G.R. No.

L-22490 May 21, 1969

GAN TION, petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First
Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents.

Burgos and Sarte for petitioner.

Roxas, Roxas, Roxas and Associates for respondents.

MAKALINTAL, J.:

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

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

On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a
month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the
aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.lwphi1.et

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

This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in favor of the
litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the
cases enumerated in Article 2208 of the Civil Code.1 It is the litigant, not his counsel, who is the judgment
creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject of
legal compensation. Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when
admittedly his creditor is indebted to him for more than P4,000.

WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court
of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent.
Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Fernando and Capistrano, JJ., concur.
Teehankee and Barredo JJ., took no part.
Concepcion, C.J., and Castro, J., are on leave.

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

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

DECISION

TORRES, JR., J.:

The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul the
sale of two parcels of land, from petitioner CKH Industrial and Development Corporation (CKH, for brevity) to
private respondent Century-Well Phil. Corporation (Century-Well, for brevity), for failure to pay the stipulated
price of P800,000.00.

Petitioners specifically assail the Decision [1] of the respondent Court of Appeals, which denied the
annulment of the sale. The appellate court found that there was payment of the consideration by way of
compensation, and ordered petitioners to pay moral damages and attorney's fees to private respondents. The
dispositive portion of the questioned decision reads:

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

With costs in this instance against the plaintiffs-appellees.

SO ORDERED."[2]

The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil
Case No. 2845-V-88 entitled "CKH Industrial & Development Corporation vs. Century-Well Philippine
Corporation, Lourdes Chong, Chong Tak Kei, Uy Chi Kim, and the Register of Deeds of Metro Manila, District
III (Valenzuela)." The trial court's decision stated pertinently:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff:

1. Ordering the rescission/annulment of the Deed of Absolute Sale of Realty.

2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in the
sum of P200,000.00;

3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney's fees in the
amount of 15% of the agreed price of P800,000.00 plus appearance fees of P500.00 per appearance;

4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit;

5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby
ordered to cancel the certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of Realty
and to reissue a new title in the name of CKH.

The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is
likewise dismissed considering that by his mediation he took it upon himself to assume the
damages he allegedly suffered.

SO ORDERED."[3]

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

It also appears that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah
(Wah), who lived in Hongkong together with their children, Chong Tak Kei, (Kei), Chong Tak Choi (Choi), and
Chong Tak Yam (Yam). After Cheng immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he
brought his first wife, Heng, and their children to this country, and established himself and his Chinese family
as naturalized Filipino citizens. Heng died in 1984.

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

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

"KNOW ALL MEN BY THESE PRESENTS:

This Deed of Absolute Sale of Realty executed by and between:

CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines, with business address at 553
Bermuda St., Sta. Cruz, Manila, represented in this act by its authorized representative, Ms. RUBI
SAW, hereinafter referred to as VENDOR,

- in favor of -
 CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by
virtue of the laws of the Republic of the Philippines at least sixty (60%) percent of the subscribed
capital stock of which is owned by Filipino citizens, duly qualified to own and acquire lands in the
Philippines, with office and business address at 66 F Bautista St., Valenzuela, Metro Manila and
represented in this act by its Treasurer and authorized representative, Ms. Lourdes Chong, hereinafter
referred to as VENDEE,

WITNESSETH:

That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of
Karuhatan, Municipality of Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos.
B-8710 and B-8711 of the Registry of Deeds for Metro Manila District III, and more particularly
described as follows:

xxx

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

That the above-described parcels of land are free from liens and encumbrances of whatever kind and
nature.

IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their
hand on ________ at ________."

Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. [7] The document was
notarized the day after the parties signed the same, i. e., March 9, 1988.[8]

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

The trial court synthesized the petitioners' submissions as follows:

"The complaint alleges the following:

Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price
shall be in the form of a Manager's Check, to be delivered to Rubi Saw upon the execution of
the Deed of Sale, the preparation of which, Lourdes Chong undertook. On May 8, 1988, the
date agreed upon for the execution of the Deed of Sale, plaintiff Rubi Saw, accompanied by her
friend Aurora Chua Ng, went to 1266 Soler St., Sta. Cruz, Manila which is the residence and
place of business of defendant Uy Chi Kim, an elderly man of Chinese ancestry and the place
 suggested by Lourdes Chong as their meeting place. During the meeting, Uy Chi Kim who was
there presented to Rubi Saw a Deed of Absolute Sale in favor of defendant Century Well for
her signature. Before Rubi Saw signed the Deed of Absolute Sale she inquired about the
payment ofthe P800,000.00. Defendant Uy Chi Kim presented to her a personal check but she
refused the same because it was contrary to her arrangement with Lourdes Chong that the
payment would be in the form of Manager's Check. Uy Chi Kim then explained to Rubi Saw
that since it was a Sunday that day, they were unable to obtain the Manager's Check. He
assured her that he had sufficient cash money at the first floor of his residence which is a store
owned by Uy Chi Kim. Before Uy Chi Kim left on the pretext of getting the money, he
persuaded plaintiff Rubi Saw to sign the Deed of Absolute Sale and give the same to Lourdes
Chong together with the two Certificates of Title. Since Uy Chi Kim is an elderly Chinese
whom Rubi Saw had no reason to mistrust, following Chinese custom, plaintiff Rubi Saw
acceded to the request of Uy Chi Kim, trusting that he had sufficient cash amounting
to P800,000.00 kept in the first floor of his residence. When Uy Chi Kim returned, he told
Rubi Saw that he had only P20,000 on hand. He assured plaintiff, however, that there was no
cause for her to worry (as) he was certain he would have the entire amount ready by the next
day when the banks would be open. Again, trusting the elderly defendant Uy Chi Kim, Rubi
Saw did not object and did not insist on the return of the Deed of Absolute Sale that she signed,
together with the Certificate of Title which she delivered to Lourdes Chong. The next day, May
9, 1988 Rubi Saw called Lourdes Chong and Uy Chi Kim over the telephone but was told they
were not around. She could not go to the residence of Uy Chi Kim because she could not leave
her office due to business concerns. On May 10, 1988 Rubi Saw repeatedly called the two but
was informed they were not around. On May 11, 1988 already anxious, she personally went to
the residences and offices of the two defendants but they were not around. On May 12, 1988
Rubi Saw wrote defendant Century Well advising Lourdes Chong of the rescission and
cancellation of the Deed of Absolute Sale because of lack of consideration. Lourdes Chong
refused to receive the letter. Thereafter, several demand letters were sent to the defendants but
they refused to pay plaintiffs. Worried that defendants might surreptitiously transfer the
certificates of title to their names, Rubi Saw wrote the public defendant Register of Deeds on
May 16, 1988, giving information about the circumstances of the sale and requesting not to
allow registration of the Deed of Absolute Sale, together with an Affidavit of Adverse
Claim. On May 20, 1988, plaintiffs' representative was informed by the Register of Deeds that
defendants have made representations with defendant to Register the Deed of Absolute Sale on
May 23, 1988.

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

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

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

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

"...his only participation in the transaction was as a mediator, he being one of the closest friends of
Cheng Kim Heng; that because the heirs of Cheng Kim Heng could not settle their problems he,
together with Machao Chan and Tomas Ching tried to mediate in accordance with Chinese traditions;
that after long and tedious meetings the parties finally agreed to meet at his residence at 1266 Soler St.,
Sta. Cruz, Manila for the purpose of pushing thru the sale of the properties in question as part of the
settlement of the estate. Defendant Uy Chi Kim corroborated the defense of his co-defendants that the
purchase price of the properties was P800,000.00 the payment of which consists in the form
of P100,000.00 in cash Philippine Currency; and the balance of P700,000.00 will be applied as a set-
off to the amount borrowed by plaintiff CKH from Chong Tak Choi and Chong Tak Kei. He advanced
the amount of P100,000.00 by way of his personal check to Rubi Saw but because Rubi Saw refused,
he gave Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and Jacinto Say even counted.
After the P100,000.00 cash was given and the promissory notes, Rubi Saw signed the document of
sale. It was during the registration of the sale that a problem arose as to the payment of the capital
gains (tax) which Rubi Saw refused to pay. The buyer likewise refused to pay the same. The complaint
against him is baseless and which besmirched his reputation. Hence his counterclaim for damages."[12]

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

After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the
Deed of Absolute Sale was merited, as there was no payment of the stipulated consideration for the sale of the
real properties involved to Rubi Saw.

In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement
between the parties, did not provide for payment by off-setting a portion of the purchase price with the
outstanding obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei. On the contrary, it
provided for payment in cash, in the amount of P800,000.00. The evidence presented, however, did not disclose
that payment of the said amount had ever been made by the private respondent. Moreover, there cannot be any
valid off-setting or compensation in this case, as Article 1278 of the Civil Code [14]requires, as a prerequisite for
compensation, that the parties be mutually bound principally as creditors and debtors, which is not the case in
this instance. The rescission of the contract is, therefore, called for, ruled the court.
 Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial
court. In its Decision[15] dated April 21, 1993, the appellate court expressed its own findings, that the execution
of the Deed of Absolute Sale was in settlement of a dispute between Rubi Saw and the first family of Cheng
Kim Heng, which arose upon Cheng's death. The appellate court described the history of their dispute as
follows:

"In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his
first wife Wah, children Choi and Kei, and second wife Rubi as his co-incorporators/stockholders,
along with other individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13, respectively). On April 15 and
July 17 the following year, Heng, on behalf of CHK [sic], obtained loans of P400,000.00
and P100,000.00 from Choi, for which Heng executed two promissory notes in Choi's favor (Exhs. 6
and 7; ibid., p. 40 and p. 41, respectively). On November 24, 1981, Heng obtained from his other son,
Kei, another loan this time in the sum of P200,000.00 on behalf of CKH for which he issued another
promissory note (Exh. 8, ibid., p. 42).

After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan
(now Metro Manila) covered by Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint;
Record, p. 13) and B-8711 (Annex B-Complaint; ibid., p. 14), which are now the subject of litigation in
instant case.

On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico
Hai Huat (Lourdes). During their marriage, Kei and Lourdes resided in the house on Tetuan St., Sta.
Cruz, Manila, which CKH was then utilizing as its office. At about this time, Heng and Rubi had
moved residence from Valenzuela, Metro Manila, to Bermuda St., Sta. Cruz, Manila.

Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between
Heng's first wife Wah and their three children on the one hand, and his second wife Rubi, on the other,
which came to a head when, Rubi as president of CKH wrote a letter dated August 21, 1985 to the
mayor of Valenzuela, Metro Manila, to prevent issuance of a business permit to American Metals
managed by Chong Tak Choi, stating that CKH has not allowed it to make use of the property, and on
November 7, 1985, when CKH, through counsel, demanded that Wah, Choi and Yam vacate the
residential and factory buildings and premises owned by CKH and located on one of the subject lots on
76 F. Bautista St., Valenzuela, which the three and the corporation (of which two of them were
stockholders), had been allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp. 44-45).

Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim,
Ma Chao, Tomas Cheng and Johnny Saw, were called in to mediate. The mediation efforts which
resulted in the withdrawal by Rubi Saw of her letter about the withholding of a license to American
Metals, Inc. and much later, had culminated in the transaction now under litigation.

The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to
Century Well for the amount of P800,000.00, P100,000.00 of which will be paid in cash and the
balance of P700,000.00 to be set-off by the three (3) promissory notes executed in behalf of CKH in
favor of Chong Tak Choi and Chong Tak Kei (Exhs. 6, 7 and 8) the accumulated interests thereon to be
waived as unstated consideration of the sale.

Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St.,
where the corresponding deed of absolute sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid.,
pp. 46-49), with mediator Cheng and CKH stockholder and Rubi's secretary, Jacinto Say, signing as
 instrumental witnesses. After having received the cash consideration of P100,000.00 and the
promissory notes amounting to P700,000.00 Rubi had signed the deed, and thereafter delivered to
Lourdes the document of sale and the owner's copies of the certificates of title for the two lots. The
deed having been executed on a Sunday, the parties agreed to have the same notarized the following
day, May 9, 1988. The parties again met the next day, May 9, 1988, when they acknowledged the deed
before a notary public."[16]

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

As observed by the appellate court:

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

The question the Court is now tasked to answer is whether or not there was payment of the consideration
for the sale of real property subject of this case. More specifically, was there a valid compensation of the
obligations of Cheng Kim Heng to his sons with the purchase price of the sale?

To resolve this issue, it is first required that we establish the true agreement of the parties.

Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective claims.
Petitioners, while submitting that as worded, the Deed of Absolute Sale does not provide for payment by
compensation, thereby ruling out the intention of the parties to provide for such mode of payment, submit on the
other hand, that they had not received payment of the stipulated cash payment of P800,000.00. The testimony of
Rubi Saw during the hearings for preliminary injunction and during trial was submitted to advance the
submission that she was never paid the price of the subject lots, in cash or in promissory notes.

On the other side of the fence, private respondents, who, ironically, were the parties who drafted the subject
document, claim that the Deed of Sale does not express the true agreement of the parties, specifically with
regard to the mode of payment. Private respondents allege that the execution of the deed of absolute sale was
the culmination of mediation of the dispute of the first and second families of Cheng Kim Heng, over the
properties of the decedent; that the price of the real property subject of the contract of sale was partly in cash,
and the reminder to be compensated against Cheng's indebtedness to his sons Choi and Kei, reflected in the
promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation, the sale
has been consummated and the private respondent Century-Well is entitled to the registration of the certificates
of title over the subject properties in its name.

These contrasting submissions of the circumstances surrounding the execution of the subject document
have led to this stalemate of sorts. Still, the best test to establish the true intent of the parties remains to be the
Deed of Absolute Sale, whose genuineness and due execution, are unchallenged.[19]

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

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

We reiterate the pertinent provisions of the deed:

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

The foregoing stipulation is clear enough in manifesting the vendors admission of receipt of the purchase
price, thereby lending sufficient, though reluctant, credence to the private respondents submission that payment
had been made by off-setting P700,000.00 of the purchase price with the obligation of Cheng Kim Heng to his
sons Choi and Kei. By signing the Deed of Absolute Sale, petitioner Rubi Saw has given her imprimatur to the
provisions of the deed, and she cannot now challenge its veracity.

However, the suitability of the said stipulations as benchmarks for the intention of the contracting parties,
does not come clothed with the cloak of validity. It must be remembered that agreements affecting the civil
relationship of the contracting parties must come under the scrutiny of the provisions of law existing and
effective at the time of the execution of the contract.

We refer particularly to the provisions of the law on compensation as a mode of extinguishment of

obligations. Under Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or
performance; (2) by the loss of the thing due, (3) by the condonation or remission of the debt; (4) by the
confusion or merger of the rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes
of extinguishment of obligations include annulment, rescission, fulfillment of a resolutory condition and
prescription.

Compensation may take place by operation of law (legal compensation), when two persons, in their own
right, are creditors and debtors of each other.[23] Article 1279 of the Civil Code provides for the requisites of
legal compensation:

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

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
 (2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

Compensation may also be voluntary or conventional, that is, when the parties, who are mutually creditors
and debtors agree to compensate their respective obligations, even though not all the requisites for legal
compensation are present. Without the confluence of the characters of mutual debtors and creditors, contracting
parties cannot stipulate to the compensation of their obligations, for then the legal tie that binds contracting
parties to their obligations would be absent. At least one party would be binding himself under an authority he
does not possess. As observed by a noted author, the requirements of conventional compensation are (1) that
each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual
extinguishment of their credits.[24]

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

Exhibit 6

Metro Manila, Philippines

April 15, 1978

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

To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH
INDUSTRIAL & DEVELOPMENT CORPORATION, do hereby signed [sic] in behalf of the
Corporation.

CKH INDUSTRIAL & DEVELOPMENT CORPORATION

signed:

CHENG KIM HENG"

Exhibit 7
 Manila,

July 17, 1978

For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered
domestic corporation in the City of Manila, represented by its president, CHENG KIM HENG with
residence certificate no. 118824650 issued at Manila, on 2-28-78 do promise to pay on demand the sum
of ONE HUNDRED THOUSAND PESOS ONLY (P100,000.00), Philippine currency with interest
from the date hereof at the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI.

In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG,
president of CKH INDUSTRIAL & DEVELOPMENT CORPORATION do hereby affixed [sic] my
signature below.

signed:

CHENG KIM HENG

Exhibit 8

Manila, Philippines,

November 24, 1981

I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831
Tetuan St. (2nd floor) Sta. Cruz, Manila, promises to pay to CHONG TAK KEI, with postal address at
76 F. Bautista St., Valenzuela, Metro Manila, the sum of PESOS: TWO HUNDRED THOUSAND
ONLY (P200,000.00) Philippine Currency, with interest at the rate of Ten per cent (10%) per annum
from date stated above to a period of one year and I hereby consent to any renewal, or extension of
same amount to a same period which may be requested by any one of us for the payment of this note.

I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI.

CKH IND. & DEV. CORP.

signed:

CHENG KIM HENG

President

In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as
stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale.They are
merely stockholders of Century-Well,[25] and as such, are not bound principally, not even in a representative
capacity, in the contract of sale. Thus, their interest in the promissory notes cannot be off-set against the
obligations between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation,
much less, even a scintilla of substantiation, that Choi and Keis interest in Century-Well are so considerable as
to merit a declaration of unity of their civil personalities. Under present law, corporations, such as Century-
Well, have personalities separate and distinct from their stockholders, [26] except only when the law sees it fit to
pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to defeat public
convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or business
conduit of a person.[27] The Court cannot, in this instance make such a ruling absent a demonstration of the merit
of such a disposition.

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

IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of the
Court of Appeals dated April 21, 1993, is hereby REVERSED and SET ASIDE. The decision of the Regional
Trial Court of Valenzuela, Branch 173 dated February 4, 1991, is hereby REINSTATED, with the
MODIFICATION that the award of moral damages and attorney's fees to Rubi Saw, and the order for payment
of costs are DELETED.

The parties shall bear their respective costs.

SO ORDERED.

G.R. No. 76509 December 15, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, WEAREVER TEXTILE MILLS, INC., and VICENTE
LIM, respondents.

Eriberto D. Ignacio for petitioner.

Roberto B. Arca for respondents.

GUTIERREZ, JR., J.:

This is a petition for certiorari seeking to annul and set aside the decision of the Court of appeals which
affirmed the dismissal of the petitioner's complaint on the ground that compensation cannot take place between
the petitioner and the private respondents as its requisites are not present.

In September, 1978, petitioner Pioneer Insurance and Surety Corporation issued general warehousing bonds in
favor of the Bureau of Customs for importation of raw materials in the total amount of P 6,500,000.00. The
bonds were issued on behalf of the private respondents Wearever Textile Mills, Inc., and its president, Vicente T.
Lim.

To secure the petitioner from and against any and all harm, damages and losses of whatever kind and nature
which it may incur as a consequence of its becoming a surety upon the bonds, the respondents executed jointly
and severally in favor of the petitioner indemnity agreements for said bonds each of which contain the
following stipulations:
INDEMNITY: -The undersigned, jointly and severally, agree and bind themselves to indemnify and hold and
save harmless the Corporation from and against any and all damages, losses, costs, stamps, taxes, penalties,
charges and expenses of whatsoever kind and nature which the Corporation shall or may at any time incur in
consequence of having become surety upon the bond/note or any extension, renewal, substitution or alteration
thereof made at the instance of the undersigned or executed on behalf of the undersigned or any of them; and to
pay, reimburse and make good to the Corporation, its successors and assigns, all sums and amounts of money
which it or its representatives shall or may pay or cause to be paid or become liable to pay, on account of the
undersigned or any of them, of whatsoever kind and nature including 20% of the amount involved in the
litigation or other matters growing out of or connected therewith for attorney's fees but in no case to be less than
P 200.00. The undersigned further agree, jointly and severally, that in case of any extension or renewal of the
bond/note, to bind ourselves for the payment thereof under the same terms and conditions, as above mentioned,
without the necessity of executing another Indemnity Agreement for the purpose and we hereby equally waive
our right to be notified of any renewal or extension of the bond/note which may be granted under this Indemnity
Agreement.

MATURITY OF OUR OBLIGATIONS CONTRACTED HEREWITH:- The above indemnities shall be paid to
the corporation as soon as demand is received from the creditor or as soon as it becomes liable to make payment
of any sum under the terms of the above-mentioned bond/note, its renewal, extensions or substitutions whether
the said sum or sums or part thereof have been actually paid or not. (pp. 29-30, Rollo)

The private respondents failed to comply with their commitment under the warehousing bonds by reason
whereof the Bureau of Customs demanded from the petitioner payment of the value of the said bonds in the
amount of P 6,390,259.00. This amount eventually reached P 9,031,000.00 in 1983.

In the meantime, in response to the petitioner's demand letter, the private respondents wrote petitioner
promising that they will settle their obligations with the Bureau of Customs.

On representations by private respondents to the Bureau of Customs, the latter granted the request of
respondents for staggered monthly installment payments of their obligation on condition that the respondents
will make an initial payment of P 500,000.00 and thereafter shall amortize the balance of P 400,000.00 monthly
until fully paid pursuant to the first indorsement by the Bureau of Customs dated September 22, 1976. Other
than the initial payment of P 500,000.00, however, respondents have not made any other payments thereby
violating the terms of the said agreement.

As a result of the foregoing, the Bureau of Customs again demanded from the petitioner payment of its bonds.
No payment, however, has been made as yet.

Sometime in 1979, a fire gutted the respondent's factory destroying materials insured with the petitioner in the
amount of P l,144,744.49. Respondents demanded from the petitioner payment of the proceeds of the insurance
policy but the latter refused to pay claiming that said proceeds must be applied by way of partial compensation
or set-off against its liability with the Bureau of Customs arising from the warehousing bonds.

The petitioner's efforts to protect itself from total loss in the much bigger amount of P 6,390,259.00 which as of
April 19, 1983 had already reached P 9,031,000.00 having proved fruitless, the complaint for compensation was
filed below.

The trial court rendered judgment in favor of the private respondents and ordered the petitioner to pay, among
others, the insurance proceeds in the amount of P l,144,744.49 plus legal interest from November 19, 1979 until
the whole amount is fully paid.
On appeal, the Court of Appeals affirmed the trial court's decision, holding that legal compensation cannot take
place because the requisites thereof are not present, namely: that petitioner is not the creditor of private
respondents; and that the former's claim against the latter is not due, demandable and liquidated because its
liability on the warehousing bonds was extinguished when the textile goods covered by the same were
destroyed by the fire. Therefore, according to the appellate court since the petitioner and private respondents are
not mutually creditors and debtors to each other, the law on compensation is inapplicable.

In this petition, Pioneer Insurance alleges that legal compensation or set-off under Articles 1278 and 1279 can
take place because there is due to private respondents from the petitioner the amount of P l,144,744.49 as
proceeds of the fire insurance policy in the same manner that the private respondents are bound, jointly and
severally, to reimburse petitioner what the latter is liable to pay the Bureau of Customs in the total amount of P
6,390,259.00 and which, as of the date of the filing of the complaint, had already reached P 9,031,000.00. The
petitioner also stresses that even if it has not yet paid the Bureau of Customs any amount, the private
respondents have already become indebted to the petitioner pursuant to the indemnity agreement which stands
as the law between the parties.

On the other hand, the private respondents argue that the demands to pay made by the Bureau of Customs did
not prove nor create any liability and even if they did, the liability under the warehousing bonds in favor of the
Bureau of Customs was the liability of the petitioner; that petitioner did not pay and has never paid the Bureau
of Customs under the warehousing bonds and, therefore, the private respondents have nothing to reimburse the
petitioner for and that the approved staggered payment arrangement of the respondents with the Bureau of
Customs released petitioner from liability under the warehousing bonds.

We rule for the petitioner.

In the case of The International Corporate Bank, Inc. v. The Intermediate Appellate Court, et al. (G.R. No.
69560, June 30, 1988), we reiterated the requisites of legal compensation. We said:

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.
(Art. 1278, Civil Code). 'When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or knowledge of the debtors.' (Art.
1290, Civil Code). Art. 1279 of the Civil Code requires among others, that in order that legal compensation
shall take place, the two debts be due' and 'they be liquidated and demandable.' Compensation is not proper
where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation
cannot extend to unliquidated, disputed claim arising from breach of contract. (Compania General de Tabacos v.
French and Unson, 39 Phil. 34; Lorenzo & Martinez v. Herrero 17 Phil. 29).

There can be no doubt that petitioner is indebted to private respondent in the amount of P 1,062,063.83
representing the proceeds of her money market investment. This is admitted. But whether private respondent is
indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of
the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents
legal compensation from taking place. (CA Decision, Rollo, pp. 112- 113).

There is no dispute that the petitioner owes the private respondents the amount representing the proceed of the
insurance policy. The private respondents, however, try to negate their liability by questioning the veracity and
accuracy of the Bureau of Customs' demand letters to the petitioner and by claiming that they have no more
liability because of the fortuitous event. At the same time, however, they admit liability when they argue that the
petitioner was released from the same upon their agreement with the Bureau of Customs to make staggered
payments. Finally, the private respondents argue that since the petitioner has not made any payment yet
regarding the amount demanded by the Bureau of Customs, there is nothing for which the petitioner should be
reimbursed.

It is needless to emphasize that at the time the fire occurred, the private respondents together with the petitioner
had already incurred liability on the warehousing bonds with the Bureau of Customs because of the respondents'
inability to comply with the provisions of their undertaking. It is, therefore, clear that as far as the amount of P
9,031,000.00 is concerned, both the petitioner and respondents were already liable for said amount to the
Bureau of Customs when the contingency for which compensation is sought, happened. Neither can the
respondents claim that the petitioner was released from liability when they made arrangements with the Bureau
of Customs for staggered payments since the facts will bear out that other than the P 500,000.00 payment by
respondents, no further payment was made by them thus leading the Bureau of Customs to go after the
petitioner again. The private respondents, contend, however, that since the petitioner has not made any payment
with the Bureau of Customs, it cannot demand reimbursement and, thus, petitioner cannot apply legal
compensation or set-off against them because their liability has not yet become due and demandable.

In the recent case of Mercantile Insurance Co., Inc. v. Felipe Ysmael, Jr., & Co., Inc. (G.R. No. L-40962,
January 13, 1989), we ruled:

The question as to whether or not under the Indemnity Agreement of the parties, the Surety can demand
indemnification from the principal, upon the latter's default, even before the former has paid to the creditor, has
long been settled by this Court in the affirmative.

It has been held that:

The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is
enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the
creditors. (Cosmopolitan Ins. Co. Inc. v. Reyes, 15 SCRA 528 [1965] citing: Security Bank v. Globe Assurance,
58 Off. Gaz, 3709 [April 30, 1962]; Alto Surety and Ins. Co., Inc. v. Aguilar, et al., G.R. No. L-5625, March 16,
1954).

Clearly, the petitioner can demand reimbursement from the respondents even before it has actually paid its
obligation to the Bureau of Customs. It can, in principle, be held liable under the warehouse bonds even before
actual payment to the Bureau of Customs. The liability has been fixed. What remains is simply its liquidation.
The respondents who defaulted on the agreement to make staggered payments thereby causing the petitioner's
liability to the Bureau of Customs cannot refuse the set-off. Consequently, legal compensation can take place
between the petitioner and the private respondents, that is, the petitioner can partially set-off the insurance
proceeds in the amount of P 1,144,744.49 against its liability under the warehousing bonds which has been
computed in the amount of P 9,031,000.00 as of 1983.

From the records, it is seen that the last demand letter of the Bureau of Customs asking the petitioner to pay the
value of the bonds was on March 27,1981. The records are silent on whether or not the Bureau of Customs sued
either of the parties to enforce liability under the warehousing bonds. It may be noted that the petitioner admits
its liability under the warehousing bonds. Since the issue is legal compensation and in order to avoid any
miscarriage of justice, the Court refers the issue on the enforcement of liability under the bonds to the Bureau of
Customs.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated September 23, 1986 is
hereby ANNULLED and SET ASIDE. A copy of this decision is furnished the Commissioner of Customs for
appropriate action to be taken under the warehousing bonds. Costs against the private respondents.
SO ORDERED.