Sagrada Orden vs NACOCO

Facts: The land in question belongs to plaintiff Sagrada Orden in whose name the title was registered
before the war

On January 4, 1943, during the Japanese military occupation, the land was acquired by a Japanese
corporation by the name of Taiwan Tekkosho

After liberation on April 4, 1946, the Alien Property Custodian of the United States of America took
possession, control, and custody of the property pursuant to the Trading with the Enemy Act

The property was occupied by the Copra Export Management Company under a custodian agreement
with US Alien Property Custodian. When it vacated the property, it was occupied by defendant National
Coconut Corporation

The plaintiff made claim to the said property before the Alien Property Custodian. Alien Property
Custodian denied such claim

It bought an action in court which resulted to the cancellation of the title issued in the name of Taiwan
Tekkosho which was executed under threats, duress, and intimidation; reissuance of the title in favor of
the plaintiff; cancellation of the claims, rights, title, interest of the Alien property Custodian; and
occupant National Coconut Corporations ejection from the property. A right was also vested to the
plaintiff to recover from the defendants rentals for its occupation of the land from the date it vacated.

Defendant contests the rental claims on the defense that it occupied the property in good faith and
under no obligation to pay rentals.

ISSUE: Whether or not the defendant is obliged to pay rentals to the plaintiff

Held: No, We can not understand how the trial court, from the mere fact that plaintiff-appellee was the
owner of the property and the defendant-appellant the occupant, which used for its own benefit but by
the express permission of the Alien Property Custodian of the United States, so easily jumped to the
conclusion that the occupant is liable for the value of such use and occupation. If defendant-appellant is
liable at all, its obligations, must arise from any of the four sources of obligations, namley, law, contract
or quasi-contract, crime, or negligence. (Article 1089, Spanish Civil Code.) Defendant-appellant is not
guilty of any offense at all, because it entered the premises and occupied it with the permission of the
entity which had the legal control and administration thereof, the Allien Property Administration. Neither
was there any negligence on its part. There was also no privity (of contract or obligation) between the
Alien Property Custodian and the Taiwan Tekkosho, which had secured the possession of the property
from the plaintiff-appellee by the use of duress, such that the Alien Property Custodian or its permittee
(defendant-appellant) may be held responsible for the supposed illegality of the occupation of the
property by the said Taiwan Tekkosho. The Allien Property Administration had the control and
administration of the property not as successor to the interests of the enemy holder of the title, the
Taiwan Tekkosho, but by express provision of law (Trading with the Enemy Act of the United States, 40
Stat., 411; 50 U.S.C.A., 189). Neither is it a trustee of the former owner, the plaintiff-appellee herein, but
a trustee of then Government of the United States (32 Op. Atty. Gen. 249; 50 U.S.C.A. 283), in its own
right, to the exclusion of, and against the claim or title of, the enemy owner. (Youghioheny & Ohio Coal
Co. vs. Lasevich [1920], 179 N.W., 355; 171 Wis., 347; U.S.C.A., 282-283.) From August, 1946, when
defendant-appellant took possession, to the late of judgment on February 28, 1948, Allien Property
Administration had the absolute control of the property as trustee of the Government of the United
States, with power to dispose of it by sale or otherwise, as though it were the absolute owner. (U.S vs.
Chemical Foundation [C.C.A. Del. 1925], 5 F. [2d], 191; 50 U.S.C.A., 283.) Therefore, even if defendant-
appellant were liable to the Allien Property Administration for rentals, these would not accrue to the
benefit of the plaintiff-appellee, the owner, but to the United States Government.

But there is another ground why the claim or rentals can not be made against defendant-appellant.
There was no agreement between the Alien Property Custodian and the defendant-appellant for the
latter to pay rentals on the property. The existence of an implied agreement to that effect is contrary to
the circumstances. The copra Export Management Company, which preceded the defendant-appellant,
in the possession and use of the property, does not appear to have paid rentals therefor, as it occupied it
by what the parties denominated a "custodianship agreement," and there is no provision therein for the
payment of rentals or of any compensation for its custody and or occupation and the use. The Trading
with the Enemy Act, as originally enacted, was purely a measure of conversation, hence, it is very
unlikely that rentals were demanded for the use of the property. When the National coconut
Corporation succeeded the Copra Export Management Company in the possession and use of the
property, it must have been also free from payment of rentals, especially as it was Government
corporation, and steps where then being taken by the Philippine Government to secure the property for
the National Coconut Corporation. So that the circumstances do not justify the finding that there was an
implied agreement that the defendant-appellant was to pay for the use and occupation of the premises
at all.

The above considerations show that plaintiff-appellee's claim for rentals before it obtained the judgment
annulling the sale of the Taiwan Tekkosho may not be predicated on any negligence or offense of the
defendant-appellant, or any contract, express or implied, because the Allien Property Administration was
neither a trustee of plaintiff-appellee, nor a privy to the obligations of the Taiwan Tekkosho, its title being
based by legal provision of the seizure of enemy property. We have also tried in vain to find a law or
provision thereof, or any principle in quasi contracts or equity, upon which the claim can be supported.
On the contrary, as defendant-appellant entered into possession without any expectation of liability for
such use and occupation, it is only fair and just that it may not be held liable therefor. And as to the rents
it collected from its lessee, the same should accrue to it as a possessor in good faith, as this Court has
already expressly held. (Resolution, National Coconut Corporation vs. Geronimo, 83 Phil. 467.)

Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim for
rentals existed at the time of the reservation, no rights can arise or accrue from such reservation alone.

Wherefore, the part of the judgment appealed from, which sentences defendant-appellant to pay rentals
from August, 1946, to February 28, 1949, is hereby reversed. In all other respects the judgment is
affirmed. Costs of this appeal shall be against the plaintiff-appellee.
Smith Bell vs Sotelo Mat

Facts: Plaintiff corporation undertook to sell and deliver equipment for Mr. Sotelo but no definite dates
were fixed for the delivery. The periods were couched in ambiguous terms such as within 3 or 4
months, in the month of September or as soon as possible, and approximate delivery with 90 days-
This is not guaranteed. When the goods arrived, Mr. Sotelo refused to receive them and to pay the
prices. Mr. Sotelo then sued for damages because of the delay suffered.

Issue: Whether Smith Bell incurred delay in the delivery of goods to Sotelo

Held: No, From the record it appears that these contracts were executed at the time of the world war
when there existed connection with the tanks and "Priority Certificate, subject to the United -States
Government requirements," with respect to the motors. At the time of the execution of the contracts,
the parties were not unmindful of the contingency of the United States Government not allowing the
export of the goods, nor of the fact that the other foreseen circumstances therein stated might prevent
it.

Considering these contracts in the light of the civil law, we cannot but conclude that the term which the
parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those
articles could be brought to Manila or not. If that is the case, as we think it is, the obligation must be
regarded as conditional.

When the delivery was subject to a condition the fulfillment of which depended not only upon the effort
of the herein plaintiff, but upon the will of third persons who could in no way be compelled to fulfill .the
condition. In cases like this, which are not expressly provided for, but impliedly covered, by the Civil
Code, the obligor will be deemed to have sufficiently performed his part of the obligation, if he has done
all that was in his power, even if the condition has not been fulfilled in reality.

In connection with this obligation to deliver, occurring in a contract of sale like those in question, the rule
in North America is that when the time of delivery is not fixed in the contract, time is regarded
unessential.

When the contract provides for delivery 'as soon as possible' the seller is entitled to a reasonable time,
in view of all the circumstances, such as the necessities of manufacture, or of putng the goods in
condition for delivery. The term does not mean immediately or that the seller must stop all his other
work and devote himself to that particular order. But the seller must nevertheless act with all reasonable
diligence or without unreasonable delay. It has been held that a requirement that the shipment of goods
should be the 'earliest possible' must be construed as meaning that the goods should be sent as soon as
the seller could possibly send them, and that it signified rather more than that the goods should be sent
within a reasonable time.

"The question as to what is a reasonable time for the delivery of the goods by the seller is to be
determined by the circumstances attending the particular transaction, such as the character of the
goods, and the purpose for which they are intended, the ability of the seller to produce the goods if they
are to be manufactured, the facilities available for transportation, and the distance the goods must be
carried, and the usual course of business in the particular trade." (35 Cyc., 181-184.)

The record shows, as we have stated, that the plaintiff did all within its power to have the machinery
arrive at Manila as soon as possible, and immediately upon its arrival it notified the purchaser of the fact
and offered to deliver it to him. Taking these circumstances into account, we hold that the said
machinery was brought to Manila by the plaintiff within a reasonable time.

Therefore, the plaintiff has not been guilty of any delay in the fulfillment of its obligation, and,
consequently, it could not have incurred any of the liabilities mentioned by the intervenor in its
counterclaim or set-off.

Bachrach vs Espiritu

Facts: In case 28497, on July 28, 1925, defendant Faustino Espiritu purchased from Bachrach a two-ton
White truck for P11,983.50, paying P1,000 downpayment, and obligating himself to pay the remaining
P10,983.50 within the periods agreed upon. To secure the payment of this sum, the defendants
mortgaged the said truck purchased and, besides, three others, two of which are f the same White
model. These two trucks had been purchased from the same plaintiff and were fully paid for by the
defendant and his brother Rosario Espiritu. Faustino failed to pay he balance of the price secured by this
mortgage.

In connection with case 28498, on February 18, 1925 the Faustino bought a one-ton White truck of the
plaintiff corporation for the sum of P7,136.50, and after having deducted the P500 cash payment and the
12% annual interest on the unpaid principal, obligated himself to make payment of this sum within the
periods agreed upon. To secure this payment the defendant mortgaged to Bachrach the said truck
purchased and two others, numbered 77197 and 92744, respectively, the same that were mortgaged in
the purchase of the other truck referred to in the other case. The defendant failed to pay P4,208.28 of
this sum.

In both sales it was agreed that 12% interest would be paid upon the unpaid portion of the price at the
executon of the contracts, and in case of non-payment of the total debt upon its maturity, 25 per cent
thereon, as penalty.

In addition to the mortagage deeds, Faustino also signed a promissory note solidarily with his brother
Rosario Espiritu for the several sums secured by the two mortgages (Exhibits B and D).

Rosario appeared in these two cases as intervenor, alleging to be the exclusive owner of the two White
trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants to the plaintiff. l
While these two cases were pending in the lower court, the mortgaged trucks were sold by virtue of the
mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation charges
to Manila, the net sum of P3,269.58.

The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case 28497
the sum of P7,732.09 with interest at the rate of 12% per annum from May 1, 1926 until fully paid, and
25 per cent thereof in addition as penalty. In case 28498, the trial court ordered the defendant and the
intervenor to pay plaintiff the sum of P4,208.28 with interest at 12% per annum from December 1, 1925
until fully paid, and 25% thereon as penalty.

Faustino and Rosario contend that trucks 77197 and 92744 were not mortgaged, because, when the
defendant signed the mortgage deeds these trucks were not included in those documents, and were
only put in later, without defendant's knowledge. They also alleged that on February 4, 1925, the
Faustino sold his rights in said 2 trucks to Rosario, and that as the latter did not sign the mortgage deeds,
such trucks cannot be considered as mortgaged.

It is finally contended that the 25% penalty upon the debt, in addition to the interest of 12% per annum,
makes the contract usurious.

Issue: Whether the 25% penalty upon the debt, in addition to the interest of 12% per annum, makes the
contract usurious

Held: No, We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory
notes Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature
on Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his
signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on the
date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in Batac,
Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of July, the
plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not necessarily prove
that the latter could not have been in Manila on the 25th of that month.

In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197 and
92744 and consented to the mortgage of the same, it is immaterial whether he was or was not the
exclusive owner thereof.

It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per
cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of the
Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an
agreement, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the
interest, and which may be demanded separately. According to this, the penalty is not to be added to the
interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate
was fixed only for the interest. But considering that the obligation was partly performed, and making use
of the power given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of
the unpaid debt.
With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay
only 10 per cent thereon as penalty, the judgment appealed from is affirmed in all other respects
without special pronouncement as to costs. So ordered

Arrieta vs NARIC

Facts: Mrs. Paz Arrieta participated in public bidding called by NARIC on May 19, 1952 for the supply of
20,000 metric tons of Burmese rice. Her bid was $ 203.00 per metric ton, it was the lowest thats why
the contract was awarded to her. On July 1,1952, Arrieta and NARIC entered into contract. Arrieta was
obligated to deliver 20,000 metric ton of Burmese rice at $203.00 per metric ton to NARIC. In return,
NARIC committed itself to pay for the imported rice by means of an irrevocable, confirmed and
assignable letter of credit in US currency in favour of Arrieta and/or supplier in Burma (THIRI SETKYA),
immediately. NARIC took the first step to open the letter of credit on July 30, 1952 by forwarding to the
PNB its application for commercial letter of credit. Arrieta with the help of a counsel, advised NARIC of
the necessity for the opening of the letter because she tender her supplier in Ragoon, Burma of 5 % of
the price of 20,000 tons at $180.70 and if she didnt comply the 5% will be confiscated if the required
letter of credit is not received by them before August 4, 1952. PNB informed NARIC that their application
of credit letter amounting to $3,614,000.00 was approved with the condition of 50% marginal cash be
paid. NARIC does not meet the condition. The allocation of Arrietas supplier in Ragoon was cancelled
and the 5% deposit was forfeited.

Issue: Whether NARIC is liable for the damages incurred by Arrieta.

Held: Yes,

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for
breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of
money expressed in American currency, the indemnity to be allowed should be expressed in Philippine
currency at the rate of exchange at the time of the judgment rather than at the rate of exchange
prevailing on the date of defendant's breach. This ruling, however, can neither be applied nor extended
to the case at bar for the same was laid down when there was no law against stipulating foreign
currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly declares such
stipulations as contrary to public policy, void and of no effect. And, as We already pronounced in the case
of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if there is
any agreement to pay an obligation in a currency other than Philippine legal tender, the same is null and
void as contrary to public policy (Republic Act 529), and 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 (Sec. 1, idem)."
UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification
that the award should be converted into the Philippine peso at the rate of exchange prevailing at the
time the obligation was incurred or on July 1, 1952 when the contract was executed. The appellee
insurance company, in the light of this judgment, is relieved of any liability under this suit. No
pronouncement as to costs

Swire Realty Dev. Corp vs Jayne Yu

Facts: Respondent and petitioner entered into a contract to sell a condominium unit in Makati. Petitioner
also opted to purchase a parking lot on the same building. The respondent paid the condominium unit in
full and a down payment for the parking lot was made. Petitioner failed to deliver the condominium unit
on time, respondent sought to rescind the contract of sale plus damages before the HLURB. The Board of
Commissioners granted the petition of the respondent, CA affirmed.

Issue: Whether rescission of contract is proper.

Held: Yes, Basic is the rule that the right of rescission of a party to an obligation under Article 1191 of the
Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between
them. The breach contemplated in the said provision is the obligors failure to comply with an existing
obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek
rescission and, in the absence of any just cause for the court to determine the period of compliance, the
court shall decree the rescission.

In the instant case, the CA aptly found that the completion date of the condominium unit was November
1998 pursuant to License No. 97-12-3202 dated November 2, 1997 but was extended to December 1999
as per License to Sell No. 99-05-3401 dated May 8, 1999. However, at the time of the ocular inspection
conducted by the HLURB ENCRFO, the unit was not yet completely finished as the kitchen cabinets and
fixtures were not yet installed and the agreed amenities were not yet available. Said inspection report
states:

The unit of the [respondent] is Unit 3007, which was labeled as P2-07, at the Palace of Makati, located at
the corner of P. Burgos Street and Caceres Street, Poblacion, Makati City. Based on the approved plans,
the said unit is at the 26th Floor.

During the time of inspection, the said unit appears to be completed except for the installation of
kitchen cabinets and fixtures.
Complainant pinpointed to the undersigned the deficiencies as follows:

The delivered unit has high density fiber (HDF) floorings instead of narra wood parquet.

The [petitioners] have also installed baseboards as borders instead of pink porrino granite boarders.

Walls are newly painted by the respondent and the alleged obvious signs of cladding could not be
determined.

Window opening at the master bedroom conforms to the approved plans. As a result it leaves a 3 inches
(sic) gap between the glass window and partitioning of the masters bedroom.

It was verified and confirmed that a square column replaced the round column, based on the approved
plans.

At the time of inspection, amenities such as swimming pool and change room are seen at the 31st floor
only. These amenities are reflected on the 27th floor plan of the approved condominium plans. Health
spa for men and women, Shiatsu Massage Room, Two-Level Sky Palace Restaurant and Hall for games
and entertainments, replete with billiard tables, a bar, indoor golf with spectacular deck and karaoke
rooms were not yet provided by the [petitioner].

The [masters] bedroom door bore sign of poor quality of workmanship as seen below.

The stairs have been installed in such manner acceptable to the undersigned.

Bathrooms and powder room have been installed in such manner acceptable to the undersigned.

From the foregoing, it is evident that the report on the ocular inspection conducted on the subject
condominium project and subject unit shows that the amenities under the approved plan have not yet
been provided as of May 3, 2002, and that the subject unit has not been delivered to respondent as of
August 28, 2002, which is beyond the period of development of December 1999 under the license to
sell. Incontrovertibly, petitioner had incurred delay in the performance of its obligation amounting to
breach of contract as it failed to finish and deliver the unit to respondent within the stipulated period.
The delay in the completion of the project as well as of the delay in the delivery of the unit are breaches
of statutory and contractual obligations which entitle respondent to rescind the contract, demand a
refund and payment of damages.

WHEREFORE, premises considered, the instant petition is DENIED. The Decision dated January 24, 2013
and Resolution dated April 30, 2013 of the Court of Appeals in CA-G.R. SP No. 121175 are hereby
AFFIRMED, with MODIFICATION that moral damages be awarded in the amount of P20,000.00

SO ORDERED.

Bognot vs RRI Lending

Facts: In September 1996, Leonardo Bognot and his younger brother, Rolando Bognot applied for and
obtained a loan of P500,000.00 from RRI Lending, payable on November 30, 1996. The loan was
evidenced by a promissory note and was secured by a post dated check dated November 30, 1996.

Evidence on record shows that Leonardo renewed the loan several times on a monthly basis. He paid a
renewal fee of P54,600.00 for each renewal, issued a new post-dated check as security, and executed
and/or renewed the promissory note previously issued. RRI Lending on the other hand, cancelled and
returned to Leonardo the post-dated checks issued prior to their renewal.

Leonardo purportedly paid the renewal fees and issued a post-dated check dated June 30, 1997 as
security. As had been done in the past, RRI Lending superimposed the date "June 30, 1997" on the
promissory note to make it appear that it would mature on the said date.

Several days before the loans maturity, Rolandos wife, Julieta, went to the respondents office and
applied for another renewal of the loan. She issued in favor of RRI Lending a promissory note and a
check dated July 30, 1997, in the amount of P54,600.00 as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings signatures and
replacement, Julieta asked the RRI Lending clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Julieta, however, never returned these documents nor
issued a new post-dated check. Consequently, RRI Lending sent Leonardo follow-up letters demanding
payment of the loan, plus interest and penalty charges. These demands went unheeded.

In his Answer, Leonardo, claimed, among other things, that the complaint states no cause of action
because RRI Lendings claim had been paid, waived, abandoned or otherwise extinguished, and that the
one (1) month loan contracted by Rolando and his wife in November 1996 which was lastly renewed in
March 1997 had already been fully paid and extinguished in April 1997.

Issue: Whether the obligation was extinguished by novation.

Held: No, Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and 1237."

To give novation legal effect, the original debtor must be expressly released from the obligation, and the
new debtor must assume the original debtors place in the contractual relationship. Depending on who
took the initiative, novation by substitution of debtor has two forms substitution by expromision and
substitution by delegacion. The difference between these two was explained in Garcia v. Llamas:37

"In expromision, the initiative for the change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third persons assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus,
the consent of these three persons are necessary."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid
novation.38 Furthermore, novation by substitution of debtor must always be made with the consent of
the creditor.39

The petitioner contends that novation took place through a substitution of debtors when Mrs. Bognot
renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying
the renewal fees and charges, and by executing a new promissory note. He further claimed that she
issued her own check40 to cover the renewal fees, which fact, according to the petitioner, was done with
the respondents consent.

Contrary to the petitioners contention, Mrs. Bognot did not substitute the petitioner as debtor. She
merely attempted to renew the original loan by executing a new promissory note41 and check. The
purported one month renewal of the loan, however, did not push through, as Mrs. Bognot did not return
the documents or issue a new post dated check. Since the loan was not renewed for another month, the
original due date, June 30,1997, continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and
the petitioners previous check dated June 30, 1997, does not ipso fact result in novation. Neither will
this acquiescence constitute an implied acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor.
Novation must be clearly and unequivocally shown, and cannot be presumed.

Since the petitioner failed to show that the respondent assented to the substitution, no valid novation
took place with the effect of releasing the petitioner from his obligation to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment of the obligation against the original debtor.
Mere acquiescence to the renewal of the loan, when there is clearly no agreement to release the
petitioner from his responsibility, does not constitute novation.

Gan Tion vs CA

FULL TEXT LOL!!

The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion
and respondent Ong Wan Sieng.

Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an
ejectment case against the former, alleging non-payment of rents for August and September of that year,
at P180 a month, or P360 altogether. The defendant denied the allegation and said that the agreed
monthly rental was only P160, which he had offered to but was refused by the plaintiff. The plaintiff
obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of First
Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff
to pay the defendant the sum of P500 as attorneys fees. That judgment became final.

On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a
month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in
the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.

In the meantime, over Gan Tions opposition, Ong Wan Sieng was able to obtain a writ of execution of
the judgment for attorneys fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where
he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320
for unpaid rents. The appellate court accepted the petition but eventually decided for the respondent,
holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of
more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust
fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel." In
the opinion of said Court, the requisites of legal compensation, namely, that the parties must be
creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them
must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not
present in the instant case, since the real creditor with respect to the sum of P500 was the defendants
counsel.

This is not an accurate statement of the nature of an award for attorneys fees. The award is made in
favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by
the former in the cases enumerated in Article 2208 of the Civil Code. 1 It is the litigant, not his counsel,
who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore,
may properly be the subject of legal compensation. Quite obviously it would be unjust to compel
petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000.
WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the
Court of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against Respondent.

Metropolitan Bank vs Rural Bank of Gerona

Facts:

RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In the
1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the
loan applications of farmers-borrowers under the Central Bank-International Bank for Reconstruction
and Developments (IBRDs) 4th Rural Credit Project. The agreement required RBG to open a separate
bank account where the IBRD loan proceeds shall be deposited. The RBG accordingly opened a special
savings account with Metrobanks Tarlac Branch. As the depository bank of RBG, Metrobank was
designated to receive the credit advice released by the Central Bank representing the proceeds of the
IBRD loan of the farmers-borrowers; Metrobank, in turn, credited the proceeds to RBGs special savings
account for the latters release to the farmers-borrowers.

Two loans were approved and RBG withdrew the amounts needed for the approved loans in its account
with the MetroBank.

On November 3, 1978, more than a month after RBG had made the above withdrawals from its account
with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD loans. The
Central Bank implemented the reversal by debiting from Metrobanks demand deposit account the
amount corresponding to all three IBRD loans.

Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts
from RBGs special savings account: P189,052.00, P115,000.00, and P8,000.41. Metrobank, however,
claimed that these amounts were insufficient to cover all the credit advices that were reversed by the
Central Bank. It demanded payment from RBG which could make partial payments. As of October 17,
1979, Metrobank claimed that RBG had an outstanding balance of P334,220.00. To collect this amount, it
filed a complaint for collection of sum of money against RBG before the RTC, docketed as Civil Case No.
6028.

Issue: Whether there is a legal subrogation.

Held: Yes, A basic first step in resolving this case is to determine who the liable parties are on the IBRD
loans that the Central Bank extended. The Terms and Conditions of the IBRD 4th Rural Credit Project[12]
(Project Terms and Conditions) executed by the Central Bank and the RBG shows that the farmers-
borrowers to whom credits have been extended, are primarily liable for the payment of the borrowed
amounts. The loans were extended through the RBG which also took care of the collection and of the
remittance of the collection to the Central Bank. RBG, however, was not a mere conduit and collector.
While the farmers-borrowers were the principal debtors, RBG assumed liability under the Project Terms
and Conditions by solidarily binding itself with the principal debtors to fulfill the obligation.
How RBG profited from the transaction is not clear from the records and is not part of the issues before
us, but if it delays in remitng the amounts due, the Central Bank imposed a 14% per annum penalty
rate on RBG until the amount is actually remitted. The Central Bank was further authorized to deduct the
amount due from RBGs demand deposit reserve should the latter become delinquent in payment. On
these points, paragraphs 5 and 6 of the Project Terms and Conditions read:

5. Collection received representing repayments of borrowers shall be immediately remitted to the

Central Bank, otherwise[,] the Rural Bank/SLA shall be charged a penalty of fourteen [percent] (14%) p.a.
until date of remittance.

6. In case the rural bank becomes delinquent in the payment of amortizations due[,] the Central Bank is
authorized to deduct the corresponding amount from the rural banks demand deposit reserve[13] at any
time to cover any delinquency. [Emphasis supplied.]

Based on these arrangements, the Central Banks immediate recourse, therefore should have been
against the farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by the
debit advices from Metrobanks demand deposit account. Under the Project Terms and Conditions,
Metrobank had no responsibility over the proceeds of the IBRD loans other than serving as a conduit for
their transfer from the Central Bank to the RBG once credit advice has been issued. Thus, we agree with
the CAs conclusion that the agreement governed only the parties involved the Central Bank and the RBG.
Metrobank was simply an outsider to the agreement. Our disagreement with the appellate court is in its
conclusion that no legal subrogation took place; the present case, in fact, exemplifies the circumstance
contemplated under paragraph 2, of Article 1302 of the Civil Code which provides:

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtors knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latters share. [Emphasis supplied.]

As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as
a conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobanks demand
deposit account, instead of RBGs, which the Central Bank proceeded against, on the assumption perhaps
that this was the most convenient means of recovering the cancelled loans. That Metrobanks payment
was involuntarily made does not change the reality that it was Metrobank which effectively answered for
RBGs obligations.

Was there express or tacit approval by RBG of the payment enforced against Metrobank? After
Metrobank received the Central Banks debit advices in November 1978, it (Metrobank) accordingly
debited the amounts it could from RBGs special savings account without any objection from RBG.[14]
RBGs President and Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14, 1979, with
proposals regarding possible means of settling the amounts debited by Central Bank from Metrobanks
demand deposit account.[15] These instances are all indicative of RBGs approval of Metrobanks payment
of the IBRD loans. That RBGs tacit approval came after payment had been made does not completely
negate the legal subrogation that had taken place.

Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with
all the rights thereto appertaining, either against the debtor or against third persons. As the entity
against which the collection was enforced, Metrobank was subrogated to the rights of Central Bank and
has a cause of action to recover from RBG the amounts it paid to the Central Bank, plus 14% per annum
interest.

Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that the
CA erroneously believed that the Central Banks presence is necessary in order x x x to shed light on the
matter of reversals made by it concerning the loan applications of the end users and to have a complete
determination or settlement of the claim.[16] In so far as Metrobank is concerned, however, the Central
Banks presence and the reasons for its reversals of the IBRD loans are immaterial after subrogation has
taken place; Metrobanks interest is simply to collect the amounts it paid the Central Bank. Whatever
cause of action RBG may have against the Central Bank for the unexplained reversals and any undue
deductions is for RBG to ventilate as a third-party claim; if it has not done so at this point, then the
matter should be dealt with in a separate case that should not in any way further delay the disposition of
the present case that had been pending before the courts since 1980.