G.R. No.

138677 February 12, 2002 "In the case at bar, defendants-appellants executed a promissory note
where they undertook to pay the obligation on its maturity date 'without
necessity of demand.' They also agreed to pay the interest in case of non-
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,
payment from the date of default.
vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY, respondents. "x x x xxx xxx

DECISION "While we maintain that defendants-appellants must be bound by the

contract which they acknowledged and signed, we take cognizance of their
plea for the application of the provisions of Article 1229 x x x. Pag
VITUG, J.:

"Considering that defendants-appellants partially complied with their

e|
Before the Court is a petition for review on certiorari under Rule 45 of the
obligation under the promissory note by the reduction of the original amount 1
Rules of Court, assailing the decision and resolutions of the Court of
of P120,000.00 to P114,416.00 and in order that they will finally settle their
Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co.
obligation, it is our view and we so hold that in the interest of justice and
vs. Tolomeo Ligutan, et al."
public policy, a penalty of 3% per month or 36% per annum would suffice.

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May

"x x x xxx xxx
1981 a loan in the amount of P120,000.00 from respondent Security Bank
and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest "WHEREFORE, the decision sought to be reconsidered is hereby
of 15.189% per annum upon maturity and to pay a penalty of 5% every MODIFIED. The defendants-appellants Tolomeo Ligutan and Leonidas dela
month on the outstanding principal and interest in case of default. In Llana are hereby ordered to pay the plaintiff-appellee Security Bank and
addition, petitioners agreed to pay 10% of the total amount due by way of Trust Company the following:
attorney’s fees if the matter were indorsed to a lawyer for collection or if a
suit were instituted to enforce payment. The obligation matured on 8
"1. The sum of P114,416.00 with interest thereon at the rate of
September 1981; the bank, however, granted an extension but only up until
15.189% per annum and 3% per month penalty charge
29 December 1981.
commencing May 20, 1982 until fully paid;

Despite several demands from the bank, petitioners failed to settle the debt
"2. The sum equivalent to 10% of the total amount of the
which, as of 20 May 1982, amounted to P114,416.10. On 30 September
indebtedness as and for attorney’s fees."5
1982, the bank sent a final demand letter to petitioners informing them that
they had five days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November 1982, with the On 16 November 1998, petitioners filed an omnibus motion for
Regional Trial Court of Makati, Branch 143, a complaint for recovery of the reconsideration and to admit newly discovered evidence,6 alleging that
due amount. while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of petitioners
After petitioners had filed a joint answer to the complaint, the bank
Ligutan and dela Llana with the bank. Petitioners contended that the
presented its evidence and, on 27 March 1985, rested its case. Petitioners,
execution of the real estate mortgage had the effect of novating the contract
instead of introducing their own evidence, had the hearing of the case reset
between them and the bank. Petitioners further averred that the mortgage
on two consecutive occasions. In view of the absence of petitioners and
was extrajudicially foreclosed on 26 August 1986, that they were not
their counsel on 28 August 1985, the third hearing date, the bank moved,
informed about it, and the bank did not credit them with the proceeds of the
and the trial court resolved, to consider the case submitted for decision.
sale. The appellate court denied the omnibus motion for reconsideration
and to admit newly discovered evidence, ratiocinating that such a second
Two years later, or on 23 October 1987, petitioners filed a motion for motion for reconsideration cannot be entertained under Section 2, Rule 52,
reconsideration of the order of the trial court declaring them as having of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said,
waived their right to present evidence and prayed that they be allowed to the newly-discovered evidence being invoked by petitioners had actually
prove their case. The court a quo denied the motion in an order, dated 5 been known to them when the case was brought on appeal and when the
September 1988, and on 20 October 1989, it rendered its decision, 1 the first motion for reconsideration was filed.7
dispositive portion of which read:
Aggrieved by the decision and resolutions of the Court of Appeals,
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and petitioners elevated their case to this Court on 9 July 1999 via a petition for
against the defendants, ordering the latter to pay, jointly and severally, to review on certiorari under Rule 45 of the Rules of Court, submitting thusly -
the plaintiff, as follows:
"I. The respondent Court of Appeals seriously erred in not holding
"1. The sum of P114,416.00 with interest thereon at the rate of that the 15.189% interest and the penalty of three (3%) percent
15.189% per annum, 2% service charge and 5% per month per month or thirty-six (36%) percent per annum imposed by
penalty charge, commencing on 20 May 1982 until fully paid; private respondent bank on petitioners’ loan obligation are still
manifestly exorbitant, iniquitous and unconscionable.
"2. To pay the further sum equivalent to 10% of the total amount
of indebtedness for and as attorney’s fees; and "II. The respondent Court of Appeals gravely erred in not
reducing to a reasonable level the ten (10%) percent award of
attorney’s fees which is highly and grossly excessive,
"3. To pay the costs of the suit."2
unreasonable and unconscionable.

Petitioners interposed an appeal with the Court of Appeals, questioning the

"III. The respondent Court of Appeals gravely erred in not
rejection by the trial court of their motion to present evidence and assailing
admitting petitioners’ newly discovered evidence which could not
the imposition of the 2% service charge, the 5% per month penalty charge
have been timely produced during the trial of this case.
and 10% attorney's fees. In its decision3 of 7 March 1996, the appellate
court affirmed the judgment of the trial court except on the matter of the 2%
service charge which was deleted pursuant to Central Bank Circular No. "IV. The respondent Court of Appeals seriously erred in not
783. Not fully satisfied with the decision of the appellate court, both parties holding that there was a novation of the cause of action of private
filed their respective motions for reconsideration.4 Petitioners prayed for the respondent’s complaint in the instant case due to the subsequent
reduction of the 5% stipulated penalty for being unconscionable. The bank, execution of the real estate mortgage during the pendency of this
on the other hand, asked that the payment of interest and penalty be case and the subsequent foreclosure of the mortgage." 8
commenced not from the date of filing of complaint but from the time of
default as so stipulated in the contract of the parties.
Respondent bank, which did not take an appeal, would, however, have it
that the penalty sought to be deleted by petitioners was even insufficient to
On 28 October 1998, the Court of Appeals resolved the two motions thusly: fully cover and compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of its
"We find merit in plaintiff-appellee’s claim that the principal sum of
occurrence. The Bank would stress that only the amount of P5,584.00 had
P114,416.00 with interest thereon must commence not on the date of filing
been remitted out of the entire loan of P120,000.00.9
of the complaint as we have previously held in our decision but on the date
when the obligation became due.
A penalty clause, expressly recognized by law,10 is an accessory
undertaking to assume greater liability on the part of an obligor in case of
"Default generally begins from the moment the creditor demands the
breach of an obligation. It functions to strengthen the coercive force of the
performance of the obligation. However, demand is not necessary to render
obligation11 and to provide, in effect, for what could be the liquidated
the obligor in default when the obligation or the law so provides.
damages resulting from such a breach. The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof on the existence Extinctive novation requires, first, a previous valid obligation; second, the
and on the measure of damages caused by the breach.12 Although a court agreement of all the parties to the new contract; third, the extinguishment of
may not at liberty ignore the freedom of the parties to agree on such terms the obligation; and fourth, the validity of the new one.22 In order that an
and conditions as they see fit that contravene neither law nor morals, good obligation may be extinguished by another which substitutes the same, it is
customs, public order or public policy, a stipulated penalty, nevertheless, imperative that it be so declared in unequivocal terms, or that the old and
may be equitably reduced by the courts if it is iniquitous or unconscionable the new obligation be on every point incompatible with each other. 23 An
or if the principal obligation has been partly or irregularly complied with.13 obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding
compatible covenants or where the old contract is merely supplemented by
The question of whether a penalty is reasonable or iniquitous can be partly
the new one.24 When not expressed, incompatibility is required so as to
subjective and partly objective. Its resolution would depend on such factors
ensure that the parties have indeed intended such novation despite their
as, but not necessarily confined to, the type, extent and purpose of the
failure to express it in categorical terms. The incompatibility, to be sure,
Pag
penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of
should take place in any of the essential elements of the obligation, i.e., (1) e|
the juridical relation or tie, such as from a mere commodatum to lease of
the parties, and the like, the application of which, by and large, is 2
things, or from negotiorum gestio to agency, or from a mortgage to
addressed to the sound discretion of the court. In Rizal Commercial
antichresis,25 or from a sale to one of loan;26 (2) the object or principal
Banking Corp. vs. Court of Appeals,14 just an example, the Court has
conditions, such as a change of the nature of the prestation; or (3) the
tempered the penalty charges after taking into account the debtor’s pitiful
subjects, such as the substitution of a debtor27 or the subrogation of the
situation and its offer to settle the entire obligation with the creditor bank.
creditor. Extinctive novation does not necessarily imply that the new
The stipulated penalty might likewise be reduced when a partial or irregular
agreement should be complete by itself; certain terms and conditions may
performance is made by the debtor.15 The stipulated penalty might even be
be carried, expressly or by implication, over to the new obligation.
deleted such as when there has been substantial performance in good faith
by the obligor,16 when the penalty clause itself suffers from fatal infirmity, or
when exceptional circumstances so exist as to warrant it. 17 WHEREFORE, the petition is DENIED.

The Court of Appeals, exercising its good judgment in the instant case, has G.R. No. 157480 May 6, 2005
reduced the penalty interest from 5% a month to 3% a month which
petitioner still disputes. Given the circumstances, not to mention the
PRYCE CORPORATION (formerly PRYCE PROPERTIES
repeated acts of breach by petitioners of their contractual obligation, the
CORPORATION), petitioners,
Court sees no cogent ground to modify the ruling of the appellate court..
vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
Anent the stipulated interest of 15.189% per annum, petitioners, for the first
time, question its reasonableness and prays that the Court reduce the
DECISION
amount. This contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the interest stipulation, on
its face, does not appear as being that excessive. The essence or rationale PANGANIBAN, J.:
for the payment of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A penalty stipulation is
In legal contemplation, the termination of a contract is not equivalent to
not necessarily preclusive of interest, if there is an agreement to that effect,
the two being distinct concepts which may separately be demanded.18 What its rescission. When an agreement is terminated, it is deemed valid at
may justify a court in not allowing the creditor to impose full surcharges and inception. Prior to termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is rescinded, it is
penalties, despite an express stipulation therefor in a valid agreement, may
not equally justify the non-payment or reduction of interest. Indeed, the deemed inexistent, and the parties are returned to their status quo ante.
interest prescribed in loan financing arrangements is a fundamental part of Hence, there is mutual restitution of benefits received. The consequences
of termination may be anticipated and provided for by the contract. As long
the banking business and the core of a bank's existence. 19
as the terms of the contract are not contrary to law, morals, good customs,
public order or public policy, they shall be respected by courts. The judiciary
Petitioners next assail the award of 10% of the total amount of is not authorized to make or modify contracts; neither may it rescue parties
indebtedness by way of attorney's fees for being grossly excessive, from disadvantageous stipulations. Courts, however, are empowered to
exorbitant and unconscionable vis-a-vis the time spent and the extent of reduce iniquitous or unconscionable liquidated damages, indemnities and
services rendered by counsel for the bank and the nature of the case. penalties agreed upon by the parties.
Bearing in mind that the rate of attorney’s fees has been agreed to by the
parties and intended to answer not only for litigation expenses but also for
The Case
collection efforts as well, the Court, like the appellate court, deems the
award of 10% attorney’s fees to be reasonable.
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
Neither can the appellate court be held to have erred in rejecting assailing the May 22, 2002 Decision2 of the Court of Appeals (CA) in CA-
GR CV No. 51629 and its March 4, 2003 Resolution3 denying petitioner’s
petitioners' call for a new trial or to admit newly discovered evidence. As the
appellate court so held in its resolution of 14 May 1999 - Motion for Reconsideration. The assailed Decision disposed thus:

"WHEREFORE, in view of the foregoing, judgment is hereby

"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same rendered as follows: (1) In Civil Case No. 93-68266, the appealed
party shall be entertained. Considering that the instant motion is already a decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to
second motion for reconsideration, the same must therefore be denied.
pay [Petitioner] Pryce Properties Corporation the total amount
of P687,289.50 as actual damages representing the accrued
"Furthermore, it would appear from the records available to this court that rentals for the quarter September to November 1993 with interest
the newly-discovered evidence being invoked by defendants-appellants and penalty at the rate of two percent (2%) per month from date
have actually been existent when the case was brought on appeal to this of filing of the complaint until the amount shall have been fully
court as well as when the first motion for reconsideration was paid, and the sum of P50,000.00 as attorney’s fees; (2) In Civil
filed.1âwphi1 Hence, it is quite surprising why defendants-appellants raised Case No. 93-68337, the appealed decision is REVERSED and
the alleged newly-discovered evidence only at this stage when they could SET ASIDE and a new judgment is rendered ordering [Petitioner]
have done so in the earlier pleadings filed before this court. Pryce Properties Corporation to reimburse [Respondent]
Philippine Amusement and Gaming Corporation the amount
of P687,289.50 representing the advanced rental deposits, which
"The propriety or acceptability of such a second motion for reconsideration
amount may be compensated by [Petitioner] Pryce Properties
is not contingent upon the averment of 'new' grounds to assail the
Corporation with its award in Civil Case No. 93-68266 in the
judgment, i.e., grounds other than those theretofore presented and
equal amount of P687,289.50."4
rejected. Otherwise, attainment of finality of a judgment might be stayed off
indefinitely, depending on the party’s ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly discovered errors' The Facts
therein, or thinking up some injury or prejudice to the rights of the movant
for reconsideration."20
According to the CA, the facts are as follows:

At any rate, the subsequent execution of the real estate mortgage as

security for the existing loan would not have resulted in the extinguishment "Sometime in the first half of 1992, representatives from Pryce
Properties Corporation (PPC for brevity) made representations
of the original contract of loan because of novation. Petitioners
acknowledge that the real estate mortgage contract does not contain any with the Philippine Amusement and Gaming Corporation
express stipulation by the parties intending it to supersede the existing loan (PAGCOR) on the possibility of setting up a casino in Pryce
Plaza Hotel in Cagayan de Oro City. [A] series of negotiations
agreement between the petitioners and the bank.21 Respondent bank has
correctly postulated that the mortgage is but an accessory contract to followed. PAGCOR representatives went to Cagayan de Oro City
secure the loan in the promissory note. to determine the pulse of the people whether the presence of a
casino would be welcomed by the residents. Some local
government officials showed keen interest in the casino operation
and expressed the view that possible problems were
surmountable. Their negotiations culminated with PPC’s counter- relentless and vehement opposition to their casino operations. In
letter proposal dated October 14, 1992. a letter dated October 12, 1993 x x x, PAGCOR asked PPC to
refund the total of P1,437,582.25 representing the reimbursable
rental deposits and expenses for the permanent improvement of
"On November 11, 1992, the parties executed a Contract of
the Hotel’s parking lot. In a letter dated November 5, 1993 x x x,
Lease x x x involving the ballroom of the Hotel for a period of
PAGCOR formally demanded from PPC the payment of its claim
three (3) years starting December 1, 1992 and until November
for reimbursement.
30, 1995. On November 13, 1992, they executed an addendum
to the contract x x x which included a lease of an additional 1000
square meters of the hotel grounds as living quarters and "On November 15, 1993 x x x, PPC filed a case for sum of
playground of the casino personnel. PAGCOR advertised the money in the Regional Trial Court of Manila docketed as Civil
start of their casino operations on December 18, 1992. Case No. 93-68266. On November 19, 1993, PAGCOR also filed Pag
a case for sum of money in the Regional Trial Court of Manila
docketed as Civil Case No. 93-68337. e|
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de
Oro City passed Resolution No. 2295 x x x dated November 19, 3
1990 declaring as a matter of policy to prohibit and/or not to allow "In a letter dated November 25, 1993, PPC informed PAGCOR
the establishment of a gambling casino in Cagayan de Oro City. that it was terminating the contract of lease due to PAGCOR’s
Resolution No. 2673 x x x dated October 19, 1992 (or a month continuing breach of the contract and further stated that it was
before the contract of lease was executed) was subsequently exercising its rights under the contract of lease pursuant to Article
passed reiterating with vigor and vehemence the policy of the 20 (a) and (c) thereof.
City under Resolution No. 2295, series of 1990, banning casinos
in Cagayan de Oro City. On December 7, 1992, the Sangguniang
"On February 2, 1994, PPC filed a supplemental complaint x x x
Panlungsod of Cagayan de Oro City enacted Ordinance No.
in Civil Case No. 93-68266, which the trial court admitted in an
3353 x x x prohibiting the issuance of business permits and
Order dated February 11, 1994. In an Order dated April 27, 1994,
canceling existing business permits to any establishment for
Civil Case No. 93-68377 was ordered consolidated with Civil
using, or allowing to be used, its premises or any portion thereof
Case No. 93-68266. These cases were jointly tried by the court a
for the operation of a casino.
quo. On August 17, 1995, the court a quo promulgated its
decision. Both parties appealed."5
"In the afternoon of December 18, 1992 and just hours before the
actual formal opening of casino operations, a public rally in front
In its appeal, PPC faulted the trial court for the following reasons: 1) failure
of the hotel was staged by some local officials, residents and
of the court to award actual and moral damages; 2) the 50 percent
religious leaders. Barricades were placed [which] prevented
reduction of the amount PPC was claiming; and 3) the court’s ruling that the
some casino personnel and hotel guests from entering and
2 percent penalty was to be imposed from the date of the promulgation of
exiting from the Hotel. PAGCOR was constrained to suspend
the Decision, not from the date stipulated in the Contract.
casino operations because of the rally. An agreement between
PPC and PAGCOR, on one hand, and representatives of the
rallyists, on the other, eventually ended the rally on the 20th of On the other hand, PAGCOR criticized the trial court for the latter’s failure
December, 1992. to rule that the Contract of Lease had already been terminated as early as
September 21, 1993, or at the latest, on October 14, 1993, when PPC
received PAGCOR’s letter dated October 12, 1993. The gaming corporation
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed
added that the trial court erred in 1) failing to consider that PPC was entitled
by the Sangguniang Panlungsod of Cagayan de Oro City,
to avail itself of the provisions of Article XX only when PPC was the party
prohibiting the operation of casinos and providing for penalty for
terminating the Contract; 2) not finding that there were valid, justifiable and
violation thereof. On January 7, 1993, PPC filed a Petition for
good reasons for terminating the Contract; and 3) dismissing the Complaint
Prohibition with Preliminary Injunction x x x against then public
of PAGCOR in Civil Case No. 93-68337 for lack of merit, and not finding
respondent Cagayan de Oro City and/or Mayor Pablo P.
PPC liable for the reimbursement of PAGCOR’S cash deposits and of the
Magtajas x x x before the Court of Appeals, docketed as CA G.R.
value of improvements.
SP No. 29851 praying inter alia, for the declaration of
unconstitutionality of Ordinance No. 3353. PAGCOR intervened
in said petition and further assailed Ordinance No. 4475-93 as Ruling of the Court of Appeals
being violative of the non-impairment of contracts and equal
protection clauses. On March 31, 1993, the Court of Appeals
promulgated its decision x x x, the dispositive portion of which First, on the appeal of PAGCOR, the CA ruled that the PAGCOR’S
reads: pretermination of the Contract of Lease was unjustified. The appellate court
explained that public demonstrations and rallies could not be considered as
fortuitous events that would exempt the gaming corporation from complying
‘IN VIEW OF ALL THE FOREGOING, Ordinance No. with the latter’s contractual obligations. Therefore, the Contract continued to
3353 and Ordinance No. 3375-93 are hereby be effective until PPC elected to terminate it on November 25, 1993.
DECLARED UNCONSTITUTIONAL and VOID and the
respondents and all other persons acting under their
authority and in their behalf are PERMANENTLY Regarding the contentions of PPC, the CA held that under Article 1659 of
the Civil Code, PPC had the right to ask for (1) rescission of the Contract
ENJOINED from enforcing those ordinances.
and indemnification for damages; or (2) only indemnification plus the
continuation of the Contract. These two remedies were alternative, not
‘SO ORDERED.’ cumulative, ruled the CA.

"Aggrieved by the decision, then public respondents Cagayan de As PAGCOR had admitted its failure to pay the rentals for September to
Oro City, et al. elevated the case to the Supreme Court in G.R. November 1993, PPC correctly exercised the option to terminate the lease
No. 111097, where, in an En Banc Decision dated July 20, 1994 agreement. Previously, the Contract remained effective, and PPC could
x x x, the Supreme Court denied the petition and affirmed the collect the accrued rentals. However, from the time it terminated the
decision of the Court of Appeals. Contract on November 25, 1993, PPC could no longer demand payment of
the remaining rentals as part of actual damages, the CA added.
"In the meantime, PAGCOR resumed casino operations on July
15, 1993, against which, however, another public rally was held. Denying the claim for moral damages, the CA pointed out the failure of PPC
Casino operations continued for some time, but were later on to show that PAGCOR had acted in gross or evident bad faith in failing to
indefinitely suspended due to the incessant demonstrations. Per pay the rentals from September to November 1993. Such failure was
verbal advice x x x from the Office of the President of the shown especially by the fact that PPC still had in hand three (3) months
Philippines, PAGCOR decided to stop its casino operations in advance rental deposits of PAGCOR. The former could have simply applied
Cagayan de Oro City. PAGCOR stopped its casino operations in this deposit to the unpaid rentals, as provided in the Contract. Neither did
the hotel prior to September, 1993. In two Statements of Account PPC adequately show that its reputation had been besmirched or the
dated September 1, 1993 x x x, PPC apprised PAGCOR of its hotel’s goodwill eroded by the establishment of the casino and the public
outstanding account for the quarter September 1 to November protests.
30, 1993. PPC sent PAGCOR another Letter dated September 3,
1993 x x x as a follow-up to the parties’ earlier conference. PPC
sent PAGCOR another Letter dated September 15, 1993 x x x Finally, as to the claimed reimbursement for parking lot improvement, the
stating its Board of Directors’ decision to collect the full rentals in CA held that PAGCOR had not presented official receipts to prove the
latter’s alleged expenses. The appellate court, however, upheld the trial
case of pre-termination of the lease.
court’s award to PPC of P50,000 attorney’s fees.

"PAGCOR sent PPC a letter dated September 20, 1993 x x x

Hence this Petition.6
[stating] that it was not amenable to the payment of the full
rentals citing as reasons unforeseen legal and other
circumstances which prevented it from complying with its Issues
obligations. PAGCOR further stated that it had no other
alternative but to pre-terminate the lease agreement due to the
In their Memorandum, petitioner raised the following issues:
 "MAIN ISSUE: "c) Moreover, the LESSEE shall be fully liable to the LESSOR for
the rentals corresponding to the remaining term of the lease as
well as for any and all damages, actual or consequential resulting
"Did the Honorable Court of Appeals commit x x x grave and
from such default and termination of this contract.
reversible error by holding that Pryce was not entitled to future
rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR? "d) x x x x x x x x x." (Italics supplied)

"Sub-Issues: The above provisions leave no doubt that the parties have covenanted 1) to
give PPC the right to terminate and cancel the Contract in the event of a
default or breach by the lessee; and 2) to make PAGCOR fully liable for Pag
"1. Were the provisions of Sections 20(a) and 20(c) of the
rentals for the remaining term of the lease, despite the exercise of such
Contract of Lease relative to the right of PRYCE to terminate the
Contract for cause and to moreover collect rentals from PAGCOR
right to terminate. Plainly, the parties have voluntarily bound themselves to e|
require strict compliance with the provisions of the Contract by stipulating
corresponding to the remaining term of the lease valid and
that a default or breach, among others, shall give the lessee the termination 4
binding?
option, coupled with the lessor’s liability for rentals for the remaining term of
the lease.
"2. Did not Article 1659 of the Civil Code supersede Sections
20(a) and 20(c) of the Contract, PRYCE having ‘rescinded’ the
For sure, these stipulations are valid and are not contrary to law, morals,
Contract of Lease?
good customs, public order or public policy. Neither is there anything
objectionable about the inclusion in the Contract of mandatory provisions
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et concerning the rights and obligations of the parties.11 Being the primary law
al. and the other cases cited by PAGCOR support its position that between the parties, it governs the adjudication of their rights and
PRYCE was not entitled to future rentals? obligations. A court has no alternative but to enforce the contractual
stipulations in the manner they have been agreed upon and written. 12 It is
well to recall that courts, be they trial or appellate, have no power to make
"4. Would the collection by PRYCE of future rentals not give rise or modify contracts.13 Neither can they save parties from disadvantageous
to unjust enrichment?
provisions.

"5. Could we not have ‘harmonized’ Article 1659 of the Civil Code Termination or Rescission?
and Article 20 of the Contract of Lease?

Well-taken is petitioner’s insistence that it had the right to ask for

"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed "termination plus the full payment of future rentals" under the provisions of
written in contracts, particularly in the PRYCE-PAGCOR Contract the Contract, rather than just rescission under Article 1659 of the Civil
of Lease?"7 Code. This Court is not unmindful of the fact
that termination and rescission are terms that have been used loosely and
The Court’s Ruling interchangeably in the past. But distinctions ought to be made, especially in
this controversy, in which the terms mean differently and lead to equally
different consequences.
The Petition is partly meritorious.

The term "rescission" is found in 1) Article 119114 of the Civil Code, the
Main Issue: general provision on rescission of reciprocal obligations; 2) Article
1659,15 which authorizes rescission as an alternative remedy, insofar as the
Collection of Remaining Rentals rights and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 138016 with regard to the rescission of contracts.
PPC anchors its right to collect future rentals upon the provisions of the
Contract. Likewise, it argues that termination, as defined under the In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J.
Contract, is different from the remedy of rescission prescribed under Article B. L. Reyes differentiated rescission under Article 1191 from that under
1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA Article 1381 et seq. as follows:
ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly
no longer entitled to future rentals, because it chose to rescind the "x x x. The rescission on account of breach of stipulations is not
Contract. predicated on injury to economic interests of the party plaintiff but
on the breach of faith by the defendant, that violates the
Contract Provisions reciprocity between the parties. It is not a subsidiary action, and
Clear and Binding Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations to the defendant.
Article 1159 of the Civil Code provides that "obligations arising from This rescission is a principal action retaliatory in character, it
contracts have the force of law between the contracting parties and should being unjust that a party be held bound to fulfill his promises
be complied with in good faith."8 In deference to the rights of the parties, the when the other violates his. As expressed in the old Latin
law9 allows them to enter into stipulations, clauses, terms and conditions aphorism: ‘Non servanti fidem, non est fides servanda.’ Hence,
they may deem convenient; that is, as long as these are not contrary to law, the reparation of damages for the breach is purely secondary.
morals, good customs, public order or public policy. Likewise, it is settled
that if the terms of the contract clearly express the intention of the
contracting parties, the literal meaning of the stipulations would be "On the contrary, in rescission by reason of lesion or economic
controlling.10 prejudice, the cause of action is subordinated to the existence of
that prejudice, because it is the raison d’etre as well as the
measure of the right to rescind. x x x."18
In this case, Article XX of the parties’ Contract of Lease provides in part as
follows:
Relevantly, it has been pointed out that resolution was originally used in
Article 1124 of the old Civil Code, and that the term became the basis
"XX. BREACH OR DEFAULT for rescission under Article 1191 (and, conformably, also Article 1659).19

"a) The LESSEE agrees that all the terms, conditions and/or Now, as to the distinction between termination (or cancellation)
covenants herein contained shall be deemed essential conditions and rescission (more properly, resolution), Huibonhoa v. CA20 held that,
of this contract, and in the event of default or breach of any of where the action prayed for the payment of rental arrearages, the aggrieved
such terms, conditions and/or covenants, or should the LESSEE party actually sought the partial enforcement of a lease contract. Thus, the
become bankrupt, or insolvent, or compounds with his remedy was not rescission, but termination or cancellation, of the contract.
creditors, the LESSOR shall have the right to terminate and The Court explained:
cancel this contract by giving them fifteen (15 days) prior notice
delivered at the leased premises or posted on the main door
thereof. Upon such termination or cancellation, the LESSOR may "x x x. By the allegations of the complaint, the Gojoccos’ aim was
forthwith lock the premises and exclude the LESSEE therefrom, to cancel or terminate the contract because they sought its partial
forcefully or otherwise, without incurring any civil or criminal enforcement in praying for rental arrearages. There is a
liability. During the fifteen (15) days notice, the LESSEE may distinction in law between cancellation of a contract and its
prevent the termination of lease by curing the events or causes of rescission. To rescind is to declare a contract void in its inception
termination or cancellation of the lease. and to put an end to it as though it never were. It is not merely to
terminate it and release parties from further obligations to each
other but to abrogate it from the beginning and restore the parties
"b) x x x x x x x x x to relative positions which they would have occupied had no
contract ever been made.
 "x x x. The termination or cancellation of a contract would termination of this contract." Having entered into the Contract voluntarily
necessarily entail enforcement of its terms prior to the declaration and with full knowledge of its provisions, PAGCOR must be held bound to
of its cancellation in the same way that before a lessee is ejected its obligations. It cannot evade further liability for liquidated damages.
under a lease contract, he has to fulfill his obligations thereunder
that had accrued prior to his ejectment. However, termination of a
Reduction of Penalty
contract need not undergo judicial intervention. x x x."21 (Italics
supplied)
In certain cases, a stipulated penalty may nevertheless be equitably
reduced by the courts.32 This power is explicitly sanctioned by Articles 1229
Rescission has likewise been defined as the "unmaking of a contract, or
and 2227 of the Civil Code, which we quote:
its undoing from the beginning, and not merely its
termination." Rescission may be effected by both parties by mutual Pag
agreement; or unilaterally by one of them declaring a rescission of contract "Art. 1229. The judge shall equitably reduce the penalty when the
without the consent of the other, if a legally sufficient ground exists or if a principal obligation has been partly or irregularly complied with by
e|
decree of rescission is applied for before the courts. 22 On the other the debtor. Even if there has been no performance, the penalty 5
hand, termination refers to an "end in time or existence; a close, cessation may also be reduced by the courts if it is iniquitous or
or conclusion." With respect to a lease or contract, it means an ending, unconscionable."
usually before the end of the anticipated term of such lease or contract, that
may be effected by mutual agreement or by one party exercising one of its
remedies as a consequence of the default of the other.23 "Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable."
Thus, mutual restitution is required in a rescission (or resolution), in order to
bring back the parties to their original situation prior to the inception of the
contract.24 Applying this principle to this case, it means that PPC would re- The question of whether a penalty is reasonable or iniquitous is addressed
to the sound discretion of the courts. To be considered in fixing the amount
acquire possession of the leased premises, and PAGCOR would get back
the rentals it paid the former for the use of the hotel space. of penalty are factors such as -- but not limited to -- the type, extent and
purpose of the penalty; the nature of the obligation; the mode of the breach
and its consequences; the supervening realities; the standing and
In contrast, the parties in a case of termination are not restored to their relationship of the parties; and the like.33
original situation; neither is the contract treated as if it never existed. Prior
to its termination, the parties are obliged to comply with their contractual
obligations. Only after the contract has been cancelled will they be released In this case, PAGCOR’s breach was occasioned by events that, although
from their obligations. not fortuitous in law, were in fact real and pressing. From the CA’s factual
findings, which are not contested by either party, we find that PAGCOR
conducted a series of negotiations and consultations before entering into
In this case, the actions and pleadings of petitioner show that it never the Contract. It did so not only with the PPC, but also with local government
intended to rescind the Lease Contract from the beginning. This fact was officials, who assured it that the problems were surmountable. Likewise,
evident when it first sought to collect the accrued rentals from September to PAGCOR took pains to contest the ordinances34 before the courts, which
November 1993 because, as previously stated, it actually demanded the consequently declared them unconstitutional. On top of these
enforcement of the Lease Contract prior to termination. Any intent to developments, the gaming corporation was advised by the Office of the
rescind was not shown, even when it abrogated the Contract on November President to stop the games in Cagayan de Oro City, prompting the former
25, 1993, because such abrogation was not the rescission provided for to cease operations prior to September 1993.
under Article 1659.
Also worth mentioning is the CA’s finding that PAGCOR’s casino operations
Future Rentals had to be suspended for days on end since their start in December 1992;
and indefinitely from July 15, 1993, upon the advice of the Office of
President, until the formal cessation of operations in September 1993.
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is
Needless to say, these interruptions and stoppages meant that PAGCOR
inapplicable, because the remedy resorted to by the lessors in that case
suffered a tremendous loss of expected revenues, not to mention the fact
was rescission, not termination. The rights and obligations of the parties
that it had fully operated under the Contract only for a limited time.
in Rios were governed by Article 1659 of the Civil Code; hence, the Court
held that the damages to which the lessor was entitled could not have
extended to the lessee’s liability for future rentals. While petitioner’s right to a stipulated penalty is affirmed, we consider the
claim for future rentals to the tune of P7,037,835.40 to be highly iniquitous.
The amount should be equitably reduced. Under the circumstances, the
Upon the other hand, future rentals cannot be claimed as compensation for
advanced rental deposits in the sum of P687,289.50 should be sufficient
the use or enjoyment of another’s property after the termination of a
penalty for respondent’s breach.
contract. We stress that by abrogating the Contract in the present case,
PPC released PAGCOR from the latter’s future obligations, which included
the payment of rentals. To grant that right to the former is to unjustly enrich WHEREFORE, the Petition is GRANTED in part. The assailed Decision
it at the latter’s expense. and Resolution are hereby MODIFIED to include the payment of penalty.
Accordingly, respondent is ordered to pay petitioner the additional amount
of P687,289.50 as penalty, which may be set off or applied against the
However, it appears that Section XX (c) was intended to be a penalty
former’s advanced rental deposits. Meanwhile, the CA’s award to petitioner
clause. That fact is manifest from a reading of the mandatory provision
of actual damages representing the accrued rentals for September to
under subparagraph (a) in conjunction with subparagraph (c) of the
November 1993 -- with interest and penalty at the rate of two percent (2%)
Contract. A penal clause is "an accessory obligation which the parties
per month, from the date of filing of the Complaint until the amount shall
attach to a principal obligation for the purpose of insuring the performance
have been fully paid -- as well as the P50,000 award for attorney’s fees,
thereof by imposing on the debtor a special prestation (generally consisting
is AFFIRMED. No costs.
in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled."26
SO ORDERED.
Quite common in lease contracts, this clause functions to strengthen the
coercive force of the obligation and to provide, in effect, for what could be G.R. NO.172384 : September 12, 2007]
the liquidated damages resulting from a breach. 27 There is nothing immoral
or illegal in such indemnity/penalty clause, absent any showing that it was
ERMINDA F. FLORENTINO, Petitioner, v. SUPERVALUE,
forced upon or fraudulently foisted on the obligor. 28
INC., Respondent.

In obligations with a penal clause, the general rule is that the penalty serves
DECISION
as a substitute for the indemnity for damages and the payment of interests
in case of noncompliance; that is, if there is no stipulation to the
contrary,29 in which case proof of actual damages is not necessary for the CHICO-NAZARIO, J.:
penalty to be demanded.30 There are exceptions to the aforementioned
rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2) when the obligor is Before this Court is a Petition for Review on Certiorari under Rule 45 of the
sued for refusal to pay the agreed penalty, and 3) when the obligor is guilty Revised Rules of Court, filed by petitioner Erminda F. Florentino, seeking to
of fraud. In these cases, the purpose of the penalty is obviously to punish reverse and set aside the Decision,1 dated 10 October 2003 and the
the obligor for the breach. Hence, the obligee can recover from the former Resolution,2 dated 19 April 2006 of the Court of Appeals in CA-G.R. CV No.
not only the penalty, but also other damages resulting from the 73853. The appellate court, in its assailed Decision and Resolution,
nonfulfillment of the principal obligation. 31 modified the Decision dated 30 April 2001 of the Regional Trial Court (RTC)
of Makati, Branch 57, in Civil Case No. 00-1015, finding the respondent
Supervalue, Inc., liable for the sum of P192,000.00, representing the
In the present case, the first exception applies because Article XX (c) security deposits made by the petitioner upon the commencement of their
provides that, aside from the payment of the rentals corresponding to the Contract of Lease. The dispositive portion of the assailed appellate court's
remaining term of the lease, the lessee shall also be liable "for any and all Decision thus reads:
damages, actual or consequential, resulting from such default and
WHEREFORE, premises considered, the appeal is PARTLY GRANTED. In addition, petitioner alleged that the respondent, without justifiable cause
The April 30, 2001 Decision of the Regional Trial Court of Makati, Branch and without previous demand, refused to return the security deposits in the
57 is therefore MODIFIED to wit: (a) the portion ordering the [herein amount of P192,000.00.18
respondent] to pay the amount of P192,000.00 representing the security
deposits and P50,000.00 as attorney's fees in favor of the [herein petitioner]
Further, petitioner claimed that the respondent seized her equipment and
as well as giving [respondent] the option to reimburse [petitioner] - of the
personal belongings found inside the store space in SM Megamall after the
value of the improvements introduced by the [petitioner] on the leased
lease contract for the said outlet expired and despite repeated written
[premises] should [respondent] choose to appropriate itself or require the
demands from the petitioner, respondent continuously refused to return the
[petitioner] to remove the improvements, is hereby REVERSED and SET
seized items.19
ASIDE; and (b) the portion ordering the return to [petitioner] the properties
seized by [respondent] after the former settled her obligation with the latter
is however MAINTAINED.3 Petitioner thus prayed for the award of actual damages in the sum
Pag
of P472,000.00, representing the sum of security deposits, cost of e|
improvements and the value of the personal properties seized. Petitioner
The factual and procedural antecedents of the instant petition are as 6
also asked for the award of P300,000.00 as moral damages; P50,000.00 as
follows:
exemplary damages; and P80,000.00 as attorney's fees and expenses of
litigation.20
Petitioner is doing business under the business name "Empanada Royale,"
a sole proprietorship engaged in the retail of empanada with outlets in
For its part, respondent countered that petitioner committed several
different malls and business establishments within Metro Manila. 4
violations of the terms of their Contracts of Lease by not opening from 16
December 1999 to 26 December 1999, and by introducing a new variety of
Respondent, on the other hand, is a domestic corporation engaged in the empanada without the prior consent of the respondent, as mandated by the
business of leasing stalls and commercial store spaces located inside SM provision of Section 2 of the Contract of Lease. Respondent also alleged
Malls found all throughout the country.5 that petitioner infringed the lease contract by frequently closing earlier than
the agreed closing hours. Respondent finally averred that petitioner is liable
for the amount P106,474.09, representing the penalty for selling a new
On 8 March 1999, petitioner and respondent executed three Contracts of
variety of empanada, electricity and water bills, and rental adjustment,
Lease containing similar terms and conditions over the cart-type stalls at
among other charges incidental to the lease agreements. Respondent
SM North Edsa and SM Southmall and a store space at SM Megamall. The
claimed that the seizure of petitioner's personal belongings and equipment
term of each contract is for a period of four months and may be renewed
was in the exercise of its retaining lien, considering that the petitioner failed
upon agreement of the parties.6
to settle the said obligations up to the time the complaint was filed. 21

Upon the expiration of the original Contracts of Lease, the parties agreed to
Considering that petitioner already committed several breaches of contract,
renew the same by extending their terms until 31 March 2000. 7
the respondent thus opted not to renew its Contracts of Lease with her
anymore. The security deposits were made in order to ensure faithful
Before the expiration of said Contracts of Lease, or on 4 February 2000, compliance with the terms of their lease agreements; and since petitioner
petitioner received two letters from the respondent, both dated 14 January committed several infractions thereof, respondent was justified in forfeiting
2000, transmitted through facsimile transmissions.8 the security deposits in the latter's favor.

In the first letter, petitioner was charged with violating Section 8 of the On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner
Contracts of Lease by not opening on 16 December 1999 and 26 and found that the physical takeover by the respondent of the leased
December 1999.9 premises and the seizure of petitioner's equipment and personal belongings
without prior notice were illegal. The decretal part of the RTC Judgment
reads:
Respondent also charged petitioner with selling a new variety of empanada
called "mini-embutido" and of increasing the price of her merchandise
from P20.00 to P22.00, without the prior approval of the respondent.10 WHEREFORE, premises duly considered, judgment is hereby rendered
ordering the [herein respondent] to pay [herein petitioner] the amount
of P192,000.00 representing the security deposits made by the [petitioner]
Respondent observed that petitioner was frequently closing earlier than the and P50,000.00 as and for attorney's fees.
usual mall hours, either because of non-delivery or delay in the delivery of
stocks to her outlets, again in violation of the terms of the contract. A stern
warning was thus given to petitioner to refrain from committing similar The [respondent] is likewise ordered to return to the [petitioner] the various
infractions in the future in order to avoid the termination of the lease properties seized by the former after settling her account with the
contract.11 [respondent].

In the second letter, respondent informed the petitioner that it will no longer Lastly, the [respondent] may choose either to reimburse the [petitioner] one
renew the Contracts of Lease for the three outlets, upon their expiration on half (1/2) of the value of the improvements introduced by the plaintiff at SM
31 March 2000.12 Megamall should [respondent] choose to appropriate the improvements to
itself or require the [petitioner] to remove the improvements, even though
the principal thing may suffer damage thereby. [Petitioner] shall not,
In a letter-reply dated 11 February 2000, petitioner explained that the "mini-
however, cause anymore impairment upon the said leased premises than is
embutido" is not a new variety of empanada but had similar fillings, taste necessary.
and ingredients as those of pork empanada; only, its size was reduced in
order to make it more affordable to the buyers.13
The other damages claimed by the plaintiff are denied for lack of merit.
Such explanation notwithstanding, respondent still refused to renew its
Contracts of Lease with the petitioner. To the contrary, respondent took Aggrieved, the respondent appealed the adverse RTC Judgment to the
possession of the store space in SM Megamall and confiscated the Court of Appeals.
equipment and personal belongings of the petitioner found therein after the
expiration of the lease contract.14
In a Decision23 dated 10 October 2003, the Court of Appeals modified the
RTC Judgment and found that the respondent was justified in forfeiting the
In a letter dated 8 May 2000, petitioner demanded that the respondent security deposits and was not liable to reimburse the petitioner for the value
release the equipment and personal belongings it seized from the SM of the improvements introduced in the leased premises and to pay for
Megamall store space and return the security deposits, in the sum attorney's fees. In modifying the findings of the lower court, the appellate
of P192,000.00, turned over by the petitioner upon signing of the Contracts court declared that in view of the breaches of contract committed by the
of Lease. On 15 June 2000, petitioner sent respondent another letter petitioner, the respondent is justified in forfeiting the security deposits.
reiterating her previous demands, but the latter failed or refused to comply Moreover, since the petitioner did not obtain the consent of the respondent
therewith.15 before she introduced improvements on the SM Megamall store space, the
respondent has therefore no obligation to reimburse the petitioner for the
amount expended in connection with the said improvements.24 The Court of
On 17 August 2000, an action for Specific Performance, Sum of Money and Appeals, however, maintained the order of the trial court for respondent to
Damages was filed by the petitioner against the respondent before the RTC return to petitioner her properties after she has settled her obligations to the
of Makati, Branch 57.16
respondent. The appellate court denied petitioner's Motion for
Reconsideration in a Resolution25 dated 19 April 2006.
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged
that the respondent made verbal representations that the Contracts of
Hence, this instant Petition for Review on Certiorari26 filed by the petitioner
Lease will be renewed from time to time and, through the said assailing the Court of Appeals Decision. For the resolution of this Court are
representations, the petitioner was induced to introduce improvements the following issues:
upon the store space at SM Megamall in the sum of P200,000.00, only to
find out a year later that the respondent will no longer renew her lease
contracts for all three outlets.17 I. Whether or not the respondent is liable to return the security deposits to
the petitions.
II. Whether or not the respondent is liable to reimburse the petitioner for the not of such degree that the respondent was unduly prejudiced thereby. It is
sum of the improvements she introduced in the leased premises. III. but equitable therefore to reduce the penalty of the petitioner to 50% of the
Whether or not the respondent is liable for attorney's fees. total amount of security deposits.

The appellate court, in finding that the respondent is authorized to forfeit the It is in the exercise of its sound discretion that this court tempered the
security deposits, relied on the provisions of Sections 5 and 18 of the penalty for the breaches committed by the petitioner to 50% of the amount
Contract of Lease, to wit: of the security deposits. The forfeiture of the entire sum of P192,000.00 is
clearly a usurious and iniquitous penalty for the transgressions committed
by the petitioner. The respondent is therefore under the obligation to return
Section 5.DEPOSIT. The LESSEE shall make a cash deposit in the sum of
the 50% of P192,000.00 to the petitioner.
SIXTY THOUSAND PESOS (P60,000.00) equivalent to three (3) months Pag
rent as security for the full and faithful performance to each and every term,
provision, covenant and condition of this lease and not as a pre-payment of Turning now to the liability of the respondent to reimburse the petitioner for e|
rent. If at any time during the term of this lease the rent is increased[,] the one-half of the expenses incurred for the improvements on the leased store
LESSEE on demand shall make an additional deposit equal to the increase space at SM Megamall, the following provision in the Contracts of Lease 7
in rent. The LESSOR shall not be required to keep the deposit separate will enlighten us in resolving this issue:
from its general funds and the deposit shall not be entitled to interest. The
deposit shall remain intact during the entire term and shall not be applied as
Section 11.ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The
payment for any monetary obligations of the LESSEE under this contract. If
LESSEE shall not make any alterations, additions, or improvements without
the LESSEE shall faithfully perform every provision of this lease[,] the
the prior written consent of LESSOR; and all alterations, additions or
deposit shall be refunded to the LESSEE upon the expiration of this Lease
improvements made on the leased premises, except movable or fixtures
and upon satisfaction of all monetary obligation to the LESSOR.
put in at LESSEE's expense and which are removable, without defacing the
buildings or damaging its floorings, shall become LESSOR's property
xxx without compensation/reimbursement but the LESSOR reserves the right to
require the removal of the said alterations, additions or improvements upon
expiration of the lease.
Section 18.TERMINATION. Any breach, non-performance or non-
observance of the terms and conditions herein provided shall constitute
default which shall be sufficient ground to terminate this lease, its extension The foregoing provision in the Contract of Lease mandates that before the
or renewal. In which event, the LESSOR shall demand that LESSEE petitioner can introduce any improvement on the leased premises, she
immediately vacate the premises, and LESSOR shall forfeit in its favor the should first obtain respondent's consent. In the case at bar, it was not
deposit tendered without prejudice to any such other appropriate action as shown that petitioner previously secured the consent of the respondent
may be legally authorized.28 before she made the improvements on the leased space in SM Megamall. It
was not even alleged by the petitioner that she obtained such consent or
she at least attempted to secure the same. On the other hand, the
Since it was already established by the trial court that the petitioner was
petitioner asserted that respondent allegedly misrepresented to her that it
guilty of committing several breaches of contract, the Court of Appeals
would renew the terms of the contracts from time to time after their
decreed that she cannot therefore rightfully demand the return of the
expirations, and that the petitioner was so induced thereby that she
security deposits for the same are deemed forfeited by reason of evident
expended the sum of P200,000.00 for the improvement of the store space
contractual violations.
leased.

It is undisputed that the above-quoted provision found in all Contracts of

This argument was squarely addressed by this court in Fernandez v. Court
Lease is in the nature of a penal clause to ensure petitioner's faithful
of Appeals,33 thus:
compliance with the terms and conditions of the said contracts.

The Court ruled that the stipulation of the parties in their lease contract "to
A penal clause is an accessory undertaking to assume greater liability in
be renewable" at the option of both parties stresses that the faculty to
case of breach. It is attached to an obligation in order to insure performance
renew was given not to the lessee alone nor to the lessor by himself but to
and has a double function: (1) to provide for liquidated damages, and (2) to
the two simultaneously; hence, both must agree to renew if a new contract
strengthen the coercive force of the obligation by the threat of greater
is to come about.
responsibility in the event of breach.29 The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof of the existence
and the measure of damages caused by the breach. 30 Article 1226 of the Petitioner's contention that respondents had verbally agreed to extend the
Civil Code states: lease indefinitely is inadmissible to qualify the terms of the written contract
under the parole evidence rule, and unenforceable under the statute of
frauds.34
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless, Moreover, it is consonant with human experience that lessees, before
damages shall be paid if the obligor refuses to pay the penalty or is guilty of occupying the leased premises, especially store spaces located inside
fraud in the fulfillment of the obligation. malls and big commercial establishments, would renovate the place and
introduce improvements thereon according to the needs and nature of their
business and in harmony with their trademark designs as part of their
The penalty may be enforced only when it is demandable in accordance
marketing ploy to attract customers. Certainly, no inducement or
with the provisions of this Code.
misrepresentation from the lessor is necessary for this purpose, for it is not
only a matter of necessity that a lessee should re-design its place of
As a general rule, courts are not at liberty to ignore the freedoms of the business but a business strategy as well.
parties to agree on such terms and conditions as they see fit as long as
they are not contrary to law, morals, good customs, public order or public
In ruling that the respondent is liable to reimburse petitioner one half of the
policy. Nevertheless, courts may equitably reduce a stipulated penalty in
amount of improvements made on the leased store space should it choose
the contracts in two instances: (1) if the principal obligation has been partly
to appropriate the same, the RTC relied on the provision of Article 1678 of
or irregularly complied with; and (2) even if there has been no compliance if
the Civil Code which provides:
the penalty is iniquitous or unconscionable in accordance with Article 1229
of the Civil Code which clearly provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which
are suitable to the use for which the lease is intended, without altering the
Art. 1229. The judge shall equitably reduce the penalty when the principal
form or substance of the property leased, the lessor upon the termination of
obligation has been partly or irregularly complied with by the debtor. Even if
the lease shall pay the lessee one-half of the value of the improvements at
there has been no performance, the penalty may also be reduced by the
that time. Should the lessor refuse to reimburse said amount, the lessee
courts if it is iniquitous or unconscionable.31
may remove the improvements, even though the principal thing may suffer
damage thereby. He shall not, however, cause any more impairment upon
In ascertaining whether the penalty is unconscionable or not, this court set the property leased than is necessary.
out the following standard in Ligutan v. Court of Appeals,32 to wit:
While it is true that under the above-quoted provision of the Civil Code, the
The question of whether a penalty is reasonable or iniquitous can be partly lessor is under the obligation to pay the lessee one-half of the value of the
subjective and partly objective. Its resolution would depend on such factor improvements made should the lessor choose to appropriate the
as, but not necessarily confined to, the type, extent and purpose of the improvements, Article 1678 however should be read together with Article
penalty, the nature of the obligation, the mode of breach and its 448 and Article 546 of the same statute, which provide:
consequences, the supervening realities, the standing and relationship of
the parties, and the like, the application of which, by and large, is
Art. 448. The owner of the land on which anything has been built, sown or
addressed to the sound discretion of the court. xxx. crvll
planted in good faith, shall have the right to appropriate as his own the
works, sowing or planting, after payment of the indemnity provided for in
In the instant case, the forfeiture of the entire amount of the security articles 546 and 548, or to oblige the one who built or planted to pay the
deposits in the sum of P192,000.00 was excessive and unconscionable price of the land, and the one who sowed, the proper rent. However, the
considering that the gravity of the breaches committed by the petitioner is builder or planter cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In such case, he shall Decision2 of the Regional Trial Court, Branch 7, Manila (RTC Manila) in
pay reasonable rent, if the owner of the land does not choose to Civil Case No. 92-62029 and granted respondent Country Bankers
appropriate the building or trees after proper indemnity. The parties shall Insurance Corporation's (Country Bankers') prayer for a sum of money
agree upon the terms of the lease and in case of disagreement, the court against the petitioners.
shall fix the terms thereof.
The controversy originated from a civil case3 pending before the Regional
xxx Trial Court, Branch 125, Caloocan City (RTC Caloocan) filed by Marceliano
Borja (Borja) against Rogelio S. Acidre (Rogelio) for the latter's breach of
his obligation to construct a residential and commercial building. Rogelio is
Art. 546. Necessary expenses shall be refunded to every possessor; but
the sole proprietor of petitioner Diamond Builders Conglomeration (DBC).
only possessor in good faith may retain the thing until he has been Pag
reimbursed therefor.
To put an end to the foregoing litigation, the parties entered into a e|
Compromise Agreement4 which provided, in part:
Useful expenses shall be refunded only to the possessor in good faith with 8
the same right of retention, the person who has defeated him in the
possession having the option of refunding the amount of the expenses or of COMPROMISE AGREEMENT
paying the increase in value which the thing may have acquired by reason
thereof.
1. x x x

Thus, to be entitled to reimbursement for improvements introduced on the

A. In lieu of rescission, the parties have mutually agreed, subject to the
property, the petitioner must be considered a builder in good faith. Further,
provisions hereunder, to fully implement the building contract dated October
Articles 448 and 546 of the Civil Code, which allow full reimbursement of
1, 1990 and supplemented on October 2, 1990 with an additional scope of
useful improvements and retention of the premises until reimbursement is
work marked as Annex "A" of the complaint and the Letter-Agreement
made, apply only to a possessor in good faith, i.e., one who builds on land
dated November 16, 1991 signed by the [petitioner Rogelio] and plaintiff's
with the belief that he is the owner thereof. A builder in good faith is one
son(,) Ferdinand A. Borja, marked as Annex "B" of the complaint, which
who is unaware of any flaw in his title to the land at the time he builds on
required full compliance of the structural design of Engr. Ramos and explicit
it.35 In this case, the petitioner cannot claim that she was not aware of any
reminders in the constructing of the residential/commercial building and the
flaw in her title or was under the belief that she is the owner of the subject
additional works therein specified for the added consideration
premises for it is a settled fact that she is merely a lessee
of P100,000.00 as alleged in paragraphs 2 and 3 of the complaint, Annex
thereof.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
"C" hereof.

In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring

b. [Petitioner Rogelio] admits full payment of plaintiff to him the amount
that lessees are not possessors or builders in good faith, thus:
of P1,530,000.00 leaving the balance of P570,000.00 of the contractual
price of P2,100,000.00 for the construction of the buildings aforementioned.
Being mere lessees, the private respondents knew that their occupation of
the premises would continue only for the life of the lease. Plainly, they
c. [Petitioner Rogelio] agrees to fully complete the construction of the
cannot be considered as possessors nor builders in good faith.
residential/commercial building mentioned in paragraph 1 hereof provided
plaintiff would pay to him, subject to hereunder terms, the aforesaid amount
In a plethora of cases, this Court has held that Article 448 of the Civil Code, of P570,000.00.
in relation to Article 546 of the same Code, which allows full reimbursement
of useful improvements and retention of the premises until reimbursement
d. The plaintiff agrees to pay [petitioner Rogelio] the amount
is made, applies only to a possessor in good faith, i.e., one who builds on
of P570,000.00 subject to the terms hereunder set forth and subject strictly
land with the belief that he is the owner thereof. It does not apply where
to the condition that [petitioner Rogelio] will finish the building above-
one's only interest is that of a lessee under a rental contract; otherwise, it
described pursuant to the agreements [Annex(es) "A" and "B"] set forth in
would always be in the power of the tenant to "improve" his landlord out of
paragraph 1 hereof.
his property.

e. Plaintiff shall pay [petitioner Rogelio] the amount of P570,000.00 as

Since petitioner's interest in the store space is merely that of the lessee
follows:
under the lease contract, she cannot therefore be considered a builder in
good faith. Consequently, respondent may appropriate the improvements
introduced on the leased premises without any obligation to reimburse the i. P370,000.00 - the 5th day from approval of this compromise agreement
petitioner for the sum expended. by this Honorable Court and to coincide (with) the start of the 75 days for
[petitioner Rogelio] to complete the construction of the building.
Anent the claim for attorney's fees, we resolve to likewise deny the award
of the same. Attorney's fees may be awarded when a party is compelled to ii. P200,000.00 - When the aforedescribed building is fully constructed
litigate or to incur expenses to protect its interest by reason of unjustified pursuant to agreements stated in paragraph 1 hereof.
act of the other.37
iii. Said building must be fully finished pursuant to the agreement stated in
In the instant petition, it was not shown that the respondent unjustifiably paragraph 1 hereof within 75 days (excluding Sundays and Holidays)
refused to grant the demands of the petitioner so as to compel the latter to counted from receipt of payment of P370,000.00. The date of receipt to be
initiate legal action to enforce her right. As we have found herein, there is issued by [petitioner Rogelio] will control. The 75th day will be 12:00 noon
basis for respondent's refusal to return to petitioner the security deposits of the 75th day.
and to reimburse the costs of the improvements in the leased premises.
The award of attorney's fees is therefore not proper in the instant case.
iv. From receipt of the aforesaid amount of P370,000.00, [petitioner
Rogelio] shall submit in favor of plaintiff a performance or surety bond in the
WHEREFORE, premises considered, the instant Petition is PARTLY equivalent amount of P370,000.00 - to answer or indemnify plaintiff in the
GRANTED. The Court of Appeals Decision dated 10 October 2003 in CA- event the building is not finished on the 75th day.
G.R. CV No. 73853 is hereby AFFIRMED with the MODIFICATION that the
respondent may forfeit only 50% of the total amount of the security deposits
in the sum of P192,000.00, and must return the remaining 50% to the v. In the event the building is finished within 75 days as heretofore stated
petitioner. No costs. and pursuant to the agreements set forth in paragraph 1 hereof, in addition
to the amount of P200,000.00, the plaintiff shall also pay [petitioner Rogelio]
the amount of P90,000.00 by way of [bonus]. However, in the event
SO ORDERED. [petitioner Rogelio] shall fail to fully complete the construction of the
building pursuant to the agreements set forth in paragraph 1 hereof within
75 days as heretofore stated, [petitioner Rogelio] shall not be entitled to any
[G.R. NO. 171820 : December 13, 2007]
further payments and the performance or surety bond above-mentioned
shall be fully implemented by way of penalizing [petitioner Rogelio] and/or
DIAMOND BUILDERS CONGLOMERATION, ROGELIO S. ACIDRE, as award for damages in favor of plaintiff.
TERESITA P. ACIDRE, GRACE C. OSIAS, VIOLETA S. FAIYAZ and
EMMA S. CUTILLAR, Petitioners, v. COUNTRY BANKERS INSURANCE
xxx
CORPORATION, Respondent.

f. x x x
DECISION

g. That the construction herein contemplated shall not extend beyond 75

NACHURA, J.:
days. Said period shall commence five days from the date of the final
approval hereof by this Honorable Court.
Before us is a Petition for Review on Certiorari to annul the Decision1 of the
Court of Appeals (CA) in CA-G.R. C.V. No. 48603, which reversed the
i. That any violation and/or avoidance of the terms and conditions of this WHEREFORE, premises considered, the Appeal is GRANTED and the
Compromise Agreement by either of the parties herein shall forthwith entitle Decision dated November 2, 1992 of Branch 7 of the Regional Trial Court
the aggrieved party to an immediate execution hereof and to the necessary of Manila is hereby REVERSED and a new one entered, ordering
and corresponding reliefs and remedies therefore. (Emphasis supplied.) [petitioners] to pay [Country Bankers] the sum of THREE HUNDRED
SEVENTY THOUSAND PESOS (P370,000.00), as reimbursement or
actual damages, plus interest thereon at the rate of 12% per annum
The RTC Caloocan approved the Compromise Agreement and rendered a
computed from the date of judicial demand, or from July 24, 1992, the date
Decision5 in accordance with the terms and conditions contained therein.
of filing of the complaint until the said amount has been fully paid.

In compliance with the Compromise Agreement, Rogelio obtained a Surety

SO ORDERED.
Bond6 from Country Bankers in favor of the spouses Borja.7 In this regard, Pag
Rogelio and his spouse, petitioner Teresita P. Acidre, together with DBC
employees Grace C. Osias, Violeta S. Faiyaz and Emma S. Cutillar (the In reversing the trial court, the CA ruled that Country Bankers, as surety of e|
other petitioners herein), signed an Indemnity Agreement8 consenting to Rogelio's loan obligation, did not effect voluntary payment on the bond. The
their joint and several liability to Country Bankers should the surety bond be appellate court found that what Country Bankers paid was an obligation 9
executed upon. legally due and demandable. It declared that Country Bankers acted upon
compulsion of a writ of execution, which appears to have been regularly,
and validly issued, and, by its very nature, is immediately enforceable.
On April 23, 1992, Country Bankers received a Motion for Execution9 of the
surety bond filed by Borja with the RTC Caloocan for Rogelio's alleged
violation of the Compromise Agreement. Consequently, Country Bankers, Hence, this appeal positing a sole issue for our resolution, to wit:
in a letter10 dated May 13, 1992, advised petitioners that in the event it is
constrained to pay under the surety bond to Borja, it shall proceed against
Whether petitioners should indemnify Country Bankers for the payment of
petitioners for reimbursement.
the surety bond.

In turn, petitioners wrote Country Bankers informing the latter of the filing of
In fine, petitioners contend that Country Bankers is not entitled to
an Opposition to Borja's Motion for Execution.11 In spite of the opposition,
reimbursement when it voluntarily paid the surety bond considering it knew
however, the RTC Caloocan issued a Writ of Execution12 on May 25, 1992.
full well the remedies availed of by petitioners to stay the execution of the
Petitioners then filed a motion for reconsideration.
compromise judgment. Thus, Country Bankers must bear the loss or
damage arising from its voluntary act.
On May 29, 1992, Sheriff Perceverando Pangan of RTC Caloocan served
Country Bankers a copy of the writ. Posthaste, Country Bankers, in writing,
We deny the appeal and affirm the appellate court's ruling. Country
requested Sheriff Pangan for a 10-day grace period within which to settle
Bankers should be reimbursed for the P370,000.00 it paid to Borja under
the claim.13
the surety bond.

Subsequently, Rogelio filed an Urgent Omnibus Motion14 to suspend the

In impugning the CA's decision, petitioners invoke their pending Omnibus
Writ of Execution and to resolve the Motion for Reconsideration dated June
Motion to stay the execution of the compromise judgment. Petitioners'
3, 1992. Upon receipt of the Omnibus Motion, Country Bankers forthwith
theory is that, although the RTC Caloocan had already issued a writ of
wrote Sheriff Pangan and requested that the implementation of the Writ of
execution and Country Bankers had been served a Notice of Levy/Sheriff's
Execution be held in abeyance so as not to render moot and academic the
Sale of its properties at the impending public auction, the payment made by
RTC Caloocan's resolution on the Omnibus Motion.15
Country Bankers to Borja is a voluntary act. Petitioners push their theory
even further, and deign to suggest that Country Bankers should have itself
Nonetheless, on June 9, 1992, Country Bankers was served a Notice of intervened in the proceedings before the RTC Caloocan to stay the writ of
Levy/Sheriff's Sale16 with a list of its personal properties to be sold at the execution.
scheduled public auction on June 15, 1992.
We reject this preposterous suggestion. Petitioners ought to be reminded of
The next day, or on June 10, 1992, Country Bankers verified with the RTC the nature of a judgment on a compromise and a writ of execution issued in
Caloocan the status of petitioners' Omnibus Motion. It was informed that connection therewith.
the motion had yet to be acted upon. On the same date, Sheriff Pangan
arrived at Country Bankers' office, and the latter was thus constrained to
A compromise judgment is a decision rendered by a court sanctioning the
pay the amount of the surety bond.17
agreement between the parties concerning the determination of the
controversy at hand. Essentially, it is a contract, stamped with judicial
Significantly, on June 22, 1992, twelve (12) days after the satisfaction of imprimatur, between two or more persons, who, for preventing or putting an
judgment in Civil Case No. C-14745, Rogelio filed a Petition end to a lawsuit, adjust their difficulties by mutual consent in the manner
for Certiorari and Prohibition with Preliminary Injunction and Restraining which they agree on, and which each of them prefers in the hope of
Order18 with the CA, docketed as CA-G.R. SP No. 28205. Although the gaining, balanced by the danger of losing.22 Upon court approval of a
appellate court issued a Temporary Restraining Order (TRO), the petition compromise agreement, it transcends its identity as a mere contract binding
was eventually denied due course and dismissed outright for being fait only upon the parties thereto, as it becomes a judgment that is subject to
accompli, as what it sought to enjoin or prohibit had already been fully execution in accordance with Rule 39 of the Rules of Court. 23
satisfied and executed.19
Ordinarily, a judgment based on compromise is not appealable. It should
In the meantime, after Country Bankers was compelled to pay the amount not be disturbed except upon a showing of vitiated consent or forgery. The
of the surety bond, it demanded reimbursement from the petitioners under reason for the rule is that when both parties enter into an agreement to end
the Indemnity Agreement.20 However, petitioners refused to reimburse a pending litigation and request that a decision be rendered approving said
Country Bankers. agreement, it is only natural to presume that such action constitutes an
implicit, as undeniable as an express, waiver of the right to appeal against
said decision.24 Thus, a decision on a compromise agreement is final and
In addition, upon the dismissal of their petition in CA-G.R. SP No. 28205,
executory, and is conclusive between the parties.25
petitioners wrote Country Bankers and informed the latter that the voluntary
payment of the bond effectively prevented them from contesting the validity
of the issuance of the Writ of Execution.21 It is beyond cavil that if a party fails or refuses to abide by a compromise
agreement, the other party may either enforce the compromise or regard it
as rescinded and insist upon his original demand.26 Following this
As a result, Country Bankers filed a complaint for sum of money against the
mandatory rule, the RTC Caloocan granted Borja's motion, and
petitioners which, as previously stated, the RTC Manila dismissed. It
subsequently issued an order to the sheriff to execute the compromise
disposed of the case, thus:
judgment. Notwithstanding the foregoing, petitioners still maintain that since
they had taken steps to stay the execution of the compromise judgment,
WHEREFORE, and considering the foregoing, judgment is hereby Country Bankers, with full knowledge of their active opposition to the
rendered: execution thereof, should not have readily complied with the RTC Caloocan
Order.
1. Dismissing the complaint for lack of merit;
Petitioners' argument contemplates a brazen defiance of a validly issued
court order, which had not been restrained by the appellate court or this
2. On the counterclaim, ordering [Country Bankers] to pay [petitioners] Court. The argument is unacceptable.
attorney's fees of P50,000.00, plus the costs of suit.

The Compromise Agreement between Borja and Rogelio explicitly provided

SO ORDERED.
that the latter's failure to complete construction of the building within the
stipulated period27 shall cause the full implementation of the surety bond as
On appeal, the CA reversed and set aside the decision of the RTC Manila, a penalty for the default, and as an award of damages to Borja.
to wit: Furthermore, the Compromise Agreement contained a default executory
clause in case of a violation or avoidance of the terms and conditions
thereof. Therefore, the payment made by Country Bankers to Borja was (e) where petitioner was deprived of due process and there is extreme
proper, as failure to pay would have amounted to contumacious urgency for relief;
disobedience of a valid court order.
(f) where, in a criminal case, relief from an order of arrest is urgent and the
Clearly, even without the aforesaid default clause, the compromise granting of such relief by the trial court is improbable;
judgment remained executory as against Rogelio, as the principal obligor
(co-debtor), and Country Bankers as surety of the obligation. Section 4,
(g) where the proceedings in the lower court are a nullity for lack of due
Rule 39 of the Rules of Court provides:
process;

SEC. 4. Judgments not stayed by appeal. - Judgments in actions for Pag

(h) where the proceedings was ex-parte or in which the petitioner had no
injunction, receivership, accounting and support, and such other judgments
opportunity to object; andcralawlibrary
as are now or may hereafter be declared to be immediately executory, shall e|
be enforceable after their rendition and shall not be stayed by an appeal
taken therefrom, unless otherwise ordered by the trial court. On appeal (i) where the issue raised is one purely of law or where public interest is 10
therefrom, the appellate court in its discretion may make an order involved.36
suspending, modifying, restoring or granting the injunction, receivership,
accounting, or award of support.
Evidently, it would not have been premature for petitioners to have filed a
petition before the CA, upon the issuance by the RTC Caloocan of a writ of
The stay of execution shall be upon such terms as to bind or otherwise as execution, because the RTC Caloocan already denied their Opposition to
may be considered proper for the security or protection of the rights of the Borja's Motion for Execution on the surety bond. If, as petitioners insist,
adverse party. they had a meritorious challenge to the satisfaction of the writ of execution,
they should have immediately filed a Petition for Certiorari with the CA and
therein alleged the exceptional circumstance warranting the non-filing of a
Other judgments in actions declared to be immediately executory and not
motion for reconsideration. Petitioners should not have persisted on waiting
stayed by the filing of an appeal are for: (1) compromise, 28 (2) forcible entry
for the resolution of their Omnibus Motion.
and unlawful detainer,29 (3) direct contempt,30 and (4) expropriation.31

We have consistently ruled that an order for the issuance of a writ of

Likewise, Section 9, paragraph (a),32 of the same Rule outlines the
execution is ordinarily not appealable. The reason for this is that the merits
procedure for execution of judgments for money, thus:
of the case should not be delved into anew after a determination has been
made thereon with finality.37 Otherwise, there would be practically no end to
SEC. 9 Execution of judgments for money, how enforced.' litigation since the losing party would always try to thwart execution by
appealing from every order granting the writ. In this case, this aphorism
should apply. Rogelio, after agreeing to an amicable settlement with Borja
(a) Immediate payment on demand. - The officer shall enforce an execution
to put an end to the case before the RTC Caloocan, cannot flout
of a judgment for money by demanding from the judgment obligor the
compliance of the court order of execution by refusing to reimburse Country
immediate payment of the full amount stated in the writ of execution and all
Bankers, the surety of his obligation in the compromise agreement.
lawful fees. The judgment obligor shall pay in case, certified bank check
payable to the judgment oblige, or any other form of payment acceptable to
the latter, the amount of the judgment debt under proper receipt directly to Still, petitioners stubbornly refuse to pay Country Bankers, contending that
the judgment oblige or his authorized representative if present at the time of the CA itself, in CA-G.R. SP No. 28205, declared that the payment effected
payment. The lawful fees shall be handed under proper receipt to the was voluntary.
executing sheriff who shall turn over the said amount within the same day
to the clerk of court of the court that issued the writ.
We are not persuaded.

As Rogelio's obligation under the compromise agreement, and approved by

Article 2047 of the Civil Code specifically calls for the application of the
the RTC Caloocan, had a penal clause33 which is monetary in nature,34 the
provisions on solidary obligations to suretyship contracts. In particular,
writ of execution availed of by Borja, and paid by Country Bankers, strictly
Article 1217 of the Civil Code recognizes the right of reimbursement from a
complied with the rules on execution of money judgments.
co-debtor (the principal co-debtor, in case of suretyship) in favor of the one
who paid (i.e., the surety).38 In contrast, Article 1218 of the Civil Code is
It is true that the petitioners did not directly question the compromise definitive on when reimbursement is unavailing, such that only those
judgment. What was pending before the Caloocan RTC was petitioners' payments made after the obligation has prescribed or became illegal shall
Omnibus Motion praying for a stay in the implementation of the writ of not entitle a solidary debtor to reimbursement. Nowhere in the invoked CA
execution. However, the bottom line issue raised in the Omnibus Motion is, Decision does it declare that a surety who pays, by virtue of a writ of
actually, a question on the compromise judgment, since its resolution would execution, is not entitled to reimbursement from the principal co-debtor. The
require an inquiry into the stipulations contained in the Compromise CA Decision was confined to the mootness of the issue presented and
Agreement, particularly the provision on immediate execution. petitioners' preclusion from the relief it prayed for, i.e., a stay of the writ of
execution, considering that the writ had already been satisfied.
Thus, when the RTC Manila ruled that the payment on the bond made by
Country Bankers was voluntary, the lower court effectively disregarded the More importantly, the Indemnity Agreement signed by Rogelio and the
rule on the non-appealable nature and the immediately executory character other petitioners explicitly provided for an incontestability clause on
of a judgment on a compromise. payments made by Country Bankers.ςηαñrοblεš νιr†υαl lαω
lιbrαrÿ
Moreover, it has not escaped our attention that petitioners belatedly filed a
Petition for Certiorari and Prohibition with prayer for a TRO with the CA, The said clause reads:
ostensibly to stop the execution of the compromise judgment. Not only was
the filing thereof late, it was done twelve (12) days after the satisfaction of
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: - Any
the compromise judgment. We are, therefore, perplexed why, despite the
payment or disbursement made by [Country Bankers] on account of the
urgency of the matter, petitioners merely banked on a pending motion for
above-mentioned Bond, its renewals, extensions, alterations or
reconsideration to stay the enforcement of an already issued writ of
substitutions either in the belief that [Country Bankers] was obligated to
execution. Petitioners' total reliance thereon was certainly misplaced.
make such payment or in the belief that said payment was necessary or
expedient in order to avoid greater losses or obligations for which [Country
Admittedly, the general rule is that certiorari will not lie unless a motion for Bankers] might be liable by virtue of the terms of the above-mentioned
reconsideration is first filed before the respondent tribunal to allow it an Bond, its renewals, extensions, alterations, or substitutions, shall be final
opportunity to correct the imputed errors.35 Nonetheless, the rule admits of and shall not be disputed by the undersigned, who hereby jointly and
exceptions, thus: severally bind themselves to indemnify [Country Bankers] of any and all
such payments, as stated in the preceding clauses.
(a) where the order is a patent nullity, as where the court a quo has no
jurisdiction; In case [Country Bankers] shall have paid, settled or compromised any
liability, loss, costs, damages, attorney's fees, expenses, claims, demands,
suits, or judgments as above-stated, arising out of or in connection with
(b) where the questions raised in the certiorari proceedings have been duly
said bond, an itemized statement thereof, signed by an officer of [Country
raised and passed upon by the lower court, or are the same as those raised
Bankers] and other evidence to show said payment, settlement or
and passed upon in the lower court;
compromise, shall be prima facie evidence of said payment, settlement or
compromise, as well as the liability of [petitioners] in any and all suits and
(c) where there is an urgent necessity for the resolution of the question and claims against [petitioners] arising out of said bond or this bond application.
any further delay would prejudice the interests of the Government or of the
petitioner or the subject matter of the action is perishable;
Ineluctably, petitioners are obligated to reimburse Country Bankers the
amount of P370,000.00.
(d) where, under the circumstances, a motion for reconsideration would be
useless;
Finally, petitioners desperately attempt to inveigle out of this burden, which interest monthly from the date of default until the entire obligation is fully
is of their own making, by imputing a lack of initiative on Country Banker's paid for.
part to intervene in the execution proceedings before the RTC.
Should this note be referred to a lawyer for collection, I agree to pay the
further sum equivalent to twenty percent (20%) of the total amount due and
This contention, as with the rest of petitioners' arguments, deserves scant
payable as and for attorney’s fees which in no case shall be less than
consideration. Suffice it to state that Country Bankers is a surety of the
P5,000.00 and to pay in addition the cost of suit and other incidental
obligation with a penal clause, constituted in the compromise judgment; it is
litigation expense.
not a joint and solidary co-debtor of Rogelio.
Any action which may arise in connection with this note shall be brought in
In the recent case of Escaňo v. Ortigas,39 we elucidated on the distinction the proper Court of the City of Manila.
Pag
between a surety as a co-debtor under a suretyship agreement and a joint
and solidary co-debtor, thus: Manila, February 24, 1995[.] e|
(SGD.) RODRIGO RIVERA4
11
(A)s indicated by Article 2047, a suretyship requires a principal debtor to
whom the surety is solidarily bound by way of an ancillary obligation of
segregate identity from the obligation between the principal debtor and the In October 1998, almost three years from the date of payment stipulated in
creditor. The suretyship does not bind the surety to the creditor, inasmuch the promissory note, Rivera, as partial payment for the loan, issued and
as the latter is vested with the right to proceed against the former to collect delivered to the Spouses Chua, as payee, a check numbered 012467,
the credit in lieu of proceeding against the principal debtor for the same dated 30 December 1998, drawn against Rivera’s current account with the
obligation. At the same time, there is also a legal tie created between the Philippine Commercial International Bank (PCIB) in the amount of
surety and the principal debtor to which the creditor is not privy or party to. P25,000.00.
The moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished. At the same On 21 December 1998, the Spouses Chua received another check
time, the surety may seek reimbursement from the principal debtor for the presumably issued by Rivera, likewise drawn against Rivera’s PCIB current
amount paid, for the surety does in fact "become subrogated to all the account, numbered 013224, duly signed and dated, but blank as to payee
rights and remedies of the creditor." and amount. Ostensibly, as per understanding by the parties, PCIB Check
No. 013224 was issued in the amount of P133,454.00 with “cash” as payee.
Purportedly, both checks were simply partial payment for Rivera’s loan in
WHEREFORE, the Petition is DENIED. The Decision of the Court of the principal amount of P120,000.00.
Appeals in CA-G.R. C.V. No. 48603 is hereby AFFIRMED. Costs against
the petitioner. Upon presentment for payment, the two checks were dishonored for the
reason “account closed.”
SO ORDERED.
As of 31 May 1999, the amount due the Spouses Chua was pegged at
P366,000.00 covering the principal of P120,000.00 plus five percent (5%)
G.R. No. 184458, January 14, 2015 interest per month from 1 January 1996 to 31 May 1999.

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. The Spouses Chua alleged that they have repeatedly demanded payment
VIOLETA CHUA, Respondents. from Rivera to no avail. Because of Rivera’s unjustified refusal to pay, the
Spouses Chua were constrained to file a suit on 11 June 1999. The case
[G.R. NO. 184472] was raffled before the MeTC, Branch 30, Manila and docketed as Civil
Case No. 163661.
SPS.SALVADOR CHUA AND VIOLETA S.
CHUA, Petitioners, v. RODRIGO RIVERA, Respondent. In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he
never executed the subject Promissory Note; (2) in all instances when he
obtained a loan from the Spouses Chua, the loans were always covered by
DECISION a security; (3) at the time of the filing of the complaint, he still had an
existing indebtedness to the Spouses Chua, secured by a real estate
PEREZ, J.: mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him
which he delivered to the Spouses Chua on 21 December 1998, should
have been issued in the amount of only P1,300.00, representing the
amount he received from the Spouses Chua’s saleslady; (5) contrary to the
Before us are consolidated Petitions for Review on Certiorari under Rule 45 supposed agreement, the Spouses Chua presented the check for payment
of the Rules of Court assailing the Decision1 of the Court of Appeals in CA- in the amount of P133,454.00; and (6) there was no demand for payment of
G.R. SP No. 90609 which affirmed with modification the separate rulings of the amount of P120,000.00 prior to the encashment of PCIB Check No.
the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil 0132224. 5chanRoblesvirtualLawlibrary
Case No. 02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30,
in Civil Case No. 163661,3 a case for collection of a sum of money due a In the main, Rivera claimed forgery of the subject Promissory Note and
promissory note. While all three (3) lower courts upheld the validity and denied his indebtedness thereunder.
authenticity of the promissory note as duly signed by the obligor, Rodrigo
Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified The MeTC summarized the testimonies of both parties’ respective
the trial courts’ consistent awards: (1) the stipulated interest rate of sixty witnesses:chanroblesvirtuallawlibrary
percent (60%) reduced to twelve percent (12%) per annum computed from
the date of judicial or extrajudicial demand, and (2) reinstatement of the [The spouses Chua’s] evidence include[s] documentary evidence and oral
award of attorney’s fees also in a reduced amount of P50,000.00. evidence (consisting of the testimonies of [the spouses] Chua and NBI
Senior Documents Examiner Antonio Magbojos). x x x
In G.R. No. 184458, Rivera persists in his contention that there was no
valid promissory note and questions the entire ruling of the lower courts. On xxxx
the other hand, petitioners in G.R. No. 184472, Spouses Salvador and
Violeta Chua (Spouses Chua), take exception to the appellate court’s Witness Magbojos enumerated his credentials as follows: joined the NBI
reduction of the stipulated interest rate of sixty percent (60%) to twelve (1987); NBI document examiner (1989); NBI Senior Document Examiner
percent (12%) per annum. (1994 to the date he testified); registered criminologist; graduate of 18th
Basic Training Course [i]n Questioned Document Examination conducted
We proceed to the facts. by the NBI; twice attended a seminar on US Dollar Counterfeit Detection
conducted by the US Embassy in Manila; attended a seminar on Effective
The parties were friends of long standing having known each other since Methodology in Teaching and Instructional design conducted by the NBI
1973: Rivera and Salvador are kumpadres, the former is the godfather of Academy; seminar lecturer on Questioned Documents, Signature
the Spouses Chua’s son. Verification and/or Detection; had examined more than a hundred thousand
questioned documents at the time he testified.
On 24 February 1995, Rivera obtained a loan from the Spouses
Chua:chanroblesvirtuallawlibrary Upon [order of the MeTC], Mr. Magbojos examined the purported signature
of [Rivera] appearing in the Promissory Note and compared the signature
PROMISSORY NOTE thereon with the specimen signatures of [Rivera] appearing on several
documents. After a thorough study, examination, and comparison of the
120,000.00 signature on the questioned document (Promissory Note) and the specimen
signatures on the documents submitted to him, he concluded that the
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses questioned signature appearing in the Promissory Note and the specimen
SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred signatures of [Rivera] appearing on the other documents submitted were
Twenty Thousand Philippine Currency (P120,000.00) on December 31, written by one and the same person. In connection with his findings,
1995. Magbojos prepared Questioned Documents Report No. 712-1000 dated 8
January 2001, with the following conclusion: “The questioned and the
It is agreed and understood that failure on my part to pay the amount of standard specimen signatures RODGRIGO RIVERA were written by one
(P120,000.00) One Hundred Twenty Thousand Pesos on December 31, and the same person.”
1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%)
[Rivera] testified as follows: he and [respondent] Salvador are “kumpadres;” Rivera continues to deny that he executed the Promissory Note; he claims
in May 1998, he obtained a loan from [respondent] Salvador and executed that given his friendship with the Spouses Chua who were money lenders,
a real estate mortgage over a parcel of land in favor of [respondent he has been able to maintain a loan account with them. However, each of
Salvador] as collateral; aside from this loan, in October, 1998 he borrowed these loan transactions was respectively “secured by checks or sufficient
P25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30 collateral.”
December 1998; he expressly denied execution of the Promissory Note
dated 24 February 1995 and alleged that the signature appearing thereon Rivera points out that the Spouses Chua “never demanded payment for the
was not his signature; [respondent Salvador’s] claim that PCIB Check No. loan nor interest thereof (sic) from [Rivera] for almost four (4) years from
0132224 was partial payment for the Promissory Note was not true, the the time of the alleged default in payment [i.e., after December 31,
truth being that he delivered the check to [respondent Salvador] with the 1995].”13chanRoblesvirtualLawlibrary
space for amount left blank as he and [respondent] Salvador had agreed
Pag
that the latter was to fill it in with the amount of ?1,300.00 which amount he On the issue of the supposed forgery of the promissory note, we are not e|
owed [the spouses Chua]; however, on 29 December 1998 [respondent] inclined to depart from the lower courts’ uniform rulings that Rivera indeed
Salvador called him and told him that he had written P133,454.00 instead of signed it. 12
P1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner
Magbojos, [Rivera] reiterated his averment that the signature appearing on Rivera offers no evidence for his asseveration that his signature on the
the Promissory Note was not his signature and that he did not execute the promissory note was forged, only that the signature is not his and varies
Promissory Note.6 from his usual signature. He likewise makes a confusing defense of having
previously obtained loans from the Spouses Chua who were money lenders
After trial, the MeTC ruled in favor of the Spouses and who had allowed him a period of “almost four (4) years” before
Chua:chanroblesvirtuallawlibrary demanding payment of the loan under the Promissory Note.

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: First, we cannot give credence to such a naked claim of forgery over the
P120,000.00 plus stipulated interest at the rate of 5% per month from 1 testimony of the National Bureau of Investigation (NBI) handwriting expert
January 1996, and legal interest at the rate of 12% percent per annum from on the integrity of the promissory note.
11 June 1999, as actual and compensatory damages; 20% of the whole
amount due as attorney’s fees.7 On that score, the appellate court aptly disabled Rivera’s
contention:chanroblesvirtuallawlibrary
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the
Decision of the MeTC, but deleted the award of attorney’s fees to the [Rivera] failed to adduce clear and convincing evidence that the signature
Spouses Chua:chanroblesvirtuallawlibrary on the promissory note is a forgery. The fact of forgery cannot be presumed
but must be proved by clear, positive and convincing evidence. Mere
WHEREFORE, except as to the amount of attorney’s fees which is hereby variance of signatures cannot be considered as conclusive proof that the
deleted, the rest of the Decision dated October 21, 2002 is same was forged. Save for the denial of Rivera that the signature on the
hereby AFFIRMED.8 note was not his, there is nothing in the records to support his claim of
forgery. And while it is true that resort to experts is not mandatory or
Both trial courts found the Promissory Note as authentic and validly bore indispensable to the examination of alleged forged documents, the opinions
the signature of Rivera. of handwriting experts are nevertheless helpful in the court’s determination
of a document’s authenticity.
Undaunted, Rivera appealed to the Court of Appeals which affirmed
Rivera’s liability under the Promissory Note, reduced the imposition of To be sure, a bare denial will not suffice to overcome the positive value of
interest on the loan from 60% to 12% per annum, and reinstated the award the promissory note and the testimony of the NBI witness. In fact, even a
of attorney’s fees in favor of the Spouses Chua:chanroblesvirtuallawlibrary perfunctory comparison of the signatures offered in evidence would lead to
the conclusion that the signatures were made by one and the same person.
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject It is a basic rule in civil cases that the party having the burden of proof must
to the MODIFICATION that the interest rate of 60% per annum is hereby establish his case by preponderance of evidence, which simply means
reduced to 12% per annum and the award of attorney’s fees is reinstated at “evidence which is of greater weight, or more convincing than that which is
the reduced amount of P50,000.00 Costs against [Rivera].9 offered in opposition to it.”
Hence, these consolidated petitions for review on certiorari of Rivera in Evaluating the evidence on record, we are convinced that [the Spouses
G.R. No. 184458 and the Spouses Chua in G.R. No. 184472, respectively Chua] have established a prima facie case in their favor, hence, the burden
raising the following issues:chanroblesvirtuallawlibrary of evidence has shifted to [Rivera] to prove his allegation of forgery.
Unfortunately for [Rivera], he failed to substantiate his defense. 14
A. In G.R. No. 184458
Well-entrenched in jurisprudence is the rule that factual findings of the trial
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED court, especially when affirmed by the appellate court, are accorded the
IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE highest degree of respect and are considered conclusive between the
WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA]. parties.15 A review of such findings by this Court is not warranted except
upon a showing of highly meritorious circumstances, such as: (1) when the
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED findings of a trial court are grounded entirely on speculation, surmises or
IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN conjectures; (2) when a lower court's inference from its factual findings is
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
LAW. discretion in the appreciation of facts; (4) when the findings of the appellate
court go beyond the issues of the case, or fail to notice certain relevant
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED facts which, if properly considered, will justify a different conclusion; (5)
IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE when there is a misappreciation of facts; (6) when the findings of fact are
SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT conclusions without mention of the specific evidence on which they are
THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION based, are premised on the absence of evidence, or are contradicted by
OF THE RTC DELETING THE AWARD OF ATTORNEY’S evidence on record.16 None of these exceptions obtains in this instance.
FEES.10chanRoblesvirtualLawlibrary There is no reason to depart from the separate factual findings of the three
(3) lower courts on the validity of Rivera’s signature reflected in the
B. In G.R. No. 184472 Promissory Note.

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS Indeed, Rivera had the burden of proving the material allegations which he
COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE sets up in his Answer to the plaintiff’s claim or cause of action, upon which
APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM issue is joined, whether they relate to the whole case or only to certain
60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT issues in the case.17chanRoblesvirtualLawlibrary
RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE
SAID STIPULATED RATE OF INTEREST IS EXORBITANT, In this case, Rivera’s bare assertion is unsubstantiated and directly
UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, disputed by the testimony of a handwriting expert from the NBI. While it is
IMMORAL OR VOID.11 true that resort to experts is not mandatory or indispensable to the
examination or the comparison of handwriting, the trial courts in this case,
As early as 15 December 2008, we already disposed of G.R. No. 184472 on its own, using the handwriting expert testimony only as an aid, found the
and denied the petition, via a Minute Resolution, for failure to sufficiently disputed document valid.18chanRoblesvirtualLawlibrary
show any reversible error in the ruling of the appellate court specifically
concerning the correct rate of interest on Rivera’s indebtedness under the Hence, the MeTC ruled that:chanroblesvirtuallawlibrary
Promissory Note.12chanRoblesvirtualLawlibrary
[Rivera] executed the Promissory Note after consideration of the following:
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472. categorical statement of [respondent] Salvador that [Rivera] signed the
Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Senior Documents Examiner that the questioned signature (appearing on
Rivera questioning the entire ruling of the Court of Appeals in CA-G.R. SP the Promissory Note) and standard specimen signatures “Rodrigo Rivera”
No. 90609.
“were written by one and the same person”; actual view at the hearing of (3) When demand would be useless, as when the obligor has rendered it
the enlarged photographs of the questioned signature and the standard beyond his power to perform.
specimen signatures.19 In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
Specifically, Rivera insists that: “[i]f that promissory note indeed exists, it is upon him. From the moment one of the parties fulfills his obligation, delay
beyond logic for a money lender to extend another loan on May 4, 1998 by the other begins. (Emphasis supplied)
secured by a real estate mortgage, when he was already in default and has
not been paying any interest for a loan incurred in February There are four instances when demand is not necessary to constitute the
1995.”20chanRoblesvirtualLawlibrary debtor in default: (1) when there is an express stipulation to that effect; (2)
where the law so provides; (3) when the period is the controlling motive or
We disagree. the principal inducement for the creation of the obligation; and (4) where
demand would be useless. In the first two paragraphs, it is not sufficient
Pag
It is likewise likely that precisely because of the long standing friendship of that the law or obligation fixes a date for performance; it must further state e|
the parties as “kumpadres,” Rivera was allowed another loan, albeit this expressly that after the period lapses, default will commence.
time secured by a real estate mortgage, which will cover Rivera’s loan 13
should Rivera fail to pay. There is nothing inconsistent with the Spouses We refer to the clause in the Promissory Note containing the stipulation of
Chua’s two (2) and successive loan accommodations to Rivera: one, interest:chanroblesvirtuallawlibrary
secured by a real estate mortgage and the other, secured by only a
Promissory Note. It is agreed and understood that failure on my part to pay the amount of
(P120,000.00) One Hundred Twenty Thousand Pesos on December 31,
Also completely plausible is that given the relationship between the parties, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%)
Rivera was allowed a substantial amount of time before the Spouses Chua interest monthly from the date of default until the entire obligation is fully
demanded payment of the obligation due under the Promissory Note. paid for.23
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim which expressly requires the debtor (Rivera) to pay a 5% monthly interest
of forgery and a discordant defense to assail the authenticity and validity of from the “date of default” until the entire obligation is fully paid for. The
the Promissory Note. Although the burden of proof rested on the Spouses parties evidently agreed that the maturity of the obligation at a date certain,
Chua having instituted the civil case and after they established a prima 31 December 1995, will give rise to the obligation to pay interest. The
facie case against Rivera, the burden of evidence shifted to the latter to Promissory Note expressly provided that after 31 December 1995, default
establish his defense.21 Consequently, Rivera failed to discharge the commences and the stipulation on payment of interest starts.
burden of evidence, refute the existence of the Promissory Note duly
signed by him and subsequently, that he did not fail to pay his obligation The date of default under the Promissory Note is 1 January 1996, the day
thereunder. On the whole, there was no question left on where the following 31 December 1995, the due date of the obligation. On that date,
respective evidence of the parties preponderated—in favor of plaintiffs, the Rivera became liable for the stipulated interest which the Promissory Note
Spouses Chua. says is equivalent to 5% a month. In sum, until 31 December 1995, demand
was not necessary before Rivera could be held liable for the principal
Rivera next argues that even assuming the validity of the Promissory Note, amount of P120,000.00. Thereafter, on 1 January 1996, upon default,
demand was still necessary in order to charge him liable thereunder. Rivera Rivera became liable to pay the Spouses Chua damages, in the form of
argues that it was grave error on the part of the appellate court to apply stipulated interest.
Section 70 of the Negotiable Instruments Law
(NIL).22chanRoblesvirtualLawlibrary The liability for damages of those who default, including those who are
guilty of delay, in the performance of their obligations is laid down on Article
We agree that the subject promissory note is not a negotiable instrument 117024 of the Civil Code.
and the provisions of the NIL do not apply to this case. Section 1 of the NIL
requires the concurrence of the following elements to be a negotiable Corollary thereto, Article 2209 solidifies the consequence of payment of
instrument:chanroblesvirtuallawlibrary interest as an indemnity for damages when the obligor incurs in
delay:chanroblesvirtuallawlibrary
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in Art. 2209. If the obligation consists in the payment of a sum of money,
money; and the debtor incurs in delay, the indemnity for damages, there being
(c) Must be payable on demand, or at a fixed or determinable future time; no stipulation to the contrary, shall be the payment of the interest agreed
(d) Must be payable to order or to bearer; and upon, and in the absence of stipulation, the legal interest, which is six
(e) Where the instrument is addressed to a drawee, he must be named or percent per annum. (Emphasis supplied)
otherwise indicated therein with reasonable certainty.
Article 2209 is specifically applicable in this instance where: (1) the
On the other hand, Section 184 of the NIL defines what negotiable obligation is for a sum of money; (2) the debtor, Rivera, incurred in delay
promissory note is:chanroblesvirtuallawlibrary when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of
SECTION 184. Promissory Note, Defined. – A negotiable promissory note Rivera which is the payment of a 5% monthly interest from the date of
within the meaning of this Act is an unconditional promise in writing made default.
by one person to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum certain in money We do not consider the stipulation on payment of interest in this case as a
to order or to bearer. Where a note is drawn to the maker’s own order, it is penal clause although Rivera, as obligor, assumed to pay additional 5%
not complete until indorsed by him. monthly interest on the principal amount of P120,000.00 upon default.

The Promissory Note in this case is made out to specific persons, herein Article 1226 of the Civil Code provides:chanroblesvirtuallawlibrary
respondents, the Spouses Chua, and not to order or to bearer, or to the
order of the Spouses Chua as payees. Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
However, even if Rivera’s Promissory Note is not a negotiable instrument noncompliance, if there is no stipulation to the contrary. Nevertheless,
and therefore outside the coverage of Section 70 of the NIL which provides damages shall be paid if the obligor refuses to pay the penalty or is guilty of
that presentment for payment is not necessary to charge the person liable fraud in the fulfillment of the obligation.
on the instrument, Rivera is still liable under the terms of the Promissory
Note that he issued. The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
The Promissory Note is unequivocal about the date when the obligation
falls due and becomes demandable—31 December 1995. As of 1 January The penal clause is generally undertaken to insure performance and works
1996, Rivera had already incurred in delay when he failed to pay the as either, or both, punishment and reparation. It is an exception to the
amount of P120,000.00 due to the Spouses Chua on 31 December 1995 general rules on recovery of losses and damages. As an exception to the
under the Promissory Note. general rule, a penal clause must be specifically set forth in the
obligation.25chanRoblesvirtualLawlibrary
Article 1169 of the Civil Code explicitly provides:chanroblesvirtuallawlibrary
In high relief, the stipulation in the Promissory Note is designated as
Art. 1169. Those obliged to deliver or to do something incur in delay from payment of interest, not as a penal clause, and is simply an indemnity for
the time the obligee judicially or extrajudicially demands from them the damages incurred by the Spouses Chua because Rivera defaulted in the
fulfillment of their obligation. payment of the amount of P120,000.00. The measure of damages for the
Rivera’s delay is limited to the interest stipulated in the Promissory Note. In
However, the demand by the creditor shall not be necessary in order apt instances, in default of stipulation, the interest is that provided by
that delay may exist: law.26chanRoblesvirtualLawlibrary
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears In this instance, the parties stipulated that in case of default, Rivera will pay
that the designation of the time when the thing is to be delivered or the interest at the rate of 5% a month or 60% per annum. On this score, the
service is to be rendered was a controlling motive for the establishment of appellate court ruled:chanroblesvirtuallawlibrary
the contract; or
It bears emphasizing that the undertaking based on the note clearly states 1. When the obligation is breached, and it consists in the
the date of payment to be 31 December 1995. Given this circumstance, payment of a sum of money, i.e., a loan or forbearance of
demand by the creditor is no longer necessary in order that delay may exist money, the interest due should be that which may have been
since the contract itself already expressly so declares. The mere failure of stipulated in writing. Furthermore, the interest due shall
[Spouses Chua] to immediately demand or collect payment of the value of itself earn legal interest from the time it is judicially
the note does not exonerate [Rivera] from his liability therefrom. Verily, the demanded. In the absence of stipulation, the rate of interest
trial court committed no reversible error when it imposed interest from 1 shall be 6% per annum to be computed from default, i.e.,
January 1996 on the ratiocination that [Spouses Chua] were relieved from from judicial or extrajudicial demand under and subject to
making demand under Article 1169 of the Civil Code. the provisions of Article 1169 of the Civil Code.

xxxx 2. When an obligation, not constituting a loan or forbearance of Pag

money, is breached, an interest on the amount of damages
As observed by [Rivera], the stipulated interest of 5% per month or 60% per awarded may be imposed at the discretion of the court at the rate e|
annum in addition to legal interests and attorney’s fees is, indeed, highly of 6% per annum. No interest, however, shall be adjudged on
iniquitous and unreasonable. Stipulated interest rates are illegal if they are unliquidated claims or damages, except when or until the
14
unconscionable and the Court is allowed to temper interest rates when demand can be established with reasonable certainty.
necessary. Since the interest rate agreed upon is void, the parties are Accordingly, where the demand is established with reasonable
considered to have no stipulation regarding the interest rate, thus, the rate certainty, the interest shall begin to run from the time the claim is
of interest should be 12% per annum computed from the date of judicial or made judicially or extrajudicially (Art. 1169, Civil Code), but when
extrajudicial demand.[27chanRoblesvirtualLawlibrary such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the
The appellate court found the 5% a month or 60% per annum interest rate, date the judgment of the court is made (at which time the
on top of the legal interest and attorney’s fees, steep, tantamount to it being quantification of damages may be deemed to have been
illegal, iniquitous and unconscionable. reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
Significantly, the issue on payment of interest has been squarely disposed adjudged.
of in G.R. No. 184472 denying the petition of the Spouses Chua for failure
to sufficiently show any reversible error in the ruling of the appellate court, 3. When the judgment of the court awarding a sum of money
specifically the reduction of the interest rate imposed on Rivera’s becomes final and executory, the rate of legal interest, whether
indebtedness under the Promissory Note. Ultimately, the denial of the the case falls under paragraph 1 or paragraph 2, above, shall be
petition in G.R. No. 184472 is res judicata in its concept of “bar by prior 6% per annum from such finality until its satisfaction, this interim
judgment” on whether the Court of Appeals correctly reduced the interest period being deemed to be by then an equivalent to a
rate stipulated in the Promissory Note. forbearance of credit.
Res judicata applies in the concept of “bar by prior judgment” if the And, in addition to the above, judgments that have become final
following requisites concur: (1) the former judgment or order must be final; and executory prior to July 1, 2013, shall not be disturbed and
(2) the judgment or order must be on the merits; (3) the decision must have shall continue to be implemented applying the rate of interest
been rendered by a court having jurisdiction over the subject matter and the fixed therein. (Emphasis supplied)
parties; and (4) there must be, between the first and the second action,
identity of parties, of subject matter and of causes of
action.28chanRoblesvirtualLawlibrary
On the reinstatement of the award of attorney’s fees based on the
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an stipulation in the Promissory Note, we agree with the reduction thereof but
identity of parties and subject matter raising specifically errors in the not the ratiocination of the appellate court that the attorney’s fees are in the
Decision of the Court of Appeals. Where the Court of Appeals’ disposition nature of liquidated damages or penalty. The interest imposed in the
on the propriety of the reduction of the interest rate was raised by the Promissory Note already answers as liquidated damages for Rivera’s
Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of default in paying his obligation. We award attorney’s fees, albeit in a
Appeals is a “bar by prior judgment.” reduced amount, in recognition that the Spouses Chua were compelled to
litigate and incurred expenses to protect their interests. 34 Thus, the award
At the time interest accrued from 1 January 1996, the date of default under of P50,000.00 as attorney’s fees is proper.
the Promissory Note, the then prevailing rate of legal interest was 12% per
annum under Central Bank (CB) Circular No. 416 in cases involving the For clarity and to obviate confusion, we chart the breakdown of the total
loan or forbearance of money.29 Thus, the legal interest accruing from the amount owed by Rivera to the Spouses Chua:chanroblesvirtuallawlibrary
Promissory Note is 12% per annum from the date of default on 1 January
1996.
Face value Stipulated Interest Interest due Attorney’s Total
of the A&B earning legal fees Amount
However, the 12% per annum rate of legal interest is only applicable until
Promissory interest A & B
30 June 2013, before the advent and effectivity of Bangko Sentral ng
Note
Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of legal
interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery February 24, A. January 1, 1996 A. June 11, 1999 Wholesale
Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. 1995 to to June 30, 2013 (date of judicial amount
In short, the applicable rate of legal interest from 1 January 1996, the date December demand) to June
when Rivera defaulted, to date when this Decision becomes final and 31, 1995 B. July 1 2013 to 30, 2013
executor is divided into two periods reflecting two rates of legal interest: (1) date when this B. July 1, 2013 to
12% per annum from 1 January 1996 to 30 June 2013; and (2) 6% per Decision becomes date when this
annum FROM 1 July 2013 to date when this Decision becomes final and final and executory Decision
executory. becomes final
and executory
As for the legal interest accruing from 11 June 1999, when judicial demand P120,000.00 A. 12 % per A. 12% per P50,000.00 Total
was made, to the date when this Decision becomes final and executory,
annum on the annum on the amount
such is likewise divided into two periods: (1) 12% per annum from 11 June principal amount total amount of of
1999, the date of judicial demand to 30 June 2013; and (2) 6% per of P120,000.00 column 2 Columns
annum from 1 July 2013 to date when this Decision becomes final and
B. 6% per B. 6% per 1-4
executor.31 We base this imposition of interest on interest due earning
annum on the annum on the
legal interest on Article 2212 of the Civil Code which provides that “interest
principal amount total amount of
due shall earn legal interest from the time it is judicially demanded,
of P120,000.00 column 235
although the obligation may be silent on this point.”

From the time of judicial demand, 11 June 1999, the actual amount owed The total amount owing to the Spouses Chua set forth in this Decision shall
by Rivera to the Spouses Chua could already be determined with further earn legal interest at the rate of 6% per annum computed from its
reasonable certainty given the wording of the Promissory finality until full payment thereof, the interim period being deemed to be a
Note.32chanRoblesvirtualLawlibrary forbearance of credit.chanrobleslaw

We cite our recent ruling in Nacar v. Gallery WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of
Frames:33chanRoblesvirtualLawlibrary the Court of Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner
Rodrigo Rivera is ordered to pay respondents Spouse Salvador and Violeta
Chua the following:chanroblesvirtuallawlibrary
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 (1) the principal amount of P120,000.00;
Civil Code govern in determining the measure of recoverable damages. (2) legal interest of 12% per annum of the principal amount of P120,000.00
reckoned from 1 January 1996 until 30 June 2013;
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 (3) legal interest of 6% per annum of the principal amount of P120,000.00
thereof, is imposed, as follows:ChanRoblesVirtualawlibrary form 1 July 2013 to date when this Decision becomes final and
executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 A. Rediscounting transactions do not create loan
June 1999, date of judicial demand, to 30 June 2013, as interest due obligations between the parties.
earning legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from B. By the rediscounting, Metrobank subrogated appellant
1 July 2013 to date when this Decision becomes final and executor, as as creditor of Rene Imperial, the issuer of the checks.
interest due earning legal interest;
(6) Attorney’s fees in the amount of P50,000.00; and C. Legal subrogation was presumed when Metrobank
paid the obligation of Mr. Imperial with the latter's
(7) 6% per annum interest on the total of the monetary awards from the
knowledge and consent.
finality of this Decision until full payment thereof.
Costs against petitioner Rodrigo Rivera. Pag
II
SO ORDERED.cralawlawlibrary e|
THE TRIAL COURT ERRED IN GRANTING METROBANK'S CLAIMS ON
THE BASIS OF THE PROMISSORY NOTES. 15
G.R. No. 167082, August 03, 2016

A. The promissory notes are null and void for being

TERESITA I. BUENAVENTURA, Petitioner, v. METROPOLITAN BANK simulated and fictitious.
AND TRUST COMPANY, Respondent.
B. Assuming that the promissory notes are valid, these
DECISION only serve as guaranty to secure the payment of the
rediscounted checks.
BERSAMIN, J.:
III
A duly executed contract is the law between the parties, and, as such,
THE TRIAL COURT ERRED IN NOT RULING THAT APPELLANT IS
commands them to comply fully and not selectively with its terms. A
ENTITLED TO HER COUNTERCLAIMS FOR EXEMPLARY DAMAGES,
contract of adhesion, of itself, does not exempt the parties from compliance
ATTTORNEY'S FEES, LITIGATION EXPENSES AND COSTS OF
with what was mutually agreed upon by them.
SUIT.6chanrobleslaw

The Case On April 23, 2004, the CA promulgated the assailed decision affirming the
decision of the RTC with modification,7 as follows:
In this appeal, the petitioner seeks the reversal of the decision promulgated
on April 23, 2004,1 whereby the Court of Appeals (CA) affirmed with chanRoblesvirtualLawlibraryWHEREFORE, the appealed decision
modification the judgment2 rendered on July 11, 2002 by the Regional Trial is AFFIRMED with
Court (RTC), Branch 61, in Makati City. Also being appealed is the
resolution3 promulgated on February 9, 2005, whereby the CA denied her MODIFICATION of the second paragraph of its dispositive portion, which
motion for reconsideration. should now read:ChanRoblesVirtualawlibrary
"As a consequence of this judgment, defendant Buenaventura is directed to
Antecedents pay plaintiff bank the amount of P3,553,444.45 plus interest and penalty
therein at 14.239% per annum and 18% per annum, respectively, from July
The following factual and procedural antecedents are narrated by the CA in 15, 1998 until fully paid and 10% of said amount as attorney's fees."
its assailed decision, to wit:ChanRoblesVirtualawlibrary SO ORDERED.8
On January 20, 1997 and April 17, 1997, Teresita Buenaventura (or On May 21, 2004, the petitioner moved for the reconsideration of the
"appellant") executed Promissory Note (or "PN") Nos. 232663 and 232711, decision, but the CA denied her motion for that purpose on February 9,
respectively, each in the amount of PI,500,000.00 and payable to 2005.9chanrobleslaw
Metropolitan Bank and Trust Company (or "appellee"). PN No. 232663 was
to mature on July 1, 1997, with interest and credit evaluation and Hence, this appeal by the petitioner.
supervision fee (or "CESF") at the rate of 17.532% per annum, while PN
No. 232711 was to mature on April 7, 1998, with interest and CESF at the
rate of 14.239% per annum. Both PNs provide for penalty of 18% per Issues
annum on the unpaid principal from date of default until full payment of the
obligation. The petitioner ascribes the following errors to the CA, to wit:

Despite demands, there remained unpaid on PN Nos. 232663 and 232711 chanRoblesvirtualLawlibrary
the amounts of P2,061,208.08 and PI,492,236.37, respectively, as of July I
15, 1998, inclusive of interest and penalty. Consequently, appellee filed an THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS
action against appellant for recovery of said amounts, interest, penalty and LIABLE UNDER THE PROMISSORY NOTES.
attorney's fees before the Regional Trial Court of Makati City (Branch 61).
A. The promissory notes executed by petitioner are null
In answer, appellant averred that in 1997, she received from her nephew, and void for being simulated and fictitious.
Rene Imperial (Or "Imperial"), three postdated checks drawn against
appellee (Tabaco Branch), i.e., Check No. TA 1270484889PA dated
B. Even assuming that the promissory notes are valid,
January 5, 1998 in the amount of PI,200,000.00, Check No. 1270482455PA
these are intended as mere guaranty to secure Rene
dated March 31, 1998 in the amount of PI,197,000.00 and Check No.
Imperial's payment of the rediscounted checks. Hence,
TA1270482451PA dated March 31, 1998 in the amount of P500,000.00 (or
being a mere guarantor, the action against petitioner
"subject checks"), as partial payments for the purchase of her properties;
under the said promissory notes is premature.
that she rediscounted the subject checks with appellee (Timog Branch), for
which she was required to execute the PNs to secure payment thereof; and
that she is a mere guarantor and cannot be compelled to pay unless and C. Metrobank is deemed to have subrogated petitioner as
until appellee shall have exhausted all the properties of Imperial.4 creditor of Mr. Imperial (the issuer of the checks).
On July 11, 2002, the RTC rendered its Hence, Metrobank's recourse as creditor, is against Mr.
judgment,5 viz.:ChanRoblesVirtualawlibrary Imperial.
WHEREFORE, in view of the foregoing, the Court finds in favor of plaintiff
METROPOLITAN BANK AND TRUST COMPANY and against defendant II
TERESITA BUENAVENTURA.
THE COURT OF APPEALS ERRED IN NOT RULING THAT PETITIONER
As a consequence of this judgment, defendant Buenaventura is directed to IS ENTITLED TO HER COUNTER-CLAIM FOR EXEMPLARY DAMAGES,
pay plaintiff bank the amount of P3,553,444.45 plus all interest and ATTORNEY'S FEES, LITIGATION EXPENSES AND COSTS OF SUIT.10
penalties due as stipulated in Promissory Notes Nos. 232663 and 232711
beginning July 15, 1998 until the amount is fully paid and 10% of the total Ruling
amount due as attorney's fees.
The appeal lacks merit.
SO ORDERED.
Dissatisfied, the petitioner appealed, assigning the following as errors, First of all, the petitioner claims that the promissory notes she executed
namely: were contracts of adhesion because her only participation in their execution
was affixing her signature,11 and that the terms of the promissory notes
chanRoblesvirtualLawlibrary should consequently be strictly construed against the respondent as the
I party responsible for their preparation.12 In contrast, the respondent
THE TRIAL COURT ERRED IN HOLDING THAT THE REDISCOUNTING counters that the terms and conditions of the promissory notes were clear
TRANSACTION BETWEEN APPELLANT AND METROBANK RESULTED and unambiguous; hence, there was no room or need for interpretation
TO A LOAN OBLIGATION SECURED BY THE SUBJECT CHECKS AND thereof.13chanrobleslaw
PROMISSORY NOTES.
The respondent is correct.
 meant as guaranties to secure payment of the checks by the issuer, Rene
The promissory notes were written as follows:ChanRoblesVirtualawlibrary Imperial; hence, her liability was that of a guarantor, and would take effect
FOR VALUE RECEIVED, I/we jointly and severally promise to pay only upon exhaustion of all properties and after resort to all legal remedies
Metropolitan Bank and Trust Company, at its office x x x the principal sum against Imperial.27chanrobleslaw
of PESOS xxx, Philippine currency, together with interest and credit
evaluation and supervision fee (CESF) thereon at the effective rate of xxx The insistence of the petitioner is bereft of merit.
per centum xxx per annum, inclusive, from date hereof and until fully paid.14
What the petitioner advocates is for the Court to now read into the The CA rejected this insistence, expounding as
promissory notes terms and conditions that would contradict their clear and follows:ChanRoblesVirtualawlibrary
unambiguous terms in the guise of such promissory notes being contracts A guaranty is not presumed; it must be expressed (Art. 2055, New Civil
of adhesion. This cannot be permitted, for, even assuming that the Code). The PNs provide, in clear language, that appellant is primarily liable
promissory notes were contracts of adhesion, such circumstance alone did thereunder. On the other hand, said PNs do not state that Imperial, who is
Pag
not necessarily entitle her to bar their literal enforcement against her if their not even privy thereto, is the one primarily liable and that appellant is e|
terms were unequivocal. It is preposterous on her part to disparage the merely a guarantor. Parenthetically, the disclosure statement (Exh. "D")
promissory notes for being contracts of adhesion, for she thereby seems to executed by appellant states that PN No. 232711 is "secured by postdated 16
forget that the validity and enforceability of contracts of adhesion were the checks". In other words, it does not appear that the PNs were executed as
same as those of other valid contracts. The Court has made this plain guaranty for the payment of the subject checks.
in Avon Cosmetics, Inc. v. Luna,15 stating:ChanRoblesVirtualawlibrary
A contract of adhesion is so-called because its terms are prepared by only Nevertheless, appellant insists that she did not obtain a short-term loan
one party while the other party merely affixes his signature signifying his from appellee but rediscounted the subject checks, with the PNs as
adhesion thereto. Such contract is just as binding as ordinary contracts. guaranty. The contention is untenable.

It is true that we have, on occasion, struck down such contracts as void In Great Asian Sales Center Corporation vs. Court of Appeals (381 SCRA
when the weaker party is imposed upon in dealing with the dominant 557), which was cited in support of appellant's claim, the Supreme Court
bargaining party and is reduced to the alternative of taking it or leaving it, explained the meaning of "discounting line",
completely deprived of the opportunity to bargain on equal footing. thus:ChanRoblesVirtualawlibrary
Nevertheless, contracts of adhesion are not invalid per se and they are not "In the financing industry, the term 'discounting line' means a credit facility
entirely prohibited. The one who adheres to the contract is in reality free to with a financing company or bank which allows a business entity to sell, on
reject it entirely, if he adheres, he gives his consent. a continuing basis, its accounts receivable at a discount. The term
'discount' means the sale of a receivable at less than its face value. The
xxxx purpose of a discounting line is to enable a business entity to generate
instant cash out of its receivables which are still to mature at future dates.
Accordingly, a contract duly executed is the law between the parties, and The financing company or bank which buys the receivables makes its profit
they are obliged to comply fully and not selectively with its terms. A contract out of the difference between the face value of the receivable and the
of adhesion is no exception. discounted price."
As a rule, indeed, the contract of adhesion is no different from any other A guarantor may bind himself for less, but not for more than the principal
contract. Its interpretation still aligns with the literal meaning of its terms and debtor, both as regards the amount and the onerous nature of the
conditions absent any ambiguity, or with the intention of the parties.16 The conditions (Art. 2054, id). Curiously, the face amounts of the PNs (totaling
terms and conditions of the promissory notes involved herein, being clear P3,000,000.00) are more than those of the subject checks (totaling
and beyond doubt, should then be enforced accordingly. In this regard, we P2,897,000.00). And unlike the subject checks, the PNs provide for interest,
approve of the observation by the CA, citing Cruz v. Court of CESF and penalty.
Appeals, 17 that the intention of the parties should be "deciphered not from
the unilateral post facto assertions of one of the parties, but from the Moreover, the maturity date (July 1, 1997) of PN No. 232663 is ahead of
language used in the contract."18 As fittingly declared in The Insular Life the dates (January 5, 1998 and March 31, 1998) of the subject checks. In
Assurance Company, Ltd. vs. Court of Appeals and Sun Brothers & other words, appellant, as "guarantor", was supposed to make good her
Company,19 "[w]hen the language of the contract is explicit leaving no doubt "guaranty", i.e. PNs in question, even before the "principal" obligations, i.e.
as to the intention of the drafters thereof, the courts may not read into it any subject checks, became due. It is also noted that the rediscounting of the
other intention that would contradict its plain import." Accordingly, no court, subject checks (in January 1997) occurred months ahead of the execution
even this Court, can "make new contracts for the parties or ignore those of PN No. 232711 (on April 17, 1997) even as the PNs were supposedly a
already made by them, simply to avoid seeming hardships. Neither abstract precondition to said rediscounting.
justice nor the rule of liberal construction justifies the creation of a contract
for the parties which they did not make themselves or the imposition upon xxxx
one party to a contract of an obligation not assumed."20chanrobleslaw
Stated differently, appellant is primarily liable under the subject checks. She
Secondly, the petitioner submits that the promissory notes were null and is a principal debtor and not a guarantor. Consequently, the benefit of
void for being simulated and fictitious; hence, the CA erred in enforcing excussion may not be interposed as a defense in an action to enforce
them against her. appellant's warranty as indorser of the subject checks.

The submission contradicts the records and the law pertinent to simulated Moreover, it is absurd that appellant (as maker of the PNs) may act as
contracts. guarantor of her own obligations (as indorser of the subject checks). Thus,
Art. 2047 of the New Civil Code provides that "(b)y guaranty, a person
Based on Article 134521 of the Civil Code, simulation of contracts is of two called the guarantor, binds himself to the creditor to fulfill the obligation of
kinds, namely: (1) absolute; and (2) relative. Simulation is absolute when the principal debtor in case the latter should fail to do so."28 (Emphasis
there is color of contract but without any substance, the parties not supplied)
intending to be bound thereby.22 It is relative when the parties come to an The CA was correct. A contract of guaranty is one where a person, the
agreement that they hide or conceal in the guise of another guarantor, binds himself or herself to another, the creditor, to fulfill the
contract.23chanrobleslaw obligation of the principal debtor in case of failure of the latter to do so. 29 It
cannot be presumed, but must be express and in writing to be
The effects of simulated contracts are dealt with in Article 1346 of the Civil enforceable,30 especially as it is considered a special promise to answer for
Code, to wit:ChanRoblesVirtualawlibrary the debt, default or miscarriage of another.31 It being clear that the
Art. 1346. An absolutely simulated or fictitious contract is void. A relative promissory notes were entirely silent about the supposed guaranty in favor
simulation, when it does not prejudice a third person and is not intended for of Imperial, we must read the promissory notes literally due to the absence
any purpose contrary to law, morals, good customs, public order or public of any ambiguities about their language and meaning. In other words, the
policy binds the parties to their real agreement. petitioner could not validly insist on the guaranty. In addition, the disclosure
The burden of showing that a contract is simulated rests on the party statements32 and the statements of loan release33 undeniably identified her,
impugning the contract. This is because of the presumed validity of the and no other, as the borrower in the transactions. Under such established
contract that has been duly executed.24 The proof required to overcome the circumstances, she was directly and personally liable for the obligations
presumption of validity must be convincing and preponderant. Without such under the promissory notes.
proof, therefore, the petitioner's allegation that she had been made to
believe that the promissory notes would be guaranties for the rediscounted Fourth, the petitioner argues that the respondent was immediately .
checks, not evidence of her primary and direct liability under loan subrogated as the creditor of the accounts by its purchase of the checks
agreements,25cralawred could not stand. from her through its rediscounting facility;34 and that legal subrogation
should be presumed because the petitioner, a third person not interested in
Moreover, the issue of simulation of contract was not brought up in the the obligation, paid the debt with the express or tacit approval of the
RTC. It was raised for the first time only in the CA.26 Such belatedness debtor.35chanrobleslaw
forbids the consideration of simulation of contracts as an issue. Indeed, the
appellate courts, including this Court, should adhere to the rule that issues The argument is barren of factual and legal support.
not raised below should not be raised for the first time on appeal. Basic
considerations of due process and fairness impel this adherence, for it Legal subrogration finds no application because there is no evidence
would be violative of the right to be heard as well as unfair to the parties showing that Imperial, the issuer of the checks, had consented to the
and to the administration of justice if the points of law, theories, issues and subrogation, expressly or impliedly.36 This circumstance was pointed out by
arguments not brought to the attention of the lower courts should be the RTC itself.37 Also, as the CA emphatically observed,38 the argument
considered and passed upon by the reviewing courts for the first time. was off-tangent because the suit was not for the recovery of money by
virtue of the checks of Imperial but for the enforcement of her obligation as
Thirdly, the petitioner insists that the promissory notes, even if valid, were the maker of the promissory notes.
Fifth, the petitioner posits that she was made to believe by the manager of
the respondent's Timog Avenue, Quezon City Branch that the promissory
notes would be mere guaranties for the rediscounted checks;39 that despite PAST DUE INTEREST - 334 days @34.991%
the finding of the RTC and the CA that she was a seasoned
businesswoman presumed to have read and understood all the documents fr. Aug. 15, 1997 to July 15, 1998 P486,958.08
given to her for signature, she remained a layman faced with and puzzled
by complex banking terms; and that her acceding to signing the promissory
notes should not be taken against her as to conclude her. 40chanrobleslaw
PENALTY CHARGES - 99 days @18.0%
The petitioner's position is unworthy of serious consideration.
Pag
After having determined that the terms and conditions of the promissory fr. April 07, 1998 to July 15, 1998 P74,250.00 e|
notes were clear and unambiguous, and thus should be given their literal
meaning and not be interpreted differently, we insist and hold that she 17
should be bound by such terms and conditions. Verily, the promissory notes
as contracts should bind both contracting parties; hence, the validity or TOTAL OUTSTANDING LOAN
compliance therewith should not be left to the will of the
petitioner.41 Otherwise, she would contravene and violate the principles of AS OF JULY 15, 1998 P2,061,208.08
mutuality and of the obligatory force of contracts. A respected commentator
on civil law has written in this respect:ChanRoblesVirtualawlibrary
The binding effect of the contract on both parties is based on the principles
(1) that obligations arising from contracts have the force of law between the
contracting parties; and (2) that there must be mutuality between the parties Promissory Note No. 23266350
based on their essential equality, to which is repugnant to have one party
bound by the contract leaving the other free therefrom.

xxxx PRINCIPAL AMOUNT P1,200,000.00

Just as nobody can be forced to enter into a contract, in the same manner
once a contract is entered into, no party can renounce it unilaterally or
without the consent of the other. It is a general principle of law that no one
may be permitted to change his mind or disavow and go back upon his own PAST DUE INTEREST - 191 days @27.901%
acts, or to proceed contrary thereto, to the prejudice of the other party.
fr. [J]an. 05, 1998 to [J]uly 15, 1998 P177,636.37
If, after a perfect and binding contract has been executed between the
parties, it occurs to one of them to allege some defect therein as a reason
for annulling it, the alleged defect must be conclusively proven, since the
validity and fulfillment of contracts cannot be left to the will of one of the PENALTY CHARGES - 191 days @18.0%
contracting parties. The fact that a party may not have fully understood the
legal effect of the contract is no ground for setting it aside. 42
fr. [J]an. 05, 1998 to [J]uly 15, 1998 P114,600.00
And, lastly, there is need to revise the monetary awards by the CA.
Although no issue is raised by the petitioner concerning the monetary
awards, the Court feels bound to make this revision as a matter of law in
order to arrive at a just resolution of the controversy.

Involved here are two loans of the petitioner from the respondent,
specifically: (1) the principal amount of PI,500,000.00 covered by TOTAL OUTSTANDING LOAN
Promissory Note No. 232663 to be paid on or before July 1, 1997 with
interest and credit evaluation and supervision fee (CESF) at the rate of AS OF JULY 15, 1998 P1,492,236.37
17.532% per annum and penalty charge of 18% per annum based on the
unpaid principal to be computed from the date of default until full payment The total of P3,553,444.45 was the final sum of the computations contained
of the obligation; and (2) the principal amount of PI,500,000.00 covered by in the statements of past due interest and penalty charges as of July 15,
Promissory Note No. 232711 to be paid on or before April 7, 1998 with 1998, and was inclusive of interest at the rate of 34.991% (on the principal
interest and CESF at the rate of 14.239% per annum and penalty charge of of P1,500,000.00) and 27.901% (on the principal of P1,200,00.00). Yet,
18% per annum based on the unpaid principal to be computed from the such interest rates were different from the interest rates stipulated in the
date of default until full payment of the obligation. promissory notes, namely: 14.239% for promissory Note No. 232711 and
17.532% for Promissory Note No. 232663. As a result, the P3,553,444.45
The RTC adjudged the petitioner liable to pay to the respondent the total of claimed by the respondent as the petitioner's aggregate oustanding loan
P3,553,444.45 representing her outstanding obligation, including accrued obligatopn included interest of almost double the rates stipulated by the
interests and penalty charges under the promissory notes, plus attorney's parties.
fees.43 On appeal, the CA ruled that she was liable to the respondent for
the sum of P3,553,444.45 with interest and penalties at 14.239% per We hold that the respondent had no legal basis for imposing rates far
annum and 18% per annum, respectively, from July 15, 1998 until fully higher than those agreed upon and stipulated in the promissory notes. It did
paid.44chanrobleslaw not suitably justify the imposition of the increased rates of 34.991% and
27.901%, as borne out by the statements of past due interest and penalty
The bases of the amounts being claimed from the petitioner were charges as of July 15, 1998, although it certainly was its burden to show the
apparently the two statements of past due interest and penalty charges as legal and factual support for the imposition. We need not remind that the
of July 15, 1998, one corresponding to Promissory Note No. 232711,45 and burden of proof is the duty of any party to present evidence to establish its
the other to Promissory Note No. 232663,46 Respondent's witness Patrick claim or defense by the amount of evidence required by law, which in civil
N. Miranda, testifying on the obligation and the computation cases is preponderance of evidence.51 Consequently, we have to strike
thereof,47 attested as follows:ChanRoblesVirtualawlibrary down the imposition.

1. What is the amount of her loan obligation? Parenthetically, we observe that the stipulation in the promissory notes on
the automatic increase of the interest rate to the prevailing rate52 did not
-Under Promissory Note No. 232663, her loan obligation is justify the increase of the interest rates because the respondent did not
Pl,492,236.37 inclusive of interest and penalty charges as of July adduce evidence about the prevailing rates at the time material to this case.
15, 1998. Under Promissory Note No. 232711, her loan obligation
is P2,061,208.08, inclusive of interest and penalty charges as of On May 16, 2013, the Monetary Board of the Bangko Sentral ng Pilipinas,
July 15, 1998. Thus, the total is P3,553,444.45 as of July 15, in the exercise of its statutory authority to review and fix interest rates,
1998. Two (2) Statements of Account were prepared to show the issued Circular No. 799, Series of 2013 to lower to 6% per annum the rate
computation and penalty charges. of interest for loan or forbearance of any money, goods or credits, and the
rate allowed in judgment.53 The revised rate applies only in the absence of
stipulation in loan contracts. Hence, the contractual stipulations on the rates
2. Do you have these Statements of Account? of interest contained in the promissory notes remained applicable.
48
-Yes, sir. (Copies are hereto attached as Exhibits "H" and "I".) Considering that, as mentioned, the P3,553,444.45 was an aggregate
inclusive of the interest {i.e., at the rates of 34.991% and 27.901% per
annum); and that the penalty charges contravened the express provisions
Promissory Note No. 23271149 of the promissory notes, the RTC and the CA both erred on a matter of law,
and we should correct their error as a matter of law in the interest of justice.

It is further held that the CA could not validly apply the lower interest rate of
PRINCIPAL AMOUNT P1,500,000.00 14.239% per annum to the whole amount of P3,553,444.45 in contravention
of the stipulation of the parties. In Mallari v. Prudential Bank,54 the Court
declared that the interest rate of "3% per month and higher are excessive, Pursuant to these changes, this Court modified the guidelines in Eastern
unconscionable and exorbitant, hence, the stipulation was void for being Shipping Lines, Inc. v. Court of Appeals in the case of Dario Nacar v.
contrary to morals." Even so, the Court did not consider as unconscionable Gallery Frames, et al.(Nacar). In Nacar, we established the following
the interest rate of 23% per annum agreed upon by the parties. Upholding guidelines:ChanRoblesVirtualawlibrary
the 23% per annum interest rate agreed upon, the Court instead opined
that "the borrowers cannot renege on their obligation to comply with what is
I. When an obligation, regardless of its source, i.e., law, contracts,
incumbent upon them under the contract of loan as the said contract is the
quasi-contracts, delicts or quasi-delicts is breached, the
law between the parties and they are bound by its
contravenor can be held liable for damages. The provisions
stipulations."55 Consequently, the respondent could not impose the flat
under Title XVIII on "Damages" of the Civil Code govern in
interest rate of 14.239% per annum on the petitioner's loan obligation.
determining the measure of recoverable damages.
Verily, the obligatory force of the stipulations between the parties called for
the imposition of the interest rates stipulated in the promissory notes.
Pag
II. With regard particularly to an award of interest in the e|
To accord with the prevailing jurisprudence, the Court pronounces that the concept of actual and compensatory damages, the rate of
respondent was entitled to recover the principal amount of P1,500,000.00 interest, as well as the accrual thereof, is imposed, as 18
subject to the stipulated interest of 14.239%per annum from date of default follows:
until full payment;56 and the principal amount of P1,200,000.00 subject to
the stipulated interest of 17.532%per annum from date of default until full 1. When the obligation is breached, and it consists in the
payment.57chanrobleslaw payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
The next matter to be considered and determined is the date of default. stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
According to Article 1169 of the Civil Code, there is delay or default from demanded. In the absence of stipulation, the rate of interest
the time the obligee judicially or extrajudically demands from the obligor the shall be 6% per annum to be computed from default, i.e.,
fulfillment of his or her obligation. The records reveal that the respondent from judicial or extrajudicial demand under and subject to
did not establish when the petitioner defaulted in her obligation to pay the provisions of Article 1169 of the Civil Code, (emphasis
based on the two promissory notes. As such, its claim for payment and underscore supplied)
computed from July 15, 1998 until full payment of the obligation had no
moorings other than July 15, 1998 being the date reflected in
the statements of past due interest and penalty charges as of July 15, 2. When an obligation, not constituting a loan or forbearance of
1998. Nonetheless, its counsel, through the letter dated July 7, money, is breached, an interest on the amount of damages
1998,58 made a final demand in writing for the petitioner to settle her total awarded may be imposed at the discretion of the court at the rate
obligation within five days from receipt. As the registry return receipt of 6% per annum. No interest, however, shall be adjudged on
indicated,59 the final demand letter was received for the petitioner by one unliquidated claims or damages, except when or until the
Elisa dela Cruz on July 28, 1998. Hence, the petitioner had five days from demand can be established with reasonable certainty.
such receipt, or until August 2, 1998, within which to comply. The reckoning Accordingly, where the demand is established with reasonable
date of default is, therefore, August 3, 1998. certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code), but when
As to the penalty charge, the same was warranted for being expressly such certainty cannot be so reasonably established at the time
stipulated in the promissory notes, to wit:ChanRoblesVirtualawlibrary the demand is made, the interest shall begin to run only from the
I/we further agree to pay the Bank, in addition to the agreed interest rate, a date the judgment of the court is made (at which time the
penalty charge of eighteen per centum (18%) per annum based on any quantification of damages may be deemed to have been
unpaid principal to be computed from date of default until full payment of reasonably ascertained). The actual base for the computation of
the obligation.60 legal interest shall, in any case, be on the amount finally
Verily, a penal clause is an accessory undertaking attached to a principal adjudged.
obligation. It has for its purposes, firstly, to provide for liquidated damages;
and, secondly, to strengthen the coercive force of the obligation by the 3. When the judgment of the court awarding a sum of money
threat of greater responsibility in the event of breach of obligation.61 Under becomes final and executory, the rate of legal interest, whether
Article 1226 of the Civil Code,62 a penal clause is a substitute indemnity for the case falls under paragraph 1 or paragraph 2, above, shall be
damages and the payment of interests in case of noncompliance, unless 6% per annum from such finality until its satisfaction, this interim
there is a stipulation to the contrary. In Tan v. Court of Appeals[63] the period being deemed to be by then an equivalent to a
Court has elaborated on the nature of a penalty clause in the forbearance of credit.
following:ChanRoblesVirtualawlibrary
Penalty on delinquent loans may take different forms. In Government
And, in addition to the above, judgments that have become final and
Service Insurance System v. Court of Appeals, this Court has ruled that the
executory prior to July 1, 2013, shall not be disturbed and shall continue to
New Civil Code permits an agreement upon a penalty apart from the
be implemented applying the rate of interest fixed therein.
monetary interest. If the parties stipulate this kind of agreement, the penalty
To accord with the foregoing rulings, the 17.532% and 14.239% annual
does not include the monetary interest, and as such the two are different
interest rates shall also respectively earn a penalty charge of 18% per
and distinct from each other and may be demanded separately.
annum reckoned on the unpaid principals computed from the date of default
Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to
(August 3, 1998) until fully paid. This is in line with the express agreement
state that such a stipulation about payment of an additional interest rate
between the parties to impose such penalty charge.
partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2229 of the New Civil Code which provides
Article 2212 of the Civil Code requires that interest due shall earn legal
that:ChanRoblesVirtualawlibrary
interest from the time it is judicially demanded, although the obligation may
If the obligation consists in the payment of a sum of money, and the debtor
be silent upon this point. Accordingly, the interest due shall itself earn legal
incurs in delay, the indemnity for damages, there being no stipulation to the
interest of 6% per annum from the date of finality of the judgment until its
contrary, shall be the payment of the interest agreed upon, and the
full satisfaction, the interim period being deemed to be an equivalent to a
absence of stipulation, the legal interest, which is six per cent per annum.
forbearance of credit.66chanrobleslaw
The penalty charge of two percent (2%) per month in the case at bar began
to accrue from the time of default by the petitioner. There is no doubt that
WHEREFORE, the Court AFFIRMS the decision promulgated on April 23,
the petitioner is liable for both the stipulated monetary interest and the
2004 with the MODIFICATION that the petitioner shall pay to the
stipulated penalty charge. The penalty charge is also called penalty or
respondent: (1) the principal sum of PI,500,000.00 under Promissory Note
compensatory interest.
No. 232711, plus interest at the rate of 14.239% per annum commencing
The Court has explained the rate of compensatory interest on monetary
on August 3, 1998 until fully paid; (2) the principal sum of PI,200,000.00
awards adjudged in decisions of the Court in Planters Development Bank v.
under Promissory Note No. 232663, plus interest at the rate of 17.532% per
Lopez,64 citing Nacar v. Gallery Frames [65] to
annum commencing on August 3, 1998 until fully paid; (3) penalty interest
wit:ChanRoblesVirtualawlibrary
on the unpaid principal amounts at the rate of 18% per annum commencing
With respect to the computation of compensatory interest, Section 1 of
on August 3, 1998 until fully paid; (4) legal interest of 6% per annum on the
Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, which
interests commencing from the finality of this judgment until fully paid; (5)
took effect on July 1, 2013, provides:ChanRoblesVirtualawlibrary
attorney's fees equivalent to 10% of the total amount due to the
Section 1. The rate of interest for the loan or forbearance of any money,
respondent; and (6) costs of suit.
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
SO ORDERED.chanRoblesvirtualLawlibrary
annum.
This provision amends Section 2 of Central Bank (CB) Circular No. 905-82,
Series of 1982, which took effect on January 1, 1983. Notably, we recently G.R. No. 175378, November 11, 2015
upheld the constitutionality of CB Circular No. 905-82 in Advocates for
Truth in Lending, Inc., et al. v. Bangko Sentral ng Pilipinas Monetary Board,
MULTI-INTERNATIONAL BUSINESS DATA SYSTEM,
etc. Section 2 of CB Circular No. 905-82
INC., Petitioner, v. RUEL MARTINEZ, Respondent.
provides:ChanRoblesVirtualawlibrary
Section 2. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of DECISION
express contract as to such rate of interest, shall continue to be twelve
percent (12%) per annum.
JARDELEZA, J.:
Before us is a petition for review on certiorari1 (petition) under Rule 45 filed CA G.R. CV No. 82686, the appeal alleged that the parties agreed that the
by Multi-International Business Data System, Inc. (petitioner) to annul and car loan would be payable within four years from the time respondent
set aside the Decision2 dated October 18, 2006 rendered by the Appeals secured the loan in June 1994.23 Respondent alleged that he already
(CA) Sixteenth Division in CA G.R. CV No. 82686. completed his payment in June 1998 and that the payment was done
through salary deductions because if it were otherwise, petitioner would be
The Facts seeking full payment in the amount of P648,288.00 and not only the
balance of P418,012.78.24 Respondent also assailed the finding that the
Respondent Ruel Martinez (respondent) was the Operations Manager3 of due execution of the certification dated September 10, 1996 was not
petitioner from the last quarter of 1990 to January 22, 1999.4 Sometime in proven. Respondent alleged that by mere comparison, one can safely say
June 4, 1994, respondent applied for and was granted a car loan that the signatures appearing in the certification and in Dy's affidavit
submitted before the National Labor Relations Commission are signatures
amounting to P648,288.00.5 Both parties agreed that the loan was payable
by one and the same person, Dy. Respondent claims that he is very much
Pag
through deductions from respondent's bonuses or commissions, if
any.6 Further, if respondent would be terminated for any cause before the familiar with the signature of Dy, his former boss for ten years and even e|
end of the term of the loan obligation, the unpaid balance would be petitioner's witness, who is also its administrative manager, Aida Valle
immediately due and demandable without need of demand.7 On November (Valle), also identified the signature of Dy in the certification. 25cralawred 19
11, 1998, petitioner sent respondent a letter informing him of the
breakdown of his outstanding obligation with petitioner amounting to The CA in its Decision26 dated October 18, 2006 reversed the trial court and
P418,012.78, detailing every bonus, loan or advance obtained and ruled in favor of respondent in holding that the latter already fulfilled his loan
deducted.8 The subject vehicle remains with respondent.9 obligation with petitioner. The CA found credence in the following pieces of
evidence: (1) certification dated September 10, 1996 signed by Dy; (2)
In a letter dated November 24, 1998, respondent requested for a deduction of the monthly installments from respondent's salary pursuant to
breakdown of his benefits from petitioner as director/operations manager in the agreement between him and petitioner; and (3) petitioner's admission of
case he will resign from his position. In said letter, respondent stated that respondent's installment payments made in the amount of
the computation "is only for the assumed amount on my end to deduct P230,275.22.27 The CA held that Dy never denied nor confirmed in open
whatever I owe the Company."10 court the authenticity of her signature in the certification dated September
10, 1996.28 Citing Permanent Savings and Loan Bank v.
In a letter dated January 22, 1999 which respondent received the next day, Velarde29 and Consolidated Bank and Trust Corporation (SOLIDBANK) v.
petitioner terminated respondent for cause effective immediately and Del Monte Motor Works, Inc.,30 the CA held that Dy must declare under
demanded that respondent pay his outstanding loan of P418,012.78 and oath that she did not sign the document or that it is otherwise false or
surrender the car to petitioner within three days from receipt.11 Despite this, fabricated.31
respondent failed to pay the outstanding balance.
Thus, the CA reversed the trial court's ruling and
In a letter dated June 23, 1999, petitioner demanded respondent to pay his held:chanRoblesvirtualLawlibrary
loan within three days from receipt thereof at petitioner's office. 12 Again,
despite demand, respondent failed to pay his outstanding obligation. WHEREFORE, premises considered, the November 22, 2002 Decision of
the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 99-
On July 12, 1999, petitioner filed a complaint13 with the Regional Trial Court 1295, is hereby REVERSED and SET ASIDE and a new one is
of Makati City, Branch 148 (trial court) against respondent praying that entered DISMISSING the complaint for lack of merit.
respondent be ordered to pay his outstanding obligation of P418,012.78
plus interest, and that respondent be held liable for exemplary damages, SO ORDERED.32 (Emphasis in the original)
attorney's fees and costs of the suit.14 cralawlawlibrary

In his answer15 dated August 28, 1999, respondent alleged that he already Hence, this petition.
paid his loan through deductions made from his compensation/salaries,
bonuses and commissions.16 During trial, respondent presented a The Issues
certification dated September 10, 1996 issued by petitioner's president,
Helen Dy (Dy), stating that respondent already paid the amount of The issues for resolution are:chanRoblesvirtualLawlibrary
P337,650.00 as of the said date.17 Respondent alleged that a simple
accounting would show that the he already paid the loan considering that it
is payable within four years from 1994.18 1. Whether respondent has fulfilled his obligation with petitioner;
and
The Ruling of the Regional Trial Court
2. Whether the certification dated September 10, 1996 should be
19
In its Decision dated November 22, 2002, the trial court ruled in favor of admitted as basis for respondent's payment of his loan with
petitioner. It decreed, thus:chanRoblesvirtualLawlibrary petitioner.33

WHEREFORE, judgment i[s] hereby rendered in favor of plaintiff as against cralawlawlibrary

the defendant[ ] as follows:
Our Ruling
1. Ordering defendant to pay plaintiff the balance of his car loan in
The petition is partly meritorious.
the amount of Four Hundred Eighteen Thousand Twelve and
78/100 Pesos ([P]418,012.78) plus interest at the rate of twelve
Verification/Certification on Non-Forum Shopping
percent (12%) [per annum] from [June 23,] 1999 until full
payment;
Before going into the substantive merits of the case, we shall first resolve
the technical issue raised by respondent in his Comment 34 dated February
2. Ordering defendant Martinez to pay plaintiff the amount of Ten 8, 2007 and Memorandum35 dated November 6, 2007.
Thousand Pesos ([P]10,000.00), by way of exemplary damages;
Respondent alleged that the petition should be dismissed for failing to
3. Ordering defendant to pay plaintiff the amount of Twenty comply with Section 4, Rule 45 of the Rules of Court in relation to Sections
Thousand Pesos ([P]20,000.00) by way of attorney's fees; 4 and 5, Rule 7 of the Rules of Court.36 Respondent alleged that the
signature of Dy in the Verification/Certification in the petition differs from her
4. Dismissing the counterclaims interposed by defendant; signature in the letter dated November 11, 1998, thus, inferred that
someone not authorized signed the Verification/Certification. 37
5. Ordering defendant to pay the costs of the suit. Upon a review of the records, however, we found Dy's signature in the
petition to be the same with Dy's signature in the Ex-Parte Manifestation of
SO ORDERED.20ChanRoblesVirtualawlibrary Compliance38 dated February 22, 2005 which petitioner filed with the CA.
cralawlawlibrary Respondent never objected to Dy's signature in petitioner's Ex-Parte
Manifestation of Compliance. Further, Dy did not refute that the signature in
In arriving at the above pronouncement, the trial court held that the the petition is hers. Thus, we find no reason to dismiss the petition outright
respondent failed to present evidence to prove payment. The trial court also based on respondent's allegation.
held that the due execution and authenticity of the certification dated
September 10, 1996 were not established. In respondent's direct Review of factual findings
examination, he merely testified that he knows Dy and her spouse but did
not state that the document was actually executed by Dy. 21 Before going into the merits of the petition, we stress the well-settled rule
that only questions of law may be raised in a petition for review
On December 16, 2002, respondent filed a motion seeking the on certiorari under Rule 45 of the Rules of Court, since "the Supreme Court
reconsideration of the trial court's decision dated November 22, 2002. The is not a trier of facts."39 It is not our function to review, examine and
trial court denied this motion in its Order22 dated March 22, 2004. evaluate or weigh the probative value of the evidence presented.

When supported by substantial evidence, the findings of fact of the CA are

The Ruling of the Court of Appeals
conclusive and binding on the parties and are not reviewable by this Court,
unless the case falls under any of the recognized exceptions in
Respondent appealed the trial court's decision with the CA. Docketed as
jurisprudence.40 Q: Is that your signature?
A: But I said it looks like my signature. I want you to notice something
In the present case, the factual findings of the trial court and the CA on because everytime...
whether respondent has fully paid his car loan are conflicting. The trial court
found that no deductions were made from respondent's salary to establish Q: Just answer the question please. Is that your signature?
full payment of the car loan while the CA found otherwise. The trial court A: I said it looks like my signature.
held, thus:chanRoblesvirtualLawlibrary
xxx
Culled from the evidence adduced and the testimony of the witnesses, it
appears that the defendant himself admitted on cross-examination that no Q: Just answer the question please.
deductions were made in his monthly salary. Thus, it was a mere A: I said it looks like my signature.51 (Emphasis supplied)cralawlawlibrary Pag
presumption of fact on his part that he had been able to fully pay off his car
loan. The testimony of the defendant creating merely an inference of On the other hand, Valle, on cross-examination testified as e|
payment will not be regarded as conclusive on that issue. Thus, payment follows:chanRoblesvirtualLawlibrary
cannot be presumed by a mere inference from surrounding circumstances.
20
At most, the agreement that the payments for the car loan shall be Q: If I show you Certification dated September 10, 1996 will you be able to
deducted from the defendant's salary and bonus is only affirmative of the confirm if this is a Certification signed by the president?
capacity or ability of the defendant to fulfill his part of the bargain.
A: It looked like the signature of the president but I think she will be
But whether or not there was actual payment through deductions from the the one to testify because she was the one who signed.52 (Emphasis
defendant's salary and bonus remains to be proven by independent and supplied)cralawlawlibrary
credible evidence. As the saying goes: "a proof that an act could have been
done is no proof that it was actually done." Hence for failure to present Aside from supporting our finding that the signature in the certification is
evidence to prove payment, defendant miserably failed in his defense and genuine, the foregoing testimonies of Dy and Valle substantially comply
in effect admitted the allegations of plaintiff.41cralawlawlibrary with the other modes of authenticating a private document under Section
20,53 Rule 132 of the Rules of Court.
The CA, on the other hand, found that respondent sufficiently established
that deductions were made from his salary:chanRoblesvirtualLawlibrary Dy never testified that any forgery or fraud attended the certification. 54 In
fact, she did not deny the authenticity of her signature but actually admitted
x x x Moreover, it had been sufficiently established by witness Aida Valle that the signature therein looks like hers. Additionally, Valle, who is familiar
(VALLE), Administrative manager of plaintiff-appellee MULTI- with the signature of Dy because of the requirements of her job, also
INTERNATIONAL, that defendant-appellant MARTINEZ had been the only positively testified that the signature in the certification looks like that of
employee granted by plaintiff-appellee MULTI-INTERNATIONAL a car loan Dy's.55
as such [sic]. With that, it can fairly be inferred that plaintiff-appellee
MULT1-INTERNATlONAL's asseveration that the deductions from the The defenses of Dy that she does not have a copy or record of the
salary of defendant-appellant MARTINEZ had not been reflected in his certification in her file and that the letterhead shows an old address are
payslips is for naught, since indeed, no such "item" in the payslip is weak and do not prove that the certification was not duly executed.
provided, considering that it is only defendant-appellant MARTINEZ who
had been granted such car loan x x x.42cralawlawlibrary For having established the due execution and authentication of the
certification dated September 10, 1996, the certification should be admitted
Thus, the conflicting factual findings of the trial court and CA compel us to in evidence to prove that respondent partially paid the car loan in the
re-evaluate the facts of this case, an exception to the rule that only amount ofP337,650.00.
questions of law may be dealt with in a petition for certiorari under Rule 45.
Insufficient evidence to prove
Admissibility of the full payment of loan
certification dated
September 10, 1996 It is established that the one who pleads payment has the burden of proving
it. Even where the creditor alleges non-payment, the general rule is that the
Respondent relies on the certification43 dated September 10, 1996 to debtor has the burden to prove payment, rather than the creditor. The
bolster his defense that he already fully paid his car loan to petitioner. We debtor has the burden of showing with legal certainty that the obligation has
affirm the findings of the CA that the certification is admissible in evidence. been discharged by payment. Where the debtor introduces some evidence
of payment, the burden of going forward with the evidence—as distinct from
Section 22,44 Rule 132 of the Rules of Court explicitly authorizes the court the general burden of proof—shifts to the creditor, who is then under a duty
to compare the handwriting in issue with writings admitted or treated as of producing some evidence to show non-payment.56
genuine by the party against whom the evidence is offered or proved to be
genuine to the satisfaction of the judge. In Jimenez v. Commission on It must be emphasized that both parties have not presented any written
Ecumenical Mission and Relations of the United Presbyterian Church in the agreement or contract governing respondent's obligation. Nevertheless, it
USA,45 we held:chanRoblesvirtualLawlibrary has been established that respondent obtained a car loan amounting to
P648,288.00 from petitioner. Thus, the burden is now on respondent to
It is also hornbook doctrine that the opinions of handwriting experts, even prove that the obligation has already been extinguished by payment.
those from the NBI and the PC, are not binding upon courts. This principle
holds true especially when the question involved is mere handwriting Although not exclusive, a receipt of payment is the best evidence of the fact
similarity or dissimilarity, which can be determined by a visual comparison of payment.57 We held that the fact of payment may be established not only
of specimens of the questioned signatures with those of the currently by documentary evidence but also by parol evidence.58
existing ones.
Except for respondent's bare allegations that he has fully paid the
Handwriting experts are usually helpful in the examination of forged P648,288.00 car loan, there is nothing in the records which shows that full
documents because of the technical procedure involved in analyzing them. payment has indeed been made. Respondent did not present any receipt
But resort to these experts is not mandatory or indispensable to the other than the certification dated September 10, 1996 which only proves
examination or the comparison of handwriting. A finding of forgery does not that respondent has already paid P337,650.00 of the car loan. A balance of
depend entirely on the testimonies of handwriting experts, because the P310,638.00 still remained.
judge must conduct an independent examination of the questioned
signature in order to arrive at a reasonable conclusion as to its authenticity, Even respondent's testimony lacks credence. He alleged that the
x x x46 (Citations omitted)cralawlawlibrary amortization of the car loan was deducted from his salaries, bonuses and
commissions. However, he could not even answer nor give an estimate of
The documents containing the signature of Dy which have been submitted how much bonuses and commissions he receives from petitioner. 59
by petitioner as authentic are the following: (1) letter dated November 11,
1998;47 (2) termination letter dated January 22, 1999;48 (3) promissory note Respondent also alleged that although deductions were made from his
dated June 17, 1994;49 and (4) chattel mortgage signed on June 27, salaries, bonuses and commissions, his payslips do not reflect such
1994.50 Examining and analyzing the signatures in these documents with deductions because "there is no such car loan field" in the accounting
Dy's signature in the certification, we find no substantial reason to doubt the program for the payroll.60 Respondent admitted in his testimony that he only
latter's authenticity. In fact, the testimonies of Dy herself and Valle support presumed that the deductions were being made from his salaries, bonuses
our finding. and commissions, to wit:chanRoblesvirtualLawlibrary

Dy testified on cross-examination as follows:chanRoblesvirtualLawlibrary Q: So my question was that, whether or not your regular salary which was
received twice a month, the monthly amortization| s] are being deducted
Q: Now, ms witness [sic], sometime in December 10, 1996, do you recall from that? [sic]
having executed a certification to Mr. Martinez? A: There is no reflection in the payslip.
A: No.
Q: But do you know it was ever deducted from your monthly salary? [sic]
Q: Just to refresh your memory, would you please identify if this is the A: It must be deducted from my salary, [sic]
signature you signed given [sic] to Mr. Martinez?
A: Yeah. If looks like my signature, but... Q: You are assuming?
A: That is the agreement.
 assailing the decision2 dated June 22, 2001 of the Court of Appeals (CA) in
Q: That is the agreement but you don't know if it was indeed deducted? CA-G.R. CV No. 47578, as well as the resolution3 dated January 25, 2002
A: Yes.61cralawlawlibrary denying the spouses Go Cinco's motion for reconsideration.

If indeed deductions were made on his salaries, bonuses and commissions,

THE FACTUAL ANTECEDENTS
respondent should have been confident in answering the questions
propounded on him during trial. Me should have presented his payslips and
shown that even if his payslips did not reflect any deductions for his car In December 1987, petitioner Manuel Cinco (Manuel) obtained a
loan, deductions were indeed made, by comparing the amount of commercial loan in the amount of P700,000.00 from respondent Maasin
compensation he could have gotten based on his employment contract and Traders Lending Corporation (MTLC). The loan was evidenced by a
the amount he actually received. Respondent merely made calculations on promissory note dated December 11, 1987,4 and secured by a real estate Pag
what he presumed he already paid. Further, respondent could have mortgage executed on December 15, 1987 over the spouses Go Cinco's
presented testimonies of persons other than himself to prove payment of land and 4-storey building located in Maasin, Southern Leyte. e|
the loans. The letter dated November 24, 1998 showed that respondent
was aware that he still had outstanding obligations with petitioner. 21
Under the terms of the promissory note, the P700,000.00 loan was subject
In Royal Cargo Corporation v. DFS Sports Unlimited, Inc., we held that the to a monthly interest rate of 3% or 36% per annum and was payable within
a term of 180 days or 6 months, renewable for another 180 days. As of July
defense of payment was not proven by the respondent's failure to present
any supporting evidence such as official receipts or the testimony of the 16, 1989, Manuel's outstanding obligation with MTLC amounted
person who made payment or who had direct knowledge of the payment, to P1,071,256.66, which amount included the principal, interest, and
penalties.5
among others.62 Respondent's witness therein also assumed that payment
was made even in the absence of any receipt "once the accounting
department of respondent forwarded to her the original invoice which was To be able to pay the loan in favor of MTLC, the spouses Go Cinco applied
stamped PAID". We held in this case that such testimony and the invoices for a loan with the Philippine National Bank, Maasin Branch (PNB or the
which were stamped paid, are all self-serving and do not, by themselves, bank) and offered as collateral the same properties they previously
prove respondent's claim of payment.63 mortgaged to MTLC. The PNB approved the loan application for P1.3
Million6 through a letter dated July 8, 1989; the release of the amount,
Nevertheless, even if the parties agreed to make deductions from however, was conditioned on the cancellation of the mortgage in favor of
respondent's salary, bonuses and commissions, we agree with the trial MTLC.
court that this is "only affirmative of the capacity or ability of the
[respondent] to fulfill his part of the bargain. But whether or not there was
actual payment through deductions from [respondent]'s salary and bonus On July 16, 1989, Manuel went to the house of respondent Ester Servacio
remains to be proven by independent and credible evidence."64 (Ester), MTLC's President, to inform her that there was money with the
PNB for the payment of his loan with MTLC. Ester then proceeded to the
Finally, we find it questionable why respondent would agree on a setup PNB to verify the information, but she claimed that the bank's officers
where petitioner would not give him any written acknowledgment receipt of informed her that Manuel had no pending loan application with them. When
his payments or accounting of his loan.65 Respondent should have insisted she told Manuel of the bank's response, Manuel assured her there was
that receipts be issued in his favor in the first place if it were true that the money with the PNB and promised to execute a document that would allow
program for issuing the payslips could not reflect the deductions from his her to collect the proceeds of the PNB loan.
salaries, bonuses and commissions. Since he was the only employee who
was given a car loan, it would not have been an inconvenience for the On July 20, 1989, Manuel executed a Special Power of Attorney7 (SPA)
petitioner. His actions go against the legal presumption that a person takes authorizing Ester to collect the proceeds of his PNB loan. Ester again went
ordinary care of his concerns.66 to the bank to inquire about the proceeds of the loan. This time, the bank's
officers confirmed the existence of the P1.3 Million loan, but they required
Statement of account is Ester to first sign a deed of release/cancellation of mortgage before they
self-serving could release the proceeds of the loan to her. Outraged that the spouses
Go Cinco used the same properties mortgaged to MTLC as collateral for
Similarly, we find that the statement of account, showing the amount of the PNB loan, Ester refused to sign the deed and did not collect the P1.3
P418,012.78 as respondent's outstanding loan obligation to petitioner, is Million loan proceeds.
self-serving. Dy admitted that she prepared the statement of
account.67 However, she neither explained clearly, during her testimony, the
breakdown nor supported the amounts stated therein with documentary As the MTLC loan was already due, Ester instituted foreclosure
evidence.68 proceedings against the spouses Go Cinco on July 24, 1989.

Although petitioner refers to the amount of P418,012.78 in the statement to To prevent the foreclosure of their properties, the spouses Go Cinco filed
represent only the car loan obligation, the statement itself shows that the an action for specific performance, damages, and preliminary
amount also includes the cash advances of respondent from the company. injunction8 before the Regional Trial Court (RTC), Branch 25, Maasin,
The trial court has already ruled that judgment cannot be rendered on the Southern Leyte. The spouses Go Cinco alleged that foreclosure of the
issue regarding cash advances because this was not made subject of mortgage was no longer proper as there had already been settlement of
petitioner's complaint and the same was not amended. 69 Such issue was Manuel's obligation in favor of MTLC. They claimed that the assignment of
also not raised with us on appeal. Further, it was not explained why Valle the proceeds of the PNB loan amounted to the payment of the MTLC loan.
was not the one who prepared the statement or was not asked to testify on Ester's refusal to sign the deed of release/cancellation of mortgage and to
the document when her duties include supervising the accounting collect the proceeds of the PNB loan were, to the spouses Go Cinco,
department and assisting in the preparation of the employees' payroll. 70 completely unjustified and entitled them to the payment of damages.

Thus, having only proven payment to the extent of P337,650.00,

respondent is obligated to pay petitioner the balance of P310,638.00 with Ester countered these allegations by claiming that she had not been
interest. previously informed of the spouses Go Cinco's plan to obtain a loan from
the PNB and to use the loan proceeds to settle Manuel's loan with MTLC.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The Court She claimed that she had no explicit agreement with Manuel authorizing
of Appeals' Decision dated October 18, 2006 in CA G.R. CV No. 82686 her to apply the proceeds of the PNB loan to Manuel's loan with MTLC; the
is SET ASIDE. The respondent is ORDERED to pay petitioner the balance SPA merely authorized her to collect the proceeds of the loan. She thus
of the car loan in the amount of P310,638.00 plus interest at the rate of six averred that it was unfair for the spouses Go Cinco to require the release of
percent (6%) per annum computed from January 23, 199971 until the date the mortgage to MTLC when no actual payment of the loan had been
of finality of this judgment. The total amount shall thereafter earn interest at made.
the rate of six percent (6%) per annum 72 until fully paid. The trial court's
Decision dated November 22, 2002 is AFFIRMED in all other respects. In a decision dated August 16, 1994,9 the RTC ruled in favor of the spouses
Go Cinco. The trial court found that the evidence sufficiently established the
SO ORDERED.chanr existence of the PNB loan whose proceeds were available to satisfy
Manuel's obligation with MTLC, and that Ester unjustifiably refused to
[G.R. NO. 151903 : October 9, 2009] collect the amount. Creditors, it ruled, cannot unreasonably prevent
payment or performance of obligation to the damage and prejudice of
debtors who may stand liable for payment of higher interest rates.10 After
MANUEL GO CINCO and ARACELI S. GO CINCO, Petitioners, v. COURT finding MTLC and Ester liable for abuse of rights, the RTC ordered the
OF APPEALS, ESTER SERVACIO and MAASIN TRADERS LENDING award of the following amounts to the spouses Go Cinco:
CORPORATION Respondents.
(a) P1,044,475.15 plus 535.63 per day hereafter, representing loss of
DECISION savings on interest, by way of actual or compensatory damages, if
defendant corporation insists on the original 3% monthly interest rate;
BRION, J.:
(b) P100,000.00 as unrealized profit;
Before the Court is a Petition for Review on Certiorari 1 filed by petitioners,
spouses Manuel and Araceli Go Cinco (collectively, the spouses Go Cinco), (c) P1,000,000.00 as moral damages;
(d) P20,000.00 as exemplary damages; have been effected and the obligation extinguished.16 As the records show,
Ester refused to collect and allow the cancellation of the mortgage.
(e) P22,000.00 as litigation expenses; and
Under these facts, Manuel posits two things: first, that Ester's refusal was
based on completely unjustifiable grounds; and second, that the refusal
(f) 10% of the total amount as attorney's fees plus costs. 11
was equivalent to payment that led to the extinguishment of the obligation.

Through an appeal with the CA, MTLC and Ester successfully secured a
A. Unjust Refusal to Accept Payment
reversal of the RTC's decision. Unlike the trial court, the appellate court
found it significant that there was no explicit agreement between Ester and
the spouses Go Cinco for the cancellation of the MTLC mortgage in favor of After considering Ester's arguments, we agree with Manuel that Ester's Pag
PNB to facilitate the release and collection by Ester of the proceeds of the refusal of the payment was without basis.
PNB loan. The CA read the SPA as merely authorizing Ester to withdraw
e|
the proceeds of the loan. As Manuel's loan obligation with MTLC remained
Ester refused to accept the payment because the bank required her to first 22
unpaid, the CA ruled that no valid objection could be made to the institution
sign a deed of release/cancellation of the mortgage before the proceeds of
of the foreclosure proceedings. Accordingly, it dismissed the spouses Go
the PNB loan could be released. As a prior mortgagee, she claimed that the
Cinco' complaint. From this dismissal, the spouses Go Cinco filed the
spouses Go Cinco should have obtained her consent before offering the
present appeal by certiorari .
properties already mortgaged to her as security for the PNB loan.
Moreover, Ester alleged that the SPA merely authorized her to collect the
THE PETITION proceeds of the loan; there was no explicit agreement that the MTLC loan
would be paid out of the proceeds of the PNB loan.
The spouses Go Cinco impute error on the part of the CA for its failure to
consider their acts as equivalent to payment that extinguished the MTLC There is nothing legally objectionable in a mortgagor's act of taking a
loan; their act of applying for a loan with the PNB was indicative of their second or subsequent mortgage on a property already mortgaged; a
good faith and honest intention to settle the loan with MTLC. They contend subsequent mortgage is recognized as valid by law and by commercial
that the creditors have the correlative duty to accept the payment. practice, subject to the prior rights of previous mortgages. Section 4, Rule
68 of the 1997 Rules of Civil Procedure on the disposition of the proceeds
of sale after foreclosure actually requires the payment of the proceeds to,
The spouses Go Cinco charge MTLC and Ester with bad faith and ill-motive
among others, the junior encumbrancers in the order of their
for unjustly refusing to collect the proceeds of the loan and to execute the
priority.17 Under Article 2130 of the Civil Code, a stipulation forbidding the
deed of release of mortgage. They assert that Ester's justifications for
owner from alienating the immovable mortgaged is considered void. If the
refusing the payment were flimsy excuses so she could proceed with the
mortgagor-owner is allowed to convey the entirety of his interests in the
foreclosure of the mortgaged properties that were worth more than the
mortgaged property, reason dictates that the lesser right to encumber his
amount due to MTLC. Thus, they conclude that the acts of MTLC and of
property with other liens must also be recognized. Ester, therefore, could
Ester amount to abuse of rights that warrants the award of damages in their
not validly require the spouses Go Cinco to first obtain her consent to the
(spouses Go Cinco's) favor.
PNB loan and mortgage. Besides, with the payment of the MTLC loan using
the proceeds of the PNB loan, the mortgage in favor of the MTLC would
In refuting the claims of the spouses Go Cinco, MTLC and Ester raise the have naturally been cancelled.
same arguments they raised before the RTC and the CA. They claim that
they were not aware of the loan and the mortgage to PNB, and that there
We find it improbable for Ester to claim that there was no agreement to
was no agreement that the proceeds of the PNB loan were to be used to
apply the proceeds of the PNB loan to the MTLC loan. Beginning July 16,
settle Manuel's obligation with MTLC. Since the MTLC loan remained
1989, Manuel had already expressed intent to pay his loan with MTLC and
unpaid, they insist that the institution of the foreclosure proceedings was
thus requested for an updated statement of account. Given Manuel's
proper. Additionally, MTLC and Ester contend that the present petition
express intent of fully settling the MTLC loan and of paying through the
raised questions of fact that cannot be addressed in a Rule 45 petition.
PNB loan he would secure (and in fact secured), we also cannot give credit
to the claim that the SPA only allowed Ester to collect the proceeds of the
THE COURT'S RULING PNB loan, without giving her the accompanying authority, although verbal,
to apply these proceeds to the MTLC loan. Even Ester's actions belie her
claim as she in fact even went to the PNB to collect the proceeds. In sum,
The Court finds the petition meritorious. the surrounding circumstances of the case simply do not support Ester's
position.
Preliminary Considerations
b. Unjust Refusal Cannot be Equated to Payment
Our review of the records shows that there are no factual questions
involved in this case; the ultimate facts necessary for the resolution of the While Ester's refusal was unjustified and unreasonable, we cannot agree
case already appear in the records. The RTC and the CA decisions differed with Manuel's position that this refusal had the effect of payment that
not so much on the findings of fact, but on the conclusions derived from
extinguished his obligation to MTLC. Article 1256 is clear and unequivocal
these factual findings. The correctness of the conclusions derived from on this point when it provides that -
factual findings raises legal questions when the conclusions are so linked
to, or are inextricably intertwined with, the appreciation of the applicable law
that the case requires, as in the present case.12 The petition raises the ARTICLE 1256. If the creditor to whom tender of payment has been made
issue of whether the loan due the MTLC had been extinguished; this is a refuses without just cause to accept it, the debtor shall be released from
question of law that this Court can fully address and settle in an appeal responsibility by the consignation of the thing or sum due. [Emphasis
by certiorari . supplied.]

Payment as Mode of Extinguishing Obligations In short, a refusal without just cause is not equivalent to payment; 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
Obligations are extinguished, among others, by payment or consignation.
performance,13 the mode most relevant to the factual situation in the
present case. Under Article 1232 of the Civil Code, payment means not
only the delivery of money but also the performance, in any other manner, Tender of payment, as defined in Far East Bank and Trust Company v.
of an obligation. Article 1233 of the Civil Code states that "a debt shall not Diaz Realty, Inc.,18 is the definitive act of offering the creditor what is due
be understood to have been paid unless the thing or service in which the him or her, together with the demand that the creditor accept the same.
obligation consists has been completely delivered or rendered, as the case When a creditor refuses the debtor's tender of payment, the law allows the
may be." In contracts of loan, the debtor is expected to deliver the sum of consignation of the thing or the sum due. Tender and consignation have the
money due the creditor. These provisions must be read in relation with the effect of payment, as by consignation, the thing due is deposited and
other rules on payment under the Civil Code,14 which rules impliedly require placed at the disposal of the judicial authorities for the creditor to collect. 19
acceptance by the creditor of the payment in order to extinguish an
obligation.
A sad twist in this case for Manuel was that he could not avail of
consignation to extinguish his obligation to MTLC, as PNB would not
In the present case, Manuel sought to pay Ester by authorizing her, through release the proceeds of the loan unless and until Ester had signed the deed
an SPA, to collect the proceeds of the PNB loan - an act that would have of release/cancellation of mortgage, which she unjustly refused to do.
led to payment if Ester had collected the loan proceeds as authorized. Hence, to compel Ester to accept the loan proceeds and to prevent their
Admittedly, the delivery of the SPA was not, strictly speaking, a delivery of mortgaged properties from being foreclosed, the spouses Go Cinco found it
the sum of money due to MTLC, and Ester could not be compelled to necessary to institute the present case for specific performance and
accept it as payment based on Article 1233. Nonetheless, the SPA stood as damages.
an authority to collect the proceeds of the already-approved PNB loan that,
upon receipt by Ester, would have constituted as payment of the MTLC
c. Effects of Unjust Refusal
loan.15 Had Ester presented the SPA to the bank and signed the deed of
release/cancellation of mortgage, the delivery of the sum of money would
Under these circumstances, we hold that while no completed tender of release of the mortgage on the property given as security for the loan upon
payment and consignation took place sufficient to constitute payment, the PNB's acknowledgment that the proceeds of the loan, sufficient to cover the
spouses Go Cinco duly established that they have legitimately secured a total indebtedness to respondent Maasin Traders Lending Corporation
means of paying off their loan with MTLC; they were only prevented from computed as of June 20, 1989, shall forthwith be released;
doing so by the unjust refusal of Ester to accept the proceeds of the PNB
loan through her refusal to execute the release of the mortgage on the
(2) The award for loss of savings and unrealized profit is deleted;
properties mortgaged to MTLC. In other words, MTLC and Ester in fact
prevented the spouses Go Cinco from the exercise of their right to secure
payment of their loan. No reason exists under this legal situation why we (3) The award for moral damages is reduced to P100,000.00; and
cannot compel MTLC and Ester: (1) to release the mortgage to MTLC as a
condition to the release of the proceeds of the PNB loan, upon PNB's
acknowledgment that the proceeds of the loan are ready and shall forthwith
(4) The awards for exemplary damages, attorney's fees, and expenses of Pag
litigation are retained.
be released; and (2) to accept the proceeds, sufficient to cover the total e|
amount of the loan to MTLC, as payment for Manuel's loan with MTLC.
The awards under (3) and (4) above shall be deducted from the amount of 23
We also find that under the circumstances, the spouses Go Cinco have the outstanding loan due the respondents as of June 20, 1989. Costs
undertaken, at the very least, the equivalent of a tender of payment that against the respondents.
cannot but have legal effect. Since payment was available and was
unjustifiably refused, justice and equity demand that the spouses Go Cinco SO ORDERED.
be freed from the obligation to pay interest on the outstanding amount from
the time the unjust refusal took place;20 they would not have been liable for
any interest from the time tender of payment was made if the payment had
only been accepted. Under Article 19 of the Civil Code, they should likewise
be entitled to damages, as the unjust refusal was effectively an abusive act G.R. No. 212362, March 14, 2018
contrary to the duty to act with honesty and good faith in the exercise of
rights and the fulfillment of duty.
JOSE T. ONG BUN, Petitioner, v. BANK OF THE PHILIPPINE
ISLANDS, Respondent.
For these reasons, we delete the amounts awarded by the RTC to the
spouses Go Cinco (P1,044,475.15, plus P563.63 per month) representing
loss of savings on interests for lack of legal basis. These amounts were DECISION
computed based on the difference in the interest rates charged by the
MTLC (36% per annum) and the PNB (17% to 18% per annum), from the PERALTA, J.:
date of tender of payment up to the time of the promulgation of the RTC
decision. The trial court failed to consider the effects of a tender of payment
and erroneously declared that MTLC can charge interest at the rate of only This is to resolve the Petition for Review on Certiorari under Rule 45 of the
18% per annum - the same rate that PNB charged, not the 36% interest Rules of Court, dated May 22,2014, of petitioner Jose T. Ong Bun, that
rate that MTLC charged; the RTC awarded the difference in the interest seeks to reverse and set aside the Decision1 dated September 25, 2012
rates as actual damages. and Resolution2 dated March 19, 2014 of the Court of Appeals (CA) in CA-
G.R. CV No. 02715 dismissing petitioner's complaint for collection of sum of
money and damages against respondent Bank of the Philippine Islands
As part of the actual and compensatory damages, the RTC also (BPI).
awarded P100,000.00 to the spouses Go Cinco representing unrealized
profits. Apparently, if the proceeds of the PNB loan (P1,203,685.17) had The facts follow:
been applied to the MTLC loan (P1,071,256.55), there would have been a
balance of P132,428.62 left, which amount the spouses Go Cinco could In 1989, Ma. Lourdes Ong, the wife of petitioner, purchased the following
have invested in their businesses that would have earned them a profit of at three (3) silver custodian certificates (CC) in the Spouses' name from the
least P100,000.00.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ Far East Bank & Trust Company (FEBTC):

We find no factual basis for this award. The spouses Go Cinco were unable a) CC No. 131157 dated June 9, 1989 in the name of Jose Ong Bun or Ma.
to substantiate the amount they claimed as unrealized profits; there was Lourdes Ong for One Hundred Thousand Pesos;
only their bare claim that the excess could have been invested in their other
businesses. Without more, this claim of expected profits is at best b) CC No. 131200 dated July 25, 1989 in the name of Jose Ong Bun or Ma.
speculative and cannot be the basis for a claim for damages. In Lucas v. Lourdes Ong for Five Hundred Thousand Pesos; and
Spouses Royo,21 we declared that:
c) CC No. 224826 dated November 8, 1989 in the name of Jose or Ma.
Lourdes Ong Bun for One Hundred Fifty Thousand Pesos.
In determining actual damages, the Court cannot rely on speculation,
conjecture or guesswork as to the amount. Actual and compensatory The three CCs have the following common provisions:
damages are those recoverable because of pecuniary loss in business,
trade, property, profession, job or occupation and the same must be
sufficiently proved, otherwise, if the proof is flimsy and This instrument is transferable only in the books of the Custodian by the
unsubstantiated, no damages will be given. [Emphasis supplied.] holder, or in the event of transfer, by the transferee or buyer thereof in
person or by a duly authorized attorney-in-fact upon surrender of this
instrument together with an acceptable deed of assignment.
We agree, however, that there was basis for the award of moral and
exemplary damages and attorney's fees. The Holder hereof or transferee can withdraw at anytime during office hours
his/her Silver Certificate of Deposit herein held in custody.
Ester's act of refusing payment was motivated by bad faith as evidenced by
the utter lack of substantial reasons to support it. Her unjust refusal, in her This instrument shall not be valid unless duly signed by the authorized
behalf and for the MTLC which she represents, amounted to an abuse of signatories of the Bank, and shall cease to have force and effect upon
rights; they acted in an oppressive manner and, thus, are liable for moral payment under the terms hereof.
and exemplary damages.22 We nevertheless reduce Thereafter, FEBTC merged with BPI after about eleven years since the said
the P1,000,000.00to P100,000.00 as the originally awarded amount for CCs were purchased. After the death of Ma. Lourdes Ong in December
moral damages is plainly excessive. 2002, petitioner discovered that the three CCs bought from FEBTC were
still in the safety vault of his deceased wife and were not surrendered to
We affirm the grant of exemplary damages by way of example or correction FEBTC. As such, petitioner sent a letter dated August 12, 2003 to BPI,
for the public good in light of the same reasons that justified the grant of through the manager of its Trust Department Asset Management, to advise
moral damages. him on the procedure for the claim of the said certificates. BPI replied to
petitioner and informed the latter that upon its merger with FEBTC in 2000,
there were no Silver Certificates of Deposit outstanding, which meant that
As the spouses Go Cinco were compelled to litigate to protect their the certificates were fully paid on their respective participation's maturity
interests, they are entitled to payment of 10% of the total amount of dates which did not go beyond 1991. There were further exchanges of
awarded damages as attorney's fees and expenses of litigation. written communications between petitioner and BPI, but the latter still
refused to pay petitioner's claim because his certificates were no longer
WHEREFORE, we GRANT the petitioners' Petition for Review outstanding in its records. Thus, petitioner, with the assistance of counsel,
on Certiorari, and REVERSE the decision of June 22, 2001 of the Court of made a final demand in writing for the payment of the certificates, to no
Appeals in CA-G.R. CV No. 47578, as well as the resolution of January 25, avail.
2002 that followed. We REINSTATE the decision dated August 16, 1994 of
the Regional Trial Court, Branch 25, Maasin, Southern Leyte, with the After about.three years from his discovery of the certificates, petitioner filed
following MODIFICATIONS: a complaint for collection of sum of money and damages against BPI on
March 7, 2006 with the Regional Trial Court (RTC), Branch 33, Iloilo City
(Civil Case No. 06-28822) praying that BPI be ordered to pay him
(1) The respondents are hereby directed to accept the proceeds of the P750,000.00 for the three CCs, legal interest, 1!75,000.00 for attorney's
spouses Go Cinco's PNB loan, if still available, and to consent to the fees, P100,000.00 for moral damages, and an unspecified amount for
exemplary damages as well as cost of suit. As distinguished from a question of law which exists "when the doubt or
difference arises as to what the law is on a certain state of facts" - "there is
BPI, in its Answer, insists that as early as 1991, all the Silver Certificates of a question of fact when the doubt or difference arises as to the truth or the
Deposits, including those issued to petitioner and his wife, were already falsehood of alleged facts;" or when the "query necessarily invites
paid. It claimed that the CCs had terms of only 25 months and that by the calibration of the whole evidence considering mainly the credibility of
year 2000, when it merged with FEBTC and when the Trust and witnesses, existence and relevancy of specific surrounding circumstances,
Investments Group of FEBTC was no longer in existence, there were .no their relation to each other and to the whole and the probabilities of the
longer any outstanding CCs in its books. It had checked and double- situation."10
checked its records as well as those of FEBTC. It also claimed that FEBTC However, these rules do admit of exceptions.11 Over time, the exceptions to
had funy paid all of its silver certificates of time deposit on their maturity these rules have expanded. At present, there are 10 recognized exceptions
dates. According to BPI, contrary to petitioner's assertion, the presentation that were first listed in Medina v. Mayor Assistor, Jr.:12
or surrender of the certificates is not a condition precedent for its payment (1) When the conclusion is a finding grounded entirely on speculation,
Pag
by FEBTC. It also argued that petitioner filed his claim for the first time only surmises or conjectures; (2) When the inference made is manifestly e|
on August 12, 2003, or 12 years after the maturity of the CCs and under mistaken, absurd or impossible; (3) Where there is a grave abuse of
Article 1144 of the Civil Code, actions based on a written contract must be discretion; (4) When the judgment is based. on a misapprehension of facts; 24
brought within 10 years from the time the right accrues. In this case, (5) When the findings of fact are conflicting; (6) When the Court of Appeals,
according to BPI, petitioner's right accrued upon the maturity of the CCs in in making its findings, went beyond the issues of the case and the same is
1991, and the same has prescribed by the time he filed his claim. As a contrary to the admissions of both appellant and appellate; (7) The findings
counterclaim, BPI prayed that petitioner be ordered to pay it P75,000.00 as of the Court of Appeals are contrary to those of the trial court; (8) When the
attorney's fees, P2,000.00 per court appearance, at least P20,000.00 for findings of fact are conclusions without citation of specific evidence on
litigation expenses, and P1,000,000.00 for exemplary damages. It further which they are based; (9) When the facts set forth in the petition as well as
prayed that the complaint be dismissed and that petitioner be ordered to in the petitioner's main and reply briefs are not disputed by the
pay for the cost of the suit. respondents; and (10) The finding of fact of the Court of Appeals is
premised on the supposed absence of evidence and is contradicted by the
After trial on the merits, the RTC found in favor of petitioner and disposed of evidence on record.13
the case as follows: In the present case, the findings of facts of the RTC and the CA are
WHEREFORE, judgment is hereby rendered: apparently in contrast, hence, this Court deems it proper to rule on the
issues raised in the petition.
(a) Ordering defendant to pay plaintiff the sum of One Hundred Thousand
Pesos (P100,000.00) for the Custodian Certificate dated June 9, 1989 After careful consideration, this Court finds the petition to be meritorious.
bearing Serial CC No. 13115; the sum of Five Hundred Thousand Pesos
(P500,000.00) for the Custodian Certificate dated July 25, 1989 bearing It is undisputed that petitioner is in possession of three (3) CCs from
Serial CC No. 131200; and the sum of One Hundred Fifty Thousand Pesos FEBTC in the following amounts: (a) Custodian Certificate of Silver
(P150,000.00) for the Custodian Certificate dated November 8, 1989 Certificate of Deposit No. 131157 issued on June 9, 1989 in the amount of
bearing Serial CC No. 224826, including their respective interests for One Hundred Thousand Pesos (P100,000.00); (b) Custodian Certificate of
twenty-five (25) months under the terms and conditions of the Silver Silver Certificate of .Oeposit No. 131200 issued on July 25, 1989, in the
Certificate of Deposit - entrusted for custody to defendant by plaintiff - that amount of Five Hundred Thousand Pesos (P500,000.00); (c) Custodian
the said Custodian Certificates represent; plus legal interest thereon as Certificate of Silver Certificate of Deposit No. 224826 issued on November
regular savings deposit of the investments and their accrued interests from 8, 1989 in the amount of One Hundred Fifty Thousand Pesos
.the time of their respective maturity up to the time of payment. (P150,000.00).

(b) Ordering defendant to pay the plaintiff P100,000.00 for moral damages Simply put, the said CCs are proof that Silver Certificates of Deposits are in
and another P100,000.00 as exemplary damages; and the custody of a custodian, which is, in this case, FEBTC. The CA
therefore, erred in suggesting that the possession of petitioner of the same
(c) Ordering the defendant to pay P75,000.00 as attorney's fees, plus costs CCs does not prove an outstanding deposit because the latter are not the
of the suit. certificates of deposit themselves. What proves the deposits of the
petitioner are the Silver Certificates of Deposits that have been admitted by
SO ORDERED.3 the Trust Investments Group of the FEBTC to be in its custody as clearly
As a consequence, BPI elevated the case to the CA wherein the latter shown by the wordings used in the subject CCs. Custodian Certificate of
granted the appeal of the former. The dispositive portion of the CA's Silver Certificate of Deposit No. 131200 reads, in part:
decision reads as follows: This is to certify that the TRUSTS INVESTMENTS GROUP of FAR EAST
WHEREFORE, the appeal is hereby GRANTED. The 5 JUNE 2008 BANK AND TRUST COMPANY (Custodian) has in its custody for and in
Decision rendered in Civil Case No. 06-28822 by Branch 33 of the Regional behalf of ***** JOSE ONG BUN OR MA. LOURDES ONG ***** (Holder) the
Trial Court in Iloilo City is hereby REVERSED and SET ASIDE and the Silver Certificate of Deposit in the amount of PESOS: Php500,000.00.
complaint filed in the said case is hereby DISMISSED.
This instrument is transferable only in the books of the Custodian by the
SO ORDERED.4 holder, or in the event of transfer, by the transferee or buyer thereof in
The CA ruled that petitioner failed to prove that the deposits, which he person or by a duly authorized attorney-in-fact upon surrender of this
claims to be unpaid, are still outstanding. According to the appellate court, instrument together with an acceptable deed of assignment.
the custodian certificates, standing alone, do not prove an outstanding
deposit with the bank, but merely certify that FEBTC had in its custody for The Holder hereof or transferee can withdraw at anytime during office hours
and in behalf of either petitioner or his late wife the corresponding Silver his/her Silver Certificate of Deposit herein held in custody.
Certificates of Deposit and nothing more. The CA further ruled that the
surrender of the custodian certificates is not required for the withdrawal of This instrument shall not be valid unless duly signed by the authorized
the certificates of deposits themselves or for the payment of the Silver signa;ories of the Bank, and shall c ase to have force and effect upon
Certificates of Deposit, hence, even if the holder has in his possession the payment under the terms hereof.14
said custodian certificates, this does not ipso facto mean that he is an The other two custodian certificates are of the same tenor.
unpaid depositor of the bank.
In its Comment, respondent argued that upon its merger with FEBTC, there
Hence, the present petition. were no longer any outstanding Silver Certificates of Deposits, thus:
As previously discussed, the nature of the Silver Custodian Certificates of
Petitioner insists that the CCs are evidence that the Silver Certificates of Time Deposit was issued by then FEBTC on the occasion of its 25th year
Deposit in his name in varying amounts are in the possession of the Trust anniversary in the year 1989. Consequently, these certificates had a
Investments Group of FEBTC and constitute an outstanding obligation of term/maturity of twenty-five (25) months from its issuance or in the year
respondent with whom FEBTC merged. He adds that since it has been 1991. Further, these certificates should be accompanied by a Confirmation
proved that the CCs remained in the possession o.f the petitioner and has of Participation which provides for the details of each participant would
not been contn verted or shown to be non-existing, the said CCs remain have. Upon the merger of FEBTC and BPI sometime in the year 2000,
incontrovertible and unrebutted evidence of indebtedness of the respond nt there were no outstanding Silver Certificates of Deposit in its books of
because said CCs all openly admit that the Silver Certificates of Deposit in accounts; neither did the petitioner present the Confirmation of Participation
varying amounts owned by the petitioner are in its possession and has not which should have been attached to his Custodian Certificates. 15
been discharged by payment. Hence, according to petitioner, the CA erred Such an argument does not prove that petitioner has already been paid or
in its conclusion that the CCs in his possession do not prove an outstanding that his deposits have already been returned. Likewise, there was no proof
deposit with the respondent simply because the CCs are not the .or evidence that petitioner or his late wife withdrew the said Silver
Certificates of Deposit themselves. Certificates of Deposit. When the existence of a debt is fully established by
the evidence contained in the record, the burden of proving that it has been
The Rules of Court require that only questions of law should be raised in extinguished by payment devolves upon the debtor who offers such
petitions filed under Rule 45.5 This court is not a trier of facts. It will not defense to the claim of the creditor.16 Even where it is the plaintiff
entertain questions of fact as the factual findings of the appellate courts are ([petitioner] herein) who alleges nonpayment, the general rule is that the
"final, binding[,] or conclusive on the parties and upon this [c]ourt"6 when burden rests on the defendant ([respondent] herein) to prove payment,
supported by substantial evidence.7 Factual findings of the appellate courts rather than on the plaintiff to prove non-payment.17 Verily, an obligation may
will not be reviewed nor disturbed on appeal to this court. 8 be extinguished by payment.18 However, two requisites must concur: (1)
identity of the prestation, and (2) its integrjty. The first means that the very
In Chessman v. Intermediate Appellate Court,9 this Court distinguished thing due must be delivered or released; and the second, that the prestation
questions oflaw from questions of fact, thus: be fulfilled completely.19 In t.his case, no acknowledgment nor proof of full
payment was presented by respondent but merely a pronouncement that
there are no longer ap.y outstanding Silver Certificates of Deposits in its the grant of attorney's fees on the reasoning that petitioner was forced to
books of accounts. Thus, the RTC did not err in.the following findings: litigate. Thus, the present case does not fall within the exception provided
A promise had been obtained by plaintiff from defendant bank that the under Article 2208 of the Civil Code.
custodian certificates would be paid upon maturity. Hence, the latter
reneged on its promise when it refused payment thereof after demands WHEREFORE, the Petition for Review on Certiorari under Rule 45 of the
were made by plaintiff for such payment considering that in 1989, his wife Rules of Court, dated May 22, 2014, of petitioner Jose T. Ong Bun,
Ma. Lourdes Ong Bun acquired in their names three (3) certificates of is GRANTED. Consequently, the Decision dated September 25, 2012 and
deposits from FEBTC in various amounts, to wit: (a) Custodian Certificate Resolution dated March 19,2014 of the Court of Appeals in CA-G.R. CV
of Silver Certificate of Deposit No. 131157 issued on June 9, 1989 in the No. 02715 are REVERSED and SET ASIDE, and the Decision dated June
amount of One Hundred Thousand Pesos (P100,000.00), (Exhibit "A"); (b) 5, 2008 of the Regional Trial Court, Branch 33, Iloilo City
Custodian Certificate of Silver Certificate of Deposit No. 131200 issued on is AFFIRMED and REINSTATED, with the MODIFICATION that the award
July 25, 1989 in the amount of Five Hundred Thousand Pesos of moral damages, exemplary damages and attorney's fees be OMITTED.
Pag
(P500,000.00) (Exhibit "B"); (c) Custodian Certificate of Silver Certificate e|
ofDeposit No. 224826 issued on November 8, 1989 in the amount of One SO ORDERED.
Hundred Fifty Thousand Pesos (P150,000.00), (Exhibit "C"). His wife kept 25
these certificates of deposits. The claim of defendant bank, through the
G.R. No. 147561 June 22, 2006
Manager of its Trust Department Asset Management, that the
aforementioned certificates had been paid, is not supported by credible
evidence and, therefore, unsubstantiated. Its position that the Silver STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
Certificates of Time Deposits in question and in the names of Jose Ong vs.
Bun or Ma. Lourdes Ong had been paid by the Far East Bank and Trust REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
Company as early as the year 1991, when the same matured considering
that at the time of the merger between Far East Bank and Trust Company
DECISION
and the Bank of Philippine Islands, no such Silver Certificates of Time
Deposits were outstanding on the books of Far East Bank and Trust
Company, is simply unconvincing. PANGANIBAN, CJ:

The fact that the plaintiff still has [a] copy of the Custodian Certificate of the
Silver Certificates of Time Deposit is material, contrary to the stance of Asurety company’s liability under the performance bond it issues is solidary.
defendant, as it is inconceivable that the bank would make payment without The death of the principal obligor does not, as a rule, extinguish the
requiring the surrender thereof.20 obligation and the solidary nature of that liability.
Hence, the conclusion that the Silver Certificates of Deposit may have been
withdrawn by the petitioner or his wife although they failed to surrender the The Case
custodian certificates is speculative and replete of any proof or evidence.

The CA further ruled that the surrender of the CCs is not required for the Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
withdrawal of he certificates of deposit themselves or for the payment of the seeking to reverse the March 13, 2001 Decision2 of the Court of Appeals
Silver Certificates of Deposit, hence, even if the holder has in his (CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows:
possession the said custodian certificates, this does not ipso facto mean
that he is an unpaid depositor of the bank. Such conclusion is illogical "WHEREFORE, the Order dated January 28, 1993 issued by the lower
because the very wordings contained in the CCs would suggest otherwise, court is REVERSED and SET ASIDE. Let the records of the instant case be
thus: REMANDED to the lower court for the reception of evidence of all parties." 3
This instrument is transferable only in the books of the Custodian by the
holder, or in the event of transfer, by the transferee or buyer thereof in
person or by a duly authorized attorney-in-fact upon surrender of this The Facts
instrument together with an acceptable deed of assignment.
The facts of the case are narrated by the CA in this wise:
The Holder hereof or transferee can withdraw at anytime during office hours
his/her Silver Certificate of Deposit herein held in custody.
"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation
This instrument shall not be valid unless duly signed by the authorized (Republic-Asahi) entered into a contract with x x x Jose D. Santos, Jr., the
signatories of the Bank, and shall cease to have force and effect upon proprietor of JDS Construction (JDS), for the construction of roadways and
payment under the terms hereof.21 a drainage system in Republic-Asahi’s compound in Barrio Pinagbuhatan,
Furthermore, the surrender of such certificates would have promoted the Pasig City, where [respondent] was to pay x x x JDS five million three
protection of the bank and would have been more in line with the high hundred thousand pesos (P5,300,000.00) inclusive of value added tax for
standards expected of any banking institution. Banks, their business being said construction, which was supposed to be completed within a period of
impressed with public interest, are expected to exercise more care and two hundred forty (240) days beginning May 8, 1989. In order ‘to guarantee
prudence than private individuals in their dealings.22 The Court is not the faithful and satisfactory performance of its undertakings’ x x x JDS, shall
unmindful of the fact that a bank owes great fidelity to the public it deals post a performance bond of seven hundred ninety five thousand pesos
with, its operation being essentially imbued with public interest x x x.23 (P795,000.00). x x x JDS executed, jointly and severally with [petitioner]
Stronghold Insurance Co., Inc. (SICI) Performance Bond No. SICI-
As to the issues of prescription and laches raised by the respondent in its 25849/g(13)9769.
Comment, the same were not passed upon by the CA and cannot be raised
before this Court unless an appeal was filed by the same respondent "On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety
raising such issues. five thousand pesos (P795,000.00) by way of downpayment.
The award of moral and exemplary damages, however, must be deleted for
failure of petitioner to show that respondent was in bad faith or acted in any "Two progress billings dated August 14, 1989 and September 15, 1989, for
wanton, fraudulent, reckless, oppressive or malevolent manner in its the total amount of two hundred seventy four thousand six hundred twenty
dealings with petitioner. "The person claiming moral damages must prove one pesos and one centavo (P274,621.01) were submitted by x x x JDS to
the existence of bad faith by clear and convincing evidence for the law [respondent], which the latter paid. According to [respondent], these two
always presumes good faith. It is not enough that one merely suffered progress billings accounted for only 7.301% of the work supposed to be
sleepless nights, mental anguish, serious anxiety as the result of the undertaken by x x x JDS under the terms of the contract.
actuations of the other party. Invariably such action must be shown to have
been willfully done in bad faith or with ill motive."24 Also, in contracts "Several times prior to November of 1989, [respondent’s] engineers called
and quasi-contracts, the Court has the discretion to award exemplary the attention of x x x JDS to the alleged alarmingly slow pace of the
damages if the defendant acted in a wanton, fraudulent, reckless, construction, which resulted in the fear that the construction will not be
oppressive, or malevolent manner.25 In this case, it appears that finished within the stipulated 240-day period. However, said reminders went
respondent had an honest belief that before its merger with FEBTC, the unheeded by x x x JDS.
subject CCs were already paid and cleared from its books, hence, belying
any claim that it acted in any manner that would warrant the grant of moral
and exemplary damages to the petitioner. "On November 24, 1989, dissatisfied with the progress of the work
undertaken by x x x JDS, [respondent] Republic-Asahi extrajudicially
The award of attorney's fees must also be omitted. We have consistently rescinded the contract pursuant to Article XIII of said contract, and wrote a
held that an award of attorney's fees under Article 220826 demands factual, letter to x x x JDS informing the latter of such rescission. Such rescission,
legal, and equitable justification to avoid speculation and conjecture according to Article XV of the contract shall not be construed as a waiver of
surrounding the grant thereof.27 Due to the special nature of the award of [respondent’s] right to recover damages from x x x JDS and the latter’s
attorney's fees, a rigid standard is imposed on the courts before these fees sureties.
could be granted. Hence, it is imperative that they clearly and distinctly set
forth in their decisions the basis for the award thereof. It is not enough that "[Respondent] alleged that, as a result of x x x JDS’s failure to comply with
they merely state the amount of the grant in the dispositive portion of their the provisions of the contract, which resulted in the said contract’s
decisions.28 It bears reiteration that the award of attorney's fees is an rescission, it had to hire another contractor to finish the project, for which it
exception rather than the general rule; thus, there must be compelling legal incurred an additional expense of three million two hundred fifty six
reason to bring the case within the exceptions provided under Article 2208 thousand, eight hundred seventy four pesos (P3,256,874.00).
of the Civil Code to justify the award.29 In this case, the RTC merely justified
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its reconsideration which was opposed by [petitioner] SICI. On April 16, 1993,
claim under the bond for not less than P795,000.00. On March 22, 1991, the lower court denied [respondent’s] motion for reconsideration. x x x."4
[respondent] again sent another letter reiterating its demand for payment
under the aforementioned bond. Both letters allegedly went unheeded.
Ruling of the Court of Appeals

"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought
The CA ruled that SICI’s obligation under the surety agreement was not
from x x x JDS payment of P3,256,874.00 representing the additional
extinguished by the death of Jose D. Santos, Jr. Consequently, Republic-
expenses incurred by [respondent] for the completion of the project using
Asahi could still go after SICI for the bond.
another contractor, and from x x x JDS and SICI, jointly and severally,
payment of P750,000.00 as damages in accordance with the performance
bond; exemplary damages in the amount of P100,000.00 and attorney’s The appellate court also found that the lower court had erred in Pag
fees in the amount of at least P100,000.00. pronouncing that the performance of the Contract in question had become
impossible by respondent’s act of rescission. The Contract was rescinded
e|
"According to the Sheriff’s Return dated June 14, 1991, submitted to the
because of the dissatisfaction of respondent with the slow pace of work and 26
pursuant to Article XIII of its Contract with JDS.
lower court by Deputy Sheriff Rene R. Salvador, summons were duly
served on defendant-appellee SICI. However, x x x Jose D. Santos, Jr. died
the previous year (1990), and x x x JDS Construction was no longer at its The CA ruled that "[p]erformance of the [C]ontract was impossible, not
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., because of [respondent’s] fault, but because of the fault of JDS
Pasig, Metro Manila, and its whereabouts were unknown. Construction and Jose D. Santos, Jr. for failure on their part to make
satisfactory progress on the project, which amounted to non-performance of
the same. x x x [P]ursuant to the [S]urety [C]ontract, SICI is liable for the
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the
non-performance of said [C]ontract on the part of JDS Construction."5
[respondent’s] money claims against [petitioner and JDS] have been
extinguished by the death of Jose D. Santos, Jr. Even if this were not the
case, [petitioner] SICI had been released from its liability under the Hence, this Petition.6
performance bond because there was no liquidation, with the active
participation and/or involvement, pursuant to procedural due process, of
Issue
herein surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI under the
performance bond. At this point in time, said liquidation was impossible Petitioner states the issue for the Court’s consideration in the following
because of the death of Santos, who as such can no longer participate in manner:
any liquidation. The unilateral liquidation on the party (sic) of [respondent]
of the work accomplishments did not bind SICI for being violative of
procedural due process. The claim of [respondent] for the forfeiture of the "Death is a defense of Santos’ heirs which Stronghold could also adopt as
performance bond in the amount of P795,000.00 had no factual and legal its defense against obligee’s claim."7
basis, as payment of said bond was conditioned on the payment of
damages which [respondent] may sustain in the event x x x JDS failed to More precisely, the issue is whether petitioner’s liability under the
complete the contracted works. [Respondent] can no longer prove its claim performance bond was automatically extinguished by the death of Santos,
for damages in view of the death of Santos. SICI was not informed by the principal.
[respondent] of the death of Santos. SICI was not informed by [respondent]
of the unilateral rescission of its contract with JDS, thus SICI was deprived
of its right to protect its interests as surety under the performance bond, The Court’s Ruling
and therefore it was released from all liability. SICI was likewise denied due
process when it was not notified of plaintiff-appellant’s process of The Petition has no merit.
determining and fixing the amount to be spent in the completion of the
unfinished project. The procedure contained in Article XV of the contract is
against public policy in that it denies SICI the right to procedural due Sole Issue:
process. Finally, SICI alleged that [respondent] deviated from the terms and
conditions of the contract without the written consent of SICI, thus the latter Effect of Death on the Surety’s Liability
was released from all liability. SICI also prayed for the award of P59,750.00
as attorney’s fees, and P5,000.00 as litigation expenses.
Petitioner contends that the death of Santos, the bond principal,
extinguished his liability under the surety bond. Consequently, it says, it is
"On August 16, 1991, the lower court issued an order dismissing the automatically released from any liability under the bond.
complaint of [respondent] against x x x JDS and SICI, on the ground that
the claim against JDS did not survive the death of its sole proprietor, Jose
D. Santos, Jr. The dispositive portion of the [O]rder reads as follows: As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation.8 Obligations are transmissible to the heirs, except
when the transmission is prevented by the law, the stipulations of the
‘ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., parties, or the nature of the obligation.9 Only obligations that are
doing business under trade and style, ‘JDS Construction’ and Stronghold personal10 or are identified with the persons themselves are extinguished
Insurance Company, Inc. is ordered DISMISSED. by death.11

‘SO ORDERED.’ Section 5 of Rule 8612 of the Rules of Court expressly allows the
prosecution of money claims arising from a contract against the estate of a
"On September 4, 1991, [respondent] filed a Motion for Reconsideration deceased debtor. Evidently, those claims are not actually
seeking reconsideration of the lower court’s August 16, 1991 order extinguished.13 What is extinguished is only the obligee’s action or suit filed
dismissing its complaint. [Petitioner] SICI field its ‘Comment and/or before the court, which is not then acting as a probate court. 14
Opposition to the Motion for Reconsideration.’ On October 15, 1991, the
lower court issued an Order, the dispositive portion of which reads as In the present case, whatever monetary liabilities or obligations Santos had
follows: under his contracts with respondent were not intransmissible by their
nature, by stipulation, or by provision of law. Hence, his death did not result
‘WHEREFORE, premises considered, the Motion for Reconsideration is in the extinguishment of those obligations or liabilities, which merely passed
hereby given due course. The Order dated 16 August 1991 for the on to his estate.15 Death is not a defense that he or his estate can set up to
dismissal of the case against Stronghold Insurance Company, Inc., is wipe out the obligations under the performance bond. Consequently,
reconsidered and hereby reinstated (sic). However, the case against petitioner as surety cannot use his death to escape its monetary obligation
defendant Jose D. Santos, Jr. (deceased) remains undisturbed. under its performance bond.

‘Motion for Preliminary hearing and Manifestation with Motion filed by The liability of petitioner is contractual in nature, because it executed a
[Stronghold] Insurance Company Inc., are set for hearing on November 7, performance bond worded as follows:
1991 at 2:00 o’clock in the afternoon.
"KNOW ALL MEN BY THESE PRESENTS:
‘SO ORDERED.’
"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor,
"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for of Shaw Blvd., Pasig, MM Philippines, as principal and the STRONGHOLD
Bondsman/Defendant SICI (Re: Effect of Death of defendant Jose D. INSURANCE COMPANY, INC. a corporation duly organized and existing
Santos, Jr.)’ reiterating its prayer for the dismissal of [respondent’s] under and by virtue of the laws of the Philippines with head office at Makati,
complaint. as Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS
CORPORATION and to any individual, firm, partnership, corporation or
association supplying the principal with labor or materials in the penal sum
"On January 28, 1993, the lower court issued the assailed Order of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00),
reconsidering its Order dated October 15, 1991, and ordered the case, Philippine Currency, for the payment of which sum, well and truly to be
insofar as SICI is concerned, dismissed. [Respondent] filed its motion for
made, we bind ourselves, our heirs, executors, administrators, successors G.R. No. 187543
and assigns, jointly and severally, firmly by these presents.
WERR CORPORATION INTERNATIONAL, Petitioner
"The CONDITIONS OF THIS OBLIGATION are as follows; vs.
HIGHLANDS PRIME INC., Respondent
"WHEREAS the above bounden principal on the ___ day of __________,
19__ entered into a contract with the REPUBLIC ASAHI GLASS x-----------------------x
CORPORATION represented by _________________, to fully and
faithfully. Comply with the site preparation works road and drainage system
G.R. No. 187580
of Philippine Float Plant at Pinagbuhatan, Pasig, Metro Manila. Pag
"WHEREAS, the liability of the Surety Company under this bond shall in no
HIGHLANDS PRIME, INC., Petitioner, e|
vs.
case exceed the sum of PESOS SEVEN HUNDRED NINETY FIVE
WERR CORPORATION INTERNATIONAL, Respondent. 27
THOUSAND (P795,000.00) Philippine Currency, inclusive of interest,
attorney’s fee, and other damages, and shall not be liable for any advances
of the obligee to the principal. DECISION

"WHEREAS, said contract requires the said principal to give a good and JARDELEZA, J.:
sufficient bond in the above-stated sum to secure the full and faithfull
performance on its part of said contract, and the satisfaction of obligations
These are consolidated petitions1 seeking to nullify the Court of Appeals'
for materials used and labor employed upon the work;
(CA) February 9, 2009 Decision2 and April 16, 2009 Resolution3 in CA-G.R.
SP No. 105013. The CA modified the August 11, 2008 Decision4 of the
"NOW THEREFORE, if the principal shall perform well and truly and fulfill Construction Industry Arbitration Commission (CIAC) in CIAC Case No. 09-
all the undertakings, covenants, terms, conditions, and agreements of said 2008, viz.:
contract during the original term of said contract and any extension thereof
that may be granted by the obligee, with notice to the surety and during the
WHEREFORE, premises considered, the instant petition for review
life of any guaranty required under the contract, and shall also perform well
is PARTLY GRANTED. The assailed Decision dated August 11, 2008 of
and truly and fulfill all the undertakings, covenants, terms, conditions, and
agreements of any and all duly authorized modifications of said contract the Construction Industry Arbitration Commission in CIAC Case No. 09-
2008 is hereby MODIFIED as follows:
that may hereinafter be made, without notice to the surety except when
such modifications increase the contract price; and such principal
contractor or his or its sub-contractors shall promptly make payment to any 1) Respondent Werr Corporation International shall pay petitioner
individual, firm, partnership, corporation or association supplying the Highlands Prime, Inc. liquidated damages in the amount of ₱8,969,330.70;
principal of its sub-contractors with labor and materials in the prosecution of
the work provided for in the said contract, then, this obligation shall be null
and void; otherwise it shall remain in full force and effect. Any extension of 2) Petitioner Highlands Prime, Inc. shall return to respondent Werr
the period of time which may be granted by the obligee to the contractor Corporation International the balance of its retention money in the amount
shall be considered as given, and any modifications of said contract shall of ₱10,955,899.80 with the right to offset the award for liquidated damages
be considered as authorized, with the express consent of the Surety. in the aforesaid amount of ₱8,969,330.70; and

"The right of any individual, firm, partnership, corporation or association 3) The cost of arbitration shall be shared equally by the parties.
supplying the contractor with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the penal bond, pursuant to The rest of the decision stands.
the provision of Act No. 3688, is hereby acknowledge and confirmed." 16
SO ORDERED.5
As a surety, petitioner is solidarily liable with Santos in accordance with the
Civil Code, which provides as follows:
Facts

"Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter Highlands Prime, Inc. (HPI) and Werr Corporation International (Werr) are
should fail to do so. domestic corporations engaged in property development and construction,
respectively. For the construction of 54 residential units contained in three
clusters of five-storey condominium structures, known as "The Horizon-
"If a person binds himself solidarily with the principal debtor, the provisions Westridge Project," in Tagaytay Midlands Complex, Talisay, Batangas, the
of Section 4,17 Chapter 3, Title I of this Book shall be observed. In such project owner, HPI, issued a Notice of Award/Notice to Proceed6 to its
case the contract is called a suretyship." chosen contractor, Werr, on July 22, 2005. Thereafter, the parties executed
a General Building Agreement7 (Agreement) on November 17, 2005.8
xxxxxxxxx
Under the Agreement, Werr had the obligation to complete the project
"Art. 1216. The creditor may proceed against any one of the solidary within 210 calendar days from receipt of the Notice of Award/Notice to
debtors or some or all of them simultaneously. The demand made against Proceed on July 22, 2005, or until February 19, 2006.9 For the completion
one of them shall not be an obstacle to those which may subsequently be of the project, HPI undertook to pay Werr a lump sum contract price of
directed against the others, so long as the debt has not been fully ₱271,797,900.00 inclusive of applicable taxes, supply and transportation of
collected." materials, and labor.10 It was agreed that this contract price shall be subject
to the following payment scheme: (1) HPI shall pay 20% of the contract
price upon the execution of the agreement and the presentation of the
Elucidating on these provisions, the Court in Garcia v. Court of necessary bonds and insurance required under the contract, and shall pay
Appeals18 stated thus: the balance on installments progress billing subject to recoupment of
downpayment and retention money;11 (2) HPI shall retain 10% of the
contract price in the form of retention bond provided by Werr;12 (3) HPI may
"x x x. The surety’s obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the deduct or set off any sum against monies due Werr, including expenses for
obligation contracted by the principal. Nevertheless, although the contract the rectification of defects in the construction project;13 and (4) HPI has the
right to liquidated damages in the event of delay in the construction of the
of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct, project equivalent to 1/10 of 1% of the contract price for every day of
primary and absolute; in other words, he is directly and equally bound with delay.14
the principal. x x x."19
Upon HPI's payment of the stipulated 20% downpayment in the amount of
Under the law and jurisprudence, respondent may sue, separately or ₱54,359,580.00, Werr commenced with the construction of the project. The
contract price was paid and the retention money was deducted, both in the
together, the principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The death of the principal debtor will not progress billings. The project, however, was not completed on the initial
work to convert, decrease or nullify the substantive right of the solidary completion date of February 19, 2006, which led HPI to grant several
extensions and a final extension until October 15, 2006. On May 8, 2006, W
creditor. Evidently, despite the death of the principal debtor, respondent
may still sue petitioner alone, in accordance with the solidary nature of the err sought the assistance of HPI to pay its obligations with its suppliers
latter’s liability under the performance bond. under a "Direct Payment Scheme" totaling ₱24,503,500.08, which the latter
approved only up to the amount of ₱18,762,541.67. The amount is to be
charged against the accumulated retention money. As of the last billing on
WHEREFORE, the Petition is DENIED and the Decision of the Court of October 25, 2006, HPI had already paid the amount of ₱232,940,265.85
Appeals AFFIRMED. Costs against petitioner. corresponding to 93.18% accomplishment rate of the project and retained
the amount of ₱25,738,258.01 as retention bond.15
SO ORDERED.
The project was not completed on the last extension given. Thus, HPI the amount of liquidated damages and arbitration costs. According to the
terminated its contract with Werr on November 28, 2006, which the latter CA, delay should be computed from October 27, 2006 until termination of
accepted on November 30, 2006.16 No progress billing was adduced for the the contract on November 28, 2006, or 33 days, since the contract prevails
period October 28, 2006 until the termination of the contract.17 over the industry practice. Thus, the total liquidated damages is
₱8,969,330.70. As to the arbitration costs, it ruled that it is more equitable
that it be borne equally by the parties since the claims of both were
On October 3, 2007, Werr demanded from HPI payment of the balance of
considered and partially granted. 34
the contract price as reflected in its financial status report which showed a
conditional net payable amount of ₱36,078,652.90.18 On January 24, 2007,
HPI informed Werr that based on their records, the amount due to the latter Hence, these consolidated petitions.
as of December 31, 2006 is ₱14,834,926.71.19 This amount was confirmed
by Werr.20 Not having received any payment, Werr filed a Complaint21 for
Arguments
Pag
arbitration against HPI before the CIAC to recover the ₱14,834,926.71
representing the balance of its retention money. e|
Werr argues that the CA erred in modifying the CIAC decision on the 28
amount of liquidated damages and arbitration costs. It insists that the
In its Answer,22 HPI countered that it does not owe Werr because the
appellate court disregarded Articles 1234, 1235, and 1376 of the Civil Code
balance of the retention money answered for the payments made to
and the industry practice (as evidenced by Clause 52.1 of the Construction
suppliers and for the additional costs and expenses incurred after
Industry Authority of the Philippines [CIAP] Document No. 101 or the
termination of the contract. From the retention money of ₱25,738,258.0l, it
"General Conditions of Contract for Government Construction" and Article
deducted (1) ₱18,762,541.67 as payment to the suppliers under the Direct
20.11 of CIAP Document No. 102 or the "Uniform General Conditions of
Payment Scheme, and (2) ₱7,548,729.15 as additional costs and expenses
Contract for Private Construction") when it did not apply the construction
further broken down as follows: (a) ₱3,336,526.91 representing the
industry practice in computing liquidated damages only until substantial
unrecouped portion of the 20% downpayment; (b) ₱542,500.00
completion of the project, and not until the termination of the
representing the remainder of Werr's unpaid advances; (c) ₱629,702.24 for
contract.35 Werr further emphasizes that the CIAC, being an administrative
the waterproofing works done by Dubbel Philippines; and (d) ₱3,040,000.00
agency, has expertise on the subject matter, and thus, its findings prevail
for the rectification works performed by A.A. Manahan Construction after
over the appellate court's findings.36
the termination of the contract. Deducting the foregoing from the
accumulated retention money resulted in a deficiency of ₱573,012.81 in its
favor.23 By way of counterclaim, HPI prayed for the payment of liquidated On the other hand, HPI argues that Werr was unjustly enriched when the
damages in the amount of ₱11,959,107.60 for the 44-day delay in the CA disallowed HPI' s recovery of the amounts it paid to suppliers. HPI
completion of the project reckoned from October 15, 2006 up to the claims that: (1) payments made to suppliers identified in the Direct Payment
termination of the Agreement on November 28, 2006; for actual damages in Scheme even after the termination of the contract should be charged
the sum of ₱573,012.81; and for attorney's fees of ₱500,000.00 and against the balance of the retention money, the same having been made
litigation expenses of ₱100,000.00.24 pursuant to Werr's express instructions; (2) the payments to Dubbel
Philippines and the cost of the contract with A.A. Manahan Construction are
chargeable to the retention money, pursuant to the terms of the Agreement;
CIAC's Ruling
and (3) the expenses incurred in excess of the retention money should be
paid by Werr as actual damages. These payments, while made after the
After due proceedings, the CIAC rendered its Decision25 on August 11, termination of the contract, were for prior incurred obligations.37 HPI also
2008 where it granted Werr's claim for the balance of the retention money argues that it is not liable for arbitration costs, and reiterates its claims for
in the amount of ₱10,955,899.79 and arbitration costs. It also granted HPI's actual damages, and payment of attorney's fees and litigation expenses. 38
claim for liquidated damages in the amount of ₱2,535,059.0l equivalent to
9.327 days of delay,26 but denied its counterclaim for damages, attorney's
Issues
fees, and litigation expenses.

I. Whether the payments made to suppliers and contractors after the

From the claims of HPI, the CIAC only deducted the amounts of (1)
termination of the contract are chargeable against the retention money.
₱10,903,331.30 representing the direct payments made from September
26, 2006 until December 31, 2006,27 (2) ₱3,336,526.91 representing the
unrecouped retention money, and (3) P542,500.00 representing the unpaid II. Whether the industry practice of computing liquidated damages only up
cash advances from the ₱25,738,258.0l retention money. It disallowed the to substantial completion of the project applies in the computation of
direct payments charged by HPI in 2007 and 2008 for having been supplied liquidated damages. Consequently, whether delay should be computed until
after the termination of the project, for not corresponding to the list of termination of the contract or until substantial completion of the project.
suppliers submitted, and for HPI failing to show that Werr requested it to
continue payments even after termination of the Agreement. It also
III. Whether the cost of arbitration should be shouldered by both parties.
disallowed the amount of ₱629,702.24 for the waterproofing works done by
Dubbel Philippines for being works done after the termination of the
contract. The ₱3,040,000.00 for the rectification works performed after the IV. Whether HPI is entitled to attorney's fees and litigation expenses.
termination of the contract was also disallowed because while HPI
presented its contract with A.A. Manahan Construction for rectification and
completion works, it failed to present proof of how much was specifically Our Ruling
paid for rectification works only, as well as the proof of its payment.
Moreover, prior notice of such defective works was not shown to have been We deny the consolidated petitions.
given to Werr as required under the Agreement, and even noted that HPI's
project manager approved of the quality of the works up to almost 94%.28
I. Charges against the Retention Money

The CIAC further ruled that Werr incurred only 9.327 days of delay. Citing
Article 137629 of the Civil Code and considering the failure of the Anent the first issue, we emphasize that what is before us is a petition for
Agreement to state otherwise, it applied the industry practice in the review under Rule 45 where only questions of law may be raised.39 Factual
construction industry that liquidated damages do not accrue after achieving issues, which involve a review of the probative value of the evidence
substantial compliance. It held that delay should be counted from October presented, such as the credibility of witnesses, or the existence or
27, 2006 until the projected date of substantial completion. Since the last relevance of surrounding circumstances and their relation to each other,
admitted accomplishment is 93.18% on October 27, 2006, the period it will may not be raised unless it is shown that the case falls under recognized
take Werr to perform the remaining 1.82% is the period of delay. Based on exceptions.40
the past billings, since it took Werr 5 .128 days30 to achieve 1%
accomplishment, it will therefore take it 9.327 days to achieve substantial In cases of arbitral awards rendered by the CIAC, adherence to this rule is
completion. Thus, the CIAC concluded that the period of delay until all the more compelling.41 Executive Order No. 1008,42 which vests upon
substantial completion of the project is 9.327 days. The liquidated damages the CIAC original and exclusive jurisdiction over disputes arising from, or
under the Agreement being 1/10 of 1% of the ₱271,797,900.00 or connected with, contracts entered into by parties involved in construction in
₱271,797.90 per day of delay, Werr is liable for liquidated damages in the the Philippines, clearly provides that the arbitral award shall be binding
amount of ₱2,535,048.95.31 upon the parties and that it shall be final and inappealable except on
questions of law which shall be appealable to the Supreme Court. 43 This
Since the liquidated damages did not exhaust the balance of the retention rule on the finality of an arbitral award is anchored on the premise that an
money, the CIAC likewise denied the claim for actual damages.32 impartial body, freely chosen by the parties and to which they have
confidence, has settled the dispute after due proceedings:

Thereafter, HPI filed its petition for review33 under Rule 43 with the CA on
August 28, 2008.1âwphi1 Voluntary arbitration involves the reference of a dispute to an impartial
body, the members of which are chosen by the parties themselves, which
parties freely consent in advance to abide by the arbitral award issued after
CA's Ruling proceedings where both parties had the opportunity to be heard. The basic
objective is to provide a speedy and inexpensive method of settling
The CA rendered the assailed decision, affirming the CIAC's findings on the disputes by allowing the parties to avoid the formalities, delay, expense and
allowable charges against the retention money, and on the attorney's fees aggravation which commonly accompany ordinary litigation, especially
and litigation expenses. It, however, disagreed with the CIAC decision as to litigation which goes through the entire hierarchy of courts. Executive Order
No. 1008 created an arbitration facility to which the construction industry in amount of the Contract price for every day of delay (inclusive of Sundays
the Philippines can have recourse. The Executive Order was enacted to and holidays).51
encourage the early and expeditious settlement of disputes in the
construction industry, a public policy the implementation of which is
Werr, as contractor, urges us to apply the construction industry practice that
necessary and important for the realization of national development goals.
liquidated damages do not accrue after the date of substantial completion
of the project, as evidenced in CIAP Document No. 102, which provides
Aware of the objective of voluntary arbitration in the labor field, in the that:
construction industry, and in any other area for that matter, the Court will
not assist one or the other or even both parties in any effort to subvert or
20.11 SUBSTANTIAL COMPLETION AND ITS EFFECT:
defeat that objective for their private purposes. The Court will not review the
factual findings of an arbitral tribunal upon the artful allegation that such Pag
body had "misapprehended the facts" and will not pass upon issues which A. [a] There is substantial completion when the Contractor completes 95%
are, at bottom, issues of fact, no matter how cleverly disguised they might of the Work, provided that the remaining work and the performance of the
e|
be as "legal questions." The parties here had recourse to arbitration and work necessary to complete the Work shall not prevent the normal use of 29
chose the arbitrators themselves; they must have had confidence in such the completed portion.
arbitrators. The Court will not, therefore, permit the parties to relitigate
before it the issues of facts previously presented and argued before the
xxx
Arbitral Tribunal, save only where a very clear showing is made that, in
reaching its factual conclusions, the Arbitral Tribunal committed an error so
egregious and hurtful to one party as to constitute a grave abuse of D. [a] No liquidated damages for delay beyond the Completion Time shall
discretion resulting in lack or loss of jurisdiction. Prototypical examples accrue after the date of substantial completion of the Work.
would be factual conclusions of the Tribunal which resulted in deprivation of
one or the other party of a fair opportunity to present its position before the
Arbitral Tribunal, and an award obtained through fraud or the corruption of We reject this claim of Werr and find that while this industry practice may
arbitrators. Any other, more relaxed, rule would result in setting at naught supplement the Agreement, Werr cannot benefit from it.
the basic objective of a voluntary arbitration and would reduce arbitration to
a largely inutile institution.44 At the outset, we do not agree with the CA that industry practice be rejected
because liquidated damages is provided in the Agreement, autonomy of
In this case, the issues of whether HPI was able to prove that payments contracts prevails, and industry practice is completely set aside.
made to suppliers and to third party contractors are prior incurred Contracting parties are free to stipulate as to the terms and conditions of
obligations that should be charged against the retention money, and the contract for as long as they are not contrary to law, morals, good
whether HPI incurred expenses above the retention money that warrants customs, public order or public policy.52 Corollary to this rule is that laws are
actual damages, are issues of facts beyond the review of the Court under deemed written in every contract.53
Rule 45.
Deemed incorporated into every contract are the general provisions on
Moreover, even if we consider such factual issues, we are bound by the obligations and interpretation of contracts found in the Civil Code. The Civil
findings of fact of the CIAC especially when affirmed by the CA.45 Factual Code provides:
findings by a quasi-judicial body like the CIAC, which has acquired
expertise because its jurisdiction is confined to specific matters, are Art. 1234. If the obligation has been substantially performed in good faith,
accorded not only with respect but even finality if they are supported by the obligor may recover as though there had been a strict and complete
substantial evidence.46 We recognize that certain cases require the fulfillment, less damages suffered by the obligee.
expertise, specialized skills, and knowledge of the proper administrative
bodies because technical matters or intricate questions of facts are
involved.47 Art. 1376. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established.
We nevertheless note that factual findings of the construction arbitrators are
not beyond review, such as when the petitioner affirmatively proves the
following: (1) the award was procured by corruption, fraud, or other undue In previous cases, we applied these provisions in construction agreements
means; (2) there was evident partiality or corruption of the arbitrators or any to determine whether the project owner is entitled to liquidated damages.
of them; (3) the arbitrators were guilty of misconduct in refusing to hear We held that substantial completion of the project equates to achievement
evidence pertinent and material to the controversy; (4) one or more of the of 95% project completion which excuses the contractor from the payment
arbitrators were disqualified to act as such under Section 1048 of Republic of liquidated damages.
Act No. 87649 and willfully refrained from disclosing such disqualifications or
of any other misbehavior by which the rights of any party have been In Diesel Construction Co., Inc. v. UPSI Property Holdings, Inc., 54 we
materially prejudiced; (5) the arbitrators exceeded their powers, or so applied Article 1234 of the Civil Code. In determining what is considered
imperfectly executed them, that a mutual, final, and definite award upon the substantial compliance, we used the CIAP Document No. 102 as evidence
subject matter submitted to them was not made; (6) when there is a very of the construction industry practice that substantial compliance is
clear showing of grave abuse of discretion resulting in lack or loss of equivalent to 95% accomplishment rate. In that case, the construction
jurisdiction as when a party was deprived of a fair opportunity to present its agreement requires the contractor "to pay the owner liquidated damages in
position before the arbitral tribunal or when an award is obtained through the amount equivalent to one-fifth (1/5) of one (1) percent of the total
fraud or the corruption of arbitrators; (7) when the findings of the CA are Project cost for each calendar day of delay."55 We declared that the
contrary to those of the CIAC; or (8) when a party is deprived of contractor cannot be liable for liquidated damages because it already
administrative due process.50 However, we do not find that HPI was able to accomplished 97.56% of the project.56 We reiterated this in Transcept
show any of the exceptions that should warrant a review and reversal of the Construction and Management Professionals, Inc. v. Aguilar57 where we
findings made by the CIAC and the CA. ruled that since the contractor accomplished 98.16% of the project, the
project owner is not entitled to the 10% liquidated damages.58
Thus, we affirm the CIAC and CA's findings that direct payments charged
by HPI in 2007 and 2008 were for materials supplied after the termination of Considering the foregoing, it: was error for the CA to immediately dismiss
the project and did not correspond to the list of suppliers submitted; that the the application of industry practice on the sole ground that there is an
waterproofing works done by Dubbel Philippines in the amount of existing agreement as to liquidated damages. As expressly stated under
₱629,702.24 were for works done after the termination of the contract that Articles 1234 and 1376, and in jurisprudence, the construction industry's
were for the account of the new contractor; and that the rectification works prevailing practice may supplement any ambiguities or omissions in the
performed after the termination of the contract worth ₱3,040,000.00 were stipulations of the contract.
not proven to have been paid, that it was for rectification works only, and
that prior notice of such defective works as required under the Agreement
was not proven. Accordingly, we affirm that the balance of the retention Notably, CIAP Document N0. 102, by itself, was intended to have
money is ₱10,955,899.79. suppletory effect on private construction contracts.1âwphi1 This is evident
in CIAP Board Resolution No. 1-98,59 which states:

II. Delay in computing Liquidated Damages

Sec. 9. Policy-Making Body, - The [CIAP], through the CIAP Executive
Office and its various Implementing Agencies, shall continuously monitor
On the other hand, the question on how liquidated damages should be and study the operations of the construction industry, both domestic and
computed based on the Agreement and prevailing jurisprudence is a overseas operations, to identify its needs, problems and opportunities, in
question of law that we may review. order to provide for the pertinent policies and/or executive action and/or
legislative agenda necessary to implement plans, programs and measures
The pertinent provision on liquidated damages is found in clause 41.5 of the required to support the sustainable development of the construction
Agreement, viz.: industry, such as but not limited to the following:

41.5. Considering the importance of the timely completion of the WORKS xxx
on the OWNER'S commitments to its clients, the CONTRACTOR agrees to
pay the OWNER liquidated damages in the amount of 1/10th of 1% of the
9.05 The promulgation and adoption of Standard Conditions of Contract for the projected substantial completion date. Consistent with the CA's ruling
the public construction and private construction sector which shall have that liquidated damages did not exceed the retention money, we therefore
suppletory effect in cases where there is a conflict in the internal documents affirm that HPI did not suffer actual damages in the amount of ₱573,012.81.
of a construction contract or in the absence of the general conditions of a
construction agreement[.]
III. Arbitration Costs, Attorney's Fees, and Litigation Costs

As the standard conditions for contract for private construction adopted and
Courts are allowed to adjudge which party may bear the cost of the suit
promulgated by the CIAP, CIAP Document No. 102 applies suppletorily to
depending on the circumstances of the case.61 Considering the CA's
private construction contracts to remedy the conflict in the internal
findings that both parties were able to recover their claims, and neither was
documents of, or to fill in the omissions in, the construction agreement.
guilty of bad faith, we do not find that the CA erred in dividing the arbitration Pag
costs between the parties.
In this case, clause 41.5 of the Agreement is undoubtedly a valid e|
stipulation. However, while clause 41.5 requires payment of liquidated
damages if there is delay, it is silent as to the period until when liquidated
We also do not find the need to disturb the findings as to attorney's fees 30
and expenses of litigation, both the CIAC and the CA having found that
damages shall run. The Agreement does not state that liquidated damages
there is no basis for the award of attorney's fees and litigation expenses. 62
is due until termination of the project; neither does it completely reject that it
WHEREFORE, the petitions are DENIED. The Court of Appeals' February
is only due until substantial completion of the project. This omission in the
9, 2009 Decision and April 16, 2009 Resolution are AFFIRMED. The net
Agreement may be supplemented by the provisions of the Civil Code,
award in favor of Werr Corporation International shall earn interest at the
industry practice, and the CIAP Document No. 102. Hence, the industry
rate of 6% per annum from date of demand on October 3, 2007 until finality
practice that substantial compliance excuses the contractor from payment
of this Decision. Thereafter, the total amount shall earn interest from finality
of liquidated damages applies to the Agreement.
of this Decision until fully paid.

Nonetheless, we find that Werr cannot benefit from the effects of

SO ORDERED.
substantial compliance.

G.R. No. 205578

Paragraph A.[a.], Article 20.11 of CIAP Document No. 102 requires that the
contractor completes 95% of the work for there to be substantial completion
of the project. Also, in those cases where we applied the industry practice GEORGIA OSMEÑA-JALANDONI, Petitioner
to supplement the contracts and excused payment from liquidated vs
damages under Article 1234, the contractors there actually achieved 95% CARMEN A. ENCOMIENDA, Respondent
completion of the project. Neither the CIAC nor the courts assumed as to
when substantial compliance will be achieved by the contractor, but the
DECISION
contractors offered substantial evidence that they actually achieved at least
95% completion of the project. Thus, the effects of substantial completion
only operate to relieve the contractor from the burden of paying liquidated PERALTA, J.:
damages when it has, in reality, achieved substantial completion of the
project.
This is an appeal from the Decision1 of the Court of Appeals, Cebu
City (CA) dated March 29, 2012 and its Resolution2 dated December 19,
While the case before us presents a different scenario, as the contractor 2012 in CA-G.R. CV No. 01339 which set aside the Decision3 of the Cebu
here does not demand total release from payment of liquidated damages, Regional Trial Court (RTC), Branch 57, dated January 9, 2006, dismissing
we find that in order to benefit from the effects of the substantial completion respondent Carmen Encomienda's claim for sum of money.
of a project, the condition precedent must first be met-the contractor must
successfully prove by substantial evidence that it actually achieved 95%
completion rate of the project. As such, it is incumbent upon Werr to show The facts, as shown by the records of the case, are as follows:
that it had achieved an accomplishment rate of 95% before or at the time of
the termination of the contract. Encomienda narrated that she met petitioner Georgia Osmeña-Jalandoni in
Cebu on October 24, 1995, when the former was purchasing a
Here, there is no dispute that Werr failed to prove that it completed 95% of condominium unit and the latter was the real estate broker. Thereafter,
the project before or at the time of the termination of the contract. As found Encomienda and Jalandoni became close friends. On March 2, 1997,
by CIAC, it failed to present evidence as to what accomplishment it Jalandoni called Encomienda to ask if she could borrow money for the
achieved from the time of the last billing until the termination of the search and rescue operation of her children in Manila, who were allegedly
contract.60 What was admitted as accomplishment at the last billing is taken by their father, Luis Jalandoni. Encomienda then went to Jalandoni's
93.18%. For this reason, even if we adopt the rule that no liquidated house and handed ₱l00,000.00 in a sealed envelope to the latter's security
damages shall run after the date of substantial completion of the project, guard. While in Manila, Jalandoni again borrowed money for the following
Werr cannot claim benefit for it failed to meet the condition errands:4
precedent, i.e., the contractor has successfully proven that it actually
achieved 95% completion rate. 1. Publication in SunStar Daily of ₱l1,000.00
Georgia's missing children
More importantly, Werr failed to show that it is the construction industry's 2. Reproduction of the pictures of 720.00
practice to project the date of substantial completion of a project, and to Georgia's children
compute the period of delay based on the rate in past progress billings just 3. Additional reproduction of 1,350.00
as what the CIAC has done. Consequently, the CIAC erred when it pictures
assumed that Werr continued to perform works, and if it did, that it 4. Plane fare for Georgia's 3,196.00
performed them at the rate of accomplishment of the previous works in the secretary to Manila
absence of evidence. 5. Allowance of Germana Berning 4,080.00
in going to Manila
6. Cash airbill of Kabayan 49.50
That the effects of substantial completion will only apply Forwarders
when actual substantial completion is reached is apparent when we
7. Cash airbill of Kabayan 49.50
consider the reason behind the rules on substantial completion of the
Forwarders
project found in Section 20.1l[E] of the CIAP Document No. 102, viz.:
8. Salary of Georgia's household 750.00
helper Reynilda Atillo for March
E. The purpose of this Article [ART. 20, WORK; 20.11: SUBSTANTIAL 16-31, 1997
COMPLETION AND ITS EFFECT] is to ensure that the Contractor is paid 9. Salary of Georgia's driver Billy 2,000.00
for Work completed and for the Owner to retain such portion of the Contract Tano for March 16-31, 1997
Price which, together with the Performance Bond, is sufficient to complete 10. Petty cash for Germana 250.00
the Work without additional cost to the Owner. Berning
11. Consultancy fee of Germana 7,000.00
The rules are intended to balance the allocation and burden of costs Berning
between the contractor and the project owner so that the contractor still 12. Filing fee of case filed by 100,500.00
achieves a return for its completed work, and the project owner will not Georgia against CIS
incur further costs. To compute the period of delay when substantial 13. Cebu cable bill per receipt No. 380.00
compliance is not yet achieved but merely on the assumption that it will 197743
eventually be achieved would result in an iniquitous situation where the 14. Cebu cable bill per receipt No. 380.00
project owner will bear the risks and additional costs for the period excused 197742
from liquidated damages. 15. Bankard bill of Georgia 840.00
16. Services of 2 security guards 14,715.00
for 2/1-15/97 and 3/1-31/97
From the foregoing, we affirm the CA' s conclusion that the period of delay
17. One sack of rice and gasoline 1,270.00
in computing liquidated damages should be reckoned from October 27,
18. Food allowance for Georgia's 2,900.00
2006 until the termination of the contract or for 33 days, and not only until
household and payment for food
ordered cap of Easycall pager
19. Shipping charge of 145.45 58. Bill for the cellphone in the 8,630.11
immigration papers sent to name of Paz Encomienda but
Georgia in Manila used by Georgia, June to July 8,
20. Shipping charge of cellphone 145 .45 1997
and easy call pager sent to 59. Penalty for downgrading of 1,045.00
Georgia executive line of cellphone
21. Salary of Georgia's helper 750.00 60. Globe cellphone bill paid on 1,903.00
Renilda Atillo from April 1-15, 9/10/97
1997 61. Charge for downgrading of 660.00
22. Purchase of cellphone cellphone plan from Advantage to Pag
registered in the name of 10,260.00 Basic
Encomienda's sister, Paz 62. Penalty for Easycall 11/17/97 1,248.50 e|
23. Pager acquired on April 10, 6,351.00
1997 upon Georgia's request
31
24. Wanted ad in Panay News 8,500.00
and expenses of Georgia's On April 1, 1997, Jalandoni borrowed ₱l Million from Encomienda and
secretary promised that she would pay the same when her money in the bank
25. Salary of Billy Tano from April 2,000.00 matured. Thereafter, Encomienda went to Manila to attend the hearing of
1-15, 1997 Jalandoni's habeas corpus case before the CA where ₱100,000.00 more
26. Water consumption of 1,120.00 was requested. On May 26, 1997, now crying, Jalandoni asked if
Encomienda could lend her an additional ₱900,000.00. Encomienda still
Georgia's house in Paradise
Village acceded, albeit already feeling annoyed. All in all, Encomienda spent
around ₱3,245,836.02 and $6,638.20 for Jalandoni.
2 7. Services of security guard 4,905.00
from April 1-15, 1997
28. Telephone bill for Georgia's 3,609.77 When Jalandoni came back to Cebu on July 14, 1997, she never informed
residential phone from March 25 Encomienda. Encomienda then later gave Jalandoni six (6) weeks to settle
to April 24, 1997 her debts. Despite several demands, no payment was made. Jalandoni
29. Telephone bill for Georgia's 440.20 insisted that the amounts given were not in the form of loans. When they
other telephone line had to appear before the Barangay for conciliation, no settlement was
30. Plane ticket for Georgia's $1,570.00 reached. But a member of the Lupong
psychic friends Tagapamayapa of Barangay Kasambagan, Laureano Rogero, attested that
31. Petty cash for GRO Co. 3,150.00 J alandoni admitted having borrowed money from Encomienda and that she
owned by Georgia was willing to return it. Jalandoni said she would talk to her lawyer first, but
32. Bill of cellphone under the 5,468.70 she never came back. Hence, Encomienda filed a complaint. She
name of Paz Encomienda impleaded Luis as a necessary party, being Georgia's husband.
33. Another bill of cellphone used 3,923.87
by Georgia For her defense, Jalandoni claimed that there was never a discussion or
34. Cost of reproduction of 2,500.00 even just an allusion about a loan. She confirmed that Encomienda would
pictures indeed deposit money in her bank account and pay her bills in Cebu. But
35. Salary of driver and house 3,250.00 when asked, Encomienda would tell her that she just wanted to extend
help of Georgia from May 15-31, some help and that it was not a loan. When Jalandoni returned to Cebu,
1997 Encomienda wanted to fetch her at the airport but the former refused. This
36. Service charge of Georgia's 550.00 allegedly made Encomienda upset, causing her to eventually demand
cellphone number payment for the amounts originally intended to be gratuitous.
37. Ritual performed in Georgia's 17,500.00
house to drive away evil spirits
On January 9, 2006, the RTC of Cebu City dismissed Encomienda's
38. Prayers for Georgia's missing 5,500.00
complaint, the dispositive portion of which states:
children
39. Amount given to priest who 500.00
performed a blessing of the WHEREFORE, in view of the foregoing, this case is hereby dismissed.
house of Georgia
40. Globe cellular phone bill of 7,957.24 SO ORDERED.5
Georgia as of 5/10/97
41. Salary of Germana Berning 6,000.00
for May 1997 Therefore, Encomienda brought the case to the CA. On March 29, 2012,
42. Amount given to priest for 2,500.00 the appellate court granted the appeal and reversed the RTC Decision, to
mass and blessing wit:
43. Cash given to G. Berning for 3,000.00
payment of Georgia's phone bill WHEREFORE, the defendant-appellant's appeal is GRANTED. The
44. Gasoline for Georgia's car 150.00 decision of the trial court dated January 9, 2006 is hereby REVERSED and
paid on 6/10/97 per cash slip SET ASIDE and in its stead render judgment against defendant-appellee
#221088 Georgia Osmefia-Jalandoni ordering the latter to pay plaintiff-appellant
45. Gasoline for Georgia's car 379.44 Carmen A. Encomienda the following:
paid on 6/10/97 per cash slip
#220997
46. Bill for Georgia's Easycall 1,605.09 1. The sum of Three Million Two Hundred Forty-Five Thousand Eight
pager Hundred Thirty-Six (₱3,245,836.02) Pesos and 02/100 and Six Thousand
47. Security guard services for 4,905.00 Six Hundred Thirty-Eight (US$6,638.20) US Dollars and 20/100;
May 16-31
48. Globe bill for cellular phone 5,543.98 2. Legal interest of Twelve (12%) Percent from August 14, 1997 the date of
from April 18, 1997 to May 17, extrajudicial demand.
1997
49. Bill of cellular phone 14,169.21
3. Attorney's fees and expenses of litigation in the amount of One Hundred
registered in the name of Paz
Thousand (₱l 00,000.00) Pesos.
Encomienda but used by Georgia
paid on June 18, 1997
50. Charge for changing the cap 275.00 Let a copy of this Decision be served upon defendants-appellees through
of Easycall pager on June 21, their respective counsels. The Division Clerk of Court is directed to furnish
1997 a copy of this Decision to plaintiff-appellant who, to date, has yet to submit
51. Monthly bill for Georgia's 1,551.00 the name of her new counsel following the death of appellant's original
Easycall pager from 7 /15/97 to counsel ofrecord, Atty. Richard W. Sison.
10/14/97
52. Water bill for April-May 1997 1,728.31 SO ORDERED.6
paid on June 25, 1997
53. Cebu Cable bill paid 380.00
on 6125197 Jalandoni filed a motion for reconsideration, but the same was
54. PLDT bill for the telephone in 2,097.98 denied.7 Hence, the instant petition.
Georgia's residence
55. Electric bill paid on 6/25/97 1,964.43 The sole issue in this case is whether or not Encomienda is entitled to be
56. Purchase of steel cabinet on 2,750.00 reimbursed for the amounts she defrayed for Jalandoni.
6/25/97
57. Airbill of JRS in sending the 20.00
Jalandoni insists that she never borrowed any amount of money from Truly, Jalandoni herself admitted that she received the aforementioned
Encomienda. During the entire time that Encomienda was sending amounts from Encomienda and is merely using her lack of authorization
hermoney and paying her bills, there was not one reference to a loan. In over the payments as her defence. In fact, Lupong Tagapamayapa member
other words, Jalandoni would have the Court believe that Encomienda Rogero, a disinterested third party, confirmed this, saying that during
volunteeredto spend about ₱3,245,836.02 and $6,638.20 of her hard- the barangay conciliation, Jalandoni indeed admitted having borrowed
earned money in a span of eight (8) months for her and her family simply money from Encomienda and that she would return it. Jalandoni, however,
out of pure generosity and the kindness of her heart, without expecting reneged on said promise.
anything in return. Suchpresupposition is incredible, highly unusual, and
contrary to common experience, unless the benefactor is a billionaire
The principle of unjust enrichment finds application in this case. Unjust
philanthropist who usuallyspends his days distributing his fortune to the
enrichment exists when a person unfairly retains a benefit to the loss of
needy. It is a notable fact that Jalandoni was married to one of the
richest hacienderos of Iloilo and belongto the privileged and affluent
another, or when a person retains money or property of another against the Pag
fundamental principles of justice, equity, and good conscience. There is
Osmeña family, being the daughter of the late Senator Sergio Osmeña, Jr.
unjust enrichment under Article 22 of the Civil Code when (1) a person is e|
Clearly then, Jalandoni is not one to be aconvincing object of anyone's
unjustly benefited, and (2) such benefit is derived at the expense of or with 32
charitable acts, especially not from someone like Encomienda who has not
damages to another. The principle of unjust enrichment essentially
been endowed with such wealth and powerful pedigree.
contemplates payment when there is no duty to pay, and the person who
receives the payment has no right to receive it.12 The CA is then correct
The appellate court aptly pointed out that when Encomienda gave a Barbie when it ruled that allowing Jalandoni to keep the amounts received from
doll to Jalandoni's daughter, she was quick to send a letter acknowledging Encomienda will certainly cause an unjust enrichment on Jalandoni' s part
receipt and thanking Encomienda for the simple gift. However, not once did and to Encomienda's damage and prejudice.
Jalandoni ever send a simple note or letter, let alone a card, expressing her
gratitude towards Encomienda for the countless instances she received
WHEREFORE, PREMISES CONSIDERED, the Court DISMISSES the
various amounts of money supposedly given to her as gifts.
petition for lack of merit and AFFIRMS the Decision of the Court of
Appeals, Cebu City dated March 29, 2012 and its Resolution dated
Jalandoni also contends that the amounts she received from Encomienda December 19, 2012 in CA-G.R. CV No. 01339, with MODIFICATION as to
were mostly provided and paid without her prior knowledge and thus she the interest which must be twelve percent (12%) per annum of the amount
could not have consented to any loan agreement. She relies on the trial awarded from the time of demand on August 14, 1997 to June 30, 2013,
court's finding that Encomienda's claims were not supported by any and six percent (6%)13 per annum from July 1, 2013 until its full satisfaction.
documentary evidence. It must be stressed, however, that the trial court
merely found that no documentary evidence was offered showing
SO ORDERED.
Jalandoni's authorization or undertaking to pay the expenses. But the
second paragraph of Article 1236 of the Civil Code provides:
G.R. No. 182128, February 19, 2014
xxxx
PHILIPPINE NATIONAL BANK, Petitioner, v. TERESITA TAN DEE,
ANTIPOLO PROPERTIES, INC., (NOW PRIME EAST PROPERTIES,
Whoever pays for another may demand from the debtor what he has paid,
INC.) AND AFP–RSBS, INC., Respondents.
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.8 DECISION

Clearly, Jalandoni greatly benefited from the purportedly unauthorized REYES, J.:
payments. Thus, even if she asseverates that Encomienda's payment of
her household bills was without her knowledge or against her will, she
This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing
cannot deny the fact that the same still inured to her benefit and
Encomienda must therefore be consequently reimbursed for it. Also, when the Decision2 dated August 13, 2007 and Resolution3 dated March 13, 2008
Jalandoni learned about the payments, she did nothing to express her rendered by the Court of Appeals (CA) in CA–G.R. SP No. 86033, which
affirmed the Decision4 dated August 4, 2004 of the Office of the President
objection to or repudiation of the same, within a reasonable time. Even
when she claimed that she was prepared with her own money, 9 she still (OP) in O.P. Case No. 04–D–182 (HLURB Case No. REM–A–030724–
accepted the financial assistance and actually made use of it. While she 0186).
asserts to have been upset because of Encomienda's supposedly intrusive
actions, she failed to protest and, in fact, repeatedly accepted money from Facts of the Case
her and further allowed her to pay her driver, security guard, househelp,
and bills for her cellular phone, cable television, pager, gasoline, food, and Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from
other utilities. She cannot, therefore, deny the benefits she reaped from respondent Prime East Properties Inc.5 (PEPI) on an installment basis a
said acts now that the time for restitution has come. The debtor who knows residential lot located in Binangonan, Rizal, with an area of 204 square
that another has paid his obligation for him and who does not repudiate it at meters6 and covered by Transfer Certificate of Title (TCT) No. 619608.
any time, must corollarily pay the amount advanced by such third person. 10 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
The RTC likewise harped on the fact that if Encomienda really intended the property purchased by Dee.
amounts to be a loan, nonnal human behavior would have prompted at
least a handwritten acknowledgment or a promissory note the moment she Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00
parted with her money for the purpose of granting a loan. This would be loan from petitioner Philippine National Bank (petitioner), secured by a
particularly true if the loan obtained was part of a business dealing and not mortgage over several properties, including Dee’s property. The mortgage
one extended to a close friend who suddenly needed monetary aid. In fact, was cleared by the Housing and Land Use Regulatory Board (HLURB) on
in case of loans between friends and relatives, the absence of September 18, 1996.7cralawred
acknowledgment receipts or promissory notes is more natural and real. In a
similar case,11 the Court upheld the CA' s pronouncement that the After Dee’s full payment of the purchase price, a deed of sale was executed
existence of a contract of loan cannot be denied merely because it was not by respondents PEPI and AFP–RSBS on July 1998 in Dee’s favor.
reduced in writing. Surely, there can be a verbal loan. Contracts are binding Consequently, Dee sought from the petitioner the delivery of the owner’s
between the parties, whether oral or written. The law is explicit that duplicate title over the property, to no avail. Thus, she filed with the HLURB
contracts shall be obligatory in whatever form they may have been entered a complaint for specific performance to compel delivery of TCT No. 619608
into, provided all the essential requisites for their validity are present. A by the petitioner, PEPI and AFP–RSBS, among others. In its
simple loan or mutuum exists when a person receives a loan of money or Decision8 dated May 21, 2003, the HLURB ruled in favor of Dee and
any other fungible thing and acquires its ownership. He is bound to pay to disposed as follows:chanRoblesvirtualLawlibrary
the creditor the equal amount of the same kind and quality. Jalandoni posits WHEREFORE, premises considered, judgment is hereby rendered as
that the more logical reason behind the disbursements would be what follows:chanroblesvirtuallawlibrary
Encomiendacandidly told the trial court, that her acts were plainly an
"unselfish display of Christian help" and done out of "genuine concern for
Georgia's children." However, the "display of Christian help" is not 1. Directing [the petitioner] to cancel/release the mortgage on Lot
inconsistent with theexistence of a loan. Encomienda immediately offered a 12, Block 21–A, Village East Executive Homes covered by
helping hand when a friend asked for it. But this does not mean that she Transfer Certificate of Title No. –619608– (TCT No. –619608–),
had already waived herright to collect in the future. Indeed, when and accordingly, surrender/release the title thereof to [Dee];
Encomienda felt that Jalandoni was beginning to avoid her, that was when
she realized that she had to protect her right to demand payment. The fact 2. Immediately upon receipt by [Dee] of the owner’s duplicate of
that Encomienda kept the receipts even for the smallest amounts she had Transfer Certificate of Title No. –619608– (TCT No. –619608–),
advanced, repeatedly sent demand letters, and immediately filed the instant respondents PEPI and AFP–RSBS are hereby ordered to deliver
case when Jalandoni stubbornly refused to heed her demands sufficiently the title of the subject lot in the name of [Dee] free from all liens
disproves the latter’s belief that all the sums of money she received were and encumbrances;
merely given out of charity.
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 petitioner agreed to release the mortgage lien on fully paid mortgaged
No. –619608– (TCT No. –619608–) as agreed upon by them in properties upon the issuance of the certificates of title over
their Real Estate Mortgage within six (6) months from the time the dacioned properties.21
the owner’s duplicate of Transfer Certificate of Title No. –
619608– (TCT No. –619608–) is actually surrendered and For her part, respondent Dee adopts the arguments of the CA in support of
released by [the petitioner] to [Dee]; her prayer for the denial of the petition for review.22

4. In the alternative, in case of legal and physical impossibility on Ruling of the Court
the part of [PEPI, AFP–RSBS, and the petitioner] to comply and
perform their respective obligation/s, as above–mentioned, The petition must be DENIED.
respondents PEPI and AFP–RSBS are hereby ordered to jointly Pag
and severally pay to [Dee] the amount of FIVE HUNDRED The petitioner is correct in arguing that it is not obliged to perform any of the
TWENTY THOUSAND PESOS ([P]520,000.00) plus twelve undertaking of respondent PEPI and AFP–RSBS in its transactions with e|
percent (12%) interest to be computed from the filing of complaint Dee because it is not a privy thereto. The basic principle of relativity of
on April 24, 2002 until fully paid; and contracts is that contracts can only bind the parties who entered into
33
it,23 and cannot favor or prejudice a third person, even if he is aware of such
5. Ordering [PEPI, AFP–RSBS, and the petitioner] to pay jointly and contract and has acted with knowledge thereof.24 “Where there is no privity
severally [Dee] the following sums: of contract, there is likewise no obligation or liability to speak
about.”25cralawred
a) The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as The petitioner, however, is not being tasked to undertake the obligations of
attorney’s fees; PEPI and AFP–RSBS. In this case, there are two phases involved in the
b) The cost of litigation[;] and transactions between respondents PEPI and Dee – the first phase is the
c) An administrative fine of TEN THOUSAND PESOS contract to sell, which eventually became the second phase, the absolute
([P]10,000.00) payable to this Office fifteen (15) days upon receipt of sale, after Dee’s full payment of the purchase price. In a contract of sale,
this decision, for violation of Section 18 in relation to Section 38 of PD the parties’ obligations are plain and simple. The law obliges the vendor to
957. transfer the ownership of and to deliver the thing that is the object of
SO ORDERED.9ChanRoblesVirtualawlibrary sale.26 On the other hand, the principal obligation of a vendee is to pay the
The HLURB decision was affirmed by its Board of Commissioners per full purchase price at the agreed time.27 Based on the final contract of sale
Decision dated March 15, 2004, with modification as to the rate of between them, the obligation of PEPI, as owners and vendors of Lot 12,
interest.10 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
On appeal, the Board of Commissioners’ decision was affirmed by the OP fact paid, the full purchase price of the property. There is nothing in the
in its Decision dated August 4, 2004, with modification as to the monetary decision of the HLURB, as affirmed by the OP and the CA, which shows
award.11cralawred 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
Hence, the petitioner filed a petition for review with the CA, which, in turn, the petitioner’s claim that the mortgage has been nullified. The order of
issued the assailed Decision dated August 13, 2007, affirming the OP cancellation/release of the mortgage is simply a consequence of Dee’s full
decision. The dispositive portion of the decision payment of the purchase price, as mandated by Section 25 of P.D. No. 957,
reads:chanRoblesvirtualLawlibrary to wit:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, the petition is DENIED. The Sec. 25. Issuance of Title. The owner or developer shall deliver the title of
Decision dated August 4, 2004 rendered by the Office of the President in O. the lot or unit to the buyer upon full payment of the lot or unit. No fee,
P. Case No. 04–D–182 (HLURB Case No. REM–A–030724–0186) is except those required for the registration of the deed of sale in the Registry
hereby AFFIRMED.chanroblesvirtualawlibrary 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
SO ORDERED. 12ChanRoblesVirtualawlibrary the title to the buyer, the owner or developer shall redeem the mortgage or
Its motion for reconsideration having been denied by the CA in the the corresponding portion thereof within six months from such issuance in
Resolution dated March 13, 2008, the petitioner filed the present petition for order that the title over any fully paid lot or unit may be secured and
review on the following grounds:chanRoblesvirtualLawlibrary delivered to the buyer in accordance herewith.
It must be stressed that the mortgage contract between PEPI and the
I. THE HONORABLE COURT OF APPEALS ERRED IN petitioner is merely an accessory contract to the principal three–year loan
ORDERING OUTRIGHT RELEASE OF TCT NO. 619608 takeout from the petitioner by PEPI for its expansion project. It need not be
DESPITE PNB’S DULY REGISTERED AND HLURB[–] belaboured that “[a] mortgage is an accessory undertaking to secure the
APPROVED MORTGAGE ON TCT NO. 619608. 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
II. THE HONORABLE COURT OF APPEALS ERRED IN a debt.29
ORDERING CANCELLATION OF MORTGAGE/RELEASE OF
Note that at the time PEPI mortgaged the property to the petitioner, the
TITLE IN FAVOR OF RESPONDENT DEE DESPITE THE LACK
OF PAYMENT OR SETTLEMENT BY THE MORTGAGOR prevailing contract between respondents PEPI and Dee was still the
(API/PEPI and AFP–RSBS) OF ITS EXISTING LOAN 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
OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT
OF REDEMPTION BY THE MORTGAGOR AS MANDATED BY mortgaged the property to the petitioner, for in a contract to sell, ownership
SECTION 25 OF PD 957 OR DIRECT PAYMENT MADE BY 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
RESPONDENT DEE TO PNB PURSUANT TO THE DEED OF
UNDERTAKING WHICH WOULD WARRANT RELEASE OF owner of the property. Thus, in China Banking Corporation v. Spouses
THE SAME.13 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
The petitioner claims that it has a valid mortgage over Dee’s property, condominium unit when the title thereto still resides in the owner or
which was part of the property mortgaged by PEPI to it to secure its loan developer awaiting the full payment of the purchase price by the installment
obligation, and that Dee and PEPI are bound by such mortgage. The buyer.”32 Moreover, the mortgage bore the clearance of the HLURB, in
petitioner also argues that it is not privy to the transactions between the compliance with Section 18 of P.D. No. 957, which provides that “[n]o
subdivision project buyers and PEPI, and has no obligation to perform any mortgage on any unit or lot shall be made by the owner or developer
of their respective undertakings under their contract. 14 without prior written approval of the [HLURB].”

The petitioner also maintains that Presidential Decree (P.D.) No. Nevertheless, despite the apparent validity of the mortgage between the
95715 cannot nullify the subsisting agreement between it and PEPI, and that petitioner and PEPI, the former is still bound to respect the transactions
the petitioner’s rights over the mortgaged properties are protected by Act between respondents PEPI and Dee. The petitioner was well aware that the
313516 . If at all, the petitioner can be compelled to release or cancel the properties mortgaged by PEPI were also the subject of existing contracts to
mortgage only after the provisions of P.D. No. 957 on redemption of the sell with other buyers. While it may be that the petitioner is protected by Act
mortgage by the owner/developer (Section 25) are complied with. The No. 3135, as amended, it cannot claim any superior right as against the
petitioner also objects to the denomination by the CA of the provisions in installment buyers. This is because the contract between the respondents
the Affidavit of Undertaking as stipulations pour autrui,17 arguing that the is protected by P.D. No. 957, a social justice measure enacted primarily to
release of the title was conditioned on Dee’s direct payment to it.18 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
Respondent AFP–RSBS, meanwhile, contends that it cannot be compelled that is already subject of a contract to sell and is protected by the provisions
to pay or settle the obligation under the mortgage contract between PEPI of P.D. No. 957, is bound by the contract to sell.35
and the petitioner as it is merely an investor in the subdivision project and is However, the transferee BANK is bound by the Contract to Sell and has to
not privy to the mortgage.19 respect Enriquez’s rights thereunder. This is because the Contract to
Sell, involving a subdivision lot, is covered and protected by PD 957.
Respondent PEPI, on the other hand, claims that the title over the subject x x x.
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 xxx
pago entered into between them.20 The agreement was reached after PEPI
filed a petition for rehabilitation, and contained the stipulation that the 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 SO ORDERED.
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
[G.R. NO. 125862. April 15, 2004]
party:chanRoblesvirtualLawlibrary
“[The Bank] should have considered that it was dealing with a property
subject of a real estate development project. A reasonable person, FRANCISCO CULABA and DEMETRIA CULABA, doing business under
particularly a financial institution x x x, should have been aware that, to the name and style Culaba Store, Petitioners, v. COURT OF APPEALS
finance the project, funds other than those obtained from the loan could and SAN MIGUEL CORPORATION, Respondents.
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
DECISION Pag
granting the loan, [the Bank] should not have been content merely with a e|
clean title, considering the presence of circumstances indicating the need CALLEJO, SR., J.:
for a thorough investigation of the existence of buyers x x x. Wanting in 34
care and prudence, the [Bank] cannot be deemed to be an innocent
mortgagee. x x x”36 (Citation omitted)chanroblesvirtualawlibrary This is a Petition for Review under Rule 45 of the Revised Rules of Civil
More so in this case where the contract to sell has already ripened Procedure of the Decision1 of the Court of Appeals in CA-G. R. CV No.
into a contract of absolute sale. 19836 affirming in toto the Decision2 of the Regional Trial Court of Makati,
Branch 138, in Civil Case No. 1033 for collection of sum of money, and the
Moreover, PEPI brought to the attention of the Court the subsequent Resolution3 denying the motion for reconsideration of the said decision.
execution of a Memorandum of Agreement dated November 22, 2006 by
PEPI and the petitioner. Said agreement was executed pursuant to an The Undisputed Facts
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 The spouses Francisco and Demetria Culaba were the owners and
RTC order approved PEPI’s modified Rehabilitation Plan, which included proprietors of the Culaba Store and were engaged in the sale and
the settlement of the latter’s unpaid obligations to its creditors by way distribution of San Miguel Corporations (SMC) beer products. SMC sold
of dacion of real properties. In said order, the RTC also incorporated certain beer products on credit to the Culaba spouses in the amount of P28,650.
measures that were not included in PEPI’s plan, one of which is that “[t]itles 00, as evidenced by Temporary Credit Invoice No. 42943.4 Thereafter, the
to the lots which have been fully paid shall be released to the purchasers Culaba spouses made a partial payment of P3,740. 00, leaving an unpaid
within 90 days after the dacion to the secured creditors has been balance of P24,910. 00. As they failed to pay despite repeated demands,
completed.”37 Consequently, the agreement stipulated that as partial SMC filed an action for collection of a sum of money against them before
settlement of PEPI’s obligation with the petitioner, the former absolutely and the RTC of Makati, Branch 138.
irrevocably conveys by way of “dacion en pago” the properties listed
therein,38 which included the lot purchased by Dee. The petitioner also The defendant-spouses denied any liability, claiming that they had already
committed to – paid the plaintiff in full on four separate occasions. To substantiate this
[R]elease its mortgage lien on fully paid Mortgaged Properties upon claim, the defendants presented four (4) Temporary Charge Sales (TCS)
issuance of the certificates of title over the Dacioned Properties in the name Liquidation Receipts, as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
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] April 19, 1983Receipt No. 27331for P8,0005 ςrνll
hereby undertakes to cause the transfer of the certificates of title over the
Dacioned Properties and the release of the Mortgaged Properties with April 22, 1983Receipt No. 27318for P9,0006 ςrνll
reasonable dispatch.39ChanRoblesVirtualawlibrary
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 April 27, 1983Receipt No. 27339for P4,5007 ςrνll
of the performance of the obligation.40 It is a mode of extinguishing an
existing obligation41 and partakes the nature of sale as the creditor is really April 30, 1983Receipt No. 27346for P3,4108 ςrνll
buying the thing or property of the debtor, the payment for which is to be
charged against the debtor’s debt.42 Dation in payment extinguishes the
obligation to the extent of the value of the thing delivered, either as agreed Defendant Francisco Culaba testified that he made the foregoing payments
upon by the parties or as may be proved, unless the parties by agreement – to an SMC supervisor who came in an SMC van. He was then showed a list
express or implied, or by their silence – consider the thing as equivalent to of customers accountabilities which included his account. The defendant, in
the obligation, in which case the obligation is totally extinguished.43 good faith, then paid to the said supervisor, and he was, in turn, issued
genuine SMC liquidation receipts.
There is nothing on record showing that the Memorandum of Agreement
has been nullified or is the subject of pending litigation; hence, it carries For its part, SMC submitted a publishers affidavit9 to prove that the entire
with it the presumption of validity.44 Consequently, the execution of the booklet of TCSL Receipts bearing Nos. 27301-27350 were reported lost by
dation in payment effectively extinguished respondent PEPI’s loan it, and that it caused the publication of the notice of loss in the July 9, 1983
obligation to the petitioner insofar as it covers the value of the property issue of the Daily Express, as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
purchased by Dee. This negates the petitioner’s claim that PEPI must first
redeem the property before it can cancel or release the mortgage. As it now
stands, the petitioner already stepped into the shoes of PEPI and there is NOTICE OF LOSS
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 OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY
accepting the assigned properties as payment of the obligation, “[the bank] CHARGE SALES LIQUIDATION RECEIPTS WITH SERIAL NOS. 27301-
has assumed the risk that some of the assigned properties are covered by 27350 HAVE BEEN LOST.
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 ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF
she has already fully paid for. THE ABOVE RECEIPTS WILL NOT BE HONORED.
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 SAN MIGUEL CORPORATION
of social justice—must favor the weak.46 (Emphasis
omitted)chanroblesvirtualawlibrary
Finally, the Court will not dwell on the arguments of AFP–RSBS given the BEER DIVISION
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 Makati Beer Region10
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
The Trial Courts Ruling
WHEREFORE, the petition for review is DENIED for lack of merit.
Consequently, the Decision dated August 13, 2007 and Resolution dated After trial on the merits, the trial court rendered judgment in favor of SMC,
March 13, 2008 of the Court of Appeals in CA–G.R. SP No. 86033 and held the Culaba spouses liable on the balance of its obligation,
are AFFIRMED. thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
Petitioner Philippine National Bank and respondents Prime East Properties
Inc. and Armed Forces of the Philippines–Retirement and Separation Wherefore, judgment is hereby rendered in favor of the plaintiff, as
Benefits System, Inc. are hereby ENJOINED to strictly comply with the follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
Housing and Land Use Regulatory Board Decision dated May 21, 2003, as
modified by its Board of Commissioners Decision dated March 15, 2004 1. Ordering defendants to pay the amount of P24,910. 00 plus legal interest
and Office of the President Decision dated August 4, of 6% per annum from April 12, 1983 until the whole amount is fully
2004.ChanRoblesVirtualawlibrary paid;chanroblesvirtuallawlibrary
2. Ordering defendants to pay 20% of the amount due to plaintiff as and for The petitioners pose the following issues for the Courts resolution:
attorneys fees plus costs.
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY
SO ORDERED.11 ςrνll PREPONDERANT EVIDENCE THAT IT HAD PROPERLY AND TIMELY
NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS
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 II. WHETHER OR NOT RESPONDENT HAD PROVEN BY
he did not require the said collector to print his name on the receipts. The PREPONDERANT EVIDENCE THAT PETITIONER WAS REMISS IN THE
court also noted that although they were part of a single booklet, the TCS PAYMENT OF HIS ACCOUNTS TO ITS AGENT.16 ςrνll
Liquidation Receipts submitted by the defendants did not appear to have Pag
been issued in their natural sequence. Furthermore, they were part of the
According to the Petitioners, receiving receipts from the private
lost booklet receipts, which the public was duly warned of through the
respondents agents instead of its salesmen was a usual occurrence, as
e|
Notice of Loss the plaintiff caused to be published in a daily newspaper.
This confirmed the plaintiffs claim that the receipts presented by the
they had been operating the store since 1979. Thus, on four occasions in 35
April 1983, when an agent of the respondent came to the store wearing an
defendants were spurious ones.
SMC uniform and driving an SMC van, petitioner Francisco Culaba, without
question, paid his accounts. He received the receipts without fear, as they
The Case on Appeal 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
On appeal, the appellants interposed the following assignment of errors:
receipts.

I
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
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS belated notice showed its glaring lack of interest or concern for its
PRESENTED BY DEFENDANTS EVIDENCING HIS PAYMENTS TO customers welfare, and, in sum, its negligence.
PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.
Anent the second issue, petitioner Francisco Culaba avers that the agent to
II 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
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF- testimony that he does not necessarily check the contents of the receipts
APPELLEE HAS SUFFICIENTLY PROVED ITS CAUSE OF ACTION issued to him except for the amount indicated if [the] same accurately
AGAINST THE DEFENDANTS. reflects his actual payment is a common attitude of customers. He could,
thus, not be faulted for paying the private respondents agent on four
III 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
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% obligation in accordance with Articles 1240 and 1242 of the New Civil Code.
OF THE AMOUNT DUE TO PLAINTIFF AS ATTORNEYS FEES.12 ςrνll

The private respondent, for its part, avers that the burden of proving
The appellants asserted that while the trial courts observations were true, it payment is with the debtor, in consonance with the express provision of
was the usual business practice in previous transactions between them and Article 1233 of the New Civil Code. The petitioners miserably failed to prove
SMC. The SMC previously honored receipts not bearing the salesmans the self-serving allegation that they already paid their liability to the private
name. According to appellant Francisco Culaba, he even lost some of the respondent. Furthermore, under normal circumstances, an obligor would
receipts, but did not encounter any problems. not just pay a substantial amount to someone whom he saw for the first
time, without even asking for the latters name.
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 The Ruling of the Court
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. The petition is dismissed.
Thus, the subsequent publication in a daily newspaper declaring the
booklets lost did not affect the validity and legality of the payments made. The petitioners question the findings of the Court of Appeals as to whether
Accordingly, by its actuations, the SMC was estopped from questioning the
the payment of the petitioners obligation to the private respondent was
legality of the payments and had no cause of action against the Appellants. 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
Anent the issue of attorneys fees, the order of the trial court for payment with the well-settled rule that findings of fact of the trial court, especially
thereof is without basis. According to the appellant, the provision for when affirmed by the Court of Appeals, are accorded the highest degree of
attorneys fees is a contingent fee, already provided for in the SMCs respect, and generally will not be disturbed on appeal. Such findings are
contract with the law firm. To further order them to pay 20% of the amount binding and conclusive on the Court.17 Furthermore, it is not the Courts
due as attorneys fees is double payment, tantamount to undue enrichment function under Rule 45 of the Rules of Court, as amended, to review,
and therefore improper.13 ςrνll examine and evaluate or weigh the probative value of the evidence
presented.18 ςrνll
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 To reiterate, the issue being raised by the petitioners does not involve a
was incumbent upon the defendants-appellants to exercise ordinary question of law, but a question of fact, not cognizable by this Court in a
prudence and reasonable diligence to verify and identify the extent of the Petition for Review under Rule 45. The jurisdiction of the Court in such a
alleged agents authority. It was their burden to establish the true identity of case is limited to reviewing only errors of law, unless the factual findings
the assumed agent, and this could not be established by mere being assailed are not supported by evidence on record or the impugned
representation, rumor or general reputation. As they utterly failed in this judgment is based on a misapprehension of facts.19 ςrνll
regard, the appellants must suffer the consequences.
A careful study of the records of the case reveal that the appellate court
The Court of Appeals affirmed the decision of the trial court, affirmed the trial courts factual findings as
thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

In the face of the somewhat tenuous evidence presented by the appellants, First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the
we cannot fault the lower court for giving more weight to appellees private respondents lost booklet, which loss was duly advertised in a
testimonial and documentary evidence, all of which establish with some newspaper of general circulation; thus, the private respondent could not
degree of preponderance the existence of the account sued upon. have officially issued them to the petitioners to cover the alleged payments
on the dates appearing thereon.
ALL CONSIDERED, we cannot find any justification to reject the factual
findings of the lower court to which we must accord respect, for which Second. There was something amiss in the way the receipts were issued to
reason, the judgment appealed from is hereby AFFIRMEDin all respects. 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-
SO ORDERED.15 ςrνll up in these receipts, and no attempt was made in this regard.

Hence, the instant petition. 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 On December 5, 1983, a person claiming to be Lim Sio Wan called up
the veracity of the petitioners claim. Cristina So, an officer of Allied, and instructed the latter to pre-terminate
Lim Sio Wan's money market placement, to issue a manager's check
representing the proceeds of the placement, and to give the check to one
We find no cogent reason to reverse the said findings.
Deborah Dee Santos who would pick up the check.5 Lim Sio Wan
described the appearance of Santos so that So could easily identify her.6
The dismissal of the petition is inevitable even upon close perusal of the
merits of the case.
Later, Santos arrived at the bank and signed the application form for a
manager's check to be issued.7 The bank issued Manager's Check No.
Payment is a mode of extinguishing an obligation.20 Article 1240 of the Civil 035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wan's
Code provides that payment shall be made to the person in whose favor the money market placement in the name of Lim Sio Wan, as payee.8 The Pag
obligation has been constituted, or his successor-in-interest, or any person check was cross-checked "For Payee's Account Only" and given to
authorized to receive it.21 In this case, the payments were purportedly made Santos.9 e|
to a supervisor of the private respondent, who was clad in an SMC uniform 36
and drove an SMC van. He appeared to be authorized to accept payments
Thereafter, the manager's check was deposited in the account of Filipinas
as he showed a list of customers accountabilities and even issued SMC
Cement Corporation (FCC) at respondent Metropolitan Bank and Trust Co.
liquidation receipts which looked genuine. Unfortunately for petitioner
(Metrobank),10 with the forged signature of Lim Sio Wan as indorser.11
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 Earlier, on September 21, 1983, FCC had deposited a money market
mans representation that he was collecting payments for SMC. Thus, the placement for PhP 2 million with respondent Producers Bank. Santos was
payments the petitioners claimed they made were not the payments that the money market trader assigned to handle FCC's account.12 Such deposit
discharged their obligation to the private respondent. is evidenced by Official Receipt No. 31756813 and a Letter dated
September 21, 1983 of Santos addressed to Angie Lazo of FCC,
acknowledging receipt of the placement.14 The placement matured on
The basis of agency is representation.22 A person dealing with an agent is
October 25, 1983 and was rolled-over until December 5, 1983 as evidenced
put upon inquiry and must discover upon his peril the authority of the
by a Letter dated October 25, 1983.15 When the placement matured, FCC
agent.23 In the instant case, the petitioners loss could have been avoided if
demanded the payment of the proceeds of the placement.16 On December
they had simply exercised due diligence in ascertaining the identity of the
5, 1983, the same date that So received the phone call instructing her to
person to whom they allegedly made the payments. The fact that they were
pre-terminate Lim Sio Wan's placement, the manager's check in the name
parting with valuable consideration should have made them more
of Lim Sio Wan was deposited in the account of FCC, purportedly
circumspect in handling their business transactions. Persons dealing with
representing the proceeds of FCC's money market placement with
an assumed agent are bound at their peril to ascertain not only the fact of
Producers Bank.17 In other words, the Allied check was deposited with
agency but also the nature and extent of authority, and in case either is
Metrobank in the account of FCC as Producers Bank's payment of its
controverted, the burden of proof is upon them to establish it. 24 The
obligation to FCC.
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. To clear the check and in compliance with the requirements of the
Philippine Clearing House Corporation (PCHC) Rules and Regulations,
Metrobank stamped a guaranty on the check, which reads: "All prior
Negligence is the omission to do something which a reasonable man,
endorsements and/or lack of endorsement guaranteed."18
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 check was sent to Allied through the PCHC. Upon the presentment of
the petitioners should have done was to ascertain the identity and authority the check, Allied funded the check even without checking the authenticity of
of the person who collected their payments. Failing this, the petitioners Lim Sio Wan's purported indorsement. Thus, the amount on the face of the
cannot claim that they acted in good faith when they made such payments. check was credited to the account of FCC.19
Their claim therefor is negated by their negligence, and they are bound by
its consequences. Being negligent in this regard, the petitioners cannot
On December 9, 1983, Lim Sio Wan deposited with Allied a second money
seek relief on the basis of a supposed agency.26 ςrνll
market placement to mature on January 9, 1984.20

WHEREFORE, the instant petition is hereby DENIED. The assailed

On December 14, 1983, upon the maturity date of the first money market
Decision dated April 16, 1996, and the Resolution dated July 19, 1996 of
placement, Lim Sio Wan went to Allied to withdraw it.21 She was then
the Court of Appeals are AFFIRMED. Costs against the petitioners.
informed that the placement had been pre-terminated upon her instructions.
She denied giving any instructions and receiving the proceeds thereof. She
SO ORDERED. desisted from further complaints when she was assured by the bank's
manager that her money would be recovered.22
ALLIED BANKING CORPORATION, Petitioner, v. LIM SIO WAN,
METROPOLITAN BANK AND TRUST CO., and PRODUCERS When Lim Sio Wan's second placement matured on January 9, 1984, So
BANK, Respondents. called Lim Sio Wan to ask for the latter's instructions on the second
placement. Lim Sio Wan instructed So to roll-over the placement for
another 30 days.23 On January 24, 1984, Lim Sio Wan, realizing that the
DECISION
promise that her money would be recovered would not materialize, sent a
demand letter to Allied asking for the payment of the first
VELASCO, JR., J.: placement.24 Allied refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its subsequent release
to Santos.25
To ingratiate themselves to their valued depositors, some banks at times
bend over backwards that they unwittingly expose themselves to great
risks. Consequently, Lim Sio Wan filed with the RTC a Complaint dated February
13, 198426 docketed as Civil Case No. 6757 against Allied to recover the
proceeds of her first money market placement. Sometime in February 1984,
The Case she withdrew her second placement from Allied.

This Petition for Review on Certiorari under Rule 45 seeks to reverse the
Allied filed a third party complaint27 against Metrobank and Santos. In turn,
Court of Appeals' (CA's) Decision promulgated on March 18, 19981 in CA- Metrobank filed a fourth party complaint28 against FCC. FCC for its part
G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et filed a fifth party complaint29 against Producers Bank. Summonses were
al. The CA Decision modified the Decision dated November 15, 19932 of
duly served upon all the parties except for Santos, who was no longer
the Regional Trial Court (RTC), Branch 63 in Makati City rendered in Civil connected with Producers Bank.30
Case No. 6757.

On May 15, 1984, or more than six (6) months after funding the check,
The Facts Allied informed Metrobank that the signature on the check was
forged.31 Thus, Metrobank withheld the amount represented by the check
The facts as found by the RTC and affirmed by the CA are as follows: from FCC. Later on, Metrobank agreed to release the amount to FCC after
the latter executed an Undertaking, promising to indemnify Metrobank in
case it was made to reimburse the amount.32
On November 14, 1983, respondent Lim Sio Wan deposited with petitioner
Allied Banking Corporation (Allied) at its Quintin Paredes Branch in Manila
a money market placement of PhP 1,152,597.35 for a term of 31 days to Lim Sio Wan thereafter filed an amended complaint to include Metrobank
mature on December 15, 1983,3 as evidenced by Provisional Receipt No. as a party-defendant, along with Allied.33 The RTC admitted the amended
1356 dated November 14, 1983.4 complaint despite the opposition of Metrobank.34 Consequently, Allied's
third party complaint against Metrobank was converted into a cross-claim
and the latter's fourth party complaint against FCC was converted into a
third party complaint.35
After trial, the RTC issued its Decision, holding as follows: respective parties were negligent in the exercise of their obligations is also
conclusive upon this Court.
WHEREFORE, judgment is hereby rendered as follows:
The Liability of the Parties
1. Ordering defendant Allied Banking Corporation to pay plaintiff the
amount of P1,158,648.49 plus 12% interest per annum from March 16, As to the liability of the parties, we find that Allied is liable to Lim Sio Wan.
1984 until fully paid; Fundamental and familiar is the doctrine that the relationship between a
bank and a client is one of debtor-creditor.
2. Ordering defendant Allied Bank to pay plaintiff the amount of
P100,000.00 by way of moral damages; Articles 1953 and 1980 of the Civil Code provide: Pag
e|
3. Ordering defendant Allied Bank to pay plaintiff the amount of Art. 1953. A person who receives a loan of money or any other fungible
P173,792.20 by way of attorney's fees; and, thing acquires the ownership thereof, and is bound to pay to the creditor an 37
equal amount of the same kind and quality.
4. Ordering defendant Allied Bank to pay the costs of suit.
Art. 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
Defendant Allied Bank's cross-claim against defendant Metrobank is
loan.
DISMISSED.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of
Likewise defendant Metrobank's third-party complaint as against Filipinas
a simple loan or mutuum.42 More succinctly, in Citibank, N.A. (Formerly
Cement Corporation is DISMISSED.
First National City Bank) v. Sabeniano, this Court ruled that a money
market placement is a simple loan or mutuum.43 Further, we defined a
Filipinas Cement Corporation's fourth-party complaint against Producer's money market in Cebu International Finance Corporation v. Court of
Bank is also DISMISSED. Appeals, as follows:

SO ORDERED.36 [A] money market is a market dealing in standardized short-term

credit instruments (involving large amounts) where lenders and borrowers
do not deal directly with each other but through a middle man or dealer in
The Decision of the Court of Appeals
open market. In a money market transaction, the investor is a lender who
loans his money to a borrower through a middleman or dealer.
Allied appealed to the CA, which in turn issued the assailed Decision on
March 18, 1998, modifying the RTC Decision, as follows:
In the case at bar, the money market transaction between the petitioner and
the private respondent is in the nature of a loan.44
WHEREFORE, premises considered, the decision appealed from is
MODIFIED. Judgment is rendered ordering and sentencing defendant- Lim Sio Wan, as creditor of the bank for her money market placement, is
appellant Allied Banking Corporation to pay sixty (60%) percent and entitled to payment upon her request, or upon maturity of the placement, or
defendant-appellee Metropolitan Bank and Trust Company forty (40%) of until the bank is released from its obligation as debtor. Until any such event,
the amount of P1,158,648.49 plus 12% interest per annum from March 16, the obligation of Allied to Lim Sio Wan remains unextinguished.
1984 until fully paid. The moral damages, attorney's fees and costs of suit
adjudged shall likewise be paid by defendant-appellant Allied Banking
Corporation and defendant-appellee Metropolitan Bank and Trust Company Art. 1231 of the Civil Code enumerates the instances when obligations are
in the same proportion of 60-40. Except as thus modified, the decision considered extinguished, thus:
appealed from is AFFIRMED.
Art. 1231. Obligations are extinguished:
SO ORDERED.37
(1) By payment or performance;
Hence, Allied filed the instant petition.
(2) By the loss of the thing due;
The Issues
(3) By the condonation or remission of the debt;
Allied raises the following issues for our consideration:
(4) By the confusion or merger of the rights of creditor and debtor;
The Honorable Court of Appeals erred in holding that Lim Sio Wan did not
authorize [Allied] to pre-terminate the initial placement and to deliver the
(5) By compensation;
check to Deborah Santos.

(6) By novation.
The Honorable Court of Appeals erred in absolving Producers Bank of any
liability for the reimbursement of amount adjudged demandable.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
The Honorable Court of Appeals erred in holding [Allied] liable to the extent
governed elsewhere in this Code. (Emphasis supplied.)
of 60% of amount adjudged demandable in clear disregard to the ultimate
liability of Metrobank as guarantor of all endorsement on the check, it being
the collecting bank.38 From the factual findings of the trial and appellate courts that Lim Sio Wan
did not authorize the release of her money market placement to Santos and
the bank had been negligent in so doing, there is no question that the
The petition is partly meritorious.
obligation of Allied to pay Lim Sio Wan had not been extinguished. Art.
1240 of the Code states that "payment shall be made to the person in
A Question of Fact whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it." As commented by Arturo
Tolentino:
Allied questions the finding of both the trial and appellate courts that Allied
was not authorized to release the proceeds of Lim Sio Wan's money market
placement to Santos. Allied clearly raises a question of fact. When the CA Payment made by the debtor to a wrong party does not extinguish the
affirms the findings of fact of the RTC, the factual findings of both courts are obligation as to the creditor, if there is no fault or negligence which can be
binding on this Court.39 imputed to the latter. Even when the debtor acted in utmost good faith and
by mistake as to the person of his creditor, or through error induced by the
fraud of a third person, the payment to one who is not in fact his creditor, or
We also agree with the CA when it said that it could not disturb the trial authorized to receive such payment, is void, except as provided in Article
court's findings on the credibility of witness So inasmuch as it was the trial
1241. Such payment does not prejudice the creditor, and accrual of interest
court that heard the witness and had the opportunity to observe closely her is not suspended by it.45 (Emphasis supplied.)
deportment and manner of testifying. Unless the trial court had plainly
overlooked facts of substance or value, which, if considered, might affect
the result of the case,40 we find it best to defer to the trial court on matters Since there was no effective payment of Lim Sio Wan's money market
pertaining to credibility of witnesses. placement, the bank still has an obligation to pay her at six percent (6%)
interest from March 16, 1984 until the payment thereof.
Additionally, this Court has held that the matter of negligence is also a
factual question.41 Thus, the finding of the RTC, affirmed by the CA, that the We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of the loss of Lim Sio having indorsed the same. In Republic Bank v. Ebrada,49 the check was
Wan's money. It points out that Metrobank guaranteed all prior properly issued by the Bureau of Treasury. While in Banco de Oro Savings
indorsements inscribed on the manager's check, and without Metrobank's and Mortgage Bank (Banco de Oro) v. Equitable Banking
guarantee, the present controversy would never have occurred. According Corporation,50 Banco de Oro admittedly issued the checks in the name of
to Allied: the correct payees. And in Traders Royal Bank v. Radio Philippines
Network, Inc.,51 the checks were issued at the request of Radio Philippines
Network, Inc. from Traders Royal Bank.chanrobles virtual law library
Failure on the part of the collecting bank to ensure that the proceeds of the
check is paid to the proper party is, aside from being an efficient intervening
cause, also the last negligent act, x x x contributory to the injury caused in However, in Bank of the Philippine Islands v. Court of Appeals, we said that
the present case, which thereby leads to the conclusion that it is the the drawee bank is liable for 60% of the amount on the face of the
collecting bank, Metrobank that is the proximate cause of the alleged loss negotiable instrument and the collecting bank is liable for 40%. We also Pag
of the plaintiff in the instant case.46 noted the relative negligence exhibited by two banks, to wit:
e|
We are not persuaded. Both banks were negligent in the selection and supervision of their 38
employees resulting in the encashment of the forged checks by an
impostor. Both banks were not able to overcome the presumption of
Proximate cause is "that cause, which, in natural and continuous sequence,
negligence in the selection and supervision of their employees. It was the
unbroken by any efficient intervening cause, produces the injury and
gross negligence of the employees of both banks which resulted in the
without which the result would not have occurred."47 Thus, there is an
fraud and the subsequent loss. While it is true that petitioner BPI's
efficient supervening event if the event breaks the sequence leading from
negligence may have been the proximate cause of the loss, respondent
the cause to the ultimate result. To determine the proximate cause of a
CBC's negligence contributed equally to the success of the impostor in
controversy, the question that needs to be asked is: If the event did not
encashing the proceeds of the forged checks. Under these circumstances,
happen, would the injury have resulted? If the answer is NO, then the event
we apply Article 2179 of the Civil Code to the effect that while respondent
is the proximate cause.
CBC may recover its losses, such losses are subject to mitigation by the
courts. (See Phoenix Construction Inc. v. Intermediate Appellate Courts,
In the instant case, Allied avers that even if it had not issued the check 148 SCRA 353 [1987]).
payment, the money represented by the check would still be lost because
of Metrobank's negligence in indorsing the check without verifying the
Considering the comparative negligence of the two (2) banks, we rule that
genuineness of the indorsement thereon.
the demands of substantial justice are satisfied by allocating the loss of
P2,413,215.16 and the costs of the arbitration proceeding in the amount of
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law P7,250.00 and the cost of litigation on a 60-40 ratio.52
provides:
Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing
Section 66.Liability of general indorser. Every indorser who indorses institution and the collecting bank should equally share the liability for the
without qualification, warrants to all subsequent holders in due course; loss of amount represented by the checks concerned due to the negligence
of both parties:
a) The matters and things mentioned in subdivisions (a), (b) and (c) of the
next preceding section; and The Court finds as reasonable, the proportionate sharing of fifty percent-fifty
percent (50%-50%). Due to the negligence of the Province of Tarlac in
releasing the checks to an unauthorized person (Fausto Pangilinan), in
b) That the instrument is at the time of his indorsement valid and subsisting;
allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining
And in addition, he engages that on due presentment, it shall be accepted why the retired hospital cashier was collecting checks for the payee hospital
or paid, or both, as the case may be according to its tenor, and that if it be in addition to the hospital's real cashier, respondent Province contributed to
dishonored, and the necessary proceedings on dishonor be duly taken, he the loss amounting to P203,300.00 and shall be liable to the PNB for fifty
will pay the amount thereof to the holder, or to any subsequent indorser (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty
who may be compelled to pay it. percent (50%) of P203,300.00 from PNB.

Section 65. Warranty where negotiation by delivery, so forth. Every person The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%)
negotiating an instrument by delivery or by a qualified indorsement, percent of P203,300.00. It is liable on its warranties as indorser of the
warrants: checks which were deposited by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its
a) That the instrument is genuine and in all respects what it purports to be; duty to ascertain the genuineness of the payee's indorsement.53

b) That he has a good title of it; A reading of the facts of the two immediately preceding cases would reveal
that the reason why the bank or institution which issued the check was held
c) That all prior parties had capacity to contract; partially liable for the amount of the check was because of the negligence
of these parties which resulted in the issuance of the checks.
d) That he has no knowledge of any fact which would impair the validity of
the instrument or render it valueless. In the instant case, the trial court correctly found Allied negligent in issuing
the manager's check and in transmitting it to Santos without even a written
authorization.54 In fact, Allied did not even ask for the certificate evidencing
But when the negotiation is by delivery only, the warranty extends in favor the money market placement or call up Lim Sio Wan at her residence or
of no holder other than the immediate transferee. office to confirm her instructions. Both actions could have prevented the
whole fraudulent transaction from unfolding. Allied's negligence must be
The provisions of subdivision (c) of this section do not apply to persons considered as the proximate cause of the resulting loss.
negotiating public or corporation securities, other than bills and notes.
(Emphasis supplied.) To reiterate, had Allied exercised the diligence due from a financial
institution, the check would not have been issued and no loss of funds
The warranty "that the instrument is genuine and in all respects what it would have resulted. In fact, there would have been no issuance of
purports to be" covers all the defects in the instrument affecting the validity indorsement had there been no check in the first place.
thereof, including a forged indorsement. Thus, the last indorser will be liable
for the amount indicated in the negotiable instrument even if a previous The liability of Allied, however, is concurrent with that of Metrobank as the
indorsement was forged. We held in a line of cases that "a collecting bank last indorser of the check. When Metrobank indorsed the check in
which indorses a check bearing a forged indorsement and presents it to the compliance with the PCHC Rules and Regulations55 without verifying the
drawee bank guarantees all prior indorsements, including the forged authenticity of Lim Sio Wan's indorsement and when it accepted the check
indorsement itself, and ultimately should be held liable therefor."48 despite the fact that it was cross-checked payable to payee's account
only,56 its negligent and cavalier indorsement contributed to the easier
However, this general rule is subject to exceptions. One such exception is release of Lim Sio Wan's money and perpetuation of the fraud. Given the
when the issuance of the check itself was attended with negligence. Thus, relative participation of Allied and Metrobank to the instant case, both banks
in the cases cited above where the collecting bank is generally held liable, cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities
in two of the cases where the checks were negligently issued, this Court of Allied and Metrobank, as ruled by the CA, must be upheld.
held the institution issuing the check just as liable as or more liable than the
collecting bank. FCC, having no participation in the negotiation of the check and in the
forgery of Lim Sio Wan's indorsement, can raise the real defense of forgery
In isolated cases where the checks were deposited in an account other as against both banks.57
than that of the payees on the strength of forged indorsements, we held the
collecting bank solely liable for the whole amount of the checks involved for
As to Producers Bank, Allied Bank's argument that Producers Bank must Additionally and by way of MODIFICATION, Producers Bank is hereby
be held liable as employer of Santos under Art. 2180 of the Civil Code is ordered to pay Allied and Metrobank the aforementioned amounts. The
erroneous. Art. 2180 pertains to the vicarious liability of an employer for liabilities of the parties are concurrent and independent of each other.
quasi-delicts that an employee has committed. Such provision of law does
not apply to civil liability arising from delict.
SO ORDERED.

One also cannot apply the principle of subsidiary liability in Art. 103 of the
G.R. No. 172825 October 11, 2012
Revised Penal Code in the instant case. Such liability on the part of the
employer for the civil aspect of the criminal act of the employee is based on
the conviction of the employee for a crime. Here, there has been no SPOUSES MINIANO B. DELA CRUZ and LETA L. DELA
conviction for any crime. CRUZ, Petitioners, Pag
vs.
ANA MARIE CONCEPCION, Respondent.
e|
As to the claim that there was unjust enrichment on the part of Producers
Bank, the same is correct. Allied correctly claims in its petition that 39
Producers Bank should reimburse Allied for whatever judgment that may be DECISION
rendered against it pursuant to Art. 22 of the Civil Code, which provides:
"Every person who through an act of performance by another, or any other
PERALTA, J.:
means, acquires or comes into possession of something at the expense of
the latter without just cause or legal ground, shall return the same to
him."chanrobles virtual law library Assailed in this petition for review on certiorari under Rule 45 of the Rules
of Court filed by petitioners spouses Miniano B. Dela Cruz and Leta L. Dela
The above provision of law was clarified in Reyes v. Lim, where we ruled Cruz against respondent Ana Marie Concepcion are the Court of Appeals
that "[t]here is unjust enrichment when a person unjustly retains a benefit to (CA) Decision1 dated March 31, 2005 and Resolution2 dated May 24, 2006
in CA-G.R. CV No. 83030.
the loss of another, or when a person retains money or property of another
against the fundamental principles of justice, equity and good
conscience."58 The facts of the case are as follows:

In Tamio v. Ticson, we further clarified the principle of unjust enrichment, On March 25, 1996, petitioners (as vendors) entered into a Contract to
thus: "Under Article 22 of the Civil Code, there is unjust enrichment when Sell3 with respondent (as vendee) involving a house and lot in Cypress St.,
(1) a person is unjustly benefited, and (2) such benefit is derived at the Phase I, Town and Country Executive Village, Antipolo City for a
expense of or with damages to another."59 consideration of P2,000,000.00 subject to the following terms and
conditions:
In the instant case, Lim Sio Wan's money market placement in Allied Bank
was pre-terminated and withdrawn without her consent. Moreover, the a) That an earnest money of P100,000.00 shall be paid
proceeds of the placement were deposited in Producers Bank's account in immediately;
Metrobank without any justification. In other words, there is no reason that
the proceeds of Lim Sio Wans' placement should be deposited in FCC's
account purportedly as payment for FCC's money market placement and b) That a full down payment of Four Hundred Thousand Pesos
interest in Producers Bank.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ (P400,000.00) shall be paid on February 29, 1996;

With such payment, Producers Bank's indebtedness to FCC was c) That Five Hundred Thousand Pesos (P500,000.00) shall be
extinguished, thereby benefitting the former. Clearly, Producers Bank was paid on or before May 5, 1996; and
unjustly enriched at the expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should reimburse Allied and d) That the balance of One Million Pesos (P1,000,000.00) shall
Metrobank for the amounts the two latter banks are ordered to pay Lim Sio be paid on installment with interest of Eighteen Percent (18%)
Wan. per annum or One and a half percent (1-1/2 %) interest per
month, based on the diminishing balance, compounded monthly,
It cannot be validly claimed that FCC, and not Producers Bank, should be effective May 6, 1996. The interest shall continue to run until the
considered as having been unjustly enriched. It must be remembered that whole obligation shall have been fully paid. The whole One
FCC's money market placement with Producers Bank was already due and Million Pesos shall be paid within three years from May 6, 1996;
demandable; thus, Producers Bank's payment thereof was justified. FCC
was entitled to such payment. As earlier stated, the fact that the e) That the agreed monthly amortization of Fifty Thousand Pesos
indorsement on the check was forged cannot be raised against FCC which (P50,000.00), principal and interest included, must be paid to the
was not a part in any stage of the negotiation of the check. FCC was not Vendors, without need of prior demand, on or before May 6,
unjustly enriched. 1996, and every month thereafter. Failure to pay the monthly
amortization on time, a penalty equal to Five Percent (5%) of the
From the facts of the instant case, we see that Santos could be the amount due shall be imposed, until the account is updated. In
architect of the entire controversy. Unfortunately, since summons had not addition, a penalty of One Hundred Pesos per day shall be
been served on Santos, the courts have not acquired jurisdiction over imposed until the account is updated;
her.60 We, therefore, cannot ascribe to her liability in the instant case.
f) That after receipt of the full payment, the Vendors shall execute
Clearly, Producers Bank must be held liable to Allied and Metrobank for the the necessary Absolute Deed of Sale covering the house and lot
amount of the check plus 12% interest per annum, moral damages, mentioned above x x x4
attorney's fees, and costs of suit which Allied and Metrobank are adjudged
to pay Lim Sio Wan based on a proportion of 60:40. Respondent made the following payments, to wit: (1) P500,000.00 by way
of downpayment; (2) P500,000.00 on May 30, 1996; (3) P500,000.00 paid
WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA on January 22, 1997; and (4) P500,000.00 bounced check dated June 30,
Decision in CA-G.R. CV No. 46290 and the November 15, 1993 RTC 1997 which was subsequently replaced by another check of the same
Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION. amount, dated July 7, 1997. Respondent was, therefore, able to pay a total
of P2,000,000.00.5

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as

follows: Before respondent issued the P500,000.00 replacement check, she told
petitioners that based on the computation of her accountant as of July 6,
1997, her unpaid obligation which includes interests and penalties was only
WHEREFORE, premises considered, the decision appealed from is P200,000.00.6 Petitioners agreed with respondent and said "if P200,000.00
MODIFIED. Judgment is rendered ordering and sentencing defendant- is the correct balance, it is okay with us."7
appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%) of
the amount of P1,158,648.49 plus 12% interest per annum from March 16, Meanwhile, the title to the property was transferred to respondent.
1984 until fully paid. The moral damages, attorney's fees and costs of suit Petitioners later reminded respondent to pay P209,000.00 within three
adjudged shall likewise be paid by defendant-appellant Allied Banking months.8 They claimed that the said amount remained unpaid, despite the
Corporation and defendant-appellee Metropolitan Bank and Trust Company transfer of the title to the property to respondent. Several months later,
in the same proportion of 60-40. Except as thus modified, the decision petitioners made further demands stating the supposed correct computation
appealed from is AFFIRMED. of respondent’s liabilities.9 Despite repeated demands, petitioners failed to
collect the amounts they claimed from respondent. Hence, the Complaint
for Sum of Money With Damages10 filed with the Regional Trial Court
SO ORDERED. (RTC)11 of Antipolo, Rizal. The case was docketed as Civil Case No. 98-
4716.
In her Answer with Compulsory Counterclaim, 12 respondent claimed that show that her unpaid obligation had already been paid having been
her unpaid obligation to petitioners is only P200,000.00 as earlier confirmed allegedly given to a person who was not armed with authority to receive
by petitioners and not P487,384.15 as later alleged in the complaint. payment.26
Respondent thus prayed for the dismissal of the complaint. By way of
counterclaim, respondent prayed for the payment of moral damages and
The petition is without merit.
attorney’s fees. During the presentation of the parties’ evidence, in addition
to documents showing the statement of her paid obligations, respondent
presented a receipt purportedly indicating payment of the remaining It is undisputed that the parties entered into a contract to sell a house and
balance of P200,000.00 to Adoracion Losloso (Losloso) who allegedly lot for a total consideration of P2 million. Considering that the property was
received the same on behalf of petitioners.13 payable in installment, they likewise agreed on the payment of interest as
well as penalty in case of default. It is likewise settled that respondent was Pag
able to pay the total purchase price of P2 million ahead of the agreed term.
On March 8, 2004, the RTC rendered a Decision14 in favor of respondent,
the dispositive portion of which reads:
Afterwhich, they agreed on the remaining balance by way of interest and e|
penalties which is P200,000.00. Considering that the term of payment was
not strictly followed and the purchase price had already been fully paid by 40
WHEREFORE, premises considered, this case is hereby DISMISSED. The respondent, the latter presented to petitioners her computation of her
plaintiff is hereby ordered to pay the defendant’s counterclaim, amounting liabilities for interests and penalties which was agreed to by petitioners.
to wit: Petitioners also manifested their conformity to the statement of account
prepared by respondent.
a) P300,000 as moral damages; and
In paragraph (9) of petitioners’ Complaint, they stated that:
b) P100,000 plus P2,000 per court appearance as attorney’s
fees. 9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is the
correct balance, it is okay with us." x x x.27
SO ORDERED.15
But in paragraph (17) thereof, petitioners claimed that defendant’s
outstanding liability as of November 6, 1997 was P487,384.15. 28 Different
The RTC noted that the evidence formally offered by petitioners have not
amounts, however, were claimed in their demand letter and in their
actually been marked as none of the markings were recorded. Thus, it
testimony in court.
found no basis to grant their claims, especially since the amount claimed in
the complaint is different from that testified to. The court, on the other hand,
granted respondent’s counterclaim.16 With the foregoing factual antecedents, petitioners cannot be permitted to
assert a different computation of the correct amount of respondent’s
liability.
On appeal, the CA affirmed the decision with modification by deleting the
award of moral damages and attorney’s fees in favor of respondent. 17 It
agreed with the RTC that the evidence presented by petitioners cannot be It is noteworthy that in answer to petitioners’ claim of her purported unpaid
given credence in determining the correct liability of obligation, respondent admitted in her Answer with Compulsory
respondent.18 Considering that the purchase price had been fully paid by Counterclaim that she paid a total amount of P2 million representing the
respondent ahead of the scheduled date agreed upon by the parties, purchase price of the subject house and lot. She then manifested to
petitioners were not awarded the excessive penalties and interests. 19 The petitioners and conformed to by respondent that her only balance was
CA thus maintained that respondent’s liability is limited to P200,000.00 as P200,000.00. Nowhere in her Answer did she allege the defense of
claimed by respondent and originally admitted by petitioners.20 This amount, payment. However, during the presentation of her evidence, respondent
however, had already been paid by respondent and received by petitioners’ submitted a receipt to prove that she had already paid the remaining
representative.21 Finally, the CA pointed out that the RTC did not explain in balance. Both the RTC and the CA concluded that respondent had already
its decision why moral damages and attorney’s fees were awarded. paid the remaining balance of P200,000.00. Petitioners now assail this,
Considering also that bad faith cannot be attributed to petitioners when they insisting that the court should have maintained the judicial admissions of
instituted the collection suit, the CA deleted the grant of their respondent in her Answer with Compulsory Counterclaim, especially as to
counterclaims.22 their agreed stipulations on interests and penalties as well as the existence
of outstanding obligations.
Aggrieved, petitioners come before the Court in this petition for review on
certiorari under Rule 45 of the Rules of Court raising the following errors: It is, thus, necessary to discuss the effect of failure of respondent to plead
payment of its obligations.
I.
Section 1, Rule 9 of the Rules of Court states that "defenses and objections
not pleaded either in a motion to dismiss or in the answer are deemed
"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT
waived." Hence, respondent should have been barred from raising the
ON THE GROUND THAT PLAINTIFF FAILED TO FORMALLY
defense of payment of the unpaid P200,000.00. However, Section 5, Rule
OFFER THEIR EVIDENCE AS DEFENDANT JUDICIALLY
10 of the Rules of Court allows the amendment to conform to or authorize
ADMITTED IN HER ANSWER WITH COMPULS[O]RY
presentation of evidence, to wit:
COUNTERCLAIM HER OUTSTANDING OBLIGATION STILL
DUE TO PLAINTIFFS AND NEED NO PROOF.
Section 5.Amendment to conform to or authorize presentation of evidence.
– When issues not raised by the pleadings are tried with the express or
II.
implied consent of the parties, they shall be treated in all respects as if they
had been raised in the pleadings. Such amendment of the pleadings as
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT may be necessary to cause them to conform to the evidence and to raise
FOR ALLEGED FAILURE OF PLAINTIFFS TO PRESENT these issues may be made upon motion of any party at any time, even after
COMPUTATION OF THE AMOUNT BEING CLAIMED AS judgment; but failure to amend does not affect the result of the trial of these
DEFENDANT JUDICIALLY ADMITTED HAVING RECEIVED issues. If evidence is objected to at the trial on the ground that it is not
THE DEMAND LETTER DATED OCTOBER 22, 1997 WITH within the issues made by the pleadings, the court may allow the pleadings
COMPUTATION OF THE BALANCE DUE. to be amended and shall do so with liberality if the presentation of the
merits of the action and the ends of substantial justice will be subserved
thereby. The court may grant a continuance to enable the amendment to be
III.
made.

THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT The foregoing provision envisions two scenarios, namely, when evidence is
ON THE GROUND THAT THE DEFENDANT FULLY PAID THE
introduced in an issue not alleged in the pleadings and no objection was
CLAIMS OF PLAINTIFFS BASED ON THE ALLEGED RECEIPT interjected; and when evidence is offered on an issue not alleged in the
OF PAYMENT BY ADORACION LOSLOSO FROM ANA MARIE pleadings but this time an objection was raised.29 When the issue is tried
CONCEPCION MAGLASANG WHICH HAS NOTHING TO DO
without the objection of the parties, it should be treated in all respects as if it
WITH THE JUDICIALLY ADMITTED OBLIGATION OF had been raised in the pleadings.30 On the other hand, when there is an
APPELLEE."23 objection, the evidence may be admitted where its admission will not
prejudice him.31
Invoking the rule on judicial admission, petitioners insist that respondent
admitted in her Answer with Compulsory Counterclaim that she had paid Thus, while respondent judicially admitted in her Answer that she only paid
only a total amount of P2 million and that her unpaid obligation amounts to
P2 million and that she still owed petitioners P200,000.00, respondent
P200,000.00.24 They thus maintain that the RTC and the CA erred in claimed later and, in fact, submitted an evidence to show that she already
concluding that said amount had already been paid by respondent. paid the whole amount of her unpaid obligation. It is noteworthy that when
Petitioners add that respondent’s total liability as shown in the latter’s
respondent presented the evidence of payment, petitioners did not object
statement of account was erroneously computed for failure to compound thereto. When the receipt was formally offered as evidence, petitioners did
the monthly interest agreed upon.25 Petitioners also claim that the RTC and not manifest their objection to the admissibility of said document on the
the CA erred in giving credence to the receipt presented by respondent to
ground that payment was not an issue. Apparently, petitioners only denied
receipt of said payment and assailed the authority of Losloso to receive Q: You would agree with me that you have authorized this Doiry Losloso to
payment. Since there was an implied consent on the part of petitioners to receive payment of whatever balance is due you coming from Ana Marie
try the issue of payment, even if no motion was filed and no amendment of Concepcion, that is correct?
the pleading has been ordered,32 the RTC cannot be faulted for admitting
respondent’s testimonial and documentary evidence to prove payment. 33
A: In one or two times but not total authority, sir.

As stressed by the Court in Royal Cargo Corporation v. DFS Sports

Q: Yes, but you have authorized her to receive payment?
Unlimited, Inc.,34

A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)40
The failure of a party to amend a pleading to conform to the evidence Pag
adduced during trial does not preclude adjudication by the court on the
basis of such evidence which may embody new issues not raised in the Thus, as shown in the receipt signed by petitioners’ agent and pursuant to e|
pleadings. x x x Although, the pleading may not have been amended to the authority granted by petitioners to Losloso, payment made to the latter
conform to the evidence submitted during trial, judgment may nonetheless is deemed payment to petitioners. We find no reason to depart from the 41
be rendered, not simply on the basis of the issues alleged but also on the RTC and the CA conclusion that payment had already been made and that
issues discussed and the assertions of fact proved in the course of the trial. it extinguished respondent's obligations.
The court may treat the pleading as if it had been amended to conform to
the evidence, although it had not been actually amended. x x x Clearly, a
court may rule and render judgment on the basis of the evidence before it WHEREFORE, premises considered, the petition is DENIED for lack of
even though the relevant pleading had not been previously amended, so merit. The Court of Appeals Decision dated March 31, 2005 and Resolution
dated May 24, 2006 in CA-G.R. CV No. 83030, are AFFIRMED.
long as no surprise or prejudice is thereby caused to the adverse party. Put
a little differently, so long as the basic requirements of fair play had been
met, as where the litigants were given full opportunity to support their SO ORDERED.
respective contentions and to object to or refute each other's evidence, the
court may validly treat the pleadings as if they had been amended to
conform to the evidence and proceed to adjudicate on the basis of all the G.R. No. 175863, February 18, 2015
evidence before it. (Emphasis supplied)35
NATIONAL POWER CORPORATION, Petitioner, v. LUCMAN M.
To be sure, petitioners were given ample opportunity to refute the fact of IBRAHIM, ATTY. OMAR G. MARUHOM, ELIAS G. MARUHOM, BUCAY
and present evidence to prove payment. G. MARUHOM, MAMOD G. MARUHOM, FAROUK G.
MARUHOM, HIDJARA G. MARUHOM, ROCANIA G.
MARUHOM, POTRISAM G. MARUHOM, LUMBA G. MARUHOM, SINAB
With the evidence presented by the contending parties, the more important G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G.
question to resolve is whether or not respondent’s obligation had already MARUHOM, MOHAMAD M. IBRAHIM, CAIRONESA M. IBRAHIM AND
been extinguished by payment. MACAPANTON K. MANGONDATO, Respondents.

We rule in the affirmative as aptly held by the RTC and the CA. DECISION

Respondent’s obligation consists of payment of a sum of money. In order to PEREZ, J.:

extinguish said obligation, payment should be made to the proper person
as set forth in Article 1240 of the Civil Code, to wit:
At bench is a petition for review on certiorari1 assailing the Decision2 dated
24 June 2005 and Resolution3 dated 5 December 2006 of the Court of
Article 1240. Payment shall be made to the person in whose favor the Appeals in CA-G.R. CV No. 68061.
obligation has been constituted, or his successor in interest, or any person
authorized to receive it. (Emphasis supplied) The facts:

The Court explained in Cambroon v. City of Butuan,36 cited in Republic v. The Subject Land
De Guzman,37 to whom payment should be made in order to extinguish an
obligation:
In 1978, petitioner took possession of a 21,995 square meter parcel of land
Payment made by the debtor to the person of the creditor or to one in Marawi City (subject land) for the purpose of building thereon a
authorized by him or by the law to receive it extinguishes the obligation. hydroelectric power plant pursuant to its Agus 1 project. The subject land,
When payment is made to the wrong party, however, the obligation is not while in truth a portion of a private estate registered under Transfer
extinguished as to the creditor who is without fault or negligence even if the Certificate of Title (TCT) No. 378-A4 in the name of herein respondent
debtor acted in utmost good faith and by mistake as to the person of the
Macapanton K. Mangondato (Mangondato),5 was occupied
creditor or through error induced by fraud of a third person.
by petitioner under the mistaken belief that such land is part of the vast tract
of public land reserved for its use by the government under Proclamation
In general, a payment in order to be effective to discharge an obligation, No. 1354, s. 1974.6cralawred
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 Mangondato first discovered petitioner’s occupation of the subject land in
authority to receive the money will, as a rule, be treated as though actual 1979—the year that petitioner started its construction of the Agus 1 plant.
authority had been given for its receipt. Likewise, if payment is made to one Shortly after such discovery, Mangondato began demanding compensation
who by law is authorized to act for the creditor, it will work a discharge. The for the subject land from petitioner.
receipt of money due on a judgment by an officer authorized by law to
accept it will, therefore, satisfy the debt.38
In support of his demand for compensation, Mangondato sent
to petitioner a letter7 dated 28 September 1981 wherein the former detailed
Admittedly, payment of the remaining balance of P200,000.00 was not the origins of his ownership over the lands covered by TCT No. 378-A,
made to the creditors themselves. Rather, it was allegedly made to a including the subject land. The relevant portions of the letter
certain Losloso. Respondent claims that Losloso was the authorized agent
read:chanRoblesvirtualLawlibrary
of petitioners, but the latter dispute it.

Now let me trace the basis of the title to the land adverted to for
Losloso’s authority to receive payment was embodied in petitioners’
Letter39 addressed to respondent, dated August 7, 1997, where they particularity. The land titled in my name was originally consisting of seven
informed respondent of the amounts they advanced for the payment of the (7) hectares. This piece of land was particularly set aside by the Patriarch
1997 real estate taxes. In said letter, petitioners reminded respondent of Maruhom, a fact recognized by all royal datus of Guimba, to belong to his
her remaining balance, together with the amount of taxes paid. Taking into eldest son, Datu Magayo-ong Maruhom. This is the very foundation of the
consideration the busy schedule of respondent, petitioners advised the right and ownership over the land in question which was titled in my name
latter to leave the payment to a certain "Dori" who admittedly is Losloso, or because as the son-in-law of Hadji Ali Maruhom the eldest son of, and only
to her trusted helper. This is an express authority given to Losloso to
lawyer among the descendants of Datu Magayo-ong Maruhom, the
receive payment.
authority and right to apply for the title to the land was given to me by said
heirs after mutual agreement among themselves besides the fact that I
Moreover, as correctly held by the CA:
have already bought a substantial portion of the original seven (7) hectares.

Furthermore, that Adoracion Losloso was indeed an agent of the appellant The original title of this seven (7) hectares has been subdivided into several
spouses is borne out by the following admissions of plaintiff-appellant Atty. TCTs for the other children of Datu Magayo-ong Maruhom with whom I
Miniano dela Cruz, to wit:
have executed a quit claim. Presently, only three (3) hectares is left to me
out of the original seven (7) hectares representing those portion [sic]
belonging to my wife and those I have bought previously from other heirs. Hence, the Ibrahims and Maruhoms prayed for the following reliefs in their
This is now the subject of this case.8cralawlawlibrary complaint:16cralawred

Petitioner, at first, rejected Mangondato’s claim of ownership over the 1. That Mangondato be ordered to execute a Deed of
subject land; the former then adamant in its belief that the said land is Conveyance transferring to them the ownership of the lands
public land covered by Proclamation No. 1354, s. 1974. But, after more covered by TCT No. 378-A;ChanRoblesVirtualawlibrary
than a decade, petitioner finally acquiesced to the fact that the subject land
is private land covered by TCT No. 378-A and consequently acknowledged 2. That petitioner be ordered to pay to them whatever indemnity for
Mangondato’s right, as registered owner, to receive compensation therefor. the subject land it is later on adjudged to pay in Civil Case No.
605-92 and Civil Case No. 610-92;ChanRoblesVirtualawlibrary Pag
Thus, during the early 1990s, petitioner and Mangondato partook in a
series of communications aimed at settling the amount of compensation 3. That Mangondato be ordered to pay to them any amount that the e |
that the former ought to pay the latter in exchange for the subject land. former may have received from the petitioner by way of indemnity 42
for the subject land;ChanRoblesVirtualawlibrary
Ultimately, however, the communications failed to yield a genuine
consensus between petitioner and Mangondato as to the fair market value
4. That petitioner and Mangondato be ordered jointly and severally
of the subject land.chanroblesvirtuallawlibrary
liable to pay attorney’s fees in the sum of P200,000.00.

Civil Case No. 605-92 and Civil Case No. 610-92

In the same complaint, the Ibrahims and Maruhoms also prayed for the
With an agreement basically out of reach, Mangondato filed a complaint for
issuance of a temporary restraining order (TRO) and a writ of preliminary
reconveyance against petitioner before the Regional Trial Court (RTC) of
injunction to enjoin petitioner, during the pendency of the suit, from making
Marawi City in July 1992. In his complaint, Mangondato asked for, among
any payments to Mangondato concerning expropriation indemnity for the
others, the recovery of the subject land and the payment by petitioner of a
subject land.17cralawred
monthly rental from 1978 until the return of such land. Mangondato’s
complaint was docketed as Civil Case No. 605-92.
On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer
9 of the Ibrahims and Maruhoms for the issuance of a TRO.18 On 29 May
For its part, petitioner filed an expropriation complaint before the RTC on
1993, after conducting an appropriate hearing for the purpose, the same
27 July 1992. Petitioner’s complaint was docketed as Civil Case No. 610-
court likewise granted the prayer for the issuance of a writ of preliminary
92.
injunction.19cralawred

Later, Civil Case No. 605-92 and Civil Case No. 610-92 were consolidated
In due course, trial then ensued in Civil Case No. 967-
before Branch 8 of the Marawi City RTC.
93.chanroblesvirtuallawlibrary

On 21 August 1992, Branch 8 of the Marawi City RTC rendered a

The Decision of the Court of Appeals in CA-G.R. CV No. 39353
Decision10 in Civil Case No. 605-92 and Civil Case No. 610-92. The
and the Decision of this Court in G.R. No. 113194
decision upheld petitioner’s right to expropriate the subject land: it denied
Mangondato’s claim for reconveyance and decreed the subject land
On 21 December 1993, the Court of Appeals rendered a Decision in CA-
condemned in favor of the petitioner, effective July of 1992, subject to
G.R. CV No. 39353 denying the appeal of petitioner and affirming in
payment by the latter of just compensation in the amount of
toto the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case
P21,995,000.00. Anent petitioner’s occupation of the subject land from
No. 610-92. Undeterred, petitioner next filed a petition for review
1978 to July of 1992, on the other hand, the decision required the former to
on certiorari with this Court that was docketed herein as G.R. No.
pay rentals therefor at the rate of P15,000.00 per month with 12% interest
113194.20cralawred
per annum. The decision’s fallo reads:chanRoblesvirtualLawlibrary

On 11 March 1996, we rendered our Decision in G.R. No. 113194 wherein

WHEREFORE, the prayer in the recovery case for [petitioner’s] surrender
we upheld the Court of Appeals’ denial of petitioner’s appeal.21 In the same
of the property is denied but [petitioner] is ordered to pay monthly rentals in
decision, we likewise sustained the appellate court’s affirmance of the
the amount of P15,000.00 from 1978 up to July 1992 with 12% interest per
decision in Civil Case No. 605-92 and Civil Case No. 610-92 subject only to
annum xxx and the property is condemned in favor of [petitioner] effective
a reduction of the rate of interest on the monthly rental fees from 12% to
July 1992 upon payment of the fair market value of the property at One
6% per annum.22cralawred
Thousand (P1,000.00) Pesos per square meter or a total of Twenty-One
Million Nine Hundred Ninety-Five Thousand (P21,995,000.00)
Our decision in G.R. No. 113194 eventually became final and executory on
[P]esos.11cralawred
13 May 1996.23cralawred
cralawlawlibrary

Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and
Disagreeing with the amount of just compensation that it was adjudged to
Civil Case No. 610-92, as Modified
pay under the said decision, petitioner filed an appeal with the Court of
Appeals. This appeal was docketed in the Court of Appeals as CA-G.R. CV
No. 39353. In view of the finality of this Court’s decision in G.R. No. 113194,
Mangondato filed a motion for execution of the decision in Civil Case No.
605-92 and Civil Case No. 610-92.24 Against this motion,
Respondents Ibrahims and Maruhoms and Civil Case No. 967-93
however, petitioner filed an opposition.25cralawred

During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993,

In its opposition, petitioner adverted to the existence of the writ of
herein respondents the Ibrahims and Maruhoms12 filed before the RTC of
preliminary injunction earlier issued in Civil Case No. 967-93 that enjoins it
Marawi City a complaint13 against Mangondato and petitioner. This
from making any payment of expropriation indemnity over the subject land
complaint was docketed as Civil Case No. 967-93 and was raffled to
in favor of Mangondato.26 Petitioner, in sum, posits that such writ of
Branch 10 of the Marawi City RTC.
preliminary injunction constitutes a legal impediment that effectively bars
any meaningful execution of the decision in Civil Case No. 605-92 and Civil
In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s
Case No. 610-92.
ownership of the lands covered by TCT No. 378-A, including the subject
land. The Ibrahims and Maruhoms asseverate that they are the real owners
Finding no merit in petitioner’s opposition, however, Branch 8 of the Marawi
of the lands covered by TCT No. 378-A; they being the lawful heirs of the
City RTC rendered a Resolution27 dated 4 June 1996 ordering the issuance
late Datu Magayo-ong Maruhom, who was the original proprietor of the said
of a writ of execution in favor of Mangondato in Civil Case No. 605-92 and
lands.14 They also claimed that Mangondato actually holds no claim or right
Civil Case No. 610-92. Likewise, in the same resolution, the trial court
over the lands covered by TCT No. 378-A except that of a trustee who
ordered the issuance of a notice of garnishment against several
merely holds the said lands in trust for them.15cralawred
of petitioner’s bank accounts28 for the amount of P21,801,951.00—the
figure representing the total amount of judgment debt due from petitioner in
The Ibrahims and Maruhoms submit that since they are the real owners of
Civil Case No. 605-92 and Civil Case No. 610-92 less the amount then
the lands covered by TCT No. 378-A, they should be the ones entitled to
already settled by the latter. The dispositive portion of the resolution
any rental fees or expropriation indemnity that may be found due for the
reads:chanRoblesvirtualLawlibrary
subject land.

WHEREFORE, let a Writ of Execution and the corresponding order or

notice of garnishment be immediately issued against [petitioner] and in
favor of [Mangondato] for the amount of Twenty One Million Eight Hundred be solidarily liable with Mangondato to pay to the Ibrahims and Maruhoms
One Thousand and Nine Hundred Fifty One (P21,801,951.00) the rental fees and expropriation indemnity adjudged due for the subject
Pesos.chanrobleslaw land. This appeal was docketed as CA-G.R. CV No. 68061.

x x x.29cralawlawlibrary While the foregoing appeal was still pending decision by the Court of
Appeals, however, the Ibrahims and Maruhoms were able to secure with
Pursuant to the above resolution, a notice of garnishment 30 dated 5 June the court a quo a writ of execution pending appeal36 of the decision in Civil
1996 for the amount of P21,801,951.00 was promptly served upon the Case No. 967-93. The enforcement of such writ led to the garnishment of
Philippine National Bank (PNB)—the authorized depositary of petitioner. Mangondato’s moneys in the possession of the Social Security System
Consequently, the amount thereby garnished was paid to Mangondato in (SSS) in the amount of P2,700,000.00 on 18 September 1998.37 Eventually, Pag
full satisfaction of petitioner’s judgment debt in Civil Case No. 605-92 and the amount thereby garnished was paid to the Ibrahims and Mangondato in
Civil Case No. 610-92.chanroblesvirtuallawlibrary partial satisfaction of the decision in Civil Case No. 967-93.
e|
43
Decision in Civil Case No. 967-93 On 24 June 2005, the Court of Appeals rendered its Decision38 in CA-G.R.
CV No. 68061 denying petitioner’s appeal. The appellate court
Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City RTC denied petitioner’s appeal and affirmed the decision in Civil Case No. 967-
decided Civil Case No. 967-93.31 In its decision, Branch 10 of the Marawi 93, subject to the right of petitioner to deduct the amount of P2,700,000.00
City RTC made the following relevant findings:32cralawred from its liability as a consequence of the partial execution of the decision in
Civil Case No. 967-93.39cralawred
1. The Ibrahims and Maruhoms—not Mangondato—are the true
owners of the lands covered by TCT No. 378-A, which includes Hence, the present appeal by petitioner.chanroblesvirtuallawlibrary
the subject land.
The Present Appeal
2. The subject land, however, could no longer be reconveyed to the
Ibrahims and Maruhoms since the same was already The present appeal poses the question of whether it is correct, in view of
expropriated and paid for by the petitioner under Civil Case No. the facts and circumstances in this case, to hold petitioner liable in favor of
605-92 and Civil Case No. 610-92. the Ibrahims and Maruhoms for the rental fees and expropriation indemnity
adjudged due for the subject land.
3. Be that as it may, the Ibrahims and Maruhoms, as true owners of
the subject land, are the rightful recipients of whatever rental fees
In their respective decisions, both Branch 10 of the Marawi City RTC and
and indemnity that may be due for the subject land as a result of
its expropriation. the Court of Appeals had answered the foregoing question in the
affirmative. The two tribunals postulated that, notwithstanding petitioner’s
previous payment to Mangondato of the rental fees and expropriation
indemnity as a consequence of the execution of the decision in Civil Case
Consistent with the foregoing findings, Branch 10 of the Marawi City RTC
No. 605-92 and 610-92, petitioner may still be held liable to the Ibrahims
thus required payment of all the rental fees and expropriation indemnity due
and Maruhoms for such fees and indemnity because its previous payment
for the subject land, as previously adjudged in Civil Case No. 605-92 and
to Mangondato was tainted with “bad faith.”40 As proof of such bad faith,
Civil Case No. 610-92, to the Ibrahims and Maruhoms.
both courts cite the following considerations:41cralawred
Notable in the trial court’s decision, however, was that it held both
Mangondato and the petitioner solidarily liable to the Ibrahims and 1. Petitioner “allowed” payment to Mangondato despite its prior
Maruhoms for the rental fees and expropriation indemnity adjudged in knowledge, which dates back as early as 28 September 1981, by
virtue of Mangondato’s letter of even date, that the subject land
Civil Case No. 605-92 and Civil Case No. 610-92.33cralawred
was owned by a certain Datu Magayo-ong Maruhom and not by
Mangondato; and
In addition, Mangondato and petitioner were also decreed solidarily liable to
the Ibrahims and Maruhoms for attorney’s fees in the amount of 2. Petitioner “allowed” such payment despite the issuance of a TRO
P200,000.00.34cralawred and a writ of preliminary injunction in Civil Case No. 967-93 that
precisely enjoins it from doing so.
The pertinent dispositions in the decision read:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered in favor For the two tribunals, the bad faith on the part of petitioner rendered its
of [the Ibrahims and Maruhoms] and against [Mangondato and petitioner] previous payment to Mangondato invalid insofar as the Ibrahims and
as follows: Maruhoms are concerned. Hence, both courts concluded
that petitioner may still be held liable to the Ibrahims and Maruhoms for the
1. xxx rental fees and expropriation indemnity previously paid to
Mangondato.42cralawred
2. Ordering [Mangondato and petitioner] to pay jointly and severally
[the Ibrahims and Maruhoms] all forms of expropriation indemnity Petitioner, however, argues otherwise. It submits that a finding of bad faith
as adjudged for [the subject land] consisting of 21,995 square against it would have no basis in fact and law, given that it merely complied
meters in the amount of P21,801,051.00 plus other forms of with the final and executory decision in Civil Case No. 605-92 and Civil
indemnity such as rentals and Case No. 610-92 when it paid the rental fees and expropriation indemnity
interests;ChanRoblesVirtualawlibrary
due the subject to Mangondato.43 Petitioner thus insists that it should be
absolved from any liability to pay the rental fees and expropriation
3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and
indemnity to the Ibrahims and Maruhoms and prays for the dismissal of
Maruhoms] jointly and severally the sum of P200,000.00 as
attorney’s fees;ChanRoblesVirtualawlibrary Civil Case No. 967-93 against it.chanroblesvirtuallawlibrary

4. xxx OUR RULING

5. xxx We grant the appeal.

6. xxx No Bad Faith On The Part

of Petitioner
SO ORDERED.35cralawred
cralawlawlibrary Petitioner is correct. No “bad faith” may be taken against it in paying
Mangondato the rental fees and expropriation indemnity due the subject
land.
Petitioner’s Appeal to the Court of Appeals and the Execution
Pending Appeal of the Decision in Civil Case No. 967-93 Our case law is not new to the concept of bad faith. Decisions of this Court,
both old and new, had been teeming with various pronouncements that
illuminate the concept amidst differing legal contexts. In any attempt to
Petitioner appealed the decision in Civil Case No. 967-93 with the Court of understand the basics of bad faith, it is mandatory to take a look at some of
Appeals: contesting mainly the holding in the said decision that it ought to these pronouncements:
In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort
case, we defined the concept of bad faith as:chanRoblesvirtualLawlibrary Contrary then to the view of Branch 10 of the Marawi City RTC and of the
Court of Appeals, it was not the petitioner that “allowed” the payment of the
“…a breach of a known duty through some motive of interest or ill rental fees and expropriation indemnity to Mangondato. Indeed, given the
will.”45cralawlawlibrary circumstances, the more accurate rumination would be that it was the trial
court in Civil Case No. 605-92 and Civil Case No. 610-92 that ordered or
Just months after the promulgation of Lopez, however, came the case of Air allowed the payment to Mangondato and that petitioner merely complied
France v. Carrascoso, et al.,46 In Air France, we expounded on Lopez’s with the order or allowance by the trial court. Since petitioner was only
definition by describing bad faith as:chanRoblesvirtualLawlibrary acting under the lawful orders of a court in paying Mangondato, we find that
no bad faith can be taken against it, even assuming that petitioner may Pag
“xxx a state of mind affirmatively operating with furtive design or with some have had prior knowledge about the claims of the Ibrahims and Maruhoms
upon the subject land and the TRO issued in Civil Case No. 967-93.
e|
motive of self-interest or will or for ulterior purpose.”47cralawlawlibrary
44
Air France’s articulation of the meaning of bad faith was, in turn, echoed in Sans Bad Faith, Petitioner
a number subsequent cases,48 one of which, is the 2009 case of Balbuena, Cannot Be Held Liable to the
et al. v. Sabay, et al.49cralawred Ibrahims and Maruhoms

In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the other Without the existence of bad faith, the ruling of the RTC and of the Court of
hand, we enunciated one of the more oft-repeated formulations of bad faith Appeals apropos petitioner’s remaining liability to the Ibrahims and
in our case law:chanRoblesvirtualLawlibrary Maruhoms becomes devoid of legal basis. In fact, petitioner’s previous
payment to Mangondato of the rental fees and expropriation indemnity due
the subject land pursuant to the final judgment in Civil Case No. 605-92 and
“xxx bad faith does not simply connote bad judgment or negligence; it
Civil Case No. 610-92 may be considered to have extinguished the former’s
imports a dishonest purpose or some moral obliquity and conscious doing
obligation regardless of who between Mangondato, on one hand, and
of wrong. It means breach of a known duty thru some motive or interest of
the Ibrahims and Maruhoms, on the other, turns out to be the real
ill will; it partakes of the nature of fraud.”51cralawlawlibrary
owner of the subject land.62 Either way, petitioner cannot be made liable
to the Ibrahims and Maruhoms:
As a testament to its enduring quality, the foregoing pronouncement
in Board of Liquidators had been reiterated in a slew of later cases,52 more
First. If Mangondato is the real owner of the subject land, then the
recently, in the 2009 case of Nazareno, et al. v. City of Dumaguete53 and
obligation by petitioner to pay for the rental fees and expropriation
the 2012 case of Aliling v. Feliciano.54cralawred
indemnity due the subject land is already deemed extinguished by the
latter’s previous payment under the final judgment in Civil Case No. 605-92
Still, in 1995, the case of Far East Bank and Trust Company v. Court of
and Civil Case No. 610-92. This would be a simple case of an obligation
Appeals55 contributed the following description of bad faith in
being extinguished through payment by the debtor to its creditor.63 Under
our jurisprudence:chanRoblesvirtualLawlibrary
this scenario, the Ibrahims and Maruhoms would not even be entitled to
receive anything from anyone for the subject land. Hence, petitioner cannot
“Malice or bad faith implies a conscious and intentional design to do a
be held liable to the Ibrahims and Maruhoms.
wrongful act for a dishonest purpose or moral
obliquity;xxx.”56cralawlawlibrary
Second. We, however, can reach the same conclusion even if the Ibrahims
and Maruhoms turn out to be the real owners of the subject land.
The description of bad faith in Far East Bank and Trust Company then went
on to be repeated in subsequent cases such as 1995’s Ortega v. Court of
Should the Ibrahims and Maruhoms turn out to be the real owners of the
Appeals,57 1997’s Laureano Investment and Development Corporation v.
subject land, petitioner’s previous payment to Mangondato pursuant to Civil
Court of Appeals,58 2010’s Lambert Pawnbrokers v. Binamira59 and
Case No. 605-92 and Civil Case No. 610-92—given the absence of bad
2013’s California Clothing, Inc., v. Quiñones,60 to name a few.
faith on petitioner’s part as previously discussed—may nonetheless be
considered as akin to a payment made in “good faith” to a person
Verily, the clear denominator in all of the foregoing judicial pronouncements
in “possession of credit” per Article 1242 of the Civil Code that, just the
is that the essence of bad faith consists in the deliberate commission of
same, extinguishes its obligation to pay for the rental fees and expropriation
a wrong. Indeed, the concept has often been equated with malicious or
indemnity due for the subject land. Article 1242 of the Civil Code
fraudulent motives, yet distinguished from the mere unintentional wrongs
reads:chanRoblesvirtualLawlibrary
resulting from mere simple negligence or oversight. 61cralawred

“Payment made in good faith to any person in possession of the credit shall
A finding of bad faith, thus, usually assumes the presence of two (2)
release the debtor.” cralawlawlibrary
elements: first, that the actor knew or should have known that a particular
course of action is wrong or illegal, and second, that despite such actual or
Article 1242 of the Civil Code is an exception to the rule that a valid
imputable knowledge, the actor, voluntarily, consciously and out of his own
payment of an obligation can only be made to the person to whom such
free will, proceeds with such course of action. Only with the concurrence of
obligation is rightfully owed.64 It contemplates a situation where a debtor
these two elements can we begin to consider that the wrong committed had
pays a “possessor of credit” i.e., someone who is not the real creditor but
been done deliberately and, thus, in bad faith.
appears, under the circumstances, to be the real creditor. 65 In such
scenario, the law considers the payment to the “possessor of credit” as
In this case, both Branch 10 of the Marawi City RTC and the Court of
valid even as against the real creditor taking into account the good faith of
Appeals held that petitioner was in bad faith when it paid to Mangondato
the debtor.
the rental fees and expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it “allowed” such payment to
Borrowing the principles behind Article 1242 of the Civil Code, we find that
take place despite the latter’s alleged knowledge of the existing claim of the
Mangondato—being the judgment creditor in Civil Case No. 605-92 and
Ibrahims and Maruhoms upon the subject land and the issuance of a TRO
Civil Case No. 610-92 as well as the registered owner of the subject land at
in Civil Case No. 967-93. Hence, the two tribunals claim that petitioner’s
the time66—may be considered as a “possessor of credit” with respect to
payment to Mangondato is ineffective as to the Ibrahims and Maruhoms,
the rental fees and expropriation indemnity adjudged due for the subject
whom they found to be the real owners of the subject land.
land in the two cases, if the Ibrahims and Maruhoms turn out to be the real
owners of the subject land. Hence, petitioner’s payment to Mangondato of
We do not agree.
the fees and indemnity due for the subject land as a consequence of the
execution of Civil Case No. 605-92 and Civil Case No. 610-92 could still
Branch 10 of the Marawi City RTC and the Court of Appeals erred in their
validly extinguish its obligation to pay for the same even as against the
finding of bad faith because they have overlooked the utter significance of
Ibrahims and Maruhoms.
one important fact: that petitioner’s payment to Mangondato of the
rental fees and expropriation indemnity adjudged due for the subject
Effect of Extinguishment of
land in Civil Case No. 605-92 and Civil Case No. 610-92, was required by
Petitioner’s Obligation
the final and executory decision in the said two cases and was
compelled thru a writ of garnishment issued by the court that
The extinguishment of petitioner’s obligation to pay for the rental fees and
rendered such decision. In other words, the payment to Mangondato
expropriation indemnity due the subject land carries with it certain legal
was not a product of a deliberate choice on the part of the petitioner but
effects:
was made only in compliance to the lawful orders of a court with
jurisdiction.
First. If Mangondato turns out to be the real owner of the subject land, the
Ibrahims and Maruhoms would not be entitled to recover anything from equivalent to 20% of the total amount due, other expenses and costs of
anyone for the subject land. Consequently, the partial execution of the suit.
decision in Civil Case No. 967-93 that had led to the garnishment of
Mangondato’s moneys in the possession of the Social Security System The case was filed in the Regional Trial Court of Antipolo and raffled to
(SSS) in the amount of P2,700,000.00 in favor of the Ibrahims and Branch 73 thereof.
Maruhoms, becomes improper and unjustified. In this event, therefore, the
Ibrahims and Maruhoms may be ordered to return the amount so garnished Subsequently, respondent moved for suspension of the proceedings on
to Mangondato. account of an earnest attempt to arrive at an amicable settlement of the
case. The trial court suspended the proceedings, and during the course of
Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners of negotiations, a deed of assignment3 dated August 16, 2000 was drafted by Pag
the respondent, which provides in part, that:
the subject land, they may only recover the rental fees and expropriation
indemnity due the subject land against Mangondato but only up to whatever
e|
payments the latter had previously received from petitioner pursuant to Civil x x x the ASSIGNOR is indebted to the ASSIGNEE in the 45
Case No. 605-92 and Civil Case No. 610-92. aggregate sum of SEVEN MILLION THREE HUNDRED FIVE
THOUSAND FOUR HUNDRED FIFTY NINE PESOS and FIFTY
TWO CENTAVOS (P7,305,459.52), Philippine currency,
Second. At any rate, the extinguishment of petitioner’s obligation to pay for inclusive of accrued interests and penalties as of August 16,
the rental fees and expropriation indemnity due the subject land negates 2000, and in full payment thereof, the ASSIGNOR does
whatever cause of action the Ibrahims and Maruhoms might have had hereby ASSIGN, TRANSFER and CONVEY unto the
against the former in Civil Case No. 967-93. Hence, regardless of who ASSIGNEE those motor vehicles, with all their tools and
between Mangondato, on one hand, and the Ibrahims and Maruhoms, accessories, more particularly described as follows:
on the other, turns out to be the real owner of the subject land, the
dismissal of Civil Case No. 967-93 insofar as petitioner is concerned is Make : Isuzu Dump Truck
called for.
xxx
Re: Attorney’s Fees
Make : Isuzu Dump Truck
The dismissal of Civil Case No. 967-93 as against petitioner necessarily
absolves the latter from paying attorney’s fees to the Ibrahims and
xxx
Maruhoms arising from that case.

WHEREFORE, premises considered, the instant petition is GRANTED. The Make : x x x Caterpillar Bulldozer x x x
Decision dated 24 June 2005 and Resolution dated 5 December 2006 of
the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET ASIDE. The That the ASSIGNEE hereby accepts the assignment in full
Decision dated 16 April 1998 of the Regional Trial Court in Civil Case No. payment of the above-mentioned debt x x x. (Emphasis
967-93 is MODIFIED in that petitioner is absolved from any liability in that supplied)
case in favor of the respondents Lucman M. Ibrahim, Atty. Omar G.
Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G. Petitioners affixed their signatures on the deed of assignment. However, for
Maruhom, Farouk G. Maruhom, Hidjara G. Maruhom, Rocania G. some unknown reason, respondent bank’s duly authorized representative
failed to sign the deed.
Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom, Sinab G.
Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M.
Ibrahim and Caironesa M. Ibrahim. Civil Case No. 967-93 is DISMISSED as On October 6, 2000 and March 8, 2001, respectively, petitioners completed
against petitioner. the delivery of the heavy equipment mentioned in the deed of assignment –
two dump trucks and a bulldozer – to respondent, which accepted the same
without protest or objection.
No costs.

However, on June 20, 2001, respondent filed a manifestation and motion to

SO ORDERED.cralawlawlibrary
admit an amended complaint for the seizure and delivery of two more
heavy equipment – the bulldozer and wheel loader – which are covered
G.R. No. 178537 February 11, 2008 under the second deed of chattel mortgage. Respondent claimed that its
representative inadvertently failed to include the second deed of chattel
mortgage among the documents forwarded to its counsel when the original
SPS. RAFAEL P. ESTANISLAO AND ZENAIDA complaint was being drafted. Respondent likewise claimed that petitioners
ESTANISLAO, petitioners, were given a chance to submit a refinancing scheme that would allow them
vs. to keep the remaining two heavy equipment, but they failed to come up with
EAST WEST BANKING CORPORATION, respondent. such a scheme despite repeated promises to do so.

DECISION Respondent’s amended complaint for replevin alleged that petitioners’

outstanding indebtedness as of June 14, 2001 stood at P4,275,919.61
YNARES-SANTIAGO, J.: which is more or less equal to the aggregate value of the additional units of
heavy equipment sought to be recovered. It also prayed that, in the event
the two heavy equipment could not be replevied, petitioners be ordered to
This is a petition for review of the Decision1 of the Court of Appeals dated pay the outstanding sum of P3,846,127.73 with 19.5% interest per annum
April 13, 2007 in CA-G.R. CV No. 87114 which reversed and set aside the reckoned from January 24, 1998, compound interest, exemplary damages
Decision of the Regional Trial Court of Antipolo City, Branch 73 in Civil of P50,000.00, attorney’s fees equivalent to 20% of the total amount due,
Case No. 00-5731. The appellate court entered a new judgment ordering other expenses and costs of suit.
petitioners spouses Estanislao to pay respondent East West Banking
Corporation P4,275,919.65 plus interest and attorney’s fees. Also assailed
is the Resolution2 dated June 25, 2007 denying the motion for Petitioners sought to dismiss the amended complaint. They alleged that
reconsideration. their previous payments on loan amortizations, the execution of the deed of
assignment on August 16, 2000, and respondent’s acceptance of the three
units of heavy equipment, had the effect of full payment or satisfaction of
The facts are as follows: their total outstanding obligation which is a bar on respondent bank from
recovering any more amounts from them. By way of counterclaim,
On July 24, 1997, petitioners obtained a loan from the respondent in the petitioners sought the award of nominal damages in the amount of
amount of P3,925,000.00 evidenced by a promissory note and secured by P500,000.00, moral damages in the amount of P500,000.00, exemplary
two deeds of chattel mortgage dated July 10, 1997: one covering two dump damages in the amount of P500,000.00, attorney’s fees, litigation
trucks and a bulldozer to secure the loan amount of P2,375,000.00, and expenses, interest and costs.
another covering bulldozer and a wheel loader to secure the loan amount of
P1,550,000.00. Petitioners defaulted in the amortizations and the entire On March 14, 2006, the trial court dismissed the amended complaint for
obligation became due and demandable. lack of merit. It held that the deed of assignment and the petitioners’
delivery of the heavy equipment effectively extinguished petitioners’ total
On April 10, 2000, respondent bank filed a suit for replevin with damages, loan obligation. It also held that respondent was estopped from further
praying that the equipment covered by the first deed of chattel mortgage be collecting from the petitioners when it accepted, without any protest,
seized and delivered to it. In the alternative, respondent prayed that delivery of the three units of heavy equipment as full and complete
petitioners be ordered to pay the outstanding principal amount of satisfaction of the petitioners’ total loan obligation. Respondent likewise
P3,846,127.73 with 19.5% interest per annum reckoned from judicial failed to timely rectify its alleged mistake in the original complaint and deed
demand until fully paid, exemplary damages of P50,000.00, attorney’s fees of assignment, taking almost a year to act.
Respondent bank appealed to the Court of Appeals, which reversed the explicitly provides that the assignor (petitioners), "in full payment" of its
trial court’s decision, the dispositive portion of which reads: obligation in the amount of P7,305,459.52, shall deliver the three units of
heavy equipment to the assignee (respondent), which "accepts the
assignment in full payment of the above-mentioned debt." This could
WHEREFORE, premises considered, the present appeal is
only mean that should petitioners complete the delivery of the three units of
hereby GRANTED. The Decision dated March 14, 2006 of the
heavy equipment covered by the deed, respondent’s credit would have
Regional Trial Court of Antipolo City, Branch 73 in Civil Case No.
been satisfied in full, and petitioners’ aggregate indebtedness of
00-5731 is hereby REVERSED and SET ASIDE. A new judgment
P7,305,459.52 would then be considered to have been paid in full as well.
is hereby entered ordering the defendants-appellees to pay,
jointly and severally, plaintiff-appellant East West Banking
Corporation the sum of FOUR MILLION TWO HUNDRED The nature of the assignment was a dation in payment, whereby property is
SEVENTY FIVE THOUSAND NINE HUNDRED NINETEEN and alienated to the creditor in satisfaction of a debt in money. Such transaction Pag
69/100 (P4,275,919.69) per Statement of Account as of June 14, is governed by the law on sales.6 Even if we were to consider the
2001 (Exh. "E", Records, p.328) with interest at 12% per annum agreement as a compromise agreement, there was no need for e|
from June 15, 2001 until full payment thereof. Defendants- respondent’s signature on the same, because with the delivery of the heavy 46
appellees are likewise ordered to pay the plaintiff-appellant equipment which the latter accepted, the agreement was consummated.
attorney’s fees in the sum equivalent to ten per cent (10%) of the Respondent’s approval may be inferred from its unqualified acceptance of
total amount due. the heavy equipment.

No pronouncement as to costs. Consent to contracts is manifested by the meeting of the offer and the
acceptance of the thing and the cause which are to constitute the contract;
the offer must be certain and the acceptance absolute. 7 The acceptance of
SO ORDERED.4
an offer must be made known to the offeror, and unless the offeror knows
of the acceptance, there is no meeting of the minds of the parties, no real
The reversal of the lower court’s decision hinges on: (1) the appellate concurrence of offer and acceptance.8 Upon due acceptance, the contract
court’s finding that the deed of assignment cannot bind the respondent is perfected, and from that moment the parties are bound not only to the
because it did not sign the same. The appellate court ruled that the fulfillment of what has been expressly stipulated but also to all the
assignment contract was never perfected although it was prepared and consequences which, according to their nature, may be in keeping with
drafted by the respondent; (2) respondent was not estopped by its own good faith, usage and law.9
declarations in the deed of assignment, because such declarations were
the result of "ignorance founded upon an innocent mistake" and "plain
With its years of banking experience, resources and manpower, respondent
oversight" on the part of respondent’s staff in the bank’s loan operations
bank is presumed to be familiar with the implications of entering into the
department, who failed to forward the complete documents pertaining to
deed of assignment, whose terms are categorical and left nothing for
petitioners’ account to the bank’s legal department, such that when the
interpretation. The alleged non-inclusion in the deed of certain units of
original complaint for replevin was prepared, the second deed of chattel
heavy equipment due to inadvertence, plain oversight or mistake, is
mortgage covering two other pieces of heavy equipment was inadvertently
tantamount to inexcusable manifest negligence, which should not invalidate
excluded; (3) petitioners are aware that there were five pieces of heavy
the juridical tie that was created.10 Respondent is presumed to have
equipment under chattel mortgage for an outstanding balance of over P7
maintained a high level of meticulousness in its dealings with petitioners.
million; and (4) the appellate court held that even after the delivery of the
The business of a bank is affected with public interest; thus, it makes a
heavy equipment covered by the deed of assignment, the petitioners
sworn profession of diligence and meticulousness in giving irreproachable
continued to negotiate with the respondent on a possible refinancing
service.11
scheme that will enable them to retain the two other units of heavy
equipment still in their possession and which are the subject of the second
deed of chattel mortgage. Besides, respondent’s protestations of mistake and plain oversight are self-
serving. The evidence show that from August 16, 2000 (date of the deed of
assignment) up to March 8, 2001 (the date of delivery of the last unit of
Petitioners argue that: a) the appellate court erred in ordering the payment
heavy equipment covered under the deed), respondent did not raise any
of the principal obligation in a replevin suit which it erroneously treated as a
objections nor make any move to question, invalidate or rescind the deed of
collection case; b) the deed of assignment is binding between the parties
assignment. It was not until June 20, 2001 that respondent raised the issue
although it was not signed by the respondent, constituting as it did an offer
of its alleged mistake by filing an amended complaint for replevin involving
which they validly accepted; and c) the respondent is estopped from
different chattels, although founded on the same principal obligation.
collecting or foreclosing on the second deed of chattel mortgage.

The legal presumption is always on the validity of contracts.12 In order to

On the other hand, respondent argues that: a) the deed of assignment
judge the intention of the contracting parties, their contemporaneous and
produced no legal effect between the parties for failure of the respondent to
subsequent acts shall be principally considered.13 When respondent
sign the same; b) the deed was founded on a mistake on its part because it
accepted delivery of all three units of heavy equipment under the deed of
honestly believed that only one chattel mortgage had been constituted to
assignment, there could be no doubt that it intended to be bound under the
secure the petitioners’ obligation; c) the non-inclusion of the second deed of
agreement.
chattel mortgage in the original complaint was a case of "plain oversight" on
the part of the loan operations unit of respondent bank, which failed to
forward to the legal department the complete documents pertaining to the Since the agreement was consummated by the delivery on March 8, 2001
petitioners’ loan account; d) the continued negotiations in August 2001 of the last unit of heavy equipment under the deed, petitioners are deemed
between the parties, after delivery of the three units of heavy equipment, to have been released from all their obligations to respondent.
proves that petitioners acknowledged their continuing obligations to
respondent under the second deed of mortgage; and, e) the deed of
Since there is no more credit to collect, no principal obligation to speak of,
assignment did not have the effect of novating the original loan obligation.
then there is no more second deed of chattel mortgage that may subsist. A
chattel mortgage cannot exist as an independent contract since its
The issue for resolution is: Did the deed of assignment – which expressly consideration is the same as that of the principal contract. Being a mere
provides that the transfer and conveyance to respondent of the three units accessory contract, its validity would depend on the validity of the loan
of heavy equipment, and its acceptance thereof, shall be in full payment of secured by it.14 This being so, the amended complaint for replevin should
the petitioners’ total outstanding obligation to the latter – operate to be dismissed, because the chattel mortgage agreement upon which it is
extinguish petitioners’ debt to respondent, such that the replevin suit could based had been rendered ineffectual.
no longer prosper?
WHEREFORE, the petition is GRANTED. The Decision of the Court of
We find merit in the petition. Appeals dated April 13, 2007 in CA-G.R. CV No. 87114 and its Resolution
dated June 25, 2007 are hereby SET ASIDE. The March 14, 2006 decision
of the Regional Trial Court of Antipolo, Branch 73, which dismisses Civil
The appellate court erroneously denominated the replevin suit as a
Case No. 00-5731, is hereby REINSTATED.
collection case. A reading of the original and amended complaints show
that what the respondent initiated was a pure replevin suit, and not a
collection case. Recovery of the heavy equipment was the principal aim of SO ORDERED.
the suit; payment of the total obligation was merely an alternative prayer
which respondent sought in the event manual delivery of the heavy
G.R. No. 190375 February 8, 2012
equipment could no longer be made.

TAN SHUY, Petitioner,

Replevin, broadly understood, is both a form of principal remedy and a
vs.
provisional relief. It may refer either to the action itself, i.e., to regain the
Spouses GUILLERMO MAULAWIN and PARING CARIÑO-
possession of personal chattels being wrongfully detained from the plaintiff
MAULAWIN, Respondents.
by another, or to the provisional remedy that would allow the plaintiff to
retain the thing during the pendency of the action and hold it pendente lite.5
DECISION
The deed of assignment was a perfected agreement which extinguished
petitioners’ total outstanding obligation to the respondent. The deed SERENO, J.:
Before the Court is a Petition for Review on Certiorari filed under Rule 45 of On 31 July 2009, the CA issued its assailed Decision, which affirmed the
the Rules of Court, assailing the 31 July 2009 Decision and 13 November finding of the trial court. According to the appellate court, petitioner could
2009 Resolution of the Court of Appeals (CA).1 have easily belied the existence of the pesadas and the purpose for which
they were offered in evidence by presenting his daughter Elena as witness;
however, he failed to do so. Thus, it gave credence to the testimony of
Facts
respondent Guillermo in that the net proceeds from the copra deliveries
were applied as installment payments for the loan.7 On 13 November 2009,
Petitioner Tan Shuy is engaged in the business of buying copra and corn in the CA issued its assailed Resolution, which denied the Motion for
the Fourth District of Quezon Province. According to Vicente Tan (Vicente), Reconsideration of petitioner.
son of petitioner, whenever they would buy copra or corn from crop sellers,
they would prepare and issue a pesada in their favor. A pesada is a Pag
Petitioner now assails before this Court the aforementioned Decision and
document containing details of the transaction, including the date of sale,
Resolution of the CA and presents the following issues:
the weight of the crop delivered, the trucking cost, and the net price of the e|
crop. He then explained that when a pesada contained the annotation "pd"
on the total amount of the purchase price, it meant that the crop delivered Issues 47
had already been paid for by petitioner.2
1. Whether the pesadas require authentication before they can
Guillermo Maulawin (Guillermo), respondent in this case, is a farmer- be admitted in evidence, and
businessman engaged in the buying and selling of copra and corn. On 10
July 1997, Tan Shuy extended a loan to Guillermo in the amount of ₱
2. Whether the delivery of copra amounted to installment
420,000. In consideration thereof, Guillermo obligated himself to pay the
payments for the loan obtained by respondents from petitioner.
loan and to sell lucad or copra to petitioner. Below is a reproduction of the
contract:3
Discussion

As regards the first issue, petitioner asserts that the pesadas should not
No2567 Lopez, Quezon July 10, 1997 have been admitted in evidence, since they were private documents that
were not duly authenticated.8 He further contends that the pesadas were
Tinanggap ko kay G. TAN SHUY ang halagang fabricated in order to show that the goods delivered were copra and not
……………………………………………………………. (P420,000.00) corn. Finally, he argues that five of the pesadas mentioned in the Formal
salaping Filipino. Inaako ko na isusulit sa kanya ang aking LUCAD Offer of Evidence of respondent were not actually offered.9
at babayaran ko ang nasabing halaga. Kung hindi ako makasulit ng
LUCAD o makabayad bago sumapit ang ……………………., 19 With regard to the second issue, petitioner argues that respondent
…… maaari niya akong ibigay sa may kapangyarihan. Kung ang undertook two separate obligations – (1) to pay for the loan in cash and (2)
pagsisingilan ay makakarating sa Juzgado ay sinasagutan ko ang to sell the latter’s lucad or copra. Since their written agreement did not
lahat ng kaniyang gugol. specifically provide for the application of the net proceeds from the
deliveries of copra for the loan, petitioner contends that he cannot be
P………………………................ [Sgd. by respondent] compelled to accept copra as payment for the loan. He emphasizes that the
……………………………………. pesadas did not specifically indicate that the net proceeds from the copra
Lagda deliveries were to be used as installment payments for the loan. He also
claims that respondent’s copra deliveries were duly paid for in cash, and
that the pesadas were in fact documentary receipts for those payments.

Most of the transactions involving Tan Shuy and Guillermo were coursed We reiterate our ruling in a line of cases that the jurisdiction of this Court, in
through Elena Tan, daughter of petitioner. She served as cashier in the cases brought before it from the CA, is limited to reviewing or revising
business of Tan Shuy, who primarily prepared and issued the pesada. In errors of law.10 Factual findings of courts, when adopted and confirmed by
case of her absence, Vicente would issue the pesada. He also helped his the CA, are final and conclusive on this Court except if unsupported by the
father in buying copra and granting loans to customers (copra sellers). evidence on record.11 There is a question of fact when doubt arises as to
According to Vicente, part of their agreement with Guillermo was that they the truth or falsehood of facts; or when there is a need to calibrate the
would put the annotation "sulong" on the pesada when partial payment for whole evidence, considering mainly the credibility of the witnesses and the
the loan was made. probative weight thereof, the existence and relevancy of specific
surrounding circumstances, as well as their relation to one another and to
the whole, and the probability of the situation.12
Petitioner alleged that despite repeated demands, Guillermo remitted only
₱ 23,000 in August 1998 and ₱ 5,500 in October 1998, or a total of ₱
28,500.4 He claimed that respondent had an outstanding balance of ₱ Here, a finding of fact is required in the ascertainment of the due execution
391,500. Thus, convinced that Guillermo no longer had the intention to pay and authenticity of the pesadas, as well as the determination of the true
the loan, petitioner brought the controversy to the Lupon Tagapamayapa. intention behind the parties’ oral agreement on the application of the net
When no settlement was reached, petitioner filed a Complaint before the proceeds from the copra deliveries as installment payments for the
Regional Trial Court (RTC). loan.13 This function was already exercised by the trial court and affirmed by
the CA. Below is a reproduction of the relevant portion of the trial court’s
Decision:
Respondent Guillermo countered that he had already paid the subject loan
in full. According to him, he continuously delivered and sold copra to
petitioner from April 1998 to April 1999. Respondent said they had an oral x x x The defendant further averred that if in the receipts or "pesadas"
arrangement that the net proceeds thereof shall be applied as installment issued by the plaintiff to those who delivered copras to them there is a
payments for the loan. He alleged that his deliveries amounted to ₱ notation "pd" on the total amount of purchase price of the copras, it means
420,537.68 worth of copra. To bolster his claim, he presented copies of that said amount was actually paid or given by the plaintiff or his daughter
pesadas issued by Elena and Vicente. He pointed out that the pesadas did Elena Tan Shuy to the seller of the copras. To prove his averments the
not contain the notation "pd," which meant that actual payment of the net defendant presented as evidence two (2) receipts or pesadas issued by the
proceeds from copra deliveries was not given to him, but was instead plaintiff to a certain "Cariño" (Exhibits "1" and "2" – defendant) showing the
applied as loan payment. He averred that Tan Shuy filed a case against notation "pd" on the total amount of the purchase price for the copras. Such
him, because petitioner got mad at him for selling copra to other copra claim of the defendant was further bolstered by the testimony of Apolinario
buyers. Cariño which affirmed that he also sell copras to the plaintiff Tan Shuy. He
also added that he incurred indebtedness to the plaintiff and whenever he
delivered copras the amount of the copras sold were applied as payments
On 27 July 2007, the trial court issued a Decision, ruling that the net
to his loan. The witness also pointed out that the plaintiff did not give any
proceeds from Guillermo’s copra deliveries – represented in the pesadas,
official receipts to those who transact business with him (plaintiff). This
which did not bear the notation "pd" – should be applied as installment
Court gave weight and credence to the documents receipts (pesadas)
payments for the loan. It gave weight and credence to the pesadas, as their
(Exhibits "3" to "64") offered as evidence by the defendant which does not
due execution and authenticity was established by Elena and Vicente,
bear the notation "pd" or paid on the total amount of the purchase price of
children of petitioner.5 However, the court did not credit the net proceeds
copras appearing therein. Although said "pesadas" were private instrument
from 12 pesadas, as they were deliveries for corn and not copra. According
their execution and authenticity were established by the plaintiff’s daughter
to the RTC, Guillermo himself testified that it was the net proceeds from the
Elena Tan and sometimes by plaintiff’s son Vicente Tan. x x x.14 (Emphasis
copra deliveries that were to be applied as installment payments for the
supplied)
loan. Thus, it ruled that the total amount of ₱ 41,585.25, which
corresponded to the net proceeds from corn deliveries, should be deducted
from the amount of ₱ 420,537.68 claimed by Guillermo to be the total value In affirming the finding of the RTC, the CA reasoned thus:
of his copra deliveries. Accordingly, the trial court found that respondent
had not made a full payment for the loan, as the total creditable copra
deliveries merely amounted to ₱ 378,952.43, leaving a balance of ₱ In his last assigned error, plaintiff-appellant herein impugns the conclusion
41,047.57 in his loan.6 arrived at by the trial court, particularly with respect to the giving of
evidentiary value to Exhs. "3" to "64" by the latter in order to prove the claim
of defendant-appellee Guillermo that he had fully paid the subject loan
already.
The foregoing deserves scant consideration. the plaintiff were all given to Elena Tan Shuy as installments for the loan he
owed to plaintiff. The defendant further averred that if in the receipts or
"pesadas" issued by the plaintiff to those who delivered copras to them
Here, plaintiff-appellant could have easily belied the existence of Exhs. "3"
there is a notation "pd" on the total amount of purchase price of the copras,
to "64", the pesadas or receipts, and the purposes for which they were
it means that said amount was actually paid or given by the plaintiff or his
offered in evidence by simply presenting his daughter, Elena Tan Shuy, but
daughter Elena Tan Shuy to the seller of the copras. To prove his
no effort to do so was actually done by the former given that
averments the defendant presented as evidence two (2) receipts or
scenario.15 (Emphasis supplied)
pesadas issued by the plaintiff to a certain "Cariño" (Exhibits "1" and "2" –
defendant) showing the notation "pd" on the total amount of the purchase
We found no clear showing that the trial court and the CA committed price for the copras. Such claim of the defendant was further bolstered by
reversible errors of law in giving credence and according weight to the the testimony of Apolinario Cariño which affirmed that he also sell [sic]
pesadas presented by respondents. According to Rule 132, Section 20 of copras to the plaintiff Tan Shuy. He also added that he incurred
Pag
the Rules of Court, there are two ways of proving the due execution and indebtedness to the plaintiff and whenever he delivered copras the amount e|
authenticity of a private document, to wit: of the copras sold were applied as payments to his loan. The witness also
pointed out that the plaintiff did not give any official receipts to those who 48
transact business with him (plaintiff). x x x
SEC. 20.Proof of private document. – Before any private document offered
as authentic is received in evidence, its due execution and authenticity
must be proved either: Be that it may, this Court cannot however subscribe to the averments of the
defendant that he has fully paid the amount of his loan to the plaintiff from
the proceeds of the copras he delivered to the plaintiff as shown in the
(a) By anyone who saw the document executed or written; or
"pesadas" (Exhibits "3" to "64"). Defendant claimed that based on the said
"pesadas" he has paid the total amount of P420,537.68 to the plaintiff.
(b) By evidence of the genuineness of the signature or handwriting of the However, this Court keenly noted that some of the "pesadas" offered in
maker. evidence by the defendant were not for copras that he delivered to the
plaintiff but for "mais" (corn). The said pesadas for mais or corn were the
following, to wit:
Any other private document need only be identified as that which it is
claimed to be. (21a)
xxx xxx xxx
As reproduced above, the trial court found that the due execution and
authenticity of the pesadas were "established by the plaintiff’s daughter To the mind of this Court the aforestated amount (P41,585.25) which the
Elena Tan and sometimes by plaintiff’s son Vicente Tan."16 The RTC said: above listed pesadas show as payment for mais or corn delivered by the
defendant to the plaintiff cannot be claimed by the defendant to have been
applied also as payment to his loan with the plaintiff because he does not
On cross-examination, [Vicente] reiterated that he and her [sic] sister Elena testify on such fact. He even stressed during his testimony that it was the
Tan who acted as their cashier are helping their father in their business of proceeds from the copras that he delivered to the plaintiff which will be
buying copras and mais. That witness agreed that in the business of buying applied as payments to his loan. x x x Thus, equity dictates that the total
copra and mais of their father, if a seller is selling copra, a pesada is being amount of P41,585.25 which corresponds to the payment for "mais" (corn)
issued by his sister. The pesada that she is preparing consists of the date delivered by the plaintiff shall be deducted from the total amount of
when the copra is being sold to the seller. Being familiar with the P420,537.68 which according to the defendant based on the pesadas
penmanship of Elena Tan, the witness was shown a sample of the pesada (Exhibits "3" to "64") that he presented as evidence, is the total amount of
issued by his sister Elena Tan. x x x the payment that he made for his loan to the plaintiff. x x x

xxx xxx xxx xxx xxx xxx

x x x. He clarified that in the "pesada" (Exh. "1") prepared by Elena and Clearly from the foregoing, since the total amount of defendant’s loan to the
also in Exh "2", there appears on the lower right hand portion of the said plaintiff is P420,000.00 and the evidence on record shows that the actual
pesadas the letter "pd", the meaning of which is to the effect that the seller amount of payment made by the defendant from the proceeds of the copras
of the copra has already been paid during that day. He also confirmed the he delivered to the plaintiff is P378,952.43, the defendant is still indebted to
penmanship and handwriting of his sister Ate Elena who acted as a cashier the plaintiff in the amount of P41,047.53 (sic) (P420,000.00-
in the pesada being shown to him. He was even made to compare the P378,952.43).25 (Emphasis supplied)
xerox copies of the pesadas with the original copies presented to him and
affirmed that they are faithful reproduction of the originals.17 (Emphasis
supplied) In affirming this finding of fact by the trial court, the CA cited the above-
quoted portion of the RTC’s Decision and stated the following:
In any event, petitioner is already estopped from questioning the due
execution and authenticity of the pesadas.1âwphi1 As found by the CA, In fact, as borne by the records on hand, herein defendant-appellee
Tan Shuy "could have easily belied the existence of x x x the pesadas or Guillermo was able to describe and spell out the contents of Exhs. "3" to
receipts, and the purposes for which they were offered in evidence by "64" which were then prepared by Elena Tan Shuy or sometimes by
simply presenting his daughter, Elena Tan Shuy, but no effort to do so was witness Vicente Tan. Herein defendant-appellee Guillermo professed that
actually done by the former given that scenario." The pesadas having been since the release of the subject loan was subject to the condition that he
admitted in evidence, with petitioner failing to timely object thereto, these shall sell his copras to the plaintiff-appellant, the former did not already
documents are already deemed sufficient proof of the facts contained receive any money for the copras he delivered to the latter starting April
therein.18 We hereby uphold the factual findings of the RTC, as affirmed by 1998 to April 1999. Hence, this Court can only express its approval to the
the CA, in that the pesadas served as proof that the net proceeds from the apt observation of the trial court on this matter[.]
copra deliveries were used as installment payments for the debts of
respondents.19
xxx xxx xxx

Indeed, pursuant to Article 1232 of the Civil Code, an obligation is Notwithstanding the above, however, this Court fully agrees with the
extinguished by payment or performance. There is payment when there is
pronouncement of the trial court that not all amounts indicated in Exhs. "3"
delivery of money or performance of an obligation.20 Article 1245 of the Civil to "64" should be applied as payments to the subject loan since several of
Code provides for a special mode of payment called dation in payment which clearly indicated "mais" deliveries on the part of defendant-appellee
(dación en pago). There is dation in payment when property is alienated to
Guillermo instead of "copras"[.]26 (Emphasis supplied)
the creditor in satisfaction of a debt in money. 21 Here, the debtor delivers
and transmits to the creditor the former’s ownership over a thing as an
accepted equivalent of the payment or performance of an outstanding The subsequent arrangement between Tan Shuy and Guillermo can thus
debt.22 In such cases, Article 1245 provides that the law on sales shall be considered as one in the nature of dation in payment. There was partial
apply, since the undertaking really partakes – in one sense – of the nature payment every time Guillermo delivered copra to petitioner, chose not to
of sale; that is, the creditor is really buying the thing or property of the collect the net proceeds of his copra deliveries, and instead applied the
debtor, the payment for which is to be charged against the debtor’s collectible as installment payments for his loan from Tan Shuy. We
obligation.23 Dation in payment extinguishes the obligation to the extent of therefore uphold the findings of the trial court, as affirmed by the CA, that
the value of the thing delivered, either as agreed upon by the parties or as the net proceeds from Guillermo’s copra deliveries amounted to ₱
may be proved, unless the parties by agreement – express or implied, or by 378,952.43. With this partial payment, respondent remains liable for the
their silence – consider the thing as equivalent to the obligation, in which balance totaling ₱ 41,047.57.27
case the obligation is totally extinguished.24
WHEREFORE the Petition is DENIED. The 31 July 2009 Decision and 13
The trial court found thus: November 2009 Resolution of the Court of Appeals in CA-G.R. CV No.
90070 are hereby AFFIRMED.
x x x [T]he preponderance of evidence is on the side of the defendant. x x x
The defendant explained that for the receipts (pesadas) from April 1998 to SO ORDERED.
April 1999 he only gets the payments for trucking while the total amount
which represent the total purchase price for the copras that he delivered to
 G.R. No. 208021, February 03, 2016 and proposed that the properties covered by TCTs T-53252 and T-12142
be returned to him; the properties covered by TCTs T-130095 and T-
214950 were delivered to him via appellant's two deeds of absolute sale;
OSCAR S. VILLARTA, Petitioner, v. GAUDIOSO TALAVERA,
the consideration for both lots was set at P500,000.00 each, on appellant's
JR., Respondent.
own request, in order to reduce his capital gains tax liability and other
expenses; the true consideration for both lots was P4,826,552.00, the
DECISION amount of appellant's total obligation; he had constantly demanded that
appellant vacate the lots, but the latter refused; there could be no equitable
mortgage over TCT T-214950 for the same was never made a collateral for
CARPIO, J.:
the loan; there could also be no equitable mortgage over TCT T-130095 for
though it was true that the same initially served as security, the
arrangement was novated when appellant offered the lot as payment;
Pag
The Case
appellant's complaint failed to state a cause of action; the transfer of the e|
G.R. No. 208021 is a petition for review1 assailing the properties to him was by virtue of dacion en pago; he justly acted within his
Decision2 promulgated on 22 November 2012 as well as the rights and in the performance of his duties, gave appellant his due, and 49
Resolution3 promulgated on 18 June 2013 by the Court of Appeals (CA) in observed honesty and good faith; appellant's claim for moral damages,
CA-G.R. CV No. 96732. The CA affirmed the Decision dated 26 October attorney's fees, and litigation expenses had no legal or factual basis; and,
20104 and the Resolution dated 8 February 20115 of Branch 35 of the as counterclaim, appellee claimed moral damages, exemplary damages
Regional Trial Court of Santiago City (RTC) in Civil Case No. 35-3306. and attorney's fees.6chanroblesvirtuallawlibrary
The RTC's Ruling
In its 26 October 2010 Decision, the RTC rendered judgment in favor of
respondent Gaudioso Talavera, Jr. (respondent) and against petitioner The RTC rendered a Decision dated 26 October 2010 and ruled in favor of
Oscar S. Villarta (petitioner). The RTC dismissed petitioner's action for respondent. The RTC ruled:ChanRoblesVirtualawlibrary
reformation of two deeds of absolute sale to that of equitable mortgage due It is the claim of the [petitioner] that the two (2) subject deeds of absolute
to want of evidence, and ordered petitioner and all other persons acting for sale both dated May 18, 2001 in favor of the [respondent] were intended to
and in his behalf to vacate the land subject of the complaint and peacefully merely secure his loan obligation. But the Court is not convinced. It should
surrender it to respondent. The 8 February 2011 Resolution denied be stressed that the subject deeds of absolute sale were executed by the
petitioner's motion for reconsideration.chanRoblesvirtualLawlibrary [petitioner] when his loan obligation was already overdue. As a matter of
fact, the two (2) checks he issued in 1997 were already dishonored
The Facts [because the] account [was] closed, as well as the last check in the amount
of P4 Million he issued as collateral on June 30, 2000 (Exhibit "4"), reason
The CA recited the facts as follows:ChanRoblesVirtualawlibrary for which, and after almost a year from June 30, 2000 to May 18, 20001, his
Appellant Oscar Villarta filed the complaint a quo for reformation of loan was overdue, thus [petitioner] had to offer [respondent] his two (2)
contracts, moral damages, and attorney's fees against appellee Gaudioso properties covered by TCTNo. T-21495 and TCT No. T-130095 as full
Talavera, Jr. He alleged: he owned four parcels of land, all situated in payment of his overdue loan which already amounted to Php4,826,552.00;
Santiago City viz: a) 1,243 square meters under TCT No. T-130095, b) thus, by way of a contract of sale, his unpaid loan was the agreed sufficient
25,000 square meters under TCT No. T-12142, c) 296 square meters price or consideration thereof, hence, the two (2) subject deeds of absolute
[under] TCT No. T-53252, and d) 1,475 square meters under TCT No. T- sale. In other words, the subject deeds of absolute sale, being public
214950; sometime in 1993, he ventured into treasure hunting activites; in documents, speak for themselves, res ipsa loquit[u]r, that [petitioner] sold
order to infuse his much needed capital, he obtained several loans from the two (2) covered properties for and in consideration of his overdue loan
appellee who was a distant relative; as of 1996, his loan already reached account with [respondent], and this fact is unrefuted. On their faces, the
P800,000.00, inclusive of 3% interest per month; he religiously paid the Court finds no other intention, nor ambiguity in them, hence, no cogent
interest, but when the 1997 financial crisis struck, appellee raised the reason to reform them nor to consider them as equitable mortgages,
interest to a rate between 7% and 10%; in 1995, appellee employed obviously, for want of evidence.
insidious words and machinations in convincing him to execute a deed of
absolute sale over TCT No. T-130095; however, the real agreement was Considering the absolute ownership of [respondent] now over the
that the lot would only serve as security for the several loans he obtained; properties covered by his new certificate of title and the other deed of
in 1997, he was again convinced to execute two more deeds of conveyance absolute sale, [respondent] is entitled under the law to possess and occupy
over the two lots under TCTs T-12142 and T-53252, respectively; in 2001, the premises, including the exercise by him of the other attributes of
he was informed that his loan had already reached P2,000,000.00 and ownership to the exclusion of others, including the [petition]. Indeed,
since the 3 parcels of land were no longer sufficient to cover the loan, he possession follows ownership.7chanroblesvirtuallawlibrary
was further convinced to mortgage to Maybank additional real properties, The dispositive portion of the RTC's decision
on top of the 3 parcels of land, to secure a P50 million loan; when appellee reads:ChanRoblesVirtualawlibrary
realized that his loan was going to be approved, the former demanded that WHEREFORE, in view of the foregoing considerations, the Court hereby
he execute a deed of absolute sale over the lot under TCT T-214950, yet, renders judgment in favor of [respondent], DISMISSING the complaint for
the real agreement was that the lot would only serve as collateral; TCT T- want of evidence, and ORDERING [petitioner] and all other persons acting
53252 and T-12142 were returned to him; when he requested appellee to for and in his behalf to vacate the subject premises and peacefully
remove the encumbrance on TCTs T-130095 and T-214950 so that the surrender the same to [respondent] and/or his duly authorized
bank could process the loan, appellee suddenly demanded P5,000,000.00; representatives.
when the bank learned of it, he was advised not to pursue the loan because
he would no longer have the means to pay it; appellee took advantage of No other pronouncements.
the situation and caused the cancellation of TCT T-214950, by utilizing the
deed of absolute sale, contrary to their real agreement that the property SO ORDERED.8chanroblesvirtuallawlibrary
should only serve as collateral; the Deeds of Absolute Sale dated March Petitioner filed a Motion for Reconsideration on 16 December 2010. The
1995 and May 18, 2001 were in reality an equitable mortgage; the RTC denied petitioner's motion for reconsideration in its Resolution dated 8
P500,000.00 consideration for the Deed of Absolute Sale dated May 18, February 2011.
2001 was grossly inadequate because the actual market value of the
subject land was P5,900,000.00; despite the execution of the two deeds of Petitioner received the notice from the CA to file his Appellant's Brief by 24
absolute sale, he still had possession of the subject lots and and even October 2011. His motion for extension of time to file his brief was granted,
leased them to Wellmade Manufacturing Corp.; because of appellee's and he was granted an extension until 22 January 2012.9 Petitioner filed his
fraudulent act of transferring titles of the two lots to his name, he suffered Appellant's Brief on 24 January 2012,10 while respondent failed to file his
sleepless nights and serious anxiety; and, he also prayed for attorney's Appellee's Brief. The CA considered the appeal submitted for decision
fees and costs of suit. without Appellee's Brief.11chanRoblesvirtualLawlibrary

In his Answer dated April 15, 2005, appellee Gaudioso Talavera, Jr. The CA's Ruling
averred: even before 1996, appellant had been obtaining loans from him;
during their early transactions, appellant paid his obligations; sometime in In its Decision promulgated on 22 November 2012, the CA dismissed
1996, appellant obtained a loan from him totaling P826,552.00, duly petitioner's appeal and affirmed the RTC's 26 October 2010 Decision and 8
covered by two Metrobank Check Nos. 521917 (P300,000.00) and 521916 February 2011 Resolution. The CA rejected petitioner's argument that the
(P526,552.00) both dated February 3, 1997; the amount of P300,000.00 real transaction is an equitable mortgage and consequently denied the
was subsequently secured by the lot covered by TCT T-130095, and, the request to recompute the obligation.
amount of P526.552.00, by appellant's two lots covered by TCT T-12142
and TCT T-53252; when the two checks were presented for payment, they The CA found that there was nothing ambiguous in the language of the
were dishonored due to account closed [sic]; despite repeated demands, deeds of absolute sale dated March 1995 and 18 May 2001. The CA also
appellant failed to settle his obligations and the agreed interest of 5% per found that the essential requisites of a contract were all present. Petitioner
month continued to run, which eventually amounted to P4,882,960.33 as of never argued that his consent was vitiated when he executed the deeds of
June 30, 2000; appellant asked that his obligation be pegged at sale. The objects of the contracts were also certain in referring to TCT Nos.
P4,826,552.00 and tendered partial payment of P4,000,000.00 through T-130095 and T-214950. Both parties have also admitted that the cause of
RCBC Check No. 0001055; when the RCBC check was presented for both contracts was to completely satisfy petitioner's loan obligations.
payment, however, the same was dishonored due to account closed [sic];
he, once again, made demands for appellant to pay his loan, but, the latter The CA also failed to find in the deeds of sale an intent to secure an
asked for more time to produce the money; sometime in May 2001, existing debt by way of a mortgage. Respondent was able to prove, by
appellant told him that he could no longer raise the sum to pay off his loans, preponderance of evidence, that the Metrobank checks originally used to
and, instead offered his properties, i.e., TCTs T-130095 and T-214950, to secure petitioner's loans were dishonored, the RCBC check intended for
satisfy his obligation; appellant offered to transfer these titles to his name payment was also dishonored, and the TCTs were subsequently offered as
payment. Further, respondent did not tolerate petitioner's occupancy of the of this sale and that I agree to the registration of this deed in the Office of
lots. Respondent sent petitioner a final demand letter to vacate, the Register of Deeds of Isabela.15chanroblesvirtuallawlibrary
consolidated ownership over the lots, and paid the real estate taxes on the Respondent denied the existence of the March 1995 Deed of Sale. He
lots. The CA found that the records show that the parties entered into a alleged that he did not sign it, and that the March 1995 Deed of Sale was
series of arrangements and schemes where petitioner offered varying not notarized.16 He instead stated that there were two deeds of absolute
modes of payment for his loans. There were no extensions of the period to sale dated 18 May 2001. The first deed of absolute sale dated 18 May 2001
pay, but a series of modifications of the mode of payment. The totality of also referred to TCT No. T-130095, and reads:ChanRoblesVirtualawlibrary
the evidence shows that the parties never intended to make TCT Nos. T- DEED OF ABSOLUTE SALE
130095 and T-214950 as mere collateral for petitioner's loans.
KNOW ALL MEN BY THESE PRESENTS:
Petitioner filed a Motion for Reconsideration12 dated 20 December 2012.
The CA denied the motion in a Resolution13 dated 18 June That I, OSCAR SANTOS VILLARTA[,] of legal age, Filipino, married to
Pag
2013.chanRoblesvirtualLawlibrary Lucila Santiago and a resident of Dubinam West, City of Santiago, e|
Philippines, for and in consideration of the sum of FIVE HUNDRED
The Issues THOUSAND PESOS (P500,000.00), Philippine Currency, to me in hand 50
paid by GAUDIOSO TAL[A]VERA, JR., likewise of legal age, married,
Petitioner enumerated the following grounds warranting allowance of his Filipino and a resident of Cauayan, IsabelachanRoblesvirtualLawlibrary
petition:ChanRoblesVirtualawlibrary
Do:
1. The Honorable Court of Appeals gravely erred and has in fact
hereby SELL, TRANSFER and CONVEY unto the said GAUDIOSO
decided the instant case in a manner contrary to law and
TALAVERA, JR., his heirs and or assigns ONE THOUSAND TWO
established jurisprudence when it held that while some of the
HUNDRED FORTY THREE (1,243) SQUARE METER[S] of a parcel of land
circumstances mentioned under Article 1602 of the Civil Code
with its improvements with Transfer Certificate of Title No. T-130095
are present in the case at bar, the totality of evidence shows that
located at Municipality of Santiago, Isabela, Philippines now City of
the parties never intended to make TCTs T-130095 and T-
Santiago, Philippines belonging to me and more particularly described as
214950 as mere collateral for [petitioner's] loans; and
follows:

2. As a consequence, the Honorable Court of Appeals likewise xxxx

erred in holding that the petitioner's request for recomputation to
determine his correct obligation must fail in view of said That I hereby warrant exclusive possession and ownership of the above
Honorable Court's findings that there is no equitable mortgage described property including its
despite the clear presence of the circumstances mentioned under improvements[.]17chanroblesvirtuallawlibrary
Article 1602 of the Civil Code.14chanroblesvirtuallawlibrary The second deed of absolute sale dated 18 May 2001 referred to TCT No.
T-214950, and reads:ChanRoblesVirtualawlibrary
The Court's Ruling DEED OF ABSOLUTE SALE

The petition has no merit. We affirm the decision of the Court of Appeals. KNOW ALL MEN BY THESE PRESENTS:

Not an Equitable Mortgage That I, OSCAR SANTOS VILLARTA[,] of legal age, Filipino, married to
Lucila Santiago and a resident of Dubinam West, City of Santiago,
The relevant provisions of the Civil Code read:ChanRoblesVirtualawlibrary Philippines, for and in consideration of the sum of FIVE HUNDRED
Art. 1602. The contract shall be presumed to be an equitable mortgage, in THOUSAND PESOS (P500,000.00), Philippine Currency, to me in hand
any of the following cases: paid by GAUDIOSO TAL[A]VERA, JR., likewise of legal age, married,
Filipino and a resident of Cauayan, IsabelachanRoblesvirtualLawlibrary
1. When the price of a sale with a right to repurchase is unusually
inadequate; Do:

2. When the vendor remains in possession as lessee or otherwise;

hereby SELL, TRANSFER and CONVEY unto the said GAUDIOSO
3. When upon or after the expiration of the right to repurchase another TALAVERA JR., his heirs and or assigns ONE THOUSAND FOUR
instrument extending the period of redemption or granting a new period is HUNDRED SEVENTY FIVE (1,475) SQUARE METER[S] of a parcel of
executed; land with its improvements with Transfer Certificate of Title No. T-214950
located at Municipality of Santiago, Isabela, Philippines now City of
4. When the purchaser retains for himself a part of the purchase price; Santiago, Philippines belonging to me and more particularly described as
follows:
5. When the vendor binds himself to pay the taxes on the thing sold;
xxxx
6. In any other case where it may be fairly inferred that the real intention of
the parties is that the transaction shall secure the payment of a debt or the That I hereby warrant exclusive possession and ownership of the above
performance of any other obligation. described property including its
improvements[.]18chanroblesvirtuallawlibrary
In any of the foregoing cases, any money, fruits or other benefit to be An affidavit of true consideration of the absolute sale of property, also dated
received by the vendee as rent or otherwise shall be considered as interest 18 May 2001, reads:ChanRoblesVirtualawlibrary
which shall be subject to the usury laws. AFFIDAVIT OF TRUE CONSIDERATION OF THE ABSOLUTE SALE OF
PROPERTY
Art. 1604. The provisions of article 1602 shall also apply to a contract
purporting to be an absolute sale. I, OSCAR SANTOS VILLARTA[,] of legal age, married to Lucila J.
A deed of absolute sale dated March 1995 and referred to TCT No. T- Santiago, Filipino and a resident of Dubinam West, City of Santiago,
130095 was attached to the complaint. It reads:ChanRoblesVirtualawlibrary Philippines after having been sworn to in accordance with law herebu [sic]
DEED OF ABSOLUTE SALE depose and say:

KNOW ALL MEN BY THESE PRESENTS: 1. That I am the same person executing this captioned affidavit;

I, OSCAR S. VILLARTA, Filipino, of legal age, married to Lucila J. 2. That I am the true and registered owner of two (2) parcels of land located
Santiago, and a resident of Santiago, Isabela, am the registered owner of at City of Santiago, Philippines with Transfer Certificate No. T-214950 and
that certain parcel of land, particularly described as T-130095;
follows:ChanRoblesVirtualawlibrary
". . . A PARCEL OF LAND x x x containing an area of ONE THOUSAND 3. That I sold the two (2) above described property to Gaudioso Talavera,
TWO HUNDRED FORTY THREE (1,243) SQUARE METERS, more or Jr., for and in consideration of the amount of FOUR MILLION EIGHT
less. It is covered by TRANSFER CERT. OF TITLE NO. T-130095, Isabela HUNDRED TWENTY SIX THOUSAND AND FIVE HUNDRED FIFTY TWO
Registry." (P4,826,552.00) PESOS in Philippine Currency.
That for and in consideration of the sum of THREE HUNDRED
THOUSAND (P300,000.00) PESOS, Philippine currency, to me in hand 4. That I acknowledge to have received the said amount from Mr. Gaudioso
paid by GAUDIOSO TALAVERA, JR., of legal age, Filipino, married to Talavera, Jr. in its fullness;
Emilia Dy, and a resident of Cauayan, Isabela, I do hereby SELL,
TRANSFER and CONVEY, absolutely and unconditionally, unto the said 5. That I am waiving any claim and whatsoever rights I have to the said
GAUDIOSO TALAVERA, JR., his heirs and or assigns the above-described property against the vendee Gaudioso Talavera Jr.[;]
real property.
6. That I am executing this affidavit to attest to the truth of the foregoing and
That I further declare that the above-described real property sold is free that it is my true act and deed without any coercion and or intimidation on
from liens and encumbrances; that it is a residential lot; that the provisions my person.19chanroblesvirtuallawlibrary
of Art. 1623 of the Civil Code had been complied with prior to the execution The trial court recognized that TCT No. T-130095 was covered by two
Deeds of Absolute Sale. However, the trial court was unconvinced that the
2001 Deeds of Absolute Sale were intended merely to secure petitioner's seeking further negotiation with SSS by recommending that the appraisal
loan obligations because both were executed when the loans were already be done by Asian Appraisal, Co. Inc.4 SSC agreed, but it later turned out
overdue. The CA affirmed the findings of the trial court. The CA conceded that Asian Appraisal, Inc. did not respond to Dalisay's request. Thus, Atty.
that although "some of the circumstances mentioned under Art. 1602 are
Honesto Cabarroguis, DGC's lawyer, suggested that the appraisal be done
present in the case at bar, the totality of the evidence shows that the parties
never intended to make TCT Nos. T-130095 and T-214950 as mere by Joson, Capili and Associates instead. The suggestion was later
collateral for [petitioner's] loans. The twin deeds of sale speak for approved.5
themselves."
On July 24, 1982, DDII's Special Board of Directors issued a Resolution
We agree with the lower courts' assessment of the facts. The conduct of stating that the properties covered by TCT Nos. T-18204 and T-
the parties prior to, during, and after the execution of the deeds of sale
adequately shows that petitioner sold to respondent the lots in question to
82276 together with all improvements thereon be sold to SSS in order to Pag
settle the unremitted premiums and penalty obligations of DDII, Davao
satisfy his debts.
Stevedore Terminal Co., and Desidal Fruits, Inc. In the same Board
e|
Respondent was able to sufficiently explain why the presumption of an Resolution, Desiderio Dalisay, or in his absence, Veronica Dalisay-Tirol 51
equitable mortgage does not apply in the present case. The inadequacy of (Dalisay-Tirol), was authorized to sign in behalf of the corporation any and
the purchase price in the two deeds of sale dated 18 May 2001 was all papers pertinent to effect full and absolute transfer of said properties to
supported by an Affidavit of True Consideration of the Absolute Sale of the the SSS.7
Property. Respondent did not tolerate petitioner's possession of the lots.
Respondent caused the registration and subsequent transfer of TCT No. T-
On May 21, 1982, the real estate appraisers Joson, Capili and Associates,
214950 to TCT No.T-333921 under his name, and paid taxes thereon.
There were no extensions of time for the payment of petitioner's loans; whose services Dalisay engaged for the purpose of appraising the value of
rather, petitioner offered different modes of payment for his loans. It was the properties being offered to SSS, sent a letter8 to him informing him that
only after three instances of bounced checks that petitioner offered TCT the total value of the lots is One Million Nine Hundred Fifty Four Thousand
Nos. T-130095 and T-214950 as payment for his loans and executed deeds Seven Hundred Seventy-Seven & 78/100 (P1,954,777.78), rounded to
of sale in respondent's favor. P1,955,000.9 This Appraisal Report was then indorsed to the SSC.10
The transaction between petitioner and respondent is thus not an equitable
mortgage, but is instead a dacion en pago. On May 27, 1982, during a meeting (1982 Meeting) of the SSS' Committee
Dacion en pago is the delivery and transmission of ownership of a thing by on Buildings, Supplies and Equipment (Committee) attended by Atty.
the debtor to the creditor as an accepted equivalent of the performance of Cabarroguis, the latter, representing DGC, explained that the DGC is in
an existing obligation. It is a special mode of payment where the debtor financial distress and is in no way capable of settling its obligation in
offers another thing to the creditor who accepts it as equivalent to the cash.11 When asked what the DGC's offer is, he stated that he has "the
payment of an outstanding debt. For dacion en pago to exist, the authority to offer [the properties] in the amount of 2 million pesos." 12 He also
following elements must concur: (a) existence of a money obligation; (b) the
assured them that that they will turn the properties over to SSS free of liens
alienation to the creditor of a property by the debtor with the consent of the
former; and (c) satisfaction of the money obligation of the and encumbrances.13 The offer for dacion was accepted at the appraised
debtor.20chanroblesvirtuallawlibrary value of P2,000,000. As regards the implementation of the dacion, Atty.
In view of the foregoing, we see no reason to depart from the findings of Cabarroguis stated that "[t)]he Legal Department of the SSS can prepare
fact and conclusions of the lower courts. the Deed of Sale or whatever documents that have to be prepared. My
clients are ready to vacate the premises and you can have it occupied
WHEREFORE, we DENY the petition and AFFIRM the assailed Decision anytime."14 During the same Meeting, Atty. Cabarroguis likewise relayed to
promulgated on 22 November 2012 as well as the Resolution promulgated
SSS that they are requesting that the P2,000,000 amount be applied first to
on 18 June 2013 by the Court of Appeals in CA-G.R. CV No. 96732. Costs
against petitioner. the unpaid premiums and the excess be used to settle part of the penalties
due.15
SO ORDERED.cralawlawlibrary
On May 28, 1982, DDII's total liabilities with SSS covering unpaid premium
G.R. No. 231053, April 04, 2018 contributions, inclusive of penalties and salary/calamity loan amortizations,
amounted to P4,421,321.62.16
DESIDERIO DALISAY INVESTMENTS, INC., Petitioner, v. SOCIAL
SECURITY SYSTEM, Respondent. On June 9, 1982, the SSC issued Resolution No. 849 - s. 82.17 In said
Resolution, it accepted DDII's proposed dacion en pago pegged at the
appraised value of P2,000,000. Said Resolution reads:
DECISION
On motion duly seconded,
VELASCO JR., J.:
RESOLVED, that the acceptance of the offer of the Dalisay Group of
The Case Companies to offset their outstanding liabilities with the SSS with their lot
and building at Davao City valued at 2M, as recommended by the SSC
Committee on Building, Supplies and Equipment, be, as it is hereby,
This Petition for Review on Certiorari under Rule 45 of the Rules of Court approved and confirmed, subject to the terms and conditions contained in
seeks the reversal and setting aside of the August 12, 2016 Decision1 and the Memorandum, dated June 8, 1982, of the Executive Officer of the said
March 10, 2017 Resolution of the Court of Appeals (CA) in CA-G.R. CV No. Committee.
03233-MIN.
RESOLVED FURTHER, That the following additional conditions be, as they
The Facts are hereby, imposed:

Involved is a parcel of land covered by Transfer Certificate of Title (TCT) 1. That part of tge (sic) 2M is to be applied to its outstanding
Nos. T-18203, T-18204, T-255986, and T-255985, with an aggregate area educational/salary loans obligations;
of 2,450 sq.m., including the building erected thereon, situated in Agdao,
Davao City. 2. That the criminal cases against the Dalisay Group of companies
shall not be withdrawn as the penalties are not being paid in full
Sometime in the year 1976, respondent Social Security System (SSS) filed and it is up to them to make the necessary representations with
a case before the Social Security Commission (SSC) against the Dalisay the Fiscal's Office.18
Group of Companies (DGC) for the collection of unremitted SSS premium
contributions of the latter's employees. The said cases are: (1) SSS The SSC then informed DDII of its acceptance of the proposed dacion in
v. Desiderio Dalisay Investments, Inc. (SSC Case No. 6414); (2) SSS v. payment, including its specified terms and conditions, via a Letter dated
Desidal Fruits Corporation (SSC Case No. 6415); and (3) SSS v. Davao June 17, 1982.19 Said Letter20 reads:
Stevedore Terminal Co., Inc. (SSC Case No. 6416).2 We are pleased to inform you that pursuant to Resolution No. 849 dated
June 9, 1982, the Social Security Commission approved and confirmed the
On March 11, 1977, Desiderio Dalisay, then President acceptance of the offer of your client, the Dalisay Group of Companies, that
of petitioner Desiderio Dalisay Investments, Inc. (DDII), sent a Letter to they be allowed to offset their outstanding liabilities with the SSS with their
SSS offering the subject land and building to offset DGC's liabilities subject property (lot and building), as described in the offer, at Davao City valued at
of the aforementioned cases at P3,500,000.3 The parties, however, failed to P2 million, subject to the following terms and conditions:
arrive at an agreement as to the appraised value thereof. Thus, no
negotiation took place. 1. The P2 million consideration in this transaction shall be applied
first to the premium contribution in arrears which amounts to P1.5
Later, or on December 15, 1981, Desiderio Dalisay sent another Letter million, more or less, and whatever amount in excess of the P2
 million after premium contribution shall then be applied to the
payment of penalties. 3) Return of the property to DDII; and

2. Part of the P2 million shall also be applied to its outstanding

education/salary loan obligations. 4) Withdrawal of claim against the Estate of Desiderio F. Dalisay, Sr. 31

3. The criminal cases against the Dalisay Group of Companies shall

On January 18, 2000, DDII issued a Letter to SSS proposing the "offset of
not be withdrawn as the penalties have not as yet been valid (sic)
in full and it is up to them to make the necessary representations SSS obligations with back rentals on occupied land and building of the
with the Fiscal's Office. obligor." It alleged that SSS is bound to pay back rentals totaling
P34,217,988.1932 for its use of the subject property from July 1982 up to Pag
May we invite you, therefore, to sit down with us for the preparation of the the present. It likewise demanded for the return of the said property. 33 e|
documents preparatory to the final transfer of the titles of the properties to
Meanwhile, despite repeated written and verbal demands made by SSS for 52
the SSS.
On July 8, 1982, Dalisay-Tirol, then Acting President and General Manager DDII to deliver the titles of the subject property, free from all liens and
of Dalisay Investment, informed SSS that the company is preparing the encumbrances, DDII still failed to comply.
subject property, especially the building, for its turnover on August 15,
1982.21 Said Letter reads: On October 8, 2002, DDII filed a complaint for Quieting of Title, Recovery of
Possession and Damages against SSS with the Regional Trial Court
We are pleased to advise you that by August 15, 1982, we will already (RTC), Branch 14, in Davao City, docketed as Civil Case No. 29, 353-02.
transfer to the next building. Desidal Building will already be available for
you to prepare for you own transfer. The delay is caused by the preparation In said complaint, DDII asserted that it is the owner of the subject property.
we have to make for the transfer of our office equipment and records. It averred that when SSS filed the abovementioned cases, the late
Desiderio Dalisay, during his lifetime and as president of the company,
Kindly, send somebody on August 15th, so we can effect the proper offered the property appraised at P3,500,000 to SSS for the offsetting of
turnover of the building to you.22 said amount against DGC's total liability to SSS. SSS accepted such but
only in the amount of P2,000,000 and subject to certain conditions. It also
Later, or on July 31, 1982, An Affidavit of Consent for the Sale of Real insists that while negotiations with SSS were still ongoing, it decided to
Property was executed by the surviving heirs of the late Regina L. Dalisay, vacate the subject property in favor of SSS to show goodwill on its part.
stating that in order to settle the companies' obligations to SSS, they Unfortunately, the negotiations were not fruitful as they failed to agree on
expressly agree to the sale thereof to the SSS for its partial settlement. 23 the terms and conditions set forth by SSS. Furthermore, DDII insists that
Atty. Cabarroguis' alleged acceptance of the proposals of SSS was not
On September 18, 1989, Desiderio Dalisay passed away. covered by any Board Resolution or Affidavit of Consent by the corporate
and individual owners of the properties. Thus, according to DDII, there was
As of November 30, 1995, the company's total obligations allegedly no meeting of the minds between the parties. Consequently, there was no
amounted to P15,689,684.93.24 dation in payment to speak of, contrary to the claim of SSS. With these,
DDII asserted that SSS owes it P43,208,270.99 as back rentals for its use
Later, or on December 29, 1995, the Philippine National Bank (PNB) of the property from 1982 onwards. It also prayed for attorney's fees and
executed a Deed of Confirmatory Sale in favor of DDII for properties that it costs of litigation.34
reacquired, including the property subject of the present dispute.
In its Answer, SSS argued that the offer for dacion was categorically
accepted by SSS, thereby perfecting such.35
On March 20, 1998, Eddie A. Jara (Jara), Assistant Vice-President of the
SSS - Davao I Branch, executed an Affidavit of Adverse Claim 25 over the RTC Judgment
properties subject of the instant case because of the companies' failure to
turn over the certificates of title to SSS. On July 22, 2010, the RTC resolved the case in favor of DDII, holding that
there was no perfected dacion in payment between the parties.
Then, on April 2, 1998, Jara sent a letter to Dalisay-Tirol, formally Consequently, SSS has no legal personality to own, possess, and occupy
demanding the certificates of title over the properties subject of the property. The dispositive portion thereof reads:
the dacion.26 In said letter, Jara stated that "[t]he mortgage with PNB has
already been settled by Desiderio Dalisay Investments, Inc. last January WHEREFORE, judgment is hereby rendered as follows:
20, 1994, but the titles were not delivered to the SSS in violation of the
express terms in the dacion in payment that the Dalisay group should
deliver the titles after the release of the mortgage with the PNB." 27 a) Declaring [DDII] as the true and absolute owner of the properties
covered by TCT Nos. T-18203, T-18204, T-255986 and T-255985,
In her reply dated May 5, 1998 to the April 2, 1998 Letter, Dalisay-Tirol, free from all liens and encumbrances, and that [SSS] has no right or
who was then the President of DDII, stated that the corporation could not at interest over the same whatsoever;
that time give due course to and act on the matter because of several
issues that need to be resolved first, including two cases involving the
subject properties, to wit: (1) the properties are being claimed by the estate b) Ordering the Registrar, Registry of Deeds, Davao City, to cancel the
of Desiderio F. Dalisay, Sr. and included in the inventory already filed by adverse claims caused by [SSS] to be annotated on the foregoing
the executrix, where the corporation's stockholders are contesting said [TCTs];
inclusion; and (2) the SSS' pending petition covering the properties where
the accuracy and propriety of the amount of PI5,605,079.25 contained
therein has yet to be substantiated and verified.28 She likewise pointed out c) Ordering [SSS] to pay [DDII] the reasonable amount of P50,000.00 a
that the "Board Resolution covers only two (2) parcels of land which were month for the use and continued occupation by [SSS] of the subject
proposed and submitted for the purpose of a negotiated sale to settle properties reckoned from the date of [DDII's] demand to vacate on
unremitted premiums and penalties."29 June 6, 2002 until [SSS] vacates the subject properties;

On November 18, 1999, DDII, through its Managing Director Edith L.

Dalisay-Valenzuela (Dalisay-Valenzuela), wrote a letter addressed to SSS d) Ordering [SSS] to turn over the possession and occupation of the
President and Chief Executive Officer Carlos A. Arellano, requesting the properties to [DDII] in peace, there being no perfected dacion in
reevaluation and reconsideration of their problem.30 In said Letter, DDII payment or dacion en pago;
requested the following:

e) Ordering [SSS] to reimburse [DDII] the sum of P100,000.00 as

1) Condonation of penalties and interest or accrual of rentals for off- attorney's fees; and
setting against the penalties, interest and principal;

f) To pay the cost.

2) Payment of original liabilities for unpaid premiums of P4,421,321.62;

SO ORDERED.36
Ruling in favor of DDII, the RTC found that the June 8, 1982 Memorandum
is not an acceptance of DDII's offer for the reason that it contained terms Its Motion for Reconsideration having been denied by the CA in its March
and conditions—a qualified acceptance which amounts to a counter- 10,2017 Resolution,50 DDII now comes before this Court for relief.
offer.37 The RTC further noted that there is no iota of proof that said
counter-offer was accepted by DDII.38 The Issues

As to the contention of SSS that the turnover of the properties in its favor
I. Whether or not there was a perfected "Dacion en Pago"
shows that there was, indeed, a perfected dacion in payment, the RTC
ruled that said transfer of possession was not tantamount to delivery as an
II. Whether or not the fact that the Transfer Certificates of Title over
element of a contract of sale which transmits ownership of the thing from the subject properties remained in the name of the petitioner is a Pag
the vendor to the vendee. The RTC likewise noted that the June 8, 1982 strong indicium that the parties remained in the preparatory stage
Memorandum included a provision on automatic cancellation of its
e|
of contract-making
supposed acceptance of Dalisay's offer if, for any reason, the offsetting 53
cannot be implemented. Correlating this with SSS' non-receipt of the III. Whether or not the prescriptive period to file the action had
certificates of title to the property, the RTC ruled that SSS' supposed already prescribed
acceptance was thereby automatically cancelled effective June 8, 1982—
the date of the Memorandum containing the provision on automatic IV. Whether or not petitioner slept on its rights that would warrant the
cancellation. This being the case, the trial court held, SSS' occupation of imposition of laches.
the property on July 24, 1982, a month after its acceptance was
automatically cancelled, has no leg to stand on.39 It was, therefore, only by The pivotal issue in the instant case is whether or not there was a
mere tolerance which tolerance ended when DDII made a demand for SSS perfected dacion en pago; and if answered in the affirmative, whether or not
to vacate the premises on June 6, 2002.40 SSS validly acquired title or interest over the subject properties. This is so
since if there was a perfected dacion and if title or interest over the property
Its motion for reconsideration having been denied by the RTC in its was transferred to SSS, then an action for quieting of title filed by DDII
September 20, 2010 Order,41 SSS appealed the case to the CA. would not prosper since SSS has a legitimate interest and claim over the
properties subject of the case.
CA Ruling
In the present petition, DDII argues that its offer to SSS contained in the
Finding merit in the appeal, the CA reversed the RTC's ruling, disposing of December 15, 1981 letter was never categorically accepted by the
the appeal in this wise: latter.51 For DDII, the seemingly unambiguous language of the SSS'
Memorandum is, in truth, a rejection of its offer, it being a qualified
WHEREFORE, the appealed Decision of the [RTC], Branch 14, Davao City, acceptance thereof. It maintains that for there to be an acceptance of the
in Civil Case No. 29,353-02 is REVERSED and SET ASIDE insofar as it offer, it should be identical in all respects and must not contain any
granted the complaint for quieting of title, recovery of possession and modification or variation from the terms of the offer.52
damages in favor of [DDII], and the said complaint is
hereby DISMISSED for lack of merit. No pronouncement as to costs. Furthermore, petitioner claims, no document or instrument proving that it
accepted SSS' counter-offer exists, as it, in fact, remains unaddressed.53
SO ORDERED.42
Moreover, DDII points out that in SSS' Brief, it admitted that it indeed made
According to the CA, the pivotal issue in the appeal is whether there was a a counter-offer to DDII, although it insists that DDII accepted said counter-
perfected dation in payment, in which it ruled in the affirmative. offer.54 In this respect, DDII maintains that contrary to SSS' position that it
impliedly accepted the counter-offer by turning over to SSS the possession
The CA held that the records establish that DGC has an outstanding and occupation of the property, said turnover was done not because it is
obligation in favor of SSS that it proposed to pay the amount via dacion en accepting the counter-offer but to show goodwill in the negotiations.55
pago, said offer was categorically accepted by SSS, and the agreement
was consummated by DDII's delivery of the property to SSS. 43 To further bolster its claim, DDII argues that the fact that the TCTs over the
property remain in the name of the original owner clearly indicates that no
As to DDII's argument that the acceptance by SSS included certain dation in payment ever occurred.56
conditions, this, according to the appellate court, is inconsequential
because its acceptance was unequivocal and absolute. In this respect, it As to the CA's ruling that DDII's claim is barred by laches, it posits that the
held that dacion in payment being in the nature of a contract of sale, the cause of action did not arise when the possession of the property was
principle that a deed of sale is considered absolute where there is neither a transferred to SSS.57 According to it, the transfer being a show of goodwill,
stipulation in the deed that title to the property sold is reserved in the seller there was, at that time, no threat against its title over the property that
until full payment thereof, nor one giving the vendor the right to unilaterally would prompt DDII to seek redress from the courts and commence the
resolve the contract the moment the buyer fails to pay within a fixed period, running of the prescriptive period. DDII maintains that the reason why it
applies to the instant dispute. The CA, thus, concluded that applying said took a long time before it sought the removal of a cloud in its title is
principle, the contract of sale or dacion between the parties is absolute, not because it was under the impression that no offsetting took place and that
conditional. To be sure, the CA said, there is no reservation of ownership of SSS was merely in physical possession thereof.58
the subject property or a stipulation providing for unilateral rescission by
either party. In fact, according to the CA, the sale was consummated upon In our January 31, 2018 Resolution, We required SSS to file its Comment
the delivery of the subject property to SSS.44 on the petition within a non-extendible period of 10 days. But as of this
date, the SSS has yet to file said Comment. In view of the fact that the
Anent the stipulations in the June 17, 1982 letter of the SSS according to previous pleadings of the SSS sufficiently allow Us to decide the instant
the CA, the conditions were not of a nature that would affect the efficacy of dispute, We resolve to dispense with the SSS' Comment and decide the
the contract of sale. It, the CA said, merely provided the manner by which case based on the records.
the full consideration is to be applied to DDII's liability and the implication of
the payment vis-a-vis the pending criminal cases filed against DDII.45 Our Ruling

The CA, thus, ruled that all the requisites for a valid dation are present. The We resolve to deny the petition.
sale and transfer of the subject property in favor of SSS are valid and
binding against DDII. Article 476 of the Civil Code provides:

The CA went on to state that even assuming that the dation is defective, Art. 476. Whenever there is a cloud on title to real property or any interest
said defect is immaterial due to DDII's inaction which lasted for 20, therein, by reason of any instrument, record, claim, encumbrance or
years.46 Applying the principle of laches, DDII's failure to assert its rights proceeding which is apparently valid or effective but is in truth and in fact
over the property against SSS for 20 years since its consummation bars it invalid, ineffective, voidable, or unenforceable, and may be prejudicial to
from recovering the subject property.47 said title, an action may be brought to remove such cloud or to quiet the
title.
With respect to the award of attorney's fees, the CA held that such is
improper,48 there being no factual, legal, or equitable justification for the An action may also be brought to prevent a cloud from being cast upon title
award of attorney's fees in favor of DDII. As regards the award of litigation to real property or any interest therein.
expenses, the CA likewise deleted such for lack of factual or legal
justification therefor.49
For an action to quiet title to prosper, two indispensable requisites must In this respect, petitioner argues that Atty. Cabarroguis did not have the
concur, namely: (1) the plaintiff or complainant has a legal or an equitable requisite authority to make said representations and thereby bind the
title to or interest in the real property subject of the action; and (2) the deed, corporation. DDII thus maintains that the offer to SSS remained at
claim, encumbrance, or proceeding claimed to be casting cloud on his title P3,500,000. We beg to disagree.
must be shown to be in fact invalid or inoperative despite its prima facie
appearance of validity or legal efficacy.59 While petitioner is correct that there is no evidence of Atty. Cabarroguis'
authority to represent the company in said meeting, this however is
Here, the presence or absence of these two requisites is hinged on the outweighed by the fact that no one questioned Atty. Cabarroguis'
question of whether or not the proposed dacion en pago was indeed representations and authority after the conclusion of the negotiations; and
perfected, thereby vesting unto SSS a legitimate title and interest over the that a few days after the said meeting, the company immediately arranged Pag
properties in question. In other words, if it can be proved that the for the property's turnover through Dalisay-Tirol, Acting President and
proposed dacion was perfected, or even consummated, then SSS' claim General Manager, and eventually delivered possession thereof to SSS.
e|
which allegedly casts a cloud on DDII's title is valid and operative, and 54
consequently, the action for quieting of title filed by DDII will not prosper. What makes matters worse for petitioner is that it was well aware of what
transpired during the meeting and the agreements reached. In fact, after
Dacion en pago the SSC issued Resolution No. 849 - s. 82 where it accepted DDII's
proposed dacion en pago at P2,000,000,72 it sent a Letter dated June 17,
Among other modes, an obligation is extinguished by payment or 1982, communicating that:
performance.60 There is payment when there is delivery of money or
performance of an obligation.61 Corollary thereto, Article 1245 of the Civil We are pleased to inform you that pursuant to Resolution No. 849 dated
Code provides for a special mode of payment called dacion in payment June 9, 1982, the Social Security Commission approved and confirmed the
(dacion en pago). acceptance of the offer of your client, the Dalisay Group of Companies, that
they be allowed to offset their outstanding liabilities with the SSS with their
In dacion en pago, property is alienated to the creditor in satisfaction of a property (lot and building), as described in the offer, at Davao City valued at
debt in money.62 The debtor delivers and transmits to the creditor the P2 million, subject to the following terms and conditions:
former's ownership over a thing as an accepted equivalent of the payment
or performance of an outstanding debt.63 In such cases, Article 1245 1. The P2 million consideration in this transaction shall be applied
provides that the law on sales shall apply, since the undertaking really first to the premium contribution in arrears which amounts to P1.5
partakes—in one sense—of the nature of sale; that is, the creditor is really million, more or less, and whatever amount in excess of the P2
buying the thing or property of the debtor, the payment for which is to be million after premium contribution shall then be applied to the
charged against the debtor's obligation.64 payment of penalties.

As a mode of payment, dacion en pago extinguishes the obligation to the 2. Part of the P2 million shall also be applied to its outstanding
education/salary loan obligations.
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
3. The criminal cases against the Dalisay Group of Companies shall
implied, or by their silence—consider the thing as equivalent to the
not be withdrawn as the penalties have not as yet been valid (sic)
obligation, in which case the obligation is totally extinguished.65 It requires in full and it is up to them to make the necessary representations
delivery and transmission of ownership of a thing owned by the debtor to with the Fiscal's Office.
the creditor as an accepted equivalent of the performance of the obligation.
There is no dacion in payment when there is no transfer of ownership in the
May we invite you, therefore, to sit down with us for the preparation of the
creditor's favor, as when the possession of the thing is merely given to the
documents preparatory to the final transfer of the titles of the properties to
creditor by way of security.66
the SSS.73
We emphasize that it is only now, in this action for quieting of title filed
In the case at hand, in order to determine whether or not there was indeed
decades after the conclusion of the 1982 Meeting, that DDII questioned
a perfected, or even consummated, dacion in payment, it is necessary to
Atty. Cabarroguis' authority to represent the corporation. If it were true that
review and assess the evidence and events that transpired and see
Atty. Cabarroguis did not possess the requisite authority to represent the
whether these correspond to the three stages of a contract of sale. This is
company in said Meeting, then it could have opposed such, contested his
so since, as previously mentioned, dacion en pago agreements are
presence thereat, or even deny that the corporation is reducing its offer to
governed, among others, by the law on sales.
P2,000,000. Unfortunately for petitioner, despite knowledge thereof, there is
no evidence manifesting any opposition thereto.
Stages of a contract of sale
This acquiescence to Atty. Cabarroguis' representations and authority to do
Briefly, the stages of a contract of sale are: (1) negotiation, covering the
so is strengthened by the fact that a few days after the conclusion of the
period from the time the prospective contracting parties indicate interest in
meeting, the company's Vice-President at that time, Dalisay-Tirol, sent a
the contract to the time the contract is perfected; (2) perfection, which takes
Letter dated July 8, 1982, informing the SSS that they will be vacating the
place upon the concurrence of the essential elements of the sale, which is
premises offered and will turn over the possession thereof to SSS,
the meeting of the minds of the parties as to the object of the contract and
consistent with what was agreed upon during said meeting. Thus:
upon the price; and (3) consummation, which begins when the parties
perform their respective undertakings under the contract of sale, We are pleased to advise you that by August 15, 1982, we will already
culminating in the extinguishment thereof.67 Each shall hereinafter be transfer to the next building. Desidal Building will already be available for
discussed in seriatim. you to prepare for your own transfer. The delay is caused by the
preparation we have to make for the transfer of our office equipment and
First Stage: Negotiation Offer validly reduced
records.

To recall, the negotiation stage covers the period from the time the Kindly, send somebody on August 15th, so we can effect the proper
prospective contracting parties indicate interest in the contract to the time turnover of the building to you.74
the contract is perfected. This then includes the making of an offer by one
party to another and ends when both parties agree on the object and the Without an iota of evidence of any opposition to the offered P2,000,000
price. price coming from the company when it could have communicated such to
the SSS after the conclusion of the 1982 Meeting, plus the fact that its Vice-
In the instant case, the late Desiderio Dalisay, on March 11, 1977, offered President even informed SSS that they will be turning over the property to
to SSS that they partially settle their obligations to the latter via dacion. the latter, We are sufficiently convinced that, contrary to petitioner's claim,
Dalisay offered several properties for P3,500,000 in favor of SSS to partially Atty. Cabarroguis acted within the scope of the authority given him, which
extinguish petitioner's obligation which amounted to P4,421,321.62.68 includes offering the properties at P2,000,000.

Then, years later or on May 27, 1982, the SSS' Committee met with the It may be argued that the absence of the written document embodying Atty.
corporation, represented by Atty. Cabarroguis. During said meeting, Atty. Cabarroguis' authority prevents the courts from unearthing what indeed the
Cabarroguis explained that he has "the authority to offer [the properties] in extent of said authority is. Nevertheless, We are of the view that the
the amount of 2 million pesos."69 He also gave them an assurance that that aforementioned events that transpired thereafter and the absence of
they will turn the properties over to SSS free of liens and opposition coming from the company are sufficient proof that they tacitly
encumbrances,70 and that his clients are ready to vacate the premises and ratified Atty. Cabarroguis' acts during the meeting, assuming he went
you can have it occupied anytime.71
beyond his authority in so doing. Thus, Article 1910 of the Civil Code Within the purview of the law on sales, a contract of sale is perfected by
provides: mere consent, upon a meeting of the minds on the offer and the
acceptance thereof based on subject matter, price and terms of
Art. 1910. The principal must comply with all the obligations which the payment.78 It is perfected at the moment there is a meeting of the minds
agent may have contracted within the scope of his authority. uponi the thing which is the object of the contract and upon the price.79

As for any obligation wherein the agent has exceeded his power, the Applying said principles to the case at bar convinces us that SSS'
principal is not bound except when he ratifies it expressly or acceptance of the offer at P2,000,000 resulted in a perfected dation. As
tacitly. (emphasis ours) discussed earlier, the offer was validly reduced from P3,500,000 to
P2,000,000. Consequently, SSS' agreement to the P2,000,000 offer was Pag
These, plus the absence of any allegation or proof that the SSS relied upon not a counter-offer as petitioner would have it, but an acceptance of the
Atty. Cabarroguis' actions in bad faith, convince Us that the corporation new reduced offer communicated by the company's representative, Atty.
e|
bound itself to said representations and agreements reached during the Cabarroguis, which acceptance perfected the proposed dation in payment. 55
meeting via implied ratification.75 DDII has the onus of proving that the P2,000,000 offer made to SSS was
invalid which would result in SSS' acceptance at said amount to be different
Accordingly, We conclude that DDII's offer was validly reduced from from the price offered. Petitioner, however, failed to discharge said burden.
P3,500,000 to P2,000,000.
As regards petitioner's contention that the following conditions set forth in
We shall now discuss whether SSS' acceptance of the new offer perfects the SSS' Letter dated June 17, 198280 make its acceptance a qualified one,
the agreement on dation. We find otherwise. To recall, said conditions are as follows:

Second Stage: Perfection Acceptance absolute and unqualified We are pleased to inform you that pursuant to Resolution No. 849 dated
June 9, 1982, the Social Security Commission approved and confirmed the
As regards the question whether the parties were able to perfect the acceptance of the offer of your client, the Dalisay Group of Companies, that
agreement on dacion en pago, the RTC ruled that they did not. According they be allowed to offset their outstanding liabilities with the SSS with their
to the trial court, SSS' "acceptance" was qualified which is tantamount to a property (lot and building), as described in the offer, at Davao City valued at
counter-offer, and not an absolute acceptance which perfects the contract. P2 million, subject to the following terms and conditions:
Thus, said the RTC, there being no evidence to show
that petitioner accepted SSS' counter-offer, there was no dation to speak 1. The P2 million consideration in this transaction shall be applied
of. first to the premium contribution in arrears which amounts to P1.5
million, more or less, and whatever amount in excess of the P2
The CA was of a different view. According to the CA, SSC Resolution No. million after premium contribution shall then be applied to the
849 — s. 82 constitutes an absolute and unequivocal acceptance which payment of penalties.
perfected the offered dacion. Thus, when possession of the subject
property was delivered to SSS, this signified a transfer of ownership 2. Part of the P2 million shall also be applied to its outstanding
thereon, consistent with the supposedly perfected agreement. education/salary loan obligations.

We agree with the CA that there was perfected dation in payment. 3. The criminal cases against the Dalisay Group of Companies shall
not be withdrawn as the penalties have not as yet been valid (sic)
in full and it is up to them to make the necessary representations
Article 1319 of the New Civil Code reads: with the Fiscal's Office.

Art. 1319. Consent is manifested by the meeting of the offer and the
May we invite you, therefore, to sit down with us for the preparation of the
acceptance upon the tiling and the cause which are to constitute the
documents preparatory to the final transfer of the titles of the properties to
contract. The offer must be certain and the acceptance absolute. A qualified
the SSS.81
acceptance constitutes a counter-offer.
A reading of the transcript of the 1982 Meeting reveals that the procedure in
applying the proceeds of the dacion en pago actually came from the
Acceptance made by letter or telegram does not bind the offerer except
company, through Atty. Cabarroguis, and not from SSS. Thus:
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was made.
Atty. Cabarroguis: We only pray that in order that the penalties will not
continue to run, on the unpaid remittance premiums, we only request tha
Relevant thereto are the following principles, as summarized by the Court
the amount of 2 million be applied first to the premiums, unremitted
in Traders Royal Bank v. Cuison Lumber Co., Inc.,76 thus:
premiums, the excess would be part of the penalty so that what will remain
Under the law, a contract is perfected by mere consent, that is, from the will be the penalties themselves.82
moment that there is a meeting of the offer and the acceptance upon the
This to Us clearly shows that the SSS simply agreed to saicl proposal when
thing and the cause that constitutes the contract. The law requires that the
it included such in its Resolution. It is not a new condition imposed by the
offer must be certain and the acceptance absolute and unqualified. An
SSS as petitioner argues.
acceptance of an offer may be express and implied; a qualified offer (sic)
constitutes a counter-offer. Case law holds that an offer, to be considered
Having settled that the parties were in agreement as to the price and that
certain, must be definite, while an acceptance is considered absolute and
the acceptance by SSS was, in fact, unqualified, We are convinced that the
unqualified when it is identical in all respects with that of the offer so as to
parties indeed have a perfected contract. We shall now determine whether
produce consent or a meeting of the minds. We have also previously held
said contract was consummated, thereby solidifying SSS' title, interest, and
that the ascertainment of whether there is a meeting of minds on the offer
claim over the properties.
and acceptance depends on the circumstances surrounding the case.

Third Stage: Consummation Transfer of possession to SSS

The offer must be certain and definite with respect to the cause or
tantamount to "delivery"
consideration and object of the proposed contract, while the acceptance of
this offer - express or implied - must be unmistakable, unqualified, and
Agreeing with SSS, the CA held that the agreement on dacion en pago was
identical in all respects to the offer. x x x (Italics supplied)
consummated by DDII's delivery of the property to SSS.83 We agree.
Also, in Manila Metal Container Corporation v. Philippine National
Bank,77 the Court ruled: The third stage of a contract of sale is consummation which begins when
the parties perform their respective undertakings under the contract of sale,
A qualified acceptance or one that involves a new proposal constitutes a culminating in the extinguishment thereof.84
counter-offer and a rejection of the original offer. A counteroffer is
considered in law, a rejection of the original offer and an attempt to end the While a contract of sale is perfected by mere consent, ownership of the
negotiation between the parties on a different basis. Consequently, when thing sold is acquired only upon its delivery to the buyer. Upon the
something is desired which is not exactly what is proposed in the offer, perfection of the sale, the seller assumes the obligation to transfer
such acceptance is not sufficient to guarantee consent because any ownership and to deliver the thing sold, but the real right of ownership is
modification or variation from the terms of the offer annuls the offer. The transferred only "by tradition" or delivery thereof to the buyer.85
acceptance must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds. (Italics supplied) In this regard, reference must be made to Article 1496 of the Civil Code,
which reads:
ARTICLE 1496. The ownership of the thing sold is acquired by the vendee
from the moment it is delivered to him in any of the ways specified in Dear Mr. Campo:
Articles 1497 to 1501, or in any other manner signifying an agreement that
the possession is transferred from the vendor to the vendee. (n) This is to formally inform your good office that Desidal
Investments, Inc. and the Estate of Regina L. Dalisay would like
Material to the case at bar is tradition by real or actual to request for substitution of collaterals or properties encumbered
delivery contemplated Article 1497 of the same Code. Thus: with your bank.

ARTICLE 1497. The thing sold shall be understood as delivered, when it is xxxx
placed in the control and possession of the vendee. (1462a) Pag
This request for substitution of collaterals had been made
In Cebu Winland Development Corporation v. Ong Siao Hua, We explained primarily because Social Security System, Regional Office of
e|
that: Davao, is very much interested to purchase our Desidal 56
office building. (emphasis ours)
Under the Civil Code, ownership does not pass by mere stipulation but only
by delivery. Manresa explains, "the delivery of the thing . . . signifies that xxxx
title has passed from the seller to the buyer." According to Tolentino, the
purpose of delivery is not only for the enjoyment of the thing but also a
mode of acquiring dominion and determines the transmission of ownership, Truly yours,
the birth of the real right. The delivery under any of the forms provided by
Articles 1497 to 1505 of the Civil Code signifies that the transmission of
ownership from vendor to vendee has taken place.86 (Citations omitted)

Here, petitioner DDII insists that its delivery of the property to SSS was only
to show its goodwill in the negotiations. The records, however, reveal (SGD)
otherwise.

It is well to emphasize that nowhere in their communications or during DESIDERIO DALISAY

the discussions at the meeting is it stated that the company will turn
over possession of the property to SSS to show its goodwill while the
negotiations were pending. President Desidal Investments, Inc.91

Too, consider the following turn of events:

1. During the 1982 Meeting, the following discussions took place: 4. As regards the obligation to deliver to SSS the certificates of title
over the properties, DDII failed to do so even after the PNB has
Atty. Cabarroguis: Yes. Now it is the earnest desire of Mr. Dalisay already executed a Deed of Confirmatory Sale in favor of DDII for
somehow, to be able to compensate for the benefits of the properties that it reacquired, including the property subject of the
employees, that's why he is offering this. And if this would be present dispute. This prompted Jara to execute an Affidavit of
considered seriously by the System, Mrs. Tirol made Adverse Claim92 over the properties.
arrangements with the Philippine National Bank that this property
be released because x x x if a portion of the obligation will be 5. Jara then sent a letter to Dalisay-Tirol, formally demanding the
paid to the PNB, then it will release this particular property, so we certificates of title over the properties subject of the dacion,
will be turning this over to you clear of any liens or stating that "[t]he mortgage with PNB has already been settled
encumbrances. Thank you very much.87 by Desiderio Dalisay Investments, Inc. last January 20, 1994, but
the titles were not delivered to the SSS in violation of the express
xxxx terms in the dacion in payment that the Dalisay group should
deliver the titles after the release of the mortgage with the
Atty. Cabarroguis: The Legal Department of the SSS can prepare PNB."93
the Deed of Sale or whatever documents that have to be
prepared. My clients are ready to vacate the premises and you 6. In her reply, Dalisay-Tirol, now President of DDII, stated that the
can have it occupied anytime.88 x x x corporation could not at that time give due course and act on the
matter because of several issues that need to be resolved first.
2. Thereafter, or on July 8, 1982, DDII, through Dalisay-Tirol,
informed SSS that the company is preparing the subject property,
especially the building, for its turnover on August 15, The aforementioned events that transpired convince Us that contrary
1982.89 Guilty of reiteration, the said Letter reads, thusly: to petitioner's claim, the turnover of the properties to SSS was tantamount
to delivery or "tradition" which effectively transferred the real right of
We are pleased to advise you that by August 15, 1982, we will ownership over the properties from DDII to SSS.94Even after a review of
already transfer to the next building. Desidal Building will already the records of the case, this Court is unable to find any indication that
be available for you to prepare for your own transfer. The delay is when they turned over the properties to SSS, the company reserved
caused by the preparation we have to make for the transfer of our
its ownership over the property and only transferred the jus
office equipment and records.
possidendi thereon to SSS.
Kindly, send somebody on August 15th, so we can effect the
proper turnover of the building to you.90 Too, if it indeed turned over the possession of the property to simply show
goodwill in the negotiations, then there would be no need for it to give SSS
3. Then, on January 4, 1983, the corporation arranged for the possession of the subject property free from all liens and encumbrances.
release or replacement of the properties subject of
the dacion from its mortgage with the PNB. Thus: Thus, contrary to petitioner's arguments, We are of the view that the
turnover was in fact tantamount to tradition and was not done simply to
DESIDERIO DALISAY INVESTMENTS, INC. show goodwill on the part of the company. What was only left to be done
Desidal Building, Agdao, Davao City was for the corporation to surrender the certificates of title over the
properties, free from all liens and encumbrances as promised during the
1982 meeting, so as to facilitate its transfer in SSS' name.

Indeed, as expounded by this Court in Equatorial Realty Development, Inc.

January 4, 1983 v. Mayfair Theater, Inc.:95
Delivery has been described as a composite act, a thing in which both
parties must join and the minds of both parties concur. It is an act by
Mr. Julius L. Campo which one party parts with the title to and the possession of the
Asst. Vice-President & Manager property, and the other acquires the right to and the possession of the
Philippine National Bank same. In its natural sense, delivery means something in addition to the
Davao Branch, Davao City delivery of property or title; it means transfer of possession. In the Law on
Sales, delivery may be either actual or constructive, but both forms of
RE: DESIDAL INVESTMENTS COLLATERAL delivery contemplate "the absolute giving up of the control and
custody of the property on the part of the vendor, and the assumption KAREN NUÑEZ* VITO, LYNETTE** NUÑEZ MASINDA, WARREN NUÑEZ,
of the same by the vendee." AND ALDEN*** NUÑEZ, PETITIONERS, v. NORMA MOISES-
PALMA, RESPONDENT.
This being the case, We find that SSS has validly and in good faith
acquired title to the property subject of the dispute, making the action to
quiet title filed by DDII improper.

Additionally, it is well to emphasize that in order that an action for quieting DECISION
of title may prosper, it is essential that the plaintiff must have legal or
equitable title to, or interest in, the property which is the subject-matter of CAGUIOA, J.: Pag
the action.96 Legal title denotes registered ownership, while equitable title
means beneficial ownership. In the absence of such legal or equitable title,
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This is a Petition for Review on Certiorari1 (Petition) under Rule 45 of the
or interest, there is no cloud to be prevented or removed.97 Rules of Court assailing the Decision2 dated July 31, 2015 and 57
Resolution3 dated March 15, 2016 of the Court of Appeals4 (CA) in CA-G.R.
Here, DDII having divested itself of any claim over the property in favor of SP. No. 07390. The CA Decision affirmed with modifications the
SSS by means of sale via dacion en pago, petitioner has lost its title over Decision5 dated December 11, 2012 of the Regional Trial Court, 6th Judicial
the property which would give it legal personality to file said action. Region, Branch 21, Mambusao, Capiz (RTC) in Civil Case No. M-12-0360-
07 AP. The RTC Decision, in turn, modified the Decision6 dated June 8,
2012 of the Municipal Trial Court, 6th Judicial Region, Mambusao, Capiz
Thus, the CA did not err in dismissing the complaint for lack of merit.
(MTC) in Civil Case No. 515. The CA Resolution denied the motion for
reconsideration filed by the petitioners.
A necessary consequence of this ruling is the recomputation of DDII's
obligations to SSS as a result of the application of the P2,000,000 amount Facts and Antecedent Proceedings
agreed upon in the dacion. Thus, SSS shall recompute said outstanding
obligations by deducting from the total obligations as of June 17, 1982 the Petitioners' father, Vicentico Nuñez (Vicentico), was the original owner of
amount of P2,000,000, following the terms and conditions agreed upon. Lot No. 2159-A, with an area of 429 square meters, located in Mambusao,
Said date refers to SSS communication of its acceptance of the offer, Capiz (subject lot) as evidenced by Transfer Certificate of Title No. (TCT)T-
16612.7
resulting in the perfection of the contract.98
Sometime in May 1992, Vicentico, who was then suffering from diabetes,
At this point, it is well to remind DDII that it cannot escape its liability from borrowed P30,000.00 from Rosita Moises (Rosita) and as security,
SSS by giving the latter possession over the property with the executed a real estate mortgage over his property (Lot No. 2159-A). Since
representation that it is doing so as partial settlement of its unremitted SSS Rosita had no money, the funds came from Norma Moises-Palma (Norma),
premiums and penalties due only to take the property back decades Rosita's daughter. According to petitioners, the P30,000.00 loan of
thereafter, seek condonation of its obligations, and to make matters worse, Vicentico was subsequently paid as evidenced by an Affidavit Authorizing
Release of Mortgage8 (AARM).9
claim payment of back rentals from SSS. While it is true that the value of
the property has definitely significantly increased over the years compared Upon Vicentico's death on September 27, 1994, the subject lot was
to the P2,000,000 amount for which it was offered to SSS, still, such is not transmitted to his heirs, namely: petitioners Karen Nuñez Vito
sufficient justification for DDII to turn its back on its obligations under (Karen), Warren Nuñez (Warren), Lynette Nuñez Macinda (Lynette), Alden
the dacion en pago agreement. In fact, the turn of events convinces Us that Nuñez (Alden) (collectively, petitioners) and Placida Hisole10 Nuñez
DDII's actions are tainted with bad faith. (Placida), Vicentico's surviving spouse.11 Each heir had an undivided 1/5
share in the subject lot equivalent to 85.812 square meters.13
If We were to grant the reliefs prayed for by DDII, an injustice will definitely
Placida died on August 1, 1997 and her 1/5 share was inherited equally by
be caused to SSS, which in good faith relied upon the company's her heirs. Thus, petitioners each had a pro indiviso 1/4 share in the subject
representations. Too, We find it proper to remind DDII that it would not have lot equivalent to 107.25 square meters.14
lost ownership over the property if, in the first place, it diligently paid the
SSS premiums due. On June 28, 1995, Norma was able to have all petitioners, except Alden,
sign a Deed of Adjudication and Sale15 (DAS)
wherein petitioners purportedly sold to Norma their respective pro
With these, We need not belabor the other assigned errors.
indiviso shares in the subject lot for P50,000.00, but the DAS reflected
P30,000.00 as the consideration in order to reduce the amount to be paid
WHEREFORE, the instant petition is DENIED. The assailed August 12, for capital gains tax and documentary stamp tax. After the execution of the
2016 Decision and March 10, 2017 Resolution of the Court of Appeals in DAS, Norma immediately took possession of the subject lot.16
CA-G.R. CV No. 03233-MIN are hereby AFFIRMED. The complaint for
quieting of title, recovery of possession and damages, docketed as Civil Instead of paying cash, Norma executed a Promissory Note17 (PN) on July
Case No. 29,353-02, is DISMISSED for lack of merit. 1, 1995 in favor of petitioners whereby she obligated herself to pay
P50,000.00, which "amount represents the cost of a parcel of land [Norma]
bought from them described as follows: TITLE NO. T-16612 Lot No 2159-A
Petitioner Desiderio Dalisay Investments, Inc. is hereby ordered to: situated at Poblacion Tabuc Mambusao, Capiz[,] [containing an area of
FOUR HUNDRED TWENTY NINE (429) SQUARE METERS, more or
1. Execute the Deed of Sale over the properties in favor of less"18 on or before July 1, 1998, without interest.19 Upon prodding
respondent Social Security System, consistent with the terms and of petitioners, Norma executed an Acknowledgment of Debt20 (AOD) dated
conditions of the dacion en pago agreed upon by the parties as February 22, 2007, whereby she admitted that she
embodied in SSC Resolution No. 849 - s. 82 within ten (10) days owed petitioners P50,000.00, representing the purchase price of the DAS. 21
from finality of this Decision; and
Despite non-payment of the purchase price and the absence of Alden's
signature on the DAS, Norma was able to cause the registration of the
2. Surrender the Owner's Duplicate of Transfer Certificate of Title document with the Register of Deeds of Capiz and TCT T-3546022 was
Nos. T-18203, T-18204, T-255986, and T-255985, as well as the issued to her on August 2, 2005.23
Tax Declarations over said properties to respondent Social
Security System within ten (10) days from finality of this Decision. On July 10, 2006, Alden instituted a case against respondent for Annulment
of Transfer Certificate of Title No. T-35460, Declaring Deed of Adjudication
Should petitioner Desiderio Dalisay Investments, Inc. refuse to execute said and Sale Null and Void, Partition, Reconveyance and Recovery of
Deed of Sale, the Clerk of Court shall execute such in favor of respondent Possession of a Portion of Land with Damages24 docketed as Civil Case
No. 499 before the MTC. During the pendency of this case, Alden and
Social Security System.
Norma entered into a Compromise Agreement (Compromise Agreement)
on September 7, 2006, whereby Alden agreed to respect Norma's
The Register of Deeds of Davao City is directed to cancel the subject titles ownership and possession of 85.8 square meters of the subject lot, the
and issue new ones in the name of respondent Social Security System. share being claimed by him.25

Respondent Social Security System is ordered to re-compute petitioner's About a year later, or on August 15, 2007, petitioners Karen, Warren and
obligations accordingly, reckoned from June 17, 1982, the date when Lynette, represented by their brother and attorney-in-fact Alden, filed
against Norma a case for Declaration of Nullity of Deed of Adjudication and
respondent communicated its acceptance of the offer.
Sale, Cancellation of Transfer Certificate of Title No. T-35460, Recovery of
Ownership and/or Possession of Lot No. 2159-A and Damages26 before the
SO ORDERED. MTC. After trial on the merits, the MTC, on February 27, 2009 rendered a
Decision in favor of petitioners. Norma filed a Notice of Appeal on April 22,
2009 which was given due course by the MTC. On October 19, 2009, the
G.R. No. 224466 (Formerly UDK-15574), March 27, 2019
RTC rendered a Decision setting aside the MTC's Decision on the ground
that Alden, who was merely acting as attorney-in-fact of Karen, Warren and
Lynette, was not included as indispensable party. The RTC ordered the
MTC to include Alden as an indispensable party and to conduct further 1. Ordering the defendant-appellant to pay the plaintiffs except
proceedings on the case.27 Alden Nuñez, the amount of P50,000.00 with legal interest rate of
12% starting on April 28, 1995 until the full amount price is paid;
On February 19, 2010, Karen, Warren and Lynette, through Alden, and
Alden, in his own capacity, filed an amended complaint before the MTC 2. Ordering defendant Norma Moises Palma to pay plaintiffs the
for Declaration of Nullity of Deed of Adjudication and Sale, Cancellation of following:
Transfer Certificate of Title No. T-35460, Recovery of Ownership and/or
Possession of Lot No. 2159-A and Damages.28 The allegations of the
amended complaint are basically the same as those of the original, except
the addition of Alden as an indispensable party.29 Even up to the filing of
the amended complaint, Norma was not able to pay the consideration of a.) Fifty Thousand (P50,000.00) pesos as attorney's fees;
P50,000.00.30
Pag
e|
The MTC Ruling b.) Five Thousand (P5,000.00) pesos as litigation expenses;
58
After trial, the MTC rendered on June 8, 2012 a Decision31 in favor
of petitioners, the dispositive portion of which states:
c.) Seventy Five Thousand (P75,000.00) pesos as moral
WHEREFORE, preponderance of evidence point in favor of plaintiffs and
damages; and
against defendant, judgment is hereby rendered:

1.) DECLARING the Deed of Adjudication and d.) Fifteen Thousand (P15,000.00) pesos as exemplary
Sale dated June 28, 1995 NULL AND VOID; damages; and

2.) ORDERING the CANCELLATION of Transfer 3.

Certificate of Title No. T-35460 in the name of 4. Declaring as valid the Deed of Adjudication and Sale, dated June
defendant Norma Moises Palma and 28, 1995, with judicial notice on the decision based on the
the REINSTATEMENT of Transfer Certificate of Compromise Agreement rendered by the Municipal Trial Court of
Title No. T-16612 in the name of Vicentico Mambusao in Civil Case No. 499, dated September 20, 2006,
Nuñez married to Placida Hisole; involving the share of Alden Nuñez with an area of 85.8 square
meters.

3.) DECLARING plaintiffs as the rightful owners of No pronouncement as to costs.

Lot No. 2159-A subject to the right of defendant
Norma Moises Palma with respect to the share SO ORDERED.35
of Alden Nuñez in the total area of 85.8 square Dissatisfied, petitioners filed a petition for review under Rule 42 before the
meters; CA.

The CA Ruling
4.) ORDERING defendant to turn over ownership The CA in its Decision36 dated July 31, 2015 affirmed the RTC Decision
and possession of Lot No. 2159-A to plaintiffs with modification. The dispositive portion of the CA Decision states:
except the share of Alden Nuñez with an area of WHEREFORE, the Decision dated December 11, 2012 of the RTC, Branch
85.8 square meters; 21, Mambusao, Capiz in Civil Case No. M-12-0360-07 AP
is AFFIRMED with the following MODIFICATION. The order directing
respondent to pay petitioners the amount of P50,000.00 as consideration
5.) ORDERING defendant Norma Moises Palma to for the sale is DELETED. The award of attorney's fees, litigation expenses,
pay plaintiffs the following: moral damages and exemplary damages is likewise DELETED. No
pronouncement as to costs.

SO ORDERED.37
a.) Fifty Thousand
Petitioners filed a motion for reconsideration38 and pointed to the CA the
(Php50,000.00)
AARM as proof of payment of Vicentico's loan. The CA denied the motion
pesos as
for reconsideration.39
attorney's fees;
Hence, the Petition. To date, Norma has not filed her Comment despite the
Resolution40 dated July 11, 2016 of the Court requiring her to comment on
b.) Five Thousand the Petition within 10 days from receipt thereof; accordingly, she is deemed
(Php5,000.00) to have waived her right to do so.
pesos as litigation
expenses; Issues

The petitioners raise the following issues in the Petition:

c.) Seventy-Five
Thousand 1. whether the CA, in ruling that the transaction between petitioners and
(Php75,000.00) Norma is dacion en pago, erred in applying Article 1245 of the Civil Code;
pesos as moral and
damages; and
2. whether the CA erred in deleting the award of attorney's fees, litigation
expenses, moral damages and exemplary damages.41
d.) Fifteen Thousand
(Php15,000.00) The Court's Ruling
pesos as
exemplary The general rule is that only questions of law may be raised in a Rule 45
damages; and petition for certiorari.42 There are, however, admitted exceptions. One of
them is when the findings of the CA are contrary to the trial court.43

Indeed, the findings of the CA and the RTC with respect to the DAS dated
6.) ORDERING defendant to pay the cost of the June 28, 1995 are divergent, requiring a review of their factual findings.
suit.
The CA ruled that the transaction between the parties is in reality a dacion
SO ORDERED. 32 en pago44 based on the following:
Norma appealed33 the MTC Decision to the RTC. x x x First. Both parties agreed that Vicentico's pre-existing debt of
P30,000.00 should be considered as the consideration for the Deed of
The RTC Ruling Adjudication and Sale. Notably too, the dation in payment was not only with
the creditor's consent, it was upon her proposal. Second. There is no
showing that other creditors would be prejudiced by the
The RTC in its Decision34 dated December 11, 2012 granted respondent's
appeal. The dispositive portion of the RTC Decision states: agreement. Lastly, petitioners had not been judicially declared insolvent.
WHEREFORE, premises considered, the decision of the Court a quo is Accordingly, We uphold the validity of the Deed of Adjudication and Sale.45
On the other hand, the RTC ruled that the DAS "showed that the
hereby modified as follows:
consequent sale of the lot in question was by way of constructive delivery x
x x [and] the defendant-appellant took possession of the property right after
the execution of the Deed of Adjudication. Clearly, there has been transfer
of ownership x x x."46 The RTC, thus, considered the transaction of the
parties as a valid contract of sale, notwithstanding the non-payment of the WARREN NUNEZ
consideration.47

The RTC in effect agreed with the MTC's finding that the DAS is a contract
of sale. But, it disagreed with the MTC's ruling that it is null and void. The (SGD.)
MTC reasoned out as follows:
By the testimonies of plaintiffs that no money or consideration was ever LYNETH NUNEZ52
paid to them by defendant despite repeated demands and coupled with the
presentation [by] plaintiffs of the Promissory Note (Exhibit "E") and the 2. PN - Promissory Note53 executed by Norma and notarized on July 1,
Acknowledgment of Debt (Exhibit "F") all of which was executed by the 1995 (Exhibit "E"), which provides:
defendant Norma Moises Palma, the burden of proof x x x now has shifted
Pag
That I, NORMA MOISES PALMA, of legal age, [FJilipino, widow and a
on the shoulder of the defendant to prove that she paid the consideration of resident of Mambusao, Capiz by these presents promise to pay the heirs of e|
the sale of Lot No. 2159-A, because the plaintiffs categorically testified and VICENTICO NUÑEZ: namely PLACIDA NIZOLE NUÑEZ, widow, KAREN
told this Court that they did not receive even a single centavo from the NUNE[Z], single, WARREN NUÑEZ, single, ALDIN NUÑEZ, single, and 59
defendant x x x much so that the defendant never rebutted such testimony LYNETTE NUÑEZ, single x x x the sum of FIFTY THOUSAND
of plaintiffs. Likewise, the execution of defendant of the Promissory Note (P50,000.00) PESOS, Philippine Currency; on or before July 1, 1998. This
(Exhibit "E") which expressly points to Lot No. 2159-A as the subject of sale amount do (sic) not bear interest.
between plaintiffs and defendant, will add to the belief of this Court that
indeed no consideration was given to plaintiffs, because it is very unnatural This amount represents the cost of a parcel of land I bought from them
for defendant to still execute a Promissory Note (Exhibit "E"), whose described as follows: TITLE NO. T-16612 Lot No 2159-A situated at
amount of Fifty Thousand (Php50,000.00) pesos is even greater than the Poblacion Tabuc Mambusao, Capiz. Containing an area of FOUR
amount of Thirty Thousand (Php30,000.00) pesos as reflected in the Deed FIUNDRED TWENTY NINE (429) SQUARE METERS, more or less.54
of Adjudication and Sale (Exhibit "D"), had she already paid the latter 3. AOD - Acknowledgment of Debt55 notarized on February 22, 2007
amount to plaintiffs. (Exhibit "F") executed by Norma which provides:
That I am indebted to KAREN NUÑEZ VITO, WARREN NUÑEZ AND
xxxx LYNETTE NUÑEZ x x x in the sum of FIFTY THOUSAND PESOS (PHP
50,000.00).
In short, [the defendant failed to render proof that she paid the purchase
price of lot No. 2159-A, because, as] the burden of proof had already That I promise, to pay KAREN NUÑEZ VITO, WARREN NUÑEZ AND
shifted [upon her] to prove she [had] paid the [consideration], she failed to LYNETTE NUÑEZ the amount of FIFTY THOUSAND PESOS (PHP
introduce [any evidence that would tend] to prove [the payment of the 50,000.00) within a period of five (5) days after I have sold my parcel of
purchase price.] x x x48 land, [Lot No. 2159-A of the Subdivision plan (LRC) Psd-213453 being a
Having ruled that no consideration was ever given to plaintiffs portion of Lot 2159, Mambusao Cadastre, LRC Cad. Record No. N-449]
(herein petitioners) by defendant (Norma), the DAS was considered by the situated at Poblacion Tabuc, Mambusao, Capiz and covered by Transfer
MTC as null and void on the ground that a contract of sale is void and Certificate of Title No. T-35460.56
produces no effect whatsoever where the price, which appears thereon 4. AARM - Affidavit Authorizing Release of Mortgage57 dated July 8, 2005
paid, has in fact never been paid by the vendee to the vendor.49 (Exhibit "I" and "6") which states:
WE, NORMA MOISES-PALMA, widow; CESAR N. MOISES, married;
The following documentary exhibits adduced and admitted are crucial in the LACERIANO N. MOISES, widower; JOSE N. MOISES, single; and GILDA
resolution of the first issue: MOISES FELONIA, widow, Filipinos, all of legal ages, and all residents of
Mambusao, Capiz, after having been duly sworn to according to law,
1. DAS - Deed of Adjudication and Sale50 dated June 28, 1995 (Exhibit "D" depose and say:
and "1"), notarized on July 14, 1995, but inscribed as Entry No.
15533151 on August 2, 2005 in TCT T-16612. It provides: That we are the children of the late Rosita Nuñez Moises who died on May
We, PLACIDA HISOLE NUÑEZ, widow, KAREN NUÑEZ, single, WARREN 09, 2003;
NUÑEZ, single, ALDIN NUÑEZ, single AND LYNETH NUÑEZ, single, all of
legal ages, Filipinos and residents of Mambusao, Capiz, do by these That during her lifetime, his brother, the late Vicentico Nuñez who died on
presents hereby declare: September 27, 1994 was indebted to her in the amount of THIRTY
THOUSAND PESOS (P30,000.00) under and by virtue of Real Estate
1.) That a certain VICENTICO NUÑEZ died in Mambusao, Capiz on Sept. Mortgage notarized by Notary Public Jesus V. Rivas under Doc. No. 112,
27, 1994 leaving as forced heirs the herein parties; Page No. 57, Book No. 6, Series of 1992, dated May 19, 1992 and
inscribed by the Acting Register of Deeds, Paterno Kapunan on December
xxxx 1, 1993 at 10:25 A.M.;

3.) That upon his death he left Real Property hereunder described: That by these presents, we are releasing this Real Estate Mortgage, the
TITLE NO. T-16612 fact being that the late Vicentico Nuñez had already paid our late mother
indebtedness of THIRTY THOUSAND PESOS (P30,000.00);
"A parcel of land (Lot 2159-A of the Subd.plan (LRC) Psd-213453, being a
portion of Lot 2159, Mambusao cadastre, LRC Cad. Record No. N-449), That we are executing this affidavit to attest further to the fact that the late
situated in the Barrio of Municipality of Mambusao, province of Capiz, Vicentico Nuñez has paid his total obligation of THIRTY THOUSAND
Island of Panay. x x x Containing an area of FOUR HUNDRED TWENTY PESOS (P30,000.00) to our late mother;
NINE (429) Square meters, more or less. x x x"
4.) That pursuant to the provision of Rule 74, Sec. 1 of the Rules of Court, That furthermore, we are executing this affidavit absolving the late Vicentico
We the parties of these instrument do hereby adjudicate unto ourselves the Nuñez of any liabilities whatsoever, thus releasing this Deed of Real Estate
above described property in pro indiviso share; Mortgage.

5.) That for and in consideration of the sum of THIRTY THOUSAND IN WITNESS WHEREOF, We have hereunto set our hands 8th day of July
PESOS (P30,000.00), Philippine Currency which we have received from 2005, at Roxas City[,] Philippines.
NORMA MOISES PALMA, of legal age, widow and resident of Mambusao,
Capiz, do by these presents hereby CEDE, SELL, CONVEY and
TRANSFER by way of Absolute Sale unto the above named NORMA (SGD.) (SGD.)
MOISES PALMA, her heirs and successors the above described property
free from all liens and encumbrances and whatever kind. NORMA M. PALMA CESAR N. MOISES

This instrument concerns a residential lot, hence, it is not within the Affiant Affiant
provision of Land Reform Code nor any tenancy contract.

By virtue of this instrument that certain Real Estate Mortgage executed

before Jesus V. Rivas dated May 19, 1992 and docketed in the Notarial
Register as Doc. No. 112; Page No. 57; Book No. 6; Series of 1992 is (SGD.) (SGD.)
cancell (sic) and considered null and void and no effect.
LACERIANO N. MOISES JOSE N. MOISES
WITNESS our signature hereunder this 28th day of June 1995, at Roxas
City. Affiant Affiant

(SGD.) (SGD.)

PLACIDA HISOLE NUNEZ KAREN NUNEZ (SGD.)

GILDA M. FELONIA

(SGD.) Affiant58
5. TCT T-1661259 (Exhibit "B") registered in the name of "VICENTICO assuming that the DAS was a dation in payment, the documents that were
NUÑEZ, married to Placeda Hesole" with the following annotations:60 subsequently executed had the effect of novating the same.
Entry No. 118493 - Mortgage - executed by Vicentico Nuñez in favor of
Rosita Nuñez covering the whole parcel of land described in this title for the Under Article 1291 of the Civil Code, obligations may be modified by: (1)
sum of THIRTY THOUSAND PESOS (30,000.00) subject to all conditions changing their object or principal conditions; (2) substituting the person of
stipulated therein and acknowledged before Notary Public Jesus V. Rivas the debtor; and (3) subrogating a third person in the rights of the creditor.
under Doc. No. 112, Page No. 57, Book No. 6, Series of 1992. Date of
document May 19, 1992. Inscription December 1, 1993 at 10:25 A.M. When Norma executed the PN, AOD and Compromise Agreement, she
was acknowledging that the principal condition or stipulation on the
xxxx payment of the purchase price in the DAS had been modified from the
offset or cancellation of Vicentico's indebtedness secured by the REM,
Entry No. 155188 - Affidavit Authorizing Release of Mortgage - executed by without which would have amounted to a dation in payment, to a loan
Pag
the children of Rosita Nuñez Moises namely: Norma Moises-Palma; Cesar payable within a certain period, which converted the transaction to a sale e|
N. Moises, Lacer[ia]no N. Moises; Jose N. Moises and Gilda Moises on credit.
Felonia in favor of Vicentico Nuñez, affecting Entry No. 118493. Subscribed 60
by Notary Public Erico V. Abalajon under Doc. No. 405; Page No. 82; Book Given the foregoing, the CA erred in its finding that the transaction between
No. XXXVIII; Series of 2005. Date of Doc. July 8, 2005. Inscription: July 13, the parties is a dation in payment or dacion en pago. The MTC and RTC
2005 at 1:30 P.M. were, therefore, correct in considering the transaction as a contract of sale.

xxxx A contract of sale is defined in Article 1458 of the Civil Code, to wit:
ART. 1458. By the contract of sale, one of the contracting parties obligates
Entry No. 155331 - Deed of Adjudication and Sale - executed by the heirs himself to transfer the ownership of and to deliver a determinate thing, and
of the late Vicentico Nuñez, stating that they are the only heirs who the other to pay therefor a price certain in money or its equivalent.
survived the deceased, namely: Placida Hisole Nuñez, Karen, Warren, and
Lynette, all surnamed Nuñez, have adjudicated and partitioned the parcel of A contract of sale may be absolute or conditional.
land described in this title in pro indiviso equal share and thereby sold to The Court in Sps. Ramos v. Sps. Heruela67 (Ramos) differentiated an
Norma Moises Palma for the sum of THIRTY THOUSAND PESOS absolute sale from a conditional sale as follows:
(P30,000.00). Acknowledged before Notary Public Eleuterio F. Martinez, Article 1458 of the Civil Code provides that a contract of sale may be
under Doc. No. 901; Page No. 84; Book No. II; Series of 1995. Date of absolute or conditional. A contract of sale is absolute when title to the
Document: June 28, 1995. Inscription: August 2, 2005 at 10:55 A.M. This property passes to the vendee upon delivery of the thing sold. 68 A deed of
title is cancelled by TCT No. T-3546061 . sale is absolute when there is no stipulation in the contract that title to the
6. Compromise Agreement62 dated September 7, 2006 executed by Alden property remains with the seller until full payment of the purchase
and Norma in connection with Civil Case No. 499, wherein they agreed as price.69 The sale is also absolute if there is no stipulation giving the vendor
follows: the right to cancel unilaterally the contract the moment the vendee fails to
1. As settlement, the private defendant [Norma] undertakes to pay the pay within a fixed period.70 In a conditional sale, as in a contract to sell,
amount of Eighty Eight Thousand Pesos (Php88,000.00) Philippine ownership remains with the vendor and does not pass to the vendee until
Currency as payment for the purchase of the 85.8 square meters undivided full payment of the purchase price.71 The full payment of the purchase price
portion of Lot 2159-A, which amount shall be delivered on or before partakes of a suspensive condition, and non-fulfillment of the condition
January 31, 2007; prevents the obligation to sell from arising.72
Pursuant to Ramos, the DAS is an absolute sale because there is no
2. The plaintiff [Alden], in return, shall respect defendant's ownership and stipulation in the contract that title to the property remains with the sellers
possession over the same. He further waives and renounce (sic) his until full payment of the purchase price and there is no stipulation giving the
interest over Lot 2159-A in favor of defendant.63 vendors the right to cancel unilaterally the contract the moment the vendee
It can be gathered from the last paragraph of the DAS wherein the Real fails to pay within a fixed period. It will be recalled that after the execution of
Estate Mortgage (REM) which Vicentico executed was "cancell[ed] and the DAS, Norma immediately took possession of the subject lot73 and there
considered null and void and no effect" that a dation in payment might have was no retention of ownership by the heirs of Vicentico until full payment of
been intended by the parties therein. Under Article 1245 of the Civil Code, the purchase price by Norma that was stipulated in the DAS.
there is dation in payment when property is alienated to the creditor in
satisfaction of a debt in money and is governed by the law of sales. What then is the legal effect of the non-payment of the purchase price of
P50,000.0074 by Norma to petitioners?
This scheme was affirmed by Laceriano N. Moises (Laceriano), the brother
of Norma, who testified on direct examination that his uncle Vicentico Pursuant to Article 1458 of the Civil Code, a contract of sale is a reciprocal
together with his wife mortgaged Lot 2159-A, the subject lot, to his mother obligation to give; and the prestation or obligation of the seller or vendor is
Rosita for the amount of P30,000.00 and the source of the amount came "to transfer the ownership of and to deliver a determinate thing" while the
from his younger sister Norma,64 and that since no payment was made prestation or obligation of the buyer or vendee is "to pay therefor a price
regarding the P30,000.00, Vicentico and Placida offset the subject lot for certain in money or its equivalent." The full payment of the purchase price
their indebtedness.65 is the buyer's prestation.

While the DAS seems to suggest a dation in payment, the subsequent The non-payment of the purchase price by the buyer after the seller has
actuations of the parties, especially Norma, negate the same or the delivered the object of the sale to the buyer constitutes a breach of the
contemplated offset. If the DAS was intended to be a dation in payment, the buyer's prestation in a contract of sale. The buyer has contravened the very
execution of the PN and AOD by Norma as well as the Compromise tenor of the contract.
Agreement by Alden and Norma on September 7, 2006, whereby Alden
agreed, for an agreed consideration, to respect Norma's ownership and Generally, under Article 1594 of the Civil Code, "[a]ctions for breach of the
possession of 85.8 square meters of the subject lot, the share being contract of sale of goods shall be governed particularly by the provisions of
claimed by him, shows an opposite declaration, i.e., there was no dation in this Chapter [Chapter 6 on 'Actions for Breach of Contract of Sale of
payment or offset. Goods'], and as to matters not specifically provided for herein, by other
applicable provisions of this Title [Title VI on 'Sales']."
If the intention by the parties was that the heirs of Vicentico were ceding the
subject lot to Norma as payment of the P30,000.00 loan of their father to One remedy is provided in Article 1595, to wit:
Rosita, it would be out of the ordinary for Norma to execute a PN two days ART. 1595. Where, under a contract of sale, the ownership of the goods
after the DAS, acknowledging her indebtedness of the P50,000.00 to them, has passed to the buyer, and he wrongfully neglects or refuses to pay for
promising to pay the same within a specified period, and declaring against the goods according to the terms of the contract of sale, the seller may
her interest that the said amount represented the "cost" of the land that she maintain an action against him for the price of the goods.
bought from them. Subsequently, in 2007, it would be unlikely for her to In addition, the buyer may be held liable for damages under Article 1596, to
execute the AOD wherein she acknowledged that she owed Karen, Warren wit:
and Lynette P50,000.00 if the consideration of the DAS was Vicentico's ART. 1596. Where the buyer wrongfully neglects or refuses to accept and
indebtedness of P30,000.00. Alden was no longer included because by pay for the goods, the seller may maintain an action against him for
then Norma had already paid the P88,000.00 which she agreed to pay him damages for nonacceptance.
pursuant to their Compromise Agreement. And, Norma should have
insisted in the case filed by Alden against her that there was an offset of his The measure of damages is the estimated loss directly and naturally
father's loan to her, through Rosita, her mother. resulting in the ordinary course of events from the buyer's breach of
contract.
Moreover, in the AARM, a duly notarized document which the heirs of Also, an unpaid seller, who is deemed as such "[w]hen the whole of the
Rosita executed in July 2005, they acknowledged that: "[they] are releasing price has not been paid or tendered" as provided in Article 1525(1), has the
this Real Estate Mortgage, the fact being that the late Vicentico Nuñez had right to rescind the sale under Article 1526.
already paid [their] late mother indebtedness of THIRTY THOUSAND
PESOS (P30,000.00) [and] absolving the late Vicentico Nuñez of any With respect to the sale of immovable properties, the remedies of the
liabilities whatsoever."66 Indeed, as claimed by petitioners in the Petition, vendor are provided in the following Civil Code provisions:
the P30,000.00 loan of their father Vicentico had been paid as duly ART. 1591. Should the vendor have reasonable grounds to fear the loss of
acknowledged in a registered public instrument by the heirs of Rosita, immovable property sold and its price, he may immediately sue for the
including Norma. rescission of the sale:

Thus, there is preponderant evidence that supports the finding that the DAS Should such ground not exist, the provisions of Article 1191 shall be
was not intended by the parties to be a dation in payment. And, even observed.
 been vested to the buyer, are:
ART. 1592. In the sale of immovable property, even though it may have
been stipulated that upon failure to pay the price at the time agreed upon 1. To compel specific performance by filing an action against the buyer for
the rescission of the contract shall of right take place, the vendee may pay, the agreed purchase price; or
even after the expiration of the period, as long as no demand for rescission
of the contract has been made upon him either judicially or by a notarial act. 2. To rescind or resolve the contract of sale either judicially or t|y a notarial
After the demand, the court may not grant him a new term. act; and

xxxx 3. In either (1) or (2), to recover damages for the breach of the contract.

ART. 2242. With reference to specific immovable property and real rights of Based on the amended complaint, petitioners seek to declare the DAS null
the debtor, the following claims, mortgages and liens shall be preferred, and void ab initio and non-existent since Norma, the vendee, did not pay
Pag
and shall constitute an encumbrance on the immovable or real right: the purchase price to them pursuant to the doctrine that where the price e|
which appears in the contract of sale to have been paid but has in fact not
xxxx or never been paid, the contract is void; and the absence of Alden's 61
signature in the DAS showed that he did not sign the same and it lacked his
(2) For the unpaid price of real property sold, upon the immovable sold[.] 75 consent.87 The DAS being null and void, TCT T-35460 that was issued in
The above remedies in case of breach of a contract of sale mirror the rights the name of Norma should be cancelled; the ownership of the subject lot
of a creditor in an obligation to give a determinate thing, as in the sale of a should be reconveyed to the heirs of Vicentico; and possession thereof
specific real property, which are: should be delivered to them.88
(1) To compel specific performance. This right is expressly recognized by
the first paragraph of Art. 1165 of the Code which states that the creditor Since the cause of action of Alden had been finally and fully settled in the
may compel the debtor to make the delivery. x x x Compromise Agreement in Civil Case No. 499, he no longer has a cause of
action against Norma with respect to his pro indiviso right in the subject lot.
(2) To recover damages for breach of the obligation. Besides the right to
compel specific performance, the creditor has also the right to recover What is clear from the amended complaint is that the remedy of specific
damages from the debtor in case of breach of the obligation through delay, performance was not availed of by petitioners. They do not seek to collect
fraud, negligence or contravention of the tenor thereof.76 from Norma the purchase price of P50,000.00. While they have not
With respect to reciprocal obligations, rescission or more appropriately expressly sought the resolution of the DAS on account of Norma's non-
resolution is another remedy pursuant to Article 1191 of the Civil Code, to payment of the purchase price, such remedy could be implied when they
wit: sought the nullification of Norma's TCT, the reconveyance to them of the
ART. 1191. The power to rescind obligations is implied in reciprocal ones, subject lot and the return of the possession to them. When the remedy of
in case one of the obligors should not comply with what is incumbent upon resolution of reciprocal obligations, as in rescission, is sought, "the
him. obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interests" is created pursuant
The injured party may choose between the fulfillment and the rescission of to Article 1385 of the Civil Code.
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should Aside from attorney's fees, litigation expenses, moral damages and
become impossible. exemplary damages, they also seek from Norma in their amended
complaint the "reasonable value of the use of the premises in the estimated
The court shall decree the rescission claimed, unless there be just cause amount of at least P10,000.00 a year, the property in question being a
authorizing the fixing of a period. prime commercial lot," having been deprived thereof.89

This is understood to be without prejudice to the rights of third persons who As to the ruling of the MTC, it erred when it concluded that the DAS could
have acquired the thing, in accordance with Articles 1385 and 1388 and the be considered as not consummated because no consideration was effected
Mortgage Law. or given by Norma; and, thus, it is void and non-existent.90 The sale was
To recall, reciprocal obligations are those which are created or established partly consummated on account of the transfer of ownership by the vendors
at the same time, out of the same cause, and which result in mutual to Norma. The DAS is not void for lack of consideration, but it has been
relationships of creditor and debtor between the parties; and their extinguished by the happening of the tacit resolutory condition, which is
outstanding characteristic is reciprocity arising from identity of cause by judicial resolution or rescission of the sale.
virtue of which one obligation is a correlative of the other. 77
Likewise, the RTC erred in ruling that the DAS is valid, notwithstanding the
Justice Eduardo P. Caguioa78 explained: non-payment of the consideration, because there was delivery pursuant to
x x x A reciprocal obligation has been defined as that where each of the Article 147791 in relation to Article 149892 of the Civil Code.93 It further erred
parties is a promisee of a prestation and promises another in return as a when it ordered Norma to pay the P50,000.00 with interest at the legal rate
counterpart or equivalent of the other.79 Article 1191 refers to this kind of of 12% per annum starting on June 28, 1995 (DAS' date of execution) until
obligation. The most salient feature of this obligation is reciprocity. In order the full amount is paid.94 The error is because, firstly, the remedy availed of
that there be reciprocity, it is not sufficient that two persons be mutually by the vendors is not specific performance, and secondly, under Article
debtor and creditor of each other; the reciprocity must be so perfect as to 1592 of the Civil Code, the court may not grant the buyer a new term when
cause both relations to arise from the same source; each obligation being a demand for rescission of the contract has been made upon him judicially.
correlative with the other, it not being possible to conceive one without the
other. x x x80 The applicability of Article 1592 was discussed by the Court in Cabrera v.
In a contract of sale, as in the DAS in this case, the obligation of the vendee Ysaac:95
to pay the price is a correlative of the obligation of the vendor to deliver the For the sale of immovable property, the following provision governs its
thing sold.81 rescission:
Article 1592. In the sale of immovable property, even though it may have
Proceeding from the fact that the obligation of one party is the correlative of been stipulated that upon failure to pay the price at the time agreed upon
the obligation of the other in reciprocal obligations, the Civil Code in the first the rescission of the contract shall of right take place, the vendee may pay,
paragraph of Article 1191 has established the principle that if one of the even after the expiration of the period, as long as no demand for rescission
parties fails to comply with what is incumbent upon him, there is a right on of the contract has been made upon him either judicially or by notarial act.
the part of the other to rescind (or "resolve" in accordance with accepted After the demand, the court may not grant him a new term.
translations of the Spanish Civil Code) the obligation.82 Since this condition, This provision contemplates (1) a contract of sale of an immovable property
which is implied as a general rule in all reciprocal obligations, has the effect and (2) a stipulation in the contract that failure to pay the price at the time
of extinguishing rights which are already acquired or vested, it is resolutory agreed upon will cause the rescission of the contract. The vendee or the
in character, thus a tacit resolutory condition.83 buyer can still pay even after the time agreed upon, if the agreement
between the parties has these requisites. This right of the vendee to pay
In the words of Justice Eduardo P. Caguioa, "Article 1191 provides for the ceases when the vendor or the seller demands the rescission of the
implied or tacit resolutory condition even if there is no corresponding contract judicially or extrajudicially. In case of an extrajudicial demand to
agreement between the parties," unlike in unilateral obligations where the rescind the contract, it should be notarized.
right to resolve the obligation must always be express.84 He further opined
that although the said Article uses the term "rescind" the same should be Hence, this provision does not apply if it is not a contract of sale of an
understood in the sense of "resolve"; and distinguished the two terms as immovable property and merely a contract to sell an immovable property. A
follows: contract to sell is "where the ownership or title is retained by the seller and
x x x Between the two terms, there are several differences: (1) resolution is not to pass until the full payment of the price, such payment being a
can only be availed of by a party to the obligation while rescission may be positive suspensive condition and failure of which is not a breach, casual or
availed of by a third person (creditor); (2) resolution can be obtained only serious, but simply an event that prevented the obligation of the vendor to
on the ground of non-performance by the other party while rescission may convey title from acquiring binding force."96
be based on fraud, lesion, etc.; (3) resolution may be refused by the court The Court is mindful of the opinion of Justice J.B.L. Reyes in the
on valid grounds while rescission may not be refused by the court if all consolidated cases of Sing, Yee & Cuan, Inc. v. Santos, et al.97 and Santos,
requisites are present; (4) resolution is a primary remedy while rescission is et al. v. Sing Yee & Cuan, Inc.98 (Sing, Yee & Cuan, Inc.), viz.:
subsidiary, available only when there is no other remedy; and (5) resolution x x x [I]t is nevertheless clear that a distinction must be made between a
is based on mutuality of the parties while rescission is based on prejudice contract of sale in which title passes to the buyer upon delivery of the thing
or damage suffered.85 sold and a contract to sell (or of "exclusive right and privilege to purchase,"
To summarize, the remedies of the unpaid seller, after ownership of the real as in this case) where by agreement the ownership is reserved in the seller
property not covered by Republic Act No. 655286 or the Maceda Law, has and is not to pass until the full payment of the purchase price is made. In
the first case, nonpayment of the price is a negative resolutory condition; in The MTC Decision has adequately explained the award of damages and
the second place, full payment is a positive suspensive condition. Being the Court is in full agreement based on the statutory bases afore-cited.
contraries, their effect in law can not be identical. In the first case, the
vendor has lost and can not recover the ownership of the land sold until and The Court is aware that while petitioners alleged the amount of at least
unless the contract of sale is itself resolved and set aside. In the second P10,000.00 a year as reasonable value of the use of the premises in the
case, however, the title remains in the vendor if the vendee does not amended complaint,102 no evidence was adduced by them to support such
comply with the condition precedent of making payment at the time claim. Nonetheless, the Court deems it just and equitable to award
specified in the contract. Hence, when the seller, because of reasonable compensation in the amount as alleged by petitioners for the
noncompliance with the suspensive condition stipulated, seeks to eject the use and occupation of the premises by Norma because petitioners have
buyer from the land object of the agreement, said vendor is enforcing the been unjustly deprived of the use of the subject lot.103 They are entitled to
contract and is not resolving the same. That article 1504 [(of the Civil Code recover possession of the subject lot because of the failure of Norma to pay
of Spain or old Civil Code, now Article 1592 of the new Civil Code)] refers to the agreed purchase price and she has not been paying any rental for her
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nonpayment as a resolutory condition and does not contemplate an use and occupancy of the premises. Under Article 1596, the measure of e|
agreement to sell in which title is reserved by the vendor until the vendee damages is the estimated loss directly and naturally resulting in the
has complied first with conditions specified, is clear from its terms: ordinary course of events from the buyer's breach of contract for refusing to 62
"ART. 1504. In the sale of real property, even though it may have been pay the purchase price.
stipulated that in default of the payment of the price within the time agreed
upon, the resolution of the contract shall take place ipso jure, the purchaser WHEREFORE, the Petition is hereby GRANTED. The Court of Appeals
may pay even after the expiration of the period, at any time before demand (Visayas Station) Decision dated July 31, 2015 and Resolution dated March
has been made upon him either by suit or by notarial act. After such 15, 2016 in CA-G.R. SP No. 07390 are hereby REVERSED and SET
demand has been made the judge cannot grant him further time."99 ASIDE. Likewise, the Decision dated December 11, 2012 of the Regional
Based on Justice J.B.L. Reyes' opinion in Sing, Yee & Cuan, Inc. that the Trial Court, 6th Judicial Region, Branch 21, Mambusao, Capiz in Civil Case
non-payment of the purchase price in a contract of sale is a negative No. M-12-0360-07 AP is hereby REVERSED and SET ASIDE. The
resolutory condition, the happening or fulfillment thereof will extinguish the Decision dated June 8, 2012 of the Municipal Trial Court, 6th Judicial
obligation or the sale pursuant to Article 1231 of the Civil Code, which Region, Mambusao, Capiz in Civil Case No. 515
provides that fulfillment of a resolutory condition is another cause of is REINSTATED and AFFIRMED with MODIFICATION as follows:
extinguishment of obligations. Despite its extinguishment, since the vendor WHEREFORE, preponderance of evidence points in favor of plaintiffs and
has lost ownership of the land, the contract must itself be resolved and set against defendant, judgment is hereby rendered:
aside. It is noted, however, that the resolution of the sale is the tacit
resolutory condition under Article 1191, as discussed above, which is
implied in reciprocal obligations. 1.) DECLARING the Deed of Adjudication
and Sale dated June 28,
Consequently, the Court rules that the sale transaction in the DAS is 1995 RESOLVED in so far as the sale
deemed resolved. in favor of Norma Moises Palma is
concerned;
Proceeding to the second issue, the MTC justified the award of damages in
this wise:
It is an elementary rule that when a person causes injury to another by
2.) ORDERING the proper Register of Deeds
reason of a breach of contract or by a wrongful act or negligent act or
to CANCEL Transfer Certificate of Title
omission, the person injured can recover damages for the injury he
No. T-35460 in the name of defendant
sustained from the one who causes it and that the damages he may receive
Norma Moises Palma and, in lieu thereof,
will be commensurate to the injuries he sustained.
to ISSUE a new Transfer Certificate of
Title in the names of Placida Hisole
It was testified to by the plaintiffs, particularly Karen Nuñez Vito and Lynette
Nuñez, Karen Nuñez, Warren Nuñez,
Nuñez Macinda, that due to the non-payment of defendant Norma
Lynette Nuñez and Norma Moises Palma,
Moises Palma of the purchase price of their property (Lot No. 2159-A)
as co-owners to the extent of 1/5 pro
despite their demands and the transfer of the defendant in her name the
indiviso each or 85.8 square meters
certificate of title over the subject property, it causes them sleepless nights,
undivided portion;
serious anxiety and other sufferings because, they said, they might lose
their property to defendant for nothing. The plaintiff further testified that they
had no other choice but to protect their rights and hired the services of a
lawyer for thirty thousand (Php30,000.00) pesos. 3.) DECLARING plaintiffs as the rightful co-
owners of Lot No. 2159-A subject to the
It is already ruled by this Court that defendant Norma Moises Palma never co-owner's right of defendant Norma
paid plaintiffs the purchase price of Lot No. 2159-A and as such, her action Moises Palma with respect to the share of
caused breached (sic) of faith, which lead to the nullification of the Deed of Alden Nuñez in the total area of 85.8
Adjudication and Sale. Defendant's action indeed caused apprehension to square meters;
plaintiffs that their property will go to waste considering that defendant had
already registered and acquired in her name a Transfer Certificate of Title.
The worry of plaintiffs are real and justice and equity dictates that moral 4.) ORDERING defendant Norma
damages be given to them just to alleviate and or (sic) compensate their Moises Palma to recognize and respect
moral sufferings caused by the action of defendant Norma Moises Palma. the rights of ownership and possession of
Likewise, the attitude of defendant, despite the lapse of twelve (12) years Placida Hisole Nuñez, Karen
from the time the Deed of Adjudication and Sale was executed (June 28, Nuñez, Warren Nuñez and Lynette Nuñez
1995) by the plaintiffs up to the time of the filing of this case which was on as co-owners of Lot No. 2159-A;
August 15, 2007, in not paying plaintiffs, shows that defendant acted in a
wanton, fraudulent and even oppressive manner which this Court will not
countenance and therefore so as to give an example to similarly minded
persons, the award for exemplary damages is proper. 5.) ORDERING defendant Norma
Moises Palma to pay plaintiffs the
Plaintiffs action in filing a case against defendant was borne out of fear that following:
they may lose their property. They were forced to litigate and incurred
expenses to protect their rights, hence, an award of attorney's fees and
litigation expenses is just and equitable.100 a.) Ten Thousand
The non-payment of the entire purchase price, despite repeated (Php10,000.00) pesos
assurances by Norma to pay the same clearly constitutes a substantial and per year from 1995 up
fundamental breach as would defeat the very object of the parties in making to the actual turnover of
the agreement.101 possession of Lot No.
2159-A to plaintiffs
In contracts, the court may award exemplary damages if the defendant except the share of
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner Alden Nuñez with an
pursuant to Article 2232 of the Civil Code. Under Article 2219, moral area of 85.8 square
damages may be recovered with respect to acts and actions referred to in meters;
Article 21: "Any person who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage." As provided in Article 2208, as to
attorney's fees and expenses of litigation, other than judicial costs, they b.) Fifty Thousand
cannot be recovered in the absence of stipulation, except: when the (Php50,000.00) pesos
defendant's act or omission has compelled the plaintiff to incur expenses to as attorney's fees;
protect his interest; where the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiffs plainly valid, just and demandable
claim; and in any other case where the court deems it just and equitable c.) Five Thousand
that attorney's fees and expenses of litigation should be recovered. In all (Php5,000.00) pesos as
cases, they must be reasonable. litigation expenses;
 subsequently dishonored by the drawee bank for insufficiency of funds or
credit; or the check would have been dishonored for the same reason had
d.) Seventy-Five Thousand not the drawer, without any valid reason, ordered the bank to stop payment.
(Php75,000.00) pesos The trial court pointed out, though, that the prosecution failed to prove the
as moral damages; and third element; i.e. at the time of the issuance of the check to the payee, the
latter did not have sufficient funds in, or credit with, the drawee bank for
payment of the check in full upon its presentment.[9] In the instant case, the
d.) Fifteen Thousand court held that while prosecution witness Alexander G. Yu declared that the
(P15,000.00) pesos as lawyer had sent a demand letter to Evangelista, Yu failed to prove that the
exemplary damages; letter had actually been received by addressee. Because there was no way
to determine when the five-day period should start to toll, there was a
failure to establish prima facie evidence of knowledge of the insufficiency of
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with the foregoing
funds on the part of Evangelista.[10] Hence, the court acquitted him of the e|
criminal charges.
amounts bearing legal Ruling on the civil aspect of the cases, the court held that while Evangelista 63
interest at 6% per admitted to having issued and delivered the checks to Gotuaco and to
annum from finality of having fully paid the amounts indicated therein, no evidence of payment
this Decision until full was presented.[11] It further held that the creditor's possession of the
payment; and instrument of credit was sufficient evidence that the debt claimed had not
yet been paid.[12] In the end, Evangelista was declared liable for the
corresponding civil obligation.[13]
6.) ORDERING defendant to pay the cost of The dispositive portion of the Decision[14] reads:
the suit. WHEREFORE, judgment is rendered acquitting the accused BENJAMIN
EVANGELISTA for failure of the prosecution to establish all the elements
SO ORDERED. constituting the offense of Violation of B.P. 22 for two (2) counts. However,
accused is hereby ordered to pay his civil obligation to the private
complainant in the total amount of ONE MILLION FIVE HUNDRED
[ G.R. No. 211564, November 20, 2017 ] THOUSAND PESOS (P1,500,000) plus twelve (12%) percent interest per
annum from the date of the filing of the two sets of Information until fully
BENJAMIN EVANGELISTA, PETITIONER, V. SCREENEX,[1] INC., paid and to pay the costs of suit.
REPRESENTED BY ALEXANDER G, YU, RESPONDENT.
SO ORDERED.[15]
DECISION THE RULING OF THE RTC
SERENO, C.J.: Evangelista filed a timely Notice of Appeal[16] and raised two errors of the
This is a Petition[2] for Review on Certiorari seeking to set aside the MeTC before the Regional Trial Court (RTC) of Makati City, Branch 147.
Decision[3] and Resolution[4] rendered by the Court of Appeals (CA) Manila, Docketed therein as Criminal Case Nos. 08-1723 and 08-1724, the appeal
Fifth Division, in CA-G.R. SP No. 110680. posed the following issues: (1) the lower court erred in not appreciating the
ANTECEDENT FACTS fact that the prosecution failed to prove the civil liability of Evangelista to
The facts as summarized by the CA are as follows: private complainant; and (2) any civil liability attributable to Evangelista had
been extinguished and/or was barred by prescription.[17]
Sometime in 1991, [Evangelista] obtained a loan from respondent After the parties submitted their respective Memoranda,[18] the RTC ruled
Screenex, Inc. which issued two (2) checks to [Evangelista]. The first check that the checks should be taken as evidence of Evangelista's indebtedness
was UCPB Check No. 275345 for P1,000,000 and the other one is China to Gotuaco, such that even if the criminal aspect of the charge had not
Banking Corporation Check No. BDO 8159110 for P500,000. There were been established, the obligation subsisted.[19] Also, the alleged payment by
also vouchers of Screenex that were signed by the accused evidencing that Evangelista was an affirmative defense that he had the burden of proving,
he received the 2 checks in acceptance of the loan granted to him. but that he failed to discharge.[20] With respect to the defense of
prescription, the RTC ruled in this wise:
As to the defense of prescription, the same cannot be successfully invoked
As security for the payment of the loan, [Evangelista] gave two (2) open in this appeal. The 10-year prescriptive period of the action under Art. 1144
dated checks: UCPB Check Nos. 616656 and 616657, both pay to the of the New Civil Code is computed from the time the right of action accrues.
order of Screenex, Inc. From the time the checks were issued by The terms and conditions of the loan obligation have not been shown, as
[Evangelista], they were held in safe keeping together with the other only the checks evidence the same. It has not been shown when the loan
documents and papers of the company by Philip Gotuaco, Sr., father-in-law obligation was to mature such that there is no basis to show or from which
of respondent Alexander Yu, until the former's death on 19 November to infer, when the cause of action (non-payment of the loan) which would
2004. give the obligee the right to seek redress for the non-payment of the
obligation, accrued. In other words, the reckoning point of prescription has
not been established.
Before the checks were deposited, there was a personal demand from the
family for [Evangelista] to settle the loan and likewise a demand letter sent
by the family lawyer.[5] Prosecution witness Alexander G. Yu was not competent to state that the
On 25 August 2005, petitioner was charged with violation of Batas loan was contracted in 1991 as in fact, Yu admitted that it was a few
Pambansa (BP) Blg. 22 in Criminal Case Nos. 343615-16 filed with the months before his father-in-law (Philip Gotuaco) died when the latter told
Metropolitan Trial Court (MeTC) of Makati City, Branch 61.[6] The him about accused's failure to pay his obligation. That was a few months
Information reads: before November 19, 2004, date of death of his father-in-law.
That sometime in 1991, in the City of Makati, Metro Manila, Philippines, a
place within the jurisdiction of this Honorable Court, the above-named
accused, did then and there, willfully, unlawfully and feloniously make out, At any rate, the right of action in this case is not upon a written contract, for
draw, and issue to SCREENEX INC., herein represented by ALEXANDER which reason, Art. 1144, New Civil Code, on prescription does not apply. [21]
G. YU, to apply on account or for value the checks described below: In a Decision[22] dated 18 December 2008, the RTC dismissed the appeal
and affirmed the MeTC decision in toto.[23] The Motion for
Reconsideration[24] was likewise denied in an Order[25] dated 19 August
Check 2009.
Date Amount THE RULING OF THE CA
No.
Evangelista filed a petition for review[26] before the CA insisting that the
United AGR 12-22- lower court erred in finding him liable to pay the sum with interest at 12%
P1,000,000.00
Coconut 616656 04 per annum from the date of filing until full payment. He further alleged that
witness Yu was not competent to testify on the loan transaction; that the
Planters AGR 12-22- insertion of the date on the checks without the knowledge of the accused
500,000.00
Bank 616657 04 was an alteration that avoided the checks; and that the obligation had been
said accused well knowing that at the time of issue thereof, said accused extinguished by prescription.[27]
did not have sufficient funds in or credit with the drawee bank for the Screenex, Inc., represented by Yu, filed its Comment.[28] Yu claimed that he
payment in full of the face amount of such check upon its presentment had testified on the basis of his personal dealings with his father-in law,
which check when presented for payment within ninety (90) days from the whom Evangelista dealt with in obtaining the loan. He further claimed that
date thereof, was subsequently dishonored by the drawee bank for the during the trial, petitioner never raised the competence of the witness as an
reason "ACCOUNT CLOSED" and despite receipt of notice of such issue.[29] Moreover, Yu argued that prescription set in from the accrual of
dishonor, the said accused failed to pay said payee the face amount of said the obligation; hence, while the loan was transacted in 1991, the demand
checks or to make arrangement for full payment thereof within five (5) was made in February 2005, which was within the 10-year prescriptive
banking days after receiving notice. period.[30] Yu also argued that while Evangelista claimed under oath that the
loan had been paid in 1992, he was not able to present any proof of
payment.[31] Meanwhile, Yu insisted that the material alteration invoked by
CONTRARY TO LAW.[7] Evangelista was unavailing, since the checks were undated; hence, nothing
Petitioner pleaded not guilty when arraigned, and trial proceeded. [8] had been altered.[32] Finally, Yu argued that Evangelista should not be
THE RULING OF THE MeTC allowed to invoke prescription, which he was raising for the first time on
The MeTC found that the prosecution had indeed proved the first two appeal, and for which no evidence was adduced in the court of origin. [33]
elements of cases involving violation of BP 22: i.e. the accused makes,
draws or issues any check to apply to account or for value, and the check is
The CA denied the petition.[34] It held that (1) the reckoning time for the (b) By payment in due course by the party accommodated, where the
prescriptive period began when the instrument was issued and the instrument is made or accepted for his accommodation;
corresponding check returned by the bank to its depositor;[35] (2) the issue
of prescription was raised for the first time on appeal with the RTC; [36] (3)
the writing of the date on the check cannot be considered as an alteration, (c) By the intentional cancellation thereof by the holder;
as the checks were undated, so there was nothing to change to begin
with;[37] (4) the loan obligation was never denied by petitioner, who claimed (d) By any other act which will discharge a simple contract for the
that it was settled in 1992, but failed to show any proof of payment of money;
payment.[38] Quoting the MeTC Decision, the CA declared: (e) When the principal debtor becomes the holder of the instrument at or
[t]he mere possession of a document evidencing an obligation by the after maturity in his own right. (Emphasis supplied)
person in whose favor it was executed, merely raises a presumption of
nonpayment which may be overcome by proof of payment, or by
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satisfactory explanation of the fact that the instrument is found in the hands A check therefore is subject to prescription of actions upon a written e|
of the original creditor not inconsistent with the fact of payment. [39] contract. Article 1144 of the Civil Code provides:
The dispositive portion reads: 64
Article 1144. The following actions must be brought within ten years from
WHEREFORE, premises considered, the petition is DENIED. The assailed the time the right of action accrues:
August 19, 2009 Order of the Regional Trial Court, Branch 147, Makati City,
denying petitioner's Motion for Reconsideration of the Court's December
1) Upon a written contract;
18, 2008 Decision in Crim. Case Nos. 08-1723 and 08-1724
2) Upon an obligation created by law;
are AFFIRMED.
3) Upon a judgment. (Emphasis supplied)
SO ORDERED.[40]
Barring any extrajudicial or judicial demand that may toll the 10-year
Petitioner filed a Motion for Reconsideration,[41] which was similarly denied
prescription period and any evidence which may indicate any other time
in a Resolution[42] dated 27 February 2014.
when the obligation to pay is due, the cause of action based on a check is
Hence, this Petition,[43] in which petitioner contends that the lower court
reckoned from the date indicated on the check.
erred in ordering the accused to pay his alleged civil obligation to private
complainant. In particular, he argues that the court did not consider the
prosecution's failure to prove his civil liability to respondent, and that any If the check is undated, however, as in the present petition, the cause of
civil liability there might have been was already extinguished and/or barred action is reckoned from the date of the issuance of the check. This is so
by prescription.[44] because regardless of the omission of the date indicated on the check,
Meanwhile, respondent filed its Comment,[45] arguing that the date of Section 17[53] of the Negotiable Instruments Law instructs that an undated
prescription was reckoned from the date of the check, 22 December 2004. check is presumed dated as of the time of its issuance.
So when the complaint was filed on 25 August 2005, it was supposedly well While the space for the date on a check may also be filled, it must,
within the prescriptive period of ten (10) years under Article 1144 of the however, be filled up strictly in accordance with the authority given and
New Civil Code.[46] within a reasonable time.[54] Assuming that Yu had authority to insert the
OUR RULING dates in the checks, the fact that he did so after a lapse of more than 10
With petitioner's acquittal of the criminal charges for violation of BP 22, the years from their issuance certainly cannot qualify as changes made within a
only issue to be resolved in this petition is whether the CA committed a reasonable time.
reversible error in holding that petitioner is still liable for the total amount of Given the foregoing, the cause of action on the checks has become stale,
P1.5 million indicated in the two checks. hence, time-barred. No written extrajudicial or judicial demand was shown
to have been made within 10 years which could have tolled the period.
Prescription has indeed set in.
We rule in favor of petitioner.

A check is discharged by any Prescription allows the court to

other act which will discharge a dismiss the case motu proprio.
simple contract for the payment of We therefore have no other recourse but to grant the instant petition on the
money. ground of prescription. Even if that defense was belatedly raised before the
In BP 22 cases, the action for the corresponding civil obligation is deemed RTC for the first time on appeal from the ruling of the MeTC, we
instituted with the criminal action.[47] The criminal action for violation of BP nonetheless dismiss the complaint, seeking to enforce the civil liability of
22 necessarily includes the corresponding civil action, and no reservation to Evangelista based on the undated checks, by applying Section 1 of Rule 9
file such civil action separately shall be allowed or recognized. [48] of the Rules of Court, to wit:
The rationale for this rule has been elucidated in this wise:
Section 1. Defenses and objections not pleaded. - Defenses and objections
Generally, no filing fees are required for criminal cases, but because of the not pleaded either in a motion to dismiss or in the answer are deemed
inclusion of the civil action in complaints for violation of B.P. 22, the Rules waived. However, when it appears from the pleadings or the evidence on
require the payment of docket fees upon the filing of the complaint. This record that the court has no jurisdiction over the subject matter, that there is
rule was enacted to help declog court dockets which are filled with B.P. 22 another action pending between the same parties for the same cause, or
cases as creditors actually use the courts as collectors. Because ordinarily that the action is barred by a prior judgment or by statute of limitations, the
no filing fee is charged in criminal cases for actual damages, the payee court shall dismiss the claim.
uses the intimidating effect of a criminal charge to collect his While it was on appeal before the RTC that petitioner invoked the defense
credit gratis and sometimes, upon being paid, the trial court is not even of prescription, we find that the pleadings and the evidence on record
informed thereof. The inclusion of the civil action in the criminal case is indubitably establish that the action to hold petitioner liable for the two
expected to significantly lower the number of cases filed before the courts checks has already prescribed.
for collection based on dishonored checks. It is also expected to expedite
the disposition of these cases. Instead of instituting two separate cases,
one for criminal and another for civil, only a single suit shall be filed and The delivery of the check
tried. It should be stressed that the policy laid down by the Rules is to produces the effect of payment
discourage the separate filing of the civil action. The Rules even prohibit the when through the fault of the
reservation of a separate civil action, which means that one can no longer creditor they have been impaired
file a separate civil case after the criminal complaint is filed in court. The It is a settled rule that the creditor's possession of the evidence of debt is
only instance when separate proceedings are allowed is when the civil proof that the debt has not been discharged by payment.[55] It is likewise an
action is filed ahead of the criminal case. Even then, the Rules encourage established tenet that a negotiable instrument is only a substitute for money
the consolidation of the civil and criminal cases. We have previously and not money, and the delivery of such an instrument does not, by itself,
observed that a separate civil action for the purpose of recovering the operate as payment.[56] Thus, in BPI v. Spouses Royeca,[57] we ruled that
amount of the dishonored checks would only prove to be costly, despite the lapse of three years from the time the checks were issued, the
burdensome and time-consuming for both parties and would further delay obligation still subsisted and was merely suspended until the payment by
the final disposition of the case. This multiplicity of suits must be commercial document could actually be realized.[58]
avoided.[49] (Citations omitted) However, payment is deemed effected and the obligation for which the
This notwithstanding, the civil action deemed instituted with the criminal check was given as conditional payment is treated discharged, if a period of
action is treated as an "independent civil liability based on contract."[50] 10 years or more has elapsed from the date indicated on the check until the
By definition, a check is a bill of exchange drawn on a bank 'payable on date of encashment or presentment for payment. The failure to encash the
demand.[51] It is a negotiable instrument - written and signed by a drawer checks within a reasonable time after issue, or more than 1 0 years in this
containing an unconditional order to pay on demand a sum certain in instance, not only results in the checks becoming stale but also in the
money.[52] It is an undertaking that the drawer will pay the amount indicated obligation to pay being deemed fulfilled by operation of law.
thereon. Section 119 of the NIL, however, states that a negotiable
instrument like a check may be discharged by any other act which will
Art. 1249 of the Civil Code specifically provides that checks should be
discharge a simple contract for the payment of money, to wit:
presented for payment within a reasonable period after their issuance, to
Sec. 119. Instrument; how discharged. - A negotiable instrument is
wit:
discharged:

(a) By payment in due course by or on behalf of the principal debtor;

Art. 1249. The payment of debts in money shall be made in the currency Equitable, in its answer, asserted that respondents knowingly accepted all
stipulated, and if it is not possible to deliver such currency, then in the the terms and conditions contained in the promissory notes. 9 In fact, they
currency which is legal tender in the Philippines. continuously availed of and benefited from Equitable's credit facilities for
five years.10
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of After trial, the RTC upheld the validity of the promissory notes. It found that,
payment only when they have been cashed, or when through the fault in 2001 alone, Equitable restructured respondents' loans amounting to
of the creditor they have been impaired. US$228,200 and ₱1,000,000.11 The trial court, however, invalidated the
In the meantime, the action derived from the original obligation shall be held escalation clause contained therein because it violated the principle of
in the abeyance. (Emphasis supplied) mutuality of contracts.12 Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period13 and declared the Pag
existence of extraordinary deflation.14 Consequently, the RTC ordered the
This rule is similarly stated in the Negotiable Instruments Law as follows: use of the 1996 dollar exchange rate in computing respondents' dollar- e|
denominated loans.15 Lastly, because the business reputation of 65
Sec. 186. Within what time a check must be presented. — A check must be respondents was (allegedly) severely damaged when Equitable froze their
presented for payment within a reasonable time after its issue or the accounts,16 the trial court awarded moral and exemplary damages to
drawer will be discharged from liability thereon to the extent of the them.17
loss caused by the delay. (Emphasis supplied)
These provisions were the very same ones we cited when we discharged a The dispositive portion of the February 5, 2004 RTC decision18 provided:
check by reason of the creditor's unreasonable or unexplained delay in
encashing it. In Papa v. Valencia,[59] the respondents supposedly paid the
petitioner the purchase price of the lots in cash and in check. The latter WHEREFORE, premises considered, judgment is hereby rendered:
disputed this claim and argued that he had never encashed the checks, and
that he could no longer recall the transaction that happened 10 years A) Ordering [Equitable] to reinstate and return the amount of
earlier. This Court ruled: [respondents'] deposit placed on hold status;
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. B) Ordering [Equitable] to pay [respondents] the sum of ₱12
[m]illion [p]esos as moral damages;

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 C) Ordering [Equitable] to pay [respondents] the sum of ₱10
otherwise if the debtor is prejudiced by the creditor's unreasonable delay in [m]illion [p]esos as exemplary damages;
presentment. The acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from whom it is D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
received sustains loss by want of such diligence, it will be held to [respondents], jointly and severally, the sum of [t]wo [m]illion
operate as actual payment of the debt or obligation for which it was [p]esos as moral and exemplary damages;
given. It has, likewise, been held that if no presentment is made at all, the
drawer cannot be held liable irrespective of loss or injury unless
presentment is otherwise excused. This is in harmony with Article 1249 of E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly
the Civil Code under which payment by way of check or other negotiable and severally, to pay [respondents'] attorney's fees in the sum of
instrument is conditioned on its being cashed, except when through the ₱300,000; litigation expenses in the sum of ₱50,000 and the cost
fault of the creditor, the instrument is impaired. The payee of a check would of suit;
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 F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay
the check was given as conditional payment will be [Equitable] the unpaid principal obligation for the peso loan as
discharged.[60] (Citations omitted and emphasis supplied) well as the unpaid obligation for the dollar denominated loan;
Similarly in this case, we find that the delivery of the checks, despite the
subsequent failure to encash them within a period of 10 years or more, had
the effect of payment. Petitioner is considered discharged from his G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
obligation to pay and can no longer be pronounced civilly liable for the [Equitable] interest as follows:
amounts indicated thereon.
1) 12% per annum for the peso loans;
WHEREFORE, the instant Petition is GRANTED. The Decision dated 1
October 2013 and Resolution dated 27 February 2014 in CA-G.R. SP No. 2) 8% per annum for the dollar loans. The basis for the
110680 are SET ASIDE. The Complaint against petitioner is payment of the dollar obligation is the conversion rate
hereby DISMISSED. of P26.50 per dollar availed of at the time of incurring
SO ORDERED. of the obligation in accordance with Article 1250 of the
Civil Code of the Philippines;

G.R. No. 171545 December 19, 2007 H) Dismissing [Equitable's] counterclaim except the payment of
the aforestated unpaid principal loan obligations and interest.
EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL
APAS, Petitioners, SO ORDERED.19
vs.
NG SHEUNG NGOR** doing business under the name and style "KEN
Equitable and respondents filed their respective notices of appeal. 20
MARKETING," KEN APPLIANCE DIVISION, INC. and BENJAMIN E.
GO, Respondents.
In the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents "failed to submit proof that they
DECISION
paid their respective appeal fees."21

CORONA, J.:
WHEREFORE, premises considered, the appeal interposed by defendants
from the Decision in the above-entitled case is DENIED due course. As of
This petition for review on certiorari1 seeks to set aside the decision2 of the February 27, 2004, the Decision dated February 5, 2004, is considered
Court of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution3 denying final and executory in so far as [Equitable, Aimee Yu and Bejan Lionel
reconsideration. Apas] are concerned.22 (emphasis supplied)

On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Equitable moved for the reconsideration of the March 1, 2004 order of the
Division, Inc. and Benjamin E. Go filed an action for annulment and/or RTC23 on the ground that it did in fact pay the appeal fees. Respondents,
reformation of documents and contracts5 against petitioner Equitable PCI on the other hand, prayed for the issuance of a writ of execution. 24
Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in
the Regional Trial Court (RTC), Branch 16 of Cebu City. 6 They claimed that
On March 24, 2004, the RTC issued an omnibus order denying Equitable's
Equitable induced them to avail of its peso and dollar credit facilities by
motion for reconsideration for lack of merit25 and ordered the issuance of a
offering low interest rates7 so they accepted Equitable's proposal and
writ of execution in favor of respondents.26 According to the RTC, because
signed the bank's pre-printed promissory notes on various dates beginning
respondents did not move for the reconsideration of the previous order
1996. They, however, were unaware that the documents contained identical
(denying due course to the parties’ notices of appeal),27 the February 5,
escalation clauses granting Equitable authority to increase interest rates
2004 decision became final and executory as to both parties and a writ of
without their consent.8
execution against Equitable was in order.28
A writ of execution was thereafter issued29 and three real properties of The petition shall be accompanied by a certified true copy of the judgment,
Equitable were levied upon.30 order or resolution subject thereof, copies of all pleadings and documents
relevant and pertinent thereto, and a sworn certificate of non-forum
shopping as provided in the third paragraph of Section 3, Rule 46.
On March 26, 2004, Equitable filed a petition for relief in the RTC from the
March 1, 2004 order.31 It, however, withdrew that petition on March 30,
200432 and instead filed a petition for certiorari with an application for an There are two substantial requirements in a petition for certiorari. These
injunction in the CA to enjoin the implementation and execution of the are:
March 24, 2004 omnibus order.33
1. that the tribunal, board or officer exercising judicial or quasi-
On June 16, 2004, the CA granted Equitable's application for injunction. A judicial functions acted without or in excess of his or its Pag
writ of preliminary injunction was correspondingly issued. 34 jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction; and e|
Notwithstanding the writ of injunction, the properties of Equitable previously 66
levied upon were sold in a public auction on July 1, 2004. 2. that there is no appeal or any plain, speedy and adequate
Respondents were the highest bidders and certificates of sale were issued remedy in the ordinary course of law.
to them.35
For a petition for certiorari premised on grave abuse of discretion to
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction prosper, petitioner must show that the public respondent patently and
sale and to cite the sheriffs who conducted the sale in contempt for grossly abused his discretion and that abuse amounted to an evasion of
proceeding with the auction despite the injunction order of the CA. 36 positive duty or a virtual refusal to perform a duty enjoined by law or to act
at all in contemplation of law, as where the power was exercised in an
arbitrary and despotic manner by reason of passion or hostility.49
On October 28, 2005, the CA dismissed the petition for certiorari.37 It found
Equitable guilty of forum shopping because the bank filed its petition for
certiorari in the CA several hours before withdrawing its petition for relief in The March 1, 2004 order denied due course to the notices of appeal of both
the RTC.38 Moreover, Equitable failed to disclose, both in the statement of Equitable and respondents. However, it declared that the February 5, 2004
material dates and certificate of non-forum shopping (attached to its petition decision was final and executory only with respect to Equitable.50 As
for certiorari in the CA), that it had a pending petition for relief in the RTC. 39 expected, the March 24, 2004 omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the issuance of a writ
of execution.51
Equitable moved for reconsideration40 but it was denied.41 Thus, this
petition.
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously
intended to prevent Equitable, et al. from appealing the February 5, 2004
Equitable asserts that it was not guilty of forum shopping because the
decision. Not only that. The execution of the decision was undertaken with
petition for relief was withdrawn on the same day the petition for certiorari
indecent haste, effectively obviating or defeating Equitable's right to avail of
was filed.42 It likewise avers that its petition for certiorari was meritorious
possible legal remedies. No matter how we look at it, the RTC committed
because the RTC committed grave abuse of discretion in issuing the March
grave abuse of discretion in rendering those orders.
24, 2004 omnibus order which was based on an erroneous assumption.
The March 1, 2004 order denying its notice of appeal for non payment of
appeal fees was erroneous because it had in fact paid the required With regard to whether Equitable had a plain, speedy and adequate remedy
fees.43 Thus, the RTC, by issuing its March 24, 2004 omnibus order, in the ordinary course of law, we hold that there was none. The RTC denied
effectively prevented Equitable from appealing the patently wrong February due course to its notice of appeal in the March 1, 2004 order. It affirmed
5, 2004 decision.44 that denial in the March 24, 2004 omnibus order. Hence, there was no way
Equitable could have possibly appealed the February 5, 2004 decision.52
This petition is meritorious.
Although Equitable filed a petition for relief from the March 24, 2004 order,
that petition was not a plain, speedy and adequate remedy in the ordinary
Equitable Was Not Guilty Of Forum shopping
course of law.53 A petition for relief under Rule 38 is an equitable remedy
allowed only in exceptional circumstances or where there is no other
Forum shopping exists when two or more actions involving the same available or adequate remedy.54
transactions, essential facts and circumstances are filed and those actions
raise identical issues, subject matter and causes of action. 45 The test is
Thus, we grant Equitable's petition for certiorari and consequently give due
whether, in two or more pending cases, there is identity of parties, rights or
course to its appeal.
causes of actions and reliefs.46

Equitable Raised Pure Questions of Law in Its Petition For Review

Equitable's petition for relief in the RTC and its petition for certiorari in the
CA did not have identical causes of action. The petition for relief from the
denial of its notice of appeal was based on the RTC’s judgment or final The jurisdiction of this Court in Rule 45 petitions is limited to questions of
order preventing it from taking an appeal by "fraud, accident, mistake or law.55 There is a question of law "when the doubt or controversy concerns
excusable negligence."47 On the other hand, its petition for certiorari in the the correct application of law or jurisprudence to a certain set of facts; or
CA, a special civil action, sought to correct the grave abuse of discretion when the issue does not call for the probative value of the evidence
amounting to lack of jurisdiction committed by the RTC.48 presented, the truth or falsehood of facts being admitted."56

In a petition for relief, the judgment or final order is rendered by a court with Equitable does not assail the factual findings of the trial court. Its arguments
competent jurisdiction. In a petition for certiorari, the order is rendered by a essentially focus on the nullity of the RTC’s February 5, 2004 decision.
court without or in excess of its jurisdiction. Equitable points out that that decision was patently erroneous, specially
the exorbitant award of damages, as it was inconsistent with existing law
and jurisprudence.57
Moreover, Equitable substantially complied with the rule on non-forum
shopping when it moved to withdraw its petition for relief in the RTC on the
same day (in fact just four hours and forty minutes after) it filed the petition The Promissory Notes Were Valid
for certiorari in the CA. Even if Equitable failed to disclose that it had a
pending petition for relief in the RTC, it rectified what was doubtlessly a
The RTC upheld the validity of the promissory notes despite respondents’
careless oversight by withdrawing the petition for relief just a few hours
assertion that those documents were contracts of adhesion.
after it filed its petition for certiorari in the CA ― a clear indication that it had
no intention of maintaining the two actions at the same time.
A contract of adhesion is a contract whereby almost all of its provisions are
drafted by one party.58 The participation of the other party is limited to
The Trial Court Committed Grave Abuse of Discretion In Issuing Its
affixing his signature or his "adhesion" to the contract. 59 For this reason,
March 1, 2004 and March 24, 2004 Orders
contracts of adhesion are strictly construed against the party who drafted
it.60
Section 1, Rule 65 of the Rules of Court provides:
It is erroneous, however, to conclude that contracts of adhesion are
Section 1. Petition for Certiorari. When any tribunal, board or officer invalid per se. They are, on the contrary, as binding as ordinary contracts. A
exercising judicial or quasi-judicial function has acted without or in party is in reality free to accept or reject it. A contract of adhesion becomes
excess of its or his jurisdiction, or with grave abuse of discretion void only when the dominant party takes advantage of the weakness of the
amounting to lack or excess of jurisdiction, and there is no appeal, nor other party, completely depriving the latter of the opportunity to bargain on
any plain, speedy or adequate remedy in the ordinary course of law, a equal footing.61
person aggrieved thereby may file a verified petition in the proper court,
alleging the facts with certainty and praying that judgment be rendered
That was not the case here. As the trial court noted, if the terms and
annulling or modifying the proceedings of such tribunal, board or officer,
conditions offered by Equitable had been truly prejudicial to respondents,
and granting such incidental reliefs as law and justice may require.
they would have walked out and negotiated with another bank at the first Despite the devaluation of the peso, the BSP never declared a situation of
available instance. But they did not. Instead, they continuously availed of extraordinary inflation. Moreover, although the obligation in this instance
Equitable's credit facilities for five long years. arose out of a contract, the parties did not agree to recognize the effects of
extraordinary inflation (or deflation).77 The RTC never mentioned that there
was a such stipulation either in the promissory note or loan agreement.
While the RTC categorically found that respondents had outstanding dollar-
Therefore, respondents should pay their dollar-denominated loans at the
and peso-denominated loans with Equitable, it, however, failed to ascertain
exchange rate fixed by the BSP on the date of maturity.78
the total amount due (principal, interest and penalties, if any) as of July 9,
2001. The trial court did not explain how it arrived at the amounts of
US$228,200 and ₱1,000,000.62 In Metro Manila Transit Corporation v. D.M. The Award Of Moral And Exemplary Damages Lacked Basis
Consunji,63 we reiterated that this Court is not a trier of facts and it shall
pass upon them only for compelling reasons which unfortunately are not
Moral damages are in the category of an award designed to compensate
Pag
present in this case.64 Hence, we ordered the partial remand of the case for
the sole purpose of determining the amount of actual damages. 65
the claimant for actual injury suffered, not to impose a penalty to the e|
wrongdoer.79 To be entitled to moral damages, a claimant must prove:
67
Escalation Clause Violated The Principle Of Mutuality Of Contracts
1. That he or she suffered besmirched reputation, or physical,
mental or psychological suffering sustained by the claimant;
Escalation clauses are not void per se. However, one "which grants the
creditor an unbridled right to adjust the interest independently and
2. That the defendant committed a wrongful act or omission;
upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. Clauses of that nature
violate the principle of mutuality of contracts.66 Article 130867 of the Civil 3. That the wrongful act or omission was the proximate cause of
Code holds that a contract must bind both contracting parties; its validity or the damages the claimant sustained;
compliance cannot be left to the will of one of them. 68
4. The case is predicated on any of the instances expressed or
For this reason, we have consistently held that a valid escalation clause envisioned by Article 221980 and 222081 . 82
provides:
In culpa contractual or breach of contract, moral damages are recoverable
1. that the rate of interest will only be increased if the applicable maximum only if the defendant acted fraudulently or in bad faith or in wanton
rate of interest is increased by law or by the Monetary Board; and disregard of his contractual obligations.83 The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or abusive. 84
2. that the stipulated rate of interest will be reduced if the applicable
maximum rate of interest is reduced by law or by the Monetary Board (de- The RTC found that respondents did not pay Equitable the interest due on
escalation clause).69 February 9, 2001 (or any month thereafter prior to the maturity of the
loan)85 or the amount due (principal plus interest) due on July 9,
2001.86 Consequently, Equitable applied respondents' deposits to their
The RTC found that Equitable's promissory notes uniformly stated:
loans upon maturity.

If subject promissory note is extended, the interest for subsequent

The relationship between a bank and its depositor is that of creditor and
extensions shall be at such rate as shall be determined by the bank. 70
debtor.87 For this reason, a bank has the right to set-off the deposits in its
hands for the payment of a depositor's indebtedness.88
Equitable dictated the interest rates if the term (or period for repayment) of
the loan was extended. Respondents had no choice but to accept them.
Respondents indeed defaulted on their obligation. For this reason,
This was a violation of Article 1308 of the Civil Code. Furthermore, the
Equitable had the option to exercise its legal right to set-off or
assailed escalation clause did not contain the necessary provisions for
compensation. However, the RTC mistakenly (or, as it now appears,
validity, that is, it neither provided that the rate of interest would be
deliberately) concluded that Equitable acted "fraudulently or in bad faith or
increased only if allowed by law or the Monetary Board, nor allowed de-
in wanton disregard" of its contractual obligations despite the absence of
escalation. For these reasons, the escalation clause was void.
proof. The undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay their
With regard to the proper rate of interest, in New Sampaguita Builders v. loans. There was therefore absolutely no basis for the award of moral
Philippine National Bank71 we held that, because the escalation clause was damages to them.
annulled, the principal amount of the loan was subject to the original or
stipulated rate of interest. Upon maturity, the amount due was subject to
Neither was there reason to award exemplary damages. Since respondents
legal interest at the rate of 12% per annum.72
were not entitled to moral damages, neither should they be awarded
exemplary damages.89 And if respondents were not entitled to moral and
Consequently, respondents should pay Equitable the interest rates of exemplary damages, neither could they be awarded attorney's fees and
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their peso- litigation expenses.90
denominated loans from January 10, 2001 to July 9, 2001. Thereafter,
Equitable was entitled to legal interest of 12% p.a. on all amounts due.
ACCORDINGLY, the petition is hereby GRANTED.

There Was No Extraordinary Deflation

The October 28, 2005 decision and February 3, 2006 resolution of the
Court of Appeals in CA-G.R. SP No. 83112 are
Extraordinary inflation exists when there is an unusual decrease in the hereby REVERSED and SET ASIDE.
purchasing power of currency (that is, beyond the common fluctuation in
the value of currency) and such decrease could not be reasonably foreseen
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16,
or was manifestly beyond the contemplation of the parties at the time of the
Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for being
obligation. Extraordinary deflation, on the other hand, involves an inverse
rendered with grave abuse of discretion amounting to lack or excess of
situation.73
jurisdiction. All proceedings undertaken pursuant thereto are likewise
declared null and void.
Article 1250 of the Civil Code provides:
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu
Article 1250. In case an extraordinary inflation or deflation of the currency City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of
stipulated should intervene, the value of the currency at the time of the petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is
establishment of the obligation shall be the basis of payment, unless there therefore given due course.1avvphi1
is an agreement to the contrary.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of
For extraordinary inflation (or deflation) to affect an obligation, the following Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New
requisites must be proven: judgment is hereby entered:

1. that there was an official declaration of extraordinary inflation 1. ordering respondents Ng Sheung Ngor, doing business under
or deflation from the Bangko Sentral ng Pilipinas (BSP); 74 the name and style of "Ken Marketing," Ken Appliance Division,
Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank the
principal amount of their dollar- and peso-denominated loans;
2. that the obligation was contractual in nature;75 and

2. ordering respondents Ng Sheung Ngor, doing business under

3. that the parties expressly agreed to consider the effects of the
the name and style of "Ken Marketing," Ken Appliance Division,
extraordinary inflation or deflation.76
Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank
interest at:
 a) 12.66% p.a. with respect to their dollar-denominated Respondent refused to pay the VAT and adjusted rentals as demanded by
loans from January 10, 2001 to July 9, 2001; petitioners but continued to pay the stipulated amount set forth in their
contract.
b) 20% p.a. with respect to their peso-denominated
loans from January 10, 2001 to July 9, 2001;91 On February 18, 1998, respondent instituted an action for declaratory relief
for purposes of determining the correct interpretation of condition Nos. 6
and 7 of the lease contract to prevent damage and prejudice. 10 The case
c) pursuant to our ruling in Eastern Shipping Lines v.
was docketed as Civil Case No. 98-411 before the RTC of Makati.
Court of Appeals,92 the total amount due on July 9,
2001 shall earn legal interest at 12% p.a. from the time
petitioner Equitable PCI Bank demanded payment, On March 10, 1998, petitioners in turn filed an action for ejectment, Pag
whether judicially or extra-judicially; and rescission and damages against respondent for failure of the latter to
vacate the premises after the demand made by the former.11 Before e|
respondent could file an answer, petitioners filed a Notice of
d) after this Decision becomes final and executory, the
Dismissal.12 They subsequently refiled the complaint before the 68
applicable rate shall be 12% p.a. until full satisfaction;
Metropolitan Trial Court of Makati; the case was raffled to Branch 139 and
was docketed as Civil Case No. 53596.
3. all other claims and counterclaims are dismissed.
Petitioners later moved for the dismissal of the declaratory relief case for
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall being an improper remedy considering that respondent was already in
compute the exact amounts due on the respective dollar-denominated and breach of the obligation and that the case would not end the litigation and
peso-denominated loans, as of July 9, 2001, of respondents Ng Sheung settle the rights of the parties. The trial court, however, was not persuaded,
Ngor, doing business under the name and style of "Ken Marketing," Ken and consequently, denied the motion.
Appliance Division and Benjamin E. Go.
After trial on the merits, on May 9, 2000, the RTC ruled in favor of
SO ORDERED. respondent and against petitioners. The pertinent portion of the decision
reads:
G.R. No. 150806 January 28, 2008
WHEREFORE, premises considered, this Court renders
judgment on the case as follows:
EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners,
vs.
BATHALA MARKETING INDUSTRIES, INC., respondent. 1) declaring that plaintiff is not liable for the payment of Value-
Added Tax (VAT) of 10% of the rent for [the] use of the leased
premises;
DECISION

2) declaring that plaintiff is not liable for the payment of any rental
NACHURA, J.:
adjustment, there being no [extraordinary] inflation or
devaluation, as provided in the Seventh Condition of the lease
This is a Petition for Review on Certiorari under Rule 45 of the Rules of contract, to justify the same;
Court, of the Decision1 of the Court of Appeals (CA), dated September 3,
2001, in CA-G.R. CV No. 67784, and its Resolution2 dated November 19, 3) holding defendants liable to plaintiff for the total amount
2001. The assailed Decision affirmed with modification the Decision3 of the
of P1,119,102.19, said amount representing payments
Regional Trial Court (RTC), Makati City, Branch 136, dated May 9, 2000 in erroneously made by plaintiff as VAT charges and rental
Civil Case No. 98-411. adjustment for the months of January, February and March,
1999; and
Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as
lessee, represented by its president Ramon H. Garcia, renewed its Contract 4) holding defendants liable to plaintiff for the amount
of Lease4 with Ponciano L. Almeda (Ponciano), as lessor, husband of
of P1,107,348.69, said amount representing the balance of
petitioner Eufemia and father of petitioner Romel Almeda. Under the said plaintiff's rental deposit still with defendants.
contract, Ponciano agreed to lease a portion of the Almeda Compound,
located at 2208 Pasong Tamo Street, Makati City, consisting of 7,348.25
square meters, for a monthly rental of P1,107,348.69, for a term of four (4) SO ORDERED.13
years from May 1, 1997 unless sooner terminated as provided in the
contract.5 The contract of lease contained the following pertinent provisions
The trial court denied petitioners their right to pass on to respondent the
which gave rise to the instant case:
burden of paying the VAT since it was not a new tax that would call for the
application of the sixth clause of the contract. The court, likewise, denied
SIXTH - It is expressly understood by the parties hereto that the their right to collect the demanded increase in rental, there being no
rental rate stipulated is based on the present rate of assessment extraordinary inflation or devaluation as provided for in the seventh clause
on the property, and that in case the assessment should of the contract. Because of the payment made by respondent of the rental
hereafter be increased or any new tax, charge or burden be adjustment demanded by petitioners, the court ordered the restitution by
imposed by authorities on the lot and building where the leased the latter to the former of the amounts paid, notwithstanding the well-
premises are located, LESSEE shall pay, when the rental herein established rule that in an action for declaratory relief, other than a
provided becomes due, the additional rental or charge declaration of rights and obligations, affirmative reliefs are not sought by or
corresponding to the portion hereby leased; provided, however, awarded to the parties.
that in the event that the present assessment or tax on said
property should be reduced, LESSEE shall be entitled to
Petitioners elevated the aforesaid case to the Court of Appeals which
reduction in the stipulated rental, likewise in proportion to the
affirmed with modification the RTC decision. The fallo reads:
portion leased by him;

WHEREFORE, premises considered, the present appeal is

SEVENTH - In case an extraordinary inflation or devaluation of
DISMISSED and the appealed decision in Civil Case No. 98-411
Philippine Currency should supervene, the value of Philippine
is hereby AFFIRMED with MODIFICATION in that the order for
peso at the time of the establishment of the obligation shall be
the return of the balance of the rental deposits and of the
the basis of payment;6
amounts representing the 10% VAT and rental adjustment, is
hereby DELETED.
During the effectivity of the contract, Ponciano died. Thereafter, respondent
dealt with petitioners. In a letter7 dated December 29, 1997, petitioners
No pronouncement as to costs.
advised respondent that the former shall assess and collect Value Added
Tax (VAT) on its monthly rentals. In response, respondent contended that
VAT may not be imposed as the rentals fixed in the contract of lease were SO ORDERED.14
supposed to include the VAT therein, considering that their contract was
executed on May 1, 1997 when the VAT law had long been in effect.8
The appellate court agreed with the conclusions of law and the application
of the decisional rules on the matter made by the RTC. However, it found
On January 26, 1998, respondent received another letter from petitioners that the trial court exceeded its jurisdiction in granting affirmative relief to
informing the former that its monthly rental should be increased by 73% the respondent, particularly the restitution of its excess payment.
pursuant to condition No. 7 of the contract and Article 1250 of the Civil
Code. Respondent opposed petitioners' demand and insisted that there
Petitioners now come before this Court raising the following issues:
was no extraordinary inflation to warrant the application of Article 1250 in
light of the pronouncement of this Court in various cases.9
I.
 WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL CODE who insisted that the action for declaratory relief be preferred over the
IS APPLICABLE TO THE CASE AT BAR. action for unlawful detainer. Conversely, in the case at bench, the trial court
had not yet resolved the rescission/ejectment case during the pendency of
the declaratory relief petition. In fact, the trial court, where the rescission
II.
case was on appeal, itself initiated the suspension of the proceedings
pending the resolution of the action for declaratory relief.
WHETHER OR NOT THE DOCTRINE ENUNCIATED IN
FILIPINO PIPE AND FOUNDRY CORP. VS. NAWASA CASE,
We are not unmindful of the doctrine enunciated in Teodoro, Jr. v.
161 SCRA 32 AND COMPANION CASES ARE (sic)
Mirasol18 where the declaratory relief action was dismissed because the
APPLICABLE IN THE CASE AT BAR.
issue therein could be threshed out in the unlawful detainer suit. Yet, again,
in that case, there was already a breach of contract at the time of the filing Pag
III. of the declaratory relief petition. This dissimilar factual milieu proscribes the
Court from applying Teodoro to the instant case. e|
WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN 69
THE CASE OF DEL ROSARIO VS. THE SHELL COMPANY OF Given all these attendant circumstances, the Court is disposed to entertain
THE PHILIPPINES, 164 SCRA 562, THE HONORABLE COURT the instant declaratory relief action instead of dismissing it, notwithstanding
OF APPEALS SERIOUSLY ERRED ON A QUESTION OF LAW. the pendency of the ejectment/rescission case before the trial court. The
resolution of the present petition would write finis to the parties' dispute, as
it would settle once and for all the question of the proper interpretation of
IV. the two contractual stipulations subject of this controversy.

WHETHER OR NOT THE FINDING OF THE HONORABLE Now, on the substantive law issues.
COURT OF APPEALS THAT RESPONDENT IS NOT LIABLE
TO PAY THE 10% VALUE ADDED TAX IS IN ACCORDANCE
WITH THE MANDATE OF RA 7716. Petitioners repeatedly made a demand on respondent for the payment of
VAT and for rental adjustment allegedly brought about by extraordinary
inflation or devaluation. Both the trial court and the appellate court found no
V.
merit in petitioners' claim. We see no reason to depart from such findings.

WHETHER OR NOT DECLARATORY RELIEF IS PROPER As to the liability of respondent for the payment of VAT, we cite with
SINCE PLAINTIFF-APPELLEE WAS IN BREACH WHEN THE
approval the ratiocination of the appellate court, viz.:
PETITION FOR DECLARATORY RELIEF WAS FILED BEFORE
THE TRIAL COURT.
Clearly, the person primarily liable for the payment of VAT is the
lessor who may choose to pass it on to the lessee or absorb the
In fine, the issues for our resolution are as follows: 1) whether the action for same. Beginning January 1, 1996, the lease of real property in
declaratory relief is proper; 2) whether respondent is liable to pay 10% VAT the ordinary course of business, whether for commercial or
pursuant to Republic Act (RA) 7716; and 3) whether the amount of rentals residential use, when the gross annual receipts
due the petitioners should be adjusted by reason of extraordinary inflation exceed P500,000.00, is subject to 10% VAT. Notwithstanding the
or devaluation.
mandatory payment of the 10% VAT by the lessor, the actual
shifting of the said tax burden upon the lessee is clearly optional
Declaratory relief is defined as an action by any person interested in a on the part of the lessor, under the terms of the statute. The word
deed, will, contract or other written instrument, executive order or "may" in the statute, generally speaking, denotes that it is
resolution, to determine any question of construction or validity arising from directory in nature. It is generally permissive only and operates to
the instrument, executive order or regulation, or statute, and for a confer discretion. In this case, despite the applicability of the rule
declaration of his rights and duties thereunder. The only issue that may be under Sec. 99 of the NIRC, as amended by R.A. 7716, granting
raised in such a petition is the question of construction or validity of the lessor the option to pass on to the lessee the 10% VAT, to
provisions in an instrument or statute. Corollary is the general rule that such existing contracts of lease as of January 1, 1996, the original
an action must be justified, as no other adequate relief or remedy is lessor, Ponciano L. Almeda did not charge the lessee-appellee
available under the circumstances. 15 the 10% VAT nor provided for its additional imposition when they
renewed the contract of lease in May 1997. More significantly,
said lessor did not actually collect a 10% VAT on the monthly
Decisional law enumerates the requisites of an action for declaratory relief, rental due from the lessee-appellee after the execution of the
as follows: 1) the subject matter of the controversy must be a deed, will, May 1997 contract of lease. The inevitable implication is that the
contract or other written instrument, statute, executive order or regulation, lessor intended not to avail of the option granted him by law to
or ordinance; 2) the terms of said documents and the validity thereof are shift the 10% VAT upon the lessee-appellee. x x x.19
doubtful and require judicial construction; 3) there must have been no
breach of the documents in question; 4) there must be an actual justiciable
controversy or the "ripening seeds" of one between persons whose In short, petitioners are estopped from shifting to respondent the burden of
interests are adverse; 5) the issue must be ripe for judicial determination; paying the VAT.
and 6) adequate relief is not available through other means or other forms
of action or proceeding.16
Petitioners' reliance on the sixth condition of the contract is, likewise,
unavailing. This provision clearly states that respondent can only be held
It is beyond cavil that the foregoing requisites are present in the instant liable for new taxes imposed after the effectivity of the contract of lease,
case, except that petitioners insist that respondent was already in breach of that is, after May 1997, and only if they pertain to the lot and the building
the contract when the petition was filed. where the leased premises are located. Considering that RA 7716 took
effect in 1994, the VAT cannot be considered as a "new tax" in May 1997,
as to fall within the coverage of the sixth stipulation.
We do not agree.

Neither can petitioners legitimately demand rental adjustment because of

After petitioners demanded payment of adjusted rentals and in the months extraordinary inflation or devaluation.
that followed, respondent complied with the terms and conditions set forth
in their contract of lease by paying the rentals stipulated therein.
Respondent religiously fulfilled its obligations to petitioners even during the Petitioners contend that Article 1250 of the Civil Code does not apply to this
pendency of the present suit. There is no showing that respondent case because the contract stipulation speaks of extraordinary inflation or
committed an act constituting a breach of the subject contract of lease. devaluation while the Code speaks of extraordinary inflation or deflation.
Thus, respondent is not barred from instituting before the trial court the They insist that the doctrine pronounced in Del Rosario v. The Shell
petition for declaratory relief. Company, Phils. Limited20 should apply.

Petitioners claim that the instant petition is not proper because a separate Essential to contract construction is the ascertainment of the intention of the
action for rescission, ejectment and damages had been commenced before contracting parties, and such determination must take into account the
another court; thus, the construction of the subject contractual provisions contemporaneous and subsequent acts of the parties. This intention, once
should be ventilated in the same forum. ascertained, is deemed an integral part of the contract.21

We are not convinced. While, indeed, condition No. 7 of the contract speaks of "extraordinary
inflation or devaluation" as compared to Article 1250's "extraordinary
inflation or deflation," we find that when the parties used the term
It is true that in Panganiban v. Pilipinas Shell Petroleum Corporation17 we "devaluation," they really did not intend to depart from Article 1250 of the
held that the petition for declaratory relief should be dismissed in view of Civil Code. Condition No. 7 of the contract should, thus, be read in harmony
the pendency of a separate action for unlawful detainer. However, we with the Civil Code provision.
cannot apply the same ruling to the instant case. In Panganiban, the
unlawful detainer case had already been resolved by the trial court before
the dismissal of the declaratory relief case; and it was petitioner in that case
That this is the intention of the parties is evident from petitioners' real estate mortgage over Condominium Certificate of Title No. 8804,
letter22 dated January 26, 1998, where, in demanding rental adjustment Makati City. PN No. 376-X was availed of through a renewal of Central
ostensibly based on condition No. 7, petitioners made explicit reference to Surety’s prior loan, then covered by PN No. 367-Z.6 As with the
Article 1250 of the Civil Code, even quoting the law verbatim. Thus, the ₱6,000,000.00 loan and the constituted pledge over the Wack Wack
application of Del Rosario is not warranted. Rather, jurisprudential rules on Membership, the ₱40,898,000.00 loan with real estate mortgage was
the application of Article 1250 should be considered. transacted by Constancio and Engracio Castañeda on behalf of Central
Surety.
Article 1250 of the Civil Code states:
It appears that on August 22, 2000, Premiere Bank sent a letter to Central
Surety demanding payment of the ₱6,000,000.00 loan, to wit:
In case an extraordinary inflation or deflation of the currency Pag
stipulated should supervene, the value of the currency at the time
of the establishment of the obligation shall be the basis of August 22, 2000 e |
payment, unless there is an agreement to the contrary.
70
CENTRAL SURETY AND INSURANCE CO.
Inflation has been defined as the sharp increase of money or credit, or both, 2nd Floor Universalre Bldg.
without a corresponding increase in business transaction. There is inflation No. 106 Paseo de Roxas, Legaspi Village
when there is an increase in the volume of money and credit relative to Makati City
available goods, resulting in a substantial and continuing rise in the general
price level.23 In a number of cases, this Court had provided a discourse on
Attention: Mr. Constancio T. Castaneda, Jr.
what constitutes extraordinary inflation, thus:
President

[E]xtraordinary inflation exists when there is a decrease or

Mr. Engracio T. Castaneda
increase in the purchasing power of the Philippine currency which
Vice President
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.24
Gentlemen:
The factual circumstances obtaining in the present case do not make out a
case of extraordinary inflation or devaluation as would justify the application
of Article 1250 of the Civil Code. We would like to stress that the erosion of This has reference to your overdue loan of ₱6.0 Million.
the value of the Philippine peso in the past three or four decades, starting in
the mid-sixties, is characteristic of most currencies. And while the Court We regret to inform you that despite efforts to restructure the same, you
may take judicial notice of the decline in the purchasing power of the have failed up to this time, to submit the required documents and come up
Philippine currency in that span of time, such downward trend of the peso with equity necessary to implement the restructuring scheme.
cannot be considered as the extraordinary phenomenon contemplated by
Article 1250 of the Civil Code. Furthermore, absent an official
pronouncement or declaration by competent authorities of the existence of In view thereof, we regret that unless the above loan is settled on or before
extraordinary inflation during a given period, the effects of extraordinary five (5) days from the date hereof, we shall exercise our option to have the
inflation are not to be applied. 25 Stock Certificate No. 217 with Serial No. 1793 duly issued by Wack Wack
Golf and Country Club, Inc. transferred in the name of Premiere
Development Bank in accordance with the terms and conditions of the
WHEREFORE, premises considered, the petition is DENIED. The Decision Deed of Assignment with Pledge executed in favor of Premiere
of the Court of Appeals in CA-G.R. CV No. 67784, dated September 3, Development Bank.
2001, and its Resolution dated November 19, 2001, are AFFIRMED.
We shall appreciate your prompt compliance.
SO ORDERED.
Very truly yours,
G.R. No. 176246 February 13, 2009
(sgd.)
PREMIERE DEVELOPMENT BANK, Petitioner, IGNACIO R. NEBRIDA, JR.
vs. Senior Asst. Vice President/
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent. Business Development Group - Head7

DECISION Posthaste, Central Surety responded and sent the following letter dated
August 24, 2000:
NACHURA, J.:
24 August 2000
Before us is a petition for review on certiorari assailing the Court of Appeals
(CA) Decision1 in CA-G.R. CV No. 85930, which reversed and set aside the Mr. Ignacio R. Nebrida, Jr.
decision of the Regional Trial Court (RTC), Branch 132, Makati City in Civil Senior Asst. Vice President/
Case No. 0051306.2 Business Development Group – Head
Premiere Bank
On August 20, 1999, respondent Central Surety & Insurance Company EDSA cor. Magallanes Avenue
(Central Surety) obtained an industrial loan of ₱6,000,000.00 from Makati City
petitioner Premiere Development Bank (Premiere Bank) with a maturity
date of August 14, 2000. This ₱6,000,000.00 loan, evidenced by Sir:
Promissory Note (PN) No. 714-Y,3 stipulates payment of 17% interest per
annum payable monthly in arrears and the principal payable on due date. In
addition, PN No. 714-Y provides for a penalty charge of 24% interest per With reference to this 6.0 Million loan account, we have informed Ms.
annum based on the unpaid amortization/installment or the entire unpaid Evangeline Veloira that we are intending to settle the account by the end of
balance of the loan. In all, should Central Surety fail to pay, it would be September. As of 14 August 2000 we made payment to your bank as per
liable to Premiere Bank for: (1) unpaid interest up to maturity date; (2) receipt attached.
unpaid penalties up to maturity date; and (3) unpaid balance of the
principal. As you may know, present conditions have been difficult for the insurance
industry whose performance is so closely linked to the nation’s economic
To secure payment of the ₱6,000,000.00 loan, Central Surety executed in prosperity; and we are now asking for some consideration and leeway on
favor of Premiere Bank a Deed of Assignment with Pledge4 covering your very stiff and immediate demands.
Central Surety’s Membership Fee Certificate No. 217 representing its
proprietary share in Wack Wack Golf and Country Club Incorporated (Wack Kindly extend to us your favorable approval.
Wack Membership). In both PN No. 714-Y and Deed of Assignment,
Constancio T. Castañeda, Jr. and Engracio T. Castañeda, president and
vice-president of Central Surety, respectively, represented Central Surety Very truly yours,
and solidarily bound themselves to the payment of the obligation.
(sgd.)
Parenthetically, Central Surety had another commercial loan with Premiere ENGRACIO T. CASTANEDA
Bank in the amount of ₱40,898,000.00 maturing on October 10, 2001. This Vice-President8
loan was, likewise, evidenced by a PN numbered 376-X5 and secured by a
Accordingly, by September 20, 2000, Central Surety issued Bank of Thank you.
Commerce (BC) Check No. 081149 dated September 22, 2000 in the
amount of ₱6,000,000.00 and payable to Premiere Bank. The check was
Very truly yours,
received by Premiere Bank’s Senior Account Manager, Evangeline Veloira,
with the notation "full payment of loan-Wack Wack," as reflected in Central
Surety’s Disbursement Voucher.10 However, for undisclosed reasons, (sgd.)
Premiere Bank returned BC Check No. 08114 to Central Surety, and in its EPIFANIO E. CUA
letter dated September 28, 2000, demanded from the latter, not just Counsel for Central Surety & Insurance Company13
payment of the ₱6,000,000.00 loan, but also the ₱40,898,000.00 loan (italics supplied)
which was originally covered by PN No. 367-Z.11 In the same letter,
Premiere Bank threatened foreclosure of the loans’ respective securities,
the pledge and real estate mortgage, should Central Surety fail to pay these
On even date, a separate letter with another BC Check No. 08115 in the Pag
amount of ₱2,600,000.00 was also tendered to Premiere Bank as payment
within ten days from date, thus:
for the Spouses Engracio and Lourdes Castañeda’s (Spouses
e|
Castañeda’s) personal loan covered by PN No. 717-X and secured by 71
28 September 2000 Manila Polo Club, Inc. membership shares.

CENTRAL SURETY & INSURANCE CO. On October 13, 2000, Premiere Bank responded and signified acceptance
By: Constancio T. Castañeda Jr. – President of Central Surety’s checks under the following application of payments:
Engracio T. Castañeda – Vice President
2nd Floor Universalre Bldg. No. 106
13 October 2000
Paseo de Roxas, Legaspi Village, Makati City

RE: YOUR COMMERCIAL LOAN OF ₱40,898,000.00 & ATTY. EPIFANIO E. CUA

2/F Universalre Condominium
₱6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y 106 Paseo de Roxas
Legaspi Village, Makati City

**************************************************
Dear Atty. Cua:

Dear Sirs:
Thank you for your two (2) letters both dated 29 September 2000 on behalf
of your clients with the enclosed check nos. 0008114 and 0008115 for the
We write on behalf of our client, Premiere Development Bank, in connection total of ₱8,600,000.00.
with your above-captioned loan account.
As previously relayed to your client, Premiere Bank cannot accept the two
While our client has given you all the concessions, facilities and (2) checks as full settlement of the obligation under Account Nos. PN #714-
opportunities to service your loans, we regret to inform you that you have Y and PN # 717-X, as the amount is insufficient.
failed to settle the same despite their past due status.
In accordance with the terms and conditions of the Promissory Notes
In view of the foregoing and to protect the interest of our client, please be executed by your clients in favor of Premiere Development Bank, we have
advised that unless the outstanding balances of your loan accounts as of applied the two (2) checks to the due obligations of your clients as follows:
date plus interest, penalties and other fees and charges are paid in full or
necessary arrangements acceptable to our client is made by you within ten
(10) days from date hereof, we shall be constrained much to our regret, to 1) Account No.: COM 235-Z14 ₱1,044,939.45
file foreclosure proceedings against the collateral of the loan mortgaged to
the Bank or pursue such action necessary in the premises. 2) Account No.: IND 717-X ₱1,459,693.15

We trust, therefore, that you will give this matter your preferential attention. 3) Account No.: COM 367-Z15 ₱4,476,200.18

Very truly yours, 4) Account No.: COM 714-Y ₱1,619,187.22

(sgd.) TOTAL ₱8,600,000.00

PACITA M. ARAOS12
(italics supplied)
We are enclosing Xerox copy each of four (4) official receipts covering the
above payments. The originals are with us which your clients or their duly
The very next day, on September 29, 2000, Central Surety, through its authorized representative may pick-up anytime during office hours.
counsel, wrote Premiere Bank and re-tendered payment of the check:
We shall appreciate the settlement in full of the accounts of your client or
29 September 2000 necessary arrangements for settlement thereof be made as soon as
possible to put the accounts on up to-date status.
PREMIERE BANK
EDSA cor. Magallanes Avenue Thank you.
Makati City
Very truly yours,
Attention: Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/
Business Development Group – Head (sgd.)
MS. ELSA M. SAPAPO
Manager
Re : Promissory Note No. 714-Y Loans Accounting and
Control Department16
Sir:
Significantly, the ₱8,600,000.00 check payments were not applied in full to
Central Surety’s ₱6,000,000.00 loan under PN No. 714-Y and the Spouses
This is further to our client’s letter to you dated 24 August 2000, informing
you that it would settle its account by the end of September 2000. Castañeda’s personal loan of ₱2,600,000.00 under PN No. 717-X.
Premiere Bank also applied proceeds thereof to a commercial loan under
PN No. 235-Z taken out by Casent Realty and Development Corporation
Please be advised that on 20 September 2000 our client delivered to your (Casent Realty),17 and to Central Surety’s loan originally covered by PN No.
bank BC cheque no. 08114 payable to Premiere Bank in the amount of SIX 367-Z, renewed under PN No. 376-X, maturing on October 20, 2001.
MILLION PESOS (₱6,000,000.00), which was received by your Senior
Account Manager, Ms. Evangeline Veloira. However, for unexplained
reasons the cheque was returned to us. Strongly objecting to Premiere Bank’s application of payments, Central
Surety’s counsel wrote Premiere Bank and reiterated Central Surety’s
demand for the application of the check payments to the loans covered by
We are again tendering to you the said cheque of SIX MILLION PESOS PN Nos. 714-X and 714-Y. Additionally, Central Surety asked that the Wack
(₱6,000,000.00), in payment of PN#714-Y. Please accept the cheque and Wack Membership pledge, the security for the ₱6,000,000.00 loan, should
issue the corresponding receipt thereof. Should you again refuse to accept be released.
this cheque, then I shall advise my client to deposit it in court for proper
disposition.
In the final exchange of correspondence, Premiere Bank, through its WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND
SAVP/Acting Head-LGC, Atty. Pacita Araos, responded and refused to CONSIGNATION OF THE SUBJECT TWO CHECK PAYMENTS BY
accede to Central Surety’s demand. Premiere Bank insisted that the PN [CENTRAL SURETY].
covering the ₱6,000,000.00 loan granted Premiere Bank sole discretion
respecting: (1) debts to which payments should be applied in cases of
WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO
several obligations by an obligor and/or debtor; and (2) the initial application
[CENTRAL SURETY] IS ESTOPPED FROM CONTESTING THE
of payments to other costs, advances, expenses, and past due interest
STIPULATIONS OR PROVISIONS OF THE PROMISSORY NOTES
stipulated thereunder.
AUTHORIZING [PREMIERE BANK] TO MAKE SUCH APPLICATION OF
PAYMENTS
As a result, Central Surety filed a complaint for damages and release of
security collateral, specifically praying that the court render judgment: (1)
WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT
Pag
declaring Central Surety’s ₱6,000,000.00 loan covered by PN No. 714-Y as
fully paid; (2) ordering Premiere Bank to release to Central Surety its
[PREMIERE BANK] IS ENTITLED TO AN AWARD OF DAMAGES AS e|
OCCASIONED BY THE MALICIOUS FILING OF THIS SUIT.19
membership certificate of shares in Wack Wack; (3) ordering Premiere 72
Bank to pay Central Surety compensatory and actual damages, exemplary
damages, attorney’s fees, and expenses of litigation; and (4) directing At the outset, we qualify that this case deals only with the extinguishment of
Premiere Bank to pay the cost of suit. Central Surety’s ₱6,000,000.00 loan secured by the Wack Wack
Membership pledge. We do not dispose herein the matter of the
₱2,600,000.00 loan covered by PN No. 717-X subject of BC Check No.
On July 12, 2005, the RTC rendered a decision dismissing Central Surety’s
08115.
complaint and ordering it to pay Premiere Bank ₱100,000.00 as attorney’s
fees. The RTC ruled that the stipulation in the PN granting Premiere Bank
sole discretion in the application of payments, although it partook of a We note that both lower courts were one in annulling Premiere Bank’s
contract of adhesion, was valid. It disposed of the case, to wit: application of payments to the loans of Casent Realty and the Spouses
Castañeda under PN Nos. 235-Z and 717-X, respectively, thus:
Now that the issue as to the validity of the stipulation is settled, [Premiere
Bank] was right in contending that it had the right to apply [Central Surety’s] It bears stressing that the parties to PN No. 714-Y secured by Wack Wack
payment to the most onerous obligation or to the one it sees fit to be paid membership certificate are only Central Surety, as debtor and [Premiere
first from among the several obligations. The application of the payment to Bank], as creditor. Thus, when the questioned stipulation speaks of
the other two loans of Central Surety namely, account nos. COM 367-Z and "several obligations", it only refers to the obligations of [Central Surety] and
IND 714-Y was within [Premiere Bank’s] valid exercise of its right according nobody else.
the stipulation.lawphil.net However, [Premiere Bank] erred in applying the
payment to the loan of Casent Realty and to the personal obligation of Mr.
Engracio Castañeda despite their connection with one another. Therefore, [I]t is plain that [Central Surety] has only two loan obligations, namely:
[Premiere Bank] cannot apply the payment tendered by Central Surety to 1.) Account No. 714-Y – secured by Wack Wack membership certificate;
and 2.) Account No. 367-Z – secured by Condominium Certificate of Title.
the other two entities capriciously and expressly violating the law and
pertinent Central Bank rules and regulations. Hence, the application of the The two loans are secured by separate and different collaterals. The
payment to the loan of Casent Realty (Account No.COM 236-Z) and to the collateral for Account No. 714-Y, which is the Wack Wack membership
certificate answers only for that account and nothing else. The collateral for
loan of Mr. Engracio Castañeda (Account No. IND 717-X) is void and must
be annulled. Account No. 367-Z, which is the Condominium Certificate of Title, is
answerable only for the said account.

As to the issue of whether or not [Central Surety] is entitled to the release of

Membership Fee Certificate in the Wack Wack Golf and Country Club, The fact that the loan obligations of [Central Surety] are secured by
considering now that [Central Surety] cannot compel [Premiere Bank] to separate and distinct collateral simply shows that each collateral secures
only a particular loan obligation and does not cover loans including future
release the subject collateral.
loans or advancements.

With regard to the issue of damages and attorney’s fees, the court finds no
As regards the loan covered by Account No. 235-Z, this was obtained by
basis to grant [Premiere Bank’s] prayer for moral and exemplary damages
but deems it just and equitable to award in its favor attorney’s fees in the Casent Realty, not by [Central Surety]. Although Mr. Engracio Castañeda is
sum of Php 100,000.00. the vice-president of [Central Surety], and president of Casent Realty, it
does not follow that the two corporations are one and the same. Both are
invested by law with a personality separate and distinct from each other.
WHEREFORE, judgment is hereby rendered dismissing the complaint and
ordering [Central Surety] to pay [Premiere Bank] Php 100,000.00 as
Thus, [Central Surety] cannot be held liable for the obligation of Casent
attorney’s fees.18 (emphasis supplied)
Realty, absent evidence showing that the latter is being used to defeat
public convenience, justify wrong, protect fraud or defend crime; or used as
On appeal by Central Surety, the CA reversed and set aside the trial court’s a shield to confuse the legitimate issues, or when it is merely an adjunct, a
ruling. The appellate court held that with Premiere Bank’s letter dated business conduit or an alter ego of [Central Surety] or of another
August 22, 2000 specifically demanding payment of Central Surety’s corporation; or used as a cloak to cover for fraud or illegality, or to work
₱6,000,000.00 loan, it was deemed to have waived the stipulation in PN injustice, or where necessary to achieve equity or for the protection of
No. 714-Y granting it the right to solely determine application of payments, creditors.1avvphi1
and was, consequently, estopped from enforcing the same. In this regard,
with the holding of full settlement of Central Surety’s ₱6,000,000.00 loan
Likewise, [Central Surety] cannot be held accountable for the loan
under PN No. 714-Y, the CA ordered the release of the Wack Wack
Membership pledged to Premiere Bank. obligation of spouses Castañeda under Account No. IND 717-X. Settled is
the rule that a corporation is invested by law with a personality separate
and distinct from those of the persons composing it. The corporate debt or
Hence, this recourse by Premiere Bank positing the following issues: credit is not the debt or credit of the stockholder nor is the stockholder’s
debt or credit that of the corporation.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED REVERSIBLE AND PALPABLE ERROR WHEN IT APPLIED The mere fact that a person is a president of the corporation does not
THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE PRESENT CASE render the property he owns or possesses the property of the corporation,
INSOFAR AS THE DEMAND LETTER SENT TO [CENTRAL SURETY] IS since that president, as an individual, and the corporation are separate
CONCERNED NULLIFYING THE APPLICATION OF PAYMENTS entities.20
EXERCISED BY [PREMIERE BANK]
In fact, Premiere Bank did not appeal or question the RTC’s ruling
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY specifically annulling the application of the ₱6,000,000.00 check payment to
THE HONORABLE COURT OF APPEALS COULD PREVAIL OVER THE the respective loans of Casent Realty and the Spouses Castañeda.
CLEAR AND UNMISTAKABLE STATUTORY AND CONTRACTUAL Undoubtedly, Premiere Bank cannot be allowed, through this petition, to
RIGHT OF [PREMIERE BANK] TO EXERCISE APPLICATION OF surreptitiously include the validity of its application of payments concerning
PAYMENT AS WARRANTED BY THE PROMISSORY NOTE the loans to Casent Realty and the Spouses Castañeda.

EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE Thus, we sift through the issues posited by Premiere Bank and restate the
APPLIED TO THE SUBJECT LOAN OF RESPONDENT, WHETHER OR same, to wit:
NOT THE SUBJECT WACK-WACK SHARES COULD BE RELEASE[D]
DESPITE THE CROSS DEFAULT AND CROSS GUARANTEE
PROVISIONS OF THE DEED OF ASSIGNMENT WITH PLEDGE AND 1. Whether Premiere Bank waived its right of application of
RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY payments on the loans of Central Surety.
[CENTRAL SURETY], CASENT REALTY AND SPS. CASTAÑEDA.
2. In the alternative, whether the ₱6,000,000.00 loan of Central
Surety was extinguished by the encashment of BC Check No.
08114.
 3. Corollarily, whether the release of the Wack Wack Membership the parties, Promissory Note No. 714-Y and Promissory Note No. 376-X,
pledge is in order. Central Surety expressly agreed to grant Premiere Bank the authority to
apply any and all of Central Surety’s payments, thus:
The Petition is meritorious.
In case I/We have several obligations with [Premiere Bank], I/We hereby
empower [Premiere Bank] to apply without notice and in any manner it sees
We shall take the first and the second issues in tandem.
fit, any or all of my/our deposits and payments to any of my/our obligations
whether due or not. Any such application of deposits or payments shall be
Creditor given right to apply payments conclusive and binding upon us.

This proviso is representative of all the other Promissory Notes involved in

Pag
At the hub of the controversy is the statutory provision on application of
payments, specifically Article 1252 of the Civil Code, viz.: this case. It is in the exercise of this express authority under the Promissory e|
Notes, and following Bangko Sentral ng Pilipinas Regulations, that
Premiere Bank applied payments made by Central Surety, as it deemed fit, 73
Article 1252.He who has various debts of the same kind in favor of one and
to the several debts of the latter.
the same creditor, may declare at the time of making the payment, to which
of them the same must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose benefit the term All debts were due; There was no
has been constituted, application shall not be made as to debts which are waiver on the part of petitioner
not yet due.
Undoubtedly, at the time of conflict between the parties material to this
If the debtor accepts from the creditor a receipt in which an application of case, Promissory Note No. 714-Y dated August 20, 1999, in the amount of
the payment is made, the former cannot complain of the same, unless there ₱6,000,000.00 and secured by the pledge of the Wack Wack Membership,
is a cause for invalidating the contract. was past the due and demand stage. By its terms, Premiere Bank was
entitled to declare said Note and all sums payable thereunder immediately
due and payable, without need of "presentment, demand, protest or notice
The debtor’s right to apply payment is not mandatory. This is clear from the of any kind." The subsequent demand made by Premiere Bank was,
use of the word "may" rather than the word "shall" in the provision which
therefore, merely a superfluity, which cannot be equated with a waiver of
reads: "He who has various debts of the same kind in favor of one and the the right to demand payment of all the matured obligations of Central
same creditor, may declare at the time of making the payment, to which of Surety to Premiere Bank.
the same must be applied."

Moreover, this Court may take judicial notice that the standard practice in
Indeed, the debtor’s right to apply payment has been considered merely commercial transactions to send demand letters has become part and
directory, and not mandatory,21 following this Court’s earlier pronouncement parcel of every collection effort, especially in light of the legal requirement
that "the ordinary acceptation of the terms ‘may’ and ‘shall’ may be resorted that demand is a prerequisite before default may set in, subject to certain
to as guides in ascertaining the mandatory or directory character of well-known exceptions, including the situation where the law or the
statutory provisions."22 obligations expressly declare it unnecessary.28

Article 1252 gives the right to the debtor to choose to which of several
Neither can it be said that Premiere Bank waived its right to apply payments
obligations to apply a particular payment that he tenders to the creditor. But when it specifically demanded payment of the ₱6,000,000.00 loan under
likewise granted in the same provision is the right of the creditor to apply Promissory Note No. 714-Y. It is an elementary rule that the existence of a
such payment in case the debtor fails to direct its application. This is
waiver must be positively demonstrated since a waiver by implication is not
obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the creditor a normally countenanced. The norm is that a waiver must not only be
receipt in which an application of payment is made, the former cannot voluntary, but must have been made knowingly, intelligently, and with
complain of the same." It is the directory nature of this right and the
sufficient awareness of the relevant circumstances and likely
subsidiary right of the creditor to apply payments when the debtor does not consequences. There must be persuasive evidence to show an actual
elect to do so that make this right, like any other right, waivable. intention to relinquish the right. Mere silence on the part of the holder of the
right should not be construed as a surrender thereof; the courts must
Rights may be waived, unless the waiver is contrary to law, public order, indulge every reasonable presumption against the existence and validity of
public policy, morals or good customs, or prejudicial to a third person with a such waiver.29
right recognized by law.23
Besides, in this case, any inference of a waiver of Premiere Bank’s, as
A debtor, in making a voluntary payment, may at the time of payment direct creditor, right to apply payments is eschewed by the express provision of
an application of it to whatever account he chooses, unless he has the Promissory Note that: "no failure on the part of [Premiere Bank] to
assigned or waived that right. If the debtor does not do so, the right passes exercise, and no delay in exercising any right hereunder, shall operate as a
to the creditor, who may make such application as he chooses. But if waiver thereof."
neither party has exercised its option, the court will apply the payment
according to the justice and equity of the case, taking into consideration all Thus, we find it unnecessary to rule on the applicability of the equitable
its circumstances.24 principle of waiver that the Court of Appeals ascribed to the demand made
by Premiere Bank upon Central Surety to pay the amount of
Verily, the debtor’s right to apply payment can be waived and even granted ₱6,000,000.00, in the face of both the express provisions of the law and the
to the creditor if the debtor so agrees.25 This was explained by former agreements entered into by the parties. After all, a diligent creditor should
Senator Arturo M. Tolentino, an acknowledged expert on the Civil Code, not needlessly be interfered with in the prosecution of his legal remedies.30
thus:
When Central Surety directed the application of its payment to a specific
The following are some limitations on the right of the debtor to apply his debt, it knew it had another debt with Premiere Bank, that covered by
payment: Promissory Note 367-Z, which had been renewed under Promissory Note
376-X, in the amount of ₱40.898 Million. Central Surety is aware that
Promissory Note 367-Z (or 376-X) contains the same provision as in
xxxx Promissory Note No 714-Y which grants the Premiere Bank authority to
apply payments made by Central Surety, viz.:
5) when there is an agreement as to the debts which are to be paid first, the
debtor cannot vary this agreement.26 In case I/We have several obligations with [Premiere Bank], I/We hereby
empower [Premiere Bank] to apply without notice and in any manner it sees
Relevantly, in a Decision of the Supreme Court of Kansas in a case with fit, any or all of my/our deposits and payments to any of my/our obligations
parallel facts, it was held that: whether due or not. Any such application of deposits or payments shall be
conclusive and binding upon us.31
The debtor requested Planters apply the payments to the 1981 loan rather
than to the 1978 loan. Planters refused. Planters notes it was expressly Obviously, Central Surety is also cognizant that Promissory Note 367-Z
provided in the security agreement on the 1981 loan that Planters had a contains the proviso that:
legal right to direct application of payments in its sole discretion. Appellees
do not refute this. Hence, the debtors had no right by agreement to direct the bank shall be entitled to declare this Note and all sums payable
the payments. This also precludes the application of the U.S. Rule, which hereunder to be immediately due and payable, without need of
applies only in absence of a statute or specific agreement. Thus the trial presentment, demand, protest or notice of nay kind, all of which I/We
court erred. Planters was entitled to apply the Hi-Plains payments as it saw hereby expressly waive, upon occurrence of any of the following events: x x
fit.27 x (ii) My/Our failure to pay any amortization or installment due hereunder;
(iii) My/Our failure to pay money due under any other document or
In the case at bench, the records show that Premiere Bank and Central agreement evidencing obligations for borrowed money x x x.32
Surety entered into several contracts of loan, securities by way of pledges,
and suretyship agreements. In at least two (2) promissory notes between
by virtue of which, it follows that the obligation under Promissory Note 367- In all contractual, property or other relations, when one of the parties is at a
Z had become past due and demandable, with further notice expressly disadvantage on account of his moral dependence, ignorance, indigence,
waived, when Central Surety defaulted on its obligations under Promissory mental weakness, tender age or other handicap, the courts must be vigilant
Note No. 714-Y. for his protection.

Mendoza v. Court of Appeals33 forecloses any doubt that an acceleration But in this case, Central Surety does not appear so weak as to be placed at
clause is valid and produces legal effects. In fact, in Selegna Management a distinct disadvantage vis-à-vis the bank. As found by the lower court:
and Development Corporation v. United Coconut Planters Bank,34 we held
that:
Considering that [Central Surety] is a known business entity, the [Premiere
Bank] was right in assuming that the [Central Surety] could not have been Pag
Considering that the contract is the law between the parties, respondent is cheated or misled in agreeing thereto, it could have negotiated with the
justified in invoking the acceleration clause declaring the entire obligation bank on a more favorable term considering that it has already established a e |
immediately due and payable. That clause obliged petitioners to pay the certain reputation with the [Premiere Bank] as evidenced by its numerous
entire loan on January 29, 1999, the date fixed by respondent. transactions. It is therefore absurd that an established company such as the 74
[Central Surety] has no knowledge of the law regarding bank practice in
loan transactions.
It is worth noting that after the delayed payment of ₱6,000,000.00 was
tendered by Central Surety, Premiere Bank returned the amount as
insufficient, ostensibly because there was, at least, another account that The Dragnet Clause.
was likewise due. Obviously, in its demand of 28 September 2000,
petitioner sought payment, not just of the ₱6,000,000.00, but of all these
The factual circumstances of this case showing the chain of transactions
past due accounts. There is extant testimony to support this claim, as the
and long-standing relationship between Premiere Bank and Central Surety
transcript of stenographic notes on the testimony of Atty. Araos reveals:
militate against the latter’s prayer in its complaint for the release of the
Wack Wack Membership, the security attached to Promissory Note 714-Y.
Atty. Opinion: Q. But you accepted this payment of Six Million
(₱6,000,000.00) later on when together with this was paid another check for
A tally of the facts shows the following transactions between Premiere Bank
1.8 Million?
and Central Surety:

Witness: A. We accepted.
Date Instrument Amount Stipulation
covered
Atty. Opinion: Q. And you applied this to four (4) other accounts three (3)
other accounts or to four (4) accounts mentioned in Exhibit "J." Is that
correct?

Atty. Tagalog: We can stipulate on that. Your Honor. August PN 714-Y P6M
20, 1999
Court: This was stipulated?

Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we August Deed of ₱ 15 M As security for PN 714-
confirm that those are the applications of payments made by the defendant 29, 1999 Assignment Y and/or such
Bank on those loan accounts. with Pledge Promissory Note/s
which the ASSIGNOR /
PLEDGOR shall
Atty. Opinion: Q. Were these accounts due already when you made this hereafter execute in
application, distribution of payments? favor of the
ASSIGNEE/PLEDGEE
Witness: A. Yes sir.35

Conversely, in its evidence-in-chief, Central Surety did not present any From these transactions and the proviso in the Deed of Assignment with
witness to testify on the payment of its obligations. In fact, the record shows Pledge, it is clear that the security, which peculiarly specified an amount at
that after marking its evidence, Central Surety proceeded to offer its ₱15,000,000.00 (notably greater than the amount of the promissory note it
evidence immediately. Only on the rebuttal stage did Central Surety present secured), was intended to guarantee not just the obligation under PN 714-
a witness; but even then, no evidence was adduced of payment of any Y, but also future advances. Thus, the said deed is explicit:
other obligation. In this light, the Court is constrained to rule that all
obligations of Central Surety to Premiere Bank were due; and thus, the
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR
application of payments was warranted.
from the ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION
PESOS (15,000,000.00) Philippine Currency in accordance with the
Being in receipt of amounts tendered by Central Surety, which were Promissory Note attached hereto and made an integral part hereof as
insufficient to cover its more onerous obligations, Premiere Bank cannot be Annex "A" and/or such Promissory Note/s which the
faulted for exercising the authority granted to it under the Promissory Notes, ASSIGNOR/PLEDGOR shall hereafter execute in favor of the
and applying payment to the obligations as it deemed fit. Subject to the ASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR hereby transfers,
caveat that our ruling herein shall be limited only to the transactions entered assigns, conveys, endorses, encumbers and delivers by way of first pledge
into by the parties to this case, the Court will not disturb the finding of the unto the ASSIGNEE/PLEDGEE, its successors and assigns, that certain
lower court that Premiere Bank rightly applied the payments that Central Membership fee Certificate Share in Wack Wack Golf and Country Club
Surety had tendered. Corollary thereto, and upon the second issue, the Incorporate covered by Stock Certificate No. 217 with Serial No. 1793 duly
tender of the amount of ₱6,000,000.00 by Central Surety, and the issue by Wack Wack Golf and Country Club Incorporated on August 27,
encashment of BC Check No. 08114 did not totally extinguish the debt 1996 in the name of the ASSIGNOR." (Emphasis made in the Petition.)
covered by PN No. 714-Y.
Then, a Continuing Guaranty/Comprehensive Surety Agreement was later
Release of the pledged executed by Central Surety as follows:

Wack Wack Membership Date Instrument Amount Stipulation

Contract of Adhesion

To the extent that the subject promissory notes were prepared by the
Premiere Bank and presented to Central Surety for signature, these
agreements were, indeed, contracts of adhesion. But contracts of adhesion
are not invalid per se. Contracts of adhesion, where one party imposes a
ready-made form of contract on the other, are not entirely prohibited. The
one who adheres to the contract is, in reality, free to reject it entirely; if he
adheres, he gives his consent.

In interpreting such contracts, however, courts are expected to observe

greater vigilance in order to shield the unwary or weaker party from
deceptive schemes contained in ready-made covenants.36 Thus, Article 24
of the Civil Code pertinently states:
Notarized, Continuing ₱40,898,0 In consideration of Our ruling in Prudential Bank v. Alviar38 is instructive:
Sept. 22, Guaranty/Compreh 00.00 the loan and/or any
1999 ensive Surety credit A "blanket mortgage clause," also known as a "dragnet clause" in American
Agreement accommodation jurisprudence, is one which is specifically phrased to subsume all debts of
which you past or future origins. Such clauses are "carefully scrutinized and strictly
(petitioner) have construed." Mortgages of this character enable the parties to provide
extended and/or will continuous dealings, the nature or extent of which may not be known or
extend to Central anticipated at the time, and they avoid the expense and inconvenience of
Surety and executing a new security on each new transaction. A "dragnet clause"
Insurance Co. operates as a convenience and accommodation to the borrowers as it
makes available additional funds without their having to execute additional Pag
security documents, thereby saving time, travel, loan closing costs, costs of
extra legal services, recording fees, et cetera. Indeed, it has been settled in e|
a long line of decisions that mortgages given to secure future 75
advancements are valid and legal contracts, and the amounts named as
consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument
the intent to secure future and other indebtedness can be gathered.

The "blanket mortgage clause" in the instant case states:

And on October 10, 2000, Promissory Note 376-X was entered into, a
renewal of the prior Promissory Note 367-Z, in the amount of
₱40,898,000.00. In all, the transactions that transpired between Premiere That for and in consideration of certain loans, overdraft and other credit
Bank and Central Surety manifest themselves, thusly: accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may
Date hereafter be obtained, the principal or all of which is hereby fixed at Two
Instrument
Amount
Stipulation Hundred Fifty Thousand (₱250,000.00) Pesos, Philippine Currency, as well
covered as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in
August 20, PN 714-Y ₱6M the accounts, books and records of the Mortgagee, the Mortgagor does
1999 hereby transfer and convey by way of mortgage unto the Mortgagee, its
successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together
August 29, Deed of ₱ 15 M As security for PN 714- with all the buildings and improvements now existing or which may
1999 Assignment with Y and/or such hereafter be erected or constructed thereon, of which the Mortgagor
Pledge Promissory Note/s declares that he/it is the absolute owner free from all liens and
which the ASSIGNOR / incumbrances. . . .
PLEDGOR shall
hereafter execute in
xxxx
favor of the
ASSIGNEE/PLEDGEE
In the case at bar, the subsequent loans obtained by respondents were
secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar
was secured by a "hold-out" on his foreign currency savings account, while
PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of
assignment on two promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and
Notarized, Continuing ₱40,898,000.0 In consideration of the by a chattel mortgage on various heavy and transportation equipment. The
Sept. 22, Guaranty/Compr 0 loan and/or any credit matter of PN BD#76/C-430 has already been discussed. Thus, the critical
1999 ehensive Surety accommodation which issue is whether the "blanket mortgage" clause applies even to subsequent
Agreement you (petitioner) have advancements for which other securities were intended, or particularly, to
extended and/or will PN BD#76/C-345.
extend to Central Surety
and Insurance Co.
Under American jurisprudence, two schools of thought have emerged on
this question. One school advocates that a "dragnet clause" so worded as
to be broad enough to cover all other debts in addition to the one
specifically secured will be construed to cover a different debt, although
such other debt is secured by another mortgage. The contrary thinking
maintains that a mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its entirety, at least
to anything other than a deficiency after exhausting the security specified
October 10, Promissory Note ₱40,898,000.0 therein, such deficiency being an indebtedness within the meaning of the
2000 376-X (PN 367- 0 mortgage, in the absence of a special contract excluding it from the
Z) arrangement.

The latter school represents the better position. The parties having
From the foregoing, it is more than apparent that when, on August 29, conformed to the "blanket mortgage clause" or "dragnet clause," it is
1999, the parties executed the Deed of Assignment with Pledge (of the reasonable to conclude that they also agreed to an implied understanding
Wack Wack Membership), to serve as security for an obligation in the that subsequent loans need not be secured by other securities, as the
amount of ₱15,000,000.00 (when the actual loan covered by PN No. 714-Y subsequent loans will be secured by the first mortgage. In other words, the
was only ₱6,000,000.00), the intent of the parties was for the Wack Wack sufficiency of the first security is a corollary component of the "dragnet
Membership to serve as security also for future advancements. The clause." But of course, there is no prohibition, as in the mortgage contract
subsequent loan was nothing more than a fulfillment of the intention of the in issue, against contractually requiring other securities for the subsequent
parties. Of course, because the subsequent loan was for a much greater loans. Thus, when the mortgagor takes another loan for which another
amount (₱40,898,000.00), it became necessary to put up another security, security was given it could not be inferred that such loan was made in
in addition to the Wack Wack Membership. Thus, the subsequent surety reliance solely on the original security with the "dragnet clause," but rather,
agreement and the specific security for PN No. 367-X were, like the Wack on the new security given. This is the "reliance on the security test."
Wack Membership, meant to secure the ballooning debt of the Central
Surety. Hence, based on the "reliance on the security test," the California court in
the cited case made an inquiry whether the second loan was made in
The above-quoted provision in the Deed of Assignment, also known as the reliance on the original security containing a "dragnet clause." Accordingly,
"dragnet clause" in American jurisprudence, would subsume all debts of finding a different security was taken for the second loan no intent that the
respondent of past and future origins. It is a valid and legal undertaking, parties relied on the security of the first loan could be inferred, so it was
and the amounts specified as consideration in the contracts do not limit the held. The rationale involved, the court said, was that the "dragnet clause" in
amount for which the pledge or mortgage stands as security, if from the four the first security instrument constituted a continuing offer by the borrower to
corners of the instrument, the intent to secure future and other secure further loans under the security of the first security instrument, and
indebtedness can be gathered. A pledge or mortgage given to secure future that when the lender accepted a different security he did not accept the
advancements is a continuing security and is not discharged by the offer.
repayment of the amount named in the mortgage until the full amount of all
advancements shall have been paid.37
In another case, it was held that a mortgage with a "dragnet clause" is an where deeds absolute in form were executed to secure any and all kinds of
"offer" by the mortgagor to the bank to provide the security of the mortgage indebtedness that might subsequently become due, a balance due on a
for advances of and when they were made. Thus, it was concluded that the note, after exhausting the special security given for the payment of such
"offer" was not accepted by the bank when a subsequent advance was note, was, in the absence of a special agreement to the contrary, within the
made because (1) the second note was secured by a chattel mortgage on protection of the mortgage, notwithstanding the giving of the special
certain vehicles, and the clause therein stated that the note was secured by security. This is recognition that while the "dragnet clause" subsists, the
such chattel mortgage; (2) there was no reference in the second note or security specifically executed for subsequent loans must first be exhausted
chattel mortgage indicating a connection between the real estate mortgage before the mortgaged property can be resorted to.
and the advance; (3) the mortgagor signed the real estate mortgage by her
name alone, whereas the second note and chattel mortgage were signed
However, this does not prevent the creditor from foreclosing on the security
by the mortgagor doing business under an assumed name; and (4) there
was no allegation by the bank, and apparently no proof, that it relied on the
for the first loan if that loan is past due, because there is nothing in law that Pag
prohibits the exercise of that right. Hence, in the case at bench, Premiere
security of the real estate mortgage in making the advance.
Bank has the right to foreclose on the Wack Wack Membership, the e|
security corresponding to the first promissory note, with the deed of 76
Indeed, in some instances, it has been held that in the absence of clear, assignment that originated the "dragnet clause." This conforms to the
supportive evidence of a contrary intention, a mortgage containing a doctrine in Prudential, as, in fact, acknowledged in the decision’s
"dragnet clause" will not be extended to cover future advances unless the penultimate paragraph, viz.:
document evidencing the subsequent advance refers to the mortgage as
providing security therefor.
Petitioner, however, is not without recourse. Both the Court of Appeals and
the trial court found that respondents have not yet paid the ₱250,000.00
It was therefore improper for petitioner in this case to seek foreclosure of and gave no credence to their claim that they paid the said amount when
the mortgaged property because of non-payment of all the three promissory they paid petitioner ₱2,000,000.00. Thus, the mortgaged property could still
notes. While the existence and validity of the "dragnet clause" cannot be be properly subjected to foreclosure proceedings for the unpaid
denied, there is a need to respect the existence of the other security given ₱250,000.00 loan, and as mentioned earlier, for any deficiency after D/A
for PN BD#76/C-345. The foreclosure of the mortgaged property should SFDX#129, security for PN BD#76/c-345, has been exhausted, subject of
only be for the ₱250,000.00 loan covered by PN BD#75/C-252, and for any course to defenses which are available to respondents.
amount not covered by the security for the second promissory note. As held
in one case, where deeds absolute in form were executed to secure any
In any event, even without this Court’s prescription in Prudential, the
and all kinds of indebtedness that might subsequently become due, a
release of the Wack Wack Membership as the pledged security for
balance due on a note, after exhausting the special security given for the
Promissory Note 714-Y cannot yet be done as sought by Central Surety.
payment of such note, was in the absence of a special agreement to the
The chain of contracts concluded between Premiere Bank and Central
contrary, within the protection of the mortgage, notwithstanding the giving of
Surety reveals that the Wack Wack Membership, which stood as security
the special security. This is recognition that while the "dragnet clause"
for Promissory Note 714-Y, and which also stands as security for
subsists, the security specifically executed for subsequent loans must first
subsequent debts of Central Surety, is a security in the form of a pledge. Its
be exhausted before the mortgaged property can be resorted to.
return to Central Surety upon the pretext that Central Surety is entitled to
pay only the obligation in Promissory Note No. 714-Y, will result in the
The security clause involved in the case at bar shows that, by its terms: extinguishment of the pledge, even with respect to the subsequent
obligations, because Article 2110 of the Civil Code provides:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR
from the ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION (I)f the thing pledged is returned by the pledgor or owner, the pledge is
PESOS (15,000,000.00) Philippine Currency in accordance with the extinguished. Any stipulation to the contrary is void.
Promissory Note attached hereto and made an integral part hereof as
Annex "A" and/or such Promissory Note/s which the
This is contrary to the express agreement of the parties, something which
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the
Central Surety wants this Court to undo. We reiterate that, as a rule, courts
ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR hereby transfers,
cannot intervene to save parties from disadvantageous provisions of their
assigns, conveys, endorses, encumbers and delivers by way of first pledge
contracts if they consented to the same freely and voluntarily.39
unto the ASSIGNEE/PLEDGEE, its successors and assigns, that certain
Membership fee Certificate Share in Wack Wack Golf and Country Club
Incorporated covered by Stock Certificate No. 217 with Serial No. 1793 duly Attorney’s Fees
issue by Wack Wack Golf and Country Club Incorporated on August 27,
1996 in the name of the ASSIGNOR."
The final issue is the propriety of attorney’s fees. The trial court based its
award on the supposed malice of Central Surety in instituting this case
it is comparable with the security clause in the case of Prudential, viz.: against Premiere Bank. We find no malice on the part of Central Surety;
indeed, we are convinced that Central Surety filed the case in the lower
court in good faith, upon the honest belief that it had the prerogative to
That for and in consideration of certain loans, overdraft and other credit
choose to which loan its payments should be applied.
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may Malicious prosecution, both in criminal and civil cases, requires the
hereafter be obtained, the principal or all of which is hereby fixed at Two presence of two elements, to wit: (a) malice and (b) absence of probable
Hundred Fifty Thousand (₱250,000.00) Pesos, Philippine Currency, as well cause. Moreover, there must be proof that the prosecution was prompted
as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, by a sinister design to vex and humiliate a person; and that it was initiated
including interest and expenses or any other obligation owing to the deliberately, knowing that the charge was false and baseless. Hence, the
Mortgagee, whether direct or indirect, principal or secondary as appears in mere filing of what turns out to be an unsuccessful suit does not render a
the accounts, books and records of the Mortgagee, the Mortgagor does person liable for malicious prosecution, for the law could not have meant to
hereby transfer and convey by way of mortgage unto the Mortgagee, its impose a penalty on the right to litigate.40 Malice must be proved with clear
successors or assigns, the parcels of land which are described in the list and convincing evidence, which we find wanting in this case.
inserted on the back of this document, and/or appended hereto, together
with all the buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the Mortgagor WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed
declares that he/it is the absolute owner free from all liens and Decision of the Court of Appeals in CA-G.R. CV No. 85930 dated July 31,
2006, as well as its Resolution dated January 4, 2007, are REVERSED and
incumbrances. . . .
SET ASIDE. The Decision of the Regional Trial Court of Makati City,
Branch 132, in Civil Case No. 00-1536, dated July 12, 2005, is
and there is no substantive difference between the terms utilized in both REINSTATED with the MODIFICATION that the award of attorney’s fees to
clauses securing future advances. petitioner is DELETED. No pronouncement as to costs.

To recall, the critical issue resolved in Prudential was whether the "blanket SO ORDERED.
mortgage" clause applies even to subsequent advancements for which
other securities were intended. We then declared that the special security
G.R. No. 116805 June 22, 2000
for subsequent loans must first be exhausted in a situation where the
creditor desires to foreclose on the "subsequent" loans that are due.
However, the "dragnet clause" allows the creditor to hold on to the first MARIO S. ESPINA, petitioner,
security in case of deficiency after foreclosure on the special security for the vs.
subsequent loans. THE COURT OF APPEALS and RENE G. DIAZ, respondents.

In Prudential, we disallowed the petitioner’s attempt at multiple PARDO, J.:

foreclosures, as it foreclosed on all of the mortgaged properties serving as
individual securities for each of the three loans. This Court then laid down
the rule, thus: The case before the Court is an appeal from a decision of the Court of
Appeals 1 reversing that of the Regional Trial Court, Antipolo,
Rizal, 2 affirming in all respects the decision of the Municipal Trial Court,
Antipolo, Rizal, 3 ordering respondent Rene G. Diaz to vacate the
condominium unit owned by petitioner and to pay back current rentals, every month thereafter as rentals unit (sic) he vacates
attorney's fees and costs.1âwphi1.nêt the premises; to pay the amount of P5,000.00 as and
attorney's fees; the amount of P300.00 per
appearance, and costs of suit.
The facts, as found by the Court of Appeals, are as follows:

However, the plaintiff may refund to the defendant the

Mario S. Espina is the registered owner of a Condominium Unit
balance from (sic) P400,000.00 after deducting all the
No. 403, Victoria Valley Condominium, Valley Golf Subdivision,
total obligations of the defendant as specified in the
Antipolo, Rizal. Such ownership is evidenced by Condominium
decision from receipt of said decision.
Certificate of Title No. N-10 (p. 31, Rollo).

SO ORDERED.(Decision, Annex "B"; p. 27, Rollo).

Pag
On November 29, 1991, Mario S. Espina, the private respondent
as seller, and Rene G. Diaz, the petitioner as buyer, executed a
e|
Provisional Deed of Sale, whereby the former sold to the latter From the said decision, petitioner appealed to the Regional Trial 77
the aforesaid condominium unit for the amount of P100,000.00 to Court Branch 71, Antipolo, Rizal. On April 29, 1994, said
be paid upon the execution of the contract and the balance to be appellate court affirmed in all respects the decision of the trial
paid through PCI Bank postdated checks as follows: court. 4

1. P400,000.00 On June 14, 1994, petitioner filed with the Court of Appeals a petition for
review.
Check No. 301245
January 15, 1992 On July 20, 1994, the Court of Appeals promulgated its decision reversing
the appealed decision and dismissing the complaint for unlawful detainer
with costs against petitioner Espina.
2. P200,000.00

On August 8, 1994, petitioner filed a motion for reconsideration of the

Check No. 301246
decision of the Court of Appeals. 5
February 1, 1992

On August 19, 1994, the Court of Appeals denied the motion. 6

3. P200,000.00

Hence, this appeal via petition for review on certiorari. 7

Check No. 301247
February 22, 1992
The basic issue raised is whether the Court of Appeals erred in ruling that
the provisional deed of sale novated the existing contract of lease and that
4. P200,000.00
petitioner had no cause of action for ejectment against respondent Diaz.

Check No. 301248

We resolve the issue in favor of petitioner.
March 14, 1992

According to respondent Diaz, the provisional deed of sale that was

5. P200,000.00
subsequently executed by the parties novated the original existing contract
of lease. The contention cannot be sustained. Respondent originally
Check No. 301249 occupied the condominium unit in question in 1987 as a lessee. 8 While he
April 4, 1992 occupied the premises as lessee, petitioner agreed to sell the condominium
unit to respondent by installments. 9 The agreement to sell was provisional
as the consideration was payable in installments.
6. P200,000.00

The question is, did the provisional deed of sale novate the existing lease
Check No. 301250
contract? The answer is no. The novation must be clearly proved since its
April 25, 1992 existence is not presumed. 10 "In this light, novation is never presumed; it
must be proven as a fact either by express stipulation of the parties or by
(pp. 59-61, Rollo). implication derived from an irreconcilable incompatibility between old and
new obligations or contracts." 11 Novation takes place only if the parties
expressly so provide, otherwise, the original contract remains in force. In
Subsequently, in a letter dated January 22, 1992, petitioner other words, the parties to a contract must expressly agree that they are
informed private respondent that his checking account with PCI abrogating their old contract in favor of a new one. 12 Where there is no
Bank has been closed and a new checking account with the clear agreement to create a new contract in place of the existing one,
same drawee bank is opened for practical purposes. The letter novation cannot be presumed to take place, unless the terms of the new
further stated that the postdated checks issued will be replaced contract are fully incompatible with the former agreement on every
with new ones in the same drawee bank (p. 63, Rollo). point. 13 Thus, a deed of cession of the right to repurchase a piece of land
does not supersede a contract of lease over the same property. 14 In the
On January 25, 1992, petitioner through Ms. Socorro Diaz, wife provisional deed of sale in this case, after the initial down payment,
of petitioner, paid private respondent Mario Espina P200,000.00, respondent's checks in payment of six installments all bounced and were
acknowledged by him as partial payment for the condominium dishonored upon presentment for the reason that the bank account was
unit subject of this controversy (p. 64, Rollo). closed. 15 Consequently, on July 26, 1992, petitioner terminated the
provisional deed of sale by a notarial notice of cancellation. 16 Nonetheless,
respondent Diaz continued to occupy the premises, as lessee, but failed to
On July 26, 1992, private respondent sent petitioner a "Notice of pay the rentals due. On October 28, 1992, respondent made a payment of
Cancellation" of the Provisional Deed of Sale (p. 48, Rollo). P100,000.00 that may be applied either to the back rentals or for the
purchase of the condominium unit. On February 13, 1993, petitioner gave
However, despite the Notice of Cancellation from private respondent a notice to vacate the premises and to pay his back
respondent, the latter accepted payment from petitioner per rentals. 17 Failing to do so, respondent's possession became unlawful and
Metrobank Check No. 395694 dated and encashed on October his eviction was proper. Hence, on February 24, 1993, petitioner filed with
28, 1992 in the amount of P100,000.00 (p. 64, Rollo). the Municipal Trial Court, Antipolo, Rizal, Branch 01 an action for unlawful
detainer against respondent Diaz. 18
On February 24, 1993, private respondent filed a complaint
docketed as Civil Case No. 2104 for Unlawful Detainer against Now respondent contends that the petitioner's subsequent acceptance of
petitioner before the Municipal Trial Court of Antipolo, Branch 1. such payment effectively withdrew the cancellation of the provisional sale.
We do not agree. Unless the application of payment is expressly indicated,
the payment shall be applied to the obligation most onerous to the
On November 12, 1993, the trial court rendered its decision, the debtor. 19 In this case, the unpaid rentals constituted the more onerous
dispositive portion of which reads: obligation of the respondent to petitioner. As the payment did not fully settle
the unpaid rentals, petitioner's cause of action for ejectment survives. Thus,
WHEREFORE, in view of the foregoing consideration, the Court of Appeals erred in ruling that the payment was "additional
judgment is hereby rendered ordering the defendant payment" for the purchase of the property.
and all persons claiming rights under him to vacate unit
403 of the Victoria Golf Valley Condominium, Valley WHEREFORE, the Court GRANTS the petition for review on certiorari, and
Golf Subdivision, Antipolo, Rizal; to pay the total REVERSES the decision of the Court of Appeals. 20 Consequently, the
arrears of P126,000.00, covering the period July 1991 Court REVIVES the decision of the Regional Trial Court, Antipolo, Rizal,
up to the filing (sic) complaint, and to pay P7,000.00
Branch 71, 21 affirming in toto the decision of the Municipal Trial Court,
Antipolo, Rizal, Branch 01. 22 It is expressly stipulated in the Promissory Notes that Lorenze Realty
agreed to pay the additional amount of 1/10 of 1% per day of the total
amount of obligation due as penalty to be computed from the day that
No costs.
the default was incurred up to the time that the loan obligations are fully
paid. The debtor also undertook pay an additional 10% of the total
SO ORDERED.1âwphi1.nêt amount due including interests, surcharges and penalties as
attorney's fees.
G.R. No. 200299, August 17, 2016
As a security for the said obligations, Lorenze Realty executed Real Estate
Mortgages (REM) over 11 parcels of land covered by Transfer Certificates
of Title (TCT) Nos. B-44428, B-44451, B-44452, V-4J275: V-44276, V-
Pag
SPOUSES JUAN CHUY TAN AND MARY TAN (DECEASED)
SUBSTITUTED BY THE SURVIVING HEIRS, JOEL TAN AND ERIC 44277, V-44278, V-44280, V-44281, V-44283 and V-44284 registered by e|
TAN, Petitioners, v. CHINA BANKING CORPORATION, Respondent. the Registry of Deeds of Valenzuela City.
78
Subsequently, Lorenze Realty incurred in default in the payment of its
DECISION amortization prompting China Bank to cause the extra-judicial foreclosure
of the REM constituted on the securities after the latter failed to heed to its
PEREZ, J.: demand to settle the entire obligation.

After the notice and publication requirements were complied with, the
For resolution of the Court is the instant Petition for Review mortgaged properties were sold at a public auction wherein China emerged
on Certiorari1 filed by petitioner Spouses Juan Chuy Tan and Mary Tan as the highest bidder for the amount of P85,000,000.0u as evidenced by a
(deceased) substituted by the surviving heirs, Joel Tan and Eric Tan, certificate of sale.
seeking to reverse and set aside the Decision2 dated 14 October 2011 and
Resolution3 dated 24 January 2012 of the Court of Appeals (CA) in CA- As shown by the Statement of Account dated 10 August 1998, the
G.R. CV. No. 87450. The assailed decision and resolution affirmed with indebtedness of Lorenze Realty already reached the amount
modification the 29 December 2003 Decision4 of the Regional Trial Court P114,258,179.81, broken down as follows:
(RTC) of Makati City, Branch 142 by ordering that the penalty surcharge of
24% per annum as stipulated in the contract of loan is reduced to 12% per chanRoblesvirtualLawlibrary
annum.
Principal Amount P71,050,000.00
The Facts
Interest 13,521,939.31
Petitioner Lorenze Realty and Development Corporation (Lorenze Realty) is
a domestic corporation duly authorized by Philippine laws to engage in real Penalties 19,763,257.50
estate business. It is represented in this action by petitioners Joel Tan and
Eric Tan as substitutes for their deceased parents, Spouses Juan Chuy Tan
Registration Expenses 9,542,013.00
and Mary Tan (Spouses Tan).

Respondent China Banking Corporation (China Bank), on the other hand, is Filing Fee 351,300.00
a universal banking corporation duly authorized by Bangko Sentral ng
Pilipinas (BSP) to engage in banking business. Publication Fee 25,970.00

On several occasions in 1997, Lorenze Realty obtained from China Bank Sheriffs Fee 2,000.00
various amounts of loans and credit accommodations in the following
amounts: Posting Fee 700.00
chanRoblesvirtualLawlibrary
After deducting from the total amount of loan obligation the P85,000,000.00
DATE PROMISSORY NOTE PRINCIPAL AMOUNT proceeds of the public sale, there remains a balance in the amount of
NOS. P29,258,179.81. In its effort to collect the deficiency obligation, China Bank
demanded from Lorenze Realty for the payment of the remaining loan but
27 June 1997 BDC-0345 P1,600,000.00 such demand just went to naught.

30 July 1997 BDC-0408 1,000,000.00 Consequently, China Bank initiated an action for the collection of sum of
money against the Lorenze Realty and its officers, namely, Lawrence Ong,
13 August 1997 BDC-0422 1,100,000.00 Victoria Ong, Juan Chuy Tan and Mary Tan before the RTC of Makati City,
Branch 142. In its Complaint docketed as Civil Case No. 98-3069, China
Bank alleged that it is entitled to deficiency judgment because the purchase
18 August 1997 BDC-0432 1,960.000.00
price of the securities pledged by the debtor is not sufficient to settle the
entire obligation incurred by the latter including the interest, penalties and
21 August 1997 BDC-0438 1,490.000.00 surcharges that had accrued from the time of default. China Bank thus
prayed that defendants be ordered to pay the amount of P29,25 8,179.81,
2 September 1997 BDC-0455 2,200,000.00 representing the deficiency in its obligation in accordance with the express
terms of the promissory notes.
1 October 1997 BDC-0506 1,700,000.00
While conceding that they have voluntarily signed the promissory notes,
20 November DLS-0316 2,800,000.00 defendants, for their part, disclaim liability by alleging that the surety
1997 agreements did not express the true intention of the parties. The officers of
the corporation who represented Lorenze Realty below claimed that they
just signed the surety contracts without reading the fine terms stipulated
18 June 1997 DLS-0324 5,500,000.00 therein because they were macle to believe by the bank manager that the
collaterals they offered to obtain the loans were already sufficient to cover
18 June 1997 DLS-0325 2,675,000.00 the entire obligation should they incur in default. The collection suit for the
deficiency obligation came as a surprise to them after China Bank managed
04 July 1997 DLS-0360 7,000,000.00 to successfully foreclose the securities of the obligation and purchased for
itself the mortgaged properties at the public sale. In addition, defendants
24 July 1997 DLS-0403 4,000,000.00 averred that the penalty in the amount of 1/10 of 1% per day of the total
amount due is usurious and shocking to the conscience and should be
nullified by the court. Finally, they prayed that the RTC declare Lorenze
28 August 1997 BDC-0449 1,550,000.00
Realty's obligation fully settled on account of the sale of the securities.
20 November BDC-0340 1,550,000.00 On 29 December 2003, the RTC found in favor of China Bank declaring the
1997 defendants jointly and severally liable for the amount of P29,258,179.81
representing the deficiency judgment. It was held by the trial court that
8 September 1997 BDC-0466 1,262,500.00 Lorenze Realty, "[a]fter having voluntarily signed the surety agreements,
cannot be discharged from the consequences of the undertaking because
31 September BDC-0479 662,500.00 the terms and conditions contained therein is considered to be the law
1997 between the parties as long as it is not contrary to law, morals, good
customs and public policy. The mistake, misapprehension and ignorance of
10 July 1997 DLS 0379 33,000,000.00 the defendants as to the legal effects of the obligations are no reason for
relieving them of their liabilities." The RTC disposed in this
wise:ChanRoblesVirtualawlibrary
TOTAL P71,050,000.00
WHEREFORE, premises considered, judgment is rendered ordering the which of the same must be applied.[']
defendants to pay [China Bank], jointly and severally, the following:
Indeed, the debtor[']s right to apply payment has been considered merely
directory, and not mandatory, following this Court[']s earlier pronouncement
1. [T]he amount of £29,258,179.81 representing the deficiency
that [']the ordinary acceptation of the terms [']may['] and [']shall['] may be
claim as of August 10, 1998 plus penalties accruing
resorted to as guides in ascertaining the mandatory or directory character
thereafter at the rate of 2% per month until fully paid;
of statutory provisions. [']

2. 5% of the total amount due as Attorney's [F]ees; Article 1252 gives the right to the debtor to choose to which of several
obligations to apply a particular payment that he tenders to the creditor. But
3. Expenses of litigation and cost of suit. likewise granted in the same provision is the right of the creditor to apply
such payment in case the debtor fails to direct its application. This is
Pag
SO ORDERED.5chanroblesvirtuallawlibrary
obvious in Art. 1252, par. 2, viz.: [']If the debtor accepts from the creditor a e|
receipt in which an application of payment is made, the former cannot
On appeal, the CA affirmed with modification the judgment of the RTC by complain of the same.[‘] It is the directory nature of this right and the 79
reducing the rate of the penalty surcharge from 24% per annum to 12% per subsidiary right of the creditor to apply payments when the debtor does not
annum, and, likewise the award of attorney's fees was reduced from 5% to elect to do so that make this right, like any other right, waivable.
2% of the total amount due. The appellate court deemed that the rate of
penalty agreed by the parties is unconscionable under the circumstances Rights may be waived, unless the waiver is contrary to law, public order,
considering that the obligation was already partially satisfied by the sale of public policy, morals or good customs, or prejudicial to a third person with a
the securities constituted for the loan and resolved to fairly and equitably right recognized by law.
reduce it to 12% per annum. The decretal portion of the appellate court's
decision reads:ChanRoblesVirtualawlibrary A debtor, in making a voluntary payment, may at the time of payment direct
WHEREFORE, premises considered, the assailed Decision dated an application of it to whatever account he chooses, unless he has
December 29, 2003 of the Regional Trial Court of Makati City, Branch 142 assigned or waived that right. If the debtor does not do so, the right
is AFFIRMED with MODIFICATION in that the penalty surcharge of 2% per passes to the creditor, who may make such application as he
month or 24% per annum is reduced to 12% per annum and, likewise, the chooses. But if neither party has exercised its option, the court will apply
award of attorney's fees is reduced from 5% to 2% of the total amount due. the payment according to the justice and equity of the case, taking into
No pronouncement as to costs. consideration all its circumstances." [Emphasis supplied, citations omitted.]
In the event that the debtor failed to exercise the right to elect the creditor
SO ORDERED. may choose to which among the debts the payment is applied as in the
In a Resolution dated 24 January 2012, the CA refused to reconsider its case at bar. It is noteworthy that after the sale of the foreclosed properties
earlier decision by denying the Motion for Reconsideration interposed by at the public auction, Lorenze Realty failed to manifes": its preference as to
Lorenze Realty. which among the obligations that were all due the proceeds of the sale
should be applied. Its silence can be construed as acquiescence to China
The Issue Bank's application of the payment first to the interest and penalties and the
remainder to the principal which is sanctioned by Article 1253 of the New
Dissatisfied with the disquisition of the Court of Appeals, Lorenze Realty Civil Code which provides that:,
elevated the matter before the Court by filing a Petition for Review Art. 1253. If the debt produces interest, payment of the principal shall not
on Certiorari. For the resolution of the Court is the sole issue be deemed to have been made until the interests have been covered.
of:ChanRoblesVirtualawlibrary That they assume that the obligation is fully satisfied by the sale of the
WHETHER LORENZE REALTY'S OBLIGATION IS FULLY SETTLED securities does not hold any water. Nowhere in our statutes and
WHEN THE REAL PROPERTIES CONSTITUTED AS SECURITIES FOR jurisprudence do they provide that the sale of the collaterals constituted as
THE LOAN WERE SOLD AT THE PUBLIC AUCTION FOR security of the obligation results in the extinguishment of the obligation. The
P85,000,000.00. rights and obligations of parties are governed by the terms and conditions
The Court's Ruling of the contract and not by assumptions and presuppositions of the parties.
The amount of their entire liability should be computed on the basis of the
In assailing the CA Decision, Lorenze Realty argues that it is no longer rate of interest as imposed by the CA minus the proceeds of the sale of the
liable to pay the deficiency obligation because the proceeds of the sale of foreclosed properties in public auction.
the foreclosed properties in the amount of P85,000,000.00 is more than
enough to cover the principal amount of the loan which is just It is worth mentioning that the appellate court aptly reduced the interest rate
P71,050,000.00. In fact, it further asserted that after applying the proceeds to 12%' per annum which is in consonance to existing jurisprudence.
of the public sale to the principal amount of loan, there remains a balance in Albos v. Embisan, 11MCMP Construction Corp. v. Monark Equipment
of P13,950,000.00 which should more than enough to cover the penalties, Corp.,12 Bognot v. RRI Lending Corporation,13 and Menchavez v.
interests and surcharges. Bermudez,14 the Court struck down the stipulated rates of interest for being
excessive, iniquitous, unconscionable and exorbitant and
For its part, China Bank maintains that the obligation of Lorenze Realty is uniformly reduced the rates to 12% per annum.
not extinguished by the foreclosure and sale of real properties constituted
as securities citing Article 1253 of the New Civil Code which explicitly states Lorenze Realty's plea to further reduce the interest to 3% per annum has
that "If the debt produces interest, payment of the principal shall not be no leg to stand on and could not be adopted by this Court. On the other
deemed to have been made until the interests have been covered." By first hand, the appellate court, consistent with the ruling of this Court in a
applying the proceeds of the sale to the interest, penalties and expenses of number of cases, correctly pegged the rate of interest at 1% per month or
the sale, there yields a balance in the principal obligation in the amount of 12% per annum. We need not unsettle the principle we had affirmed in a
P29,258,179.81. plethora of cases that 12% per annum is the legal rate of interest imposed
We resolve to deny the petition. by this Court on occasions that we nullified the rates stipulated by parties.
Obligations are extinguished, among others, by payment or performance, While the Court has the power to nullify excessive interest rates and
the mode most relevant to the factual situation in the present case. 6 Under impose new rates for the parties, such reduction, however, must always be
Article 1232 of the Civil Code, payment means not only the delivery of guided by reason and equity.
money but also the performance, in any other manner, of an
obligation.7 Article 1233 of the Civil Code states that a debt shall not be WHEREFORE, premises considered, the petition is DENIED. The assailed
understood to have been paid unless the thing or service in which the Decision and Resolution of the Court of Appeals are hereby AFFIRMED.
obligation consists has been completely delivered or rendered, as the case
may be.8 In contracts of loan, the debtor is expected to deliver the sum of SO ORDERED.chanRoblesvirtualLawlibrary
money due the creditor.9 These provisions must be read in relation with the
other rules on payment under the Civil Code, such as the application of
payment, to wit:ChanRoblesVirtualawlibrary
Art. 1252. He who has various debts of the same kind in favor of one and G.R. No. 194642, April 06, 2015
the same creditor, may declare at the time of making the payment, to which
of them the same must be applied. Unless the parties so stipulate, or when NUNELON R. MARQUEZ, Petitioner, v. ELISAN CREDIT
the application of payment is made by the party for whose benefit the term CORPORATION, Respondents.
has been constituted, application shall not be made as to debts which are
not yet due.
DECISION
If the debtor accepts from the creditor a receipt in which an application of
the payment is made, the former cannot complain of the same, unless there BRION, J.:
is a cause for invalidating the contract.
In interpreting the foregoing provision of the statute, the Court in Premiere
Development Bank v. Central Surety & Insurance Company Inc.10 held that We resolve the present petition for review on certiorari1 assailing the May
the right of the debtor to apply payment is merely directory in nature and 17, 2010 decision2 and the November 25, 2010 resolution3 of the Court of
must be promptly exercised, lest, such right passes to the creditor, Appeals (CA) in CA-G.R. SP No. 102144.4redarclaw
viz:
"The debtor[']s right to apply payment is not mandatory. This is clear from The Factual Antecedents
the use of the word [']may['] rather than the word [']shall['] in the provision
which reads: [']He who has various debts of the same kind in favor of one On December 16, 1991, Nunelon R. Marquez (petitioner) obtained a (first
and the same creditor, may declare at the time of making the payment, to loan) from Elisan Credit Corporation (respondent) for fifty-three thousand
pesos (Php 53,000.00) payable in one-hundred eighty (180)
days.5redarclaw Acting on the respondent's motion for reconsideration, the RTC reversed
itself. Citing Article 1253 of the Civil Code, it held that "if the debt produces
The petitioner signed a promissory note which provided that it is payable in interest, payment of the principal shall not be deemed to have been made
weekly installments and subject to twenty-six percent (26%) annual interest. until the interests have been covered." It also sustained the contention of
In case of non-payment, the petitioner agreed to pay ten percent (10%) the respondent that the chattel mortgage was revived when
monthly penalty based on the total amount unpaid and another twenty-five the petitioner executed the promissory note covering the second loan.
percent (25%) of such amount for attorney's fees exclusive of costs, and
judicial and extrajudicial expenses.6redarclaw The RTC ordered:LawlibraryofCRAlaw

To further secure payment of the loan, the petitioner executed a chattel

mortgage7 over a motor vehicle. The contract of chattel mortgage provided
1. "the defendant to pay the plaintiff the following: a) P25,040.00, Pag
plus interest thereon at the rate of 26% per annum and penalties
among others, that the motor vehicle shall stand as a security for the first
of 10% per month thereon from due date of the second e|
loan and "all other obligations of every kind already incurred or which may
promissory note until fully paid, b) 25% of the defendant's 80
hereafter be incurred."8redarclaw
outstanding obligation as and for attorney's fees, c) costs of this
suit;"
Both the petitioner and respondent acknowledged the full payment of the
first loan.9redarclaw
2. "the foreclosure of the chattel mortgage dated December 16,
Subsequently, the petitioner obtained another loan (second loan) from the 1991 and the sale of the mortgaged property at a public auction,
respondent for fifty-five thousand pesos (P55,000.00) evidenced by a with the proceeds thereof to be applied as and in payment of the
promissory note10 and a cash voucher11 both dated June 15, 1992. amounts awarded in a and b above."

The promissory note covering the second loan contained exactly the The CA Ruling20
same terms and conditions as the first promissory note.
The CA affirmed the RTC's ruling with modification.
When the second loan matured on December 15, 1992,
the petitioner had only paid twenty-nine thousand nine hundred sixty pesos The CA observed that the disparity in the amount loaned and the amount
(P29,960.00), leaving an unpaid balance of twenty five thousand forty paid by the petitioner supports the respondent's view that the daily
pesos (P25,040.00).12redarclaw payments were properly applied first for the payment of interests and not for
the principal.
Due to liquidity problems, the petitioner asked the respondent if he could
pay in daily installments (daily payments) until the second loan is paid. The According to the CA, if the respondent truly condoned the payment of
respondent granted the petitioner's request. Thus, as of September 1994 or interests as claimed by the petitioner, the latter did not have to pay an
twenty-one (21) months after the second loan's maturity, the petitioner had amount in excess of the principal. The CA believed the petitioner knew his
already paid a total of fifty-six thousand four-hundred forty pesos payments were first applied to the interests due.
(P56,440.00), an amount greater than the principal.13redarclaw
The CA held that Article 1253 of the Civil Code is clear that if debt produces
Despite the receipt of more than the amount of the principal, the respondent interest, payment of the principal shall not be deemed made until the
filed a complaint for judicial foreclosure of the chattel mortgage because interests have been covered. It ruled that even if the official receipts issued
the petitioner allegedly failed to settle the balance of the second loan by the respondent did not mention that the payments were for the interests,
despite demand.14redarclaw the omission is irrelevant as it is deemed by law to be for the payment of
interests first, if any, and then for the payment of the principal amount.
The respondent further alleged that pursuant to the terms of the promissory
note, the petitioner's failure to fully pay upon maturity triggered the The CA, however, reduced the monthly penalty from ten percent (10%) to
imposition of the ten percent (10%) monthly penalty and twenty-five percent two percent (2%) pursuant to Article 1229 of the Civil Code which gives the
(25%) attorney's fees. courts the power to decrease the penalty when the principal obligation has
been partly or irregularly complied with by the debtor.
The respondent prayed that the petitioner be ordered to pay the balance of
the second loan plus accrued penalties and interest.15redarclaw The dispositive portion of the CA decision provides:LawlibraryofCRAlaw
"WHEREFORE, premises considered, the Petition is hereby DENIED for
Before the petitioner could file an answer, the respondent applied for the lack of merit. The Order dated 07 May 2007 of the Regional Trial Court,
issuance of a writ of replevin. The MTC issued the writ and by virtue of Branch 222, Quezon City is hereby AFFIRMED with MODIFICATION that
which, the motor vehicle covered by the chattel mortgage was seized from the penalty charge should only be two (2%) per month until fully paid."
the petitioner and delivered to the respondent.16redarclaw The CA denied the petitioner's Motion for Reconsideration dated May 17,
2010 on November 25, 2010 for failing to raise new matters. Hence, this
Trial on the merits thereafter ensued. present petition.

The MTC Ruling17 The Petition

The MTC found for the petitioner and held that the second loan was fully The petitioner seeks the reversal of the CA's decision and resolution. He
extinguished as of September 1994. argues that he has fully paid his obligation. Thus, the respondent has no
right to foreclose the chattel mortgage.
It held that when an obligee accepts the performance or payment of an
obligation, knowing its incompleteness or irregularity and without The petitioner insists that his daily payments should be deemed to have
expressing any protest or objection, the obligation is deemed fully complied been credited against the principal, as the official receipts issued by the
with.18 The MTC noted that the respondent accepted the daily payments respondent were silent with respect to the payment of interest and
made by the petitioner without protest. The second loan having been fully penalties. He cites Article 1176 of the Civil Code which ordains that [t]he
extinguished, the MTC ruled that respondent's claim for interests and receipt of the principal by the creditor without reservation with respect to the
penalties plus the alleged unpaid portion of the principal is without legal interest, shall give rise to the presumption that the interest has been paid.
basis. The petitioner invokes Article 1235 of the Civil Code which states that
"[w]hen the obligee accepts the performance of an obligation, knowing its
The MTC ordered:LawlibraryofCRAlaw incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with."
1. "the plaintiff Elisan Credit Corporation to return/deliver the seized
motor vehicle with Plate No. UV-TDF-193 to the possession of The petitioner denies having stipulated upon and consented to the twenty-
the defendant and in the event its delivery is no longer possible, six per cent (26%) per annum interest charge, ten percent (10%) monthly
to pay the defendant the amount of P30,000.00 corresponding to penalty and twenty-five percent (25%) attorney's fees. According to
the value of the said vehicle;" the petitioner, he signed the promissory note in blank.

The petitioner likewise disclaims receiving any demand letter from the
2. "the bonding company People's Trans-East Asia Insurance
respondent for the alleged balance of the second loan after he had paid
Corporation to pay the defendant the amounts of P20,000.00 and
fifty-six thousand four-hundred forty pesos (Php56,440.00) as of September
P5,000.00 representing the damages and attorney's fees under
1994, and further argues that the chattel mortgage could not cover the
P.T.E.A.LC Bond No. JCL (13)-00984;"
second loan as it was annulled and voided upon full payment of the first
loan.
3. "the plaintiff is likewise directed to surrender to the defendant the
originals of the documents evidencing indebtedness in this case
The Respondent's Case21
so as to prevent further use of the same in another proceeding."
The respondent claims that the daily payments were properly credited
The RTC Ruling19 against the interest and not against the principal because
the petitioner incurred delay in the full payment of the second loan.
Except for the MTC's order directed to the bonding company, the RTC
initially affirmed the ruling of the MTC. It argues that pursuant to the terms and conditions of the promissory note,
the interest and penalties became due and demandable when
the petitioner failed to pay in full upon maturity. The respondent relies on These considerations strongly militate against the petitioner's claim that he
Article 1253 of the Civil Code which provides that if the debt produces did not consent to and stipulated on the interest and penalty charges of the
interest, payment of the principal shall not be deemed to have been made second loan. Thus, he did not only fail to fully pay the second loan upon
until the interests have been covered. maturity; the loan was also subject to interest, penalty and attorney's fees.

The respondent likewise maintains that the chattel mortgage could validly Article 1176 in relation to Article 1253
secure the second loan invoking its provision which provided that it covers
"obligations...which may hereafter be incurred." Article 1176 falls under Chapter I (Nature and Effect of Obligations) while
Article 1253 falls under Subsection I (Application of Payments), Chapter
IV (Extinguishment of Obligations) of Book IV (Obligations and
Issues
Contracts) of the Civil Code.
Pag
The petitioner raises the following issues for our e|
resolution:LawlibraryofCRAlaw The structuring of these provisions, properly taken into account, means that
Article 1176 should be treated as a general presumption subject to the 81
more specific presumption under Article 1253. Article 1176 is relevant on
I. "WHETHER THE HONORABLE COURT OF APPEALS ERRED questions pertaining to the effects and nature of obligations in general,
IN AFFIRMING THE DECISION OF THE REGIONAL TRIAL while Article 1253 is specifically pertinent on questions involving application
COURT ORDERING THE PETITIONER TO PAY THE of payments and extinguishment of obligations.
RESPONDENT THE AMOUNT OF PHP24,040.00 PLUS
INTEREST AND PENALTY FROM DUE DATE UNTIL FULLY A textual analysis of the above provisions yields the results we discuss at
PAID; AND length below:LawlibraryofCRAlaw

II. "WHETHER THE HONORABLE COURT OF APPEALS ERRED The presumption under Article 1176 does not resolve the question of
IN AFFIRMING THE DECISION OF THE REGIONAL TRIAL whether the amount received by the creditor is a payment for the principal
COURT ORDERING THE FORECLOSURE AND SALE OF THE or interest. Under this article the amount received by the creditor is the
MORTGAGED PROPERTY."22 payment for the principal, but a doubt arises on whether or not the interest
is waived because the creditor accepts the payment for the principal without
reservation with respect to the interest. Article 1176 resolves this doubt by
In simpler terms, did the respondent act lawfully when it credited the daily presuming that the creditor waives the payment of interest because he
payments against the interest instead of the principal? Could the chattel accepts payment for the principal without any reservation.
mortgage cover the second loan?
On the other hand, the presumption under Article 1253 resolves doubts
The Court's Ruling involving payment of interest-bearing debts. It is a given under this Article
that the debt produces interest. The doubt pertains to the application of
We find the petition partly meritorious. payment; the uncertainty is on whether the amount received by the creditor
is payment for the principal or the interest. Article 1253 resolves this doubt
We rule that: (1) the respondent acted pursuant to law by providing a hierarchy: payments shall first be applied to the interest;
and jurisprudence when it credited the daily payments against the interest payment shall then be applied to the principal only after the interest has
instead of the principal; and (2) the chattel mortgage could not cover the been fully-paid.
second loan.
Correlating the two provisions, the rule under Article 1253 that payments
Rebuttable presumptions; Article 1176 vis-a-vis Article 1253 shall first be applied to the interest and not to the principal shall govern if
two facts exist: (1) the debt produces interest (e.g., the payment of interest
There is a need to analyze and harmonize Article 1176 and Article 1253 of is expressly stipulated) and (2) the principal remains unpaid.
the Civil Code to determine whether the daily payments made after the
second loan's maturity should be credited against the interest or against the The exception is a situation covered under Article 1176, i.e., when the
principal. creditor waives payment of the interest despite the presence of (1) and (2)
above. In such case, the payments shall obviously be credited to the
Article 1176 provides that:LawlibraryofCRAlaw principal.
"The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that said Since the doubt in the present case pertains to the application of the daily
interest has been paid. payments, Article 1253 shall apply. Only when there is a waiver of interest
shall Article 1176 become relevant.
xxx."
On the other hand, Article 1253 states:LawlibraryofCRAlaw Under this analysis, we rule that the respondent properly credited the daily
"If the debt produces interest, payment of the principal shall not be payments to the interest and not to the principal because: (1) the debt
deemed to have been made until the interests have been covered." produces interest, i.e., the promissory note securing the second loan
The above provisions appear to be contradictory but they in fact support, provided for payment of interest; (2) a portion of the second loan remained
and are in conformity with, each other. Both provisions are also unpaid upon maturity; and (3) the respondent did not waive the payment of
presumptions and, as such, lose their legal efficacy in the face of proof or interest.
evidence to the contrary.
There was no waiver of interest
Thus, the settlement of the first issue depends on which of these
presumptions prevails under the given facts of the case. The fact that the official receipts did not indicate whether the payments
were made for the principal or the interest does not prove that the
There are two undisputed facts crucial in resolving the first issue: (1) respondent waived the interest.
the petitioner failed to pay the full amount of the second loan upon maturity;
and (2) the second loan was subject to interest, and in case of default, to We reiterate that the petitioner made the daily payments after the second
penalty and attorney's fees. loan had already matured and a portion of the principal remained unpaid.
As stipulated, the principal is subject to 26% annual interest.
But before proceeding any further, we first tackle the petitioner's denial of
the genuineness and due execution of the second promissory note. He All these show that the petitioner was already in default of the principal
denies that he stipulated upon and consented to the interest, penalty and when he started making the daily payments. The stipulations providing for
attorney's fees because he purportedly signed the promissory note in the 10% monthly penalty and the additional 25% attorney's fees on the
blank.23redarclaw unpaid amount also became effective as a result of the petitioner's failure to
pay in full upon maturity.
This allegation deserves scant consideration. It is self-serving and
unsupported by evidence. In other words, the so-called interest for default25 (as distinguished from
the stipulated monetary interest of 26% per annum) in the form of the 10%
As aptly observed by the RTC and the CA, the promissory notes securing monthly penalty accrued and became due and demandable. Thus, when
the first and second loan contained exactly the same terms and conditions. the petitioner started making the daily payments, two types of interest were
They were mirror-image of each other except for the date and amount of at the same time accruing, the 26% stipulated monetary interest and
principal Thus, we see sufficient basis to believe that the petitioner knew or the interest for default in the form of the 10% monthly penalty.
was aware of such terms and conditions even assuming that the entries on
the interest and penalty charges were in blank when he signed the Article 1253 covers both types of interest. As noted by learned civilist,
promissory note. Arturo M. Tolentino, no distinction should be made because the law makes
no such distinction. He explained:LawlibraryofCRAlaw
Moreover, we find it significant that the petitioner does not deny the "Furthermore, the interest for default arises because of non-performance by
genuineness and due execution of the first promissory note. Only when he the debtor, and to allow him to apply payment to the capital without
failed to pay the second loan did he impugn the validity of the interest, first satisfying such interest, would be to place him in a better
penalty and attorney's fees. The CA and the RTC also noted that position than a debtor who has not incurred in delay. The delay should
the petitioner is a schooled individual, an engineer by profession, who, worsen, not improve, the position of a debtor."26 [Emphasis supplied.]
because of these credentials, will not just sign a document in blank without The petitioner failed to specify which of the two types of interest the
appreciating the import of his action.24redarclaw respondent allegedly waived. The respondent waived neither.
 unduly burdensome, to the point of oppression on their
In Swagman Hotels and Travel Inc. v. Court of Appeals,27 we applied Article borrowers.34redarclaw
1253 of the Civil Code in resolving whether the debtor has waived the
payments of interest when he issued receipts describing the payments as In exercising this power to determine what is iniquitous and
"capital repayment." We held that, unconscionable, courts must consider the circumstances of each case
"Under Article 1253 of the Civil Code, if the debt produces interest, since what may be iniquitous and unconscionable in one may be totally just
payment of the principal shall not be deemed to have been made until the and equitable in another.35redarclaw
interest has been covered. In this case, the private respondent would not
have signed the receipts describing the payments made by In the recent case of MCMP Construction Corp. v. Monark Equipment
the petitioner as "capital repayment" if the obligation to pay the Corp.,36 we reduced the interest rate of twenty-four percent (24%) per
interest was still subsisting. annum to twelve percent (12%) per annum; the penalty and collection
charge of three percent (3%) per month, or thirty-six percent (36%) per
Pag
"There was therefore a novation of the terms of the three promissory notes annum, to six percent (6%) per annum; and the amount of attorney's fees e|
in that the interest was waived..."28 [Emphasis supplied.] from twenty-five percent (25%) of the total amount due to five percent (5%).
The same ruling was made in an older case29 where the creditor issued a 82
receipt which specifically identified the payment as referring to the principal. Applying the foregoing principles, we hereby reduce the stipulated rates as
We held that the interest allegedly due cannot be recovered, in conformity follows: the interest of twenty-six percent (26%) per annum is reduced to
with Article 1110 of the Old Civil Code, a receipt from the creditor for the two percent (2%) per annum; the penalty charge of ten percent (10%) per
principal, that contains no stipulation regarding interest, extinguishes the month, or one-hundred twenty percent (120%) per annum is reduced to two
obligation of the debtor with regard thereto when the receipt issued by the percent (2%) per annum; and the amount of attorney's fees from twenty-five
creditor showed that no reservation whatever was made with respect to the percent (25%) of the total amount due to two percent (2%) of the total
interest. amount due.

In both of these cases, it was clearly established that the creditors accepted We believe the markedly reduced rates are reasonable, equitable and just
the payment of the principal. The creditors were deemed to have waived under the circumstances.
the payment of interest because they issued receipts expressly referring to
the payment of the principal without any reservation with respect to the It is not entirely the petitioner's fault that he honestly, albeit wrongly,
interest. As a result, the interests due were deemed waived. It was believed that the second loan had been fully paid. The respondent is partly
immaterial whether the creditors intended to waive the interest or not. The to blame for issuing receipts not indicating that the daily payments were
law presumed such waiver because the creditors accepted the payment of being applied against the interest.
the principal without reservation with respect to the interest.
Moreover, the reduction of the rates is justified in the context of its
In the present case, it was not proven that the respondent accepted the computation period. In Trade & Investment Dev't Corp. of the Phil. v.
payment of the principal. The silence of the receipts on whether the daily Roblett Industrial Construction Corp.,37 we equitably reduced the interest
payments were credited against the unpaid balance of the principal or the rate because the case was decided with finality sixteen years after the filing
accrued interest does not mean that the respondent waived the payment of of the complaint. We noted that the amount of the loan swelled to a
interest. There is no presumption of waiver of interest without any evidence considerably disproportionate sum, far exceeding the principal debt.
showing that the respondent accepted the daily installments as payments
for the principal. It is the same in the present case where the complaint was filed almost
twenty-years ago.38redarclaw
Ideally, the respondent could have been more specific by indicating on the
receipts that the daily payments were being credited against the interest. Its The Chattel Mortgage could not cover the second loan.
failure to do so, however, should not be taken against it. The respondent
had the right to credit the daily payments against the interest applying The chattel mortgage could not validly cover the second loan. The order for
Article 1253. foreclosure was without legal and factual basis.

It bears stressing that the petitioner was already in default. Under the In Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,39 the debtor
promissory note, the petitioner waived demand in case of non-payment executed a chattel mortgage, which had a provision to this
upon due date.30 The stipulated interest and interest for default have both effect:LawlibraryofCRAlaw
accrued. The only logical result, following Article 1253 of the Civil Code, is "In case the MORTGAGOR executes subsequent promissory note or notes
that the daily payments were first applied against either or both the either as a renewal of the former note, as an extension thereof, or as a new
stipulated interest and interest for default. loan, or is given any other kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of exchange, releases of import
Moreover, Article 1253 is viewed as having an obligatory character and not shipments on Trust Receipts, etc., this mortgage shall also stand as
merely suppletory. It cannot be dispensed with except by mutual security for the payment of the said promissory note or notes and/or
agreement. The creditor may oppose an application of payment made by accommodations without the necessity of executing a new contract
the debtor contrary to this rule.31redarclaw and this mortgage shall have the same force and effect as if the said
promissory note or notes and/or accommodations were existing on
In any case, the promissory note provided that "interest not paid when due the date thereof."40 [Emphasis supplied.]
shall be added to, and become part of the principal and shall likewise bear In due time, the debtor settled the loan covered by the chattel mortgage.
interest at the same rate, compounded monthly."32redarclaw Subsequently, the debtor again borrowed from the creditor. Due to financial
constraints, the subsequent loan was not settled at maturity.
Hence, even if we assume that the daily payments were applied against the
principal, the principal had also increased by the amount of unpaid interest On the issue whether the chattel mortgage could be foreclosed due to the
and the interest on such unpaid interest. Even under this assumption, it is debtor's failure to settle the subsequent loan, we held that,
doubtful whether the petitioner had indeed fully paid the second loan. "[c]ontracts of security are either personal or real, x x x In contracts of real
security, such as a pledge, a mortgage or an antichresis, that fulfillment is
Excessive interest, penalty and attorney's fees secured by an encumbrance of property — in pledge, the placing of
movable property in the possession of the creditor; in chattel mortgage, by
Notwithstanding the foregoing, we find the stipulated rates of interest, the execution of the corresponding deed substantially in the form
penalty and attorney's fees to be exorbitant, iniquitous, unconscionable and prescribed by law; x x x — upon the essential condition that if the principal
excessive. The courts can and should reduce such astronomical rates as obligation becomes due and the debtor defaults, then the property
reason and equity demand. encumbered can be alienated for the payment of the obligation, but
that should the obligation be duly paid, then the contract is
Article 1229 of the Civil Code provides:LawlibraryofCRAlaw automatically extinguished proceeding from the accessory character
"The judge shall equitably reduce the penalty when the principal obligation of the agreement. As the law so puts it, once the obligation is
has been partly or irregularly complied with by the debtor. Even if there has complied with, then the contract of security becomes, ipso facto, null
been no performance, the penalty may also be reduced by the courts if it is and void."41redarclaw
iniquitous or unconscionable."
Article 2227 of the Civil Code ordains:LawlibraryofCRAlaw While a pledge, real estate mortgage, or antichresis may exceptionally
"Liquidated damages, whether intended as an indemnity or a penalty, shall secure after-incurred obligations so long as these future debts are
be equitably reduced if they are iniquitous or unconscionable. accurately described, a chattel mortgage, however, can only cover
More importantly, Article 1306 of the Civil Code is obligations existing at the time the mortgage is constituted. Although a
emphatic:LawlibraryofCRAlaw promise expressed in a chattel mortgage to include debts that are yet
"The contracting parties may establish such stipulations, clauses, terms to be contracted can be a binding commitment that can be compelled
and conditions as they may deem convenient, provided they are not upon, the security itself, however, does not come into existence or
contrary to law, morals, good customs, public order, or public policy." arise until after a chattel mortgage agreement covering the newly
Thus, stipulations imposing excessive rates of interest and penalty are void contracted debt is executed either by concluding a fresh chattel
for being contrary to morals, if not against the law.33redarclaw mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. Refusal on the part of the
Further, we have repeatedly held that while Central Bank Circular No. 905- borrower to execute the agreement so as to cover the after-incurred
82, which took effect on January 1, 1983, effectively removed the ceiling on obligation can constitute an act of default on the part of the borrower of the
interest rates for both secured and unsecured loans, regardless of maturity, financing agreement whereon the promise is written but, of course, the
nothing in the said circular could possibly be read as granting carte remedy of foreclosure can only cover the debts extant at the time of
blanche authority to lenders to raise interest rates to levels that would be
constitution and during the life of the chattel mortgage sought to be
foreclosed."42 [Emphasis supplied.]
We noted that the Chattel Mortgage Law43 requires the parties to the
contract to attach an affidavit of good faith and execute an oath that -
" x x x (the) mortgage is made for the purpose of securing the obligation
specified in the conditions thereof, and for no other purposes, and that
the same is a just and valid obligation, and one not entered into for the
purposes of fraud."44
It is obvious therefore that the debt referred in the law is a current, not an
obligation that is yet merely contemplated.45
"x x x in consideration of the credit accommodation granted by the
MORTGAGEE to the MORTGAGOR(S) in the amount of FIFTY-THREE
Pag
THOUSAND ONLY PESOS (P53,000.00) xxx and all other obligations of e|
every kind already incurred or which may hereafter be incurred, for or
accommodation of the MORTGAGOR(S), as well as the faithful 83
performance of the terms and conditions of this mortgage x x
x."46 [Emphasis supplied.]
The only obligation specified in the chattel mortgage contract was the first
loan which the petitioner later fully paid. By virtue of Section 3 of the Chattel
Mortgage Law,47 the payment of the obligation automatically rendered the
chattel mortgage terminated; the chattel mortgage had ceased to exist upon
full payment of the first loan. Being merely an accessory in nature, it cannot
exist independently of the principal obligation.

The parties did not execute a fresh chattel mortgage nor did they amend
the chattel mortgage to comply with the Chattel Mortgage Law which
requires that the obligation must be specified in the affidavit of good faith.
Simply put, there no longer was any chattel mortgage that could cover the
second loan upon full payment of the first loan. The order to foreclose the
motor vehicle therefore had no legal basis.

WHEREFORE, in view of the foregoing findings and legal premises,

we PARTIALLY GRANT the petition. We MODIFY the May 17, 2010
Decision and the November 25, 2010 Resolution of the Court of Appeals in
CA G.R. SP No. 102144.

ACCORDINGLY, petitioner Nunelon R. Marquez is ORDERED to

pay:LawlibraryofCRAlaw

1. Twenty-five thousand forty pesos (P25,040.00) representing the

amount of the unpaid balance of the second
loan;chanRoblesvirtualLawlibrary

2. Interest of two percent (2%) per annum on the unpaid balance to

be computed from December 15, 199248 until full payment;
3. Penalty of two percent (2%) per annum on the unpaid balance to
be computed from December 15,
1992;chanRoblesvirtualLawlibrary

4. Attorney's Fees of two percent (2%) of the total amount to be

recovered.

The total amount to be recovered shall further be subject to the legal

interest rate of six percent (6 %) per annum from the finality of this Decision
until fully paid.49redarclaw

Respondent Elisan Credit Corporation, on the other hand, is ORDERED to

return/deliver the seized motor vehicle with Plate No. UV-TDF-193, subject
of the chattel mortgage, to the possession of the petitioner; in the event its
delivery is no longer possible, to pay the petitioner the amount of
P30,000.00 corresponding to the value of the said vehicle.

No pronouncement as to costs.

SO ORDERED.cralawlawlibrary