chi Kim, a reason why the execution of the Deed of Absolute Sale was to be done at the residence and business
address of Uy Chi Kim. 11
Uy Chi Kim, on the other hand, answered on his behalf, that:
. . . his only participation in the transaction was as a mediator, he being one of the closest friends of Cheng Kim Heng; that
because the heirs of Cheng Kim Heng could not settle their problems he, together with Machao Chan and Tomas Ching tried to
mediate in accordance with Chinese traditions; that after long and tedious meetings the parties finally agreed to meet at his
residence at 1266 Solar St., Sta. Cruz, Manila for the purpose of pushing thru the sale of the properties in question as part of the
settlement of the estate. Defendant Uy Chi Kim corroborated the defense of his co-defendants that the purchase price of the
properties was P800,000.00 the payment of which consists in the form of P100,000.00 in cash Philippine Currency; and the

balance of P700,000.00 will be applied as a set-off to the amount borrowed by plaintiff CKH from Chong Tak Choi and Chong Tak
Kei. He advanced the amount of P100,000.00 by way of his personal check to Rubi Saw but because Rubi Saw refused, he gave
Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and Jacinto Say even counted. After the P100,000.00 cash was
given and the promissory notes, Rubi Saw signed the document of sale. It was during the registration of the sale that a problem
arose as to the payment of the capital gains (tax) which Rubi Saw refused to pay . The buyer likewise refused to pay the same.
The complaint against him is baseless and which besmirched his reputation. Hence his counterclaim for damages. 12
The trial court denied the petitioners' prayer for issuance of the writ of preliminary injunction in its Order dated August 4, 1988.

13

After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the Deed of Absolute Sale was
merited, as there was no payment of the stipulated consideration for the sale of the real properties involved to Rubi Saw.
In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement between the parties, did not
provide for payment by offsetting a portion of the purchase price with the outstanding obligation of Cheng Kim Heng to his sons
Chong Tak Choi and Chong Tak Kei. On the contrary, it provided for payment in cash, in the amount of P800,000.00. The evidence
presented, however, did not disclose that payment of the said amount had ever been made by the private respondent. Moreover,
there cannot be any valid off-setting or compensation in this case, as Article 1278 of the Civil
Code 14 requires, as a prerequisite for compensation, that the parties be mutually bound principally as creditors and debtors, which
is not the case in this instance. The rescission of the contract is, therefore, called for, ruled the court.
Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial court. In its Decision 15 dated
April 21, 1993, the appellate court expressed its own findings, that the execution of the Deed of Absolute Sale was in settlement of
a dispute between Rubi Saw and the first family of Cheng Kim Heng, which arose upon Cheng's death. The appellate court
described the history of their dispute as follows:
In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his first wife Wah, children Choi
and Kei, and second wife Rubi as his co-incorporators/stockholders, along with other individuals (Exhs. C and D; ibid., p. 9 and
pp. 10-13, respectively). On April 15 and July 17 the following year, Heng, on behalf of CHK [ sic], obtained loans of P400,000.00
and P100,000.00 from Choi, for which Heng executed two promissory notes in Choi's favor (Exhs. 6 and 7; ibid., p. 40 and p. 41,
respectively). On November 24, 1981, Heng obtained from his other son, Kei, another loan this time in the sum of P200,000.00 on
behalf of CKH for which he issued another promissory note. (Exh. 8, ibid., p. 42.)
After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan (now Metro Manila) covered
by Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint; Record, p. 13) and B-8711 (Annex B-Complaint; ibid., p. 14),
which are now the subject of litigation in instant case.
On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico Hai Huat (Lourdes). During
their marriage, Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz, Manila, which CKH was then utilizing as its office.
At about this time, Heng and Rubi had moved residence from Valenzuela, Metro Manila, to Bermuda St., Sta. Cruz, Manila.
Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between Heng's first wife Wah and
their three children on the one hand, and his second wife Rubi, on the other, which came to a head when, Rubi as president of
CKH wrote a letter dated August 21, 1985 to the mayor of Valenzuela, Metro Manila, to prevent issuance of a business permit to
American Metals managed by Chong Tak Choi, stating that CKH has not allowed it to make use of the property, and on November
7, 1985, when CKH, through counsel, demanded that Wah, Choi and Yam vacate the residential and factory buildings and
premises owned by CKH and located on one of the subject lots on 76 F. Bautista St., Valenzuela, which the three and the
corporation (of which two of them were stockholders), had been allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp. 4445).
Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim, Ma Chao, Tomas Cheng
and Johnny Saw, were called in to mediate. The mediation efforts which resulted in the withdrawal by Rubi Saw of her letter about
the withholding of a license to American Metals, Inc. and much later, had culminated in the transaction now under litigation.
The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to Century Well for the amount of
P800,000.00, P100,000.00 of which will be paid in cash and the balance of P700,000.00 to be set-off by the three (3) promissory
notes executed in behalf of CKH in favor of Chong Tak Choi and Chong Tak Kei (Exhs. 6, 7 and 8) the accumulated interests
thereon to be waived as unstated consideration of the sale.
Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St., where the corresponding
deed of absolute sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid., pp. 46-49), with mediator Cheng and CKH stockholder
and Rubi's secretary, Jacinto Say, signing as instrumental witnesses. After having received the cash consideration of P100,000.00
and the promissory notes amounting to P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes the document
of sale and the owner's copies of the certificates of tittle for the two lots. The deed having been executed on a Sunday, the parties
agreed to have the same notarized the following day, May 9, 1988. The parties again met the next day, May 9, 1988, when they
acknowledge the deed before a notary public. 16
In sum, the appellate court found that there was indeed payment of the purchase price, partially in cash for P100,000.00 and
partially by compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei for P500,000.00 and P200,000.00
respectively, against the remainder of the stipulated price. Such mode of payment is recognized under Article 1249 17 of the Civil
Code.
As observed by the appellate court:
We are of the considered view that the appellees have not established what they claim to be the invalidity of the subject deed of
sale. The appellees are therefore neither entitled to the rescission or annulment of the document nor to the award made in their
favor in the decision under question and those other reliefs they are seeking. 18
The question the Court is now tasked to answer is whether or not there was payment of the consideration for the sale of real
property subject of this case. More specifically, was there a valid compensation of the obligations of Cheng Kim Heng to his sons
with the purchase price of the sale?
To resolve this issue, it is first required that we establish the true agreement of the parties.

Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective claims. Petitioners, while
submitting that as worded, the Deed of Absolute Sale does not provide for payment by compensation, thereby ruling out the
intention of the parties to provide for such mode of payment, submit on the other hand, that they had not received payment of the
stipulated cash payment of P800,000.00. The testimony of Rubi Saw during the hearings for preliminary injunction and during trial
was submitted to advance the submission that she was never paid the price of the subject lots, in cash or in promissory notes.
On the other side of the fence, private respondents, who, ironically, were the parties, who drafted the subject document, claim that
the Deed of Sale does not express the true agreement of the parties, specifically with regard to the mode of payment. Private
respondents allege that the execution of the deed of absolute sale was the culmination of mediation of the dispute of the first and
second families of Cheng Kim Heng, over the properties of the decedent; that the price of the real property subject of the contract
of sale was partly in cash, and the reminder to be compensated against Cheng's indebtedness to his sons Choi and Kei, reflected
in the promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation, the sale has been
consummated and the private respondent Century-Well is entitled to the registration of the certificates of title over the subject
properties in its name.
These contrasting submissions of the circumstances surrounding the execution of the subject document have led to this stalemate
of sorts. Still, the best test to establish the true intent of the parties remains to be the Deed of Absolute Sale, whose genuineness
and due execution, are unchallenged. 19
Section 9 of Rule 130 of the Rules of Court states that "when the terms of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no
evidence of such terms other than the contents of the written agreement."
The so-called "parol evidence rule" forbids any addition to or contradiction of the terms of a written instrument by testimony or
other evidence purporting to show that, at or before the execution of the parties' written agreement, other or different terms were
agreed upon by the parties, varying the purport of the written contract. When an agreement has been reduced to writing, the
parties cannot be permitted to adduce evidence to prove alleged practices which to all purposes would alter the terms of the
written agreement. Whatever is not found in the writing is understood to have been waived and abandoned. 20
The rule is not without exceptions, however, as it is likewise provided that a party to an action may present evidence to modify,
explain, or add to the terms of the written agreement if he puts in issue in his pleadings: (a) An intrinsic ambiguity, mistake or
imperfection in the written agreement; (b) The failure of the written agreement to express the true intent and agreement of the
parties thereto; (c) The validity of the written agreement; or (d) The existence of other terms agreed to by the parties or their
successors in interest after the execution of the written agreement. 21
We reiterate the pertinent provisions of the deed:
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by
VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to its entire satisfaction, said VENDOR, by these
presents, has SOLD, CEDED, TRANSFERRED, and CONVEYED by way of absolute sale unto said VENDEE, its successors and
assigns, the two parcels of land above described and any and all improvements therein; 22
The foregoing stipulation is clear enough in manifesting the vendor's admission of receipt of the purchase price, thereby lending
sufficient, though reluctant, credence to the private respondents' submission that payment had been made by off-setting
P700,000.00 of the purchase price with the obligation of Cheng Kim Heng to his sons Choi and Kei. By signing the Deed of
Absolute Sale, petitioner Rubi Saw has given her imprimatur to the provisions of the deed, and she cannot now challenge its
veracity.
However, the suitability of the said stipulations as benchmarks for the intention of the contracting parties, does not come clothed
with the cloak of validity. It must be remembered that agreements affecting the civil relationship of the contracting parties must
come under the scrutiny of the provisions of law existing and effective at the time of the execution of the contract.
We refer particularly to the provisions of the law on compensation as a mode of extinguishment of obligations. Under Article 1231
of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2) by the loss of the thing due, (3) by the
condonation or remission of the debt; (4) by the confusion or merger of the rights of creditor and debtor, (5) by compensation; or
(6) by novation. Other causes of extinguishment of obligations include annulment, rescission, fulfillment of a resolutory condition
and prescription.
Compensation may take place by operation of law (legal compensation), when two persons, in their own right, are creditors and
debtors of each other. 23 Article 1279 of the Civil Code provides for the requisites of legal compensation:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time
to the debtor.
Compensation may also be voluntary or conventional, that is, when the parties, who are mutually creditors and debtors agree to
compensate their respective obligations, even though not all the requisites for legal compensation are present. Without the
confluence of the characters of mutual debtors and creditors, contracting parties cannot stipulate to the compensation of their
obligations, for then the legal tie that binds contracting parties to their obligations would be absent. At least one party would be
binding himself under an authority he does not possess. As observed by a noted author, the requirements of conventional
compensation are (1) that each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the
mutual extinguishment of their credits. 24
In the instant case, there can be no valid compensation of the purchase price with the obligations of Cheng Kim Heng reflected in

the promissory notes, for the reason that CKH and Century-Well the principal contracting parties, are not mutually bound as
creditors and debtors in their own name. A close scrutiny of the promissory notes does not indicate the late Cheng, as then
president of CKH, acknowledging any indebtedness to Century-Well. As worded, the promissory notes reveal CKH's indebtedness
to Chong Tak Choi and Chong Tak Kei.
Exhibit 6
Metro Manila, Philippines
April 15, 1978
For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered corporation with postal
address at Rm. 330, MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic] to pay on demand to Mr. CHONG TAK CHOI,
the sum of FOUR HUNDRED THOUSAND PESOS, Philippine currency (P400,000.00)
To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH INDUSTRIAL &
DEVELOPMENT CORPORATION, do hereby signed [sic] in behalf of the Corporation.
CKH INDUSTRIAL & DEVELOPMENT
CORPORATION
signed:
CHENG KIM HENG
Exhibit 7
Manila,
July 17, 1978
For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered domestic corporation in the
City of Manila, represented by its presidents, CHENG KIM HENG with residence certificate no. 118824650 issued at Manila, on 228-78 do promise to pay on demand the sum of ONE HUNDRED THOUSAND PESOS ONLY (P100,000.00), Philippine currency
with interest from the date hereof at the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI.
In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG, president of CKH
INDUSTRIAL & DEVELOPMENT CORPORATION do hereby affixed [sic] my signature below.
signed:
CHENG KIM HENG
Exhibit 8
Manila, Philippines,
November 24, 1981
I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831 Tetuan St. (2nd floor) Sta. Cruz,
Manila, promises to pay to CHONG TAK KEI, with postal address at 76 F. Bautista St., Valenzuela, Metro Manila, the sum of
PESOS: TWO HUNDRED THOUSAND ONLY (P200,000.00) Philippine Currency, with interest at the rate of Ten per cent (10%)
per annum from date stated above to a period of one year and I hereby consent to any renewal, or extension of same amount to a
same period which may be requested by any one of us for the payment of this note.
I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI.
CKH IND. & DEV. CORP.
signed:
CHENG KIM HENG
President
In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as stockholders of
Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are merely stockholders of Century-Well, 25
and as such, are not bound principally, not even in a representative capacity, in the contract of sale. Thus, their interest in the
promissory notes cannot be off-set against the obligations between CKH and Century-Well arising out of the deed of absolute
sale, absent any allegation, much less, even a scintilla of substantiation, that Choi and Kei's interest in Century-Well are so
considerable as to merit a declaration of unity of their civil personalities. Under present law, corporations, such as Century-Well,
have personalities separate and distinct from their stockholders, 26 except only when the law sees it fit to pierce the veil of
corporate identity, particularly when the corporate fiction is shown to be used to defeat public convenience, justify wrong, protect
fraud or defend crime, or where a corporation the mere alter ego or business conduit of a person. 27 The Court cannot, in this
instance make such a ruling absent a demonstration of the merit of such a disposition.
Considering the foregoing premises, the Court finds it proper to grant the prayer for rescission of the subject deed of sale, for
failure of consideration. 28
IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of the Court of Appeals dated
April 21, 1993, is hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court of Valenzuela, Branch 173 dated
February 4, 1991, is hereby REINSTATED, with the MODIFICATION that the award of moral damages and attorney's fees to Rubi
Saw, and the order for payment of costs are DELETED.
The parties shall bear their respective costs.
SO ORDERED.

G.R. No. 181692

August 14, 2013

ADELAIDA SORIANO, PETITIONER,

vs.
PEOPLE OF THE PHILIPPINES, RESPONDENT.
DECISION
VILLARAMA, JR., J.:
Before this Court is a petition for review on certiorari assailing the May 19, 2005 Decision 1 and January 11, 2008 Resolution 2 of
the Court of Appeals (CA) in CA-G.R. CR No. 23108 insofar as it ordered petitioner to pay P74,807 plus interest to private
complainant Consolacion R. Alagao.
Petitioner Adelaida Soriano was charged with the crime of estafa on January 30, 1995 under an Information which reads as
follows:
That on September 9, 1994, at more or less 2:00 o'clock [sic] in the afternoon, and days thereafter, at Piaping Puti, Macabalan,
Cagayan de Oro City, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused, with intent to
defraud and cause damage and prejudice by means of deceit, and false pretenses or fraudulent acts executed prior to or
simultaneously with the commission of the fraud, did then and there wil[l]fully, unlawfully and feloniously represent and pretend to
the offended party, Consolacion Alagao y Regala, who was then canvassing for buyers of her one (1) truck load of corn grits
containing 398 sacks, that she (accused Adelaida Soriano) was engaged in the business of buying corn grits, among others from
the public under the business style of A & R Soriano Trading, paying it in cash, with place of business located at Piaping Puti,
Macab[a]lan, this City; that due to accused[s] representation, said offended party was persuaded and convinced to sell her own
corn grits to the former, which cereals came all the way from Old Nungnungan, Don Carlos, Bukidnon; that after unloading said
398 sacks of corn grains in the establishment of said Adelaida Soriano, said accused did not pay offended party for the said goods
delivered, but instead she let offended party to sign a Cash Voucher, making it appear thereat that offended party has received the
sum of P85,607.00, when in truth and in fact accused has not paid the same; that inspite of that misrepresented entries in the
Cash Voucher above-cited, the accused further directed to collect the same amount from a neighbor of the offended party in
OId.Nungnungan, above-mentioned; that perplexed about the actions of Mrs. Adelaida Soriano, offended party proceeded to
demand payment from her but the accused failed to pay her monetary obligation [to] the offended party as the accused and her
business establishment disappeared from Piaping Puti, Macabalan, this City after the incident, and transferred to an unknown
location; that she couId.not also get back the said 398 sacks of corn grits anymore because the accused had disposed of it
already; thus misapplying, misappropriating and converting the said sum of P85,607.00 the value of 398 sacks of corn grits, to her
own gain and benefit, to the damage and prejudice of the said offended party, in the aforestated sum of P85,607.00, Philippine
currency.
Contrary to and in violation to Article 315, par. 2(a), of the Revised Penal Code, as amended. 3
When arraigned, petitioner pleaded not guilty.4
During pre-trial, the following transpired:
1. Parties admitted that on September 9, 1993, private complainant Consolacion Alagao borrowed cash from the accused in the
amount of P10,000, guaranteed by a titled land, owned by her daughter Evelyn Alagao;
2. Parties also agreed that the aforesaid debt was fully paid with corn grains by the private complainant in February, 1994;
3. Parties also agreed that subsequent to this transaction, private complainants daughter Evelyn Alagao executed a Contract of
Loan secured by Real Estate Mortgage now marked Exh. "1" for the defense, to secure the payment of P40,000.00 which private
complainant admitted to have received P51,730.00 in the form of fertilizers and cash advances [:]
Fertilizers & Pioneer corn seeds

17,910.00

(Exh. "A")
110 bags chicken dung

6,600.00

(Chicken manure)
Hauling expense of th[e]se materials
1,570.00
Additional fertilizers

9,550.00

(As shown in Exh. "B")

and several cash advances as follows:
2-7-94

4,000.00

2-14-94

2,000.00

3-3-94

2,000.00

No date

100.00

5-1-94

2,000.00

5-6-94

2,000.00

7-19-94

500.00

7-20-94

500.00

(but which accused claimed [to be]

1,500.00)
9-10-94

3,000.00

16,100.00

51,730.00
4. That private complainant claimed that x x x on August 17, 1994, she delivered a 10-wheeler corn grains (sic) to the accused
which parties agreed [was] worth more than P80,000.00. And the private complainant claimed having paid the accused partially in
the amount of P8,060.00 which accused denied. The latter claimed that no payment was ever made because the corn grains were
owned by private complainant and another person and that private complainant and companion were paid of the worth of the
delivery;
5. Parties agreed that on September 9, 1994 at 2:00 oclock (sic) in the afternoon[,] there was a delivery by the private
complainant with her companions, corn grains worth P85,607.00. Private complainant claimed that she was only paid P3,000.00
and which accused claimed that she did not pay her because that delivery was in payment of her account and the P3,000.00
which she received was advanced payment of whatever remaining after paying her previous accounts to the accused;
6. Parties agreed that there was a Cash Voucher of the amount of corn grains delivered to the accused on September 9, 1994,
now marked [as] Exh. "C."5 (Emphasis and underscoring supplied.)
Trial on the merits ensued.
Based on the evidence presented and what transpired during the pre-trial, the facts are:
On February 18, 1994, Evelyn Alagao (Evelyn), daughter of private complainant Consolacion Alagao (Alagao), as borrowermortgagor, executed a "Contract of Loan Secured by Real Estate Mortgage with Special Power to Sell Mortgage Property without
Judicial Proceedings"6 in favor of petitioner as lender-mortgagee. The instrument provides for a P40,000 loan secured by a parcel
of land covered by Original Certificate of Title No. P-6254, 7 located in OId.Nongnongan, Don Carlos, Bukidnon, registered in
Evelyns name. It likewise provides that the loan was to be paid two years from the date of execution of the contract, or on
February 18, 1996, and that Evelyn agrees to give petitioner of every harvest from her cornland until the full amount of the loan
has been paid, starting from the first harvest. Based on Alagaos testimony, the first harvest was made only in September 1994. 8
Petitioner on the other hand claims that from the time the loan was obtained until September 1994, there were already four
harvests. During pre-trial, it was admitted by Alagao that she did not only receive P40,000 as provided in the contract of loan but
P51,730 in the form of fertilizers and cash advances. 9
On September 9, 1994, Alagao and some companions delivered 398 sacks of corn grains to petitioner. Petitioner prepared a
voucher indicating that Alagao had received the amount of P85,607 as full payment for the 398 sacks of corn grains. Alagao
signed said voucher even if she only received P3,000.10 According to Alagao, 64 of the 398 sacks will serve as partial payment of
her P40,000 loan with petitioner while the remaining balance will come from the P85,607 cash she was supposed to receive as
payment for the corn grains delivered so she can redeem her daughters land title. 11
On March 16, 1999, the Regional Trial Court (RTC) of Misamis Oriental, Branch 40, rendered a decision 12 finding petitioner guilty
beyond reasonable doubt of the crime of estafa. The fallo of the RTC decision reads:
WHEREFORE, IN VIEW OF THE FOREGOING PREMISES, accused Adelaida Soriano is hereby found guilty beyond reasonable
doubt of the crime of Estafa as defined and penalized under Article 315, par. 2(a) of the Revised Penal Code, and is hereby
sentenced to suffer imprisonment of Four (4) Years, Two (2) Months and One (1) day of Prision Correccional, as minimum, to
Thirteen (13) Years, Four (4) Months of Reclusion Temporal, as maximum and, is hereby further ordered to pay the offended party
in this case the amount of P85,607.00 representing the value of the 398 sacks of corn grains. Costs against the accused.
SO ORDERED.13
Petitioners conviction, however, was set aside by the CA in the assailed decision. The CA disposed as follows:
WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court of Misamis Oriental, Branch 40, dated 16
March 1999 in Criminal Case No. 95-41 is REVERSED and SET ASIDE. Appellant ADELAIDA SORIANO is ACQUITTED of the
crime charged on the ground of reasonable doubt. However, Appellant ADELAIDA SORIANO is hereby ordered to pay private
complainant CONSOLACION R. ALAGAO the sum of seventy-four thousand, eight hundred seven pesos ( P74,807.00) as
payment for the remaining balance of the cash value of the 398 sacks of corn grains, plus, legal interest at the rate of 12% per
annum computed from 9 September 1994 until fully paid.
SO ORDERED.14
The CA ruled that the prosecution failed to establish that petitioner made false pretenses, fraudulent acts or fraudulent means to
induce Alagao to deliver to her the 398 sacks of corn grains. In fact, in Alagaos testimony, she admitted that she delivered the
corn grains to petitioner because the latter was demanding payment from her and she wanted to pay her obligation of P40,000 to
petitioner so that she couId.get back the title of her daughters mortgaged property and the balance of the total cash value of the
398 sacks of corn. Thus, the CA heId. in the absence of deceit, petitioners liability is only civil.
In determining petitioners civil liability, the CA deducted from P85,607 the total value of the 398 sacks of corn grains delivered to
petitioner the P3,000 petitioner had paid Alagao and the P7,800 which the CA considered as the value of the 64 sacks of corn
grains which Alagao intended as partial payment for the P40,000 loan, thus leaving the balance of P74,807.
Unsatisfied, petitioner is now before this Court questioning her civil liability. She assigns to the CA the following errors:
1)
The Court of Appeals committed error in the computation of petitioners civil liability as it failed to apply correctly the principle of
set-off or compensation.
2)

The Court of Appeals, in applying set-off or compensation, erroneously placed private complainants indebtedness to petitioner at
P40,000.00 instead of P51,730.00 as found by it and as stipulated during pre-trial.
3)
The Court of [A]ppeals omitted to off-set the amount equivalent to share of the harvest (or P57,200.00) against petitioners
indebtedness to private complainant in the amount of P85,607.00 despite admission by private complainant. 15
Petitioner argues that while the CA found her indebted to Alagao in the sum of P85,607, it only offset P40,000 instead of P51,730
which was the amount stipulated during pre-trial. Petitioner contends that the compensation should be as follows:
Petitioners indebtedness:
85,607.00 (value of 398 sacks)
- 3,000.00 (cash payment)
82,607.00

[Alagaos] Indebtedness:
51,730.00 (instead of P40,000.00)
- 7,800.00 (value of 64 sacks)
43,930.00

- 7,800.00 (value of 64 sacks)

74,807.00 (as correctly found by
the Court of Appeals)16
Thus, deducting Alagaos indebtedness of P43,930 from petitioners indebtedness amounting to P74,807, petitioners remaining
indebtedness shouId.only be P30,877.
Petitioner likewise argues that the CA also failed to consider Alagaos obligation to deliver to her of every harvest. Petitioner
claims that her share in the harvest amounted to P57,200 for four harvests. Therefore, applying the principle of set off, it is
Alagao who is indebted to petitioner in the amount of P26,323 (P57,200 minus P30,877).
Respondent on the other hand contends that the amount of loan extended to Alagao was P40,000 and not P51,730 as claimed by
petitioner. Moreover, the entire value of the 398 sacks of corn grains shouId.not be set off with Alagaos loan since (1) the loan
was not yet due and demandable at the time of delivery of the 398 sacks of corn grains in September 1994; and (2) only 154 of
the 398 sacks of corn grains belong to Alagao. Respondent also claims that P13,765.9517 should be considered as the correct
value of the 64 sacks intended by Alagao as partial payment for the loan and not P7,800 as found by the CA.
The petition is partly meritorious.
Compensation is a mode of extinguishing to the concurrent amount, the debts of persons who in their own right are creditors and
debtors of each other. The object of compensation is the prevention of unnecessary suits and payments through the mutual
extinction by operation of law of concurring debts. 18 Article 1279 of the Civil Code provides for the requisites for compensation to
take effect:
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time
to the debtor.
This Court rules that all the above requisites for compensation are present in the instant case.
First, petitioner and Alagao are debtors and creditors of each other. It is undisputable that petitioner and Alagao owe each other
sums of money. Petitioner owes P85,607 for the value of the corn grains delivered to her by Alagao in September 1994 while
Alagao owes petitioner P51,730 by virtue of a loan extended by the latter in February 1994.
Second, both debts consist in a sum of money. There is no issue as to the P85,607 debt by petitioner that it consists a sum of
money. As to the P51,730 received by Alagao from petitioner, though what was extended by petitioner consists of cash advances
and fertilizers, there is no dispute that said amount is payable in money.
Third, both debts are due. Upon delivery of the 398 sacks to petitioner, she was under the obligation to pay for the value thereof
as buyer. As to Alagaos debt, the contract of loan provided that it is payable in February 1996. Though it was not yet due in
September 1994 when she delivered the 398 sacks of corn grains to petitioner, it eventually became due at the time of trial of the
instant case.
Fourth, both debts are liquidated and demandable.1wphi1 A debt is liquidated when the amount is known or is determinable by
inspection of the terms and conditions of relevant documents. 19 There is no dispute that the value of the 398 sacks of corn grains
is P85,607. As to Alagaos debt, we disagree with respondent People that the loan amount is only P40,000 since during pre-trial,
Alagao herself admitted that she did not only receive P40,000 but P51,730 in the form of cash advances and fertilizers from
petitioner. It is well settled that an admission made in a stipulation of facts at pre-trial by the parties is considered a judicial
admission and, under the Rules of Court, requires no proof. Such admission may be controverted only by a showing that it was
made through a palpable mistake or that no such admission was made. 20
And lastly, neither of the debts are subject of a controversy commenced by a third person. There are no third-party claims with
respect to Alagaos P51,730 loan. As to petitioners P85,607 debt representing the 398 sacks of corn grains, Alagao claims that
she is not the sole owner of all the 398 sacks. This claim of Alagao, however, was never substantiated and a perusal of the
information for estafa shows that the subject corn grains are all owned by her. Moreover, the alleged other owners have not
commenced any action to protect their claim over it. Thus, the P85, 607 debt cannot be considered subject of a controversy by a

third person.
With the presence of all the requisites mentioned in Article 1279, legal compensation took effect by operation of law as provided in
Article 1290 of the Civil Code, to wit:
ART. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.
Thus, the computation of petitioner's civil liability should be as follows:
Value of the 398 sacks of corn grains
Cash payment by petitioner upon delivery

85,607
- 3,000

82,607
Alagao's debt

- 51,730

Petitioner's net civil liability to Alagao

30.877
========

With respect to the 114 share in the harvest due to petitioner as provided in the contract of loan, the same cannot be considered in
the legal compensation of the debts of the parties since it does not consist in a sum of money, said share being in the form of
harvests. More importantly, it is not yet liquidated. There is still a dispute as to how many harvests were made from the time of the
execution of contract of loan up to the time the action was commenced against petitioner and even when the principal obligation
became due in February 1996. Thus, the harvests due petitioner is not capable of determination.
WHEREFORE, the May 19, 2005 Decision and January 11, 2008 Resolution of the Court of Appeals in CA-G.R. CR No. 23108
are hereby AFFIRMED with MODIFICATION. Petitioner Adelaida Soriano is hereby ordered to pay P30,877 as payment for the
remaining balance of the cash value of the 398 sacks of corn grains, plus legal interest at the rate of 6% 21 per annum computed
from finality of this Decision until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 164985

January 15, 2014

FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR CONSTRUCTION CORPORATION, Petitioners,
vs.
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the applicability of the legal principles of recoupment and compensation.
The Case
Under review is the decision promulgated on July 26, 2004, 1 whereby the Court of Appeals CA) affirmed the judgment rendered on
May 14 1996 by the Regional Trial Court, Branch 107, in Quezon City adjudging the petitioners defendants) liable to pay to the
respondent plaintiff) various sums of money and damages. 2
Antecedents
Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction Corporation (Blue Star) were
associate construction firms sharing financial resources, equipment and technical personnel on a case-to-case basis. From May
27, 1992 to July 8, 1992, they ordered six units of dump trucks from the respondent, a domestic corporation engaged in the
business of importing and reconditioning used Japan-made trucks, and of selling the trucks to interested buyers who were mostly
engaged in the construction business, to wit:
TO WHOM
DELIVERY

DATE OF DELIVERY

Isuzu Dump Truck

FUCC

27 May 1992

Isuzu Dump Truck

FUCC

27 May 1992

Isuzu Dump Truck

FUCC

10 June 1992

Isuzu Dump Truck

FUCC

18 June 1992

Isuzu Dump Truck

Blue Star

4 July 1992

Isuzu Dump Truck

FUCC

8 July 1992

The parties established a good business relationship, with the respondent extending service and repair work to the units
purchased by the petitioners. The respondent also practiced liberality towards the petitioners in the latters manner of payment by
later on agreeing to payment on terms for subsequent purchases.

On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that the respondent delivered on the
same date. On September 29, 1992, FUCC again ordered from the respondent one unit of Isuzu Transit Mixer that was also
delivered to the petitioners. For the two purchases, FUCC partially paid in cash, and the balance through post-dated checks, as
follows:
BANK/CHECK NO.

DATE

AMOUNT

Pilipinas Bank 18027379

23 November 1992

360,000.00

Pilipinas Bank 18027384

1 December 1992

375,000.00

Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment stopped. The
respondent immediately demanded the full settlement of their obligation from the petitioners, but to no avail. Instead, the
petitioners informed the respondent that they were withholding payment of the checks due to the breakdown of one of the dump
trucks they had earlier purchased from respondent, specifically the second dump truck delivered on May 27, 1992.
Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993, seeking payment of the unpaid
balance in the amount of P735,000.00 represented by the two checks.
In their answer, the petitioners averred that they had stopped the payment on the two checks worth P735,000.00 because of the
respondents refusal to repair the second dump truck; and that they had informed the respondent of the defects in that unit but the
respondent had refused to comply with its warranty, compelling them to incur expenses for the repair and spare parts. They
prayed that the respondent return the price of the defective dump truck worth P830,000.00 minus the amounts of their two checks
worth P735,000.00, with 12% per annum interest on the difference of P90,000.00 from May 1993 until the same is fully paid; that
the respondent should also reimburse them the sum of P247,950.00 as their expenses for the repair of the dump truck, with 12%
per annum interest from December 16, 1992, the date of demand, until fully paid; and that the respondent pay exemplary
damages as determined to be just and reasonable but not less than P500,000, and attorneys fees of P50,000 plus P1,000.00 per
court appearance and other litigation expenses.
It was the position of the respondent that the petitioners were not legally justified in withholding payment of the unpaid balance of
the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer due the alleged defects in second dump truck because
the purchase of the two units was an entirely different transaction from the sale of the dump trucks, the warranties for which
having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its judgment, 3 finding the petitioners liable to pay for the unpaid balance of the purchase
price of the Hino Prime Mover and the Isuzu Transit Mixer totaling P735,000.00 with legal interest and attorneys fees; and
declaring the respondent liable to pay to the petitioners the sum of P71,350.00 as costs of the repairs incurred by the petitioners.
The RTC held that the petitioners could not avail themselves of legal compensation because the claims they had set up in the
counterclaim were not liquidated and demandable. The fallo of the judgment states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum of P360,000.00 and P375,000.00 with interest at the legal rate
of 12% per annum computed from February 11, 1993, which is the date of the first extrajudicial demand, until fully paid;
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent to 10% of the principal amount due, for
attorneys fees;
3. On the counterclaim, ordering plaintiff to pay defendants the sum of P71,350.00 with interest at the legal rate of 12% per annum
computed from the date of this decision until fully paid;
4. Ordering plaintiff to pay the defendants attorneys fees equivalent to 10% of the amount due;
5. No pronouncement as to costs.
SO ORDERED.4
Decision of the CA
The petitioners appealed, stating that they could justifiably stop the payment of the checks in the exercise of their right of
recoupment because of the respondents refusal to settle their claim for breach of warranty as to the purchase of the second dump
truck.
In its decision promulgated on July 26, 2004, 5 however, the CA affirmed the judgment of the RTC. It held that the remedy of
recoupment could not be properly invoked by the petitioners because the transactions were different; that the expenses incurred
for the repair and spare parts of the second dump truck were not a proper subject of recoupment because they did not arise out of
the purchase of the Hino Prime Mover and the Isuzu Transit Mixer; and that the petitioners claim could not also be the subject of
legal compensation or set-off, because the debts in a set-off should be liquidated and demandable.
Issues
The petitioners are now before the Court asserting in their petition for review on certiorari that the CA erred in:
I
x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT UNDER PAR. (1) OF ART. 1599 OF THE CIVIL
CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES AVAILABLE TO A BUYER AGAINST A SELLERS BREACH OF
WARRANTY.
II
x x x RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION ALLEGEDLY BECAUSE THEIR CLAIMS AGAINST
RESPONDENT ARE NOT LIQUIDATED AND DEMANDABLE.

III
x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL INTEREST COMPUTED FROM THE FIRST
EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY DAMAGES.6
The petitioners submit that they were justified in stopping the payment of the two checks due to the respondents breach of
warranty by refusing to repair or replace the defective second dump truck earlier purchased; that the withholding of payments was
an effective exercise of their right of recoupment as allowed by Article 1599(1) of the Civil Code; due to the sellers breach of
warranty that the CAs interpretation (that recoupment in diminution or extinction of price in case of breach of warranty by the
seller should refer to the reduction or extinction of the price of the same item or unit sold and not to a different transaction or
contract of sale) was not supported by jurisprudence; that recoupment should not be restrictively interpreted but should include the
concept of compensation or set-off between two parties who had claims arising from different transactions; and that the series of
purchases and the obligations arising therefrom, being inter-related, could be considered as a single and ongoing transaction for
all intents and purposes.
The respondent counters that the petitioners could not refuse to pay the balance of the purchase price of the Hino Prime Mover
and the Isuzu Transit Mixer on the basis of the right of recoupment under Article 1599 of the Civil Code; that the buyers remedy of
recoupment related only to the same transaction; and that compensation was not proper because the claims of the petitioners as
alleged in their counterclaim were not liquidated and demandable.
There is no longer any question that the petitioners were liable to the respondent for the unpaid balance of the purchase price of
the Hino Prime Mover and the Isuzu Transit Mixer. What remain to be resolved are strictly legal, namely: one, whether or not the
petitioners validly exercised the right of recoupment through the withholding of payment of the unpaid balance of the purchase
price of the Hino Prime Mover and the Isuzu Transit Mixer; and, two, whether or not the costs of the repairs and spare parts for the
second dump truck delivered to FUCC on May 27, 1992 could be offset for the petitioners obligations to the respondent.
Ruling
We affirm the decision of the CA with modification.
1.
Petitioners could not validly resort to recoupment against respondent
Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by means of a legal or
equitable right resulting from a counterclaim arising out of the same transaction. 7 It is the setting up of a demand arising from the
same transaction as the plaintiffs claim, to abate or reduce that claim.
The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil Code, viz:
Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:
(1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or
extinction of the price;
(2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to
return them to the seller and recover the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted,
without prejudice to the provisions of the second paragraph of article 1191. (Emphasis supplied)
xxxx
In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case, explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment in diminution or extinction of price in
case of breach of warranty by the seller should therefore be interpreted as referring to the reduction or extinction of the price of the
same item or unit sold and not to a different transaction or contract of sale. This is more logical interpretation of the said article
considering that it talks of breach of warranty with respect to a particular item sold by the seller. Necessarily, therefore, the buyers
remedy should relate to the same transaction and not to another.
Defendants-appellants act of ordering the payment on the prime mover and transit mixer stopped was improper considering that
the said sale was a different contract from that of the dump trucks earlier purchased by defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair and spare parts of dump truck no.
2 is therefore not a proper subject of recoupment since it does not arise out of the contract or transaction sued on or the claim of
plaintiff-appellee for unpaid balances on the last two (2) purchases, i. e. the prime mover and the transit mixer. 8
The CA was correct. It was improper for petitioners to set up their claim for repair expenses and other spare parts of the dump
truck against their remaining balance on the price of the prime mover and the transit mixer they owed to respondent.1avvphi1
Recoupment must arise out of the contract or transaction upon which the plaintiffs claim is founded. 9 To be entitled to
recoupment, therefore, the claim must arise from the same transaction, i.e., the purchase of the prime mover and the transit mixer
and not to a previous contract involving the purchase of the dump truck. That there was a series of purchases made by petitioners
could not be considered as a single transaction, for the records show that the earlier purchase of the six dump trucks was a
separate and distinct transaction from the subsequent purchase of the Hino Prime Mover and the Isuzu Transit Mixer.
Consequently, the breakdown of one of the dump trucks did not grant to petitioners the right to stop and withhold payment of their
remaining balance on the last two purchases.
2.
Legal compensation was permissible

Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of the Civil Code are present, to
wit:
Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other."
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time
to the debtor.
As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled that they could not because the
claims of petitioners against respondent were not liquidated and demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount of P71,350.00 stated in their counterclaim, and the CA
concurred in the finding, stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. "1") defendants were charging plaintiff only for the following items of
repair:
1. Cost of repair and spare parts 2. Cost of repair and spare parts -

46,800.00
24,550.00

71,350.00
Said amounts may be considered to have been spent for repairs covered by the warranty period of three (3) months. While the
invoices (Exhs. "2-B" and "3-A") dated September 26, 1992 and September 18, 1992, this delay in repairs is attributable to the fact
that when defects were brought to the attention of the plaintiff in the letter of August 14, 1992 (Exh. "8") which was within the
warranty period, the plaintiff did not respond with the required repairs and actual repairs were undertaken by defendants.
Thereafter, the spare parts covered by Exhibits "2-B" and "3-A" pertain to the engine, which was covered by the warranty.
x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded correction of defects. In their letter of August 22, 1992
(Exh. "9") they demanded replacement. In their letter of August 27, 1992 (Exh. "10"), they demanded replacement/repair. In
September, 1992, they undertook repairs themselves (Exhs. "2-B" and "3-A") and demanded payment for the expenses in their
letter of December 16, 1992 (Exh. "1"). All other items of expenses connected with subsequent breakdowns are no longer
chargeable to plaintiff which granted only a 3-month warranty. x x x 10
Considering that preponderant evidence showing that petitioners had spent the amount of P71,350.00 for the repairs and spare
parts of the second dump truck within the warranty period of three months supported the finding of the two lower courts, the Court
accepts their finding. Verily, factual findings of the trial court, when affirmed by the CA, are conclusive on the Court when
supported by the evidence on record.11
A debt is liquidated when its existence and amount are determined. 12 Accordingly, an unliquidated claim set up as a counterclaim
by a defendant can be set off against the plaintiffs claim from the moment it is liquidated by judgment. 13 Article 1290 of the Civil
Code provides that when all the requisites mentioned in Article 1279 of the Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount. With petitioners expenses for the repair of the dump truck
being already established and determined with certainty by the lower courts, it follows that legal compensation could take place
because all the requirements were present. Hence, the amount of P71,350.00 should be set off against petitioners unpaid
obligation of P735,000.00, leaving a balance of P663,650.00, the amount petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial and appellate courts.1wphi1 The legal interest rate to be
imposed from February 11, 1993, the time of the extrajudicial demand by respondent, should be 6% per annum in the absence of
any stipulation in writing in accordance with Article 2209 of the Civil Code, which provides:
Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects subject to the MODIFICATION that
petitioners are ordered, jointly and severally, to pay to respondent the sum of 1 663,650.00, plus interest of 6% per annum
computed from February
11, 1993, the date of the first extrajudicial demand, until fully paid; and ORDERS the petitioners to pay the costs of suit.
SO ORDERED.

G.R. No. 172020

December 6, 2010

TRADERS ROYAL BANK, Petitioner,

vs.
NORBERTO CASTAARES and MILAGROS CASTAARES, Respondents.

DECISION
VILLARAMA, JR., J.:
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the Decision 1 dated
January 11, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint Decision 2 dated August 26,
1998 of the Regional Trial Court (RTC) of Cebu City, Branch 13 in Civil Case Nos. R-22608 and CEB-112.
The Facts
Respondent-spouses Norberto and Milagros Castaares are engaged in the business of exporting shell crafts and other
handicrafts. Between 1977 and 1978, respondents obtained from petitioner Traders Royal Bank various loans and credit
accommodations. Respondents executed two real estate mortgages (REMs) dated April 18, 1977 and January 25, 1978 covering
their properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 and T-37191). As evidenced by Promissory Note No. BD-77-113
dated May 10, 1977, petitioner released only the amount of P35,000.00 although the mortgage deeds indicated the principal
amounts as P86,000.00 and P60,000.00.3
Respondents were further granted additional funds on various dates under promissory notes 4 they executed in favor of the
petitioner:
Type of Loan

Date Granted

Amount

Packing Credit

May 10, 1977

P19,000.00

Packing Credit

May 18, 1977

P25,000.00

Packing Credit

June 23, 1977

P12,500.00

Packing Credit

August 19, 1977

P 2,900.00

Packing Credit

April 4, 1978

P18,000.00

Packing Credit

April 19, 1978

P23,000.00

On June 22, 1977, petitioner transferred the amount of P1,150.00 from respondents current account to their savings account,
which was erroneously posted as P1,500.00 but later corrected to reflect the figure P1,150.00 in the savings account passbook.
By the second quarter of 1978, the loans began to mature and the letters of credit against which the packing advances were
granted started to expire. Meanwhile, on December 7, 1979, petitioner, without notifying the respondents, applied to the payment
of respondents outstanding obligations the sum of $4,220.00 or P30,930.49 which was remitted to the respondents thru
telegraphic transfer from AMROBANK, Amsterdam by one Richard Wagner. The aforesaid entries in the passbook of respondents
and the $4,220.00 telegraphic transfer were the subject of respondents letter-complaint 5 dated September 20, 1982 addressed to
the Manager of the Regional Office of the Central Bank of the Philippines.
For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded with the extrajudicial foreclosure
of the real estate mortgages. 6 Thereafter, a Certificate of Sale 7 covering all the mortgaged properties was issued by Deputy Sheriff
Wilfredo P. Borces in favor of petitioner as the lone bidder for P117,000.00 during the auction sale conducted on November 24,
1981. Said certificate of sale was registered with the Office of the Register of Deeds on February 4, 1982.
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency judgment, claiming that after applying the
proceeds of foreclosure sale to the total unpaid obligations of respondents (P200,397.78), respondents were still indebted to
petitioner for the sum of P83,397.68.8 Respondents filed their Answer With Counterclaim on December 27, 1982. 9
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of the sums of P2,584.27 debited from their
savings account passbook and the equivalent amount of $4,220.00 telegraphic transfer, and in addition, $55,258.85 representing
the damage suffered by the respondents from letters of credit left un-negotiated because of petitioners refusal to pay the
$4,220.00 demanded by the respondents.10
The cases were consolidated before Branch 13, RTC of Cebu City.
Ruling of the RTC
In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the petitioner, as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case No. R-22608 in favor of the plaintiff and
against the defendants directing the defendants jointly and solidarily to pay plaintiff the sum of P83,397.68 with legal rate of
interest to be computed from November 24, 1981 (the date of the auction sale) until full payment thereof. They are likewise
directed to pay plaintiff attorneys fees in the sum of P10,000.00 plus litigation expenses in the amount of P2,500.00.
With cost against defendants.
In CEB-112, judgment is hereby rendered dismissing the complaint.
With cost against the plaintiff.
SO ORDERED.12
The trial court found that despite respondents insistence that the REM covered only a separate loan for P86,000.00 which they
believed petitioner committed to lend them, the evidence clearly shows that said REM was constituted as security for all the
promissory notes. No separate demand was made for the amount of P86,000.00 stated in the REM, as the demand was limited to
the amounts of the promissory notes. The trial court further noted that respondents never questioned the judgment for extrajudicial
foreclosure, the certificate of sale and the deficiency in that case. 13
With respect to the passbook entries, the trial court stated that no objection thereto was made by the respondents until five years
later when in a letter dated August 10, 1982, respondents counsel asked petitioner to be enlightened on the matter. Neither did
respondents protest the application of the balance (P1,150.00) in the passbook to his account with petitioner. More important,
respondent Norberto Castaares in his testimony admitted that the matter was already clarified to him by petitioner and that the

latter had the right to apply his deposit to his loan accounts. Admittedly, his complaint has to do more with the lack of consent on
his part and the non-issuance of official receipt. However, he did not follow up his request for official receipt as he did not want to
be going back and forth to the bank.14
CA Ruling
With the trial courts denial of their motion for reconsideration, respondents appealed to the CA. Finding merit in respondents
arguments, the appellate court set aside the trial courts judgment under its Decision 15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us GRANTING the appeal filed in this case and
REVERSING AND SETTING ASIDE the Joint Decision dated August 26, 1998, Regional Trial Court, 7th Judicial Region, Branch
13, in Civil Case No. R-22608 and Civil Case No. CEB-112. With regard to Civil Case No. R-22608, the real estate mortgage
dated April 18, 1977 is hereby DECLARED as valid in part as to the amount of P35,000.00 actually released in favor of appellants,
while the real estate mortgage dated January 26, 1978 is hereby declared as null and void. Furthermore, in Civil Case No. CEB112, TRB is hereby ordered to release the amount of US$4,220.90 to the appellants at its current rate of exchange. No
pronouncement as to costs.
SO ORDERED.16
The CA held that the RTC overlooked the fact that there were no adequate evidence presented to prove that petitioner released in
full to the respondents the proceeds of the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate Court 17 and
Naguiat v. Court of Appeals,18 the appellate court declared that where there was failure of the mortgagee bank to deliver the
consideration for which the mortgage was executed, the contract of loan was invalid and consequently the accessory contract of
mortgage is likewise null and void. In this case, only P35,000.00 out of the P86,000.00 stated in the REM dated April 18, 1977 was
released to respondents, and hence the REM was valid only to that extent. For the same reason, the second REM was null and
void since no actual loan proceeds were released to the respondents-mortgagors. The REMs are not connected to the
subsequent promissory notes because these were signed by respondents for the sole purpose of securing packing credits and
export advances. Further citing Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals, 19 the CA stated that the rule is that a
pledge, real estate mortgage or antichresis may exceptionally secure after-incurred obligations only as long as these debts are
accurately described therein. In this case, neither of the two REMs accurately described or even mentioned the securing of future
debts or obligations.20
The CA thus held that petitioners remedy would be to file a collection case on the unpaid promissory notes which were not
secured by the REMs.
As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis for withholding and applying the said amount to
respondents loan account. Said transaction was separate and distinct from the contract of loan between petitioner and
respondents. Petitioner had no authority to convert the said telegraphic transfer into cash since the participation of respondents
was necessary to sign and indorse the disbursement voucher and check. Moreover, petitioner was not transparent in its actions as
it did not inform the respondents of its intention to apply the proceeds of the telegraphic transfer to their loan account and worse, it
did not even present an official receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise known as the Foreign
Currency Deposit Act, provides that there shall be no restriction on the withdrawability by the depositor of his deposit or the
transferability of the same abroad except those arising from contract between the depositor and the bank. 21
The Petition
Petitioner raised the following grounds in the review of the CA decision:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID
ONLY IN PART TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE AMOUNT PROVED TO HAVE BEEN
ACTUALLY RELEASED TO RESPONDENTS OUT OF THE SUM OF PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID THE REAL ESTATE MORTGAGE DATED 26
JANUARY 1978 IN THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF THE RESPONDENTS.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD NO BASIS IN WITHHOLDING AND
SUBSEQUENTLY APPLYING IN PAYMENT OF RESPONDENTS OVERDUE ACCOUNT IN THE TELEGRAPHIC TRANSFER IN
THE AMOUNT OF U.S.$4,220.00.22
Petitioner contends that the CA overlooked the specific stipulation in the REMs that the mortgage extends not only to the amounts
specified therein but also to loans or credits subsequently granted, which include the packing credits and export advances
obtained by the respondents. Moreover, the amounts indicated on the REMs need not exactly be the same amounts that should
be released and covered by checks or credit memos, the same being only the maximum sum or "ceiling" which the REM secures,
as explained by petitioners witness, Ms. Blesy Nemeo. Her testimony does not prove that the proceeds of the loans were not
released in full, as no credit memos in the specific amounts received by the respondents can be presented.
Petitioner argues that the rulings cited by the CA do not at all support its conclusion that the promissory notes were totally
unrelated to the REMs. In the Acme case, the pronouncement was that the after-incurred obligations must, at the time they are
contracted, only be accurately described in a proper instrument as in the case of a promissory note. The confusion was brought by
the use in the CA decision of the word "therein" which is not found in the text of the Acme ruling. Besides, it is way too impossible
that future loans can be accurately described, as the CA opined, at the time that a deed of real estate mortgage is executed. The
CAs reliance on the case of Filipinas Marble Corporation, is likewise misplaced as it finds no application under the facts obtaining
in the present case. The misappropriation by some individuals of the loan proceeds secured by petitioner was the consideration
which compelled this Court to rule that there was failure on the part of DBP to deliver the consideration for which the mortgage
was executed. Similarly, the case of Naguiat is inapplicable in that there was evidence that an agent of the creditor withheld from
the debtor the checks representing the proceeds of the loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the telegraphic transfer in the sum of $4,220.00 against the
unpaid loan account of respondents. Citing Bank of the Philippine Islands v. Court of Appeals, 23 petitioner asserts that they are
bound principally as both creditors and debtors of each other, the debts consisting of a sum of money, both due, liquidated and
demandable, and are not claimed by a third person. Hence, the RTC did not err in holding that petitioner validly applied the
amount of P30,930.20 (peso equivalent of $4,220.00) to the loan account of the respondents.

Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and other credit accommodations obtained, from the Mortgagee by the
Mortgagor and/or SPS. NORBERTO V. CASTAARES & MILAGROS M. CASTAARES and to secure the payment of the same,
the principal of all of which is hereby fixed at EIGHTY-SIX THOUSAND PESOS ONLY (P86,000.00) Pesos, Philippine Currency,
as well as those that the Mortgagee may hereafter extend to the Mortgagor x x x, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and
records of the Mortgagee x x x.24 (Emphasis supplied.)
The above stipulation is also known as "dragnet clause" or "blanket mortgage clause" in American jurisprudence that would
subsume all debts of past and future origins. It has been held as a valid and legal undertaking, the amounts specified as
consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security, if from the four corners
of the instrument, the intent to secure future and other indebtedness can be gathered. A pledge or mortgage given to secure future
advancements is a continuing security and is not discharged by the repayment of the amount named in the mortgage until the full
amount of all advancements shall have been paid.25
A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without
their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.26 While a real estate mortgage may exceptionally secure future loans or advancements, these future
debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly
within the terms of the mortgage contract.27
In holding that the REMs were null and void, the CA opined that the full amount of the principal loan stated in the deed should
have been released in full, sustaining the position of the respondents that the promissory notes were not secured by the mortgage
and unrelated to it. However, a reading of the afore-quoted provision of the REMs shows that its terms are broad enough to cover
packing credits and export advances granted by the petitioner to respondents. That the respondents subsequently availed of
letters of credit and export advances in various amounts as reflected in the promissory notes, buttressed the claim of petitioner
that the amounts of P86,000.00 and P60,000.00 stated in the REMs merely represent the maximum total loans which will be
secured by the mortgage. This must be so as respondents confirmed that the mortgage was constituted for the purpose of
obtaining additional capital as dictated by the needs of their export business. Significantly, no complaint was made by the
respondents as to the non-release of P86,000.00 and P60,000.00, in full, simultaneous or immediately following the execution of
the REMs -- under a single promissory note each equivalent to the said sums -- and no demand for the said specific amounts was
ever made by the petitioner. Even the letter-complaint sent by respondents to the Central Bank almost a year after the extrajudicial
foreclosure sale mentioned only the questioned entries in their passbook and the $4,220.00 telegraphic transfer. Considering that
respondents deemed it a serious "banking malpractice" for petitioner not to release in full the loan amount stated in the REMs, it
can only be inferred that respondents themselves understood that the P86,000.00 and P60,000.00 indicated in the REMs was
intended merely to fix a ceiling for the loan accommodations which will be secured thereby and not the actual principal loan to be
released at one time. Thus, the RTC did not err in upholding the validity of the REMs and ordering the respondents to pay the
deficiency in the foreclosure sale to satisfy the remaining mortgage indebtedness.
The cases relied upon by the CA are all inapplicable to the present controversy.lawph!1 In Filipinas Marble Corporation, we held
that pending the outcome of litigation between DBP which together with Bancom officers were alleged by the petitioner-mortgagor
to have misspent and misappropriated the $5 million loan granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions
against foreclosures by government financial institutions, cannot be automatically applied. Foreclosure of the mortgaged
properties for the whole amount of the loan was deemed prejudicial to the petitioner, its employees and their families since the
true amount of the loan which was applied for the benefit of the petitioner can be determined only after a trial on the merits. 28 No
such act of misappropriation by corporate officers appointed by the mortgagee is involved in this case. Besides, the respondents
never denied receiving the amounts under the promissory notes which were all covered by the REMs and the very obligations
subject of the extrajudicial foreclosure.
As to the ruling in Naguiat, we found therein no compelling reason to disturb the lower courts finding that the lender did not remit
and the borrower did not receive the proceeds of the loan. Hence, we held the mortgage contract, being just an accessory
contract, as null and void for absence of consideration. 29 In this case, however, respondents admitted they received all the
amounts under the promissory notes presented by the petitioner. The consideration in the execution of the REMs consist of those
credit accommodations to fund their export transactions. Respondents as an afterthought raised issue on the nature of the
amounts of principal loan indicated in the REMs long after these obligations have matured and the mortgage foreclosed due to
their failure to fully settle their outstanding accounts with petitioner. Having expressly agreed to the terms of the REMs which are
phrased to secure all such loans and advancements to be obtained from petitioner, although the principal amount stated therein
were not released at one time and under several, not just one, subsequently issued promissory notes, respondents may not be
allowed to complain later that the amounts they received were unrelated to the REMs.
On the issue of the $4,220.00 telegraphic transfer which was applied by the petitioner to the loan account of respondents, we hold
that the CA erred in holding that petitioner had no authority to do so by way of compensation or set off. In this case, the parties
stipulated on the manner of such set off in case of non-payment of the amount due under each promissory note.
The subject promissory notes thus provide:
In case of non-payment of this note or any installments thereof at maturity, I/We jointly and severally, agree to pay an additional
amount equivalent to two per cent (2%) per annum of the amount due and demandable as penalty and collection charges, in the
form of liquidated damages, until fully paid; and the further sum of ten per cent (10%) thereof in full, without any deduction, as and
for attorneys fees whether actually incurred or not, exclusive of costs and judicial/extrajudicial expenses; moreover, I/We, jointly
and severally, further empower and authorize the TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply
to the payment of this note any and all funds, which may be in its hands on deposit or otherwise belonging to anyone or all of us,
and to hold as security therefor any real or personal property, which may be in its possession or control by virtue of any other
contract.30 (Emphasis supplied.)
Agreements for compensation of debts or any obligations when the parties are mutually creditors and debtors are allowed under

Art. 1282 of the Civil Code even though not all the legal requisites for legal compensation are present. Voluntary or conventional
compensation is not limited to obligations which are not yet due. 31 The only requirements for conventional compensation are (1)
that each of the parties can fully dispose of the credit he seeks to compensate, and (2) that they agree to the extinguishment of
their mutual credits.32 Consequently, no error was committed by the trial court in holding that petitioner validly applied, by way of
compensation, the $4,220.00 telegraphic transfer remitted by respondents foreign client through the petitioner.
WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of the Court of Appeals in CA-G.R. CV No. 67257
is REVERSED and SET ASIDE. The Joint Decision dated August 26, 1998 of the Regional Trial Court of Cebu City, Branch 13 in
Civil Case Nos. R-22608 and CEB-112 is REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-62169 February 28, 1983

MINDANAO PORTLAND CEMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, PACWELD STEEL CORPORATION and ATTY. CASIANO P. LAQUIHON respondents.
Tolentino, Garcia, Cruz Reyes Law Office for petitioner.
Casiano P. Laquihon for respondents.

TEEHANKEE, J.:
The Court of Appeals (now Intermediate Appellate Court) certified petitioner's appeal therein as defendant-appellant, docketed as
C.A.-G.R. No. 65102 thereof, to this Court as involving only questions of law in its Resolution of August 31, 1982, reading as
follows:
The 'Statement of the Case and the Statement of Facts' contained in appellant's brief follow:
STATEMENT OF FACTS
On January 3, 1978, one Atty. Casiano P. Laquihon, in behalf of third-party defendant Pacweld Steel Corporation (Pacweld for
short) as the latter's attorney, filed a pleading addressed to the defendant & Third-Party Plaintiff Mindanao Portland Cement
Corporation (MPCC) for short), herein appellant, entitled 'motion to direct payment of attorney's fee to counsel' (himself ), invoking
in his motion the fact that in the decision of the court of Sept. 14, 1976, MPCC was adjudged to pay Pacweld the sum of
P10,000.00 as attorney's fees (Record on Appeal, pp. 1, 6-9).
On March 14, 1978, MPCC filed an opposition to Atty. Laquihon's motion, stating, as grounds therefor, that said amount is set-off
by a like sum of P10,000.00 which it MPCC has collectible in its favor from Pacweld also by way of attorney's fees which MPCC
recovered from the same Court of First Instance of Manila (Branch XX) in Civil Case No. 68346, entitled Pacweld Steel
Corporation, et al. writ of execution to this effect having been issued by said court (Record on Appeal, pp, 2,10- 14).
On June 26, 1978 the court issued the order appealed from (Record on Appeal, pp. 24-25) and despite MPCCs motion for
reconsideration of said order, citing the law applicable and Supreme Court decisions (Record on Appeal, pp. 26-33), denied the
same in its order of August 28, 1978 (Record on Appeal, p. 37), also subject matter of this appeal.
The writ of execution referred to above which MPCC has invoked to set- off the amount sought to be collected by Pacweld through
the latter's lawyer, Atty. Casiano P. Laquihon, is hereunder quoted in full.
In his brief, appellee comments that the statements in appellant's brief are 'substantially correct,' as follows:
STATEMENT OF THE CASE
This is an appeal from the Order of the Court of First Instance of Manila (Branch X dated June 26, 1978 ordering the appellant
(MINDANAO PORTLAND CEMENT CORPORATION) to pay the amount of P10,000.00 attorney's fees directly to Atty. Casiano B.
Laquihon (Record on Appeal, pp. 24-25) and from the Order dated August 28, 1978 denying appellant's motion for reconsideration
(Record on Appeal, p. 37).
There was no trial or submission of documentary evidence. Against the orders of June 26. 1978, and August 28, 1978, appellant
has brought this appeal to this Court, contending that:
The lower court erred in not holding that the two obligations are extinguished reciprocally by operation of law.' (p. 6, Appellant's
Brief)
This appeal calls for the application of Arts. 1278, 1279 and 1290 of the Civil Code, as urged by the appellant. Another question is:
The judgment in Civil Case No. 75179 being already final at the time the motion under consideration was filed, does not the order
of June 26, 1976 constitute a change or alteration of the said judgment, though issued by the very same court that rendered the
judgment?
WHEREFORE, since only questions of law are involved and there is no factual issue left for us to determine, let the records of the
appeal in this case be certified to the Honorable Supreme Court for determination.
After considering the briefs of the parties in the appellate court and the additional pleadings required of them by this Court, the
Court finds merit in the appeal and sets aside the appealed orders of June 26 and August 28, 1978 of the Court of First Instance
(now Regional Trial Court) of Manila, Branch XX.
It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent

Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each other consisting in final and
executory judgments of the Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of
P10,000.00 by way of attorney's fees. The two (2) obligations, therefore, respectively offset each other, compensation having
taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions
of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic
compensation "even though the creditors and debtors are not aware of the compensation" were duly present.**
Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the judgment of September
14, 1976 against Mindanao Portland Cement Corporation so as to make the award therein of P10,000.00 as attorney's fees
payable directly to himself as counsel of Pacweld Steel Corporation instead of payable directly to said corporation as provided in
the judgment, which had become final and executory long before the issuance of said "amendatory" order was a void alteration of
judgment. It was a substantial change or amendment beyond the trial court's jurisdiction and authority and it could not defeat the
compensation or set-off of the two (2) obligations of the corporations to each other which had already extinguished both debts by
operation of law.
ACCORDINGLY. the appealed orders are hereby annulled and set aside. No costs.

G.R. No. 191555

January 20, 2014

UNION BANK OF THE PHILIPPINES, Petitioner,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on Certiorari 1 are the Decision2 dated November 3, 2009 and Resolution3 dated February 26,
2010 of the Court of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed the Orders 4 dated November 9, 2005 and January 30,
2006 of the Regional Trial Court of Makati, Branch 58 5 (RTC) in Civil Case No. 7648 denying the motion to affirm legal
compensation6 filed by petitioner Union Bank of the Philippines (Union Bank) against respondent Development Bank of the
Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks predecessor-in-interest, Bancom Development
Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of Debt 7 (dacion en pago)
whereby the former ceded in favor of the latter certain properties (including a processing plant in Marilao, Bulacan [processing
plant]) in consideration of the following: (a) the full and complete satisfaction of FIs loan obligations to DBP; and (b) the direct
assumption by DBP of FIs obligations to Bancom in the amount of P17,000,000.00 (assumed obligations).8
On the same day, DBP, as the new owner of the processing plant, leased back 9 for 20 years the said property to FI (Lease
Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement10 with Bancom (Assumption Agreement) whereby the former: (a) confirmed its
assumption of FIs obligations to Bancom; and (b) undertook to remit up to 30% of any and all rentals due from FI to Bancom
(subject rentals) which would serve as payment of the assumed obligations, to be paid in monthly installments. The pertinent
portions of the Assumption Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom which DBP has
assumed shall be settled, paid and/or liquidated by DBP out of a portion of the lease rentals or part of the proceeds of sale of
those properties of the Assignors conveyed to DBP pursuant to the [Deed of Cession of Property in Payment of Debt dated May
21, 1979] and which are the subject of [the Lease Agreement] made and executed by and between DBP and [FI], the last
hereafter referred to as the "Lessee" to be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from the Lessee pursuant to the
Lease Agreement shall be remitted by DBP to Bancom at the latters offices at Pasay Road, Makati, Metro Manila within five (5)
days from due dates thereof, and applied in payment of the Assumed Obligations. Likewise, the amount up to 30% of the
proceeds from any sale of the Leased Properties shall within the same period above, be remitted by DBP to Bancom and applied
in payment or prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually received
by Bancom on the Leased Properties shall be paid by DBP to Bancom not later than December 29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc. (FW); 11
while on May 9, 1984, Bancom conveyed all its receivables, including, among others, DBPs assumed obligations, to Union
Bank.12
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed, on June 20, 1984, a
collection case against DBP before the RTC, docketed as Civil Case No. 7648. 13 In opposition, DBP countered, among others,
that the obligations it assumed were payable only out of the rental payments made by FI. Thus, since FI had yet to pay the same,
DBPs obligation to Union Bank had not arisen.14 In addition, DBP sought to implead FW as third party-defendant in its capacity as
FIs assignee and, thus, should be held liable to Union Bank. 15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be a real-party-in-interest due
to the supervening transfer of its rights, title and interests over the subject matter to the Asset Privatization Trust (APT). Said
motion was, however, denied by the RTC in an Order dated May 27, 1988. 16

The RTC Ruling in Civil Case No. 7648

Finding the complaint to be meritorious, the RTC, in a Decision 17 dated May 8, 1990, ordered: (a) DBP to pay Union Bank the sum
of P4,019,033.59, representing the amount of the subject rentals (which, again, constitutes 30% of FIs [now FWs] total rental
debt), including interest until fully paid; and (b) FW, as third-party defendant, to indemnify DBP, as third- party plaintiff, for its
payments of the subject rentals to Union Bank. It ruled that there lies no evidence which would show that DBPs receipt of the
rental payments from FW is a condition precedent to the formers obligation to remit the subject rentals under the Lease
Agreement. Thus, when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed obligations. 18 DBP then
elevated the case on appeal before the CA, docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTCs ruling, and consequently ordered: (a)
FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred under the Lease Agreement, including
P10,000.00 as attorneys fees; and (b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject
rentals) to Union Bank.20
It rejected Union Banks claim that DBP has the direct obligation to remit the subject rentals not only from FWs rental payments
but also out of its own resources since said claim contravened the "plain meaning" of the Assumption Agreement which specifies
that the payment of the assumed obligations shall be made "out of the portion of the lease rentals or part of the proceeds of the
sale of those properties of [FI] conveyed to DBP." 21 It also construed the phrase under the Assumption Agreement that DBP is
obligated to "pay any balance of the Assumed Obligations after application of the entire rentals and/or the entire sales proceeds
actually received by [Union Bank] on the Leased Properties . . . not later than December 29, 1998" to mean that the lease rentals
must first be applied to the payment of the assumed obligations in the amount of P17,000,000.00, and that DBP would have to
pay out of its own money only in case the lease rentals were insufficient, having only until December 29, 1998 to do so.
Nevertheless, the monthly installments in satisfaction of the assumed obligations would still have to be first sourced from said
lease rentals as stipulated in the assumption agreement. 22 In view of the foregoing, the CA ruled that DBP did not default in its
obligations to remit the subject rentals to Union Bank precisely because it had yet to receive the rental payments of FW.23
Separately, the CA upheld the RTCs denial of DBPs motion to dismiss for the reason that the transfer of its rights, title and
interests over the subject matter to the APT occurred pendente lite, and, as such, the substitution of parties is largely discretionary
on the part of the court.
At odds with the CAs ruling, Union Bank and DBP filed separate petitions for review on certiorari before the Court, respectively
docketed as G.R. Nos. 115963 and 119112, which were thereafter consolidated.
The Courts Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution24 dated December 13, 1995. First, it upheld the CAs finding that while DBP
directly assumed FIs obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the lease rentals collected
from FW, from which any deficiency was to be settled by DBP not later than December 29, 1998. 25 Similarly, the Court agreed with
the CA that the denial of DBPs motion to dismiss was proper since substitution of parties, in case of transfers pendente lite, is
merely discretionary on the part of the court, adding further that the proposed substitution of APT will amount to a novation of
debtor which cannot be done without the consent of the creditor.26
On August 2, 2000, the Courts resolution became final and executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution 28 before the RTC, praying that DBP be directed to pay the amount of
P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the FWs total rental debt in the amount of
P32,441,401.85). DBP opposed29 Union Banks motion, contending that it sought to effectively vary the dispositive portion of the
CAs May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on September 12, 2001, DBP filed its own motion for execution
against FW, citing the same CA decision as its basis.
In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC granted both motions for execution. Anent Union
Banks motion, the RTC opined that the CAs ruling that DBPs payment to Union Bank shall be demandable only upon payment of
FW must be viewed in light of the date when the same was rendered. It noted that the CA decision was promulgated only on May
27, 1994, which was before the December 29, 1998 due date within which DBP had to fully pay its obligation to Union Bank under
the Assumption Agreement. Since the latter period had already lapsed, "[i]t would, thus, be too strained to argue that payment by
DBP of its assumed obligation[s] shall be dependent on [FWs] ability, if not availability, to pay." 31 In similar regard, the RTC
granted DBPs motion for execution against FW since its liability to Union Bank and DBP remained undisputed.
As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of Execution) and, thereafter, a notice of
garnishment33 against DBP were issued. Records, however, do not show that the same writ was implemented against FW.
DBP filed a motion for reconsideration34 from the Execution Order, averring that the latter issuance varied the import of the CAs
May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered DBP to pay the assumed obligations to Union
Bank before FWs payment. The motion was, however, denied on December 5, 2001. 35 Thus, DBPs deposits were eventually
garnished.36 Aggrieved, DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R. SP No. 68300.
The CA Ruling in CA-G.R. SP No. 68300
In a Decision38 dated July 26, 2002, the CA dismissed DBPs petition, finding that the RTC did not abuse its discretion when it
issued the October 15, 2001 Writ of Execution. It upheld the RTCs observation that there was "nothing wrong in the manner how
[said writ] was implemented," as well as "in the zealousness and promptitude exhibited by Union Bank" in moving for the same.
DBP appealed the CAs ruling before the Court, which was docketed as G.R. No. 155838.
The Courts Ruling in G.R. No. 155838
In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBPs appeal, and thereby reversed and
set aside the CAs ruling in CA-G.R. SP No. 68300. It found significant points of variance between the CAs May 27, 1994 Decision
in CA-G.R. CV No. 35866, and the RTCs Order of Execution/October 15, 2001 Writ of Execution. It ruled that both the body and

the dispositive portion of the same decision acknowledged that DBPs obligation to Union Bank for remittance of the lease
payments is contingent on FWs prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the
Assumption Agreement cannot be determined until after the satisfaction of FWs own rental obligations to DBP. Accordingly, the
Court: (a) nullified the October 15, 2001 Writ of Execution and all related issuances thereto; and (b) ordered Union Bank to return
to DBP the amounts it received pursuant to the said writ. 40 Dissatisfied, Union Bank moved for reconsideration which was,
however, denied by the Court in a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained
finality on April 30, 2004.41 Thereafter, DBP moved for the execution of the said decision before the RTC. After numerous efforts
on the part of Union Bank proved futile, the RTC issued a writ of execution (September 6, 2005 Writ of Execution), ordering Union
Bank to return to DBP all funds it received pursuant to the October 15, 2001 Writ of Execution. 42
Union Banks Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation, 43 praying that the RTC apply
legal compensation between itself and DBP in order to offset the return of the funds it previously received from DBP. Union Bank
anchored its motion on two grounds which were allegedly not in existence prior to or during trial, namely: (a) on December 29,
1998, DBPs assumed obligations became due and demandable; 44 and (b) considering that FWI became non-operational and nonexistent, DBP became primarily liable to the balance of its assumed obligation, which as of Union Banks computation after its
claimed set-off, amounted to P1,849,391.87.45
On November 9, 2005, the RTC issued an Order46 denying the above-mentioned motion for lack of merit, holding that Union
Banks stated grounds were already addressed by the Court in the January 13, 2004 Decision in G.R. No. 155838. With Union
Banks motion for reconsideration therefrom having been denied, it filed a petition for certiorari 47 with the CA, docketed as CA-G.R.
SP No. 93833.
Pending resolution, Union Bank issued Managers Check48 No. 099-0003192363 dated April 21, 2006 amounting to
P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September 6, 2005 Writ of Execution. DBP, however,
averred that Union Bank still has a balance of P756,372.39 representing a portion of the garnished funds of DBP,49 which means
that said obligation had not been completely extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision50 dated November 3, 2009, the CA dismissed Union Banks petition, finding no grave abuse of discretion on the
RTCs part. It affirmed the denial of its motion to affirm legal compensation considering that: (a) the RTC only implemented the
Courts January 13, 2004 Decision in G.R. No. 155838 which by then had already attained finality; (b) DBP is not a debtor of
Union Bank; and (c) there is neither a demandable nor liquidated debt from DBP to Union Bank. 51
Undaunted, Union Bank moved for reconsideration which was, however, denied in a Resolution 52 dated February 26, 2010; hence,
the instant petition.
The Issue Before the Court
The sole issue for the Courts resolution is whether or not the CA correctly upheld the denial of Union Banks motion to affirm legal
compensation.
The Courts Ruling
The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons in their
capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable
obligations to which no retention or controversy has been timely commenced and communicated by third parties. 53 The requisites
therefor are provided under Article 1279 of the Civil Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time
to the debtor.1awp++i1 (Emphases and underscoring supplied)
The rule on legal54 compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all the requisites
mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware of the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order to effectively offset (a)
its own obligation to return the funds it previously received from DBP as directed under the September 6, 2005 Writ of Execution
with (b) DBPs assumed obligations under the Assumption Agreement. However, legal compensation could not have taken place
between these debts for the apparent reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since
DBPs assumed obligations to Union Bank for remittance of the lease payments are in the Courts words in its Decision dated
January 13, 2004 in G.R. No. 155838 " contingent on the prior payment thereof by [FW] to DBP," it cannot be said that both
debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling, the Court observed that any deficiency that
DBP had to make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the assumed
obligations " cannot be determined until after the satisfaction of Foodmasters obligation to DBP." In this regard, it cannot be
concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of Article 1279 of the
Civil Code).
The aforementioned Court decision had already attained finality on April 30, 2004 55 and, hence, pursuant to the doctrine of
conclusiveness of judgment, the facts and issues actually and directly resolved therein may not be raised in any future case
between the same parties, even if the latter suit may involve a different cause of action. 56 Its pertinent portions are hereunder

quoted for ready reference:57

Both the body and the dispositive portion of the [CAs May 27, 1994 Decision in CA-G.R. CV No. 35866] correctly construed the
nature of DBPs liability for the lease payments under the various contracts, to wit:
x x x Construing these three contracts, especially the "Agreement" x x x between DBP and Bancom as providing for the payment
of DBPs assumed obligation out of the rentals to be paid to it does not mean negating DBPs assumption "for its own account" of
the P17.0 million debt x x x. It only means that they provide a mechanism for discharging [DBPs] liability. This liability subsists,
since under the "Agreement" x x x, DBP is obligated to pay "any balance of the Assumed Obligations after application of the entire
rentals and or the entire sales proceeds actually received by [Union Bank] on the Leased Properties not later than December
29, 1998." x x x It only means that the lease rentals must first be applied to the payment of the P17 million debt and that [DBP]
would have to pay out of its money only in case of insufficiency of the lease rentals having until December 29, 1998 to do so. In
this sense, it is correct to say that the means of repayment of the assumed obligation is not limited to the lease rentals. The
monthly installments, however, would still have to come from the lease rentals since this was stipulated in the "Agreement."
xxxx
Since, as already stated, the monthly installments for the payment of the P17 million debt are to be funded from the lease rentals,
it follows that if the lease rentals are not paid, there is nothing for DBP to remit to [Union Bank], and thus [DBP] should not be
considered in default. It is noteworthy that, as stated in the appealed decision, "as regards plaintiffs claim for damages against
defendant for its alleged negligence in failing and refusing to enforce a lessors remedies against Foodmasters Worldwide, Inc.,
the Court finds no competent and reliable evidence of such claim."
xxxx
WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay defendant and third-party plaintiff-appellant
Development Bank of the Philippines the sum of P32,441,401.85, representing the unpaid rentals from August 1981 to June 30,
1987, as well as P10,000.00 for attorneys fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the Philippines after having been paid by third-party
defendant-appellee the sum of P32,441,401.85, to remit 30% thereof to plaintiff-appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the aforequoted decision acknowledged that DBPs obligation to Union
Bank for remittance of the lease payments is contingent on the prior payment thereof by Foodmasters to DBP.
A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme Court, found that only the
balance or the deficiency of the P17 million principal obligation, if any, would be due and demandable as of December 29, 1998.
Naturally, this deficiency cannot be determined until after the satisfaction of Foodmasters obligation to DBP, for remittance to
Union Bank in the proportion set out in the 1994 Decision. (Emphases and underscoring supplied; citations omitted)
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In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal compensation could
have taken place between the above-stated debts pursuant to Article 1290 of the Civil Code. Perforce, the petition must be
denied, and the denial of Union Bank s motion to affirm legal compensation sustained.
WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated February 26, 2010 of the
Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.
SO ORDERED.