Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No.

L-44349 October 29, 1976 JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners, vs. HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC., respondents. Occena Law Office for petitioners. Serrano, Diokno & Serrano for respondents.

TEEHANKEE, J.: The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with the force of law between the parties. Private respondent's complaint for modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause of action. On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of land in Davao City), making the following allegations: "That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions and factors which formed the original basis of said contract, Annex 'A', have been totally changed; 'That further performance by the plaintiff under the contract. That further performance by the plaintiff under the contract,Annex 'S', will result in situation where defendants would be unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations.

Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and sole share and participation an amount equivalent to forty (40%) percent of all cash receifpts fromthe sale of the subdivision lots" Respondent pray of the Rizal court of first instance that "after due trial, this Honorable Court render judgment modifying the terms and conditions of the contract ... by fixing the proer shares that shouls pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subjects subdivision". Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals. Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously issued by it and dimissed petition on the ground that under Article 1267 of the Civil Code which provides that ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. 1
... a positive right is created in favor of the obligor to be released from the performance of an obligation in full or in part when its performance 'has become so difficult as to be manifestly beyond the contemplation of the parties.

Hence, the petition at abar wherein petitioners insist that the worldwide increase inprices cited by respondent does not constitute a sufficient casue of action for modification of the subdivision contrct. After receipt of respondent's comment, the Court in its Resolution of September 13, 1976 resolved to treat the petition as special civil actionand declared the case submitted for decision. The petition must be granted. While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, to wit; The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible. ... 2 It misapplied the same to respondent's complaint. If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of the parties", then respondent court's upholding of respondet's complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its contract under the theretofore prevailing doctrine that performance therewith is ot

excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or unespectedly burdensome", 3 since in case a party desires to be excuse from performance in the event of such contingencies arising, it is his duty to provide threfor in the contract. But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment I modifying the terms and Conditions of the Contract by fixing the proper shares that should pertain to the herein parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the partiesthemselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought. A final procedural note. Respondent cites the general rule that an erroneous order denying a motion to dismiss is interlocutory and should not be corrected by certiorari but by appeal in due course. This case however manifestly falls within the recognized exception that certiorari will lie when appeal would not prove to be a speedy and adequate remedy.' Where the remedy of appeal would not, as in this case, promptly relieve petitioners from the injurious effects of the patently erroneous order maintaining respondent's baseless action and compelling petitioners needlessly to go through a protracted trial and clogging the court dockets by one more futile case, certiorari will issue as the plain, speedy and adequate remedy of an aggrieved party. ACCORDINGLY, the resolution of respondent appellate court is reversed and the petition for certiorari is granted and private respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action. With costs in all instances against private respondent. Makasiar, Muoz Palma, Concepcion, Jr., and Martin JJ., concur.

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Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 116896 May 5, 1997 PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner, vs. COURT OF APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S. RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S. RAYMUNDO, and AMADOR S. RAYMUNDO, respondents.

DAVIDE, JR., J.: This petition for review on certiorari has its roots in Civil Case No. 53444, which was sparked by petitioner's refusal to pay the rentals as stipulated in the contract of lease 1 on an undivided portion of 30,000 square meters of a parcel of land owned by private respondents. The lease contract, executed on 18 November 1985, reads in part as follows: 1. TERM OF LEASE This lease shall be for a period of five (5) years, commencing on the date of issuance of the industrial clearance by the Ministry of Human Settlements, renewable for a like or other period at the option of the LESSEE under the same terms and conditions. 2. RATE OF RENT LESSEE shall pay to the LESSOR rent at the monthly rate of TWENTY THOUSAND PESOS (P20,000.00), Philippine Currency, in the manner set forth in Paragraph 3 below. This rate shall be increased yearly by Five Percent (5%) based on the agreed monthly rate of P20,000.00 as follows: Monthly Rate Period Applicable P21,000.00 Starting on the 2nd year P22,000.00 Starting on the 3rd year P23,000.00 Starting on the 4th year P24,000.00 Starting on the 5th year 3. TERMS OF PAYMENT The rent stipulated in Paragraph 2 above shall be paid yearly in advance by the LESSEE. The first annual rent in the amount of TWO HUNDRED FORTY THOUSAND PESOS (P240,000.00), Philippine currency, shall be due and payable upon the execution of this

Agreement and the succeeding annual rents shall be payable every twelve (12) months thereafter during the effectivity of this Agreement. 4. USE OF LEASED PROPERTY It is understood that the Property shall be used by the LESSEE as the site, grounds and premises of a rock crushing plant and field office, sleeping quarters and canteen/mess hall. The LESSORS hereby grant to the LESSEE the right to erect on the Leased Property such structure(s) and/or improvement(s) necessary for or incidental to the LESSEE's purposes. xxx xxx xxx 11. TERMINATION OF LEASE This Agreement may be terminated by mutual agreement of the parties. Upon the termination or expiration of the period of lease without the same being renewed, the LESSEE shall vacate the Leased Property at its expense. On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary Use Permit 2 for the proposed rock crushing project. The permit was to be valid for two years unless sooner revoked by the Ministry. On 16 January 1986, private respondents wrote petitioner requesting payment of the first annual rental in the amount of P240,000 which was due and payable upon the execution of the contract. They also assured the latter that they had already stopped considering the proposals of other aggregates plants to lease the property because of the existing contract with petitioner. 3 In its reply-letter, petitioner argued that under paragraph 1 of the lease contract, payment of rental would commence on the date of the issuance of an industrial clearance by the Ministry of Human Settlements, and not from the date of signing of the contract. It then expressed its intention to terminate the contract, as it had decided to cancel or discontinue with the rock crushing project "due to financial, as well as technical, difficulties." 4 Private respondents refused to accede to petitioner's request for the pretermination of the lease contract. They insisted on the performance of petitioner's obligation and reiterated their demand for the payment of the first annual rental. 5 Petitioner objected to private respondents' claim and argued that it was "only obligated to pay . . . the amount of P20,000.00 as rental payments for the one-month period of lease, counted from 07 January 1986 when the Industrial Permit was issued by the Ministry of Human Settlements up to 07 February 1986 when the Notice of Termination was served" 6 on private respondents. On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig an action against petitioner for Specific Performance with Damages. 7 The case was docketed as Civil Case No. 53444 at Branch 160 of the said court. After the filing by petitioner of its Answer with Counterclaim, the case was set for trial on the merits. What transpired next was summarized by the trial court in this wise: Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant asked for postponement of the reception of its evidence scheduled on August

10, 1988 and as prayed for, was reset to August 25, 1988 (p. 91 rec.) Counsel for defendant again asked for postponement, through representative, as he was presently indisposed. The case was reset, intransferable to September 15 and 26, 1988 (p. 94 rec.) On September 2, 1988, the office of the Government Corporate Counsel entered its appearance for defendant (p. 95, rec.) and the original counsel later withdrew his appearance. On September 15, 1988 the Government Corporate Counsel asked for postponement, represented by Atty. Elpidio de Vega, and with his conformity in open court, the hearing was reset, intransferable to September 26 and October 17, 1988, (p. 98, rec.) On September 26, 1988 during the hearing, defendant's counsel filed a motion for postponement (urgent) as he had "sore eyes", a medical certificate attached. Counsel for plaintiffs objected to the postponement and the court considered the evidence of the government terminated or waived. The case was deemed submitted for decision upon the filing of the memorandum. Plaintiffs filed their memorandum on October 26, 1988. (p. 111, rec.). On October 18, 1988 in the meantime, the defendant filed a motion for reconsideration of the order of the court on September 26, 1988 (p. 107, rec.) The motion was not asked to be set for hearing (p. 110 rec.)There was also no proof of notice and service to counsel for plaintiff . The court in the interest of justice set the hearing on the motion on November 29, 1988. (p. 120, rec.) but despite notice, again defendant's counsel was absent (p. 120A, dorsal side, rec.) without reason. The court reset the motion to December 16, 1988, in the interest of justice. The motion for reconsideration was denied by the court. A second motion for reconsideration was filed and counsel set for hearing the motion on January 19, 1989. During the hearing, counsel for the government was absent. The motion was deemed abandoned but the court at any rate, after a review of the incidents and the grounds relied upon in the earlier motion of defendant, found no reason to disturb its previous order. 8 On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private respondents the amount of P492,000 which represented the rentals for two years, with legal interest from 7 January 1986 until the amount was fully paid, plus attorney's fees in the amount of P20,000 and costs. 9 Petitioner then appealed to the Court of Appeals alleging that the trial court erred in ordering it to pay private respondent the amount of P492,000 and in denying it the right to be heard. Upon the affirmance of the trial court's decision 10 and the denial of its motion for reconsideration, petitioner came to this Court ascribing to respondent Court of Appeals the same alleged errors and reiterating their arguments. First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract, which reads: "This lease shall be for a period of five (5) years, commencing on the date of issuance of the industrial clearance by the Ministry of Human Settlements. . . ." It then submits that the issuance of an industrial clearance is a suspensive condition without which the rights under the contract would not be acquired. The Temporary Use Permit is not the industrial clearance referred to in the contract; for the said permit requires that a clearance from the National Production Control Commission be first secured, and besides, there is a finding in the permit

that the proposed project does not conform to the Zoning Ordinance of Rodriguez, (formerly Montalban), Rizal, where the leased property is located. Without the industrial clearance the lease contract could not become effective and petitioner could not be compelled to perform its obligation under the contract. Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial clearance contemplated in the contract. In its letter dated 24 April 1986, petitioner states: We wish to reiterate PNCC Management's previous stand that it is only obligated to pay your clients the amount of P20,000.00 as rental payments for the one-month period of the lease, counted from 07 January 1986 when the Industrial Permit was issued by the Ministry of Human Settlements up to 07 February 1986 when the Notice of Termination was served on your clients. 11 (Emphasis Supplied). The "Industrial Permit" mentioned in the said letter could only refer to the Temporary Use Permit issued by the Ministry of Human Settlements on 7 January 1986. And it can be gleaned from this letter that petitioner has considered the permit as industrial clearance; otherwise, petitioner could have simply told private respondents that its obligation to pay rentals has not yet arisen because the Temporary Use Permit is not the industrial clearance contemplated by them. Instead, petitioner recognized its obligation to pay rentals counted from the date the permit was issued. Also worth noting is petitioner's earlier letter, thus: [P]lease be advised of PNCC Management's decision to cancel or discontinue with the rock crushing project due to financial as well as technical difficulties. In view thereof, we would like to terminate our Lease Contract dated 18 November, 1985. Should you agree to the mutual termination of our Lease Contract, kindly indicate your conformity hereto by affixing your signature on the space provided below. May we likewise request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and Mrs. Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo to sign on the spaces indicated below. 12 It can be deduced from this letter that the suspensive condition issuance of industrial clearance has already been fulfilled and that the lease contract has become operative. Otherwise, petitioner did not have to solicit the conformity of private respondents to the termination of the contract for the simple reason that no juridical relation was created because of the non- fulfillment of the condition. Moreover, the reason of petitioner in discontinuing with its project and in consequently cancelling the lease contract was "financial as well as technical difficulties," not the alleged insufficiency of the Temporary Use Permit. Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it should be released from the obligatory force of the contract of lease because the purpose of the contract did not materialize due to unforeseen events and causes beyond its control, i.e., due to the abrupt change in political climate after the EDSA Revolution and financial difficulties.

It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law between the parties and should be complied with in good faith. 13 But the law recognizes exceptions to the principle of the obligatory force of contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: "The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor." Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations "to do," and not to obligations "to give." 14 An obligation "to do" includes all kinds of work or service; while an obligation "to give" is a prestation which consists in the delivery of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its simple possession, or in order to return it to its owner. 15 The obligation to pay rentals 16 or deliver the thing in a contract of lease 17 falls within the prestation "to give"; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in the said article. Besides, petitioner failed to state specifically the circumstances brought about by "the abrupt change in the political climate in the country" except the alleged prevailing uncertainties in government policies on infrastructure projects. The principle of rebus sic stantibus 18 neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. 19 This theory is said to be the basis of Article 1267 of the Civil Code, which provides: Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle ofrebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. 20 In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after the EDSA Revolution and its poor financial condition "rendered the performance of the lease contract impractical and inimical to the corporate survival of the petitioner." This Court cannot subscribe to this argument. As pointed out by private respondents: 21 It is a matter of record that petitioner PNCC entered into a contract with private respondents on November 18, 1985. Prior thereto, it is of judicial notice that after the assassination of Senator Aquino on August 21, 1983, the country has experienced political upheavals, turmoils, almost daily mass demonstrations, unprecedented, inflation, peace and order deterioration, the Aquino trial and many other things that brought about the hatred of people even against crony corporations. On November 3, 1985, Pres. Marcos, being interviewed live on U.S. television announced that there would be a snap election scheduled for February 7, 1986.

On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract of lease with private respondents with open eyes of the deteriorating conditions of the country. Anent petitioner's alleged poor financial condition, the same will neither release petitioner from the binding effect of the contract of lease. As held in Central Bank v. Court of Appeals, 22 cited by private respondents, mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to an action for specific performance. With regard to the non-materialization of petitioner's particular purpose in entering into the contract of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. 23 As a general principle, the motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of the contract; an exception is when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. 24The exception does not apply here. Third. According to petitioner, the award of P492,000.00 representing the rent for two years is excessive, considering that it did not benefit from the property. Besides, the temporary permit, conformably with the express provision therein, was deemed automatically revoked for failure of petitioner to use the same within one year from the issuance thereof. Hence, the rent payable should only be for one year. Petitioner cannot be heard to complain that the award is excessive. The temporary permit was valid for two years but was automatically revoked because of its non-use within one year from its issuance. The non-use of the permit and the non-entry into the property subject of the lease contract were both imputable to petitioner and cannot, therefore, be taken advantage of in order to evade or lessen petitioner's monetary obligation. The damage or prejudice to private respondents is beyond dispute. They unquestionably suffered pecuniary losses because of their inability to use the leased premises. Thus, in accordance with Article 1659 of the Civil Code, 25 they are entitled to indemnification for damages; and the award of P492,000.00 is fair and just under the circumstances of the case. Finally, petitioner submits that the trial court gravely abused its discretion in denying petitioner the right to be heard. We disagree. The trial court was in fact liberal in granting several postponements 26 to petitioner before it deemed terminated and waived the presentation of evidence in petitioner's behalf. It must be recalled that private respondents rested their case on 7 September 1987 yet. 27 Almost a year after, or on 10 August 1988 when it was petitioner's turn to present evidence, petitioner's counsel asked for postponement of the hearing to 25 August 1988 due to conflict of schedules, 28 and this was granted. 29 At the rescheduled hearing, petitioner's counsel, through a representative, moved anew for postponement, as he was allegedly indisposed. 30 The case was then reset "intransferable" to September 15 and 26, 1988. 31 On 2 September 1988, the Office of the Government Corporate Counsel, through Atty. Elpidio J. Vega, entered its appearance for the petitioner, 32 and later the original counsel withdrew his appearance. 33 On 15 September 1988, Atty. Vega requested for postponement to enable him to go over the records of the case. 34 With his conformity, the hearing was reset "intransferable" to September 26 and October 17, 1988. 35 In the morning of 26 September 1988, the court received Atty. Vega's Urgent Motion for

Postponement on the ground that he was afflicted with conjunctivitis or sore eyes. 36 This time, private respondents objected; and upon their motion, the court deemed terminated and waived the presentation of evidence for the petitioner. 37 Nevertheless, before the court considered the case submitted for decision, it required the parties to submit their respective memoranda within thirty days. 38 But petitioner failed to comply.

Likewise, the court was liberal with respect to petitioner's motion for reconsideration. Notwithstanding the lack of request for hearing and proof of notice and service to private respondents, the court set the hearing of the said motion on 29 November 1988. 39 Upon the denial of the said motion for lack of merit, 40 petitioner filed a second motion for reconsideration. But during the hearing of the motion on a date selected by him, Atty. Vega was absent for no reason at all, despite due notice. 41 From the foregoing narration of procedural antecedents, it cannot be said that petitioner was deprived of its day in court. The essence of due process is simply an opportunity to he heard. 42 To be heard does not only mean oral arguments in court; one may be heard also through pleadings. Where opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due process. 43 WHEREFORE, the instant petition is DENIED and the challenge decision of the Court of Appeals is AFFIRMED in toto. No pronouncements as to costs. SO ORDERED. Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

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SECOND DIVISION

[G.R. No. 104726. February 11, 1999]

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

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

As of July 31, 1986, petitioners was P727,001.35, broken down as follows:[7]

total

liability

to

private

respondent

Principal Interest Penalties Service Charges TOTAL

P295,469.47 165,385.00 254,820.55 11,326.33 P 727,001.35

On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank check, receipt of which was acknowledged by Destajo.[8] The corresponding voucher for the check bears the following notation: full payment of IGLF LOAN.[9] The amount of P410,854.47 was the sum of the principal (P295,469.47) and the interest (P165,385.00) less the partial payment of P50,000.00. The private respondent sent two demand letters to petitioners, dated September 4, 1986 and September 25, 1986, seeking payment of the balance of P266,146.88. As petitioners did not respond, private respondent filed this case in the Regional Trial Court of Metro Manila for the collection of P266,146.88 plus interests, penalties, and service charges or, in the alternative, for the foreclosure of the mortgaged machineries. In their Answer, petitioners claimed that they had fully paid their obligation to private respondent. They contended that some time after receiving private respondents letter of July 2, 1986 (concerning the conditional offer to reduce their penalty charges), petitioner Victor Yam and his wife, Elena Yam, met with Carlos Sobrepeas, president of respondent corporation, during which the latter agreed to waive the penalties and service charges, provided petitioners paid the principal and interest, computed as of July 31, 1986, less the earlier payment of P50,000.00. This is the reason why according to them they only paid P410,854.47. Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank check they issued, which bore the notation full payment of IGLF loan. On April 30, 1990, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the defendants Victor Yam and Yek Sun Lent are hereby ordered to pay jointly and severally, the principal loan balance of P266,146.88 as of September 4, 1986 plus interest at 14% per annum, service charge at 1% per annum and penalty fees at 2% per month and to pay plaintiff attorneys fees equivalent to 10% of the amount to be recovered, and to pay the costs of suit, failing in which, the chattel mortgage instituted on the printing machineries and equipment described in the Deed of

Chattel Mortgage dated May 10, 1979, as amended, is hereby declared foreclosed and the subject thereof sold in accordance with law to satisfy the judgment herein rendered. SO ORDERED.[10]
On appeal, the Court of Appeals affirmed the decision of the trial court in toto. Hence, this petition. Petitioners reiterate the same assignment of errors made by them before the Court of Appeals, to wit:[11]

FIRST ASSIGNED ERROR THAT THE LOWER COURT GRIEVOUSLY ERRED IN FAILING TO GIVE CREDENCE TO THE DOCUMENTARY AS WELL AS TESTIMONIAL EVIDENCE OF THE PETITIONERS RELATIVE TO THE PAYMENT TO THE RESPONDENT OF THE ADDITIONAL LOAN UNDER THE AMENDMENT OF DEED OF CHATTEL MORTGAGE (EXHIBIT K, RESPONDENT) AND AS AGAINST THE TESTIMONY OF RESPONDENTS WITNESS, CRISTINA L. DESTAJO. SECOND ASSIGNED ERROR THAT THE COURT BELOW ERRED IN NOT TOTALLY DISREGARDING EXHIBITS E AND F OF THE RESPONDENTS
The question is whether petitioners are liable for the payment of the penalties and service charges on their loan which, as of July 31, 1986, amounted to P266,146.88. The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation.[12] Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits,[13] are considered movable property. In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second IGLF loan was not reduced in writing.[14] Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing the notation that the amount is in full payment of IGLF loan, constitutes documentary evidence of such oral agreement. This contention is without merit. The notation in full payment of IGLF loan merely states petitioners intention in making the payment, but in no way does it bind private respondent. It would have been a different matter if the notation appeared in a receipt issued by respondent corporation, through its receiver, because then it would be an admission against interest. Indeed, if private respondent really condoned the amount in question, petitioners should have asked

for a certificate of full payment from respondent corporation, as they did in the case of their first IGLF loan of P500,000.00.[15] Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation, Cristina Destajo, signed the voucher in question. Destajo claimed that, when she signed the voucher, she failed to notice the statement that the amount of P410,854.47 was being given in full payment of IGLF Loan. She said she merely took note of the amount and the check number indicated therein.[16] In any event, Destajo, by countersigning the voucher, did no more than acknowledge receipt of the payment. She cannot be held to have ascented thereby to the payment in full of petitioners indebtedness to private respondent. It was obvious she had no authority to condone any indebtedness, her duties being limited to issuing official receipts, preparing check vouchers and documentation.[17] Moreover, it is to be noted that the alleged agreement to condone the amount in question was supposedly entered into by the parties sometime in July 1986, that is, after respondent corporation had been placed under receivership on November 4, 1985. As held in Villanueva v. Court of Appeals[18] the appointment of a receiver operates to suspend the authority of a [corporation] and of its directors and officers over its property and effects, such authority being reposed in the receiver.[19] Thus, Sobrepeas had no authority to condone the debt. Indeed, Mrs. Yam herself testified that when she and her husband sought the release of the chattel mortgage over their property, they were told that only the Central Bank would authorize the same because [the CB] is the receiver.[20] Considering this, petitioners cannot feign ignorance and plead good faith. The second assignment of error pertains to the petitioners allegation that they did not receive the two letters of demand sent by private respondent on September 4 and September 25, 1986. Both the lower court and the Court of Appeals found otherwise. We have no reason to disturb this factual finding. It is settled that findings of fact of trial courts, adopted and confirmed by the Court of Appeals, are final and conclusive and, as a rule, will not be reviewed on appeal.[21] WHEREFORE, the decision of the Court of Appeals is AFFIRMED. SO ORDERED. Bellosillo, (Chairman), Puno, Quisumbing, and Buena, JJ., concur. ! ! ! ! ! ! ! ! ! !

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22490 May 21, 1969

GAN TION, petitioner, vs. HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents. Burgos and Sarte for petitioner. Roxas, Roxas, Roxas and Associates for respondents. MAKALINTAL, J.: The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion and respondent Ong Wan Sieng. Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360 altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160, which he had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of First Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became final. On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.
lwphi1.et

In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid rents. The appellate court accepted the petition but eventually decided for the respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel." In the opinion of said court, the requisites of legal compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel. This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code.1 It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation. Quite

obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000. WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent. Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Fernando and Capistrano, JJ., concur. Teehankee and Barredo JJ., took no part. Concepcion, C.J., and Castro, J., are on leave.

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THIRD DIVISION

[G.R. No. 108052. July 24, 1996]

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON LAPEZ,[1] doing business under the name and style SAPPHIRE SHIPPING, respondents. DECISION
PANGANIBAN, J.:

Does a local bank, while acting as local correspondent bank, have the right to intercept funds being coursed through it by its foreign counterpart for transmittal and deposit to the account of an individual with another local bank, and apply the said funds to certain obligations owed to it by the said individual? Assailed in this petition is the Decision of respondent Court of Appeals[2] in CA-G.R. CV No. 27926 rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon City, the dispositive portion of which read:[3] "WHEREFORE, judgment is hereby rendered: 1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff (private respondent herein) the sum of US$2,627.11 or its equivalent in Philippine currency with interest at the legal rate from January 13, 1987, the date of judicial demand; 2) The plaintiff's supplemental complaint is hereby dfismissed (sic); 3) The defendant's counterclaims are likewise dismissed. The Facts The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same being undisputed by the parties:[4]

"The body of the decision reads: "'After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court makes the following conclusions: "'(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defenses of compensation for what is owing to it on the principle of solution (sic) indebiti; "'(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to be credited to his account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the plaintiff's account with the defendant, No. 830-2410; (c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of P2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22, 1986 (Exh. 13), inviting the plaintiff to come for a conference; "'(d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when the plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an aggregate amount of P87,380.44. The defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's Answer), were never refuted nor impugned by the plaintiff. He claims, however, that plaintiffs claim has prescribed. "'(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and 11 months from November 1980, and 5 years and 9 months from January 1981. Such letter was answered by the plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to by the defendant through Exh. 13; "'(f) The deduction of P34,340.38 was made by the defendant not without the knowledge and consent of the plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant. "'There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981 created an extra-contractual obligation on

the part of the plaintiff in favor of the defendant, under the principle of solutio indebiti, as follows: "'If something is received when there is no right to demand it, and it was unduly delivered throughg (sic) mistake, the obligation to return it arises."' (Article 2154, Civil Code of the Phil.) Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally justified in making the compensation or set-off against the two remittances coursed through it in favor of private respondent to recover on the double credits it erroneously made in 1980 and 1981, based on the principle of solutio indebiti, and second,whether or not petitioner's claim is barred by the statute of limitations. The trial court's ratiocination, as quoted by the appellate Court, follows:[5] "'Article 1279 of the Civil Code provides: "'In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there by any retention or controversy, commenced by third persons and communicated in due time to the debtor."'

"'In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum of money, are both due, liquidated and demandable, and over neither of them is there a retention or controversy commenced by third persons and communicated in due time to the debtor. The question, however, is, where both of the obligors bound principally, and was each one of them a debtor and creditor of the other at the same time? "'Analyzing now the relationship between the parties, it appears that: "'(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor respectively (Guingona, et al. vs. City Fiscal, et al., 128 SCRA 577);

"'(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank and local bank asking the latter to pay an amount to a beneficiary is a stipulation pour autrui. (Bank of America NT & SA vs. IAC, 145 SCRA 419). "'A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193; Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475). "'Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and the plaintiff as beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted as follows: "'When the property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated (sic). "'c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly received something (sic) by mistake (i.e., the 2 double credits, although he had no right to demand it), became obligated to the defendant to return what he unduly received. Thus, there was created between them a relationship of obligor and obligee, or of debtor and creditor under a quasicontract. "In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect to the $2,627.11 from Jeddah neither are they at the same time principal creditor of the other. Therefore, as matters stand, the parties' obligations are not subject to compensation or set off under Art. 1279 of the Civil Code, for the reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as the amount of $2,627.11 is concerned. They are debtor and creditor only with respect to the double payments; but are trustee-beneficiary as to the fund transfer of $2,627.11. "'Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the other hand, the defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of the plaintiff the sum of $2,627.11. "'Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23 and $5,885.38 erroneously doubly credited to his account, the defendant's actuation in intercepting the amount of

$2,627.11 supposed to be remitted to another bank is not only improper; it will also erode the trust and confidence of the international banking community in the banking system of the country, something we can ill afford at this time when we need to attract and invite deposits of foreign currencies."' "It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to plaintiffs account No. 830-2410 with the defendant bank. However, the defendant alleged this for the first time in its Memorandum (Pls. see par. 16, p. 6 of defendant's Memorandum). There was neither any allegation thereof in its pleadings, nor was there any evidence to prove such fact. On the contrary, the defendant admitted that the telex advice was for credit of the amount of $2,627.11 to plaintiffs account with Citibank, Greenhills, San Juan, MetroManila (Pls. see par. of defendant's Answer with Compulsory Counterclaim, in relation to plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11 against the double payments to plaintiff's account is not in accordance with law. "'On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no express contract of agency. On the other hand, were we to infer that there was an implied agency, the same would not be between the plaintiff and defendant, but rather, between the National Commercial Bank of Jeddah as principal on the one hand, and the defendant as agent on the other. Thus, in case of violation of the agency, the cause of action would accrue to the NCB and not to the plaintiff. "'The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which is a receipt issued to the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts receivables with RICB Fund Transfer Department, PNB-Escolta base on Legal Department Memo dated February 28, 1987" seems to uphold the defendant's theory that the said amount was voluntarily delivered by the plaintiff to the defendant as alleged in the last paragraph of defendant's memorandum. The same is in accordance with the defendant's answer, as follows: "The retention and application of the amount of P34,340.38 was done in a manner consonant with basic due process considering that plaintiff was not only furnished documented proof of the cause butwas also giv en the opportunity to con(tro)vert such Proof. "Moreover, plaintiff, through counsel, communicated his unequivocal and unco nditional consent to the retention and application of the amount in question."

(Pls. see paragraphs 8-9, defendant's Answer with Compulsory Counterclaim to Plaintiff's Supplemental Complaint)." This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt was handed over to the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from Libya. "'At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum Marketing Company of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit in plaintiff's account at the defendant's Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the plaintiff). Such being the case, the Court believes that insofar as the amount of P34,340.38 is concerned, all the requirements of Art. 1279 of the Civil Code are present, and the said amount may properly be the subject of compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as the amount of P34,392.38 is concerned), compensation takes place by operation of law (Art. 1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44. "Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not applicable in this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive period for actions upon a quasi-contract (such as solutio indebiti) at six years. In the dispositive portion of its decision, the trial court ruled that the herein petitioner was obligated to pay private respondent the amount of US$2,627.11 or its peso equivalent, with interest at the legal rate. The court dismissed all other claims and counterclaims. On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the US$2,627.11 in payment of the private respondent's indebtedness by way of compensation or set-off, as provided under Art. 1279 of the Civil Code. The respondent Court of Appeals rejected such argument, saying: "The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of Plaintiff with the Citibank, Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's head office, the NCB's corresponden(t) bank in the Philippines.

"The credit account, or simply account means that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with the Citibank, and, in that sense, presupposes acreditordebtor relationship between the plaintiff, as creditor and the Citibank, as debtor. Withal the telegraphic money transfer, no such creditordebtor relationship could have been created betweenthe plaintiff and defendant. "The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank in the Philippines, there is created between the two banks a sort of communication exchange for the corresponden(t) bank to transmit and/or remit and/or pay the value of the telegraphic transfer in accordance with the dictate of the correspondence exchange. Some such responsibility of the corresponden(t) bank is akin to Section 7 of the Rules and Regulations Implementing E.O. 857, as amended by E.O. 925, "x x x to take charge of the prompt payment" of the telegraphic transfer, that is, by transmitting the telegraphic money transfer to the Citibank so that the amou nt can be promptly credited to the account ofthe plaintiff with the said bank. T hat is all that the PNB can do under the remittance arrangement that it has with the NCB. With its responsibility as defined as well as by the nature of its banking business and the responsibility attached to it, and through which the industry, trade and commerce of all countries and communities are carried on, the PNB's liability as corresponden(t) bank continues until it has completgely (sic) performed and discharged it(s) obligation thereunder." (underscoring ours) Hence, the respondent Court affirmed the trial court's holding in toto. Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision. The Issue Petitioner's arguments revolve around one single issue:[6] "WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE WITH SPEEDY AND

SUBSTANTIAL JUSTICE, AND WOULD PREVENT THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME AMOUNT FROM PRIVATE RESPONDENT." The Court's Ruling We note that in framing the issue in the manner aforecited, the petitioner implicitly admits the correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner liable to private respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have done otherwise. After a careful scrutiny of both the decision of the trial court and that of the appellate court, we find no reversible error whatsoever in either ruling, and see no need to add to the extensive discussions already made regarding the non-existence of all the requisites for legal compensation to take place. But petitioner has adopted a novel theory, contending that since respondent Court found that private respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private respondent (resulting in legal compensation), the (h)onorable respondent court should have ordered private respondent to pay PNB what the latter is bound by the trial court's decision to return the former.[7] By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court and the appellate Court, and have this Court validate its original misdeed, thereby making a mockery of the entire judicial process of this country. What the petitioner bank is effectively saying is that since the respondent Court of Appeals ruled that petitioner bank could not do a shortcut and simply intercept funds being coursed through it, for transmittal to another bank, and eventually to be deposited to the account of an individual who happens to owe some amount of money to the petitioner, and because respondent Court ordered petitioner bank to return the intercepted amount to said individual, who in turn was found by the appellate Court to be indebted to petitioner bank, THEREFORE, there must now be legal compensation of the amounts each owes the other, and hence, there is no need for petitioner bank to actually return the amount, and finally, that petitioner bank ends up in exactly the same position as when it first took the improper and unwarranted shortcut by intercepting

the said money transfer, notwithstanding the assailed Decision saying that this could not be done! We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the petitioner bank, with the not impossible intention of using this case as a precedent for similar acts of interception in the future. This piratical attitude of the nation's premier bank deserves a warning that it should not abuse the justice system in its collection efforts, particularly since we are aware that if the petitioner bank had been in good faith, it could have easily disposed of this controversy in ten minutes flat by means of an exchange of checks with private respondent for the same amount. The litigation could have ended there, but it did not. Instead, this plainly unmeritorious case had to clog our docket and take up the valuable time of this Court. WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the assailed Decision is AFFIRMED in toto. Costs against petitioner. SO ORDERED. Narvasa, C.J., (Chairman), Davide, Jr., and Francisco, JJ., concur. Melo, J., no part, being a member of the CA division which decided the case under review.
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SECOND DIVISION

[G.R. No. 111890. May 7, 1997]

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

The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul the sale of two parcels of land, from petitioner CKH Industrial and Development Corporation (CKH, for brevity) to private respondent Century-Well Phil. Corporation (Century-Well, for brevity), for failure to pay the stipulated price of P800,000.00. Petitioners specifically assail the Decision of the respondent Court of Appeals, which denied the annulment of the sale. The appellate court found that there was payment of the consideration by way of compensation, and ordered petitioners to pay moral damages and attorney's fees to private respondents. The dispositive portion of the questioned decision reads:
[1]

"WHEREFORE, in view of all the foregoing, the appealed Decision is REVERSED. The complaint is DISMISSED with costs against the plaintiffs. The plaintiffs jointly and severally are required to pay each of the defendants Lourdes Chong, Chong Tak Kei, and Uy Chi Kim moral damages of P20,000.00; and further requiring the plaintiffs, jointly and severally, to pay to each of the defendants Century-Well Phil. Corporation, Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney's fees of P20,000.00 With costs in this instance against the plaintiffs-appellees. SO ORDERED."
[2]

The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil Case No. 2845-V-88 entitled "CKH Industrial & Development Corporation vs. Century-Well Philippine Corporation, Lourdes

Chong, Chong Tak Kei, Uy Chi Kim, and the Register of Deeds of Metro Manila, District III (Valenzuela)." The trial court's decision stated pertinently:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff: 1. Ordering the rescission/annulment of the Deed of Absolute Sale of Realty. 2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in the sum of P200,000.00; 3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney's fees in the amount of 15% of the agreed price of P800,000.00 plus appearance fees of P500.00 per appearance; 4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit; 5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby ordered to cancel the certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of Realty and to reissue a new title in the name of CKH. The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is likewise dismissed considering that by his mediation he took it upon himself to assume the damages he allegedly suffered. SO ORDERED."
[3]

The records disclose that petitioner CKH is the owner of two parcels of land, consisting of 4,590 sq. m. and 300 sq. m. respectively, located in Karuhatan, Valenzuela, and covered by Transfer Certificates of Title Nos. 8710 and 8711, Register of Deeds of Caloocan City (now Register of Deeds District III [Valenzuela]). CKH is a corporation established under Philippine law by the late Cheng Kim Heng (Cheng), an immigrant of Chinese descent. Upon Cheng's demise, control over the petitioner corporation was transferred to Rubi Saw, also of Chinese descent, and Cheng's second wife.
[4]

It also appears that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah (Wah), who lived in Hongkong together with their children, Chong Tak Kei, (Kei), Chong Tak Choi (Choi), and Chong Tak Yam (Yam). After Cheng immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he brought his first wife, Heng, and their children to this country,

and established himself and his Chinese family as naturalized Filipino citizens. Heng died in 1984. On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng's son, Kei, met at the 1266 Soler St., Sta. Cruz, Manila, the residence of Cheng's friend, Uy Chi Kim, and executed a Deed of Absolute Sale, whereby Rubi Saw, representing CKH, agreed to sell the subject properties to Century-Well, a corporation owned in part by Lourdes Chong, Kei and Choi.
[5] [6]

The pertinent portions of the Deed of Sale are hereby reproduced:

"KNOW ALL MEN BY THESE PRESENTS: This Deed of Absolute Sale of Realty executed by and between: CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with business address at 553 Bermuda St., Sta. Cruz, Manila, represented in this act by its authorized representative, Ms. RUBI SAW, hereinafter referred to as VENDOR, - in favor of CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines at least sixty (60%) percent of the subscribed capital stock of which is owned by Filipino citizens, duly qualified to own and acquire lands in the Philippines, with office and business address at 66 F Bautista St., Valenzuela, Metro Manila and represented in this act by its Treasurer and authorized representative, Ms. Lourdes Chong, hereinafter referred to as VENDEE, WITNESSETH: That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of Karuhatan, Municipality of Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos. B-8710 and B-8711 of the Registry of Deeds for Metro Manila District III, and more particularly described as follows:
xxx

That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to its entire satisfaction, said VENDOR, by these presents, has

SOLD, CEDED, TRANSFERRED, and CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land above described and any and all improvements therein; That the above-described parcels of land are free from liens and encumbrances of whatever kind and nature. IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their hand on ________ at ________."
Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. The document was notarized the day after the parties signed the same, i. e., March 9, 1988.
[7] [8]

Claiming that the consideration for the sale of the subject properties was not paid by the private respondent-vendee despite several demands to do so, Petitioners CKH and Rubi Saw filed the instant complaint on May 23, 1988, with the Regional Trial Court of Valenzuela, Branch 172, against Century-Well, Lourdes Chong, Chong Tak Kei and Uy Chi Kim. Petitioners prayed for the annulment/rescission of the Deed of Absolute Sale, and in the meantime, for the issuance of a writ of preliminary injunction restraining the Register of Deeds of Valenzuela from registering the Certificates of Title over the subject properties in the name of the private respondent Century-Well.
[9]

The trial court synthesized the petitioners' submissions as follows:

"The complaint alleges the following: Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price shall be in the form of a Manager's Check, to be delivered to Rubi Saw upon the execution of the Deed of Sale, the preparation of which, Lourdes Chong undertook. On May 8, 1988, the date agreed upon for the execution of the Deed of Sale, plaintiff Rubi Saw, accompanied by her friend Aurora Chua Ng, went to 1266 Soler St., Sta. Cruz, Manila which is the residence and place of business of defendant Uy Chi Kim, an elderly man of Chinese ancestry and the place suggested by Lourdes Chong as their meeting place. During the meeting, Uy Chi Kim who was there presented to Rubi Saw a Deed of Absolute Sale in favor of defendant Century Well for her signature. Before Rubi Saw signed the Deed of Absolute Sale she inquired about the payment of the P800,000.00. Defendant Uy Chi Kim presented to her a personal check but she refused the same because it was contrary to her arrangement with Lourdes Chong that the

payment would be in the form of Manager's Check. Uy Chi Kim then explained to Rubi Saw that since it was a Sunday that day, they were unable to obtain the Manager's Check. He assured her that he had sufficient cash money at the first floor of his residence which is a store owned by Uy Chi Kim. Before Uy Chi Kim left on the pretext of getting the money, he persuaded plaintiff Rubi Saw to sign the Deed of Absolute Sale and give the same to Lourdes Chong together with the two Certificates of Title. Since Uy Chi Kim is an elderly Chinese whom Rubi Saw had no reason to mistrust, following Chinese custom, plaintiff Rubi Saw acceded to the request of Uy Chi Kim, trusting that he had sufficient cash amounting to P800,000.00 kept in the first floor of his residence. When Uy Chi Kim returned, he told Rubi Saw that he had only P20,000 on hand. He assured plaintiff, however, that there was no cause for her to worry (as) he was certain he would have the entire amount ready by the next day when the banks would be open. Again, trusting the elderly defendant Uy Chi Kim, Rubi Saw did not object and did not insist on the return of the Deed of Absolute Sale that she signed, together with the Certificate of Title which she delivered to Lourdes Chong. The next day, May 9, 1988 Rubi Saw called Lourdes Chong and Uy Chi Kim over the telephone but was told they were not around. She could not go to the residence of Uy Chi Kim because she could not leave her office due to business concerns. On May 10, 1988 Rubi Saw repeatedly called the two but was informed they were not around. On May 11, 1988 already anxious, she personally went to the residences and offices of the two defendants but they were not around. On May 12, 1988 Rubi Saw wrote defendant Century Well advising Lourdes Chong of the rescission and cancellation of the Deed of Absolute Sale because of lack of consideration. Lourdes Chong refused to receive the letter. Thereafter, several demand letters were sent to the defendants but they refused to pay plaintiffs. Worried that defendants might surreptitiously transfer the certificates of title to their names, Rubi Saw wrote the public defendant Register of Deeds on May 16, 1988, giving information about the circumstances of the sale and requesting not to allow registration of the Deed of Absolute Sale, together with an Affidavit of Adverse Claim. On May 20, 1988, plaintiffs' representative was informed by the Register of Deeds that

defendants have made representations with defendant to Register the Deed of Absolute Sale on May 23, 1988. Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and Uy Chi Kim maliciously misled her to believe that they would pay the P800,000 as consideration when in fact they had no intention to pay plaintiffs, and prayed that they should be awarded moral damages; that defendants be restrained from registering the Deed of Absolute Sale, and be ordered to return to them the 2 titles of the properties together with the Deed of Absolute Sale."
[10]

On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei alleged that:

"...the consideration for the two parcels of land was paid by means of off-setting or legal compensation in the amount of P700,000 thru alleged promissory notes executed by Cheng Kim Heng in favor of his sons Chong Tak Choi and Chong Tak Kei (Exh. 6, 7, & 8) and payment of P100,000.00 in cash. The defendant Century Well filed its Answer stating that during the operation of plaintiff CKH, the latter borrowed from Chong Tak Choi and Chong Tak Kei the total sum of P700,000.00 paying interest on P300,000.00 while the remaining P400,000.00 was interest free, and upon the death of Cheng Kim Heng, it stopped making said payments. Defendant tried to prove that the source of this P700,000 was Hung Yuk Wah while she was still residing in Hongkong, sent via bank draft from Hongkong to Chong Tak Choi and Chong Tak Kei on a bank to bank transfer. Defendant likewise tried to prove that after the death of Cheng Kim Heng, Rubi Saw unilaterally arrogated to herself the executive positions in plaintiff corporation such as President, Secretary, Treasurer and General Manager; thus effectively shunting aside Hung Yuk Wah and her children in the management of plaintiff corporation. Family differences (arose) between Rubi Saw on one hand, and Hung Yuk Wah and her children on the other hand which turned to worst after the death of Cheng Kim Heng. This brought about the entry of Chinese mediators between them, one of whom is defendant Uy Chi Kim, a reason why the execution of the Deed of Absolute Sale was to be done at the residence and business address of Uy Chi Kim."
[11]

Uy Chi Kim, on the other hand, answered on his behalf, that:

"...his only participation in the transaction was as a mediator, he being one of the closest friends of Cheng Kim Heng; that because the heirs of

Cheng Kim Heng could not settle their problems he, together with Machao Chan and Tomas Ching tried to mediate in accordance with Chinese traditions; that after long and tedious meetings the parties finally agreed to meet at his residence at 1266 Soler St., Sta. Cruz, Manila for the purpose of pushing thru the sale of the properties in question as part of the settlement of the estate. Defendant Uy Chi Kim corroborated the defense of his co-defendants that the purchase price of the properties was P800,000.00 the payment of which consists in the form of P100,000.00 in cash Philippine Currency; and the balance ofP700,000.00 will be applied as a set-off to the amount borrowed by plaintiff CKH from Chong Tak Choi and Chong Tak Kei. He advanced the amount of P100,000.00 by way of his personal check to Rubi Saw but because Rubi Saw refused, he gave Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and Jacinto Say even counted. After the P100,000.00 cash was given and the promissory notes, Rubi Saw signed the document of sale. It was during the registration of the sale that a problem arose as to the payment of the capital gains (tax) which Rubi Saw refused to pay. The buyer likewise refused to pay the same. The complaint against him is baseless and which besmirched his reputation. Hence his counterclaim for damages."
[12]

The trial court denied the petitioners' prayer for issuance of the writ of preliminary injunction in its Order dated August 4, 1988.
[13]

After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the Deed of Absolute Sale was merited, as there was no payment of the stipulated consideration for the sale of the real properties involved to Rubi Saw. In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement between the parties, did not provide for payment by off-setting a portion of the purchase price with the outstanding obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei. On the contrary, it provided for payment in cash, in the amount of P800,000.00. The evidence presented, however, did not disclose that payment of the said amount had ever been made by the private respondent. Moreover, there cannot be any valid off-setting or compensation in this case, as Article 1278 of the Civil Code requires, as a prerequisite for compensation, that the parties be mutually bound principally as creditors and debtors, which is not the case in this instance. The rescission of the contract is, therefore, called for, ruled the court.
[14]

Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial court. In its Decision dated April 21, 1993, the appellate court expressed its own findings, that the execution of the Deed of Absolute Sale was in settlement of a dispute between Rubi Saw and the first
[15]

family of Cheng Kim Heng, which arose upon Cheng's death. The appellate court described the history of their dispute as follows:

"In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his first wife Wah, children Choi and Kei, and second wife Rubi as his coincorporators/stockholders, along with other individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13, respectively). On April 15 and July 17 the following year, Heng, on behalf of CHK [sic], obtained loans of P400,000.00 and P100,000.00 from Choi, for which Heng executed two promissory notes in Choi's favor (Exhs. 6 and 7; ibid., p. 40 and p. 41, respectively). On November 24, 1981, Heng obtained from his other son, Kei, another loan this time in the sum of P200,000.00 on behalf of CKH for which he issued another promissory note (Exh. 8, ibid., p. 42). After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan (now Metro Manila) covered by Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint; Record, p. 13) and B-8711 (Annex B-Complaint; ibid., p. 14), which are now the subject of litigation in instant case. On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico Hai Huat (Lourdes). During their marriage, Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz, Manila, which CKH was then utilizing as its office. At about this time, Heng and Rubi had moved residence from Valenzuela, Metro Manila, to Bermuda St., Sta. Cruz, Manila. Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between Heng's first wife Wah and their three children on the one hand, and his second wife Rubi, on the other, which came to a head when, Rubi as president of CKH wrote a letter dated August 21, 1985 to the mayor of Valenzuela, Metro Manila, to prevent issuance of a business permit to American Metals managed by Chong Tak Choi, stating that CKH has not allowed it to make use of the property, and on November 7, 1985, when CKH, through counsel, demanded that Wah, Choi and Yam vacate the residential and factory buildings and premises owned by CKH and located on one of the subject lots on 76 F. Bautista St., Valenzuela, which the three and the corporation (of which two of them were stockholders), had been allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp. 44-45).

Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim, Ma Chao, Tomas Cheng and Johnny Saw, were called in to mediate. The mediation efforts which resulted in the withdrawal by Rubi Saw of her letter about the withholding of a license to American Metals, Inc. and much later, had culminated in the transaction now under litigation. The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to Century Well for the amount of P800,000.00, P100,000.00 of which will be paid in cash and the balance of P700,000.00 to be set-off by the three (3) promissory notes executed in behalf of CKH in favor of Chong Tak Choi and Chong Tak Kei (Exhs. 6, 7 and 8) the accumulated interests thereon to be waived as unstated consideration of the sale. Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St., where the corresponding deed of absolute sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid., pp. 46-49), with mediator Cheng and CKH stockholder and Rubi's secretary, Jacinto Say, signing as instrumental witnesses. After having received the cash consideration ofP100,000.00 and the promissory notes amounting to P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes the document of sale and the owner's copies of the certificates of title for the two lots. The deed having been executed on a Sunday, the parties agreed to have the same notarized the following day, May 9, 1988. The parties again met the next day, May 9, 1988, when they acknowledged the deed before a notary public."
[16]

In sum, the appellate court found that there was indeed payment of the purchase price, partially in cash for P100,000.00 and partially by compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei for P500,000.00 and P200,000.00 respectively, against the remainder of the stipulated price. Such mode of payment is recognized under Article 1249 of the Civil Code.
[17]

As observed by the appellate court:

We are of the considered view that the appellees have not established what they claim to be the invalidity of the subject deed of sale. The appellees are therefore neither entitled to the rescission or annulment of the document nor to the award made in their favor in the decision under question and those other reliefs they are seeking.
[18]

The question the Court is now tasked to answer is whether or not there was payment of the consideration for the sale of real property subject of this

case. More specifically, was there a valid compensation of the obligations of Cheng Kim Heng to his sons with the purchase price of the sale? To resolve this issue, it is first required that we establish the true agreement of the parties. Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective claims. Petitioners, while submitting that as worded, the Deed of Absolute Sale does not provide for payment by compensation, thereby ruling out the intention of the parties to provide for such mode of payment, submit on the other hand, that they had not received payment of the stipulated cash payment of P800,000.00. The testimony of Rubi Saw during the hearings for preliminary injunction and during trial was submitted to advance the submission that she was never paid the price of the subject lots, in cash or in promissory notes. On the other side of the fence, private respondents, who, ironically, were the parties who drafted the subject document, claim that the Deed of Sale does not express the true agreement of the parties, specifically with regard to the mode of payment. Private respondents allege that the execution of the deed of absolute sale was the culmination of mediation of the dispute of the first and second families of Cheng Kim Heng, over the properties of the decedent; that the price of the real property subject of the contract of sale was partly in cash, and the reminder to be compensated against Cheng's indebtedness to his sons Choi and Kei, reflected in the promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation, the sale has been consummated and the private respondent Century-Well is entitled to the registration of the certificates of title over the subject properties in its name. These contrasting submissions of the circumstances surrounding the execution of the subject document have led to this stalemate of sorts. Still, the best test to establish the true intent of the parties remains to be the Deed of Absolute Sale, whose genuineness and due execution, are unchallenged.
[19]

Section 9 of Rule 130 of the Rules of Court states that when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successorsin-interest, no evidence of such terms other than the contents of the written agreement. The so-called parol evidence rule forbids any addition to or contradiction of the terms of a written instrument by testimony or other evidence purporting to show that, at or before the execution of the parties written agreement, other or different terms were agreed upon by the parties, varying the purport of the written contract. When an agreement has been reduced to writing, the parties cannot be permitted to adduce evidence to prove alleged practices which to all purposes would alter the terms of the written agreement. Whatever is not found in the writing is understood to have been waived and abandoned.
[20]

The rule is not without exceptions, however, as it is likewise provided that a party to an action may present evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleadings: (a) An intrinsic ambiguity, mistake or imperfection in the written agreement; (b) The failure of the written agreement to express the true intent and agreement of the parties thereto; (c) The validity of the written agreement; or (d) The existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement.
[21]

We reiterate the pertinent provisions of the deed:

That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to its entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED, and CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land above described and any and all improvements therein;
[22]

The foregoing stipulation is clear enough in manifesting the vendors admission of receipt of the purchase price, thereby lending sufficient, though reluctant, credence to the private respondents submission that payment had been made by off-setting P700,000.00 of the purchase price with the obligation of Cheng Kim Heng to his sons Choi and Kei. By signing the Deed of Absolute Sale, petitioner Rubi Saw has given her imprimatur to the provisions of the deed, and she cannot now challenge its veracity. However, the suitability of the said stipulations as benchmarks for the intention of the contracting parties, does not come clothed with the cloak of validity. It must be remembered that agreements affecting the civil relationship of the contracting parties must come under the scrutiny of the provisions of law existing and effective at the time of the execution of the contract. We refer particularly to the provisions of the law on compensation as a mode of extinguishment of obligations. Under Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2) by the loss of the thing due, (3) by the condonation or remission of the debt; (4) by the confusion or merger of the rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of obligations include annulment, rescission, fulfillment of a resolutory condition and prescription. Compensation may take place by operation of law (legal compensation), when two persons, in their own right, are creditors and debtors of each other. Article 1279 of the Civil Code provides for the requisites of legal compensation:
[23]

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
Compensation may also be voluntary or conventional, that is, when the parties, who are mutually creditors and debtors agree to compensate their respective obligations, even though not all the requisites for legal compensation are present. Without the confluence of the characters of mutual debtors and creditors, contracting parties cannot stipulate to the compensation of their obligations, for then the legal tie that binds contracting parties to their obligations would be absent. At least one party would be binding himself under an authority he does not possess. As observed by a noted author, the requirements of conventional compensation are (1) that each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their credits.
[24]

In the instant case, there can be no valid compensation of the purchase price with the obligations of Cheng Kim Heng reflected in the promissory notes, for the reason that CKH and Century-Well the principal contracting parties, are not mutually bound as creditors and debtors in their own name. A close scrutiny of the promissory notes does not indicate the late Cheng, as then president of CKH, acknowledging any indebtedness to Century-Well. As worded, the promissory notes reveal CKHs indebtedness to Chong Tak Choi and Chong Tak Kei.

Exhibit 6 Metro Manila, Philippin es April 15, 1978 For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered corporation with postal address at Rm. 330, MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic] to pay on demand to Mr. CHONG TAK CHOI, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine currency (P400,000.00)

To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, do hereby signed [sic] in behalf of the Corporation. CKH INDUSTRIAL & DEVELOPMENT CORPORATION signed: CHENG KIM HENG" Exhibit 7 Manila, July 17, 1978 For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered domestic corporation in the City of Manila, represented by its president, CHENG KIM HENG with residence certificate no. 118824650 issued at Manila, on 2-28-78 do promise to pay on demand the sum of ONE HUNDRED THOUSAND PESOS ONLY (P100,000.00), Philippine currency with interest from the date hereof at the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI. In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG, president of CKH INDUSTRIAL & DEVELOPMENT CORPORATION do hereby affixed [sic] my signature below. signed: CHENG KIM HENG Exhibit 8 Manila, Philippines, November 24, 1981 I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831 Tetuan St. (2nd floor) Sta. Cruz, Manila, promises to pay to CHONG TAK KEI, with postal address at 76 F. Bautista St., Valenzuela, Metro Manila, the sum of PESOS: TWO HUNDRED THOUSAND ONLY (P200,000.00) Philippine Currency, with interest at the rate of Ten per cent (10%) per annum from date stated above to a period of one year and I hereby

consent to any renewal, or extension of same amount to a same period which may be requested by any one of us for the payment of this note. I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI. CKH IND. & DEV. CORP. signed: CHENG KIM HENG President
In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are merely stockholders of Century-Well, and as such, are not bound principally, not even in a representative capacity, in the contract of sale. Thus, their interest in the promissory notes cannot be off-set against the obligations between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation, much less, even a scintilla of substantiation, that Choi and Keis interest in Century-Well are so considerable as to merit a declaration of unity of their civil personalities. Under present law, corporations, such as Century-Well, have personalities separate and distinct from their stockholders, except only when the law sees it fit to pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to defeat public convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or business conduit of a person. The Court cannot, in this instance make such a ruling absent a demonstration of the merit of such a disposition.
[25] [26] [27]

Considering the foregoing premises, the Court finds it proper to grant the prayer for rescission of the subject deed of sale, for failure of consideration.
[28]

IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of the Court of Appeals dated April 21, 1993, is hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court of Valenzuela, Branch 173 dated February 4, 1991, is hereby REINSTATED, with the MODIFICATION that the award of moral damages and attorney's fees to Rubi Saw, and the order for payment of costs are DELETED. The parties shall bear their respective costs. SO ORDERED. Regalado, (Chairman), Romero, Puno, and Mendoza, JJ., concur. ! ! !

SECOND DIVISION

[G.R. No. 128448. February 1, 2001]

SPOUSES ALEJANDRO MIRASOL and LILIA E. MIRASOL, petitioners, vs. THE COURT OF APPEALS, PHILIPPINE NATIONAL BANK, and PHILIPPINE EXCHANGE CO., INC., respondents. DECISION
QUISUMBING, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals dated July 22, 1996, in CA-G.R. CV No. 38607, as well as of its resolution of January 23, 1997, denying petitioners motion for reconsideration. The challenged decision reversed the judgment of the Regional Trial Court of Bacolod City, Branch 42 in Civil Case No. 14725. The factual background of this case, as gleaned from the records, is as follows: The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08 piculs[1] of sugar, 25,662.36 of which were assigned for export. The following crop year, their acreage planted to the same crop was lower, yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for export. Private respondent Philippine National Bank (PNB) financed the Mirasols sugar production venture for crop years, 1973-1974 and 1974-1975 under a crop loan financing scheme. Under said scheme, the Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage empowered PNB as the petitioners attorney-in-fact to negotiate and to sell the latters sugar in both domestic and export markets and to apply the proceeds to the payment of their obligations to it. Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued Presidential Decree (P.D.) No. 579[2] in November, 1974. The decree authorized private respondent Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export to the United States and to other foreign markets. The price and quantity was determined by the Sugar Quota Administration, PNB, the Department of Trade and Industry, and finally, by the Office of the President. The decree further authorized PNB to finance PHILEXs purchases. Finally, the decree directed that whatever profit PHILEX might realize from sales of sugar abroad was to be remitted to a special fund of the national government, after commissions, overhead expenses and liabilities had been deducted. The government offices and entities tasked by existing

laws and administrative regulations to oversee the sugar export pegged the purchase price of export sugar in crop years 1973-1974 and 1974-1975 at P180.00 per picul. PNB continued to finance the sugar production of the Mirasols for crop years 19751976 and 1976-1977. These crop loans and similar obligations were secured by real estate mortgages over several properties of the Mirasols and chattel mortgages over standing crops. Believing that the proceeds of their sugar sales to PNB, if properly accounted for, were more than enough to pay their obligations, petitioners asked PNB for an accounting of the proceeds of the sale of their export sugar. PNB ignored the request. Meanwhile, petitioners continued to avail of other loans from PNB and to make unfunded withdrawals from their current accounts with said bank. PNB then asked petitioners to settle their due and demandable accounts. As a result of these demands for payment, petitioners on August 4, 1977, conveyed to PNB real properties valued at P1,410,466.00 by way of dacion en pago, leaving an unpaid overdrawn account of P1,513,347.78. On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to PNB stood at P15,964,252.93. Despite demands, the Mirasols failed to settle said due and demandable accounts. PNB then proceeded to extrajudicially foreclose the mortgaged properties. After applying the proceeds of the auction sale of the mortgaged realties, PNB still had a deficiency claim of P12,551,252.93. Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop years 1973-1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their outstanding obligations with the bank. PNB remained adamant in its stance that under P.D. No. 579, there was nothing to account since under said law, all earnings from the export sales of sugar pertained to the National Government and were subject to the disposition of the President of the Philippines for public purposes. On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages against PNB with the Regional Trial Court of Bacolod City, docketed as Civil Case No. 14725. On June 16, 1987, the complaint was amended to implead PHILEX as partydefendant. The parties agreed at pre-trial to limit the issues to the following:

1. The constitutionality and/or legality of Presidential Decrees numbered 338, 579, and 1192; 2. The determination of the total amount allegedly due the plaintiffs from the defendants corresponding to the allege(d) unliquidated cost price of export sugar during crop years 1973-1974 and 1974-1975.[3]
After trial on the merits, the trial court decided as follows:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendants Philippine National Bank (PNB) and Philippine Exchange Co., Inc. (PHILEX):
(1)Declaring Presidential Decree 579 enacted on November 12, 1974 and all circulars, as well as policies, orders and other issuances issued in furtherance thereof, unconstitutional and therefore, NULL and VOID being in gross violation of the Bill of Rights; (2) Ordering defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the whole amount corresponding to the residue of the unliquidated actual cost price of 25,662 piculs in export sugar for crop year 1973-1974 at an average price of P300.00 per picul, deducting therefrom however, the amount of P180.00 already paid in advance plus the allowable deductions in service fees and other charges; (3) And also, for the same defendants to pay, jointly and severally, same plaintiffs the whole amount corresponding to the unpaid actual price of 14,596 piculs of export sugar for crop year 1974-1975 at an average rate of P214.14 per picul minus however, the sum of P180.00 per picul already paid by the defendants in advance and the allowable deducting (sic) in service fees and other charges.

The unliquidated amount of money due the plaintiffs but withheld by the defendants, shall earn the legal rate of interest at 12% per annum computed from the date this action was instituted until fully paid; and, finally
(4) Directing the defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the sum of P50,000.00 in moral damages and the amount of P50,000.00 as attorneys fees, plus the costs of this litigation.

SO ORDERED.[4]
The same was, however, modified by a Resolution of the trial court dated May 14, 1992, which added the following paragraph:

This decision should however, be interpreted without prejudice to whatever benefits that may have accrued in favor of the plaintiffs with the passage and approval of Republic Act 7202 otherwise known as the Sugar Restitution Law, authorizing the restitution of losses suffered by the plaintiffs from Crop year 1974-1975 to Crop year 1984-1985 occasioned by the actuations of government-owned and controlled agencies. (Underscoring in the original). SO ORDERED.[5]
The Mirasols then filed an appeal with the respondent court, docketed as CA-G.R. CV No. 38607, faulting the trial court for not nullifying the dacion en pago and the mortgage contracts, as well as the foreclosure of their mortgaged properties. Also faulted

was the trial courts failure to award them the full money claims and damages sought from both PNB and PHILEX. On July 22, 1996, the Court of Appeals reversed the trial court as follows:

WHEREFORE, this Court renders judgment REVERSING the appealed Decision and entering the following verdict: 1. Declaring the dacion en pago and the foreclosure of the mortgaged properties valid; 2. Ordering the PNB to render an accounting of the sugar account of the Mirasol[s] specifically stating the indebtedness of the latter to the former and the proceeds of Mirasols 1973-1974 and 1974-1975 sugar production sold pursuant to and in accordance with P.D. 579 and the issuances therefrom; 3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols indebtedness to it crediting to the latter payments already made as well as the auction price of their foreclosed real estate and stipulated value of their properties ceded to PNB in the dacon (sic) en pago; 4. Whatever the result of the recomputation of Mirasols account, the outstanding balance or the excess payment shall be governed by the pertinent provisions of RA 7202. SO ORDERED.[6]
On August 28, 1996, petitioners moved for reconsideration, which the appellate court denied on January 23, 1997. Hence, the instant petition, with petitioners submitting the following issues for our resolution:

1. Whether the Trial Court has jurisdiction to declare a statute unconstitutional without notice to the Solicitor General where the parties have agreed to submit such issue for the resolution of the Trial Court. 2. Whether PD 579 and subsequent issuances[7] thereof are unconstitutional. 3. Whether the Honorable Court of Appeals committed manifest error in not applying the doctrine of piercing the corporate veil between respondents PNB and PHILEX.

4. Whether the Honorable Court of Appeals committed manifest error in upholding the validity of the foreclosure on petitioners property and in upholding the validity of the dacion en pago in this case. 5. Whether the Honorable Court of Appeals committed manifest error in not awarding damages to petitioners grounds relied upon the allowance of the petition. (Underscored in the original)[8]
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the constitutionality of a statute, presidential decree, or executive order.[9] The Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.[10] In J.M. Tuason and Co. v. Court of Appeals, 3 SCRA 696 (1961) we held:

Plainly, the Constitution contemplates that the inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality happens to be in issue.[11]
Furthermore, B.P. Blg. 129 grants Regional Trial Courts the authority to rule on the conformity of laws or treaties with the Constitution, thus:

SECTION 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive original jurisdiction: (1) In all civil actions in which the subject of the litigations is incapable of pecuniary estimation;
The pivotal issue, which we must address, is whether it was proper for the trial court to have exercised judicial review. Petitioners argue that the Court of Appeals erred in finding that it was improper for the trial court to have declared P.D. No. 579[12] unconstitutional, since petitioners had not complied with Rule 64, Section 3, of the Rules of Court. Petitioners contend that said Rule specifically refers only to actions for declaratory relief and not to an ordinary action for accounting, specific performance, and damages. Petitioners contentions are bereft of merit. Rule 64, Section 3 of the Rules of Court provides:

SEC. 3. Notice to Solicitor General. In any action which involves the validity of a statute, or executive order or regulation, the Solicitor General shall be notified by the party attacking the statute, executive order, or regulation, and shall be entitled to be heard upon such question.

This should be read in relation to Section 1 [c] of P.D. No. 478,[13] which states in part:

SECTION 1. Functions and Organizations (1) The Office of the Solicitor General shallhave the following specific powers and functions:
xxx

[c] Appear in any court in any action involving the validity of any treaty, law, executive order or proclamation, rule or regulation when in his judgment his intervention is necessary or when requested by the court.
It is basic legal construction that where words of command such as shall, must, or ought are employed, they are generally and ordinarily regarded as mandatory.[14] Thus, where, as in Rule 64, Section 3 of the Rules of Court, the word shall is used, a mandatory duty is imposed, which the courts ought to enforce. The purpose of the mandatory notice in Rule 64, Section 3 is to enable the Solicitor General to decide whether or not his intervention in the action assailing the validity of a law or treaty is necessary. To deny the Solicitor General such notice would be tantamount to depriving him of his day in court. We must stress that, contrary to petitioners stand, the mandatory notice requirement is not limited to actions involving declaratory relief and similar remedies. The rule itself provides that such notice is required in any action and not just actions involving declaratory relief. Where there is no ambiguity in the words used in the rule, there is no room for construction.[15] In all actions assailing the validity of a statute, treaty, presidential decree, order, or proclamation, notice to the Solicitor General is mandatory. In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the trial court ever require him to appear in person or by a representative or to file any pleading or memorandum on the constitutionality of the assailed decree. Hence, the Court of Appeals did not err in holding that lack of the required notice made it improper for the trial court to pass upon the constitutional validity of the questioned presidential decrees. As regards the second issue, petitioners contend that P.D. No. 579 and its implementing issuances are void for violating the due process clause and the prohibition against the taking of private property without just compensation. Petitioners now ask this Court to exercise its power of judicial review. Jurisprudence has laid down the following requisites for the exercise of this power: First, there must be before the Court an actual case calling for the exercise of judicial review. Second, the question before the Court must be ripe for adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest opportunity, and lastly, the issue of constitutionality must be the very lis mota of the case. [16]

As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on other grounds.[17] The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid, absent a clear and unmistakable showing to the contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers. This means that the measure had first been carefully studied by the legislative and executive departments and found to be in accord with the Constitution before it was finally enacted and approved.[18] The present case was instituted primarily for accounting and specific performance. The Court of Appeals correctly ruled that PNBs obligation to render an accounting is an issue, which can be determined, without having to rule on the constitutionality of P.D. No. 579. In fact there is nothing in P.D. No. 579, which is applicable to PNBs intransigence in refusing to give an accounting. The governing law should be the law on agency, it being undisputed that PNB acted as petitioners agent. In other words, the requisite that the constitutionality of the law in question be the very lis mota of the case is absent. Thus we cannot rule on the constitutionality of P.D. No. 579. Petitioners further contend that the passage of R.A. No. 7202[19] rendered P.D. No. 579 unconstitutional, since R.A. No. 7202 affirms that under P.D. 579, the due process clause of the Constitution and the right of the sugar planters not to be deprived of their property without just compensation were violated. A perusal of the text of R.A. No. 7202 shows that the repealing clause of said law merely reads:

SEC. 10. All laws, acts, executive orders and circulars in conflict herewith are hereby repealed or modified accordingly.
The settled rule of statutory construction is that repeals by implication are not favored.[20] R.A. No. 7202 cannot be deemed to have repealed P.D. No. 579. In addition, the power to declare a law unconstitutional does not lie with the legislature, but with the courts.[21] Assuming arguendo that R.A. No. 7202 did indeed repeal P.D. No. 579, said repeal is not a legislative declaration finding the earlier law unconstitutional. To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of corporate fiction with respect to PNB and PHILEX. Petitioners submit that PHILEX was a wholly-owned subsidiary of PNB prior to the latters privatization. We note, however, that the appellate court made the following finding of fact:

1. PNB and PHILEX are separate juridical persons and there is no reason to pierce the veil of corporate personality. Both existed by virtue of separate organic acts. They had separate operations and different purposes and powers.[22]
Findings of fact by the Court of Appeals are conclusive and binding upon this Court unless said findings are not supported by the evidence.[23] Our jurisdiction in a petition for review under Rule 45 of the Rules of Court is limited only to reviewing questions of law

and factual issues are not within its province.[24] In view of the aforequoted finding of fact, no manifest error is chargeable to the respondent court for refusing to pierce the veil of corporate fiction. On the fourth issue, the appellate court found that there were two sets of accounts between petitioners and PNB, namely:

1. The accounts relative to the loan financing scheme entered into by the Mirasols with PNB (PNBs Brief, p. 16) On the question of how much the PNB lent the Mirasols for crop years 1973-1974 and 1974-1975, the evidence recited by the lower court in its decision was deficient. We are offered (sic) PNB the amount of FIFTEEN MILLION NINE HUNDRED SIXTY FOUR THOUSAND TWO HUNDRED FIFTY TWO PESOS and NINETY THREE Centavos (Ps15,964,252.93) but this is the alleged balance the Mirasols owe PNB covering the years 1975 to 1982. 2. The account relative to the Mirasols current account Numbers 5186 and 5177 involving the amount of THREE MILLION FOUR HUNDRED THOUSAND Pesos (P3,400,000.00) PNB claims against the Mirasols. (PNBs Brief, p. 17) In regard to the first set of accounts, besides the proceeds from PNBs sale of sugar (involving the defendant PHILEX in relation to the export portion of the stock), the PNB foreclosed the Mirasols mortgaged properties realizing therefrom in 1982 THREE MILLION FOUR HUNDRED THIRTEEN THOUSAND Pesos (P3,413,000.00), the PNB itself having acquired the properties as the highest bidder. As to the second set of accounts, PNB proposed, and the Mirasols accepted, a dacion en pago scheme by which the Mirasols conveyed to PNB pieces of property valued at ONE MILLION FOUR HUNDRED TEN THOUSAND FOUR HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNBs Brief, pp. 1617).[25]
Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were void for want of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982 had been fully paid by virtue of legal compensation. Hence, the foreclosure was invalid and of no effect, since the mortgages were already fully discharged. It is also averred that they agreed to the dacion only by virtue of a martial law Arrest, Search, and Seizure Order (ASSO). We find petitioners arguments unpersuasive. Both the lower court and the appellate court found that the Mirasols admitted that they were indebted to PNB in the sum stated in the latters counterclaim.[26] Petitioners nonetheless insist that the same can be offset by

the unliquidated amounts owed them by PNB for crop years 1973-74 and 1974-75. Petitioners argument has no basis in law. For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code must be present. Said articles read as follows:

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
In the present case, set-off or compensation cannot take place between the parties because: First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the two firms. P.D. No. 579 prescribed where the profits from the sales are to be paid, to wit:

SECTION 7. x x x After deducting its commission of two and one-half (21/2%) percent of gross sales, the balance of the proceeds of sugar trading operations for every crop year shall be set aside by the Philippine Exchange Company, Inc,. as profits which shall be paid to a special fund of the National Government subject to the disposition of the President for public purposes.
Thus, as correctly found by the Court of Appeals, there was nothing with which PNB was supposed to have off-set Mirasols admitted indebtedness.[27] Second, compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as the same cannot be deemed liquidated.[28] With respect to the duress allegedly employed by PNB, which impugned petitioners consent to the dacion en pago, both the trial court and the Court of Appeals found that

there was no evidence to support said claim. Factual findings of the trial court, affirmed by the appellate court, are conclusive upon this Court.[29] On the fifth issue, the trial court awarded petitioners P50,000.00 in moral damages and P50,000.00 in attorneys fees. Petitioners now theorize that it was error for the Court of Appeals to have deleted these awards, considering that the appellate court found PNB breached its duty as an agent to render an accounting to petitioners. An agents failure to render an accounting to his principal is contrary to Article 1891 of the Civil Code.[30] The erring agent is liable for damages under Article 1170 of the Civil Code, which states:

Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
Article 1170 of the Civil Code, however, must be construed in relation to Article 2217 of said Code which reads:

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendants wrongful act or omission.
Moral damages are explicitly authorized in breaches of contract where the defendant acted fraudulently or in bad faith.[31] Good faith, however, is always presumed and any person who seeks to be awarded damages due to the acts of another has the burden of proving that the latter acted in bad faith, with malice, or with ill motive. In the instant case, petitioners have failed to show malice or bad faith[32] on the part of PNB in failing to render an accounting. Absent such showing, moral damages cannot be awarded. Nor can we restore the award of attorneys fees and costs of suit in favor of petitioners. Under Article 2208 (5) of the Civil Code, attorneys fees are allowed in the absence of stipulation only if the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just, and demandable claim. As earlier stated, petitioners have not proven bad faith on the part of PNB and PHILEX. WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent court in CA-G.R. CV 38607 AFFIRMED. Costs against petitioners. SO ORDERED. Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

THIRD DIVISION

[G.R. No. 156940. December 14, 2004]

ASSOCIATED BANK (Now WESTMONT BANK), petitioner, vs. VICENTE HENRY TAN, respondent. DECISION
PANGANIBAN, J.:

While banks are granted by law the right to debit the value of a dishonored check from a depositors account, they must do so with the highest degree of care, so as not to prejudice the depositor unduly. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the January 27, 2003 Decision of the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows:
[1] [2]

WHEREFORE, premises considered, the Decision dated December 3, 1996, of the Regional Trial Court of Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF is herebyAFFIRMED. Costs against the [petitioner].
[3]

The Facts The CA narrated the antecedents as follows: Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositorcreditor of the Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a postdated UCPB check with the said BANK in the amount of P101,000.00 issued to him by a certain Willy Cheng from Tarlac. The check was duly entered in his bank record thereby making his balance in the amount of P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice and

instruction of the BANK that the P101,000.00 check was already cleared and backed up by sufficient funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing balance in the amount of P107,793.45, because he has issued several checks to his business partners, to wit: CHECK NUMBERS a. 138814 b. 138804 c. 138787 d. 138847 e. 167054 f. 138792 g. 138774 h. 167072 i. 168802 DATE Sept. 29, 1990 Oct. 8, 1990 Sept. 30, 1990 Sept. 29, 1990 Sept. 29, 1990 Sept. 29, 1990 Oct. 2, 1990 Oct. 10, 1990 Oct. 10, 1990 AMOUNT P9,000.00 9,350.00 6,360.00 21,850.00 4,093.40 3,546.00 6,600.00 9,908.00 3,650.00

However, his suppliers and business partners went back to him alleging that the checks he issued bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive steps regarding the matter for he has adequate and sufficient funds to pay the amount of the subject checks. Nonetheless, the BANK did not bother nor offer any apology regarding the incident. Consequently, TAN, as plaintiff, filed a Complaint for Damages on December 19, 1990, with the Regional Trial Court of Cabanatuan City, Third Judicial Region, docketed as Civil Case No. 892-AF, against the BANK, as defendant. In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject checks and alleged that his suppliers decreased in number for lack of trust. As he has been in the business community for quite a time and has established a good record of reputation and probity, plaintiff claimed that he suffered embarrassment, humiliation, besmirched reputation, mental anxieties and sleepless nights because of the said unfortunate incident. [Respondent] further averred that he continuously lost profits in the amount of P250,000.00. [Respondent] therefore prayed for exemplary damages and that [petitioner] be ordered to pay him the sum of P1,000,000.00 by way of moral damages, P250,000.00 as lost profits, P50,000.00 as attorneys fees plus 25% of the amount claimed including P1,000.00 per court appearance.

Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was denied for lack of merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on March 20, 1991 filed its Answer denying, among others, the allegations of [respondent] and alleged that no banking institution would give an assurance to any of its client/depositor that the check deposited by him had already been cleared and backed up by sufficient funds but it could only presume that the same has been honored by the drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. For its part, [petitioner] alleged that on October 2, 1990, it gave notice to the [respondent] as to the return of his UCPB check deposit in the amount of P101,000.00, hence, on even date, [respondent] deposited the amount of P50,000.00 to cover the returned check. By way of affirmative defense, [petitioner] averred that [respondent] had no cause of action against it and argued that it has all the right to debit the account of the [respondent] by reason of the dishonor of the check deposited by the [respondent] which was withdrawn by him prior to its clearing. [Petitioner] further averred that it has no liability with respect to the clearing of deposited checks as the clearing is being undertaken by the Central Bank and in accepting [the] check deposit, it merely obligates itself as depositors collecting agent subject to actual payment by the drawee bank. [Petitioner] therefore prayed that [respondent] be ordered to pay it the amount of P1,000,000.00 by way of loss of goodwill, P7,000.00 as acceptance fee plus P500.00 per appearance and by way of attorneys fees. Considering that Westmont Bank has taken over the management of the affairs/properties of the BANK, [respondent] on October 10, 1996, filed an Amended Complaint reiterating substantially his allegations in the original complaint, except that the name of the previous defendant ASSOCIATED BANK is now WESTMONT BANK. Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the [respondent] and against the [petitioner], ordering the latter to pay the [respondent] the sum ofP100,000.00 by way of moral damages, P75,000.00 as exemplary damages, P25,000.00 as attorneys fees, plus the costs of this suit. In making said ruling, it was shown that [respondent] was not officially informed about the debiting of the P101,000.00 [from] his existing balance and that the BANK merely allowed the [respondent] to use the fund prior to clearing merely for accommodation because the BANK considered him as one of its valued clients. The trial court ruled that the bank manager was negligent in handling the particular checking account of the [respondent] stating that such lapses caused all the inconveniences to the

[respondent]. The trial court also took into consideration that [respondents] mother was originally maintaining with the x x x BANK [a] current account as well as [a] time deposit, but [o]n one occasion, although his mother made a deposit, the same was not credited in her favor but in the name of another.
[4]

Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to debit the account of its client for a dishonored check; and whether it had informed respondent about the dishonor prior to debiting his account. Ruling of the Court of Appeals Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of the value of the deposited check prior to its clearing. Having done so, contrary to its obligation to treat respondents account with meticulous care, the bank violated its own policy. It thereby took upon itself the obligation to officially inform respondent of the status of his account before unilaterally debiting the amount of P101,000. Without such notice, it is estopped from blaming him for failing to fund his account. The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds for the postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner to him is the proximate cause of his business woes and shame, for which it is liable for damages. Because of the banks negligence, the CA awarded respondent moral damages of P100,000. It also granted him exemplary damages of P75,000 and attorneys fees ofP25,000. Hence this Petition.
[5]

Issue In its Memorandum, petitioner raises the sole issue of whether or not the petitioner, which is acting as a collecting bank, has the right to debit the account of its client for a check deposit which was dishonored by the drawee bank.
[6]

The Courts Ruling The Petition has no merit. Sole Issue: Debit of Depositors Account Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated by the CA. It insists that its right to debit the amount of the dishonored check from the account of respondent is clear and unmistakable. Even assuming that it did not give him notice that the check had been dishonored, such right remains immediately enforceable. In particular, petitioner argues that the check deposit slip accomplished by respondent on September 17, 1990, expressly stipulated that the bank was obligating itself merely as the depositors collecting agent and -- until such time as actual payment would be made to it -- it was reserving the right to charge against the depositors account any amount previously credited. Respondent was allowed to withdraw the amount of the check prior to clearing, merely as an act of accommodation, it added. At the outset, we stress that the trial courts factual findings that were affirmed by the CA are not subject to review by this Court. As petitioner itself takes no issue with those findings, we need only to determine the legal consequence, based on the established facts.
[7]

Right of Setoff A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a clients account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that [f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.
[8]

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place when all the requisites mentioned in Article 1279 are present, as follows:
[9] [10] [11]

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
[12]

Nonetheless, the real issue here is not so much the right of petitioner to debit respondents account but, rather, the manner in which it exercised such right. The Court has held that even while the right of setoff is conceded, separate is the question of whether that remedy has properly been exercised.
[13]

The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised its right of setoff. The determination thereof hinges, in turn, on the banks role and obligations, first, as respondents depositary bank; and second, as collecting agent for the check in question. Obligation as Depositary Bank In BPI v. Casa Montessori, the Court has emphasized that the banking business is impressed with public interest. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required of it. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care.
[14] [15]

Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals has held that the degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is
[16]

concerned. Indeed, the banking business is vested with the trust and confidence of the public; hence the appropriate standard of diligence must be very high, if not the highest, degree of diligence. The standard applies, regardless of whether the account consists of only a few hundred pesos or of millions.
[17] [18] [19]

The fiduciary nature of banking, previously imposed by case law, is now enshrined in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance.
[20]

Did petitioner treat respondents account with the highest degree of care? From all indications, it did not. It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That act certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or money; and its value can properly be transferred to a depositors account only after the check has been cleared by the drawee bank.
[21] [22]

Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the amount to a depositors account; or infuse value to that account only after the drawee bank shall have paid such amount. Before the check shall have been cleared for deposit, the collecting bank can only assume at its own risk -- as herein petitioner did -- that the check would be cleared and paid out.
[23]

Reasonable business practice and prudence, moreover, dictated that petitioner should not have authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and above his outstanding cleared balance of P196,793.45. Hence, the lower courts correctly appreciated the evidence in his favor.
[24]

Obligation as Collecting Agent Indeed, the bank deposit slip expressed this reservation: In receiving items on deposit, this Bank obligates itself only as the Depositors Collecting agent, assuming no responsibility beyond carefulness in selecting

correspondents, and until such time as actual payments shall have come to its possession, this Bank reserves the right to charge back to the Depositors account any amounts previously credited whether or not the deposited item is returned. x x x."
[25]

However, this reservation is not enough to insulate the bank from any liability. In the past, we have expressed doubt about the binding force of such conditions unilaterally imposed by a bank without the consent of the depositor. It is indeed arguable that in signing the deposit slip, the depositor does so only to identify himself and not to agree to the conditions set forth at the back of the deposit slip.
[26] [27]

Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as respondents agent, consonant with the wellsettled rule that the relationship between the payee or holder of a commercial paper and the collecting bank is that of principal and agent. Under Article 1909 of the Civil Code, such bank could be held liable not only for fraud, but also for negligence.
[28] [29]

As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. Due to the very nature of their business, banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. Jurisprudence has established that the lack of diligence of a servant is imputed to the negligence of the employer, when the negligent or wrongful act of the former proximately results in an injury to a third person; in this case, the depositor.
[30] [31] [32]

The manager of the banks Cabanatuan branch, Consorcia Santiago, categorically admitted that she and the employees under her control had breached bank policies. They admittedly breached those policies when, without clearance from the drawee bank in Baguio, they allowed respondent to withdraw on October 1, 1990, the amount of the check deposited. Santiago testified that respondent was not officially informed about the debiting of the P101,000 from his existing balance of P170,000 on October 2, 1990 x x x.
[33]

Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the withdrawal and the subsequent debiting without notice. Accordingly, what remains to be determined is whether her actions proximately caused respondents injury. Proximate cause is that which -- in a natural and continuous sequence, unbroken

by any efficient intervening cause --produces the injury, and without which the result would not have occurred.
[34]

Let us go back to the facts as they unfolded. It is undeniable that the banks premature authorization of the withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural sequence -- the debiting of his account, the fall of his account balance to insufficient levels, and the subsequent dishonor of his own checks for lack of funds. The CA correctly noted thus: x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his money was already cleared. Without such advice, [respondent] would not have withdrawn the sum ofP240,000.00. Therefore, it cannot be denied that it was [petitioners] fault which allowed [respondent] to withdraw a huge sum which he believed was already his. To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had the P101,000.00 not [been] debited, the subject checks would not have been dishonored. Hence, we can say that [respondents] injury arose from the dishonor of his well-funded checks. x x x.
[35]

Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of the debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act of depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This argument deserves short shrift. First, notice was proper and ought to be expected. By the bank managers account, respondent was considered a valued client whose checks had always been sufficiently funded from 1987 to 1990, until the October imbroglio. Thus, he deserved nothing less than an official notice of the precarious condition of his account.
[36]

Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general indorser and the procedure for a notice of dishonor, it was incumbent on the bank to give proper notice to respondent. In Gullas v. National Bank, the Court emphasized:
[37] [38] [39]

x x x [A] general indorser of a negotiable instrument engages that if the instrument the check in this case is dishonored and the necessary proceedings for its dishonor are duly taken, he will pay the amount thereof to the holder (Sec. 66) It has been held by a long line of authorities that notice of

dishonor is necessary to charge an indorser and that the right of action against him does not accrue until the notice is given. x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued checks in good faith. As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests.
[40]

Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to the CAs observations that it was not unusual for a well-reputed businessman like him, who ordinarily takes note of the amount of money he takes and releases, to immediately deposit money in his current account to answer for the postdated checks he had issued.
[41]

Damages Inasmuch as petitioner does not contest the basis for the award of damages and attorneys fees, we will no longer address these matters. WHEREFORE, the Petition is DENIED and Decision AFFIRMED. Costs against petitioner. SO ORDERED. Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur. Corona, J., on leave.
! ! ! ! ! ! !

the

assailed

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. L-53585 February 15, 1990 ROMULO VILLANUEVA, petitioner, vs. HON. FRANCISCO TANTUICO, JR., and EMILIANA CRUZ, respondents. Mariano C. Cortezano for petitioner.

NARVASA, J.: This case treats of the liability of a Government officer of the Bureau of Records Management who was designated Administrative Officer and Training Coordinator of two (2) regional seminars of the Bureau, and who, as such, and having custody of seminar fees collected from the participants, authorized disbursements to certain of the latter for transportation expenses, food, etc. although, as subsequently disclosed, they had already collected and received amounts corresponding to said items from their respective offices. The officer involved is Romulo Villanueva, petitioner herein. The seminars of his Bureau were organized and conducted pursuant to a directive of the Secretary of General Services with a view to updating records management techniques. 1The seminar fees were charged against the appropriations of the participants' respective offices in accordance with Memo Circular 830 issued by the Office of the President, authorizing the attendance of records officers from the different government agencies at the seminars. All the fees collected, P43,000.00 in the aggregate, were placed under Villanueva's control and supervision, and were made disbursable only upon his authorization and for the purposes of the seminars specified in Seminar Operation Plans Numbered 001 and 002. For both seminars, Villanueva authorized disbursements of P41,148.20 in payment of food, snacks, transportation expenses, seminar kits and hand-outs of the participants; hauling services; additional allowance for training staff (including snacks for personnel who worked overtime in preparation for the seminars); hotel bills and honoraria of resource speakers. The balance of P1,851.80 was deposited with the Cashier of the Bureau of Records Management after the conclusion of the seminars, this being evidenced by Official Receipt No. 0926496 dated October 8, 1975. It was subsequently discovered that employees and officers designated to take part in the seminars had earlier collected from the offices or corporations to which they pertained, their transportation expenses, per diems, and other allowances. For this reason, the Auditor of the Bureau of Records Management, herein respondent Emiliana Cruz, disallowed the disbursement of seminar funds in the total amount of P31,949.15 which Villanueva had authorized for the transportation expenses, food and other expenses of said employees and officers. In Auditor Cruz's view, this amount should also have been deposited with the Cashier of the Bureau of Records Management.

Auditor Cruz accordingly wrote to Villanueva demanding restitution of this sum of P31,949.15. Villanueva demurred, claiming that the seminar funds were private funds, and they had been disbursed in pursuance to the objectives of the seminars. What Cruz did was to cause the issuance to Villanueva of a certificate of permanent disallowance in virtue of which all money collectible by him from the Government would be applied in satisfaction of the amount of P31,949.15 which she had disallowed in audit. She did this in reliance on Section 624 of the Revised Administrative Code, viz.: SEC. 624. When any person is indebted to the Government of the Philippine Islands, the Insular Auditor may direct the proper officer to withhold the payment of any money due him or his estate, the same to be applied in satisfaction of such indebtedness. Auditor Cruz characterized as an "indebtedness" within the meaning of Section 624, the disbursement of P31,949.15 authorized by Villanueva to certain seminar participants (which she had disallowed as aforestated). The result was that Villanueva was prevented from receiving (1) his salaries in the total amount of P13,313.30, (2) his transportation and representation expenses as Administrative Officer and Training Coordinator of the seminars amount in to P2,205.00, and (3) the money value of his terminal leave, P14,796.29. On top of this, Villanueva was charged by the Commission on Audit with malversation of public funds before the Tanodbayan. 2 The Tanodbayan however dismissed the case upon the Special Prosecutor's finding that the seminar fees were not public funds, and they had been disbursed by Villanueva in good faith. The Commission's motion for reconsideration was denied for lack of merit. Villanueva then addressed a letter to the President of the Philippines, appealing for reversal of Auditor Cruz's action in preventing the payment of his salaries and other money benefits due him. The matter was referred to the Commission on Audit which however found no cogent reason to recommend favorable action on Villanueva's appeal. 3 To obtain relief from these adverse dispositions, Villanueva has instituted the special civil action of certiorari at bar, faulting the respondents with having acted with lack or excess of jurisdiction or grave abuse of discretion. He argues that: 1) the seminar fees entrusted to him were private, not public funds; 2) any conclusion that he "is indebted to the Government" so that, according to Section 624 of the Revised Administrative Code, "any money due him or his estate" may be withheld and "applied in satisfaction of such indebtedness," must proceed from judgment of a competent court, not a mere opinion and pronouncement of an auditor or even by the COA; and 3) in any event, he is not in truth "indebted to the Government," no disbursement authorized by him being in violation of the President's Memo Circular 830, or Seminar Regulations Nos. 001 and 002 of the Bureau of Records Management, or any existing auditing rule or regulation. 1. The petitioner's first submission is quickly disposed of. The record shows that the seminar fees collected from seminar participants and entrusted to Villanueva were chargeable against the appropriations of the participants' respective offices or agencies in accordance

with the President's Memorandum Circular No. 830. Those fees must therefore be deemed public, not private, funds. The audit of the disbursements of said funds conducted by a government auditor was therefore entirely in order. 2. The ratiocinations and conclusions of the auditor, sustained by the Commission on Audit, are something else. Auditor Cruz made the finding, on the basis of her examination of the relevant records, that Villanueva was indebted to the Government in the sum of P31,949.15 representing supposedly unauthorized disbursements, which she had consequently disallowed and in reliance on Section 624 of the Revised Administrative Code, supra, the indebtedness may properly. be offset against Villanueva's salary and other monetary benefits payable to him by the Government. The proposition is untenable. While Section 624 of the Revised Administrative Code does indeed authorize the set-off of a person's indebtedness to the Government against "any money due him or his estate to be applied in satisfaction of such indebtedness," that indebtedness must be one that is admitted by the alleged debtor or pronounced by final judgment of a competent court. In such a case, the person and the Government are in their own right both debtors and creditors of each other, and compensation takes place by operation of law in accordance with Article 1278 of the Civil Code. 4 Absent, however, any such categorical admission by an obligor or final adjudication, no legal compensation can take place, as this Court has already had occasion to rule in an early case. 5 Unless admitted by a debtor himself, the conclusion that he is in truth indebted to the Government cannot be definitely and finally pronounced by a Government auditor, no matter how convinced he may be from his examination of the pertinent records of the validity of that conclusion. Such a declaration, that a government employee or officer is indeed indebted to the Government, if it is to have binding authority, may only be made by a court. That determination is after all, plainly a judicial, not an administrative function. No executive officer or administrative body possesses such a power. 3. In any case, the record does not show Villanueva to have made illegitimate disbursements of the public funds in his custody for reimbursement of which to the Government he had become obliged. The Court is satisfied that his disbursements were within the letter and contemplation of the Seminar Operation Plans in question, Numbered 001 and 002. The disbursements were for items explicitly specified as authorized expenditures, i.e., food, snacks, transportation, hauling services, additional allowances for the training staff, acquisition costs of seminar kits and hand-outs, and grocery items for the snacks of the training staff who had worked overtime without pay, or for items which were allowable as reasonably necessary expenses for the seminars upon approval (actually given) of the Director of the Bureau of Records Management, such as hotel bills and honoraria for resource speakers. There is moreover no showing whatever, contrary to Auditor Cruz's claim, that Villanueva had knowledge at the time of making the disputed disbursements, that some of the seminar participants had already collected from their home offices or agencies certain amounts to cover some of their expenses for attendance at the seminar. Hence, assuming that some of the participants, after having received certain amounts from their home offices in connection with their participation in the seminars, had again received other amounts for the same purpose from petitioner Villanueva, the liability for that duplication in disbursements should be exacted from the participants concerned, not from Villanueva. It is difficult, in fine, to discern any irregularity in Villanueva's conduct as officer in charge of the seminars such as would make him a debtor of the Government, it appearing on the contrary that he has done naught but fulfill his duties in good faith and in accordance with the applicable rules and guidelines. He did not deserve the harsh treatment accorded to him in the premises. In meting it out to him, there was grave abuse of discretion.

WHEREFORE, the writ of certiorari prayed for is granted, annulling and declaring void ab initio the certificate of permanent disallowance issued by Auditor Cruz against petitioner Villanueva and the resolution or order of the Commission on Audit sustaining the same, and ordering the Commission on Audit to cause the immediate payment to the petitioner of the sums rightfully due but improperly withheld from him, i.e., his salaries in the total amount of P13,313.30, the transportation and representation expenses due him as Administrative Officer and Training Coordinator of the seminars in the sum of P2,205.00, and the money value of his terminal leave: P14,796.29. SO ORDERED. Cruz, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

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SECOND DIVISION

[G.R. No. 118870. March 29, 1996]

NERISSA Z. PEREZ, petitioner, vs. THE COURT OF APPEALS (Ninth Division) and RAY C. PEREZ, respondents. DECISION
ROMERO, J.:

Parties herein would have this Court duplicate the feat of King Solomon who was hailed in Biblical times for his sagacious, if, at times unorthodox, manner of resolving conflicts, the most celebrated case being that when his authority was invoked to determine the identity of the real mother as between two women claiming the same infant. Since there could only be one mother, the daunting task that confronted the king/judge was to choose the true one. In the instant case, we are faced with the challenge of deciding, as between father and mother, who should have rightful custody of a child who bears in his person both their genes. While there is a provision of law squarely in point, the two courts whose authority have been invoked to render a decision have arrived at diametrically opposite conclusions. It has fallen upon us now to likewise act as judge between the trial court, on the one hand, and the appellate, on the other. On the issue of custody over the minor Ray Perez II, respondent Court of Appeals ruled in favor of the boys father Ray C. Perez, reversing the trial courts decision to grant custody to Nerissa Z. Perez, the childs mother. Ray Perez, private respondent, is a doctor of medicine practicing in Cebu while Nerissa, his wife who is petitioner herein, is a registered nurse. They were married in Cebu onDecember 6, 1986. After six miscarriages, two operations and a high-risk pregnancy, petitioner finally gave birth to Ray Perez II in New York on July 20, 1992. Petitioner who began working in the United States in October 1988, used part of her earnings to build a modest house in Mandaue City, Cebu. She also sought medical attention for her successive miscarriages in New York. She became a resident alien in February 1992.

Private respondent stayed with her in the U.S. twice and took care of her when she became pregnant. Unlike his wife, however, he had only a tourist visa and was not employed. On January 17, 1993, the couple and their baby arrived in Cebu. After a few weeks, only Nerissa returned to the U.S. She alleged that they came home only for a five-week vacation and that they all had round-trip tickets. However, her husband stayed behind to take care of his sick mother and promised to follow her with the baby. According to Ray, they had agreed to reside permanently in the Philippines but once Nerissa was in New York, she changed her mind and continued working. She was supposed to come back immediately after winding up her affairs there. When Nerissa came home a few days before Ray IIs first birthday, the couple was no longer on good terms. That their love for each other was fading became apparent from their serious quarrels. Petitioner did not want to live near her in-laws and rely solely on her husbands meager income of P5,000.00. She longed to be with her only child but he was being kept away from her by her husband. Thus, she did not want to leave RJ (Ray Junior) with her husband and in-laws. She wished for her son to grow up with his mother.
1

On the other hand, Ray wanted to stay here, where he could raise his son even as he practiced his profession. He maintained that it would not be difficult to live here since they have their own home and a car. They could live comfortably on his P 15,000.00 monthly income as they were not burdened with having to pay any debts.
2

Petitioner was forced to move to her parents home on Guizo Street in Mandaue. Despite mediation by the priest who solemnized their marriage, the couple failed to reconcile. On July 26, 1993, Nerissa Z. Perez filed a petition for habeas corpus asking respondent Ray C. Perez to surrender the custody of their son, Ray Z. Perez II, to her.
3

On August 27, 1993, the court a quo issued an Order awarding custody of the one-year old child to his mother, Nerissa Perez, citing the second paragraph of Article 213 of the Family Code which provides that no child under seven years of age shall be separated from the mother, unless the court finds compelling reasons to order otherwise. The dispositive portion of the Order reads:

WHEREFORE, foregoing premises considered, Order is hereby issued ordering the respondent to turn over the custody of their child Ray Cortes Perez II, his passport and roundtrip ticket to herein petitioner with a warning that if he will escape together with the child for the purpose of hiding the minor child instead of complying with this Order, that warrant for his arrest will be issued. SO ORDERED.
4

Upon appeal by Ray Perez, the Court of Appeals, on September 27, 1994, reversed the trial courts order and awarded custody of the boy to his father.
5

Petitioners motion for reconsideration having been denied, she filed the instant petition for review where the sole issue is the custody of Ray Perez II, now three years old.
6

Respondent court differed in opinion from the trial court and ruled that there were enough reasons to deny Nerissa Perez custody over Ray II even if the child is under seven years old. It held that granting custody to the boys father would be for the childs best interest and welfare.
7

Before us is the unedifying situation of a husband and wife in marital discord, struggling for custody of their only child. It is sad that petitioner and private respondent have not found it in their hearts to understand each other and live together once again as a family. Separated in fact, they now seek the Courts assistance in the matter of custody or parental authority over the child. The wisdom and necessity for the exercise of joint parental authority need not be belabored. The father and the mother complement each other in giving nurture and providing that holistic care which takes into account the physical, emotional, psychological, mental, social and spiritual needs of the child. By precept and example, they mold his character during his crucial formative years. However, the Courts intervention is sought in order that a decision may be made as to which parent shall be given custody over the young boy. The Courts duty is to determine whether Ray Perez II will be better off with petitioner or with private respondent. We are not called upon to declare which party committed the greater fault in their domestic quarrel. When the parents of the child are separated, Article 213 of the Family Code is the applicable law. It provides:

ART. 213. In case of separation of the parents, parental authority shall be exercised by the parent designated by the Court. The Court shall take into account all relevant considerations, especially the choice of the child over seven years of age, unless the parent chosen is unfit. No child under seven years of age shall be separated from the mother, unless the court finds compelling reasons to order otherwise. (Italics supplied)
Since the Code does not qualify the word separation to mean legal separation decreed by a court, couples who are separated in fact, such as petitioner and private respondent, are covered within its terms.
8

The Revised Rules of Court also contains a similar provision. Rule 99, Section 6 (Adoption and Custody of Minors) provides:

SEC. 6. Proceedings as to child whose parents are separated. Appeal. - When husband and wife are divorced or living separately and apart from each other, and the questions as to the care, custody, and control of a child or children of their marriage is brought before a Court of First Instance by petition or as an incident to any other proceeding, the court, upon hearing the testimony as may be pertinent, shall award the care, custody, and control of each such child as will be for its best interest, permitting the child to choose which parent it prefers to live with if it be over ten years of age, unless the parent chosen be unfit to take charge of the child by reason of moral depravity, habitual drunkenness, incapacity, or poverty x x x. No child under seven years of age shall be separated from its mother, unless the court finds there are compelling reasons therefor. (Italics supplied)
The provisions of law quoted above clearly mandate that a child under seven years of age shall not be separated from his mother unless the court finds compelling reasons to order otherwise. The use of the word shall in Article 213 of the Family Code and Rule 99, Section 6 of the Revised Rules of Court connotes a mandatory character. In the case ofLacson v. San Jose-Lacson, the Court declared:
9

The use of the word shall in Article 363 of the Civil Code, coupled with the observations made by the Code Commission in respect to the said legal provision, underscores its mandatory character. It prohibits in no uncertain terms the separation of a mother and her child below seven years, unless such separation is grounded upon compelling reasons as determined by a court.
10 11

The rationale for awarding the custody of children younger than seven years of age to their mother was explained by the Code Commission:

The general rule is recommended in order to avoid many a tragedy where a mother has seen her baby torn away from her. No man can sound the deep sorrows of a mother who is deprived of her child of tender age. The exception allowed by the rule has to be for compelling reasons for the good of the child; those cases must indeed be rare, if the mothers heart is not to be unduly hurt. If she has erred, as in cases of adultery, the penalty of imprisonment and the divorce decree (relative divorce) will ordinarily be sufficient punishment for her. Moreover, moral dereliction will not have any effect upon the baby who is as yet unable to understand her situation. (Report of the Code Commission, p. 12)
12

The Family Code, in reverting to the provision of the Civil Code that a child below seven years old should not be separated from the mother (Article 363), has expressly repealed the earlier Article 17, paragraph three of the Child and

Youth Welfare Code (Presidential Decree No. 603) which reduced the childs age to five years.
13

The general rule that a child under seven years of age shall not be separated from his mother finds its raison detre in the basic need of a child for his mothers loving care. Only the most compelling of reasons shall justify the courts awarding the custody of such a child to someone other than his mother, such as her unfitness to exercise sole parental authority. In the past the following grounds have been considered ample justification to deprive a mother of custody and parental authority: neglect, abandonment, unemployment and immorality, habitual drunkenness, drug addiction, maltreatment of the child, insanity and being sick with a communicable disease.
14 15 16 17 18

It has long been settled that in custody cases, the foremost consideration is always the Welfare and best interest of the child. In fact, no less than an international instrument, the Convention on the Rights of the Child provides: In all actions concerning children, whether undertaken by public or private social welfare institutions, courts of law, administrative authorities or legislative bodies, the best interests of the child shall be a primary consideration.
19 20

Courts invariably look into all relevant factors presented by the contending parents, such as their material resources, social and moral situations.
21

In the case at bench, financial capacity is not a determinative factor inasmuch as both parties have demonstrated that they have ample means. Respondent court stated that petitioner has no permanent place of work in the U.S.A. and has taken this point against her. The records, however, show that she is employed in a New York hospital and was, at the time the petition was filed, still abroad. She testified that she intends to apply for a job elsewhere, presumably to improve her work environment and augment her income, as well as for convenience. The Court takes judicial notice of the fact that a registered nurse, such as petitioner, is still very much in demand in the United States. Unlike private respondent, a doctor who by his own admission could not find employment there, petitioner immediately got a job in New York. Considering her skill and experience, petitioner should find no difficulty in obtaining work elsewhere, should she desire to do so.
22 23 24

The decision under review casts doubt on petitioners capability to take care of the child, particularly since she works on twelve-hour shifts thrice weekly, at times, even at night. There being no one to help her look after the child, it is alleged that she cannot properly attend to him. This conclusion is as unwarranted as it is unreasonable. First, her present work schedule is not so unmanageable as to deprive her of quality time for Ray II. Quite a number of working mothers who are away from home for longer periods of time are still able to raise a family well, applying time management principles judiciously. Second, many a mother, finding herself in such a position, has invited her own mother or relative to join her abroad, providing the latter with plane tickets and liberal allowances, to look after the child until he is able to take care of himself. Others go on leave from

work until such time as the child can be entrusted to day-care centers. Delegating child care temporarily to qualified persons who run day-care centers does not detract from being a good mother, as long as the latter exercises supervision, for even in our culture, children are often brought up by housemaids or yayas under the eagle eyes of the mother. Third, private respondents work schedule was not presented in evidence at the trial. Although he is a general practitioner, the records merely show that he maintains a clinic, works for several companies on retainer basis and teaches part-time. Hence, respondent courts conclusion that his work schedule is flexible (and h)e can always find time for his son is not well-founded. Fourth, the fact that private respondent lives near his parents and sister is not crucial in this case. Fifth, petitioners work schedule cited in the respondent courts decision is not necessarily permanent. Hospitals work in shifts and, given a mothers instinctive desire to lavish upon her child the utmost care, petitioner may be expected to arrange her schedule in such a way as to allocate time for him. Finally, it does not follow that petitioner values her career more than her family simply because she wants to work in the United States. There are any number of reasons for a persons seeking a job outside the country, e.g. to augment her income for the familys benefit and welfare, and for psychological fulfillment, to name a few. In the instant case, it has been shown that petitioner earned enough from her job to be able to construct a house for the family in MandaueCity. The record describes sketchily the relations between Ray and Nerissa Perez. The transcripts of the three hearings are inadequate to show that petitioner did not exert earnest efforts and make sacrifices to save her marriage.
25 26

It is not difficult to imagine how heart-rending it is for a mother whose attempts at having a baby were frustrated several times over a period of six years to finally bear one, only for the infant to be snatched from her before he has even reached his first year. The mothers role in the life of her child, such as Ray II, is well-nigh irreplaceable. In prose and poetry, the depth of a mothers love has been immortalized times without number, finding as it does, its justification, not in fantasy but in reality. WHEREFORE, the petition for review is GRANTED. The decision of the Court of Appeals dated September 27, 1994 as well as its Resolution dated January 24, 1995 are hereby REVERSED and SET ASIDE. The Order of the trial court dated August 27, 1993 is hereby REINSTATED. Custody over the minor Ray Z. Perez II is awarded to his mother, herein petitioner Nerissa Z. Perez. This decision is immediately executory. SO ORDERED. Regalado (Chairman), Puno, and Mendoza, JJ., concur. Torres, Jr., J., on leave. ! ! !

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G. R. No. L-74027 December 7, 1989 SILAHIS MARKETING CORPORATION, petitioner vs. INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business under the name and style of "MARK INDUSTRIAL SALES", respondents. Jaime V. Villanueva for petitioner. Tinga, Fuentes, Tagle & Malate for private respondent.

FERNAN, C.J. Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a reversal of the decision of the then Intermediate Appellate Court (IAC) in AC-G.R. CV No. 67162 entitled "De Leon, etc. v. Silahis Marketing Corporation", disallowing petitioner's counterclaim for commission to partially offset the claim against it of private respondent Gregorio de Leon for the purchase price of certain merchandise. A review of the record shows that on various dates in October, November and December, 1975, Gregorio de Leon (De Leon for short) doing business under the name and style of Mark Industrial Sales sold and delivered to Silahis Marketing Corporation (Silahis for short) various items of merchandise covered by several invoices in the aggregate amount of P 22,213.75 payable within thirty (30) days from date of the covering invoices. Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed before the then Court of First Instance of Manila a complaint for the collection of the said accounts including accrued interest thereon in the amount of P 661.03 and attorney's fees of P 5,000.00 plus costs of litigation. The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as affirmative defenses; [al a debit memo for P 22,200.00 as unrealized profit for a supposed commission that Silahis should have received from de Leon for the sale of sprockets in the amount of P 111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime in August 1975 without coursing the same through the former allegedly in violation of the usual practice concerning sale of merchandise to Dole Philippines, Inc.; and [b] Silahis' claim that it is entitled to return the stainless steel screen covered by Exhibits '6-A' and '6-B' which was found defective by its client, Borden International, Davao City, and to have the corresponding amount cancelled from its account with de Leon. In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis for the claim of de Leon but at the same time ordered that it be partially offset by Silahis' counterclaim as contained in the debit memo for unrealized profit and commission. Judge Bienvenido C. Ejercito of said court held:

There is no question that the defendant received from the plaintiff the items contained in Exhs. 'A' to 'F'. The only question is whether or not the defendant is entitled to set off against the claim of the plaintiff the amount contained in the debit memo of the defendant, Exh. '1', and whether or not the defendant is entitled to return the steel wire mesh which was returned to them by Borden Philippines, as shown by Exhs. '6-A' and '6-B'. The Court believes that the defendant is properly chargeable for the amounts of the unpaid invoices set forth in the complaint. However, the Court also believes that the plaintiff is also properly chargeable for the debit memo of P 22,200.00, Exh. '1'. This is because it was proven by the defendant from the testimonies of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to the agreement between plaintiff and defendant that the latter was to serve the account of Dole Philippines in Davao, the plaintiff made a direct sale of sprockets for P 111,000.00 which therreby deprives the defendant of its corresponding commission for P 22,200.00 which the defendant would have otherwise made if the plaintiff had followed its previous arrangement with the defendant. However, as to the counterclaim of the defendant for a cancellation of the amount of P 6,000.00 for defective stainless screen wire purchased and intended for Borden International, Davao City, the Court believes that it is much too late now to present said claim because the purchase was made and delivered as early as December 22,1975 and the proposed return to the defendant by Borden was made on April 1, 1976 only. The Court is not ready to award damages to any of the parties. After deducting the amount of P 22,200.00, which is the unpaid commission of the defendant from the principal total amount of the unpaid invoices of the plaintiff of P 22,213.75, the unpaid balance in favor of the plaintiff is P 13.75. The claim for interest and attorney's fees of the plaintiff may be offset against the interest and attorney's fees of the defendant. WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the defendant to pay to the plaintiff the amount of P 13.75, with interest at 12% per annum from the date of the filing of the action on July 1, 1976 until fully paid, without pronouncement as to costs. SO ORDERED. 2 De Leon appealed from the said decision insofar as it directed partial compensation and its failure to award interest on his principal claim as well as attomey's fees in his favor. In a decision dated March 1 7, 1986, 3 respondent Intermediate Appellate Court 4 set aside the decision of the lower court and dismissed herein petitioner's (therein defendant- appellee's) counterclaim for lack of factual or legal basis. The appellate court found that there was no agreement, verbal or otherwise, nor was there any contractual obligation between De Leon and Silahis prohibiting any direct sales to Dole Philippines, Inc. by de Leon; nor was there anything in the debit memo obligating de Leon to pay a commission to Silahis for the sale of P 111,000.00 worth of sprockets to Dole Philippines although in the past, the former did supply certain items to the latter for delivery to Dole Philippines, Incorporated. Hence, in this petition for review on certiorari, the central issue is whether or not private respondent is liable to the petitioner for the commission or margin for the direct sale which the former concluded and consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner.

We have carefully gone over the record of this case particularly the debit memo upon which petitioner's counterclaim rests and found nothing contained therein to show that private respondent obligated himself to set-off or compensate petitioner's outstanding accounts with the alleged unrealized commission from the assailed sale of sprockets in the amount of P 111,000.00 to Dole Philippines, Inc. It must be remembered that compensation takes place when two persons, in their own right, are creditors and debtors to each other. Article 1279 of the Civil Code provides that: "In order that compensation may be proper, it is necessary: [1] that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; [2] that both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; [3] that the two debts be due; [4] that they be liquidated and demandable; [5] that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the creditors and debtors. 5 Article 1279 requires, among others, that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of contract. 6 Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of P 22,213.75 as contained in its answer. But whether private respondent is liable to pay the petitioner a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking place. The Court agrees with respondent appellate court that there is no evidence on record from which it can be inferred that there was any agreement between the petitioner and private respondent prohibiting the latter from selling directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract binding between the parties considering that the same, as correctly found by the appellate court, was not signed by private respondent nor was there any mention therein of any commitment by the latter to pay any commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00. Indeed, such document can be taken as self-serving with no probative value absent a showing or at the very least an inference, that the party sought to be bound assented to its contents or showed conformity thereto. In fact the letter written by private respondent's lawyer dated March 5,1975 7 in reply to petitioner's letter dated February 19, 1976 transmitting its Debit Memo No. 1695 8 further strengthens private respondent's stand that it never agreed to give petitioner any commission on the direct sale to Dole Philippines, Inc. by its company because said letter denied any utilization of petitioners personnel and facilities at its Davao Branch in the transaction with Dole Philippines, Inc. which would otherwise lend a basis for petitioner's monetary claim. WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court is hereby AFFIRMED. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-29981 April 30, 1971 EUSEBIO S. MILLAR, petitioner, vs. THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents. Fernandez Law Office and Millar and Esguerra for petitioner. Francisco de la Fuente for respondents.

CASTRO, J.: On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel (hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of suit. From the said judgment, the respondent appealed to the Court of Appeals which, however, dismissed the appeal on January 11, 1957. Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner moved ex parte in the court of origin for the issuance of the corresponding writ of execution to enforce the judgment. Acting upon the motion, the lower court issued the writ of execution applied for, on the basis of which the sheriff of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297 and plate no. 7225, Manila, 1956). The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on the jeep, stipulating,inter alia, that This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine currency, which MORTGAGOR agrees to pay as follows: March 31, 1957 EIGHT HUNDRED FIFTY (P850) PESOS;

April 30, 1957 EIGHT HUNDRED FIFTY (P850.00) PESOS. Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner obtained an alias writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957 after the lapse of the entire period stipulated in the chattel mortgage for the respondent to comply with his obligation was returned unsatisfied. So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner, issued several aliaswrits, which writs the sheriff also returned unsatisfied. On September 20, 1961, the petitioner obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain personal properties belonging to the respondent, and then scheduled them for execution sale. However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the execution sale on the ground of payment of the judgment obligation. The lower court, on November 11, 1961, ordered the suspension of the execution sole to afford the respondent the opportunity to prove his allegation of payment of the judgment debt, and set the matter for hearing on November 25, 1961. After hearing, the lower court, on January 25, 1962, issued an order the dispositive portion of which reads: IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution. The lower court ruled that novation had taken place, and that the parties had executed the chattel mortgage only "to secure or get better security for the judgment. The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the parties impliedly novated the judgment obligation in civil case 27116. The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation: 1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of chattel mortgage limits the principal obligation of the respondent to P1,700; 2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments; 3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to pay liquidated damages in the amount of P300 in case of default on his part; and 4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation.

On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition for certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate court's decision and affirmance of the order of the lower court. Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion that implied novation has taken place, took into account the four circumstances heretofore already adverted to as indicative of the incompatibility between the judgment debt and the principal obligation under the deed of chattel mortgage. 1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying novation of the judgment debt, stating that in the interim from the time of the rendition of the judgment in civil case 27116 to the time of the execution of the deed of chattel mortgage the respondent made partial payments, necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on record appears the admission by both parties of the partial payments made before the execution of the deed of chattel mortgage. The erroneous conclusion arrived at by the Court of Appeals, the petitioner argues, creates the wrong impression that the execution of the deed of chattel mortgage provided the consideration or the reason for the reduced judgment indebtedness. Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial incompatibility between the two obligations Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon. At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the amounts already paid and as to the sum still due, decoded to state with specificity in the deed of chattel mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage agreement. 2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The appellate court pointed out that while the judgment made no mention of payment of damages, the deed of chattel mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the part of the respondent. However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's fees and not as liquidated damages. Similarly, the judgment

makes mention of the payment of the sum of P400 as attorney's fees and omits any reference to liquidated damages. The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made by the respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts. At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment of liquidated damages in case of default on the part of the respondent, we find it difficult to agree with the conclusion reached by the Court of Appeals. 3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate court considered said circumstances in a way not in accordance with law or accepted jurisprudence. The appellate court stated that while the judgment specified no mode for the payment of the judgment debt, the deed of chattel mortgage provided for the payment of the amount fixed therein in two equal installments. On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment payment in two equal installments. The chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness. 1 The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent. The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation under the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the parties agreed upon the chattel mortgage solely to secure, not the payment of the reduced amount as fixed in the aforesaid deed, but the payment of the judgment obligation and other incidental expenses in civil case 27116. The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial alteration in the liability of the respondent. The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. 2 The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place.

We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express novation. ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order of the Court of First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's cost. Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Makasiar, JJ., concur. Villamor, J., abstains.

Separate Opinions

BARREDO, J., concurring: I concur. I would like to add the following considerations to the rationale of the main opinion: As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it was unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the said Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner therein stated. If this can in any sense in which the parties must be held to have newly bound themselves. In other words, by their explicit covenant, the parties contemplated the chattel mortgage to be a security for the payment of the judgment and not the payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru the ordinary procedure of a writ of execution by the petitioner is an election to which every mortgage creditor is entitled when he decides to abandon his security. Teehankee, J., concurs.

Separate Opinions BARREDO, J., concurring:

I concur. I would like to add the following considerations to the rationale of the main opinion: As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it was unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the said Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner therein stated. If this can in any sense in which the parties must be held to have newly bound themselves. In other words, by their explicit covenant, the parties contemplated the chattel mortgage to be a security for the payment of the judgment and not the payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru the ordinary procedure of a writ of execution by the petitioner is an election to which every mortgage creditor is entitled when he decides to abandon his security. Teehankee, J., concurs.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. L-25897 August 21, 1976 AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner vs. HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch Bacolod City, and SERAFIN LAZALITA, respondents. Graciano H. Arinday, Jr. for petitioners. Antonio L. Balinas for respondent.

FERNANDO, Acting C.J.: The filing of this suit for certiorari could have been avoided had there full awareness by petitioners of the legal import and significance of a later decision involving the parties. If such were the case, they would have realized that no grave abuse of discretion, no abuse of discretion for that matter, could be imputed to respondent Judge for issuing the challenged order,1 setting aside a writ of execution conformably to a petition for relief by private respondent Serafin Lazalita. 2 Insofar as pertinent, it is worded thus: "That the above-mentioned order of Execution to be set aside is based on the decision of the Honorable Court dated September 5, 1961 in the above-entitled case which is no longer enforceable, and executory by virtue of the "Agreed Stipulation of Facts" entered into by the Plaintiffs and Defendants in Civil Case No. 6553, and which said "Agreed Stipulation of Facts" was the basis for the judgment of the Honorable Court dated February 12, 1965. That the parties and subject matter in Civil Case No. 5111 and Civil Case No. 6553 are the same except that the plaintiffs in Civil Case No. 5111 were the defendants in Civil Case No. 6553, and vice-versa; ... That in the "Agreed Stipulation of Facts" in Civil Case No. 6553 which was the basis of the Honorable Court judgment dated February 12, 1965, it was agreed by the defendant spouses Dormitorio, who are the plaintiffs in Civil Case No. 5111 that the defendant Serafin Lazalita should be reimbursed for his expenses in transferring his house to another Lot to be assigned to him by the Municipality of Victorias, and that the Decision in Civil Case No. 5111 shall not be enforced and executed anymore; That by means of fraud, misrepresentation and concealment of the true facts of the case, the plaintiffs were able to mislead the Honorable Court, thru an Ex-Parte Motion to issue by mistake an Order for the issuance of a Writ of Execution by making this Honorable Court believe that the Decision of September 5, 1961 is still enforceable and executory; ..." 3 Respondent Judge granted the relief prayed for and set aside the writ of execution, in view of the conclusion reached by him that such later decision, arrived at as the result of a compromise between the same parties, evidenced by the agreed stipulation of facts, was clear proof of ananimus novandi and thus superseded the previous judgment which as a result of an ex parte motion was mistakenly ordered executed. Such a conclusion is borne out by a study of the records of the case. certiorari does not lie. The decision in the aforecited Civil Case No. 6553, which as contended by private respondent, a submission that earned the approval of respondent Judge, sufficed for the lifting of the writ of execution, pursuant to the decision in Civil Case No. 5111 deemed superseded, started with a stipulation of facts. Thus: "When this case was called for hearing

the parties submitted an Agreed Stipulation of Facts duly signed by the parties and their respective counsel, as follows: "[Agreed Stipulation of Facts]," Come now the parties, in the above-entitled case, represented by their respective counsel and before this Honorable Court, respectfully submit the following agreed stipulation of facts: 1. That the defendant Municipality of Victorias, is the owner of several parcels of lands in Victorias, Negros Occidental, known as Lots Nos. 102 and 120 and 138 and 102-New, which [are] consolidated and subdivided into small lots for sale to the inhabitants thereof; the lots were sold by the Municipality, either in cash or installment for ten (10) years at [one peso] (P1.00) per square meter; 2. That on December 7, 1948, the plaintiff Serafin Lazalita, bought from the Municipality of Victorias, Lot No. 1, Block 16 of the consolidated-subdivision plan PCs118 having an area of Two Hundred Thirty (230) Square Meters, payable in installment at [one peso] (P1.00) per square meter, and in the year 1958, upon full payment by plaintiff Lazalita of the purchase price of the land, a deed of definite sale was executed in his favor by the then Municipal Mayor Montinola of Victorias, Negros Occidental, and thereafter a Certificate of Title No. T-23098 covering the property, was issued him by the Register of Deeds of Bacolod, Negros Occidental; 3. That from February 7, 1948, until about eight continuous years thereafter, plaintiff had been in full and peaceful possession of the said land, and he introduced permanent and valuable improvements thereon, [namely] fruit trees, like coconuts, avocados, pumelos and oranges, which have long been fruit bearing, and built a house of strong materials, valued at P5,000.00; 4. That plaintiff Lazalita, was placed in possession of the said Lot No. 1, Block 16 of the subdivision plan of Victorias, by the persons designated by the Municipality to take charge of the sale of said lots to the people, and from the time, he had occupied by same, up to the present, there has not been a change in the location thereof, as described in the Certificate of Title covering the property, now registered in plaintiff's name; 5. That about the year 1955, however, the other co-defendants herein the spouses Agustin Dormitorio and Leoncia D. Dormitorio, purchased also, from the defendant Municipality of Victorias, their lot known as Lot 2, Block 16, of the same consolidation-subdivision plan PCs-118, having an area of Three Hundred Forty-Three (343) Square meters, in cash, at [one peso) (P1.00) per square meter. Immediately thereafter, the Dormitorios, obtained a transfer Certificate of Title known as T-18189 for their property, from the Office of the Register of Deeds, Bacolod, Negros Occidental. However, the spouses Dormitorio, have not taken actual possession of the land, they have purchased from the defendant Municipality of Victorias, up to the present; 6. That on December 12, 1958, the spouses Dormitorio, brought a suit against the plaintiff Lazalita, for Ejectment and the conflict between them was made known to the office of the Municipal Mayor and the Council of Victorias, who tried to settle the matter between the parties Dormitorio and Lazalita. Later, a private Land Surveyor, was hired by the Municipality of Victorias, and it was found out, according to said Surveyor, Mr. Ceballos, that the Lot sold by the Municipality of Victorias, to the plaintiff, was converted into the new Municipal. Road known as "Jover Street" and that the lot presently occupied by him, is supposed to be the lot No. 2, bought by the spouses Dormitorio from the Municipality of Victorias; and so, availing of the said discovery, the Court of First Instance of Negros Occidental, Branch V, Presided over by Hon. Jose F. Fernandez, rendered judgment in that case No. 5111, in favor of Dormitorio, ordering the plaintiff herein Lazalita, to vacate the land and to pay a monthly rental of P20.00, to said Dormitorio, besides his Attorney's fees; 7. That Lazalita, having failed to appeal from said judgment in Civil Case No. 5111 of this Honorable Court, brought this present action, against the Municipality of Victorias, and joined the Dormitorios, as formal parties, because of the value of his permanent improvements and building introduced or constructed on Lot No. 2, Block 16, ascertained to be that, very lot purchased by Dormitorio from the defendant Municipality of Victorias, which building and improvements, have far exceed then, the original purchase price of the land; 8. That the present fair market value of residential lots in the Poblacion of Victorias, ranges between P15.00 to P25.00 per square meter and the lots in controversy, are saleable at present, at P20.00 per square meter; 9. That the Municipality of Victorias,

under the present administration, is willing to amicably settle the case, now before this Honorable Court, by giving the plaintiff another lot, if they could open their newly proposed subdivision, or pay back Lazalita the amount necessary and just for plaintiff to acquire another lot for his residence, and for the expenses of transferring his present residential house thereto. ....:" 4Then, as noted in the decision, the parties did respectfully pray "that judgment be rendered by this Honorable Court, on the basis of the foregoing agreed stipulation of facts, and on such other basis just and equitable, without special pronouncement of costs." 5 So it was granted in the dispositive portion of such decision: "[Wherefore], judgment is hereby rendered in accordance with the above-mentioned Agreed Stipulation of Facts." 6 grave abuse of discretion when he set aside the writ of execution is thus clearly apparent. He had no choice on the matter. That was made even more evident in the answer to the petition filed by respondents. It must have been the realization by petitioners that certiorari certainly did not lie that led to their not only failing to make an attempt at a refutation of what was asserted in the answer but also failing to appear at the hearing when this case was set for oral argument. As noted at the outset, this petition must be dismissed. 1. What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds support in the applicable authorities. There is this relevant excerpt in Barretta v. Lopez, 7 this Court speaking through the then Chief Justice Paras: "Alleging that the respondent judge of the municipal court had acted in excess of her jurisdiction and with grave abuse of discretion in issuing the writ of execution of December 15, 1947, the petitioner has filed the present petition for certiorari and prohibition for the purpose of having said writ of execution annulled. Said petition is meritorious. The agreement filed by the parties in the ejectment case created as between them new rights and obligations which naturally superseded the judgment of the municipal court." 8 In Santos v. Acua, 9 it was contended that a lower court decision was novated by subsequent agreement of the parties. Implicit in this Court's ruling is that such a plea would merit approval if indeed that was what the parties intended. Nonetheless, it was not granted, for as explained by the ponente, Justice J. B. L. Reyes: "Appellants understood and expressly agreed to be bound by this condition, when they stipulated that "they will voluntarily deliver and surrender possession of the premises to the plaintiff in such event" ... Hence, it is plain that in no case were the subsequent arrangements entered into with any unqualified intention to discard or replace the judgment in favor of the plaintiff-appellee; and without such intent or animus novandi, no substitution of obligations could possibly take place." 10Can there be any doubt that if it could be shown, as it was in this case, that there was such clear manifestation of will by the parties, the original decision had lost force and effect? To ask the question is to answer it. The presence of the animus novandi is undeniable. Nor is there anything novel in such an approach. So it was noted by then Chief Justice Concepcion inDe los Santos v. Rodriguez: 11 "As early as Molina v. De la Riva the principle has been laid down that, when, after judgment has become final, facts and circumstances transpire which render its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and the facts" 12 Molina v. de la Riva 13 was a 1907 decision. Again, the present case is far stronger, for there is a later decision expressly superseding the earlier one relied upon on which the writ of execution thereafter set aside was based. 2. Nor can it be denied that as the later decision in Civil Case No. 6553 was the result of a compromise, it had the effect ofres judicata. This was made clear in Salazar v. Jarabe. 14 There are later decisions to the same effect. 15 The parties were, therefore, bound by it. There was thus an element of bad faith when petitioners did try to evade its terms. At first, they were quite successful. Respondent Judge, however, upon being duly informed, set matters right. He set aside the writ of execution. That was to act in accordance with law. He is to be commended, not condemned.

3. There is no merit likewise to the point raised by petitioners that they were not informed by respondent Judge of the petition by private respondent to set aside the writ of execution. The order granting such petition was the subject of a motion for reconsideration. 16 The motion for reconsideration was thereafter denied. 17 Under the circumstances, the failure to give notice to petitioners had been cured. That is a well-settled doctrine. 18 Their complaint was that they were not heard. They were given the opportunity to file a motion for reconsideration. So they did. That was to free the order from the alleged infirmity. Petitioners then cannot be heard to claim that they were denied procedural due process. WHEREFORE, the petition for certiorari is dismissed. Costs against petitioners. Barredo, Antonio, Aquino and Concepcion, Jr., JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-18411

December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee, vs. ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants. Roxas and Sarmiento for plaintiff-appelle. Somero, Baclig and Savello for defendants-appellants. REGALA, J.: Appeal from the decision of the Court of First Instance of Manila ordering the defendantsappellants to pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs. The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the appellants executed on January 4, 1957, the following promissory note representing the said account:

OMISSORY NOTE

000.00 Manila, January 4, 1957

, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally promise to pay the Magdalena ates, Inc., or order, at its offices in the City of Manila, without any demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philipp rency, with interest at the rate of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00 resents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193, containing an area of 2,191 squar ters, Quezon City. (Sgd.) Antonio A. Rodriguez ( T ) ANTONIO A. RODRIGUEZ (Sgd.) Herminia C. Rodriguez ( T ) HERMINIA C. RODRIGUEZ

ned in the Presence of:

d.) ILLEGIBLE

d.) ILLEGIBLE

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the appellee, the undertaking thereof being embodied therein as follows:

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191 square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified in writing within Ten (10) days from moment of default otherwise, this undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from the appellants the payment of P655.89 corresponding to the alleged accumulated interests on the principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee started this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on February 5, 1959, rendered judgment in favor of the appellee and against the appellants, ordering the latter to pay jointly and severally the appellee the sum of P655.89 with interest thereon at the legal rate from November 10, 1958, the date of the filing of the complaint, until the whole amount is fully paid. Not satisfied with that judgment, appellants appealed to the Court of First Instance of Manila, where the case was submitted for decision on the pleadings. The Court of First Instance of Manila rendered the judgment stated at the outset of this decision. On appeal directly to this Court, the following errors are assigned:

I. The lower court erred in concluding as a fact from the pleadings that the plaintiffappellee demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the said interests. II. The lower court erred in not finding and declaring that the obligation of the defendants-appellants in favor of the plaintiff-appellee was totally extinguished by payment and/or condonation. III. The lower court erred in not finding and declaring that the promissory note executed by the defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly accepted the surety bond which merely guaranteed payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the payment of accrued interest and what could be deduced therefrom was merely that the appellee demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the amount of the principal obligation and without exercising its (appellee's) right to apply a portion of P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its right to do so, the appellee showed that it waived or condoned the interests due, because Articles 1235 and 1253 of the Civil Code provide:

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the promissory note that the principal obligation is the balance of the purchase price of the parcel of land known as Lot 7K-2-G, Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing in the contract. The liability of a surety is not extended, by implication, beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular; his liability is confined to such obligation, and he is entitled to have all payments made applied exclusively to said application and to no other.2 Besides, Article 1253 of the Civil Code is merely directory, and not mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say that there was a waiver or condonation on the interest due. It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of the appellee because the appellee accepted without reservation the subsequent agreement set forth in the surety bond despite its failure to provide that it also guaranteed payment of accruing interest. The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import.4 An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one,5 or wherein the old contract is merely supplemented by the new one.6 The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Dugo v. Lopena, supra ). In the instant case, the surety bond is not a new and separate contract but an accessory of the promissory note. WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the appellants. Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

SECOND DIVISION

[G.R. No. 120817. November 4, 1996]

ELSA B. REYES, petitioner, vs. SECRETARY OF JUSTICE, ASSOCIATION, INC., ELEAZAR, respondents.

COURT OF APPEALS, AFP-MUTUAL BENEFIT and GRACIELA

DECISION
TORRES, JR., J.:

Petitioner assails the respondent courts decision dated May 12, 1995 which sustained the two resolutions of the respondent Secretary of Justice, namely: 1) the Resolution dated January 23, 1992 affirming the resolution of the Provincial Prosecutor of Rizal dismissing the complaints of petitioner against private respondent Eleazar in I.S. Nos. 91-2853, 91-4328 to 29, 91-4585 to 91 and 914738 to 39 for violations of B.P. Blg. 22 and estafa under Article 315, par. 4, no. 2 (d) of the Revised Penal Code, and 2) the Resolution dated January 12, 1993 affirming the resolution of the City Prosecutor of Quezon City finding a prima facie case in I.S. No. 92-926 for violation of B.P. Blg. 22 and estafa filed by respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for brevity) against petitioner Reyes.
[1]

The facts as summarized by the respondent court are as follows:

Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic corporation engaged in credit financing. Graciela Eleazar, private respondent, is the president of B.E. Ritz Mansion International Corporation (BERMIC), a domestic enterprise engaged in real estate development. The other respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily to perform welfare services for the Armed Forces of the Philippines. A. Re: Resolution dated January 23, 1992 In her various affidavits-complaints with the Office of the Provincial Prosecutor of Rizal, Elsa Reyes alleges that Eurotrust and Bermic entered into a loan agreement. Pursuant to the said contract, Eurotrust extended to Bermic P216,053,126.80 to finance the construction of the latters Ritz Condominium and Gold Business Park. The loan was without collateral but

with higher interest rates than those allowed by the banks. In turn, Bermic issued 21 postdated checks to cover payments of the loan packages. However, when those checks were presented for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking Corporation (RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrusts notices and repeated demands to pay, Eleazar failed to make good the dishonored checks, prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal Code. Graciela Eleazar, in her counter-affidavits, asserts that beginning December 1989, Eurotrust extended to Bermic several loan packages amounting to P190,336,388.86. For its part, Bermic issued several postdated checks to cover payments of the principal and interest of every loan packages involved. Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon Committee. She was involved in a large scale scam amounting to millions of pesos belonging to Instructional Material Corporation (IMC), an agency under the Department of Education, Culture and Sports. Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it government securities, conducted its own investigation and found that after Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the same securities but failed to return them to AFPMBAI; and that the amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and others. When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic belonged to AFP-MBAI, she, as President of Bermic, requested a meeting with Eurotrust representatives. Thus, onFebruary 15,1991, the representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the real owners of the fund-AFP-MBAI and DECSIMC. This agreement was formalized in two letters dated March 19, 1991. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made payments to the latter. In fact, Bermic paid AFPMBAI P31,711.11 and a check of P1-million. However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated checks issued by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to hold the amounts in constructive trust for the real owners. But Reyes continued to collect on the other postdated checks dated

April 17 to June 28, 1991. Upon her counsels advise, Eleazar had the payment stopped. Hence, her checks issued in favor of Eurotrust were dishonored. After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the ground that when the latter assumed the obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing any criminal liability on the part of Eleazar. Reyes filed a petition for review of the said resolution with respondent Secretary of Justice contending that novation did not take place. The Secretary of Justice dismissed the petition holding that the novation of the loan agreement prevents the rise of any incipient criminal liability since the novation had the effect of canceling the checks and rendering without effect the subsequent dishonor of the already cancelled checks. B. Re: Resolution dated January 12, 1993 At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of BP 22 against Elsa Reyes with the office of the city prosecutor of Quezon city docketed as I.S. 92-926. The affidavit of Gudelia Dinapo a member of the investigating committee formed by AFP-MBAI to investigate the anomalies committed by Eurotrust/Reyes, shows that between August 1989 and September 1990, Eurotrust offered to sell to AFP-MBAI various marketable securities, including government securities, such as but not limited to treasury notes, treasury bills, Land Bank of the Philippines Bonds and Asset Participation Certificates. Relying on a canvass conducted by one of its employees, Cristina Cornista, AFP-MBAI decided to purchase several securities amounting to P120,000,000.00 from Eurotrust. From February 1990 to September 1990, a total of 21 transactions were entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed all those treasury notes from the AFP-MBAI for purposes of verification with the Central Bank. Despite AFPMBAIs repeated demands, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI which were dishonored upon presentment for payment. Eurotrust nonetheless made partial payment to AFP-MBAI amounting to P35,151,637.72. However, after deducting this partial payment, the amounts of P73 million treasury notes with

interest and P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI filed with the Office of the City Prosecutor of Quezon City a complaint for violation of BP 22 and estafa against Elsa Reyes. Reyes interposed the defense of novation and insisted that AFP-MBAIs claim of unreturned P73 million worth of government securities has been satisfied upon her payment of P30 million. With respect to the remaining P43 million, the same was paid when Eurotrust assigned its Participation Certificates to AFP-MBAI. Eventually, the Office of the City Prosecutor of Quezon City issued a resolution recommending the filing of an information against Reyes for violation of BP 22 and estafa. Whereupon, Reyes filed a petition for review with respondent Secretary of Justice. The latter dismissed the petition on the ground that only resolutions of the prosecutors dismissing criminal complaints are cognizable for review by the Department of Justice.
[2]

On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the respondent Secretary of Justice filed a petition for certiorari, prohibition andmandamus with the respondent court which, however, denied and dismissed her petition. Her motion for reconsideration was likewise denied in a Resolution dated June 27, 1995. Hence, this present petition.
[3] [4] [5]

The first Department of Justice Resolution dated January 23, 1992 which sustained the Provincial Prosecutors decision dismissing petitioners complaints against respondent Eleazar for violation of B.P. 22 and estafa ruled that the contract of loan between petitioner and respondent Eleazar had been novated when they agreed that respondent Eleazar should settle her firms (BERMIC) loan obligations directly with AFP-MBAI and DECS-IMC instead of settling it with petitioner Reyes. This finding was affirmed by the respondent court which pointed out that the first contract was novated in the sense that there was a substitution of creditor when respondent Eleazar, with the agreement of Reyes, directly paid her obligations to AFP-MBAI.
[6]

We cannot see how novation can take place considering the surrounding circumstances which negate the same. The principle of novation by substitution of creditor was erroneously applied in the first questioned resolution involving the contract of loan between petitioner and respondent Eleazar. Admittedly, in order that a novation can take place, the concurrence of the following requisites is indispensable:
[7]

1. there must be a previous valid obligation,

2. there must be an agreement of the parties concerned to a new contract, 3. there must be the extinguishment of the old contract, and 4. there must be the validity of the new contract.
Upon the facts shown in the record, there is no doubt that the last three essential requisites of novation are wanting in the instant case. No new agreement for substitution of creditor was forged among the parties concerned which would take the place of the preceding contract. The absence of a new contract extinguishing the old one destroys any possibility of novation by conventional subrogation. In including that a novation took place, the respondent court relied on the two letters dated March 19, 1991, which, according to it, formalized petitioners and respondent Eleazars agreement that BERMIC would directly settle its obligation with the real owners of the funds - the AFP MBAI and DECS IMC. Be that as it may, a cursory reading of these letters, however, clearly and unmistakably shows that there was nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-MBAIs consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAIs intention to be the substitute creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires an agreement among the three parties concerned - the original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. Hence, there is no novation if no new contract was executed by the parties. Article 1301 of the Civil Code is explicit, thus:
[8] [9] [10]

Conventional subrogation of a third person requires the consent of the original parties and of the third person.
The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. There must be an express intention to novate - animus novandi. Novation is never presumed. Article 1300 of the Civil Code provides inter alia that conventional subrogation must be clearly established in order that it may take effect.
[11] [12]

Notwithstanding our disagreement with the decision of the respondent court and the ruling of the Secretary of Justice that a novation by substitution of creditor has taken place, we opt not to disturb the Resolution of the respondent Secretary of Justice dated January 23, 1992 finding a prima facie case against the petitioner in as much as it had already become final. It appears that petitioner filed two motions for reconsideration to the said resolution, the first one on

February 6, 1992 and the second one in June 2, 1992. These two motions were, however, denied by the respondent Secretary of Justice, the last denial was contained in a Resolution dated June 25, 1992 which was received by petitioner on July 9, 1992. Petitioner made no prompt attempt to question the said resolutions before the proper forum. It took her almost seventeen months (from July 9, 1992 to February 2, 1994) to challenge the January 23, 1992 Resolution when she filed the petition for certiorari with the respondent court on February 2, 1994, which resolved to affirm the aforesaid resolution of the Secretary of Justice.
[13]

Petitioner who chose her forum but unfortunately lost her claim is bound by such adverse judgment on account of finality of judgment, otherwise, there would be no end to litigation. Litigation must end and terminate sometime and somewhere, and it is essential to an effective administration of justice that once a judgment has become final, the issue or cause therein should be laid at rest. While the respondent Secretary of Justice was in error in applying the rule on novation in the January 23, 1992 Resolution, such irregularity, however, does not affect the validity of the proceedings in the Department of Justice. Erroneous application of a legal principle cannot bring a judgment that has already attained the status of finality to an absolute nullity under the well entrenched rule of finality of judgment. The basic rule of finality of judgment is grounded on the fundamental principle of public policy and sound practice that at the risk of occasional error, the judgment of court and award of quasi-judicial agencies must become final at some definite date fixed by law.
[14] [15]

We find no plausible explanation nor justifiable reason offered by petitioner for the obvious delay or omission to take a timely action against the questioned resolution. She is apparently guilty of laches which bars her from seeking relief in a court of law after she intentionally and unreasonably fails to guard of her rights. Laches is the failure or neglect for an unreasonable and unexplained length of time to do that which by exerting due diligence could/should have been done earlier. Petitioners omission to assert her right to avail of the remedies in law within a reasonable time warrants a presumption that she abandoned it or declined to assert it. The law serves those who are vigilant and diligent and not those who sleep when the law requires them to act.
[16] [17]

It bears emphasis that the above pronouncement we laid down applies only pro hac vice. This Court in affirming the questioned resolution despite the erroneous application of a legal principle acted according to what the peculiar circumstances of the instant case demand. Its factual setting led us to consider that to sustain the resolution is but the proper action to take in this particular case. Regarding the second Resolution of respondent Secretary of Justice dated January 12, 1993 which affirms the City Prosecutors finding of a prima facie case against petitioner for violation of B.P. Blg. 22 and estafa involving the contract of sale of securities, petitioner avers that she could not be held criminally liable for the crime charged because the contract of sale of securities between

her and respondent AFP-MBAI was novated by substitution of debtor. According to petitioner, the obligation assumed by respondent Eleazar pursuant to the authority given by her to respondent Eleazar in a letter dated March 19, 1991 was precisely her (petitioners) obligation to respondent AFP-MBAI under the contract of sale of securities. She claims that private respondent Eleazar, instead of fulfilling her obligation under the contract of loan to pay petitioner the amount of debts, assumed petitioners obligation under the contract of sale to make payments to respondent AFP-MBAI directly.
[18]

This contention is bereft of any legal and factual basis. Just like in the first questioned resolution, no novation took place in this case. A thorough examination of the records shows that no hard evidence was presented which would expressly and unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. Article 1293 of the Civil Code is explicit, thus:
[19]

Novation which consists in substituting a new debtor in the place of the original one, may be made even without or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
The consent of the creditor to a novation by change of debtor is as indispensable as the creditors consent in conventional subrogation in order that a novation shall legally take place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to release petitioner from her responsibility, does not constitute novation, at most, it only creates a juridical relation of co-debtorship or suretyship on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce the obligation against the petitioner. In Ajax Marketing and Development Corporation vs. Court of Appeals, which is relevant in the instant case, we stated that [20]

In the same vein, to effect a subjective novation by a change in the person of the debtor, it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. There is no novation without such release as the third person who has assumed the debtors obligation becomes merely a co-debtor or surety. XXX. Novation arising from a purported change in the person of the debtor must be clear and express XXX.
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law jurisprudence, the principle - novatio non

praesumitur - that novation is never presumed. At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito basically extinguishing the old obligation for the new one. The foregoing elements are found wanting in the case at bar. ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995, the same is hereby AFFIRMED in all respects. SO ORDERED. Regalado (Chairman), Romero, Puno, and Mendoza, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. L-47369 June 30, 1987 JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.: This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended. In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided:

(b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not; (c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the abovementioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not. We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors. xxx xxx xxx (e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses. xxx xxx xxx When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be rendered:

b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and] c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966; xxx xxx xxx Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence. In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B
Surety, the dispositive portion of which reads as follows;

Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts: On P14,000.00 from September 27, 1966;

On P4,000.00 from November 28, 1966; On P4,000.00 from December 14, 1966; On P4,000.00 from January 19, 1967; On P8,000.00 from February 13, 1967; On P4,000.00 from March 6, 1967; On P8,000.00 from June 24, 1967; On P8,000. 00 from September 14, 1967; On P8,000.00 from November 28, 1967; and On P8,000. 00 from February 26, 1968 until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable. There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice. Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva. Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law. The issues we must confront in this appeal are: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements; 2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and 3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond. We address these issues seriatim.

1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., asTrustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00; WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO); WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION,respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds; WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . . l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the allocation of WARVETS; xxx xxx xxx 6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly accredited to do

business with the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT; xxx xxx xxx 9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied) There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3 We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof. 5 If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7 Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8 Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case, the parties to the new obligation

expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all.

What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that: [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB. 2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety . The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitionersindemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case. The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties. There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R &

B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079: [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied) The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held, merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. 12 In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. 3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of

indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB.

Summarizing, we hold that : (1) The Surety Bond was not novated by the Trust Agreement. Both agreements can coexist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. (2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's

consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and (3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners. SO ORDERED. Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 79642 July 5, 1993 BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner, vs. TROPICAL HUT FOOD MARKET, INC. and THE HONORABLE COURT OF APPEALS, respondents. Gozon, Berenguer, Fernandez & Defensor Law Offices for petitioner. Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles Law Office for respondent.

FELICIANO, J.: Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private respondent Tropical Hut Food Market. Inc. ("Tropical") executed an 28 November 1980 a contract of lease. Broadway, as lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex for a period of ten (10) years, commencing from 1 February 1981 and expiring on 1 February 1991, "renewable for a like period upon the mutual agreement of both parties." The rental provision of this contract reads as follows: 3. BASIC RENTAL ON LEASED PREMISES LESSEE agrees to pay LESSOR a basic monthly rental on the leased promises in the amount of ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00) Philippine Currency, during the first three (3) years of this lease contract from February 1, 1981 to February 1, 1984, allowing two (2) months grace period on rental for renovation/improvements on the leased promises from December 1, 1980 to January 31. 1961. The basic rental shall be increased to ONE HUNDRED FORTY THOUSAND PESOS (P140,000.00) per month during the next three (3) years from February 1, 1984 to February 1, 1987, and ONE HUNDRED SIXTY FIVE THOUSAND PESOS (P165,000.00) per month during the last four (4) years from February 1, 1967 to February 1, 1991. The first basic monthly rental shall be paid in advance to the LESSOR on or before December 1, 1980. Succeeding basic monthly rentals starting March, 1981 be paid by LESSEE to LESSOR, without the necessity of a previous demand or the services of a collector, within the first five (5) days of the month to which said rental shall correspond, at the Office of the LESSOR at Broadway Centrum. During the first year of the lessor-lessee relationship between Broadway and Tropical, no problems were apparently experienced by either of them. On 5 February 1982, however,

Tropical wrote to Broadway stating that Tropical's rental payments to Broadway were equivalent to 7.31% of Tropical's actual sales of P17,246,103.00 in 1981, while "[Tropical's] gross profit, rate [was] only 10%." Tropical went on to say that the rental specified in that contract had been "based merely on [Tropical's) projections that [Tropical] could reach an average sale of P120,000.00 a day;" however, Tropical's total sales projection for 1982 was only P23,000,000.00. This would mean again a rental rate of 6.08% of sales "which is too high for Tropical Hut-Broadway considering that the present rental rates of other Tropical branches are even below the normal rate of 1.5% on sales." Accordingly. Tropical made the following proposal to Broadway: [Tropical] would therefore propose to reduce the present monthly rental to P50,000.00 or 2.0% of their monthly sales whichever is higher, up to the end of the third year after which it shall again be subject to renegotiations. (Emphasis supplied) On 4 March 1962, Broadway responded to Tropical's latter by stating that it (Broadway) believed that the problems of Tropical's supermarket in the Broadway Centrum were within the control of Tropical's management. Broadway offered six (6) suggestions which, if implemented, should result in increased sales for Tropical of at least 15% in the succeeding months. In the meantime, Broadway made the following counter-proposal consisting of conditional reduction of the stipulated rental by P20,000.00 for a limited period of four (4) months: . . . Meantime, we are agreeable to a conditional reduction of your rental by P20,000.00 per month for four months starting this month on a trial basis; that is, the P20,000.00 per month reduction in rental will be paid back to us and spread over the last six months of the years should the target of 15% increase in sales be achieved by the fourth month. However, should your sales not increased by 5% in spite of the improvements you have introduced, the reduction in rental of P20,000.00 per month of P80,000.00 for four months will not have to be paid anymore. In other words, the monthly reduction in rental is conditioned upon your not achieving the desired 15% increased in sales volume by the fourth month assuming you implement all of the above changes. It is understood, however, that any reduction in rental extended is merely a temporary suspension of the original rate of rental stipulated in our contract of lease and not an amendment thereto. 2 (Emphases supplied) Officers of Tropical met with the President of Broadway and during this conference, Tropical's officers recounted the "low sales volume" that the Tropical Supermarket in the Broadway Centrum was experiencing, apparently as a result of the temporary closure of Doa Juana Rodriguez Avenue. 3 This Avenue is a major thoroughfare adjacent to the Broadway Centrum and was then closed to vehicular traffic because of the road expansion project of the Government. Broadway's President, Mrs. Cita Fernandez Orosa, was aware that the temporary closure of the Doa Juana Rodriguez Avenue had affected the business of all the Broadway's tenants, including Tropical. She, therefore, agreed on 20 April 1982 to a "provisional and temporary agreement" which agreement needs to be quoted in full: Further to our letter dated April 6, 1982, we hereby make formal our provisional and temporary agreement to a reduction of your monthly rental on the basis of 2% of gross receipts or P60,000.00 whichever is higher. Gross

receipts should be construed as the total sales and receipts from sublessees of your area and from whatever source arising from the area leased by you. This Provisional arrangement should not be interpreted as amendment to the lease contract entered into between us. We invite your attention to the fact that, as agreed upon, you have committed to return by the end of April a certain portion of your leased premises totalling 466.56 square meters and presently occupied by your drug store and coffee shop outlets and half of the hallway. Finally we wish to remind you that the temporary alteration in rental is conditioned on your good faith implementation an the suggestions we conveyed to you in our letter of March 4, 1982 regarding the operations of the supermarket and shall not commence until the area mentioned above to be surrendered is actually surrendered. Should you find the foregoing in accordance with our previous verbal agreement, please signify your acceptance by signing above the word "conforme." Thank you for your, continued patronage. C o n f o r m e: Very, truly yours, Tropical Hut Food Broadway Centrum Market, Inc. Condominium Corp. By: (Signed) By: (Signed) 4 ___________________ _____________________ (Emphasis supplied). Months later, the road expansion project at the Doa Juana Rodriguez Avenue was completed. By a letter dated 15 December 1982, addressed to Tropical, Broadway referred to the rental which "as of last, April 20, 1982, was provisionally reduced" to P60,000.00 a month or 2% of gross receipts whichever is higher "without waving any of [Broadway's] rights under our rental agreement." Broadway then went on to say that: After careful deliberation, we regret that this concession can no longer be extended in its present form. We, therefore, advising that we shall increase the monthly rental to P100,000.00. This increase, however, shall be implemented gradually as follows: P80,000.00 effective January, 1983 and P100,000.00 effective April, 1993 until further notice. Considering the fact that you collect a monthly gross rental of P24,600.00 from your concessionaires (other forms of income not considered), the previous temporary arrangement afforded you mare than sufficient respite from whatever business constraints you may have had then. The consequent effect of said temporary arrangement is your payment of a monthly rental of P35,400.00 or an effective rate of P14.32 only per square

mater. We are sure that you will agree with us that this rate is very low and cannot therefore be sustained indefinitely. 5 (Emphases supplied). While the rental rate above fixed by Broadway was higher than that set out in the provisional and temporary agreement of the parties of 20 April 1982, the rates so fixed were nonetheless lower than that stipulated in their contract of 28 November 1980. Tropical, however, was not satisfied with the adjusted rates fixed by Broadway. In a letter dated 4 January 1983, Mr. Luis Que of Tropical wrote to Broadway's President appealing to Broadway "to fix our monthly rental at P60,000.00 or 2% of our gross receipts whichever is higher." In this letter, Mr. Que expressly hoped that [Broadway would] understand our position, and may we reiterate our appeal to maintain our presentprovisional rates until such time that more sales are achieved. (Emphasis supplied) Mr. Luis Que's appeal was, however, found unsatisfactory by Broadway. In a letter dated 13 January 1983, Broadway said: We are replying to your letter of January 4, 1983. While it may be admitted that you are incurring losses in your operations, the same is not a monopoly experienced solely by your corporation. Broadway Centrum itself has had its share of business setbacks but we have nevertheless decided to absorb part of your losses last year by agreeing to a temporary reduction of your monthly rental. However, as we have stated in our December 15, 1982 letter, this concession can no longer be extended in its present form which continues to be a considerable reduction on the provisions of our existing long term contract. Consequently, we have to reiterate our advise on you regarding your rental increased. 6 (Emphasis supplied). Tropical continued its renegotiation efforts. In another letter dated 29 March 1983, Broadway's President wrote to Mr. Luis Que turning down his request for reconsideration. Broadway, however, was evidently desirous of keeping Tropical as a tenant if possible and so stated that the P100,000.00 monthly rental would begin, not on April 1983 as stated in its letter of 15 December 1982 but rather on July 1983. By a letter, dated 9 April 1983, the Credit and Collection Officer of Broadway sent Mr. Luis Que a bill for P81,320.00 representing the accrued differential of P20,000.00 per month between the rental which Broadway was willing to grant to Tropical (P80,000.00 per month starting 1 January, 1983) and up to 30 June 1983)and the P60,000.00 per month or 2% of gross receipts whichever is higher, under the temporary and provisional letter-agreement of 20 April 1982. Tropical responded to the statement of account sent by Broadway by pleading, once more, in a letter dated 15 April 1983, that Tropical's present rentals of P60,000.00 monthly or 2% of gross receipts, whichever is higher, "would at least stay until we have somehow recovered," to which Tropical proposed, however, to add 20% of its income from concessionaires(i.e., concessionaires at Tropical-Broadway Supermarket). 7 Tropical's last counter-offer was not acceptable to Broadway. In a letter dated 22 April 1983, Broadway's President wrote to Mr. Luis Que stating that "the matter was no longer negotiable": We are responding to your letter of April 15, 1983 proposing a counter offer to the payment of your rentals. You will remember that in our last meeting our

position on the matter has been unequivocably stated. The temporary arrangement of reducing your monthly rentals was extended as an assistance. This had caused us to lose P620,000.00 on rental income. You will agree that this is a sizeable amount which had tremendous adverse effects on our financial position.This can no longer be sustained. We reiterate, therefore, that the matter is no longer negotiable and we strongly urge you to settle your obligation to minimize the 2% penalty on delayed payments provided for in our contract. We trust that you will see the merits of the foregoing. 8 (Emphasis supplied). On 5 May 1983, Mr. Mariano Gue, adopting a new and much harder posture than Mr. Luis Que had, wrote to Broadway as follows: . . . I could only confirm what I told you in our conference that we cannot afford any increase in rentals in the space occupied by us at Broadway Centrum. And I could only repeat what is contained in the letter sent you by our Mr. Luis Que dated April 15, 1983. We cannot agree to an increase in rentals at this time. To do so would put us in a financial situation worse then we were in before we agreed to reduce the leased premises and adjust the rentals. Our position is that you cannot arbitrarily and unilaterally increase the rentals. This is a matter which should be mutually agreed upon by us and as stated, we are not in a financial position to agree to such an increase. 9 (Emphasis supplied). On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que expressing shock and dismay at the posture suddenly adopted by the latter. Mrs. Orosa wrote: We are replying to your letter of May 5, 1983 categorically stating that your position is that we cannot arbitrarily and unilaterally increase the rentals. We are appealed by the apparent attempt to distort the very crystal clear arrangement we reached last April 20, 1982 anent the temporary alteration of your rentals. We hereby attached a xerox copy of said agreement with our underscores to refresh your memory. We have exhaustively, repeatedly but patiently labored to explain to you the temporary and provisional arrangement to reduce your monthly rentals is not amendment to the lease contract and this was done merely as an assistance. There is, therefore, absolutely no basis to your claim that we cannot arbitrarily and unilaterally increase the rentals. We strongly feel that we should have instead been the recipient an act of gratitude from you. In view therefore of your obstinate decision to blur your view and continue refusing to heed our demands, we are hereby formally serving you notice that if you still fail to pay your back accounts amounting to P100,000.00 exclusive of penalty charges by Monday, May 9, 1983, paragraph five (5) of our lease contract will be implemented. 10 (Emphasis supplied). A week later, on 12 May 1983, Tropical filed a Complaint before the Regional Trial Court, Quezon City, seeking a restraining order or preliminary injunction to prevent Broadway from

invoking and implementing Section 5 of their Lease Contract and asking the court to decree that the, rental provided for in the letter-agreement of 20 April 1982 "should subsist while the low volume of sales [of Tropical] still continues." A restraining order was issued by the trial court ex parte the next day and a preliminary injunction was granted on 2 June 1983, upon Tropical's filing of a bond in the amount of P100,000.00. On 6 January 1984, while trial before the Regional Trial Court was pending, Broadway informed Tropical that the basic rental would be increased to P140,000.00 per month during the next three (3) years from 1 February 1984 to 1 February 1987 in accordance with paragraph (3) of the Lease Contract dated 28 November 1980. Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the issue of whether or not the letter-agreement dated 20 April 1982 had novated the Lease Contract of 28 November 1980. Tropical alleged that the original Contract. of Lease had been novated in its principal conditions i.e., the area subject to the lease and the lease rentals by the letter-agreement dated 20 April 1982 and that the reduced lease rates set out in the letter-agreement are to subsist while Tropical's sales volume "remains low." Petitioner, upon the other hand, vehemently denied that the original Lease Contract had been novated by the letter-agreement of 20 April 1982. In time, the trial court rendered its decision dated 14 March 1985, the dispositive portion of which reads as follows: WHEREFORE, judgment, is hereby rendered in favor of the plaintiff and against the defendant as follows: 1. The writ of preliminary injunction previously issued is made permanent; 2. The reduced rental provided for in the letter-agreement of April 20, 1982 (Exh. "G" or "5") shall subsist or be effective during the period that a plaintiff cannot achieve its Projected daily sales average as envisioned in its feasibility study; 3. The contract of leased dated November 28, 1980 (Exh. "A" or "1") is declared as partially novated or modified by the letter-agreement; 4. The amount of monthly rentals payable by plaintiff for the reduced area of the leased promises after plaintiff has achieved its projected daily sales average is fixed as follows: February 1, 1981 to February 1, 1984 P39.45 per square meter or P101,609.00; February 1, 1984 to February 1, 1987 P46.02 per square meter or P118.530.00; February 1, 1987 to February 1, 1991 P54.24 per square mater or P139,702.00. Correspondingly, defendant's counterclaim is dismissed.

Costs against the defendant. So Ordered. 11 (Emphasis supplied). On appeal, the Court of Appeals affirmed the decision of the trial court. The Court of Appeals held that the letter-agreement dated 20 April 1982 had novated the principal conditions of the Lease Contract. The Court of Appeals also hold that the reduction in the rentals was not entirely a gratuitous accommodation on the part of Broadway since the reduction of the leased space by 466.56 square meters, possession of which was returned by Tropical to Broadway, constituted valuable consideration for the reduction of rentals while the "low sales volume" of Tropical continued. The Court of Appeals corrected a microscopic arithmetical error committed by the trial court and in effect directed Tropical to pay, when its "low sales volume" shall hove been overcome, the following rental rates: From 1 February 1984 up to 1 February 1987 P118.529.15 per month; From 1 February 1987 up to 1 February 1991 P139,695.07 per month. Petitioner Broadway now asks us to review and set aside the Decision of the Court of Appeals. The sole issue confronting us here is Whether or not the latter-agreement dated 20 April 1982 had novated the Contract of Lease of 28 November 1980. We start with the basic conception that novation is the extinguishment of an obligation by the substitution of that obligation with a subsequent one, which terminates it, either by changing its object or principal conditions or by substituting a now debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 12 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved an obligation in extinguished and a news one is created In lieu thereof. 13 If objective novation is to take place, it is essential that the new obligation expressly declare that the old obligation to be extinguished, or that now obligation be on every point incompatible with the old one. 14 Novation is never presumed; it must be established either by the discharge of use old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly manifested. 15 It is hardly necessary to add that the role that novation is never presumed, is not avoided by merely referring to partial novation. The will to novate, whether totally or partially, must appear by express agreement of the parties, by their acts which are too clear and unequivocal to be mistaken. Applying the above principles to the case at bar, it is entirely clear to the court that the letteragreement of 20 April 1992 didnot extinguish or alter the obligations of respondent Tropical and the rights of petitioner Broadway under their lease contract dated 28 November 1980. In the first place, the letter-agreement of 20 April 1982 was, by its own terms, a " provisional and temporary agreement to a reduction of [Tropical's] monthly rental ." The letteragreement, as noted earlier, also contained the following sentence:

This provisional agreement should not be interpreted as amendment to the contract entered into by us. The same letter also referred to the reduction of rental as a "temporary alteration in rental" which was "conditioned" upon good faith implementation by Tropical of the six (6) principal suggestions Broadway had conveyed to Tropical concerning improvement of the operations of Tropical's supermarket at the Broadway Centrum. The non-specification by Broadway (who had prepared the letter-agreement an which Tropical placed its conforme) of the period of time during which the reduced rentals would remain in effect, only meant that Broadway retained for itself the discretionary right to return to the original contractual rates of rental whenever Broadway felt it appropriate to do so. There is nothing in the text of the 20 April 1982 letter-agreement to suggest that the reduced concessional rental rates could not be terminated Broadway without the consent of Tropical. In the second place, the formal notarized Lease Contract of 28 November 1980 made it clear that a temporary and provisional concessional reduction of rentals which Broadway might grant to Tropical was not to be construed as alteration or waiver of any; of the terms of the Lease Contract itself. That Lease Contract provided, among other things, as follows: 32. NON-WAIVER OF CONDITIONS & COVENANTS The failure of the LESSOR to insist upon strict performance of any of the terms, conditions and stipulation hereof shall not be deemed a relinquishment or waiver of any right or remedy that said LESSOR may have, nor shall it be construed as a waiver of any subsequent breach of, or default in the terms, conditions and covenants hereof, which terms, conditions and covenants shall continue under this Contract and shall be deemed to have been made unless express in writing and signed by the LESSOR. 16 (Emphasis supplied). In the third place, the course of negotiations between Broadway and Tropical before the execution of their letter-agreement of 20 April 1982, quite clearly indicated that what they were negotiating was a temporary and provisional reduction of rentals. Thus, Tropical itself, in its letter to Broadway dated 5 February 1982, quoted earlier, had proposed reduction of rentals from the stipulated contractual rates to P50,000.00 per month or 2% of monthly sales, whichever is higher, "up to the end of the third year after which it shall again subject, to renegotiation." Any reduction in rental extended is merely a temporary suspension of the original rate of rental stipulated in our contract of lease and not an amendment thereto. In the fourth place, the course of discussions between Broadway and Tropical, as disclosed in their correspondence, afterexecution of the 20 April 1982 letter-agreement, shows that the reduction of rentals agreed upon in the letter-agreement was not to persist, for the rest of the life of the ten (10)-year Contract of Lease. That correspondence is bereft of any, sign of mutual agreement or recognition that the reduced rentals had so permanently replaced the contract stipulations on rentals as to have become immune to change save by common consent of Tropical and Broadway. Quite the contrary. In Broadway's letter to Tropical dated 15 December 1982, Mrs. Orosa referred to the letter-agreement of 20 April 1982 which "provisionally reduced to P60,000.00 a month or 2% of [Tropical's] gross receipts, whichever is higher, without waiving any of our right under our rental agreement." This 15 December 1982 letter, quoted earlier, in an obvious effort to be conciliatory, did not try to go back immediately to the contract stipulation of P120,000.00 monthly rental, from 1 February 1981

to 1 February 1984. Instead, Broadway proposed P80,000.00 per month effective January 1983 and P100 000.00 per month effective April 1983 "until further notice." In its reply letter of 4 January 1983, Tropical appealed to Broadway to maintain "our present provisional rates until such time that more sales are achieved." In its rejoinder of 13 January 1983, Broadway stressed that though it had its own share of business set backs, it had "nevertheless decided to absorb part of [Tropical-Broadway Centrum's] losses last year by agreeing to a temporary reduction of the monthly rental." At the same time, Broadway stressed that "this concession" could no longer be extended "in its present form which continues to be a considerable reduction on the provisions of our existing long-term contract." Finally, in his last letter of 15 April 1983, Mr. Luis Que of Tropical appealed once more to Broadway to continue the reduction in rental under the 20 April 1982 letteragreement "until we have somehow recovered" and then, at the same time, offered to increase that reduced rental by adding to it 20% of Tropical's income from concessionaires at its Broadway Centrum Supermarket. Turning down Mr. Que's last counter-officer, Mrs. Orosa of Broadway on 22 April 1983 once again stressed that: The temporary arrangement of reducing your monthly rentals was extended as an assistance. This had caused us to lose P620,000.00 on rental income. (Emphasis supplied). It is thus clear to the Court that Tropical was attempting to modify its formal Lease Contract with Broadway by implying or inserting terms into the 20 April 1982 letter-agreement which are not found in that letter-agreement. Under both the Civil Code and our case law on novation and as well the express terms of the 28 November 1980 Contract of Lease, only evidence of the clearest and most explicit kind will suffice for that purpose. Tropical's theory that Broadway had agreed in the 20 April 1982 letter-agreement to maintain the reduced rental so long as Tropical was suffering from a "low volume of sales" appears to us as an afterthought, imaginative and original no doubt, but still an afterthought. Tropical did not pretend to have reached agreement with Broadway on what level of sales would constitute the critical "low volume of sales." And so, the trial court ended up with the truly extraordinary recourse of referring to the feasibility study that Tropical had made on it's own, before Tropical and Broadway executed their 28 November 1980 Contract of Lease. That feasibility study was no mare than an expression of Tropical's own expectations when it entered into the 1980 Contract of Lease; yet the trial court held that the reduced rentals were to remain in effect until Tropical achieved its own expectations concerning its sales at the Broadway Centrum, which presumably were not "low." Tropical, in its Memorandum, stressed that Broadway had supplied the number of customers which Tropical had inputted in its feasibility study. Whatever number Broadway may have submitted to Tropical in their pre-contract negotiations was no more than an estimate or speculation as to the number of customers that might be coming into the then proposed Tropical Supermarket at the Broadway Centrum. We do not understand Tropical to have suggested that that number constituted a representation on the part of Broadway which turned out to be false and which vitiated Tropical's consent to the original 1980 Contract, of Lease. Neither do we understand Tropical to be suggesting that Broadway had warranted to Tropical that a certain number of customers would in fact be visiting the then proposed Tropical Supermarket at Broadway Centrum. The 1980 Contract of Lease itself was totally silent as to any such estimated or expected number of customers either as a representation or as a warranty on the part, of Broadway. That silence rendered any estimate which Broadway may have conveyed to Tropical, quite immaterial. 17 We turn to the holding of the Court of Appeals that the surrender of 466.56 square meters of leased space by Tropical to Broadway constituted valuable consideration, acceptance of

which disabled Broadway from insisting on the original terms of their Contract of Lease. Under the view we have taken above of the legal effects of the 20 April 1982 letteragreement, this supposed valuable consideration appears quite immaterial. We must, nonetheless, note that comparison of the lease rentals reduced and the floor space surrendered yields a strong presumption that Broadway could not have agreed to the supposed partial novation. The rentals were reduced by Broadway by 50% (from P120,000.00 to P60,000.00 per month). The floor space was reduced by slightly over 15% only. No substantial relationship existed between the amount of the reduction of rental and the area of the space returned by Tropical. Hence, no reasonable presumption can be indulged that that, return of part of the leased space constituted consideration for the reduction of rental rates. In that Contract of Lease, moreover, the rentals were stipulated for a specified portion of the Broadway Centrum having a total floor area of 3,042.19 square meters; the rental rate was not specified on a per square meter basis. We conclude that the Court, of Appeals fell into reversible error when it affirmed the decision of the trial court. We believe and so hold that the letter-agreement of 20 April 1982 did not constitute a novation, Whether partial or total, of the 28 November 1980 Contract of Lease between Broadway and Tropical. WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby GIVEN DUE COURSE, and the Comment filed by private respondent Tropical is hereby TREATED as its ANSWER and the Decision dated 30 January 1987 of the Court, of Appeals and the Decision dated 14 March 1985 of the trial court are hereby REVERSED and SET ASIDE. A new judgment is hereby entered dismissing the complaint filed by private respondent Tropical, and requiring private respondent Tropical to pay to petitioner Broadway the following rental rates: 1. P80,000.00 per month from 1 January 1983 up to 30 June 1983; 2. P100,000.00 per, month from 1 July 1983 up to 31 January 1984; 3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and 4. P160,000.00 per month from 1 February 1987 to 31 January 1991. The penalty of 2% per month on unpaid rentals specified in Section 5 of the 28 November 1980 Contract of Lease is, in the exercise of the Court's discretion, hereby equitably REDUCED to ten percent (10%) per annum computed from accrual of such rentals as above specified until fully paid. In addition, private respondent Tropical shall pay to petitioner Broadway attorney's fees in the amount of ten percent (10%) (and not twenty percent [20%] as specified in Section 33 of the Contract of lease) of the total amount due and payable to petitioner Broadway under this Decision. Costs against, private respondent. SO ORDERED. Bidin, Davide, Jr. and Melo, JJ., concur. Romero, J., took no part.

THIRD DIVISION

[G.R. No. 136780. August 16, 2001]

JEANETTE D. MOLINO, petitioner, vs. SECURITY INTERNATIONAL CORPORATION, respondent. DECISION

GONZAGA-REYES, J.:

DINERS

Assailed by this petition for review on certiorari is the decision of the Court of Appeals dated September 28, 1998[1] which held petitioner liable as surety for the outstanding credit card debts of Danilo Alto with herein respondent corporation. The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing of this case:

The Security Diners International Corporation (SDIC) operates a credit card system under the name of Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and payment of services from its member establishments to be reimbursed later on by the cardholder upon proper billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the cardholder to purchase goods and pay services from member establishments in an amount not exceeding P10,000.00; and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay services from member establishments in unlimited amounts. One of the requirements for the issuance of either of these cards is that an applicant should have a surety. On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form (Exhibit A) and Jeanette signed the Surety Undertaking (Exhibit A-5). Attached to the Application Form was an Agreement (Use of Diners Club Card), paragraph 16 of which reads: 16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to Security Diners who shall be jointly and severally liable with the cardholder to pay Security Diners all the obligations and charges incurred and credit extended on the basis of the card. In the event the surety/sureties furnished the cardholder are discharged the cardholder must furnish a new

surety or sureties acceptable to Security Diners within thirty (30) days. Otherwise the cardholders privileges shall be automatically terminated in accordance with Section 11 hereof. The Surety Undertaking signed by Jeanette states: I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to pay SECURITY DINERS INTERNATIONAL CORPORATION, hereinafter referred to as Security Diners all the obligations and charges including but not limited to fees, interest, attorneys fees and all other costs incurred by him/her in connection with the use of the DINERS CLUB CARD in accordance with the terms and conditions governing the issuance and use of the Diners Club Card. Any change or novation in the agreement or any extension of time granted by SECURITY DINERS to pay such obligations, charges and fees, shall not release me/us from this Surety Undertaking, it being understood that said undertaking is a continuing one and shall subsist and bind me/us until all such obligations, charges and fees have been fully paid and satisfied. It is understood that the indication of a credit limit to the cardholder shall not relieve me/us of liability for charges and all other amounts voluntarily incurred by the cardholder in excess of the credit limit. On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to Danilo Diners Card No. 365102932160006. The latter used this card and initially paid his obligations to SDIC. On February 8, 1988, Danilo wrote SDIC a letter (Exhibit B) requesting it to upgrade his Regular (Local) Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her approval. The latter obliged and so on March 2, 1988, she signed a Note (Exhibit C) which states: This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with Card No. 3651-203216-0006 and 3651-203412-5007 to upgrade their card from regular to diamond edition. Danilos request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card and made purchases (Exhibits D, D-1 to D7) from member establishments. On October 1, 1988 Danilo had incurred credit charged plus appropriate interest and service charges in the aggregate amount of P166,408.31. He defaulted in the payment of this obligation.

SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9, 1988, SDIC filed an action to collect said indebtedness against Danilo and Jeanette. This was docketed in the Regional Trial Court of Makati, Branch 145 as Civil Case No. 88-2381. xxx [2]
Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent moved to have the complaint dismissed against him, without prejudice to a subsequent re-filing. Petitioner was left as the lone defendant, sued in her capacity as surety of Danilo. In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that her liability under the Surety Undertaking was limited to P10,000.00 and that she did not expressly and categorically agree to act as surety for Danilo in an amount higher than P10,000.00.[3] By way of counterclaim, she asked for moral and exemplary damages. On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of respondent to prove its case by a preponderance of the evidence. It found that while petitioner clearly bound herself as surety under the terms of Danilo Altos Regular Diners Club Card, there was no evidence that after the card had been upgraded to Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit C or Exhibit 1, inter alia, which was a note bearing petitioners signature certifying to her approval of Danilos request to have his card upgraded should be read simply as a statement of no objection to his request for upgrading, and not as an assumption of liability for the debts that Danilo may later owe through the said card.[4] The trial court also took note of the testimony of Alfredo Vicente, an officer of respondent, who opined that the consent to be bound as surety to an upgraded card should be categorical[5] and not in a simple no objection form. The trial court went on further to state that petitioner was not liable for any amount, not even for P10,000.00 which is the maximum credit limit for Regular Diners Club Cards, since at the time of the upgrading Danilo had no outstanding credit card debts.[6] This is evident from the fact that Danilos request for upgrading was approved, since one of the requirements for the approval of a request for the upgrading of a credit card from Regular to Diamond is that the applicant must have paid all his billings for the last three months prior to his request. Hence, the trial court disposed of the case with these pronouncements:

WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D. Molino-Alto for failure of the plaintiff to prove its case by a clear preponderance of evidence. Said defendants counterclaim is also dismissed. No pronouncement as to costs.

SO ORDERED.[7]
The Court of Appeals found contrary to the lower court, and declared that the Surety Undertaking signed by petitioner when Danilo Alto first applied for a Regular Diners Club Card clearly applied to the unpaid purchases of Danilo Alto under the Diamond card. In holding thus, the Court of Appeals referred to the terms of the said Surety Undertaking, which stated that any change or novation in the agreement on the use of the Diners Club card does not release the surety from his obligations, it being understood that the undertaking is a continuing one which subsists until all obligations and charges under the subject credit card are paid and satisfied. It also cited Pacific Banking Corporation vs. Intermediate Appellate Court,[8] a 1991 decision which held the surety liable to the extent of the credit cardholders indebtedness, under the clear terms of the Guarantors Undertaking that the surety signed with the credit card company. The Court of Appeals further declared that it was erroneous of the trial court to conclude that petitioner was completely relieved of liability under Danilo Altos credit card since the Surety Undertaking she signed remained valid and enforceable even after the upgrading of the said card; besides, petitioner herself admitted that she was liable to the extent of P10,000.00. Additionally, the Court of Appeals reduced the attorneys fees (stipulated in the Agreement for the Use of Diners Club Card) from 25% to 10% of the amount due, judging this to be a more reasonable rate under the circumstances. The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendant-appellee Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners International, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum and 2% per month from November 9, 1988 until the obligation is fully paid; 2. The amount equivalent to 10% of the obligation mentioned in the preceding paragraph as attorneys fees; and 3. Costs.

SO ORDERED.[9]
Petitioners motion for reconsideration of the above decision was denied for lack of merit on December 1, 1998. Hence, the petition before us, which assigns the following errors:
I

The material findings of the Court of Appeals, which are contrary to those of the lower court, are erroneous.

II

The findings of the Court of Appeals are conflicting and/or without citation of specific evidence on which they are based.
III

The Court of Appeals erred in disregarding the applicable legal principle established by this Honorable Court that, unlike in ordinary solidary debtors, the surety does not incur liability unless the principal debtor is held liable.[10]
Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card. She points out that the note she signed, marked as Exhibit C, registering her approval of the request of Danilo Alto to upgrade his card, renders the Surety Undertaking she signed under the terms of the previous card without probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of the regular credit card by the principal debtor xxx .[11] She argues further that because the principal debtor, Danilo Alto, was not held liable, having been dropped as a defendant, she could not be said to have incurred liability as surety. The petition is devoid of merit. The resolution of whether petitioner is liable as surety under the Diamond card revolves around the effect of the upgrading by Danilo Alto of his card. Was the upgrading a novation of the original agreement governing the use of Danilo Altos first credit card, as to extinguish that obligation and the Surety Undertaking which was simply accessory to it? Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by material incompatibility (implied novation). As we stated in Fortune Motors vs. Court of Appeals, supra:

xxx The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Novation must be established either by the express terms of the new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or by their acts which are too clear or unequivocal to be mistaken. There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with the intent of cancelling and replacing the said card. However,

the novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. The nature and extent of petitioners obligations are set out in clear and unmistakable terms in the Surety Undertaking. Thus: 1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of the Diners Club Card, including fees, interest, attorneys fees, and costs; 2. She declared that any change or novation in the Agreement or any extension of time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking; 3. (S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges and fees have been fully paid and satisfied; and 4. The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other amounts voluntarily incurred by the cardholder in excess of said credit limit.[12]
We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a suretys liability is determined by the language of the suretyship contract or bond itself.[13]Article 1370 of the Civil Code provides: If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of Appeals, which involved a Guarantors Undertaking (although thus denominated, it was in substance a contract of surety) signed by the husband for the credit card application of his wife. Like herein petitioner, the husband also argued that his liability should be limited to the credit limit allowed under his wifes card but the Court declared him liable to the full extent of his wifes indebtedness. Thus:

We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation. xxx
xxxxxxxxxxx

It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree, however, that Roberto Jr.s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtors (Celias) indebtedness likewise expressly waiving any discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card. Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the Guarantors Undertaking Roberto signed, thus: x x x. Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisified or paid. (italics supplied)
As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement should first be made declaring the principal debtor liable before she herself can be proceeded against. The argument, which is hinged upon the dropping of Danilo as defendant in the complaint, is bereft of merit. The Surety Undertaking expressly provides that petitioners liability is solidary. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.[14] Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.[15]There being no question that Danilo Alto incurred debts of P166,408.31 in credit card advances, an obligation shared solidarily by petitioner, respondent was certainly within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo Alto, until the obligation is fully satisfied. This is so provided under Article 1216 of the Civil Code:

The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may be subsequently directed against the others, so long as the debt has not been fully collected.

Petitioner is a graduate of business administration, and possesses considerable work experience in several banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged to. Prospective sureties to credit card applicants would be well-advised to study carefully the terms of the agreements prepared by the credit card companies before giving their consent, and pay heed to stipulations that could lead to onerous effects, like in the present case where the credit applied for was limitless. At the same time, it bears articulating that although courts in appropriate cases may equitably reduce the award for penalty as provided under such suretyship agreements if the same is iniquitous or unconscionable,[16] we are unable to give relief to petitioner by way of reducing the amount of the principal liability as surety under the circumstances of this case. WHEREFORE, the petition is dismissed for lack of merit. The decision of the Court of Appeals is AFFIRMED in all respects. SO ORDERED. Melo, (Chairman), Panganiban, and Sandoval-Gutierrez, JJ., concur. Vitug, J., in the result, (pro hac vice).

FIRST DIVISION

[G.R. No. 154127. December 8, 2003]

ROMEO C. GARCIA, petitioner, LLAMAS, respondent. DECISION

PANGANIBAN, J.:

vs. DIONISIO

V.

Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by the complete incompatibility between the old and the new agreements. Petitioner herein fails to show either requirement convincingly; hence, the summary judgment holding him liable as a joint and solidary debtor stands. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the November 26, 2001 Decision and the June 26, 2002 Resolution of the Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as follows:
[1] [2] [3]

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the award for attorneys fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is REMANDED to the court of origin for purposes of receiving ex parte [Respondent] Dionisio Llamas evidence against x x x Eduardo de Jesus.
[4]

The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration. The Antecedents

The antecedents of the case are narrated by the CA as follows:

This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and, despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent] was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be recovered from [petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by [respondent] addressed to [petitioner and de Jesus]. Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and, alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of the check and [respondents] acceptance thereof novated or superseded the note. [Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner] Garcias answer was not even accompanied by a certificate of non-forum shopping. Annexed to the reply were the face of the check and the reverse side thereof. For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereon for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of interests; that this was made when [respondents] daughter, one Nits Llamas-Quijencio, received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of P40,000.00, representing the peso equivalent of his accumulated leave credits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the months of March and April 1997; that he had difficulty in

paying the loan and had asked [respondent] for an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed the instant case while his retirement was being processed; and that, in defense of his rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees, plusP1,000.00 for every court appearance. During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia file a pretrial brief, and his counsel even manifested that he would no [longer] present evidence. Given this development, the trial court gave [respondent] permission to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto. Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the pleadings, withdrawing in the process his previous motion. Thereunder, he asserted that [petitioners and de Jesus] solidary liability under the promissory note cannot be any clearer, and that the check issued by de Jesus did not discharge the loan since the check bounced.
[5]

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as follows:

WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally, the [respondent] the following sums, to wit: 1) P400,000.00 representing the principal amount plus 5% interest thereon per month from January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00 representing interests already paid by x x x de Jesus; 2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt appearance, and;

3)

Cost of this suit.

[6]

Ruling of the Court of Appeals The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even though De Jesus had been declared in default. The case against the latter was therefore remanded by the CA to the trial court for the ex parte reception of the formers evidence. As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise even a single genuine issue regarding any material fact. The appellate court ruled that no novation -- express or implied -- had taken place when respondent accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which had been intended to extinguish the obligation -- bounced upon its presentment. Hence, this Petition.
[7]

Issues Petitioner submits the following issues for our consideration:

I

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by: a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of P400,000.00 in favor of Respondent Llamas, although the check subsequently bounced[;]

b)

Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution by x x x de Jesus or [the superseding of] the promissory note; x x x de Jesus having paid interests on the loan in the total amount of P120,000.00; The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financial difficulties, he be given an extension of time to pay his loan obligation and that his retirement benefits from the Philippine National Police will answer for said obligation.
II

c) d)

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of petitioner that he was merely an accommodation party, despite the fact that the promissory note provided for a joint and solidary liability, should have been given weight and credence considering that subsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing circumstances showing his assumption of sole liability over the loan obligation.
III

Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself admitted in its Decision, which call for the presentation of evidence in a full-blown trial.
[8]

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment against him -- be it a judgment on the pleadings or a summary judgment -- was proper. The Courts Ruling The Petition has no merit. First Issue: Novation

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the check. Alternatively, the former argues that the original obligation was extinguished when the latter, who was his co-obligor, paid the loan with the check. The fallacy of the second (alternative) argument is all too apparent. The check could not have extinguished the obligation, because it bounced upon presentment. By law, the delivery of a check produces the effect of payment only when it is encashed.
[9]

We now come to the main issue of whether novation took place. Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows:
[10]

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from -- and may even be made without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor.
[11] [12]

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merelymodificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. For novation to take place, the following requisites must concur:
[13] [14]

1) 2)

There must be a previous valid obligation. The parties concerned must agree to a new contract.

3) 4)

The old contract must be extinguished. There must be a valid new contract.
[15]

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence.
[16] [17]

Applying the foregoing to the instant case, we hold that no novation took place. The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two can stand together. Neither could the payment of interests -- which, in petitioners view, also constitutes novation -- change the terms and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check, was totally in accord with the terms thereof.
[18]

Also unmeritorious is petitioners argument that the obligation was novated by the substitution of debtors. In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the formers place in the relation. Wellsettled is the rule that novation is never presumed. Consequently, that which arises from a purported change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place.
[19] [20] [21]

In the present case, petitioner has not shown that he was expressly released from the obligation, that a third person was substituted in his place, or that the joint and solidaryobligation was cancelled and substituted by the solitary undertaking of De Jesus. The CA aptly held:

x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature of the obligation being solidary due to the fact that the promissory note expressly declared that the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or performance from one of the solidary debtors or some or all of them simultaneously, and payment made by one of them extinguishes the obligation. It therefore follows that in case the creditor fails to collect from one

of the solidary debtors, he may still proceed against the other or others. x x x
[22]

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor. Since novationimplies a waiver of the right the creditor had before the novation, such waiver must be express. It cannot be supposed, without clear proof, that the present respondent has done away with his right to exact fulfillment from either of the solidary debtors.
[23] [24] [25]

More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment. Respondents acceptance of his check did not change the person of the debtor, because a joint and solidary obligor is required to pay the entirety of the obligation. It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. It is up to the former to determine against whom to enforce collection. Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable for the entire obligation.
[26] [27] [28] [29]

Second Issue: Accommodation Party Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as such, he was released as obligor when respondent agreed to extend the term of the obligation. This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

PROMISSORY NOTE P400,000.00 RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St.Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof. It is understood that our liability under this loan is jointly and severally [sic]. Done at Quezon City, Metro Manila this 23rd day of December, 1996.
[30]

By its terms, the note was made payable to a specific person rather than to bearer or to order -- a requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of the NILs provisions on the liabilities and defenses of an accommodation party. Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent of the parties. The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.
[31] [32]

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation party. The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety -- the accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promissor and debtor from the beginning. The liability is immediate and direct.
[33] [34]

Third Issue: Propriety of Summary Judgment or Judgment on the Pleadings The next issue illustrates the usual confusion between a judgment on the pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show that (1) except as to the amount of damages, there is no genuine issue regarding any material fact; and (2) the moving party is entitled to a judgment as a matter of law. A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown by the pleadings, depositions or admissions. A summary judgment may be applied for by either a claimant or a defending party.
[35] [36] [37]

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is proper when an answer fails to render an issue or otherwise admits the material allegations of the adverse partys pleading. The essential question is whether there are issues generated by the pleadings. A judgment on the pleadings may be sought only by a claimant, who is the party
[38]

seeking to recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief.

[39]

Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His Answer apparently raised several issues -- that he signed the promissory note allegedly as a mere accommodation party, and that the obligation was extinguished by either payment or novation. However, these are not factual issues requiring trial. We quote with approval the CAs observations:
[40]

Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid issues. Firstly, Garcias claim that he was merely an accommodation party is belied by the promissory note that he signed. Nothing in the note indicates that he was only an accommodation party as he claimed to be. Quite the contrary, the promissory note bears the statement: It is understood that our liability under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant de Jesus already paid the loan by means of a check collapses in view of the dishonor thereof as shown at the dorsal side of said check.
[41]

From the records, it also appears that petitioner himself moved to submit the case for judgment on the basis of the pleadings and documents. In a written Manifestation, he stated that judgment on the pleadings may now be rendered without further evidence, considering the allegations and admissions of the parties.
[42] [43]

In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court had issued against petitioner. WHEREFORE, this Petition is hereby DENIED and Decision AFFIRMED. Costs against petitioner. SO ORDERED. Davide, JJ., concur. Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, the assailed

SECOND DIVISION

[G.R. No. 147950. December 11, 2003]

CALIFORNIA BUS LINES, INC., petitioner, INVESTMENT HOUSE, INC., respondent. DECISION
QUISUMBING, J.:

vs.

STATE

In this petition for review, California Bus Lines, Inc., assails the decision, dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment , dated June 3, 1993, of the Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment House, Inc. v. California Bus Lines, Inc., for collection of a sum of money. The Court of Appeals held petitioner California Bus Lines, Inc., liable for the value of five promissory notes assigned to respondent State Investment House, Inc.
[1] [2]

The facts, as culled from the records, are as follows: Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for financial assistance from respondent State Investment House, Inc. (hereafter SIHI), a domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit line to Delta for P25,000,000.00 in three separate credit agreements dated May 11, June 19, and August 22, 1979. On several occasions, Delta availed of the credit line by discounting with SIHI some of its receivables, which evidence actual sales of Deltas vehicles. Delta eventually became indebted to SIHI to the tune of P24,010,269.32.
[3] [4]

Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25, 1980. In each promissory note, CBLI promised to pay Delta or order, P2,314,000 payable in 60 monthly installments starting August 31, 1980, with interest at 14% per annum. CBLI further promised to pay
[5]

the holder of the said notes 25% of the amount due on the same as attorneys fees and expenses of collection, whether actually incurred or not, in case of judicial proceedings to enforce collection. In addition to the notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor. When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta on October 7, 1981, to cover its overdue obligations under the promissory notes. The restructuring agreement provided for a new schedule of payments of CBLIs past due installments, extending the period to pay, and stipulating daily remittance instead of the previously agreed monthly remittance of payments. In case of default, Delta would have the authority to take over the management and operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted and/or updated CBLIs past due account. CBLI and Delta also increased the interest rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a. restructuring fee.
[6]

On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables in favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of Agreement dated March 31, 1982. Delta obligated itself to pay a fixed monthly amortization of P400,000 to SIHI and to discount with SIHI P8,000,000 worth of receivables with the understanding that SIHI shall apply the proceeds against Deltas overdue accounts.
[7] [8]

CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with the enforcement of the management takeover clause. To pre-empt the take-over, CBLI filed on May 3, 1982, a complaint for injunction , docketed as Civil Case No. 0023-P, with the Court of First Instance of Rizal, Pasay City, (now Regional TrialCourt of Pasay City). In due time, Delta filed its amended answer with applications for the issuance of a writ of preliminary mandatory injunction to enforce the management takeover clause and a writ of preliminary attachment over the buses it sold to CBLI. On December 27, 1982, the trial court granted Deltas prayer for issuance of a writ of preliminary mandatory injunction and preliminary attachment on account of the fraudulent disposition by CBLI of its assets.
[9] [10] [11]

On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of Sale assigning to SIHI five (5) of the sixteen (16) promissory notes from California Bus Lines, Inc. At the time of assignment, these five promissory notes, identified and numbered as 80-53, 80-54, 80-55, 80-56, and 80-57, had a total value ofP16,152,819.80 inclusive of interest at 14% per annum.
[12] [13]

SIHI subsequently sent a demand letter dated December 13, 1983, to CBLI requiring CBLI to remit the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of Civil Case No. 0023-P and of the fact that Delta had taken over its management and operations.
[14] [15]

As regards Deltas remaining obligation to SIHI, Delta offered its available bus units, valued at P27,067,162.22, as payment in kind. On December 29, 1983, SIHI accepted Deltas offer, and Delta transferred the ownership of its available buses to SIHI, which in turn acknowledged full payment of Deltas remaining obligation. When SIHI was unable to take possession of the buses, SIHI filed a petition for recovery of possession with prayer for issuance of a writ of replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and SIHI was able to take possession of 17 bus units belonging to Delta. SIHI applied the proceeds from the sale of the said 17 buses amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI was thus reduced to P20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered judgment in Civil Case No. 8423019 ordering Delta to pay SIHI this amount.
[16] [17]

Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984, in Civil Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. The RTC of Pasay approved this compromise agreement the following day, July 25, 1984. Following this, CBLI vehemently refused to pay SIHI the value of the five promissory notes, contending that the compromise agreement was in full settlement of all its obligations to Delta including its obligations under the promissory notes.
[18] [19]

On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes with interest at

14% p.a. SIHI also prayed for the issuance of a writ of preliminary attachment against the properties of CBLI.
[20]

On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of Pasay a motion for execution of the judgment based on the compromise agreement. The RTC of Pasay granted this motion the following day.
[21] [22]

In view of Deltas petition and motion for execution per the judgment of compromise, the RTC of Manila granted in Civil Case No. 8428505 SIHIs application for preliminary attachment on January 4, 1985. Consequently, SIHI was able to attach and physically take possession of thirty-two (32) buses belonging to CBLI. However, acting on CBLIsmotion to quash the writ of preliminary attachment, the same court resolved on January 15, 1986, to discharge the writ of preliminary attachment. SIHI assailed the discharge of the writ before the Intermediate Appellate Court (now Court of Appeals) in a petition for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals granted SIHIs petition in CA-GR SP No. 08378 and ruled that the writ of preliminary attachment issued by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should stay. The decision of the Court of Appeals attained finality on August 22, 1987.
[23] [24] [25] [26] [27]

Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses for P3,920,000. On April 7, 1987, the sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-23019.
[28]

Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila in view of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which had previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to the January 4, 1985, Order of the RTC of Manila. SIHIs motion was granted on December 16, 1987. On November 29, 1988, however, SIHI filed an urgent exparte motion to amend this order claiming that through inadvertence and
[29] [30]

excusable negligence of its new counsel, it made a mistake in the list of buses in the Motion to Sell Attached Properties it had earlier filed. SIHI explained that 14 of the buses listed had already been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay, and that two of the buses listed had been released to third party, claimant Pilipinas Bank, by Order dated September 16, 1987 of Branch 13 of the RTC of Manila.
[31] [32]

CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989, Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow the sale of the 16 buses listed in its motion to amend. The trial court ruled that the best interest of the parties might be better served by denying further sales of the buses and to go direct to the trial of the case on the merits.
[33] [34]

After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging CBLI from liability on the five promissory notes. The trial court likewise favorably ruled on CBLIs compulsory counterclaim. The trial court directed SIHI to return the 16 buses or to pay CBLI P4,000,000 representing the value of the seized buses, with interest at 12% p.a. to begin from January 11, 1985, the date SIHI seized the buses, until payment is made. In ruling against SIHI, the trial court held that the restructuring agreement datedOctober 7, 1981, between Delta and CBLI novated the five promissory notes; hence, at the time Delta assigned the five promissory notes to SIHI, the notes were already merged in the restructuring agreement and cannot be enforced against CBLI. SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner: WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We find defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the complaint a quo less the proceeds from the attached sixteen (16) buses. The award of attorneys fees and costs is eliminated. The appealed decision is hereby REVERSED. No costs. SO ORDERED.
[35]

Hence, this appeal where CBLI contends that

I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE

PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE FIVE PROMISSORY NOTES. II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES. III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF MALEFACTIONS IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.[36]

Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981, between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned to respondent SIHI, and (2) whether the compromise agreement in Civil Case No. 0023-P superseded and/or discharged the subject five promissory notes. The issues being interrelated, they shall be jointly discussed. CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of the obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with the addition of new obligations that were incompatible with the old obligations in the said notes. CBLI adds that even if the restructuring agreement did not totally extinguish the obligations under the sixteen (16) promissory notes, the July 24, 1984, compromise agreement executed in Civil Case No. 0023-P did. CBLI cites paragraph 5 of the compromise agreement which states that the agreement between it and CBLI was in full and final settlement, adjudication and termination of all their rights and obligations as of the date of (the) agreement, and of the issues in (the) case. According to CBLI, inasmuch as the five promissory notes were subject matters of the Civil Case No. 0023-P, the decision approving the compromise agreement operated as res judicata in the present case.
[37] [38] [39]

Novation has been defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor.
[40]

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the
[41]

former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Novation has two functions: one to extinguish an existing obligation, the other to substitute a new one in its place. For novation to take place, four essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.
[42] [43] [44] [45]

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
[46] [47]

The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. The term "expressly" means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.
[48] [49] [50]

There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligationnovates the first. Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation.
[51] [52] [53]

The necessity to prove the foregoing by clear and convincing evidence is accentuated where the obligation of the debtor invoking the defense of novation has already matured.
[54]

With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled rule that the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, and adds other obligations not incompatible with the old ones, or where the new contract merely supplements the old one.
[55]

In Inchausti & Co. v. Yulo this Court held that an obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified, by changing only the term of payment and adding other obligations not incompatible with the old one. In Tible v. Aquino and Pascual v. Lacsamana this Court declared that it is well settled that a mere extension of payment and the addition of another obligation not incompatible with the old one is not a novation thereof.
[56] [57] [58]

In this case, the attendant facts do not make out a case of novation. The restructuring agreement between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the preexisting obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a finding of novation by implication. However, our review of its terms yields no incompatibility between the promissory notes and the restructuring agreement.
[59]

The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the following common stipulations: 1. 2. 3. They were payable in 60 monthly installments up to July 31, 1985; Interest: 14% per annum; Failure to pay any of the installments would render the entire remaining balance due and payable at the option of the holder of the notes; In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr. Dionisio O. Llamas, Jr)

4.

were solidarily liable of attorneys fees and expenses of 25% of the amount due in addition to the costs of suit. The restructuring agreement, for its part, had the following provisions: WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:
a. PN Nos. 16 to 26 (11 units) Past Due as of September 30, 1981 P1,411,434.00 b. PN Nos. 52 to 57 (24 units) Past Due as of September 30, 1981 P1,105,353.00

WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months PN Nos. 52 to 57 (24 units) 46 months b. Interest Rate: 16% per annum c. Documentation Fee: 2% per annum d. Penalty previously incurred and Restructuring fee: 4% p.a. e. Mode of Payment: Daily Remittance

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and covenant as follows: 1. That the past due installment referred to above plus the current and/or falling due amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or LLAMAS in accordance with the following schedule of payments: Daily payments of P11,000.00 from October 1 to December 31, 1981 Daily payments of P12,000.00 from January 1, 1982 to March 31, 1982 Daily payments of P13,000.00 from April 1, 1982 to June 30, 1982

Daily payments of P14,000.00 from July 1, 1982 to September 30, 1982 Daily payments of P15,000.00 from October 1, 1982 to December 31, 1982 Daily payments of P16,000.00 from January 1, 1983 to June 30, 1983 Daily payments of P17,000.00 from July 1, 1983 2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due to DMC in accordance with the schedule in paragraph 1. DMC may send a collector to receive the amount due at CBLs premises. All delayed remittances shall be charged additional 2% penalty interest per month. 3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of the restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57. 4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL pertaining to the financial and field operations and service and maintenance matters of M.A.N. units. Records needed by the DMC representatives in monitoring said operations shall be made available by CBL and LLAMAS. 5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made from what is due and payable to DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to 57. 6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC andSilverio shall exercise any or all of the following options: (a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per annum on total past due installments will immediately become due and payable. In

the event of judicial proceedings to enforce collection, CBL and LLAMAS will pay to DMC an additional sum equivalent to 25% of the amount due for attorneys fees and expenses of collection, whether actually incurred or not, in addition to the cost of suit; (b) To enforce in accordance with law, their rights under the Chattel Mortgage over various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or To take over management and operations of CBL until such time that CBL and/or LLAMAS have remitted and/or updated their past due account with DMC.

(c)

7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel Buses and shall make available to CBL at the price prevailing at the time of purchase, an inventory of spare parts consisting of at least ninety (90%) percent of the needs of CBL based on a moving 6-month requirement to be prepared and submitted by CBL, and acceptable to DMC, within the first week of each month. 8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 8044 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation until full payment. 9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto G. Doller and to instruct him not to proceed with the public auction sale of the shares of stock of CBL subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for the immediate dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto G. Doller, et al., Court of First Instance of Pasay, Branch XXIX.
[60]

It is clear from the foregoing that the restructuring agreement, instead of containing provisions absolutely incompatible with the obligations of the judgment, expressly ratifies such obligations in paragraph 8 and contains provisions for satisfying them. There was no change in the object of the prior obligations. The restructuring agreement merely provided for a new schedule of payments and additional security in paragraph 6 (c) giving Delta authority to take over

the management and operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, there can be no novation. Moreover, this Court has ruled that an agreement subsequently executed between a seller and a buyer that provided for a different schedule and manner of payment, to restructure the mode of payments by the buyer so that it could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to novation.
[61] [62]

The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA , this Court ruled that a change in the incidental elements of, or an addition of such element to, an obligation, unless otherwise expressed by the parties will not result in its extinguishment.
[63]

In fine, the restructuring agreement can stand together with the promissory notes. Neither is there merit in CBLIs argument that the compromise agreement dated July 24, 1984, in Civil Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta and CBLI cannot deny that the five promissory notes were no longer subject of Civil Case No. 0023-P when they entered into the compromise agreement on July 24, 1984. Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise the same. Deltas limited authority to collect for SIHI stipulated in theSeptember 13, 1985, Deed of Sale cannot be construed to include the power to compromise CBLIs obligations in the said promissory notes. An authority to compromise, by express provision of Article 1878 of the Civil Code, requires a special power of attorney, which is not present in this case. Incidentally, Deltas authority to collect in behalf of SIHI was, by express provision of the Continuing Deed of Assignment, automatically revoked when SIHI opted to collect directly from CBLI.
[64] [65]

As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to remit the payments directly to SIHI effectively revoked Deltas limited right to collect in behalf of SIHI. This should have dispelled CBLIs erroneous notion that Delta was acting in behalf of SIHI, with authority to compromise the five promissory notes.

But more importantly, the compromise agreement itself provided that it covered the rights and obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new creditor of CBLI in the subject promissory notes. CBLI and Delta stipulated in paragraph 5 of the agreement that: 5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the plaintiffs and the defendants as well as their lawyers, and operates as full and final settlement, adjudication and termination of all their rights and obligations as of the date of this agreement, and of the issues in this case.
[66]

Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under the settled rule that a compromise agreement determines the rights and obligations of only the parties to it. Therefore, we hold that the compromise agreement covered the rights and obligations only of Delta and CBLI and only with respect to the eleven (11) other promissory notes that remained with Delta.
[67]

CBLI next maintains that SIHI is estopped from questioning the compromise agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta of CBLIs management and operations and the resultant impossibility for CBLI to comply with its obligations in the subject promissory notes. CBLI also adds thatSIHIs failure to intervene in Civil Case No. 0023-P is proof that Delta continued to act in SIHIs behalf in effecting collection under the notes. The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the subject promissory notes in favor of SIHI. This had the effect of separating the five promissory notes from the 16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied in the five promissory notes became separate and distinct from CBLIs obligations in eleven (11) other promissory notes that remained with Delta. Thus, any breach of these independent obligations gives rise to a separate cause of action in favor of SIHI against CBLI. Considering that Deltas assignment to SIHI of these five promissory notes had the effect of removing the said notes from Civil Case No. 0023-P, there was no reason for SIHI to intervene in the said case. SIHI did not have any interest to protect in Civil Case No. 0023-P.

Moreover, intervention is not mandatory, but only optional and permissive. Notably, Section 2, Rule 12 of the then 1988 Revised Rules of Procedure uses the word may in defining the right to intervene. The present rules maintain the permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil Procedure, which provides as follows:
[68] [69]

SEC. 1. Who may intervene.A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor's rights may be fully protected in a separate proceeding.
[70]

Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while Civil Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest pendente lite is that the action may be continued by or against the original party unless the court, upon motion, directs the person to whom the interest is transferred to be substituted in the action or joined with the original party. The non-inclusion of a necessary party does not prevent the court from proceeding in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary party.
[71] [72]

In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another court does not amount to an estoppel that may prevent SIHI from instituting a separate and independent action of its own. This is especially so since it does not appear that a separate proceeding would be inadequate to protect fully SIHIs rights. Indeed, SIHIsrefusal to intervene is precisely because it considered that its rights would be better protected in a separate and independent suit.
[73] [74]

The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent SIHI from prosecuting its claims in the present case. As previously discussed, the compromise agreement and the judgment on compromise in Civil Case No. 0023-P covered only Delta and CBLI and their respective rights under the 11 promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI

and CBLI and the five promissory notes. There being no identity of parties and subject matter, there is no resjudicata. CBLI maintains, however, that in any event, recovery under the subject promissory notes is no longer allowed by Article 1484(3) of the Civil Code, which prohibits a creditor from suing for the deficiency after it has foreclosed on the chattel mortgages. SIHI, being the successorin-interest of Delta, is no longer allowed to recover on the promissory notes given as security for the purchase price of the 35 buses because Delta had already extrajudicially foreclosed on the chattel mortgages over the said buses on April 2, 1987.
[75]

This claim is likewise untenable. Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the chattel mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the assignment of the five notes operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct and separate from CBLIs obligations to Delta. And since there was a previous revocation of Deltas authority to collect for SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn, knew of the assignment and Deltas lack of authority to compromise the subject notes, yet it readily agreed to the foreclosure. To sanction CBLIs argument and to apply Article 1484 (3) to this case would work injustice to SIHI by depriving it of its right to collect against CBLI who has not paid its obligations. That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No. 0023-P, did not operate to render the compromise agreement and the foreclosure binding on SIHI. At the time SIHI effected the levy on execution to satisfy its judgment credit against Delta in Civil Case No. 84-23019, the said buses already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer had any interest in the said buses. Under the circumstances, we cannot see how SIHIs belated acquisition of the foreclosed buses operates to hold the compromise agreementand consequently Article 1484(3) applicable to SIHI as CBLI contends. CBLIs last contention must, therefore, fail. We hold that the writ of execution to enforce the judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of April 2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other promissory notes covered by the

compromise agreement and the judgment on compromise in Civil Case No. 0023-P. In support of its third assignment of error, CBLI maintains that there was no basis for SIHIs application for a writ of preliminary attachment. According to CBLI, it committed no fraud in contracting its obligation under the five promissory notes because it was financially sound when it issued the said notes on April 25, 1980. CBLI also asserts that at no time did it falsely represent to SIHI that it would be able to pay its obligations under the five promissory notes. According to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of fraudulent intent to conceal, remove, or dispose of its properties to defraud its creditors; and that SIHIs bare allegations on this matter were insufficient for the preliminary attachment of CBLIs properties.
[76] [77] [78] [79] [80]

The question whether the attachment of the sixteen (16) buses was valid and in accordance with law, however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the Court of Appeals upheld the legality of the writ of preliminary attachment SIHI obtained and ruled that the trial court judge acted with grave abuse of discretion in discharging the writ of attachment despite the clear presence of a determined scheme on the part of CBLI to dispose of its property. Considering that the said Court of Appeals decision has already attained finality on August 22, 1987, there exists no reason to resolve this question anew. Reasons of public policy, judicial orderliness, economy and judicial time and the interests of litigants as well as the peace and order of society, all require that stability be accorded the solemn and final judgments of courts or tribunals of competent jurisdiction.
[81]

Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain CBLIs contention that the Court of Appeals erred in dismissing its counterclaim for lost income and the value of the 16 buses over which SIHI obtained a writ of preliminary attachment. Where the party who requested the attachment acted in good faith and without malice, the claim for damages resulting from the attachment of property cannot be sustained.
[82]

WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State Investment House, Inc., the value of the five (5) promissory notes subject of the

complaint in Civil Case No. 84-28505 less the proceeds from the sale of the attached sixteen (16) buses. No pronouncement as to costs. SO ORDERED. Puno, (Chairman), JJ., concur. Austria-Martinez, Callejo, Sr., and Tinga,

FIRST DIVISION

[G.R. No. 99398. January 26, 2001]

CHESTER BABST, petitioner, vs. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTICOMMERCIAL CORPORATION, respondents.

[G.R. No. 104625. January 26, 2001]

ELIZALDE STEEL CONSOLIDATED, INC., petitioner, vs. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION and CHESTER BABST, respondents. DECISION
YNARES-SANTIAGO, J.:

These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals in CA-G.R. CV No. 17282[1] entitled, Bank of the Philippine Islands, Plaintiff-Appelleeversus Elizalde Steel Consolidated, Inc., Pacific MultiCommercial Corporation, and Chester G. Babst, Defendants-Appellants. The complaint was commenced principally to enforce payment of a promissory note and three domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the Commercial Bank and Trust Company (CBTC). On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory note.[2] ELISCON defaulted in its payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982.[3] The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31, 1977 which reads:

WHEREAS, at least 90% of the Companys gross sales is generated by the sale of tin-plates manufactured by Elizalde Steel Consolidated, Inc.; WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line; WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing output and the Company is willing to extend said requested assistance; NOW, THEREFORE, for and in consideration of the foregoing premises --BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC MULTICOMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati, Metro Manila; RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of the same; RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust Company of the Philippines, Makati, Metro Manila, for their information.[4]
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing Suretyship,[5] whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each. Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3) domestic letters of credit in the amounts of P1,946,805.73,[6] P1,702,869.32[7] and P200,307.72,[8] respectively, which ELISCON used to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of October 31, 1982, in the total amount of P3,963,372.08.[9] On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.[10]

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt.[11] In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets. In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCONs obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable.[12] Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court of Makati, Branch 147, a complaint[13] for sum of money against ELISCON, MULTI and Babst, which was docketed as Civil Case No. 49226. ELISCON, in its Answer,[14] argued that the complaint was premature since DBP had made serious efforts to settle its obligations with BPI. Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it covers only obligations which MULTI incurred solely for its benefit and not for any third party liability, and he had no knowledge or information of any transaction between MULTI and ELISCON.[15] MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the guaranty under its board resolution did not cover purchases made by ELISCON in the form of trust receipts. It set up a cross-claim against ELISCON alleging that the latter should be held liable for any judgment which the court may render against it in favor of BPI.[16] On February 20, 1987, the trial court rendered its Decision,[17] the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the plaintiff and against all the defendants: 1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the promissory note, Annex A of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982; 2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of credit of

P3,564,349.25 interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full payment; 3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related charges but unpaid as of the filing of this complaint, until full payment thereof; 4) Ordering defendant ELISCON to pay attorneys fees equivalent to 10% of the total amount due under the preceding paragraphs; 5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interests and related charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst; 6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally plaintiff interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof; 7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally, attorneys fees of not less than 10% of the total amount due under paragraphs 5 and 6 hereof. With costs. SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal.[18] On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:

WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to show the principal changes from the decision of the lower court) thus: 1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on the promissory note, Annex A of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;

2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full payment; 3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and related charges but unpaid as of the filing of this complaint, until full payment thereof; 4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to pay appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interest and related charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst; 5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally, appellee BPI interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof and the plaintiffs lawyers fees in the nominal amount of P200,000.00; 6) Ordering appellant ELISCON to reimburse appellants Pacific MultiCommercial Corporation and Chester Babst whatever amount they shall have paid in said Eliscons behalf particularly referring to the three (3) letters of credit as of 31 October 1982 and other related charges. No costs. SO ORDERED.[19]
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however, denied in a Resolution dated March 9, 1992.[20] Subsequently, ELISCON filed a petition for review on certiorari, docketed as G.R. No. 104625, on the following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER ELISCON THE LATTERS OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC)

B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM ITS OBLIGATION TO BPI. C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS SURETIES OF ELISCONS OBLIGATION TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON. D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO RESPONDENT BPI. E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS DECISION.[21]

BPI filed its Comment[22] raising the following arguments, to wit:

1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due obligations with CBTC prior to the merger of BPI with CBTC. 2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has been effected. 3. Express consent of creditor to substitution should be recorded in the books. 4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for the unpaid letters of credit of ELISCON. 5. The question of the liability of ELISCON to BPI has been clearly established. 6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they may recover from the latter what they may have paid for on account of that guaranty.
Chester Babst filed a Comment with Manifestation,[23] wherein he contends that the suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein which authorizes MULTI, in turn, to guarantee the obligations of ELISCON.

In its Comment,[24] MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in June 1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon the said bank to formally communicate its objection to the assumption of ELISCONs liabilities by DBP in answer to the call for the meeting. Moreover, there was no showing that the availment by ELISCON of MULTIs credit facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was indeed authorized by the latter pursuant to the resolution of the Board of Directors of MULTI. In compliance with this Courts Resolution dated March 17, 1993,[25] the parties submitted their respective memoranda. Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion when:

1. IT AFFIRMED THE LOWER COURTS HOLDING THAT THERE WAS NO NOVATION INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON) IN THE LATTERS OBLIGATION TO BPI. 2. IT CONFIRMED THE LOWER COURTS CONCLUSION THAT THERE WAS NO IMPLIED CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED, INC. 3. IT AFFIRMED THE LOWER COURTS FINDING OF LACK OF MERIT OF THE CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE MEETING OF ELISCONS CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI. 4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY LIABILITY TO BPI.

5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI. 6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE. 7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH ELISCON.[26]
Petitioner Babst alleged that DBP sold all of ELISCONs assets to the National Development Company, for the latter to take over and continue the operation of its business. On September 11, 1981, the Board of Governors of the DBP adopted Resolution No. 2817 which states that DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCONs creditors, including BPI in the amount of P4,015,534.54. This was followed by a Memorandum of Agreement executed on May 4, 1983 by and between DBP and NDC, wherein they stipulated, inter alia, that NDC shall pay to ELISCONs creditors, through DBP, the amount of P299,524,700.00. Among the creditors mentioned in the agreement was BPI, with a listed credit of P4,015,534.54. Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and later transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation No. 50, issued by then President Corazon C. Aquino on December 8, 1986. In its Comment,[27] BPI countered that by virtue of its merger with CBTC, it acquired all the latters rights and interest including all receivables; that in order to effect a valid novation by substitution of debtors, the consent of the creditor must be express; that in addition, the consent of BPI must appear in its books, it being a private corporation; that BPI intentionally did not consent to the assumption by DBP of the obligations of ELISCON because it wanted to preserve intact its causes of action and legal recourse against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily for ELISCONs obligations to CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and that the suretyship agreement executed by Babst does not exclude liabilities incurred by MULTI on behalf of third parties, such as ELISCON. ELISCON likewise filed a Comment,[28] wherein it manifested that of the seven errors raised by Babst in his petition, six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth assigned error --- that the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with ELISCON --that ELISCON takes exception to. More particularly, ELISCON pointed out the

contradictory positions taken by Babst in admitting that he bound himself to pay the indebtedness of MULTI, while at the same time completely disavowing and denying any such obligation. It stressed that should MULTI or Babst be finally adjudged liable under the suretyship agreement, they cannot lawfully recover from ELISCON, but from the DBP which had been substituted as the new debtor. MULTI filed its Comment,[29] admitting the correctness of the petition and adopting the Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI. At the outset, the preliminary issue of BPIs right of action must first be addressed. ELISCON and MULTI assail BPIs legal capacity to recover their obligation to CBTC. However, there is no question that there was a valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation.[30] Hence, BPI has a right to institute the case a quo. We now come to the primordial issue in this case whether or not BPI consented to the assumption by DBP of the obligations of ELISCON. Article 1293 of the Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In the case of Testate Estate of Mota, et al. v. Serra,[31] this Court held:

It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must be express under the principle of renuntiatio non prsumitur, recognized by the law in declaring that a waiver of right may not be performed [should read: presumed] unless the will to waive is indisputably shown by him who holds the right.[32]
The import of the foregoing ruling, however, was explained and clarified by this Court in the later case of Asia Banking Corporation v. Elser[33] in this wise:

The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditors consent to the substitution of the new debtor for the old be

express, or given at the time of the substitution, and the Supreme Court of Spain, in its judgment of June 16, 1908, construing said article, laid down the doctrine that article 1205 of the Civil Code does not mean or require that the creditors consent to the change of debtors must be given simultaneously with the debtors consent to the substitution, its evident purpose being to preserve the creditors full right, it is sufficient that the latters consent be given at any time and in any form whatever, while the agreement of the debtors subsists. The same rule is stated in the Enciclopedia Jurdica Espaola, volume 23, page 503, which reads: The rule that this kind of novation, like all others, must be express, is not absolute; for the existence of the consent may well be inferred from the acts of the creditor, since volition may as well be expressed by deeds as by words. The understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with respect to Luis R. Yangcos stock in said corporation, and the acts of the board of directors after Henry W. Elser had acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and unmistakable expression of its consent. When this court said in the case of Estate of Mota vs. Serra (47 Phil., 464), that the creditors express consent is necessary in order that there may be a novation of a contract by the substitution of debtors, it did not wish to convey the impression that the word express was to be given an unqualified meaning, as indicated in the authorities or cases, both Spanish and American, cited in said decision.[34]
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Ca., Inc. v. Albo & Sevilla, Inc., et al.,[35] this Court reiterated the rule that there can be implied consent of the creditor to the substitution of debtors. In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its objection to the take-over by DBP of ELISCONs assets, at the creditors meeting held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor. We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that ---

the Development Bank of the Philippines (DBP), for a time, had proposed a formula for the settlement of Eliscons past obligations to its creditors, including the plaintiff [BPI], but the formula was expressly rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar).[36]
The Court of Appeals held that even if the account officer who attended the June 1981 creditors meeting had expressed consent to the assumption by DBP of ELISCONs debts, such consent would not bind BPI for lack of a specific authority therefor. In its

petition, ELISCON counters that the mere presence of the account officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors meeting. Moreover, BPI did not object to the substitution of debtors, although it objected to the payment formula submitted by DBP. Indeed, the authority granted by BPI to its account officer to attend the creditors meeting was an authority to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCONs obligations. As repeatedly pointed out by ELISCON and MULTI, BPIs objection was to the proposed payment formula, not to the substitution itself. BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtors failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.[37] A surety is an insurer of the debt; he promises to pay the principals debt if the principal will not pay.[38] In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the government.[39] More importantly, the National Development Company took over the business of ELISCON and undertook to pay ELISCONs creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI.[40] Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCONs debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the sureties. The course of action chosen taxes the credulity of this Court. At the very least, suffice it to state that BPIs actuation in this regard runs counter to the good faith covenant in contractual relations, provided for by the Civil Code, to wit:

ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. ART. 1159. Obligations arising from contract have the force of law between the contracting parties and should be complied with in good faith.
BPIs conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there was a valid novation which resulted in the release

of ELISCON from its obligation to BPI, whose cause of action should be directed against DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions one to extinguish an existing obligation, the other to substitute a new one in its place requiring a conflux of four essential requisites, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.[41]
The original obligation having been extinguished, the contracts of suretyship executed separately by Babst and MULTI, being accessory obligations, are likewise extinguished.[42] Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the lapse of time within which these cases have remained pending, the prescriptive period for BPI to file its action was interrupted when it filed Civil Case No. 49226.[43] WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory note and letters of credit, is REVERSED and SET ASIDE. BPIs complaint against ELISCON, MULTI and Babst is DISMISSED. SO ORDERED. Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

THIRD DIVISION

[G.R. No. 126712. April 14, 1999]

LEONIDA C. QUINTO, petitioner, PHILIPPINES, respondent. DECISION

VITUG, J.:

vs. PEOPLE

OF

THE

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the decision of the Court of Appeals, promulgated on 27 September 1996, in People of the Philippines vs. Leonida Quinto y Calayan, docketed CAG.R. CR No. 16567, which has affirmed the decision of Branch 157 of the Regional Trial Court (RTC), National Capital Judicial Region, Branch 157, Pasig City, finding Leonida Quinto y Calayan guilty beyond reasonable doubt of the crime of Estafa. Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of estafa under Article 315, paragraph 1(b), of the Revised Penal Code, in an information which read:

"That on or about the 23rd day of March 1977, in the Municipality of Makati, Metro Manila, Philippines and within the jurisdiction of this Honorable Court, the above-named accused, received in trust from one Aurelia Cariaga the following pieces of jewelry, to wit: One (1) set of marques with briliantitos valued at .............................................P17,500.00 One (1) solo ring (2 karats & 30 points) valued at .............................................P16,000.00 One (1) diamond ring (rosetas) valued at .............................................P 2,500.00 with a total value of P36,000.00 for the purpose of selling the same on commission basis and with the express obligation on the part of the accused to turn over the proceeds of sale thereof, or to return the said jewelries (sic), if not sold, five (5) days after receipt thereof, but the accused once in possession of the jewelries (sic), far from complying with her obligation, with intent of gain, gave abuse of confidence and to

defraud said Aurelia Cariaga, did then and there wilfully, unlawfully and feloniously misappropriate, misapply and convert to her own personal use and benefit the said jewelries (sic) and/or the proceeds of sale or to return the pieces of jewelry, to the damage and prejudice of the said Aurelia Cariaga in the aforementioned amount of P 36,000.00. "Contrary to law "[1]
Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not guilty; trial on the merits thereupon ensued. According to the prosecution, on or about 23 March 1977, Leonida went to see Aurelia Cariaga (private complainant) at the latter's residence in Makati. Leonida asked Aurelia to allow her have some pieces of jewelry that she could show to prospective buyers. Aurelia acceded and handed over to Leonida one (1) set of marques with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00 and one (1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A") therefor, thus:

"RECEIPT Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mga alahas na nakatala sa ibaba, upang aking ipagbili sa pamamagitan ng BIGAY PALA o Commission at Kaliwaan lamang. Ako'y hindi pinahihintulutan (na) ipagbili ang mga ito ng Pautang. Pinananagutan ko na ang mga alahas na ito ay hindi ko ipagkakaloob o ipagkakatiwala sa kanino pa man upang ilagak o maipagbili nila, at ang mga ito ay ako ang magbibili sa ilalim ng aking pangangasiwa at pananagutan sa halagang nakatala sa ibaba. At aking isasauli ang mga hindi na maipagbili sa loob ng 5 days (sic) araw mula sa petsa nito o sa kahilingan, na nasa mabuti at malinis na kalagayan katulad ng tanggapin ko sa petsang ito. MGA URI NG ALAHAS 1 set marques with titos 1 solo 2 karats & 30 points 1 ring Rosetas brill Makati, March 23, 1977 (Sgd.)"[2]
When the 5-day period given to her had lapsed, Leonida requested for and was granted additional time within which to vend the items. Leonida failed to

17,500. 16,000. 2,500.

conclude any sale and, about six (6) months later, Aurelia asked that the pieces of jewelry be returned. She sent to Leonida a demand letter which the latter ignored. The inexplicable delay of Leonida in returning the items spurred the filing of the case for estafa against her. The defense proffered differently. In its version, the defense sought to prove that Leonida was engaged in the purchase and sale of jewelry. She was used to buying pieces of jewelry from a certain Mrs. Antonia Ilagan who later introduced her (Leonida) to Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started to transact business in pieces of jewelry among which included a solo ring worth P40,000.00 which was sold to Mrs. Camacho who paid P20,000.00 in check and the balance of P20,000.00 in installments later paid directly to Aurelia. The last transaction Leonida had-with Mrs. Camacho involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs. Camacho was not able to pay the due amount in full and left a balance of P13,000.00. Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay the balance in installments. Leonida was also able to sell for Aurelia a 2-karat diamond ring worth P17,000.00 to Mrs. Concordia Ramos who, unfortunately, was unable to pay the whole amount. Leonida brought Mrs. Ramos to Aurelia and they talked about the terms of payment. As first payment, Mrs. Ramos gave Leonida a ring valued at P3,000.00. The next payment made by her was P5,000.00. Leonida herself then paid P2,000.00. The RTC, in its 25th January 1993 decision, found Leonida guilty beyond reasonable doubt of the crime of estafa and sentenced her to suffer the penalty of imprisonment of seven (7) years and one (1) day of prision mayor as minimum to nine (9) years of prision mayor as maximum and to indemnify private complainant in the amount of P36,000.00. Leonida interposed an appeal to the Court of Appeals which affirmed, in its 27th September 1996 decision, the RTC's assailed judgment. The instant petition before this Court would have it that the agreement between petitioner and private complainant was effectively novated when the latter consented to receive payment on installments directly from Mrs. Camacho and Mrs. Ramos. The petition is bereft of merit. Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal).[3] Under this mode, novation would have dual functions - one to extinguish an existing obligation, the other to substitute a new one in its place[4] requiring a conflux of four essential requisites: (1) a previous valid obligation; (2)

an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.[5] Novation is never presumed,[6] and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.[7] The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly.[8] The term "expressly" means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.[9] Upon the other hand, no specific form is required for an implied novation,[10] and all that is prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.[11] There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.[12] Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. The changes alluded to by petitioner consists only in the manner of payment. There was really no substitution of debtors since private complainant merely acquiesced to the payment but did not give her consent[13] to enter into a new contract. The appellate court observed:

"Appellant, however, insists that their agreement was novated when complainant agreed to be paid directly by the buyers and on installment basis. She adds that her liability is merely civil in nature. "We are unimpressed. "It is to remembered that one of the buyers, Concordia Ramos, was not presented to testify on the alleged aforesaid manner of payment. "The acceptance by complainant of partial payment tendered by the buyer, Leonor Camacho, does not evince the intention of the

complainant to have their agreement novated. It was simply necessitated by the fact that, at that time, Camacho had substantial accounts payable to complainant, and because of the fact that appellant made herself scarce to complainant. (TSN, April 15, 1981, 31-32) Thus, to obviate the situation where complainant would end up with nothing, she was forced to receive the tender of Camacho. Moreover, it is to be noted that the aforesaid payment was for the purchase, not of the jewelry subject of this case, but of some other jewelry subject of a previous transaction. (Ibid.June 8, 1981, 10-11)"[14]
There are two forms of novation by substituting the person of the debtor, depending on whose initiative it comes from, to wit: expromision and delegacion. In the former, the initiative for the change does not come from the debtor and may even be made without his knowledge. Since a third person would substitute for the original debtor and assume the obligation, his consent and that of the creditor would be required. In the latter, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation, thereby releasing the original debtor from the obligation, here, the intervention and the consent of all parties thereto would perforce be necessary.[15] In either of these two modes of substitution, the consent of the creditor, such as can be seen, is an indispensable requirement.[16] It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment on installment basis cannot be construed as a case of either expromision or delegacionsufficient to justify the attendance of extinctive novation. Not too uncommon is when a stranger to a contract agrees to assume an obligation; and while this may have the effect of adding to the number of persons liable, it does not necessarily imply the extinguishment of the liability of the first debtor.[17] Neither would the fact alone that the creditor receives guaranty or accepts payments from a third person who has agreed to assume the obligation, constitute an extinctive novation absent an agreement that the first debtor shall be released from responsibility.[18] Petitioner's reliance on Candida Mariano vs. People[19] is misplaced. The factual milieu in Mariano would indicate a clear intention on the part of the parties to release the accused from her responsibility as an agent and for her to instead assume the obligation of a guarantor. Unfortunately for petitioner in the case at bar, the factual findings of both the trial court and the appellate court prove just the opposite which is that there has never been any animus novandi between or among the parties. Article 315 of the Revised Penal Code defines estafa and penalizes any person who shall defraud another by "misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying

having received such money, goods, or other property." It is axiomatic that the gravamen of the offense is the appropriation or conversion of money or property received to the prejudice of the owner. The terms "convert" and "misappropriate" have been held to connote "an act of using or disposing of another's property as if it were one's own or devoting it to a purpose or use different from that agreed upon." The phrase, 'to misappropriate to one's own use" has been said to include "not only conversion to one's personal advantage, but also every attempt to dispose of the property of another without right."[20] Verily, the sale of the pieces of jewelry on installments in contravention of the explicit terms of the authority granted to her in Exhibit "A" (supra) is deemed to be one of conversion. Thus, neither the theory of "delay in the fulfillment of commission" nor that of novation posed by petitioner, can avoid the incipient criminal liability. In People vs. Nery,[21] this Court held:

"It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be either to prevent the rise of criminal liability or to cast doubt on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal responsibility ..."
The criminal liability for estafa already committed is then not affected by the subsequent novation of contract, for it is a public offense which must be prosecuted and punished by the State in its own conation.[22] Finally, this Court fails to see any reversible error, let alone any grave abuse of discretion, in the appreciation of the evidence by the Court of Appeals which, in fact, hews with those of the trial court. Indeed, under the circumstances, this Court must be deemed bound by the factual findings of those courts. Article 315, 1st paragraph, of the Revised Penal Code, as amended by Presidential Decree No. 818, provides that the penalty of "prision correccional in its maximum period toprison mayor in its minimum period, if the amount of the fraud is over 12,000 but does not exceed 22,000 pesos, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In such case, and in connection with the accessory penalties which may be imposed and for the purpose of the other provisions of this Code, the penalty shall be termedprision mayor or reclusion temporal, as the case may be." In the leading case of People vs. Gabres[23] this Court ruled:

"Under the Indeterminate Sentence Law, the maximum term of the penalty shall be 'that which, in view of the attending circumstances, could be properly imposed' under the Revised Penal Code, and the

minimum shall be 'within the range of the penalty next lower to that prescribed' for the offense. The penalty next lower should be based on the penalty prescribed by the Code for the offense, without first considering any modifying circumstance attendant to the commission of the crime. The determination of the minimum penalty is left by law to the sound discretion of the court and it can be anywhere within the range of the penalty next lower without any reference to the periods into which it might be subdivided. The modifying circumstances are considered only in the imposition of the maximum term of the indeterminate sentence. "The fact that the amounts involved in the instant case exceed P22,000.00 should not be considered in the initial determination of the indeterminate penalty; instead, the matter should be so taken as analogous to modifying circumstances in the imposition of the maximum term of the full indeterminate sentence. This interpretation of the law accords with the rule that penal laws should be construed in favor of the accused. Since the penalty prescribed by law for the estafa charge against accused-appellant is prision correccionalmaximum to prision mayor minimum, the penalty next lower would then be prision correccional minimum to medium. Thus, the minimum term of the indeterminate sentence should be anywhere within six (6) months and one (1) day to four (4) years and two (2) months while the maximum term of the indeterminate sentence should at least be six (6) years and one (1) day because the amounts involved exceeded P22,000.00, plus an additional one (1) year for each additional P10,000.00."[24]
The penalty imposed by the trial court, affirmed by the appellate court, should accordingly be modified. WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED except that the imprisonment term is MODIFIED by now sentencing petitioner to an indeterminate penalty of from two (2) years, eight (8) months and one (1) day of prison correccional to seven (7) years and one (1) day of prision mayor. The civil liability of appellant forP36,000.00 in favor of private complainant is maintained. Costs against petitioner. SO ORDERED. Romero, JJ., concur. (Chairman), Panganiban, Purisima, and Gonzaga-Reyes,

THIRD DIVISION

[G.R. No. 142838. August 9, 2001]

ABELARDO B. LICAROS, petitioner, GATMAITAN, respondent. DECISION

GONZAGA-REYES, J.:

vs. ANTONIO

P.

This is a petition for review on certiorari under Rule 45 of the Rules of Court. The petition seeks to reverse and set aside the Decision dated February 10, 2000 of the Court of Appeals and its Resolution dated April 7, 2000 denying petitioners Motion for Reconsideration thereto. The appellate court decision reversed the Decision dated November 11, 1997 of the Regional Trial Court of Makati, Branch 145 in Civil Case No. 96-1211.
[1] [2] [3]

The facts of the case, as stated in the Decision of the Court of Appeals dated February 10, 2000, are as follows:

The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a private bank registered and organized to do business under the laws of the Republic of Vanuatu but not in the Philippines. Its business consists primarily in receiving fund placements by way of deposits from institutions and individual investors from different parts of the world and thereafter investing such deposits in money market placements and potentially profitable capital ventures in Hongkong, Europe and the United States for the purpose of maximizing the returns on those investments. Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a Filipino businessman, decided to make a fund placement with said bank sometime in the 1980s. As it turned out, the grim outcome of Licaros foray in overseas fund investment was not exactly what he envisioned it to be. More particularly, Licaros, after having invested in Anglo-Asean, encountered tremendous and unexplained difficulties in retrieving, not only the interest or profits, but even the very investments he had put in Anglo-Asean. Confronted with the dire prospect of not getting back any of his investments, Licaros then decided to seek the counsel of Antonio P. Gatmaitan, a reputable banker and investment manager who had been extending managerial, financial

and investment consultancy services to various firms and corporations both here and abroad. To Licaros relief, Gatmaitan was only too willing enough to help. Gatmaitan voluntarily offered to assume the payment of Anglo-Aseans indebtedness to Licaros subject to certain terms and conditions. In order to effectuate and formalize the parties respective commitments, the two executed a notarized MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh. B; also Exhibit 1), the full text of which reads: Memorandum of Agreement KNOW ALL MEN BY THESE PRESENTS: This MEMORANDUM OF AGREEMENT made and executed this 29th day of July 1988, at Makati by and between: ABELARDO B. LICAROS, Filipino, of legal age and holding office at Concepcion Building, Intramuros, Manila hereinafter referred to as THE PARTY OF THE FIRST PART, and ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7 Mangyan St., La Vista, hereinafter referred to as the PARTY OF THE SECOND PART, WITNESSETH THAT: WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated by the Republic of Vanuatu, hereinafter referred to as the OFFSHORE BANK, is indebted to the PARTY OF THE FIRST PART in the amount of US dollars; ONE HUNDRED FIFTY THOUSAND ONLY (US$150,000) which debt is now due and demandable. WHEREAS, the PARTY OF THE FIRST PART has encountered difficulties in securing full settlement of the said indebtedness from the OFFSHORE BANK and has sought a business arrangement with the PARTY OF THE SECOND PART regarding his claims; WHEREAS, the PARTY OF THE SECOND PART, with his own resources and due to his association with the OFFSHORE BANK, has offered to the PARTY OF THE FIRST PART to assume the payment of the aforesaid indebtedness, upon certain terms and conditions, which offer, the PARTY OF THE FIRST PART has accepted;

WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record herein with the express conformity of the third parties concerned; NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants stipulated herein, the PARTY OF THE FIRST PART and the PARTY OF THE SECOND PART have agreed, as they do hereby agree, as follows: 1. The PARTY OF THE SECOND PART hereby undertakes to pay the PARTY OF THE FIRST PART the amount of US DOLLARS ONE HUNDRED FIFTY THOUSAND((US$150,000) payable in Philippine Currency at the fixed exchange rate of Philippine Pesos 21 to US$1 without interest on or before July 15, 1993. For this purpose, the PARTY OF THE SECOND PART shall execute and deliver a non negotiable promissory note, bearing the aforesaid material consideration in favor of the PARTY OF THE FIRST PART upon execution of this MEMORANDUM OF AGREEMENT, which promissory note shall form part as ANNEX A hereof. 2. For and in consideration of the obligation of the PARTY OF THE SECOND PART, the PARTY OF THE FIRST does hereby; a. Sell, assign, transfer and set over unto the PARTY OF THE SECOND PART that certain debt now due and owing to the PARTY OF THE FIRST PART by the OFFSHORE BANK, to the amount of US Dollars One Hundred Fifty Thousand plus interest due and accruing thereon; b. Grant the PARTY OF THE SECOND PART the full power and authority, for his own use and benefit, but at his own cost and expense, to demand, collect, receive, compound, compromise and give acquittance for the same or any part thereof, and in the name of the PARTY OF THE FIRST PART, to prosecute, and withdraw any suit or proceedings therefor; c. Agree and stipulate that the debt assigned herein is justly owing and due to the PARTY OF THE FIRST PART from the said OFFSHORE BANK, and that the PARTY OF THE FIRST PART has not done and will not cause anything to be done to diminish or discharge said debt, or to delay or prevent the PARTY OF THE SECOND PART from collecting the same; and;

d. At the request of the PARTY OF SECOND PART and the latters own cost and expense, to execute and do all such further acts and deeds as shall be reasonably necessary for proving said debt and to more effectually enable the PARTY OF THE SECOND PART to recover the same in accordance with the true intent and meaning of the arrangements herein. IN WITNESS WHEREOF, the parties have caused this MEMORANDUM OF AGREEMENT to be signed on the date and place first written above. Sgd. ABELARDO B. LICAROS GATMAITAN PARTY OF THE FIRST PART WITH OUR CONFORME: ANGLO-ASEAN BANK & TRUST BY: (Unsigned) SIGNED IN THE PRESENCE OF: Sgd. (illegible) ________________________ ________________________ Sgd. ANTONIO P. PARTY OF THE FIRST PART

Conformably with his undertaking under paragraph 1 of the aforequoted agreement, Gatmaitan executed in favor of Licaros a NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS (Exhs. A; also Exh. 2), which promissory note, appended as Annex A to the same Memorandum of Agreement, states in full, thus NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS This promissory note is Annex A of the Memorandum of Agreement executed between Abelardo B. Licaros and Antonio P. Gatmaitan, on ______ 1988 at Makati, Philippines and is an integral part of said Memorandum of Agreement. P3,150,000. On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum of Philippine Pesos 3,150,000 (P3,150,000) without interest as material consideration for the full settlement of his money claims from ANGLO-

ASEAN BANK, referred to in the Memorandum of Agreement as the OFFSHORE BANK. As security for the payment of this Promissory Note, I hereby ASSIGN, CEDE and TRANSFER, Seventy Percent (70%) of ALL CASH DIVIDENDS, that may be due or owing to me as the registered owner of ___________________ (__________) shares of stock in the Prudential Life Realty, Inc. This assignment shall likewise include SEVENTY PERCENT (70%) of cash dividends that may be declared by Prudential Life Realty, Inc. and due or owing to Prudential Life Plan, Inc., of which I am a stockholder, to the extent of or in proportion to my aforesaid shareholding in Prudential Life Plan, Inc., the latter being the holding company of Prudential Life Realty, Inc. In the event that I decide to sell or transfer my aforesaid shares in either or both the Prudential Life Plan, Inc. or Prudential Life Realty, Inc. and the Promissory Note remains unpaid or outstanding, I hereby give Mr. Abelardo B. Licaros the first option to buy the said shares. Manila, Philippines July _____, 1988 (SGD.) Antonio P. Gatmaitan 7 Mangyan St., La Vista, QC Signed in the Presence of (SGD.) _________________ _ Francisco A. Alba President, Prudential Life Plan, Inc..

_________________

Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier executed by him and Licaros for the purpose of collecting the latters placement thereat of U.S.$150,000.00. Albeit the officers of AngloAsean allegedly committed themselves to look into [this matter], no formal response was ever made by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not acted on Gatmaitans monetary claims.

Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to make good his promise to pay Licaros the amount stated in his promissory note (Exh. A; also Exh. 2). Licaros, however, thought differently. He felt that he had a right to collect on the basis of the promissory note regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July 1996, Licaros, thru counsel, addressed successive demand letters to Gatmaitan (Exhs. C and D), demanding payment of the latters obligations under the promissory note. Gatmaitan, however, did not accede to these demands. Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed the complaint in this case. In his complaint, docketed in the court below as Civil Case No. 96-1211, Licaros prayed for a judgment ordering Gatmaitan to pay him the following: a) Principal Obligation in the amount of Three Million Five Hundred Thousand Pesos (P3,500,000.00); b) Legal interest thereon at the rate of six (6%) percent per annum from July 16, 1993 when the amount became due until the obligation is fully paid; c) Twenty percent (20%) of the amount due as reasonable attorneys fees; d) Costs of the suit.
[4]

After trial on the merits, the court a quo rendered judgment in favor of petitioner Licaros and found respondent Gatmaitan liable under the Memorandum of Agreement and Promissory Note for P3,150,000.00 plus 12% interest per annum from July 16, 1993 until the amount is fully paid. Respondent was likewise ordered to pay attorneys fees of P200,000.00.
[5]

Respondent Gatmaitan appealed the trial courts decision to the Court of Appeals. In a decision promulgated on February 10, 2000, the appellate court reversed the decision of the trial court and held that respondent Gatmaitan did not at any point become obligated to pay to petitioner Licaros the amount stated in the promissory note. In a Resolution dated April 7, 2000, the Court of Appeals denied petitioners Motion for Reconsideration of its February 10, 2000 Decision. Hence this petition for review on certiorari where petitioner prays for the reversal of the February 10, 2000 Decision of the Court of Appeals and the reinstatement of the November 11, 1997 decision of the Regional Trial Court. The threshold issue for the determination of this Court is whether the Memorandum of Agreement between petitioner and respondent is one of assignment of credit or one of conventional subrogation. This matter is determinative of whether or not respondent became liable to petitioner under the promissory note considering that its efficacy is

dependent on the Memorandum of Agreement, the note being merely an annex to the said memorandum.
[6]

An assignment of credit has been defined as the process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale.
[7]

On the other hand, subrogation has been defined as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties.
[8]

The general tenor of the foregoing definitions of the terms subrogation and assignment of credit may make it seem that they are one and the same which they are not. A noted expert in civil law notes their distinctions thus:

Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the debtors consent is necessary; in the latter it is not required. Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditors right to another.
[9]

For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the original transaction. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce legal effects. What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories without the debtors consent. On the other hand, conventional subrogation requires an agreement among the three parties concerned the original creditor, the debtor, and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. Thus, Article 1301 of the Civil Code explicitly states that (C)onventional subrogation of a third person requires the consent of the original parties and of the third person.
[10] [11] [12]

The trial court, in finding for the petitioner, ruled that the Memorandum of Agreement was in the nature of an assignment of credit. As such, the court a quo held respondent liable for the amount stated in the said agreement even if the parties thereto failed to obtain the consent of Anglo-Asean Bank. On the other hand, the appellate court held that the agreement was one of conventional subrogation which necessarily requires the agreement of all the parties concerned. The Court of Appeals thus ruled that the Memorandum of Agreement never came into effect due to the failure of the parties to get

the consent of Anglo-Asean Bank to the agreement and, as such, respondent never became liable for the amount stipulated. We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July 29, 1988 was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank, for its validity. We note with approval the following pronouncement of the Court of Appeals:

Immediately discernible from above is the common feature of contracts involving conventional subrogation, namely, the approval of the debtor to the subrogation of a third person in place of the creditor. That Gatmaitan and Licaros had intended to treat their agreement as one of conventional subrogation is plainly borne by a stipulation in their Memorandum of Agreement, to wit: WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record herein with the express conformity of the third partiesconcerned (emphasis supplied), which third party is admittedly Anglo-Asean Bank. Had the intention been merely to confer on appellant the status of a mere assignee of appellees credit, there is simply no sense for them to have stipulated in their agreement that the same is conditioned on the express conformity thereto of Anglo-Asean Bank. That they did so only accentuates their intention to treat the agreement as one of conventional subrogation. And it is basic in the interpretation of contracts that the intention of the parties must be the one pursued (Rule 130, Section 12, Rules of Court). Given our finding that the Memorandum of Agreement (Exh. B; also Exh. 1), is not one of assignment of credit but is actually a conventional subrogation, the next question that comes to mind is whether such agreement was ever perfected at all. Needless to state, the perfection or non-perfection of the subject agreement is of utmost relevance at this point. For, if the same Memorandum of Agreement was actually perfected, then it cannot be denied that Gatmaitan still has a subsisting commitment to pay Licaros on the basis of his promissory note. If not, Licaros suit for collection must necessarily fail. Here, it bears stressing that the subject Memorandum of Agreement expressly requires the consent of Anglo-Asean to the subrogation. Upon whom the task of securing such consent devolves, be it on Licaros or Gatmaitan, is of no significance. What counts most is the hard reality that there has been an abject failure to get Anglo-Aseans nod of approval over Gatmaitans being

subrogated in the place of Licaros. Doubtless, the absence of such conformity on the part of Anglo-Asean, which is thereby made a party to the same Memorandum of Agreement, prevented the agreement from becoming effective, much less from being a source of any cause of action for the signatories thereto.
[13]

Aside for the whereas clause cited by the appellate court in its decision, we likewise note that on the signature page, right under the place reserved for the signatures of petitioner and respondent, there is, typewritten, the words WITH OUR CONFORME. Under this notation, the words ANGLO-ASEAN BANK AND TRUST were written by hand. To our mind, this provision which contemplates the signed conformity of Anglo-Asean Bank, taken together with the aforementioned preambulatory clause leads to the conclusion that both parties intended that Anglo-Asean Bank should signify its agreement and conformity to the contractual arrangement between petitioner and respondent. The fact that Anglo-Asean Bank did not give such consent rendered the agreement inoperative considering that, as previously discussed, the consent of the debtor is needed in the subrogation of a third person to the rights of a creditor.
[14]

In this petition, petitioner assails the ruling of the Court of Appeals that what was entered into by the parties was a conventional subrogation of petitioners rights as creditor of the Anglo-Asean Bank which necessarily requires the consent of the latter. In support, petitioner alleges that: (1) the Memorandum of Agreement did not create a new obligation and, as such, the same cannot be a conventional subrogation; (2) the consent of Anglo-Asean Bank was not necessary for the validity of the Memorandum of Agreement; (3) assuming that such consent was necessary, respondent failed to secure the same as was incumbent upon him; and (4) respondent himself admitted that the transaction was one of assignment of credit. Petitioner argues that the parties to the Memorandum of Agreement could not have intended the same to be a conventional subrogation considering that no new obligation was created. According to petitioner, the obligation of Anglo-Asean Bank to pay under Contract No. 00193 was not extinguished and in fact, it was the basic intention of the parties to the Memorandum of Agreement to enforce the same obligation of Anglo-Asean Bank under its contract with petitioner. Considering that the old obligation of AngloAsean Bank under Contract No. 00193 was never extinguished under the Memorandum of Agreement, it is contended that the same could not be considered as a conventional subrogation. We are not persuaded. It is true that conventional subrogation has the effect of extinguishing the old obligation and giving rise to a new one. However, the extinguishment of the old obligation is the effect of the establishment of a contract for conventional subrogation. It is not a requisite without which a contract for conventional subrogation may not be created. As such, it is not determinative of whether or not a contract of conventional subrogation was constituted.

Moreover, it is of no moment that the subject of the Memorandum of Agreement was the collection of the obligation of Anglo-Asean Bank to petitioner Licaros under Contract No. 00193. Precisely, if conventional subrogation had taken place with the consent of Anglo-Asean Bank to effect a change in the person of its creditor, there is necessarily created a new obligation whereby Anglo-Asean Bank must now give payment to its new creditor, herein respondent. Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not necessary to the validity of the Memorandum of Agreement as the evidence on record allegedly shows that it was never the intention of the parties thereto to treat the same as one of conventional subrogation. He claims that the preambulatory clause requiring the express conformity of third parties, which admittedly was Anglo-Asean Bank, is a mere surplusage which is not necessary to the validity of the agreement. As previously discussed, the intention of the parties to treat the Memorandum of Agreement as embodying a conventional subrogation is shown not only by the whereas clause but also by the signature space captioned WITH OUR CONFORME reserved for the signature of a representative of Anglo-Asean Bank. These provisions in the aforementioned Memorandum of Agreement may not simply be disregarded or dismissed as superfluous. It is a basic rule in the interpretation of contracts that (t)he various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Moreover, under our Rules of Court, it is mandated that (i)n the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all. Further, jurisprudence has laid down the rule that contracts should be so construed as to harmonize and give effect to the different provisions thereof.
[15] [16] [17]

In the case at bench, the Memorandum of Agreement embodies certain provisions that are consistent with either a conventional subrogation or assignment of credit. It has not been shown that any clause or provision in the Memorandum of Agreement is inconsistent or incompatible with a conventional subrogation. On the other hand, the two cited provisions requiring consent of the debtor to the memorandum is inconsistent with a contract of assignment of credit. Thus, if we were to interpret the same as one of assignment of credit, then the aforementioned stipulations regarding the consent of Anglo-Asean Bank would be rendered inutile and useless considering that, as previously discussed, the consent of the debtor is not necessary in an assignment of credit. Petitioner next argues that assuming that the conformity of Anglo-Asean was necessary to the validity of the Memorandum of Agreement, respondent only had himself to blame for the failure to secure such conformity as was, allegedly, incumbent upon him under the memorandum. As to this argument regarding the party responsible for securing the conformity of Anglo-Asean Bank, we fail to see how this question would have any relevance on the outcome of this case. Having ruled that the consent of Anglo-Asean was necessary for the validity of the Memorandum of Agreement, the determinative fact is that such consent

was not secured by either petitioner or respondent which consequently resulted in the invalidity of the said memorandum. With respect to the argument of petitioner that respondent himself allegedly admitted in open court that an assignment of credit was intended, it is enough to say that respondent apparently used the word assignment in his testimony in the general sense. Respondent is not a lawyer and as such, he is not so well versed in law that he would be able to distinguish between the concepts of conventional subrogation and of assignment of credit. Moreover, even assuming that there was an admission on his part, such admission is not conclusive on this court as the nature and interpretation of the Memorandum of Agreement is a question of law which may not be the subject of stipulations and admissions.
[18]

Considering the foregoing, it cannot then be said that the consent of the debtor Anglo-Asean Bank is not necessary to the validity of the Memorandum of Agreement. As above stated, the Memorandum of Agreement embodies a contract for conventional subrogation and in such a case, the consent of the original parties and the third person is required. The absence of such conformity by Anglo-Asean Bank prevented the Memorandum of Agreement from becoming valid and effective. Accordingly, the Court of Appeals did not err when it ruled that the Memorandum of Agreement was never perfected.
[19]

Having arrived at the above conclusion, the Court finds no need to discuss the other issues raised by petitioner. WHEREFORE, the instant petition is DENIED and the Decision of the Court of Appeals dated February 10, 2000 and its Resolution dated April 7, 2000 are hereby AFFIRMED. Melo, (Chairman), Vitug, and Panganiban, JJ., concur. Sandoval-Gutierrez, J., on leave.

SECOND DIVISION

[G.R. No. 136729. September 23 ,2003]

ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent. DECISION
AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of the Court of Appeals in CA-G.R. CV No. 41274, affirming the decision of the Regional Trial Court (Branch 147) of Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for brevity) were ordered to pay respondent Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee), jointly and severally, the amount of P3,621,187.52 with interests and costs.
[1]

The antecedent facts are undisputed. Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to P3,000,000.00 with interest and secured by three promissory notes: PN NO. PFX-254 dated December 14, 1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477 dated August 27, 1981 for P2,000,000.00. In each of these promissory notes, it appears that petitioner Roxas signed twice, as President of Astro and in his personal capacity. Roxas also signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as surety.
[2] [3]

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of Astros loan, subject to the condition that upon payment by Philguanrantee of said amount, it shall be proportionally subrogated to the rights of Philtrust against Astro.
[4] [5]

As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for sum of money with the RTC of Makati.

In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed the same in blank and the phrases in his personal capacity and in his official capacity were fraudulently inserted without his knowledge.
[6]

After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive portion: WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the plaintiff and against the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay, jointly and severally, the plaintiff the sum of P3,621.187.52 representing the total obligation of defendants in favor of plaintiff Philguarantee as of December 31, 1984 with interest at the stipulated rate of 16% per annum and stipulated penalty charges of 16% per annum computed from January 1, 1985 until the amount is fully paid. With costs. SO ORDERED.
[7]

The trial court observed that if Roxas really intended to sign the instruments merely in his capacity as President of Astro, then he should have signed only once in the promissory note.
[8]

On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas failed to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that private transactions have been fair and regular must be sustained.
[9]

In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly and severally liable (solidary) with Astro for the sum awarded by the RTC. The answer is in the affirmative. Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president of Astro and second, in his personal capacity. In signing his name aside from being the President of Asro, Roxas became a comaker of the promissory notes and cannot escape any liability arising from it. Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. Thus, even without the phrase personal capacity, Roxas will
[10] [11]

still be primarily liable as a joint and several debtor under the notes considering that his intention to be liable as such is manifested by the fact that he affixed his signature on each of the promissory notes twice which necessarily would imply that he is undertaking the obligation in two different capacities, official and personal. Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures affixed by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that portions of his signatures covered portions of the typewritten words personal capacity indicating with certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus demolishing his claim that the typewritten words were just inserted after he signed the promissory notes. If what he claims is true, then portions of the typewritten words would have covered portions of his signatures, and not vice versa. As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so that this Court could not discern the same observations on the notes, Exhibits A-4 and 3-A and B-4 and 4-A. Nevertheless, the following discussions equally apply to all three promissory notes. The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order... An instrument which begins with I, We, or Either of us promise to pay, when signed by two or more persons, makes them solidarily liable. Also, the phrase joint and several binds the makers jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit. Having signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may choose to enforce the notes against him alone or jointly with Astro.
[12] [13] [14]

Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is not disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the trial and appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to overcome the presumptions that private transactions are presumed to be fair and regular and that a person takes ordinary care of his concerns. Aside from his self-serving allegations, Roxas failed to prove the truth of such
[15] [16]

allegations. Thus, said presumptions prevail over his claims. Bare allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under our Rules of Court.
[17]

Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care of his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign document without first informing himself of its contents and consequences. Clearly, he knew the nature of the transactions and documents involved as he not only executed these notes on two different dates but he also executed, and again, signed twice, a continuing Surety ship Agreement notarized on July 31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even re-enforced his solidary liability Philtrust because as a surety, he bound himself jointly and severally with Astros obligation. Roxas cannot now avoid liability by hiding under the convenient excuse that he merely signed the notes in blank and the phrases in personal capacity and in his official capacity were fraudulently inserted without his knowledge.
[18]

Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of 70% of roxas and Astro Electronics Corp.s loan obligation. In compliance with its contract of Guarantee in favor of Philtrust. Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Instances of legal subrogation are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement of the parties.
[19] [20] [21]

Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of the legal subrogation that occurs by operation of law, and without need of the debtors knowledge. Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas and Astro because the guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.
[22] [23]

WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998, the same is hereby AFFIRMED in toto. SO ORDERED. Bellosillo, (Chairman), Callejo, Sr., and Tinga, JJ., concur. Quisumbing, J., in the result.