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SEBASTIAN SIGA-AN, G.R. No.

173227
Petitioner,
Present:

YNARES-SANTIAGO,
-versus Chairperson,
AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA, and
ALICIA VILLANUEVA, LEONARDO-DE CASTRO,* JJ.
Respondent.

Promulgated:

January 20, 2009

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DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the

Decision,[2] dated 16 December 2005, and Resolution,[3] dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.

71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch

255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of money against petitioner Sebastian

Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-

0068. Respondent alleged that she was a businesswoman engaged in supplying office materials and equipments to the

1
Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of

the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the

amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners

proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for

the loan.[6]

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On

31 October 1993, she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining balance

of the loan. Petitioner told her that since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the

excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as interest,

petitioner pestered her to pay additional interest. Petitioner threatened to block or disapprove her transactions with the

PNO if she would not comply with his demand. As all her transactions with the PNO were subject to the approval of petitioner

as comptroller of the PNO, and fearing that petitioner might block or unduly influence the payment of her vouchers in the

PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for the loan. She asked petitioner

for receipt for the payments but petitioner told her that it was not necessary as there was mutual trust and confidence

between them. According to her computation, the total amount she paid to petitioner for the loan and interest accumulated

to P1,200,000.00.[7]

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of

agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was

no agreement between her and petitioner regarding payment of interest. Since she paid petitioner a total amount

of P1,200,000.00 for the P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to

petitioner, she sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00. Petitioner,

despite receipt of the demand letter, ignored her claim for reimbursement.[8]

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal

interest from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an

amount equivalent to 25% of P660,000.00 as attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992,

respondent approached and asked him if he could grant her a loan, as she needed money to finance her business venture

with the PNO. At first, he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the

2
PNO. However, since respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the

loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous

loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan

because she could not give full payment on the due date. He acceded to her request. Thereafter, respondent pleaded for

another restructuring of the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a

promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue

several postdated checks to guarantee the payment of her obligation. Upon his approval of respondents request for

restructuring of the loan, respondent executed a promissory note dated 12 September 1994 wherein she admitted having

borrowed an amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in March

1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00 as guarantee of compliance with

her obligation. Subsequently, he presented the six checks for encashment but only one check was honored. He demanded

that respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the

Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial

Court of Makati City, Branch 65 (MeTC).[12]

Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that

her monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that

respondent was already estopped from complaining that she should not have paid any interest, because she was given

several times to settle her obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to

concluding that the loan was given interest-free. Based on the foregoing averments, he asked the RTC to dismiss

respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her

loan obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that

respondents obligation was only to pay the loaned amount of P540,000.00, and that the alleged interests due should not be

included in the computation of respondents total monetary debt because there was no agreement between them regarding

payment of interest. It concluded that since respondent made an excess payment to petitioner in the amount of P660,000.00

through mistake, petitioner should return the said amount to respondent pursuant to the principle of solutio indebiti.[13]

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings

experienced by respondent. Further, petitioner should pay exemplary damages by way of example or correction for the

public good, plus attorneys fees and costs of suit.

3
The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant
as follows:

(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of
12% per annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;

(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;

(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys
fees; and

(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision

affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied.[16] Hence, petitioner

lodged the instant petition before us assigning the following errors:


I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary

interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory

interest.[18] The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the

principal loan on which interest is demanded.[19]

Article 1956 of the Civil Code, which refers to monetary interest,[20] specifically mandates that no interest shall be

due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary

interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the

payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary

interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law.[21]

4
It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there

convincing proof of written agreement between the two regarding the payment of interest. Respondent testified that although

she accepted petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for

her to pay interest on the loan.[22]

Petitioner presented a handwritten promissory note dated 12 September 1994 [23]wherein respondent purportedly

admitted owing petitioner capital and interest.Respondent, however, explained that it was petitioner who made a promissory

note and she was told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval

of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would

not pay interest; that being unaware of the law on interest and fearing that petitioner would make good of his threats if she

would not obey his instruction to copy the promissory note, she copied the promissory note in her own handwriting; and

that such was the same promissory note presented by petitioner as alleged proof of their written agreement on

interest.[24] Petitioner did not rebut the foregoing testimony. It is evident that respondent did not really consent to the

payment of interest for the loan and that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot

be gainfully said that such promissory note pertains to an express stipulation of interest or written agreement of interest

on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed

on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in

her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by

respondent, the RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him

since the agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil Code should not

be absolute, and an exception to the application of such provision should be made when the borrower admits that a specific

rate of interest was agreed upon as in the present case; and that it would be unfair to allow respondent to pay only the loan

when the latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate

of interest on the loan.[25]

We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner

and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although

petitioner and respondent entered into a valid oral contract of loan amounting to P540,000.00, they, nonetheless, never

intended the payment of interest thereon.[26] While the Court of Appeals mentioned in its Decision that it concurred in the

RTCs ruling that petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider this as

merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals ruled that petitioner is not

entitled to the payment of interest on the loan. The rule is that factual findings of the trial court deserve great weight and

5
respect especially when affirmed by the appellate court.[27] We found no compelling reason to disturb the ruling of both

courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed

on the payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that

after paying the total amount of loan, petitioner ordered her to pay interest. [28] Respondent did not categorically declare in

the same case that she and respondent made an express stipulation in writing as regards payment of interest at the rate of

7%. As earlier discussed, monetary interest is due only if there was an expressstipulation in writing for the payment of

interest.

There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or

written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of

a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages

if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest

due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of

contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the

two instances apply only to compensatory interest and not to monetary interest.[29] The case at bar involves petitioners claim

for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that

respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written

agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the

instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest.[30]

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation

therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains

the principle of solutio indebiti. Said provision provides that if something is received when there is no right to demand it,

and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship

is created under a quasi-contract whereby the payor becomes the creditor who then has the right to demand the return of

payment made by mistake, and the person who has no right to receive such payment becomes obligated to return the

same. The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at
6
the expense of another.[31] The principle of solutio indebitiapplies where (1) a payment is made when there exists no binding

relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made

through mistake, and not through liberality or some other cause.[32]We have held that the principle of solutio indebiti applies

in case of erroneous payment of undue interest.[33]

It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such

payment because there was no express stipulation in writing to that effect. There was no binding relation between petitioner

and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something

when there was no right to demand it, he has an obligation to return it.

We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of

Appeals.

Records show that respondent received a loan amounting to P540,000.00 from petitioner.[34] Respondent issued two

checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan.[35] These checks were subsequently

encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that

the excess of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks,

respondent also paid cash in the total amount of P175,000.00 to petitioner as interest.[37] Although no receipts reflecting

the same were presented because petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his

Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid him a total amount of P175,000.00 cash in

addition to the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a

relevant fact may be given in evidence against him. Aside from the amounts of P160,000.00 and P175,000.00 paid as

interest, no other proof of additional payment as interest was presented by respondent. Since we have previously found that

petitioner is not entitled to payment of interest and that the principle of solutio indebiti applies to the instant case, petitioner

should return to respondent the excess amount of P160,000.00 and P175,000.00 or the total amount of P335,000.00.

Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be reduced

from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against

respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five

dishonored checks to petitioner. Nonetheless, respondents conviction therein does not affect our ruling in the instant

case.The two checks, subject matter of this case, totaling P700,000.00 which respondent claimed as payment of

the P540,000.00 worth of loan, were not among the five checks found to be dishonored or bounced in the five criminal cases.

Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest which the latter paid

to petitioner.[39]
7
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical

suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation

and similar injury. Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused

to return the amount paid as interest despite her repeated demands. Hence, the award of moral damages is

justified. However, its corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant

and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages is left to the discretion

of the court according to the circumstances of each case. This discretion is limited by the principle that the amount awarded

should not be palpably excessive as to indicate that it was the result of prejudice or corruption on the part of the trial

court.[40] To our mind, the amount of P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury

suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be

imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered respondent to pay

interest and threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay

interest despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00

imposed as exemplary damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from

committing similar and other serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable

justification for awarding the same.[42] In the case under consideration, the RTC stated in its Decision that the award of

attorneys fees equivalent to 25% of the amount paid as interest by respondent to petitioner is reasonable and moderate

considering the extent of work rendered by respondents lawyer in the instant case and the fact that it dragged on for several

years.[43] Further, respondent testified that she agreed to compensate her lawyer handling the instant case such

amount.[44] The award, therefore, of attorneys fees and its amount equivalent to 25% of the amount paid as interest by

respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to

respondent computed from 3 March 1998 until its full payment. This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that 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 rate of 6% per

annum. We further declared that when the judgment of the court awarding a sum of money becomes final and executory,

the rate of legal interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until

its satisfaction, this interim period being deemed equivalent to a forbearance of credit.
8
In the present case, petitioners obligation arose from a quasi-contract of solutio indebitiand not from a loan or

forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on

the damages awarded and on the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March

1998,[46] up to the finality of this Decision. In addition, the interest shall become 12% per annum from the finality of this

Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is

hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of interest

is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed

as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum

is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be computed from the time of the

extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also

imposed from the finality of this Decision up to its satisfaction.Costs against petitioner.

SO ORDERED.
PRISMA CONSTRUCTION & DEVELOPMENT G.R. No. 160545
CORPORATION and ROGELIO S. PANTALEON,
Petitioners,

Present:

*NACHURA, J.,
- versus -
BRION, Acting Chairperson,

DEL CASTILLO,

ABAD, and

PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,

Respondent.

Promulgated:

March 9, 2010

x------------------------------------------------------------------------------------------x
DECISION

BRION, J.:

9
We resolve in this Decision the petition for review on certiorari[1] filed by petitioners Prisma Construction & Development

Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the

Decision[2] dated May 5, 2003 and the Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of

Appeals (CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC),

Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment of P3,526,117.00 to

respondent Arthur F. Menchavez (respondent), but modified the interest rate from 4% per month to 12% per annum,

computed from the filing of the complaint to full payment. The assailed CA Resolution denied the petitioners Motion for
Reconsideration.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained

a P1,000,000.00[4] loan from the respondent, with a monthly interest of P40,000.00 payable for six months, or a

total obligation of P1,240,000.00 to be paid within six (6) months,[5] under the following schedule of payments:

January 8, 1994 . P40,000.00


February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00[6]

Total P1,240,000.00

To secure the payment of the loan, Pantaleon issued a promissory note[7] that states:

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY
THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-
month loan payable according to the following schedule:

January 8, 1994 . P40,000.00


February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged.[8]

10
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in his

personal capacity,[9] and as duly authorized by the Board of Directors of PRISMA.[10] The petitioners failed to completely pay

the loan within the stipulated six (6)-month period.

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent:

September 8, 1994 P320,000.00


October 8, 1995.P600,000.00
November 8, 1995.....P158,772.00
January 4, 1997 P30,000.00[11]

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00.However, the respondent found that the

petitioners still had an outstanding balance of P1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly

interest.[12] Thus, on August 28, 1997, the respondent filed a complaint for sum of money with the RTC to enforce the

unpaid balance, plus 4% monthly interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of

suit.[13]

In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but denied the stipulation on

the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he

made himself personally liable and that he made representations that the loan would be repaid within six (6) months. [14]

THE RTC RULING

The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for P1,000,000.00 in favor of

the petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-

month period. It noted that the petitioners made several payments amounting to P1,228,772.00, but they were still indebted

to the respondent for P3,526,117.00 as of February 11,[15] 1999 after considering the 4% monthly interest. The RTC

observed that PRISMA was a one-man corporation of Pantaleon and used this circumstance to justify the piercing of the veil

of corporate fiction. Thus, the RTC ordered the petitioners to jointly and severally pay the respondent the amount

of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid.[16]

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting that there

was no express stipulation on the 4% monthly interest.

THE CA RULING
11
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest principally based

on the board resolution that authorized Pantaleon to transact a loan with an approved interest of not more than 4% per

month. The appellate court, however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and

should be reduced to 12% per annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of

Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC Decision by imposing a

12% per annum interest, computed from the filing of the complaint until finality of judgment, and thereafter, 12% from

finality until fully paid.[17]

After the CA's denial[18] of their motion for reconsideration,[19] the petitioners filed the present petition for review

on certiorariunder Rule 45 of the Rules of Court.

THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to a 4%

monthly interest because the board resolution was not an evidence of a loan or forbearance of money, but merely an

authorization for Pantaleon to perform certain acts, including the power to enter into a contract of loan. The expressed

mandate of Article 1956 of the Civil Code is that interest due should be stipulated in writing, and no such stipulation exists.

Even assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)-month period only and cannot

be interpreted to apply beyond it. The petitioners also point out the glaring inconsistency in the CA Decision, which reduced

the interest from 4% per month or 48% per annum to 12% per annum, but failed to consider that the amount

of P3,526,117.00that the RTC ordered them to pay includes the compounded 4% monthly interest.

THE CASE FOR THE RESPONDENT

The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the board

resolution is attached to, and an integral part of, the promissory note based on which the petitioners obtained the loan. The

respondent further contends that the petitioners are estopped from assailing the 4% monthly interest, since they agreed to

pay the 4% monthly interest on the principal amount under the promissory note and the board resolution.

THE ISSUE

12
The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest

apply to the 6-month payment period only or until full payment of the loan?

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in writing; otherwise, 12%


per annum

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in

good faith.[20] When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the

literal meaning of its stipulations governs.[21] In such cases, courts have no authority to alter the contract by construction

or to make a new contract for the parties; a court's duty is confined to the interpretation of the contract the parties made

for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract

words the contract does not contain.[22] It is only when the contract is vague and ambiguous that courts are permitted to

resort to the interpretation of its terms to determine the parties intent.

In the present case, the respondent issued a check for P1,000,000.00.[23] In turn, Pantaleon, in his personal capacity and

as authorized by the Board, executed the promissory note quoted above. Thus, the P1,000,000.00 loan shall be payable

within six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest

of P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month period. We note that this agreed sum

can be computed at 4% interest per month, but no such rate of interest was stipulated in the promissory note;

rather a fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has been expressly stipulated in

writing. Under this provision, the payment of interest in loans or forbearance of money is allowed only if: (1) there was an

express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing.

The concurrence of the two conditions is required for the payment of interest at a stipulated rate. Thus, we held in Tan v.

Valdehueza[24] and Ching v. Nicdao[25]that collection of interest without any stipulation in writing is prohibited by law.

Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six (6)-month period of

the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the

13
interest on the loan should be at the legal interest rate of 12% perannum, consistent with our ruling in Eastern Shipping

Lines, Inc. v. Court of Appeals:[26]

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.
(Emphasis supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,[27] Sulit v. Court of Appeals,[28] Crismina

Garments, Inc. v. Court of Appeals,[29] Eastern Assurance and Surety Corporation v. Court of Appeals,[30]Sps. Catungal v.

Hao,[31] Yong v. Tiu,[32] and Sps. Barrera v. Sps. Lorenzo.[33] Thus, the RTC and the CA misappreciated the facts of the case;

they erred in finding that the parties agreed to a 4% interest, compounded by the application of this interest beyond the

promissory notes six (6)-month period. The facts show that the parties agreed to the payment of a specific sum of

money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a six (6)-month period.

Medel v. Court of Appeals not applicable

The CA misapplied Medel v. Court of Appeals[34] in finding that a 4% interest per month was unconscionable.

In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per month, a service charge

of 2% per annum, and a penalty charge of 1% per month, plus attorneys fee equivalent to 25% of the amount due, until the

loan is fully paid. Taken in conjunction with the stipulated service charge and penalty, we found the interest rate of 5.5%

to be excessive, iniquitous, unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null

and void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar[35] of 6% per

month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of Appeals,[36] of 3% per month or 36% per annum

interest on a P3,000,000.00 loan; in Imperial v. Jaucian,[37]of 16% per month or 192% per annum interest on a P320,000.00

loan; in Arrofo v. Quio,[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.

Yasuma,[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v. Timan,[40] of 7% and 5%

per month for loans totalling P964,000.00. We note that in all these cases, the terms of the loans were open-ended; the

stipulated interest rates were applied for an indefinite period.

14
Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount

except a specific sum of P40,000.00 per month on the principal of a loan payable within six months. Additionally, no

issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the

petitioners;[41] they only assailed the application of a 4% interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms

and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses,

terms and conditions are not contrary to law, morals, public order or public policy.[42] The payment of the specific sum of

money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from

the records and, in fact, there is no allegation showing that petitioners were victims of fraud when they entered into the

agreement with the respondent.

Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month for a period of six

(6) months, or from December 8, 1993 to June 8, 1994, for a total principal and interest amount of P1,240,000.00.

Thereafter, interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners during the

pendency of the suit, amounting to P1,228,772.00 as of February 12, 1999,[43]should be deducted from the total amount

due, computed as indicated above. We remand the case to the trial court for the actual computation of the total amount

due.

Doctrine of Estoppel not applicable

The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-month

stipulated period, since they agreed to pay this interest on the principal amount under the promissory note and the board

resolution.

We disagree with the respondents contention.

We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by the record,

negate its application. Under the promissory note,[44] what the petitioners agreed to was the payment of a specific sum

of P40,000.00 per month for six months not a 4% rate of interest per month for six (6) months on a loan whose

principal is P1,000,000.00, for the total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in

estoppel, barring them from raising their present defenses against a 4% per month interest after the six-month period of the

agreement. The board resolution,[45] on the other hand, simply authorizes Pantaleon to contract for a loan with a monthly

interest of not more than 4%. This resolution merely embodies the extent of Pantaleons authority to contract and does not
15
create any right or obligation except as between Pantaleon and the board. Again, no cause exists to place the petitioners in

estoppel.

Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct

corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an

existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a

crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business

conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely

an instrumentality, agency, conduit or adjunct of another corporation. [46] In the absence of malice, bad faith, or a specific

provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate

liabilities.[47]

In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on the part

of PRISMA to justify piercing its corporate veil.While Pantaleon denied personal liability in his Answer, he made himself

accountable in the promissory note in his personal capacity and as authorized by the Board Resolution of PRISMA.[48] With

this statement of personal liability and in the absence of any representation on the part of PRISMA that the obligation is all

its own because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as material to

the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May 5, 2003 of the

Court of Appeals in CA-G.R. CV No. 69627. The petitioners loan of P1,000,000.00 shall bear interest of P40,000.00 per

month for six (6) months from December 8, 1993 as indicated in the promissory note. Any portion of this loan, unpaid as

of the end of the six-month payment period, shall thereafter bear interest at 12% per annum. The total amount due and

unpaid, including accrued interests, shall bear interest at 12% per annum from the finality of this Decision. Let this case

be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the proper computation of the amount due as
herein directed, with due regard to the payments the petitioners have already remitted. Costs against the respondent.

SO ORDERED.

G.R. No. 96405 June 26, 1996

16
BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

ROMERO, J.:p

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of
Misamis Oriental, Branch 18,1 which disposed of Civil Case No. 10507 for collection of a sum of money and damages, as
follows:

WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay
to the plaintiff Philippine Bank of Communications, Cagayan de Oro City, the amount of FIFTY
THOUSAND PESOS (P50,000.00), with interest thereon from May 5, 1983 at 16% per annum until fully
paid; and 6% per annum on the total amount due, as liquidated damages or penalty from May 5, 1983
until fully paid; plus 10% of the total amount due for expenses of litigation and attorney's fees; and to pay
the costs.

The counterclaim, as well as the cross claim, are dismissed for lack of merit.

SO ORDERED.

Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with Rene C. Naybe
and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally liable to private respondent
Philippine Bank of Communications, Cagayan de Oro City branch. The promissory note was due on May 5, 1983.

Said due date expired without the promissors having paid their obligation. Consequently, on November 14, 1983 and on
June 8, 1984, private respondent sent petitioner telegrams demanding payment thereof. 2 On December 11, 1984 private
respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since both obligors did not respond to
the demands made, private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00
against the three obligors.

On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case. However, on
January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. On
January 27, 1987, the lower court dismissed the case against defendant Pantanosas as prayed for by the private
respondent herein. Meanwhile, only the summons addressed to petitioner was served as the sheriff learned that defendant
Naybe had gone to Saudi Arabia.

In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy Campos, who
told him that he was a partner of Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the falcata
logs operation business. Campos also intimated to him that Rene C. Naybe was interested in the business and would
contribute a chainsaw to the venture. He added that, although Naybe had no money to buy the equipment, Pio Tio had
assured Naybe of the approval of a loan he would make with private respondent. Campos then persuaded petitioner to act
as a "co-maker" in the said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-
maker for the loan of P50,000.00.

Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He
affixed his signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus,
it was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00.

In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --" clearly appears directly
below the admitted signature of the petitioner in the promissory note. 3 Hence, the latter's uncorroborated testimony on
his limited liability cannot prevail over the presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule
131. The lower court added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the
promissory note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that, even
granting that said limited amount had actually been agreed upon, the same would have been merely collateral between
him and Naybe and, therefore, not binding upon the private respondent as creditor-bank.

17
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was
supposed to take due care of his concerns, and that, on the witness stand, Pio Tio denied having participated in the
alleged business venture although he knew for a fact that the falcata logs operation was encouraged by the bank for its
export potential.

Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990, affirmed that of the
lower court. His motion for reconsideration of the said decision having been denied, he filed the instant petition for review
on certiorari.

On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of Court and
paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its questioned
decision.4 His motion for the reconsideration of the denial of his petition was likewise denied with finality in the
Resolution of April 24, 1991.5 Thereafter, petitioner filed a motion for leave to file a second motion for reconsideration
which, in the Resolution of May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of
judgment in this case.6

Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he asserted that he had
attached Registry Receipt No. 3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7,
1991, the Court granted his prayer that his petition be given due course and reinstated the same. 7

Nonetheless, we find the petition unmeritorious.

Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the decision of the lower
court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the promissory note. It supports
petitioner's allegation that they were induced to sign the promissory note on the belief that it was only for P5,000.00,
adding that it was Campos who caused the amount of the loan to be increased to P50,000.00.

The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of Appeals should
have declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office
of Judge Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand
chainsaw which cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved
by the board or credit committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f)
petitioner and Judge Pantanosas were not present at the time the loan was released in contravention of the bank practice,
and (g) notices of default are sent simultaneously and separately but no notice was validly sent to him. 8 Finally, petitioner
contends that in signing the promissory note, his consent was vitiated by fraud as, contrary to their agreement that the
loan was only for the amount of P5,000.00, the promissory note stated the amount of P50,000.00.

The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is not a trier of
facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same
opportunity in the absence of grave abuse of discretion on the part of the court below. Had he presented Judge
Pantanosas affidavit before the lower court, it would have strengthened his claim that the promissory note did not reflect
the correct amount of the loan.

Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the formalities
prescribed by law but . . . a mere commercial paper which does not bear the signature of . . . attesting witnesses," parol
evidence may "overcome" the contents of the promissory note.9 The first paragraph of the parol evidence rule 10 states:

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.

Clearly, the rule does not specify that the written agreement be a public document.

What is required is that the agreement be in writing as the rule is in fact founded on "long experience that written
evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the
stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them." 11 Thus, for the parol evidence
rule to apply, a written contract need not be in any particular form, or be signed by both parties. 12 As a general rule,

18
bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic
evidence. 13

By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he and his co-makers
agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and
moving cause of the written contract, it may be shown by parol evidence. 15 However, fraud must be established by clear
and convincing evidence, mere preponderance of evidence, not even being adequate. 16 Petitioner's attempt to prove fraud
must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony.

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his
co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was
upon the motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which
provides that:

The guarantors, even though they be solidary, are released from their obligation whenever by some act of
the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter.

It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This
is patent even from the first sentence of the promissory note which states as follows:

Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum
of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest . . . at the rate
of SIXTEEN (16) per cent per annum until fully paid.

A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the Civil Code states:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such a case the contract is called a suretyship. (Emphasis supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different
from that of a solidary debtor. Thus, Tolentino explains:

A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between
a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay
the debt before the property of the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other
rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code. 18

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207
thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint
so that each of the debtors is liable only for a proportionate part of the debt. There is a solidary liability only when the
obligation expressly so states, when the law so provides or when the nature of the obligation so requires. 19

Because the promissory note involved in this case expressly states that the three signatories therein are jointly and
severally liable, any one, some or all of them may be proceeded against for the entire obligation. 20 The choice is left to the
solidary creditor to determine against whom he will enforce collection. 21 Consequently, the dismissal of the case against
Judge Pontanosas may not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to
say that the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-
makers, as provided by law.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

19
PHILIPPINE COMMERCIAL G.R. No. 121989
INTERNATIONAL BANK,
Petitioner,
Present:

QUISUMBING, J.,
Chairman,
- versus - CARPIO,
CARPIO-MORALES, and
TINGA, JJ.

COURT OF APPEALS, ATLAS


CONSOLIDATED MINING & Promulgated:
DEVELOPMENT CORPORATION,
Respondents. January 31, 2006
x------------------------------------------------------------------------------------x

DECISION

TINGA, J.:

In this Petition for Review on Certiorari, Philippine Commercial International Bank (PCIB) impugns the Decision[1] of the

Court of Appeals dated 21 June 1995 finding it liable to Atlas Consolidated Mining and DevelopmentCorporation (Atlas), as

well as the Resolution[2] dated 12 September 1995 denying its Motion for Reconsideration.[3]

The antecedents follow.

PCIB and, Manila Banking Corporation (MBC) were joint bidders in a foreclosure sale held on 20 December 1975 of

assorted mining machinery and equipment previously mortgaged to them by the Philippine Iron Mines, Inc. (PIM).

Four (4) years later, Atlas agreed to purchase some of these properties owned jointly at that time by PCIB and

MBC. The sale was evidenced by a Deed of Sale dated 8 February 1979, with the parties agreeing therein to an initial

downpayment of P12,000,000.00 and the balance of P18,000,000.00 payable in six (6) monthly installments. It was also

stipulated that the total purchase price would be finally adjusted to exclude items to be retained by the Bureau of Mines. The

contract contained provisions expressly warranting the following: (1) full and sufficient title to the properties, (2) freeing the

properties from all liens and encumbrances, (3) freeing Atlas from all claims and incidental actions of the National Mines

and Allied Workers Union (NAMAWU), and (4) full rights and capacity of the seller to convey title to and effect peaceful

delivery of the properties to Atlas.[4]

The NAMAWU claim stemmed from a labor dispute docketed as RB-VI-3322-75 of the National Labor Relations

Commission (NLRC), where it obtained a favorable judgment against PIM in the amount of P4,298,307.77.This award was

affirmed by the Court.[5]After the judgment became final and executory, a writ of execution was duly issued.

In compliance with the contract, on 12 February 1979, Atlas issued Hongkong and Shanghai Bank Check No.
003842 in the amount of P12,000,000.00 as downpayment, payable to both PCIB and MBC.

20
In a letter-agreement[6] dated 7 March 1979 between PCIB and MBC bearing the conformity of Atlas that was made a

supplement to the Deed of Sale, the final purchase price was adjusted to P29,630,000.00.

On the following day, PCIB and MBC wrote Atlas requesting that subsequent installment payments of the balance

be made in the following proportions: PCIB 63.1579% and MBC - 36.8421%. The request was expressed through a

letter[7] signed by Ruben G. Asedillo and Porfirio Q. Cabalu, Vice Presidents respectively of MBC and PCIB.

On 18 April 1979, Atlas paid to NAMAWU the amount of P4,298,307.77. This payment was made in compliance with the

writ of garnishment issued on the same date against Atlas to satisfy the final judgment in favor of NAMAWU and against

PIM.

PCIB and MBC filed on 23 April 1979 a petition for certiorari with this Court, seeking to annul and set aside the order of

garnishment and to enjoin Atlas from complying with it. The Court, in G.R. No. L-50402, dismissed the petition and

sustained Atlass rights as follows:

. . . Atlas had the right to receive the properties free from any lien and encumbrance, and when the
garnishment was served on it, it was perfectly in the right in slashing the P4,298,307.77 from the P30M it
had to pay petitioners (PCIB, MBC) in order to satisfy the long existing and vested right of the laborers of
financially moribund PIM, without any liability to petitioners for reimbursement thereof.[8]

In the meantime, Atlas had made six (6) monthly payments in 1979 totaling P13,696,692.22, of

which P8,650,543.18 or 63.1579% was received by PCIB.

According to Atlas, apart from the downpayment of P12,000,000.00 and installment payments of P13,696,692.22,

it should be credited with its payment of P4,298,307.77 to NAMAWU as a consequence of the garnishment with which the

latter had secured together with corresponding P5,000.00 sheriffs fee. Thus, Atlas claims to have paid a total

of P30,000,000.00, of which P370,000.00 was an overpayment. Following the payment allocations between PCIB and MBI,

Atlas claimed that PCIB should reimburse it to the tune of P233,684.23. When PCIB refused to pay, Atlas sued PCIB to

obtain reimbursement of the alleged overpayment.

On the other hand, PCIB contended that Atlas still owed it a total of P908,398.75. It also alleged that even before

the writ of garnishment was served on Atlas, the judgment in favor of NAMAWU had already been partially satisfied in the

amount of P601,260.00. On account of this earlier payment, PCIB argued that the total payments NAMAWU had received

exceeded what it was entitled to by reason of the final judgment and, therefore, Atlas could not credit the full amount

received by NAMAWU in satisfaction of the Atlas obligation to PCIB.

21
The trial court, in a Decision[9] dated 29 November 1990, upheld PCIBs position and ordered Atlas to pay P908,398.75, plus

interest at the legal rate from the time of demand until payment of said amount.[10] It ruled:

After a thorough analysis and evaluation of the evidence thus far adduced and remaining unrebutted, the
Court is convinced that defendant only received the amount of P6,819,766.10, as its share out of
the P12,000,000.00 downpayment, provided in the Deed of Sale, not P7,578,948.00 as claimed by
plaintiff. The Court is furthermore convinced that plaintiff erroneously paid the amount of P4,298,307.77
to NAMAWU which payment was made pursuant to the writ of garnishment in NLRC Case No. RB-VI-3322-
75. Before the service of the writ of garnishment on April 18, 1979, the judgment in NLRC Case had already
been satisfied in the amount of P601,260.00 on account of several execution sales held on February 28,
1976 and October 20, 1976 and the remaining balance thereto at the time of the service of the writ of
garnishment on plaintiff was only P3,697,[047].77. Certainly, this is the only amount which can be credited
to plaintiff by defendant because 63.1579% of P3,697,047.77 is P2,334,977.74, according to letter-request
of defendant PCIB and MBC to plaintiff dated March 8, 1979. Instead of paying NAMAWU the amount
of P3,697,047.77 which is the correct amount, plaintiff paid the amount of P4,298,307.77.

The Court of Appeals reversed the lower court by ordering PCIB to pay Atlas the sum of P233,654.23, plus interest at the

legal rate from the date of the first demand on 3 September 1984, until fully paid, as well as the sum of P20,000.00 as

attorneys fees and costs of suit. The appellate court disposed of the case as follows:

A careful examination of the evidences presented in the case, though, evidently show that appellee PCIB
has no cause to blame appellant Atlas for its failure to receive what it maintains was a shortchange in the
share of P12 Million downpayment. It must be emphasized that at the time the downpayment check was
paid, the Deed of Sale did not mention any proportionate sharing of the proceeds thereof between PCIB and
MBC implying a 50-50 sharing between the two (2) sellers. The 63.1579% for PCIB and 36.8421% was only
made known and relayed to Atlas in a letter dated March 8, 1979 after the downpayment check of P12
Million had already been paid on February 12, 1979. Furthermore, the initial check was paid and received
by Porfirio O. Cabalu, Jr., Vice-President of defendant-appellee PCIB. Apparently, after the check was
deposited in the account of MBC, the latter issued its MBC Check No. 1652661 in the amount
of P6,819,766.10 to PCIB, properly receipted under Official Receipt No. 466652 of PCIB.In other words,
what the appellee herein receipted was the share given to it by Manilabank. Whether the same was short of
what is legally entitled becomes an internal matter between MBC and PCIB, with Atlas having nothing to do
with it. Legally, Atlas had effectively paid the P12 Million downpayment to both PCIB and MBC.
As regard the second item, the propriety of the P4,298,307.77 paid by Atlas to NAMAWU and incidental
amount of P5,000.00 to the Sheriff by virtue of the Notice of Garnishment in the labor dispute NLRC Case
No. RB-VI-331-75, had already been judicially settled in the case of PCIB and MBC versus NAMAWU-IMF,
L-50402, August 1982, 115 SCRA 873. Said case is a Petition for Certiorari praying, inter-alia that the High
Court orders [sic] the NLRC to stop delivery of the check of P4,298,307.77 (same check in this case) of
private respondent Atlas and/or to stop payment to NAMAWU.

....

Rightfully so, with the above discussion and the conceded fact that Atlas made a P370,000.00 overpayment
to PCIB and MBC, said amount should be ordered returned. And since mathematically, 63.1579%
of P370,000.00 is P233,684.23, appellee PCIB should be ordered to pay back Atlas said amount with
interest at the legal rate, being a forbearance of money, from the first demand until fully paid. Reasonable
attorneys [fees] of P20,000.00 is likewise award[ed] to appellant Atlas for having been forced to litigate after
its several prior lawful demands to collect from PCIB the overpayment, were obstinately and unjustly
refused.[11] (Emphasis not ours.)

PCIB moved for a reconsideration of the decision but the same was denied by the Court of Appeals in

a Resolution dated 12 September 1995.

22
PCIB is now before us. The instant petition is anchored on two grounds, namely: (1) the Court of Appeals erred in

reversing the trial court by disturbing the latters factual findings and conclusions despite the absence of strong and cogent

reasons: and (2) the Court of Appeals erred in finding that Atlas had complied with its obligation to PCIB. [12]

Prefatorily, findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on appeal to

this Court.[13] A deviation from this rule, however, is justified where the findings of fact of the Court of Appeals contradict

those of the trial court.[14]In the case at bar, the contradictory findings of the courts below necessitate our review of the

factual issues.

The controversy boils down into whether Atlas overpaid or underpaid PCIB. To resolve the conflicting claims, we

must dispose of two issues: whether PCIB should settle for only P6,819,766.10 which it received out of the P12,000,000.00

downpayment or it is entitled to more than that, specifically 63.1579% of the downpayment; and whether Atlas should be

fully credited for the amount of P4,298,307.77 it had paid to NAMAWU.

Let us briefly recall the pertinent antecedents to appreciate the issues in a better light. There is no dispute that the

total purchase price of the properties bought by Atlas was P29,630,000.00. Of this amount, PCIB claims that it is entitled

to receive from Atlas the total of P18,713,685.77 or 63.1579% of the purchase price, pursuant to the letter dated 7 March

1979 of the P12,000,000.00 down payment made by Atlas to PCIB and MBC, and PCIB acknowledged that it had

received P6,819,766.10. PCIB also admitted having received P8,650,543.18 as its share from the subsequent installment

payments made by Atlas.

On the first issue, the Court of Appeals rejected PCIBs claim that it should received 63.1579% of the downpayment.

It ruled in essence that PCIB cannot demand from Atlas more than what it got from MBC out of the downpayment remitted

by Atlas to both PCIB and MBC.

We uphold the appellate court on this issue.

This case concerns a joint obligation, which is defined as an obligation where there is a concurrence of several

creditors, or of several debtors, or of several debtors, or of several creditors and debtors, by virtue of which each of the

creditors has a right to demand, and each of the debtors is bound to render, compliance with his proportionate part of the

prestation which constitutes the object of the

obligation.[15] Article 1208[16] of the Civil Code mandates the equal sharing of creditors in the payment of debt in the absence

of any law or stipulation to the contrary.

PCIB is adamant in claiming that it only received P6,819,766.10 as its share in the downpayment. To prove its

allegation, PCIB presented its own receipt[17] wherein it was clearly stated that PCIB received from Atlas the amount
of P6,819,766.10.

23
It is beyond dispute that Atlas issued Hongkong Shanghai Bank Check No. 003842 in the sum of P12,000,000.00

with PCIB and MBC as joint payees as downpayment of the purchase price on 12 February 1979. The check was received

by Porfirio Cabalu, Jr., a PCIB Vice-President. As admitted by the parties during trial, the check was afterwards deposited

in the account of MBC.[18]Therefore, it is reasonable to conclude that the amount received by PCIB, as evidenced by the

receipt, was given to it by MBC. The appellate court arrived at the same conclusion, to wit:

Apparently, after the check was deposited in the account of MBC, the latter issued its MBC Check
No. 1652661 in the amount of P6,819,766.10 to PCIB, properly receipted under Official Receipt No. 466652
of PCIB. In other words, what the appellee herein receipted was the share given to it by Manilabank.

Undeniably, there was yet no agreement as of that date concerning the corresponding share of each creditor. It was

only on 8 March 1979 when PCIB communicated to Atlas the percentage of payments to be remitted to PCIB and

MBC. Before said date, Atlas could be secure in the thought that the matter of sharing was best left to the creditors to

decide.

Thus, we agree with the appellate courts conclusion that whatever deficiency PCIB is entitled from

the P12,000,000.00 down payment had become an internal matter between it and MBC. [19] The obligation was deemed

fulfilled to the extent ofP12,000,000.00 on the part of Atlas when the check was received by a representative of PCIB and

eventually deposited in the account of MBC.

On the second issue, PCIB posits that Atlas cannot be credited with the payment of the full amount of P4,298,307.77

because the remaining outstanding balance with respect to the NAMAWU judgment claim at the time of the service of the

writ of garnishment on Atlas was only P3,697,047.77. Atlas, on the other hand, insists that the creditable payment to

NAMAWU was P4,298,307.77, as upheld by the Supreme Court in NAMAWU v. PCIB. Accordingly, it is this amount which

should be the basis in extracting the 63.1579% share of PCIB, which amounts to P2,714,720.92 and not P2,334,977.74 as

erroneously asserted by PCIB.[20]

The appellate court upheld the position of Atlas on the second issue. We reverse the appellate court.

While the original amount sought to be garnished was P4,298,307.77, the partial payment of P601,260.00 naturally

reduced it to P3,697,047.77. Clearly, Atlas overpaid NAMAWU. It will be recalled that upon receipt of the writ of

garnishment, Atlas immediately paid NAMAWU, without making any investigation or consultation with PCIB.

24
Article 1236 of the Civil Code applies in this instance. It provides that whoever pays for another may demand from

the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover

only insofar as the payment has been beneficial to the debtor.

PCIB is the debtor in this case, it having purchased along with MBC legally garnished properties, while Atlas is the

third person who paid the obligation of the debtor without the latters knowledge and consent. Since Atlas readily paid

NAMAWU without the knowledge and consent of PCIB, Atlas may only recover from PCIB or, more precisely charge to PCIB,

only the amount of payment which has benefited the latter.

Generally, the third person who paid anothers debt is entitled to recover the full amount he had paid. The law,

however, limits his recovery to the amount by which the debtor has been benefited, if the debtor has no knowledge of, or

has expressed his opposition to such payment. Where the defenses that could have been set up by the debtor against the

creditor were existing and perfected, a payment by a third person without the knowledge of the debtor cannot obligate the

debtor to such third person to an amount more than what he could have been compelled by the creditor to pay. Thus, if the

debt has been remitted, paid, compensated or prescribed, a payment by a third person would constitute a payment of what

is not due; his remedy would be against the person who received the payment under such conditions, and not against the

debtor who did not benefit from the payment.[21]

The trial court correctly ruled that the overpayment amounting to P601,260.00 should be recovered from NAMAWU.

The remedy of Atlas in this case would be to proceed, not against PCIB, but against NAMAWU who was paid in excess,

applying the principle that no person can unjustly enrich himself at the expense of another. [22]

Having established that there has been partial satisfaction of the judgment in the amount of P601,260.00, the

remaining obligation of PCIB in the judgment account stood at P2,334,977.74. Consequently, this is the only amount which

must be credited to Atlas.

As it stands, the total payments by Atlas amounted to only P29,398,739.99. Therefore, Atlas must

settle P231,260.00, the balance of the purchase price, of which PCIB is entitled to receive P146,058.96 as its proportionate

share.

WHEREFORE, based on the foregoing, the petition is GRANTED in PART. The Decision of the Court of Appeals is

REVERSED and SET ASIDE and in lieu thereof Atlas is ORDERED to pay PCIB the sum of P146,058.96, with legal interest

commencing from the time of first demand on 22 August 1985.

No costs.

SO ORDERED.

25
[G.R. No. 101723. May 11, 2000]

INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP. (INIMACO), petitioner, vs. NATIONAL LABOR
RELATIONS COMMISSION, (Fourth Division) Cebu City, and ENRIQUE SULIT, SOCORRO MAHINAY, ESMERALDO
PEGARIDO, TITA BACUSMO, GINO NIERE, VIRGINIA BACUS, ROBERTO NEMENZO, DARIO GO, and ROBERTO
ALEGARBES, respondents.

DECISION

BUENA, J.:

This is a petition for certiorari assailing the Resolution dated September 4, 1991 issued by the National Labor Relations
Commission in RAB-VII-0711-84 on the alleged ground that it committed a grave abuse of discretion amounting to lack of
jurisdiction in upholding the Alias Writ of Execution issued by the Labor Arbiter which deviated from the dispositive
portion of the Decision dated March 10, 1987, thereby holding that the liability of the six respondents in the case below is
solidary despite the absence of the word "solidary" in the dispositive portion of the Decision, when their liability should
merely be joint. S-jcj

The factual antecedents are undisputed: Supr-eme

In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo Pegarido, Tita Bacusmo, Gino Niere,
Virginia Bacus, Roberto Nemenzo, Dariogo, and Roberto Alegarbes filed a complaint with the Department of Labor and
Employment, Regional Arbitration Branch No. VII in Cebu City against Filipinas Carbon Mining Corporation, Gerardo
Sicat, Antonio Gonzales, Chiu Chin Gin, Lo Kuan Chin, and petitioner Industrial Management Development Corporation
(INIMACO), for payment of separation pay and unpaid wages. Sc-jj

In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:

"RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering respondents Filipinas Carbon and Mining Corp.
Gerardo Sicat, Antonio Gonzales/Industrial Management Development Corp. (INIMACO), Chiu Chin Gin and Lo Kuan
Chin, to pay complainants Enrique Sulit, the total award of P82,800.00; ESMERALDO PEGARIDO the full award of
P19,565.00; Roberto Nemenzo the total sum of P29,623.60 and DARIO GO the total award of P6,599.71, or the total
aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND 31/100
(P138,588.31) to be deposited with this Commission within ten (10) days from receipt of this Decision for appropriate
disposition. All other claims are hereby Dismiss (sic) for lack of merit. Jjs-c

"SO ORDERED.

"Cebu City, Philippines.

"10 March 1987."0[1]

No appeal was filed within the reglementary period thus, the above Decision became final and executory. On June 16,
1987, the Labor Arbiter issued a writ of execution but it was returned unsatisfied. On August 26, 1987, the Labor Arbiter
issued an Alias Writ of Execution which ordered thus: Ed-pm-is

"NOW THEREFORE, by virtue of the powers vested in me by law, you are hereby commanded to proceed to the premises of
respondents Antonio Gonzales/Industrial Management Development Corporation (INIMACO) situated at Barangay Lahug,
Cebu City, in front of La Curacha Restaurant, and/or to Filipinas Carbon and Mining corporation and Gerardo Sicat at
4th Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi Village, Makati Metro Manila and at Philippine National Bank,
Escolta, Manila respectively, and collect the aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE
HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE CENTAVOS (P138,588.31) and thereafter turn over said amount to
complainants ENRIQUE SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO GO or to this Office for
appropriate disposition. Should you fail to collect the said sum in cash, you are hereby authorized to cause the
satisfaction of the same on the movable or immovable property(s) of respondents not exempt from execution. You are to
return this writ sixty (6) (sic) days from your receipt hereof, together with your corresponding report.

"You may collect your legal expenses from the respondents as provided for by law.

"SO ORDERED."[2]
26
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution and Set Aside Decision,"[3] alleging
among others that the alias writ of execution altered and changed the tenor of the decision by changing the liability of
therein respondents from joint to solidary, by the insertion of the words "AND/OR" between "Antonio Gonzales/Industrial
Management Development Corporation and Filipinas Carbon and Mining Corporation, et al." However, in an order dated
September 14, 1987, the Labor Arbiter denied the motion. Mis-oedp

On October 2, 1987, petitioner appealed[4] the Labor Arbiters Order dated September 14, 1987 to the respondent
NLRC. Mis-edp

The respondent NLRC dismissed the appeal in a Decision[5] dated August 31, 1988, the pertinent portions of which read:

"In matters affecting labor rights and labor justice, we have always adopted the liberal approach which favors the exercise
of labor rights and which is beneficial to labor as a means to give full meaning and import to the constitutional mandate
to afford protection to labor. Considering the factual circumstances in this case, there is no doubt in our mind that the
respondents herein are called upon to pay, jointly and severally, the claims of the complainants as was the latters prayers.
Inasmuch as respondents herein never controverted the claims of the complainants below, there is no reason why
complainants prayer should not be granted. Further, in line with the powers granted to the Commission under Article 218
(c) of the Labor code, to waive any error, defect or irregularity whether in substance or in form in a proceeding before Us,
We hold that the Writ of Execution be given due course in all respects." Ed-p

On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of P23,198.05 Representing One Sixth
Pro Rata Share of Respondent INIMACO As Full and Final Satisfaction of Judgment As to Said Respondent."[6] The private
respondents opposed the motion. In an Order[7] dated August 15, 1989, the Labor Arbiter denied the motion ruling thus:

"WHEREFORE, responsive to the foregoing respondent INIMACOs Motions are hereby DENIED. The Sheriff of this Office is
order (sic) to accept INIMACOs tender payment (sic) of the sum of P23,198.05, as partial satisfaction of the judgment and
to proceed with the enforcement of the Alias Writ of Execution of the levied properties, now issued by this Office, for the
full and final satisfaction of the monetary award granted in the instant case.

"SO ORDERED." Ed-psc

Petitioner appealed the above Order of the Labor Arbiter but this was again dismissed by the respondent NLRC in its
Resolution[8] dated September 4, 1991 which held that:

"The arguments of respondent on the finality of the dispositive portion of the decision in this case is beside the point.
What is important is that the Commission has ruled that the Writ of Execution issued by the Labor Arbiter in this case is
proper. It is not really correct to say that said Writ of Execution varied the terms of the judgment. At most, considering the
nature of labor proceedings there was, an ambiguity in said dispositive portion which was subsequently clarified by the
Labor Arbiter and the Commission in the incidents which were initiated by INIMACO itself. By sheer technicality and
unfounded assertions, INIMACO would now reopen the issue which was already resolved against it. It is not in keeping
with the established rules of practice and procedure to allow this attempt of INIMACO to delay the final disposition of this
case.

"WHEREFORE, in view of all the foregoing, this appeal is DISMISSED and the Order appealed from is hereby
AFFIRMED. Sce-dp

"With double costs against appellant."

Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the respondent NLRC committed grave abuse
of discretion in affirming the Order of the Labor Arbiter dated August 15, 1989, which declared the liability of petitioner to
be solidary.

The only issue in this petition is whether petitioners liability pursuant to the Decision of the Labor Arbiter dated March
10, 1987, is solidary or not. Calrs-pped

Upon careful examination of the pleadings filed by the parties, the Court finds that petitioner INIMACOs liability is not
solidary but merely joint and that the respondent NLRC acted with grave abuse of discretion in upholding the Labor
Arbiters Alias Writ of Execution and subsequent Orders to the effect that petitioners liability is solidary.

27
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation.[9] In a joint obligation each obligor answers only for a part of the whole liability
and to each obligee belongs only a part of the correlative rights.[10]

Well-entrenched is the rule that solidary obligation cannot lightly be inferred. [11] There is a solidary liability only when the
obligation expressly so states, when the law so provides or when the nature of the obligation so requires.[12]

In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear. The said falloexpressly states the
following respondents therein as liable, namely: Filipinas Carbon and Mining Corporation, Gerardo Sicat, Antonio
Gonzales, Industrial Management Development Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor
can it be inferred therefrom that the liability of the six (6) respondents in the case below is solidary, thus their liability
should merely be joint.

Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not provided in a judgment that the
defendants are liable to pay jointly and severally a certain sum of money, none of them may be compelled to satisfy in full
said judgment. In Oriental Commercial Co. vs. Abeto and Mabanag[13] this Court held:

"It is of no consequence that, under the contract of suretyship executed by the parties, the obligation
contracted by the sureties was joint and several in character. The final judgment, which superseded the
action for the enforcement of said contract, declared the obligation to be merely joint, and the same
cannot be executed otherwise."[14]

Granting that the Labor Arbiter has committed a mistake in failing to indicate in the dispositive portion that the liability of
respondents therein is solidary, the correction -- which is substantial -- can no longer be allowed in this case because the
judgment has already become final and executory. Scc-alr

It is an elementary principle of procedure that the resolution of the court in a given issue as embodied in the dispositive
part of a decision or order is the controlling factor as to settlement of rights of the parties.[15] Once a decision or order
becomes final and executory, it is removed from the power or jurisdiction of the court which rendered it to further alter or
amend it.[16] It thereby becomes immutable and unalterable and any amendment or alteration which substantially affects
a final and executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for that
purpose.[17] An order of execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity.[18]

None of the parties in the case before the Labor Arbiter appealed the Decision dated March 10, 1987, hence the same
became final and executory. It was, therefore, removed from the jurisdiction of the Labor Arbiter or the NLRC to further
alter or amend it. Thus, the proceedings held for the purpose of amending or altering the dispositive portion of the said
decision are null and void for lack of jurisdiction. Also, the Alias Writ of Execution is null and void because it varied the
tenor of the judgment in that it sought to enforce the final judgment against "Antonio Gonzales/Industrial Management
Development Corp. (INIMACO) and/or Filipinas Carbon and Mining Corp. and Gerardo Sicat," which makes the liability
solidary. Ca-lrsc

WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4, 1991 of the respondent National
Labor Relations is hereby declared NULL and VOID. The liability of the respondents in RAB-VII-0711-84 pursuant to the
Decision of the Labor Arbiter dated March 10, 1987 should be, as it is hereby, considered joint and petitioners payment
which has been accepted considered as full satisfaction of its liability, without prejudice to the enforcement of the award,
against the other five (5) respondents in the said case. Sppedsc

SO ORDERED.

SALVADOR P. ESCAO G. R. No. 151953


and MARIO M. SILOS,
Petitioners,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
Respondent.
Promulgated:

28
June 29, 2007

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

DECISION

TINGA, J.:

The main contention raised in this petition is that petitioners are not under obligation to reimburse respondent, a

claim that can be easily debunked. The more perplexing question is whether this obligation to repay is solidary, as contended

by respondent and the lower courts, or merely joint as argued by petitioners.

On 28 April 1980, Private Development Corporation of the Philippines (PDCP)[1]entered into a loan agreement with

Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon the amount of US$320,000.00,

for specific purposes and subject to certain terms and conditions.[2] On the same day, three stockholders-officers of Falcon,

namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption of

Solidary Liability whereby they agreed to assume in [their] individual capacity, solidary liability with [Falcon] for the due

and punctual payment of the loan contracted by Falcon with PDCP. [3]In the meantime, two separate guaranties were

executed to guarantee the payment of the same loan by other stockholders and officers of Falcon, acting in their personal

and individual capacities. One Guaranty[4] was executed by petitioner Salvador Escao (Escao), while the other[5] by petitioner

Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti (Matti). Thus,

contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon to Escao, Silos and Matti.[6] Part of the consideration that induced the sale

of stock was a desire by Ortigas, et al., to relieve themselves of all liability arising from their previous joint and several

undertakings with Falcon, including those related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was

executed by the concerned parties,[7] namely: with Escao, Silos and Matti identified in the document as SURETIES, on one

hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS, on the other. The Undertaking reads in part:

3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release OBLIGORS
from their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to assume all
of OBLIGORs said guarantees [sic] to PDCP and PAIC under the following terms and conditions:

a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the
payment of FALCONs obligations with it, any of [the] OBLIGORS shall immediately inform
SURETIES thereof so that the latter can timely take appropriate measures;

b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS
for collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS
at their own expense, without prejudice to any and/or all of OBLIGORS impleading
29
SURETIES therein for contribution, indemnity, subrogation or other relief in respect to any
of the claims of PDCP and/or PAIC; and

c. In the event that any of [the] OBLIGORS is for any reason made to pay any
amount to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment;

4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from FALCON
arising out of, or in connection with, their said guarantees[sic].[8]

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would also execute a Deed

of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon subsequently defaulted in its

payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of P5,031,004.07, which

Falcon did not satisfy despite demand.[9]

On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money with the Regional

Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and Inductivo. The case was docketed as Civil

Case No. 89-5128. For his part, Ortigas filed together with his answer a cross-claim against his co-defendants Falcon, Escao

and Silos, and also manifested his intent to file a third-party complaint against the Scholeys and Matti.[10] The cross-claim

lodged against Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of

Ortigas with respect to the PDCP loan.

Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms with PDCP was

Escao, who in December of 1993, entered into a compromise agreement whereby he agreed to pay the bank P1,000,000.00.

In exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire claim in the complaint against all of the

other defendants in the case.[11] The compromise agreement was approved by the RTC in a Judgment[12]dated 6 January

1994.

Then on 24 February 1994, Ortigas entered into his own compromise agreement[13] with PDCP, allegedly without

the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as full satisfaction of the

PDCPs claim against Ortigas,[14] in exchange for PDCPs release of Ortigas from any liability or claim arising from the Falcon

loan agreement, and a renunciation of its claims against Ortigas.

In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay P500,000.00 in

exchange for PDCPs waiver of its claims against him.[15]

In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos and Matti, on the

basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and Silos,[16] while he maintained his

cross-claim against Escao. In 1995, Ortigas filed a motion for Summary Judgment in his favor against Escao, Silos and

Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly

and severally, the amount of P1,300,000.00, as well as P20,000.00 in attorneys fees.[17] The trial court ratiocinated that

none of the third-party defendants disputed the 1982 Undertaking, and that the mere denials of defendants with respect to
non-compliance of Ortigas of the terms and conditions of the Undertaking, unaccompanied by any substantial fact which

30
would be admissible in evidence at a hearing, are not sufficient to raise genuine issues of fact necessary to defeat a motion

for summary judgment, even if such facts were raised in the pleadings. [18]In an Order dated 7 March 1996, the trial court

denied the motion for reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per annum to

be computed from 28 February 1994.[19]

From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao and Silos appealed

jointly while Matti appealed by his lonesome. In a Decision [20] dated 23 January 2002, the Court of Appeals dismissed the

appeals and affirmed the Summary Judgment. The appellate court found that the RTC did not err in rendering the summary

judgment since the three appellants did not effectively deny their execution of the 1982 Undertaking. The special defenses

that were raised, payment and excussion, were characterized by the Court of Appeals as appear[ing] to be merely sham in

the light of the pleadings and supporting documents and affidavits. [21]Thus, it was concluded that there was no genuine

issue that would still require the rigors of trial, and that the appealed judgment was decided on the bases of the undisputed

and established facts of the case.

Hence, the present petition for review filed by Escao and Silos.[22] Two main issues are raised. First, petitioners

dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document which they do not disavow and

have in fact annexed to their petition. Second, on the assumption that they are liable to Ortigas under the 1982 Undertaking,

petitioners argue that they are jointly liable only, and not solidarily. Further assuming that they are liable, petitioners also

submit that they are not liable for interest and if at all, the proper interest rate is 6% and not 12%.

Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the Court, the

appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of

Civil Procedure, summary judgment may avail if the pleadings, supporting affidavits, depositions and admissions on file

show that, except as to the amount of damages, there is no genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law. Petitioner have not attempted to demonstrate before us that there existed a

genuine issue as to any material fact that would preclude summary judgment. Thus, we affirm with ease the common

rulings of the lower courts that summary judgment is an appropriate recourse in this case.

The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on the basis of

the 1982 Undertaking in this Summary Judgment. An examination of the document reveals several clauses that make it

clear that the agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to be released from their

liability under the loan agreement which release was, in turn, part of the consideration for the assignment of their shares

in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon for the payment

of the loan with PDCP, and that amongst the consideration for OBLIGORS and/or their principals aforesaid selling is

SURETIES relieving OBLIGORS of any and all liability arising from their said joint and several undertakings with

FALCON.[23] Most crucial is the clause in Paragraph 3 of the Undertaking wherein petitioners irrevocably agree and

undertake to assume all of OBLIGORs said guarantees [sic] to PDCP x x x under the following terms and conditions. [24]

31
At the same time, it is clear that the assumption by petitioners of Ortigass guarantees [sic] to PDCP is governed by

stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by any of

OBLIGORS of any demand from PDCP for the payment of Falcons obligations with it, any of OBLIGORS was to immediately

inform SURETIES thereof so that the latter can timely take appropriate measures. Second, should any and/or all of

OBLIGORS be impleaded by PDCP in a suit for collection of its loan, SURETIES agree[d] to defend OBLIGORS at their own

expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity,

subrogation or other relief[25] in respect to any of the claims of PDCP. Third, if any of the OBLIGORS is for any reason made

to pay any amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7) calendar days

from such payment.[26]

Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not made to pay PDCP the amount

now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of P1.3 Million as an amicable settlement of the

claims posed by the bank against him. However, the subject clause in paragraph 3(c) actually reads [i]n the event that any

of OBLIGORS is for any reason made to payany amount to PDCP x x x [27] As pointed out by Ortigas, the phrase for any

reason reasonably includes any extra-judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP,

as it is indeed obvious that the phrase was incorporated in the clause to render the eventual payment adverted to therein

unlimited and unqualified.

The interpretation posed by petitioners would have held water had the Undertaking made clear that the right of

Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a consequence of a final and

executory judgment. On the contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve the burden

on Ortigas and his fellow OBLIGORS as soon as possible, and not only after Ortigas had been subjected to a final and

executory adverse judgment.

Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to cause PDCP x x x to within a reasonable

time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x[28] In the event that Ortigas and his fellow

OBLIGORS could not be released from their guaranties, paragraph 2 commits petitioners and Matti to cause the Board of

Directors of Falcon to make a call on its stockholders for the payment of their unpaid subscriptions and to pledge or assign
such payments to Ortigas, et al., as security for whatever amounts the latter may be held liable under their guaranties. In

addition, paragraph 1 also makes clear that nothing in the Undertaking shall prevent OBLIGORS, or any one of them, from

themselves negotiating with PDCP x x x for the release of their said guarantees [sic].[29]

There is no argument to support petitioners position on the import of the phrase made to pay in the Undertaking,

other than an unduly literalist reading that is clearly inconsistent with the thrust of the document. Under the Civil Code,

the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may

result from all of them taken jointly.[30] Likewise applicable is the provision that if some stipulation of any contract

should admit of several meanings, it shall be understood as bearing

32
that import which is most adequate to render it effectual.[31] As a means to effect the general intent of the document to

relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.

Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph 3, as they

claim. Following the general assertion in the petition that Ortigas violated the terms of the Undertaking, petitioners add that

Ortigas paid PDCP BANK the amount of P1.3 million without petitioners ESCANO and SILOSs knowledge and

consent.[32] Paragraph 3(a) of the Undertaking does impose a requirement that any of the OBLIGORS shall immediately

inform SURETIES if they received any demand for payment of FALCONs obligations to PDCP, but that requirement is

reasoned so that the [SURETIES] can timely take appropriate measures[33] presumably to settle the obligation without having

to burden the OBLIGORS. This notice requirement in paragraph 3(a) is markedly way off from the suggestion of petitioners

that Ortigas, after already having been impleaded as a defendant in the collection suit, was obliged under the 1982

Undertaking to notify them before settling with PDCP.

The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.

Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas had, in his answer,

denied any liability to PDCP and had alleged that he signed the Assumption of Solidary Liability not in his personal capacity,

but as an officer of Falcon. However, such position, according to petitioners, could not be justified since Ortigas later

voluntarily paid PDCP the amount of P1.3 Million. Such circumstances, according to petitioners, amounted to estoppel on

the part of Ortigas.

Even as we entertain this argument at depth, its premises are still erroneous. The Partial Compromise Agreement

between PDCP and Ortigas expressly stipulated that Ortigass offer to pay PDCP was conditioned without [Ortigass] admitting

liability to plaintiff PDCP Banks complaint, and to terminate and dismiss the said case as against Ortigas

solely.[34] Petitioners profess it is unthinkable for Ortigas to have voluntarily paid PDCP without admitting his liability, [35]yet

such contention based on assumption cannot supersede the literal terms of the Partial Compromise Agreement.

Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned his obligation to
petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial claim against Ortigas notwithstanding

the Undertaking he executed with petitioners. Not being a party to such Undertaking, PDCP was not precluded by a contract

from pursuing its claim against Ortigas based on the original Assumption of Solidary Liability.

At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a settlement with

the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that nothing herein shall prevent OBLIGORS,

or any one of them, from themselves negotiating with PDCP x x x for the release of their said guarantees [sic].[36]Simply put,

the Undertaking did not bar Ortigas from pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas

from recovering from petitioners whatever amount he may have paid PDCP through his own settlement. The stipulation that

if Ortigas was for any reason made to pay any amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such payment[37] makes it clear that petitioners remain liable to reimburse

Ortigas for the sums he paid PDCP.


33
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the assumption that they

are indeed liable.

Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that the Undertaking

did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which states in part that [t]here is a

solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires

solidarity.

Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the Undertaking, as the

language used in the agreement clearly shows that it is a surety agreement[38] between the obligors (Ortigas group) and the

sureties (Escao group). Ortigas points out that the Undertaking uses the word SURETIES although the document, in

describing the parties. It is further contended that the principal objective of the parties in executing the Undertaking cannot

be attained unless petitioners are solidarily liable because the total loan obligation can not be paid or settled to free or

release the OBLIGORS if one or any of the SURETIES default from their obligation in the Undertaking. [39]

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, Article

1207 of the Civil Code states that among them, [t]here is a solidary liability only when the obligation expressly so states, or

when the law or the nature of the obligation requires solidarity. Article 1210 supplies further caution against the broad

interpretation of solidarity by providing: The indivisibility of an obligation does not necessarily give rise to solidarity. Nor

does solidarity of itself imply indivisibility.

These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more debtors in one

and the same obligation, and in the absence of express and indubitable terms characterizing the obligation as solidary, the

presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is

indeed solidary in character to prove such fact with a preponderance of evidence.

The Undertaking does not contain any express stipulation that the petitioners agreed to bind themselves jointly and
severally in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation established in

the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact solidary, bears the

burden to overcome the presumption of jointness of obligations. We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the Undertaking

as SURETIES, a term repeated no less than thirteen (13) times in the document. Ortigas claims that such manner of

identification sufficiently establishes that the obligation of petitioners to him was joint and solidary in nature.

The term surety has a specific meaning under our Civil Code. Article 2047 provides the statutory definition of a
surety agreement, thus:

34
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis
supplied][40]

As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the principal

debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. It appears

that Ortigass argument rests solely on the solidary nature of the obligation of the surety under Article 2047. In tandem with

the nomenclature SURETIES accorded to petitioners and Matti in the Undertaking, however, this

argument can only be viable if the obligations established in the

Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly is not the

case here, notwithstanding the use of the nomenclature SURETIES in the Undertaking.

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound

by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The

suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former

to collect the credit in lieu of proceeding against the principal debtor for the same obligation. [41] At the same time, there is

also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment

the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is

extinguished.[42] At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for

the surety does in fact become subrogated to all the rights and remedies of the creditor.[43]

Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations

to suretyship contracts.[44] Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from

a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).[45]However, a significant

distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the

creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal

debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for

the sums they paid out to the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

A guarantor who binds himself in solidumwith the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between
a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes
to pay the debt before the property of the principal debtor has been exhausted, retains all the other
rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor
has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code.

35
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The
civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.[46]

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment

to the creditor may claim from his co-debtors only the share which corresponds to each, with the interest for the payment

already made. Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the

creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the

particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound

with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid,

and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the

other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety.

What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the

Civil Code, which assures that [t]he guarantor who pays for a debtor must be indemnified by the latter, such indemnity
comprising of, among others, the total amount of the debt.[47]Further, Article 2067 of the Civil Code likewise establishes that

[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.[48]

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to

sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should apply

to sureties. We reject that argument, and instead adopt Dr. Tolentinos observation that [t]he reference in the second

paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations,

however, does not mean that suretyship is withdrawn from the applicable provisions governing guaranty. [49] For if that were

not the implication, there would be no material difference between the surety as defined under Article 2047 and the joint

and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles

2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays

materially differ from those granted under Article 1217 to the solidary debtor who pays, since the indemnification that

pertains to the latter extends only [to] the share which corresponds to each [co-debtor]. It is for this reason that the Court

cannot accord the conclusion that because petitioners are identified in the Undertaking as SURETIES, they are consequently

joint and severally liable to Ortigas.

In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint liability,

the Court would have to be satisfied that among the petitioners and Matti, there is one or some of them who stand as the

principal debtor to Ortigas and another as surety who has the right to full reimbursement from the principal debtor or

debtors. No suggestion is made by the parties that such is the case, and certainly the Undertaking is not revelatory of such

intention. If the Court were to give full fruition to the use of the term SURETIES as conclusive indication of the existence of

a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay

down a corresponding set of rights and obligations as between the SURETIES which petitioners and Matti did not clearly
intend.

36
It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in the event that

Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was to act as surety and to

pay Ortigas in full, subject to his right to full reimbursement from the other two obligors. In such case, there would have

been, in fact, a surety agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an

agreement, it does not appear on the record. More consequentially, no such intention is reflected in the Undertaking itself,

the very document that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made

to pay PDCP. The mere utilization of the term SURETIES could not work to such effect, especially as it does not appear who

exactly is the principal debtor whose obligation is assured or guaranteed by the surety.

Ortigas further argues that the nature of the Undertaking requires solidary obligation of the Sureties, since the

Undertaking expressly seeks to reliev[e] obligors of any and all liability arising from their said joint and several undertaking

with [F]alcon, and for the sureties to irrevocably agree and undertake to assume all of obligors said guarantees to

PDCP.[50] We do not doubt that a finding of solidary liability among the petitioners works to the benefit of Ortigas in the

facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that establishes petitioners obligation

to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves establish that the nature of the

obligation requires solidarity. Even if the liability of petitioners and Matti were adjudged as merely joint, the full relief and

reimbursement of Ortigas arising from his payment to PDCP would still be accomplished through the complete execution of

such a judgment.

Petitioners further claim that they are not liable for attorneys fees since the Undertaking contained no such

stipulation for attorneys fees, and that the situation did not fall under the instances under Article 2208 of the Civil Code

where attorneys fees are recoverable in the absence of stipulation.

We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being impleaded in the suit

filed by PDCP. The Undertaking was precisely executed as a means to obtain the release of Ortigas and the Scholeys from

their previous obligations as sureties of Falcon, especially considering that they were already divesting their shares in the

corporation. Specific provisions in the Undertaking obligate petitioners to work for the release of Ortigas from his surety

agreements with Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas should he still be made

to pay PDCP by reason of the guaranty agreements from which he was ostensibly to be released through the efforts of

petitioners. None of these provisions were complied with by petitioners, and Article 2208(2) precisely allows for the recovery
of attorneys fees [w]hen the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur

expenses to protect his interest.

Finally, petitioners claim that they should not be liable for interest since the Undertaking does not contain any

stipulation for interest, and assuming that they are liable, that the rate of interest should not be 12% per annum, as

adjudged by the RTC.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals [51] set forth the rules with respect to the

manner of computing legal interest:

37
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 the judgment of the court is made (at which time 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.[52]

Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the rate of interest

thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand. The interest rate

imposed by the RTC is thus proper. However, the computation should be reckoned from judicial or extrajudicial demand.

Per records, there is no indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paid PDCP,

but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party Complaint praying that petitioners and

Matti be made to reimburse him for the payments made to PDCP. It is the filing of this Third Party Complaint on 14 March

1994 that should be considered as the date of judicial demand from which the computation of interest should be

reckoned.[53] Since the RTC held that interest should be computed from 28 February 1994, the appropriate redefinition

should be made.

38
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5 October

1995 is MODIFIED bydeclaring that petitioners and Joseph M. Matti are only jointly liable, not jointly and severally, to

respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is

MODIFIED in that the legal interest of 12% per annum on the amount of P1,300,000.00 is to be computed from 14 March

1994, the date of judicial demand, and not from 28 February 1994 as directed in the Order of the lower court. The assailed

rulings are affirmed in all other respects. Costs against petitioners.

SO ORDERED.
LILIBETH SUNGA-CHAN and CECILIA SUNGA, G.R. No. 164401
Petitioners,

- versus -
Present:
THE HONORABLE COURT OF APPEALS; THE
HONORABLE PRESIDING JUDGE, Regional QUISUMBING, J., Chairperson,
Trial Court, Branch 11, Sindangan, CARPIO MORALES,
Zamboanga Del Norte; THE REGIONAL TRIAL TINGA,
COURT SHERIFF, Branch 11, Sindangan, VELASCO, JR., and
Zamboanga Del Norte; THE CLERK OF COURT BRION, JJ.
OF MANILA, as Ex-Officio Sheriff; and
LAMBERTO T. CHUA,
Respondents.

Promulgated:

June 25, 2008


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

DECISION

VELASCO, JR., J.:


The Case

Before us is a petition for review under Rule 45, seeking to nullify and set aside the Decision [1] and Resolution
dated November 6, 2003 and July 6, 2004, respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 75688. The impugned
CA Decision and Resolution denied the petition for certiorari interposed by petitioners assailing the
Resolutions[2]dated November 6, 2002 and January 7, 2003, respectively, of the Regional Trial Court (RTC), Branch 11 in
Sindangan, Zamboanga Del Norte in Civil Case No. S-494, a suit for winding up of partnership affairs, accounting, and
recovery of shares commenced thereat by respondent Lamberto T. Chua.
The Facts

In 1977, Chua and Jacinto Sunga formed a partnership to engage in the marketing of liquefied petroleum gas. For

convenience, the business, pursued under the name, ShelliteGas Appliance Center (Shellite), was registered as a sole

proprietorship in the name of Jacinto, albeit the partnership arrangement called for equal sharing of the net profit.

After Jacintos death in 1989, his widow, petitioner Cecilia Sunga, and married daughter, petitioner Lilibeth Sunga-

Chan, continued with the business without Chuas consent. Chuas subsequent repeated demands for accounting and

winding up went unheeded, prompting him to file on June 22, 1992 a Complaint for Winding Up of a Partnership Affairs,

39
Accounting, Appraisal and Recovery of Shares and Damages with Writ of Preliminary Attachment, docketed as Civil Case No.

S-494 of the RTC in Sindangan, Zamboanga del Norte and raffled to Branch 11 of the court.

After trial, the RTC rendered, on October 7, 1997, judgment finding for Chua, as plaintiff a quo. The RTCs decision

would subsequently be upheld by the CA in CA-G.R. CV No. 58751 and by this Court per its Decision dated August 15,

2001 in G.R. No. 143340.[3] The corresponding Entry of Judgment[4] would later issue declaring the October 7, 1997 RTC

decision final and executory as of December 20, 2001. The fallo of the RTCs decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as
follows:

(1) DIRECTING them to render an accounting in acceptable form under accounting procedures
and standards of the properties, assets, income and profits of [Shellite] since the time of death of
Jacinto L. Sunga, from whom they continued the business operations including all businesses derived
from [Shellite]; submit an inventory, and appraisal of all these properties, assets, income, profits, etc. to
the Court and to plaintiff for approval or disapproval;

(2) ORDERING them to return and restitute to the partnership any and allproperties, assets,
income and profits they misapplied and converted to their own use and advantage that legally pertain
to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of this petition as
basis;

(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in
the partnership of the listed properties, assets and good will in schedules A, B and C, on pages 4-5 of the
petition;

(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the
partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the sum
of P35,000.00 per month, with legal rate of interest until fully paid;

(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities
pursuant to law, after delivering to the plaintiff all the interest, shares, participation and equity in the
partnership, or the value thereof in money or moneys worth, if the properties are not physically divisible;

(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and
hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,

(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys [fee] and P25,000.00
as litigation expenses.

NO special pronouncements as to COSTS.

SO ORDERED.[5] (Emphasis supplied.)

Via an Order[6] dated January 16, 2002, the RTC granted Chuas motion for execution. Over a month later, the RTC,

acting on another motion of Chua, issued an amended writ of execution.[7]

It seems, however, that the amended writ of execution could not be immediately implemented, for, in an omnibus

motion of April 3, 2002, Chua, inter alia, asked the trial court to commission a certified public accountant (CPA) to undertake

the accounting work and inventory of the partnership assets if petitioners refuse to do it within the time set by the
court. Chua later moved to withdraw his motion and instead ask the admission of an accounting report prepared by CPA

40
Cheryl A. Gahuman. In the report under the heading, Computation of Claims,[8]Chuas aggregate claim, arrived at using the

compounding-of-interest method, amounted to PhP 14,277,344.94. Subsequently, the RTC admitted and approved the

computation of claims in view of petitioners failure and refusal, despite notice, to appear and submit an accounting report

on the winding up of the partnership on the scheduled hearings on April 29 and 30, 2002. [9]

After another lengthy proceedings, petitioners, on September 24, 2002, submitted their own CPA-certified valuation

and accounting report. In it, petitioners limited Chuas entitlement from the winding up of partnership affairs to an aggregate

amount of PhP 3,154,736.65 only.[10] Chua, on the other hand, submitted a new computation,[11] this time applying simple

interest on the various items covered by his claim. Under this methodology, Chuas aggregate claim went down to PhP

8,733,644.75.

On November 6, 2002, the RTC issued a Resolution,[12] rejecting the accounting report petitioners submitted, while

approving the new computation of claims Chua submitted. The fallo of the resolution reads:

WHEREFORE, premises considered, this Court resolves, as it is hereby resolved, that the
Computation of Claims submitted by the plaintiff dated October 15, 2002 amounting to P8,733,644.75 be
APPROVED in all respects as the final computation and accounting of the defendants liabilities in favor of
the plaintiff in the above-captioned case, DISAPPROVING for the purpose, in its entirety, the computation
and accounting filed by the defendants.

SO RESOLVED.[13]

Petitioners sought reconsideration, but their motion was denied by the RTC per its Resolution of January 7, 2003.[14]

In due time, petitioners went to the CA on a petition for certiorari[15] under Rule 65, assailing the November 6, 2002

and January 7, 2003 resolutions of the RTC, the recourse docketed as CA-G.R. SP No. 75688.

The Ruling of the CA

As stated at the outset, the CA, in the herein assailed Decision of November 6, 2003, denied the petition for
certiorari, thus:

WHEREFORE, the foregoing considered, the Petition is hereby DENIED for lack of merit.

SO ORDERED.[16]

The CA predicated its denial action on the ensuing main premises:

1. Petitioners, by not appearing on the hearing dates, i.e., April 29 and 30, 2002, scheduled to consider Chuas

computation of claims, or rendering, as required, an accounting of the winding up of the partnership, are deemed to have

waived their right to interpose any objection to the computation of claims thus submitted by Chua.

41
2. The 12% interest added on the amounts due is proper as the unwarranted keeping by petitioners of Chuas money

passes as an involuntary loan and forbearance of money.

3. The reiterative arguments set forth in petitioners pleadings below were part of their delaying tactics. Petitioners

had come to the appellate court at least thrice and to this Court twice. Petitioners had more than enough time to question

the award and it is now too late in the day to change what had become final and executory.

Petitioners motion for reconsideration was rejected by the appellate court through the assailed

Resolution[17] dated July 6, 2004.Therein, the CA explained that the imposition of the 12% interest for forbearance of credit

or money was proper pursuant to paragraph 1 of the October 7, 1997 RTC decision, as the computation done by CPA

Gahuman was made in acceptable form under accounting procedures and standards of the properties, assets, income and

profits of [Shellite].[18]Moreover, the CA ruled that the imposition of interest is not based on par. 3 of the October 7, 1997

RTC decision as the phrase shares and interests mentioned therein refers not to an imposition of interest for use of money

in a loan or credit, but to a legal share or right.The appellate court also held that the imposition of interest on the partnership

assets falls under par. 2 in relation to par. 1 of the final RTC decision as the restitution mentioned therein does not simply

mean restoration but also reparation for the injury or damage committed against the rightful owner of the property.

Finally, the CA declared the partnership assets referred to in the final decision as liquidated claim since the claim

of Chua is ascertainable by mathematical computation; therefore, interest is recoverable as an element of damage.

The Issues

Hence, the instant petition with petitioners raising the following issues for our consideration:

I.

Whether or not the Regional Trial Court can [impose] interest on a final judgment of unliquidated claims.

II.

Whether or not the Sheriff can enforce the whole divisible obligation under judgment only against one
Defendant.

III.

Whether or not the absolute community of property of spouses Lilibeth Sunga Chan with her husband
Norberto Chan can be lawfully made to answer for the liability of Lilibeth Chan under the judgment.[19]

Significant Intervening Events

In the meantime, pending resolution of the instant petition for review and even before the resolution by the CA of

its CA-G.R. SP No. 75688, the following relevant events transpired:

42
1. Following the RTCs approval of Chuas computation of claims in the amount of PhP 8,733,644.75, the sheriff

of Manila levied upon petitioner Sunga-Chans property located along Linao St., Paco, Manila, covered by Transfer Certificate

of Title (TCT) No. 208782,[20] over which a building leased to the Philippine National Bank (PNB) stood. In the auction sale

of the levied lot, Chua, with a tender of PhP 8 million,[21] emerged as the winning bidder.

2. On January 21, 2005, Chua moved for the issuance of a final deed of sale and a writ of possession. He also asked

the RTC to order the Registry of Deeds of Manila to cancel TCT No. 208782 and to issue a new certificate. Despite petitioners

opposition on the ground of prematurity, a final deed of sale[22] was issued on February 16, 2005.

3. On February 18, 2005, Chua moved for the confirmation of the sheriffs final deed of sale and for the issuance of

an order for the cancellation of TCT No. 208782. Petitioners again interposed an opposition in which they informed the RTC

that this Court had already granted due course to their petition for review on January 31, 2005;

4. On April 11, 2005, the RTC, via a Resolution, confirmed the sheriffs final deed of sale, ordered the Registry of

Deeds of Manila to cancel TCT No. 208782, and granted a writ of possession [23] in favor of Chua.

5. On May 3, 2005, petitioners filed before this Court a petition for the issuance of a temporary restraining order

(TRO). On May 24, 2005, the sheriff of Manila issued a Notice to Vacate[24] against petitioners, compelling petitioners to

repair to this Court anew for the resolution of their petition for a TRO.

6. On May 31, 2005, the Court issued a TRO,[25] enjoining the RTC and the sheriff from enforcing the April 11,

2005 writ of possession and the May 24, 2005 Notice to Vacate. Consequently, the RTC issued an Order[26] on June 17,

2005, suspending the execution proceedings before it.

7. Owing to the clashing ownership claims over the leased Paco property, coupled with the filing of an unlawful

detainer suit before the Metropolitan Trial Court (MeTC) in Manila against PNB, the Court, upon the banks motion, allowed,

by Resolution[27]dated April 26, 2006, the consignation of the monthly rentals with the MeTC hearing the ejectment case.

The Courts Ruling

The petition is partly meritorious.

First Issue: Interest Proper in Forbearance of Credit

Petitioners, citing Article 2213[28] of the Civil Code, fault the trial court for imposing, in the execution of its final

judgment, interests on what they considered as unliquidated claims. Among these was the claim for goodwill upon which
the RTC attached a monetary value of PhP 250,000.Petitioners also question the imposition of 12% interest on the claimed

43
monthly profits of PhP 35,000, reckoned from 1988 to October 15, 1992. To petitioners, the imposable rate should only be

6% and computed from the finality of the RTCs underlying decision, i.e., from December 20, 2001.

Third on the petitioners list of unliquidated claims is the yet-to-be established value of the one-half partnership

share and interest adjudicated to Chua, which, they submit, must first be determined with reasonable certainty in a judicial

proceeding. And in this regard, petitioners, citing Eastern Shipping Lines, Inc. v. Court of Appeals,[29] would ascribe error on

the RTC for adding a 12% per annum interest on the approved valuation of the one-half share of the assets, inclusive of

goodwill, due Chua.

Petitioners are partly correct.

For clarity, we reproduce the summary valuations and accounting reports on the computation of claims certified to

by the parties respective CPAs. Chua claimed the following:

A 50% share on assets (exclusive of goodwill) at fair


market value (Schedule 1) P1,613,550.00

B 50% share in the monetary value of goodwill


(P500,000 x 50%) 250,000.00

C Legal interest on share of assets from June 1, 1992 to


Oct. 15, 2002 at 12% interest per year (Schedule 2) 2,008,869.75

D Unreceived profits from 1988 to 1992 and its corresponding


interest from Jan. 1, 1988 to Oct. 15, 2002
(Schedule 3) 4,761,225.00

E Damages 50,000.00

F Attorneys fees 25,000.00

G Litigation fees 25,000.00

TOTAL AMOUNT P 8,733,644.75

On the other hand, petitioners acknowledged the following to be due to Chua:

Total Assets Schedule 1 P2,431,956.35


50% due to Lamberto Chua P1,215,978.16
Total Alleged Profit, Net of Payments Made,
May 1992-Sch. 2 1,613,758.49
50% share in the monetary value of goodwill
(500,000 x 50%) 250,000.00
Moral and Exemplary Damages 50,000.00
Attorneys Fee 25,000.00
Litigation Fee 25,000.00
TOTAL AMOUNT P3,154,736.65

44
As may be recalled, the trial court admitted and approved Chuas computation of claims amounting to PhP

8,733,644.75, but rejected that of petitioners, who came up with the figure of only PhP 3,154,736.65. We highlight the

substantial differences in the accounting reports on the following items, to wit: (1) the aggregate amount of the partnership

assets bearing on the 50% share of Chua thereon; (2) interests added on Chuas share of the assets; (3) amount of profits

from 1988 through May 30, 1992, net of alleged payments made to Chua; and (4) interests added on the amount entered

as profits.

From the foregoing submitted valuation reports, there can be no dispute about the goodwill earned thru the years

by Shellite. In fact, the parties, by their own judicial admissions, agreed on the monetary value, i.e., PhP 250,000, of this

item. Clearly then, petitioners contradict themselves when they say that such amount of goodwill is without basis. Thus,

the Court is loathed to disturb the trial courts approval of the amount of PhP 250,000, representing the monetary value of

the goodwill, to be paid to Chua.

Neither is the Court inclined to interfere with the CAs conclusion as to the total amount of the partnership profit,

that is, PhP 1,855,000, generated for the period January 1988 through May 30, 1992, and the total partnership assets of

PhP 3,227,100, 50% of which, or PhP 1,613,550, pertains to Chua as his share. To be sure, petitioners have not adduced

adequate evidence to belie the above CAs factual determination, confirmatory of the trial courts own. Needless to stress, it

is not the duty of the Court, not being a trier of facts, to analyze or weigh all over again the evidence or premises supportive

of such determination, absent, as here, the most compelling and cogent reasons.

This brings us to the question of the propriety of the imposition of interest and, if proper, the imposable rate of

interest applicable.

In Reformina v. Tomol, Jr.,[30] the Court held that the legal interest at 12% per annum under Central Bank (CB)

Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions involving

payment of indemnities in the concept of damages arising from default in the performance of obligations in general and/or

for money judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is Art. 2209 of

the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

The term forbearance, within the context of usury law, has been described as a contractual obligation of a lender
or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due

and payable.[31]
45
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate,

as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods,

or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum

under Art. 2209 of the Civil Code applies when the transaction involves the payment of indemnities in the concept of damage

arising from the breach or a delay in the performance of obligations in general,[32]with the application of both rates reckoned

from the time the complaint was filed until the [adjudged] amount is fully paid. [33] In either instance, the reckoning period

for the commencement of the running of the legal interest shall be subject to the condition that the courts are vested with

discretion, depending on the equities of each case, on the award of interest.[34]

Otherwise formulated, the norm to be followed in the future on the rates and application thereof is:

I. When an obligation, regardless of its source, 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 breached 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 loans 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 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.[35]

Guided by the foregoing rules, the award to Chua of the amount representing earned but unremitted profits, i.e..

PhP 35,000 monthly, from January 1988 until May 30, 1992, must earn interest at 6% per annum reckoned from October

7, 1997, the rendition date of the RTC decision, until December 20, 2001, when the said decision became final and

executory. Thereafter, the total of the monthly profits inclusive of the add on 6% interest shall earn 12% per annum reckoned

from December 20, 2001 until fully paid, as the award for that item is considered to be, by then, equivalent to a forbearance

of credit.Likewise, the PhP 250,000 award, representing the goodwill value of the business, the award of PhP 50,000 for

moral and exemplary damages, PhP 25,000 attorneys fee, and PhP 25,000 litigation fee shall earn 12% per annum from
December 20, 2001 until fully paid.

46
Anent the impasse over the partnership assets, we are inclined to agree with petitioners assertion that Chuas share

and interest on such assets partake of an unliquidated claim which, until reasonably determined, shall not earn interest

for him. As may be noted, the legal norm for interest to accrue is reasonably determinable, not, as Chua suggested and the

CA declared, determinable by mathematical computation.

The Court has certainly not lost sight of the fact that the October 7, 1997 RTC decision clearly directed petitioners

to render an accounting, inventory, and appraisal of the partnership assets and then to wind up the partnership affairs by

restituting and delivering to Chua his one-half share of the accounted partnership assets. The directive itself is a recognition

that the exact share and interest of Chua over the partnership cannot be determined with reasonable precision without

going through with the inventory and accounting process. In fine, a liquidated claim cannot validly be asserted without

accounting. In net effect, Chuas interest and share over the partnership asset, exclusive of the goodwill, assumed the nature

of a liquidated claim only after the trial court, through its November 6, 2002 resolution, approved the assets inventory and

accounting report on such assets.

Considering that Chuas computation of claim, as approved by the trial court, was submitted only on October 15,

2002, no interest in his favor can be added to his share of the partnership assets. Consequently, the computation of claims

of Chua should be as follows:

(1) 50% share on assets (exclusive of goodwill)


at fair market value PhP 1,613,550.00

(2) 50% share in the monetary value of goodwill


(PhP 500,000 x 50%) 250,000.00

(3) 12% interest on share of goodwill from December


20, 2001 to October 15, 2000
[PhP 250,000 x 0.12 x 299/365 days] 24,575.34

(4) Unreceived profits from 1988 to May 30, 1992 1,855,000.00

(5) 6% interest on unreceived profits from January


1, 1988 to December 20, 2001[36] 1,360,362.50
(6) 12% interest on unreceived profits from December
20, 2001 to October 15, 2002
[PhP 3,215,362.50 x 12% x 299/365 days]316,074.54

(7) Moral and exemplary damages 50,000.00

(8) Attorneys fee 25,000.00

(9) Litigation fee 25,000.00

(10) 12% interest on moral and exemplary damages,


attorneys fee, and litigation fee from December
20, 2001 to October 15, 2002
[PhP 100,000 x 12% x 299/365 days] 9,830.14

TOTAL AMOUNT PhP 5,529,392.52

47
Second Issue: Petitioners Obligation Solidary

Petitioners, on the submission that their liability under the RTC decision is divisible, impugn the implementation

of the amended writ of execution, particularly the levy on execution of the absolute community property of spouses petitioner

Sunga-Chan and Norberto Chan. Joint, instead of solidary, liability for any and all claims of Chua is obviously petitioners

thesis.

Under the circumstances surrounding the case, we hold that the obligation of petitioners is solidary for several

reasons.

For one, the complaint of Chua for winding up of partnership affairs, accounting, appraisal, and recovery of shares

and damages is clearly a suit to enforce a solidary or joint and several obligation on the part of petitioners. As it were, the

continuance of the business and management of Shellite by petitioners against the will of Chua gave rise to a solidary

obligation, the acts complained of not being severable in nature. Indeed, it is well-nigh impossible to draw the line between

when the liability of one petitioner ends and the liability of the other starts. In this kind of situation, the law itself imposes

solidary obligation. Art. 1207 of the Civil Code thus provides:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each of the latter is
bound to render, entire compliance with the prestation. There is solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity. (Emphasis ours.)

Any suggestion that the obligation to undertake an inventory, render an accounting of partnership assets, and to

wind up the partnership affairs is divisible ought to be dismissed.

For the other, the duty of petitioners to remit to Chua his half interest and share of the total partnership assets

proceeds from petitioners indivisible obligation to render an accounting and inventory of such assets. The need for the

imposition of a solidary liability becomes all the more pronounced considering the impossibility of quantifying how much of

the partnership assets or profits was misappropriated by each petitioner.

And for a third, petitioners obligation for the payment of damages and attorneys and litigation fees ought to be

solidary in nature, they having resisted in bad faith a legitimate claim and thus compelled Chua to litigate.

Third Issue: Community Property Liable

48
Primarily anchored as the last issue is the erroneous theory of divisibility of petitioners obligation and their joint

liability therefor. The Court needs to dwell on it lengthily.

Given the solidary liability of petitioners to satisfy the judgment award, respondent sheriff cannot really be faulted

for levying upon and then selling at public auction the property of petitioner Sunga-Chan to answer for the whole obligation

of petitioners. The fact that the levied parcel of land is a conjugal or community property, as the case may be, of spouses

Norberto and Sunga-Chan does not per se vitiate the levy and the consequent sale of the property. Verily, said property is

not among those exempted from execution under Section 13,[37] Rule 39 of the Rules of Court.

And it cannot be overemphasized that the TRO issued by the Court on May 31, 2005 came after the auction sale in

question.

Parenthetically, the records show that spouses Sunga-Chan and Norberto were married on February 4, 1992, or

after the effectivity of the Family Code on August 3, 1988. Withal, their absolute community property may be held liable for

the obligations contracted by either spouse.Specifically, Art. 94 of said Code pertinently provides:

Art. 94. The absolute community of property shall be liable for:

(1) x x x x

(2) All debts and obligations contracted during the marriage by the designated administrator-
spouse for the benefit of the community, or by both spouses, or by one spouse with the consent of the
other.

(3) Debts and obligations contracted by either spouse without the consent of the other to the
extent that the family may have been benefited. (Emphasis ours.)

Absent any indication otherwise, the use and appropriation by petitioner Sunga-Chan of the assets of Shellite even

after the business was discontinued on May 30, 1992 may reasonably be considered to have been used for her and her

husbands benefit.

It may be stressed at this juncture that Chuas legitimate claim against petitioners, as readjusted in this disposition,

amounts to only PhP 5,529,392.52, whereas Sunga-Chans auctioned property which Chua acquired, as the highest bidder,

fetched a price of PhP 8 million. In net effect, Chua owes petitioner Sunga-Chan the amount of PhP 2,470,607.48,

representing the excess of the purchase price over his legitimate claims.

Following the auction, the corresponding certificate of sale dated January 15, 2004 was annotated on TCT No.

208782. On January 21, 2005, Chua moved for the issuance of a final deed of sale (1) to order the Registry of Deeds of

Manila to cancel TCT No. 208782; (2) to issue a new TCT in his name; and (3) for the RTC to issue a writ of possession in

his favor.And as earlier stated, the RTC granted Chuas motion, albeit the Court restrained the enforcement of the RTCs
package of orders via a TRO issued on May 31, 2005.

49
Therefore, subject to the payment by Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, we affirm the RTCs April

11, 2005 resolution, confirming the sheriffs final deed of sale of the levied property, ordering the Registry of Deeds of Manila

to cancel TCT No. 208782, and issuing a writ of possession in favor of Chua.

WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the assailed decision and resolution of the CA in
CA-G.R. SP No. 75688 are hereby AFFIRMED with the following MODIFICATIONS:

(1) The Resolutions dated November 6, 2002 and January 7, 2003 of the RTC, Branch 11 in Sindangan, Zamboanga
Del Norte in Civil Case No. S-494, as effectively upheld by the CA, are AFFIRMED with the modification that the
approved claim of respondent Chua is hereby corrected and adjusted to cover only the aggregate amount of PhP
5,529,392.52;

(2) Subject to the payment by respondent Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, the Resolution dated
April 11, 2005 of the RTC, confirming the sheriffs final deed of sale of the levied property, ordering the Registry of Deeds of
Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of respondent Chua, is AFFIRMED; and

The TRO issued by the Court on May 31, 2005 in the instant petition is LIFTED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 147561 June 22, 2006

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,


vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.

DECISION

PANGANIBAN, CJ:

Asurety company’s liability under the performance bond it issues is solidary. The death of the principal obligor does not,
as a rule, extinguish the obligation and the solidary nature of that liability.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the March 13, 2001 Decision2 of
the Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows:

"WHEREFORE, the Order dated January 28, 1993 issued by the lower court is REVERSED and SET ASIDE. Let the
records of the instant case be REMANDED to the lower court for the reception of evidence of all parties."3

The Facts

The facts of the case are narrated by the CA in this wise:

"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a contract with x x x Jose
D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a drainage system in
Republic-Asahi’s compound in Barrio Pinagbuhatan, Pasig City, where [respondent] was to pay x x x JDS five million three
50
hundred thousand pesos (P5,300,000.00) inclusive of value added tax for said construction, which was supposed to be
completed within a period of two hundred forty (240) days beginning May 8, 1989. In order ‘to guarantee the faithful and
satisfactory performance of its undertakings’ x x x JDS, shall post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). x x x JDS executed, jointly and severally with [petitioner] Stronghold Insurance Co., Inc.
(SICI) Performance Bond No. SICI-25849/g(13)9769.

"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos (P795,000.00) by way of
downpayment.

"Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two hundred seventy four
thousand six hundred twenty one pesos and one centavo (P274,621.01) were submitted by x x x JDS to [respondent],
which the latter paid. According to [respondent], these two progress billings accounted for only 7.301% of the work
supposed to be undertaken by x x x JDS under the terms of the contract.

"Several times prior to November of 1989, [respondent’s] engineers called the attention of x x x JDS to the alleged
alarmingly slow pace of the construction, which resulted in the fear that the construction will not be finished within the
stipulated 240-day period. However, said reminders went unheeded by x x x JDS.

"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS, [respondent] Republic-Asahi
extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a letter to x x x JDS informing
the latter of such rescission. Such rescission, according to Article XV of the contract shall not be construed as a waiver of
[respondent’s] right to recover damages from x x x JDS and the latter’s sureties.

"[Respondent] alleged that, as a result of x x x JDS’s failure to comply with the provisions of the contract, which resulted
in the said contract’s rescission, it had to hire another contractor to finish the project, for which it incurred an additional
expense of three million two hundred fifty six thousand, eight hundred seventy four pesos (P3,256,874.00).

"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for not less
than P795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its demand for payment under
the aforementioned bond. Both letters allegedly went unheeded.

"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment of P3,256,874.00
representing the additional expenses incurred by [respondent] for the completion of the project using another contractor,
and from x x x JDS and SICI, jointly and severally, payment of P750,000.00 as damages in accordance with the
performance bond; exemplary damages in the amount of P100,000.00 and attorney’s fees in the amount of at
least P100,000.00.

"According to the Sheriff’s Return dated June 14, 1991, submitted to the lower court by Deputy Sheriff Rene R. Salvador,
summons were duly served on defendant-appellee SICI. However, x x x Jose D. Santos, Jr. died the previous year (1990),
and x x x JDS Construction was no longer at its address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St.,
Pasig, Metro Manila, and its whereabouts were unknown.

"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondent’s] money claims against [petitioner and
JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this were not the case, [petitioner] SICI had been
released from its liability under the performance bond because there was no liquidation, with the active participation
and/or involvement, pursuant to procedural due process, of herein surety and contractor Jose D. Santos, Jr., hence,
there was no ascertainment of the corresponding liabilities of Santos and SICI under the performance bond. At this point
in time, said liquidation was impossible because of the death of Santos, who as such can no longer participate in any
liquidation. The unilateral liquidation on the party (sic) of [respondent] of the work accomplishments did not bind SICI for
being violative of procedural due process. The claim of [respondent] for the forfeiture of the performance bond in the
amount of P795,000.00 had no factual and legal basis, as payment of said bond was conditioned on the payment of
damages which [respondent] may sustain in the event x x x JDS failed to complete the contracted works. [Respondent]
can no longer prove its claim for damages in view of the death of Santos. SICI was not informed by [respondent] of the
death of Santos. SICI was not informed by [respondent] of the unilateral rescission of its contract with JDS, thus SICI was
deprived of its right to protect its interests as surety under the performance bond, and therefore it was released from all
liability. SICI was likewise denied due process when it was not notified of plaintiff-appellant’s process of determining and
fixing the amount to be spent in the completion of the unfinished project. The procedure contained in Article XV of the
contract is against public policy in that it denies SICI the right to procedural due process. Finally, SICI alleged that
[respondent] deviated from the terms and conditions of the contract without the written consent of SICI, thus the latter
was released from all liability. SICI also prayed for the award of P59,750.00 as attorney’s fees, and P5,000.00 as litigation
expenses.

51
"On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent] against x x x JDS and
SICI, on the ground that the claim against JDS did not survive the death of its sole proprietor, Jose D. Santos, Jr. The
dispositive portion of the [O]rder reads as follows:

‘ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing business under trade and style, ‘JDS
Construction’ and Stronghold Insurance Company, Inc. is ordered DISMISSED.

‘SO ORDERED.’

"On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of the lower court’s
August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its ‘Comment and/or Opposition to the Motion for
Reconsideration.’ On October 15, 1991, the lower court issued an Order, the dispositive portion of which reads as follows:

‘WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due course. The Order dated 16
August 1991 for the dismissal of the case against Stronghold Insurance Company, Inc., is reconsidered and hereby
reinstated (sic). However, the case against defendant Jose D. Santos, Jr. (deceased) remains undisturbed.

‘Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold] Insurance Company Inc., are set for
hearing on November 7, 1991 at 2:00 o’clock in the afternoon.

‘SO ORDERED.’

"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for Bondsman/Defendant SICI (Re: Effect of Death of defendant
Jose D. Santos, Jr.)’ reiterating its prayer for the dismissal of [respondent’s] complaint.

"On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated October 15, 1991, and
ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed its motion for reconsideration which was
opposed by [petitioner] SICI. On April 16, 1993, the lower court denied [respondent’s] motion for reconsideration. x x x."4

Ruling of the Court of Appeals

The CA ruled that SICI’s obligation under the surety agreement was not extinguished by the death of Jose D. Santos, Jr.
Consequently, Republic-Asahi could still go after SICI for the bond.

The appellate court also found that the lower court had erred in pronouncing that the performance of the Contract in
question had become impossible by respondent’s act of rescission. The Contract was rescinded because of the
dissatisfaction of respondent with the slow pace of work and pursuant to Article XIII of its Contract with JDS.

The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of [respondent’s] fault, but because of the
fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to make satisfactory progress on the project,
which amounted to non-performance of the same. x x x [P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-
performance of said [C]ontract on the part of JDS Construction."5

Hence, this Petition.6

Issue

Petitioner states the issue for the Court’s consideration in the following manner:

"Death is a defense of Santos’ heirs which Stronghold could also adopt as its defense against obligee’s claim."7

More precisely, the issue is whether petitioner’s liability under the performance bond was automatically extinguished by
the death of Santos, the principal.

The Court’s Ruling

The Petition has no merit.

52
Sole Issue:

Effect of Death on the Surety’s Liability

Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety bond.
Consequently, it says, it is automatically released from any liability under the bond.

As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. 8Obligations are
transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the
nature of the obligation.9 Only obligations that are personal10 or are identified with the persons themselves are
extinguished by death.11

Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money claims arising from a contract
against the estate of a deceased debtor. Evidently, those claims are not actually extinguished. 13 What is extinguished is
only the obligee’s action or suit filed before the court, which is not then acting as a probate court. 14

In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the
extinguishment of those obligations or liabilities, which merely passed on to his estate.15 Death is not a defense that he or
his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot
use his death to escape its monetary obligation under its performance bond.

The liability of petitioner is contractual in nature, because it executed a performance bond worded as follows:

"KNOW ALL MEN BY THESE PRESENTS:

"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig, MM
Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
organized and existing under and by virtue of the laws of the Philippines with head office at Makati, as
Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any
individual, firm, partnership, corporation or association supplying the principal with labor or materials in
the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for
the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these presents.

"The CONDITIONS OF THIS OBLIGATION are as follows;

"WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with
the REPUBLIC ASAHI GLASS CORPORATION represented by _________________, to fully and faithfully.
Comply with the site preparation works road and drainage system of Philippine Float Plant at
Pinagbuhatan, Pasig, Metro Manila.

"WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of
PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of
interest, attorney’s fee, and other damages, and shall not be liable for any advances of the obligee to the
principal.

"WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-
stated sum to secure the full and faithfull performance on its part of said contract, and the satisfaction of
obligations for materials used and labor employed upon the work;

"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of said contract during the original term of said contract
and any extension thereof that may be granted by the obligee, with notice to the surety and during the life
of any guaranty required under the contract, and shall also perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications
of said contract that may hereinafter be made, without notice to the surety except when such
modifications increase the contract price; and such principal contractor or his or its sub-contractors shall
promptly make payment to any individual, firm, partnership, corporation or association supplying the
principal of its sub-contractors with labor and materials in the prosecution of the work provided for in the

53
said contract, then, this obligation shall be null and void; otherwise it shall remain in full force and effect.
Any extension of the period of time which may be granted by the obligee to the contractor shall be
considered as given, and any modifications of said contract shall be considered as authorized, with the
express consent of the Surety.

"The right of any individual, firm, partnership, corporation or association supplying the contractor with labor or materials
for the prosecution of the work hereinbefore stated, to institute action on the penal bond, pursuant to the provision of Act
No. 3688, is hereby acknowledge and confirmed."16

As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as follows:

"Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.

"If a person binds himself solidarily with the principal debtor, the provisions of Section 4, 17Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a suretyship."

xxxxxxxxx

"Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected."

Elucidating on these provisions, the Court in Garcia v. Court of Appeals18 stated thus:

"x x x. The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with the principal. x x x."19

Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner
herein, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease
or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent
may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond.

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs against petitioner.

SO ORDERED.

FILINVEST LAND, INC., G.R. No.138980


P e t i t i o n e r,
Present:

PUNO,
- versus - Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA and
HON. COURT OF APPEALS, PHILIPPINE CHICO-NAZARIO, JJ.
AMERICAN GENERAL INSURANCE
COMPANY, and PACIFIC EQUIPMENT
CORPORATION, Promulgated:
R e s p o n d e n t s.
September 20, 2005
x--------------------------------------------------x

DECISION

54
CHICO-NAZARIO, J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals dated 27 May 1999 affirming the

dismissal by the Regional Trial Court of Makati, Branch 65,[2]of the complaint for damages filed by Filinvest Land, Inc.

(Filinvest) against herein private respondents Pacific Equipment Corporation (Pecorp) and Philippine American General

Insurance Company.

The essential facts of the case, as recounted by the trial court, are as follows:

On 26 April 1978, Filinvest Land, Inc. (FILINVEST, for brevity), a corporation engaged in the
development and sale of residential subdivisions, awarded to defendant Pacific Equipment Corporation
(PACIFIC, for brevity) the development of its residential subdivisions consisting of two (2) parcels of land
located at Payatas, Quezon City, the terms and conditions of which are contained in an Agreement. (Annex
A, Complaint). To guarantee its faithful compliance and pursuant to the agreement, defendant Pacific posted
two (2) Surety Bonds in favor of plaintiff which were issued by defendant Philippine American General
Insurance (PHILAMGEN, for brevity). (Annexes B and C, Complaint).

Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter failed to finish
the contracted works. (Annexes G, I and K, Complaint). On 16 October 1979, plaintiff wrote defendant
Pacific advising the latter of its intention to takeover the project and to hold said defendant liable for all
damages which it had incurred and will incur to finish the project. (Annex L, Complaint).

On 26 October 1979, plaintiff submitted its claim against defendant Philamgen under its
performance and guarantee bond (Annex M, Complaint) but Philamgen refused to acknowledge its liability
for the simple reason that its principal, defendant Pacific, refused to acknowledge liability therefore. Hence,
this action.

In defense, defendant Pacific claims that its failure to finish the contracted work was due to
inclement weather and the fact that several items of finished work and change order which plaintiff refused
to accept and pay for caused the disruption of work. Since the contractual relation between plaintiff and
defendant Pacific created a reciprocal obligation, the failure of the plaintiff to pay its progressing bills estops
it from demanding fulfillment of what is incumbent upon defendant Pacific. The acquiescence by plaintiff
in granting three extensions to defendant Pacific is likewise a waiver of the formers right to claim any
damages for the delay. Further, the unilateral and voluntary action of plaintiff in preventing defendant
Pacific from completing the work has relieved the latter from the obligation of completing the same.

On the other hand, Philamgen contends that the various amendments made on the principal
contract and the deviations in the implementation thereof which were resorted to by plaintiff and co-
defendant Pacific without its (defendant Philamgens) written consent thereto, have automatically released
the latter from any or all liability within the purview and contemplation of the coverage of the surety bonds
it has issued. Upon agreement of the parties to appoint a commissioner to assist the court in resolving the
issues confronting the parties, on 7 July 1981, an order was issued by then Presiding Judge Segundo M.
Zosa naming Architect Antonio Dimalanta as Court Commissioner from among the nominees submitted by
the parties to conduct an ocular inspection and to determine the amount of work accomplished by the
defendant Pacific and the amount of work done by plaintiff to complete the project.

On 28 November 1984, the Court received the findings made by the Court Commissioner. In
arriving at his findings, the Commissioner used the construction documents pertaining to the project as
basis. According to him, no better basis in the work done or undone could be made other than the contract
billings and payments made by both parties as there was no proper procedure followed in terminating the
contract, lack of inventory of work accomplished, absence of appropriate record of work progress (logbook)
and inadequate documentation and system of construction management.

Based on the billings of defendant Pacific and the payments made by plaintiff, the work
accomplished by the former amounted to P11,788,282.40 with the exception of the last billing (which was

55
not acted upon or processed by plaintiff) in the amount of P844,396.42. The total amount of work left to be
accomplished by plaintiff was based on the original contract amount less value of work accomplished by
defendant Pacific in the amount of P681,717.58 (12,470,000-11,788,282.42).

As regards the alleged repairs made by plaintiff on the construction deficiencies, the Court
Commissioner found no sufficient basis to justify the same. On the other hand, he found the additional
work done by defendant Pacific in the amount of P477,000.00 to be in order.

On 01 April 1985, plaintiff filed its objections to the Commissioners Resolution on the following
grounds:

a) Failure of the commissioner to conduct a joint survey which according to the latter
is indispensable to arrive at an equitable and fair resolution of the issues between the parties;

b) The cost estimates of the commissioner were based on pure conjectures and contrary
to the evidence; and,

c) The commissioner made conclusions of law which were beyond his assignment or
capabilities.

In its comment, defendant Pacific alleged that the failure to conduct joint survey was due to
plaintiffs refusal to cooperate. In fact, it was defendant Pacific who initiated the idea of conducting a joint
survey and inventory dating back 27 November 1983. And even assuming that a joint survey were
conducted, it would have been an exercise in futility because all physical traces of the actual conditions
then obtaining at the time relevant to the case had already been obliterated by plaintiff.

On 15 August 1990, a Motion for Judgment Based on the Commissioners Resolution was filed by
defendant Pacific.

On 11 October 1990, plaintiff filed its opposition thereto which was but a rehash of objections to
the commissioners report earlier filed by said plaintiff.[3]

On the basis of the commissioners report, the trial court dismissed Filinvests complaint as well as Pecorps

counterclaim. It held:

In resolving this case, the court observes that the appointment of a Commissioner was a joint
undertaking among the parties. The findings of facts of the Commissioner should therefore not only be
conclusive but final among the parties. The court therefore agrees with the commissioners findings with
respect to

1. Cost to repair deficiency or defect P532,324.02


2. Unpaid balance of work done by defendant - P1,939,191.67
3. Additional work/change order (due to defendant) P475,000.00

The unpaid balance due defendant therefore is P1,939,191.67. To this amount should be added
additional work performed by defendant at plaintiffs instance in the sum of P475,000.00. And from this
total of P2,414,191.67 should be deducted the sum of P532,324.01 which is the cost to repair the deficiency
or defect in the work done by defendant. The commissioner arrived at the figure of P532,324.01 by getting
the average between plaintiffs claim of P758,080.37 and defendants allegation of P306,567.67. The amount
due to defendant per the commissioners report is therefore P1,881,867.66.

Although the said amount of P1,881,867.66 would be owing to defendant Pacific, the fact remains
that said defendant was in delay since April 25, 1979. The third extension agreement of September 15,
1979 is very clear in this regard. The pertinent paragraphs read:

a) You will complete all the unfinished works not later than Oct. 15, 1979. It is agreed
and understood that this date shall DEFINITELY be the LAST and FINAL extension &
there will be no further extension for any cause whatsoever.

56
b) We are willing to waive all penalties for delay which have accrued since April 25,
1979 provided that you are able to finish all the items of the contracted works as per
revised CPM; otherwise you shall continue to be liable to pay the penalty up to the time
that all the contracted works shall have been actually finished, in addition to other
damages which we may suffer by reason of the delays incurred.

Defendant Pacific therefore became liable for delay when it did not finish the project on the date agreed
on October 15, 1979. The court however, finds the claim of P3,990,000.00 in the form of penalty by reason
of delay (P15,000.00/day from April 25, 1979 to Jan. 15, 1980) to be excessive. A forfeiture of the amount
due defendant from plaintiff appears to be a reasonable penalty for the delay in finishing the project
considering the amount of work already performed and the fact that plaintiff consented to three prior
extensions.

The foregoing considered, this case is dismissed. The counterclaim is likewise dismissed.

No Costs.[4]

The Court of Appeals, finding no reversible error in the appealed decision, affirmed the same.

Hence, the instant petition grounded solely on the issue of whether or not the liquidated damages agreed upon by

the parties should be reduced considering that: (a) time is of the essence of the contract; (b) the liquidated damages was

fixed by the parties to serve not only as penalty in case Pecorp fails to fulfill its obligation on time, but also as indemnity for

actual and anticipated damages which Filinvest may suffer by reason of such failure; and (c) the total liquidated damages

sought is only 32% of the total contract price, and the same was freely and voluntarily agreed upon by the parties.

At the outset, it should be stressed that as only the issue of liquidated damages has been elevated to this Court,

petitioner Filinvest is deemed to have acquiesced to the other matters taken up by the courts below. Section 1, Rule 45 of

the 1997 Rules of Court states in no uncertain terms that this Courts jurisdiction in petitions for review on certiorari is

limited to questions of law which must be distinctly set forth.[5] By assigning only one legal issue, Filinvest has effectively

cordoned off any discussion into the factual issue raised before the Court of Appeals.[6] In effect, Filinvest has yielded to the

decision of the Court of Appeals, affirming that of the trial court, in deferring to the factual findings of the commissioner

assigned to the parties case. Besides, as a general rule, factual matters cannot be raised in a petition for review on certiorari.

This Court at this stage is limited to reviewing errors of law that may have been committed by the lower courts. [7]We do not

perceive here any of the exceptions to this rule; hence, we are restrained from conducting further scrutiny of the findings of

fact made by the trial court which have been affirmed by the Court of Appeals. Verily, factual findings of the trial court,

especially when affirmed by the Court of Appeals, are binding and conclusive on the Supreme Court. [8] Thus, it is settled

that:
(a) Based on Pecorps billings and the payments made by Filinvest, the balance of work to be accomplished
by Pecorp amounts to P681,717.58 representing 5.47% of the contract work. This means to say
that Pecorp, at the time of the termination of its contract, accomplished 94.53% of the contract
work;

57
(b) The unpaid balance of work done by Pecorp amounts to P1,939,191.67;

(c) The additional work/change order due Pecorp amounts to P475,000.00;

(d) The cost to repair deficiency or defect, which is for the account of Pecorp, is P532,324.02; and

(e) The total amount due Pecorp is P1,881,867.66.

Coming now to the main matter, Filinvest argues that the penalty in its entirety should be respected as it was a product of

mutual agreement and it represents only 32% of the P12,470,000.00 contract price, thus, not shocking and unconscionable

under the circumstances. Moreover, the penalty was fixed to provide for actual or anticipated liquidated damages and not

simply to ensure compliance with the terms of the contract; hence, pursuant to Laureano v. Kilayco,[9]courts should be slow

in exercising the authority conferred by Art. 1229 of the Civil Code.

We are not swayed.

There is no question that the penalty of P15,000.00 per day of delay was mutually agreed upon by the parties and

that the same is sanctioned by law. A penal clause is an accessory undertaking to assume greater liability in case of

breach.[10] It is attached to an obligation in order to insure performance[11] and has a double function: (1) to provide for

liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the

event of breach.[12]Article 1226 of the Civil Code states:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.

As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions

as they see fit as long as they are not contrary to law, morals, good customs, public order or public policy. [13] Nevertheless,

courts may equitably reduce a stipulated penalty in the contract in two instances: (1) if the principal obligation has been

partly or irregularly complied; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable

in accordance with Article 1229 of the Civil Code which provides:

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.

In herein case, the trial court ruled that the penalty charge for delay pegged at P15,000.00 per day of delay in the

aggregate amount of P3,990,000.00 -- was excessive and accordingly reduced it to P1,881,867.66 considering the amount

58
of work already performed and the fact that [Filinvest] consented to three (3) prior extensions. The Court of Appeals affirmed

the ruling but added as well that the penalty was unconscionable as the construction was already not far from completion.

Said the Court of Appeals:

Turning now to plaintiffs appeal, We likewise agree with the trial court that a penalty interest
of P15,000.00 per day of delay as liquidated damages or P3,990,000.00 (representing 32% penalty of
the P12,470,000.00 contract price) is unconscionable considering that the construction was already not far
from completion. Penalty interests are in the nature of liquidated damages and may be equitably reduced
by the courts if they are iniquitous or unconscionable (Garcia v. Court of Appeals, 167 SCRA 815, Lambert
v. Fox, 26 Phil. 588). 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. 1229, New Civil Code). Moreover,
plaintiffs right to indemnity due to defendants delay has been cancelled by its obligations to the latter
consisting of unpaid works.

This Court finds no fault in the cost estimates of the court-appointed commissioner as to the cost
to repair deficiency or defect in the works which was based on the average between plaintiffs claim
of P758,080.37 and defendants P306,567.67 considering the following factors: that plaintiff did not follow
the standard practice of joint survey upon take over to establish work already accomplished, balance of
work per contract still to be done, and estimate and inventory of repair (Exhibit H). As for the cost to finish
the remaining works, plaintiffs estimates were brushed aside by the commissioner on the reasoned
observation that plaintiffs cost estimate for work (to be) done by the plaintiff to complete the project is based
on a contract awarded to another contractor (JPT), the nature and magnitude of which appears to be
inconsistent with the basic contract between defendant PECORP and plaintiff FILINVEST. [14]

We are hamstrung to reverse the Court of Appeals as it is rudimentary that the application of Article 1229 is

essentially addressed to the sound discretion of the court.[15] As it is settled that the project was already 94.53% complete

and that Filinvest did agree to extend the period for completion of the project, which extensions Filinvest included in

computing the amount of the penalty, the reduction thereof is clearly warranted.

Filinvest, however, hammers on the case of Laureano v. Kilayco,[16] decided in 1915, which cautions courts to

distinguish between two kinds of penalty clauses in order to better apply their authority in reducing the amount recoverable.

We held therein that:

. . . [I]n any case wherein there has been a partial or irregular compliance with the provisions in a contract for
special indemnification in the event of failure to comply with its terms, courts will rigidly apply the doctrine of
strict construction against the enforcement in its entirety of the indemnification, where it is clear from the
terms of the contract that the amount or character of the indemnity is fixed without regard to the probable
damages which might be anticipated as a result of a breach of the terms of the contract; or, in other words, where
the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance
with the contract. But the courts will be slow in exercising the jurisdiction conferred upon them in article
1154[17] so as to modify the terms of an agreed upon indemnification where it appears that in fixing such
indemnification the parties had in mind a fair and reasonable compensation for actual damages anticipated as a
result of a breach of the contract, or, in other words, where the principal purpose of the indemnification agreed
upon appears to have been to provide for the payment of actual anticipated and liquidated damages rather than the
penalization of a breach of the contract. (Emphases supplied)

59
Filinvest contends that the subject penalty clause falls under the second type, i.e., the principal purpose for its

inclusion was to provide for payment of actual anticipated and liquidated damages rather than the penalization of a breach

of the contract. Thus, Filinvest argues that had Pecorp completed the project on time, it (Filinvest) could have sold the lots

sooner and earned its projected income that would have been used for its other projects.

Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein case. The Supreme Court

in Laureano instructed that a distinction between a penalty clause imposed essentially as penalty in case of breach and a

penalty clause imposed as indemnity for damages should be made in cases where there has been neither partial nor irregular

compliance with the terms of the contract. In cases where there has been partial or irregular compliance, as in this case,

there will be no substantial difference between a penalty and liquidated damages insofar as legal results are

concerned.[18] The distinction is thus more apparent than real especially in the light of certain provisions of the Civil Code

of the Philippines which provides in Articles 2226 and Article 2227 thereof:

Art. 2226. Liquidated damages are those agreed upon by the parties to a contract to be paid in case
of breach thereof.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.

Thus, we lamented in one case that (t)here is no justification for the Civil Code to make an apparent distinction between a

penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated

damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual

damages and both may be reduced when proper.[19]

Finally, Filinvest advances the argument that while it may be true that courts may mitigate the amount of liquidated

damages agreed upon by the parties on the basis of the extent of the work done, this contemplates a situation where the

full amount of damages is payable in case of total breach of contract. In the instant case, as the penalty clause was agreed

upon to answer for delay in the completion of the project considering that time is of the essence, the parties thus clearly

contemplated the payment of accumulated liquidated damages despite, and precisely because of, partial performance. [20] In

effect, it is Filinvests position that the first part of Article 1229 on partial performance should not apply precisely because,

in all likelihood, the penalty clause would kick in in situations where Pecorp had already begun work but could not finish

it on time, thus, it is being penalized for delay in its completion.


60
The above argument, albeit sound,[21] is insufficient to reverse the ruling of the Court of Appeals. It must be remembered

that the Court of Appeals not only held that the penalty should be reduced because there was partial compliance but

categorically stated as well that the penalty was unconscionable. Otherwise stated, the Court of Appeals affirmed the

reduction of the penalty not simply because there was partial compliance per se on the part of Pecorp with what was

incumbent upon it but, more fundamentally, because it deemed the penalty unconscionable in the light of

Pecorps 94.53%completion rate.

In Ligutan v. Court of Appeals,[22] we pointed out that the question of whether a penalty is reasonable or iniquitous

can be partly subjective and partly objective as 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.[23]

In herein case, there has been substantial compliance in good faith on the part of Pecorp which renders unconscionable the

application of the full force of the penalty especially if we consider that in 1979 the amount of P15,000.00 as penalty for

delay per day was quite steep indeed. Nothing in the records suggests that Pecorps delay in the performance of 5.47% of

the contract was due to it having acted negligently or in bad faith. Finally, we factor in the fact that Filinvest is not free of

blame either as it likewise failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp for work actually

performed by the latter in the total amount of P1,881,867.66. Thus, all things considered, we find no reversible error in the

Court of Appeals exercise of discretion in the instant case.

Before we write finis to this legal contest that had spanned across two and a half decades, we take note of Pecorps

own grievance. From its Comment and Memorandum, Pecorp, likewise, seeks affirmative relief from this Court by praying

that not only should the instant case be dismissed for lack of merit, but that Filinvest should likewise be made to pay what

the Court Commissioner found was due defendant in the total amount of P2,976,663.65 plus 12% interest from 1979 until

full payment thereof plus attorneys fees.[24] Pecorp, however, cannot recover that which it seeks as we had already denied,

in a Resolution dated 21 June 2000, its own petition for review of the 27 May 1999decision of the Court of Appeals. Thus,

as far as Pecorp is concerned, the ruling of the Court of Appeals has already attained finality and can no longer be disturbed.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 27 May 1999 is AFFIRMED. No

pronouncement as to costs.

SO ORDERED.

61
G.R. No. 158026 April 23, 2008

DORIE ABESA NICOLAS, petitioner,


vs.
DEL-NACIA CORPORATION, respondent.

DECISION

PUNO, C.J.:

This case arose from a complaint for unfair business practice1 filed by petitioner Dorie Abesa Nicolas (Mrs. Nicolas)
against respondent Del-Nacia Corporation (Del-Nacia) before the Housing and Land Use Regulatory Board (HLURB).

On February 20, 1988, the spouses Armando Nicolas and Dorie Abesa Nicolas (Spouses Nicolas) and Del-Nacia entered
into a Land Purchase Agreement2 (Agreement) for the sale by the latter to the former of a parcel of land, covered by
Transfer Certificate of Title No. 233702, consisting of 10,000 square meters, situated at Lot No. 3-B-4, Del Nacia Ville No.
5, San Jose del Monte, Bulacan.

The relevant parts of the Agreement are:

(1) The PURCHASER agrees to pay to the OWNER upon execution of this Contract the sum of FORTY THOUSAND
PESOS (P40,000) as first payment on account of the purchase price and agrees to pay the balance of FIVE
HUNDRED TEN THOUSAND PESOS (P510,000) at the office of the OWNER in the City of Quezon, Philippines, or
such other office as the OWNER may designate in 120 equal monthly installment of NINE THOUSAND ONE
HUNDRED EIGHTY NINE AND 45/100 PESOS (P9,189.45) interest being included on successive monthly balance
at 18% per annum, and payments to be made on the _____ day of each month thereafter beginning April 20, 1988.

xxxx

(5) In the event that any of the payments as stipulated be not paid when, where, and as the same become due; it
is agreed that sums in arrears shall bear interest at the rate of EIGHTEEN (18%) per centum per annum payable
monthly from the date on which said sums is due and payable.

(6) If any such payment or payments shall continue in arrears for more than sixty-days, or if the PURCHASER
shall violate any of the conditions herein set forth then the entire unpaid balance due under this contract, with
any interest which may have attached shall at once become due and payable and shall bear interest at the rate of
TWELVE (12%) per centum per annum until paid, and in such case, the PURCHASER further agrees to pay to the
OWNER a sum equal to ten (10%) per centum of the amount due as attorney's fees.3

Under the Agreement, the ownership of the land remains with Del-Nacia until full payment of the stipulated purchase
price under the following terms and conditions:

(3) Title to said parcel of land shall remain in the name of the OWNER until complete payment by the
PURCHASER of all obligations herein stipulated, at which time the OWNER agree to execute a final deed of sale in
favor of the PURCHASER and cause the issuance of a certificate of title in the name of the latter, free from liens
and encumbrances except those provided in the Land Registration Act, those imposed by the authorities, and
those contained in Clauses (10) and (16) of this agreement. Registration fees and documentary stamps of the deed
of sale shall be paid by the PURCHASER.

(4) Only the PURCHASER shall be deemed for all legal purposes to take possession of the parcel of land upon
payment of the down payment provided, however, that his/her possession under this section shall be only that of
a tenant or lessee, and subject to ejectment proceedings during all the period of this agreement.

xxxx

(7) In case the PURCHASER fails to comply with any conditions of this contract and/or to pay any payments
herein agreed upon, the PURCHASER shall be granted a period or periods of grace which in no case shall exceed
(60) days to be counted from the condition breached ought to be complied with or the said payments ought have
been made, during which period of grace the PURCHASER must comply with the said condition or satisfy all due
monetary obligations including those which correspond to the period of grace. OTHERWISE, the Contract shall be
62
automatically cancelled and rescinded and of no force and effect, and as a consequence therefore, the OWNER
may dispose of the parcels of land covered by this Contract in favor of other persons, as if this Contract had never
been entered into. In case of such cancellation of this Contract all amounts paid in accordance with this
agreement, together with all the improvements introduced in the premises, shall be considered as rents for the
use and occupation of the abovementioned premises and as payments for the damages suffered on the OWNER on
account of the failure of the PURCHASER to fulfill his part of this Contract and the PURCHASER hereby
renounces all his rights to demand or reclaim the return of the same and further obligates himself to peacefully
vacate the premises and deliver the same to the OWNER; PROVIDED, HOWEVER, that any consideration,
concession, tolerance or relaxation of provisions shall not be interpreted as a renunciation on the part of OWNER
of any rights granted in this Contract.4

Upon signing of the Agreement, the Spouses Nicolas paid the down payment of P40,000. Thereupon, the Spouses Nicolas
took possession of the land, and for several months thereafter, paid on or before the 20 th of each month, the monthly
amortizations.5

Unfortunately, however, Armando Nicolas died shortly after the signing of the Agreement and Mrs. Nicolas began to falter
in her payments. As found by Arbiter Jose A. Atencio, Jr. (HLURB Arbiter) of the Office of Appeals, Adjudication and Legal
Affairs (OAAL), HLURB Region III, the records of Del-Nacia indicate that Mrs. Nicolas is delinquent in her monthly
amortization for the following months: November 1988; March 1989; May 1989; June 1989-July 1989; September 1989;
October 1989; November 1989-December 1989; February 1990-September 1990; October 1990-November 1990;
December 1990-April 1991. The last payment of Mrs. Nicolas was made on July 19, 1991.6

Del-Nacia sent Mrs. Nicolas notice to pay her arrearages with a grace period of sixty (60) days within which to make
payment but to no avail. Del-Nacia then caused the notarial cancellation of the Agreement on December 3, 1991.7

Subsequently, Del-Nacia verbally informed Mrs. Nicolas to get the cash surrender value of her payment at its office.
However, Mrs. Nicolas did not claim the same. Del-Nacia prepared a check in the amount of P270,651.88 representing the
cash surrender value of Mrs. Nicolas's payment and sent it to her by registered mail. The check was received by Mrs.
Nicolas and until now it remains in her possession.8

On February 23, 1993, Mrs. Nicolas filed a Complaint9 against Del-Nacia before the HLURB. On December 15, 1994, the
HLURB Arbiter rendered a Decision10 (Arbiter Decision) with the following disposition:

PREMISES considered, judgment is hereby rendered as follows:

a. Declaring the notarial cancellation of the contract on December 3, 1991 as null and void.

b. Ordering respondent to fortwith furnish complainant accounting of the paid and unpaid amortizations
including interests and penalty interests and other stipulated fees or charges covering the period or delinquent
payments, as a consequence of the latter's default stating clearly and specifically the bases as stated in the
contract and for the complainant to pay her unpaid obligations within forty five (45) days from receipt of the said
computation/accounting.

c. Ordering the same respondent to execute the pertinent deed in favor of the complainant within fifteen (15) days
from receipt of complainant's full payment under paragraph b aforementioned and thereafter to deliver to the
latter the Transfer Certificate of Title of the lot in question.

d. Remedies provided under R.A. 6552 and other legal remedies may be resorted to, at the option of the
respondent, if complainant fails or refuses to pay within the period provided under paragraph b.

So Ordered.11

Mrs. Nicolas sought review of the Arbiter Decision by the HLURB Board of Commissions (HLURB Board) on the following
assignment of errors:

FIRST ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN ORDERING THE INCLUSION OF INTERESTS, PENALTY INTERESTS AND OTHER
STIPULATED FEES OR CHARGES IN THE UNILATERAL COMPUTATION TO BE MADE BY THE RESPONDENT-
APPELLEE AS THE UNPAID OBLIGATION OF COMPLAINANT-APPELLANT.

63
SECOND ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN ORDERING THE COMPLAINANT-APPELLANT TO PAY HER SUPPOSED UNPAID
OBLIGATION BASED UPON THE UNILATERAL COMPUTATION OF RESPONDENT-APPELLEE WITHIN FORTY
FIVE (45) DAYS FROM RECEIPT OF SAID COMPUTATION/ACCOUNTING.

THIRD ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN GIVING RESPONDENT-APPELLEE THE RIGHT TO RESORT TO REMEDIES
PROVIDED UNDER R.A. 6552 AND OTHER LEGAL REMEDIES.

FOURTH ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN NOT AWARDING ATTORNEY'S FEES IN THE SUM OF P50,000.00 TO
COMPLAINANT-APPELLANT.

FIFTH ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN NOT GRANTING THE PRAYER OF COMPLAINANT-APPELLANT IN HER
COMPLAINT.12

The HLURB Board was partly receptive of the appeal and, on December 1, 1995, it handed down a Decision 13 (HLURB
Board Decision) adjudging that:

WHEREFORE, in light of the foregoing premises, we hereby MODIFY the Decision dated 15 December 1994 of the
Office a Quo, insofar as paragraph (b) of the dispositive portion is concerned and an additional paragraph e, to
wit:

(b) Ordering complainant to pay respondent within sixty (60) days from receipt hereof the amount of one hundred
seventy three thousand nine hundred fifty seven pesos and 29/1000 (P173,957.29) representing the remaining
balance of the installment purchase price of the land inclusive of legal interests at the rate of twelve percent (12%)
per annum.

(e) Ordering respondent to pay this Board the amount of ten thousand (P10,000) as an administrative fine for
violation of Section 5 of P.D. 957 within thirty (30) days from finality hereof.

SO ORDERED. Quezon City.14

Del-Nacia filed a Motion for Reconsideration15 and a Supplement to Motion for Reconsideration.16Meanwhile, Mrs. Nicolas
filed a motion for the "consignment" of P173,957.29, representing the balance of the purchase price of the land as found
by the HLURB Board.

On June 21, 1996, the HLURB Board resolved to deny Del-Nacia's motion for reconsideration and ordered Mrs. Nicolas to
deposit with it for safekeeping the amount indicated in its Decision until Del-Nacia is willing to accept the same.17

Consequently, Del-Nacia appealed to the Office of the President which, however, was dismissed by its Decision dated
March 4, 1998 (O.P. Original Decision).18 Upon motion for reconsideration, however, the Office of the President, in a
Resolution dated January 5, 200119 (O.P. Resolution), set aside the O.P. Original Decision and affirmed
the Arbiter Decision in toto.

Unsuccessful in her bid at overturning the O.P. Resolution, Mrs. Nicolas filed a Petition for Review20with the Court of
Appeals (CA) docketed as CA-G.R. SP No. 68407. The CA initially dismissed her petition for failing to comply with the
procedural requirements of Section 6(c) of Rule 43 of the Revised Rules of Court.21 Mrs. Nicolas filed an omnibus motion
praying that the CA reconsider and set aside the dismissal of her petition and to admit her amended petition. 22 The CA
then required Del-Nacia to submit its comment to the petition.23

On January 23, 2003, the CA rendered its Decision,24 affirming the O.P. Resolution, to wit:

64
WHEREFORE, finding no flaw in the appealed O.P. Resolution, the same is hereby AFFIRMED in toto, with costs
against Mrs. Nicolas.

SO ORDERED.

The Motion for Reconsideration25 filed by Mrs. Nicolas was denied by the CA in its Resolution dated April 29, 2003.26

Hence, this Petition for Review on Certiorari27, raising the lone issue of:

"WHETHER OR NOT complainant (now petitioner) is bound to pay the interests, penalty interests and other
stipulated charges based on the unilateral accounting or computation made by respondent."28

The instant petition prays that the O.P. Original Decision, which affirmed the HLURB Board Decision, be reinstated by
this Court.

In its Comment, Del-Nacia argues that the instant petition be denied for the following reasons: (1) failure to comply with
section 4, Rule 45, and (2) failure to advance any special reason that would warrant the exercise by this Court of its
discretionary power of review.

Before discussing the merits of the case, we shall first discuss its procedural aspect.

Del-Nacia urges this Court to dismiss the instant petition for failing to attach material portions of the records of the case
that will support the same as required under Section 6 of Rule 46 of the Revised Rules of Court, such as, for instance,
copies of her own pleadings filed before the proceedings below.29It appears that the Agreement of the parties, subject of
the dispute, was not attached to the petition. Nevertheless, since the Agreement and the other documents that were not
attached to the petition are already part of the records of this case, and could easily be referred to by this Court if
necessary, a dismissal of the instant petition purely on technical grounds is not warranted. Indeed, the Court has, in past
cases, granted relief in favor of the petitioner despite this procedural infirmity.30Thus, we explained the rationale behind
the Court's liberal stance as follows:

We must stress that cases should be determined on the merits, after all parties have been given full opportunity
to ventilate their causes and defenses, rather than on technicalities or procedural imperfections. In that way, the
ends of justice would be served better. Rules of procedure are mere tools designed to expedite the decision or
resolution of cases and other matters pending in court. A strict and rigid application of rules, resulting in
technicalities that tend to frustrate rather than promote substantial justice, must be avoided. In fact, Section 6 of
Rule 1 states that the Rules shall be liberally construed in order to promote their objective of ensuring the just,
speedy and inexpensive disposition of every action and proceeding.31

Now on the merits of the case. The issue is whether Mrs. Nicolas is liable to pay interests, penalty interests and other
stipulated charges to Del-Nacia.

We rule in the affirmative.

Mrs. Nicolas contends that based on the payments she already made, she has overpaid the purchase price due under the
Agreement.32 She assails the application of her payments made by Del-Nacia since the latter applied the bulk of her
payments to interest rather than the principal.33 According to her, therefore, the penalties, interests and surcharges being
collected by Del-Nacia have no basis in fact or in law.34 In this regard, she urges this Court to affirm the HLURB Board
Decision35 which reads:

Cursory reading of the abovementioned document reveal that there is indeed no specific date indicated, as to
when complainant should pay her monthly installments. It is clear that that the space provided for in Paragraph 1
of said document for the date or day of the month on which payment is to be made has been left blank.

Considering that the Land Purchase Agreement is a pro-forma document prepared by respondent, any ambiguity
therein should be interpreted in favor of the complainant.

On the basis of the foregoing, we find that complainant did not incur any delay, hence, the imposition of
surcharges and penalty interests are unjustified.36

65
According to Del-Nacia, however, Mrs. Nicolas disregarded paying the regular rate of interest, overdue interest and penalty
interest which were voluntarily agreed upon under paragraphs (1), (5) and (6), respectively, of their Agreement. 37 Del-Nacia
contends that the records clearly establish that Mrs. Nicolas was in delay in her payments of the monthly amortizations
and she has not disputed the same.38

As found by the HLURB Arbiter, the records of Del-Nacia shows that Mrs. Nicolas incurred delay in the payment of her
monthly amortizations.39 It is a well-settled rule that factual findings of administrative agencies are conclusive and
binding on the Court when supported by substantial evidence. We agree with the O.P. Resolution,40 which was
adopted and affirmed by the CA, to wit:

Appellant's [Del-Nacia] submission, however, that appellee [Mrs. Nicolas] incurred delay in the manner of payment of her
monthly installment obligations is impressed with merit. The Housing Arbiter, in his evaluation as trier of facts of
appellee's records of payment, was of the same view. Under #1 of the basic purchase agreement, supra, appellee
undertook to pay "120 equal monthly installments" of P9,189.45, "payments to be made on the __ day of each month
thereafter beginning April 20, 1988." A fair understanding of this provision would simply mean that payment should be
made effected every 20th day of each month following April 20, 1988. Based on the records, one can safely presume that
the same was fully understood by appellee, as she had repeatedly paid her monthly amortization on the 20th day of each,
or a few days thereafter. Neither did she question the interest imposed by appellant for her payments made after the 20 th.
Be that as it may, this Office is at a loss to understand the HLURB's conclusion about appellee not having defaulted in her
installment payments. The explanation given by the HLURB Proper why it considered appellee not to have been in delay, i.
e., because "no specific date [ is] indicated [in the purchase agreement] as to when complainant should pay her monthly
installments" adding that "the space provided for . . . the date or day of the month which payment is to be made has been
left blank," strikes this Office as too simplistic to be accorded cogency. The adverted fact of a "space in blank" is of no
moment for, to reiterate, the agreement was for appellee to [the] pay the balance (P510,000.00) of the purchase price in
120 equal monthly installments, the installment period to start from April 20, 1988. The use of the phrase "120 equal
monthly installments" and "thereafter beginning April 20, 1988" can mean only one thing - that after April 20, 1988, the
monthly installment is to fall due and be payable on the 20th day of the succeeding months. The explanation adverted to
above of the HLURB, if pursued to its logical conclusion, would virtually allow appellee to perpetually withhold installment
payment without risk of being considered in default. The absurdity of this explanation needs no belaboring. 41

Clearly, under paragraphs (1), (5) and (6) of the Agreement, supra, Mrs. Nicolas was bound to pay regular interest, and in
case of delay, overdue interest and penalty. It cannot be overemphasized that a contract is the law between the
parties,42 and courts have no choice but to enforce such contract so long as they are not contrary to law, morals, good
customs or public policy.43

In this connection, a stipulation for the payment of interest and penalty apart from interest in case of delay is not contrary
to law, moral, good customs or public policy. To be sure, the same is sanctioned by the following provisions of the Civil
Code:

Article 1956. No interest shall be due unless it has been expressly stipulated in writing.

Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the contrary.

Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon x x x.

In Bachrach Motor Company v. Espiritu,44 the Court ruled that the Civil Code permits the agreement upon a penalty
apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the
two are different and distinct things which may be demanded separately. The same principle was reiterated in Equitable
Banking Corp. v. Liwanag et al.,45 where this Court held that the stipulation about payment of such additional rate
partakes of the nature of a penalty clause, which is sanctioned by law.

On Mrs. Nicolas' contention that she should not pay interest and the other charges based on the unilateral accounting or
computation made by Del-Nacia, a perusal of the formula46 for the computation of regular interest, overdue interest and
penalty interest used by Del-Nacia reveal that the same is in accord with the provisions of the Agreement and cannot be
said to have been unilaterally imposed by Del-Nacia.

Moreover, the case of Relucio v. Brillante-Garfin (Relucio),47 involves similar facts to the case at bar where we ruled as
follows:

66
Examination of the record shows that the questioned Contract to Buy and Sell the subdivision lots provided for payment
by private respondent of the sum of P200.00 as downpayment, and that "the balance [of P10,600.00] shall be paid in 180
monthly installments at P89.45 per month, including interest rate at six percent (6%) per annum, until the purchase price
is fully paid." This stipulation clearly specified that an interest charge of six percent (6%) per annum was included in the
monthly installment price: private respondent could not have helped noticing that P89.45 multiplied by 180 monthly
installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00 may thus be seen to be the cash
price of the subdivision lots, that is, the amount payable if the price of the lots were to be paid in cash and in full at the
execution of the contract; it is not the amount that the vendor will have received in the aggregate after fifteen (15) years if
the vendee shall have religiously paid the monthly installments. The installment price, upon the other hand, of the
subdivision lots - the sum total of the monthly installments (i.e., P16,101.00) - typically, as in the instant case, has an
interest component which compensates the vendor for waiting fifteen (15) years before receiving the total principal amount
of P10,600.00. Economically or financially, P10,600.00 delivered in full today is simply worth much more than a long
series of small payments totalling, after fifteen (15) years, P10,600.00. For the vendor, upon receiving the full cash price,
could have deposited that amount in a bank, for instance, and earned interest income which at six percent (6%) per year
and for fifteen (15) years, would precisely total P5,501.00 (the difference between the installment price of P16,101.00 - and
the cash price of P10,600.00 - ) To suppose, as private respondent argues, that mere prompt payment of the monthly
installments as they fell due would obviate application of the interest charge of six percent (6%) per annum, is to ignore
that simple economic fact. That economic fact is, of course, recognized by law, which authorizes the payment of interest
when contractually stipulated for by the parties or when implied in recognized commercial custom or usage.

Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its
installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is
in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the
contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in
the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day
commercial life.48

In Relucio, the Court also sustained the seller's theory of declining balance whereby the seller credited a bigger sum of
the monthly amortization to interest rather than the principal, such that in "[During] the succeeding monthly payments,
however, as the outstanding balance on the principal gradually declined, the interest component (in absolute terms)
correspondingly fell while the component credited to the principal increased proportionately, thus amortizing the balance
of the principal purchase price as that balance gradually declined."49

In the same vein, an examination of the application of Mrs. Nicolas' payments by Del-Nacia in the table50 the latter
prepared as reflected in the records of the case, shows that the same is in accord with the theory of declining balance
which was affirmed by this Court in Relucio.

Given the foregoing, it appears that the only dilemma which Mrs. Nicolas currently finds herself in is that the obligations
which she voluntary undertook under the Agreement turned out to be more onerous than what she expected. Doctrinal is
the rule that courts may not extricate parties from the necessary consequences of their acts.51 That the terms of a
contract turn out to be financially disadvantageous to them will not relieve them of their obligations therein. 52

IN VIEW WHEREOF, the petition is DISMISSED. The decision of the Court of Appeals is affirmed. Costs against the
petitioner.

SO ORDERED.

G.R. No. 172384 September 12, 2007

ERMINDA F. FLORENTINO, Petitioner,


vs.
SUPERVALUE, INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, filed by petitioner
Erminda F. Florentino, seeking to reverse and set aside the Decision,1dated 10 October 2003 and the Resolution,2 dated
19 April 2006 of the Court of Appeals in CA-G.R. CV No. 73853. The appellate court, in its assailed Decision and
Resolution, modified the Decision dated 30 April 2001 of the Regional Trial Court (RTC) of Makati, Branch 57, in Civil

67
Case No. 00-1015, finding the respondent Supervalue, Inc., liable for the sum of ₱192,000.00, representing the security
deposits made by the petitioner upon the commencement of their Contract of Lease. The dispositive portion of the assailed
appellate court’s Decision thus reads:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The April 30, 2001 Decision of the Regional Trial
Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) the portion ordering the [herein respondent] to pay the
amount of ₱192,000.00 representing the security deposits and ₱50,000.00 as attorney’s fees in favor of the [herein
petitioner] as well as giving [respondent] the option to reimburse [petitioner] ½ of the value of the improvements
introduced by the [petitioner] on the leased [premises] should [respondent] choose to appropriate itself or require the
[petitioner] to remove the improvements, is hereby REVERSED and SET ASIDE; and (b) the portion ordering the return to
[petitioner] the properties seized by [respondent] after the former settled her obligation with the latter is however
MAINTAINED.3

The factual and procedural antecedents of the instant petition are as follows:

Petitioner is doing business under the business name "Empanada Royale," a sole proprietorship engaged in the retail of
empanada with outlets in different malls and business establishments within Metro Manila. 4

Respondent, on the other hand, is a domestic corporation engaged in the business of leasing stalls and commercial store
spaces located inside SM Malls found all throughout the country.5

On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing similar terms and conditions
over the cart-type stalls at SM North Edsa and SM Southmall and a store space at SM Megamall. The term of each
contract is for a period of four months and may be renewed upon agreement of the parties.6

Upon the expiration of the original Contracts of Lease, the parties agreed to renew the same by extending their terms until
31 March 2000.7

Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received two letters from the
respondent, both dated 14 January 2000, transmitted through facsimile transmissions. 8

In the first letter, petitioner was charged with violating Section 8 of the Contracts of Lease by not opening on 16 December
1999 and 26 December 1999.9

Respondent also charged petitioner with selling a new variety of empanada called "mini-embutido" and of increasing the
price of her merchandise from ₱20.00 to ₱22.00, without the prior approval of the respondent.10

Respondent observed that petitioner was frequently closing earlier than the usual mall hours, either because of non-
delivery or delay in the delivery of stocks to her outlets, again in violation of the terms of the contract. A stern warning
was thus given to petitioner to refrain from committing similar infractions in the future in order to avoid the termination
of the lease contract.11

In the second letter, respondent informed the petitioner that it will no longer renew the Contracts of Lease for the three
outlets, upon their expiration on 31 March 2000.12

In a letter-reply dated 11 February 2000, petitioner explained that the "mini-embutido" is not a new variety of empanada
but had similar fillings, taste and ingredients as those of pork empanada; only, its size was reduced in order to make it
more affordable to the buyers.13

Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease with the petitioner. To the
contrary, respondent took possession of the store space in SM Megamall and confiscated the equipment and personal
belongings of the petitioner found therein after the expiration of the lease contract.14

In a letter dated 8 May 2000, petitioner demanded that the respondent release the equipment and personal belongings it
seized from the SM Megamall store space and return the security deposits, in the sum of ₱192,000.00, turned over by the
petitioner upon signing of the Contracts of Lease. On 15 June 2000, petitioner sent respondent another letter reiterating
her previous demands, but the latter failed or refused to comply therewith. 15

On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was filed by the petitioner against
the respondent before the RTC of Makati, Branch 57.16
68
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the respondent made verbal representations
that the Contracts of Lease will be renewed from time to time and, through the said representations, the petitioner was
induced to introduce improvements upon the store space at SM Megamall in the sum of ₱200,000.00, only to find out a
year later that the respondent will no longer renew her lease contracts for all three outlets.17

In addition, petitioner alleged that the respondent, without justifiable cause and without previous demand, refused to
return the security deposits in the amount of ₱192,000.00.18

Further, petitioner claimed that the respondent seized her equipment and personal belongings found inside the store
space in SM Megamall after the lease contract for the said outlet expired and despite repeated written demands from the
petitioner, respondent continuously refused to return the seized items.19

Petitioner thus prayed for the award of actual damages in the sum of ₱472,000.00, representing the sum of security
deposits, cost of improvements and the value of the personal properties seized. Petitioner also asked for the award of
₱300,000.00 as moral damages; ₱50,000.00 as exemplary damages; and ₱80,000.00 as attorney’s fees and expenses of
litigation.20

For its part, respondent countered that petitioner committed several violations of the terms of their Contracts of Lease by
not opening from 16 December 1999 to 26 December 1999, and by introducing a new variety of empanada without the
prior consent of the respondent, as mandated by the provision of Section 2 of the Contract of Lease. Respondent also
alleged that petitioner infringed the lease contract by frequently closing earlier than the agreed closing hours. Respondent
finally averred that petitioner is liable for the amount ₱106,474.09, representing the penalty for selling a new variety of
empanada, electricity and water bills, and rental adjustment, among other charges incidental to the lease agreements.
Respondent claimed that the seizure of petitioner’s personal belongings and equipment was in the exercise of its retaining
lien, considering that the petitioner failed to settle the said obligations up to the time the complaint was filed.21

Considering that petitioner already committed several breaches of contract, the respondent thus opted not to renew its
Contracts of Lease with her anymore. The security deposits were made in order to ensure faithful compliance with the
terms of their lease agreements; and since petitioner committed several infractions thereof, respondent was justified in
forfeiting the security deposits in the latter’s favor.

On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner and found that the physical takeover by the
respondent of the leased premises and the seizure of petitioner’s equipment and personal belongings without prior notice
were illegal. The decretal part of the RTC Judgment reads:

WHEREFORE, premises duly considered, judgment is hereby rendered ordering the [herein respondent] to pay [herein
petitioner] the amount of ₱192,000.00 representing the security deposits made by the [petitioner] and ₱50,000.00 as and
for attorney’s fees.

The [respondent] is likewise ordered to return to the [petitioner] the various properties seized by the former after settling
her account with the [respondent].

Lastly, the [respondent] may choose either to reimburse the [petitioner] one half (1/2) of the value of the improvements
introduced by the plaintiff at SM Megamall should [respondent] choose to appropriate the improvements to itself or
require the [petitioner] to remove the improvements, even though the principal thing may suffer damage thereby.
[Petitioner] shall not, however, cause anymore impairment upon the said leased premises than is necessary.

The other damages claimed by the plaintiff are denied for lack of merit.

Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of Appeals.

In a Decision23 dated 10 October 2003, the Court of Appeals modified the RTC Judgment and found that the respondent
was justified in forfeiting the security deposits and was not liable to reimburse the petitioner for the value of the
improvements introduced in the leased premises and to pay for attorney’s fees. In modifying the findings of the lower
court, the appellate court declared that in view of the breaches of contract committed by the petitioner, the respondent is
justified in forfeiting the security deposits. Moreover, since the petitioner did not obtain the consent of the respondent
before she introduced improvements on the SM Megamall store space, the respondent has therefore no obligation to
reimburse the petitioner for the amount expended in connection with the said improvements. 24 The Court of Appeals,
however, maintained the order of the trial court for respondent to return to petitioner her properties after she has settled
her obligations to the respondent. The appellate court denied petitioner’s Motion for Reconsideration in a
Resolution25 dated 19 April 2006.
69
Hence, this instant Petition for Review on Certiorari26 filed by the petitioner assailing the Court of Appeals Decision. For
the resolution of this Court are the following issues:

I. Whether or not the respondent is liable to return the security deposits to the petitions.

II. Whether or not the respondent is liable to reimburse the petitioner for the sum of the improvements she
introduced in the leased premises.

III. Whether or not the respondent is liable for attorney’s fees.27

The appellate court, in finding that the respondent is authorized to forfeit the security deposits, relied on the provisions of
Sections 5 and 18 of the Contract of Lease, to wit:

Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of SIXTY THOUSAND PESOS (P60,000.00)
equivalent to three (3) months rent as security for the full and faithful performance to each and every term, provision,
covenant and condition of this lease and not as a pre-payment of rent. If at any time during the term of this lease the rent
is increased[,] the LESSEE on demand shall make an additional deposit equal to the increase in rent. The LESSOR shall
not be required to keep the deposit separate from its general funds and the deposit shall not be entitled to interest. The
deposit shall remain intact during the entire term and shall not be applied as payment for any monetary obligations of the
LESSEE under this contract. If the LESSEE shall faithfully perform every provision of this lease[,] the deposit shall be
refunded to the LESSEE upon the expiration of this Lease and upon satisfaction of all monetary obligation to the LESSOR.

xxxx

Section 18. TERMINATION. Any breach, non-performance or non-observance of the terms and conditions herein provided
shall constitute default which shall be sufficient ground to terminate this lease, its extension or renewal. In which event,
the LESSOR shall demand that LESSEE immediately vacate the premises, and LESSOR shall forfeit in its favor the
deposit tendered without prejudice to any such other appropriate action as may be legally authorized.28

Since it was already established by the trial court that the petitioner was guilty of committing several breaches of contract,
the Court of Appeals decreed that she cannot therefore rightfully demand the return of the security deposits for the same
are deemed forfeited by reason of evident contractual violations.

It is undisputed that the above-quoted provision found in all Contracts of Lease is in the nature of a penal clause to
ensure petitioner’s faithful compliance with the terms and conditions of the said contracts.

A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in
order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event of breach.29 The obligor would then be
bound to pay the stipulated indemnity without the necessity of proof of the existence and the measure of damages caused
by the breach.30 Article 1226 of the Civil Code states:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such terms and conditions as
they see fit as long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless,
courts may equitably reduce a stipulated penalty in the contracts in two instances: (1) if the principal obligation has been
partly or irregularly complied with; and (2) even if there has been no compliance if the penalty is iniquitous or
unconscionable in accordance with Article 1229 of the Civil Code which clearly provides:

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.31

In ascertaining whether the penalty is unconscionable or not, this court set out the following standard in Ligutan v. Court
of Appeals,32to wit:
70
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution
would depend on such factor 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. xxx.

In the instant case, the forfeiture of the entire amount of the security deposits in the sum of ₱192,000.00 was excessive
and unconscionable considering that the gravity of the breaches committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable therefore to reduce the penalty of the petitioner to 50% of
the total amount of security deposits.

It is in the exercise of its sound discretion that this court tempered the penalty for the breaches committed by the
petitioner to 50% of the amount of the security deposits. The forfeiture of the entire sum of ₱192,000.00 is clearly a
usurious and iniquitous penalty for the transgressions committed by the petitioner. The respondent is therefore under the
obligation to return the 50% of ₱192,000.00 to the petitioner.

Turning now to the liability of the respondent to reimburse the petitioner for one-half of the expenses incurred for the
improvements on the leased store space at SM Megamall, the following provision in the Contracts of Lease will enlighten
us in resolving this issue:

Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE shall not make any alterations, additions,
or improvements without the prior written consent of LESSOR; and all alterations, additions or improvements made on
the leased premises, except movable or fixtures put in at LESSEE’s expense and which are removable, without defacing
the buildings or damaging its floorings, shall become LESSOR’s property without compensation/reimbursement but the
LESSOR reserves the right to require the removal of the said alterations, additions or improvements upon expiration of the
lease.

The foregoing provision in the Contract of Lease mandates that before the petitioner can introduce any improvement on
the leased premises, she should first obtain respondent’s consent. In the case at bar, it was not shown that petitioner
previously secured the consent of the respondent before she made the improvements on the leased space in SM Megamall.
It was not even alleged by the petitioner that she obtained such consent or she at least attempted to secure the same. On
the other hand, the petitioner asserted that respondent allegedly misrepresented to her that it would renew the terms of
the contracts from time to time after their expirations, and that the petitioner was so induced thereby that she expended
the sum of ₱200,000.00 for the improvement of the store space leased.

This argument was squarely addressed by this court in Fernandez v. Court of Appeals,33 thus:

The Court ruled that the stipulation of the parties in their lease contract "to be renewable" at the option of both parties
stresses that the faculty to renew was given not to the lessee alone nor to the lessor by himself but to the two
simultaneously; hence, both must agree to renew if a new contract is to come about.

Petitioner’s contention that respondents had verbally agreed to extend the lease indefinitely is inadmissible to qualify the
terms of the written contract under the parole evidence rule, and unenforceable under the statute of frauds.34

Moreover, it is consonant with human experience that lessees, before occupying the leased premises, especially store
spaces located inside malls and big commercial establishments, would renovate the place and introduce improvements
thereon according to the needs and nature of their business and in harmony with their trademark designs as part of their
marketing ploy to attract customers. Certainly, no inducement or misrepresentation from the lessor is necessary for this
purpose, for it is not only a matter of necessity that a lessee should re-design its place of business but a business strategy
as well.

In ruling that the respondent is liable to reimburse petitioner one half of the amount of improvements made on the leased
store space should it choose to appropriate the same, the RTC relied on the provision of Article 1678 of the Civil Code
which provides:

Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is
intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall
pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said amount,
the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not,
however, cause any more impairment upon the property leased than is necessary.

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While it is true that under the above-quoted provision of the Civil Code, the lessor is under the obligation to pay the lessee
one-half of the value of the improvements made should the lessor choose to appropriate the improvements, Article 1678
however should be read together with Article 448 and Article 546 of the same statute, which provide:

Art. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall have the right to
appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546 and 548,
or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However,
the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees.
In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees
after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix
the terms thereof.

xxxx

Art. 546. Necessary expenses shall be refunded to every possessor; but only possessor in good faith may retain the thing
until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in
value which the thing may have acquired by reason thereof.

Thus, to be entitled to reimbursement for improvements introduced on the property, the petitioner must be considered a
builder in good faith. Further, Articles 448 and 546 of the Civil Code, which allow full reimbursement of useful
improvements and retention of the premises until reimbursement is made, apply only to a possessor in good faith, i.e.,
one who builds on land with the belief that he is the owner thereof. A builder in good faith is one who is unaware of any
flaw in his title to the land at the time he builds on it.35 In this case, the petitioner cannot claim that she was not aware of
any flaw in her title or was under the belief that she is the owner of the subject premises for it is a settled fact that she is
merely a lessee thereof.1âwphi1

In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring that lessees are not possessors or builders in
good faith, thus:

Being mere lessees, the private respondents knew that their occupation of the premises would continue only for the life of
the lease. Plainly, they cannot be considered as possessors nor builders in good faith.

In a plethora of cases, this Court has held that Article 448 of the Civil Code, in relation to Article 546 of the same Code,
which allows full reimbursement of useful improvements and retention of the premises until reimbursement is made,
applies only to a possessor in good faith, i.e., one who builds on land with the belief that he is the owner thereof. It does
not apply where one's only interest is that of a lessee under a rental contract; otherwise, it would always be in the power
of the tenant to "improve" his landlord out of his property.

Since petitioner’s interest in the store space is merely that of the lessee under the lease contract, she cannot therefore be
considered a builder in good faith. Consequently, respondent may appropriate the improvements introduced on the leased
premises without any obligation to reimburse the petitioner for the sum expended.

Anent the claim for attorney’s fees, we resolve to likewise deny the award of the same. Attorney’s fees may be awarded
when a party is compelled to litigate or to incur expenses to protect its interest by reason of unjustified act of the other. 37

In the instant petition, it was not shown that the respondent unjustifiably refused to grant the demands of the petitioner
so as to compel the latter to initiate legal action to enforce her right. As we have found herein, there is basis for
respondent’s refusal to return to petitioner the security deposits and to reimburse the costs of the improvements in the
leased premises. The award of attorney’s fees is therefore not proper in the instant case.

WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The Court of Appeals Decision dated 10
October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED with the MODIFICATION that the respondent may forfeit
only 50% of the total amount of the security deposits in the sum of ₱192,000.00, and must return the remaining 50% to
the petitioner. No costs.

SO ORDERED.

72
G.R. No. 171820 December 13, 2007

DIAMOND BUILDERS CONGLOMERATION, ROGELIO S. ACIDRE, TERESITA P. ACIDRE, GRACE C. OSIAS, VIOLETA
S. FAIYAZ and EMMA S. CUTILLAR,Petitioners,
vs.
COUNTRY BANKERS INSURANCE CORPORATION, Respondent.

DECISION

NACHURA, J.:

Before us is a petition for review on certiorari to annul the Decision1 of the Court of Appeals (CA) in CA-G.R. C.V. No.
48603, which reversed the Decision2 of the Regional Trial Court, Branch 7, Manila (RTC Manila) in Civil Case No. 92-
62029 and granted respondent Country Bankers Insurance Corporation’s (Country Bankers’) prayer for a sum of money
against the petitioners.

The controversy originated from a civil case3pending before the Regional Trial Court, Branch 125, Caloocan City (RTC
Caloocan) filed by Marceliano Borja (Borja) against Rogelio S. Acidre (Rogelio) for the latter’s breach of his obligation to
construct a residential and commercial building. Rogelio is the sole proprietor of petitioner Diamond Builders
Conglomeration (DBC).

To put an end to the foregoing litigation, the parties entered into a Compromise Agreement4 which provided, in part:

COMPROMISE AGREEMENT

1. x x x

a. In lieu of rescission, the parties have mutually agreed, subject to the provisions hereunder, to fully implement
the building contract dated October 1, 1990 and supplemented on October 2, 1990 with an additional scope of
work marked as Annex "A" of the complaint and the Letter-Agreement dated November 16, 1991 signed by the
[petitioner Rogelio] and plaintiff’s son(,) Ferdinand A. Borja, marked as Annex "B" of the complaint, which required
full compliance of the structural design of Engr. Ramos and explicit reminders in the constructing of the
residential/commercial building and the additional works therein specified for the added consideration of
₱100,000.00 as alleged in paragraphs 2 and 3 of the complaint, Annex "C" hereof.

b. [Petitioner Rogelio] admits full payment of plaintiff to him the amount of ₱1,530,000.00 leaving the balance of
₱570,000.00 of the contractual price of ₱2,100,000.00 for the construction of the buildings aforementioned.

c. [Petitioner Rogelio] agrees to fully complete the construction of the residential/commercial building mentioned
in paragraph 1 hereof provided plaintiff would pay to him, subject to hereunder terms, the aforesaid amount of
₱570,000.00.

d. The plaintiff agrees to pay [petitioner Rogelio] the amount of ₱570,000.00 subject to the terms hereunder set
forth and subject strictly to the condition that [petitioner Rogelio] will finish the building above-described
pursuant to the agreements [Annex(es) "A" and "B"] set forth in paragraph 1 hereof.

e. Plaintiff shall pay [petitioner Rogelio] the amount of ₱570,000.00 as follows:

i. ₱370,000.00 – the 5th day from approval of this compromise agreement by this Honorable Court and to
coincide (with) the start of the 75 days for [petitioner Rogelio] to complete the construction of the building.

ii. ₱200,000.00 – When the aforedescribed building is fully constructed pursuant to agreements stated in
paragraph 1 hereof.

iii. Said building must be fully finished pursuant to the agreement stated in paragraph 1 hereof within 75
days (excluding Sundays and Holidays) counted from receipt of payment of ₱370,000.00. The date of
receipt to be issued by [petitioner Rogelio] will control. The 75th day will be 12:00 noon of the 75th day.

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iv. From receipt of the aforesaid amount of ₱370,000.00, [petitioner Rogelio] shall submit in favor of
plaintiff a performance or surety bond in the equivalent amount of ₱370,000.00 – to answer or indemnify
plaintiff in the event the building is not finished on the 75th day.

v. In the event the building is finished within 75 days as heretofore stated and pursuant to the
agreements set forth in paragraph 1 hereof, in addition to the amount of ₱200,000.00, the plaintiff shall
also pay [petitioner Rogelio] the amount of ₱90,000.00 by way of [bonus]. However, in the event [petitioner
Rogelio] shall fail to fully complete the construction of the building pursuant to the agreements set forth
in paragraph 1 hereof within 75 days as heretofore stated, [petitioner Rogelio] shall not be entitled to any
further payments and the performance or surety bond above-mentioned shall be fully implemented by
way of penalizing [petitioner Rogelio] and/or as award for damages in favor of plaintiff.

xxxx

f. x x x

g. That the construction herein contemplated shall not extend beyond 75 days. Said period shall commence five
days from the date of the final approval hereof by this Honorable Court.

i. That any violation and/or avoidance of the terms and conditions of this Compromise Agreement by either of the
parties herein shall forthwith entitle the aggrieved party to an immediate execution hereof and to the necessary
and corresponding reliefs and remedies therefore. (Emphasis supplied.)

The RTC Caloocan approved the Compromise Agreement and rendered a Decision5 in accordance with the terms and
conditions contained therein.

In compliance with the Compromise Agreement, Rogelio obtained a Surety Bond 6 from Country Bankers in favor of the
spouses Borja.7 In this regard, Rogelio and his spouse, petitioner Teresita P. Acidre, together with DBC employees Grace
C. Osias, Violeta S. Faiyaz and Emma S. Cutillar (the other petitioners herein), signed an Indemnity
Agreement8 consenting to their joint and several liability to Country Bankers should the surety bond be executed upon.

On April 23, 1992, Country Bankers received a Motion for Execution9 of the surety bond filed by Borja with the RTC
Caloocan for Rogelio’s alleged violation of the Compromise Agreement. Consequently, Country Bankers, in a letter 10 dated
May 13, 1992, advised petitioners that in the event it is constrained to pay under the surety bond to Borja, it shall
proceed against petitioners for reimbursement.

In turn, petitioners wrote Country Bankers informing the latter of the filing of an Opposition to Borja’s Motion for
Execution.11 In spite of the opposition, however, the RTC Caloocan issued a Writ of Execution12 on May 25, 1992.
Petitioners then filed a motion for reconsideration.

On May 29, 1992, Sheriff Perceverando Pangan of RTC Caloocan served Country Bankers a copy of the writ. Posthaste,
Country Bankers, in writing, requested Sheriff Pangan for a 10-day grace period within which to settle the claim.13

Subsequently, Rogelio filed an Urgent Omnibus Motion14 to suspend the Writ of Execution and to resolve the Motion for
Reconsideration dated June 3, 1992. Upon receipt of the Omnibus Motion, Country Bankers forthwith wrote Sheriff
Pangan and requested that the implementation of the Writ of Execution be held in abeyance so as not to render moot and
academic the RTC Caloocan’s resolution on the Omnibus Motion.15

Nonetheless, on June 9, 1992, Country Bankers was served a Notice of Levy/Sheriff’s Sale16 with a list of its personal
properties to be sold at the scheduled public auction on June 15, 1992.

The next day, or on June 10, 1992, Country Bankers verified with the RTC Caloocan the status of petitioners’ Omnibus
Motion. It was informed that the motion had yet to be acted upon. On the same date, Sheriff Pangan arrived at Country
Bankers’ office, and the latter was thus constrained to pay the amount of the surety bond.17

Significantly, on June 22, 1992, twelve (12) days after the satisfaction of judgment in Civil Case No. C-14745, Rogelio filed
a Petition for Certiorari and Prohibition with Preliminary Injunction and Restraining Order 18 with the CA, docketed as CA-
G.R. SP No. 28205. Although the appellate court issued a Temporary Restraining Order (TRO), the petition was eventually
denied due course and dismissed outright for being fait accompli, as what it sought to enjoin or prohibit had already been
fully satisfied and executed.19

74
In the meantime, after Country Bankers was compelled to pay the amount of the surety bond, it demanded
reimbursement from the petitioners under the Indemnity Agreement.20 However, petitioners refused to reimburse Country
Bankers.

In addition, upon the dismissal of their petition in CA-G.R. SP No. 28205, petitioners wrote Country Bankers and
informed the latter that the voluntary payment of the bond effectively prevented them from contesting the validity of the
issuance of the Writ of Execution.21

As a result, Country Bankers filed a complaint for sum of money against the petitioners which, as previously stated, the
RTC Manila dismissed. It disposed of the case, thus:

WHEREFORE, and considering the foregoing, judgment is hereby rendered:

1. Dismissing the complaint for lack of merit;

2. On the counterclaim, ordering [Country Bankers] to pay [petitioners] attorney’s fees of ₱50,000.00, plus the
costs of suit.

SO ORDERED.

On appeal, the CA reversed and set aside the decision of the RTC Manila, to wit:

WHEREFORE, premises considered, the Appeal is GRANTED and the Decision dated November 2, 1992 of Branch 7 of the
Regional Trial Court of Manila is hereby REVERSED and a new one entered, ordering [petitioners] to pay [Country
Bankers] the sum of THREE HUNDRED SEVENTY THOUSAND PESOS (₱370,000.00), as reimbursement or actual
damages, plus interest thereon at the rate of 12% per annum computed from the date of judicial demand, or from July 24,
1992, the date of filing of the complaint until the said amount has been fully paid.

SO ORDERED.

In reversing the trial court, the CA ruled that Country Bankers, as surety of Rogelio’s loan obligation, did not effect
voluntary payment on the bond. The appellate court found that what Country Bankers paid was an obligation legally due
and demandable. It declared that Country Bankers acted upon compulsion of a writ of execution, which appears to have
been regularly, and validly issued, and, by its very nature, is immediately enforceable.

Hence, this appeal positing a sole issue for our resolution, to wit:

Whether petitioners should indemnify Country Bankers for the payment of the surety bond.

In fine, petitioners contend that Country Bankers is not entitled to reimbursement when it voluntarily paid the surety
bond considering it knew full well the remedies availed of by petitioners to stay the execution of the compromise
judgment. Thus, Country Bankers must bear the loss or damage arising from its voluntary act.

We deny the appeal and affirm the appellate court’s ruling. Country Bankers should be reimbursed for the ₱370,000.00 it
paid to Borja under the surety bond.

In impugning the CA’s decision, petitioners invoke their pending Omnibus Motion to stay the execution of the compromise
judgment. Petitioners’ theory is that, although the RTC Caloocan had already issued a writ of execution and Country
Bankers had been served a Notice of Levy/Sheriff’s Sale of its properties at the impending public auction, the payment
made by Country Bankers to Borja is a voluntary act. Petitioners push their theory even further, and deign to suggest that
Country Bankers should have itself intervened in the proceedings before the RTC Caloocan to stay the writ of execution.

We reject this preposterous suggestion. Petitioners ought to be reminded of the nature of a judgment on a compromise
and a writ of execution issued in connection therewith.

A compromise judgment is a decision rendered by a court sanctioning the agreement between the parties concerning the
determination of the controversy at hand. Essentially, it is a contract, stamped with judicial imprimatur, between two or
more persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the
manner which they agree on, and which each of them prefers in the hope of gaining, balanced by the danger of

75
losing.22 Upon court approval of a compromise agreement, it transcends its identity as a mere contract binding only upon
the parties thereto, as it becomes a judgment that is subject to execution in accordance with Rule 39 of the Rules of
Court.23

Ordinarily, a judgment based on compromise is not appealable. It should not be disturbed except upon a showing of
vitiated consent or forgery. The reason for the rule is that when both parties enter into an agreement to end a pending
litigation and request that a decision be rendered approving said agreement, it is only natural to presume that such action
constitutes an implicit, as undeniable as an express, waiver of the right to appeal against said decision.24 Thus, a decision
on a compromise agreement is final and executory, and is conclusive between the parties.25

It is beyond cavil that if a party fails or refuses to abide by a compromise agreement, the other party may either enforce
the compromise or regard it as rescinded and insist upon his original demand.26Following this mandatory rule, the RTC
Caloocan granted Borja’s motion, and subsequently issued an order to the sheriff to execute the compromise judgment.
Notwithstanding the foregoing, petitioners still maintain that since they had taken steps to stay the execution of the
compromise judgment, Country Bankers, with full knowledge of their active opposition to the execution thereof, should
not have readily complied with the RTC Caloocan Order.

Petitioners’ argument contemplates a brazen defiance of a validly issued court order, which had not been restrained by the
appellate court or this Court. The argument is unacceptable.

The Compromise Agreement between Borja and Rogelio explicitly provided that the latter’s failure to complete construction
of the building within the stipulated period27 shall cause the full implementation of the surety bond as a penalty for the
default, and as an award of damages to Borja. Furthermore, the Compromise Agreement contained a default executory
clause in case of a violation or avoidance of the terms and conditions thereof. Therefore, the payment made by Country
Bankers to Borja was proper, as failure to pay would have amounted to contumacious disobedience of a valid court order.

Clearly, even without the aforesaid default clause, the compromise judgment remained executory as against Rogelio, as
the principal obligor (co-debtor), and Country Bankers as surety of the obligation. Section 4, Rule 39 of the Rules of Court
provides:

SEC. 4. Judgments not stayed by appeal. – Judgments in actions for injunction, receivership, accounting and support,
and such other judgments as are now or may hereafter be declared to be immediately executory, shall be enforceable after
their rendition and shall not be stayed by an appeal taken therefrom, unless otherwise ordered by the trial court. On
appeal therefrom, the appellate court in its discretion may make an order suspending, modifying, restoring or granting the
injunction, receivership, accounting, or award of support.

The stay of execution shall be upon such terms as to bind or otherwise as may be considered proper for the security or
protection of the rights of the adverse party.

Other judgments in actions declared to be immediately executory and not stayed by the filing of an appeal are for: (1)
compromise,28 (2) forcible entry and unlawful detainer,29 (3) direct contempt,30and (4) expropriation.31

Likewise, Section 9, paragraph (a),32 of the same Rule outlines the procedure for execution of judgments for money, thus:

SEC. 9 Execution of judgments for money, how enforced. –

(a) Immediate payment on demand. – The officer shall enforce an execution of a judgment for money by demanding from
the judgment obligor the immediate payment of the full amount stated in the writ of execution and all lawful fees. The
judgment obligor shall pay in case, certified bank check payable to the judgment oblige, or any other form of payment
acceptable to the latter, the amount of the judgment debt under proper receipt directly to the judgment oblige or his
authorized representative if present at the time of payment. The lawful fees shall be handed under proper receipt to the
executing sheriff who shall turn over the said amount within the same day to the clerk of court of the court that issued
the writ.

As Rogelio’s obligation under the compromise agreement, and approved by the RTC Caloocan, had a penal clause33 which
is monetary in nature,34 the writ of execution availed of by Borja, and paid by Country Bankers, strictly complied with the
rules on execution of money judgments.

It is true that the petitioners did not directly question the compromise judgment. What was pending before the Caloocan
RTC was petitioners’ Omnibus Motion praying for a stay in the implementation of the writ of execution. However, the

76
bottom line issue raised in the Omnibus Motion is, actually, a question on the compromise judgment, since its resolution
would require an inquiry into the stipulations contained in the Compromise Agreement, particularly the provision on
immediate execution.

Thus, when the RTC Manila ruled that the payment on the bond made by Country Bankers was voluntary, the lower court
effectively disregarded the rule on the non-appealable nature and the immediately executory character of a judgment on a
compromise.

Moreover, it has not escaped our attention that petitioners belatedly filed a Petition for Certiorari and Prohibition with
prayer for a TRO with the CA, ostensibly to stop the execution of the compromise judgment. Not only was the filing thereof
late, it was done twelve (12) days after the satisfaction of the compromise judgment. We are, therefore, perplexed why,
despite the urgency of the matter, petitioners merely banked on a pending motion for reconsideration to stay the
enforcement of an already issued writ of execution. Petitioners’ total reliance thereon was certainly misplaced.

Admittedly, the general rule is that certiorari will not lie unless a motion for reconsideration is first filed before the
respondent tribunal to allow it an opportunity to correct the imputed errors.35Nonetheless, the rule admits of exceptions,
thus:

(a) where the order is a patent nullity, as where the court a quo has no jurisdiction;

(b) where the questions raised in the certiorari proceedings have been duly raised and passed upon by the lower
court, or are the same as those raised and passed upon in the lower court;

(c) where there is an urgent necessity for the resolution of the question and any further delay would prejudice the
interests of the Government or of the petitioner or the subject matter of the action is perishable;

(d) where, under the circumstances, a motion for reconsideration would be useless;

(e) where petitioner was deprived of due process and there is extreme urgency for relief;

(f) where, in a criminal case, relief from an order of arrest is urgent and the granting of such relief by the trial
court is improbable;

(g) where the proceedings in the lower court are a nullity for lack of due process;

(h) where the proceedings was ex-parte or in which the petitioner had no opportunity to object; and

(i) where the issue raised is one purely of law or where public interest is involved.36

Evidently, it would not have been premature for petitioners to have filed a petition before the CA, upon the issuance by
the RTC Caloocan of a writ of execution, because the RTC Caloocan already denied their Opposition to Borja’s Motion for
Execution on the surety bond. If, as petitioners insist, they had a meritorious challenge to the satisfaction of the writ of
execution, they should have immediately filed a Petition for Certiorari with the CA and therein alleged the exceptional
circumstance warranting the non-filing of a motion for reconsideration. Petitioners should not have persisted on waiting
for the resolution of their Omnibus Motion.

We have consistently ruled that an order for the issuance of a writ of execution is ordinarily not appealable. The reason for
this is that the merits of the case should not be delved into anew after a determination has been made thereon with
finality.37 Otherwise, there would be practically no end to litigation since the losing party would always try to thwart
execution by appealing from every order granting the writ. In this case, this aphorism should apply. Rogelio, after agreeing
to an amicable settlement with Borja to put an end to the case before the RTC Caloocan, cannot flout compliance of the
court order of execution by refusing to reimburse Country Bankers, the surety of his obligation in the compromise
agreement.

Still, petitioners stubbornly refuse to pay Country Bankers, contending that the CA itself, in CA-G.R. SP No. 28205,
declared that the payment effected was voluntary.

We are not persuaded.

77
Article 2047 of the Civil Code specifically calls for the application of the provisions on solidary obligations to suretyship
contracts. In particular, Article 1217 of the Civil Code recognizes the right of reimbursement from a co-debtor (the
principal co-debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).38 In contrast, Article 1218 of the
Civil Code is definitive on when reimbursement is unavailing, such that only those payments made after the obligation
has prescribed or became illegal shall not entitle a solidary debtor to reimbursement. Nowhere in the invoked CA Decision
does it declare that a surety who pays, by virtue of a writ of execution, is not entitled to reimbursement from the principal
co-debtor. The CA Decision was confined to the mootness of the issue presented and petitioners’ preclusion from the relief
it prayed for, i.e., a stay of the writ of execution, considering that the writ had already been satisfied.

More importantly, the Indemnity Agreement signed by Rogelio and the other petitioners explicitly provided for an
incontestability clause on payments made by Country Bankers.1âwphi1 The said clause reads:

INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: - Any payment or disbursement made by [Country
Bankers] on account of the above-mentioned Bond, its renewals, extensions, alterations or substitutions either in the
belief that [Country Bankers] was obligated to make such payment or in the belief that said payment was necessary or
expedient in order to avoid greater losses or obligations for which [Country Bankers] might be liable by virtue of the terms
of the above-mentioned Bond, its renewals, extensions, alterations, or substitutions, shall be final and shall not be
disputed by the undersigned, who hereby jointly and severally bind themselves to indemnify [Country Bankers] of any and
all such payments, as stated in the preceding clauses.

In case [Country Bankers] shall have paid, settled or compromised any liability, loss, costs, damages, attorney’s fees,
expenses, claims, demands, suits, or judgments as above-stated, arising out of or in connection with said bond, an
itemized statement thereof, signed by an officer of [Country Bankers] and other evidence to show said payment, settlement
or compromise, shall be prima facie evidence of said payment, settlement or compromise, as well as the liability of
[petitioners] in any and all suits and claims against [petitioners] arising out of said bond or this bond application.

Ineluctably, petitioners are obligated to reimburse Country Bankers the amount of ₱370,000.00.

Finally, petitioners desperately attempt to inveigle out of this burden, which is of their own making, by imputing a lack of
initiative on Country Banker’s part to intervene in the execution proceedings before the RTC.

This contention, as with the rest of petitioners’ arguments, deserves scant consideration. Suffice it to state that Country
Bankers is a surety of the obligation with a penal clause, constituted in the compromise judgment; it is not a joint and
solidary co-debtor of Rogelio.

In the recent case of Escaňo v. Ortigas,39 we elucidated on the distinction between a surety as a co-debtor under a
suretyship agreement and a joint and solidary co-debtor, thus:

(A)s indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of
an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The
suretyship does not bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the
former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. At the same time,
there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to.
The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is
extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the
surety does in fact "become subrogated to all the rights and remedies of the creditor."

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals in CA-G.R. C.V. No. 48603 is hereby
AFFIRMED. Costs against the petitioner.

SO ORDERED.

G.R. No. 176246 February 13, 2009

PREMIERE DEVELOPMENT BANK, Petitioner,


vs.
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent.

DECISION

78
NACHURA, J.:

Before us is a petition for review on certiorari assailing the Court of Appeals (CA) Decision 1 in CA-G.R. CV No. 85930,
which reversed and set aside the decision of the Regional Trial Court (RTC), Branch 132, Makati City in Civil Case No.
0051306.2

On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety) obtained an industrial loan of
₱6,000,000.00 from petitioner Premiere Development Bank (Premiere Bank) with a maturity date of August 14, 2000. This
₱6,000,000.00 loan, evidenced by Promissory Note (PN) No. 714-Y,3 stipulates payment of 17% interest per annum
payable monthly in arrears and the principal payable on due date. In addition, PN No. 714-Y provides for a penalty charge
of 24% interest per annum based on the unpaid amortization/installment or the entire unpaid balance of the loan. In all,
should Central Surety fail to pay, it would be liable to Premiere Bank for: (1) unpaid interest up to maturity date; (2)
unpaid penalties up to maturity date; and (3) unpaid balance of the principal.

To secure payment of the ₱6,000,000.00 loan, Central Surety executed in favor of Premiere Bank a Deed of Assignment
with Pledge4 covering Central Surety’s Membership Fee Certificate No. 217 representing its proprietary share in Wack
Wack Golf and Country Club Incorporated (Wack Wack Membership). In both PN No. 714-Y and Deed of Assignment,
Constancio T. Castañeda, Jr. and Engracio T. Castañeda, president and vice-president of Central Surety, respectively,
represented Central Surety and solidarily bound themselves to the payment of the obligation.

Parenthetically, Central Surety had another commercial loan with Premiere Bank in the amount of ₱40,898,000.00
maturing on October 10, 2001. This loan was, likewise, evidenced by a PN numbered 376-X5 and secured by a real estate
mortgage over Condominium Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of through a renewal of
Central Surety’s prior loan, then covered by PN No. 367-Z.6 As with the ₱6,000,000.00 loan and the constituted pledge
over the Wack Wack Membership, the ₱40,898,000.00 loan with real estate mortgage was transacted by Constancio and
Engracio Castañeda on behalf of Central Surety.

It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding payment of the
₱6,000,000.00 loan, to wit:

August 22, 2000

CENTRAL SURETY AND INSURANCE CO.


2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
Makati City

Attention: Mr. Constancio T. Castaneda, Jr.


President

Mr. Engracio T. Castaneda


Vice President

-------------------------------------------------

Gentlemen:

This has reference to your overdue loan of ₱6.0 Million.

We regret to inform you that despite efforts to restructure the same, you have failed up to this time, to
submit the required documents and come up with equity necessary to implement the restructuring
scheme.

In view thereof, we regret that unless the above loan is settled on or before five (5) days from the date
hereof, we shall exercise our option to have the Stock Certificate No. 217 with Serial No. 1793 duly issued
by Wack Wack Golf and Country Club, Inc. transferred in the name of Premiere Development Bank in
accordance with the terms and conditions of the Deed of Assignment with Pledge executed in favor of
Premiere Development Bank.

We shall appreciate your prompt compliance.


79
Very truly yours,

(sgd.)
IGNACIO R. NEBRIDA, JR.
Senior Asst. Vice President/
Business Development Group - Head7

Posthaste, Central Surety responded and sent the following letter dated August 24, 2000:

24 August 2000

Mr. Ignacio R. Nebrida, Jr.


Senior Asst. Vice President/
Business Development Group – Head
Premiere Bank
EDSA cor. Magallanes Avenue
Makati City

Sir:

With reference to this 6.0 Million loan account, we have informed Ms. Evangeline Veloira that we are
intending to settle the account by the end of September. As of 14 August 2000 we made payment to your
bank as per receipt attached.

As you may know, present conditions have been difficult for the insurance industry whose performance is
so closely linked to the nation’s economic prosperity; and we are now asking for some consideration and
leeway on your very stiff and immediate demands.

Kindly extend to us your favorable approval.

Very truly yours,

(sgd.)
ENGRACIO T. CASTANEDA
Vice-President8

Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC) Check No. 08114 9dated September
22, 2000 in the amount of ₱6,000,000.00 and payable to Premiere Bank. The check was received by Premiere Bank’s
Senior Account Manager, Evangeline Veloira, with the notation "full payment of loan-Wack Wack," as reflected in Central
Surety’s Disbursement Voucher.10 However, for undisclosed reasons, Premiere Bank returned BC Check No. 08114 to
Central Surety, and in its letter dated September 28, 2000, demanded from the latter, not just payment of the
₱6,000,000.00 loan, but also the ₱40,898,000.00 loan which was originally covered by PN No. 367-Z.11 In the same letter,
Premiere Bank threatened foreclosure of the loans’ respective securities, the pledge and real estate mortgage, should
Central Surety fail to pay these within ten days from date, thus:

28 September 2000

CENTRAL SURETY & INSURANCE CO.


By: Constancio T. Castañeda Jr. – President
Engracio T. Castañeda – Vice President
2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City

RE: YOUR COMMERCIAL LOAN OF ₱40,898,000.00 &


₱6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y

**************************************************

80
Dear Sirs:

We write on behalf of our client, Premiere Development Bank, in connection with your above-captioned
loan account.

While our client has given you all the concessions, facilities and opportunities to service your loans, we
regret to inform you that you have failed to settle the same despite their past due status.

In view of the foregoing and to protect the interest of our client, please be advised that unless the
outstanding balances of your loan accounts as of date plus interest, penalties and other fees and charges
are paid in full or necessary arrangements acceptable to our client is made by you within ten (10) days
from date hereof, we shall be constrained much to our regret, to file foreclosure proceedings against the
collateral of the loan mortgaged to the Bank or pursue such action necessary in the premises.

We trust, therefore, that you will give this matter your preferential attention.

Very truly yours,

(sgd.)
PACITA M. ARAOS12
(italics supplied)

The very next day, on September 29, 2000, Central Surety, through its counsel, wrote Premiere Bank and re-tendered
payment of the check:

29 September 2000

PREMIERE BANK
EDSA cor. Magallanes Avenue
Makati City

Attention: Mr. Ignacio R. Nebrida, Jr.


Senior Asst. Vice President/
Business Development Group – Head

Re : Promissory Note No. 714-Y

Sir:

This is further to our client’s letter to you dated 24 August 2000, informing you that it would settle its
account by the end of September 2000.

Please be advised that on 20 September 2000 our client delivered to your bank BC cheque no. 08114
payable to Premiere Bank in the amount of SIX MILLION PESOS (₱6,000,000.00), which was received by
your Senior Account Manager, Ms. Evangeline Veloira. However, for unexplained reasons the cheque was
returned to us.

We are again tendering to you the said cheque of SIX MILLION PESOS (₱6,000,000.00), in payment of
PN#714-Y. Please accept the cheque and issue the corresponding receipt thereof. Should you again refuse
to accept this cheque, then I shall advise my client to deposit it in court for proper disposition.

Thank you.

Very truly yours,

(sgd.)
EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company13
(italics supplied)
81
On even date, a separate letter with another BC Check No. 08115 in the amount of ₱2,600,000.00 was also tendered to
Premiere Bank as payment for the Spouses Engracio and Lourdes Castañeda’s (Spouses Castañeda’s) personal loan
covered by PN No. 717-X and secured by Manila Polo Club, Inc. membership shares.

On October 13, 2000, Premiere Bank responded and signified acceptance of Central Surety’s checks under the following
application of payments:

13 October 2000

ATTY. EPIFANIO E. CUA


2/F Universalre Condominium
106 Paseo de Roxas
Legaspi Village, Makati City

Dear Atty. Cua:

Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients with the
enclosed check nos. 0008114 and 0008115 for the total of ₱8,600,000.00.

As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as full settlement of
the obligation under Account Nos. PN #714-Y and PN # 717-X, as the amount is insufficient.

In accordance with the terms and conditions of the Promissory Notes executed by your clients in favor of
Premiere Development Bank, we have applied the two (2) checks to the due obligations of your clients as
follows:

1) Account No.: COM 235-Z14 ₱1,044,939.45

2) Account No.: IND 717-X ₱1,459,693.15

3) Account No.: COM 367-Z15 ₱4,476,200.18

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

TOTAL ₱8,600,000.00

We are enclosing Xerox copy each of four (4) official receipts covering the above payments. The originals
are with us which your clients or their duly authorized representative may pick-up anytime during office
hours.

We shall appreciate the settlement in full of the accounts of your client or necessary arrangements for
settlement thereof be made as soon as possible to put the accounts on up to-date status.

Thank you.

Very truly yours,

(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and
Control Department16

Significantly, the ₱8,600,000.00 check payments were not applied in full to Central Surety’s ₱6,000,000.00 loan under PN
No. 714-Y and the Spouses Castañeda’s personal loan of ₱2,600,000.00 under PN No. 717-X. Premiere Bank also applied
proceeds thereof to a commercial loan under PN No. 235-Z taken out by Casent Realty and Development Corporation
(Casent Realty),17 and to Central Surety’s loan originally covered by PN No. 367-Z, renewed under PN No. 376-X, maturing
on October 20, 2001.

82
Strongly objecting to Premiere Bank’s application of payments, Central Surety’s counsel wrote Premiere Bank and
reiterated Central Surety’s demand for the application of the check payments to the loans covered by PN Nos. 714-X and
714-Y. Additionally, Central Surety asked that the Wack Wack Membership pledge, the security for the ₱6,000,000.00
loan, should be released.

In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-LGC, Atty. Pacita Araos,
responded and refused to accede to Central Surety’s demand. Premiere Bank insisted that the PN covering the
₱6,000,000.00 loan granted Premiere Bank sole discretion respecting: (1) debts to which payments should be applied in
cases of several obligations by an obligor and/or debtor; and (2) the initial application of payments to other costs,
advances, expenses, and past due interest stipulated thereunder.

As a result, Central Surety filed a complaint for damages and release of security collateral, specifically praying that the
court render judgment: (1) declaring Central Surety’s ₱6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2)
ordering Premiere Bank to release to Central Surety its membership certificate of shares in Wack Wack; (3) ordering
Premiere Bank to pay Central Surety compensatory and actual damages, exemplary damages, attorney’s fees, and
expenses of litigation; and (4) directing Premiere Bank to pay the cost of suit.

On July 12, 2005, the RTC rendered a decision dismissing Central Surety’s complaint and ordering it to pay Premiere
Bank ₱100,000.00 as attorney’s fees. The RTC ruled that the stipulation in the PN granting Premiere Bank sole discretion
in the application of payments, although it partook of a contract of adhesion, was valid. It disposed of the case, to wit:

Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right in contending that it had the
right to apply [Central Surety’s] payment to the most onerous obligation or to the one it sees fit to be paid first from
among the several obligations. The application of the payment to the other two loans of Central Surety namely, account
nos. COM 367-Z and IND 714-Y was within [Premiere Bank’s] valid exercise of its right according the
stipulation.lawphil.net However, [Premiere Bank] erred in applying the payment to the loan of Casent Realty and to the
personal obligation of Mr. Engracio Castañeda despite their connection with one another. Therefore, [Premiere Bank]
cannot apply the payment tendered by Central Surety to the other two entities capriciously and expressly violating the law
and pertinent Central Bank rules and regulations. Hence, the application of the payment to the loan of Casent Realty
(Account No. COM 236-Z) and to the loan of Mr. Engracio Castañeda (Account No. IND 717-X) is void and must be
annulled.

As to the issue of whether or not [Central Surety] is entitled to the release of Membership Fee Certificate in the Wack
Wack Golf and Country Club, considering now that [Central Surety] cannot compel [Premiere Bank] to release the subject
collateral.

With regard to the issue of damages and attorney’s fees, the court finds no basis to grant [Premiere Bank’s] prayer for
moral and exemplary damages but deems it just and equitable to award in its favor attorney’s fees in the sum of Php
100,000.00.

WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering [Central Surety] to pay [Premiere
Bank] Php 100,000.00 as attorney’s fees.18 (emphasis supplied)

On appeal by Central Surety, the CA reversed and set aside the trial court’s ruling. The appellate court held that with
Premiere Bank’s letter dated August 22, 2000 specifically demanding payment of Central Surety’s ₱6,000,000.00 loan, it
was deemed to have waived the stipulation in PN No. 714-Y granting it the right to solely determine application of
payments, and was, consequently, estopped from enforcing the same. In this regard, with the holding of full settlement of
Central Surety’s ₱6,000,000.00 loan under PN No. 714-Y, the CA ordered the release of the Wack Wack Membership
pledged to Premiere Bank.

Hence, this recourse by Premiere Bank positing the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE AND PALPABLE
ERROR WHEN IT APPLIED THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE PRESENT CASE
INSOFAR AS THE DEMAND LETTER SENT TO [CENTRAL SURETY] IS CONCERNED NULLIFYING THE
APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE BANK]

WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE HONORABLE COURT OF
APPEALS COULD PREVAIL OVER THE CLEAR AND UNMISTAKABLE STATUTORY AND CONTRACTUAL
RIGHT OF [PREMIERE BANK] TO EXERCISE APPLICATION OF PAYMENT AS WARRANTED BY THE
PROMISSORY NOTE

83
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO THE SUBJECT LOAN OF
RESPONDENT, WHETHER OR NOT THE SUBJECT WACK-WACK SHARES COULD BE RELEASE[D]
DESPITE THE CROSS DEFAULT AND CROSS GUARANTEE PROVISIONS OF THE DEED OF
ASSIGNMENT WITH PLEDGE AND RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY
[CENTRAL SURETY], CASENT REALTY AND SPS. CASTAÑEDA.

WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND CONSIGNATION OF THE SUBJECT
TWO CHECK PAYMENTS BY [CENTRAL SURETY].

WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL SURETY] IS ESTOPPED
FROM CONTESTING THE STIPULATIONS OR PROVISIONS OF THE PROMISSORY NOTES AUTHORIZING
[PREMIERE BANK] TO MAKE SUCH APPLICATION OF PAYMENTS

WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE BANK] IS ENTITLED
TO AN AWARD OF DAMAGES AS OCCASIONED BY THE MALICIOUS FILING OF THIS SUIT.19

At the outset, we qualify that this case deals only with the extinguishment of Central Surety’s ₱6,000,000.00 loan secured
by the Wack Wack Membership pledge. We do not dispose herein the matter of the ₱2,600,000.00 loan covered by PN No.
717-X subject of BC Check No. 08115.

We note that both lower courts were one in annulling Premiere Bank’s application of payments to the loans of Casent
Realty and the Spouses Castañeda under PN Nos. 235-Z and 717-X, respectively, thus:

It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership certificate are only Central Surety,
as debtor and [Premiere Bank], as creditor. Thus, when the questioned stipulation speaks of "several obligations", it only
refers to the obligations of [Central Surety] and nobody else.

[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No. 714-Y – secured by Wack Wack
membership certificate; and 2.) Account No. 367-Z – secured by Condominium Certificate of Title. The two loans are
secured by separate and different collaterals. The collateral for Account No. 714-Y, which is the Wack Wack membership
certificate answers only for that account and nothing else. The collateral for Account No. 367-Z, which is the
Condominium Certificate of Title, is answerable only for the said account.

The fact that the loan obligations of [Central Surety] are secured by separate and distinct collateral simply shows that
each collateral secures only a particular loan obligation and does not cover loans including future loans or advancements.

As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty, not by [Central Surety]. Although
Mr. Engracio Castañeda is the vice-president of [Central Surety], and president of Casent Realty, it does not follow that
the two corporations are one and the same. Both are invested by law with a personality separate and distinct from each
other.

Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent evidence showing that the latter is
being used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the
legitimate issues, or when it is merely an adjunct, a business conduit or an alter ego of [Central Surety] or of another
corporation; or used as a cloak to cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or
for the protection of creditors.1avvphi1

Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses Castañeda under Account No.
IND 717-X. Settled is the rule that a corporation is invested by law with a personality separate and distinct from those of
the persons composing it. The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder’s
debt or credit that of the corporation.

The mere fact that a person is a president of the corporation does not render the property he owns or possesses the
property of the corporation, since that president, as an individual, and the corporation are separate entities. 20

In fact, Premiere Bank did not appeal or question the RTC’s ruling specifically annulling the application of the
₱6,000,000.00 check payment to the respective loans of Casent Realty and the Spouses Castañeda. Undoubtedly,
Premiere Bank cannot be allowed, through this petition, to surreptitiously include the validity of its application of
payments concerning the loans to Casent Realty and the Spouses Castañeda.

84
Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:

1. Whether Premiere Bank waived its right of application of payments on the loans of Central Surety.

2. In the alternative, whether the ₱6,000,000.00 loan of Central Surety was extinguished by the encashment of
BC Check No. 08114.

3. Corollarily, whether the release of the Wack Wack Membership pledge is in order.

The Petition is meritorious.

We shall take the first and the second issues in tandem.

Creditor given right to apply payments

At the hub of the controversy is the statutory provision on application of payments, specifically Article 1252 of the Civil
Code, viz.:

Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of
making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application
of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to
debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract.

The debtor’s right to apply payment is not mandatory. This is clear from the use of the word "may" rather than the word
"shall" in the provision which reads: "He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of the same must be applied."

Indeed, the debtor’s right to apply payment has been considered merely directory, and not mandatory,21following this
Court’s earlier pronouncement that "the ordinary acceptation of the terms ‘may’ and ‘shall’ may be resorted to as guides in
ascertaining the mandatory or directory character of statutory provisions."22

Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular payment that he
tenders to the creditor. But likewise granted in the same provision is the right of the creditor to apply such payment in
case the debtor fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the
creditor a receipt in which an application of payment is made, the former cannot complain of the same." It is the directory
nature of this right and the subsidiary right of the creditor to apply payments when the debtor does not elect to do so that
make this right, like any other right, waivable.

Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals or good customs, or
prejudicial to a third person with a right recognized by law.23

A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever account he
chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who
may make such application as he chooses. But if neither party has exercised its option, the court will apply the payment
according to the justice and equity of the case, taking into consideration all its circumstances. 24

Verily, the debtor’s right to apply payment can be waived and even granted to the creditor if the debtor so agrees.25 This
was explained by former Senator Arturo M. Tolentino, an acknowledged expert on the Civil Code, thus:

The following are some limitations on the right of the debtor to apply his payment:

xxxx

5) when there is an agreement as to the debts which are to be paid first, the debtor cannot vary this agreement. 26

85
Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was held that:

The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978 loan. Planters refused.
Planters notes it was expressly provided in the security agreement on the 1981 loan that Planters had a legal right to
direct application of payments in its sole discretion. Appellees do not refute this. Hence, the debtors had no right by
agreement to direct the payments. This also precludes the application of the U.S. Rule, which applies only in absence of a
statute or specific agreement. Thus the trial court erred. Planters was entitled to apply the Hi-Plains payments as it saw
fit.27

In the case at bench, the records show that Premiere Bank and Central Surety entered into several contracts of loan,
securities by way of pledges, and suretyship agreements. In at least two (2) promissory notes between the parties,
Promissory Note No. 714-Y and Promissory Note No. 376-X, Central Surety expressly agreed to grant Premiere Bank the
authority to apply any and all of Central Surety’s payments, thus:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without notice
and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due or
not. Any such application of deposits or payments shall be conclusive and binding upon us.

This proviso is representative of all the other Promissory Notes involved in this case. It is in the exercise of this express
authority under the Promissory Notes, and following Bangko Sentral ng Pilipinas Regulations, that Premiere Bank applied
payments made by Central Surety, as it deemed fit, to the several debts of the latter.

All debts were due; There was no


waiver on the part of petitioner

Undoubtedly, at the time of conflict between the parties material to this case, Promissory Note No. 714-Y dated August 20,
1999, in the amount of ₱6,000,000.00 and secured by the pledge of the Wack Wack Membership, was past the due and
demand stage. By its terms, Premiere Bank was entitled to declare said Note and all sums payable thereunder
immediately due and payable, without need of "presentment, demand, protest or notice of any kind." The subsequent
demand made by Premiere Bank was, therefore, merely a superfluity, which cannot be equated with a waiver of the right
to demand payment of all the matured obligations of Central Surety to Premiere Bank.

Moreover, this Court may take judicial notice that the standard practice in commercial transactions to send demand
letters has become part and parcel of every collection effort, especially in light of the legal requirement that demand is a
prerequisite before default may set in, subject to certain well-known exceptions, including the situation where the law or
the obligations expressly declare it unnecessary.28

Neither can it be said that Premiere Bank waived its right to apply payments when it specifically demanded payment of
the ₱6,000,000.00 loan under Promissory Note No. 714-Y. It is an elementary rule that the existence of a waiver must be
positively demonstrated since a waiver by implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant
circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the
right. Mere silence on the part of the holder of the right should not be construed as a surrender thereof; the courts must
indulge every reasonable presumption against the existence and validity of such waiver.29

Besides, in this case, any inference of a waiver of Premiere Bank’s, as creditor, right to apply payments is eschewed by the
express provision of the Promissory Note that: "no failure on the part of [Premiere Bank] to exercise, and no delay in
exercising any right hereunder, shall operate as a waiver thereof."

Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver that the Court of Appeals
ascribed to the demand made by Premiere Bank upon Central Surety to pay the amount of ₱6,000,000.00, in the face of
both the express provisions of the law and the agreements entered into by the parties. After all, a diligent creditor should
not needlessly be interfered with in the prosecution of his legal remedies.30

When Central Surety directed the application of its payment to a specific debt, it knew it had another debt with Premiere
Bank, that covered by Promissory Note 367-Z, which had been renewed under Promissory Note 376-X, in the amount of
₱40.898 Million. Central Surety is aware that Promissory Note 367-Z (or 376-X) contains the same provision as in
Promissory Note No 714-Y which grants the Premiere Bank authority to apply payments made by Central Surety, viz.:

86
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without notice
and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due or
not. Any such application of deposits or payments shall be conclusive and binding upon us.31

Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso that:

the bank shall be entitled to declare this Note and all sums payable hereunder to be immediately due and payable,
without need of presentment, demand, protest or notice of nay kind, all of which I/We hereby expressly waive, upon
occurrence of any of the following events: x x x (ii) My/Our failure to pay any amortization or installment due hereunder;
(iii) My/Our failure to pay money due under any other document or agreement evidencing obligations for borrowed
money x x x.32

by virtue of which, it follows that the obligation under Promissory Note 367-Z had become past due and demandable, with
further notice expressly waived, when Central Surety defaulted on its obligations under Promissory Note No. 714-Y.

Mendoza v. Court of Appeals33 forecloses any doubt that an acceleration clause is valid and produces legal effects. In fact,
in Selegna Management and Development Corporation v. United Coconut Planters Bank, 34 we held that:

Considering that the contract is the law between the parties, respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable. That clause obliged petitioners to pay the entire loan on
January 29, 1999, the date fixed by respondent.

It is worth noting that after the delayed payment of ₱6,000,000.00 was tendered by Central Surety, Premiere Bank
returned the amount as insufficient, ostensibly because there was, at least, another account that was likewise due.
Obviously, in its demand of 28 September 2000, petitioner sought payment, not just of the ₱6,000,000.00, but of all these
past due accounts. There is extant testimony to support this claim, as the transcript of stenographic notes on the
testimony of Atty. Araos reveals:

Atty. Opinion: Q. But you accepted this payment of Six Million (₱6,000,000.00) later on when together with this was paid
another check for 1.8 Million?

Witness: A. We accepted.

Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or to four (4) accounts
mentioned in Exhibit "J." Is that correct?

Atty. Tagalog: We can stipulate on that. Your Honor.

Court: This was stipulated?

Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those are the applications of
payments made by the defendant Bank on those loan accounts.

Atty. Opinion: Q. Were these accounts due already when you made this application, distribution of payments?

Witness: A. Yes sir.35

Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on the payment of its obligations.
In fact, the record shows that after marking its evidence, Central Surety proceeded to offer its evidence immediately. Only
on the rebuttal stage did Central Surety present a witness; but even then, no evidence was adduced of payment of any
other obligation. In this light, the Court is constrained to rule that all obligations of Central Surety to Premiere Bank were
due; and thus, the application of payments was warranted.

Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its more onerous obligations,
Premiere Bank cannot be faulted for exercising the authority granted to it under the Promissory Notes, and applying
payment to the obligations as it deemed fit. Subject to the caveat that our ruling herein shall be limited only to the
transactions entered into by the parties to this case, the Court will not disturb the finding of the lower court that Premiere
Bank rightly applied the payments that Central Surety had tendered. Corollary thereto, and upon the second issue, the

87
tender of the amount of ₱6,000,000.00 by Central Surety, and the encashment of BC Check No. 08114 did not totally
extinguish the debt covered by PN No. 714-Y.

Release of the pledged

Wack Wack Membership

Contract of Adhesion

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

In interpreting such contracts, however, courts are expected to observe greater vigilance in order to shield the unwary or
weaker party from deceptive schemes contained in ready-made covenants.36Thus, Article 24 of the Civil Code pertinently
states:

In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral
dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his
protection.

But in this case, Central Surety does not appear so weak as to be placed at a distinct disadvantage vis-à-vis the bank. As
found by the lower court:

Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in assuming that the [Central
Surety] could not have been cheated or misled in agreeing thereto, it could have negotiated with the bank on a more
favorable term considering that it has already established a certain reputation with the [Premiere Bank] as evidenced by
its numerous transactions. It is therefore absurd that an established company such as the [Central Surety] has no
knowledge of the law regarding bank practice in loan transactions.

The Dragnet Clause.

The factual circumstances of this case showing the chain of transactions and long-standing relationship between Premiere
Bank and Central Surety militate against the latter’s prayer in its complaint for the release of the Wack Wack
Membership, the security attached to Promissory Note 714-Y.

A tally of the facts shows the following transactions between Premiere Bank and Central Surety:

Date Instrument Amount Stipulation


covered

August 20, 1999 PN 714-Y P6M

August 29, 1999 Deed of ₱ 15 M As security for PN 714-Y and/or


Assignment with such Promissory Note/s which
Pledge the ASSIGNOR / PLEDGOR
shall hereafter execute in favor
of the ASSIGNEE/PLEDGEE

From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear that the security, which
peculiarly specified an amount at ₱15,000,000.00 (notably greater than the amount of the promissory note it secured),
was intended to guarantee not just the obligation under PN 714-Y, but also future advances. Thus, the said deed is
explicit:

88
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the amount
of FIFTEEN MILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note attached hereto
and made an integral part hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR hereby transfers, assigns, conveys,
endorses, encumbers and delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and assigns, that
certain Membership fee Certificate Share in Wack Wack Golf and Country Club Incorporate covered by Stock Certificate
No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August 27, 1996 in the
name of the ASSIGNOR." (Emphasis made in the Petition.)

Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by Central Surety as follows:

Date Instrument Amount Stipulation

Notarized, Sept. Continuing ₱40,898,000.00 In consideration of the loan


22, 1999 Guaranty/Comprehensive and/or any credit
Surety Agreement accommodation which you
(petitioner) have extended
and/or will extend to
Central Surety and
Insurance Co.

And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior Promissory Note 367-Z, in the
amount of ₱40,898,000.00. In all, the transactions that transpired between Premiere Bank and Central Surety manifest
themselves, thusly:

Date Amount
Instrument Stipulation
covered

August 20, 1999 PN 714-Y ₱6M

August 29, 1999 Deed of Assignment with ₱ 15 M As security for PN 714-Y and/or
Pledge such Promissory Note/s which
the ASSIGNOR / PLEDGOR shall
hereafter execute in favor of the
ASSIGNEE/PLEDGEE

Notarized, Continuing ₱40,898,000.00 In consideration of the loan


Sept. 22, 1999 Guaranty/Comprehensive and/or any credit
Surety Agreement accommodation which you
(petitioner) have extended and/or
will extend to Central Surety and
Insurance Co.

October 10, 2000 Promissory Note 376-X (PN ₱40,898,000.00


367-Z)

From the foregoing, it is more than apparent that when, on August 29, 1999, the parties executed the Deed of Assignment
with Pledge (of the Wack Wack Membership), to serve as security for an obligation in the amount of ₱15,000,000.00 (when
the actual loan covered by PN No. 714-Y was only ₱6,000,000.00), the intent of the parties was for the Wack Wack
Membership to serve as security also for future advancements. The subsequent loan was nothing more than a fulfillment
of the intention of the parties. Of course, because the subsequent loan was for a much greater amount (₱40,898,000.00),
it became necessary to put up another security, in addition to the Wack Wack Membership. Thus, the subsequent surety
89
agreement and the specific security for PN No. 367-X were, like the Wack Wack Membership, meant to secure the
ballooning debt of the Central Surety.

The above-quoted provision in the Deed of Assignment, also known as the "dragnet clause" in American jurisprudence,
would subsume all debts of respondent of past and future origins. It is a valid and legal undertaking, and the amounts
specified as consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security, if
from the four corners of the instrument, the intent to secure future and other indebtedness can be gathered. A pledge or
mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of the
amount named in the mortgage until the full amount of all advancements shall have been paid.37

Our ruling in Prudential Bank v. Alviar38 is instructive:

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically
phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed."
Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new
transaction. A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available
additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that
mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in
said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered.

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

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by
the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the
payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (₱250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or appended hereto, together with all the
buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .

xxxx

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-
345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN BD#76/C-
430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually
by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor
of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even
to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a
"dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be
construed to cover a different debt, although such other debt is secured by another mortgage. The contrary thinking
maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured
as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such
deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it
from the arrangement.

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or "dragnet
clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be
secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency
of the first security is a corollary component of the "dragnet clause." But of course, there is no prohibition, as in the
mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the
mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in
reliance solely on the original security with the "dragnet clause," but rather, on the new security given. This is the
"reliance on the security test."
90
Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry whether the
second loan was made in reliance on the original security containing a "dragnet clause." Accordingly, finding a different
security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred,
so it was held. The rationale involved, the court said, was that the "dragnet clause" in the first security instrument
constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument,
and that when the lender accepted a different security he did not accept the offer.

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide
the security of the mortgage for advances of and when they were made. Thus, it was concluded that the "offer" was not
accepted by the bank when a subsequent advance was made because (1) the second note was secured by a chattel
mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there
was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the
advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no allegation by the
bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance.

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a
mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document evidencing the
subsequent advance refers to the mortgage as providing security therefor.

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment
of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied, there is a need
to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should
only be for the ₱250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the
second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of
indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given
for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the
mortgage, notwithstanding the giving of the special security. This is recognition that while the "dragnet clause" subsists,
the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be
resorted to.

The security clause involved in the case at bar shows that, by its terms:

As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the amount
of FIFTEEN MILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note attached hereto
and made an integral part hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR hereby transfers, assigns, conveys,
endorses, encumbers and delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and assigns, that
certain Membership fee Certificate Share in Wack Wack Golf and Country Club Incorporated covered by Stock Certificate
No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August 27, 1996 in the
name of the ASSIGNOR."

it is comparable with the security clause in the case of Prudential, viz.:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by
the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the
payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (₱250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or appended hereto, together with all the
buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .

and there is no substantive difference between the terms utilized in both clauses securing future advances.

To recall, the critical issue resolved in Prudential was whether the "blanket mortgage" clause applies even to subsequent
advancements for which other securities were intended. We then declared that the special security for subsequent loans
must first be exhausted in a situation where the creditor desires to foreclose on the "subsequent" loans that are due.
However, the "dragnet clause" allows the creditor to hold on to the first security in case of deficiency after foreclosure on
the special security for the subsequent loans.
91
In Prudential, we disallowed the petitioner’s attempt at multiple foreclosures, as it foreclosed on all of the mortgaged
properties serving as individual securities for each of the three loans. This Court then laid down the rule, thus:

where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become
due, a balance due on a note, after exhausting the special security given for the payment of such note, was, in the
absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the
special security. This is recognition that while the "dragnet clause" subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.

However, this does not prevent the creditor from foreclosing on the security for the first loan if that loan is past due,
because there is nothing in law that prohibits the exercise of that right. Hence, in the case at bench, Premiere Bank has
the right to foreclose on the Wack Wack Membership, the security corresponding to the first promissory note, with the
deed of assignment that originated the "dragnet clause." This conforms to the doctrine in Prudential, as, in fact,
acknowledged in the decision’s penultimate paragraph, viz.:

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have
not yet paid the ₱250,000.00 and gave no credence to their claim that they paid the said amount when they paid
petitioner ₱2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the
unpaid ₱250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/c-
345, has been exhausted, subject of course to defenses which are available to respondents.

In any event, even without this Court’s prescription in Prudential, the release of the Wack Wack Membership as the
pledged security for Promissory Note 714-Y cannot yet be done as sought by Central Surety. The chain of contracts
concluded between Premiere Bank and Central Surety reveals that the Wack Wack Membership, which stood as security
for Promissory Note 714-Y, and which also stands as security for subsequent debts of Central Surety, is a security in the
form of a pledge. Its return to Central Surety upon the pretext that Central Surety is entitled to pay only the obligation in
Promissory Note No. 714-Y, will result in the extinguishment of the pledge, even with respect to the subsequent
obligations, because Article 2110 of the Civil Code provides:

(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary is
void.

This is contrary to the express agreement of the parties, something which Central Surety wants this Court to undo. We
reiterate that, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if they
consented to the same freely and voluntarily.39

Attorney’s Fees

The final issue is the propriety of attorney’s fees. The trial court based its award on the supposed malice of Central Surety
in instituting this case against Premiere Bank. We find no malice on the part of Central Surety; indeed, we are convinced
that Central Surety filed the case in the lower court in good faith, upon the honest belief that it had the prerogative to
choose to which loan its payments should be applied.

Malicious prosecution, both in criminal and civil cases, requires the presence of two elements, to wit: (a) malice and (b)
absence of probable cause. Moreover, there must be proof that the prosecution was prompted by a sinister design to vex
and humiliate a person; and that it was initiated deliberately, knowing that the charge was false and baseless. Hence, the
mere filing of what turns out to be an unsuccessful suit does not render a person liable for malicious prosecution, for the
law could not have meant to impose a penalty on the right to litigate.40 Malice must be proved with clear and convincing
evidence, which we find wanting in this case.

WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. CV
No. 85930 dated July 31, 2006, as well as its Resolution dated January 4, 2007, are REVERSED and SET ASIDE. The
Decision of the Regional Trial Court of Makati City, Branch 132, in Civil Case No. 00-1536, dated July 12, 2005, is
REINSTATED with the MODIFICATION that the award of attorney’s fees to petitioner is DELETED. No pronouncement as
to costs.

SO ORDERED.

G.R. No. 159709 June 27, 2012

92
HEIRS OF SERVANDO FRANCO, Petitioners,
vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.

DECISION

BERSAMIN, J.:

There is novation when there is an irreconcilable incompatibility between the old and the new obligations. There is no
novation in case of only slight modifications; hence, the old obligation prevails.

The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the Court of Appeals (CA) upheld the
issuance of a writ of execution by the Regional Trial Court (RTC), Branch 16, in Malolos, Bulacan.

Antecedents

The Court adopts the following summary of the antecedents rendered by the Court in Medel v. Court of Appeals, 2 the case
from which this case originated, to wit:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica
R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit
Enterprises", in the amount of ₱50,000.00, payable in two months. Veronica gave only the amount of ₱47,000.00, to the
borrowers, as she retained ₱3,000.00, as advance interest for one month at 6% per month. Servado and Leticia executed a
promissory note for ₱50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of ₱90,000.00, payable
in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on January 19,
1986. They received only ₱84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of ₱300,000.00, maturing
in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a
special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed
a promissory note in favor of Veronica to pay the sum of ₱300,000.00, after a month, or on July 11, 1986. However, only
the sum of ₱275,000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous
unpaid loans totaling ₱440,000.00, and sought from Veronica another loan in the amount of ₱60,000.00, bringing their
indebtedness to a total of ₱500,000.00, payable on August 23, 1986. They executed a promissory note, reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"₱500,000.00

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R.
GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal
age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED
THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereon at the rate of5.5 PER CENT per month plus 2% servicecharge per annum
from date hereof until fully paid according to the amortization schedule contained herein. (Underscoring
supplied)

"Payment will be made in full at the maturity date.

93
"Should I/WE fail to pay any amortization orportion hereof when due, all the other installments together
with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay
an additionalamount equivalent to one per cent (1%) permonth of the amount due and demandable aspe
nalty charges in the form of liquidateddamages until fully paid; and the
further sumof TWENTY FIVE PER CENT (25%) thereof infull, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due and demandable,
exclusive of costs and judicial or extra judicial expenses. (Underscoring supplied)

"I, WE further agree that in the event the present rate of interest on loan is increased by law or the
Central Bank of the Philippines, the holder shall have the option to apply and collect the increased
interest charges without notice although the original interest have already been collected wholly or
partially unless the contrary is required by law.

"It is also a special condition of this contract that the parties herein agree that the amount of peso-
obligation under this agreement is based on the present value of peso, and if there be any change in the
value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-
obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at
the time of the complete fulfillment of obligation.

"Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this
note or extension of payments, reserving rights against each and all indorsers and all parties to this note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their
rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."

On maturity of the loan, the borrowers failed to pay the indebtedness of ₱500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial
Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including
interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not
obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs
the sum of ₱500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real
estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a
witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that the loan was the
transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in
San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per
annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is
unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties and other
charges.

After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had been
duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the loans
was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code"
that the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum."

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the
amount of ₱47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as
penalty, until the entire amount is paid in full.

94
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the
amount of ₱84,000.00 with 12% interest per annum and 1% per cent per month as penalty from
November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of ₱285,000.00 plus
12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is
fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of ₱50,000.00 as attorney's
fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the
defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing
the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a
stipulation on interest rate, but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become ‘legally
inexistent’ with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree
on any interest that may be charged on the loan". The Court of Appeals further held that "the imposition of ‘an additional
amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of liquidated
damages until fully paid’ was allowed by law".

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the Regional Trial Court,
disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to
pay the plaintiffs the sum of ₱500,000.00, plus 5.5% per month interest and 2% service charge per
annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is fully paid.

"The award to the plaintiffs of ₱50,000.00 as attorney's fees is affirmed. And so is the imposition of costs
against the defendants.

"SO ORDERED."

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated
November 25, 1997, the Court of Appeals denied the motion.3

On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the interest for being iniquitous
or unconscionable, and revived the judgment of the RTC rendered on December 9, 1991, viz:

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March
21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the
decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No.
134-M-90, involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.4

Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for execution. 5Servando Franco
opposed,6 claiming that he and the respondents had agreed to fix the entire obligation at ₱775,000.00.7 According to
Servando, their agreement, which was allegedly embodied in a receipt dated February 5, 1992, 8 whereby he made an

95
initial payment of ₱400,000.00 and promised to pay the balance of ₱375,000.00 on February 29, 1992, superseded the
July 23, 1986 promissory note.

The RTC granted the motion for execution over Servando’s opposition, thus:

There is no doubt that the decision dated December 9, 1991 had already been affirmed and had already become final and
executory. Thus, in accordance with Sec. 1 of Rule 39 of the 1997 Rules of Civil Procedure, execution shall issue as a
matter of right. It has likewise been ruled that a judgment which has acquired finality becomes immutable and
unalterable and hence may no longer be modified at any respect except only to correct clerical errors or mistakes (Korean
Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this respect, the decision deserves to be respected.

The argument about the modification of the contract or non-participation of defendant Servando Franco in the
proceedings on appeal on the alleged belief that the payment he made had already absolved him from liability is of no
moment. Primarily, the decision was for him and Leticia Medel to pay the plaintiffs jointly and severally the amounts
stated in the Decision. In other words, the liability of the defendants thereunder is solidary. Based on this aspect alone,
the new defense raised by defendant Franco is unavailing.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for Execution of Judgment.

Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff of this Court.

SO ORDERED.9

On March 8, 2001, the RTC issued the writ of execution.10

Servando moved for reconsideration,11 but the RTC denied his motion.12

On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the execution was proper because
of Servando’s failure to comply with the terms of the compromise agreement, stating:13

Petitioner cannot deny the fact that there was no full compliance with the tenor of the compromise agreement. Private
respondents on their part did not disregard the payments made by the petitioner. They even offered that whatever
payments made by petitioner, it can be deducted from the principal obligation including interest. However, private
respondents posit that the payments made cannot alter, modify or revoke the decision of the Supreme Court in the instant
case.

In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the Supreme Court ruled that:

"When the terms of the compromise judgment is violated, the aggrieved party must move for its execution, not its
invalidation."

It is clear from the aforementioned jurisprudence that even if there is a compromise agreement and the terms have been
violated, the aggrieved party, such as the private respondents, has the right to move for the issuance of a writ of execution
of the final judgment subject of the compromise agreement.

Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm or prejudice for the simple
reason that what has been asked by private respondents to be the subject of a writ of execution is only the balance of
petitioner’s obligation after deducting the payments made on the basis of the compromise agreement.

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE and consequently DISMISSED
for lack of merit.

SO ORDERED.

His motion for reconsideration having been denied,14 Servando appealed. He was eventually substituted by his heirs, now
the petitioners herein, on account of his intervening death. The substitution was pursuant to the resolution dated June
15, 2005.15

Issue
96
The petitioners submit that the CA erred in ruling that:

THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF MALOLOS, BULACAN
WAS NOT NOVATED BY THE COMPROMISE AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.

II

THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON THE DECEMBER 1991
DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF MALOLOS, BULACAN AND NOT ON THE
COMPROMISE AGREEMENT EXECUTED IN 1992.

The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note that had been already
novated; that the promissory note had been impliedly novated when the principal obligation of ₱500,000.00 had been
fixed at ₱750,000.00, and the maturity date had been extended from August 23, 1986 to February 29, 1992.

In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and executory decision of
the Court; that novation did not take place because there was no complete incompatibility between the promissory note
and the memorandum receipt; that Servando’s previous payment would be deducted from the total liability of the debtors
based on the RTC’s decision.

Issue

Was there a novation of the August 23, 1986 promissory note when respondent Veronica Gonzales issued the February 5,
1992 receipt?

Ruling

The petition lacks merits.

Novation did not transpire because no


irreconcilable incompatibility existed
between the promissory note and the receipt

To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by respondent Veronica
whereby Servando’s obligation was fixed at ₱750,000.00. They insist that even the maturity date was extended until
February 29, 1992. Such changes, they assert, were incompatible with those of the original agreement under the
promissory note.

The petitioners’ assertion is wrong.

A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes the first, either by
changing the object or the principal conditions, or by substituting the person of the debtor, or by subrogating a third
person in the rights of the creditor.16 For a valid novation to take place, there must be, therefore: (a) a previous valid
obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment of the old contract; and (d) a
valid new contract.17 In short, the new obligation extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are incompatible on every point. A compromise of a final
judgment operates as a novation of the judgment obligation upon compliance with either of these two conditions. 18

The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible with the old one under
the promissory note, viz:

February 5, 1992

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Received from SERVANDO FRANCO BPI Manager’s Check No. 001700 in the amount of ₱400,00.00 as
partial payment of loan. Balance of ₱375,000.00 to be paid on or before FEBRUARY 29, 1992. In case of
default an interest will be charged as stipulated in the promissory note subject of this case.

(Sgd)
V. Gonzalez19

To be clear, novation is not presumed. This means that the parties to a contract should expressly agree to abrogate the
old contract in favor of a new one. In the absence of the express agreement, the old and the new obligations must be
incompatible on every point.20 According to California Bus Lines, Inc. v. State Investment House, Inc.:21

The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either
expressly or impliedly.1âwphi1 The term "expressly" means that the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an
implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. While there is
really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new
obligations.

There is incompatibility when the two obligations cannot stand together, each one having its independent existence. If the
two obligations cannot stand together, the latter obligation novates the first.22 Changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must affect any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change is merely modificatory in nature
and insufficient to extinguish the original obligation.23

In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the respondents only thereby
recognized the original obligation by stating in the receipt that the ₱400,000.00 was "partial payment of loan" and by
referring to "the promissory note subject of the case in imposing the interest." The loan mentioned in the receipt was still
the same loan involving the ₱500,000.00 extended to Servando. Advertence to the interest stipulated in the promissory
note indicated that the contract still subsisted, not replaced and extinguished, as the petitioners claim.

The receipt dated February 5, 1992 was only the proof of Servando’s payment of his obligation as confirmed by the
decision of the RTC. It did not establish the novation of his agreement with the respondents. Indeed, the Court has ruled
that an obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, or changes
only the terms of payment, or adds other obligations not incompatible with the old ones, or the new contract merely
supplements the old one.24A new contract that is a mere reiteration, acknowledgment or ratification of the old contract
with slight modifications or alterations as to the cause or object or principal conditions can stand together with the former
one, and there can be no incompatibility between them.25 Moreover, a creditor’s acceptance of payment after demand does
not operate as a modification of the original contract.26

Worth noting is that Servando’s liability was joint and solidary with his co-debtors. In a solidary obligation, the creditor
may proceed against any one of the solidary debtors or some or all of them simultaneously.27 The choice to determine
against whom the collection is enforced belongs to the creditor until the obligation is fully satisfied. 28 Thus, the obligation
was being enforced against Servando, who, in order to escape liability, should have presented evidence to prove that his
obligation had already been cancelled by the new obligation or that another debtor had assumed his place. In case of
change in the person of the debtor, the substitution must be clear and express,29 and made with the consent of the
creditor.30 Yet, these circumstances did not obtain herein, proving precisely that Servando remained a solidary debtor
against whom the entire or part of the obligation might be enforced.

Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It is settled that an
extension of the term or period of the maturity date does not result in novation.31

II

Total liability to be reduced by ₱400,000.00

The petitioners argue that Servando’s remaining liability amounted to only ₱375,000.00, the balance indicated in the
February 5, 1992 receipt. Accordingly, the balance was not yet due because the respondents did not yet make a demand
for payment.

The petitioners cannot be upheld.


98
The balance of ₱375,000.00 was premised on the taking place of a novation. However, as found now, novation did not take
place. Accordingly, Servando’s obligation, being solidary, remained to be that decreed in the December 9, 1991 decision of
the RTC, inclusive of interests, less the amount of ₱400,000.00 that was meanwhile paid by him.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March 19, 2003; ORDERS the
Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the execution based on its decision rendered on
December 9, 1991, deducting the amount of ₱400,000.00 already paid by the late Servando Franco; and DIRECTS the
petitioners to pay the costs of suit.

SO ORDERED.

G.R. No. 112329 January 28, 2000

VIRGINIA A. PEREZ, petitioner,


vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.

YNARES-SANTIAGO, J.:

A contract of insurance, like all other contracts, must be assented to by both parties, either in person or through their
agents and so long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an
offer to make a contract.

Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in CA-G.R. CV 35529
entitled, "BF Lifeman Insurance Corporations; Plaintiff-Appellant versus Virginia A. Perez. Defendant-Appellee," which
declared Insurance Policy 056300 for P50,000.00 issued by private respondent corporation in favor of the deceased
Primitivo B. Perez, null and void and rescinded, thereby reversing the decision rendered by the Regional Trial Court of
Manila, Branch XVI.

The facts of the case as summarized by respondent Court of Appeals are not in dispute.

Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for P20,000.00. Sometime in
October 1987, an agent of the insurance corporation, Rodolfo Lalog, visited Perez in Guinayangan, Quezon and convinced
him to apply for additional insurance coverage of P50,000.00, to avail of the ongoing promotional discount of P400.00 if
the premium were paid annually.1âwphi1.nêt

On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance coverage of
P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivo's wife, paid P2,075.00 to Lalog. The receipt issued by
Lalog indicated the amount received was a "deposit."1Unfortunately, Lalog lost the application form accomplished by Perez
and so on October 28, 1987, he asked the latter to fill up another application form.2 On November 1, 1987, Perez was
made to undergo the required medical examination, which he passed.3

Pursuant to the established procedure of the company, Lalog forwarded the application for additional insurance of Perez,
together with all its supporting papers, to the office of BF Lifeman Insurance Corporation at Gumaca, Quezon which office
was supposed to forward the papers to the Manila office.

On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a storm. At the time of
his death, his application papers for the additional insurance of P50,000.00 were still with the Gumaca office. Lalog
testified that when he went to follow up the papers, he found them still in the Gumaca office and so he personally brought
the papers to the Manila office of BF Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers
were received in Manila.

Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved the application and
issued the corresponding policy for the P50,000.00 on December 2, 1987.4

Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased. She was paid
P40,000.00 under the first insurance policy for P20,000.00 (double indemnity in case of accident) but the insurance
company refused to pay the claim under the additional policy coverage of P50,000.00, the proceeds of which amount to
P150,000.00 in view of a triple indemnity rider on the insurance policy. In its letter' of January 29, 1988 to Virginia A.
Perez, the insurance company maintained that the insurance for P50,000.00 had not been perfected at the time of the

99
death of Primitivo Perez. Consequently, the insurance company refunded the amount of P2,075.00 which Virginia Perez
had paid.

On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint against Virginia A. Perez
seeking the rescission and declaration of nullity of the insurance contract in question.

Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his prestations under the
contract and all the elements of a valid contract are present. She then filed a counterclaim against private respondent for
the collection of P150,000.00 as actual damages, P100,000.00 as exemplary damages, P30,000.00 as attorney's fees and
P10,000.00 as expenses for litigation.

On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads as
follows:

WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of defendant Virginia A. Perez,
ordering the plaintiff BF Lifeman Insurance Corporation to pay to her the face value of BF Lifeman Insurance
Policy No. 056300, plus double indemnity under the SARDI or in the total amount of P150,000.00 (any refund
made and/or premium deficiency to be deducted therefrom).

SO ORDERED.5

The trial court, in ruling for petitioner, held that the premium for the additional insurance of P50,000.00 had been fully
paid and even if the sum of P2,075.00 were to be considered merely as partial payment, the same does not affect the
validity of the policy. The trial court further stated that the deceased had fully complied with the requirements of the
insurance company. He paid, signed the application form and passed the medical examination. He should not be made to
suffer the subsequent delay in the transmittal of his application form to private respondent's head office since these were
no longer within his control.

The Court of Appeals, however, reversed the decision of the trial court saying that the insurance contract for P50,000.00
could not have been perfected since at the time that the policy was issued, Primitivo was already dead. 6 Citing the
provision in the application form signed by Primitivo which states that:

. . . there shall be no contract of insurance unless and until a policy is issued on this application and that the
policy shall not take effect until the first premium has been paid and the policy has been delivered to and
accepted by me/us in person while I/we, am/are in good health

the Court of Appeals held that the contract of insurance had to be assented to by both parties and so long as the
application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract.

Petitioner's motion for reconsideration having been denied by respondent court, the instant petition for certiorari was filed
on the ground that there was a consummated contract of insurance between the deceased and BF Lifeman Insurance
Corporation and that the condition that the policy issued by the corporation be delivered and received by the applicant in
good health, is potestative, being dependent upon the will of the insurance company, and is therefore null and void.

The petition is bereft of merit.

Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on
a specified subject by specified perils.7 A contract, on the other hand, is a meeting of the minds between two persons
whereby one binds himself, with respect to the other to give something or to render some service.8 Under Article 1318 of
the Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance absolute.

100
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination,
his application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of
the contract of insurance between the deceased and respondent corporation was further conditioned upon compliance
with the following requisites stated in the application form:

there shall be no contract of insurance unless and until a policy is issued on this application and that the said
policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us in
person while I/We, am/are in good health.9

The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the
application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a
corresponding policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the
premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have
been perfected.

It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for additional
insurance coverage were still with the branch office of respondent corporation in Gumaca and it was only two days later,
or on November 27, 1987, when Lalog personally delivered the application papers to the head office in Manila.
Consequently, there was absolutely no way the acceptance of the application could have been communicated to the
applicant for the latter to accept inasmuch as the applicant at the time was already dead. In the case of Enriquez vs. Sun
Life Assurance Co. of Canada,10 recovery on the life insurance of the deceased was disallowed on the ground that the
contract for annuity was not perfected since it had not been proved satisfactorily that the acceptance of the application
ever reached the knowledge of the applicant.

Petitioner insists that the condition imposed by respondent corporation that a policy must have been delivered to and
accepted by the proposed insured in good health is potestative being dependent upon the will of the corporation and is
therefore null and void.

We do not agree.

A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is considered void. Article
1182 of the New Civil Code states: When the fulfillment of the condition depends upon the sole will the debtor, the
conditional obligation shall be void.

In the case at bar, the following conditions were imposed by the respondent company for the perfection of the contract of
insurance:

(a) a policy must have been issued;

(b) the premiums paid; and

(c) the policy must have been delivered to and accepted by the applicant while he is in good health.

The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant while
he is in good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the
applicant at the time of the delivery of the policy is beyond the control or will of the insurance company. Rather, the
condition is a suspensive one whereby the acquisition of rights depends upon the happening of an event which constitutes
the condition. In this case, the suspensive condition was the policy must have been delivered and accepted by the
applicant while he is in good health. There was non-fulfillment of the condition, however, inasmuch as the applicant was
already dead at the time the policy was issued. Hence, the non-fulfillment of the condition resulted in the non-perfection
of the contract.

As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in person or by
their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or
proposal to make a contract. The contract, to be binding from the date of application, must have been a completed
contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it
shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement.11

Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It should be noted that
an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on

101
the application does not constitute acceptance even though the insured has forwarded his first premium with his
application. The corporation may not be penalized for the delay in the processing of the application papers. Moreover,
while it may have taken some time for the application papers to reach the main office, in the case at bar, the same was
acted upon less than a week after it was received. The processing of applications by respondent corporation normally
takes two to three weeks, the longest being a month.12 In this case, however, the requisite medical examination was
undergone by the deceased on November 1, 1987; the application papers were forwarded to the head office on November
27, 1987; and the policy was issued on December 2, 1987. Under these circumstances, we hold that the delay could not
be deemed unreasonable so as to constitute gross negligence.

A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300 for P50,000.00 null
and void and rescinded. The Court of Appeals corrected this in its Resolution of the motion for reconsideration filed by
petitioner, thus:

Anent the appearance of the word "rescinded" in the dispositive portion of the decision, to which defendant-
appellee attaches undue significance and makes capital of, it is clear that the use of the words "and rescinded" is,
as it is hereby declared, a superfluity. It is apparent from the context of the decision that the insurance policy in
question was found null and void, and did not have to be "rescinded".13

True, rescission presupposes the existence of a valid contract. A contract which is null and void is no contract at all and
hence could not be the subject of rescission.

WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is AFFIRMED insofar as it declared
Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance Corporation of no force and effect and hence
null and void. No costs.1âwphi1.nêt

SO ORDERED.

G.R. No. 158086 February 14, 2008

ASJ CORPORATION and ANTONIO SAN JUAN,petitioners,


vs.
SPS. EFREN & MAURA EVANGELISTA, respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the Decision1 dated April 30, 2003 of the Court of Appeals in CA-G.R. CV No. 56082, which had
affirmed the Decision2 dated July 8, 1996 of the Regional Trial Court (RTC) of Malolos, Bulacan, Branch 9 in Civil Case
No. 745-M-93. The Court of Appeals, after applying the doctrine of piercing the veil of corporate fiction, held petitioners
ASJ Corporation (ASJ Corp.) and Antonio San Juan solidarily liable to respondents Efren and Maura Evangelista for the
unjustified retention of the chicks and egg by-products covered by Setting Report Nos. 108 to 113.3

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

Respondents, under the name and style of R.M. Sy Chicks, are engaged in the large-scale business of buying broiler eggs,
hatching them, and selling their hatchlings (chicks) and egg by-products4 in Bulacan and Nueva Ecija. For the incubation
and hatching of these eggs, respondents availed of the hatchery services of ASJ Corp., a corporation duly registered in the
name of San Juan and his family.

Sometime in 1991, respondents delivered to petitioners various quantities of eggs at an agreed service fee of 80 centavos
per egg, whether successfully hatched or not. Each delivery was reflected in a "Setting Report" indicating the following: the
number of eggs delivered; the date of setting or the date the eggs were delivered and laid out in the incubators; the date of
candling or the date the eggs, through a lighting system, were inspected and determined if viable or capable of being
hatched into chicks; and the date of hatching, which is also the date respondents would pick-up the chicks and by-
products. Initially, the service fees were paid upon release of the eggs and by-products to respondents. But as their
business went along, respondents’ delays on their payments were tolerated by San Juan, who just carried over the
balance, as there may be, into the next delivery, out of keeping goodwill with respondents.

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From January 13 to February 3, 1993, respondents had delivered to San Juan a total of 101,3[50]5 eggs, detailed as
follows:6

Date Set SR Number No. of eggs delivered Date hatched/


Pick-up date
1/13/1993 SR 108 32,566 eggs February 3, 1993
1/20/1993 SR 109 21,485 eggs February 10, 1993
1/22/1993 SR 110 7,213 eggs February 12, 1993
1/28/1993 SR 111 14,495 eggs February 18, 1993
1/30/1993 SR 112 15,346 eggs February 20, 1993
2/3/1993 SR 113 10,24[5]7 eggs February 24, 1993
TOTAL 101,350 eggs

On February 3, 1993, respondent Efren went to the hatchery to pick up the chicks and by-products covered by Setting
Report No. 108, but San Juan refused to release the same due to respondents’ failure to settle accrued service fees on
several setting reports starting from Setting Report No. 90. Nevertheless, San Juan accepted from Efren 10,245 eggs
covered by Setting Report No. 113 and P15,000.008 in cash as partial payment for the accrued service fees.

On February 10, 1993, Efren returned to the hatchery to pick up the chicks and by-products covered by Setting Report
No. 109, but San Juan again refused to release the same unless respondents fully settle their accounts. In the afternoon
of the same day, respondent Maura, with her son Anselmo, tendered P15,000.009 to San Juan, and tried to claim the
chicks and by-products. She explained that she was unable to pay their balance because she was hospitalized for an
undisclosed ailment. San Juan accepted the P15,000.00, but insisted on the full settlement of respondents’ accounts
before releasing the chicks and by-products. Believing firmly that the total value of the eggs delivered was more than
sufficient to cover the outstanding balance, Maura promised to settle their accounts only upon proper accounting by San
Juan. San Juan disliked the idea and threatened to impound their vehicle and detain them at the hatchery compound if
they should come back unprepared to fully settle their accounts with him.

On February 11, 1993, respondents directed their errand boy, Allan Blanco, to pick up the chicks and by-products
covered by Setting Report No. 110 and also to ascertain if San Juan was still willing to settle amicably their differences.
Unfortunately, San Juan was firm in his refusal and reiterated his threats on respondents. Fearing San Juan’s threats,
respondents never went back to the hatchery.

The parties tried to settle amicably their differences before police authorities, but to no avail. Thus, respondents filed with
the RTC an action for damages based on petitioners’ retention of the chicks and by-products covered by Setting Report
Nos. 108 to 113.

On July 8, 1996, the RTC ruled in favor of respondents and made the following findings: (1) as of Setting Report No. 107,
respondents owed petitioners P102,336.80;10 (2) petitioners withheld the release of the chicks and by-products covered by
Setting Report Nos. 108-113;11 and (3) the retention of the chicks and by-products was unjustified and accompanied by
threats and intimidations on respondents.12 The RTC disregarded the corporate fiction of ASJ Corp.,13and held it and San
Juan solidarily liable to respondents for P529,644.80 as actual damages, P100,000.00 as moral damages, P50,000.00 as
attorney’s fees, plus interests and costs of suit. The decretal portion of the decision reads:

WHEREFORE, based on the evidence on record and the laws/jurisprudence applicable thereon, judgment is
hereby rendered ordering the defendants to pay, jointly and severally, unto the plaintiffs the amounts
of P529,644.80, representing the value of the hatched chicks and by-products which the plaintiffs on the average
expected to derive under Setting Reports Nos. 108 to 113, inclusive, with legal interest thereon from the date of
this judgment until the same shall have been fully paid, P100,000.00 as moral damages and P50,000.00 as
attorney’s fees, plus the costs of suit.

SO ORDERED.14

Both parties appealed to the Court of Appeals. Respondents prayed for an additional award of P76,139.00 as actual
damages for the cost of other unreturned by-products and P1,727,687.52 as unrealized profits, while petitioners prayed
for the reversal of the trial court’s entire decision.

On April 30, 2003, the Court of Appeals denied both appeals for lack of merit and affirmed the trial court’s decision, with
the slight modification of including an award of exemplary damages of P10,000.00 in favor of respondents. The Court of
Appeals, applying the doctrine of piercing the veil of corporate fiction, considered ASJ Corp. and San Juan as one entity,
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after finding that there was no bona fide intention to treat the corporation as separate and distinct from San Juan and his
wife Iluminada. The fallo of the Court of Appeals’ decision reads:

WHEREFORE, in view of the foregoing, the Decision appealed from is hereby AFFIRMED, with the slight
modification that exemplary damages in the amount of P10,000.00 are awarded to plaintiffs.

Costs against defendants.

SO ORDERED.15

Hence, the instant petition, assigning the following errors:

I.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING, AS DID THE COURT A QUO, THAT
PETITIONERS WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-PRODUCTS COVERED BY SETTING
REPORT NOS. 108 AND 109.

II.

THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING THE HEARSAY TESTIMONY OF MAURA
EVANGELISTA SUPPORTIVE OF ITS FINDINGS THAT PETITIONERS WITHHELD/OR FAILED TO RELEASE THE
CHICKS AND BY-PRODUCTS COVERED BY SETTING REPORT NOS. 108 AND 109.

III.

THE HONORABLE COURT OF APPEALS, AS DID THE COURT A QUO, ERRED IN NOT FINDING THAT
RESPONDENTS FAILED TO RETURN TO THE PLANT TO GET THE CHICKS AND BY-PRODUCTS COVERED BY
SETTING REPORT NOS. 110, 111, 112 AND 113.

IV.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING, AS DID THE COURT A QUO, THAT THE PIERCING
OF THE VEIL OF CORPORATE ENTITY IS JUSTIFIED, AND CONSEQUENTLY HOLDING PETITIONERS JOINTLY
AND SEVERALLY LIABLE TO PAY RESPONDENTS THE SUM OF P529,644.[80].

V.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS HAVE VIOLATED THE
PRINCIPLES ENUNCIATED IN ART. 19 OF THE NEW CIVIL CODE AND CONSEQUENTLY IN AWARDING MORAL
DAMAGES, EXEMPLARY DAMAGES AND ATTORNEY’S FEES.

VI.

THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING PETITIONERS’ COUNTERCLAIM.16

Plainly, the issues submitted for resolution are: First, did the Court of Appeals err when (a) it ruled that petitioners
withheld or failed to release the chicks and by-products covered by Setting Report Nos. 108 and 109; (b) it admitted the
testimony of Maura; (c) it did not find that it was respondents who failed to return to the hatchery to pick up the chicks
and by-products covered by Setting Report Nos. 110 to 113; and (d) it pierced the veil of corporate fiction and held ASJ
Corp. and Antonio San Juan as one entity? Second, was it proper to hold petitioners solidarily liable to respondents for
the payment of P529,644.80 and other damages?

In our view, there are two sets of issues that the petitioners have raised.

The first set is factual. Petitioners seek to establish a set of facts contrary to the factual findings of the trial and appellate
courts. However, as well established in our jurisprudence, only errors of law are reviewable by this Court in a petition for
review under Rule 45.17 The trial court, having had the opportunity to personally observe and analyze the demeanor of the

104
witnesses while testifying, is in a better position to pass judgment on their credibility. 18 More importantly, factual findings
of the trial court, when amply supported by evidence on record and affirmed by the appellate court, are binding upon this
Court and will not be disturbed on appeal.19 While there are exceptional circumstances20 when these findings may be set
aside, none of them is present in this case.

Based on the records, as well as the parties’ own admissions, the following facts were uncontroverted: (1) As of Setting
Report No. 107, respondents were indebted to petitioners for P102,336.80 as accrued service fees for Setting Report Nos.
90 to 107;21 (2) Petitioners, based on San Juan’s own admission,22 did not release the chicks and by-products covered by
Setting Report Nos. 108 and 109 for failure of respondents to fully settle their previous accounts; and (3) Due to San
Juan’s threats, respondents never returned to the hatchery to pick up those covered by Setting Report Nos. 110 to 113.23

Furthermore, although no hard and fast rule can be accurately laid down under which the juridical personality of a
corporate entity may be disregarded, the following probative factors of identity justify the application of the doctrine of
piercing the veil of corporate fiction24 in this case: (1) San Juan and his wife own the bulk of shares of ASJ Corp.; (2) The
lot where the hatchery plant is located is owned by the San Juan spouses; (3) ASJ Corp. had no other properties or
assets, except for the hatchery plant and the lot where it is located; (4) San Juan is in complete control of the corporation;
(5) There is no bona fide intention to treat ASJ Corp. as a different entity from San Juan; and (6) The corporate fiction of
ASJ Corp. was used by San Juan to insulate himself from the legitimate claims of respondents, defeat public convenience,
justify wrong, defend crime, and evade a corporation’s subsidiary liability for damages. 25 These findings, being purely one
of fact,26 should be respected. We need not assess and evaluate the evidence all over again where the findings of both
courts on these matters coincide.

On the second set of issues, petitioners contend that the retention was justified and did not constitute an abuse of rights
since it was respondents who failed to comply with their obligation. Respondents, for their part, aver that all the elements
on abuse of rights were present. They further state that despite their offer to partially satisfy the accrued service fees, and
the fact that the value of the chicks and by-products was more than sufficient to cover their unpaid obligations,
petitioners still chose to withhold the delivery.

The crux of the controversy, in our considered view, is simple enough. Was petitioners’ retention of the chicks and by-
products on account of respondents’ failure to pay the corresponding service fees unjustified? While the trial and appellate
courts had the same decisions on the matter, suffice it to say that a modification is proper. Worth stressing, petitioners’
act of withholding the chicks and by-products is entirely different from petitioners’ unjustifiable acts of threatening
respondents. The retention had legal basis; the threats had none.

To begin with, petitioners’ obligation to deliver the chicks and by-products corresponds to three dates: the date of
hatching, the delivery/pick-up date and the date of respondents’ payment. On several setting reports, respondents made
delays on their payments, but petitioners tolerated such delay. When respondents’ accounts accumulated because of their
successive failure to pay on several setting reports, petitioners opted to demand the full settlement of respondents’
accounts as a condition precedent to the delivery. However, respondents were unable to fully settle their accounts.

Respondents’ offer to partially satisfy their accounts is not enough to extinguish their obligation. Under Article 124827 of
the Civil Code, the creditor cannot be compelled to accept partial payments from the debtor, unless there is an express
stipulation to that effect. More so, respondents cannot substitute or apply as their payment the value of the chicks and
by-products they expect to derive because it is necessary that all the debts be for the same kind, generally of a monetary
character. Needless to say, there was no valid application of payment in this case.

Furthermore, it was respondents who violated the very essence of reciprocity in contracts, consequently giving rise to
petitioners’ right of retention. This case is clearly one among the species of non-performance of a reciprocal obligation.
Reciprocal obligations are those which arise from the same cause, wherein each party is a debtor and a creditor of the
other, such that the performance of one is conditioned upon the simultaneous fulfillment of the other.28 From the moment
one of the parties fulfills his obligation, delay by the other party begins.29

Since respondents are guilty of delay in the performance of their obligations, they are liable to pay petitioners actual
damages of P183,416.80, computed as follows: From respondents’ outstanding balance of P102,336.80, as of Setting
Report No. 107, we add the corresponding services fees of P81,080.0030 for Setting Report Nos. 108 to 113 which had
remain unpaid.

Nonetheless, San Juan’s subsequent acts of threatening respondents should not remain among those treated with
impunity. Under Article 1931 of the Civil Code, an act constitutes an abuse of right if the following elements are present:
(a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or
injuring another.32 Here, while petitioners had the right to withhold delivery, the high-handed and oppressive acts of
petitioners, as aptly found by the two courts below, had no legal leg to stand on. We need not weigh the corresponding
105
pieces of evidence all over again because factual findings of the trial court, when adopted and confirmed by the appellate
court, are binding and conclusive and will not be disturbed on appeal.33

Since it was established that respondents suffered some pecuniary loss anchored on petitioners’ abuse of rights, although
the exact amount of actual damages cannot be ascertained, temperate damages are recoverable. In arriving at a
reasonable level of temperate damages of P408,852.10, which is equivalent to the value of the chicks and by-products,
which respondents, on the average, are expected to derive, this Court was guided by the following factors: (a) award of
temperate damages will cover only Setting Report Nos. 109 to 113 since the threats started only on February 10 and 11,
1993, which are the pick-up dates for Setting Report Nos. 109 and 110; the rates of (b) 41% and (c) 17%, representing the
average rates of conversion of broiler eggs into hatched chicks and egg by-products as tabulated by the trial court based
on available statistical data which was unrebutted by petitioners; (d) 68,784 eggs,34 or the total number of broiler eggs
under Setting Report Nos. 109 to 113; and (e) P14.00 and (f) P1.20, or the then unit market price of the chicks and by-
products, respectively.

Thus, the temperate damages of P408,852.10 is computed as follows:

[b X (d X e) + c X (d X f)] = Temperate Damages

41% X (68,784 eggs X P14) = P394,820.16

17% X (68,784 eggs X P1.20) = P 14,031.94

[P394,820.16 + P14,031.94] = P408,852.10

At bottom, we agree that petitioners’ conduct flouts the norms of civil society and justifies the award of moral and
exemplary damages. As enshrined in civil law jurisprudence: Honeste vivere, non alterum laedere et jus suum cuique
tribuere. To live virtuously, not to injure others and to give everyone his due.35 Since exemplary damages are awarded,
attorney’s fees are also proper. Article 2208 of the Civil Code provides that:

In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be
recovered, except:

(1) When exemplary damages are awarded;

xxxx

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated April 30, 2003 of the Court of Appeals in CA-G.R.
CV No. 56082 is hereby MODIFIED as follows:

a. Respondents are ORDERED to pay petitioners P183,416.80 as actual damages, with interest of 6% from the date of
filing of the complaint until fully paid, plus legal interest of 12% from the finality of this decision until fully paid.

b. The award of actual damages of P529,644.80 in favor of respondents is hereby REDUCED to P408,852.10, with legal
interest of 12% from the date of finality of this judgment until fully paid.

c. The award of moral damages, exemplary damages and attorney’s fees of P100,000.00, P10,000.00, P50,000.00,
respectively, in favor of respondents is hereby AFFIRMED.

d. All other claims are hereby DENIED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-13602 April 6, 1918

LEUNG BEN, plaintiff,


vs.
P. J. O'BRIEN, JAMES A OSTRAND and GEO. R. HARVEY, judges of First Instance of city of Manila, defendants.
106
STREET, J.:

This is an application for a writ of certiorari, the purpose of which is to quash an attachment issued from the Court of
First Instance of the City of Manila under circumstances hereinbelow stated.

Upon December 12, 1917, an action was instituted in the Court of First Instance of the city of Manila by P. J. O'Brien to
recover of Leung Ben the sum of P15,000 alleged to have been lost by the plaintiff to the defendant in a series of gambling,
banking and percentage games conducted ruing the two or three months prior to the institution of the suit. In his verified
complaint the plaintiff asked for an attachment, under section 424, and 412 (1) of the Code of Civil Procedure, against the
property of the defendant, on the ground that the latter was about to depart from the Philippine islands with intent to
defraud his creditors. This attachment was issued; and acting under the authority thereof, the sheriff attached the sum of
P15,000 which had been deposited by the defendant with the International Banking Corporation.

The defendant thereupon appeared by his attorney and moved the court to quash the attachment. Said motion having
dismissed in the Court of First Instance, the petitioner, Leung Ben, the defendant in that action, presented to this court,
upon January 8, 1918 his petition for the writ of certiorari directed against P. J. O'Brien and the judges of the Court of
First Instance of the city of Manila whose names are mentioned in the caption hereof. The prayer is that the Honorable
James A. Ostrand, as the judge having cognizance of the action in said court be required to certify the record to this court
for review and that the order of attachment which had been issued should be revoked and discharged. with costs. Upon
the filing of said petition in this court the usual order was entered requiring the defendants to show cause why the writ
should not issue. The response of the defendants, in the nature of a demurrer, was filed upon January 21, 1918; and the
matter is now heard upon the pleadings thus presented.

The provision of law under which this attachment was issued requires that there should be accuse of action arising upon
contract, express or implied. The contention of the petitioner is that the statutory action to recover money lost at gaming
is that the statutory action to recover money lost at gaming is no such an action as is contemplated in this provision, and
he therefore insists that the original complaint shows on its face that the remedy of attachment is not available in aid
thereof; that the Court of First Instance acted in excess of its jurisdiction in granting the writ of attachment; that the
petitioner has no plain, speedy, and adequate remedy by appeal or otherwise; and that consequently the writ
of certiorari supplies the appropriate remedy for his relief.

The case presents the two following questions of law, either of which, if decided unfavorably to the petitioner, will be fatal
to his application:

(1) Supposing that the Court of First Instance has granted an attachment for which there is no statutory authority, can
this court entertain the present petition and grant the desired relief?

(2) Is the statutory obligation to restore money won at gaming an obligation arising from "contract, express or implied?"

We are of the opinion that the answer to the first question should be in the affirmative. Under section 514 of the Code of
Civil Procedure the Supreme Court has original jurisdiction by the writ of certiorari over the proceedings of Courts of First
Instance, wherever said courts have exceeded their jurisdiction and there is no plaint, speedy, and adequate remedy. In
the same section, it is further declared that the proceedings in the Supreme Court in such cases hall be as prescribed for
Courts of First Instance in section 217-221, inclusive, of said Code. This Supreme Court, so far as applicable, the
provisions contained in those section to the same extent as if they had been reproduced verbatim immediately after
section 514. Turning to section 217, we find that, in defining the conditions under which certiorari can be maintained in a
Court of First Instance substantially the same language is used as is the same remedy can be maintained in the Supreme
Court of First Instance, substantially the same language is used as is found in section 514 relative to the conditions under
which the same remedy can be maintained in the Supreme Court, namely, when the inferior tribunal has exceeded its
jurisdiction and there is no appeal, nor any plain, speedy and adequate remedy. In using these expressions the author of
the Code of Civil Procedure merely adopted the language which, in American jurisdictions at least, had long ago reached
the stage of stereotyped formula.

In section 220 of the same Code, we have a provision relative to the final proceedings in certiorari, and herein it is stated
that the court shall determine whether the inferior tribunal has regularly pursued its authority it shall give judgment
either affirming annulling, or modifying the proceedings below, as the law requires. The expression, has not regularly
pursued its authority as here used, is suggestive, and we think it should be construed in connection with the other
expressions have exceeded their jurisdiction, as used in section 514, and has exceeded their jurisdiction as used in
section 217. Taking the three together, it results in our opinion that any irregular exercise of juridical power by a Court of
First Instance, in excess of its lawful jurisdiction, is remediable by the writ of certiorari, provided there is no other plain,
speedy, and adequate remedy; and in order to make out a case for the granting of the writ it is not necessary that the
court should have acted in the matter without any jurisdiction whatever. Indeed the repeated use of expression excess of
107
jurisdiction shows that the lawmaker contemplated the situation where a court, having jurisdiction should irregularly
transcend its authority as well as the situation where the court is totally devoid of lawful power.

It may be observed in this connection that the word jurisdiction as used in attachment cases, has reference not only to
the authority of the court to entertain the principal action but also to its authority to issue the attachment, as dependent
upon the existence of the statutory ground. (6 C. J., 89.) This distinction between jurisdiction to issue the attachment as
an ancillary remedy incident to the principal litigation is of importance; as a court's jurisdiction over the main action may
be complete, and yet it may lack authority to grant an attachment as ancillary to such action. This distinction between
jurisdiction over the ancillary has been recognized by this court in connection with actions involving the appointment of a
receiver. Thus in Rocha & Co. vs. Crossfield and Figueras (6 Phil. Rep., 355), a receiver had been appointed without legal
justification. It was held that the order making the appointment was beyond the jurisdiction of the court; and though the
court admittedly had jurisdiction of the main cause, the order was vacated by this court upon application a writ
of certiorari. (See Blanco vs. Ambler, 3 Phil. Rep., 358, Blanco vs. Ambler and McMicking 3 Phil. Rep., 735, Yangco vs.
Rohde, 1 Phil. Rep., 404.)

By parity of reasoning it must follow that when a court issues a writ of attachment for which there is no statutory
authority, it is acting irregularly and in excess of its jurisdiction, in the sense necessary to justify the Supreme Court in
granting relief by the writ of certiorari. In applying this proposition it is of course necessary to take account of the
difference between a ground of attachment based on the nature of the action and a ground of attachment based on the
acts or the conditions of the defendant. Every complaint must show a cause of action some sort; and when the statue
declares that the attachment may issue in an action arising upon contract, the express or implied, it announces a
criterion which may be determined from an inspection of the language of the complaint. The determination of this
question is purely a matter of law. On the other hand, when the stature declares that an attachment may be issued when
the defendant is about to depart from the Islands, a criterion is announced which is wholly foreign to the cause of action;
and the determination of it may involve a disputed question of fact which must be decided by the court. In making this
determination, the court obviously acts within its powers; and it would be idle to suppose that the writ of certiorari would
be available to reverse the action of a Court of First Instance in determining the sufficiency of the proof on such a
disputed point, and in granting or refusing the attachment accordingly.

We should not be understood, in anything that has been said, as intending to infringe the doctrine enunciated by this
court in Herrera vs. Barretto and Joaquin (25 Phil. Rep., 245), when properly applied. It was there held that we would not,
upon application for a writ of certiorari, dissolve an interlocutory mandatory injunction that had been issued in a Court of
First Instance as an incident in an action of mandamus. The issuance of an interlocutory injunction depends upon
conditions essentially different from those involved in the issuance of an attachment. The injunction is designed primarily
for the prevention of irreparable injury and the use of the remedy is in a great measure dependent upon the exercise of
discretion. Generally, it may be said that the exercise of the injunctive powers is inherent in judicial authority; and
ordinarily it would be impossible to distinguish between the jurisdiction of the court in the main litigation and its
jurisdiction to grant an interlocutory injunction, for the latter is involved in the former. That the writ of certiorari can not
be used to reverse an order denying a motion for a preliminary injunction is of course not to cavil. (Somes vs. Crossfield
and Molina, 8 Phil. Rep., 284.)

But it will be said that the writ of certiorari is not available in this cae, because the petitioner is protected by the
attachment bond, and that he has a plain, speedy, and adequate remedy appeal. This suggestion seems to be sufficiently
answered in the case of Rocha & Co vs. Crossfield and Figueras (6 Phil. Rep., 355), already referred to, and the earlier
case there cited. The remedy by appeal is not sufficiently speedy to meet the exigencies of the case. An attachment is
extremely violent, and its abuse may often result in infliction of damage which could never be repaired by any pecuniary
award at the final hearing. To postpone the granting of the writ in such a case until the final hearing and to compel the
petitioner to bring the case here upon appeal merely in order to correct the action of the trial court in the matter of
allowing the attachment would seem both unjust and unnecessary.

Passing to the problem propounded in the second question it may be observed that, upon general principles,. recognize
both the civil and common law, money lost in gaming and voluntarily paid by the loser to the winner can not in the
absence of statue, be recovered in a civil action. But Act No. 1757 of the Philippine Commission, which defines and
penalizes several forms of gambling, contains numerous provisions recognizing the right to recover money lost in gambling
or in the playing of certain games (secs. 6, 7, 8, 9, 11). The original complaint in the action in the Court of First Instance
is not clear as to the particular section of Act No. 1757 under which the action is brought, but it is alleged that the money
was lost at gambling, banking, and percentage game in which the defendant was banker. It must therefore be assumed
that the action is based upon the right of recovery given in Section 7 of said Act, which declares that an action may be
brought against the banker by any person losing money at a banking or percentage game.

Is this a cause arising upon contract, express or implied, as this term is used in section 412 of the Code of Civil
Procedure? To begin the discussion, the English version of the Code of Civil Procedure is controlling (sec. 15, Admin.
Code, ed. of 1917). Furthermore it is universally admitted to be proper in the interpretation of any statute, to consider its
108
historical antecedents and its juris prudential sources. The Code of Civil Procedure, as is well known, is an American
contribution to Philippine legislation. It therefore speaks the language of the common-law and for the most part reflects its
ideas. When the draftsman of this Code used the expression contract, express or implied, he used a phrase that has been
long current among writers on American and English law; and it is therefore appropriate to resort to that system of law to
discover the appropriate to resort to that system of law to discover the meaning which the legislator intended to convey by
those meaning which the legislator intended to convey by those terms. We remark in passing that the expression contrato
tracito, used in the official translation of the Code of Civil Procedure as the Spanish equivalent of implied contract, does
not appear to render the full sense of the English expression.

The English contract law, so far as relates to simple contracts is planted upon two foundations, which are supplied by two
very different conceptions of legal liability. These two conceptions are revealed in the ideas respectively underlying (1) the
common- law debt and (2) the assumptual promise. In the early and formative stages of the common-law the only simple
contract of which the courts took account was the real contract or contract re, in which the contractual duty imposed by
law arises upon the delivery of a chattle, as in the mutuum, commodatum, depositum, and the like; and the purely
consensual agreements of the Roman Law found no congenial place in the early common law system.

In course of time the idea underlying the contract re was extended so as to include from one person to another under
such circumstances as to constitute a justa cuas debendi. The obligation thereby created was a debt. The constitutive
element in this litigation is found in the fact that the debtor has received something from the creditor, which he is bound
by the obligation of law to return or pay for. From an early day this element was denominated the quid pro quo, an
ungainly phrase coined by Mediaeval Latinity. The quid pro quo was primarily a materials or physical object, and its
constituted the recompense or equivalent acquired by the debtor. Upon the passage of the quid pro quo from one party to
the other, the law imposed that real contractual duty peculiar to the debt. No one conversant with the early history of
English law would ever conceive of the debt as an obligation created by promise. It is the legal duty to pay or deliver a sum
certain of money or an ascertainable quantity of ponderable or measurable chattles.

The ordinary debt, as already stated, originates in a contract in which a quid pro quo passes to the debtor at the time of
the creation of the debt, but the term is equally applicable to duties imposed by custom or statute, or by judgment of a
court.

The existence of a debt supposes one person to have possession of thing (res) which he owes and hence ought to turn
over the owner. This obligation is the oldest conception of contract with which the common law is familiar; and
notwithstanding the centuries that have rolled over Westminster Hall that conception remains as one of the fundamental
bases of the common-law contract.

Near the end of the fifteenth century there was evolved in England a new conception of contractual liability, which
embodied the idea of obligation resulting from promise and which found expression in the common law assumpsit, or
parol promise supported by a consideration. The application of this novel conception had the effect of greatly extending
the filed of contractual liability and by this means rights of action came to be recognized which had been unknown before.
The action of assumpsit which was the instrument for giving effect to this obligation was found to be a useful remedy; and
presently this action came to be used for the enforcement of common-law debts. The result was to give to our contract law
the superficial appearance of being based more or less exclusively upon the notion of the obligation of promise.

An idea is widely entertained to the effect that all simple contracts recognized in the common-law system are referable to a
singly category. They all have their roots, so many of us imagine, in one general notion of obligation; and of course the
obligation of promise is supposed to supply this general notion, being considered a sort of menstruum in which all other
forms of contractual obligation have been dissolved. This a mistake. The idea of contractual duty embodied in the debt
which was the first conception of contract liability revealed in the common law, has remained, although it was detained to
be in a measure obscured by the more modern conception of obligation resulting from promise.

What has been said is intended to exhibit the fact that the duty to pay or deliver a sum certain of money or an
ascertainable quantity of ponderable or measurable chattles — which is indicated by them debt — has ever been
recognized, in the common-law system, as a true contract, regardless, of the source of the duty or the manner in which it
is create — whether derived from custom, statue or some consensual transaction depending upon the voluntary acts of
the parties. the form of contract known as the debt is of the most ancient lineage; and when reference is had to historical
antecedents, the right of the debt to be classed as a contract cannot be questioned. Indeed when the new form of
engagement consisting of the parol promise supported by a consideration first appeared, it was looked upon as an upstart
and its right to be considered a true contract was questioned. It was long customary to refer to it exclusively as an
assumpsit, agreement, undertaking, or parol promise, in fact anything but a contract. Only in time did the new form of
engagement attain the dignity of being classed among true contract.

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The term implied takers us into shadowy domain of those obligations the theoretical classification of which has engaged
the attention of scholars from the time of Gaius until our own day and has been a source of as much difficulty to the
civilian as to the common-law jurist. There we are concerned with those acts which make one person debtor to another
without there having intervened between them any true agreement tending to produce a legal bond (vinculum juris). Of late
years some American and English writers have adopted the term quasi-contract as descriptive of these obligations or some
of them; but the expression more commonly used is implied contract.

Upon examination of these obligations, from the view point of the common-law jurisprudence, it will be found that they
fall readily into two divisions according as they bear an analogy to the common-law debt or to the common law assumpsit.
To exhibit the scope of these different classes of obligations is here impracticable. It is only necessary in this connection to
observe that the most conspicuous division is that which comprises duties in the nature of debt. The characteristic
feature of these obligations is that upon certain states of fact the law imposes an obligation to pay a sum certain of
money; and it is characteristic of this obligation that the money in respect to which the duty is raised is conceived as
being equivalent of something taken or detained under circumstances giving rise to the duty to return or compensate
therefore. The proposition that no one shall be allowed to enrich himself unduly at the expense of another embodies the
general principle here lying at the basis of obligation. The right to recover money improperly paid (repeticion de lo indebido)
is also recognized as belong to this class of duties.

It will observed that according to the Civil Code obligations are supposed to be derived either from (1) the law, (2)
contracts and quasi-contracts, (3) illicit acts and omission, or (4) acts in which some sort ob lame or negligence is present.
This enumeration of sources of obligations and the obligation imposed by law are different types. The learned Italian
jurist, Jorge Giorgi, criticises this assumption and says that the classification embodied in the code is theoretically
erroneous. His conclusion is that one or the other of these categories should have been suppressed and merged in the
other. (Giorgi, Teoria de las Obligaciones, Spanish ed., vol. 5 arts. 5, 7, 9.) The validity of this criticism is, we thin, self-
evident; and it is of interest to note that the common law makes no distinction between the two sources of liability. The
obligations which in the Code are indicated as quasi-contracts, as well as those arising ex lege, are in the common la
system, merged into the category of obligations imposed by law, and all are denominated implied contracts.

Many refinements, more or less illusory, have been attempted by various writers in distinguishing different sorts of
implied contracts, as for example, the contract implied as of fact and the contract implied as of law. No explanation of
these distinctions will be here attempted. Suffice it to say that the term contract, express or implied, is used to by
common-law jurists to include all purely personal obligations other than those which have their source in delict, or tort.
As to these it may be said that, generally speaking, the law does not impose a contractual duty upon a wrongdoer to
compensate for injury done. It is true that in certain situations where a wrongdoer unjustly acquired something at the
expense of another, the law imposes on him a duty to surrender his unjust acquisitions, and the injured party may here
elect to sue upon this contractual duty instead of suing upon the tort; but even here the distinction between the two
liabilities, in contract and in tort, is never lost to sight; and it is always recognized that the liability arising out of the tort
is delictual and not of a contractual or quasi-contractual nature.

In the case now under consideration the duty of the defendant to refund the money which he won from the plaintiff at
gaming is a duty imposed by statute. It therefore arises ex lege. Furthermore, it is a duty to return a certain sum which
had passed from the plaintiff to the defendant. By all the criteria which the common law supplies, this a duty in the
nature of debt and is properly classified as an implied contract. It is well- settled by the English authorities that money
lost in gambling or by lottery, if recoverable at all, can be recovered by the loser in an action of indebitatus assumpsit for
money had and received. (Clarke vs. Johnson. Lofft, 759; Mason vs. Waite, 17 Mass., 560; Burnham vs. Fisher, 25 Vt.,
514.) This means that in the common law the duty to return money won in this way is an implied contract, or quasi-
contract.

It is no argument to say in reply to this that the obligation here recognized is called an implied contract merely because
the remedy commonly used in suing upon ordinary contract can be here used, or that the law adopted the fiction of
promise in order to bring the obligation within the scope of the action of assumpsit. Such statements fail to express the
true import of the phenomenon. Before the remedy was the idea; and the use of the remedy could not have been approved
if it had not been for historical antecedents which made the recognition of this remedy at one logical and proper.
Furthermore, it should not be forgotten that the question is not how this duty but what sort of obligation did the author of
the Code of Civil Procedure intend to describe when he sued the term implied contract in section 412.

In what has been said we have assumed that the obligation which is at the foundation of the original action in the court
below is not a quasi-contract, when judge by the principles of the civil law. A few observations will show that this
assumption is not by any means free from doubt. The obligation in question certainly does not fall under the definition of
either of the two-quasi- contracts which are made the subject of special treatment in the Civil Code, for its does not arise
from a licit act as contemplated in article 1895. The obligation is clearly a creation of the positive law — a circumstance
which brings it within the purview of article 1090, in relation with article, 1089; and it is also derived from an illicit act,

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namely, the playing of a prohibited game. It is thus seen that the provisions of the Civil Code which might be consulted
with a view to the correct theoretical classification of this obligation are unsatisfactory and confusing.

The two obligations treated in the chapter devoted to quasi-contracts in the Civil Code are (1) the obligation incident to the
officious management of the affairs of other person (gestion de negocios ajenos) and (2) the recovery of what has been
improperly paid (cabro de lo indebido). That the authors of the Civil Code selected these two obligations for special
treatment does not signify an intention to deny the possibility of the existence of other quasi-contractual obligations. As is
well said by the commentator Manresa.

The number of the quasi-contracts may be indefinite as may be the number of lawful facts, the generations of the
said obligations; but the Code, just as we shall see further on, in the impracticableness of enumerating or
including them all in a methodical and orderly classification, has concerned itself with two only — namely, the
management of the affairs of other person and the recovery of things improperly paid — without attempting by
this to exclude the others. (Manresa, 2d ed., vol. 12, p. 549.)

It would indeed have been surprising if the authors of the Code, in the light of the jurisprudence of more than a thousand
years, should have arbitrarily assumed to limit the quasi-contract to two obligations. The author from whom we have just
quoted further observes that the two obligations in question were selected for special treatment in the Code not only
because they were the most conspicuous of the quasi-contracts, but because they had not been the subject of
consideration in other parts of the Code. (Opus citat., 550.)

It is well recognized among civilian jurists that the quasi- contractual obligations cover a wide range. The Italian jurist,
Jorge Giorgi, to whom we have already referred, considers under this head, among other obligations, the following:
payments made upon a future consideration which is not realized or upon an existing consideration which fails; payments
wrongfully made upon a consideration which is contrary to law, or opposed to public policy; and payments made upon a
vicious consideration or obtained by illicit means (Giorgi, Teoria de las Obligaciones, vol. 5, art. 130.)

Im permitting the recovery of money lost at play, Act No. 1757 has introduced modifications in the application of articles
1798, 180`, and 1305 of the Civil Code. The first two of these articles relate to gambling contracts, while article 1305
treats of the nullity of contracts proceeding from a vicious or illicit consideration. Taking all these provisions together, it
must be apparent that the obligation to return money lost at play has a decided affinity to contractual obligations; and we
believe that it could, without violence to the doctrines of the civil law, be held that such obligations is an innominate
quasi-contract. It is, however, unnecessary to place the decision on this ground.

From what has been said it follows that in our opinion the cause of action stated in the complaints in the court below is
based on a contract, express or implied and is therefore of such nature that the court had authority to issue writ of
attachment. The application for the writ of certiorari must therefore be denied and the proceedings dismissed. So ordered.

G.R. No. L-7089 August 31, 1954

DOMINGO DE LA CRUZ, plaintiff-appellant,


vs.
NORTHERN THEATRICAL ENTERPRISES INC., ET AL., defendants-appellees.

MONTEMAYOR, J.:

The facts in this case based on an agreed statement of facts are simple. In the year 1941 the Northern Theatrical
Enterprises Inc., a domestic corporation operated a movie house in Laoag, Ilocos Norte, and among the persons employed
by it was the plaintiff DOMINGO DE LA CRUZ, hired as a special guard whose duties were to guard the main entrance of
the cine, to maintain peace and order and to report the commission of disorders within the premises. As such guard he
carried a revolver. In the afternoon of July 4, 1941, one Benjamin Martin wanted to crash the gate or entrance of the
movie house. Infuriated by the refusal of plaintiff De la Cruz to let him in without first providing himself with a ticket,
Martin attacked him with a bolo. De la Cruz defendant himself as best he could until he was cornered, at which moment
to save himself he shot the gate crasher, resulting in the latter's death.

For the killing, De la Cruz was charged with homicide in Criminal Case No. 8449 of the Court of First Instance of Ilocos
Norte. After a re-investigation conducted by the Provincial Fiscal the latter filed a motion to dismiss the complaint, which
was granted by the court in January 1943. On July 8, 1947, De la Cruz was again accused of the same crime of homicide,
in Criminal Case No. 431 of the same Court. After trial, he was finally acquitted of the charge on January 31, 1948. In
both criminal cases De la Cruz employed a lawyer to defend him. He demanded from his former employer reimbursement
of his expenses but was refused, after which he filed the present action against the movie corporation and the three

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members of its board of directors, to recover not only the amounts he had paid his lawyers but also moral damages said to
have been suffered, due to his worry, his neglect of his interests and his family as well in the supervision of the cultivation
of his land, a total of P15,000. On the basis of the complaint and the answer filed by defendants wherein they asked for
the dismissal of the complaint, as well as the agreed statement of facts, the Court of First Instance of Ilocos Norte after
rejecting the theory of the plaintiff that he was an agent of the defendants and that as such agent he was entitled to
reimbursement of the expenses incurred by him in connection with the agency (Arts. 1709-1729 of the old Civil Code),
found that plaintiff had no cause of action and dismissed the complaint without costs. De la Cruz appealed directly to this
Tribunal for the reason that only questions of law are involved in the appeal.

We agree with the trial court that the relationship between the movie corporation and the plaintiff was not that of
principal and agent because the principle of representation was in no way involved. Plaintiff was not employed to
represent the defendant corporation in its dealings with third parties. He was a mere employee hired to perform a certain
specific duty or task, that of acting as special guard and staying at the main entrance of the movie house to stop gate
crashers and to maintain peace and order within the premises. The question posed by this appeal is whether an employee
or servant who in line of duty and while in the performance of the task assigned to him, performs an act which eventually
results in his incurring in expenses, caused not directly by his master or employer or his fellow servants or by reason of
his performance of his duty, but rather by a third party or stranger not in the employ of his employer, may recover said
damages against his employer.

The learned trial court in the last paragraph of its decision dismissing the complaint said that "after studying many laws
or provisions of law to find out what law is applicable to the facts submitted and admitted by the parties, has found none
and it has no other alternative than to dismiss the complaint." The trial court is right. We confess that we are not aware of
any law or judicial authority that is directly applicable to the present case, and realizing the importance and far-reaching
effect of a ruling on the subject-matter we have searched, though vainly, for judicial authorities and enlightenment. All the
laws and principles of law we have found, as regards master and servants, or employer and employee, refer to cases of
physical injuries, light or serious, resulting in loss of a member of the body or of any one of the senses, or permanent
physical disability or even death, suffered in line of duty and in the course of the performance of the duties assigned to
the servant or employee, and these cases are mainly governed by the Employer's Liability Act and the Workmen's
Compensation Act. But a case involving damages caused to an employee by a stranger or outsider while said employee
was in the performance of his duties, presents a novel question which under present legislation we are neither able nor
prepared to decide in favor of the employee.

In a case like the present or a similar case of say a driver employed by a transportation company, who while in the course
of employment runs over and inflicts physical injuries on or causes the death of a pedestrian; and such driver is later
charged criminally in court, one can imagine that it would be to the interest of the employer to give legal help to and
defend its employee in order to show that the latter was not guilty of any crime either deliberately or through negligence,
because should the employee be finally held criminally liable and he is found to be insolvent, the employer would be
subsidiarily liable. That is why, we repeat, it is to the interest of the employer to render legal assistance to its employee.
But we are not prepared to say and to hold that the giving of said legal assistance to its employees is a legal obligation.
While it might yet and possibly be regarded as a normal obligation, it does not at present count with the sanction of man-
made laws.

If the employer is not legally obliged to give, legal assistance to its employee and provide him with a lawyer, naturally said
employee may not recover the amount he may have paid a lawyer hired by him.

Viewed from another angle it may be said that the damage suffered by the plaintiff by reason of the expenses incurred by
him in remunerating his lawyer, is not caused by his act of shooting to death the gate crasher but rather by the filing of
the charge of homicide which made it necessary for him to defend himself with the aid of counsel. Had no criminal charge
been filed against him, there would have been no expenses incurred or damage suffered. So the damage suffered by
plaintiff was caused rather by the improper filing of the criminal charge, possibly at the instance of the heirs of the
deceased gate crasher and by the State through the Fiscal. We say improper filing, judging by the results of the court
proceedings, namely, acquittal. In other words, the plaintiff was innocent and blameless. If despite his innocence and
despite the absence of any criminal responsibility on his part he was accused of homicide, then the responsibility for the
improper accusation may be laid at the door of the heirs of the deceased and the State, and so theoretically, they are the
parties that may be held responsible civilly for damages and if this is so, we fail to see now this responsibility can be
transferred to the employer who in no way intervened, much less initiated the criminal proceedings and whose only
connection or relation to the whole affairs was that he employed plaintiff to perform a special duty or task, which task or
duty was performed lawfully and without negligence.

Still another point of view is that the damages incurred here consisting of the payment of the lawyer's fee did not flow
directly from the performance of his duties but only indirectly because there was an efficient, intervening cause, namely,
the filing of the criminal charges. In other words, the shooting to death of the deceased by the plaintiff was not the

112
proximate cause of the damages suffered but may be regarded as only a remote cause, because from the shooting to the
damages suffered there was not that natural and continuous sequence required to fix civil responsibility.

In view of the foregoing, the judgment of the lower court is affirmed. No costs.

G.R. No. 48541 August 21, 1989

BERNABE CASTILLO (In his own behalf, and in behalf of SERAPION CASTILLO, who has since then become
deceased, and EULOGIO CASTILLO, his minor child) and GENEROSA GALANG CASTILLO, petitioners-appellants,
vs.
THE HONORABLE COURT OF APPEALS, JUANITO ROSARIO and CRESENCIA ROSARIO, respondents-appellees.

FERNAN, C.J.:

In this petition for review on certiorari, petitioners seek the reversal of the February 13, 1978 decision of the Court of
Appeals in CA-G.R. No. 52567-R, entitled "Bernabe Castillo, et al. v. Juanita Rosario, et al," affirming the dismissal by the
Court of First Instance of Manila of the complaint for damages filed by petitioners against private respondents. Said
dismissal was decreed on the basis of the evidence before the trial court as well as the decision of the Court of Appeals in
CA-G.R. No. 07684-CR, entitled "People v. Juanito Rosario."

Petitioners and private respondents figured in a vehicular accident on May 2, 1965 at Bagac, Villasis, Pangasinan, which
caused injuries to their persons and damage to their respective vehicles.

The parties have conflicting versions as to what actually transpired on that fateful day; each party pointing to the
negligence of the other as the proximate cause of the accident. Thus, as expected in cases like this, the main issue is: Who
was at fault? According to the petitioners, the accident happened as follows: 1

On May 2, 1985, at about 2:00 o'clock in the afternoon, petitioner Bernabe Castillo was driving his jeep with Plate No. J-
4649 '64 Manila on the right lane of the McArthur Highway with Generosa Castillo, his wife, father Serapion Castillo,
seated in front and Eulogio Castillo, then a minor child, as passengers, bound and northward for Binmaley, Pangasinan
at the rate of 25 kilometers per hour. Just past San Nicolas bridge, Villasis, he noticed, from a distance of 120 meters
more or less, a speeding oncoming car with Plate No. L-27045 '64 Cavite, along the same lane (facing north) he was
driving, overtaking a cargo truck ahead of it. He switched on his headlights to signal the car to return to its own right lane
as the way was not clear for it to overtake the truck.

The car turned out to be driven by the private respondent, Juanito Rosario, with his wife, Cresencia Rosario. The signal
was disregarded, as the car proceeded on its direction southward on the right lane (facing north).lâwphî1.ñèt In order to
evade the impending collision, petitioner Bernabe Castillo swerved his jeep to the right towards the shoulder and applied
on the brakes, and leaving his feet on it, even, immediately after the impact. The car rested on the shoulder of the right
lane. The jeep's rear left wheel was on the road, leaving short tiremarks behind it; while the car left long tire-marks,
specially its left rear wheel. The jeep suffered a shattered windshield, pushed-in radiator. The left mid-portion of its
bumper badly dented. The car had a flat tire on its right front wheel; its right fender badly dented as the headlamp on top
of it. The bumber stooped downward, because it went thru under the bumper of the jeep.

The driver of the jeep, including his passengers suffered physical injuries. Bernabe Castillo, with the patella of his right
knee, fractured, suffered serious physical injuries, in other parts of his body. Serapion Castillo whose head crushed
through the windshield, was nearly beheaded, while the other two passengers suffered multiple slight and less serious
injuries.

Private respondents, on the other hand, have their own version of the accident and thus asseverate as follows: 2

Sometime in the early afternoon of May 2, 1965, the private respondents, together with their small daughter, were on their
way from San Carlos City (Pangasinan) to Olongapo City where they resided at the time and where Juanito Rosario, a
member of the US Navy, had been temporarily stationed. They rode in the family car. (TSN, C. Rosario, p. 35; J. Rosario,
pp. 2, 12 Annex "D", "Request for Admission")

At or about 2:30 p.m. of the same date, as Juanito Rosario who was driving the car, and his two passengers, were along
MacArthur Highway in Barrio Bacag, Villasis, Pangasinan, going towards the south, they saw ahead of them a big heavily
loaded cargo truck. (TSN, B. Castillo, p. 532, Annex "B", "Request for Admission") The truck was moving very slowly
because of its heavy load so that Juanito Rosario decided to overtake it. But before doing so, he first saw to it that the

113
road was clear and as additional precautionary measure, he blew his horn several times at the time he was overtaking the
truck. (TSN, Juanito Rosario, pp. 4, 11; C. Rosario, pp. 31-41, Annex "B", "Request for Admission")

Then as the car was about to overtake the slow moving cargo truck, the car's front left tire suddenly burst due to pressure
causing the car to swerve to the left and naturally making steering and control difficult. Because of the tendency of the car
to veer towards the left due to the blown out tire, the driver steered the car towards the direction where he could find a
safe place to park and fix the tire. He finally brought the car to a halt at the left shoulder of the road (facing south). (TSN,
C. Rosario, p. 31; J. Rosario, pp. 4, 17, Annex "D", "Request for Admission")

But barely had the said defendant parked his car on the left shoulder of the road and just as he was about to get off to fix
the flat tire, the car was suddenly bumped by the jeep driven by Bernabe Castillo which came from the opposite direction.
(TSN, C. Rosario, p. 32; J. Rosario, p. 6, "Request for Admission") Both vehicles were damaged, the car suffering the
heavier damage. (Please see Annex "C", "Request for Admission") Passengers of the jeep sustained injuries while those of
the car were badly shaken.

On June 30, 1965, a civil case for the recovery of damages for the injuries sustained by petitioners and for the damage to
their vehicle as a result of the collision, was instituted by the petitioners in the Court of First Instance of Manila. While
this case was pending, the Provincial Fiscal of Pangasinan filed an information dated September 29, 1965 against Juanito
Rosario, private respondent herein, for double physical injuries; double less serious physical injuries; and damage to
property thru reckless imprudence, in the Court of First Instance of Urdaneta. Respondent Juanito Rosario was
prosecuted and convicted by the trial court in the criminal case. He appealed to the Court of Appeals, which rendered a
decision 3 acquitting him from the crime charged on the ground that his guilt has not been proved beyond reasonable
doubt.

In the meantime, private respondents thru counsel, filed a "Request for Admission" 4 on April 3, 1972 in the civil case,
requesting petitioners to admit the truthfulness of the facts set forth therein as well as the correctness and genuineness of
the documents attached thereto. On May 5,1972, petitioners filled a "Manifestation", 5 admitting the allegations in the
"Request for Admission" with some qualifications. Later, both parties submitted their respective memoranda.

On the basis of the testimonies and evidence submitted by the petitioners, as well as the records of the criminal case
attached in the "Request for Admission" of the private respondents, the Court of First Instance of Manila rendered a
decision 6 on December 28, 1972, dismissing the complaint of the petitioners against private respondents as well as the
counterclaim of private respondents against the petitioners. On January 24, 1973, petitioners appealed to the Court of
Appeals. On February 13, 1978, the Court of Appeals affirmed the decision 7of the Court of First Instance of Manila.

Hence, the present petition for review on certiorari. 8The petitioners-appellants raise in issue before Us the following
questions, to wit:

1) Is the decision of the Court of Appeals, where its dispositive part, or "fallo", states that the guilt of the (appellant)
accused was not proved beyond reasonable doubt final and conclusive, on an action for damages based on quasi-delict?;

2) Are the testimonies given in a criminal case, without strict compliance with Section 41 Rule 130 and without
opportunity to cross examine the witnesses who made these testimonies, admissible evidence in a subsequent case and
can be the basis of a valid decision?;

3) Is an action for damages based on quasi-delict barred by a decision of the appellate court acquitting the accused, the
body of which lays the blame on the plaintiff but in its dispositive part, declares the guilt of the accused not proved
beyond reasonable doubt ? 9

The main thrust of this petition for review which stems from a cause of action based on quasi-delict or culpa
aquiliana (being a recovery for damages arising from the vehicular accident), is that petitioners were deprived of due
process because their civil action was decided on the basis of private respondent Juanita Rosario's acquittal in the
criminal case for reckless imprudence.

There is no dispute that the subject action for damages, being civil in nature, is separate and distinct from the criminal
aspect, necessitating only a preponderance of evidence. According to a number of cases, 10 a quasi-delict or culpa
aquiliana is a separate legal institution under the Civil Code, with a substantively all its own, and individuality that is
entirely apart and independent from a delict or crime. A distinction exists between the civil liability arising from a crime
and the responsibility for quasi-delicts or culpa extra-contractual. The same negligence causing damages may produce
civil liability arising from a crime under the Penal Code, or create an action for quasidelictos or culpa extra-contractual
under the Civil Code. Therefore, the acquittal or conviction in the criminal case is entirely irrelevant in the civil case. 11

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In the case of Azucena v. Potenciano, L-14028, June 30, 1962, 5 SCRA 468, 470-471, this Court held:

... in the criminal case for reckless imprudence resulting in serious physical injuries ..., the judgment of acquittal does not
operate to extinguish the civil liability of the defendant based on the same incident. The civil action is entirely independent
of the criminal case according to Articles 33 and 2177 of the Civil Code. There can be no logical conclusion than this, for
to subordinate the civil action contemplated in the said articles to the result of the criminal prosecution — whether it be
conviction or acquittal — would render meaningless the independent character of the civil action and the clear injunction
in Article 31, that his action may proceed independently of the criminal proceedings and regardless of the result of the
latter.

But this rule is not without exception. Thus, Section 2 (c) of Rule 111 of the Rules of Court provides:

Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds
from a declaration from a final judgment that the fact from which the civil action might arise did not exist.

In a previous case, CA-G.R. No. 07684-CR, People v. Rosario, the Court of Appeals after a painstaking analysis of. (a) the
testimonial evidence; (b) the relative positions of the two vehicles as depicted in the sketches; (c) the distance of each of
the two vehicles from the cemented edge of the road; (d) the point of impact; (e) the visible tire marks, and (f) the extent of
the damage caused upon each of the two vehicles, ruled that it was the driver of the jeep and not the accused driver of the
car who was negligent and accordingly acquitted the latter. 12

Negligence, being the source and foundation of actions of quasi-delict, is the basis for the recovery of damages. In the case
at bar, the Court of Appeals found that no negligence was committed by Juanito Rosario to warrant an award of damages
to the petitioners.

Respondent Appellate Court states:

In acquitting defendant-appellee Juanito Rosario in CA-G.R. No. 07684-CR on October 28, 1968, this Court held that the
collision was not due to the negligence of Juanito Rosario but it was Castillo's own act of driving the jeep to the shoulder
[of the road] where the car was that was actually the proximate cause of the collision.' (Ibid., p. 183) With this finding, this
Court actually exonerated appellee Juanito Rosario from civil liability. Since plaintiffs-appellants' civil action is predicated
upon Juanito Rosario's alleged negligence which does not exist, it follows that his acquittal in the criminal action, which is
already final, carried with it the extinction of civil responsibility arising therefrom. (Corpus vs. Paje, 28 SCRA 1062, 1064,
1067; Faraon vs. Priela, 24 SCRA 582, 583; De Soriano vs. Albornoz, 98 Phil. 785, 787788; Tan vs. Standard Vacuum Oil
Co., 91 Phil. 672, 675). 13

It was the Court of Appeals findings that the collision was not due to the negligence of Juanita Rosario but rather it was
Castillo's own act of driving the jeep to the shoulder of the road where the car was, which was actually the proximate
cause of the collision. With this findings, the Court of Appeals exonerated Juanito Rosario from civil liability on the
ground that the alleged negligence did not exist.

As earlier stated, the questioned decision of the Court of Appeals was an affirmation of the decision of the Court of First
Instance of Manila. During the trial of the case before the Court of First Instance, the private respondents were not
present, in view of the fact that they were out of the country at that time. Their counsel introduced as part of their
evidence, the records in the criminal case, in accordance with Section 41, Rule 130 of the Rules of Court. 14 These records
were attached to their "Request for Admission" and were substantially admitted by petitioners. The said records were
mostly composed of transcripts of the hearing in the criminal case. Petitioners raised, as one of their objections, the
propriety and correctness of admitting and adopting these transcripts as part of the record in the civil case. According to
them, this is a violation of Section 41, Rule 130 of the Rules of Court, on the ground that petitioners were not given the
opportunity to cross-examine. We have to disagree. A careful reading of the transcripts would reveal that then counsel for
petitioners, Atty. Nicodemo Ferrer, actively participated during the proceedings of the criminal case. He raised various
objections, 15 in the course of the trial. Petitioners, therefore, thru counsel had the opportunity to cross-examine the
witnesses.

Thus, the admission of the said testimonies cannot be set aside.

Finally, in a long line of decisions, this Court has held time and again that the findings of facts by the Court of Appeals
are conclusive and not reviewable by the Supreme Court. 16

In Macadangdang v. Court of Appeals, 100 SCRA 73 and Tolentino v. De Jesus, 56 SCRA 167, it was held that:

115
Findings of fact of the Court of Appeals are conclusive on the parties and on the Supreme Court, unless (1) the conclusion
is a finding grounded entirely on speculations, surmises and conjectures; (2) the inference made is manifestly mistaken;
(3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the Court of Appeals went
beyond the issues of the case and its findings are contrary to the admission of both appellant and appellee; (6) the
findings of facts of the Court of Appeals are contrary to those of the trial court; (7) said findings of facts are conclusions
without citation of specific evidence on which they are based; (8) the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; and (9) when the finding of facts of the Court of
Appeals is premised on the absence of evidence and is contradicted by evidence on record.

Finding that the questioned decision does not fall under any of the exceptions cited above, we find no cogent reason to
disturb the findings and conclusions of the Court of Appeals.

WHEREFORE, in view of the foregoing, the petition is hereby denied. No pronouncement as to costs.

SO ORDERED.

G.R. No. 72964 January 7, 1988

FILOMENO URBANO, petitioner,


vs.
HON. INTERMEDIATE APPELLATE COURT AND PEOPLE OF THE PHILIPPINES, respondents.

GUTIERREZ, JR., J.:

This is a petition to review the decision of the then Intermediate Appellate Court which affirmed the decision of the then
Circuit Criminal Court of Dagupan City finding petitioner Filomeno Urban guilty beyond reasonable doubt of the crime of
homicide.

The records disclose the following facts of the case.

At about 8:00 o'clock in the morning of October 23, 1980, petitioner Filomeno Urbano went to his ricefield at Barangay
Anonang, San Fabian, Pangasinan located at about 100 meters from the tobacco seedbed of Marcelo Javier. He found the
place where he stored his palay flooded with water coming from the irrigation canal nearby which had overflowed. Urbano
went to the elevated portion of the canal to see what happened and there he saw Marcelo Javier and Emilio Erfe cutting
grass. He asked them who was responsible for the opening of the irrigation canal and Javier admitted that he was the one.
Urbano then got angry and demanded that Javier pay for his soaked palay. A quarrel between them ensued. Urbano
unsheathed his bolo (about 2 feet long, including the handle, by 2 inches wide) and hacked Javier hitting him on the right
palm of his hand, which was used in parrying the bolo hack. Javier who was then unarmed ran away from Urbano but
was overtaken by Urbano who hacked him again hitting Javier on the left leg with the back portion of said bolo, causing a
swelling on said leg. When Urbano tried to hack and inflict further injury, his daughter embraced and prevented him from
hacking Javier.

Immediately thereafter, Antonio Erfe, Emilio Erfe, and Felipe Erfe brought Javier to his house about 50 meters away from
where the incident happened. Emilio then went to the house of Barangay Captain Menardo Soliven but not finding him
there, Emilio looked for barrio councilman Felipe Solis instead. Upon the advice of Solis, the Erfes together with Javier
went to the police station of San Fabian to report the incident. As suggested by Corporal Torio, Javier was brought to a
physician. The group went to Dr. Guillermo Padilla, rural health physician of San Fabian, who did not attend to Javier but
instead suggested that they go to Dr. Mario Meneses because Padilla had no available medicine.

After Javier was treated by Dr. Meneses, he and his companions returned to Dr. Guillermo Padilla who conducted a
medico-legal examination. Dr. Padilla issued a medico-legal certificate (Exhibit "C" dated September 28, 1981) which
reads:

TO WHOM IT MAY CONCERN:

This is to certify that I have examined the wound of Marcelo Javier, 20 years of age, married, residing at
Barangay Anonang, San Fabian, Pangasinan on October 23, 1980 and found the following:

1 -Incised wound 2 inches in length at the upper portion of the lesser palmar prominence, right.

116
As to my observation the incapacitation is from (7-9) days period. This wound was presented to me only
for medico-legal examination, as it was already treated by the other doctor. (p. 88, Original Records)

Upon the intercession of Councilman Solis, Urbano and Javier agreed to settle their differences. Urbano promised to pay
P700.00 for the medical expenses of Javier. Hence, on October 27, 1980, the two accompanied by Solis appeared before
the San Fabian Police to formalize their amicable settlement. Patrolman Torio recorded the event in the police blotter
(Exhibit A), to wit:

xxx xxx xxx

Entry Nr 599/27 Oct '80/103OH/ Re entry Nr 592 on page 257 both parties appeared before this Station accompanied by
brgy. councilman Felipe Solis and settled their case amicably, for they are neighbors and close relatives to each other.
Marcelo Javier accepted and granted forgiveness to Filomeno Urbano who shoulder (sic) all the expenses in his medical
treatment, and promising to him and to this Office that this will never be repeated anymore and not to harbour any
grudge against each other. (p. 87, Original Records.)

Urbano advanced P400.00 to Javier at the police station. On November 3, 1980, the additional P300.00 was given to
Javier at Urbano's house in the presence of barangay captain Soliven.

At about 1:30 a.m. on November 14, 1980, Javier was rushed to the Nazareth General Hospital in a very serious
condition. When admitted to the hospital, Javier had lockjaw and was having convulsions. Dr. Edmundo Exconde who
personally attended to Javier found that the latter's serious condition was caused by tetanus toxin. He noticed the
presence of a healing wound in Javier's palm which could have been infected by tetanus.

On November 15, 1980 at exactly 4:18 p.m., Javier died in the hospital. The medical findings of Dr. Exconde are as
follows:

Date Diagnosis

11-14-80 ADMITTED due to trismus

adm. at DX TETANUS

1:30 AM Still having frequent muscle spasm. With diffi-

#35, 421 culty opening his mouth. Restless at times. Febrile

11-15-80 Referred. Novaldin 1 amp. inj. IM. Sudden cessation of respiration and HR after muscular spasm.

02 inhalation administered. Ambo bag resuscittion and cardiac massage done but to no avail.

Pronounced dead by Dra. Cabugao at 4:18 P.M.

PMC done and cadaver brought home by relatives. (p. 100, Original Records)

In an information dated April 10, 1981, Filomeno Urbano was charged with the crime of homicide before the then Circuit
Criminal Court of Dagupan City, Third Judicial District.

Upon arraignment, Urbano pleaded "not guilty." After trial, the trial court found Urbano guilty as charged. He was
sentenced to suffer an indeterminate prison term of from TWELVE (12) YEARS of prision mayor, as minimum to
SEVENTEEN (17) years, FOUR (4) MONTHS and ONE (1) DAY of reclusion temporal, as maximum, together with the
accessories of the law, to indemnify the heirs of the victim, Marcelo Javier, in the amount of P12,000.00 without
subsidiary imprisonment in case of insolvency, and to pay the costs. He was ordered confined at the New Bilibid Prison, in
Muntinlupa, Rizal upon finality of the decision, in view of the nature of his penalty.

The then Intermediate Appellate Court affirmed the conviction of Urbano on appeal but raised the award of indemnity to
the heirs of the deceased to P30,000.00 with costs against the appellant.

117
The appellant filed a motion for reconsideration and/or new trial. The motion for new trial was based on an affidavit of
Barangay Captain Menardo Soliven (Annex "A") which states:

That in 1980, I was the barrio captain of Barrio Anonang, San Fabian, Pangasinan, and up to the present
having been re-elected to such position in the last barangay elections on May 17, 1982;

That sometime in the first week of November, 1980, there was a typhoon that swept Pangasinan and
other places of Central Luzon including San Fabian, a town of said province;

That during the typhoon, the sluice or control gates of the Bued irrigation dam which irrigates the
ricefields of San Fabian were closed and/or controlled so much so that water and its flow to the canals
and ditches were regulated and reduced;

That due to the locking of the sluice or control gates of the dam leading to the canals and ditches which
will bring water to the ricefields, the water in said canals and ditches became shallow which was suitable
for catching mudfishes;

That after the storm, I conducted a personal survey in the area affected, with my secretary Perfecto
Jaravata;

That on November 5, 1980, while I was conducting survey, I saw the late Marcelo Javier catching fish in
the shallow irrigation canals with some companions;

That few days there after,or on November l5, l980, I came to know that said Marcelo Javier died of
tetanus. (p. 33, Rollo)

The motion was denied. Hence, this petition.

In a resolution dated July 16, 1986, we gave due course to the petition.

The case involves the application of Article 4 of the Revised Penal Code which provides that "Criminal liability shall be
incurred: (1) By any person committing a felony (delito) although the wrongful act done be different from that which he
intended ..." Pursuant to this provision "an accused is criminally responsible for acts committed by him in violation of law
and for all the natural and logical consequences resulting therefrom." (People v. Cardenas, 56 SCRA 631).

The record is clear that Marcelo Javier was hacked by the petitioner who used a bolo as a result of which Javier suffered a
2-inch incised wound on his right palm; that on November 14, 1981 which was the 22nd day after the incident, Javier
was rushed to the hospital in a very serious condition and that on the following day, November 15, 1981, he died from
tetanus.

Under these circumstances, the lower courts ruled that Javier's death was the natural and logical consequence of
Urbano's unlawful act. Hence, he was declared responsible for Javier's death. Thus, the appellate court said:

The claim of appellant that there was an efficient cause which supervened from the time the deceased was wounded to the
time of his death, which covers a period of 23 days does not deserve serious consideration. True, that the deceased did not
die right away from his wound, but the cause of his death was due to said wound which was inflicted by the appellant.
Said wound which was in the process of healing got infected with tetanus which ultimately caused his death.

Dr. Edmundo Exconde of the Nazareth General Hospital testified that the victim suffered lockjaw because of the infection
of the wound with tetanus. And there is no other way by which he could be infected with tetanus except through the
wound in his palm (tsn., p. 78, Oct. 5, 1981). Consequently, the proximate cause of the victim's death was the wound
which got infected with tetanus. And the settled rule in this jurisdiction is that an accused is liable for all the
consequences of his unlawful act. (Article 4, par. 1, R.P.C. People v. Red, CA 43 O.G. 5072; People v. Cornel 78 Phil. 418).

Appellant's allegation that the proximate cause of the victim's death was due to his own negligence in going back to work
without his wound being properly healed, and lately, that he went to catch fish in dirty irrigation canals in the first week
of November, 1980, is an afterthought, and a desperate attempt by appellant to wiggle out of the predicament he found
himself in. If the wound had not yet healed, it is impossible to conceive that the deceased would be reckless enough to
work with a disabled hand. (pp. 20-21, Rollo)

118
The petitioner reiterates his position that the proximate cause of the death of Marcelo Javier was due to his own
negligence, that Dr. Mario Meneses found no tetanus in the injury, and that Javier got infected with tetanus when after
two weeks he returned to his farm and tended his tobacco plants with his bare hands exposing the wound to harmful
elements like tetanus germs.

The evidence on record does not clearly show that the wound inflicted by Urbano was infected with tetanus at the time of
the infliction of the wound. The evidence merely confirms that the wound, which was already healing at the time Javier
suffered the symptoms of the fatal ailment, somehow got infected with tetanus However, as to when the wound was
infected is not clear from the record.

In Vda. de Bataclan, et al. v. Medina (102 Phil. 1181), we adopted the following definition of proximate cause:

xxx xxx xxx

... A satisfactory definition of proximate cause is found in Volume 38, pages 695-696 of American Jurisprudence, cited by
plaintiffs-appellants in their brief. It is as follows:

... "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the
injury, and without which the result would not have occurred."And more comprehensively, "the proximate legal cause is
that acting first and producing the injury, either immediately or by setting other events in motion, all constituting a
natural and continuous chain of events, each having a close causal connection with its immediate predecessor, the final
event in the chain immediately effecting the injury as a natural and probable result of the cause which first acted, under
such circumstances that the person responsible for the first event should, as an ordinarily prudent and intelligent person,
have reasonable ground to expect at the moment of his act or default that an injury to some person might probably result
therefrom." (at pp. 185-186)

The issue, therefore, hinges on whether or not there was an efficient intervening cause from the time Javier was wounded
until his death which would exculpate Urbano from any liability for Javier's death.

We look into the nature of tetanus-

The incubation period of tetanus, i.e., the time between injury and the appearance of unmistakable symptoms, ranges from
2 to 56 days. However, over 80 percent of patients become symptomatic within 14 days. A short incubation period indicates
severe disease, and when symptoms occur within 2 or 3 days of injury the mortality rate approaches 100 percent.

Non-specific premonitory symptoms such as restlessness, irritability, and headache are encountered occasionally, but the
commonest presenting complaints are pain and stiffness in the jaw, abdomen, or back and difficulty swallowing. As the
progresses, stiffness gives way to rigidity, and patients often complain of difficulty opening their mouths. In fact, trismus
in the commonest manifestation of tetanus and is responsible for the familiar descriptive name of lockjaw. As more
muscles are involved, rigidity becomes generalized, and sustained contractions called risus sardonicus. The intensity and
sequence of muscle involvement is quite variable. In a small proportion of patients, only local signs and symptoms develop
in the region of the injury. In the vast majority, however, most muscles are involved to some degree, and the signs and
symptoms encountered depend upon the major muscle groups affected.

Reflex spasm usually occur within 24 to 72 hours of the first symptom, an interval referred to as the onset time. As in the
case of the incubation period, a short onset time is associated with a poor prognosis. Spasms are caused by sudden
intensification of afferent stimuli arising in the periphery, which increases rigidity and causes simultaneous and excessive
contraction of muscles and their antagonists. Spasms may be both painful and dangerous. As the disease progresses,
minimal or inapparent stimuli produce more intense and longer lasting spasms with increasing frequency. Respiration
may be impaired by laryngospasm or tonic contraction of respiratory muscles which prevent adequate ventilation. Hypoxia
may then lead to irreversible central nervous system damage and death.

Mild tetanus is characterized by an incubation period of at least 14 days and an onset time of more than 6 days. Trismus is
usually present, but dysphagia is absent and generalized spasms are brief and mild. Moderately severe tetanus has a
somewhat shorter incubation period and onset time; trismus is marked, dysphagia and generalized rigidity are present,
but ventilation remains adequate even during spasms. The criteria for severe tetanus include a short incubation time, and
an onset time of 72 hrs., or less, severe trismus, dysphagia and rigidity and frequent prolonged, generalized convulsive
spasms. (Harrison's Principle of Internal Medicine, 1983 Edition, pp. 1004-1005; Emphasis supplied)

Therefore, medically speaking, the reaction to tetanus found inside a man's body depends on the incubation period of the
disease.
119
In the case at bar, Javier suffered a 2-inch incised wound on his right palm when he parried the bolo which Urbano used
in hacking him. This incident took place on October 23, 1980. After 22 days, or on November 14, 1980, he suffered the
symptoms of tetanus, like lockjaw and muscle spasms. The following day, November 15, 1980, he died.

If, therefore, the wound of Javier inflicted by the appellant was already infected by tetanus germs at the time, it is more
medically probable that Javier should have been infected with only a mild cause of tetanus because the symptoms of
tetanus appeared on the 22nd day after the hacking incident or more than 14 days after the infliction of the wound.
Therefore, the onset time should have been more than six days. Javier, however, died on the second day from the onset
time. The more credible conclusion is that at the time Javier's wound was inflicted by the appellant, the severe form of
tetanus that killed him was not yet present. Consequently, Javier's wound could have been infected with tetanus after the
hacking incident. Considering the circumstance surrounding Javier's death, his wound could have been infected by
tetanus 2 or 3 or a few but not 20 to 22 days before he died.

The rule is that the death of the victim must be the direct, natural, and logical consequence of the wounds inflicted upon
him by the accused. (People v. Cardenas, supra) And since we are dealing with a criminal conviction, the proof that the
accused caused the victim's death must convince a rational mind beyond reasonable doubt. The medical findings,
however, lead us to a distinct possibility that the infection of the wound by tetanus was an efficient intervening cause later
or between the time Javier was wounded to the time of his death. The infection was, therefore, distinct and foreign to the
crime. (People v. Rellin, 77 Phil. 1038).

Doubts are present. There is a likelihood that the wound was but the remote cause and its subsequent infection, for
failure to take necessary precautions, with tetanus may have been the proximate cause of Javier's death with which the
petitioner had nothing to do. As we ruled in Manila Electric Co. v. Remoquillo, et al. (99 Phil. 118).

"A prior and remote cause cannot be made the be of an action if such remote cause did nothing more than furnish the
condition or give rise to the occasion by which the injury was made possible, if there intervened between such prior or
remote cause and the injury a distinct, successive, unrelated, and efficient cause of the injury, even though such injury
would not have happened but for such condition or occasion. If no danger existed in the condition except because of the
independent cause, such condition was not the proximate cause. And if an independent negligent act or defective
condition sets into operation the instances which result in injury because of the prior defective condition, such
subsequent act or condition is the proximate cause." (45 C.J. pp. 931-932). (at p. 125)

It strains the judicial mind to allow a clear aggressor to go scot free of criminal liability. At the very least, the records show
he is guilty of inflicting slight physical injuries. However, the petitioner's criminal liability in this respect was wiped out by
the victim's own act. After the hacking incident, Urbano and Javier used the facilities of barangay mediators to effect a
compromise agreement where Javier forgave Urbano while Urbano defrayed the medical expenses of Javier. This
settlement of minor offenses is allowed under the express provisions of Presidential Decree G.R. No. 1508, Section 2(3).
(See also People v. Caruncho, 127 SCRA 16).

We must stress, however, that our discussion of proximate cause and remote cause is limited to the criminal aspects of
this rather unusual case. It does not necessarily follow that the petitioner is also free of civil liability. The well-settled
doctrine is that a person, while not criminally liable, may still be civilly liable. Thus, in the recent case of People v. Rogelio
Ligon y Tria, et al. (G.R. No. 74041, July 29, 1987), we said:

xxx xxx xxx

... While the guilt of the accused in a criminal prosecution must be established beyond reasonable doubt, only a
preponderance of evidence is required in a civil action for damages. (Article 29, Civil Code). The judgment of acquittal
extinguishes the civil liability of the accused only when it includes a declaration that the facts from which the civil liability
might arise did not exist. (Padilla v. Court of Appeals, 129 SCRA 559).

The reason for the provisions of article 29 of the Civil Code, which provides that the acquittal of the accused on the
ground that his guilt has not been proved beyond reasonable doubt does not necessarily exempt him from civil liability for
the same act or omission, has been explained by the Code Commission as follows:

The old rule that the acquittal of the accused in a criminal case also releases him from civil liability is one of the most
serious flaws in the Philippine legal system. It has given use to numberless instances of miscarriage of justice, where the
acquittal was due to a reasonable doubt in the mind of the court as to the guilt of the accused. The reasoning followed is
that inasmuch as the civil responsibility is derived from the criminal offense, when the latter is not proved, civil liability
cannot be demanded.

120
This is one of those causes where confused thinking leads to unfortunate and deplorable consequences. Such reasoning
fails to draw a clear line of demarcation between criminal liability and civil responsibility, and to determine the logical
result of the distinction. The two liabilities are separate and distinct from each other. One affects the social order and the
other, private rights. One is for the punishment or correction of the offender while the other is for reparation of damages
suffered by the aggrieved party. The two responsibilities are so different from each other that article 1813 of the present
(Spanish) Civil Code reads thus: "There may be a compromise upon the civil action arising from a crime; but the public
action for the imposition of the legal penalty shall not thereby be extinguished." It is just and proper that, for the purposes
of the imprisonment of or fine upon the accused, the offense should be proved beyond reasonable doubt. But for the
purpose of indemnity the complaining party, why should the offense also be proved beyond reasonable doubt? Is not the
invasion or violation of every private right to be proved only by a preponderance of evidence? Is the right of the aggrieved
person any less private because the wrongful act is also punishable by the criminal law?

"For these reasons, the Commission recommends the adoption of the reform under discussion. It will correct a serious
defect in our law. It will close up an inexhaustible source of injustice-a cause for disillusionment on the part of the
innumerable persons injured or wronged."

The respondent court increased the P12,000.00 indemnification imposed by the trial court to P30,000.00. However, since
the indemnification was based solely on the finding of guilt beyond reasonable doubt in the homicide case, the civil
liability of the petitioner was not thoroughly examined. This aspect of the case calls for fuller development if the heirs of
the victim are so minded.

WHEREFORE, the instant petition is hereby GRANTED. The questioned decision of the then Intermediate Appellate Court,
now Court of Appeals, is REVERSED and SET ASIDE. The petitioner is ACQUITTED of the crime of homicide. Costs de
oficio.

SO ORDERED.

G.R. Nos. 113472-73 December 20, 1994

ONG CHING PO, YU SIOK LIAN DAVID ONG and JIMMY ONG, petitioners,
vs.
COURT OF APPEALS and SOLEDAD PARIAN, respondents.

QUIASON, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court of the Decision of the Court of
Appeals dated July 15, 1993, which dismissed the petition for certiorari in CA-G.R. CV Nos. 28391-92.

On July 23, 1947, Ong Joi Jong sold a parcel of land located at Fundidor Street, San Nicolas to private respondent
Soledad Parian, the wife of Ong Yee. The latter, the brother of petitioner Ong Ching Po, died in January 1983; while
petitioner Ong Ching Po died in October 1986. The said sale was evidenced by a notarized Deed of Sale written in English.
Subsequently, the document was registered with the Register of Deeds of Manila, which issued Transfer Certificate of Title
No. 9260 dated September 2, 1947 in the name of private respondent.

According to private respondent, she entrusted the administration of the lot and building to petitioner Ong Ching Po when
she and her husband settled in Iloilo. When her husband died, she demanded that the lot be vacated because she was
going to sell it. Unfortunately, petitioners refused to vacate the said premises.

On March 19, 1984, private respondent filed a case for unlawful detainer against petitioner Ong Ching Po before the
Metropolitan Trial Court of Manila, Branch 26. The inferior court dismissed her case. The dismissal was affirmed by the
Regional Trial Court, Branch 10, Manila. The decision of the Regional Trial Court was, in turn, affirmed by the Court of
Appeals, which dismissed the petition. The decision of the Court of Appeals became final and executory.

Petitioners, on the other hand, claimed that on July 23, 1946, petitioner Ong Ching Po bought the said parcel of land from
Ong Joi Jong. The sale was evidenced by a photo copy of a Deed of Sale written in Chinese with the letter head "Sincere
Trading Co." (Exh. "B"). An English translation of said document (Exh. "C") read as follows:

Deed of Sale

121
I, Ong Joi Jong, a party to this Deed of Sale hereby sell in absolutely (sic) manner a lot located on No. 4 Fundidor Street,
San Nicolas an (sic) area consisting 213 square meters including a one-story house erected thereon unto Mr. Ong Ching
Po for the sum of P6,000.00 the receipt of which is hereby acknowledged by me and consequently I have executed and
signed the government registered title (sic) the said lot inclusive of the house erected thereon, now belong (sic) to Mr. Ong
Ching Po unequivocally. And the purpose of this document is to precisely serve as proof of the sale.

Addendum: I have acceded to the request of Mr. Ong Ching Po into signing another document in favor of Soledad Parian
(She is the Filipino wife of Ong Yee, brother of Ong Ching Po) for the purpose of facilitating the issuance of the new title by
the City Register of Deeds and for the reason that he is not yet a Filipino. I certify to the truthfulness of this fact.

Lot Seller: Ong Joi Jong

(Exhibits for the plaintiff, p. 4)

On December 6, 1983, petitioner Ong Ching Po executed a Deed of Absolute Sale conveying to his children, petitioners
Jimmy and David Ong, the same property sold by Ong Joi Jong to private respondent in 1947. On December 12 1985,
petitioners Ong Ching Po, Jimmy Ong and David Ong filed an action for reconveyance and damages against private
respondent in the Regional Trial Court, Branch 53, Manila, docketed as Case No. 85-33962.

On July 26, 1986, private respondent filed an action for quieting of title against petitioners Ong Ching Po and his wife,
petitioner Yu Siok Lian, in the Regional Trial Court, Branch 58, Manila, docketed as Civil Case No.
86-36818. Upon her motion, the case was consolidated with Civil Case No.
85-33962. On May 30 1990, the trial court rendered a decision in favor of private respondent. On appeal by petitioners to
the Court of Appeals, the said court affirmed the decision of the Regional Trial Court.

Hence, this petition.

II

According to petitioners, the Court of Appeals erred:

(1) When it gave full faith and credit to the Deed of Sale (Exh. "A") in favor of private respondent, instead
of the Deed of Sale (Exh. "B" and its translation, Exh. "C") in favor of petitioner Ong Ching Po.

(2) When it concluded that the acts of petitioners were not acts of ownership; and

(3) When it ruled that no express nor implied trust existed between petitioners and private respondent
(Rollo, pp. 17-18).

As stated by petitioners themselves, what is in dispute ". . . is not so much as to which between Exhibit "A" and "Exhibit
"B" is more weighty, but whether this document is what it purports to be (i.e., a deed of conveyance in favor of Soledad
Parian [private respondent] or it was only resorted to or executed as a subterfuge because the real buyer (Ong Ching Po)
was an alien and it was agreed upon between Ong Ching Po and his brother (Ong Yee, Soledad Parian's husband) that the
land be registered in the name of Soledad Parian in order to avoid legal complications and to facilitate registration and
transfer and that the said title would be transferred by Soledad to Ong Ching Po or his successors-in-interest and that she
would be holding the title in trust for him" (Rollo, pp. 19-20).

We cannot go along with the claim that petitioner Ong Ching Po merely used private respondent as a dummy to have the
title over the parcel of land registered in her name because being an alien he was disqualified to own real property in the
Philippines. To sustain such an outrageous contention would be giving a high premium to a violation of our
nationalization laws.

Assuming that Exhibit "B" is in existence and that it was duly executed, still petitioners cannot claim ownership of the
disputed lot by virtue thereof.

Section 5, Article XIII of the 1935 Constitution provides, as follows:

122
Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned
except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain
in the Philippines.

Section 14, Article XIV of the 1973 Constitution provides, as follows:

Save in cases of hereditary succession, no private land shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands in the public domain.

Section 7, Article XII of the 1987 Constitution provides:

Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands in the public domain.

The capacity to acquire private land is made dependent upon the capacity to acquire or hold lands of the public domain.
Private land may be transferred or conveyed only to individuals or entities "qualified to acquire lands of the public
domain" (II Bernas, The Constitution of the Philippines 439-440 [1988 ed.]).

The 1935 Constitution reserved the right to participate in the "disposition, exploitation, development and utilization" of all
"lands of the public domain and other natural resources of the Philippines" for Filipino citizens or corporations at least
sixty percent of the capital of which was owned by Filipinos. Aliens, whether individuals or corporations, have been
disqualified from acquiring public lands; hence, they have also been disqualified from acquiring private lands.

Petitioner Ong Ching Po was a Chinese citizen; therefore, he was disqualified from acquiring and owning real property.
Assuming that the genuineness and due execution of Exhibit "B" has been established, the same is null and void, it being
contrary to law.

On the other end of the legal spectrum, the deed of sale executed by Ong Joi Jong in favor of private respondent (Exh. "A")
is a notarized document.

To remove the mantle of validity bestowed by law on said document, petitioners claim that private respondent admitted
that she did not pay anything as consideration for the purported sale in her favor. In the same breath, petitioners said
that private respondent implied in her deposition that it was her husband who paid for the property. It appears, therefore,
that the sale was financed out of conjugal funds and that it was her husband who handled the transaction for the
purchase of the property. Such transaction is a common practice in Filipino-family affairs.

It is not correct to say that private respondent never took possession of the property. Under the law, possession is
transferred to the vendee by virtue of the notarized deed of conveyance. Under Article 1498 of the Civil Code of the
Philippines, "when the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery
of the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred." If what
petitioners meant was that private respondent never lived in the building constructed on said land, it was because her
family had settled in Iloilo.

There is no document showing the establishment of an express trust by petitioner Ong Ching Po as trustor and private
respondent as trustee. Not even Exhibit "B" can be considered as such a document because private respondent, the
registered owner of the property subject of said "deed of sale," was not a party thereto. The oral testimony to prove the
existence of the express trust will not suffice. Under Article 1443 of the Civil Code of the Philippines, "No express trust
concerning an immovable or any interest therein may be proved by parole evidence."

Undaunted, petitioners argue that if they cannot prove an express trust in writing, they can prove an implied trust orally.
While an implied trust may be proved orally (Civil Code of the Philippines, Art. 1457), the evidence must be trustworthy
and received by the courts with extreme caution, because such kind of evidence may be easily fabricated (Salao v. Salao,
70 SCRA 65 [1976]). It cannot be made to rest on vague and uncertain evidence or on loose, equivocal or indefinite
declarations (Cf. De Leon v. Molo-Peckson, et al., 116 Phil. 1267 [1962]). Petitioners do not claim that Ong Yee was not in
a financial position to acquire the land and to introduce the improvements thereon. On the other hand, Yu Siok Lian, the
wife of petitioner Ong Ching Po, admitted in her testimony in court that Ong Yee was a stockholder of Lam Sing
Corporation and was engaged in business.

The Court of Appeals did not give any credence to Exhibit "B" and its translation, Exhibit "C", because these documents
had not been properly authenticated.

123
Under Section 4, Rule 130 of the Revised Rules of Court:

Secondary Evidence when Original is lost or destroyed. When the original writing has been lost or
destroyed, or cannot be produced in court, upon proof of its execution and lost or destruction, or
unavailability, its contents may be proved by a copy, or by a recital of its contents in some authentic
document, or by the recollection of the witnesses.

Secondary evidence is admissible when the original documents were actually lost or destroyed. But prior to the
introduction of such secondary evidence, the proponent must establish the former existence of the document. The correct
order of proof is as follows: existence; execution; loss; contents. This order may be changed if necessary in the discretion
of the court (De Vera v. Aguilar, 218 SCRA 602 [1993]).

Petitioners failed to adduce evidence as to the genuineness and due execution of the deed of sale, Exhibit "B".

The due execution of the document may be established by the person or persons who executed it; by the person before
whom its execution was acknowledged; or by any person who was present and saw it executed or who after its execution,
saw it and recognized the signatures; or by a person to whom the parties to the instrument had previously confessed the
execution thereof (De Vera v. Aguilar, supra).

Petitioner Yu Siok Lian testified that she was present when said document was executed, but the trial court rejected her
claim and held:

If it is true that she was present, why did she not sign said document, even merely as a witness? Her oral
testimony is easy to concoct or fabricate. Furthermore, she was married only on September 6, 1946 to the
plaintiff, Ong Ching Po, in Baguio City where she apparently resided, or after the deed of sale was
executed. The Court does not believe that she was present during the execution and signing of the deed of
sale involved therein, notwithstanding her pretensions to the contrary (Decision p. 6, Records p. 414).

As to the contention of petitioners that all the tax receipts, tax declaration, rental receipts, deed of sale (Exh. "B") and
transfer certificate of title were in their possession, private respondent explained that she and her husband entrusted said
lot and building to petitioners when they moved to Iloilo.

As observed by the Court of Appeals:

We find, however, that these acts, even if true, are not necessarily reflective of dominion, as even a mere
administrator or manager may lawfully perform them pursuant to his appointment or employment (Rollo,
p. 10).

It is markworthy that all the tax receipts were in the name of private respondent and her husband. The rental receipts
were also in the name of her husband.

WHEREFORE, the petition is DISMISSED.

SO ORDERED

G.R. No. L-33084 November 14, 1988

ROSE PACKING COMPANY, INC., petitioner,


vs.
THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance of Rizal (Br. III),
PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF RIZAL, respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated on
December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, this Court hereby renders judgment:

124
1. Denying the petition to set aside and annul the questioned orders dated January 31, 1969 and May 7,1969 rendered by
respondent Judge, the same having been issued in consonance with the exercise of the Court's discretion.

2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of ownership over the properties sold
at such sale to have been prematurely executed thereby rendering it void ab initio.

3. In accordance with this Court's resolution dated May 8, 1970, petitioner is hereby granted sixty (60) days from receipt
of a copy of this decision within which to redeem the properties sold at the foreclosure sale of May 9, 1969.

4. Dismissing the charge of contempt against PCIB and its Executive Vice-President and General Manager, Eugenio R.
Unson,. for lack of merit.

and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its
Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration.

The facts of the case as presented by petitioner and as embodied in the decision of the Court of Appeals are as follows:

On December 12, 1962 respondent bank (PCIB) approved a letter- request by petitioner for the reactivation of its overdraft
line of P50,000.00, discounting line of P100,000.00 and a letter of credit-trust receipt line of P550,000.00 as wen as an
application for a loan of P300,000.00, on fully secured real estate and chattel mortgage and on the further condition that
respondent PCIB appoint as it did appoint its executive
vice-president Roberto S. Benedicto as its representative in petitioner's board of directors.

On November 3, 1965 the National Investment & Development Corporation (NIDC), the wholly owned investment
subsidiary of the Philippine National Bank, approved a P2.6 million loan application of petitioner with certain conditions.
Pursuant thereto, the NIDC released to petitioner on November 7, 1965 the amount of P100,000.00. Subsequently,
petitioner purchased five (5) parcels of land in Pasig, Rizal making a down payment thereon.

On January 5,1966, the NIDC released another P100,000.00 to petitioner and on January 12, 1966, the aforesaid releases
totalling P200,000.00 were applied to the payment of preferred stock which NIDC subscribed in petitioner corporation to
partially implement its P1,000,000.00 investment scheme as per agreement. Thereafter, the NIDC refused to make further
releases on the approved loan of petitioner.

On August 3, 1966 and October 5, 1966, respondent PCIB approved additional accomodations to petitioner consisting of a
P710,000.00 loan for the payment of the balance of the purchase price of those lots in Pasig required to be bought,
P500,000.00 loan for operating capital, P200,000.00 loan to be paid directly to petitioner's creditors, while consolidating
all previous accommodations at P1,597,000.00—all of which were still secured by chattel and real estate mortgages.
However, PCIB released only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands and some
P300,000.00 for operating capital.

On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for a loan of
P1,840,000.00 and a guarantee for $652,682.00 for the purchase of can making equipment. Immediately upon receipt of
notice of the approval of the Development Bank of the loan, petitioner advised respondent PCIB of the availability of
P800,000.00 to partially pay off its account and requested the release of the titles to the Pasig lots for delivery to the
Development Bank of the Philippines. Respondent PCIB verbally advised petitioner of its refusal, stating that all
obligations should be liquidated before the release of the titles to the Pasig properties. Following the PCIB's rejection of
petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela, Bulacan with the P800,000.00 DBP
loan, with the latter's consent.

On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene Knecht, its president for the collection
of petitioner's indebtedness to respondent bank, which complaint was docketed as Civil Case No. 71697 of the Court of
First Instance of Manila.

On January 22, 1968, PCIB gave petitioner notice that it would cause the real estate mortgage to be foreclosed at an
auction sale, which it scheduled for February 27,1968. Thus, respondent Sheriff served notice of sheriffs sale (of the real
properties mortgaged to respondent PCIB) on July 18,1968 at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto.
Domingo, municipality of Cainta); T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio
San Joaquin, Pasig, Rizal). Subsequently, on July 15, 1968, petitioner filed a complaint docketed as Civil Case No. 11015
in the Court of First Instance of Rizal to enjoin respondents PCIB and the sheriff from proceeding with the foreclosure
sale, to ask the lower court to fix a new period for the payment of the obligations of petitioner to PCIB and for other related

125
matters. Petitioner likewise prayed, pending final judgment, for the issuance ex-parte of a writ of preliminary injunction
enjoining herein respondents from proceeding with the foreclosure sale scheduled to be held on July 18, 1968.

On January 31, 1969, the lower court issued ail order denying the application for preliminary injunction and dissolving
its restraining order which had been issued on July 17, 1968. Petitioner promptly filed a motion for reconsideration which
was denied by the lower court on May 7, 1969.

On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with application for a restraining
order and preliminary injunction against the foreclosure sale (Rollo, p. 54).<äre||anº•1àw> On May 13, 1969 respondent
Court resolved to issue a writ of preliminary injunction upon filing by petitioner of a bond in the amount of P60,000.00.
However, petitioner moved for amendment of the Order issuing the preliminary injunction, on the ground that the
aforementioned resolution of respondent Court came too late to stop the foreclosure sale which was held on May 9, 1969,
praying instead that the preliminary injunction should now enjoin respondents, particularly respondent Provincial Sheriff,
from proceeding to give effect to the foreclosure sale of May 9, 1969; that said sheriff should refrain from issuing a deed of
certificate of sale pursuant thereto and from registering the certificate of deed of sale in the Registry of Deeds; and to toll
or stop the running of the period of redemption. Respondent Court resolved to deny said motion in its Resolution dated
May 28, 1969 (Rollo, pp. 237-242).

On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty (60) days from
receipt of the decision to be rendered in
CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one declaring the execution
sale in dispute to be valid (Rollo, p. 231).

Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R. Unson for and in behalf of
respondent PCIB concerning the properties involved in the instant petition for certiorari, was registered with the Register
of Deeds of Pasig, Rizal at 8:00 a.m.. Consequently, the old transfer certificates of title covering the aforementioned
properties were cancelled and new ones issued in the name of respondent PCIB, the buyer at the foreclosure sale. In view
thereof, petitioner filed a motion charging respondent PCIB and its Executive Vice-President and Assistant General
Manager Eugenio R. Unson with contempt of court. Petitioner prayed that (a) the Deed of Sale dated May 12, 1970 and the
consolidation of ownership of the same date be declared null and void; (b) that the new transfer certificates of title TCT
Nos. 286174, 286175, and 286176—be cancelled and the old ones, TCT Nos. 177019,175595, and 73620 be restored or
revived by the Register of Deeds of Rizal; and (c) that the respondent PCIB be ordered to surrender and deposit the TCT
Nos. 177019, 175595, and 73620 with respondent Court for safekeeping (Rollo. p. 243).

On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249). On January 12, 1971
it resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated January 5, 1971 (Rollo, p. 250) and on
January 22, 1971 it again resolved (Rollo, p. 281) to deny petitioner's supplement to motion for reconsideration dated
January 18, 1971 (Rollo, p. 260).

The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16, 1971. On February 23,
1971, the Court resolved to give due course to the petition and ordered the issuance of preliminary injunction enjoining
respondents from enforcing or implementing the appealed decision of respondent Court of Appeals, upon petitioner's
posting a bond of P50,000.00 (Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p.
619).

The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents was filed on September
20, 1971 (Rollo, p. 655). The Reply Brief was filed on December 6, 1971 (Rollo, p. 678).

On April 2, 1971 respondent PCIB filed a motion for leave to lease real estate properties in custodia legis, more specifically
the 31, 447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT No. 286176 (Rollo, p. 697). Petitioner filed its
opposition to the motion on May 27, 1971 (Rollo, p. 712). The reply to the opposition was filed on December 6,1971 (Rollo,
p. 730); the rejoinder to respondent PCIB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case
was transferred to the Second Division, by a Resolution of the First Division dated January 17, 1983
(Rollo, p. 752).

The issues raised in this case are the following:

1. WHETHER OR NOT RESPONDENT COURT ERRED IN FINDING THAT THE LOWER COURT DID NOT COMMIT AN
ABUSE OF DISCRETION IN DENYING PETITIONER'S APPLICATION FOR A PRELIMINARY INJUNCTION AND
DISSOLVING THE RESTRAINING ORDER PREVIOUSLY ISSUED. (Brief for Petitioner, pp. 21-47);

126
2. WHETHER OR NOT RESPONDENT COURT ERRED IN DECLARING VALID THE FORECLOSURE SALE ON MAY 9,1969
OF THE MORTGAGED PROPERTIES EN MASSE WHEN THEY REFER TO SEVERAL REAL ESTATE MORTGAGES
EXECUTED ON DIFFERENT DATES. (Brief for Petitioner, pp. 47-50).

The main issue is whether or not private respondents have the right to the extrajudicial foreclosure sale of petitioner's
mortgaged properties before trial on the merits. The answer is in the negative.

Petitioner filed Civil Case No. 11015 in the Court of First Instance of Rizal, Branch II, to obtain judgment (1) enjoining
defendants (respondents herein) from proceeding with the foreclosure sale of the subject real estate mortgages, (2) fixing a
new period for the payment of the obligations of plaintiff to defendant PCIB sufficiently long to enable it to recover from
the effects of defendant PCIB's inequitable acts, (3) ordering defendant PCIB to immediately give up management of
plaintiffs canning industry and to pay plaintiff such damages as it may prove in the concept of actual, compensatory and
exemplary or corrective damages, aside from attorney's fees and expenses of litigation, plus costs (Rollo, p. 98). It is to be
noted that petitioner filed the above case mainly to forestall the foreclosure sale of the mortgaged properties before final
judgment. The issuance of a writ of preliminary injuction could have preserved the status quo of the parties in relation to
the subject matter litigated by them during the pendency of the action (Lasala v. Fernandez, 5 SCRA 79 [1962]; De Lara v.
Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969].

When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it had previously
issued, in its order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated the case before trial on the merits.

While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank (Brief for Petitioner, pp.
7-11), there were matters that needed the preservation of the status quo between the parties. The foreclosure sale was
premature.

First was the question of whether or not petitioner corporation was already in default. In its letter dated August 12,1966
to petitioner corporation, among the conditions that respondent bank set for the consolidation of the outstanding
obligations of petitioner was the liquidation of the said obligations together with the latter's other obligations in the
financing scheme already approved by the NIDC and PDCP. To quote:

a) These facilities shall be temporary and shall be fully liquidated, together with other obligations from a
refinancing scheme already approved by the NIDC and PDCP totalling Pl million in equity and P2.6 million
in long term financing. In this connection, the firm shall present to this Bank a certified copy of the terms
and conditions of the approval by the NIDC and PDCP. (Brief for the Respondent, p. 41).

In other words, the loans of petitioner corporation from respondent bank were supposed to become due only at the time
that it receives from the NIDC and PDCP the proceeds of the approved financing scheme. As it is, the conditions did not
happen. NIDC refused to make further releases after it had made two releases totalling P200,000.00 which were all
applied to the payment of the preferred stock NIDC subscribed in petitioner corporation to partially implement its
P1,000,000.00 investment scheme (Brief for Petitioner, p. 9). The efficacy or obligatory force of a conditional obligation is
subordinated to the happening of a future and uncertain event so that if the suspensive condition does not take place, the
parties would stand as if the conditional obligation had never existed (Gaite v. Fonacier, 2 SCRA 831
[1961]).<äre||anº•1àw>

Petitioner corporation alleges that there had been no demand on the part of respondent bank previous to its filing a
complaint against petitioner and Rene Knecht personally for collection on petitioner's indebtedness (Brief for Petitioner, p.
13). For an obligation to become due there must generally be a demand. Default generally begins from the moment the
creditor demands the performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default
will not arise (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973]; Borje v. CFI of Misamis
Occidental, 88 SCRA 576 [1979]). Whether petitioner corporation is already in default or not and whether demand had
been properly made or not had to be determined in the lower court.

Granting that the findings of the lower court after trial on the merits answer both questions in the affirmative, another
question that had to be determined was the question of cause or consideration.

The loan agreements between petitioner and respondent Bank are reciprocal obligations (the obligation or promise of each
party is the consideration for that of the other Penacio v. Ruaya, 110 SCRA 46 [1981], cited. in Central Bank of the
Philippines v. Court of Appeals, 139 SCRA 46 [1985] ). A contract of loan is not a unilateral contract as respondent Bank
thinks it is (Brief for the Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of
respondent bank to furnish the loan (Ibid.).

127
Respondent bank had complete control of the financial affairs and the management of petitioner corporation. It appointed
its executive vice-president Roberto S. Benedicto as its representative in petitioner's board of directors, giving him the
position of
vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S. Benedicto as vice-
president and member of the board of directors of petitioner corporation on December 29, 1965 (Brief for Petitioner, p. 8),
respondent bank designated Rafael Ledesma as its representative in petitioner corporation's board of directors, due
representation in the board of petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). In fact,
Rafael Ledesma was designated Chairman of the Board of Directors (Rollo, p. 169). Respondent bank required petitioner to
appoint Sycip, Gorrez, Velayo & Co. as full-time comptroller-treasurer of the corporation at a monthly salary of P1,500.00
(Brief for Petitioner, p. 9; Brief for the Respondent, p. 41). On January 2, 1967, it also required petitioner to replace its
then manager, the Management & Investment Development Associates (MIDA) and to appoint instead Edmundo Ledesma
at a monthly salary of P3,000.00 and transportation allowance of P1,000.00 plus an assistant manager, Venancio
Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by defendant's designated
manager, no meeting of the board of directors of petitioner was called- Edmundo Ledesma exercised full control and
management (Brief for Petitioner, pp. 10-11; Rollo, p. 167). Respondent Bank has not given up management of petitioner's
food canning industry and continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate
counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied by respondent bank.

Respondent bank's designation of its own choice of people holding key positions in petitioner corporation tied the hands of
petitioner's board of directors to make decisions for the interest of petitioner corporation, in fact, undermined the latter's
financial stability. During the 18 months of Edmundo Ledesma's management, petitioner's factory produced some
P200,000.00 worth of canned goods which according to petitioner is only equivalent to its normal production in three
weeks (Brief for Petitioner, pp.10-11). Respondent bank justifies the underproduction by averring that petitioner at that
time did not have sufficient capital to operate the factory, and that said factory was only operating for the purpose of
avoiding spoilage and deterioration of the raw materials then in store at the petitioner's factory (Rollo. p. 168) and yet
respondent bank insists, that it had released the entire amount of P500,000.00 loan to petitioner (Rollo, p. 167)
earmarked for operating capital purposes (Brief for the Respondent, p. 43) and admits having granted a P40,000.00 loan
at a higher interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo, p. 167). After the
Development Bank of the Philippines had approved on June 29, 1967 a loan of P1,840,000.00 applied for by petitioner in
1961, respondent bank informed of the availability of P800,000.00 to pay off partially petitioner's account with it and
requested to release the titles of the Pasig parcels for delivery to the Development Bank of the Philippines, and the amount
actually released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's board of directors
wrote a letter to the Development Bank of the Philippines stating that Rene Knecht, petitioner's president, had no
authority to borrow for petitioner, being a mere figurehead president, although Rene Knecht, controlled 87% of the
stockholding of petitioner and the by-laws authorized the president to borrow for the company (Brief for Petitioner, pp. 11-
13).<äre||anº•1àw> That Rafael Ledesma wrote a letter to the Development Bank of the Philippines is admitted by
respondent bank (Rollo, p. 169). The Development Bank of the Philippines refused to make further releases on the
approved loan or to issue the dollar guaranty for the importation of can making machinery. It was Atty. Juan de Ocampo,
the corporate counsel retained by petitioner at the insistence of respondent bank that instituted the collection suit and
extra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo, p. 79).

It is apparent that it is respondent bank practically managing petitioner corporation through its representatives occupying
key positions therein. Not even the president of petitioner corporation could escape control by respondent bank through
the Comptroller Treasurer assigned "to countersign all checks and other disbursements and decide on all financial
matters regarding the operations and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41).
There is basis for petitioner's complaint of interference by respondent bank with petitioner's financing (Brief for Petitioner,
pp. 3132) and such interference is only a consequence of respondent bank's management of petitioner corporation
through the officers occupying key positions therein. Thus, if ever petitioner corporation was in financial straits instead of
being rehabilitated this can be attributed to the mismanagement of respondent corporation through its representatives in
petitioner corporation.

In a similar case, Filipinas Marble Corporation v. Intermediate Appellate Court (142 SCRA 180 [1986]) where the lending
institution took over the management of the borrowing corporation and led that corporation to bankcruptcy through
mismanagement or misappropriation of the funds, defeating the very purpose of the loan which is to develop the projects
of the corporation, the Court ruled that it is as if the loan was never delivered to it and thus, there was failure on the part
of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed.

It cannot be determined at this point how much of the total loan, most especially the P500,000.00 loan for operating
capital and the P40,000.00 loan of the manager, Edmundo Ledesma, had been mismanaged or misspent by respondent
bank through its representatives. This matter should rightfully be litigated below in the main action (Filipinas Marble
Corportion v. Intermediate Appellate Court. (supra).

128
Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan agreement. By its own
admission it failed to release the P710,000.00 loan (Rollo, p. 167) it approved on October 13, 1966 (Brief for Respondent,
p. 44) in which case, petitioner corporation, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46
[1985]).

As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed to satisfy its total debt
to respondent bank. (Central Bank of the Philippines v. Court of Appeals, supra.)

The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not must be answered in the
negative. The rule of indivisibility of a real estate mortgage refers to the provisions of Article 2089 of the Civil Code, which
provides:

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors
in interest of the debtor or of the creditor.

Therefore the debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as the debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion
of the debt for which each thing is specially answerable is satisfied.

Respondent bank cites the above-quoted article in its argument that the mortgage contract is indivisible and that the loan
it secures cannot be divided among the different lots (Brief for Respondent, p. 27). Respondent Court upheld the validity of
the sale en masse (Rollo, p. 246).

The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor or creditor which does
not obtain in this case (Central Bank of the Philippines v. Court of Appeals, supra.) Furthermore, granting that there was
consolidation of the entire loan of petitioner corporations approved by respondent bank, the rule of indivisibility of
mortgage cannot apply where there was failure of consideration on the part of respondent bank for the mismanagement of
the affairs of petitioner corporation and where said bank is in default in complying with its obligation to release to
petitioner corporation the amount of P710,000.00. In fact the real estate mortgage itself becomes unenforceable (Central
Bank of the Philippines v. Court of Appeals, supra). Finally, it is noted that as already stated hereinabove, the exact
amount of petitioner's total debt was still unknown.

PREMISES CONSIDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it sustained: (a) the lower
court's denial of petitioner's application for preliminary injunction and (b) the validity of the foreclosure sale; (2) the lower
court is ordered to proceed with the trial on the merits of the main case together with a determination of exactly how
much are petitioner's liabilities in favor of respondent bank PCIB so that proper measures may be taken for their eventual
liquidation; (3) the preliminary injunction issued by this Court on April 28, 1971 remains in force until the merits of the
main case are resolved; and (4) the motion of respondent bank dated April 1, 1981 for leave to lease the real properties
in custodia legis is DENIED.

SO ORDERED.

G.R. No. L-55347 October 4, 1985

PHILIPPINE NATIONAL RAILWAYS, petitioner,


vs.
THE HONORABLE COURT OF APPEALS and ROSARIO TUPANG, respondents.

ESCOLIN, J.:

129
Invoking the principle of state immunity from suit, the Philippine National Railways, PNR for short, instituted this petition
for review on certiorari to set aside the decision of the respondent Appellate Court which held petitioner PNR liable for
damages for the death of Winifredo Tupang, a paying passenger who fell off a train operated by the petitioner.

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

The facts show that on September 10, 1972, at about 9:00 o'clock in the evening, Winifredo Tupang,
husband of plaintiff Rosario Tupang, boarded 'Train No. 516 of appellant at Libmanan, Camarines Sur, as
a paying passenger bound for Manila. Due to some mechanical defect, the train stopped at Sipocot,
Camarines Sur, for repairs, taking some two hours before the train could resume its trip to Manila.
Unfortunately, upon passing Iyam Bridge at Lucena, Quezon, Winifredo Tupang fell off the train resulting
in his death.The train did not stop despite the alarm raised by the other passengers that somebody fell
from the train. Instead, the train conductor Perfecto Abrazado, called the station agent at Candelaria,
Quezon, and requested for verification of the information. Police authorities of Lucena City were
dispatched to the Iyam Bridge where they found the lifeless body of Winifredo Tupang.

As shown by the autopsy report, Winifredo Tupang died of cardio-respiratory failure due to massive
cerebral hemorrhage due to traumatic injury [Exhibits B and C, Folder of Exhibits],Tupang was later
buried in the public cemetery of Lucena City by the local police authorities. [Rollo, pp. 91-92]

Upon complaint filed by the deceased's widow, Rosario Tupang, the then Court of First Instance of Rizal, after trial, held
the petitioner PNR liable for damages for breach of contract of carriage and ordered "to pay the plaintiff the sum of
P12,000,00 for the death of Winifredo Tupang, plus P20,000.00 for loss of his earning capacity and the further sum of
P10,000.00 as moral damages, and P2,000.00 as attorney's fees, and costs. 1

On appeal, the Appellate Court sustained the holding of the trial court that the PNR did not exercise the utmost diligence
required by law of a common carrier. It further increased the amount adjudicated by the trial court by ordering PNR to
pay the plaintiff an additional sum of P5,000.00 as exemplary damages.

Moving for reconsideration of the above decision, the PNR raised for the first time, as a defense, the doctrine of state
immunity from suit. It alleged that it is a mere agency of the Philippine government without distinct or separate
personality of its own, and that its funds are governmental in character and, therefore, not subject to garnishment or
execution. The motion was denied; the respondent court ruled that the ground advanced could not be raised for the first
time on appeal.

Hence, this petition for review.

The petition is devoid of merit. The PNR was created under Rep. Act 4156, as amended. Section 4 of the said Act provides:

The Philippine national Railways shall have the following powers:

a. To do all such other things and to transact all such business directly or indirectly necessary, incidental
or conducive to the attainment of the purpose of the corporation; and

b. Generally, to exercise all powers of a corporation under the Corporation Law.

Under the foregoing section, the PNR has all the powers, the characteristics and attributes of a corporation under the
Corporation Law. There can be no question then that the PNR may sue and be sued and may be subjected to court
processes just like any other corporation. 2

The petitioner's contention that the funds of the PNR are not subject to garnishment or execution hardly raises a question
of first impression. In Philippine National Railways v. Union de Maquinistas, et al., 3 then Justice Fernando, later Chief
Justice, said. "The main issue posed in this certiorari proceeding, whether or not the funds of the Philippine National
Railways, could be garnished or levied upon on execution was resolved in two recent decisions, the Philippine National
Bank v. Court of Industrial Relations [81 SCRA 314] and Philippine National Bank v. Hon. Judge Pabalan [83 SCRA 595].
This Court in both cases answered the question in the affirmative. There was no legal bar to garnishment or execution.
The argument based on non-suability of a state allegedly because the funds are governmental in character was
unavailing.So it must be again."

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In support of the above conclusion, Justice Fernando cited the Court's holding in Philippine National Bank v. Court of
Industrial Relations, to wit: "The premise that the funds could be spoken of as public in character may be accepted in the
sense that the People's Homesite and Housing Corporation was a government-owned entity. It does not follow though that
they were exempt from garnishment. National Shipyard and Steel Corporation v. Court of Industrial Relations is squarely in
point. As was explicitly stated in the opinion of then Justice, later Chief Justice, Concepcion: "The allegation to the effect
that the funds of the NASSCO are public funds of the government, and that, as such, the same may not be garnished,
attached or levied upon, is untenable for, as a government- owned and controlled corporation, the NASSCO has a
personality of its own, distinct and separate from that of the Government. It has-pursuant to Section 2 of Executive Order
No. 356, dated October 23, 1950 * * *, pursuant to which the NASSCO has been established- 'all the powers of a
corporation under the Corporation Law * * *. 4

As far back as 1941, this Court in the case of Manila Hotel Employees Association v. Manila Hotel Co., 5laid down the rule
that "when the government enters into commercial business, it abandons its sovereign capacity and is to be treated like
any other corporation. [Bank of the U.S. v. Planters' Bank, 9 Waitch 904, 6 L. ed. 244]. By engaging in a particular
business through the instrumentality of a corporation the government divests itself pro hac vice of its sovereign character,
so as to render the corporation subject to the rules of law governing private corporations. 6 Of Similar import is the
pronouncement in Prisco v. CIR,' that "when the government engages in business, it abdicates part of its sovereign
prerogatives and descends to the level of a citizen, ... . " In fine, the petitioner PNR cannot legally set up the doctrine of
non-suability as a bar to the plaintiff's suit for damages.

The appellate court found, the petitioner does not deny, that the train boarded by the deceased Winifredo Tupang was so
over-crowded that he and many other passengers had no choice but to sit on the open platforms between the coaches of
the train. It is likewise undisputed that the train did not even slow down when it approached the Iyam Bridge which was
under repair at the time, Neither did the train stop, despite the alarm raised by other passengers that a person had fallen
off the train at lyam Bridge. 7

The petitioner has the obligation to transport its passengers to their destinations and to observe extraordinary diligence in
doing so. Death or any injury suffered by any of its passengers gives rise to the presumption that it was negligent in the
performance of its obligation under the contract of carriage. Thus, as correctly ruled by the respondent court, the
petitioner failed to overthrow such presumption of negligence with clear and convincing evidence.

But while petitioner failed to exercise extraordinary diligence as required by law, 8 it appears that the deceased was
chargeable with contributory negligence. Since he opted to sit on the open platform between the coaches of the train, he
should have held tightly and tenaciously on the upright metal bar found at the side of said platform to avoid falling off
from the speeding train. Such contributory negligence, while not exempting the PNR from liability, nevertheless justified
the deletion of the amount adjudicated as moral damages. By the same token, the award of exemplary damages must be
set aside. Exemplary damages may be allowed only in cases where the defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. 9 There being no evidence of fraud, malice or bad faith on the part of petitioner, the
grant of exemplary damages should be discarded.

WHEREFORE, the decision of the respondent appellate court is hereby modified by eliminating therefrom the amounts of
P10,000.00 and P5,000.00 adjudicated as moral and exemplary damages, respectively. No costs.

SO ORDERED.

G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,


vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR
ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner,


vs.
COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

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PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,
vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals in CA-G.R. No.
51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in Civil Case No. 74958 dated
September 21, 1971 as modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in
modifying the decision of the lower court included an award of an additional amount of P200,000.00 to the Philippine Bar
Association to be paid jointly and severally by the defendant United Construction Co. and by the third-party defendants
Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta)
to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to
pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor of plaintiff-appellant
Philippine Bar Association, with interest at the legal rate from November 29, 1968 until full payment to be paid jointly and
severally by defendant United Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other
respects, the judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the lower court is hereby
affirmed with COSTS to be paid by the defendant and third party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek the
reversal of the decision of the Court of Appeals, among other things, for exoneration from liability while petitioner
Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for
the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost of the building,
P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were consolidated by this Court in
the resolution of May 10, 1978 requiring the respective respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-
47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the Corporation Law, decided
to construct an office building on its 840 square meters lot located at the comer of Aduana and Arzobispo Streets,
Intramuros, Manila. The construction was undertaken by the United Construction, Inc. on an "administration" basis, on
the suggestion of Juan J. Carlos, the president and general manager of said corporation. The proposal was approved by
plaintiff's board of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The plans

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and specifications for the building were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building
was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the building buckled, causing the building to tilt forward
dangerously. The tenants vacated the building in view of its precarious condition. As a temporary remedial measure, the
building was shored up by United Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from the partial collapse
of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as defendants.
Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of the contractors
to follow plans and specifications and violations by the defendants of the terms of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications, alleging
in essence that the collapse of the building was due to the defects in the said plans and specifications. Roman Ozaeta, the
then president of the plaintiff Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil presented a written
stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party complaints and the third-party defendants
Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find after the trial that the above-named
defendants Juan J. Carlos and United Construction Co., Inc. are free from any blame and liability for the collapse of the
PBA Building, and should further find that the collapse of said building was due to defects and/or inadequacy of the
plans, designs, and specifications p by the third-party defendants, or in the event that the Court may find Juan F. Nakpil
and Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants,
judgment may be rendered in whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or Juan F. Nakpil
in favor of the plaintiff to all intents and purposes as if plaintiff's complaint has been duly amended by including the said
Juan F. Nakpil & Sons and Juan F. Nakpil as parties defendant and by alleging causes of action against them including,
among others, the defects or inadequacy of the plans, designs, and specifications prepared by them and/or failure in the
performance of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record on Appeal, pp. 274-275;
Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among others, the parties agreed
to refer the technical issues involved in the case to a Commissioner. Mr. Andres O. Hizon, who was ultimately appointed
by the trial court, assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had been
caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and specifications and how said
deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the
construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the
contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.


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2. If the cause of the damage suffered by the building arose from a combination of the above-enumerated
factors, the degree or proportion in which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely demolished or whether it may still be
repaired and restored to a tenantable condition. In the latter case, the determination of the cost of such
restoration or repair, and the value of any remaining construction, such as the foundation, which may
still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As aforestated the technical
issues were referred to the Commissioner. The non-technical issues were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a
strong earthquake. The motions were opposed by the defendants and the matter was referred to the Commissioner.
Finally, on April 30, 1979 the building was authorized to be demolished at the expense of the plaintiff, but not another
earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused
further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. (Record on
Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970 with the findings
that while the damage sustained by the PBA building was caused directly by the August 2, 1968 earthquake whose
magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared by the
third-party defendants' architects, deviations from said plans and specifications by the defendant contractors and failure
of the latter to observe the requisite workmanship in the construction of the building and of the contractors, architects
and even the owners to exercise the requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the owner is charged with full
nine supervision of the construction. The Court sees no legal or contractual basis for such conclusion. (Record on Appeal,
pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by the Intermediate
Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the Philippine Institute
of Architects filed with the Court a motion to intervene as amicus curiae. They proposed to present a position paper on the
liability of architects when a building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties. The motion having been
granted, the amicus curiae were granted a period of 60 days within which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. But the
Commissioner, when asked by Us to comment, reiterated his conclusion that the defects in the plans and specifications
indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131) and the 1966 Asep
Code, the Commissioner added that even if it can be proved that the defects in the construction alone (and not in the plans
and design) caused the damage to the building, still the deficiency in the original design and jack of specific provisions
against torsion in the original plans and the overload on the ground floor columns (found by an the experts including the
original designer) certainly contributed to the damage which occurred. (Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of errors: Philippine Bar Association
claimed that the measure of damages should not be limited to P1,100,000.00 as estimated cost of repairs or to the period
of six (6) months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of God
that caused the failure of the building which should exempt them from responsibility and not the defective construction,

134
poor workmanship, deviations from plans and specifications and other imperfections in the case of United Construction
Co., Inc. or the deficiencies in the design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals.
UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount of P13,661.28 while
the Nakpils opposed the payment of damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which caused the failure of
the building, exempts from liability, parties who are otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code, which
provides:

Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable for
damages if within fifteen years from the completion of the structure the same should collapse by reason of
a defect in those plans and specifications, or due to the defects in the ground. The contractor is likewise
responsible for the damage if the edifice fags within the same period on account of defects in the
construction or the use of materials of inferior quality furnished by him, or due to any violation of the
terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily liable
with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of the causes of action by
reason of any defect mentioned in the preceding paragraph.

The action must be brought within ten years following the collapse of the building.

On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or which
though foreseen, were inevitable (Article 1174, New Civil Code).

An act of God has been defined as an accident, due directly and exclusively to natural causes without human
intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been
prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of
God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the
debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or
aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA
423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v.
Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay
or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code,
which results in loss or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the
violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief.
When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man,
whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is
not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from
liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379;
Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the
lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made

135
substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to have
inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts, the
defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party defendants cannot
claim exemption from liability. (Decision, Court of Appeals, pp. 30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court (cases
cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1)
the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the
findings of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings are contrary to
the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289, 291-
292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the Court of Appeals are contrary to
those of the trial court; (8) said findings of facts are conclusions without citation of specific evidence on which they are
based; (9) the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA 322,
366); (10) the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted
by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the contrary, the records
show that the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical issues
to a Commissioner chosen by the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is
not possible to state with certainty that the building would not have collapsed were those defects not present, the fact
remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was
similarly subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial collapse (and eventual
complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner that the total amount
required to repair the PBA building and to restore it to tenantable condition was P900,000.00 inasmuch as it was not
initially a total loss. However, while the trial court awarded the PBA said amount as damages, plus unrealized rental
income for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an additional sum of
P200,000.00 representing the damage suffered by the PBA building as a result of another earthquake that occurred on
April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value of the building (L-
47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED question the additional award of
P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The
PBA further urges that the unrealized rental income awarded to it should not be limited to a period of one-half year but
should be computed on a continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount
shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is undisputed that
the building could then still be repaired and restored to its tenantable condition. The PBA, however, in view of its lack of
needed funding, was unable, thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the
earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total demolition of the building
(L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage resulting from the partial and
eventual collapse of the PBA building as a result of the earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now an Associate
Justice of the Supreme Court) while still an Associate Justice of the Court of Appeals:

136
There is no question that an earthquake and other forces of nature such as cyclones, drought, floods, lightning, and perils
of the sea are acts of God. It does not necessarily follow, however, that specific losses and suffering resulting from the
occurrence of these natural force are also acts of God. We are not convinced on the basis of the evidence on record that
from the thousands of structures in Manila, God singled out the blameless PBA building in Intramuros and around six or
seven other buildings in various parts of the city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs and plans, defective construction, poor
workmanship, deviation from plans and specifications and other imperfections. These deficiencies are attributable to
negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party defendants-appellants presented in their briefs
are premised on legal generalizations or speculations and on theological fatalism both of which ignore the plain facts. The
lengthy discussion of United on ordinary earthquakes and unusually strong earthquakes and on ordinary fortuitous
events and extraordinary fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an
overwhelming and destructive character that by its own force and independent of the particular negligence alleged, the
injury would have been produced. If we follow this line of speculative reasoning, we will be forced to conclude that under
such a situation scores of buildings in the vicinity and in other parts of Manila would have toppled down. Following the
same line of reasoning, Nakpil and Sons alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information acquired after the earthquake. If this were
so, hundreds of ancient buildings which survived the earthquake better than the two-year old PBA building must have
been designed and constructed by architects and contractors whose knowledge and foresight were unexplainably
auspicious and prophetic. Fortunately, the facts on record allow a more down to earth explanation of the collapse. The
failure of the PBA building, as a unique and distinct construction with no reference or comparison to other buildings, to
weather the severe earthquake forces was traced to design deficiencies and defective construction, factors which are
neither mysterious nor esoteric. The theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals defects and deficiencies in design and
construction. There is no mystery about these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the architects and the people in the construction
company. More relevant to our mind is the lesson from the parable of the wise man in the Sermon on the Mount "which
built his house upon a rock; and the rain descended and the floods came and the winds blew and beat upon that house;
and it fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the rain descended and man which
built his house the floods came, and the winds blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains, floods, winds, earthquakes, and natural
forces is precisely the reason why we have professional experts like architects, and engineers. Designs and constructions
vary under varying circumstances and conditions but the requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational and accurate. Instead of laying the blame
solely on the motions and forces generated by the earthquake, it also examined the ability of the PBA building, as
designed and constructed, to withstand and successfully weather those forces.

The evidence sufficiently supports a conclusion that the negligence and fault of both United and Nakpil and Sons, not a
mysterious act of an inscrutable God, were responsible for the damages. The Report of the Commissioner, Plaintiff's
Objections to the Report, Third Party Defendants' Objections to the Report, Defendants' Objections to the Report,
Commissioner's Answer to the various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to
the Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to the
Commissioner's Report not to mention the exhibits and the testimonies show that the main arguments raised on appeal
were already raised during the trial and fully considered by the lower Court. A reiteration of these same arguments on
appeal fails to convince us that we should reverse or disturb the lower Court's factual findings and its conclusions drawn
from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to the physical evidence before and after the
earthquake showing the inadequacy of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila Fire Department.

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b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the cross-sectional
area of each of the columns and the strength thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the rear, not only in columns
but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the column
A7 where the floor is lower by 80 cm. than the highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the design, plans and specifications of the PBA
building which involved appreciable risks with respect to the accidental forces which may result from earthquake shocks.
He conceded, however, that the fact that those deficiencies or defects may have arisen from an obsolete or not too
conservative code or even a code that does not require a design for earthquake forces mitigates in a large measure the
responsibility or liability of the architect and engineer designer.

The Third-party defendants, who are the most concerned with this portion of the Commissioner's report, voiced opposition
to the same on the grounds that (a) the finding is based on a basic erroneous conception as to the design concept of the
building, to wit, that the design is essentially that of a heavy rectangular box on stilts with shear wan at one end; (b) the
finding that there were defects and a deficiency in the design of the building would at best be based on an approximation
and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very possibly be outright
error; (c) the Commissioner has failed to back up or support his finding with extensive, complex and highly specialized
computations and analyzes which he himself emphasizes are necessary in the determination of such a highly technical
question; and (d) the Commissioner has analyzed the design of the PBA building not in the light of existing and available
earthquake engineering knowledge at the time of the preparation of the design, but in the light of recent and current
standards.

The Commissioner answered the said objections alleging that third-party defendants' objections were based on estimates
or exhibits not presented during the hearing that the resort to engineering references posterior to the date of the
preparation of the plans was induced by the third-party defendants themselves who submitted computations of the third-
party defendants are erroneous.

The issue presently considered is admittedly a technical one of the highest degree. It involves questions not within the
ordinary competence of the bench and the bar to resolve by themselves. Counsel for the third-party defendants has aptly
remarked that "engineering, although dealing in mathematics, is not an exact science and that the present knowledge as
to the nature of earthquakes and the behaviour of forces generated by them still leaves much to be desired; so much so
"that the experts of the different parties, who are all engineers, cannot agree on what equation to use, as to what
earthquake co-efficients are, on the codes to be used and even as to the type of structure that the PBA building (is) was (p.
29, Memo, of third- party defendants before the Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the Court itself, coupled
with the intrinsic nature of the questions involved therein, constituted the reason for the reference of the said issues to a
Commissioner whose qualifications and experience have eminently qualified him for the task, and whose competence had
not been questioned by the parties until he submitted his report. Within the pardonable limit of the Court's ability to
comprehend the meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court
sees no compelling reasons to disturb the findings of the Commissioner that there were defects and deficiencies in the

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design, plans and specifications prepared by third-party defendants, and that said defects and deficiencies involved
appreciable risks with respect to the accidental forces which may result from earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said
deviations contributed to the damage sustained by the building.

(b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the
construction of the building.

These two issues, being interrelated with each other, will be discussed together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the
construction and violations or deviations from the plans and specifications. All these may be summarized
as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one face
the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there are no spirals or where
spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar
reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 — No spiral up to a height of 22" from the ground floor,

(3) Column D6 — Spacing of spiral over 4 l/2,

(4) Column D7 — Lack of lateral ties,


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(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are at 2" from the
exterior column face and 6" from the inner column face,

(6) Column B6 — Lack of spiral on 2 feet below the floor beams,

(7) Column B5 — Lack of spirals at a distance of 26' below the beam,

(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",

(9) Column A3 — Lack of lateral ties,

(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,

(11) Column A4 — (second floor Column is completely hollow to a height of 30"

(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel beam to a height of 6
feet,

(13) Column A6 — No spirals up to a height of 30' above the ground floor level,

(14) Column A7— Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party defendants.

Ground floor columns.

(1) Column A4 — Spirals are cut,

(2) Column A5 — Spirals are cut,

(3) Column A6 — At lower 18" spirals are absent,

(4) Column A7 — Ties are too far apart,

(5) Column B5 — At upper fourth of column spirals are either absent or improperly spliced,

(6) Column B6 — At upper 2 feet spirals are absent,

(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.

(8) Column C7— Spirals are absent at lowest 18"

(9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,

(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the engineering experts for the defendants are
either contrary to general principles of engineering design for reinforced concrete or not applicable to the requirements for
ductility and strength of reinforced concrete in earthquake-resistant design and construction.

We shall first classify and consider defects which may have appreciable bearing or relation to' the earthquake-resistant
property of the building.

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As heretofore mentioned, details which insure ductility at or near the connections between columns and girders are
desirable in earthquake resistant design and construction. The omission of spirals and ties or hoops at the bottom and/or
tops of columns contributed greatly to the loss of earthquake-resistant strength. The plans and specifications required
that these spirals and ties be carried from the floor level to the bottom reinforcement of the deeper beam (p. 1,
Specifications, p. 970, Reference 11). There were several clear evidences where this was not done especially in some of the
ground floor columns which failed.

There were also unmistakable evidences that the spacings of the spirals and ties in the columns were in many cases
greater than those called for in the plans and specifications resulting again in loss of earthquake-resistant strength. The
assertion of the engineering experts for the defendants that the improper spacings and the cutting of the spirals did not
result in loss of strength in the column cannot be maintained and is certainly contrary to the general principles of column
design and construction. And even granting that there be no loss in strength at the yield point (an assumption which is
very doubtful) the cutting or improper spacings of spirals will certainly result in the loss of the plastic range or ductility in
the column and it is precisely this plastic range or ductility which is desirable and needed for earthquake-resistant
strength.

There is no excuse for the cavity or hollow portion in the column A4, second floor, and although this column did not fail,
this is certainly an evidence on the part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum may be approximated in
relation to column loads and column and beam moments. The main effect of eccentricity is to change the beam or girder
span. The effect on the measured eccentricity of 2 inches, therefore, is to increase or diminish the column load by a
maximum of about 1% and to increase or diminish the column or beam movements by about a maximum of 2%. While
these can certainly be absorbed within the factor of safety, they nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great contention between the parties and deserves
special consideration.

The proper placing of the main reinforcements and spirals in column A5, ground floor, is the responsibility of the general
contractor which is the UCCI. The burden of proof, therefore, that this cutting was done by others is upon the defendants.
Other than a strong allegation and assertion that it is the plumber or his men who may have done the cutting (and this
was flatly denied by the plumber) no conclusive proof was presented. The engineering experts for the defendants asserted
that they could have no motivation for cutting the bar because they can simply replace the spirals by wrapping around a
new set of spirals. This is not quite correct. There is evidence to show that the pouring of concrete for columns was
sometimes done through the beam and girder reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently wrap around the spirals, this would not do
for the elasticity of steel would prevent the making of tight column spirals and loose or improper spirals would result. The
proper way is to produce correct spirals down from the top of the main column bars, a procedure which can not be done if
either the beam or girder reinforcement is already in place. The engineering experts for the defendants strongly assert and
apparently believe that the cutting of the spirals did not materially diminish the strength of the column. This belief
together with the difficulty of slipping the spirals on the top of the column once the beam reinforcement is in place may be
a sufficient motivation for the cutting of the spirals themselves. The defendants, therefore, should be held responsible for
the consequences arising from the loss of strength or ductility in column A5 which may have contributed to the damages
sustained by the building.

The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns where spalling of the
concrete cover had taken place. This lack of proper splicing contributed in a small measure to the loss of strength.

The effects of all the other proven and visible defects although nor can certainly be accumulated so that they can
contribute to an appreciable loss in earthquake-resistant strength. The engineering experts for the defendants submitted
an estimate on some of these defects in the amount of a few percent. If accumulated, therefore, including the effect of
eccentricity in the column the loss in strength due to these minor defects may run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of the ground floor
columns contributed greatly to the collapse of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground floor, in the considered opinion of the
Commissioner rests on the shoulders of the defendants and the loss of strength in this column contributed to the damage
which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the plans and specifications
of the PBA building contributed to the damages which resulted during the earthquake of August 2, 1968 and the vice of
these defects and deficiencies is that they not only increase but also aggravate the weakness mentioned in the design of
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the structure. In other words, these defects and deficiencies not only tend to add but also to multiply the effects of the
shortcomings in the design of the building. We may say, therefore, that the defects and deficiencies in the construction
contributed greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of the contractor is direct and
positive, the presence of existence of all the major defects and deficiencies noted and proven manifests an
element of negligence which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the defendants voiced their
objections to the same on the grounds that the Commissioner should have specified the defects found by him to be
"meritorious"; that the Commissioner failed to indicate the number of cases where the spirals and ties were not carried
from the floor level to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties in the
columns were greater than that called for in the specifications; that the hollow in column A4, second floor, the
eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5,
ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the construction
were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor, was done by the
plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of the
defects was considered. As regards the objection as to failure to state the number of cases where the spirals and ties were
not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5
the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom.
The Commissioner likewise specified the first storey columns where the spacings were greater than that called for in the
specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to
specify the number of columns where there was lack of proper length of splicing of spirals, the Commissioner mentioned
groundfloor columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded, resulting in some
loss of strength which could be critical near the ends of the columns. He answered the supposition of the defendants that
the spirals and the ties must have been looted, by calling attention to the fact that the missing spirals and ties were only
in two out of the 25 columns, which rendered said supposition to be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or contribute to the damage,
but averred that it is "evidence of poor construction." On the claim that the eccentricity could be absorbed within the
factor of safety, the Commissioner answered that, while the same may be true, it also contributed to or aggravated the
damage suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the Commissioner by
reiterating the observation in his report that irrespective of who did the cutting of the spirals, the defendants should be
held liable for the same as the general contractor of the building. The Commissioner further stated that the loss of
strength of the cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the spiral
containment in the column and resulted in the loss of strength, as evidenced by the actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any sufficient cause to
disregard or modify the same. As found by the Commissioner, the "deviations made by the defendants from the plans and
specifications caused indirectly the damage sustained and that those deviations not only added but also aggravated the
damage caused by the defects in the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-
142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party defendants in
effecting the plans, designs, specifications, and construction of the PBA building and We hold such negligence as
equivalent to bad faith in the performance of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which may be in point in this
case reads:

One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences
thereof, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the
loss.

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As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the
vicinity were hardly affected by the earthquake. Only one thing spells out the fatal difference; gross negligence and evident
bad faith, without which the damage would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental
circumstances of this case, We deem it reasonable to render a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover
all damages (with the exception of attorney's fees) occasioned by the loss of the building (including interest charges and
lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum
being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per
annum shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs against the defendant and
third-party defendants (except Roman Ozaeta).

SO ORDERED.

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,


vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending
business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents.

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking
to set aside the decision of the Court of Appeals,1 and its resolution denying reconsideration, 2 the dispositive
portion of which decision reads as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby-ordered to pay the
plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July
23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23,
1986, until the entire amount is fully paid.

The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the
defendants.

SO ORDERED. 3

The Court required the respondents to comment on the petition,4 which was filed on April 3, 1998,5 and the
petitioners to reply thereto, which was filed on May 29, 1998.6 We now resolve to give due course to the petition
and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive
on the parties herein, as the appeal is limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from
Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name
"Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount
of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month.
Servando and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of P90,000.00,
payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing
on Janaury 19, 1986. They received only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of P300,000.00,
maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal
Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage.

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Servando and Leticia executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month,
or on July 11, 1986. However, only the sum of P275.000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous
unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of P60,000.00, bringing
their indebtedness to a total of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading
as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing
business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G.
Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2% service charge per annum from date
hereof until fully paid according to the amortization schedule contained herein. (Emphasis supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof when due, all the other installments together with all
interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additional amount
equivalent to one per cent (1%) per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due and demandable, exclusive
of costs and judicial or extra judicial expenses. (Emphasis supplied).

I, WE further agree that in the event the present rate of interest on loan is increased by law or the Central Bank of
the Philippines, the holder shall have the option to apply and collect the increased interest charges without notice
although the original interest have already been collected wholly or partially unless the contrary is required by law.

It is also a special condition of this contract that the parties herein agree that the amount of peso-obligation under
this agreement is based on the present value of the peso, and if there be any change in the value thereof, due to
extraordinary inflation or deflation, or any other cause or reason, then the peso-obligation herein contracted shall
be adjusted in accordance with the value of the peso then prevailing at the time of the complete fulfillment of the
obligation.

Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this note or
extension of payments, reserving rights against each and all indorsers and all parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights under
the provisions of Section 12, Rule 39, of the Revised Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional
Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan
including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did
not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the
plaintiffs the sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was
secured by a real estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the
promissory note only as a witness.

In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the loan was the
transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate
situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge
of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount

144
due is unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties
and other charges.

After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had
been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs
on the loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of
the New [Civil] Code" that the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per
annum."7

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as
follows:

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the
amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as penalty, until
the entire amount is paid in full.

2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount
of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from November 19, 1985 until
the whole amount is fully paid;

3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12%
interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully paid;

4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants.8

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of
the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank
prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only
in the absence of a stipulation on interest rate, but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become
'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower
could agree on any interest that may be charged on the loan".9 The Court of Appeals further held that "the
imposition of 'an additional amount equivalent to 1% per month of the amount due and demandable as penalty
charges in the form of liquidated damages until fully paid' was allowed by
law". 10

Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the Regional Trial
Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the
plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July
23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the
defendants.

SO ORDERED. 11

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated
November 25, 1997, the Court of Appeals denied the motion. 12

Hence, defendants interposed the present recourse via petition for review on certiorari. 13

We find the petition meritorious.

145
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is
whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that
plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it been
repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No.
116, as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. 13 However, we can not consider the rate "usurious" because this Court
has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the Usury Law 14 and that the Usury Law is now "legally inexistent". 15

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held that CB
Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity."
Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal another law." 17 In
the recent case of Florendo vs. Court of Appeals 18, the Court reiterated the ruling that "by virtue of CB Circular
905, the Usury Law has been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest
can now be charged as lender and borrower may agree upon." 19

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against
the law. 20The stipulation is void. 21 The courts shall reduce equitably liquidated damages, whether intended as
an indemnity or a penalty if they are iniquitous or unconscionable. 22

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial
court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as
liquidated damages may be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on
March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and
AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos,
Bulacan, in Civil Case No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.

G.R. No. 125944 June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners,


vs.
JOSE AVELINO SALAZAR, respondents.

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the decision of the
Court of Appeals in CA-G.R. CV No. 37899, affirming the decision of the Regional Trial Court, Branch 16, Malolos,
Bulacan, in Civil Case No. 375-M-91, "Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar" for annulment of
mortgage. The dispositive portion of the RTC decision reads:

"WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;

3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of attorney’s fees; and

4. To pay the costs.

SO ORDERED."1

146
The facts as summarized by the Court of Appeals in its decision being challenged are:

"On August 22, 1986, the plaintiffs-appellants executed a deed or real estate mortgage in which they mortgaged a
parcel of land situated in Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure payment of a loan of
P60,000.00 payable within a period of four (4) months, with interest thereon at the rate of 6% per month (Exh.
"B").

On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the
same parcel of land to the defendant-appellee, to secure payment of a loan of P136,512.00, payable within a
period of one (1) year, with interest thereon at the legal rate (Exh. "1").

On December 29, 1990, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged
the same parcel of land in favor of defendant-appellee, to secure payment of a loan in the amount of P230,000.00
payable within a period of four (4) months, with interest thereon at the legal rate (Exh. "2", Exh. "C").

This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the mortgaged property. They
alleged that they obtained only one loan form the defendant-appellee, and that was for the amount of P60,000.00,
the payment of which was secured by the first of the above-mentioned mortgages. The subsequent mortgages were
merely continuations of the first one, which is null and void because it provided for unconscionable rate of
interest. Moreover, the defendant-appellee assured them that he will not foreclose the mortgage as long as they
pay the stipulated interest upon maturity or within a reasonable time thereafter. They have already paid the
defendant-appellee P78,000.00 and tendered P47,000.00 more, but the latter has initiated foreclosure
proceedings for their alleged failure to pay the loan P230,000.00 plus interest.1âwphi1.nêt

On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the above-described mortgages were
executed to secure three separate loans of P60,000.00 P136,512.00 and P230,000.00, and that the first two loans
were paid, but the last one was not. He denied having represented that he will not foreclose the mortgage as long
as the plaintiffs-appellants pay interest."

In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the following errors:

1. The Court of Appeals erred in holding that three (3) mortgage contracts were executed by the parties instead of
one (1);

2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate mortgage with an interest of
72% per cent per annum or 6% per month is not unconscionable;

4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN PAID when the mortgagee
himself states in his ANSWER that the same was already paid; and

5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the appellants.

In his comment, respondent Jose Avelino Salazar avers that the petition should not be given due course as it raises
questions of facts which are not allowed in a petition for review on certiorari.

We find no merit in the instant petition.

The core of the present controversy is the validity of the third contract of mortgage which was foreclosed.

Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the amount of P60,000.00
secured by the first mortgage of August 1986. According to them, they signed the third mortgage contract in view of
respondent’s assurance that the same will not be foreclosed. The trial court, which is in the best position to evaluate the
evidence presented before it, did not give credence to petitioners’ corroborated testimony and ruled:

"The testimony is improbable. The real estate mortgage was signed not only by Ursula Solangon but also by her
husband including the Promissory Note appended to it. Signing a document without knowing its contents is
contrary to common experience. The uncorroborated testimony of Ursula Solangon cannot be given weight."2

147
Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the amount of P136,512.00,
or the second loan. In fact, such payment was confirmed by respondent Salazar in his answer to their complaint.

It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for review under Rule 45 of the
1997 Rules of Civil Procedure, as amended, only questions of law may be raised and they must be distinctly set forth. The
settled rule is that findings of fact of the lower courts (including the Court of Appeals) are final and conclusive and will not
be reviewed on appeal except: (1) when the conclusion is a finding grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when the Court of Appeals, in making its findings, went beyond the issues of the case and such findings are contrary to
the admission of both appellant and appellee; (6) when the findings of the Court of Appeals are contrary to those of the
trial court; and (7) when the findings of fact are conclusions without citation of specific evidence on which they are based.3

None of these instances are extant in the present case.

Parenthetically, petitioners are questioning the rate of interest involved here. They maintain that the Court of
Appeals erred in decreeing that the stipulated interest rate of 72% per annum or 6% per month is not unconscionable.

The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since the Usury Law had been repealed
by Central Bank Circular No. 905 there is no more maximum rate of interest and the rate will just depend on the mutual
agreement of the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic Sawmill Co.4

The factual circumstances of the present case require the application of a different jurisprudential instruction. While the
Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte
blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of
their assets.5 In Medel v. Court of Appeals,6 this court had the occasion to rule on this question - whether or not the
stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is usurious. While decreeing that the
aforementioned interest was not usurious, this Court held that the same must be equitably reduced for
being iniquitous, unconscionable and exorbitant, thus:

"We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan
is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate ‘usurious’
because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22,
1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now
‘legally inexistent.’

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB
Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity.
Indeed, we have held that ‘a Central Bank Circular can not repeal a law. Only a law can repeal another law. In the
recent case of Florendo v. Court of Appeals, the Court reiterated the ruling that ‘by virtue of CB Circular 905, the
Usury Law has been rendered ineffective.’ ‘Usury Law has been legally non-existent in our jurisdiction. Interest
can now be charged as lender and borrower may agree upon.’

Nevertheless, we find the interest at 5.5 % per month, or 66% per annum, stipulated upon by the parties
in the promissory note iniquitous or unconscionable, and hence, contrary to morals (‘contra bonos
mores’), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated
damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable." (Emphasis supplied)

In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest rate
of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with
justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.

WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that the
interest rate of 72% per annum is ordered reduced to 12 % per annum.

SO ORDERED.

G.R. No. L-44428 September 30, 1977

148
AVELINO BALURAN, petitioner,
vs.
HON. RICARDO Y. NAVARRO, Presiding Judge, Court of First Instance of Ilocos Norte, Branch I and ANTONIO
OBEDENCIO, respondents.

MUÑOZ PALMA, J.:

Spouses Domingo Paraiso and Fidela Q. Paraiso were the owners of a residential lot of around 480 square meters located
in Sarrat, Ilocos Norte. On or about February 2, 1964, the Paraisos executed an agreement entitled "BARTER" whereby as
party of the first part they agreed to "barter and exchange" with spouses Avelino and Benilda Baluran their residential lot
with the latter's unirrigated riceland situated in Sarrat, Ilocos Norte, of approximately 223 square meters without any
permanent improvements, under the following conditions:

1. That both the Party of the First Part and the Party of the Second Part shall enjoy the material possession of their
respective properties; the Party of the First Part shall reap the fruits of the unirrigated riceland and the Party of the
Second Part shall have a right to build his own house in the residential lot.

2. Nevertheless, in the event any of the children of Natividad P. Obencio, daughter of the First Part, shall choose to reside
in this municipality and build his own house in the residential lot, the Party of the Second Part shall be obliged to return
the lot such children with damages to be incurred.

3. That neither the Party of the First Part nor the Party of the Second Part shall encumber, alienate or dispose of in any
manner their respective properties as bartered without the consent of the other.

4. That inasmuch as the bartered properties are not yet accordance with Act No. 496 or under the Spanish Mortgage Law,
they finally agreed and covenant that this deed be registered in the Office of the Register of Deeds of Ilocos Norte pursuant
to the provisions of Act No. 3344 as amended. (p. 28, rollo)

On May 6, 1975 Antonio Obendencio filed with the Court of First Instance of Ilocos Norte the present complaint to recover
the above-mentioned residential lot from Avelino Baluran claiming that he is the rightful owner of said residential lot
having acquired the same from his mother, Natividad Paraiso Obedencio, and that he needed the property for Purposes Of
constructing his house thereon inasmuch as he had taken residence in his native town, Sarrat. Obedencio accordingly
prayed that he be declared owner of the residential lot and that defendant Baluran be ordered to vacate the same
forfeiting his (Obedencio) favor the improvements defendant Baluran had built in bad faith. 1

Answering the complaint, Avelino Baluran alleged inter alia (1) that the "barter agreement" transferred to him the
ownership of the residential lot in exchange for the unirrigated riceland conveyed to plaintiff's Predecessor-in-interest,
Natividad Obedencio, who in fact is still in On thereof, and (2) that the plaintiff's cause of action if any had prescribed. 2

At the pre-trial, the parties agreed to submit the case for decision on the basis of their stipulation of facts. It was likewise
admitted that the aforementioned residential lot was donated on October 4, 1974 by Natividad Obedencio to her son
Antonio Obedencio, and that since the execution of the agreement of February 2, 1964 Avelino Baluran was in possession
of the residential lot, paid the taxes of the property, and constructed a house thereon with an value of P250.00. 3 On
November 8, 1975, the trial Judge Ricardo Y. Navarro rendered a decision the dispositive portion of which reads as
follows:

Consequently, the plaintiff is hereby declared owner of the question, the defendant is hereby ordered to
vacate the same with costs against defendant.

Avelino Baluran to whom We shall refer as petitioner, now seeks a review of that decision under the following assignment
of errors:

I — The lower Court erred in holding that the barter agreement did not transfer ownership of the lot in
suit to the petitioner.

II — The lower Court erred in not holding that the right to re-barter or re- exchange of respondent Antonio
Obedencio had been barred by the statute of limitation. (p. 14, Ibid.)

The resolution of this appeal revolves on the nature of the undertaking contract of February 2, 1964 which is entitled
"Barter Agreement."

149
It is a settled rule that to determine the nature of a contract courts are not bound by the name or title given to it by the
contracting parties. 4 This Court has held that contracts are not what the parties may see fit to call them but what they
really are as determined by the principles of law. 5 Thus, in the instant case, the use of the, term "barter" in describing the
agreement of February 2, 1964, is not controlling. The stipulations in said document are clear enough to indicate that
there was no intention at all on the part of the signatories thereto to convey the ownership of their respective properties;
all that was intended, and it was so provided in the agreement, was to transfer the material possession thereof. (condition
No. 1, see page I of this Decision) In fact, under condition No. 3 of the agreement, the parties retained the right to alienate
their respective properties which right is an element of ownership.

With the material ion being the only one transferred, all that the parties acquired was the right of usufruct which in
essence is the right to enjoy the Property of another. 6 Under the document in question, spouses Paraiso would harvest
the crop of the unirrigated riceland while the other party, Avelino Baluran, could build a house on the residential lot,
subject, however, to the condition, that when any of the children of Natividad Paraiso Obedencio, daughter of spouses
Paraiso, shall choose to reside in the municipality and build his house on the residential lot, Avelino Baluran shall be
obliged to return the lot to said children "With damages to be incurred." (Condition No. 2 of the Agreement) Thus, the
mutual agreement — each party enjoying "material possession" of the other's property — was subject to a resolutory
condition the happening of which would terminate the right of possession and use.

A resolutory condition is one which extinguishes rights and obligations already existing. 7 The right of "material
possession" granted in the agreement of February 2, 1964, ends if and when any of the children of Natividad Paraiso,
Obedencio (daughter of spouses Paraiso, Party of the First Part) would reside in the municipality and build his house on
the property. Inasmuch as the condition opposed is not dependent solely on the will of one of the parties to the contract —
the spouses Paraiso — but is Part dependent on the will of third persons — Natividad Obedencio and any of her children
— the same is valid. 8

When there is nothing contrary to law, morals, and good customs Or Public Policy in the stipulations of a contract, the
agreement constitutes the law between the parties and the latter are bound by the terms thereof. 9

Art. 1306 of the Civil Code states:

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, Morals, good customs, public order, or
public policy.

Contracts which are the private laws of the contracting parties, should be fulfilled according to the literal
sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of the
contracting parties, for contracts are obligatory, no matter what their form may be, whenever the essential
requisites for their validity are present. (Philippine American General Insurance Co., Inc. vs. Mutuc, 61
SCRA 22)

The trial court therefore correctly adjudged that Antonio Obedencio is entitled to recover the possession of the residential
lot Pursuant to the agreement of February 2, 1964.

Petitioner submits under the second assigned error that the causa, of action if any of respondent Obedencio had
Prescribed after the lapse of four years from the date of execution of the document of February 2, 1964. It is argued that
the remedy of plaintiff, now respondent, Was to ask for re-barter or re-exchange of the properties subject of the agreement
which could be exercised only within four years from the date of the contract under Art. 1606 of the Civil Code.

The submission of petitioner is untenable. Art. 1606 of the Civil Code refers to conventional redemption which petitioner
would want to apply to the present situation. However, as We stated above, the agreement of the parties of February 2,
1964, is not one of barter, exchange or even sale with right to repurchase, but is one of or akin the other is the use or
material ion or enjoyment of each other's real property.

Usufruct may be constituted by the parties for any period of time and under such conditions as they may deem
convenient and beneficial subject to the provisions of the Civil Code, Book II, Title VI on Usufruct. The manner of
terminating or extinguishing the right of usufruct is primarily determined by the stipulations of the parties which in this
case now before Us is the happening of the event agreed upon. Necessarily, the plaintiff or respondent Obedencio could
not demand for the recovery of possession of the residential lot in question, not until he acquired that right from his
mother, Natividad Obedencio, and which he did acquire when his mother donated to him the residential lot on October 4,
1974. Even if We were to go along with petitioner in his argument that the fulfillment of the condition cannot be left to an
indefinite, uncertain period, nonetheless, in the case at bar, the respondent, in whose favor the resolutory condition was

150
constituted, took immediate steps to terminate the right of petitioner herein to the use of the lot. Obedencio's present
complaint was filed in May of 1975, barely several months after the property was donated to him.

One last point raised by petitioner is his alleged right to recover damages under the agreement of February 2, 1964. In the
absence of evidence, considering that the parties agreed to submit the case for decision on a stipulation of facts, We have
no basis for awarding damages to petitioner.

However, We apply Art. 579 of the Civil Code and hold that petitioner will not forfeit the improvement he built on the lot
but may remove the same without causing damage to the property.

Art. 579. The usufructuary may make on the property held in usufruct such useful improvements or
expenses for mere pleasure as he may deem proper, provided he does not alter its form or substance; but
he shall have no right to be indemnified therefor. He may, however. He may, however, removed such
improvements, should it be possible to do so without damage to the property. (Emphasis supplied)

Finally, We cannot close this case without touching on the unirrigated riceland which admittedly is in the possession of
Natividad Obedencio.

In view of our ruling that the "barter agreement" of February 2, 1964, did not transfer the ownership of the respective
properties mentioned therein, it follows that petitioner Baluran remains the owner of the unirrigated riceland and is now
entitled to its Possession. With the happening of the resolutory condition provided for in the agreement, the right of
usufruct of the parties is extinguished and each is entitled to a return of his property. it is true that Natividad Obedencio
who is now in possession of the property and who has been made a party to this case cannot be ordered in this
proceeding to surrender the riceland. But inasmuch as reciprocal rights and obligations have arisen between the parties
to the so-called "barter agreement", We hold that the parties and for their successors-in-interest are duty bound to effect a
simultaneous transfer of the respective properties if substance at justice is to be effected.

WHEREFORE, Judgment is hereby rendered: 1) declaring the petitioner Avelino Baluran and respondent Antonio
Obedencio the respective owners the unirrigated riceland and residential lot mentioned in the "Barter Agreement" of
February 2, 1964; 2) ordering Avelino Baluran to vacate the residential lot and removed improvements built by
thereon, provided, however that he shall not be compelled to do so unless the unirrigated riceland shall five been restored
to his possession either on volition of the party concerned or through judicial proceedings which he may institute for the
purpose.

Without pronouncement as to costs. So Ordered.

G.R. No. 141851 January 16, 2002

DIRECT FUNDERS HOLDINGS CORPORATION, petitioner,


vs.
JUDGE CELSO D. LAVIÑA, PRESIDING JUDGE OF RTC-Pasig City, Branch 71 and KAMBIAK Y. CHAN,
JR., respondents.

PARDO, J.:

The petition at bar1 seeks to review the decision2 of the Court of Appeals3 dismissing the petition assailing the ruling of the
trial court issuing a writ of preliminary injunction that restrained a writ of possession issued by a coordinate court.4

The Facts

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

"It is alleged by the petitioner that the respondent Judge issued the writ of preliminary injunction, despite clear
and express prayer in the Amended Complaint (Rollo, p. 23) that private respondent Kambiak Y. Chan, Jr. sought
the issuance of a writ of preliminary mandatory injunction. This is again despite the fact this error was brought to
respondent Judge's attention denied the Motion for Reconsideration on May 29, 1998 justifying the issuance
thereof due to petitioner's alleged misappreciation of facts and reliefs sought for.

151
"Culled from the records of the case, the action a quo is for annulment of documents, reconveyance, recovery of
possession, damages with application for the issuance of a writ of preliminary mandatory injunction and
temporary restraining order.1âwphi1.nêt

"During the hearing for the issuance of temporary restraining order, it was made clear to the respondent Judge
that the property in question was occupied by the petitioner by virtue of a writ of possession issued by the
Regional Trial Court of Pasig, Branch 157 in LRC Case No. R-5475 in a petition for the issuance of writ of
possession thereof way back on October 23, 1997 (Rollo, p. 22). Despite the lawful order of a coordinate and co-
equal court, the respondent Judge, presiding Regional Trial Court of Pasig, Branch 71, issued the questioned
orders to restore possession to private respondent Chan, alleging an obviously grave abuse of discretion,
tantamount to lack of jurisdiction (Rollo, p. 38).

"On the same date on December 8, 1997, the temporary restraining order (TRO) was issued, the Court Sheriff IV
Cresencio Rabello, Jr. implemented the TRO and submitted the Return on December 9, 1997 (Rollo, p. 39).

"Then, on January 21, 1998, the respondent Judge issued the questioned order granting the issuance of a writ of
preliminary injunction (Rollo, p. 14) who subsequently denied the petitioner's motion to dismiss and supplemental
motion to dismiss and the very urgent motion for reconsideration on February 16, 1998.

"On May 29, 1998, the motion for inhibition and the motion to dissolve the writ of preliminary injunction were
also denied (Rollo, p. 18)."15

On August 5, 1998, petitioner filed with the Court of Appeals a petition for certiorari and prohibition assailing the trial
court's issuance of a writ of preliminary injunction.6

On September 28, 1999, the Court of Appeals promulgated a decision dismissing the petition ruling that the trial court
jurisdiction to issue the injunction that did not interfere with the writ of possession of a coordinate court. 7

On October 19, 1999, petitioner filed with the Court of Appeals a motion for reconsideration of the decision. 8

On February 2, 2000, the Court of Appeals denied petitioner's motion stating that the arguments advanced were "mere
reiteration and restatements of those contained in their pleadings x x x."9

Hence, this appeal.10

The Issue

The issue raised is whether the Court of Appeals erred in affirming the trial court's ruling issuing a writ of injunction
restraining a writ of possession in another case to place respondent back in possession of the subject property.

In other words, the issue is who between petitioner and respondent Kambiak Y. Chan, Jr. has a better right to the
possession of the subject property?

The Court's Ruling

We resolve the issue in favor of petitioner.

The conditional sale agreement was the only document that the respondent presented during the summary hearing of the
application for a temporary restraining order before the Regional Trial Court, Branch 71, Pasig City.11

We find that the conditional sale agreement is officious and ineffectual. First, it was not consummated. Second, it was not
registered and duly annotated on the Transfer Certificate of Title (No. 12357) covering the subject property. Third, it was
executed about eight (8) years after the execution of the real estate mortgage over the subject property.1âwphi1.nêt

To emphasize, the mortgagee (United Savings Bank) did not give its consent to the change of debtor. It is a fundamental
axiom in the law on contracts that a person not a party to an agreement cannot be affected thereby. Worse, not only was
the conditional sale agreement executed without the consent of the mortgagee-creditor, United Savings Bank, the same
was also a material breach of the stipulations of the real estate mortgage over the subject property. The real estate
mortgage, in part, provides:

152
"(j) The MORTGAGOR shall neither lease the mortgaged property/ies, nor sell or dispose of the same in any
manner, without the written consent of the MORTGAGEE. However, if notwithstanding this stipulation and
during the existence of this mortgage, the property/ies herein mortgaged, or any portion thereof, is/are leased or
sold, x x x. It shall also be incumbent upon the MORTGAGOR to make it a condition of the sale or alienation that
the vendee, or any other party in whose favor the alienation is made, shall recognize as first lien the existing
mortgage or encumbrance in favor of the MORTGAGEE, as well as any new modified mortgage covering the same
properties to be executed by said MORTGAGOR in favor of the MORTGAGEE, and shall thereafter agree, promise
and bind himself to recognize and respect any extension of the terms of the original mortgage granted by the
MORTGAGEE in favor of the MORTGAGOR and such extended mortgage shall be considered as prior to such
encumbrance as the original mortgage. It is also further understood that should the MORTGAGOR sell, transfer
or in any manner alienate or encumber the mortgaged property/ies in violation of this agreement, he/she shall be
liable for damages to the MORTGAGEE."12

The conditions of the conditional sale agreement were not fulfilled, hence, respondent's claim to the subject property was
as heretofore stated ineffectual. Article 1181 of the Civil Code reads:

"Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishments or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition."

On the other hand, petitioner's right to the subject property is based on the following:

1. The real estate mortgage constituted by the Sps. Espino duly registered and annotated on TCT No. 12357 covering the
subject property.

2. The Deed of Assignment dated 15 January 1997 executed by UCPB Savings Bank (formerly United Savings Bank)
whereby it conveyed its rights as mortgagee in favor of the petitioner.

3. The Deed of Assignment of Right of Redemption dated 15 January 1997, executed by the Sps. Espino wherein they
assigned their right of redemption over the subject property to UCPB Savings Bank and the latter's successors-in-interest.

4. The Certificate of Sale dated 29 May 1997 executed by the sheriff, the affidavit of consolidation of ownership dated July
1997 (denominated as Doc. No. 490; Page No. 99. Book No. CLVII, Series of 1997 in the Notarial Books of Erlinda B.
Espejo, Notary Public for Quezon City) and TCT No. 8559-R subsequently issued to Petitioner.

5. The Order dated 23 October 1997 of Branch 157, RTC, Pasig City (LRC No. R-5475) and the Turn-over/Delivery of
Possession of the sheriff in the said LRC case.

In Soriano v. Bautista,13 the Deed of Real Estate Mortgage dated May 30, 1956 executed by the mortgagors contained a
stipulation giving the mortgagee the option to purchase the land subject of the mortgage on any date within the 2-year
period of the mortgage. The mortgagee subsequently decided to buy the land pursuant to this stipulation. We ruled:

"Appellants contend that, being mortgagors, they cannot be deprived of the right to redeem the mortgaged property,
because such right is inherent in and inseparable from this kind of contract. The premise of the contention is not entirely
accurate. While the transaction is undoubtedly a mortgage and contains the customary stipulation concerning
redemption, it carries the added special provision aforequoted, which renders the mortgagors' right to redeem defeasible at
the election of the mortgages. There is nothing illegal or immoral in this. It is simply an option to buy, sanctioned by
Article 1479 of the Civil Code, which states: "A promise to buy and sell a determinate thing for a price certain is binding
upon the promisor if the promise is supported by a consideration distinct from the price."14

In view of all of the foregoing, it is inexorable to conclude that petitioner, not the respondent, has a better right to the
possession of subject property.

The Judgment

WHEREFORE, the Court hereby REVERSES the decision of the Court of Appeals15 and the order denying reconsideration.

In lieu thereof, the Court renders judgment dismissing the case below, Civil Case No. 66554 of the Regional Trial Court,
Branch 71, Pasig City, including the counterclaims.

No costs.
153
SO ORDERED.

G.R. No. L-28967 July 22, 1975

AMELIA G. TIBLE, petitioner-administratrix,


vs.
JOSE C. AQUINO, respondent-claimant .

ESGUERRA, J.:

Petition for review on certiorari of the decision of the Court of Appeals in its C.A.-G. R. No. 32383-R, entitled "Amelia G.
Tible, petitioner-appellee vs. Jose C. Aquino, claimant-appellant", reversing the order of the Court of First Instance of
Camarines Sur in Sp. Proc. No. 731 (In the Matter of Intestate Estate of Emilio M. Tible, Amelia G. Tible, petitioner), which
dismissed the claim of Jose C. Aquino in the amount of P30,000.00 against the estate of the deceased, Emilio M. Tible,
and instead, ordered said claimant to pay said estate the sum of P50,500.00 as his indebtedness to the deceased Emilio
M. Tible. The decision of the appellate court sought to be reviewed reads as follows:

WHEREFORE, the judgment appealed from is hereby reversed. Let another be entered, ordering the
administratrix-appellee to pay claimant-appellant Jose C. Aquino the sum of P25,500.00 with legal
interest from the date of filing of the complaint. The counter-claim set forth herein is hereby dismissed for
lack of merit. With costs against the administratrix-appellee.

Petitioner was appointed administratrix of the Intestate Estate of the late Congressman Emilio M. Tible who died on
August 14, 1957, by the Court of First Instance of Naga City in Special Proceedings No. 731. Notice to creditors as
required by the Rules of Court having been published on March 8, 15, 22, 1958, private respondent-claimant Jose C.
Aquino filed with the probate court a claim against the estate for P30,000.00 on February 6, 1959, or almost eleven
months after the date of the first publication of the notice to creditors. A motion to dismiss was filed by the petitioner-
administratrix on the ground that the claim was filed beyond the reglementary period, but the trial court gave due course
to the claim. An answer with counterclaim for P54,500.00 was filed by petitioner-administratrix on May 8, 1959, followed
by an amended answer with counterclaim filed on October 12, 1959. After trial the lower court rendered judgment in favor
of the petitioner-administratrix as above mentioned.

The lower court, in dismissing Aquino's claim of P30,000.00 against the estate and ordering him to pay the estate the sum
of P50,500.00 rationalized as follows:

The evidence of the claimant shows that in 1954, he met Atty. Emilio Tible in the office of the Bureau of Forestry in Manila
he being a timber licensee and thereafter Atty. Tible borrowed money from him in the total amount of P50,000.00.
Thereafter, Congressman Tible bought from him a portion of his forest concession for the amount of P107,000.00 so that,
Atty. Tible has still a balance of P30,000.00 of his indebtedness to him as shown by the promissory notes, Exhs. A, A-1,
A-2 and A-3; that according to the claimant, he transferred to Atty. Tible a portion of his forest concession in the
Municipality of Esperanza, Agusan, under the authority of the Director of Forestry; that while Atty. Tible was still living,
he used to remind him about his indebtedness to him of P30,000.00 but the latter told him that he had no money yet.
According to the claimant, Jose C. Aquino, their agreement of the cession of the 2,000 hectares of forest land to
Congressman Tible for the amount of P107,000.00, was not made in writing.

The evidence of the administratrix, on the other hand, shows that the real agreement that took place between the
claimant and Atty. Tible was for the cession of 2,000 hectares of timberland to Tible for the amount of P50,000.00 which
was already paid by the latter as shown in the promissory note dated March 8, 1655, marked Exhibit "11"; that on April 9,
1955, the claimant was able to convince Atty. Tible to increase the amount of P50,000.00 to P80,000.00 alleging that Atty.
Emilio Tible would profit much from the 2,000 hectares and so, promissory notes marked Exhs. A, A-1 to A-3, were
executed by Atty. Emilio Tible on condition that the payment of which should depend upon the operation of the said 2,000
hectares to him; that after March 8, 1955, the claimant borrowed several amounts of money from Atty. Tible as shown in
the receipts and checks marked Exhibit 3, 4, 4-B, 4-b, 4-C, 4-D, 4-E, 4-F, 4-G, 5, 6, 7, 8, 9, 10 and 11 in the total
amount of P50,000.00 to be paid by the claimant to the said Atty. Tible but in the even that said claimant could not pay
said amount, Atty. Tible would be made a partner of the claimant in the operation of the timberland which was left to him
after the cession of the 2,000 hectares. This fact was established by the testimony of witness for the administratrix, Dr.
Marcial Tena, who was a partner of Atty. Emilio Tible, in their logging business; that besides the amount mentioned
above, Atty. Emilio Tible continued advancing money to the Aquinos' until the amount borrowed by the latter reached the
total sum of P54,500.00 as shown by the receipts marked Exhibits "3",
"4-F", "5", "6," "7", "8", "9", and "10". This amount was not yet paid by the claimant, Jose C. Aquino, up to the present.

154
The Court after a careful study of the evidence presented both by the claimant and the administratrix, arrived at the
conclusion that the amount of P30,000.00 claimed by the claimant, Jose C. Aquino, was not yet due and demandable at
the time of the presentation of the claim on the ground that Atty. Tible was not able to operate the 2,000 hectares ceded to
him by the claimant and that, the amount of P54,000.00 borrowed by the claimant from Atty. Tible has not been paid
until at present, neither was Atty. Tible made a partner by the claimant in the operation of the remaining forest
concession belonging to the said claimant. It was also found by the Court that the agreement entered into by and between
Atty. Tible and the claimant on the cession of this 2,000 hectares of timberland was against the law because a big amount
of money was paid by Atty. Tible as consideration for the cession of the 2,000 hectares of timberland which is speculative,
considering that claimant, Jose C. Aquino, had no improvement made in the ceded forest concession.

From the appealed order of the trial court it can be gleaned that although both petitioner and the private respondent agree
that there was a sale of the portion of Aquino's forest concession in Esperanza, Agusan, to Emilio Tible in 1955, two
conflicting versions of the agreement are put forward by each party as regards the consideration and the conditions
agreed upon.

Private respondent Aquino's evidence seeks to prove that Congressman Tible borrowed from him P50,000.00; thereafter
bought from him a portion of his forest concession for an agreed amount of P107,000.00; that Atty. Tible owed him a
balance of P30,000.00 as shown by promissory notes (Exhs. A, A-1, A-2, and A-3); that said forest concession was
transferred to Atty. Tible by authority of the Director of Forestry after the oral agreement of sale; and the balance of
P30,000.00 was never paid until the death of Atty. Tible.

Petitioner's version of the transaction was that the real agreement was for the cession of 2,000 hectares of timberland to
Atty. Tible for the amount of P50,000.00 which was paid by Atty. Tible as shown by the promissory note dated March 8,
1955 (]Exhibit "11"); that on April 9, 1955, Aquino was able to convince Atty. Tible to increase the sale price from
P50,000.00 to P80,000.00, as the latter expected to profit much from the 2,000 hectares of timberland; that promissory
notes (Exhs. "A", "A-1," to "A-3") were executed by Atty. Tible on condition that the payment of those promissory notes
would depend upon the operation of said 2,000 hectares; that after March 8, 1955, Aquino borrowed several amounts of
money from Atty. Tible (receipts and checks, Exhs. 3, 4, 4-B, 4-b, 4-C, 4-D, 4-E, 4-F, 4-G, 5, 6, 7, 8, 9, 10 and 11) in the
total amount of P50,000.00 to be paid by Aquino to Atty. Tible but in the event Aquino could not pay, Atty. Tible would be
made a partner of Aquino in the operation of the remainder of the timberland area still owned by Aquino; that Atty. Tible
continued lending money to Aquino until the amount of the latter's indebtedness reached P54,500.00 (Exhibits 3, 4-F, 5,
6, 7, 8, 9, 10); and that Atty. Aquino failed to pay that amount.

The two conflicting versions can be simplified thus — private respondent Aquino claims that Tible borrowed from him
P50,000.00 and then bought from him 2,000 hectares of his timberland in Agusan for P107,000.00; that Tible still owed
him a balance of P30,000.00 representing the unpaid balance of the consideration of the sale of the timberland at the time
of Tible's death. On the other hand, petitioner claims that the consideration for the sale of the timberland of Aquino to
Tible was only P50,000.00 which was already paid; that on April 9, 1955, Aquino and Tible agreed on an increase of the
sale price of the timberland from P50,000.00 to P80,000.00, so Tible executed promissory notes in favor of Aquino for the
balance of P30,000.00 subject to the condition that payment of those promissory notes would depend upon the operation
by Tible of the timberland; that after the foregoing transaction, Aquino borrowed several amounts from Tible (total
P50,000.00) but payment of said loans was subject to the condition that if Aquino cannot pay the loans to Tible, the latter
would be made a partner by Aquino in the operation of the remaining 2,000 hectares of timberland controlled by Aquino.
It is very clear that Aquino's version speaks of two transactions — loan of P50,000.00 to Tible and sale of 2,000 hectares
of timberland to Tible for P107,000.00. Petitioner's version speaks of three transactions sale of 2,000 hectares of Aquino's
timberland to Tible for P50,000.00; novation of the contract of sale by increasing the consideration from P50,000.00 to
P80,000.00, payment of the balance of P30,000.00 subject to the condition that payment would depend upon Tible's
operation of the timberland; and the supposed loans (total P50,000.00) given by Tible to Aquino, which if not paid by
Aquino would render it obligatory upon the latter to make Tible a partner in the operation of his remaining timberland.

The trial court in its evaluation of the evidence believed in petitioner's version of the transaction; hence the order of
October 31, 1961, which dismissed the claim of private respondent Aquino and ordered him to pay to the estate of Tible
the amount of P50,500.00 as his indebtedness to the deceased. It is this order of October 31, 1961, of the trial court that
was reversed by the respondent appellate court.

The respondent appellate court believed in claimant Aquino's version of the transaction in a well-discussed dissertation,
thus —

There is no dispute as to the sale of portion of Aquino's forest concession to Emilio Tible during the latter's lifetime.
However, there apparently exist two different versions as adduced by claimant and the administratrix relating to the
actual and real agreement as to the consideration of the sale and the conditions agreed upon. We have taken the pains of
reviewing carefully the records of this case in order to arrive as to the real agreement of the parties when they entered into

155
such contract of sale covering portion of Aquino's forest concession consisting of about 2,000 hectares and we are more to
believe that the version as advanced by claimant Aquino relating to their real agreement about said sale is more plausible as
it dovetailed with the material circumstances and facts of the case. To begin with, if the consideration of said transfer was
only P50,000.00 as insisted by the administratrix which was already paid as evidenced by receipt duly signed by the
claimant (Exh. 11), it would have been stated therein at least as full payment of the purchase price not as "payment of the
debt", considering that as insisted by the appellee the agreed price for such purchase of Aquino's forest concession was
only P50,000.00, which was already paid. The phrase "payment of debt" simply shows that the one tendering payment
(Tible) had an outstanding obligation to settle and this tallies with Aquino's assertion that prior to the negotiation of said
sale Tible had obtained various amounts from Aquino, which amounted all to P50,000.00 and which after consolidation
was paid by Tible as evidenced by a receipt duly signed by Aquino (Exh. 11). True, that the claimant-appellant at the
outset when asked to identify the questioned receipt of P50,000.00 (Exh. 11), admitted that said sum "covers the amount I
have taken from him which is part of the P77,000.00". Such admission, however, should be interpreted in the light of
extant circumstances. In making such sweeping admission, Aquino, however, made a qualification that said amount was
reached after consolidation and an accounting made of all the amounts received by him (t.s.n. pp. 38-39, hearing of July
3, 1955).1äwphï1.ñët And the consolidation referred to herein had reference to the various amounts secured by Aquino
from Tible as advances and as loan which were duly covered by receipts amounting also to P50,000.00 (Exhs. 3, 5, 6, 7
and 4-C) under the agreement that should the former fail to pay the same the latter would be a partner in the logging
operation of the Aquinos (t.s.n., p. 7, January 11, 1960). Thus, Aquino on rebuttal clarified his admission on this point —

Q The same witness Mr. Tena also declared that he was present on an occasion wherein you received from Mr. Tible the
sum of P50,000.00 as part payment of the portion of the area you ceded to Mr. Tible?

A I have never received the sum of P50,000.00 from the late Tible but instead that amount is a payment of what he owned
me.

Mr. Tena also declared that P50,000.00 which you received from Mr. Tible as part payment of a portion of your area was
made to appear as an indebtedness which is shown in this document, which is Exhibit "A", is that correct?

A It is true that I have received the amount from him as advances of the amount he is supposed to pay me. Those are the
advances he gave me and later on we made a liquidation of these advances and for the balance, because he has no money
at that time, he gave me that promissory note.

Q You are referring to the 4 Promissory notes executed by Mr. Tible on April 9, 1955?

A Yes, sir. (pp. 6-8, t.s.n., Jan. 11, 1960, Aquino on Rebuttal, Emphasis ours.)

Further, the foregoing asseverations of claimant-appellant coincide with the material facts of the case clearly indicating
that the amount of P50,000.00 embodied in Exhibit 11, involved another transaction which separate and distinct from the
consideration of the purchase price of the portion of Aquino's forest concession. It is of significant importance to note that
Exhibit 11, which appellee maintains as full payment of the purchase of the 2,000 hectares of Aquino's timber land
concession ceded to the deceased was executed on March 8, 1955, that is ahead by almost one month of the four
promissory notes in question upon which claimant's cause of action is predicated (Exhs. A, A-1 to A-3), which were
executed by Tible on April 9, 1955. Such being the case, therefore, and if it were really true that Tible had already paid the
purchase price as allegedly evidenced by Exhibit 11, we cannot conceive of any idea that would be within the realm of
probabilities as to why Tible had to execute the 4 promissory notes in question representing the balance of the purchase
price of said forest concession. It is advanced, however, as an excuse by the appellee that the agreed consideration thereof
in the amount of P50,000.00 was increased to P80,000.00, for which reason Tible had to execute said promissory notes,
whereby he then acknowledged to have an outstanding balance of P30,000.00 payable under the terms and conditions
embodied therein. Be that as it may, this would not create a situation contrary to what is reflected in the questioned
promissory notes (Exhs. A, A-1 to A-3). For it is undisputed that as of March 14, 1955 to April 5, 1955, Aquino evidently
appeared to be indebted to Tible in the sum total of P54,000. (Exhs. 3, 5, 6, 7, 4-C to 4-F), which various amounts were
obtained by the former from the latter as loan with an agreement that upon failure of Aquino to settle said amount, Tible
would then be a partner in the operation of Aquino's forest concession. And there is no evidence that Tible ever became a
partner in the operation of Aquino's forest concession when claimant failed to liquidate all the amounts he secured from
Tible. Therefore, it would appear that there would be no necessity for Tible to execute the promissory notes on April 9,
1955, assuming arguendo that the purchase price as originally agreed upon was increased, for Aquino was then still
indebted to Tible. Stated in short, as of March 14, 1955 to April 5, 1955, Tible appeared to be the creditor of Aquino.
However, on April 9, 1955, when Tible executed the promissory notes, the situation was reversed, as Aquino by this time
was the creditor of Tible. The reason for such shifting is clearly illustrated by Aquino when he testified —

Q Mr. Tena also declared that you received from Mr. Tible P54,500.00 which was conditioned that if you could not pay the
same you will make Mr. Tible a partner in your logging business at Esperanza, Agusan, is that correct?
156
A I do not exactly remember the amount but that was our first agreement that we will be partners in the logging but later
on he changed his mind because as a Congressman he cannot come to Butuan City. So, instead he asked me to cede part
of my area, at least 2,000 hectares which was already finalized later on. (p. 7, t.s.n., January 11, 1960.)

The four promissory notes in question executed on April 9, 1955, consisting of P12,500.00 which is payable within 240
days (Exh. A); the sum of P12,500.00 which is payable within 120 days (Exh. A-1); the sum of P2,500.00 which is payable
within 240 days (Exh. A-2); and the sum of P2,500.00 which is payable within 120 days (Exh. A-3), were found by the trial
court to be not yet due and demandable at the time of the presentation of the claim, which finding is now being capitalized
by the appellee as Tible was not able to operate the 2,000 hectares ceded to him by the claimant. The conclusion reached
by the trial court is obviously based on the subsequent receipt for P500.00 issued by Aquino in favor of Tible which
provides as follows —

P500.00

RECEIPT

RECEIVED from Congressman Emilio M. Tible an additional sum of Five Hundred (P500.00,) Pesos, to be credited against
the various amounts payable by him to the undersigned.

The following are also agreed:

(1) The various amounts totalling P4,000.00 taken by my brother, Rafael Aquino, will not be paid back to Emilio M. Tible
as promised in the receipts signed by my brother but will be credited against the various amounts payable in the future
by him to the undersigned.

(2) It is also understood that these various amounts appearing in the receipts signed by Emilio M. Tible payable to the
undersigned will not become due and payable until after the lapse of the respective periods therein specified, same to be
counted from the date the said Emilio M. Tible commences his operation within the public forest he acquired from the
undersigned. This present receipt, therefore, changes the dates of payment of the said various amounts just above
specified.

Manila, Philippines, June 15, 1955.


(Sgd.) JOSE AQUINO.

It is therefore, the theory of appellee that novation took place concerning the four promissory notes in question. Contrary
to appellee's view on this point, it is to be noted in these promissory notes executed by Tible that said amounts would be
payable within the period therein stated, provided "that in case of force majeure or any other cause beyond my control
that may hinder sale of logs, the payment of the amount ... in cash or in logs, will be deferred until normal times are
restored". The period therein stated was reproduced in a subsequent receipt (Exh. 1) which appellee maintains novated
the promissory notes stating that "these various amounts appearing in the receipts signed by Emilio M. Tible payable to
the undersigned will not become due and payable until after the lapse of the respective periods therein specified" which
obviously had reference to the period stated in the promissory notes in question. Such being the case, this can not be
treated as a novation at all. Conversely, the subsequent receipt is but a mere reiteration of acknowledgment of a debt by
Tible, although there was a qualified statement therein that "same to be counted from the date the said Emilio M. Tible
commences his operation within the public forest he acquired from the undersigned", and that said receipt (Exh. 1)
"changes the dates of payment of the said various amounts just above specified". Nonetheless, said qualification is but a
provision for a method and more time to pay and does not extinguish the obligation (Nat. Rice & Corn Corp. vs.
Gatbonton, CA-G.R. No. 27488-R, July 20, 1962). Thus, it has been held that —

An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the
term of payment and adding other obligations not incompatible with the old one (Ynchausti vs. Yulo, 34 Phil., 978; Pablo
vs. Sapungan, 71 Phil., 145., 145).

We rule, therefore, that the subsequent agreement between Aquino and Tible as to another mode of payment by giving the
latter more time to pay does not necessarily constitute novation as contemplated in Article 1291 of the New Civil Code
based on the well settled principle on novation that a "mere extension of payment and the addition of another obligation
not incompatible with the old one is not a novation thereof. Novation is never presumed; there must be a declaration to
the effect in unequivocal terms or that the old and the new obligations must be incompatible" (Santos vs. Acuna, G.R. No,
L-8831, October 31, 1956). In short, the facts of the case should plainly disclose that there was an unqualified intent to
discard the original substantial agreement, and not merely a change as to the mode of payment of an existing obligation
for novation is never presumed. The fact that Tible was not able to operate is beside the point, considering that the said

157
2,000 hectares of Aquino's timber concession was already ceded and transferred in the name of Emilio M. Tible of which
he was already granted by the Department of Agriculture and Natural Resources "Ordinary Timber License" (Exh. 22) and
later on in the name of the "Heirs of Emilio M. Tible" (Exh. 20).1äwphï1.ñët This consummates the transaction relating to
the sale of 2,000 hectares of Aquino's timber concession in favor of Tible and negates any idea that said sale of 2,000
hectares was speculative. Besides, the condition that payment of amounts embodied in the promissory notes shall be
dependent upon Tible's operation of the forest concession he acquired from Aquino is undoubtedly a void conditional
obligation, since its fulfillment is made to depend upon the exclusive will of the debtor (Tible) (Art. 115, Civil
Code).1äwphï1.ñët

It appearing that subsequent to the execution of the promissory notes, claimant Jose Aquino received the amount of
P500.00 and he acknowledged the amounts of P4,000.00 which was secured by his brother (Exh. 4-D to Exh. 4-F), to be
credited against the various sums payable by Tible in his favor, said amount in sum total of P4,500.00 should accordingly
be deducted from the whole amount of P30,000.00 as reflected in the four promissory notes subject matter of claimant's
cause of action, thereby leaving only the amount of P25,500.00 which claimant could lawfully recover from the estate of
Emilio M. Tible.

We find it difficult to dispute private respondent's argument that the real solution of this case hinges on findings based on
an evaluation of evidence as to the true nature of the transaction that transpired between Tible and Aquino. The crucial
issue of whether or not Tible borrowed from Aquino P50,000.00 before the former bought from Aquino 2,000 hectares of
timberland for P107,000.00 was resolved by the respondent Appellate Court in favor of respondent Aquino in its
aforequoted discussion on the basis of the evidence presented by both the petitioner and private respondent. Petitioner's
version of the supposed transactions that took place between Tible and Aquino was demolished by the findings of
respondent Appellate Court. Even if We were to disregard the cardinal rule that only issues of law decided by the
respondent Appellate Court may be reviewed by Us, and its findings of facts may likewise be subjected to a minute
inquiry, still We see no reasonable grounds for altering or modifying the Appellate Court's well founded conclusions.

Here, evidence of a nature that approaches the approximation of moral certainty, and not merely preponderance of
evidence, indicates the real transaction that took place between Aquino and Tible was that Tible borrowed P50,000.00
from Aquino before Tible bought 2,000 hectares of timberland from Aquino for an agreed consideration of P107,000.00.
Respondent Appellate Court's ruling relative to the four promissory notes (Exhs. "A", "A-1", "A-2", "A-3") as executed by
Tible in favor of Aquino to pay the balance of the agreed consideration of the sale, that "the subsequent agreement
between Aquino and Tible as to another mode of payment by giving the latter more time to pay does not necessarily
constitute novation as contemplated in Article 1291 of the New Civil Code on the well settled principle on novation that a
"mere extension of payment and the addition of another obligation not incompatible with the old one is not a novation
thereof", is well-buttressed by the evidence and We find no compelling reason to overturn the same. Neither do We see any
reason to disagree with respondent Appellate Court's ruling that "the condition that payment of amounts embodied in the
promissory notes shall be dependent upon Tible's operation of the forest concession he acquired from Aquino is
undoubtedly a void conditional obligation since its fulfillment is made to depend upon the exclusive will of the debtor,
Tible (Art. 1115, Civil Code)". The payment of the remaining balance of the purchase price of the 2,000 hectares of
timberland cannot be made to depend on the exclusive will of the debtor, Tible, whether or not he will operate the timber
concession.

As to the petitioner's contention raised for the first time before Us that the sale of the timberland for P107,000.00 by
Aquino to Tible is null and void for being contrary to law and public policy, suffice it to say that this new contention was
not raised by petitioner in the respondent Appellate Court where she only asked that the order of the trial court
recognizing the validity of the sale in accordance with petitioner's version and giving her a favorable judgment should be
affirmed. When the respondent Appellate Court reversed the order of the trial court and rendered judgment in favor of
private respondent Aquino by accepting his version of the transaction, petitioner now claims that the sale is void. In short,
she wants to win the case at any cost even by a complete change of theory on the real issues involved.

Petitioner's argument that the trial court erred in giving due course to Aquino's claim for P30,000.00 since it was filed
about eleven months after the date of the first publication of the notice to creditors hardly deserves consideration at this
time. When the trial court accepted the claim, what the petitioner did, instead of questioning the trial court's jurisdiction
on the matter, was to file a counterclaim against claimant Aquino, wherein she was sustained by the trial court, and she
urged the respondent Appellate Court to affirm it when claimant Aquino appealed the trial court's order. It is now late in
the day to question the timeless of the filing of the claim.

WHEREFORE, the decision of respondent Court of Appeals is affirmed, with costs against petitioner.

SO ORDERED.

G.R. No. 132403 September 28, 2007


158
HI-CEMENT CORPORATION, Petitioner,
vs.
INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now,
EQUITABLE-PCI BANK) Respondent.

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

G.R. No. 132419

E.T. HENRY & CO. and SPOUSES ENRIQUE TAN and LILIA TAN, Petitioners,
vs.
INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now,
EQUITABLE-PCI BANK), Respondent.

DECISION

CORONA, J.:

At bar are consolidated petitions assailing the decision of the Court of Appeals (CA) dated January 21, 1998 in CA-G.R.
CV No. 31600 entitled Insular Bank of Asia and America [now Philippine Commercial International Bank/(PCIB)] v. E.T.
Henry & Co., et al.1

The antecedent facts follow.

Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of E.T. Henry & Co., Inc. (E.T.
Henry), a company engaged in the business of processing and distributing bunker fuel.2 Among E.T. Henry's customers
were petitioner Hi-Cement Corporation (Hi-Cement),3 Riverside Mills Corporation (Riverside) and Kanebo Cosmetics
Philippines, Inc. (Kanebo). For their purchases, these corporations issued postdated checks to E.T. Henry.

Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now Equitable PCI-Bank) granted E.T.
Henry a credit facility known as "Purchase of Short Term Receivables." Through this arrangement, E.T. Henry was able to
encash, with pre-deducted interest, the postdated checks of its clients. In other words, E.T. Henry and respondent were
into "re-discounting" of checks.

For every transaction, respondent required E.T. Henry to execute a promissory note and a deed of assignment bearing the
conformity of the client to the re-discounting.4

From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of assignment) with respondent.
However, in February 1981, 20 checks5 of Hi-Cement (which were crossed and which bore the restriction "deposit to
payee’s account only") were dishonored. So were the checks of Riverside and Kanebo.6

Respondent filed a complaint for sum of money7 in the then Court of First Instance of Rizal8 against E.T. Henry, the
spouses Tan, Hi-Cement (including its general manager9 and its treasurer 10 as signatories of the postdated crossed
checks), Riverside and Kanebo.11

In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered actual damages equivalent to
their value, exclusive of accrued and accruing interests, charges and penalties such as attorney’s fees and expenses of
litigation, as follows:

1. Riverside Mills Corporation ₱ 115,312.50

2. Kanebo Cosmetics Philippines, Inc. 5,811,750.00

3. Hi-Cement Corporation 10,000,000.00

Respondent also sought to collect from E.T. Henry and the spouses Tan other loan obligations (amounting to
₱1,661,266.51 and ₱4,900,805, respectively) as deficiencies resulting from the foreclosure of the real estate mortgage on
E.T. Henry's property in Sucat, Parañaque.12

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Hi-Cement filed its answer alleging, among others, that: (1) its general manager and treasurer were not authorized to
issue the postdated crossed checks in E.T. Henry's favor; (2) the deed of assignment purportedly executed by Hi-Cement
assigning them to respondent only bore the conformity of its treasurer and (3) respondent was not a holder in due course
as it should not have discounted them for being "crossed checks."13

In their answer (with counterclaim against respondent and cross-claims against Hi-Cement, Riverside and Kanebo),14 E.T.
Henry and the spouses Tan claimed that: (1) the drawers of the postdated checks failed to honor them due to the adverse
economic conditions prevailing at the time respondent presented them for payment; (2) the extra-judicial sale of the
mortgaged Sucat property was void due to gross inadequacy of the bid price15and (3) their loans were subjected to a
usurious interest rate of 21% p.a.

For their part, Riverside and Kanebo sought the dismissal of the case against them, arguing that they were not privy to
the re-discounting arrangement between respondent and E.T. Henry.

On June 30, 1989, the trial court rendered a decision which read:

WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of evidence, this Court hereby renders
judgment in favor of [respondent] and against [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], to wit:

1. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and severally, to pay
[respondent] damages represented by the face value of the postdated checks as follows:

(a) Riverside Mills Corporation ₱ 115,312.50

(b) Kanebo Cosmetics Philippines, Inc. 5,811,750.00

(c) Hi-Cement Corporation 10,000,000.00

plus interests, services, charges and penalties until fully paid;

2. Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of ₱4,900,805.00 plus accrued
interests, charges, penalties until fully paid;

3. Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of ₱1,661,266.51 plus interests, charges,
and penalties until fully paid;

4. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay [respondent] [a]ttorney’s fees and
expenses of litigation in the amount of ₱200,000.00 and pay the cost of this suit.16

SO ORDERED.17

Only petitioners appealed the decision to the CA which affirmed it in toto. Hence, these petitions.

In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed checks because (1) it did not
authorize their issuance; (2) respondent was not a holder in due course and (3) there was no basis for the lower court’s
holding that it was solidarily liable for the face value of Riverside’s and Kanebo’s checks.18

In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially contend that the lower courts erred
in: (1) applying the doctrine of piercing the veil of the corporate entity to make the spouses Tan solidarily liable with E.T.
Henry; (2) not ruling on their cross-claims and counterclaims, and (3) not declaring the foreclosure of E.T. Henry's Sucat
property as void.19

(A) G.R. 132403

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of law. 20 The factual
findings of the trial court, specially when affirmed by the appellate court, are generally binding on us unless there was a
misapprehension of facts or when the inference drawn from the facts was manifestly mistaken.21This case falls within the
exception.

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Authority of Hi-Cement’s General Manager and Treasurer to Issue the Postdated Crossed Checks

Both the trial court and the CA concluded that Hi-Cement authorized its general manager and treasurer to issue the
subject postdated crossed checks. They both held that Hi-Cement was already estopped from denying such authority
since it never objected to the signatories' issuance of all previous checks to E.T. Henry which the latter, in turn, was able
to re-discount with respondent.

We agree with the lower courts that both the general manager and treasurer of Hi-Cement were authorized to issue the
subjects checks. However, notwithstanding such fact, respondent could not be considered a holder in due course.

Respondent Bank Not a Holder In Due Course

The Negotiable Instruments Law (NIL), specifically Section 191,22 provides:

"Holder" means the payee or indorsee of a bill or a note, or the person who is in possession of it, or the bearer thereof.

On the other hand, Section 5223 states:

A holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and
regular on its face; (b) he became the holder of it before it was overdue, and without notice that it has previously been
dishonored, if such was the fact; (c) he took it in good faith and for value and (d) at the time it was negotiated to him, he
had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Absent any of the elements set forth in Section 52, the holder is not a holder in due course. In the case at bar, the last two
requirements were not met.

In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA,24 we held that the holder of crossed checks was not a holder in
due course. There, the drawer (BCCF) issued postdated crossed checks in favor of one of its suppliers (George King) who
promised to deliver bales of tobacco leaf but failed. George King, however, sold the checks on discount to State Investment
House, Inc. (SIHI) and upon the latter’s presentment to the drawee bank, BCCF ordered a "stop payment." Thereafter, SIHI
filed a collection case against it. In ruling that SIHI was not a holder in due course, we explained:

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have
the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once – to one who has an account with a bank [and]; (c) the act of crossing the checks serves
as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received
the check pursuant to that purpose, otherwise, he is not a holder in due course.

Likewise, in Atrium Management Corporation v. CA,25 where E.T. Henry, Hi-Cement and its treasurer26 again engaged in a
legal scuffle over four postdated crossed checks, we held that Atrium (with which the checks were re-discounted) was not
a holder in due course. In that case, E.T. Henry was the payee of four Hi-Cement postdated checks which it endorsed to
Atrium. When the latter presented the crossed checks to the drawee bank, Hi-Cement stopped payment.27 We held that
Atrium was not a holder in due course:

In the instant case, the checks were crossed and specifically indorsed for deposit to payee’s account only. From the
beginning, Atrium was aware of the fact that the checks were all for deposit only to payee’s account, meaning E.T. Henry.
Clearly, then, Atrium could not be considered a holder in due course.

In the case at bar, respondent's claim that it acted in good faith when it accepted and discounted Hi-Cement’s postdated
crossed checks from E.T. Henry (as payee therein) fails to convince us. Good faith becomes inconsequential amidst proof
of respondent's grossly negligent conduct in dealing with the subject checks.

Respondent was all too aware that subject checks were crossed and bore restrictions that they were for deposit to payee's
account only; hence, they could not be further negotiated to it. The records likewise reveal that respondent completely
disregarded a telling sign of irregularity in the re-discounting of the checks when the general manager did not acquiesce to
it as only the treasurer's signature appeared on the deed of assignment. As a banking institution, it behooved respondent
to act with extraordinary diligence in every transaction.28 Its business is impressed with public interest, thus, it was not
expected to be careless and negligent, specially so where the checks it dealt with were crossed. In Bataan Cigar and
Cigarette Factory, Inc.,29 we ruled:

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It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to
ascertain the indorser’s title to the check or the nature of his possession. Failing in this respect, the holder is
declared guilty of gross negligence amounting to legal absence of good faith…and as such[,] the consensus of
authority is to the effect that the holder of the check is not a holder in due course. (emphasis supplied)

The next query is whether Hi-Cement can still be made liable for the checks. We answer in the negative.

In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court,30 SIHI re-discounted crossed checks and was
declared not a holder in due course. As a result, when it presented the checks for deposit, we deemed that its presentment
to the drawee bank was not proper, hence, the liability did not attach to the drawer of the checks. We ruled that:

The three subject checks in the case at bar had been crossed…which could only mean that the drawer had intended the
same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who
presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the
drawer. Thus, in the absence of due presentment, the drawer did not become liable. 31

Our resolution in the foregoing case was reiterated in Atrium Management Corporation v. CA,32 where we affirmed the CA
ruling that the drawer of the postdated crossed checks was not liable to the holder who was deemed not a holder in due
course.

We note, however, that in the two aforementioned cases, we made it clear that the NIL does not absolutely bar a holder
who is not a holder in due course from recovering on the checks. In both, we ruled that it may recover from the party who
indorsed/encashed the checks "if the latter has no valid excuse for refusing payment." Here, there was no doubt that it
was E.T. Henry that re-discounted Hi-Cement's checks and received their value from respondent. Since E.T. Henry had no
justification to refuse payment, it should pay respondent.

Solidary Liability of Hi-Cement for The Face Value of Riverside's and Kanebo's Checks

Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the face value of their checks. Hi-
Cement had nothing to do with the checks of these two corporations. However, although the language of the trial court
decision's dispositive portion seemed confusing, a reading of the decision in its entirety reveals that the fallo was for each
corporation to be liable solidarily with E.T. Henry and/or the spouses Tan for the respective values of their checks.

Furthermore, solidary liability cannot be presumed but must be established by law or contract. Neither is present here.
Articles 1207 and 1208 of the Civil Code provide:

Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter is bound to render, entire compliance with the
presentation. There is solidary liability only when the obligation expressly so states, or when the obligation
requires solidarity. (emphasis supplied)

Art. 1208. If from the law, or the nature of the wording of the obligations to which the preceding article refers to the
contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are
creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules governing the
multiplicity of suits.

At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable for the checks.

(B) G.R. No. 132419

Doctrine of Piercing the


Veil of Corporate Entity

In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in applying the "piercing the veil of
corporate entity" doctrine to their case. They claim that both the trial and appellate courts failed to cite the reasons why
the doctrine was relevant to them.

We agree with petitioners E.T. Henry and the spouses Tan in this respect.

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If any general rule can be laid down, it is that the corporation will be looked upon as a legal entity until sufficient reasons
to the contrary appear. 33 It is only when the fiction or notion of legal entity is used to defeat public convenience, justify
wrong, perpetuate fraud or defend crime that the law will shred the corporate legal veil and regard it as a mere association
of persons.34 This is referred to as the doctrine of piercing the veil of corporate entity.

After a careful study of the records, we hold that E.T. Henry's corporate veil should not have been pierced at all.

First, the trial court failed to provide a clear ground why the doctrine was used. It merely stated that it agreed with
respondent’s arguments but did not explain why the doctrine was relevant to petitioner E.T. Henry's and the spouses
Tan’s case. On the other hand, the CA held:

…It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as well as its authorized signatories.
The business of the corporation was conducted solely for the benefit of the spouses Tan who colluded with [Hi-Cement] in
defrauding [respondent]. As the lower court cited…[I]t is a settled law in this and other jurisdictions that when the
corporation is a mere alter ego of a person, same being true when the corporation is controlled, and its affairs are so
conducted to make it merely an instrumentality, agency or conduit of another.35

Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T. Henry and the spouses Tan
defrauded respondent. It did not also state what act constituted the fraud. Fraud is an allegation of fact that demands
clear and convincing evidence.36 It is never presumed.37

Second, the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate personality. 38 For this ground to stand
in this case, there must be proof that the spouses Tan: (1) had control or complete domination of E.T. Henry’s finances
and that the latter had no separate existence with respect to the act complained of; (2) used such control to commit fraud
or wrong and (3) the control was the proximate cause of the loss or injury complained of by respondent. 39 The records of
this case do not show that these elements were present.

Inadequacy of the Bid Price to Annul Foreclosure Proceeding

With respect to the allegation that foreclosure was void due to the inadequacy of the bid price, we agree with the CA that
the "mere inadequacy of the price obtained at the [s]heriff’s sale, unless shocking to the conscience, (was) not sufficient to
set aside the sale if there (was) no showing that, in the event of a regular sale, a better price (could) be
obtained."401âwphi1

Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that it was carried out without strict
observance of the procedure, we will continue to assume its regularity and strike down any attempt to vitiate it. In this
case, E.T. Henry and the spouses Tan made no mention of any anomaly to support the nullification of the foreclosure sale
but merely alleged a disparity in the bid price and the property’s fair market value.

Counterclaims and Cross-claims

Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of the lower court to pass upon
their counterclaim against respondent or cross-claims against Hi-Cement, Riverside and Kanebo. They ask us now to hold
these parties liable on the basis of said claims. We decline to do so.

First, E.T. Henry and the spouses Tan failed to implead Hi-Cement, Riverside and Kanebo as parties in the case at bar.
Under Rule 3 of the Rules of Court, every action, including a counterclaim (or a cross-claim), must be prosecuted or
defended in the name of the real party in interest.41 The term "defendant" may refer to the original defending party, the
defendant in a counterclaim, the cross-defendant or the third (fourth, etc.) party defendant.42 Hence, for this technical
lapse, we are constrained not to pass on E.T. Henry's and the spouses Tan's cross-claims.

Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on the basis of an alleged void
foreclosure proceeding on E.T. Henry's Sucat property due to an inadequate bid price. It is no longer necessary to delve
into this matter in view of our finding that the mere inadequacy of the bid price on the property did not automatically
render the foreclosure sale irregular or void.

Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts’ ruling on E.T. Henry’s and the spouses
Tan’s solidary liability with Riverside and Kanebo vis-a-vis their checks.43 To be consistent, however, with our dictum on

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the separate personality of E.T. Henry and the spouses Tan, the solidarity liability arising from the checks of Riverside
and Kanebo shall only be enforced against E.T. Henry.

WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is
hereby AFFIRMED with MODIFICATION. Accordingly, petitioner Hi-Cement Corporation is discharged from any liability.
Only petitioner E.T. Henry & Co. is ORDERED to pay respondent Insular Bank of Asia and America (later Philippine
Commercial International Bank and now Equitable PCI-Bank) the following:

1. ₱10,000,000 representing the value of Hi-Cement's checks it received from respondent plus accrued interests,
charges and penalties until fully paid, and

2. the loans for ₱1,661,266.51 and ₱4,900,805 plus accrued interests, charges and penalties until fully paid.

Let the records of this case be remanded to the trial court for the proper computation of E.T. Henry's, Riverside's and
Kanebo's liabilities for the checks, attorney's fees and costs of litigation.

Costs against petitioners E.T. Henry and the spouses Enrique and Lilia Tan.

SO ORDERED.

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