THIRD DIVISION

[G.R. No. 138677. February 12, 2002]

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT

OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.

DECISION

VITUG, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court, assailing the decision and resolutions of the Court of Appeals
in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. vs. Tolomeo
Ligutan, et al."

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May

1981 a loan in the amount of P120,000.00 from respondent Security Bank
and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest of
15.189% per annum upon maturity and to pay a penalty of 5% every month
on the outstanding principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by way of attorneys
fees if the matter were indorsed to a lawyer for collection or if a suit were
instituted to enforce payment. The obligation matured on 8 September 1981;
the bank, however, granted an extension but only up until 29 December
1981.

Despite several demands from the bank, petitioners failed to settle the debt
which, as of 20 May 1982, amounted to P114,416.10. On 30 September 1982,
the bank sent a final demand letter to petitioners informing them that they
had five days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November 1982, with the
Regional Trial Court of Makati, Branch 143, a complaint for recovery of the
due amount.

After petitioners had filed a joint answer to the complaint, the bank presented
its evidence and, on 27 March 1985, rested its case. Petitioners, instead of
introducing their own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of petitioners and their counsel
on 28 August 1985, the third hearing date, the bank moved, and the trial
court resolved, to consider the case submitted for decision.

Two years later, or on 23 October 1987, petitioners filed a motion for

reconsideration of the order of the trial court declaring them as having
waived their right to present evidence and prayed that they be allowed to
prove their case. The court a quo denied the motion in an order, dated 5
September 1988, and on 20 October 1989, it rendered its decision,[1] the
dispositive portion of which read:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and

against the defendants, ordering the latter to pay, jointly and severally, to the
plaintiff, as follows:

"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
annum, 2% service charge and 5% per month penalty charge, commencing
on 20 May 1982 until fully paid;

"2. To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorneys fees; and

"3. To pay the costs of the suit.[2]

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

rejection by the trial court of their motion to present evidence and assailing
the imposition of the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decision[3] of 7 March 1996, the appellate
court affirmed the judgment of the trial court except on the matter of the 2%
service charge which was deleted pursuant to Central Bank Circular No. 783.
Not fully satisfied with the decision of the appellate court, both parties filed
their respective motions for reconsideration.[4] Petitioners prayed for the
reduction of the 5% stipulated penalty for being unconscionable. The bank,
on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of
default as so stipulated in the contract of the parties.

On 28 October 1998, the Court of Appeals resolved the two motions thusly:

We find merit in plaintiff-appellees claim that the principal sum of

P114,416.00 with interest thereon must commence not on the date of filing of
the complaint as we have previously held in our decision but on the date
when the obligation became due.

Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render
the obligor in default when the obligation or the law so provides.

In the case at bar, defendants-appellants executed a promissory note where

they undertook to pay the obligation on its maturity date 'without necessity
of demand.' They also agreed to pay the interest in case of non-payment
from the date of default.

xxxxxxxxx

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

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

Considering that defendants-appellants partially complied with their

obligation under the promissory note by the reduction of the original amount
of P120,000.00 to P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest of justice and
public policy, a penalty of 3% per month or 36% per annum would suffice.

xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The
defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby
ordered to pay the plaintiff-appellee Security Bank and Trust Company the
following:

1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
annum and 3% per month penalty charge commencing May 20, 1982 until
fully paid;

2. The sum equivalent to 10% of the total amount of the indebtedness as and
for attorneys fees.[5]

On 16 November 1998, petitioners filed an omnibus motion for

reconsideration and to admit newly discovered evidence,[6] alleging that
while the case was pending before the trial court, petitioner Tolomeo Ligutan
and his wife Bienvenida Ligutan executed a real estate mortgage on 18
January 1984 to secure the existing indebtedness of petitioners Ligutan and
dela Llana with the bank. Petitioners contended that the execution of the real
estate mortgage had the effect of novating the contract between them and
the bank. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the
bank did not credit them with the proceeds of the sale. The appellate court
denied the omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion for
reconsideration cannot be entertained under Section 2, Rule 52, of the 1997
Rules of Civil Procedure. Furthermore, the appellate court said, the newly-
discovered evidence being invoked by petitioners had actually been known to
them when the case was brought on appeal and when the first motion for
reconsideration was filed.[7]

Aggrieved by the decision and resolutions of the Court of Appeals, petitioners

elevated their case to this Court on 9 July 1999 via a petition for review on
certiorari under Rule 45 of the Rules of Court, submitting thusly -

I. The respondent Court of Appeals seriously erred in not holding that the
15.189% interest and the penalty of three (3%) percent per month or thirty-
six (36%) percent per annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant, iniquitous and
unconscionable.

II. The respondent Court of Appeals gravely erred in not reducing to a

reasonable level the ten (10%) percent award of attorneys fees which is
highly and grossly excessive, unreasonable and unconscionable.

III. The respondent Court of Appeals gravely erred in not admitting petitioners
newly discovered evidence which could not have been timely produced
during the trial of this case.

IV. The respondent Court of Appeals seriously erred in not holding that there
was a novation of the cause of action of private respondents complaint in the
instant case due to the subsequent execution of the real estate mortgage
during the pendency of this case and the subsequent foreclosure of the
mortgage.[8]

Respondent bank, which did not take an appeal, would, however, have it that
the penalty sought to be deleted by petitioners was even insufficient to fully
cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso, particularly
vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence.
The Bank would stress that only the amount of P5,584.00 had been remitted
out of the entire loan of P120,000.00.[9]

A penalty clause, expressly recognized by law,[10] is an accessory

undertaking to assume greater liability on the part of an obligor in case of
breach of an obligation. It functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof on the existence
and on the measure of damages caused by the breach.[12] Although a court
may not at liberty ignore the freedom of the parties to agree on such terms
and conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless,
may be equitably reduced by the courts if it is iniquitous or unconscionable or
if the principal obligation has been partly or irregularly complied with.[13]
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factors
as, but not necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to
the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court
of Appeals,[14] just an example, the Court has tempered the penalty charges
after taking into account the debtors pitiful situation and its offer to settle the
entire obligation with the creditor bank. The stipulated penalty might likewise
be reduced when a partial or irregular performance is made by the debtor.
[15] The stipulated penalty might even be deleted such as when there has
been substantial performance in good faith by the obligor,[16] when the
penalty clause itself suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.[17]

The Court of Appeals, exercising its good judgment in the instant case, has
reduced the penalty interest from 5% a month to 3% a month which
petitioner still disputes. Given the circumstances, not to mention the
repeated acts of breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the appellate court..

Anent the stipulated interest of 15.189% per annum, petitioners, for the first
time, question its reasonableness and prays that the Court reduce the
amount. This contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the interest stipulation, on
its face, does not appear as being that excessive. The essence or rationale for
the payment of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A penalty stipulation is
not necessarily preclusive of interest, if there is an agreement to that effect,
the two being distinct concepts which may separately be demanded.[18]
What may justify a court in not allowing the creditor to impose full surcharges
and penalties, despite an express stipulation therefor in a valid agreement,
may not equally justify the non-payment or reduction of interest. Indeed, the
interest prescribed in loan financing arrangements is a fundamental part of
the banking business and the core of a bank's existence.[19]

Petitioners next assail the award of 10% of the total amount of indebtedness
by way of attorney's fees for being grossly excessive, exorbitant and
unconscionable vis-a-vis the time spent and the extent of services rendered
by counsel for the bank and the nature of the case. Bearing in mind that the
rate of attorneys fees has been agreed to by the parties and intended to
answer not only for litigation expenses but also for collection efforts as well,
the Court, like the appellate court, deems the award of 10% attorneys fees to
be reasonable.

Neither can the appellate court be held to have erred in rejecting petitioners'
call for a new trial or to admit newly discovered evidence. As the appellate
court so held in its resolution of 14 May 1999 -

Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second

motion for reconsideration of a judgment or final resolution by the same party
shall be entertained. Considering that the instant motion is already a second
motion for reconsideration, the same must therefore be denied.

Furthermore, it would appear from the records available to this court that the
newly-discovered evidence being invoked by defendants-appellants have
actually been existent when the case was brought on appeal to this court as
well as when the first motion for reconsideration was filed. Hence, it is quite
surprising why defendants-appellants raised the alleged newly-discovered
evidence only at this stage when they could have done so in the earlier
pleadings filed before this court.

The propriety or acceptability of such a second motion for reconsideration is

not contingent upon the averment of 'new' grounds to assail the judgment,
i.e., grounds other than those theretofore presented and rejected. Otherwise,
attainment of finality of a judgment might be stayed off indefinitely,
depending on the partys ingenuousness or cleverness in conceiving and
formulating 'additional flaws' or 'newly discovered errors' therein, or thinking
up some injury or prejudice to the rights of the movant for reconsideration.
[20]

At any rate, the subsequent execution of the real estate mortgage as security
for the existing loan would not have resulted in the extinguishment of the
original contract of loan because of novation. Petitioners acknowledge that
the real estate mortgage contract does not contain any express stipulation by
the parties intending it to supersede the existing loan agreement between
the petitioners and the bank.[21] Respondent bank has correctly postulated
that the mortgage is but an accessory contract to secure the loan in the
promissory note.

Extinctive novation requires, first, a previous valid obligation; second, the

agreement of all the parties to the new contract; third, the extinguishment of
the obligation; and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the
new obligation be on every point incompatible with each other.[23] An
obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding compatible
covenants or where the old contract is merely supplemented by the new one.
[24] When not expressed, incompatibility is required so as to ensure that the
parties have indeed intended such novation despite their failure to express it
in categorical terms. The incompatibility, to be sure, should take place in any
of the essential elements of the obligation, i.e., (1) the juridical relation or tie,
such as from a mere commodatum to lease of things, or from negotiorum
gestio to agency, or from a mortgage to antichresis,[25] or from a sale to one
of loan;[26] (2) the object or principal conditions, such as a change of the
nature of the prestation; or (3) the subjects, such as the substitution of a
debtor[27] or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself;
certain terms and conditions may be carried, expressly or by implication, over
to the new obligation.

WHEREFORE, the petition is DENIED.

THIRD DIVISION

[G.R. No. 157480. May 6, 2005]

PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION),

petitioner, vs. PHILIPPINE AMUSEMENT AND GAMING CORPORATION,
respondent.
DECISION

PANGANIBAN, J.:

In legal contemplation, the termination of a contract is not equivalent to its

rescission. When an agreement is terminated, it is deemed valid at inception.
Prior to termination, the contract binds the parties, who are thus obliged to
observe its provisions. However, when it is rescinded, it is deemed inexistent,
and the parties are returned to their status quo ante. Hence, there is mutual
restitution of benefits received. The consequences of termination may be
anticipated and provided for by the contract. As long as the terms of the
contract are not contrary to law, morals, good customs, public order or public
policy, they shall be respected by courts. The judiciary is not authorized to
make or modify contracts; neither may it rescue parties from
disadvantageous stipulations. Courts, however, are empowered to reduce
iniquitous or unconscionable liquidated damages, indemnities and penalties
agreed upon by the parties.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,

assailing the May 22, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR
CV No. 51629 and its March 4, 2003 Resolution[3] denying petitioners Motion
for Reconsideration. The assailed Decision disposed thus:

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

follows: (1) In Civil Case No. 93-68266, the appealed decision[,] is AFFIRMED
with MODIFICATION[,] ordering [Respondent] Philippine Amusement and
Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the total
amount of P687,289.50 as actual damages representing the accrued rentals
for the quarter September to November 1993 with interest and penalty at the
rate of two percent (2%) per month from date of filing of the complaint until
the amount shall have been fully paid, and the sum of P50,000.00 as
attorneys fees; (2) In Civil Case No. 93-68337, the appealed decision is
REVERSED and SET ASIDE and a new judgment is rendered ordering
[Petitioner] Pryce Properties Corporation to reimburse [Respondent] Philippine
Amusement and Gaming Corporation the amount of P687,289.50
representing the advanced rental deposits, which amount may be
compensated by [Petitioner] Pryce Properties Corporation with its award in
Civil Case No. 93-68266 in the equal amount of P687,289.50.[4]

The Facts

According to the CA, the facts are as follows:

Sometime in the first half of 1992, representatives from Pryce Properties

Corporation (PPC for brevity) made representations with the Philippine
Amusement and Gaming Corporation (PAGCOR) on the possibility of setting
up a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of
negotiations followed. PAGCOR representatives went to Cagayan de Oro City
to determine the pulse of the people whether the presence of a casino would
be welcomed by the residents. Some local government officials showed keen
interest in the casino operation and expressed the view that possible
problems were surmountable. Their negotiations culminated with PPCs
counter-letter proposal dated October 14, 1992.

On November 11, 1992, the parties executed a Contract of Lease x x x

involving the ballroom of the Hotel for a period of three (3) years starting
December 1, 1992 and until November 30, 1995. On November 13, 1992,
they executed an addendum to the contract x x x which included a lease of
an additional 1000 square meters of the hotel grounds as living quarters and
playground of the casino personnel. PAGCOR advertised the start of their
casino operations on December 18, 1992.

Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City

passed Resolution No. 2295 x x x dated November 19, 1990 declaring as a
matter of policy to prohibit and/or not to allow the establishment of a
gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated
October 19, 1992 (or a month before the contract of lease was executed) was
subsequently passed reiterating with vigor and vehemence the policy of the
City under Resolution No. 2295, series of 1990, banning casinos in Cagayan
de Oro City. On December 7, 1992, the Sangguniang Panlungsod of Cagayan
de Oro City enacted Ordinance No. 3353 x x x prohibiting the issuance of
business permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or any portion
thereof for the operation of a casino.
In the afternoon of December 18, 1992 and just hours before the actual
formal opening of casino operations, a public rally in front of the hotel was
staged by some local officials, residents and religious leaders. Barricades
were placed [which] prevented some casino personnel and hotel guests from
entering and exiting from the Hotel. PAGCOR was constrained to suspend
casino operations because of the rally. An agreement between PPC and
PAGCOR, on one hand, and representatives of the rallyists, on the other,
eventually ended the rally on the 20th of December, 1992.

On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the

Sangguniang Panlungsod of Cagayan de Oro City, prohibiting the operation of
casinos and providing for penalty for violation thereof. On January 7, 1993,
PPC filed a Petition for Prohibition with Preliminary Injunction x x x against
then public respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas x
x x before the Court of Appeals, docketed as CA G.R. SP No. 29851 praying
inter alia, for the declaration of unconstitutionality of Ordinance No. 3353.
PAGCOR intervened in said petition and further assailed Ordinance No. 4475-
93 as being violative of the non-impairment of contracts and equal protection
clauses. On March 31, 1993, the Court of Appeals promulgated its decision x
x x, the dispositive portion of which reads:

IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No.
3375-93 are hereby DECLARED UNCONSTITUTIONAL and VOID and the
respondents and all other persons acting under their authority and in their
behalf are PERMANENTLY ENJOINED from enforcing those ordinances.

SO ORDERED.

Aggrieved by the decision, then public respondents Cagayan de Oro City, et

al. elevated the case to the Supreme Court in G.R. No. 111097, where, in an
En Banc Decision dated July 20, 1994 x x x, the Supreme Court denied the
petition and affirmed the decision of the Court of Appeals.

In the meantime, PAGCOR resumed casino operations on July 15, 1993,

against which, however, another public rally was held. Casino operations
continued for some time, but were later on indefinitely suspended due to the
incessant demonstrations. Per verbal advice x x x from the Office of the
President of the Philippines, PAGCOR decided to stop its casino operations in
Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior
to September, 1993. In two Statements of Account dated September 1, 1993
x x x, PPC apprised PAGCOR of its outstanding account for the quarter
September 1 to November 30, 1993. PPC sent PAGCOR another Letter dated
September 3, 1993 x x x as a follow-up to the parties earlier conference. PPC
sent PAGCOR another Letter dated September 15, 1993 x x x stating its Board
of Directors decision to collect the full rentals in case of pre-termination of the
lease.

PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it
was not amenable to the payment of the full rentals citing as reasons
unforeseen legal and other circumstances which prevented it from complying
with its obligations. PAGCOR further stated that it had no other alternative
but to pre-terminate the lease agreement due to the relentless and vehement
opposition to their casino operations. In a letter dated October 12, 1993 x x x,
PAGCOR asked PPC to refund the total of P1,437,582.25 representing the
reimbursable rental deposits and expenses for the permanent improvement
of the Hotels parking lot. In a letter dated November 5, 1993 x x x, PAGCOR
formally demanded from PPC the payment of its claim for reimbursement.

On November 15, 1993 x x x, PPC filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68266. On
November 19, 1993, PAGCOR also filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68337.

In a letter dated November 25, 1993, PPC informed PAGCOR that it was
terminating the contract of lease due to PAGCORs continuing breach of the
contract and further stated that it was exercising its rights under the contract
of lease pursuant to Article 20 (a) and (c) thereof.

On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case

No. 93-68266, which the trial court admitted in an Order dated February 11,
1994. In an Order dated April 27, 1994, Civil Case No. 93-68377 was ordered
consolidated with Civil Case No. 93-68266. These cases were jointly tried by
the court a quo. On August 17, 1995, the court a quo promulgated its
decision. Both parties appealed.[5]

In its appeal, PPC faulted the trial court for the following reasons: 1) failure of
the court to award actual and moral damages; 2) the 50 percent reduction of
the amount PPC was claiming; and 3) the courts ruling that the 2 percent
penalty was to be imposed from the date of the promulgation of the Decision,
not from the date stipulated in the Contract.

On the other hand, PAGCOR criticized the trial court for the latters failure to
rule that the Contract of Lease had already been terminated as early as
September 21, 1993, or at the latest, on October 14, 1993, when PPC
received PAGCORs letter dated October 12, 1993. The gaming corporation
added that the trial court erred in 1) failing to consider that PPC was entitled
to avail itself of the provisions of Article XX only when PPC was the party
terminating the Contract; 2) not finding that there were valid, justifiable and
good reasons for terminating the Contract; and 3) dismissing the Complaint
of PAGCOR in Civil Case No. 93-68337 for lack of merit, and not finding PPC
liable for the reimbursement of PAGCORS cash deposits and of the value of
improvements.

Ruling of the Court of Appeals

First, on the appeal of PAGCOR, the CA ruled that the PAGCORS

pretermination of the Contract of Lease was unjustified. The appellate court
explained that public demonstrations and rallies could not be considered as
fortuitous events that would exempt the gaming corporation from complying
with the latters contractual obligations. Therefore, the Contract continued to
be effective until PPC elected to terminate it on November 25, 1993.

Regarding the contentions of PPC, the CA held that under Article 1659 of the
Civil Code, PPC had the right to ask for (1) rescission of the Contract and
indemnification for damages; or (2) only indemnification plus the continuation
of the Contract. These two remedies were alternative, not cumulative, ruled
the CA.

As PAGCOR had admitted its failure to pay the rentals for September to
November 1993, PPC correctly exercised the option to terminate the lease
agreement. Previously, the Contract remained effective, and PPC could collect
the accrued rentals. However, from the time it terminated the Contract on
November 25, 1993, PPC could no longer demand payment of the remaining
rentals as part of actual damages, the CA added.

Denying the claim for moral damages, the CA pointed out the failure of PPC
to show that PAGCOR had acted in gross or evident bad faith in failing to pay
the rentals from September to November 1993. Such failure was shown
especially by the fact that PPC still had in hand three (3) months advance
rental deposits of PAGCOR. The former could have simply applied this deposit
to the unpaid rentals, as provided in the Contract. Neither did PPC adequately
show that its reputation had been besmirched or the hotels goodwill eroded
by the establishment of the casino and the public protests.

Finally, as to the claimed reimbursement for parking lot improvement, the CA

held that PAGCOR had not presented official receipts to prove the latters
alleged expenses. The appellate court, however, upheld the trial courts award
to PPC of P50,000 attorneys fees.

Hence this Petition.[6]

Issues

In their Memorandum, petitioner raised the following issues:

MAIN ISSUE:

Did the Honorable Court of Appeals commit x x x grave and reversible error
by holding that Pryce was not entitled to future rentals or lease payments for
the unexpired period of the Contract of Lease between Pryce and PAGCOR?

Sub-Issues:
1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease
relative to the right of PRYCE to terminate the Contract for cause and to
moreover collect rentals from PAGCOR corresponding to the remaining term
of the lease valid and binding?

2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c)
of the Contract, PRYCE having rescinded the Contract of Lease?

3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other
cases cited by PAGCOR support its position that PRYCE was not entitled to
future rentals?

4. Would the collection by PRYCE of future rentals not give rise to unjust
enrichment?

5. Could we not have harmonized Article 1659 of the Civil Code and Article 20
of the Contract of Lease?

6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in
contracts, particularly in the PRYCE-PAGCOR Contract of Lease?[7]

The Courts Ruling

The Petition is partly meritorious.

Main Issue:

Collection of Remaining Rentals

PPC anchors its right to collect future rentals upon the provisions of the
Contract. Likewise, it argues that termination, as defined under the Contract,
is different from the remedy of rescission prescribed under Article 1659 of the
Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that Article
1659 of the Civil Code governs; hence, PPC is allegedly no longer entitled to
future rentals, because it chose to rescind the Contract.

Contract Provisions

Clear and Binding

Article 1159 of the Civil Code provides that obligations arising from contracts
have the force of law between the contracting parties and should be complied
with in good faith.[8] In deference to the rights of the parties, the law[9]
allows them to enter into stipulations, clauses, terms and conditions they
may deem convenient; that is, as long as these are not contrary to law,
morals, good customs, public order or public policy. Likewise, it is settled that
if the terms of the contract clearly express the intention of the contracting
parties, the literal meaning of the stipulations would be controlling.[10]

In this case, Article XX of the parties Contract of Lease provides in part as

follows:

XX. BREACH OR DEFAULT

a) The LESSEE agrees that all the terms, conditions and/or covenants herein
contained shall be deemed essential conditions of this contract, and in the
event of default or breach of any of such terms, conditions and/or covenants,
or should the LESSEE become bankrupt, or insolvent, or compounds with his
creditors, the LESSOR shall have the right to terminate and cancel this
contract by giving them fifteen (15 days) prior notice delivered at the leased
premises or posted on the main door thereof. Upon such termination or
cancellation, the LESSOR may forthwith lock the premises and exclude the
LESSEE therefrom, forcefully or otherwise, without incurring any civil or
criminal liability. During the fifteen (15) days notice, the LESSEE may prevent
the termination of lease by curing the events or causes of termination or
cancellation of the lease.
b) x x x x x x x x x

c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals
corresponding to the remaining term of the lease as well as for any and all
damages, actual or consequential resulting from such default and termination
of this contract.

d) x x x x x x x x x. (Italics supplied)

The above provisions leave no doubt that the parties have covenanted 1) to
give PPC the right to terminate and cancel the Contract in the event of a
default or breach by the lessee; and 2) to make PAGCOR fully liable for rentals
for the remaining term of the lease, despite the exercise of such right to
terminate. Plainly, the parties have voluntarily bound themselves to require
strict compliance with the provisions of the Contract by stipulating that a
default or breach, among others, shall give the lessee the termination option,
coupled with the lessors liability for rentals for the remaining term of the
lease.

For sure, these stipulations are valid and are not contrary to law, morals,
good customs, public order or public policy. Neither is there anything
objectionable about the inclusion in the Contract of mandatory provisions
concerning the rights and obligations of the parties.[11] Being the primary
law between the parties, it governs the adjudication of their rights and
obligations. A court has no alternative but to enforce the contractual
stipulations in the manner they have been agreed upon and written.[12] It is
well to recall that courts, be they trial or appellate, have no power to make or
modify contracts.[13] Neither can they save parties from disadvantageous
provisions.

Termination or Rescission?

Well-taken is petitioners insistence that it had the right to ask for termination
plus the full payment of future rentals under the provisions of the Contract,
rather than just rescission under Article 1659 of the Civil Code. This Court is
not unmindful of the fact that termination and rescission are terms that have
been used loosely and interchangeably in the past. But distinctions ought to
be made, especially in this controversy, in which the terms mean differently
and lead to equally different consequences.

The term rescission is found in 1) Article 1191[14] of the Civil Code, the
general provision on rescission of reciprocal obligations; 2) Article 1659,[15]
which authorizes rescission as an alternative remedy, insofar as the rights
and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 1380[16] with regard to the rescission of contracts.

In his Concurring Opinion in Universal Food Corporation v. CA,[17] Justice J. B.

L. Reyes differentiated rescission under Article 1191 from that under Article
1381 et seq. as follows:

x x x. The rescission on account of breach of stipulations is not predicated on

injury to economic interests of the party plaintiff but on the breach of faith by
the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to
anything other than the culpable breach of his obligations to the defendant.
This rescission is a principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when the other violates his.
As expressed in the old Latin aphorism: Non servanti fidem, non est fides
servanda. Hence, the reparation of damages for the breach is purely
secondary.

On the contrary, in rescission by reason of lesion or economic prejudice, the

cause of action is subordinated to the existence of that prejudice, because it
is the raison detre as well as the measure of the right to rescind. x x x.[18]

Relevantly, it has been pointed out that resolution was originally used in
Article 1124 of the old Civil Code, and that the term became the basis for
rescission under Article 1191 (and, conformably, also Article 1659).[19]

Now, as to the distinction between termination (or cancellation) and

rescission (more properly, resolution), Huibonhoa v. CA[20] held that, where
the action prayed for the payment of rental arrearages, the aggrieved party
actually sought the partial enforcement of a lease contract. Thus, the remedy
was not rescission, but termination or cancellation, of the contract. The Court
explained:

x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or

terminate the contract because they sought its partial enforcement in praying
for rental arrearages. There is a distinction in law between cancellation of a
contract and its rescission. To rescind is to declare a contract void in its
inception and to put an end to it as though it never were. It is not merely to
terminate it and release parties from further obligations to each other but to
abrogate it from the beginning and restore the parties to relative positions
which they would have occupied had no contract ever been made.

x x x. The termination or cancellation of a contract would necessarily entail

enforcement of its terms prior to the declaration of its cancellation in the
same way that before a lessee is ejected under a lease contract, he has to
fulfill his obligations thereunder that had accrued prior to his ejectment.
However, termination of a contract need not undergo judicial intervention. x x
x.[21] (Italics supplied)

Rescission has likewise been defined as the unmaking of a contract, or its

undoing from the beginning, and not merely its termination. Rescission may
be effected by both parties by mutual agreement; or unilaterally by one of
them declaring a rescission of contract without the consent of the other, if a
legally sufficient ground exists or if a decree of rescission is applied for before
the courts.[22] On the other hand, termination refers to an end in time or
existence; a close, cessation or conclusion. With respect to a lease or
contract, it means an ending, usually before the end of the anticipated term
of such lease or contract, that may be effected by mutual agreement or by
one party exercising one of its remedies as a consequence of the default of
the other.[23]

Thus, mutual restitution is required in a rescission (or resolution), in order to

bring back the parties to their original situation prior to the inception of the
contract.[24] Applying this principle to this case, it means that PPC would re-
acquire possession of the leased premises, and PAGCOR would get back the
rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their
original situation; neither is the contract treated as if it never existed. Prior to
its termination, the parties are obliged to comply with their contractual
obligations. Only after the contract has been cancelled will they be released
from their obligations.

In this case, the actions and pleadings of petitioner show that it never
intended to rescind the Lease Contract from the beginning. This fact was
evident when it first sought to collect the accrued rentals from September to
November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination. Any intent to rescind
was not shown, even when it abrogated the Contract on November 25, 1993,
because such abrogation was not the rescission provided for under Article
1659.

Future Rentals

As to the remaining sub-issue of future rentals, Rios v. Jacinto[25] is

inapplicable, because the remedy resorted to by the lessors in that case was
rescission, not termination. The rights and obligations of the parties in Rios
were governed by Article 1659 of the Civil Code; hence, the Court held that
the damages to which the lessor was entitled could not have extended to the
lessees liability for future rentals.

Upon the other hand, future rentals cannot be claimed as compensation for
the use or enjoyment of anothers property after the termination of a contract.
We stress that by abrogating the Contract in the present case, PPC released
PAGCOR from the latters future obligations, which included the payment of
rentals. To grant that right to the former is to unjustly enrich it at the latters
expense.

However, it appears that Section XX (c) was intended to be a penalty clause.

That fact is manifest from a reading of the mandatory provision under
subparagraph (a) in conjunction with subparagraph (c) of the Contract. A
penal clause is an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on
the debtor a special prestation (generally consisting in the payment of a sum
of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled.[26]

Quite common in lease contracts, this clause functions to strengthen the

coercive force of the obligation and to provide, in effect, for what could be the
liquidated damages resulting from a breach.[27] There is nothing immoral or
illegal in such indemnity/penalty clause, absent any showing that it was
forced upon or fraudulently foisted on the obligor.[28]

In obligations with a penal clause, the general rule is that the penalty serves
as a substitute for the indemnity for damages and the payment of interests in
case of noncompliance; that is, if there is no stipulation to the contrary,[29] in
which case proof of actual damages is not necessary for the penalty to be
demanded.[30] There are exceptions to the aforementioned rule, however, as
enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when there is
a stipulation to the contrary, 2) when the obligor is sued for refusal to pay the
agreed penalty, and 3) when the obligor is guilty of fraud. In these cases, the
purpose of the penalty is obviously to punish the obligor for the breach.
Hence, the obligee can recover from the former not only the penalty, but also
other damages resulting from the nonfulfillment of the principal obligation.
[31]

In the present case, the first exception applies because Article XX (c) provides
that, aside from the payment of the rentals corresponding to the remaining
term of the lease, the lessee shall also be liable for any and all damages,
actual or consequential, resulting from such default and termination of this
contract. Having entered into the Contract voluntarily and with full knowledge
of its provisions, PAGCOR must be held bound to its obligations. It cannot
evade further liability for liquidated damages.

Reduction of Penalty

In certain cases, a stipulated penalty may nevertheless be equitably reduced

by the courts.[32] This power is explicitly sanctioned by Articles 1229 and
2227 of the Civil Code, which we quote:
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a

penalty, shall be equitably reduced if they are iniquitous or unconscionable.

The question of whether a penalty is reasonable or iniquitous is addressed to

the sound discretion of the courts. To be considered in fixing the amount of
penalty are factors such as -- but not limited to -- the type, extent and
purpose of the penalty; the nature of the obligation; the mode of the breach
and its consequences; the supervening realities; the standing and
relationship of the parties; and the like.[33]

In this case, PAGCORs breach was occasioned by events that, although not
fortuitous in law, were in fact real and pressing. From the CAs factual findings,
which are not contested by either party, we find that PAGCOR conducted a
series of negotiations and consultations before entering into the Contract. It
did so not only with the PPC, but also with local government officials, who
assured it that the problems were surmountable. Likewise, PAGCOR took
pains to contest the ordinances[34] before the courts, which consequently
declared them unconstitutional. On top of these developments, the gaming
corporation was advised by the Office of the President to stop the games in
Cagayan de Oro City, prompting the former to cease operations prior to
September 1993.

Also worth mentioning is the CAs finding that PAGCORs casino operations had
to be suspended for days on end since their start in December 1992; and
indefinitely from July 15, 1993, upon the advice of the Office of President,
until the formal cessation of operations in September 1993. Needless to say,
these interruptions and stoppages meant that PAGCOR suffered a
tremendous loss of expected revenues, not to mention the fact that it had
fully operated under the Contract only for a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the
claim for future rentals to the tune of P7,037,835.40 to be highly iniquitous.
The amount should be equitably reduced. Under the circumstances, the
advanced rental deposits in the sum of P687,289.50 should be sufficient
penalty for respondents breach.

WHEREFORE, the Petition is GRANTED in part. The assailed Decision and

Resolution are hereby MODIFIED to include the payment of penalty.
Accordingly, respondent is ordered to pay petitioner the additional amount of
P687,289.50 as penalty, which may be set off or applied against the formers
advanced rental deposits. Meanwhile, the CAs award to petitioner of actual
damages representing the accrued rentals for September to November 1993
-- with interest and penalty at the rate of two percent (2%) per month, from
the date of filing of the Complaint until the amount shall have been fully paid
-- as well as the P50,000 award for attorneys fees, is AFFIRMED. No costs.

SO ORDERED.

SECOND DIVISION

[G.R. Nos. 128833. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO,

petitioners, vs. COURT OF APPEALS and GOYU & SONS, INC., respondents.

[G.R. No. 128834. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF

APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO,
respondents.

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.

D EC I S I O N
MELO, J.:

The issues relevant to the herein three consolidated petitions revolve around
the fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner
Malayan Insurance Company, Inc. (MICO) in connection with the mortgage
contracts entered into by and between Rizal Commercial Banking Corporation
(RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total
amount of P74,040,518.58, plus 37% interest per annum commencing July
27, 1992. RCBC was ordered to pay actual and compensatory damages in the
amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay
GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorneys
fees. GOYUs obligation to RCBC was fixed at P68,785,069.04 as of April 1992,
without any interest, surcharges, and penalties. RCBC and MICO appealed
separately but, in view of the common facts and issues involved, their
individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its
Binondo Branch. After due evaluation, RCBC Binondo Branch, through its key
officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs
application for approval by RCBCs executive committee. A credit facility in the
amount of P30 million was initially granted. Upon GOYUs application and Uys
and Laos recommendation, RCBCs executive committee increased GOYUs
credit facility to P50 million, then to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC, which were
registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each
of these four mortgage contracts, GOYU committed itself to insure the
mortgaged property with an insurance company approved by RCBC, and
subsequently, to endorse and deliver the insurance policies to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In
February 1992, Alchester Insurance Agency, Inc., the insurance agent where
GOYU obtained the Malayan insurance policies, issued nine endorsements in
favor of RCBC seemingly upon instructions of GOYU (Exhibits 1-Malayan to 9-
Malayan).

On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted
by fire. Consequently, GOYU submitted its claim for indemnity on account of
the loss insured against. MICO denied the claim on the ground that the
insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the insurance
proceeds were also claimed by other creditors of GOYU alleging better rights
to the proceeds than the insured. GOYU filed a complaint for specific
performance and damages which was docketed at the Regional Trial Court of
the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-
65442, now subject of the present G.R. No. 128833 and 128866.

RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the
same reasons that MICO denied GOYUs claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the
Regional Trial Court of Manila (Branch 3), confirmed that GOYUs other
creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust
Company obtained their respective writs of attachments from various courts,
covering an aggregate amount of P14,938,080.23, and ordered that the
proceeds of the ten insurance policies be deposited with the said court minus
the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO
deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.

In the meantime, another notice of garnishment was handed down by

another Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit
22-Malayan).

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,
disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant, Malayan Insurance Company, Inc. and Rizal
Commercial Banking Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of
P74,040,518.58 less the amount of P50,000,000.00 which is deposited with
this Court;

b. To pay the plaintiff damages by way of interest for the duration of the
delay since July 27, 1992 (ninety days after defendant insurers receipt of the
required proof of loss and notice of loss) at the rate of twice the ceiling
prescribed by the Monetary Board, on the following amounts:

1) P50,000,000.00 from July 27, 1992 up to the time said amount was
deposited with this Court on January 7, 1994;

2) P24,040,518.58 from July 27, 1992 up to the time when the writs of
attachments were received by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of

P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its
loan obligations with defendant RCBC in the amount of P68,785,069.04, as of
April 27, 1992, with interest thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties) per computation, pp. 14-
A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby
ordered to release immediately to the plaintiff the amount of P50,000,000.00
deposited with the Court by defendant Malayan, together with all the
interests earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was
unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed
the trial courts findings of liability on their part. The Court of Appeals partly
granted GOYUs appeal, but sustained the findings of the trial court with
respect to MICO and RCBCs liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby
modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58
less the amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in
court and damages by way of interest commencing July 27, 1992 until the
time Goyu receives the said amount at the rate of thirty-seven (37%) percent
per annum which is twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of

P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL

BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay
its loan obligation with RCBC in the amount of P68,785,069.04 as of April 27,
1992 without any interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered
to immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60
(per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc.,
together with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866,
respectively, seeking review and consequent reversal of the above
dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No.
CV-48376, which case, by virtue of the Court of Appeals resolution dated
August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of
herein G.R. No. 128833). At issue in said petition is RCBCs right to intervene
in the action between Alfredo C. Sebastian (the creditor) and GOYU (the
debtor), where the subject insurance policies were attached in favor of
Sebastian.

After a careful review of the material facts as found by the two courts below
in relation to the pertinent and applicable laws, we find merit in the
submissions of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several
related issues which are now submitted in the petitions before us. This Court,
however, discerns one primary and central issue, and this is, whether or not
RCBC, as mortgagee, has any right over the insurance policies taken by
GOYU, the mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to

GOYU, the latter executed several mortgage contracts in favor of RCBC. It was
expressly stipulated in these mortgage contracts that GOYU shall insure the
mortgaged property with any of the insurance companies acceptable to
RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance
company acceptable to RCBC. Based on their stipulations in the mortgage
contracts, GOYU was supposed to endorse these insurance policies in favor
of, and deliver them, to RCBC. Alchester Insurance Agency, Inc., MICOs
underwriter from whom GOYU obtained the subject insurance policies,
prepared the nine endorsements (see Exh. 1-Malayan to 9-Malayan; also Exh.
51-RCBC to 59-RCBC), copies of which were delivered to GOYU, RCBC, and
MICO. However, because these endorsements do not bear the signature of
any officer of GOYU, the trial court, as well as the Court of Appeals, concluded
that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separate and distinct
insurable interests in the same mortgaged property, such that each one of
them may insure the same property for his own sole benefit. There is no
question that GOYU could insure the mortgaged property for its own exclusive
benefit. In the present case, although it appears that GOYU obtained the
subject insurance policies naming itself as the sole payee, the intentions of
the parties as shown by their contemporaneous acts, must be given due
consideration in order to better serve the interest of justice and equity.

It is to be noted that nine endorsement documents were prepared by

Alchester in favor of RCBC. The Court is in a quandary how Alchester could
arrive at the idea of endorsing any specific insurance policy in favor of any
particular beneficiary or payee other than the insured had not such named
payee or beneficiary been specifically disclosed by the insured itself. It is also
significant that GOYU voluntarily and purposely took the insurance policies
from MICO, a sister company of RCBC, and not just from any other insurance
company. Alchester would not have found out that the subject pieces of
property were mortgaged to RCBC had not such information been voluntarily
disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have
known of GOYUs intention of obtaining insurance coverage in compliance with
its undertaking in the mortgage contracts with RCBC, and verily, Alchester
would not have endorsed the policies to RCBC had it not been so directed by
GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is

constrained to rule in favor of mortgagor RCBC. The basis and purpose of the
doctrine was explained in Philippine National Bank vs. Court of Appeals (94
SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice, and its purpose is to forbid one to speak
against his own act, representations, or commitments to the injury of one to
whom they were directed and who reasonably relied thereon. The doctrine of
estoppel springs from equitable principles and the equities in the case. It is
designed to aid the law in the administration of justice where without its aid
injustice might result. It has been applied by this Court wherever and
whenever special circumstances of a case so demand.
(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through
a certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the
nine endorsement documents for GOYUs nine insurance policies in favor of
RCBC. The original copies of each of these nine endorsement documents
were sent to GOYU, and the others were sent to RCBC and MICO, while the
fourth copies were retained for Alchesters file (tsn, February 23, pp. 7-8).
GOYU has not denied having received from Alchester the originals of these
endorsements.

RCBC, in good faith, relied upon the endorsement documents sent to it as this
was only pursuant to the stipulation in the mortgage contracts. We find such
reliance to be justified under the circumstances of the case. GOYU failed to
seasonably repudiate the authority of the person or persons who prepared
such endorsements. Over and above this, GOYU continued, in the meantime,
to enjoy the benefits of the credit facilities extended to it by RCBC. After the
occurrence of the loss insured against, it was too late for GOYU to disown the
endorsements for any imagined or contrived lack of authority of Alchester to
prepare and issue said endorsements. If there had not been actually an
implied ratification of said endorsements by virtue of GOYUs inaction in this
case, GOYU is at the very least estopped from assailing their operative
effects. To permit GOYU to capitalize on its non-confirmation of these
endorsements while it continued to enjoy the benefits of the credit facilities
of RCBC which believed in good faith that there was due endorsement
pursuant to their mortgage contracts, is to countenance grave contravention
of public policy, fair dealing, good faith, and justice. Such an unjust situation,
the Court cannot sanction. Under the peculiar circumstances obtaining in this
case, the Court is bound to recognize RCBCs right to the proceeds of the
insurance policies if not for the actual endorsement of the policies, at least on
the basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which
provides that the proceeds of insurance shall exclusively apply to the interest
of the person in whose name or for whose benefit it is made. The peculiarity
of the circumstances obtaining in the instant case presents a justification to
take exception to the strict application of said provision, it having been
sufficiently established that it was the intention of the parties to designate
RCBC as the party for whose benefit the insurance policies were taken out.
Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of

mortgage contracts entered into between RCBC and GOYU in consideration of
and for securing GOYUs credit facilities from RCBC. The mortgage contracts
contained common provisions whereby GOYU, as mortgagor, undertook to
have the mortgaged property properly covered against any loss by an
insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged

property from MICO, no less than a sister company of RCBC and definitely an
acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester

Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and
RCBC. GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the
credit facilities extended by RCBC which was conditioned upon the
endorsement of the insurance policies to be taken by GOYU to cover the
mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the absence
of its written conformity thereto, obviously considered said endorsement to
be sufficient compliance with its obligation under the mortgage contracts
since RCBC accordingly continued to extend the benefits of its credit facilities
and GOYU continued to benefit therefrom. Just as plain too is the intention of
the parties to constitute RCBC as the beneficiary of the various insurance
policies obtained by GOYU. The intention of the parties will have to be given
full force and effect in this particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which under the factual
circumstances of the case, is truly the person or entity for whose benefit the
policies were clearly intended.
Moreover, the laws evident intention to protect the interests of the
mortgagee upon the mortgaged property is expressed in Article 2127 of the
Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received when
the obligation becomes due, and to the amount of the indemnity granted or
owing to the proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person.

Significantly, the Court notes that out of the 10 insurance policies subject of
this case, only 8 of them appear to have been subject of the endorsements
prepared and delivered by Alchester for and upon instructions of GOYU as
shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number : F-114-07795 None

Issue Date : March 18, 1992

Expiry Date : April 5, 1993

Amount : P9,646,224.92

b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992

Expiry Date : (not legible)

Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992

Expiry Date : January 13, 1993

Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991

Expiry Date : October 19, 1992

Amount : P32,252,125.20
j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991

Expiry Date : December 5, 1992

Amount : P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was
admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25).
Likewise, the record shows no endorsement for Policy Number CI/F-128-03341
[(h) above]. Also, one of the endorsement documents, Exhibit 5-Malayan,
refers to a certain insurance policy number ACIA-F-07066, which is not among
the insurance policies involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to

P89,974,488.36. Being exclusively payable to RCBC by reason of the
endorsement by Alchester to RCBC, which we already ruled to have the force
and effect of an endorsement by GOYU itself, these 8 policies can not be
attached by GOYUs other creditors up to the extent of the GOYUs outstanding
obligation in RCBCs favor. Section 53 of the Insurance Code ordains that the
insurance proceeds of the endorsed policies shall be applied exclusively to
the proper interest of the person for whose benefit it was made. In this case,
to the extent of GOYUs obligation with RCBC, the interest of GOYU in the
subject policies had been transferred to RCBC effective as of the time of the
endorsement. These policies may no longer be attached by the other
creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834,
which may nonetheless forthwith be dismissed for being moot and academic
in view of the results reached herein. Only the two other policies amounting
to P19,646,224.92 may be validly attached, garnished, and levied upon by
GOYUs other creditors. To the extent of GOYUs outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were
endorsed to RCBC, are, therefore, to be released from attachment,
garnishment, and levy by the other creditors of GOYU.

This brings us to the next relevant issue to be resolved, which is, the extent
of GOYUs outstanding obligation with RCBC which the proceeds of the 8
insurance policies will discharge and liquidate, or put differently, the actual
amount of GOYUs liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding
that GOYUS total obligation to RCBC was only P68,785,060.04 as of April 27,
1992, thus sanctioning the trial courts exclusion of Promissory Note No. 421-
92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92
(renewal of Promissory Note No. 952-91) on the ground that their execution is
highly questionable for not only are these dated after the fire, but also
because the signatures of either GOYU or any its representative are
conspicuously absent. Accordingly, the Court of Appeals speculated thusly:

Hence, this Court is inclined to conclude that said promissory notes were pre-
signed by plaintiff in blank terms, as averred by plaintiff, in contemplation of
the speedy grant of future loans, for the same practice of procedure has
always been adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not
necessarily mean that the documents are spurious, for it is presumed that the
ordinary course of business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor and not
the holder of the negotiable instrument has the burden of proof of showing
that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of
Appeals, 210 SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions,

receipt of the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was
admitted by GOYU as indicated in the testimony of Go Song Hiap when he
answered the queries of the trial court:

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all
the amounts stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I asked
which is correct, Your Honor.
COURT

Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?

A: Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the
proceeds of the 29 promissory notes as hereinabove quoted, GOYU also
offered and admitted to RCBC that its obligation be fixed at P116,301,992.60
as shown in its letter dated March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the
current past due account of this company in the amount of P116,301,992.60
as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your
affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and
in the Zamboanga case at Zamboanga city, respectively, less the total of
P8,851,519.71 paid from the Seaboard and Equitable insurance companies
and other legitimate deductions. We accept and confirm this amount of
P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the
excluded promissory notes are dated after the fire. It failed to consider that
said notes had for their origin transactions consummated prior to the fire.
Thus, careful attention must be paid to the fact that Promissory Notes No.
420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and
952-91, loans already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which
they ruled should be excluded for bearing dates which are after that of the
fire, are mere renewals of previous ones. The proceeds of the loan
represented by these promissory notes were admittedly received by GOYU.
There is ample factual and legal basis for giving GOYUs judicial admission of
liability in the amount of P116,301,992.60 full force and effect

It should, however, be quickly added that whatever amount RCBC may have
recovered from the other insurers of the mortgaged property will,
nonetheless, have to be applied as payment against GOYUs obligation. But,
contrary to the lower courts findings, payments effected by GOYU prior to
January 21, 1993 should no longer be deducted. Such payments had
obviously been duly considered by GOYU, in its aforequoted letter dated
March 9, 1993, wherein it admitted that its past due account totaled
P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to

P107,246,887.90 as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21, 1993:

P116,301,992.60

Broken down as follows

Principal[1] Interest

Regular 80,535,946.32

FDU 7,548,025.17

____________ _____________

Total: 108,083,971.49 8,218,021.11[2]

LESS:

1) Proceeds from

Seaboard Eastern

Insurance Company: 6,095,145.81

2) Proceeds from

Equitable Insurance

Company: 2,756,373.00

3) Payment from

foreign department

negotiation: 203,584.89

9,055,104.70[3]

NET AMOUNT as of January 21, 1993: P 107,246,887.90

The need for the payment of interest due upon the principal amount of the
obligation, which is the cost of money to RCBC, the primary end and the
ultimate reason for RCBCs existence and being, was duly recognized by the
trial court when it ruled favorably on RCBCs counterclaim, ordering GOYU to
pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April
27,1992, with interest thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties) per computation, pp. 14-
A, 14-B, 14-C (Record, p. 479). Inexplicably, the Court of Appeals, without
even laying down the factual or legal justification for its ruling, modified the
trial courts ruling and ordered GOYU to pay the principal amount of
P68,785,069.04 without any interest, surcharges and penalties (Rollo, p. 200).

It is to be noted in this regard that even the trial court hedgingly and with
much uncertainty deleted the payment of additional interest, penalties, and
charges, in this manner:

Regarding defendant RCBCs commitment not to charge additional interest,

penalties and surcharges, the same does not require that it be embodied in a
document or some form of writing to be binding and enforceable. The
principle is well known that generally a verbal agreement or contract is no
less binding and effective than a written one. And the existence of such a
verbal agreement has been amply established by the evidence in this case. In
any event, regardless of the existence of such verbal agreement, it would still
be unjust and inequitable for defendant RCBC to charge the plaintiff with
surcharges and penalties considering the latters pitiful situation. (Emphasis
supplied.)

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is

separate and distinct from that of surcharges and penalties. What may justify
a court in not allowing the creditor to charge surcharges and penalties
despite express stipulation therefor in a valid agreement, may not equally
justify non-payment of interest. The charging of interest for loans forms a
very essential and fundamental element of the banking business, which may
truly be considered to be at the very core of its existence or being. It is
inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeals outright
deletion of the payment of interest as agreed upon in the respective
promissory notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following
rules of thumb laid down by this Court in Eastern Shipping Lines, Inc. vs.
Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum

of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

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

breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the
date of the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each

specific promissory note as summarized and tabulated by the trial court in its
decision (pp.470 and 471, Record) such agreed interest rates must be
followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that

GOYUs pitiful situation must be taken into account. We do not agree,
however, that payment of any amount as surcharges and penalties should
altogether be deleted. Even assuming that RCBC, through its responsible
officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its
assurance for assistance to GOYU immediately after the occurrence of the
fire, we cannot accept the lower courts finding that RCBC had thereby ipso
facto effectively waived collection of any additional interests, surcharges, and
penalties from GOYU. Assurances of assistance are one thing, but waiver of
additional interests, surcharges, and penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default

partake of the nature of liquidated damages, covered by Section 4, Chapter 3,
Title XVIII of the Civil Code. Article 2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty,

shall be equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and

unconscionable, the Court must consider the circumstances of each case. It
should be stressed that the Court will not make any sweeping ruling that
surcharges and penalties imposed by banks for non-payment of the loans
extended by them are generally iniquitous and unconscionable. What may be
iniquitous and unconscionable in one case, may be totally just and equitable
in another. This provision of law will have to be applied to the established
facts of any given case. Given the circumstances under which GOYU found
itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be
definitely iniquitous and unconscionable. The Court tempers these rates to
2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the
amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which
RCBC refused, we find it more in keeping with justice and equity for RCBC not
to charge additional interest, surcharges, and penalties from that time
onward.

Given the factual milieu spread hereover, we rule that it was error to hold
MICO liable in damages for denying or withholding the proceeds of the
insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of

the insurance policies, RCBC has the right to claim the insurance proceeds, in
substitution of the property lost in the fire. Having assigned its rights, GOYU
lost its standing as the beneficiary of the said insurance policies.

Secondly, for an insurance company to be held liable for unreasonably

delaying and withholding payment of insurance proceeds, the delay must be
wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA, 185
SCRA 403 [1990]). It is generally agreed, however, that an insurer may in
good faith and honesty entertain a difference of opinion as to its liability.
Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a
claim should not be inflicted unless the evidence and circumstances show
that such refusal was willful and without reasonable cause as the facts
appear to a reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito
[CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331,
28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143,
281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly
and in bad faith delayed the release of the proceeds. The problem in the
determination of who is the actual beneficiary of the insurance policies,
aggravated by the claim of various creditors who wanted to partake of the
insurance proceeds, not to mention the importance of the endorsement to
RCBC, to our mind, and as now borne out by the outcome herein, justified
MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that
RCBC cannot avail itself of two simultaneous remedies in enforcing the claim
of an unpaid creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the second action is
deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-
199). The Court of Appeals was too accommodating in giving due
consideration to this argument of GOYU, for the foreclosure suit is still
pending appeal before the same Court of Appeals in CA G.R CV No. 46247,
the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of
the Court of Appeals pre-empted the resolution of said foreclosure case which
is not before it. This is plain reversible error if not grave abuse of discretion.

As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):

It should have been enough, nonetheless, for the appellate court to merely
set aside the questioned orders of the trial court for having been issued by
the latter with grave abuse of discretion. In likewise enjoining permanently
herein petitioner from entering in and interfering with the use or occupation
and enjoyment of petitioners (now private respondent) residential house and
compound, the appellate court in effect, precipitately resolved with finality
the case for injunction that was yet to be heard on the merits by the lower
court. Elevated to the appellate court, it might be stressed, were mere
incidents of the principal case still pending with the trial court. In Municipality
of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of
Appeals would have no jurisdiction in a certiorari proceeding involving an
incident in a case to rule on the merits of the main case itself which was not
on appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the
Zamboanga Regional Trial Court, since it has been determined that RCBC has
the right to the insurance proceeds, the subject matter of intervention is
rendered moot and academic. Respondent Sebastian must, however, yield to
the preferential right of RCBC over the MICO insurance policies. It is basic and
fundamental that the first mortgagee has superior rights over junior
mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs. Reyes,
106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz,
52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and
resolution of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162
are hereby REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-
65442 before Branch 3 of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial

Banking Corporation the proceeds of the insurance policies in the amount of
P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc.,
Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per O.R. No.
3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60

including the interests earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial
Banking Corporation in the principal amount of P107,246,887.90, with
interest at the respective rates stipulated in each promissory note from
January 21, 1993 until finality of this judgment, and surcharges at 2% and
penalties at 3% from January 21, 1993 to March 9, 1993, minus payments
made by Malayan Insurance Company, Inc. and the proceeds of the amount
deposited with the trial court and its earned interest. The total amount due
RCBC at the time of the finality of this judgment shall earn interest at the
legal rate of 12% in lieu of all other stipulated interests and charges until fully
paid.

The petition of Rizal Commercial Banking Corporation against the respondent

Court in CA-GR CV 48376 is DISMISSED for being moot and academic in view
of the results herein arrived at. Respondent Sebastians right as attaching
creditor must yield to the preferential rights of Rizal Commercial Banking
Corporation over the Malayan insurance policies as first mortgagee.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 182963 June 3, 2013

SPOUSES DEO AGNER and MARICON AGNER, Petitioners,

vs.

BPI FAMILY SAVINGS BANK, INC., Respondent.

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the April 30, 2007 Decision1
and May 19, 2008 Resolution2of the Court of Appeals in CAG.R. CV No.
86021, which affirmed the August 11, 2005 Decision3 of the Regional Trial
Court, Branch 33, Manila City.

On February 15, 2001, petitioners spouses Deo Agner and Maricon Agner
executed a Promissory Note with Chattel Mortgage in favor of Citimotors, Inc.
The contract provides, among others, that: for receiving the amount of
Php834, 768.00, petitioners shall pay Php 17,391.00 every 15th day of each
succeeding month until fully paid; the loan is secured by a 2001 Mitsubishi
Adventure Super Sport; and an interest of 6% per month shall be imposed for
failure to pay each installment on or before the stated due date.4

On the same day, Citimotors, Inc. assigned all its rights, title and interests in
the Promissory Note with Chattel Mortgage to ABN AMRO Savings Bank, Inc.
(ABN AMRO), which, on May 31, 2002, likewise assigned the same to
respondent BPI Family Savings Bank, Inc.5

For failure to pay four successive installments from May 15, 2002 to August
15, 2002, respondent, through counsel, sent to petitioners a demand letter
dated August 29, 2002, declaring the entire obligation as due and
demandable and requiring to pay Php576,664.04, or surrender the
mortgaged vehicle immediately upon receiving the letter.6 As the demand
was left unheeded, respondent filed on October 4, 2002 an action for
Replevin and Damages before the Manila Regional Trial Court (RTC).

A writ of replevin was issued.7 Despite this, the subject vehicle was not
seized.8 Trial on the merits ensued. On August 11, 2005, the Manila RTC Br.
33 ruled for the respondent and ordered petitioners to jointly and severally
pay the amount of Php576,664.04 plus interest at the rate of 72% per annum
from August 20, 2002 until fully paid, and the costs of suit.

Petitioners appealed the decision to the Court of Appeals (CA), but the CA
affirmed the lower courts decision and, subsequently, denied the motion for
reconsideration; hence, this petition.

Before this Court, petitioners argue that: (1) respondent has no cause of
action, because the Deed of Assignment executed in its favor did not
specifically mention ABN AMROs account receivable from petitioners; (2)
petitioners cannot be considered to have defaulted in payment for lack of
competent proof that they received the demand letter; and (3) respondents
remedy of resorting to both actions of replevin and collection of sum of
money is contrary to the provision of Article 14849 of the Civil Code and the
Elisco Tool Manufacturing Corporation v. Court of Appeals10 ruling.
The contentions are untenable.

With respect to the first issue, it would be sufficient to state that the matter
surrounding the Deed of Assignment had already been considered by the trial
court and the CA. Likewise, it is an issue of fact that is not a proper subject of
a petition for review under Rule 45. An issue is factual when the doubt or
difference arises as to the truth or falsehood of alleged facts, or when the
query invites calibration of the whole evidence, considering mainly the
credibility of witnesses, existence and relevancy of specific surrounding
circumstances, their relation to each other and to the whole, and the
probabilities of the situation.11 Time and again, We stress that this Court is
not a trier of facts and generally does not weigh anew evidence which lower
courts have passed upon.

As to the second issue, records bear that both verbal and written demands
were in fact made by respondent prior to the institution of the case against
petitioners.12 Even assuming, for arguments sake, that no demand letter
was sent by respondent, there is really no need for it because petitioners
legally waived the necessity of notice or demand in the Promissory Note with
Chattel Mortgage, which they voluntarily and knowingly signed in favor of
respondents predecessor-in-interest. Said contract expressly stipulates:

In case of my/our failure to pay when due and payable, any sum which I/We
are obliged to pay under this note and/or any other obligation which I/We or
any of us may now or in the future owe to the holder of this note or to any
other party whether as principal or guarantor x x x then the entire sum
outstanding under this note shall, without prior notice or demand,
immediately become due and payable. (Emphasis and underscoring supplied)

A provision on waiver of notice or demand has been recognized as legal and

valid in Bank of the Philippine Islands v. Court of Appeals,13 wherein We held:

The Civil Code in Article 1169 provides that one incurs in delay or is in default
from the time the obligor demands the fulfillment of the obligation from the
obligee. However, the law expressly provides that demand is not necessary
under certain circumstances, and one of these circumstances is when the
parties expressly waive demand. Hence, since the co-signors expressly
waived demand in the promissory notes, demand was unnecessary for them
to be in default.14

Further, the Court even ruled in Navarro v. Escobido15 that prior demand is
not a condition precedent to an action for a writ of replevin, since there is
nothing in Section 2, Rule 60 of the Rules of Court that requires the applicant
to make a demand on the possessor of the property before an action for a
writ of replevin could be filed.

Also, petitioners representation that they have not received a demand letter
is completely inconsequential as the mere act of sending it would suffice.
Again, We look into the Promissory Note with Chattel Mortgage, which
provides:

All correspondence relative to this mortgage, including demand letters,

summonses, subpoenas, or notifications of any judicial or extrajudicial action
shall be sent to the MORTGAGOR at the address indicated on this promissory
note with chattel mortgage or at the address that may hereafter be given in
writing by the MORTGAGOR to the MORTGAGEE or his/its assignee. The mere
act of sending any correspondence by mail or by personal delivery to the said
address shall be valid and effective notice to the mortgagor for all legal
purposes and the fact that any communication is not actually received by the
MORTGAGOR or that it has been returned unclaimed to the MORTGAGEE or
that no person was found at the address given, or that the address is
fictitious or cannot be located shall not excuse or relieve the MORTGAGOR
from the effects of such notice.16 (Emphasis and underscoring supplied)

The Court cannot yield to petitioners denial in receiving respondents

demand letter. To note, their postal address evidently remained unchanged
from the time they executed the Promissory Note with Chattel Mortgage up to
time the case was filed against them. Thus, the presumption that "a letter
duly directed and mailed was received in the regular course of the mail"17
stands in the absence of satisfactory proof to the contrary.

Petitioners cannot find succour from Ting v. Court of Appeals18 simply

because it pertained to violation of Batas Pambansa Blg. 22 or the Bouncing
Checks Law. As a higher quantum of proof that is, proof beyond reasonable
doubt is required in view of the criminal nature of the case, We found
insufficient the mere presentation of a copy of the demand letter allegedly
sent through registered mail and its corresponding registry receipt as proof of
receiving the notice of dishonor.

Perusing over the records, what is clear is that petitioners did not take
advantage of all the opportunities to present their evidence in the
proceedings before the courts below. They miserably failed to produce the
original cash deposit slips proving payment of the monthly amortizations in
question. Not even a photocopy of the alleged proof of payment was
appended to their Answer or shown during the trial. Neither have they
demonstrated any written requests to respondent to furnish them with official
receipts or a statement of account. Worse, petitioners were not able to make
a formal offer of evidence considering that they have not marked any
documentary evidence during the presentation of Deo Agners testimony.19

Jurisprudence abounds that, in civil cases, one who pleads payment has the
burden of proving it; the burden rests on the defendant to prove payment,
rather than on the plaintiff to prove non-payment.20 When the creditor is in
possession of the document of credit, proof of non-payment is not needed for
it is presumed.21 Respondent's possession of the Promissory Note with
Chattel Mortgage strongly buttresses its claim that the obligation has not
been extinguished. As held in Bank of the Philippine Islands v. Spouses
Royeca:22

x x x The creditor's possession of the evidence of debt is proof that the debt
has not been discharged by payment. A promissory note in the hands of the
creditor is a proof of indebtedness rather than proof of payment. In an action
for replevin by a mortgagee, it is prima facie evidence that the promissory
note has not been paid. Likewise, an uncanceled mortgage in the possession
of the mortgagee gives rise to the presumption that the mortgage debt is
unpaid.23

Indeed, when the existence of a debt is fully established by the evidence

contained in the record, the burden of proving that it has been extinguished
by payment devolves upon the debtor who offers such defense to the claim
of the creditor.24 The debtor has the burden of showing with legal certainty
that the obligation has been discharged by payment.25
Lastly, there is no violation of Article 1484 of the Civil Code and the Courts
decision in Elisco Tool Manufacturing Corporation v. Court of Appeals.26

In Elisco, petitioner's complaint contained the following prayer:

WHEREFORE, plaintiffs pray that judgment be rendered as follows:

ON THE FIRST CAUSE OF ACTION

Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86
plus legal interest from the date of demand until the whole obligation is fully
paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle
more particularly described in paragraph 3 of the Complaint, from defendant
Rolando Lantan and/or defendants Rina Lantan, John Doe, Susan Doe and
other person or persons in whose possession the said motor vehicle may be
found, complete with accessories and equipment, and direct deliver thereof
to plaintiff in accordance with law, and after due hearing to confirm said
seizure and plaintiff's possession over the same;

PRAYER COMMON TO ALL CAUSES OF ACTION

1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount

equivalent to twenty-five percent (25%) of his outstanding obligation, for and
as attorney's fees;

2. Ordering defendants to pay the cost or expenses of collection,

repossession, bonding fees and other incidental expenses to be proved
during the trial; and

3. Ordering defendants to pay the costs of suit.

Plaintiff also prays for such further reliefs as this Honorable Court may deem
just and equitable under the premises.27

The Court therein ruled:

The remedies provided for in Art. 1484 are alternative, not cumulative. The
exercise of one bars the exercise of the others. This limitation applies to
contracts purporting to be leases of personal property with option to buy by
virtue of Art. 1485. The condition that the lessor has deprived the lessee of
possession or enjoyment of the thing for the purpose of applying Art. 1485
was fulfilled in this case by the filing by petitioner of the complaint for
replevin to recover possession of movable property. By virtue of the writ of
seizure issued by the trial court, the deputy sheriff seized the vehicle on
August 6, 1986 and thereby deprived private respondents of its use. The car
was not returned to private respondent until April 16, 1989, after two (2)
years and eight (8) months, upon issuance by the Court of Appeals of a writ
of execution.

Petitioner prayed that private respondents be made to pay the sum of

P39,054.86, the amount that they were supposed to pay as of May 1986, plus
interest at the legal rate. At the same time, it prayed for the issuance of a
writ of replevin or the delivery to it of the motor vehicle "complete

with accessories and equipment." In the event the car could not be delivered
to petitioner, it was prayed that private respondent Rolando Lantan be made
to pay petitioner the amount of P60,000.00, the "estimated actual value" of
the car, "plus accrued monthly rentals thereof with interests at the rate of
fourteen percent (14%) per annum until fully paid." This prayer of course
cannot be granted, even assuming that private respondents have defaulted
in the payment of their obligation. This led the trial court to say that
petitioner wanted to eat its cake and have it too.28
In contrast, respondent in this case prayed:

(a) Before trial, and upon filing and approval of the bond, to forthwith issue a
Writ of Replevin ordering the seizure of the motor vehicle above-described,
complete with all its accessories and equipments, together with the
Registration Certificate thereof, and direct the delivery thereof to plaintiff in
accordance with law and after due hearing, to confirm the said seizure;

(b) Or, in the event that manual delivery of the said motor vehicle cannot be
effected to render judgment in favor of plaintiff and against defendant(s)
ordering them to pay to plaintiff, jointly and severally, the sum of
P576,664.04 plus interest and/or late payment charges thereon at the rate of
72% per annum from August 20, 2002 until fully paid;

(c) In either case, to order defendant(s) to pay jointly and severally:

(1) the sum of P297,857.54 as attorneys fees, liquidated damages, bonding

fees and other expenses incurred in the seizure of the said motor vehicle; and

(2) the costs of suit.

Plaintiff further prays for such other relief as this Honorable Court may deem
just and equitable in the premises.29

Compared with Elisco, the vehicle subject matter of this case was never
recovered and delivered to respondent despite the issuance of a writ of
replevin. As there was no seizure that transpired, it cannot be said that
petitioners were deprived of the use and enjoyment of the mortgaged vehicle
or that respondent pursued, commenced or concluded its actual foreclosure.
The trial court, therefore, rightfully granted the alternative prayer for sum of
money, which is equivalent to the remedy of "exacting fulfillment of the
obligation." Certainly, there is no double recovery or unjust enrichment30 to
speak of.1wphi1
All the foregoing notwithstanding, We are of the opinion that the interest of
6% per month should be equitably reduced to one percent (1%) per month or
twelve percent (12%) per annum, to be reckoned from May 16, 2002 until full
payment and with the remaining outstanding balance of their car loan as of
May 15, 2002 as the base amount.

Settled is the principle which this Court has affirmed in a number of cases
that stipulated interest rates of three percent (3%) per month and higher are
excessive, iniquitous, unconscionable, and exorbitant.31 While Central Bank
Circular No. 905-82, which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to levels
which would either enslave their borrowers or lead to a hemorrhaging of their
assets.32 Since the stipulation on the interest rate is void for being contrary
to morals, if not against the law, it is as if there was no express contract on
said interest rate; thus, the interest rate may be reduced as reason and
equity demand.33

WHEREFORE, the petition is DENIED and the Court AFFIRMS WITH

MODIFICATION the April 30, 2007 Decision and May 19, 2008 Resolution of
the Court of Appeals in CA-G.R. CV No. 86021. Petitioners spouses Deo Agner
and Maricon Agner are ORDERED to pay, jointly and severally, respondent BPI
Family Savings Bank, Inc. ( 1) the remaining outstanding balance of their auto
loan obligation as of May 15, 2002 with interest at one percent ( 1 o/o) per
month from May 16, 2002 until fully paid; and (2) costs of suit.

SO ORDERED.

THIRD DIVISION

G.R. No. 175378, November 11, 2015

MULTI-INTERNATIONAL BUSINESS DATA SYSTEM, INC., Petitioner, v. RUEL

MARTINEZ, Respondent.

DECISION

JARDELEZA, J.:

Before us is a petition for review on certiorari1 (petition) under Rule 45 filed

by Multi-International Business Data System, Inc. (petitioner) to annul and set
aside the Decision2 dated October 18, 2006 rendered by the Appeals (CA)
Sixteenth Division in CA G.R. CV No. 82686.

The Facts

Respondent Ruel Martinez (respondent) was the Operations Manager3 of

petitioner from the last quarter of 1990 to January 22, 1999.4 Sometime in
June 4, 1994, respondent applied for and was granted a car loan amounting
to P648,288.00.5 Both parties agreed that the loan was payable through
deductions from respondent's bonuses or commissions, if any.6 Further, if
respondent would be terminated for any cause before the end of the term of
the loan obligation, the unpaid balance would be immediately due and
demandable without need of demand.7 On November 11, 1998, petitioner
sent respondent a letter informing him of the breakdown of his outstanding
obligation with petitioner amounting to P418,012.78, detailing every bonus,
loan or advance obtained and deducted.8 The subject vehicle remains with
respondent.9

In a letter dated November 24, 1998, respondent requested for a breakdown

of his benefits from petitioner as director/operations manager in case he will
resign from his position. In said letter, respondent stated that the
computation "is only for the assumed amount on my end to deduct whatever
I owe the Company."10

In a letter dated January 22, 1999 which respondent received the next day,
petitioner terminated respondent for cause effective immediately and
demanded that respondent pay his outstanding loan of P418,012.78 and
surrender the car to petitioner within three days from receipt.11 Despite this,
respondent failed to pay the outstanding balance.

In a letter dated June 23, 1999, petitioner demanded respondent to pay his
loan within three days from receipt thereof at petitioner's office.12 Again,
despite demand, respondent failed to pay his outstanding obligation.

On July 12, 1999, petitioner filed a complaint13 with the Regional Trial Court
of Makati City, Branch 148 (trial court) against respondent praying that
respondent be ordered to pay his outstanding obligation of P418,012.78 plus
interest, and that respondent be held liable for exemplary damages,
attorney's fees and costs of the suit.14

In his answer15 dated August 28, 1999, respondent alleged that he already
paid his loan through deductions made from his compensation/salaries,
bonuses and commissions.16 During trial, respondent presented a
certification dated September 10, 1996 issued by petitioner's president,
Helen Dy (Dy), stating that respondent already paid the amount of
P337,650.00 as of the said date.17 Respondent alleged that a simple
accounting would show that the he already paid the loan considering that it is
payable within four years from 1994.18

The Ruling of the Regional Trial Court

In its Decision19 dated November 22, 2002, the trial court ruled in favor of
petitioner. It decreed, thus:chanRoblesvirtualLawlibrary

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

the defendant[ ] as follows:

Ordering defendant to pay plaintiff the balance of his car loan in the amount
of Four Hundred Eighteen Thousand Twelve and 78/100 Pesos ([P]418,012.78)
plus interest at the rate of twelve percent (12%) [per annum] from [June 23,]
1999 until full payment;
Ordering defendant Martinez to pay plaintiff the amount of Ten Thousand
Pesos ([P]10,000.00), by way of exemplary damages;

Ordering defendant to pay plaintiff the amount of Twenty Thousand Pesos

([P]20,000.00) by way of attorney's fees;

Dismissing the counterclaims interposed by defendant;

Ordering defendant to pay the costs of the suit.

SO ORDERED.20ChanRoblesVirtualawlibrary

cralawlawlibrary

In arriving at the above pronouncement, the trial court held that the
respondent failed to present evidence to prove payment. The trial court also
held that the due execution and authenticity of the certification dated
September 10, 1996 were not established. In respondent's direct
examination, he merely testified that he knows Dy and her spouse but did not
state that the document was actually executed by Dy.21

On December 16, 2002, respondent filed a motion seeking the

reconsideration of the trial court's decision dated November 22, 2002. The
trial court denied this motion in its Order22 dated March 22, 2004.

The Ruling of the Court of Appeals

Respondent appealed the trial court's decision with the CA. Docketed as CA
G.R. CV No. 82686, the appeal alleged that the parties agreed that the car
loan would be payable within four years from the time respondent secured
the loan in June 1994.23 Respondent alleged that he already completed his
payment in June 1998 and that the payment was done through salary
deductions because if it were otherwise, petitioner would be seeking full
payment in the amount of P648,288.00 and not only the balance of
P418,012.78.24 Respondent also assailed the finding that the due execution
of the certification dated September 10, 1996 was not proven. Respondent
alleged that by mere comparison, one can safely say that the signatures
appearing in the certification and in Dy's affidavit submitted before the
National Labor Relations Commission are signatures by one and the same
person, Dy. Respondent claims that he is very much familiar with the
signature of Dy, his former boss for ten years and even petitioner's witness,
who is also its administrative manager, Aida Valle (Valle), also identified the
signature of Dy in the certification.25cralawred

The CA in its Decision26 dated October 18, 2006 reversed the trial court and
ruled in favor of respondent in holding that the latter already fulfilled his loan
obligation with petitioner. The CA found credence in the following pieces of
evidence: (1) certification dated September 10, 1996 signed by Dy; (2)
deduction of the monthly installments from respondent's salary pursuant to
the agreement between him and petitioner; and (3) petitioner's admission of
respondent's installment payments made in the amount of P230,275.22.27
The CA held that Dy never denied nor confirmed in open court the
authenticity of her signature in the certification dated September 10, 1996.28
Citing Permanent Savings and Loan Bank v. Velarde29 and Consolidated Bank
and Trust Corporation (SOLIDBANK) v. Del Monte Motor Works, Inc.,30 the CA
held that Dy must declare under oath that she did not sign the document or
that it is otherwise false or fabricated.31

Thus, the CA reversed the trial court's ruling and

held:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the November 22, 2002 Decision of the

Regional Trial Court of Makati City, Branch 148, in Civil Case No. 99-1295, is
hereby REVERSED and SET ASIDE and a new one is entered DISMISSING the
complaint for lack of merit.

SO ORDERED.32 (Emphasis in the original)

cralawlawlibrary
Hence, this petition.

The Issues

The issues for resolution are:chanRoblesvirtualLawlibrary

Whether respondent has fulfilled his obligation with petitioner; and

Whether the certification dated September 10, 1996 should be admitted as

basis for respondent's payment of his loan with petitioner.33

cralawlawlibrary

Our Ruling

The petition is partly meritorious.

Verification/Certification on Non-Forum Shopping

Before going into the substantive merits of the case, we shall first resolve the
technical issue raised by respondent in his Comment34 dated February 8,
2007 and Memorandum35 dated November 6, 2007.

Respondent alleged that the petition should be dismissed for failing to comply
with Section 4, Rule 45 of the Rules of Court in relation to Sections 4 and 5,
Rule 7 of the Rules of Court.36 Respondent alleged that the signature of Dy in
the Verification/Certification in the petition differs from her signature in the
letter dated November 11, 1998, thus, inferred that someone not authorized
signed the Verification/Certification.37
Upon a review of the records, however, we found Dy's signature in the
petition to be the same with Dy's signature in the Ex-Parte Manifestation of
Compliance38 dated February 22, 2005 which petitioner filed with the CA.
Respondent never objected to Dy's signature in petitioner's Ex-Parte
Manifestation of Compliance. Further, Dy did not refute that the signature in
the petition is hers. Thus, we find no reason to dismiss the petition outright
based on respondent's allegation.

Review of factual findings

Before going into the merits of the petition, we stress the well-settled rule
that only questions of law may be raised in a petition for review on certiorari
under Rule 45 of the Rules of Court, since "the Supreme Court is not a trier of
facts."39 It is not our function to review, examine and evaluate or weigh the
probative value of the evidence presented.

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

conclusive and binding on the parties and are not reviewable by this Court,
unless the case falls under any of the recognized exceptions in
jurisprudence.40

In the present case, the factual findings of the trial court and the CA on
whether respondent has fully paid his car loan are conflicting. The trial court
found that no deductions were made from respondent's salary to establish
full payment of the car loan while the CA found otherwise. The trial court
held, thus:chanRoblesvirtualLawlibrary

Culled from the evidence adduced and the testimony of the witnesses, it
appears that the defendant himself admitted on cross-examination that no
deductions were made in his monthly salary. Thus, it was a mere presumption
of fact on his part that he had been able to fully pay off his car loan. The
testimony of the defendant creating merely an inference of payment will not
be regarded as conclusive on that issue. Thus, payment cannot be presumed
by a mere inference from surrounding circumstances. At most, the agreement
that the payments for the car loan shall be deducted from the defendant's
salary and bonus is only affirmative of the capacity or ability of the defendant
to fulfill his part of the bargain.
But whether or not there was actual payment through deductions from the
defendant's salary and bonus remains to be proven by independent and
credible evidence. As the saying goes: "a proof that an act could have been
done is no proof that it was actually done." Hence for failure to present
evidence to prove payment, defendant miserably failed in his defense and in
effect admitted the allegations of plaintiff.41cralawlawlibrary

The CA, on the other hand, found that respondent sufficiently established that
deductions were made from his salary:chanRoblesvirtualLawlibrary

x x x Moreover, it had been sufficiently established by witness Aida Valle

(VALLE), Administrative manager of plaintiff-appellee MULTI-INTERNATIONAL,
that defendant-appellant MARTINEZ had been the only employee granted by
plaintiff-appellee MULTI-INTERNATIONAL a car loan as such [sic]. With that, it
can fairly be inferred that plaintiff-appellee MULT1-INTERNATlONAL's
asseveration that the deductions from the salary of defendant-appellant
MARTINEZ had not been reflected in his payslips is for naught, since indeed,
no such "item" in the payslip is provided, considering that it is only
defendant-appellant MARTINEZ who had been granted such car loan x x
x.42cralawlawlibrary

Thus, the conflicting factual findings of the trial court and CA compel us to re-
evaluate the facts of this case, an exception to the rule that only questions of
law may be dealt with in a petition for certiorari under Rule 45.

Admissibility of the

certification dated

September 10, 1996

Respondent relies on the certification43 dated September 10, 1996 to bolster

his defense that he already fully paid his car loan to petitioner. We affirm the
findings of the CA that the certification is admissible in evidence.
Section 22,44 Rule 132 of the Rules of Court explicitly authorizes the court to
compare the handwriting in issue with writings admitted or treated as
genuine by the party against whom the evidence is offered or proved to be
genuine to the satisfaction of the judge. In Jimenez v. Commission on
Ecumenical Mission and Relations of the United Presbyterian Church in the
USA,45 we held:chanRoblesvirtualLawlibrary

It is also hornbook doctrine that the opinions of handwriting experts, even

those from the NBI and the PC, are not binding upon courts. This principle
holds true especially when the question involved is mere handwriting
similarity or dissimilarity, which can be determined by a visual comparison of
specimens of the questioned signatures with those of the currently existing
ones.

Handwriting experts are usually helpful in the examination of forged

documents because of the technical procedure involved in analyzing them.
But resort to these experts is not mandatory or indispensable to the
examination or the comparison of handwriting. A finding of forgery does not
depend entirely on the testimonies of handwriting experts, because the judge
must conduct an independent examination of the questioned signature in
order to arrive at a reasonable conclusion as to its authenticity, x x x46
(Citations omitted)cralawlawlibrary

The documents containing the signature of Dy which have been submitted by

petitioner as authentic are the following: (1) letter dated November 11,
1998;47 (2) termination letter dated January 22, 1999;48 (3) promissory note
dated June 17, 1994;49 and (4) chattel mortgage signed on June 27, 1994.50
Examining and analyzing the signatures in these documents with Dy's
signature in the certification, we find no substantial reason to doubt the
latter's authenticity. In fact, the testimonies of Dy herself and Valle support
our finding.

Dy testified on cross-examination as follows:chanRoblesvirtualLawlibrary

Q: Now, ms witness [sic], sometime in December 10, 1996, do you recall

having executed a certification to Mr. Martinez?
A: No.

Q: Just to refresh your memory, would you please identify if this is the
signature you signed given [sic] to Mr. Martinez?

A: Yeah. If looks like my signature, but...

Q: Is that your signature?

A: But I said it looks like my signature. I want you to notice something

because everytime...

Q: Just answer the question please. Is that your signature?

A: I said it looks like my signature.

xxx

Q: Just answer the question please.

A: I said it looks like my signature.51 (Emphasis supplied)cralawlawlibrary

On the other hand, Valle, on cross-examination testified as

follows:chanRoblesvirtualLawlibrary

Q: If I show you Certification dated September 10, 1996 will you be able to
confirm if this is a Certification signed by the president?

A: It looked like the signature of the president but I think she will be the one
to testify because she was the one who signed.52 (Emphasis
supplied)cralawlawlibrary

Aside from supporting our finding that the signature in the certification is
genuine, the foregoing testimonies of Dy and Valle substantially comply with
the other modes of authenticating a private document under Section 20,53
Rule 132 of the Rules of Court.

Dy never testified that any forgery or fraud attended the certification.54 In

fact, she did not deny the authenticity of her signature but actually admitted
that the signature therein looks like hers. Additionally, Valle, who is familiar
with the signature of Dy because of the requirements of her job, also
positively testified that the signature in the certification looks like that of
Dy's.55

The defenses of Dy that she does not have a copy or record of the
certification in her file and that the letterhead shows an old address are weak
and do not prove that the certification was not duly executed.

For having established the due execution and authentication of the

certification dated September 10, 1996, the certification should be admitted
in evidence to prove that respondent partially paid the car loan in the amount
ofP337,650.00.

Insufficient evidence to prove

full payment of loan

It is established that the one who pleads payment has the burden of proving
it. Even where the creditor alleges non-payment, the general rule is that the
debtor has the burden to prove payment, rather than the creditor. The debtor
has the burden of showing with legal certainty that the obligation has been
discharged by payment. Where the debtor introduces some evidence of
payment, the burden of going forward with the evidenceas distinct from the
general burden of proofshifts to the creditor, who is then under a duty of
producing some evidence to show non-payment.56

It must be emphasized that both parties have not presented any written
agreement or contract governing respondent's obligation. Nevertheless, it
has been established that respondent obtained a car loan amounting to
P648,288.00 from petitioner. Thus, the burden is now on respondent to prove
that the obligation has already been extinguished by payment.

Although not exclusive, a receipt of payment is the best evidence of the fact
of payment.57 We held that the fact of payment may be established not only
by documentary evidence but also by parol evidence.58

Except for respondent's bare allegations that he has fully paid the
P648,288.00 car loan, there is nothing in the records which shows that full
payment has indeed been made. Respondent did not present any receipt
other than the certification dated September 10, 1996 which only proves that
respondent has already paid P337,650.00 of the car loan. A balance of
P310,638.00 still remained.

Even respondent's testimony lacks credence. He alleged that the

amortization of the car loan was deducted from his salaries, bonuses and
commissions. However, he could not even answer nor give an estimate of
how much bonuses and commissions he receives from petitioner.59

Respondent also alleged that although deductions were made from his
salaries, bonuses and commissions, his payslips do not reflect such
deductions because "there is no such car loan field" in the accounting
program for the payroll.60 Respondent admitted in his testimony that he only
presumed that the deductions were being made from his salaries, bonuses
and commissions, to wit:chanRoblesvirtualLawlibrary

Q: So my question was that, whether or not your regular salary which was
received twice a month, the monthly amortization| s] are being deducted
from that? [sic]

A: There is no reflection in the payslip.

Q: But do you know it was ever deducted from your monthly salary? [sic]

A: It must be deducted from my salary, [sic]

Q: You are assuming?

A: That is the agreement.

Q: That is the agreement but you don't know if it was indeed deducted?

A: Yes.61cralawlawlibrary

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

respondent should have been confident in answering the questions
propounded on him during trial. Me should have presented his payslips and
shown that even if his payslips did not reflect any deductions for his car loan,
deductions were indeed made, by comparing the amount of compensation he
could have gotten based on his employment contract and the amount he
actually received. Respondent merely made calculations on what he
presumed he already paid. Further, respondent could have presented
testimonies of persons other than himself to prove payment of the loans. The
letter dated November 24, 1998 showed that respondent was aware that he
still had outstanding obligations with petitioner.

In Royal Cargo Corporation v. DFS Sports Unlimited, Inc., we held that the
defense of payment was not proven by the respondent's failure to present
any supporting evidence such as official receipts or the testimony of the
person who made payment or who had direct knowledge of the payment,
among others.62 Respondent's witness therein also assumed that payment
was made even in the absence of any receipt "once the accounting
department of respondent forwarded to her the original invoice which was
stamped PAID". We held in this case that such testimony and the invoices
which were stamped paid, are all self-serving and do not, by themselves,
prove respondent's claim of payment.63

Nevertheless, even if the parties agreed to make deductions from

respondent's salary, bonuses and commissions, we agree with the trial court
that this is "only affirmative of the capacity or ability of the [respondent] to
fulfill his part of the bargain. But whether or not there was actual payment
through deductions from [respondent]'s salary and bonus remains to be
proven by independent and credible evidence."64
Finally, we find it questionable why respondent would agree on a setup where
petitioner would not give him any written acknowledgment receipt of his
payments or accounting of his loan.65 Respondent should have insisted that
receipts be issued in his favor in the first place if it were true that the
program for issuing the payslips could not reflect the deductions from his
salaries, bonuses and commissions. Since he was the only employee who was
given a car loan, it would not have been an inconvenience for the petitioner.
His actions go against the legal presumption that a person takes ordinary
care of his concerns.66

Statement of account is

self-serving

Similarly, we find that the statement of account, showing the amount of

P418,012.78 as respondent's outstanding loan obligation to petitioner, is self-
serving. Dy admitted that she prepared the statement of account.67
However, she neither explained clearly, during her testimony, the breakdown
nor supported the amounts stated therein with documentary evidence.68

Although petitioner refers to the amount of P418,012.78 in the statement to

represent only the car loan obligation, the statement itself shows that the
amount also includes the cash advances of respondent from the company.
The trial court has already ruled that judgment cannot be rendered on the
issue regarding cash advances because this was not made subject of
petitioner's complaint and the same was not amended.69 Such issue was
also not raised with us on appeal. Further, it was not explained why Valle was
not the one who prepared the statement or was not asked to testify on the
document when her duties include supervising the accounting department
and assisting in the preparation of the employees' payroll.70

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

is obligated to pay petitioner the balance of P310,638.00 with interest.

WHEREFORE, the instant petition is PARTIALLY GRANTED. The Court of

Appeals' Decision dated October 18, 2006 in CA G.R. CV No. 82686 is SET
ASIDE. The respondent is ORDERED to pay petitioner the balance of the car
loan in the amount of P310,638.00 plus interest at the rate of six percent
(6%) per annum computed from January 23, 199971 until the date of finality
of this judgment. The total amount shall thereafter earn interest at the rate of
six percent (6%) per annum72 until fully paid. The trial court's Decision dated
November 22, 2002 is AFFIRMED in all other respects.

SECOND DIVISION

[G.R. No. 125862. April 15, 2004]

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

DECISION

CALLEJO, SR., J.:

This is a petition for review under Rule 45 of the Revised Rules of Civil
Procedure of the Decision[1] of the Court of Appeals in CA-G.R. CV No. 19836
affirming in toto the Decision[2] of the Regional Trial Court of Makati, Branch
138, in Civil Case No. 1033 for collection of sum of money, and the
Resolution[3] denying the motion for reconsideration of the said decision.

The Undisputed Facts

The spouses Francisco and Demetria Culaba were the owners and proprietors
of the Culaba Store and were engaged in the sale and distribution of San
Miguel Corporations (SMC) beer products. SMC sold beer products on credit to
the Culaba spouses in the amount of P28,650.00, as evidenced by Temporary
Credit Invoice No. 42943.[4] Thereafter, the Culaba spouses made a partial
payment of P3,740.00, leaving an unpaid balance of P24,910.00. As they
failed to pay despite repeated demands, SMC filed an action for collection of
a sum of money against them before the RTC of Makati, Branch 138.

The defendant-spouses denied any liability, claiming that they had already
paid the plaintiff in full on four separate occasions. To substantiate this claim,
the defendants presented four (4) Temporary Charge Sales (TCS) Liquidation
Receipts, as follows:

April 19, 1983 Receipt No. 27331 for P8,000[5]

April 22, 1983 Receipt No. 27318 for P9,000[6]

April 27, 1983 Receipt No. 27339 for P4,500[7]

April 30, 1983 Receipt No. 27346 for P3,410[8]

Defendant Francisco Culaba testified that he made the foregoing payments to

an SMC supervisor who came in an SMC van. He was then showed a list of
customers accountabilities which included his account. The defendant, in
good faith, then paid to the said supervisor, and he was, in turn, issued
genuine SMC liquidation receipts.

For its part, SMC submitted a publishers affidavit[9] to prove that the entire
booklet of TCSL Receipts bearing Nos. 27301-27350 were reported lost by it,
and that it caused the publication of the notice of loss in the July 9, 1983
issue of the Daily Express, as follows:

NOTICE OF LOSS

OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES

LIQUIDATION RECEIPTS WITH SERIAL NOS. 27301-27350 HAVE BEEN LOST.

ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE

ABOVE RECEIPTS WILL NOT BE HONORED.

SAN MIGUEL CORPORATION

BEER DIVISION

Makati Beer Region[10]

The Trial Courts Ruling

After trial on the merits, the trial court rendered judgment in favor of SMC,
and held the Culaba spouses liable on the balance of its obligation, thus:

Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:

1. Ordering defendants to pay the amount of P24,910.00 plus legal interest of

6% per annum from April 12, 1983 until the whole amount is fully paid;

2. Ordering defendants to pay 20% of the amount due to plaintiff as and for
attorneys fees plus costs.

SO ORDERED.[11]

According to the trial court, it was unusual that defendant Francisco Culaba
forgot the name of the collector to whom he made the payments and that he
did not require the said collector to print his name on the receipts. The court
also noted that although they were part of a single booklet, the TCS
Liquidation Receipts submitted by the defendants did not appear to have
been issued in their natural sequence. Furthermore, they were part of the lost
booklet receipts, which the public was duly warned of through the Notice of
Loss the plaintiff caused to be published in a daily newspaper. This confirmed
the plaintiffs claim that the receipts presented by the defendants were
spurious ones.

The Case on Appeal

On appeal, the appellants interposed the following assignment of errors:

I
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY
DEFENDANTS EVIDENCING HIS PAYMENTS TO PLAINTIFF SAN MIGUEL
CORPORATION, ARE SPURIOUS.

II

THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS

SUFFICIENTLY PROVED ITS CAUSE OF ACTION AGAINST THE DEFENDANTS.

III

THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE

AMOUNT DUE TO PLAINTIFF AS ATTORNEYS FEES.[12]

The appellants asserted that while the trial courts observations were true, it
was the usual business practice in previous transactions between them and
SMC. The SMC previously honored receipts not bearing the salesmans name.
According to appellant Francisco Culaba, he even lost some of the receipts,
but did not encounter any problems.

According to appellant Francisco, he could not be faulted for paying the SMC
collector who came in a van and was in uniform, and that any regular
customer would, without any apprehension, transact with such an SMC
employee. Furthermore, the respective receipts issued to him at the time he
paid on the four occasions mentioned had not yet then been declared lost.
Thus, the subsequent publication in a daily newspaper declaring the booklets
lost did not affect the validity and legality of the payments made.
Accordingly, by its actuations, the SMC was estopped from questioning the
legality of the payments and had no cause of action against the appellants.

Anent the issue of attorneys fees, the order of the trial court for payment
thereof is without basis. According to the appellant, the provision for
attorneys fees is a contingent fee, already provided for in the SMCs contract
with the law firm. To further order them to pay 20% of the amount due as
attorneys fees is double payment, tantamount to undue enrichment and
therefore improper.[13]

The appellee, for its part, contended that the primary issue in the case at bar
revolved around the basic and fundamental principles of agency.[14] It was
incumbent upon the defendants-appellants to exercise ordinary prudence and
reasonable diligence to verify and identify the extent of the alleged agents
authority. It was their burden to establish the true identity of the assumed
agent, and this could not be established by mere representation, rumor or
general reputation. As they utterly failed in this regard, the appellants must
suffer the consequences.

The Court of Appeals affirmed the decision of the trial court, thus:

In the face of the somewhat tenuous evidence presented by the appellants,

we cannot fault the lower court for giving more weight to appellees
testimonial and documentary evidence, all of which establish with some
degree of preponderance the existence of the account sued upon.

ALL CONSIDERED, we cannot find any justification to reject the factual

findings of the lower court to which we must accord respect, for which
reason, the judgment appealed from is hereby AFFIRMED in all respects.

SO ORDERED.[15]

Hence, the instant petition.

The petitioners pose the following issues for the Courts resolution:

I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT

EVIDENCE THAT IT HAD PROPERLY AND TIMELY NOTIFIED PETITIONER OF LOST
BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT
EVIDENCE THAT PETITIONER WAS REMISS IN THE PAYMENT OF HIS ACCOUNTS
TO ITS AGENT.[16]

According to the petitioners, receiving receipts from the private respondents

agents instead of its salesmen was a usual occurrence, as they had been
operating the store since 1979. Thus, on four occasions in April 1983, when
an agent of the respondent came to the store wearing an SMC uniform and
driving an SMC van, petitioner Francisco Culaba, without question, paid his
accounts. He received the receipts without fear, as they were similar to what
he used to receive before. Furthermore, the petitioners assert that, common
experience will attest that unless the attention of the customers is called for,
they would not take note of the serial number of the receipts.

The petitioners contend that the private respondent advertised its warning to
the public only after the damage was done, or on July 9, 1993. Its belated
notice showed its glaring lack of interest or concern for its customers welfare,
and, in sum, its negligence.

Anent the second issue, petitioner Francisco Culaba avers that the agent to
whom the accounts were paid had all the physical and material attributes or
indications of a representative of the private respondent, leaving no doubt
that he was duly authorized by the latter. Petitioner Francisco Culabas
testimony that he does not necessarily check the contents of the receipts
issued to him except for the amount indicated if [the] same accurately
reflects his actual payment is a common attitude of customers. He could,
thus, not be faulted for paying the private respondents agent on four
occasions. Petitioner Francisco Culaba asserts that he made the payment in
good faith, to an agent who issued SMC receipts which appeared to be
genuine. Thus, according to the petitioners, they had duly paid their
obligation in accordance with Articles 1240 and 1242 of the New Civil Code.

The private respondent, for its part, avers that the burden of proving
payment is with the debtor, in consonance with the express provision of
Article 1233 of the New Civil Code. The petitioners miserably failed to prove
the self-serving allegation that they already paid their liability to the private
respondent. Furthermore, under normal circumstances, an obligor would not
just pay a substantial amount to someone whom he saw for the first time,
without even asking for the latters name.

The Ruling of the Court

The petition is dismissed.

The petitioners question the findings of the Court of Appeals as to whether

the payment of the petitioners obligation to the private respondent was
properly made, thus, extinguishing the same. This is clearly a factual issue,
and beyond the purview of the Court to delve into. This is in consonance with
the well-settled rule that findings of fact of the trial court, especially when
affirmed by the Court of Appeals, are accorded the highest degree of respect,
and generally will not be disturbed on appeal. Such findings are binding and
conclusive on the Court.[17] Furthermore, it is not the Courts function under
Rule 45 of the Rules of Court, as amended, to review, examine and evaluate
or weigh the probative value of the evidence presented.[18]

To reiterate, the issue being raised by the petitioners does not involve a
question of law, but a question of fact, not cognizable by this Court in a
petition for review under Rule 45. The jurisdiction of the Court in such a case
is limited to reviewing only errors of law, unless the factual findings being
assailed are not supported by evidence on record or the impugned judgment
is based on a misapprehension of facts.[19]

A careful study of the records of the case reveal that the appellate court
affirmed the trial courts factual findings as follows:

First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the
private respondents lost booklet, which loss was duly advertised in a
newspaper of general circulation; thus, the private respondent could not have
officially issued them to the petitioners to cover the alleged payments on the
dates appearing thereon.
Second. There was something amiss in the way the receipts were issued to
the petitioners, as one receipt bearing a higher serial number was issued
ahead of another receipt bearing a lower serial number, supposedly covering
a later payment. The petitioners failed to explain the apparent mix-up in
these receipts, and no attempt was made in this regard.

Third. The fact that the salesmans name was invariably left blank in the four
receipts and that the petitioners could not even remember the name of the
supposed impostor who received the said payments strongly argue against
the veracity of the petitioners claim.

We find no cogent reason to reverse the said findings.

The dismissal of the petition is inevitable even upon close perusal of the
merits of the case.

Payment is a mode of extinguishing an obligation.[20] Article 1240 of the Civil

Code provides that payment shall be made to the person in whose favor the
obligation has been constituted, or his successor-in-interest, or any person
authorized to receive it.[21] In this case, the payments were purportedly
made to a supervisor of the private respondent, who was clad in an SMC
uniform and drove an SMC van. He appeared to be authorized to accept
payments as he showed a list of customers accountabilities and even issued
SMC liquidation receipts which looked genuine. Unfortunately for petitioner
Francisco Culaba, he did not ascertain the identity and authority of the said
supervisor, nor did he ask to be shown any identification to prove that the
latter was, indeed, an SMC supervisor. The petitioners relied solely on the
mans representation that he was collecting payments for SMC. Thus, the
payments the petitioners claimed they made were not the payments that
discharged their obligation to the private respondent.

The basis of agency is representation.[22] A person dealing with an agent is

put upon inquiry and must discover upon his peril the authority of the agent.
[23] In the instant case, the petitioners loss could have been avoided if they
had simply exercised due diligence in ascertaining the identity of the person
to whom they allegedly made the payments. The fact that they were parting
with valuable consideration should have made them more circumspect in
handling their business transactions. Persons dealing with an assumed agent
are bound at their peril to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden
of proof is upon them to establish it.[24] The petitioners in this case failed to
discharge this burden, considering that the private respondent vehemently
denied that the payments were accepted by it and were made to its
authorized representative.

Negligence is the omission to do something which a reasonable man, guided

by those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something, which a prudent and reasonable
man would not do.[25] In the case at bar, the most prudent thing the
petitioners should have done was to ascertain the identity and authority of
the person who collected their payments. Failing this, the petitioners cannot
claim that they acted in good faith when they made such payments. Their
claim therefor is negated by their negligence, and they are bound by its
consequences. Being negligent in this regard, the petitioners cannot seek
relief on the basis of a supposed agency.[26]

WHEREFORE, the instant petition is hereby DENIED. The assailed Decision

dated April 16, 1996, and the Resolution dated July 19, 1996 of the Court of
Appeals are AFFIRMED. Costs against the petitioners.

SO ORDERED.

THIRD DIVISION

SPS. RAFAEL P. ESTANISLAO G.R. No. 178537

AND ZENAIDA ESTANISLAO,

Petitioners, Present:

Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,

Corona,*

Nachura, and

Reyes, JJ.

EAST WEST BANKING

CORPORATION, Promulgated:

Respondent.

February 11, 2008

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

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review of the Decision[1] of the Court of Appeals dated
April 13, 2007 in CA-G.R. CV No. 87114 which reversed and set aside the
Decision of the Regional Trial Court of Antipolo City, Branch 73 in Civil Case
No. 00-5731. The appellate court entered a new judgment ordering
petitioners spouses Estanislao to pay respondent East West Banking
Corporation P4,275,919.65 plus interest and attorneys fees. Also assailed is
the Resolution[2] dated June 25, 2007 denying the motion for
reconsideration.

The facts are as follows:

On July 24, 1997, petitioners obtained a loan from the respondent in the
amount of P3,925,000.00 evidenced by a promissory note and secured by
two deeds of chattel mortgage dated July 10, 1997: one covering two dump
trucks and a bulldozer to secure the loan amount of P2,375,000.00, and
another covering bulldozer and a wheel loader to secure the loan amount of
P1,550,000.00. Petitioners defaulted in the amortizations and the entire
obligation became due and demandable.

On April 10, 2000, respondent bank filed a suit for replevin with damages,
praying that the equipment covered by the first deed of chattel mortgage be
seized and delivered to it. In the alternative, respondent prayed that
petitioners be ordered to pay the outstanding principal amount of
P3,846,127.73 with 19.5% interest per annum reckoned from judicial demand
until fully paid, exemplary damages of P50,000.00, attorneys fees equivalent
to 20% of the total amount due, other expenses and costs of suit.

The case was filed in the Regional Trial Court of Antipolo and raffled to Branch
73 thereof.

Subsequently, respondent moved for suspension of the proceedings on

account of an earnest attempt to arrive at an amicable settlement of the
case. The trial court suspended the proceedings, and during the course of
negotiations, a deed of assignment[3] dated August 16, 2000 was drafted by
the respondent, which provides in part, that:

x x x the ASSIGNOR is indebted to the ASSIGNEE in the aggregate sum of

SEVEN MILLION THREE HUNDRED FIVE THOUSAND FOUR HUNDRED FIFTY
NINE PESOS and FIFTY TWO CENTAVOS (P7,305,459.52), Philippine currency,
inclusive of accrued interests and penalties as of August 16, 2000, and in full
payment thereof, the ASSIGNOR does hereby ASSIGN, TRANSFER and
CONVEY unto the ASSIGNEE those motor vehicles, with all their tools and
accessories, more particularly described as follows:

Make : Isuzu Dump Truck

xxx

Make : Isuzu Dump Truck

xxx

Make : x x x Caterpillar Bulldozer x x x

That the ASSIGNEE hereby accepts the assignment in full payment of the
above-mentioned debt x x x. (Emphasis supplied)

Petitioners affixed their signatures on the deed of assignment. However, for

some unknown reason, respondent banks duly authorized representative
failed to sign the deed.

On October 6, 2000 and March 8, 2001, respectively, petitioners completed

the delivery of the heavy equipment mentioned in the deed of assignment
two dump trucks and a bulldozer to respondent, which accepted the same
without protest or objection.

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

admit an amended complaint for the seizure and delivery of two more heavy
equipment the bulldozer and wheel loader which are covered under the
second deed of chattel mortgage. Respondent claimed that its representative
inadvertently failed to include the second deed of chattel mortgage among
the documents forwarded to its counsel when the original complaint was
being drafted. Respondent likewise claimed that petitioners were given a
chance to submit a refinancing scheme that would allow them to keep the
remaining two heavy equipment, but they failed to come up with such a
scheme despite repeated promises to do so.

Respondents amended complaint for replevin alleged that petitioners

outstanding indebtedness as of June 14, 2001 stood at P4,275,919.61 which
is more or less equal to the aggregate value of the additional units of heavy
equipment sought to be recovered. It also prayed that, in the event the two
heavy equipment could not be replevied, petitioners be ordered to pay the
outstanding sum of P3,846,127.73 with 19.5% interest per annum reckoned
from January 24, 1998, compound interest, exemplary damages of
P50,000.00, attorneys fees equivalent to 20% of the total amount due, other
expenses and costs of suit.

Petitioners sought to dismiss the amended complaint. They alleged that their
previous payments on loan amortizations, the execution of the deed of
assignment on August 16, 2000, and respondents acceptance of the three
units of heavy equipment, had the effect of full payment or satisfaction of
their total outstanding obligation which is a bar on respondent bank from
recovering any more amounts from them. By way of counterclaim, petitioners
sought the award of nominal damages in the amount of P500,000.00, moral
damages in the amount of P500,000.00, exemplary damages in the amount
of P500,000.00, attorneys fees, litigation expenses, interest and costs.

On March 14, 2006, the trial court dismissed the amended complaint for lack
of merit. It held that the deed of assignment and the petitioners delivery of
the heavy equipment effectively extinguished petitioners total loan
obligation. It also held that respondent was estopped from further collecting
from the petitioners when it accepted, without any protest, delivery of the
three units of heavy equipment as full and complete satisfaction of the
petitioners total loan obligation. Respondent likewise failed to timely rectify
its alleged mistake in the original complaint and deed of assignment, taking
almost a year to act.

Respondent bank appealed to the Court of Appeals, which reversed the trial
courts decision, the dispositive portion of which reads:

WHEREFORE, premises considered, the present appeal is hereby GRANTED.

The Decision dated March 14, 2006 of the Regional Trial Court of Antipolo
City, Branch 73 in Civil Case No. 00-5731 is hereby REVERSED and SET
ASIDE. A new judgment is hereby entered ordering the defendants-appellees
to pay, jointly and severally, plaintiff-appellant East West Banking Corporation
the sum of FOUR MILLION TWO HUNDRED SEVENTY FIVE THOUSAND NINE
HUNDRED NINETEEN and 69/100 (P4,275,919.69) per Statement of Account
as of June 14, 2001 (Exh. E, Records, p.328) with interest at 12% per annum
from June 15, 2001 until full payment thereof. Defendants-appellees are
likewise ordered to pay the plaintiff-appellant attorneys fees in the sum
equivalent to ten per cent (10%) of the total amount due.

No pronouncement as to costs.

SO ORDERED.[4]

The reversal of the lower courts decision hinges on: (1) the appellate courts
finding that the deed of assignment cannot bind the respondent because it
did not sign the same. The appellate court ruled that the assignment contract
was never perfected although it was prepared and drafted by the respondent;
(2) respondent was not estopped by its own declarations in the deed of
assignment, because such declarations were the result of ignorance founded
upon an innocent mistake and plain oversight on the part of respondents staff
in the banks loan operations department, who failed to forward the complete
documents pertaining to petitioners account to the banks legal department,
such that when the original complaint for replevin was prepared, the second
deed of chattel mortgage covering two other pieces of heavy equipment was
inadvertently excluded; (3) petitioners are aware that there were five pieces
of heavy equipment under chattel mortgage for an outstanding balance of
over P7 million; and (4) the appellate court held that even after the delivery
of the heavy equipment covered by the deed of assignment, the petitioners
continued to negotiate with the respondent on a possible refinancing scheme
that will enable them to retain the two other units of heavy equipment still in
their possession and which are the subject of the second deed of chattel
mortgage.

Petitioners argue that: a) the appellate court erred in ordering the payment of
the principal obligation in a replevin suit which it erroneously treated as a
collection case; b) the deed of assignment is binding between the parties
although it was not signed by the respondent, constituting as it did an offer
which they validly accepted; and c) the respondent is estopped from
collecting or foreclosing on the second deed of chattel mortgage.

On the other hand, respondent argues that: a) the deed of assignment

produced no legal effect between the parties for failure of the respondent to
sign the same; b) the deed was founded on a mistake on its part because it
honestly believed that only one chattel mortgage had been constituted to
secure the petitioners obligation; c) the non-inclusion of the second deed of
chattel mortgage in the original complaint was a case of plain oversight on
the part of the loan operations unit of respondent bank, which failed to
forward to the legal department the complete documents pertaining to the
petitioners loan account; d) the continued negotiations in August 2001
between the parties, after delivery of the three units of heavy equipment,
proves that petitioners acknowledged their continuing obligations to
respondent under the second deed of mortgage; and, e) the deed of
assignment did not have the effect of novating the original loan obligation.
The issue for resolution is: Did the deed of assignment which expressly
provides that the transfer and conveyance to respondent of the three units of
heavy equipment, and its acceptance thereof, shall be in full payment of the
petitioners total outstanding obligation to the latter operate to extinguish
petitioners debt to respondent, such that the replevin suit could no longer
prosper?

We find merit in the petition.

The appellate court erroneously denominated the replevin suit as a collection

case. A reading of the original and amended complaints show that what the
respondent initiated was a pure replevin suit, and not a collection case.
Recovery of the heavy equipment was the principal aim of the suit; payment
of the total obligation was merely an alternative prayer which respondent
sought in the event manual delivery of the heavy equipment could no longer
be made.

Replevin, broadly understood, is both a form of principal remedy and a

provisional relief. It may refer either to the action itself, i.e., to regain the
possession of personal chattels being wrongfully detained from the plaintiff
by another, or to the provisional remedy that would allow the plaintiff to
retain the thing during the pendency of the action and hold it pendente lite.
[5]

The deed of assignment was a perfected agreement which extinguished

petitioners total outstanding obligation to the respondent. The deed explicitly
provides that the assignor (petitioners), in full payment of its obligation in the
amount of P7,305,459.52, shall deliver the three units of heavy equipment to
the assignee (respondent), which accepts the assignment in full payment of
the above-mentioned debt. This could only mean that should petitioners
complete the delivery of the three units of heavy equipment covered by the
deed, respondents credit would have been satisfied in full, and petitioners
aggregate indebtedness of P7,305,459.52 would then be considered to have
been paid in full as well.

The nature of the assignment was a dation in payment, whereby property is

alienated to the creditor in satisfaction of a debt in money. Such transaction
is governed by the law on sales.[6] Even if we were to consider the
agreement as a compromise agreement, there was no need for respondents
signature on the same, because with the delivery of the heavy equipment
which the latter accepted, the agreement was consummated. Respondents
approval may be inferred from its unqualified acceptance of the heavy
equipment.

Consent to contracts is manifested by the meeting of the offer and the

acceptance of the thing and the cause which are to constitute the contract;
the offer must be certain and the acceptance absolute.[7] The acceptance of
an offer must be made known to the offeror, and unless the offeror knows of
the acceptance, there is no meeting of the minds of the parties, no real
concurrence of offer and acceptance.[8] Upon due acceptance, the contract is
perfected, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good
faith, usage and law.[9]

With its years of banking experience, resources and manpower, respondent

bank is presumed to be familiar with the implications of entering into the
deed of assignment, whose terms are categorical and left nothing for
interpretation. The alleged non-inclusion in the deed of certain units of heavy
equipment due to inadvertence, plain oversight or mistake, is tantamount to
inexcusable manifest negligence, which should not invalidate the juridical tie
that was created.[10] Respondent is presumed to have maintained a high
level of meticulousness in its dealings with petitioners. The business of a
bank is affected with public interest; thus, it makes a sworn profession of
diligence and meticulousness in giving irreproachable service.[11]

Besides, respondents protestations of mistake and plain oversight are self-

serving. The evidence show that from August 16, 2000 (date of the deed of
assignment) up to March 8, 2001 (the date of delivery of the last unit of
heavy equipment covered under the deed), respondent did not raise any
objections nor make any move to question, invalidate or rescind the deed of
assignment. It was not until June 20, 2001 that respondent raised the issue of
its alleged mistake by filing an amended complaint for replevin involving
different chattels, although founded on the same principal obligation.
The legal presumption is always on the validity of contracts.[12] In order to
judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.[13] When respondent
accepted delivery of all three units of heavy equipment under the deed of
assignment, there could be no doubt that it intended to be bound under the
agreement.

Since the agreement was consummated by the delivery on March 8, 2001 of

the last unit of heavy equipment under the deed, petitioners are deemed to
have been released from all their obligations to respondent.

Since there is no more credit to collect, no principal obligation to speak of,

then there is no more second deed of chattel mortgage that may subsist. A
chattel mortgage cannot exist as an independent contract since its
consideration is the same as that of the principal contract. Being a mere
accessory contract, its validity would depend on the validity of the loan
secured by it.[14] This being so, the amended complaint for replevin should
be dismissed, because the chattel mortgage agreement upon which it is
based had been rendered ineffectual.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals

dated April 13, 2007 in CA-G.R. CV No. 87114 and its Resolution dated June
25, 2007 are hereby SET ASIDE. The March 14, 2006 decision of the Regional
Trial Court of Antipolo, Branch 73, which dismisses Civil Case No. 00-5731, is
hereby REINSTATED.

FIRST DIVISION

EQUITABLE PCI BANK,* G.R. No. 171545

AIMEE YU and BEJAN

LIONEL APAS,

Petitioners, Present:
PUNO, C.J., Chairperson,

- v e r s u s - SANDOVAL-GUTIERREZ,

CORONA,

AZCUNA and

LEONARDO-DE CASTRO, JJ.

NG SHEUNG NGOR** doing

business under the name

and style KEN MARKETING, Promulgated:

KEN APPLIANCE DIVISION,

INC. and BENJAMIN E. GO,

Respondents. December 19, 2007

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

DECISION

CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the decision[2] of
the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution[3]
denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division,

Inc. and Benjamin E. Go filed an action for annulment and/or reformation of
documents and contracts[5] against petitioner Equitable PCI Bank (Equitable)
and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial
Court (RTC), Branch 16 of Cebu City.[6] They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest
rates[7] so they accepted Equitable's proposal and signed the bank's pre-
printed promissory notes on various dates beginning 1996. They, however,
were unaware that the documents contained identical escalation clauses
granting Equitable authority to increase interest rates without their consent.
[8]

Equitable, in its answer, asserted that respondents knowingly accepted all

the terms and conditions contained in the promissory notes.[9] In fact, they
continuously availed of and benefited from Equitable's credit facilities for five
years.[10]

After trial, the RTC upheld the validity of the promissory notes. It found that,
in 2001 alone, Equitable restructured respondents' loans amounting to
US$228,200 and P1,000,000.[11] The trial court, however, invalidated the
escalation clause contained therein because it violated the principle of
mutuality of contracts.[12] Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period[13] and declared the
existence of extraordinary deflation.[14] Consequently, the RTC ordered the
use of the 1996 dollar exchange rate in computing respondents' dollar-
denominated loans.[15] Lastly, because the business reputation of
respondents was (allegedly) severely damaged when Equitable froze their
accounts,[16] the trial court awarded moral and exemplary damages to them.
[17]

The dispositive portion of the February 5, 2004 RTC decision[18] provided:

WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of [respondents']

deposit placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion

[p]esos as moral damages;

C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion

[p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos as
moral and exemplary damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and

severally, to pay [respondents'] attorney's fees in the sum of P300,000;
litigation expenses in the sum of P50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable]

the unpaid principal obligation for the peso loan as well as the unpaid
obligation for the dollar denominated loan;

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]

interest as follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the
dollar obligation is the conversion rate of P26.50 per dollar availed of at the
time of incurring of the obligation in accordance with Article 1250 of the Civil
Code of the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the

aforestated unpaid principal loan obligations and interest.

SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal.[20]

In the March 1, 2004 order of the RTC, both notices were denied due course
because Equitable and respondents failed to submit proof that they paid their
respective appeal fees.[21]

WHEREFORE, premises considered, the appeal interposed by defendants from

the Decision in the above-entitled case is DENIED due course. As of February
27, 2004, the Decision dated February 5, 2004, is considered final and
executory in so far as [Equitable, Aimee Yu and Bejan Lionel Apas] are
concerned.[22] (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal fees. Respondents, on
the other hand, prayed for the issuance of a writ of execution.[24]

On March 24, 2004, the RTC issued an omnibus order denying Equitable's
motion for reconsideration for lack of merit[25] and ordered the issuance of a
writ of execution in favor of respondents.[26] According to the RTC, because
respondents did not move for the reconsideration of the previous order
(denying due course to the parties notices of appeal),[27] the February 5,
2004 decision became final and executory as to both parties and a writ of
execution against Equitable was in order.[28]

A writ of execution was thereafter issued[29] and three real properties of

Equitable were levied upon.[30]

On March 26, 2004, Equitable filed a petition for relief in the RTC from the
March 1, 2004 order.[31] It, however, withdrew that petition on March 30,
2004[32] and instead filed a petition for certiorari with an application for an
injunction in the CA to enjoin the implementation and execution of the March
24, 2004 omnibus order.[33]

On June 16, 2004, the CA granted Equitable's application for injunction. A writ
of preliminary injunction was correspondingly issued.[34]

Notwithstanding the writ of injunction, the properties of Equitable previously

levied upon were sold in a public auction on July 1, 2004. Respondents were
the highest bidders and certificates of sale were issued to them.[35]

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale
and to cite the sheriffs who conducted the sale in contempt for proceeding
with the auction despite the injunction order of the CA.[36]

On October 28, 2005, the CA dismissed the petition for certiorari.[37] It found
Equitable guilty of forum shopping because the bank filed its petition for
certiorari in the CA several hours before withdrawing its petition for relief in
the RTC.[38] Moreover, Equitable failed to disclose, both in the statement of
material dates and certificate of non-forum shopping (attached to its petition
for certiorari in the CA), that it had a pending petition for relief in the RTC.[39]

Equitable moved for reconsideration[40] but it was denied.[41] Thus, this

petition.

Equitable asserts that it was not guilty of forum shopping because the
petition for relief was withdrawn on the same day the petition for certiorari
was filed.[42] It likewise avers that its petition for certiorari was meritorious
because the RTC committed grave abuse of discretion in issuing the March
24, 2004 omnibus order which was based on an erroneous assumption. The
March 1, 2004 order denying its notice of appeal for non payment of appeal
fees was erroneous because it had in fact paid the required fees.[43] Thus,
the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented
Equitable from appealing the patently wrong February 5, 2004 decision.[44]

This petition is meritorious.

EQUITABLE WAS NOT GUILTY OF FORUM SHOPPING

Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those actions
raise identical issues, subject matter and causes of action.[45] The test is
whether, in two or more pending cases, there is identity of parties, rights or
causes of actions and reliefs.[46]

Equitable's petition for relief in the RTC and its petition for certiorari in the CA
did not have identical causes of action. The petition for relief from the denial
of its notice of appeal was based on the RTCs judgment or final order
preventing it from taking an appeal by fraud, accident, mistake or excusable
negligence.[47] On the other hand, its petition for certiorari in the CA, a
special civil action, sought to correct the grave abuse of discretion amounting
to lack of jurisdiction committed by the RTC.[48]

In a petition for relief, the judgment or final order is rendered by a court with
competent jurisdiction. In a petition for certiorari, the order is rendered by a
court without or in excess of its jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum

shopping when it moved to withdraw its petition for relief in the RTC on the
same day (in fact just four hours and forty minutes after) it filed the petition
for certiorari in the CA. Even if Equitable failed to disclose that it had a
pending petition for relief in the RTC, it rectified what was doubtlessly a
careless oversight by withdrawing the petition for relief just a few hours after
it filed its petition for certiorari in the CA a clear indication that it had no
intention of maintaining the two actions at the same time.

THE TRIAL COURT COMMITTED GRAVE ABUSE OF DISCRETION IN ISSUING ITS

MARCH 1, 2004 AND MARCH 24, 2004 ORDERS

Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer

exercising judicial or quasi-judicial function has acted without or in excess of
its or his jurisdiction, or with grave abuse of discretion amounting to lack or
excess of jurisdiction, and there is no appeal, nor any plain, speedy or
adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting such incidental
reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the judgment,

order or resolution subject thereof, copies of all pleadings and documents
relevant and pertinent thereto, and a sworn certificate of non-forum shopping
as provided in the third paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial

functions acted without or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in

the ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper,

petitioner must show that the public respondent patently and grossly abused
his discretion and that abuse amounted to an evasion of positive duty or a
virtual refusal to perform a duty enjoined by law or to act at all in
contemplation of law, as where the power was exercised in an arbitrary and
despotic manner by reason of passion or hostility.[49]

The March 1, 2004 order denied due course to the notices of appeal of both
Equitable and respondents. However, it declared that the February 5, 2004
decision was final and executory only with respect to Equitable.[50] As
expected, the March 24, 2004 omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the issuance of a writ of
execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously
intended to prevent Equitable, et al. from appealing the February 5, 2004
decision. Not only that. The execution of the decision was undertaken with
indecent haste, effectively obviating or defeating Equitable's right to avail of
possible legal remedies. No matter how we look at it, the RTC committed
grave abuse of discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy
in the ordinary course of law, we hold that there was none. The RTC denied
due course to its notice of appeal in the March 1, 2004 order. It affirmed that
denial in the March 24, 2004 omnibus order. Hence, there was no way
Equitable could have possibly appealed the February 5, 2004 decision.[52]

Although Equitable filed a petition for relief from the March 24, 2004 order,
that petition was not a plain, speedy and adequate remedy in the ordinary
course of law.[53] A petition for relief under Rule 38 is an equitable remedy
allowed only in exceptional circumstances or where there is no other
available or adequate remedy.[54]

Thus, we grant Equitable's petition for certiorari and consequently give due
course to its appeal.

EQUITABLE RAISED PURE QUESTIONS OF LAW IN ITS PETITION FOR REVIEW

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.

[55] There is a question of law when the doubt or controversy concerns the
correct application of law or jurisprudence to a certain set of facts; or when
the issue does not call for the probative value of the evidence presented, the
truth or falsehood of facts being admitted.[56]

Equitable does not assail the factual findings of the trial court. Its arguments
essentially focus on the nullity of the RTCs February 5, 2004 decision.
Equitable points out that that decision was patently erroneous, specially the
exorbitant award of damages, as it was inconsistent with existing law and
jurisprudence.[57]

THE PROMISSORY NOTES WERE VALID

The RTC upheld the validity of the promissory notes despite respondents
assertion that those documents were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are

drafted by one party.[58] The participation of the other party is limited to
affixing his signature or his adhesion to the contract.[59] For this reason,
contracts of adhesion are strictly construed against the party who drafted it.
[60]

It is erroneous, however, to conclude that contracts of adhesion are invalid

per se. They are, on the contrary, as binding as ordinary contracts. A party is
in reality free to accept or reject it. A contract of adhesion becomes void only
when the dominant party takes advantage of the weakness of the other
party, completely depriving the latter of the opportunity to bargain on equal
footing.[61]

That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to respondents,
they would have walked out and negotiated with another bank at the first
available instance. But they did not. Instead, they continuously availed of
Equitable's credit facilities for five long years.

While the RTC categorically found that respondents had outstanding dollar-
and peso-denominated loans with Equitable, it, however, failed to ascertain
the total amount due (principal, interest and penalties, if any) as of July 9,
2001. The trial court did not explain how it arrived at the amounts of
US$228,200 and P1,000,000.[62] In Metro Manila Transit Corporation v. D.M.
Consunji,[63] we reiterated that this Court is not a trier of facts and it shall
pass upon them only for compelling reasons which unfortunately are not
present in this case.[64] Hence, we ordered the partial remand of the case for
the sole purpose of determining the amount of actual damages.[65]

ESCALATION CLAUSE VIOLATED THE PRINCIPLE OF MUTUALITY OF

CONTRACTS

Escalation clauses are not void per se. However, one which grants the
creditor an unbridled right to adjust the interest independently and upwardly,
completely depriving the debtor of the right to assent to an important
modification in the agreement is void. Clauses of that nature violate the
principle of mutuality of contracts.[66] Article 1308[67] of the Civil Code
holds that a contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.[68]

For this reason, we have consistently held that a valid escalation clause
provides:

1. that the rate of interest will only be increased if the applicable

maximum rate of interest is increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the

applicable maximum rate of interest is reduced by law or by the Monetary
Board (de-escalation clause).[69]
The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions

shall be at such rate as shall be determined by the bank.[70]

Equitable dictated the interest rates if the term (or period for repayment) of
the loan was extended. Respondents had no choice but to accept them. This
was a violation of Article 1308 of the Civil Code. Furthermore, the assailed
escalation clause did not contain the necessary provisions for validity, that is,
it neither provided that the rate of interest would be increased only if allowed
by law or the Monetary Board, nor allowed de-escalation. For these reasons,
the escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v.

Philippine National Bank[71] we held that, because the escalation clause was
annulled, the principal amount of the loan was subject to the original or
stipulated rate of interest. Upon maturity, the amount due was subject to
legal interest at the rate of 12% per annum.[72]

Consequently, respondents should pay Equitable the interest rates of 12.66%

p.a. for their dollar-denominated loans and 20% p.a. for their peso-
denominated loans from January 10, 2001 to July 9, 2001. Thereafter,
Equitable was entitled to legal interest of 12% p.a. on all amounts due.

THERE WAS NO EXTRAORDINARY DEFLATION

Extraordinary inflation exists when there is an unusual decrease in the

purchasing power of currency (that is, beyond the common fluctuation in the
value of currency) and such decrease could not be reasonably foreseen or
was manifestly beyond the contemplation of the parties at the time of the
obligation. Extraordinary deflation, on the other hand, involves an inverse
situation.[73]
Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency

stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the following

requisites must be proven:

1. that there was an official declaration of extraordinary inflation or

deflation from the Bangko Sentral ng Pilipinas (BSP);[74]

2. that the obligation was contractual in nature;[75] and

3. that the parties expressly agreed to consider the effects of the

extraordinary inflation or deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance
arose out of a contract, the parties did not agree to recognize the effects of
extraordinary inflation (or deflation).[77] The RTC never mentioned that there
was a such stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans at the
exchange rate fixed by the BSP on the date of maturity.[78]

THE AWARD OF MORAL AND EXEMPLARY DAMAGES LACKED BASIS

Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered, not to impose a penalty to the wrongdoer.
[79] To be entitled to moral damages, a claimant must prove:

1. That he or she suffered besmirched reputation, or physical, mental or

psychological suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the
damages the claimant sustained;

4. The case is predicated on any of the instances expressed or envisioned

by Article 2219[80] and 2220[81]. [82]

In culpa contractual or breach of contract, moral damages are recoverable

only if the defendant acted fraudulently or in bad faith or in wanton disregard
of his contractual obligations.[83] The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive.[84]

The RTC found that respondents did not pay Equitable the interest due on
February 9, 2001 (or any month thereafter prior to the maturity of the loan)
[85] or the amount due (principal plus interest) due on July 9, 2001.[86]
Consequently, Equitable applied respondents' deposits to their loans upon
maturity.

The relationship between a bank and its depositor is that of creditor and
debtor.[87] For this reason, a bank has the right to set-off the deposits in its
hands for the payment of a depositor's indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable

had the option to exercise its legal right to set-off or compensation. However,
the RTC mistakenly (or, as it now appears, deliberately) concluded that
Equitable acted fraudulently or in bad faith or in wanton disregard of its
contractual obligations despite the absence of proof. The undeniable fact was
that, whatever damage respondents sustained was purely the consequence
of their failure to pay their loans. There was therefore absolutely no basis for
the award of moral damages to them.

Neither was there reason to award exemplary damages. Since respondents

were not entitled to moral damages, neither should they be awarded
exemplary damages.[89] And if respondents were not entitled to moral and
exemplary damages, neither could they be awarded attorney's fees and
litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court
of Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16,
Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for being
rendered with grave abuse of discretion amounting to lack or excess of
jurisdiction. All proceedings undertaken pursuant thereto are likewise
declared null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners
Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given due
course.

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu
City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is
hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the
name and style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin
E. Go to pay petitioner Equitable PCI Bank the principal amount of their dollar-
and peso-denominated loans;

2. ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin
E. Go to pay petitioner Equitable PCI Bank interest at:

a) 12.66% p.a. with respect to their dollar-denominated loans from

January 10, 2001 to July 9, 2001;

b) 20% p.a. with respect to their peso-denominated loans from

January 10, 2001 to July 9, 2001;[91]

c) pursuant to our ruling in Eastern Shipping Lines v. Court of

Appeals,[92] the total amount due on July 9, 2001 shall earn legal interest at
12% p.a. from the time petitioner Equitable PCI Bank demanded payment,
whether judicially or extra-judicially; and

d) after this Decision becomes final and executory, the applicable

rate shall be 12% p.a. until full satisfaction;

3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated and
peso-denominated loans, as of July 9, 2001, of respondents Ng Sheung Ngor,
doing business under the name and style of Ken Marketing, Ken Appliance
Division and Benjamin E. Go.

SO ORDERED.

FIRST DIVISION

[G.R. No. 116805. June 22, 2000]

MARIO S. ESPINA, petitioner, vs. THE COURT OF APPEALS and RENE G. DIAZ,
respondents. batas
DECISION

PARDO, J.:

The case before the Court is an appeal from a decision of the Court of
Appeals[1] reversing that of the Regional Trial Court, Antipolo, Rizal,[2]
affirming in all respects the decision of the Municipal Trial Court, Antipolo,
Rizal,[3] ordering respondent Rene G. Diaz to vacate the condominium unit
owned by petitioner and to pay back current rentals, attorney's fees and
costs.

The facts, as found by the Court of Appeals, are as follows:

"Mario S. Espina is the registered owner of a Condominium Unit No. 403,

Victoria Valley Condominium, Valley Golf Subdivision, Antipolo, Rizal. Such
ownership is evidenced by Condominium Certificate of Title No. N-10 (p. 31,
Rollo).

"On November 29, 1991, Mario S. Espina, the private respondent as seller,
and Rene G. Diaz, the petitioner as buyer, executed a Provisional Deed of
Sale, whereby the former sold to the latter the aforesaid condominium unit
for the amount of P100,000.00 to be paid upon the execution of the contract
and the balance to be paid through PCI Bank postdated checks as follows:

"1...........P400,000.00

..............Check No. 301245

..............January 15, 1992

"2...........P200,000.00

..............Check No. 301246

..............February 1, 1992
"3...........P200,000.00

..............Check No. 301247

..............February 22, 1992

"4...........P200,000.00

..............Check No. 301248

..............March 14, 1992 haideem

"5...........P200,000.00

..............Check No. 301249

..............April 4, 1992

"6...........P200,000.00

..............Check No. 301250

..............April 25, 1992

.............................(pp. 59-61, Rollo).

"Subsequently, in a letter dated January 22, 1992, petitioner informed private

respondent that his checking account with PCI Bank has been closed and a
new checking account with the same drawee bank is opened for practical
purposes. The letter further stated that the postdated checks issued will be
replaced with new ones in the same drawee bank (p. 63, Rollo).

"On January 25, 1992, petitioner through Ms. Socorro Diaz, wife of petitioner,
paid private respondent Mario Espina P200,000.00, acknowledged by him as
partial payment for the condominium unit subject of this controversy (p.64,
Rollo).
"On July 26, 1992, private respondent sent petitioner a "Notice of
Cancellation" of the Provisional Deed of Sale (p. 48, Rollo).

"However, despite the Notice of Cancellation from private respondent, the

latter accepted payment from petitioner per Metrobank Check No. 395694
dated and encashed on October 28, 1992 in the amount of P 100,000.00 (p.
64, Rollo).

"On February 24, 1993, private respondent filed a complaint docketed as Civil
Case No. 2104 for Unlawful Detainer against petitioner before the Municipal
Trial Court of Antipolo, Branch 1.

"On November 12, 1993, the trial court rendered its decision, the dispositive
portion of which reads:

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

rendered ordering the defendant and all persons claiming rights under him to
vacate unit 403 of the Victoria Golf Valley Condominium, Valley Golf
Subdivision, Antipolo, Rizal; to pay the total arrears of P126,000.00, covering
the period July 1991 up to the filing (sic) complaint, and to pay P7,000.00
every month thereafter as rentals unit (sic) he vacates the premises; to pay
the amount of P5,000.00 as and attorney's fees; the amount of P300.00 per
appearance, and costs of suit. Chiefx

However, the plaintiff may refund to the defendant the balance from (sic)
P400,000.00 after deducting all the total obligations of the defendant as
specified in the decision from receipt of said decision.

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

"From the said decision, petitioner appealed to the Regional Trial Court
Branch 71, Antipolo, Rizal. On April 29, 1994, said appellate court affirmed in
all respects the decision of the trial court."[4]
On June 14, 1994, petitioner filed with the Court of Appeals a petition for
review.

On July 20, 1994, the Court of Appeals promulgated its decision reversing the
appealed decision and dismissing the complaint for unlawful detainer with
costs against petitioner Espina.

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

decision of the Court of Appeals.[5]

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

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

The basic issue raised is whether the Court of Appeals erred in ruling that the
provisional deed of sale novated the existing contract of lease and that
petitioner had no cause of action for ejectment against respondent Diaz.

We resolve the issue in favor of petitioner.

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

subsequently executed by the parties novated the original existing contract
of lease. The contention cannot be sustained. Respondent originally occupied
the condominium unit in question in 1987 as a lessee.[8] While he occupied
the premises as lessee, petitioner agreed to sell the condominium unit to
respondent by installments.[9] The agreement to sell was provisional as the
consideration was payable in installments. Esmsc

The question is, did the provisional deed of sale novate the existing lease
contract? The answer is no. The novation must be clearly proved since its
existence is not presumed.[10] "In this light, novation is never presumed; it
must be proven as a fact either by express stipulation of the parties or by
implication derived from an irreconcilable incompatibility between old and
new obligations or contracts."[11] Novation takes place only if the parties
expressly so provide, otherwise, the original contract remains in force. In
other words, the parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one.[12] Where there is no
clear agreement to create a new contract in place of the existing one,
novation cannot be presumed to take place, unless the terms of the new
contract are fully incompatible with the former agreement on every point.[13]
Thus, a deed of cession of the right to repurchase a piece of land does not
supersede a contract of lease over the same property.[14] In the provisional
deed of sale in this case, after the initial down payment, respondent's checks
in payment of six installments all bounced and were dishonored upon
presentment for the reason that the bank account was closed.[15]
Consequently, on July 26, 1992, petitioner terminated the provisional deed of
sale by a notarial notice of cancellation.[16] Nonetheless, respondent Diaz
continued to occupy the premises, as lessee, but failed to pay the rentals
due. On October 28, 1992, respondent made a payment of P100,000.00 that
may be applied either to the back rentals or for the purchase of the
condominium unit. On February 13, 1993, petitioner gave respondent a notice
to vacate the premises and to pay his back rentals.[17] Failing to do so,
respondent's possession became unlawful and his eviction was proper.
Hence, on February 24, 1993, petitioner filed with the Municipal Trial Court,
Antipolo, Rizal, Branch 01 an action for unlawful detainer against respondent
Diaz.[18]

Now respondent contends that the petitioner's subsequent acceptance of

such payment effectively withdrew the cancellation of the provisional sale.
We do not agree. Unless the application of payment is expressly indicated,
the payment shall be applied to the obligation most onerous to the debtor.
[19] In this case, the unpaid rentals constituted the more onerous obligation
of the respondent to petitioner. As the payment did not fully settle the unpaid
rentals, petitioner's cause of action for ejectment survives. Thus, the Court of
Appeals erred in ruling that the payment was "additional payment" for the
purchase of the property.

WHEREFORE, the Court GRANTS the petition for review on certiorari, and
REVERSES the decision of the Court of Appeals.[20] Consequently, the Court
REVIVES the decision of the Regional Trial Court, Antipolo, Rizal, Branch 71,
[21] affirming in toto the decision of the Municipal Trial Court, Antipolo, Rizal,
Branch 01.[22]
No costs.

SO ORDERED.