on Audit (COA).
The assailed issuances affirmed the Notice of
Obligations with a period
Salonte v. Commission on Audit ................................................................. 1
Reciprocal Obligations
Fil-Estate Properties, Inc. v. Ronquillo ....................................................... 3
Golden Valley Exploration, Inc. vs. Pinkian Mining Company .................. 5
Sangguniang Panlungsod Ng Baguio City vs. Jadewell Parking Systems
Corporation .......................................................................................... 7
Metropolitan Bank and Trust Company vs. Chiok .................................... 19
The Wellex Group, Inc. vs. U-land Airlines, Co. Ltd ................................ 28
Swire Realty Development Corporation v. Yu .......................................... 40
Joint Obligation
Berot v. Siapno ......................................................................................... 42
Alternative Obligation
Arco Pulp and Paper Co., Inc. v. Lim........................................................ 45
Solidary Obligation
Olongapo City v. Subic Water and Sewerage Co., Inc. ............................. 49
Estanislao and Africa Sinamban v. China Banking Corporation ............... 52
Obligation with a penal clause
J Plus Asia Development Corp. v. Utility Assurance Corp. ...................... 56
Nacar v. Gallery Frames ........................................................................... 61
Venzon v. Rural Bank of Buenavista, Inc. ................................................ 64
S.C. Megaworld Construction and Development Corp. v. Parada ............. 65
Secretary of the Department of Public Works and Highways v. Tecson ... 69
Extinguishment of Obligations
Metro Concast Steel Corp. v. Allied Bank Corp ....................................... 73
Payment/Performance
International Hotel Corp. vs Joaquin ........................................................ 75
Dela Cruz vs. Concepcion ......................................................................... 79
National Power Corporation v. Ibrahim .................................................... 81
Netlink Computer Incorporated v. Delmo ................................................. 85
Philippine Commercial International Bank v. Franco ............................... 87
Bognot v. RRI Lending Corporation ......................................................... 89
Evangelista v. Screenex, Inc. .................................................................... 93
Tender of payment and consignment
Cacayorin v. Armed Forces and Police Mutual Benefit Association, Inc. . 95
Bonrostro v. Luna ..................................................................................... 97
Del Carmen v. Sabordo ........................................................................... 100
Philippine National Bank v. Chan ........................................................... 101
Loss of thing due/Impossibility of performance
Comglasco Corporation/Aguila Glass v. Santos Car Check Center
Corporation ...................................................................................... 103
Compensation
Soriano v. People .................................................................................... 105
Mondrago Personal Sales, Inc. v. Sola, Jr. .............................................. 107
Union Bank of the Philippines v. Development Bank of the Philippines 109
First United Constructors Corp. v. Bayanihan Automotive Corp. ........... 112
Areza v. Express Savings Bank, Inc. ....................................................... 114
California Manufacturing Company, Inc. v. Advanced Technology System,
Inc. ................................................................................................... 118
Novation
ACE Foods, Inc. v. Micro Pacific Technologies., Ltd. ............................ 120
Philippine Reclamation Authority v. Romago, Inc. ................................. 121
Vector Shipping Corporation v. Amercan Home Assurance Co.............. 124
Asian Terminals, Inc. v. Philam Insurance Co., Inc. ............................... 126
Degaños v. People of the Philippines ...................................................... 130
Arco Pulp and Paper Co., Inc. v. Lim...................................................... 133
Bognot v. RRI Lending Corporation ....................................................... 133
The Wellex Group, INc. v. U-Land Airlines, Co. Ltd. ............................ 133
Bank of the Philippine Islands v. Domingo ............................................. 133
Paradigm Development Corp. of the Philippines v. Bank of the Philippine
Islands .............................................................................................. 139
————————————————————————————
O BLIGATIONS WITH A PERIOD
Salonte v. Commission on Audit
G.R. No. 207348 August 19, 2014
ROWENA R. SALONTE, Petitioner,
vs.
COMMISSION ON AUDIT, CHAIRPERSON MA. GRACIA PULIDO-
TAN, COMMISSIONER JUANITO G. ESPINO, JR.,
COMMISSIONER HEIDI L. MENDOZA, and FORTUNATA M.
RUBICO, DIRECTOR IV, COA COMMISSION SECRETARIAT, in
their official capacities, Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is a petition for review filed under Rule 64 assailing the February 15,
2008 Decision1 and November 5, 2012 Resolution,2 denominated as
Decision Nos. 2008-018 and 2012-190, respectively, of the Commission
Disallowance No. (ND) 2000-002-101(97) dated November 14, 2001
1 issued by Rexy M. Ramos, COA State Auditor IV, pursuant to COA
Assignment Order No. 2000-63.3
3
The Facts
On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F.
Cruz) entered into a Contract of Reclamation4 in which F.F. Cruz, in
consideration of a defined land sharing formula thus stipulated, agreed to
undertake, at its own expense, the reclamation of 180 hectares, more or
less, of foreshore and submerged lands fromthe Cabahug Causeway in
42
that city. The timetables, i.e., commencement of the contract and project
45 completion, are provided in paragraphs 2 and 15 of the Contract which
state:
49
2. COMMENCEMENT. Work on the reclamation shall commence not
later than [July 1989], after thiscontract shall be ratified by the
56 Sanggunian Panlungsod;
xxxx
15. CONTRACT DURATION. The project is estimated to be completed
in six (6) years: (3 years for the dredge-filling and seawall construction
73 and 3 years for the infrastructures completion). However, if all the
infrastructures within the OWNERS’ share of the project are already
75 completed within the six (6) year period agreed upon, any extension of
time for works to bedone within the share of the DEVELOPERS, shall be
at the discretion of the DEVELOPERS, as a growing city, changes in
requirements of the lot buyers are inevitable.
On a best effort basis, the construction of roadways, drainage system and
open spaces in the area designated as share of the City of Mandaue, shall
be completed not later than December 31, 1991. (emphasis supplied)
95
Subsequently, the parties inked inrelation to the above project a
Memorandum of Agreement (MOA) dated October 24, 19895 whereby
the City of Mandaue allowed F.F. Cruz to put up structures on a portion
of a parcel of land owned by the city for the use of and to house F.F. Cruz
103 personnel assigned at the project site, subject to terms particularly
provided in paragraphs 3, 4 and 5 of the MOA:
105 3) That [F.F. Cruz] desires to use a portion of a parcel of land of the [City
of Mandaue] described under paragraph 1 hereof to the extent of 495
square meters x x x to be used by them in the construction of their offices
to house its personnel to supervise the Mandaue City Reclamation Project
x x x.
xxxx
120 4) That the [City of Mandaue] agrees to the desire of [F.F. Cruz] to use a
portion of the parcel of land described under paragraph 1 by [F.F. Cruz]
for the latter to use for the construction of their offices to house its
personnel to supervise the said Mandaue City Reclamation Project with
no rental to be paid by [F.F. Cruz] to the [City of Mandaue].
5) That the [City of Mandaue] and [F.F. Cruz] have agreed that upon the
completion of the Mandaue City Reclamation Project, all improvements
introduced by [F.F. Cruz] to the portion of the parcel of land owned by
the [City of Mandaue]as described under paragraph 3 hereof existing
upon the completion of the said Mandaue City Reclamation Project shall
ipso facto belong to the [City of Mandaue] in ownershipas compensation
for the use of said parcel of land by [F.F. Cruz] without any rental
whatsoever. (emphasis supplied)
Pursuant to the MOA, F.F. Cruz proceeded to construct the contemplated
housing units and other facilities which included a canteen and a septic
tank.
Later developments saw the City of Mandaue undertaking the Metro Cebu
Development Project II (MCDP II), part of which required the widening
of the Plaridel Extension Mandaue Causeway. However, the structures
and facilities built by F.F. Cruz subject of the MOA stood in the direct
path of the road widening project. Thus, the Department of Public Works
and Highways (DPWH) and Samuel B. Darza, MCDP II project director,
entered into an Agreement to Demolish, Remove and Reconstruct
Improvement dated July 23, 19976 with F.F. Cruz whereby the latter
would demolish the improvements outside of the boundary of the road
widening project and, in return, receive the total amount of PhP
1,084,836.42 in compensation.
Accordingly, petitioner Rowena B.Rances (now Rowena RancesSolante),
Human Resource Management Officer III, prepared and, with the
approval of Samuel B. Darza (Darza), then issued Disbursement Voucher
(DV) No. 102-07-88-97 dated July 24, 19977 for PhP 1,084,836.42 in
favor of F.F. Cruz. In the voucher, Solante certified that the expense
Obligations Part 2 | Page 1 of 143
covered by it was "necessary, lawful and incurred under my direct
supervision."
Thereafter, Darza addressed a letter-complaint to the Office of the
Ombudsman, Visayas, inviting attention to several irregularities
regarding the implementation of MCDP II. The letter was referred to the
COA which then issued Assignment Order No. 2000-063 for a team to
audit the accounts of MCDP II. Following an audit, the audit team issued
Special Audit Office (SAO) Report No. 2000-28, par. 5 of which states:
F.F. Cruz and Company, Inc. was paid ₱1,084,836.42 for the cost of the
property affected by the widening of Plaridel Extension, Mandaue
Causeway. However, under Section 5 of its MOA with Mandaue City, the
former was no longer the lawful owner of the properties at the time the
payment was made.8
Based on the above findings, the SAO audit team, through Rexy Ramos,
issued the adverted ND 2000-002-101-(97)9 disallowing the payment of
PhP 1,084,836.42 to F.F. Cruz and naming that company, Darza and
Solante liable for the transaction. Therefrom, Solante sought
reconsideration, while F.F. Cruz appealed, but the motion for
reconsideration and the appeal were jointly denied in Legal and
Adjudication Office (LAO) Local Decision No. 2004-040 dated March 5,
2004, which F.F. Cruz in time appealed to COA Central.
In the meantime, the adverted letter-complaint of Darza was upgraded as
an Ombudsman case, docketed as OMB-V-C-03-0173-C, against Solante,
et al., albeit the Ombudsman, by Resolution of June 29, 2006,10 would
subsequently dismiss the same for lack of merit.
The Ruling of the Commission on Audit
In its February 15, 2008 Decision,11
the COA, as indicated at the outset,
affirmed ND 2000-002-101-97 on the strength of the following premises:
From the above provision of the MOA, it is clear that the improvements
introduced by F.F. Cruz x x x would be owned by the City upon
completion of the project which under the Contract of reclamation should
have been in 1995. However, the project was not completed in 1995 and
even in 1997 when MDCP paid for these improvements. The fact that the
reclamation project had not yet been completed or turned over to the City
of Mandaue by F.F. Cruz in 1997 or two years after it should have been
completed, does not negate the right over such improvements by the City
x x x. Clearly, the intention of the stipulation is for F.F. Cruz x x x to
compensate the government for the use of the land on which the office,
pavement, canteen, extension shed, house and septic tank were erected.
Thus, to make the government pay for the cost of the demolished
improvements will defeat the intention of parties as regards compensation
due from the contractor for its use of [the] subject land. Under Article
1315 of the Civil Code, from the moment a contract is perfected, the
parties are bound to the fulfillment to what has been expressly stipulated
and all the consequences which according to their nature, may be in
keeping with good faith, usage and law. Thus, even if the contractual
stipulations may turn out to be financially disadvantageous to any party,
such will not relieve any or both parties fromtheir contractual
obligations.12 (emphasis supplied)
From such decision, Solante filed a Motion for Reconsideration dated
June 28, 2010 purportedly with Audit Team Leader, Leila Socorro P.
Domantay. This motion was denied by the COA in a Resolution dated
November 5, 201213wherein the commission held:
x x x The arguments of Ms. Solante that as long as the Project has not yet
been turned over, the ownership of the said improvements would not be
acquired yet by the City would put the entire contract at the mercy of F.F.
Cruz & Co., Inc., thus, negating the mutuality of contracts principle
expressed in Article 1308 ofthe New Civil Code, which states:
Art. 1308. The contracts must bindboth contracting parties; its validity or
compliance cannot be leftto the will of one of them.
On February 15, 2013, Solante received a Notice of Finality of Decision
(NFD)14 stating that the COA Decision dated February 15, 2008 and
Resolution dated November 5, 2012 have become final and executory, a
copy of the Resolution having been served on the parties on November 9,
2012 by registered mail. Notably, Solante never received a copy of the
COA Resolution. She came to get one only on May 8, 2013 after inquiring
from the Cebu Central Post Office, which, in a Certification of
Deliverydated May 8, 2013,15 stated that the registered mail containing
said copy was in fact not delivered.
Hence, the instant petition.
The Issue
The resolution of the present controversy rests on the determination of a
sole issue: who between the City ofMandaue and F.F. Cruz owned during
the period material the properties that were demolished.
The Court’s Ruling
The petition is meritorious. The COA and its audit team obviously
misread the relevant stipulations of the MOA in relation to the provisions
on project completion and termination of contract of the Mandaue-F.F.
Cruz reclamation contract.
Essentially, the COA is alleging that the Contract of Reclamation
establishes an obligation on the part of F.F. Cruz to finish the project
within the allotted period of six (6) years from contract execution in
August 1989. Prescinding from this premise, the COA would conclude
that after the six (6)-year period, F.F. Cruz is automatically deemed to be
in delay, the contract considered as completed, and the ownership of the
structures built in accordance with the MOA transferred to the City of
Mandaue.
COA’s basic position and the arguments holding it together is untenable.
On this point, the Civil Code provision on obligations with a period is
relevant. Article 1193 thereof provides:
Article 1193. Obligations for whose fulfillment a day certain has been
fixed, shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate
upon arrival of the day certain.
A day certain is understood to bethat which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the
obligation is conditional, and it shall be regulated by the rules of the
preceding Section. (emphasis supplied)
A plain reading of the Contract ofReclamation reveals that the six (6)-
year period provided for projectcompletion, or, with like effect,
termination of the contract was a mere estimateand cannot be considered
a period or a "day certain" inthe context of the aforequoted Art. 1193. To
be clear, par. 15 of the Contract of Reclamation states: "[T]he project is
estimated to be completed in six (6) years." As such, the lapse of six (6)
years from the perfection of the contract did not, by itself, make the
obligation to finish the reclamation project demandable, such as to put the
obligor in a state of actionable delay for its inability to finish. Thus, F.F.
Cruz cannot be deemed to be in delay. Parenthetically, the Ombudsman,
in a Resolution of June 29, 2006 in OMB-V-C-03-0173-C, espoused a
similar view in dismissing the complaint against Solante, thus:
A careful reading of the pertinent section of the Contract of Reclamation
between F.F. Cruz and Mandaue City, however, would confirm
respondents Rances-Solante[’s]and Sungahid’s view that herein
respondent Cruz was still the owner of the subject properties at the time
these were demolished. Indeed, the Contract specifies that the six (6)-year
period was no more than an estimate of the project completion. It was not
a fixed period agreed upon. Being so, the mere lapse of six (6) years from
the execution of the Contract, did not by itself deem the reclamation
project completed, muchless bring about the fulfillment of the condition
stipulated in the MOA (on the shift of ownership over the demolished
properties). Herein respondent Cruz, and/or his company, at least on this
particular regard, can be said to be still the owner of the structures along
Plaridel Extension x x x, when these were demolished to give way to road
widening. It was nothing but equitable that they get compensated for the
damages caused by the demolition.16 (emphasis supplied)
Put a bit differently, the lapse of six (6) years from the perfection of the
subject reclamation contract, withoutmore, could not have automatically
vested Mandaue City, under the MOA, with ownership of the structures.
Moreover, even if we consider the allotted six (6) years within which F.F.
Cruz was supposed to completethe reclamation project, the lapse thereof
does not automatically mean thatF.F. Cruz was in delay. As may be noted,
the City of Mandaue never madea demand for the fulfillment of its
obligation under the Contract of Reclamation. Article 1169 of the Civil
Code on the interaction of demand and delay and the exceptions to the
requirement of demand relevantly states:
Article 1169. Those obliged to deliver orto do something incur in delay
from the time the obligeejudicially or extrajudicially demands from them
the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exist:
(1) When the obligation or the law expressly so declares; or
Obligations Part 2 | Page 2 of 143
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be delivered
or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the momentone of the parties fulfills his
obligation, delay by the other begins.
Thus, in J Plus Asia Development Corporation v. Utility Assurance
Corporation,17 the Court has held:
In this jurisdiction, the following requisites must be present in order that
the debtor may be in default: (1) that the obligation be demandable and
already liquidated;(2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially. (emphasis
supplied)
In the instant case, the records are bereft of any document whence to
deduce that the City of Mandaue exactedfrom F.F. Cruz the fulfillment of
its obligation under the reclamation contract. And to be sure, not one of
the exceptions to the requisite demand under Art. 1169 is established, let
alone asserted. On the contrary, the then city mayor of Mandaue, no less,
absolved F.F. Cruz from incurring under the premises in delay. In his
affidavit dated July 9, 2004,18 then Mayor Ouano stated:
That although x x x the reclamation wasestimatedto be completed in six
years ending in 1995, the said project however, was not fully completed
when the demolition of the mentioned improvements of [F.F. Cruz] was
made x x x [and in fact] up to now the said Mandaue Reclamation Project
has not yet been fully completed and turned over to the City of Mandaue.
x x x [S]ince at the time of the demolition the said improvements actually
belonged to [F.F. Cruz] and the City of Mandaue has no claim whatsoever
on the said payment x x x for the demolished improvements. (emphasis
supplied)
As it were, the Mandaue-F.F.Cruz MOA states that the structures built by
F .F. Cruz on the property of the city will belong to the latter only upon
the completion of the project. Clearly, the completion of the project is a
suspensive condition that has yet to be fulfilled. Until the condition
1âwphi1
arises, ownership of the structures properly pertains to F .F. Cruz.
To be clear, the MOA does not state that the structures shall inure in
ownership to the City of Mandaue after the lapse of six ( 6) years from
the execution of the Contract of Reclamation. What the MOA does
provide is that ownership of the structures shall vest upon, or ipso facto
belong to, the City of Mandaue when the Contract of Reclamation shall
have been completed. Logically, before such time, or until the agreed
reclamation project is actually finished, F.F. Cruz owns the structures.
The payment of compensation for the demolition thereof is justified. The
disallowance of the payment is without factual and legal basis. COA then
gravely abused its discretion when it decreed the disallowance.
WHEREFORE, the instant petition is GRANTED. Accordingly, the
assailed February 15, 2008 Decision, November 5, 2012 Resolution, and
Notice of Disallowance No. 2000-002-101 (97) dated November 14, 2001
issued by the Commission on Audit are hereby REVERSED and SET
ASIDE.
No costs.
SO ORDERED.
R ECIPROCAL O BLIGATIONS
Fil-Estate Properties, Inc. v. Ronquillo
G.R. No. 185798 January 13, 2014
FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK
INC., Petitioners,
vs.
SPOUSES CONRADO AND MARIA VICTORIA
RONQUILLO, Respondents.
DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the
1997 Rules .of Civil Procedure assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the
Office of the President in O.P. Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the
Central Park Place Tower while co-petitioner Fil-Estate Network, Inc. is
its authorized marketing agent. Respondent Spouses Conrado and Maria
Victoria Ronquillo purchased from petitioners an 82-square meter
condominium unit at Central Park Place Tower in Mandaluyong City for
a pre-selling contract price of FIVE MILLION ONE HUNDRED
SEVENTY-FOUR THOUSAND ONLY (₱5,174,000.00). On 29 August
1997, respondents executed and signed a Reservation Application
Agreement wherein they deposited ₱200,000.00 as reservation fee. As
agreed upon, respondents paid the full downpayment of ₱1,552,200.00
and had been paying the ₱63,363.33 monthly amortizations until
September 1998.
Upon learning that construction works had stopped, respondents likewise
stopped paying their monthly amortization. Claiming to have paid a total
of ₱2,198,949.96 to petitioners, respondents through two (2) successive
letters, demanded a full refund of their payment with interest. When their
demands went unheeded, respondents were constrained to file a
Complaint for Refund and Damages before the Housing and Land Use
Regulatory Board (HLURB). Respondents prayed for
reimbursement/refund of ₱2,198,949.96 representing the total
amortization payments, ₱200,000.00 as and by way of moral damages,
attorney’s fees and other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against
petitioners for failing to file their Answer within the reglementary period
despite service of summons.2
Petitioners filed a motion to lift order of default and attached their position
paper attributing the delay in construction to the 1997 Asian financial
crisis. Petitioners denied committing fraud or misrepresentation which
could entitle respondents to an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor,
rendered judgment ordering petitioners to jointly and severally pay
respondents the following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT
THOUSAND NINE HUNDRED FORTY NINE PESOS & 96/100
(₱2,198,949.96) with interest thereon at twelve percent (12%) per annum
to be computed from the time of the complainants’ demand for refund on
October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS (₱100,000.00) as moral
damages,
c) FIFTY THOUSAND PESOS (₱50,000.00) as attorney’s fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (₱10,000.00)
payable to this Office fifteen (15) days upon receipt of this decision, for
violation of Section 20 in relation to Section 38 of PD 957.3
The Arbiter considered petitioners’ failure to develop the condominium
project as a substantial breach of their obligation which entitles
respondents to seek for rescission with payment of damages. The Arbiter
also stated that mere economic hardship is not an excuse for contractual
and legal delay.
Petitioners appealed the Arbiter’s Decision through a petition for review
pursuant to Rule XII of the 1996 Rules of Procedure of HLURB. On 17
February 2005, the Board of Commissioners of the HLURB denied4 the
petition and affirmed the Arbiter’s Decision. The HLURB reiterated that
the depreciation of the peso as a result of the Asian financial crisis is not
a fortuitous event which will exempt petitioners from the performance of
their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied5 on 8 May
2006. Thereafter, petitioners filed a Notice of Appeal with the Office of
the President. On 18 April 2007, petitioners’ appeal was dismissed6 by
the Office of the President for lack of merit. Petitioners moved for a
reconsideration but their motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for
review under Rule 43 containing the same arguments they raised before
the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN
AFFIRMING THE DECISION OF THE HONORABLE HOUSING
AND LAND USE REGULATORY BOARD AND ORDERING
PETITIONERS-APPELLANTS TO REFUND RESPONDENTS-
APPELLEES THE SUM OF ₱2,198,949.96 WITH 12% INTEREST
Obligations Part 2 | Page 3 of 143
FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING
THAT THE COMPLAINT STATES NO CAUSE OF ACTION
AGAINST PETITIONERS-APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN
AFFIRMING THE DECISION OF THE OFFICE BELOW ORDERING
PETITIONERS-APPELLANTS TO PAY RESPONDENTS-
APPELLEES THE SUM OF ₱100,000.00 AS MORAL DAMAGES
AND ₱50,000.00 AS ATTORNEY’S FEES CONSIDERING THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN
AFFIRMING THE DECISION OF THE HOUSING AND LAND USE
REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS
TO PAY ₱10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE
OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH
FINDING.8
On 30 July 2008, the Court of Appeals denied the petition for review for
lack of merit. The appellate court echoed the HLURB Arbiter’s ruling that
"a buyer for a condominium/subdivision unit/lot unit which has not been
developed in accordance with the approved condominium/subdivision
plan within the time limit for complying with said developmental
requirement may opt for reimbursement under Section 20 in relation to
Section 23 of Presidential Decree (P.D.) 957 x x x."9 The appellate court
supported the HLURB Arbiter’s conclusion, which was affirmed by the
HLURB Board of Commission and the Office of the President, that
petitioners’ failure to develop the condominium project is tantamount to
a substantial breach which warrants a refund of the total amount paid,
including interest. The appellate court pointed out that petitioners failed
to prove that the Asian financial crisis constitutes a fortuitous event which
could excuse them from the performance of their contractual and statutory
obligations. The appellate court also affirmed the award of moral damages
in light of petitioners’ unjustified refusal to satisfy respondents’ claim and
the legality of the administrative fine, as provided in Section 20 of
Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a
Resolution10 dated 11 December 2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially
the same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT
AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF THE
PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN
FAVOR OF THE RESPONDENTS DESPITE LACK OF CAUSE OF
ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE
PETITIONERS ARE LIABLE UNDER THE PREMISES, THE
HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED
THE HUGE AMOUNT OF INTEREST OF TWELVE PERCENT
(12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED
WHEN IT AFFIRMED IN TOTO THE DECISION OF THE OFFICE
OF THE PRESIDENT INCLUDING THE PAYMENT OF ₱100,000.00
AS MORAL DAMAGES, ₱50,000.00 AS ATTORNEY’S FEES AND
₱10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF
ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH
CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they
allegedly have not committed any act of misrepresentation amounting to
bad faith which could entitle respondents to a refund. Petitioners claim
that there was a mere delay in the completion of the project and that they
only resorted to "suspension and reformatting as a testament to their
commitment to their buyers." Petitioners attribute the delay to the 1997
Asian financial crisis that befell the real estate industry. Invoking Article
1174 of the New Civil Code, petitioners maintain that they cannot be held
liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account
of suspension of development on a project. They liken their situation to a
bank which this Court, in Overseas Bank v. Court of Appeals,12 adjudged
as not liable to pay interest on deposits during the period that its
operations are ordered suspended by the Monetary Board of the Central
Bank.
Lastly, petitioners aver that they should not be ordered to pay moral
damages because they never intended to cause delay, and again blamed
the Asian economic crisis as the direct, proximate and only cause of their
failure to complete the project. Petitioners submit that moral damages
should not be awarded unless so stipulated except under the instances
enumerated in Article 2208 of the New Civil Code. Lastly, petitioners
refuse to pay the administrative fine because the delay in the project was
caused not by their own deceptive intent to defraud their buyers, but due
to unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian
financial crisis constitute a fortuitous event which would justify delay by
petitioners in the performance of their contractual obligation; 2) assuming
that petitioners are liable, whether or not 12% interest was correctly
imposed on the judgment award, and 3) whether the award of moral
damages, attorney’s fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all
the legal fora. The rulings were consistent that first, the Asian financial
crisis is not a fortuitous event that would excuse petitioners from
performing their contractual obligation; second, as a result of the breach
committed by petitioners, respondents are entitled to rescind the contract
and to be refunded the amount of amortizations paid including interest
and damages; and third, petitioners are likewise obligated to pay
attorney’s fees and the administrative fine.
This petition did not present any justification for us to deviate from the
rulings of the HLURB, the Office of the President and the Court of
Appeals.
Indeed, the non-performance of petitioners’ obligation entitles
respondents to rescission under Article 1191 of the New Civil Code which
states:
Article 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule
governing the sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments. No installment payment made
1âwp hi1
by a buyer in a subdivision or condominium project for the lot or unit he
contracted to buy shall be forfeited in favor of the owner or developer
when the buyer, after due notice to the owner or developer, desists from
further payment due to the failure of the owner or developer to develop
the subdivision or condominium project according to the approved plans
and within the time limit for complying with the same. Such buyer may,
at his option, be reimbursed the total amount paid including amortization
interests but excluding delinquency interests, with interest thereon at the
legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to
rescind the contract and demand reimbursement for the payments they
had made to petitioners.
Notably, the issues had already been settled by the Court in the case of
Fil-Estate Properties, Inc. v. Spouses Go13promulgated on 17 August
2007, where the Court stated that the Asian financial crisis is not an
instance of caso fortuito. Bearing the same factual milieu as the instant
case, G.R. No. 165164 involves the same company, Fil-Estate, albeit
about a different condominium property. The company likewise reneged
on its obligation to respondents therein by failing to develop the
condominium project despite substantial payment of the contract price.
Fil-Estate advanced the same argument that the 1997 Asian financial
crisis is a fortuitous event which justifies the delay of the construction
project. First off, the Court classified the issue as a question of fact which
may not be raised in a petition for review considering that there was no
variance in the factual findings of the HLURB, the Office of the President
and the Court of Appeals. Second, the Court cited the previous rulings of
Asian Construction and Development Corporation v. Philippine
Commercial International Bank14 and Mondragon Leisure and Resorts
Corporation v. Court of Appeals15 holding that the 1997 Asian financial
crisis did not constitute a valid justification to renege on obligations. The
Court expounded:
Obligations Part 2 | Page 4 of 143
Also, we cannot generalize that the Asian financial crisis in 1997 was
unforeseeable and beyond the control of a business corporation. It is
unfortunate that petitioner apparently met with considerable difficulty e.g.
increase cost of materials and labor, even before the scheduled
commencement of its real estate project as early as 1995. However, a real
estate enterprise engaged in the pre-selling of condominium units is
concededly a master in projections on commodities and currency
movements and business risks. The fluctuating movement of the
Philippine peso in the foreign exchange market is an everyday occurrence,
and fluctuations in currency exchange rates happen everyday, thus, not an
instance of caso fortuito.16
The aforementioned decision becomes a precedent to future cases in
which the facts are substantially the same, as in this case. The principle
of stare decisis, which means adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid
by respondents plus 6% legal interest computed from the date of demand.
The Court also awarded attorney’s fees. We follow that ruling in the case
before us.
The resulting modification of the award of legal interest is, also, in line
with our recent ruling in Nacar v. Gallery Frames,17 embodying the
amendment introduced by the Bangko Sentral ng Pilipinas Monetary
Board in BSP-MB Circular No. 799 which pegged the interest rate at 6%
regardless of the source of obligation.
We likewise affirm the award of attorney’s fees because respondents were
forced to litigate for 14 years and incur expenses to protect their rights
and interest by reason of the unjustified act on the part of
petitioners.18 The imposition of ₱10,000.00 administrative fine is correct
pursuant to Section 38 of Presidential Decree No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe and
impose fines not exceeding ten thousand pesos for violations of the
provisions of this Decree or of any rule or regulation thereunder. Fines
shall be payable to the Authority and enforceable through writs of
execution in accordance with the provisions of the Rules of Court.
Finally, we sustain the award of moral damages. In order that moral
damages may be awarded in breach of contract cases, the defendant must
have acted in bad faith, must be found guilty of gross negligence
amounting to bad faith, or must have acted in wanton disregard of
contractual obligations.19 The Arbiter found petitioners to have acted in
bad faith when they breached their contract, when they failed to address
respondents’ grievances and when they adamantly refused to refund
respondents' payment.
In fine, we find no reversible error on the merits in the impugned Court
of Appeals' Decision and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The appealed
Decision is AFFIRMED with the MODIFICATION that the legal interest
to be paid is SIX PERCENT (6%) on the amount due computed from the
time of respondents' demand for refund on 8 October 1998.
SO ORDERED.
Golden Valley Exploration, Inc. vs. Pinkian Mining Company
G.R. No. 190080 June 11, 2014
GOLDEN VALLEY EXPLORATION, INC., Petitioner,
vs.
PINKIAN MINING COMPANY and COPPER VALLEY,
INC., Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated
July 23, 2009 and the Resolution3 dated October 23, 2009 of the Court of
Appeals (CA) in CA-G.R. CV. No. 90682 which reversed the
Decision4 dated August 18, 2006 of the Regional Trial Court of Makati
City, Branch 145 (RTC) in Civil Case No. 01-324 and, consequently,
affirmed the validity of the rescission of the Operating Agreement
between petitioner Golden Valley Exploration, Inc. (GVEI) and
respondent Pinkian Mining Company (PMC) covering various mining
claims in Kayapa, Nueva Vizcaya, as well as the Memorandum of
Agreement between PMC and respondent Copper Valley, Inc. (CVI).
The Facts
PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya,
15 of which were covered by Mining Lease Contract (MLC) No. MRD-
56,5 while the remaining 66 had pending applications for lease.6 On
October 30, 1987, PMC entered into an Operating Agreement7 (OA) with
GVEI, granting the latter "full, exclusive and irrevocable possession, use,
occupancy , and control over the [mining claims], and every matter
pertaining to the examination, exploration, development and mining of
the [mining claims] and the processing and marketing of the products x x
x ,"8 for a period of 25 years.9
In a Letter10 dated June 8, 1999, PMC extra-judicially rescinded the OA
upon GVEI’s violation of Section 5.01,11Article V thereof. Cited as
further justification for its action were reasons such as: (a) violation of
Section 2.03, Article II of the OA, or the failure of GVEI to advance the
actual cost for the perfection of the mining claims or for the acquisition
of mining rights, cost of lease applications, lease surveys and legal
expenses incidental thereto; (b) GVEI’s non-reimbursement of the
expenses incurred by PMC General Manager Benjamin Saguid in
connection with the visit of a financier to the mineral property in 1996;
(c) its non-remittance of the US$300,000.00 received from Excelsior
Resources, Ltd.; (d) its nondisclosure of contracts entered into with other
mining companies with respect to the mining claims; (e) its being a mere
"promoter/broker" of PMC’s mining claims instead of being the operator
thereof; and (f) its nonperformance of the necessary works on the mining
claims.12
GVEI contested PMC’s extra-judicial rescission of the OA through a
Letter dated December 7, 1999, averring therein that its obligation to pay
royalties to PMC arises only when the mining claims are placed in
commercial production which condition has not yet taken place. It also
reminded PMC of its prior payment of the amount of ₱185,000.00 as
future royalties in exchange for PMC’s express waiver of any breach or
default on the part of GVEI.13
PMC no longer responded to GVEI’s letter. Instead, it entered into a
Memorandum of Agreement dated May 2, 2000 (MOA) with CVI,
whereby the latter was granted the right to "enter, possess, occupy and
control the mining claims" and "to explore and develop the mining claims,
mine or extract the ores, mill, process and beneficiate and/or dispose the
mineral products in any method or process," among others, for a period
of 25 years.14
Due to the foregoing, GVEI filed a Complaint15 for Specific Performance,
Annulment of Contract and Damages against PMC and CVI before the
RTC, docketed as Civil Case No. 01-324.
The RTC Ruling
On August 18, 2006, the RTC rendered a Decision16 in favor of GVEI,
holding that since the mining claims have not been placed in commercial
production, there is no demandable obligation yet for GVEI to pay
royalties to PMC. It further declared that no fault or negligence may be
attributed to GVEI for the delay in the commercial production of the
mining claims because the non-issuance of the requisite Mineral
Production Sharing Agreement (MPSA) and other government permits,
licenses, and consent were all affected by factors beyond GVEI’s
control.17 The RTC, thus, declared the rescission of the OA void and the
execution of the MOA between PMC and CVI without force and effect.
In this relation, it ordered PMC to comply with the terms and conditions
of the OA until the expiration of its period.18
At odds with the RTC’s ruling, PMC elevated the case on appeal to the
CA.
The CA Ruling
In a Decision19 dated July 23, 2009, the CA reversed the RTC ruling,
finding that while the OA gives PMC the right to rescind only on the
ground of (GVEI’s) failure to pay the stipulated royalties, Article 1191 of
the Civil Code allows PMC the right to rescind the agreement based on a
breach of any of its provisions.20 It further held that the inaction of GVEI
for a period of more than seven (7) years to operate the areas that were
already covered by a perfected mining lease contract and to acquire the
necessary permits and licenses amounted to a substantial breach of the
OA, the very purpose of which was the mining and commercial
distribution of derivative products that may be recovered from the mining
property.21 For the foregoing reasons, the CA upheld the validity of
PMC’s rescission of the OA and its subsequent execution of the MOA
with CVI.22
Dissatisfied with the CA’s ruling, GVEI filed a motion for reconsideration
which was, however, denied by the CA in a Resolution23 dated October
23, 2009, hence, this petition.
The Issue Before the Court
The central issue for the Court’s resolution is whether or not there was a
valid rescission of the OA.
The Court’s Ruling
Obligations Part 2 | Page 5 of 143
The Court resolves the issue in the affirmative.
In reciprocal obligations, either party may rescind the contract upon the
other’s substantial breach of the obligation/s he had assumed thereunder.
The basis therefor is Article 1191 of the Civil Code which states as
follows:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
More accurately referred to as resolution, the right of rescission under
Article 1191 is predicated on a breach of faith that violates the reciprocity
between parties to the contract.24 This retaliatory remedy is given to the
contracting party who suffers the injurious breach on the premise that it
is "unjust that a party be held bound to fulfill his promises when the other
violates his."25
As a general rule, the power to rescind an obligation must be invoked
judicially and cannot be exercised solely on a party’s own judgment that
the other has committed a breach of the obligation.26 This is so because
rescission of a contract will not be permitted for a slight or casual breach,
but only for such substantial and fundamental violations as would defeat
the very object of the parties in making the agreement.27 As a well-
established exception, however, an injured party need not resort to court
action in order to rescind a contract when the contract itself provides that
it may be revoked or cancelled upon violation of its terms and
conditions.28 As elucidated in Froilan v. Pan Oriental Shipping
Co.,29 "there is x x x nothing in the law that prohibits the parties from
entering into agreement that violation of the terms of the contract would
cause cancellation thereof, even without court intervention."30 Similarly,
in Dela Rama Steamship Co., Inc. v. Tan,31 it was held that judicial
permission to rescind an obligation is not necessary if a contract contains
a special provision granting the power of cancellation to a party.32
With this in mind, the Court therefore affirms the correctness of the CA’s
Decision upholding PMC’s unilateral rescission of the OA due to GVEI’s
non-payment of royalties considering the parties’ express stipulation in
the OA that said agreement may be cancelled on such ground. This is
found in Section 8.01, Article VIII33 in relation to Section 5.01, Article
V34 of the OA which provides:
ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT
(3) royalty payments to the government;
(4) ad valorem and export taxes, if any, paid to the government.
The aforesaid royalties shall be paid to PINKIAN within five (5) days
after receipt of the smelter or refinery returns. (Emphases and
underscoring supplied)
By expressly stipulating in the OA that GVEI’s non-payment of royalties
would give PMC sufficient cause to cancel or rescind the OA, the parties
clearly had considered such violation to be a substantial breach of their
agreement. Thus, in view of the above-stated jurisprudence on the matter,
PMC’s extra-judicial rescission of the OA based on the said ground was
valid.
In this relation, the Court finds it apt to clarify that the following defenses
raised by GVEI in its petition would not impel a different conclusion:
First, GVEI cannot excuse its non-payment of royalties on the argument
that no commercial mining was yet in place. This is precisely because the
obligation to develop the mining areas and put them in commercial
operation also belonged to GVEI as it expressly undertook "to explore,
develop, and equip the Claims to mine and beneficiate the ore thereof by
any method or process"35 and "to enter into contract, agreement,
assignments, conveyances and understandings of any kind whatsoever
with reference to the exploration, development, equipping and operation
of the Claims, and the mining and beneficiation of the ore derived
therefrom, and marketing the resulting marketable products."36
Records reveal that when the OA was signed on October 30, 1987, 15
mining claims were already covered by a perfected mining lease contract,
i.e., MLC No. MRD-56, granting to the holder thereof "the right to extract
all mineral deposits found on or underneath the surface of his mining
claims x x x; to remove, process and otherwise utilize the mineral deposits
for his own benefit."37 This meant that GVEI could have immediately
extracted mineral deposits from the covered mineral land and carried out
commercial mining operations from the very start. However, despite
earlier demands made by PMC, no meaningful steps were taken by GVEI
towards the commercial production of the 15 perfected mining claims and
the beneficial exploration of those remaining. Consequently, seven years
into the life of the OA, no royalties were paid to PMC. Compounding its
breach, GVEI not only failed to pay royalties to PMC but also did not
carry out its obligation to conduct operations on and/or commercialize the
mining claims already covered by MLC No. MRD-56. Truth be told,
GVEI’s non-performance of the latter obligation under the OA actually
made the payment of royalties to PMC virtually impossible. Hence, GVEI
cannot blame anyone but itself for its breach of the OA, which, in turn,
gave PMC the right to unilaterally rescind the same.
Second, neither can GVEI successfully oppose PMC’s rescission of the
OA on the argument that the ground to rescind the OA was only limited
to its non-payment of royalties precisely because said ground was actually
among the reasons for PMC’s rescission thereof. Considering the
stipulations above-cited, the ground for non-payment of royalties was in
itself sufficient for PMC to extra-judicially rescind the OA.

8.01 This Agreement may be cancelled or terminated prior to the
expiration of the period, original or renewal mentioned in the next
preceding Section only in either of the following ways:
a. By written advance notice of sixty (60) days from OPERATOR to
PINKIAN with or without cause by registered mail or personal delivery
of the notice to PINKIAN.
b. By written notice from PINKIAN by registered or personal deliver of
the notice to OPERATOR based on the failure to OPERATOR to make
any payments determined to be due PINKIAN under Section 5.01 hereof
after written demand for payment has been made on OPERATOR:
Provided that OPERATOR shall have a grace period of ninety (90) days
from receipt of such written demand within which to make the said
payments to PINKIAN.
ARTICLE
ROYALTIES
5.01 Should the PROPERTIES be placed in commercial production the
PINKIAN shall be entitled to a Royalty computed as follows:
(a) For gold – 3.0 percent of net realizable value of gold
(b) For copper and others – 2.0 percent of net realizable value
"Net REALIZABLE Value" is gross value less the sum of the following:
(1) marketing expenses including freight and insurance;
(2) all smelter charges and deductions;
In any event, even discounting the ground of non-payment of royalties,
PMC still had the right to rescind the OA based on the other grounds it
had invoked therefor, namely, (a) violation of Section 2.03, Article II of
the OA, or the failure of GVEI to advance the actual cost for the perfection
of the mining claims or for the acquisition of mining rights, cost of lease
applications, lease surveys and legal expenses incidental thereto, (b)
GVEI’s non-reimbursement of the expenses incurred by PMC General
Manager Benjamin Saguid in connection with the visit of a financier to
the mineral property in 1996, (c) its non-remittance of the US$300,000.00
received from Excelsior Resources, Ltd., (d) its non-disclosure of
contracts entered into with other mining companies with respect to the
mining claims, (e) its being a mere "promoter/broker" of PMC’s mining
claims instead of being the operator thereof, and (f) its non-performance
of the necessary works on the mining claims, albeit the said grounds
should have been invoked judicially since the court would still need to
V determine if the same would constitute substantial breach and not merely
a slight or casual breach of the contract. While Section 8.01, Article VIII
of the OA as above-cited appears to expressly restrict the availability of
an extra-judicial rescission only to the grounds stated thereunder, the
Court finds that the said stipulation does not negate PMC’s implied
statutory right to judicially rescind the contract for other unspecified acts
that may actually amount to a substantial breach of the contract. This is
based on Article 1191 of the Civil Code (also above-cited) which
pertinently provides that the "power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what
is incumbent upon him" and that "[t]he court shall decree the rescission
claimed, unless there be just cause authorizing the fixing of a period."

Obligations Part 2 | Page 6 of 143

While it remains apparent that PMC had not judicially invoked the other
grounds to rescind in this case, the only recognizable effect, however, is
with respect to the reckoning point as to when the contract would be
formally regarded as rescinded. Where parties agree to a stipulation
allowing extra-judicial rescission, no judicial decree is necessary for
rescission to take place; the extra-judicial rescission immediately releases
the party from its obligation under the contract, subject only to court
reversal if found improper. On the other hand, without a stipulation
1âwphi1
allowing extra-judicial rescission, it is the judicial decree that rescinds,
and not the will of the rescinding party. This may be gathered from
previous Court rulings on the matter.
For instance, in Ocejo, Perez & Co. v. International Banking
Corporation,38 where the seller, without having reserved title to the thing
sold, sought to re-possess the subject matter of the sale through an action
for replevin after the buyer failed to pay its purchase price, the Court ruled
that the action of replevin (which operates on the assumption that the
plaintiff is the owner of the thing subject of the suit) "will not lie upon the
theory that the rescission has already taken place and that the seller has
recovered title to the thing sold." It held that the title which had already
passed by delivery to the buyer is not ipso facto re-vested in the seller
upon the latter’s own determination to rescind the sale because it is the
judgment of the court that produces the rescission.
On the other hand, in De Luna v. Abrigo39 (De Luna), the Court upheld
the validity of a stipulation providing for the automatic reversion of
donated property to the donor upon non-compliance of certain conditions
therefor as the same was akin to an agreement granting a party the right
to extra-judicially rescind the contract in case of breach. The Court ruled,
in effect, that a subsequent court judgment does not rescind the contract
but merely declares the fact that the same has been rescinded, viz.:
[J]udicial intervention is necessary not for purposes of obtaining a judicial
declaration rescinding a contract already deemed rescinded by virtue of
an agreement providing for rescission even without judicial intervention,
but in order to determine whether or not the rescission was
proper.40 (Emphases and underscoring supplied)
A similar agreement in Roman Catholic Archbishop of Manila v.
CA41 allowing the ipso facto reversion of the donated property upon
noncompliance with the conditions was likewise upheld, with the Court
reiterating De Luna and declaring in unmistakable terms that:42
Where [the propriety of the automatic rescission] is sustained, the
decision of the court will be merely declaratory of the revocation, but it is
not in itself the revocatory act. (Emphasis and underscoring supplied)
This notwithstanding, jurisprudence still indicates that an extra-judicial
rescission based on grounds not specified in the contract would not
preclude a party to treat the same as rescinded. The rescinding party,
however, by such course of action, subjects himself to the risk of being
held liable for damages when the extra-judicial rescission is questioned
by the opposing party in court. This was made clear in the case of U.P. v.
De Los Angeles,43 wherein the Court held as follows:
Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved on account of infractions by the other
contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court.
If the other party denies that rescission is justified, it is free to resort to
judicial action in its own behalf, and bring the matter to court. Then,
should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. x x x.44 (Emphases and
underscoring supplied)
The pronouncement, which was also reiterated in the case of Angeles v.
Calasanz,45 sought to explain various rulings that continued to require
judicial confirmation even in cases when the rescinding party has a proven
contractual right to extra-judicially rescind the contract. The observation
then was mainly on the practical effect of a stipulation allowing extra-
judicial rescission being merely "to transfer to the defaulter the initiative
on instituting suit, instead of the rescinder."46
Proceeding from the foregoing, the Court has determined that the other
grounds raised by PMC in its Letter dated June 8, 1999 to GVEI (the
existence of which had not been convincingly disputed herein) amounts
to the latter's substantial breach of the OA. To the Court's mind, said
infractions, when taken together, ultimately resulted in GVEI's failure to
faithfully perform its primordial obligation under the OA to explore and
develop PMC's mining claims as well as to put the same into commercial
operation. Accordingly, PMC's rescission of the OA on the foregoing
grounds, in addition to the ground of non-payment of royalties, is equally
valid.
Finally, the Court cannot lend credence to GVEI's contention that when
PMC entered into an agreement with CVI covering the mining claims, it
was committing a violation of the terms and conditions of the OA. As
above-explained, the invocation of a stipulation allowing extra-judicial
rescission effectively puts an end to the contract and, thus, releases the
parties from the obligations thereunder, notwithstanding the lack of a
judicial decree for the purpose. In the case at bar, PMC, through its Letter
dated June 8, 1999 to GVEI, invoked Section 8.01, Article VIII in relation
to Section 5.01, Article V of the OA which allows it to extra-judicially
rescind the contract for GVEI's non-payment of royalties. Thus, at that
point in time, PMC had effectively rescinded the OA and was then
considered to have been released from its legal effects. Accordingly, there
stood no legal impediment so as to hinder PMC from entering into a
contract with CVI covering the same mining claims subject of this case.
In fine, the Court denies the instant petition and affirms the assailed CA
Decision and Resolution. WHEREFORE, the petition is DENIED. The
Decision dated July 23, 2009 and the Resolution dated October 23, 2009
of the Court of Appeals in CA-G.R. CV. No. 90682 are hereby
AFFIRMED.
SO ORDERED.
Sangguniang Panlungsod Ng Baguio City vs. Jadewell Parking
Systems Corporation
G.R. No. 160025 April 23, 2014
SANGGUNIANG PANLUNGSOD NG BAGUIO CITY, Petitioner,
vs.
JADEWELL PARKING SYSTEMS CORPORATION, Respondent.
x-----------------------x
G.R. No. 163052
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
MAYOR BERNARDO M. VERGARA, CITY MAYOR OF BAGUIO,
VICE MAYOR BETTY LOURDES F. TABANDA, VICE MAYOR OF
BAGUIO, COUNCILOR BRAULIO D. YARANON, COUNCILOR
ELMER O. DATUIN, COUNCILOR ANTONIO R. TABORA, JR.,
COUNCILOR GALO D. WEYGAN, COUNCILOR EDILBERTO B.
TENEFRANCIA, COUNCILOR FEDERICO J. MANDAPAT, JR.,
COUNCILOR RICHARD A. CARINO, COUNCILOR FAUSTINO A.
OLOWAN, COUNCILOR DELFIN V. BALAJADIA, COUNCILOR
RUFINO M. PANAGAN, CITY SECRETARY RONALDO B. PEREZ,
SANGGUNIANG PANLUNGSOD NG BAGUIO,Respondents.
x-----------------------x
G.R. No. 164107
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
CITY MAYOR BRAULIO D. YARANON, Respondent.
x-----------------------x
G.R. No. 165564
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
CITY MAYOR BRAULIO D. YARANON, Respondent.
x-----------------------x
G.R. No. 172215
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
JUDGE FERNANDO VIL PAMINTUAN, PRESIDING JUDGE OF
BRANCH 3 OF THE REGIONAL TRIAL COURT OF BAGUIO CITY,
BENEDICTO BALAJADIA, PATERNO AQUINO, RICHARD
LABERINTO, ROLANDO ABELLERA, FERNANDO SANGALANG,
ALLAN ATOS, ANGELINO SANGALANG, CITY OF BAGUIO, AND
CITY MAYOR BRAULIO D. YARANON, Respondents.
x-----------------------x
G.R. No. 172216
Obligations Part 2 | Page 7 of 143
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
JUDGE FERNANDO VIL PAMINTUAN, PRESIDING JUDGE,
BRANCH 03 REGIONAL TRIAL COURT OF BAGUIO
CITY, Respondent.
x-----------------------x
G.R. No. 173043
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
CITY MAYOR BRAULIO D. YARANON, Respondent.
x-----------------------x
G.R. No. 174879
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
ACTING CITY MAYOR AND FORMERLY VICE MAYOR AND
PRESIDING OFFICER OF THE SANGGUNIANG PANLUNGSOD
NG BAGUIO, REINALDO A. BAUTISTA, JR., MEMBERS OF THE
SANGGUNIANG PANLUNGSOD NG BAGUIO, LEONARDO B.
YANGOT, JR., ROCKY THOMAS A. BALISONG, EDILBERTO B.
TENEFRANCIA, FAUSTINO A. OLOWAN, GALO P. WEYGAN,
FEDERICO J. MANDAP AT, PERLITA L. CHAN-RONDEZ,
ANTONIO R. TABORA, JOSE M. MOLINTAS AND RUFINO M.
PANAGAN AND CITY LEGAL OFFICER MELCHOR CARLOS R.
RABANES, Respondents.
x-----------------------x
G.R. No. 181488
CITY MAYOR BRAULIO D. YARANON, Petitioner,
vs.
JADEWELL PARKING SYSTEMS CORPORATION, HON.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, ACTING BY
AUTHORITY OF THE PRESIDENT, AND HON. RONALDO V.
PUNO, IN HIS CAPACITY AS SECRETARY OF THE
DEPARTMENT OF INTERIOR AND LOCAL
GOVERNMENT, Respondents.
DECISION
SERENO, CJ:
Before this Court are nine (9) Petitions involving essentially the same
parties - officials of the City Government of Baguio and Jadewell Parking
Systems Corporation (Jadewell). The only party here that is neither an
official of the City Government of Baguio nor an officer of Jadewell is
former Judge Fernando Vil Pamintuan.
The two principal parties executed a Memorandum of Agreement (MOA)
on 26 June 2000, whereby the City of Baguio authorized Jadewell to
regulate and collect parking fees for on-street parking in the city, as well
as to implement the installation of modern parking meters.
The legal disputes embodied in the nine Petitions began when the
Sangguniang Panlungsod of Baguio City (Sanggunian) revoked the MOA
through City Resolution No. 037, Series of 2002 (Resolution 37), alleging
substantial breach of the MOA on the part of Jadewell. Then Mayor
Alfredo Vergara vetoed the Resolution. The Sanggunian Panlungsod
overrode the veto through an unnumbered Resolution dated 17 April
2002. These twin Resolutions constitute what we call here as the first act
of Rescission1 of the MOA by the city officials of Baguio. Jadewell
denied the breach and commenced an action before the Regional Trial
Court (RTC) of Baguio,2questioning the validity of the MOA’s revocation
and the Sanggunian’s capacity to pass a resolution revoking the MOA.
There was a second act of rescission that the city officials of Baguio
performed in 2006, the circumstances of which will be narrated later on.
While the main case was under litigation, and then under appeal, the
parties filed contempt charges against each other. Six of these cases are
part of the consolidated Petitions before us.
These nine highly-voluminous cases, however, all boil down essentially
to just these five sets of legal questions requiring resolution:
(a) The validity or invalidity and legal efficacy of Saggunian’s two
distinct acts of rescission of the MOA;
(b) The duty of a trial judge to dismiss a case assailing the validity of the
MOA and the city resolution approving it in view of the pendency of the
various petitions before this Court;
(c) the liability of : (i) respondent city officials of Baguio, for various
counts of indirect contempt of this court, (ii) some respondents, who are
lawyers at the same time, for acts that require the disciplinary action of
disbarment, (iii) respondent Judge Pamintuan, for taking cognizance of a
civil case allegedly in defiance of this Court’s authority;
(d) the validity of the administrative suspension of one of the respondents
herein, former Mayor Braulio Yaranon, by the Office of the President in
relation to his acts of non-recognition of the MOA; and
(e) the nullification of certain acts of officials of Baguio City directed
against Jadewell pursuant to their belief that the latter had no authority to
continue implementing the terms of the MOA.
THE ANTECEDENT FACTS
On 1 March 1999, Jadewell proposed the privatization3 of the
administration of on-street parking in Baguio City using Schlumberger’s
DG4S Pay and Display Parking Meter (hereinafter "DG4S P&D"), which
it touted as "technologically advanced, up to the level of more progressive
countries and which would make the city as the first and only city in the
Philippines, if not in Asia, to have metered parking as an important part
of its traffic and parking system."4
Respondent Sanggunian acted favorably on the proposal.5 On 31 May
2000, it passed Resolution No. 159, Series of 1999, authorizing the City
Mayor of Baguio to negotiate and enter into a Memorandum of
Agreement with Jadewell for the installation of its proposed DG4S
parking technology.6
On 16 July 1999, the City Mayor of Baguio wrote to Jadewell,
transmitting to it the finalized draft of the MOA, with amendments
emanating from his office. The City Mayor informed Jadewell that the
finalization of the MOA would be subject to the appropriate action of the
Sanggunian and the passage of an enabling ordinance.7
On 27 March 2000, respondent Sanggunian enacted City Ordinance No.
003, Series of 2000 (Ordinance No. 003-2000) amending Ordinance No.
13, Series of 1983, outlining the rules and policy on the privatization of
the administration of on-street parking in the city streets of Baguio.8 For
this purpose, the City of Baguio authorized the intervention of a private
operator for the regulation, charging and collection of parking fees and
the installation of modern parking meters, among others.
On 10 April 2000, the City Legal Officer of Baguio City advised the City
Mayor that the project for the regulation of on-street parking and
installation of parking meters was not an infrastructure. Hence, the project
was not covered by the Build-Operate-Transfer Law9 and did not require
publication of a notice for its validity.10
Nevertheless, for the sake of transparency, the City Legal Officer
recommended the publication of the appropriate notice on the project and
an invitation to bid. An invitation to bid for the proposed regulation of on-
street parking and installation of parking meters on Baguio City’s streets
was published in the Philippine Daily Inquirer on 8, 9 and 10 May 2000.
Four interested bidders submitted their proposals, but three were
disqualified. The bid of Jadewell was the only one not disqualified; hence,
it was awarded the project.11
On 26 June 2000, the MOA was finally executed between Jadewell and
the City of Baguio – through its then City Mayor, Mauricio G. Domogan
– for the installation, management and operation of the DG4S P&D
parking meters.12
On 17 July 2000, the Sanggunian confirmed the MOA through its
Resolution No. 205-2000.13
On 31 August 2000, the parties executed a supplemental MOA to include
the Ganza/Burnham parking space, owned by the Philippine Tourism
Authority and managed by the City of Baguio, in the project.14 This
supplemental agreement was neither confirmed nor ratified by the
Sanggunian.
In September of 2000, Jadewell began to mobilize and take over the
parking facilities at the Ganza/Burnham Park area.15 Around this time,
questions arose regarding the compliance by Jadewell with the provisions
of the MOA, notably on matters such as obtaining the recommendation
from the Department of Public Works and Highways (DPWH) for the
installation of the parking meters and the legality of the collection of
parking fees being done by its parking attendants prior to the installation
of the parking meters at Burnham Park.16
On 20 December 2000, Jadewell wrote then Vice-Mayor Daniel T.
Fariñas to inform him of the progress of the deputization by the
Department of Transportation and Communications–Land Transportation
Office (DOTC-LTO) of parking attendants required for the
Obligations Part 2 | Page 8 of 143
implementation of the MOA. Jadewell explained that they were still
working on the required deputization of Jadewell’s parking attendants.
Nevertheless, it claimed that its parking attendants were authorized to
collect parking fees pending the actual installation of the parking meters.
It also claimed that the parking meters had not yet been installed because
the necessary civil works were yet to be completed.17
Shortly thereafter, a case was filed by Edgar M. Avila, et al. with the RTC-
Baguio City (Branch 61), assailing Ordinance No. 003-2000 as
unconstitutional and seeking to restrain the City Government of Baguio
from implementing the provisions of the MOA. It further alleged that the
City Government could not delegate the designation of pay parking zones
to Jadewell, that the parking attendants deployed by Jadewell were not
deputized, and that the questioned ordinance creates class legislation as
the designated taxi and jeepney stands were discriminatorily removed.
The case was docketed as Civil Case No. 4892-R.18 This was dismissed
on motion by Jadewell joined by the City Government of Baguio. The
lower court declared that Ordinance No. 003-2000 is constitutional and
that all acts emanating from it are deemed "reasonable and non-
discriminatory...having been enacted in accordance with the powers
granted to Baguio City by law."19 Complainants’ Motion for
Reconsideration (MR) was denied.
On 24 August 2001, Edgar Avila, et al., filed a Rule 65 Petition for
Certiorari, Prohibition and Mandamus with the Supreme Court assailing
the RTC’s dismissal of their Complaint. The case was docketed as G.R.
No. 149642. On 10 October 2001, this Court issued a Resolution
dismissing the petition of Avila, et al. for failure to state in their petition
the material dates when they received the appealed resolution and order,
and to append the original or certified true copies of the questioned
resolution and order subject of their petition.20 There was no resolution
on the merits. The Resolution became final and executory on 2 April
2002.21
A case was also filed by Nelia G. Cid against then Mayor Bernardo
Vergara, et al. when her vehicle was clamped, towed away, and
impounded by Jadewell after the latter found her car to be illegally parked.
She refused to pay the corresponding fees to Jadewell and as a result, the
latter refused to release her vehicle.22 Cid filed a case for replevin and
questioned the validity of Ordinance No. 003-2000 and the MOA, as well
as the authority of Jadewell to clamp down/tow away vehicles whose
owners refuse to pay parking fees. The case was docketed as Civil Case
No. 5165-R and was assigned to Branch 7 of RTC-Baguio. On 24 May
2002, an Omnibus Order was issued by this RTC that addressed several
pending incidents related to the authority of Jadewell to clamp down/tow
away vehicles. The Omnibus Order upheld Jadewell’s authority to retain
the vehicle of petitioner Nelia G. Cid pending her payment of the parking
and towage fees to Jadewell, and held that the authority of Jadewell was
lawfully provided in Ordinance No. 003-2000 and the MOA. Also, the
RTC-Baguio took cognizance of the ruling by this Court in G.R. No.
149642 which, in its mistaken view, upheld the validity of the questioned
ordinance and the MOA.23
Ultimately, Jadewell was able to install no more than 14 parking meters
in three (3) areas of Baguio City: six (6) on Session Road, five (5) on
Harrison Road and three (3) on Lake Drive.24 At the time that these meters
were installed, there were already verbal complaints being raised against
Jadewell by the Sanggunian for the following alleged violations:
a. Failure to install parking meters for each parking space as specified in
Section 3-F of Ordinance No. 003-2000;25
b. Failure to install a convenient and technologically advanced parking
device that is solar-powered and can measure the time a vehicle stays in
a parking slot;26
c. Failure to give the City of Baguio the latter's share of the collected
parking fee;27
d. Failure to post a performance bond in the amount of ₱1 million after
its previous bond expired.28
The Sanggunian passed Resolution No. 395, Series of 2000, directing
Jadewell to comply with its obligations under the MOA for the installation
of the necessary number of parking meters.29
On 15 March 2001, Jadewell wrote to the City Mayor in response to the
mentioned Resolution, informing the said office that the former had
started operation of the off-street parking on 2 December 2000 and of the
on-street parking on 15 December 2000.30 On 27 January 2001, Jadewell
also wrote the City Treasurer that the former had completed installation
of the parking meters.31
In response to the letter of Jadewell, the City Treasurer demanded the
remittance of Baguio’s share of the parking fees collected by Jadewell
since it started operations. Jadewell responded by saying that it had
complied with this obligation.32
On 19 February 2002, the Sanggunian passed Resolution 37,33 expressing
its intent to rescind the MOA with Jadewell. The said Resolution
enumerated in the "Whereas" clauses the alleged violations of Jadewell
prompting it to rescind the MOA. It reads:
xxxx
WHEREAS, it now appears from verified facts that:
1. contrary to its commitment to install a technologically based P & D
parking system, at no cost to the City, including "such equipment and
paraphernalia to meter the length of usage of the affected parking spaces
for purposes of payment of the parking fees", Jadewell has installed only
fourteen (14) parking meters (only 12 of which are working) in only three
(3) streets, and Jadewell does not intend to install anymore [sic]; instead
it has resorted as a rule to an exceptional circumstance of manual
collection of parking fees by parking attendants who, despite express
provisions of the Ordinance, are not duly deputized by the DOTC-LTO.
Despite assurances to the Honorable City Mayor that Jadewell would stop
collection of parking fees until the parking meters have been duly
installed, Jadewell continues to collect parking fees manually by using
undeputized parking attendants to do the collection;
2. contrary to its commitment to install a technologically based P & D
parking system, at no cost to the City, Jadewell has charged the cost of
such and similar equipment as direct costs, thus substantially eroding the
share of the City in the parking fees;
3. contrary to its obligation to post a performance bond, Jadewell has not
fully complied, and when required to update its performance bond
Jadewell refused to do so rationalizing its non-compliance by the
assertion that they are already performing and therefore are no longer
obligated to post a performance bond;
4. contrary to its obligation to remit the share of the City within the first
ten (10) days of the following month, Jadewell had initially resisted
making payments to the City on the pretext that the profits cannot be
determined until after the end of the fiscal year and initially failed to have
their tickets pre-numbered and registered with the Office of the City
Treasurer;
5. contrary to its promise that the City would derive substantial revenue
from the on-street pay parking system, Jadewell has not paid a single
centavo of the City share in on-street parking operation; whatever
Jadewell has remitted to the City are properly chargeable against the share
of the City in the MOA on off-street parking (the Burnham Parking Area
near Ganza), and it appears less than what the City is entitled thereto; and
6. contrary to its representations that the P & D System which it proposed
would eliminate fraud in the collection of parking fees, Jadewell has
perpetrated fraud on the City by, according to the affidavit of its former
bookkeeper, Mr. Adonis Cabungan, doctoring the financial statements
before the same are submitted to City authorities.34
WHEREAS, there has been no substantial improvement of the traffic
situation in the City even with the introduction of the P & D Parking
System and thus it increasingly appears that the system introduced by
Jadewell is more for revenue raising than for regulatory purposes. As a
consequence the legal principle applies that the collection of taxes cannot
be let to any person. In other words, government cannot allow private
persons to collect public funds for themselves with the agreement that part
thereof or as it turned out in this case no part thereof is shared with the
City;
WHEREAS, in its financial reports to the City showing substantial loses
[sic] and in its statement to other persons that it is losing money on the
project, the kindest thing that the City can do for Jadewell is to prevent
Jadewell from incurring anymore [sic] loses.
NOW THEREFORE, on motion of Hon. Bautista, and Hon. Cariño,
seconded by Hon. Yaranon, Hon. Weygan and Hon. Tabora, be it
RESOLVED, as it is hereby resolved, to rescind the Memorandum of
Agreement (MOA) executed between the City of Baguio and Jadewell
Parking System Corporation dated 26 June 2000 on the basis of the
foregoing premises and exercising its rights under Section 12 of the MOA
on the subject of On-Street Parking executed between the City of Baguio
and Jadewell Parking Systems Corporation dated 26 June 2000 and, more
importantly, performing its duty to protect and promote the general
welfare of the people of Baguio City.
RESOLVED FURTHER, to direct the City Legal Officer to cause the
proper notice of rescission to Jadewell Parking Systems Corporation
Obligations Part 2 | Page 9 of 143
forthwith and to take all appropriate steps to implement and enforce the
intent of this Resolution.
RESOLVED FURTHERMORE, to inform all City officials and
employees and all other persons concerned to be guided accordingly.35
On 1 March 2002, the then City Mayor of Baguio, Bernardo M. Vergara,
vetoed Resolution 37, through a letter dated 1 March 2002 addressed to
the Vice-Mayor, as Presiding Officer of the Sanggunian, and its members.
Mayor Vergara reasoned that it was premature for the Sangguniang
Panlungsod to rescind the MOA, because the latter provides for a
minimum period of five years before the right of rescission can be
exercised; and, that the right of Jadewell to due process was violated due
to the lack of opportunity to hear the latter’s side. The City Mayor
proposed a re-negotiation of the MOA with Jadewell as a solution to the
problem.36
Meanwhile, on 13 March 2002, the DOTC–Cordillera Autonomous
Region (DOTC-CAR) issued a cease and desist order to Jadewell
prohibiting it from clamping down and/or towing away vehicles in Baguio
City for violation of traffic rules and regulations.37
On 17 April 2002, the Sanggunian resolved through a Resolution of the
same date, to override the veto of the City Mayor, worded thus:
NOW THEREFORE, the Sangguniang Panlungsod (City Council) in
Regular Session assembled, by twelve affirmative votes constituting more
that [sic] a two-thirds vote of all its Members, has resolved to override, as
it hereby overrides, the veto of His Honor, Mayor Bernardo M. Vergara,
of City Resolution Numbered 037, Series of 2002, entitled "Rescinding
the Memorandum of Agreement (MOA) Executed Between the City of
Baguio and Jadewell Parking Systems Corporation Dated 26 June
2000."38
Also at this time, Braulio D. Yaranon, who was then a member of the
Sanggunian, requested a special audit from the Commission on Audit–
Cordillera Autonomous Region (COA-CAR) on the operations of
Jadewell as regards the pay parking project embodied in the MOA.
On 27 May 2002, Jadewell filed with the RTC of Baguio City a Rule 65
Petition for Certiorari, Prohibition and Mandamus with Prayer for the
Issuance of a Writ of Preliminary Injunction, assailing the validity of
Resolution No. 037-2002, which rescinded the MOA between the
Sangguniang Panlungsod and Jadewell.39 The case was docketed as Civil
Case No. 5285-R and was raffled off to RTC-Baguio (Branch 61).
On 8 October 2002, the RTC Br. 61 promulgated its Decision40 finding
the Sanggunian’s rescission of the MOA unlawful. The Sanggunian then
filed an appeal assailing the RTC’s decision with the Court of Appeals;
the case was docketed as CA-G.R. SP No. 74756.
Meanwhile, pending resolution of CA-G.R. SP No. 74756 before the CA,
the Sanggunian passed Resolution No. 089, Series of 2003. The resolution
sought the assistance of the DOTC-CAR specifically, for it to take
immediate action against the officers and personnel of Jadewell for
defying the 13 March 2002 cease-and-desist Order it issued prohibiting
the latter from clamping down and/or towing away vehicles.41 On 27 May
2003, City Mayor Vergara approved and signed Resolution No. 089-
2003. In response, Jadewell filed a Petition for Indirect Contempt with the
CA against Mayor Vergara, the Sanggunian and other local government
officers. The case was docketed as CA-G.R. SP No. 77341. The original
petition was followed by three (3) supplemental petitions filed by
Jadewell in the same case.
On 7 July 2003, the CA rendered a Decision42 in CA G.R. SP No. 74756,
affirming the assailed Decision of the trial court which declared as invalid
the Sanggunian’s rescission of the MOA. The Sanggunian filed a Motion
For Reconsideration, but this was denied by the CA through a Resolution
dated 4 September 2003.43 Aggrieved by the denial of their appeal, the
Sanggunian filed a Rule 45 Petition for Review on Certiorari with this
Court, seeking to reverse and set aside the 7 July 2003 Decision and its
Resolution dated 04 September 2003 of the CA. The petition was
docketed as G.R. No. 160025, the first of the consolidated petitions
herein.44
In CA-G.R. SP No. 77341, the CA dismissed in a Decision45 promulgated
on 28 July 2004 the contempt petitions filed by Jadewell for lack of merit.
The latter’s Motion For Reconsideration was likewise denied by the
CA.46Jadewell elevated the dismissal of its contempt petitions to this
Court on 8 December 2004 by filing a Rule 45 Petition for Review on
Certiorari. The case was docketed as G.R. No. 166094. This is not among
the consolidated petitions herein.
On 13 July 2003, the COA-CAR promulgated the requested Report.47 The
Report’s objective was to ascertain compliance by the contracting parties
– the City of Baguio and Jadewell – with Ordinance No. 003-2000 and
the MOA. The COA-CAR Report has 12 findings, essentially as follows:
1) The provisions of the MOA and its Supplement as regards the sharing
of the fees are contradicting, hence the share of the City Government
cannot be determined;48
2) There was no proper segregation by area of the parking fees collected,
hence the proper share of Baguio City cannot be determined;49
3) The City Government did not strictly implement the collection of
penalties arising from the late remittances of Jadewell, hence additional
revenues were not collected;50
4) The City Treasurer did not conduct an audit of the books and accounts
of Jadewell, thus the City Government’s share from parking fees cannot
be ascertained;51
5) The use of the P&D parking meters were [sic] not maximized due to
Jadewell’s non-compliance with Ordinance No. 003-2000 and the MOA,
resulting in the collection of meager income from its use;52
6) The MOA does not specify the guidelines for determining the
economic viability of installing the parking meters and the period within
which to install it [sic];53
7) The Supplemental MOA was not confirmed by the City Council of
Baguio in violation of R.A. No. 7160 (the Local Government Code);54
8) The coverage of the parking operations contained in Annex "A" of the
MOA was not confirmed by the City Council in violation of R.A. No.
7160;55
9) The City Government failed to ensure proper compliance by Jadewell
with the MOA provisions;56
10) The pay parking project was awarded to a bidder who did not have all
the qualifications as stated in the "Invitation to Bid" in violation of R.A.
No. 7160 and Audit Circular No. 92-386;57
11) The provisions on deputization in Ordinance No. 003-2000 and the
MOA are contrary to R.A. No. 4136 (the Land Transportation and Traffic
Code), thus rendering it invalid;58
12) The monthly minimum amount to be remitted to the City Government
is doubtful due to the discrepancy in the amounts collected and expenses
for the year 1999 provided by the City Government to Jadewell as against
the amount certified by the Office of the City Architect and Parks
Superintendent-Burnham Parks Office for the City Government
overseeing the Ganza-Burnham parking spaces.59
On 11 February 2004, after G.R. No. 160025 was filed and pending
resolution by this Court, the Sangguniang Panlungsod adopted Resolution
No. 056, Series of 2004. The said Resolution informs the general public
that Jadewell had neither the authority nor the police power to clamp, tow,
or impound vehicles at any place in the City of Baguio.60 Also, on the
same date, the Sangguniang Panlungsod passed Resolution No. 059,
Series of 2004, in which it made a formal demand upon Jadewell to restore
to it possession of the Ganza Parking Area.61
With these developments, Jadewell filed directly with this Court its first
indirect contempt case against Bernardo M. Vergara (then City Mayor of
Baguio), its Vice-Mayor, and the entire City Council for enacting
Resolution Nos. 056 & 059, Series of 2004 pending resolution by this
Court of G.R. 160025. The case was docketed as G.R. No. 163052.
On 23 June 2004, this Court through its First Division, ordered G.R. No.
163052 consolidated with G.R. No. 160025.62
On 1 July 2004, then Baguio City Mayor Braulio D. Yaranon issued
Executive Order No. 001-04,63 the decretal portion of which reads:
NOW, THEREFORE, the undersigned City Mayor, pursuant to his
authority to enforce all laws and ordinances relative to the governance of
the City, and to issue executive orders for the faithful and appropriate
enforcement and execution of such laws and ordinances (Sec. 455 (b) (2)
and (iii), R.A. 7160) hereby affirms and gives protection to the right of
the citizenry, particularly affected motor vehicle owners, operators, and
drivers, to refuse to submit to the enforcement of Ordinance 003-2000, by
the Jadewell Parking Systems Corporation, and further to refuse to pay
public revenue in the form of fees, charges, impositions, fines, and
penalties provided for in the said ordinance, to the said entity, such acts
being patently illegal and prohibited by law; this Executive Order shall be
in force and effect until the City Council, as the legislative arm of the City
of Baguio, shall have adopted appropriate remedial or corrective
measures on the matters and concerns specified hereinabove.
Obligations Part 2 | Page 10 of 143
On 8 July 2004, Mayor Yaranon issued a Memorandum64 to the City
Director of the Baguio City Police Department, directing the department
to stop and prevent Jadewell from clamping, towing, and impounding
vehicles; to arrest and file criminal charges against Jadewell personnel
who would execute the proscribed acts specified in the said
Memorandum; and to confiscate the equipment used by Jadewell to
clamp, tow, or impound vehicles under the authority of the rescinded
MOA.
On 12 July 2004, Jadewell filed its second Petition for indirect contempt
again with this Court, this time against Mayor Yaranon for having issued
the above-cited Order also for the same reasons given in its first contempt
petition with this Court. The Petition was docketed as G.R. No. 164107.
Furthermore, on 15 July 2004, Jadewell filed an administrative case
against Mayor Yaranon before the Office of the President (OP). Docketed
as Case No. OP 04-G-294, it sought the mayor’s suspension and removal
from office. The case against Mayor Yaranon was for his issuance of the
following: (1) Executive Order No. 001-04 dated 1 July 2004; (2) the
Memorandum dated 7 July 2004 limiting the pay parking business of
Jadewell to certain parts of Baguio City;; and (3) Memorandum dated 8
July 2004 directing the Baguio City Police Department to prevent
Jadewell from apprehending, towing and impounding vehicles. A
supplemental petition filed by Jadewell on 19 January 2005, complaining
of Executive Order No. 005-2004, which was issued on 15 October 2004,
was also included in administrative case OP 04-G-294.
On the following day, 16 July 2004, Jadewell filed a Supplemental
Petition with Motion for Leave of this Court65 in the second contempt
petition before this Court, G.R. No. 164107, alleging as a supplemental
fact, Mayor Yaranon’s Memorandum of 08 July 2004.
On 15 October 2004, Mayor Yaranon issued Executive Order No. 005-
2004.66 This was a cease and desist order against Jadewell to prevent it
from performing the following acts: (1) charging and collecting from
motorists, parking fees without their consent;67 (2) seizing and detaining
vehicles of motorists who refuse to pay parking fees to Jadewell;68 and
(3) using yellow-colored heavy wreckers or tow trucks bearing the name
"City of Baguio".69
In addition to Executive Order No. 005-2004, Mayor Yaranon issued
Executive Order No. 005-2004-A, which is essentially a rehash of
Executive Order No. 005-2004.70
On 25 October 2004, Jadewell filed a third Petition with this Court,
praying that Mayor Yaranon be cited for contempt and that Executive
Order No. 005-2004 be nullified.71 This case was docketed as G.R. No.
165564. On 16 November 2004, Jadewell filed a Supplemental Petition
to this Petition alleging as a supplemental ground the issuance of
Executive Order No. 005-2004-A.72
On 20 December 2004, Mayor Yaranon issued Administrative Order No.
622, Series of 2004, which declared that Jadewell exceeded its area of
operations for the administration of on-street parking and was thus
required to show lawful cause why its business permit should not be
revoked. In response to this Order, Jadewell filed a Second Supplemental
Petition for contempt against Mayor Yaranon in G.R. No. 165564 on 25
January 2005.
On 10 January 2005, this Court through a Resolution73 ordered the
consolidation of G.R. No. 160025 with G.R. Nos. 163052, 164107, and
165564.
On 17 January 2005, this Court denied Jadewell’s petition in G.R. No.
166094 for failure to show any reversible error on the part of the CA in
dismissing its petition for contempt in CA-G.R. SP No. 77341.74 Its
Motion For Reconsideration was likewise denied with finality.75
In the beginning of the year 2005, Jadewell attempted to renew its
business permit from the City of Baguio and tendered the fees required.
However, the Office of the City Mayor refused to renew the business
permit and returned the amount tendered.76 Because of these actions of
Mayor Yaranon, Jadewell filed on 15 April 2005 its Third Supplemental
Petition in G.R. No. 164107, which had been consolidated with G.R. Nos.
160025, 163052, and 165564. Aside from its main prayer to cite the
mayor for contempt, Jadewell also prayed that Mayor Yaranon, a lawyer,
be disbarred.77 On 25 April 2005, this Court, through its Third Division,
admitted the Third Supplemental Petition of Jadewell.78
On 9 February 2005, this Court, in G.R. No. 160025, issued a Writ of
preliminary mandatory injunction ordering Mayor Yaranon to
immediately reopen the streets and premises occupied and/or operated by
Jadewell. The Court also required Jadewell to post a cash or surety bond
in the amount of ₱100,000 within five days from receipt of the order.79
The order, in part, reads:
Acting on the urgent motion dated January 26, 2005 of respondent
Jadewell Parking Systems Corporation for the issuance of a temporary
mandatory/preventive order and/or for writ of preliminary
mandatory/prohibitory injunction pending appeal in G.R. No. 160025,
alleging that the effects of the acts of City Mayor Yaranon, unless stayed,
would also make effective what the petitioner Sangguniang Panglungsod
ng Baguio failed to obtain in the instant case, the net effect of which
would not only be grave damage and injury to the respondent but also to
the City of Baguio, the Court further Resolved:
(a) to ISSUE, the WRIT OF PRELIMINARY MANDATORY
INJUNCTION prayed for, effective immediately, commanding City
Mayor Yaranon to immediately reopen the streets and/or premises
operated and/or occupied by the respondent and to let them remain open,
until further orders of this Court; and
(b) to require petitioner to POST a CASH BOND or a SURETY BOND
from a reputable bonding company of indubitable solvency in the amount
of ONE HUNDRED THOUSAND PESOS (₱100,000.00), with terms
and conditions to be approved by the Court, within five (5) days from
notice, otherwise, the writ of preliminary mandatory injunction herein
issued shall AUTOMATICALLY be lifted.
NOW THEREFORE, You, [City Mayor Braulio D. Yaranon], your
agents, representatives and/or any person or persons acting upon your
orders or in your place or stead, are hereby DIRECTED to
IMMEDIATELY REOPEN the streets and/or premises operated and/or
occupied by the respondents and to let the said streets and premises
remain OPEN, until further orders from this Court.
On 8 April 2005, Mayor Yaranon issued a Memorandum80 directing Col.
Isagani Nerez, Director of the Baguio City Police District, to create a
special task force to stop Jadewell from clamping, towing, and
impounding vehicles in violation of parking rules in Baguio City; to
impound the wrecker/tow trucks used by Jadewell.
On 20 April 2005, this Court promulgated a Resolution in G.R. No.
160025, finding Mayor Yaranon guilty of direct and indirect contempt.
He was cited for direct contempt when it was proven that he had submitted
pleadings before this Court containing falsehoods. Mayor Yaranon had
stated in his Compliance that the streets were opened for Jadewell to
resume operations, but upon inspection these were found to be
closed.81 He was also cited for indirect contempt, for having continuously
refused to carry out the writ issued by this Court to reopen the streets so
Jadewell could resume operations.82 This Court likewise fined Mayor
Yaranon the amount of ₱10,000, which he paid. The Court further
ordered the National Bureau of Investigation (NBI) to immediately arrest
and detain Mayor Yaranon pending his compliance with the 9 February
2005 writ of preliminary mandatory injunction issued by this Court,
which ordered the reopening of some streets so Jadewell could continue
its operations.83
On 10 August 2005, Benedicto Balajadia, et al. filed Civil Case No. 6089-
R against Jadewell before the RTC–Baguio City. The case was
subsequently raffled to Branch 3 of the RTC presided by Judge Fernando
Vil Pamintuan.84 Balajadia, et al. sought to nullify the MOA between
Jadewell and the City Government of Baguio and its enabling ordinance,
Ordinance No. 003-2000. The complainants also prayed for the issuance
of a Temporary Restraining Order (TRO) and for a writ of preliminary
injunction against Jadewell.
On 19 April 2006, Judge Pamintuan issued an Order in Civil Case No.
6089-R granting the prayer of complainants Balajadia et al. for the
issuance of a Writ of Preliminary Prohibitory Injunction. The injunction
was meant to restrain Jadewell from proceeding with the supervision and
collection of parking, towing, and impounding fees on the streets of
Baguio City. Further, Judge Pamintuan ordered the holding in abeyance
of the implementation of City Ordinance No. 003-2000 and the MOA.85
On 27 April 2006, Jadewell filed with this Court a Rule 65 Petition for
Certiorari, Prohibition, and Mandamus against Judge Pamintuan86 for
refusing to dismiss Civil Case No. 6089-R. The case was docketed as G.R.
No. 172215. On the same day, Jadewell filed a Petition asking this Court
to cite Judge Pamintuan for contempt. This fourth contempt case, albeit
primarily against a member of the judiciary, was docketed as G.R. No.
172216.
On 19 June 2006, G.R. No. 172215 was ordered consolidated with G.R.
Nos. 160025, 163052, 164107, and 165564.87
On 23 June 2006, Mayor Yaranon wrote Jadewell a letter demanding that
it desist from operating the pay parking system in Baguio City.
Simultaneously, he wrote the Sanggunian, requesting it to cancel
Ordinance No. 003-2000, the enabling ordinance for the MOA.
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On 26 June 2006, Jadewell filed a Supplemental Petition88 in G.R. No.
172215 complaining of Judge Pamintuan’s issuance of the following
Orders in Civil Case No. 6089-R: (a) Order dated 24 April
200689 directing the parties to file a pre-trial brief and setting the pre-trial
of the case; (b) Order dated 01 June 200690 informing Jadewell that public
respondent was not suspending the proceedings, because he believed he
was not covered by the writ issued by this Court; (c) Order dated 14 June
200691 upholding the writ he issued in the civil case despite his receipt of
a copy of the writ of preliminary injunction issued by this Court; and (d)
Order dated 16 June 200692 directing Jadewell to comply with the writ of
preliminary prohibitory injunction under pain of direct contempt.
On the same day, 26 June 2006, the Office of the President (OP) rendered
a Decision in OP 04-G-294, the administrative case Jadewell had filed
against Mayor Yaranon, finding him guilty of grave misconduct, abuse of
authority, and oppression. Mayor Yaranon was meted out a penalty
totalling 12 months suspension from office.93This suspension was
implemented by the Department of Interior and Local Government
(DILG). Aggrieved by his suspension, Mayor Yaranon filed his Motion
For Reconsideration, which was denied on 22 August 2006 by the OP.
On 29 June 2006, in response to Mayor Yaranon’s letters of 23 June 2006,
Jadewell filed before this Court yet another case for contempt – its fifth
contempt case, and the third one specifically against Mayor Yaranon. In
addition to its prayer to cite the mayor for contempt, Jadewell also prayed
that Mayor Yaranon, a lawyer, be disbarred.94 The case was docketed as
G.R. No. 173043.
On 31 July 2006, G.R. No. 173043 was ordered consolidated with G.R.
Nos. 160025, 163052, 164107, 165564, and 172215.95 On 27 September
2006, G.R. No. 172216 was consolidated with G.R. Nos. 160025, 163052,
164107, 165564.96
On 23 August 2006, while the consolidated cases were pending resolution
before this Court, the Sangguniang Panlungsod enacted Resolution No.
204, Series of 2006. The Resolution directed the City Legal Officer to
notify Jadewell of the Baguio City Government’s intention to rescind the
MOA, and to inform Jadewell to stop its operations under the MOA 60
days after receipt of the Notice.97
On 28 August 2006, the legal counsel for Jadewell wrote to Baguio City
Vice-Mayor Bautista, Jr., informing him that the OP had denied the
Motion for Reconsideration of Mayor Yaranon assailing the OP
resolution ordering the latter’s suspension as City Mayor of Baguio
City.98 The counsel for Jadewell likewise stated in his letter that they were
aware that the Sanggunian was planning to issue a resolution to repeal
Ordinance No. 003-2000 and rescind the MOA. The letter requested the
Vice-Mayor to veto the measure in light of the pending petitions with the
Supreme Court.99 The said counsel likewise sent a similar letter to the
Sanggunian, urging it to desist from implementing the repeal of
Ordinance No. 003-2000 and the rescission of the MOA pending the
resolution of the cases with the Supreme Court.100
On 13 September 2006, Mayor Yaranon appealed to the CA, in a case
docketed as CA G.R. CV SP No. 96116, praying for the lifting of the
penalty of suspension meted him in OP 04-G-294, but this appeal was
denied. Mayor Yaranon moved for reconsideration.101
On 22 September 2006, City Legal Officer Rabanes wrote a letter to
Jadewell, through its President, Mr. Rogelio Tan, informing Jadewell of
Resolution No. 204, Series of 2006, which rescinded the MOA, and
ordering it to stop operations within 60 days from notice.102 This letter
was received on the same day it was issued;103 hence, the 60-day period
lapsed on 22 November 2006. This notice, together with the resolution,
constitute the second act of rescission of the MOA by the city officials of
Baguio.
On 19 October 2006, Jadewell filed the sixth contempt case with this
Court against the acting City Mayor of Baguio, Reinaldo A. Bautista, Jr.,
and the members of the Sanggunian, including City Legal Officer
Melchor Carlos R. Rabanes, for the second act of rescission of the
MOA.104 The case was docketed as G.R. No. 174879.
On 9 October 2007, the CA dismissed Mayor Yaranon’s Petition in CA
G.R. CV SP No. 96116 on the ground that it had become moot and
academic due to Mayor Yaranon’s failure to be re-elected in the 17 May
2007 elections. Mayor Yaranon filed a Motion for Reconsideration on 07
November 2007, but this was also denied by the CA on 24 January 2008.
Thus, on 17 March 2008, Mayor Yaranon filed a Rule 45 Petition before
this Court seeking to reverse and set aside the CA Decision and
Resolution. It was docketed as G.R. No. 181488.
On 12 November 2008, G.R. No. 181488 was ordered consolidated with
the cases already mentioned.105
THE ISSUES
1. On G.R. No. 160025 and on the
claim in G.R. No. 174879 that the second
act of rescission was a valid act of
rescission.
Whilst the issues are spread out among the nine cases, we have grouped
these according to what are common to the specific cases.
In our effort to simplify the issues and provide forms of relief to the parties
that are not purely academic, it is necessary to examine the operative
effects that may result from any resolution of this Court. Such
examination may also help guide the parties in their future actions, and
perhaps the overly-litigated matters brought before us in the consolidated
petitions may finally be put to rest.
We note at the outset that on 22 November 2006, 60 days had lapsed from
receipt of the letter dated 22 September 2006, informing Jadewell of the
decision of the City of Baguio to rescind the MOA under Section 12
thereof. It may be recalled that Section 12 requires that notice of the
intention to rescind be given 60 days prior to the effectivity of the
rescission. Jadewell has not questioned the legal efficacy of this notice. It
has brought this matter of a second rescission to the Court’s attention only
as a matter of contumacious behavior on the part of the respondents in
G.R. No. 174879, in the same way that it brought various actions of the
public respondents before the Court in its other contempt petitions. Since
the legal efficacy of the rescission in 2006 has not been contested by
Jadewell in any of the petitions before us, we thus consider this notice of
rescission to have taken legal effect and therefore, at the latest, the MOA
between the City of Baguio and Jadewell has ceased to legally exist as of
22 November 2006.
Parenthetically, we note that while the validity of the second act of
rescission described in G.R. No. 174879 is not principally determinative
of the respondents’ liability for indirect contempt therein, a conclusion
that the second act of rescission was undertaken competently and
appropriately will to a certain degree impact our appreciation of such
possible liability. We will discuss this issue in our subsequent discussion
on the charges of contempt.
Inasmuch as there is no longer any existing MOA, no order of this Court
can have the effect of directing the City of Baguio to enforce any of the
terms of the MOA, which brings us to the matter of G.R. No. 160025. In
whatever direction we rule on the question of the validity of the first act
of rescission, such ruling will only have the effect of either providing
Jadewell a basis to seek damages from the City of Baguio for the wrongful
termination of the MOA, should we find wrongful termination to have
taken place, or, deny Jadewell that right. The possible susceptibility of the
City of Baguio and its officials to an action for damages on a finding of
wrongful termination is why we do not consider G.R. No. 160025 as
having been rendered moot by the lawful rescission of the MOA on 22
November 2006. Thus, we will proceed to rule on the issues in G.R. No.
160025.
The fallo of the RTC Decision upheld by the CA, which affirmance is the
lis mota in G.R. No. 160025, reads as follows:
WHEREFORE, judgment is rendered declaring both Sangguniang
Panlungsod Resolution No. 037, Series of 2002 and the April 17, 2002
Resolution overriding the Mayor’s veto as NULL and VOID. The Writ of
Preliminary Injunction earlier issued by this Court is made
PERMANENT, with costs against respondents.106
The RTC did not order the respondents therein to comply with the MOA.
An order to perform a contract is not necessarily subsumed in an order
not to terminate the same.
Contrast this legal point with the fact that the prayer of Jadewell in its
original petition asked the RTC, in relevant part:
...that the writ of preliminary injunction be made permanent and the writs
applied for be issued against the respondents nullifying and voiding
Resolution No. 037, series of 2002 and the resolution over-riding the veto
… and instead, directing them to perform what the memorandum of
agreement requires them to do. (Emphasis supplied)107
This latter part, which is effectively a prayer for a permanent mandatory
injunction against respondents therein to perform the terms of the MOA,
are not in the fallo of the RTC decision. We consider therefore that the
RTC deliberately withheld granting the specific prayer to order Baguio
City to perform the MOA. No motion to correct or clarify the said fallo
having been filed by Jadewell, the prayer to order the city officials of
Baguio to perform the MOA is hereby deemed abandoned.
We further note three things:
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1. Jadewell has not questioned - in its Petition, Reply to Comment, and
Memorandum before this Court - the implication of the RTC and CA
Decisions to the effect that the Sanggunian had the authority to perform
acts of contractual rescission on behalf of the City of Baguio when both
these courts ignored the issue raised by Jadewell in its Petition before the
RTC, and we therefore do not consider this to be a genuine issue in this
Petition before us;
2. While the Sangguniang Panlungsod has insinuated that there was fraud
and excess of authority on the part of the mayor in the execution108 of the
MOA - because the latter provided for a smaller sharing of "20 % from
the gross profit of the operation or 50% of the net profit whichever is
higher" instead of the intended "20% of gross receipts,"109- petitioners in
G.R. No. 160025 conceded even at the RTC level that they are not
assailing the MOA for being defective but for having been breached in
the performance. We thus disregard all arguments in G.R. No. 160025
regarding the validity of the execution of the MOA, for being a non-issue
in this case;110
3. We also immediately set aside claims of Jadewell in its Petition before
the RTC that an alternative relief should be provided by the courts in the
form of compensation for terminated Build-Operate-Transfer (BOT)
contracts under the BOT Law (Republic Act No. 6957) as there is not the
slightest basis on record that the administration of on-street parking can
be classified as an infrastructure contract, a basic element that must be
present for any contract to come within the terms of the BOT Law.
Having preliminarily screened out the non-issues in this case, we proceed
to examine the rulings of the courts a quo in G.R. 160025.
The CA affirmed the RTC Decision in toto, along the following points:
1. On the sole procedural issue. - The RTC was correct in treating the
Petition as one for permanent injunction with a prayer for a preliminary
injunction, instead of treating it by its formal title: "Petition for Certiorari,
Prohibition and Mandamus with a Prayer for a Writ of Preliminary
Injunction." It was correct in holding that if the Petition had been treated
by its formal denomination, then it would have been dismissed for failing
to satisfy the requirement that the act sought to be nullified was rendered
in a judicial or quasi-judicial capacity by the respondents, but then this
formal denomination could be disregarded and the nature of the Petition
should be determined by its allegations and prayers. Since there was a
prayer to permanently enjoin respondents from enforcing the questioned
resolutions, the RTC was correct in treating it as one for permanent
injunction.
2. On the substantive issues:
a. On the lack of due process afforded Jadewell. – The RTC was correct
in ruling that Jadewell was denied the right to be heard before the
Sanggunian rescinded the MOA. There is no evidence on record that the
Sanggunian afforded Jadewell an opportunity to present its side or refute
the charges of the latter’s violation committed under the MOA.111
b. On the authority of the RTC to consider the effect of Section 9 of the
MOA112 when Jadewell never raised the matter of Section 9 in any of its
pleadings. – The RTC correctly considered Jadewell’s letter dated 24
November 2001, addressed to the Sanggunian and offered during the trial,
which introduced the subject matter of the five (5) year guarantee against
rescission provided in Section 9 of the MOA. The CA regarded the RTC’s
consideration of said letter as judicious and added that even without it, the
MOA, and its provisions, form part of the case records.113
c. On the failure to observe the 60-day notice requirement. – The RTC
correctly found that the Sanggunian cannot validly and unilaterally
rescind the MOA without observing the provisions in Section 12 of the
MOA requiring that a 60-day notice be given before rescission can take
place. To allow the Sanggunian to unilaterally rescind the MOA without
giving Jadewell an opportunity to present its side is to render the right to
rescission provided in the MOA legally vulnerable.114
d. On the lack of substantiveness of the alleged breach of performance of
the MOA by Jadewell. – The CA reviewed the records of the case and
upheld the findings of the RTC that the violations of Jadewell were not
substantial to merit the consequence of rescission under the MOA.115
We elucidate on the arguments of the parties, the RTC, and the CA.
In its Petition before the RTC, Jadewell argues that the rescission of the
MOA was not valid, on due process grounds, and also because there was
no substantial breach on its part to justify a rescission of the MOA.116 It
also asserts that the Sanggunian had no authority to rescind the MOA,
because the latter was not a party thereto.117
Jadewell sought a writ of preliminary injunction to prevent the
implementation of the questioned Resolution, and prayed that after
hearing, the preliminary injunction be made permanent. It further prayed
for the issuance of a writ of certiorari to nullify the assailed Resolution;
and for a mandatory injunction to compel the City Government to perform
the latter’s obligations under the MOA.118 Jadewell alternatively invoked
the provisions of Section 18 of the Implementing Rules and Regulations
(IRR) of the BOT Law,119 in the event the RTC would uphold the validity
of the questioned Resolution.
The trial court ruled that the rescission violated the due process clause of
the Constitution and failed to meet the requirements for rescission under
the Civil Code and the MOA itself. In the Sanggunian’s Memorandum,
on appeal before the CA, the Sanggunian assigned three errors to the
Decision of the trial court: (1) the RTC ignored the evidence on record
and the requirements of Rule 65 when it declared the subject Resolution
void; (2) Jadewell was not denied due process when the MOA was
rescinded; and (3) by ruling that the Sangguniang Panlungsod had no right
of rescission for the first 5 years of the MOA – an issue not raised in the
pleadings – the trial court improperly took up the cudgels for Jadewell in
the case.120
As earlier stated, the CA upheld the RTC’s Decision in toto.
The Sanggunian filed its Motion for Reconsideration arguing that the CA
had erred as follows: (1) treating Jadewell’s petition as an original action
for injunction;121 (2) ruling that Jadewell was deprived of due
process122 when it rescinded the MOA; and (3) finding that the MOA
stipulated for a five-year minimum guarantee against rescission.123 This
was denied, and this denial and the CA Decision are the subjects of G. R.
160025.
2. G.R. No. 172215 – Certiorari,
Prohibition and Mandamus, filed by
Jadewell against Judge Pamintuan
for not dismissing Civil Case No. 6089-R
Jadewell directly filed the instant Rule 65 Petition for Certiorari before
this Court to nullify the denial by the trial court of its Motion to Dismiss
and its Motion for Reconsideration of the same order,124 and for ordering
Jadewell to cease collecting parking fees, and from towing and
impounding vehicles on the streets of Baguio City. It also seeks to nullify
the proceedings in Civil Case No. 6089-R, invoking both res judicata and
litis pendentia.125 It contends that, since the issue on the validity of the
questioned city ordinance and the MOA was favorably ruled upon
previously by RTC Branches 7 and 61 of Baguio City in separate cases,
Branch 3 of the same RTC presided by Judge Pamintuan is bound by the
rulings of the other branches.126 Litis pendentia is being invoked in
relation to the petitions already before this Court.
Mayor Yaranon is impleaded in this case on the basis of the order of Judge
Pamintuan to the city mayor to perform his duty to supervise the roads,
streets and park of Baguio City, in coordination with the police and the
LTO during the validity of the Writ of Injunction that Judge Pamintuan
issued.127
The main issue to be resolved in Jadewell’s Petition for certiorari is
whether Judge Pamintuan’s rulings in Civil Case No. 6089-R violated the
res judicata/litis pendentia doctrines.
3. G.R. No. 181488 – The
Certiorari petition filed by Yaranon
seeking to reverse Resolutions dated
9 October 2008 and 24 January 2008
in CA-G.R. SP No. 96116 which
upheld the validity of his suspension
as City Mayor of Baguio.
Mayor Yaranon’s instant Petition before this Court raises the following
issues: (1) that his failed re-election bid was not a supervening event in
the final determination by the CA of whether he was guilty of grave
misconduct, abuse of authority, and oppression; and (2) that the CA
should rule on the substantive validity of his suspension.
4. The Petitions for Contempt
a. G.R. No. 163052 – This is the first contempt petition filed by Jadewell
directly with this Court against City Mayor Vergara, the Vice Mayor, and
the entire Sanggunian, for enacting Resolution Nos. 056 & 059, Series of
2004. To recall, Resolution No. 056, Series of 2004 informs the general
public that Jadewell had neither the authority nor the police power to
clamp, tow or impound vehicles at any place in the City of Baguio.128 In
Resolution No. 059, Series of 2004, the City of Baguio made a formal
demand upon Jadewell to surrender the Ganza and Burnham Park Parking
Areas within thirty days. In the same Resolution, the City of Baguio also
directed the City Legal Officer to file the appropriate legal actions
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necessary to recover the said parking areas and to ask for damages against
Jadewell.129
The core issue to be resolved in this case is whether the Sanggunian
Panlungsod is guilty of indirect contempt for enacting the above
resolutions, pending resolution of G.R. No. 160025.
b. G.R. No. 164107 – This contempt petition was filed directly with this
Court against then Baguio City Mayor Braulio D. Yaranon after he issued
Executive Order No. 001-04 announcing that, as City Mayor, he would
give protection to motor vehicle owners, operators, and drivers who
would refuse to submit to the enforcement of traffic rules by Jadewell
such as by refusing to pay the parking fees or fines the latter imposes.
Yaranon also issued a Memorandum dated 8 July 2004, ordering the arrest
and filing of criminal charges against Jadewell personnel who would
clamp, tow, or impound motor vehicles in defiance of Executive Order
No. 001-04. This was followed by a Memorandum on 8 April 2005
directing the Baguio City Police District to create a special task force to
prevent Jadewell from clamping, towing, and impounding vehicles found
to be in violation of the parking rules in Baguio City.
The issue to be resolved in this petition is whether Mayor Yaranon could
be cited for contempt for the above, pending resolution of the issue of the
validity of the rescission of the MOA in G.R. Nos. 160025 and 163052.
c. G.R. No. 165564 – Jadewell filed this third contempt petition against
Mayor Yaranon for issuing Executive Order No. 005-2004 dated 15
October 2004. The order directs Jadewell to cease and desist from: (a)
charging and collecting parking fees on the streets of Baguio City without
the consent of the City Government;130 (b) seizing and detaining vehicles
of motorists who refuse to pay the parking fees to Jadewell131 and (c)
using yellow-colored tow trucks bearing the name "City of
Baguio".132 Jadewell’s petition also seeks to nullify Executive Order No.
005-2004.
On 16 November 2004, Jadewell filed a Supplemental Petition. The act
complained of this time was the issuance of Executive Order No. 005-
2004-A which is a mere rehash of Executive Order No. 005-2004.133 On
25 January 2005, Jadewell filed a Second Supplemental Petition in
connection with Mayor Yaranon’s issuance of Administrative Order No.
622, Series of 2004. The said administrative order declared that Jadewell
exceeded its area of operations for the administration of on-street parking
and it required to show lawful cause why its business permit should not
be revoked.
Like in the earlier contempt petitions, Jadewell alleges that these
issuances by Mayor Yaranon are contumacious because they were made
while the main petition, G.R. No. 160025 questioning the rescission of
the MOA by the Sanggunian, is still pending resolution with this Court.
d. G.R. No. 172216 – On 27 April 2006, Jadewell filed a petition for
contempt against Judge Fernando Vil Pamintuan, Presiding Judge of
RTC-Branch 3 of Baguio City, in relation to Civil Case No. 6089-R
pending before his sala.134 In the said civil case, Judge Pamintuan issued
an Order directing Jadewell to desist from the collection of parking fees,
from towing and impounding vehicles on the streets of Baguio City and
to hold in abeyance the implementation of City Ordinance 003-2000 and
the MOA. The validity of the Order of Judge Pamintuan is the subject of
a Petition for Certiorari, Prohibition, and Mandamus instituted by
Jadewell in G.R. No. 172215.
The main issue to be resolved in this case is whether Judge Pamintuan
should be cited for indirect contempt by this Court for issuing the assailed
Orders.
e. G.R. No. 173043 – On 29 June 2006, Jadewell filed yet another
contempt case against Mayor Yaranon. In addition to its prayer to cite him
for contempt, Jadewell also prays that Mayor Yaranon, as a lawyer, be
disbarred.135Jadewell instituted this fifth contempt case after it received a
letter from Mayor Yaranon demanding that it stop its business operations
in Baguio City, at the same time directing the Sangguniang Panlungsod
to cancel Ordinance 003-2000.
The issue to be resolved in this case is whether Mayor Yaranon was guilty
of indirect contempt and professional misconduct for the above acts
pending resolution of G.R. Nos. 160025, 163052,164107, 165564 and
172215.136
f. G.R. No. 174879 - On 19 October 2006, Jadewell filed a contempt case
against the acting City Mayor of Baguio, Reinaldo A. Bautista, Jr., and
the members of the Sangguniang Panlungsod, including City Legal
Officer Melchor Carlos R. Rabanes, in connection with the second act of
rescission.137 Jadewell also asks that the respondents who are lawyers,
namely: Rocky Thomas A. Balisong, Edilberto B. Tenefrancia, Faustino
A. Olowan, Federico J. Mandapat, Perlita L. Chan-Rondez, and Jose M.
Molintas, be disbarred.
These acts, in Jadewell’s view, are contumacious in light of the pending
G.R. No. 160025 before this Court.
OUR RULINGS
1. On G.R. No. 160025
a. On the Treatment of
Jadewell’s Petition as one for
Permanent Injunction.
The CA sustained the position of the Sanggunian that certiorari could not
prosper because when the latter enacted Resolution 37, the Sanggunian
was exercising its legislative function and not its judicial or quasi-judicial
function. The writ of certiorari under Rule 65 requires: (a) that it is
directed against a tribunal, a board or an officer exercising judicial or
quasi-judicial functions; (b) that such tribunal, board, or officer has acted
without or in excess of jurisdiction or with grave abuse of discretion; and
(c) that there is no appeal nor any plain, speedy and adequate remedy in
the ordinary course of law.138
The CA nevertheless proceeded to treat the Petition as an original action
for injunction, ruling in this wise:
xxxx
Although in the trial court, Jadewell filed said petition for Certiorari,
Prohibition and Mandamus under Rule 65, it is essentially one for
Injunction under Rule 58. Said petition’s form and substance satisfied all
the requirements of a civil action for Injunction, which is the proper
remedy under the attendant circumstances.
The rules of procedure ought not to be applied in a very rigid technical
sense, rules of procedure are used only to help secure, not override
substantial justice. If a technical and rigid enforcement of the rules is
made, their aim would be defeated.
Considering the clear and patent denial of due process committed by the
Sanggunian in precipitately rescinding the MOA and in the interest of
substantial justice, WE deem it more prudent to treat the petition filed
below as an action for Injunction under Rule 58, which is well within the
jurisdiction of the trial court. Consequently, the present appeal shall be
considered as an appeal from the permanent injunction ordered by the trial
court, which is properly appealable to this Court, as held in Casilan vs.
Ybaňez.139
xxxx
We sustain the ruling of the appellate court treating Jadewell’s original
action for certiorari as one for injunction based on the allegations in the
latter’s pleadings.
In Ramon Jimenez, Jr. v. Juan Jose Jordana,140 the issue to be resolved
was whether the nature of the action was one for specific performance or
for recovery of real property. In determining that the case was one for the
recovery of real property, the Court characterized the suit on the basis of
the allegations in the Complaint. We restated the rule that the nature of an
action is determined by the material averments in the complaint and the
character of the relief sought. In the recent case of Reyes v. Alsons
Development and Investment Corporation,141 we likewise ruled that the
nature of an action is determined by the allegations in the pleadings.
In Lee, Jr. v. Court of Appeals,142 the controversy to be resolved was
whether the appeal filed by the petitioner was one under Rule 65 or Rule
42. The determination of the issue was crucial, because the appellate court
had dismissed the appeal of the petitioner, saying that the wrong mode of
appeal had been used. The CA had ruled that petitioner should have filed
a certiorari petition under Rule 65 – instead of a petition under Rule 42 –
to appeal the assailed decision rendered by the RTC in the exercise of its
appellate jurisdiction.
We held:
Our perusal of the petition filed before the Court of Appeals clearly shows
that it is a petition for review under Rule 42, and not a special civil action
for certiorari under Rule 65. We note that in the Court of Appeals’
petition, under the heading "Nature of the Petition," petitioner stated that
it was a "petition for review on certiorari to set aside, invalidate and
reverse the Decision dated December 14, 2001 of public respondent Judge
Victor T. Llamas, Jr." Also, the reversal sought was premised on the
ground that the decision was issued in gross error. The statement under
the heading "Nature of the Petition" that the trial courts’ decisions were
issued with grave abuse of discretion amounting to lack of jurisdiction,
and even the caption impleading the lower courts, would not
Obligations Part 2 | Page 14 of 143
automatically bring the petition within the coverage of Rule 65. It is
hornbook doctrine that it is not the caption of the pleading but the
allegations therein that determine the nature of the action. (Emphasis
supplied)
In the original action filed by Jadewell before the RTC of Baguio City,
although the action was clearly denominated as a Petition for Certiorari,
Prohibition and Mandamus against the Sangguniang Panlungsod, the
allegations actually supported an action for injunction under Rule 58 of
the Revised Rules on Civil Procedure. As can be gleaned from its
allegations and especially in its prayers, Jadewell filed the case with the
trial court with the ultimate end of restraining the implementation of
Resolution No. 037, Series of 2002.
We agree with the CA when it ruled that Jadewell sought permanent
injunction aside from the auxiliary remedy of preliminary injunction,
thus:
An action for injunction is a recognized remedy in this jurisdiction. It is a
suit for the purpose of enjoining the defendant, perpetually or for a
particular time, from committing or continuing to commit a specific act,
or compelling the defendant to continue performing a particular act. It has
an independent existence. The action for injunction is distinct from the
ancillary remedy of preliminary injunction, which cannot exist except
only as part or an incident of an independent action or
proceeding.143 xxxx...
In Garcia v. Adeva,144 this Court had the opportunity to clarify that while
injunction can be a provisional remedy, it can also be a main case. The
Court had to make this preliminary distinction in order to find out whether
the SEC had the jurisdiction to prevent, on a permanent basis, the
commission of certain acts by the respondents. Thus, the necessity to
make the distinction between injunction as a provisional remedy and
injunction as a main case. It found guidance from Garayblas v. Atienza,
Jr.,145 and quoting from the latter:
Injunction is a judicial writ, process or proceeding whereby a party is
ordered to do or refrain from doing a certain act. It may be the main action
or merely a provisional remedy for and as an incident in the main action.
The Court has distinguished the main action for injunction from the
provisional or ancillary remedy of preliminary injunction, thus:
The main action for injunction is distinct from the provisional or ancillary
remedy of preliminary injunction which cannot exist except only as part
or an incident of an independent action or proceeding. As a matter of
course, in an action for injunction, the auxiliary remedy of preliminary
injunction, whether prohibitory or mandatory, may issue. Under the law,
the main action for injunction seeks a judgment embodying a final
injunction which is distinct from, and should not be confused with, the
provisional remedy of preliminary injunction, the sole object of which is
to preserve the status quo until the merits can be heard. A preliminary
injunction is granted at any stage of an action or proceeding prior to the
judgment or final order. It persists until it is dissolved or until the
termination of the action without the court issuing a final injunction.
We, therefore, rule that the CA did not commit any error in treating
Jadewell’s Petition for Certiorari as an original action for injunction.
b. On the denial of due process.
The second issue in this Petition is the correctness of the CA’s ruling that
Jadewell was deprived of due process when the Sangguniang Panlungsod
rescinded the MOA. The findings of the CA are as follows:
In the instant case, evidence on record does not show that before the
Sanggunian passed the disputed Resolution it gave Jadewell an
opportunity to present its side. Neither did the Sanggunian convene an
investigatory body to inquire into Jadewell’s alleged violations nor at
least invite Jadewell to a conference to discuss the alleged violations, if
only to give Jadewell the chance to refute any evidence gathered by it
against the latter. As it is, the Sanggunian arrogated upon itself the role of
a prosecutor, judge and executioner in rescinding the MOA, all in clear
violation of Jadewell’s constitutionally embedded right to due process.146
x x x.
Both courts held that Jadewell was denied due process. When the denial
of due process argument is raised, it is directed primarily against the
exercise of governmental authority that "deprives life, liberty and
property" without observance what is, in the circumstances, the applicable
standards of "due process." It is not an argument that is relevant in
situations of contractual breach between two purely private entities, nor
is it available against the government when the latter is not discharging a
governmental function, but merely pursuing a purely commercial activity
in a proprietary capacity. In order to consider the due process argument,
this Court must first determine whether the MOA was entered into by the
City of Baguio in a governmental capacity, or in a purely proprietary
capacity.
The regulation of on-street and off-street parking is a governmental
function that can be exercised by local governments. It is important to
understand the objective of the Baguio City Government in: (1)
privatizing the administration of on-street and off-street parking; and (2)
its execution of a MOA with Jadewell. This can be gleaned from the
Explanatory Note and other provisions of the agreement, to wit:
The City of Baguio has earned the reputation of the CLEANEST AND
GREENEST HIGHLY URBANIZED CITY for the previous years. This
has become possible due to the collective effort of both the Citizens of
Baguio and the City Government. However, the increase in population,
volume of vehicles and the absence of a regulatory measure to address
this concern gradually tainted what used to be a reputation we were proud
of.
The ever increasing problems, specifically those relevant to the Traffic
situation is at this point the biggest contributor to environmental
degradation. Other Salient points we must consider relevant to this matter
are the problems on OBSTRUCTION AND DOUBLE PARKING which
are very rampant. We further add to these the problems on
DISORGANIZED PARKING, LACK OF DEPUTIZED AGENTS to
monitor, supervise and enforce traffic rules and regulations.
At this point in time, we feel the immediate need of focusing on these
problems. There is an urgent need to adopt measures that would alleviate
these matters. This we recommend that PARKING SPACES should be
REGULATED in such a manner that it would bring advantage both to the
City Government and the Citizens of Baguio. We further propose the
collection of REGULATORY FEES that would be used in maintaining
our roads and to hire people that would de deputized to help ease the
problems as stated above.
Finally, we believe that our roads are beyond the Commerce of Man. To
convert our roads into PAY PARKING SPACES, would be violative of
this principle. However to REGULATE its use and its eventual effect
would redound to the GENERAL WELFARE will be an appreciated
gesture to help preserve our image as the CLEANEST AND GREENEST
HIGHLY URBANIZED CITY.
xxxx
SECTION 4. Parking spaces. A parking place may be divided into parking
spaces and for the purposes of this Ordinance, each space or for a number
of spaces as determined by the private parking operator in consultation
with the concerned Official of the City of Baguio.
xxxx
SECTION 5. Prohibitions against parking outside the parking spaces. No
spaces shall park any motor vehicle on the sidewalk or cause or permit
any motor vehicle to wait to any road or length of road on which in any
place in which or adjacent to or in close proximity to which there is a
parking place.
xxxx
SECTION 7. Payment of Prescribed Charges. (1) No person shall park
any motor vehicle in a parking place or parking space during the times
specified in this Ordinance without paying the prescribed charge for the
required parking period; (2) The prescribed charge payable in respect to
the parking of a motor vehicle in a parking space shall be paid by the
insertion into the parking meter provided for that parking space a
coin/coins of Philippine Currency or by using cards in order to obtain the
payment ticket to evidence the payment of the prescribed charge; (3) The
payment ticket shall be displayed at a conspicuous part of a motor vehicle
in a parking place or parking space; (4) The payment ticket shall be valid
to be used on any parking space within the authorized period indicated in
the payment ticket.
xxxx
SECTION 22. Rules. The Memorandum of Agreement (MOA) to be
entered into by the City Mayor shall be governed by this Ordinance.
From the above, the following are clear: (1) that the City of Baguio
decided on the privatization of the administration of parking for
environmental and peace and safety reasons, both of which are within its
powers under Section 458(A)(5)(v) and (vi) of the Local Government
Code; and (2) that the terms of agreement between the City of Baguio and
Jadewell involve the delegation of governmental functions in terms of
regulating the designation and use of parking spaces as well as the
collection of fees for such use. These are indicators that any privatization
contract pursuant to the above Resolution takes the essential character of
Obligations Part 2 | Page 15 of 143
a franchise because what is being privatized is a government-
monopolized function.
It would thus be relevant to ask if there is a provision in the applicable
laws or the franchise (MOA) that grants the City of Baguio the right to
revoke the latter either at will, or upon the satisfaction of certain
conditions, such that ordinary due process protection can be considered
to have been waived by the franchisee. We must caution that when we
refer to revocation at will here, we are referring to the revocation of
resolutory, not suspensive, obligations.147
We have looked closely at Resolution No. 003-2000 and the MOA and
have additionally reflected on the applicable provision under the Civil
Code. We have come to the conclusion that:
(a) There is only one provision that allows for unilateral revocation of the
MOA, which can be found in Section 9 thereof:
9. Minimum Guaranty – The FIRST PARTY guaranties (sic) a minimum
period of five (5) years against rescission; provided that after such period,
the parties may agree to increase to a reasonable rate the parking fees and
the share of the city from the parking fees collected as provided for in the
guidelines, (Annex "B");
(b) This Section 9 requires that five years must have lapsed – presumably
from the date of execution of the MOA – before the unilateral right to
revoke the MOA can be exercised;
(c) Therefore, before the five year period has lapsed, the right to revoke
the MOA arises only under Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
From the above, it appears that in order to effect a valid revocation of the
MOA prior to the lapse of the 5-year period provided for in Section 9, the
City of Baguio had to approach the problem from one or both of two
perspectives: one, negotiate the termination of the MOA with Jadewell,
or two, exercise its option under Article 1191 of the Civil Code.
The first option, a negotiated pretermination of the contract, is an inherent
right of every party in a contract. This can be inferred from the freedom
of the parties to contract and modify their previous covenants provided it
would not be contrary to law, morals, good customs, public order or
public policy.148 Despite the provision on the minimum warranty against
rescission stipulated in the MOA, the parties were not constrained to
mutually modify such restriction. The Sanggunian could have proposed
to Jadewell the possibility of lifting the warranty against rescission
subject to the condition that the latter will comply with its obligations
under the MOA.
This scenario could have impressed upon Jadewell that its contractual
relations with the city government of Baguio were less than ideal. The
suggested approach for the Sanggunian could have been legally sound and
practical. Obviously, this was not done in this case; thus, Jadewell’s
Complaint before the RTC of Baguio City.
The second option is the exercise of the unilateral right to rescind a
bilateral contract on the part of a party who believes that it has been
injured by a breach substantial enough to warrant revocation. Where one
party allegedly failed to comply with his obligations under a contract, the
injured party may rescind the obligation if the other does not perform or
is not ready and willing to perform.149 We will examine the acts of Baguio
City in relation to what is allowed under Article 1191.
Rescission under Article 1191 takes place through either of two modes:
(1) through an extrajudicial declaration of rescission; or (2) upon the grant
of a judicial decree of rescission.
Extrajudicial declaration of rescission is recognized as a power which
does not require judicial intervention.150 If the rescission is not opposed,
extrajudicial declaration of rescission produces legal effect151 such that
the injured party is already relieved from performing the undertaking.152
However, the power of declaring extrajudicial rescission conferred upon
the injured party is regulated by the Civil Code. If the extrajudicial
rescission is impugned by the other party, it shall be subject to a judicial
determination153where court action must be taken, and the function of the
court is to declare the rescission as having been properly or improperly
made, or to give a period within which the debtor must perform the
obligation alleged to be breached.154 A unilateral cancellation of a
contract may be questioned in courts by the affected party to determine
whether or not cancellation is warranted.155 Thus, in an extrajudicial
decree of rescission, revocation cannot be completely exercised solely on
a party’s own judgment that the other has committed a breach of the
obligation156but always subject to the right of the other party to judicially
impugn such decision.
It is important to contextualize that the agreement entered into by the City
of Baguio with Jadewell is the embodiment of a grant of franchise imbued
with public interest and is not merely an agreement between two private
parties.
It is our view that the first act of rescission by the City of Baguio may be
valid even if there is a stipulation against it within the first five years of
the MOA’s existence. Article 1191 of the New Civil Code provides a
party the right to rescind the agreement and clearly overrides any
stipulation to the contrary. However, the grounds that would serve as basis
to the application of the said article must be clearly established.
In the exercise of this option under Article 1191, was it necessary for the
City of Baguio to provide Jadewell an opportunity to air its side on the
matter before the former implemented the rescission of the MOA? In the
instant case, was Jadewell deprived of procedural due process?
We answer in the negative. We disagree with the rulings of the RTC and
the CA that Jadewell was deprived of due process. In Taxicab Operators
of Metro Manila v. The Board of Transportation,157 we confronted the
issue of whether the petitioners were denied procedural due process when
the respondent Board of Transportation issued a circular ordering the
phasing out of old vehicles to be used as taxicabs. In the said case, the
phase-out was embodied in a circular that was promulgated without
holding a public hearing or at least requiring those affected to submit their
position papers on the policy to be implemented. We held for the
respondent Board, and ruled in this wise:
Dispensing with a public hearing prior to the issuance of the Circulars is
neither violative of procedural due process. As held in Central Bank vs.
Hon. Cloribel and Banco Filipino, 44 SCRA 307 (1972):
Previous notice and hearing as elements of due process, are
constitutionally required for the protection of life or vested property
rights, as well as of liberty, when its limitation or loss takes place in
consequence of a judicial or quasi-judicial proceeding, generally
dependent upon a past act or event which has to be established or
ascertained. It is not essential to the validity of general rules or regulations
promulgated to govern future conduct of a class or persons or enterprises,
unless the law provides otherwise.
In the instant case, the assailed act by the Sanggunian Panlungsod in
rescinding the MOA – be it first or second act of rescission – was clearly
in the exercise of its legislative or administrative functions and was not
an exercise of a judicial or quasi-judicial function. The Sanggunian
Panlungsod does not possess any judicial or quasi-judicial functions. The
preamble of the MOA lends support to this view. Evidently, the foremost
reason why the agreement was entered into by the parties was to provide
order, given Baguio City’s parking problems in identified areas, as well
as to generate income.
The objectives of the Sanggunian Panlungsod, as well as its intention to
rescind the MOA; because it deems to no longer serve the interest of the
City of Baguio, are clearly an exercise of its legislative or administrative
function. However, it is another matter as to whether the City of Baguio
was able to clearly establish the grounds as basis for the exercise of its
right to rescind.
c. On the allegation of Jadewell’s
substantial breach of the MOA.
The Baguio City government has repeatedly mentioned that Jadewell had
so far installed only 14 parking meters, with only 12 functioning. The
COA-CAR Report dated 13 July 2003 enumerated 12 findings,158 a
majority of which indicates that Jadewell was remiss in the fulfilment of
its obligations under the MOA. While Finding Nos. (1), (2), (3), (4), (5),
(8) and (12) of the COA-CAR Report state that Jadewell collected parking
fees, Jadewell failed to properly remit the same. Finding No. (11) of the
COA-CAR Report states that Jadewell failed to have its parking
attendants deputized,159 a condition under the MOA that is also important
to the overall objective of the endeavor.
Obligations Part 2 | Page 16 of 143
The MOA does not specifically provide for the exact number of parking
meters to be installed by Jadewell pursuant to the parties’ objective in
regulating parking in the city. Nevertheless, 100 parking spaces were
allotted as mentioned in Annex A of the MOA.160 The agreement also
obligates Jadewell to have its parking attendants deputized by the DOTC-
LTO so that they shall have the authority to enforce traffic rules and
regulations in the regulated areas.161 To the Court’s mind, these are two
of the most important obligations that Jadewell had to comply with,
considering the nature and objective of the agreement it had entered into.
Despite the enumeration of the above-mentioned faults of Jadewell, we
do not make a categorical finding that there was substantial breach
committed by Jadewell to justify a unilateral rescission of the MOA. We
find, however, that the RTC had not properly received evidence that
would allow it to determine the extent of the claimed violations of the
MOA. Had these violations by Jadewell been proven in a proper hearing,
the finding of a substantial breach of the MOA would have been a distinct
probability.
Unfortunately, neither the RTC nor the CA provided a clear basis for their
rulings on the extent of the breach of the MOA by Jadewell. Save from
reiterating the Sanggunian’s litany of violations said to be committed by
Jadewell, there was no testimony on record to prove such facts and no
indication as to whether the RTC or CA dismissed them or took them at
face value.
Whatever the extent of breach of contract that Jadewell may have
committed – and the enumeration of Jadewell’s alleged faults in
Resolution 37 is quite extensive – the City of Baguio was still duty-bound
to establish the alleged breach.
Matters became complicated when the RTC and the CA lumped the issues
on the due process violation of Baguio City with Jadewell’s alleged
substantial breaches under the MOA, instead of making a clear finding on
the existence and extent of such breach. The facts and legal issues were
thus muddled.
We find fault in the lower and appellate court’s lapse in examining the
issue on Jadewell’s alleged substantial breach. Evidence-taking had to be
undertaken by these courts before they could arrive at a judicial
conclusion on the presence of substantial breach.
We thus DENY the Petition of the Sanggunian Panlungsod in G.R. No.
160025 and AFFIRM the questioned CA Decision. However, we reject
the ruling made by the appellate court that the violations of Jadewell
under the MOA were not substantial. We hold that there is no sufficient
evidence on record to make such determination.
While Jadewell prays for damages against the public respondent, and
while ordinarily we could grant the same, the context of this case prevents
us from giving any form of recompense to Jadewell even if the rescission
of the MOA did not follow the required legal procedure. This is because
it would be appalling to grant Jadewell any award of damages,
considering (1) it installed only 14 out of the apparently 100 contemplated
parking meters; (2) its employees, private citizens who did not possess
any authority from the LTO, were manually collecting parking fees from
the public, and (3) it did not, apparently properly remit any significant
amount of money to the City of Baguio. These three facts are uncontested,
these omissions are offensive to the concept of public service that the
residents of Baguio were promised through Jadewell. From its ambiguous
responses extant in the records, it is clear that Jadewell does not appear to
be an investor who has lost in its investments in the Baguio City project.
Thus, we do not award any damages to Jadewell.
2. On G.R. Nos. 163052, 164107,
165564, 172216, 173043 and 174879
(The Contempt Petitions)
Section 3 of Rule 71 of the Revised Rules of Civil Procedure enumerates
the acts constituting indirect contempt, thus:
(a) Misbehavior of an officer of a court in the performance of his official
duties or in his official transactions;
(b) Disobedience of or resistance to a lawful writ, process, order, or
judgment of a court, including the act of a person who, after being
dispossessed or ejected from any real property by the judgment or process
of any court of competent jurisdiction, enters or attempts or induces
another to enter into or upon such real property, for the purpose of
executing acts of ownership or possession, or in any manner disturbs the
possession given to the person adjudged to be entitled thereto;
(c) Any abuse of or any unlawful interference with the processes or
proceedings of a court not constituting direct contempt under Section 1 of
this Rule;
(d) Any improper conduct tending, directly or indirectly, to impede,
obstruct, or degrade the administration of justice;
(e) Assuming to be an attorney or an officer of a court, and acting as such
without authority;
(f) Failure to obey a subpoena duly served;
(g) The rescue, or attempted rescue, of a person or property in the custody
of an officer by virtue of an order or process of a court held by him.
But nothing in this section shall be so construed as to prevent the court
from issuing process to bring the respondent into court, or from holding
him in custody pending such proceedings.
The rule alerts us to three possible situations, wherein, in the context of
the facts of these petitions, contumacious behaviour could have been
committed by public respondents. First, disobedience or resistance to a
lawful order of this Court under paragraph (b). Second, unlawful
interference with the proceedings of this Court under paragraph (c). Third,
improper conduct tending, directly or indirectly, to impeded, obstruct, or
degrade the administration of justice by this Court under paragraph (d).
Jadewell, in G.R. Nos. 163052, 164107, 165564, 172216, 173043, and
174879, bases its charges of indirect contempt against public respondents
on a claim that any action that tends to stop the implementation of the
MOA is contumacious. Such actions include desistance orders to desist
against Jadewell itself, the second act of unilateral rescission of the MOA;
orders to other public officers to prevent Jadewell from exercising its
authority under the MOA; and the official encouragement for motorists to
resist attempts of Jadewell to collect parking fees or clamp/tow vehicles
that do not observe the parking regulations.
We find scant jurisprudence to guide us on this matter. The closest
situation is that presented in Southern Broadcasting Network v. Davao
Light and Power,162 penned by Justice Felix Makasiar. In that case,
petitioner’s representative, Carmen Pacquing, wrote a letter to President
Marcos asking for his intervention so that her Motion for Reconsideration
(MR) of the resolution of this Court denying her Petition could be
favorably granted. Respondent Davao Light asked that petitioner
Pacquing be cited for contempt, arguing that her act in writing to the
President asking him to intervene in the case showed disrespect to and
disregard for the authority of this Court as the final arbiter of all cases.
We found petitioner Pacquing guilty of contempt, thus:
x x x. WE hold that such actuation of herein petitioner’s representative
only bespeaks more of her contumacious attempt to trifle with the orderly
administration of justice because if she know that this Court will
ultimately decide the case "regardless of the President’s intervention,"
then she should have desisted from writing to the President.
In the light of the foregoing, there is no doubt that Mrs. Pacquing
committed an "improper conduct tending, directly or indirectly, to
impede, obstruct, or degrade the administration of justice" (Section 3, par.
[d] Rule 71, Rules of Court) and impair the respect due to the courts of
justice in general, and the Supreme Court, in particular.
In the above case, respondent Carmen Pacquing was clearly asking the
President to commit an improper act – to influence the Supreme Court –
that obstructs the orderly administration of justice, as the Court is
constitutionally required to act independently free from the promptings of
the President. Pacquing clearly violated both Sections (c) and (d) of
Section 3, Rule 71.
No such similar situation occurred here. Public respondents never asked
anyone to employ pressure or influence on this Court for the former’s
benefit.
Instead, the acts that have been allegedly committed by public
respondents are acts done pursuant to their belief that: (a) the MOA has
been validly voided, and more importantly, (b) that Jadewell’s personnel
do not have the legal authority to perform the governmental function of
administering the regulation of on-street and off-street parking, of towing
or clamping vehicles that violate such regulation, and of collecting
parking fees from motorists.
It is important to note that the Court never gave a mandatory injunction
that is couched in a way that requires public respondents to fully comply
with the terms of the MOA. The writ of preliminary mandatory injunction
(WPMI) issued on 9 February 2005 is directed to Mayor Yaranon only,
and it directs him to perform only one specific act: to reopen, and maintain
open, the street and premises then being occupied and operated by
Jadewell.
Mayor Yaranon did not immediately comply with this WPMI. Thus, this
Court fined him ₱10,000 on 20 April 2005, and ordered the NBI to arrest
Obligations Part 2 | Page 17 of 143
him if he further failed to comply with the WPMI. Subsequently, Mayor
Yaranon paid the fine, and there is nothing on record to show that he has,
since April of 2005, further defied this Court on that score.
The Court did not issue a WPMI specifically ordering the parties to
observe the terms of the MOA. Thus, public respondents were not
expressly prohibited to act on their beliefs regarding the validity or
invalidity of the MOA, or, the authority or lack of authority of Jadewell
personnel to perform governmental functions in the streets of Baguio.
This is an important result, because to hold otherwise is to effectively
grant one of the parties a mandatory injunction even without an express
resolution to this effect from the Court. Without an express order, the
pendency of a suit before the Supreme Court is not a prima facie
entitlement of provisional relief to either party.
Public respondents therefore were, at liberty to question and inform the
public of their belief regarding the lack of authority of Jadewell and its
personnel to regulate public parking in Baguio. They were certainly free
to formally write Jadewell on their beliefs and pass the corresponding
resolutions to this effect. The mayor was also not under legal compulsion
to renew Jadewell’s business permit in view of his opinion that Jadewell
was exceeding its allowable area of operation, which Jadewell was not
able to fully disprove. This is especially true for two important reasons:
(1) there is an uncontested cease and desist order that was issued by the
DOTC-CAR on 13 March 2002 which Jadewell defied well into 2005,
and (2) public respondents are city officials of Baguio who have the legal
duty to ensure the laws are being followed, including laws that define who
may enforce regulations on public parking.
That Jadewell personnel do not have the legal authority to enforce
regulations on public parking is categorical from the Letter dated 1
February 2001 by the Regional Director of the DOTC-CAR denying the
request of Jadewell for the deputation of its personnel.163
We therefore do not find any of the public respondents who were then
officials of the City of Baguio, liable for indirect contempt, and thereby
dismiss G.R. Nos. 163052, 164107, 165564, 173043 and 174879. In G.R.
174879, we have already pronounced that the Sanggunian was within its
full right to perform the second act of rescission, and thus, it is even with
more reason, that its members and the City Legal Officer cannot be held
in contempt therefor. We deny the prayer in the petitions to disbar the
respondents therein who are lawyers.
We also do not find Judge Fernando Vil Pamintuan liable for contempt in
G.R. No. 172216.
Jadewell wants this Court to cite Judge Pamintuan for contempt for
issuing a writ of preliminary prohibitory injunction ordering Jadewell to
stop collecting parking fees; to refrain from supervising the parking in
Baguio City; as well as to hold in abeyance the implementation of the
MOA and its enabling ordinance.164
It was only on 5 June 2006 that this Court, in G.R. No. 172215, issued a
Temporary Restraining Order (TRO)165directing the trial court to
discontinue the proceedings in Civil Case No. 6089-R. Upon receipt by
Judge Pamintuan of the TRO, he immediately ordered the cancellation of
the 29 June 2006 hearing.166
We do not consider the promulgation of the assailed writ of preliminary
prohibitory injunction against Jadewell as a defiance of our writ issued on
9 February 2005, considering, it was directed against Mayor Yaranon
only. We have held in Leonidas v. Supnet that "a party cannot be held in
indirect contempt for disobeying a court order which is not addressed to
him."167 We note that Judge Pamintuan observed deference to the Orders
of this Court when he immediately suspended the proceedings in Civil
Case No. 6089-R upon receipt of the TRO.
G.R. No. 172215
In this Petition for certiorari, prohibition, and mandamus under Rule 65
of the Rules of Civil Procedure, Jadewell assails the Orders of RTC-
Branch 3 (Baguio City) denying its motion to dismiss and motion for
reconsideration in Civil Case No. 6089-R.
We deny the petition of Jadewell in this case.
In Manuel Camacho v. Atty. Jovito Coresis, Jr.,168 we described the
nature of special civil action for certiorari under Rule 65, as follows:
A special civil action for certiorari under Rule 65 of the Rules of Court is
an extraordinary remedy for the correction of errors of jurisdiction. To
invoke the Court’s power of judicial review under this Rule, it must first
be shown that respondent tribunal, board or officer exercising judicial or
quasi- judicial functions has indeed acted without or in excess of its or his
jurisdiction, and that there is no appeal, or any plain, speedy and adequate
remedy in the ordinary course of law. Conversely, absent a showing of
lack or excess of jurisdiction or grave abuse of discretion amounting to
lack or excess of jurisdiction, the acts of the respondents may not be
subjected to our review under Rule 65.
In Indiana Aerospace University v. Commission on Higher
Education,169 this Court ruled thus:
An order denying a motion to dismiss is interlocutory, and so the proper
remedy in such a case is to appeal after a decision has been rendered. A
writ of certiorari is not intended to correct every controversial
interlocutory ruling; it is resorted to only to correct a grave abuse of
discretion or a whimsical exercise of judgment equivalent to lack of
jurisdiction. Its function is limited to keeping an inferior court within its
jurisdiction and to relieve persons from arbitrary acts -- acts which courts
or judges have no power or authority in law to perform. It is not designed
to correct erroneous findings and conclusions made by the court.
In East Asia Traders, Inc. v. Republic of the Philippines, et al.,170 we
decreed:
The petition for certiorari and prohibition filed by petitioner with the
Court of Appeals is not the proper remedy to assail the denial by the RTC
of the motion to dismiss. The Order of the RTC denying the motion to
dismiss is merely interlocutory. An interlocutory order does not terminate
nor finally dispose of the case, but leaves something to be done by the
court before the case is finally decided on the merits. It is always under
the control of the court and may be modified or rescinded upon sufficient
grounds shown at any time before final judgment. This proceeds from the
court’s inherent power to control its process and orders so as to make them
conformable to law and justice. The only limitation is that the judge
cannot act with grave abuse of discretion, or that no injustice results
thereby.
East Asia Trader also reiterated our ruling in Indiana Aerospace. Further,
in Bonifacio Construction Management Corporation v. Hon. Perlas
Bernabe,171 we reiterated our rulings in East Asia Traders and Indiana
Aerospace. We had ruled in these earlier cases that an order of the trial
court denying a motion to dismiss is an interlocutory order, and to use a
writ of certiorari to assail it is improper.
The procedural policy in the cited cases was again referred to in Bernas
v. Sovereign Ventures, Inc.,172 highlighting the following:
Let it be stressed at this point the basic rule that when a motion to dismiss
is denied by the trial court, the remedy is not to file a petition for certiorari,
but to appeal after a decision has been rendered. (Emphasis supplied)
G.R. No. 181488
The question of law raised by petitioner Yaranon in this Petition for
Review on Certiorari is whether the CA correctly dismissed his appeal
questioning the validity of his suspension from office as City Mayor, on
the ground that his suit had become moot and academic due to his non-
re-election to office. The CA cited Crespo v. Provincial Board of Nueva
Ecija173 as basis for the dismissal.
For his part, Mayor Yaranon contends that the appellate court should have
ruled on the validity of his suspension from office despite his failure to
get re-elected as City Mayor. He argues that he has the right to know
whether his suspension was valid or not and, in the event his suspension
is declared invalid, Mayor Yaranon believes he is entitled to the salaries
and benefits accruing during the period he was suspended.
We deny the Petition of Mayor Yaranon.
The appeal of Mayor Yaranon has been rendered moot and academic. We
hold that the resolution of the issue raised herein would serve no practical
purpose.
In Miriam College v. Court of Appeals,174 we ruled that a case becomes
moot and academic when there is no more actual controversy between the
parties, or when no useful purpose can be served in passing upon the
merits. Further, courts will not determine a moot question in which no
practical relief can be granted.175
Mayor Yaranon has already served his suspension. We find no practical
value in remanding his case to the appellate court for the determination of
the factual basis and legal issues of his appeal pertaining to the validity of
his suspension as then City Mayor of Baguio City.
We have held in Nicart, Jr. v. Sandiganbayan (Third Division),176 that an
issue becomes moot when a petitioner is not entitled to substantial relief:
x x x [T]he propriety of the preventive suspension of petitioner effected
through the assailed Resolution of February 15, 2001 has become a moot
issue, it appearing that he has already served his suspension. An issue
Obligations Part 2 | Page 18 of 143
becomes moot and academic when it ceases to present a justifiable
controversy so that a determination thereof would be of no practical use
and value. In such cases, there is no actual substantial relief to which
petitioner would be entitled to and which would be negated by the
dismissal of the petition.
We cannot sustain Mayor Yaranon’s argument that his appeal should not
have been dismissed because, in the event that the finding of the Office
of the President to suspend him is reversed, he is still entitled to the
salaries accruing during the period he was suspended. We take note of the
cases cited by Mayor Yaranon such as Crespo v. Provincial Board of
Nueva Ecija,177 Baquerfo v. Sanchez178 and Reyes v. Cristi,179 among
others. These cases involve substantial issues – such as denial of due
process and procedural irregularities – other than a mere claim for
entitlement to salaries. The factual background and the legal issues for
resolution in the cases mentioned are not similar to the case at bar.
In Triste v. Leyte State College Board of Trustees180 the Court elucidated
on the nature of the salary of a public official:
Mechem states that "(l)ike the requirement of an oath, the fact of the
payment of a salary and/or fees may aid in determining the nature of a
position, but it is not conclusive, for while a salary or fees are usually
annexed to the office, it is not necessarily so. As in the case of the oath,
the salary or fees are mere incidents and form no part of the office. Where
a salary or fees are annexed, the office is often said to be ‘coupled with
an interest’; where neither is provided for it is a naked or honorary office,
and is supposed to be accepted merely for the public good." (Emphasis
supplied)
Given the circumstances of this case, we find that Mayor Yaranon’s claim
for unpaid salaries, in case of exoneration, does not constitute such
substantial relief that would justify the revival of his appeal. Even if we
did sustain his Petition, we nevertheless find that it has been mooted by
our resolution in the main petition.
WHEREFORE, we hereby rule as follows:
a.) In G.R. No. 160025, the Petition of the Sangguniang Panlungsod of
Baguio City is DENIED. The CA Decision dated 7 July 2003 in CA G.R.
SP No. 74756 is hereby AFFIRMED with modification. There is not
enough evidence on record to conclude that Jadewell’s violations were
sufficient to justify the unilateral cancellation of the MOA by the
Sangguniang Panlungsod of Baguio City; at the same time, neither the
RTC nor the CA provided a clear finding whether the breach of the MOA
by Jadewell was substantial. We affirm the CA as to the rest of its
dispositions in its assailed Decision. Nevertheless, no award of damages
is hereby made in favour of Jadewell and neither is there any
pronouncement as to costs.
b.) G.R. Nos. 163052, 164107, 165564, 172216, 173043 and 174879, the
Petitions of Jadewell to cite Mayor Braulio D. Yaranon, Mayor Bernardo
M. Vergara, Acting City Mayor Reinaldo A. Bautista, Vice Mayor Betty
Lourdes F. Tabanda, the members of the Sangguniang Panlungsod of
Baguio City namely: Elmer O. Datuin, Antonio R. Tabora, Edilberto B.
Tenefrancia, Federico J. Mandapat, Jr., Richard A. Carino, Faustino A.
Olowan, Rufino M. Panagan, Leonardo B. Yangot, Jr., Rocky Thomas A.
Balisong, Galo P. Weygan, Perlita L. Chan-Rondez, Jose M. Molintas,
and Judge Fernando Vil Pamintuan for indirect contempt and to disbar
Sangguniang Panlungsod members Rocky Thomas A. Balisong,
Edilberto B. Tenefrancia, Faustino A. Olowan, Federico J. Mandapat,
Perlita L. Chan-Rondez, Jose M. Molintas, Melchor Carlos B. Rabanes
and Mayor Braulio D. Yaranon are all hereby DISMISSED for lack of
merit. No pronouncement as to costs.
c.) We DENY the Petition of Jadewell for lack of merit in G.R. No.
172215. We likewise DENY its prayer for the issuance of a temporary
restraining order and/or writ of preliminary injunction for being moot and
academic. No pronouncement as to costs.
d.) We DENY the Petition of Mayor Braulio D. Yaranon in G.R. No.
181488, for lack of merit and AFFIRM the CA Decision CA-G.R. SP No.
96116. No pronouncement as to costs.
SO ORDERED.
x-----------------------x
G.R. No. 175302
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
WILFRED N. CHIOK, Respondent.
x-----------------------x
G.R. No. 175394
GLOBAL BUSINESS BANK, INC., Petitioner,
vs.
WILFRED N. CHIOK, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
The three consolidated petitions herein all assail the Decision1 of the
Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the
Resolution2 in the same case dated November 6, 2006.
Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading
for several years. He usually buys dollars from Gonzalo B. Nuguid
(Nuguid) at the exchange rate prevailing on the date of the sale. Chiok
pays Nuguid either in cash or manager’s check, to be picked up by the
latter or deposited in the latter’s bank account. Nuguid delivers the dollars
either on the same day or on a later date as may be agreed upon between
them, up to a week later. Chiok and Nuguid had been dealing in this
manner for about six to eight years, with their transactions running into
millions of pesos. For this purpose, Chiok maintained accounts with
petitioners Metropolitan Bank and Trust Company (Metrobank) and
Global Business Bank, Inc. (Global Bank), the latter being then referred
to as the Asian Banking Corporation (Asian Bank). Chiok likewise
entered into a Bills Purchase Line Agreement (BPLA) with Asian Bank.
Under the BPLA, checks drawn in favor of, or negotiated to, Chiok may
be purchased by Asian Bank. Upon such purchase, Chiok receives a
discounted cash equivalent of the amount of the check earlier than the
normal clearing period.
On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased"
Security Bank & Trust Company (SBTC) Manager’s Check (MC) No.
037364 in the amount of ₱25,500,000.00 issued in the name of Chiok,
and credited the same amount to the latter’s Savings Account No. 2-007-
03-00201-3.
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the
amount of ₱7,550,000.00 and MC No. 025939 in the amount of
₱10,905,350.00 to Gonzalo Bernardo, who is the same person as Gonzalo
B. Nuguid. The two Asian Bank manager’s checks, with a total value of
₱18,455,350.00 were issued pursuant toChiok’s instruction and was
debited from his account. Likewise upon Chiok’s application, Metrobank
issued Cashier’s Check (CC) No. 003380 in the amount of ₱7,613,000.00
in the name of Gonzalo Bernardo. The same was debited from Chiok’s
Savings Account No. 154-42504955. The checks bought by Chiok for
payee Gonzalo Bernardo are therefore summarized as follows:
Drawee Bank/Check No. Amount (P)
Asian Bank MC No. 025935 7,550,000.00
Asian Bank MC No. 025939 10,905,350.00
(aggregate value of
Asian Bank MCs:
18,455,350.00)

Metrobank CC No. 003380 7,613,000.00

Metropolitan Bank and Trust Company vs. Chiok
G.R. No. 172652 November 26, 2014
METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
vs. TOTAL 26,068,350.00
WILFRED N. CHIOK, Respondent.

Obligations Part 2 | Page 19 of 143


Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and
025939, and Metrobank CC No. 003380), with an aggregate value of
₱26,068,350.00 in Nuguid’s account with Far East Bank & Trust
Company (FEBTC), the predecessor-in-interest of petitioner Bank of the
Philippine Islands (BPI). Nuguid was supposed to deliver
US$1,022,288.50,4 the dollar equivalent of the three checks as agreed
upon, in the afternoon of the same day. Nuguid, however, failed to do so,
prompting Chiok to request that payment on the three checks be stopped.
Chiok was allegedly advised to secure a court order within the 24-hour
clearing period. On the following day, July 6, 1995, Chiok filed a
Complaint for damages with application for ex parte restraining order
and/or preliminary injunction with the Regional Trial Court (RTC) of
Quezon City against the spouses Gonzalo and Marinella Nuguid, and the
depositary banks, Asian Bank and Metrobank, represented by their
respective managers, Julius de la Fuente and Alice Rivera. The complaint
was docketed as Civil Case No. Q-95-24299 and was raffled to Branch
96. The complaint was later amended5 to include the prayer of Chiok to
be declared the legal owner of the proceeds of the subject checks and to
be allowed to withdraw the entire proceeds thereof.
On the same day, July 6, 1995, the RTC issued a temporary restraining
order (TRO) directing the spouses Nuguid to refrain from presenting the
said checks for payment and the depositary banks from honoring the
sameuntil further orders from the court.6
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference
to the TRO. Metrobank claimed that when it received the TRO on July 6,
1995, it refused to honor CC No. 003380 and stopped payment thereon.
However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of
FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was
issued a day after the check was presented for payment. Thus, according
to Paz, the transaction was already consummated and FEBTC had already
validly accepted the same. In another letter, FEBTC informed Metrobank
that "the restraining order indicates the name of the payee of the check as
GONZALO NUGUID, but the check isin fact payable to GONZALO
BERNARDO. We believe there is a defect in the restraining order and as
such should not bind your bank."7 Alice Rivera of Metrobank replied to
said letters, reiterating Metrobank’s position tocomply with the TRO lest
it be cited for contempt by the trial court. However, as would later be
alleged in Metrobank’s Answer before the trial court, Metrobank
eventually acknowledged the check when it became clear that nothing
more can be done to retrieve the proceeds of the check. Metrobank
furthermore claimed that since it is the issuer of CC No. 003380, the check
is its primary obligation and should not be affected by any prior
transaction between the purchaser (Chiok) and the payee (Nuguid).
In the meantime, FEBTC, as the collecting bank, filed a complaint against
Asian Bank before the Philippine Clearing House Corporation (PCHC)
Arbitration Committee for the collection of the value of Asian Bank MC
No. 025935 and 025939, which FEBTC had allegedly allowed Nuguid to
withdraw on July 5, 1995, the same day the checks were deposited. The
case was docketed as Arbicom Case No. 95-082. The PCHC Arbitration
Committee later relayed, in a letter dated August 4, 1995, its refusal to
assume jurisdiction over the case on the ground that any step it may take
might be misinterpreted as undermining the jurisdiction of the RTC over
the case or a violation of the July 6, 1995 TRO.
On July 25, 1995, the RTC issued an Order directing the issuance of a
writ of preliminary prohibitory injunction:
WHEREFORE, upon filing by the plaintiff of a sufficient bond in the
amount of ₱26,068,350.00, to be executed in favor of the defendants
under the condition that the same shall answer for whatever damages they
may sustain by reason of this injunction should the Court ultimately
determine that he was not entitled thereto, let a writ of preliminary
prohibitory injunction issue restraining and preventing during the
pendency of the case:
a) Defendant Asian Bank frompaying Manager’s Checks No. 025935 in
the amount of ₱7,550,000.00 and No. 025939 in the amount of
₱10,905,350.00; and
b) Defendant Metro Bank frompaying Cashier’s Check No. 003380 in the
amount of ₱7,613,000.00.
The application for preliminary mandatory injunctionis hereby denied and
the order issued on July 7, 1995 directing defendant Metro Bank
(Annapolis, Greenhills Branch) to allow the plaintiff to withdraw the
proceeds of Cashier’s Check No. 003380 in the amount of ₱7,613,000.00
is hereby set aside.
The plaintiff’s urgent motion todeclare defendants Asian Bank and Metro
Bank in contempt of court filed last July 13, 1995 is hereby denied for
lack of legal basis.
The writ of preliminary prohibitory injunction and a copy of this order
shall be served on the defendants by Deputy Sheriff Jose Martinez of this
Branch.8
Upon the filing by Chiok of the requisite bond, the Writ was subsequently
issued on July 26, 1995.
Before the RTC, Asian Bank pointed out that SBTC returned and issued
a Stop Payment Order on SBTC MC No. 037364 (payable to Chiok in the
amount of ₱25,500,000.00) on the basis of an Affidavit of Loss &
Undertaking executed by a certain Helen Tan. Under said Affidavit of
Loss & Undertaking, Tan claims that she purchased SBTC MC No.
037364 from SBTC, but the manager’s check got lost on that day. Asian
Bank argued that Chiok would therefore be liable for the dishonor of the
manager’s check under the terms of the BPLA, which provides for
recourse against the seller (Chiok) of the check when it is dishonored by
the drawee (SBTC) for any reason, whether valid or not.
On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil
Case No. Q-95-24299. On February6, 1996, the RTC initially denied
FEBTC’s intervention in the case. On Motion for Reconsideration,
however, the RTC, on April 15, 1996, reversed itself and allowed the
same.
In the Complaint-in-Intervention, FEBTC claimed that it allowed the
immediate withdrawal of the proceeds of Asian Bank MC Nos. 025935
and 025939 on the ground that, as manager’schecks, they were the direct
obligations of Asian Bank and were accepted in advance by Asian Bank
by the mere issuance thereof. FEBTC presented the checks for payment
on July 5, 1995 through the PCHC. Asian Bank, as admitted in its Answer
before the RTC, received the same on that day. Consequently, Asian Bank
was deemed to have confirmed and booked payment of the subject checks
in favor of FEBTC or, at the latest, during the first banking hour of July
6, 1995, when payment should have been made. FEBTC claimed that
Asian Bank exhibited bad faith when, in anticipation of the TRO, it opted
to float the checks until it received the TRO at 12:00 noon of July 6, 1995
to justify the nonpayment thereof.
In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid
had delivered much more dollars than what was required for the three
checks at the time of payment. By way of special affirmative defense, the
spouses Nuguid also claims that since the subject checks had already been
paid to him, Chiok is no longer entitled to an injunction (to hold the
payment of the subject checks), and Civil Case No. Q-95-24299 has
already become moot.
On August 29, 2002, the RTC rendered its Decision, the dispositive
portion of which states:
WHEREFORE, judgment is rendered:
1. Declaring as permanent the writ of preliminary injunction issued under
the Order of July 25, 1995;
2. Ordering Global Business Bank, Inc.to pay the plaintiff [Chiok]:
a.) The amount of ₱34,691,876.71 (less the attorney’s fees of
₱255,000.00 which shall remain with Global Business Bank, Inc.), plus
interest at the legal rate of 12%/p.a. from September 30, 1999 until fully
paid;
b.) The amount of ₱215,000.00, representing the excess amount debited
from the plaintiff’s deposit in his account with Global Business Bank, Inc.
on July 7, 1995, plus interest of 12%/p.a. from July 7, 1995, until fully
paid;
c.) Attorney’s fees equivalentof 5% of the total amount due; and
3. Ordering Metropolitan Bank & Trust Companyto pay the plaintiff:
a. The amount of his deposit of ₱7,613,000.00, plus interest of 12%/p.a.
from July 5, 1995 until said amount is fully paid; and
b. Attorney’s fees of 5%of the total amount due;
4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable
jointly and severally with Global Business Bank, Inc. and Metropolitan
Bank & Trust Company, Inc. for the respective attorney’s fees;
5. Dismissing the complaint-in-interventionof BPI for lack of merit;
6. Ordering the defendantsand the intervenorto pay, jointly and severally,
the costs of suit.9
Obligations Part 2 | Page 20 of 143
(Emphases supplied.)
The RTC held that Nuguid failed to prove the delivery of dollars to Chiok.
According to the RTC, Nuguid’s claim that Chiok was still liable for
seven dishonored China Banking Corporation (CBC) checks with a total
worth of ₱72,984,020.00 is highly doubtful since such claim was not
presented as a counterclaim in the case. Furthermore, the court ruled that
the certification of CBC stating the reasons10 for the stop payment order
"are indicative of Chiok’s non-liability to Nuguid." The RTC further
noted that there was a criminal case filed by Chiok against Nuguid on
March 29, 1996 for estafa and other deceit on account of Nuguid’s alleged
failure to return the originals of the seven CBC checks.11
The RTC went on to rule that manager’s checks and cashier’s checks may
be the subject of a Stop Payment Order from the purchaser on the basis of
the payee’s contractual breach. As explanation for this ruling, the RTC
adopted its pronouncements when it issued the July 25, 1995 Order:
Defendant Nuguid’s argument that the injunction could render manager’s
and cashier’schecks unworthy of the faith they should have and could
impair their nature as independent undertakings of the issuing banks is
probably an undistinguished simplification. While the argument may be
applicable to such checks in general, it does not adequately address the
situation, as here, when specific manager’s and cashier’s checks are
already covered by reciprocal undertakings between their purchaser and
their payee, in which the latter allegedly failed to perform. The agreement
herein was supposedly one in which Nuguid would deliver the equivalent
amount in US dollars ($1,022,288.23) "on the same date" that the plaintiff
purchased and delivered the manager’s and cashier’s checks
(₱26,068,350.00). Assuming that such a reciprocity was true, the
purchaser should have the legal protection of the injunctive writ (which,
after all, the legal departments of the issuing banks themselves allegedly
advised the plaintiff to obtain), since the usual order or instruction to stop
payment available in case of ordinary checks did not avail. This was
probably the reason that Asian Bank has expressly announced in its own
comment/opposition of July 14, 1995 that it was not opposing the
application for the prohibitory injunction.
The dedication of such checks pursuantto specific reciprocal undertakings
between their purchasers and payees authorizes rescission by the former
to prevent substantial and material damage to themselves, which authority
includes stopping the payment of the checks.12 According to the RTC,
both manager’s and cashier’s checks are still subject to regular clearing
under the regulations of the Bangko Sentral ng Pilipinas. Since manager’s
and cashier’s checks are the subject of regular clearing, they may
consequently be refused for cause by the drawee, which refusal is in fact
provided for in the PCHC Rule Book.
The RTC found the argument by BPI that the manager’s and cashier’s
checks are pre-cleared untenable under Section 60 of the New Central
Bank Act and Article 1249 of the Civil Code, which respectively
provides:
Section 60. Legal Character. – Checks representing demand deposits do
not have legal tender power and their acceptance in the payment of debts,
both public and private, is at the option of the creditor; Provided, however,
that a check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account.
Art. 1249. The payment of debts inmoney shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines. The delivery of
promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they
have been cashed, or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original obligation shall be
held in the abeyance. The RTC went on to rule that due to the timely
service of the TRO and the injunction, the value of the three checks
remained with Global Bank and Metrobank.13 The RTC concluded that
since Nuguid did not have a valid title to the proceeds of the manager’s
and cashier’s checks, Chiok is entitled to be paid back everything he had
paid to the drawees for the checks.14
With respect to Global Bank, the RTC ruled that the entire amount of
₱34,691,876.71 it recovered from SBTC from the September 15, 1997
PCHC Decision, as reflected in the September 29, 1999 Charge Slip No.
114977, less the sum of ₱225,000.00 awarded by the arbitration
committee’s decision as attorney’s fees, should be paidto Chiok, with
interest at 12% per annum from September 30, 1999 until full payment.
The RTC likewise ordered Global Bank to pay Chiok the amount of
₱215,390.00, an amount debited from Chiok’s account as payment for
outstanding bills purchase.15
With respect to Metrobank, the RTC ruled that it should pay Chiok
₱7,613,000.00, the amount paid by Chiok to purchase the CC, plus
interest of 12 percent per annum from July 5,1995 until full payment. The
RTC explained this finding as follows:
The same conclusion is true with respect to Metro Bank, with whom the
funds amounting to ₱7,613,000.00 for the purchase of CC No. 003380
has remained. According to Chiok, Metro Bank used such funds in its
operations.
In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness
for Metro Bank, but in lieu ofher testimony, the parties agreed to stipulate
on the following as her testimony, to wit:
1. That Metro Bank paid the amount of CC No. 003280;
2. That the payment on July 12, 1995 was made while the TRO of July 5,
1995 was in force;
3. [That] the payment on July 12, 1995 was on the third clearing of CC
No. 003380; and
4. That the PCHC Rule book was the authority on the rules and regulations
on the clearing operations of banks.
The payment to FEBTC by Metro Bank of CC No. 003380 on July 12,
1995 was an open defiance of the TRO of July 6, 1995. Metro Bank’s
Branch Manager Alice Rivera, through her letter of July 10, 1995 to
FEBTC as the collecting bank, returned the CC to FEBTC in compliance
with the TRO which was received about 12:10 noon of July 6, 1999.
Hence, Metro Bank should not have paid because the TRO was served
within the 24-hour period to clear checks. Moreover, the payment, being
made on third clearing, was unjustified for violating existing regulations,
particularly paragraph 1 of the Clearing House Operating Memo
(CHOM), effective September 1, 1984, which prohibited the reclearing of
a check after its first presentation if it was returned for the reason of "stop
payment" or "closed account."
It also seems that Metro Bank paid the CC without first checking whether,
in fact, any actual payment of the 3 checks had been made on July 5, 1995
to the payee when the checks were deposited in payee’s account with
FEBTC on July 5, 1995. The records show no such payment was ever
made to render the TRO of July 6, 1995 or the writ of preliminary
injunction applied for moot and academic.
Jessy A. Degaños – adopted by Metro Bank as its own witness in
injunction hearing of July 24, 1995 – stated that the payment of the 3
checks consisted of the accounting entry made at the PCHC during the
presenting process by debiting the respective accounts of the drawees and
crediting the account of collecting bank FEBTC. Yet, as already found
hereinabove, such process was reversed due to the return by the drawees
of the checks which they dishonored on account of the TRO.
Also, Degaños, testifying on January 17, 2002 for intervenor BPI, was
asked in what form was the withdrawal of the amounts of the checks made
by Nuguid on July 5, 1995, that is, whether:- 1) cash withdrawal; or 2)
credit to Nuguid’s account; or 3) draft issued to Nuguid. His reply was
that only the bank’s branch which serviced the payee’s account could
provide the answer. Yet, BPI did not present any competent personnel
from the branch concerned to enlighten the Court on this material point.
This amount of ₱7,613,000.00, having remained with Metro Bank since
the service of the TRO of July 6, 1995 and the writ of preliminary
injunction issued under the Order of July 25, 1998, should be returned to
Chiok with interest of 12%/p.a. from July 7, 1995 until full payment.16
(Citations omitted.)
The RTC likewise denied BPI’s complaint-in-intervention to recover the
value of the three checks from drawees Global Bank and Metrobank for
lack of merit. The RTC, after reprimanding Global Bank and Metrobank
for siding with BPI on this issue, held that BPI, as a mere collecting bank
of the payee with a void title to the checks, had no valid claim as to the
amounts of such checks. The RTC explained:
Firstly: BPI, being a collecting bankin relation to the 3 checks, was merely
performing collection services as an agent of Nuguid, the payee. If, as
found hereinbefore, Nuguid could not have legal title to the 3 checks, it
follows that BPI could not stake any claim for title better than Nuguid’s
own void title. Consequently, BPI has no right to claim the amounts of
the 3 checks from the drawee-banks.
Secondly: The purpose of the delivery of the 3 checks to BPI – which was
not even accompanied by Nuguid’s endorsement – was solely for deposit
in the account of payee Nuguid. Assuming, for the sake of argument, that
BPI as the collecting bank paid the value of the checks – of which fact
Obligations Part 2 | Page 21 of 143
there has been no proof whatsoever – BPI was nonetheless, at best, a mere
transferee whose title was no better than the void title of the transferor,
payee Nuguid. Under such circumstance, BPI has no legal basis to
demand payment of the amounts of the 3 checks from the draweebanks.
Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee
without indorsement, was not considered a holder of the instrument since
it was neither a payee nor an indorsee. It would become so only when and
if the indorsement is actually made, and only as of then, but not before, is
the issue whether BPI was a holder in due course or not is determined.
Consequently, any alleged payment by BPI as the collecting bank,
through the supposed though unproved withdrawal of the amounts of the
3 checks by Nuguid upon the deposit of the checks on July 5, 1995, is not
the payment which discharges liability under the 3 checks because BPI is
neither the party primarily liable northe drawee.
Such a payment, if true, is akin to, if it is not, drawing against uncollected
deposits (DAUD). In such a case, BPI was in duty bound to send the 3
checks to the PCHC for clearing pursuant to Section 1603.c.1 of the BSP
Manual of Regulations and Sec. 60, R.A. No. 7653. It serves well to note
herein that Global Bank and Metro Bank returned the checks through the
PCHC on July 6, 1995, well within the 24-hour clearing period, in
compliance with the TRO of July 6, 1995. Finally: As earlier noted and
discussed, there is no evidence of any prior valid payment by the
collecting bank to support its claim of the amounts of the 3 checks against
the defendant banks.17 (Citation omitted.)
The RTC held Global Bank and Metrobank liable for attorney’s fees
equivalent to 5% of the total amountdue them, while the spouses Nuguid
were held solidarily liable for said fees.
Defendants Global Bank, Metrobank, and the spouses Nuguid, and
intervenor BPI filed separate notices of appeal, which were approved in
the Order18 dated April 3, 2003. Chiok filed a Motion to Dismiss against
the appeal of Global Bank, on the ground that the latter had ceased to
operate as a banking institution.
On May 26, 2004, the Court of Appeals dismissed the appeal of the
spouses Nuguid pursuant to Section 1(e), Rule 50 of the Rules of Court,
on account of their failure to file their appellant’s brief. In the same
Resolution, the Court of Appeals denied Chiok’s Motion to Dismiss.
On May 5, 2006, the Court of Appeals rendered the assailed Decision
affirming the RTC Decision with modifications. The fallo of the Decision
reads:
WHEREFORE, premises considered, the Decision dated August 29, 2000
of the RTC, Branch 96, Quezon City is AFFIRMED with the following
MODIFICATIONS:
1.) The contract to buy foreign currency in the amount of $1,022,288.50
between plaintiff-appellee Wilfred N. Chiok and defendant Gonzalo B.
Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935
and 025939 and Cashier’s Check No. 003380 are ordered cancelled.
2.) Global Business Holdings, Inc. is ordered to credit Savings Account
No. 2-007-03-00201-3 with:
a) The amount of ₱25,500,000.00, plus interest at 4% from September
29, 1999 until withdrawn by plaintiff-appellee;
b) The amount of ₱215,390.00, plus interest at 4% from July 7, 1995 until
withdrawn by plaintiff-appellee.
3.) Metropolitan Bank & Trust Company is ordered to credit Savings
Account No. 154-42504955 the amount of ₱7,613,000.00, with interest
at 6% [per annum] from July 12, 1995 until the same is withdrawn;
4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered
to pay attorney’s fees equivalent to 5% of the total amount due to plaintiff-
appellee from both depository banks, as well as the costs of suit.19
According to the Court of Appeals, Article 1191 of the Civil Code
provides a legal basis of the right of purchasers of MCs and CCs to make
a stop payment order on the ground of the failure of the payee to perform
his obligation to the purchaser. The appellate court ruled that such claim
was impliedly incorporated in Chiok’s complaint. The Court of Appeals
held:
By depositing the subject checks to the account of Nuguid, Chiok had
already performed his obligation under the contract, and the subsequent
failure of Nuguid to comply with what was incumbent upon him gave rise
to an action for rescission pursuant to Article 1191 of the Civil Code,
which states:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
xxxx
Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE
RESTRAINING ORDER/INJUNCTION" when the action was really one
for rescission and damages, it is an elementary rule of procedure that what
controls or determines the nature of the action is not the caption of the
complaint but the allegations contained therein. And even without the
prayer for a specific remedy, proper relief may nevertheless be granted by
the court if the facts alleged in the complaint and the evidence introduced
so warrant.
That Chiok had intended rescission isevident from his prayer to be
declared the legal owner of the proceeds of the subject checks and to be
allowed to withdraw the same. Therefore, the argument of BPI that the
obligation on the part of Nuguid to deliver the dollars still subsists is
untenable. Article 1385 of the same Code provides that rescission creates
the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest. The object of the
contract herein to buy foreign currency is the peso-value of the dollars
bought but in the form of negotiable instruments – Manager’s
Check/Cashier’s Check. Hence, respecting the negotiation thereof, and in
order to afford complete relief to Chiok, there arose the necessity for the
issuance of the injunction restraining the payment of the subject checks
with the end in view of the eventual return of the proceeds to give effect
to Article 1385. In other words, the injunctive relief was necessary in
order not to render ineffectual the judgment in the instant case. We quote
with approval the following disquisition of the trial court, to wit:
xxxx
There is no question about the nature of manager’s and cashier’s checks
being as good as cash, being primary obligations of the issuing bank and
accepted in advanceby their mere issuance. But even as such nature of
unconditional commitment to pay on the part of the issuing bank may be
conceded, the Court opines that the injunctive relief cannot be denied to
a party who purchased the manager’s or cashier’s check to stop its
payment to the payee in a suit against the payee and the issuing banks
upon a claim that the payee himself had not performed his reciprocal
obligation for which the issuance and delivery of the self-same
manager’sor cashier’s check were, in the first place, made x x x.
It bears stressing that the subject checks would not have been issued were
it not for the contract between Chiok and Nuguid. Therefore, they cannot
be disassociated from the contract and given a distinct and exclusive
signification, as the purchase thereof is part and parcel of the series of
transactions necessary to consummate the contract. Taken in this light, it
cannot be argued that the issuing banks are bound to honor only their
unconditional undertakings on the subject checks vis-à-vis the payee
thereof regardless of the failed transaction between the purchaser of the
checks and the payee on the ground that the banks were not privy to the
said transaction.
Lest it be forgotten, the purchase of the checks was funded by the account
of Chiok with the banks. As such, the banks were equally obligated to
treat the account of their depositor with meticulous care bearing in mind
the fiduciary nature of their relationship with the depositor. Surely, the
banks would not allow their depositor to sit idly by and watch the
dissipation of his livelihood considering that the business of foreign
currency exchange is a highly volatile undertaking where the probability
of losing or gaining is counted by the ticking of the clock. With the
millions of money involved in this transaction, Chiok could not afford to
be complacent and his vigilance for his rights could not have been more
opportune under the circumstances.20 (Citations omitted.)
The Court of Appeals proceeded to sustain the dismissal of BPI’s
complaint-in-intervention, which sought to recover from Global Bank the
amounts allegedly paid to Nuguid. The Court of Appeals pointed out that
BPI failed to prove the alleged withdrawal by Nuguid of the proceeds of
the two manager’s checks, as BPI’s representative, Jessy A. Degaños,
failed to answer the question on the form of the alleged withdrawal.
Furthermore, BPI failed to prove that it was a holder in due course of the
subject manager’s checks, for two reasons: (1) the checks were not
Obligations Part 2 | Page 22 of 143
indorsed to it by Nuguid; and (2) BPI never presented its alleged bills
purchase agreement with Nuguid.21
The Court of Appeals likewise modified the order by the RTC for Global
Bank and Metrobank to pay Chiok. The Court of Appeals held that
Chiok’s cause of action against Global Bank is limited to the proceeds of
the two manager’s checks. Hence, Global Bank was ordered to credit
Chiok’s Savings Account No. 2-007-03-00201-3 with the amount of
₱25,500,000.00, the aggregate value of the two managers’ checks, instead
of the entire ₱34,691,876.71 recovered from SBTC from the September
15, 1997 PCHC Decision. The interest was also reduced from 12% per
annum to that imposed upon savings deposits, which was established
during the trial as 4% per annum.22
As regards Metrobank, the appellate court noted that there was no
evidence as to the interest rate imposed upon savings deposits at
Metrobank. Metrobank was ordered to credit the amount of
₱7,613,000.00 to Chiok’s Savings Account No. 154-42504955, with
interest at 6% per annum.23
Global Bank and BPI filed separate Motions for Reconsideration of the
May 5, 2006 Court of Appeals’ Decision. On November 6, 2006, the
Court of Appeals denied the Motions for Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank
(G.R. No. 175394) filed with this Court separate Petitions for Review on
Certiorari. In Resolutions dated February 21, 200724 and March 12,
2007,25 this Court resolved to consolidate the three petitions. Metrobank
submitted the following issues for the consideration of this Court:
(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS
ERRED IN RULING THAT "IT IS LEGALLY POSSIBLE FOR A
PURCHASER OF A MANAGER’S CHECK OR CASHIER’S CHECK
TO STOP PAYMENT THEREON THROUGH A COURT ORDER ON
THE GROUND OF THE PAYEE’S ALLEGED BREACH OF
CONTRACTUAL OBLIGATION AMOUNTING TO AN ABSENCE
OF CONSIDERATION THEREFOR."
(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR
CASHIER’S CHECK, "IN VIEW OF THE PECULIAR
CIRCUMSTANCES OF THIS CASE" MAY BE SUBJECT TO A STOP
PAYMENT ORDER BY THE PURCHASER THEREOF THROUGH A
COURT ORDER, WHETHER OR NOT THE HONORABLE COURT
OF APPEALS ERRED IN CONCLUDING THAT PETITIONER
HEREIN "HAD KNOWLEDGE OF CIRCUMSTANCES THAT
WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS"
WITHOUT, HOWEVER, CITING ANY SPECIFIC EVIDENCE
WHICH WOULD PROVE THE EXISTENCE OF SUCH
KNOWLEDGE. (C) WHETHER OR NOT THE HONORABLE COURT
OF APPEALS ERRED IN SUSTAINING THE TRIAL COURT’S
ORDER FOR PETITIONER HEREIN "TO PAY (TO CHIOK) THE
VALUE OF CASHIER’S CHECK NO. 003380 IN THE AMOUNT OF
₱7,613,000.00, WHICH WAS DEBITED AGAINST CHIOK’S
SAVINGS ACCOUNT # 154-42504955 ON THE OBSERVATION
THAT THE PAYMENT TO FEBTC BY METROBANK OF CC NO.
003380ON JULY 12, 1995 WAS AN OPEN DEFIANCE OF THE TRO
OF JULY 6, 1995."26
BPI, on the other hand, presented the following issues:
I.
Whether or not the Court of Appeals detracted from well-settled concepts
and principles in commercial law regarding the nature, causes, and effects
of a manager’s check and cashier’s checkin ruling that [the] power of the
court can be invoked by the purchaser [Chiok] in a proper action, which
the Court su[b]stantially construed as a rescissory action or the power to
rescind obligations under Article 1191 of the Civil Code.
II.
Whether or not the Honorable Court of Appeals erred in ruling that where
a purchaser invokes rescission due to an alleged breach of the payee’s
contractual obligation, it is deemed as "peculiar circumstance" which
justifies a stop payment order issued by the purchaser or a temporary
restraining order/injunction from a Court to prevent payment of a
Manager’s Check or a Cashier’s Check.
III.
Whether or not the Honorable Court of Appeals erred in ruling that
judicial admissions in the pleadings of Nuguid, BPI, Asian Bank,
Metrobank and even Chiok himself that Nuguid had withdrawn the
proceeds of the checks will not defeat Chiok’s "substantial right" to
restrain the drawee bank from paying BPI, the collecting bank or
presenting bank in this case who paid the value of the
Cashier’s/Manager’s Checks to the payee.27
Finally, Global Bank rely upon the following grounds in its petition with
this Court:
A.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
PETITIONER GLOBAL BANK HAD NO JUSTIFICATION FOR ITS
RIGHT OF RECOURSE AGAINST RESPONDENT CHIOK
NOTWITHSTANDING THE CLEAR AND UNMISTAKABLE
PROVISIONS OF THE BILLS PURCHASE AGREEMENT.
B.
THE COURT OF APPEALS GRAVELY ERRED IN MAKING
PETITIONER GLOBAL BANK LIABLE FOR INTEREST OF 4% PER
ANNUM DESPITE THE FACT THAT:
1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS
COMPLAINT;
2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST;
AND
3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY
INTEREST.28
Before delving into the merits of these cases, we shall first dispose of a
procedural development during their pendency with the Court.
Joint Manifestation and Motion allegedly
filed by Metrobank, Global Bank and
respondent Chiok
On May 28, 2013, this Court received a Joint Manifestation and Motion
allegedly filed by petitioners Metrobank, Global Bank, and respondent
Chiok, which reads:
PETITIONERS METROPOLITAN BANK & TRUST COMPANY &
GLOBAL BUSINESS BANK, INC., and RESPONDENT WILFRED N.
CHIOK, by their respective counsels, unto this Honorable Court,
respectfully state that after a thorough consideration, the parties herein
have decided to forego their respective claims against each other,
including, past, present and/or contingent, in relation to the above
referenced cases.
PRAYER
WHEREFORE, it is respectfully prayed that no further action be taken by
this Honorable Court on the foregoing petitions, that the instant
proceedings be declared CLOSED and TERMINATED, and that an Order
be rendered dismissing the above-referenced cases with prejudice.
In the above Joint Manifestation and Motion, respondent Chiok was not
represented by his counsel of record, Cruz Durian Alday and Cruz-
Matters, but was assisted by Espiritu Vitales Espiritu Law Office, with
Atty. Cesar D. Vitales as signatory, by way of special appearance and
assistance.
On June 19, 2013, this Court issued a Resolution requiring petitioner BPI
to comment on the Joint Manifestation and Motion filed by its
copetitioners Metrobank, Global Bank, and respondent Chiok. The
Resolution reads:
Considering the joint manifestation and motion of petitioners
Metropolitan Bank and Trust Company and Global Business Bank, Inc.,
and respondent, that after a thorough consideration, they have decided to
forego their respective claims against each other, including past, present
and/or contingent, in these cases and praying that the instant proceedings
in G.R. Nos. 172652 and 175394 be declared closed and terminated, the
Court resolves to require petitioner Bank of the Philippine Islands to
COMMENT thereon within ten (10) days from notice thereof x x x.
On September 12, 2013, respondent Chiok, this time assisted by his
counsel of record, Cruz Durian Alday & Cruz-Matters, filed a Motion for
Reconsideration of our Resolution dated June 19, 2013. The signatory to
the Motion for Reconsideration, Atty. Angel Cruz, grossly misread our
Resolution requiring BPI to comment on the Joint Manifestation and
Motion, and apparently contemplated that we are already granting said
Motion. Atty. Cruz objected to the Joint Manifestation and Motion,
labeling the same as tainted with fraud. According to Atty. Cruz, Espiritu
Vitales and Espiritu’s failure to give prior notice to him is in violation of
Canon 8 of the Code of Professional Responsibility. Atty. Cruz prays that
Metrobank and Global Bank be ordered to submit a document of their
Obligations Part 2 | Page 23 of 143
settlement showing the amounts paid to Chiok, and for the June19, 2013
Resolution of this Court be reconsidered and set aside.
On October 9, 2013, BPI filed its comment to the Joint Manifestation and
Motion, opposing the samefor being an implied procedural shortcut to a
Compromise Agreement. It averred that while the courts encourage
parties to amicably settle cases, such settlements are strictly scrutinized
by the courts for approval. BPI also pointed out that the Joint
Manifestation and Motion was not supported by any required appropriate
Board Resolution of Metrobank and Global Bank granting the supposed
signatories the authority to enter into a compromise. BPI prayed that the
Joint Manifestation and Motion of Metrobank, Global Bank, and Chiok
be denied, and to render a full Decision on the merits reversing the
Decision of the Court of Appeals.
On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s
Motion for Reconsideration on behalf of Chiok, praying that said Motion
be expunged from the records for failure of Atty. Cruz to indicate the
number and date of issue of his MCLE Certificate of Compliance or
Certificate of Exemption for the immediately preceding compliance
period.
As far as this Court is concerned, the counsel of record of respondent
Chiok is still Cruz Durian Alday & Cruz-Matters. The requisites of a
proper substitution of counsel of record are stated and settled in
jurisprudence:
No substitution of counsel of record is allowed unless the following
essential requisites of a valid substitution of counsel concur: (1) there
must be a written request for substitution; (2) it must be filed with the
written consent of the client; (3) it must be with the written consent of the
attorney to be substituted; and (4) in case the consent of the attorney to be
substituted cannot be obtained, there must be at least a proof of notice that
the motion for substitution was served on him in the manner prescribed
by the Rules of Court.29 (Citation omitted.)
Therefore, while we should indeed require Atty. Cruz to indicate the
number and date of issue of his MCLE Certificate of Compliance or
Certificate of Exemption for the immediately preceding compliance
period, he is justified in pointing out the violation of Canon 830 of the
Code of Professional Responsibility, Rule 8.02 of which provides:
Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon the
professional employment of another lawyer; however, it is the right of any
lawyer, without fear or favor, to give proper advice and assistance to those
seeking relief against unfaithful or neglectful counsel.
We should also give weight to the opposition of BPI to the supposed
compromise agreement. As stated above, the consolidated petitions filed
by Metrobank, BPI, and Global Bank all assail the Decision of the Court
of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the
Resolution on the same case dated November 6, 2006. BPI itself has a
claim against Global Bank, which appear to be intimately related to issues
brought forth in the other consolidated petitions.
Furthermore, the failure of the parties to the Joint Manifestation and
Motion to declare with particularity the terms of their agreement prevents
us from approving the same so as to allow it to attain the effect of res
judicata. A judicial compromise is not a mere contract between the
parties. Thus, we have held that:
A compromise agreement intended to resolve a matter already under
litigation is a judicial compromise. Having judicial mandate and entered
as its determination of the controversy, such judicial compromise has the
force and effect of a judgment. It transcends its identity as a mere contract
between the parties, as it becomes a judgment that is subject to execution
in accordance with the Rules of Court. Thus, a compromise agreement
that has been made and duly approved by the court attains the effect and
authority of res judicata, although no execution may be issued unless the
agreement receives the approval of the court where the litigation is
pending and compliance with the terms of the agreement is
decreed.31 (Citation omitted.)
We are therefore constrained to deny the Joint Manifestation and Motion
filed with this Court on May 28, 2013 and to hereby decide the
consolidated petitions on their merits.
The Court’s ruling on the merits of these
consolidated petitions
Whether or not payment of manager’s
and cashier’s checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks
The legal effects of a manager’s check and a cashier’s check are the same.
A manager’s check, like a cashier’s check, is an order of the bank to pay,
drawn upon itself, committing in effect its total resources, integrity, and
honor behind its issuance. By its peculiar character and general use in
commerce, a manager’s check or a cashier’s check is regarded
substantially to be as good as the money it represents.32 Thus, the
succeeding discussions and jurisprudence on manager’s checks, unless
stated otherwise, are applicable to cashier’s checks, and vice versa. The
RTC effectively ruled that payment of manager’s and cashier’s checks are
subject to the condition that the payee thereof complies with his
obligations to the purchaser of the checks:
The dedication of such checks pursuant to specific reciprocal
undertakings between their purchasers and payees authorizes rescission
by the former to prevent substantial and material damage to themselves,
which authority includes stopping the payment of the checks.
Moreover, it seems to be fallacious to hold that the unconditional payment
of manager’s and cashier’s checks is the rule. To begin with, both
manager’sand cashier’s checks are still subject to regular clearing under
the regulations of the Bangko Sentral ng Pilipinas, a fact borne out by the
BSP manual for banks and intermediaries, which provides, among others,
in its Section 1603.1, c, as follows:
xxxx
c. Items for clearing. All checks and documents payable on demand and
drawn against a bank/branch, institution or entity allowed to clear may be
exchanged through the Clearing Office inManila and the Regional
Clearing Units in regional clearing centers designated by the Central Bank
x x x.33
The RTC added that since manager’s and cashier’s checks are the subject
of regular clearing, they may consequently be refused for cause by the
drawee, which refusal is in fact provided for in Section 20 of the Rule
Book of the PCHC:
Sec. 20 – REGULAR RETURN ITEM PROCEDURE
20.1 Any check/item sent for clearing through the PCHC on which
payment should be refused by the Drawee Bank in accordance with long
standing and accepted banking practices, such as but not limited to the
fact that:
(a) it bears the forged or unauthorized signature of the drawer(s); or
(b) it is drawn against a closed account; or
(c) it is drawn against insufficient funds; or
(d) payment thereof has been stopped; or
(e) it is post-dated or stale-dated; and
(f) it is a cashier’s/manager’s/treasurer’s check of the drawee which has
been materially altered;
shall be returned through the PCHC not later than the next regular clearing
for local exchanges and the acceptance of said return by the Sending Bank
shall be mandatory.
It goes without saying that under the aforecited clearing rule[,] the
enumeration of causes to return checks is not exclusive but may include
other causes which are consistent with long standing and accepted
banking practices. The reason of plaintiffs can well constitute such a
justifiable cause to enjoin payment.34
The RTC made an error at this point. While indeed, it cannot be said that
manager’s and cashier’s checks are pre-cleared, clearing should not be
confused with acceptance. Manager’s and cashier’s checks are still the
subject of clearing to ensure that the same have not been materially altered
or otherwise completely counterfeited. However, manager’s and cashier’s
checks are pre-accepted by the mere issuance thereof by the bank, which
is both its drawer and drawee. Thus, while manager’s and cashier’s checks
are still subject to clearing, they cannot be countermanded for being
drawn against a closed account, for being drawn against insufficient
funds, or for similar reasons such as a condition not appearing on the face
of the check. Long standing and accepted banking practicesdo not
countenance the countermanding of manager’s and cashier’s checks on
the basis of a mere allegation of failure of the payee to comply with its
obligations towards the purchaser. On the contrary, the accepted banking
practice is that such checks are as good as cash. Thus, in New Pacific
Timber & Supply Company, Inc. v. Hon. Seneris,35 we held:
It is a well-known and accepted practice in the business sector that a
Cashier's Check is deemed as cash. Moreover, since the said check had
been certified by the drawee bank, by the certification, the funds
Obligations Part 2 | Page 24 of 143
represented by the check are transferred from the credit of the maker to
that of the payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one
in such situation. Where a check is certified by the bank on which it is
drawn, the certification is equivalent to acceptance. Said certification
"implies that the check is drawn upon sufficient funds in the hands of the
drawee, that they have been set apart for its satisfaction, and that they
shall be so applied whenever the check is presented for payment. It is an
understanding that the check is good then, and shall continue good, and
this agreement is as binding on the bank as its notes in circulation, a
certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money." When the holder
procures the check to be certified, "the check operates as an assignment
of a part of the funds to the creditors." Hence, the exception to the rule
enunciated under Section 63 of the Central Bank Act to the effect "that a
check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account" shall apply in this case. x x x.
(Emphases supplied, citations omitted.)
Even more telling is the Court’s pronouncement in Tan v. Court of
Appeals,36 which unequivocally settled the unconditional nature of the
credit created by the issuance of manager’s or cashier’s checks:
A cashier’s check is a primary obligation of the issuing bank and accepted
in advanceby its mere issuance. By its very nature, a cashier’s check is
the bank’s order to pay drawn upon itself, committing in effect its total
resources, integrity and honor behind the check. A cashier’s check by its
peculiar character and general use in the commercial world is regarded
substantially to be as good asthe money which it represents. In this case,
therefore, PCIB by issuing the check created an unconditional creditin
favor of any collecting bank. (Emphases supplied, citations omitted.)
Furthermore, under the principle of ejusdem generis, where a statute
describes things of a particular class or kind accompanied by words of a
generic character, the generic word willusually be limited to things of a
similar nature with those particularly enumerated, unless there be
something in the context of the statute which would repel such
inference.37 Thus, any long standing and accepted banking practice which
can be considered as a valid cause to return manager’s or cashier’s checks
should be of a similar nature to the enumerated cause applicable to
manager’s or cashier’s checks: material alteration. As stated above, an
example ofa similar cause is the presentation of a counterfeit check.
Whether or not the purchaser of
manager’s and cashier’s checks has the
right to have the checks cancelled by
filing an action for rescission of its
contract with the payee
The Court of Appeals affirmed the order of the RTC for Global Bank and
Metrobank to pay Chiok for the amounts of the subject manager’s and
cashier’s checks. However, since it isclear to the appellate court that the
payment of manager’s and cashier’s checks cannot be considered to be
subject to the condition the payee thereof complies with his obligations to
the purchaser of the checks, the Court of Appeals provided another legal
basis for such liability – rescission under Article 1191 of the Civil Code:
WHEREFORE, premises considered, the Decision dated August 29, 2000
of the RTC, Branch 96, Quezon City is AFFIRMED with the following
MODIFICATIONS:
1.) The contract to buy foreign currency in the amount of $1,022,288.50
between plaintiff-appellee Wilfred N. Chiok and defendant Gonzalo B.
Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935
and 025939 and Cashier’s Check No. 003380 are ordered cancelled.38
According to the Court of Appeals, while such rescission was not
mentioned in Chiok’s Amended Complaint, the same was evident from
his prayer to be declared the legal owner of the proceeds of the subject
checks and to be allowed to withdraw the same. Since rescission creates
the obligation to return the things which are the object of the contract,
together with the fruits, the price and the interest,39 injunctive relief was
necessary to restrain the payment of the subject checks with the end in
view of the return of the proceeds to Chiok.40
Thus, as it was construed by the Court of Appeals, the Amended
Complaint of Chiok was in reality an action for rescission of the contract
to buy foreign currency between Chiok and Nuguid. The Court of Appeals
then proceeded to cancel the manager’s and cashier’s checks as a
consequence of the granting of the action for rescission, explaining that
"the subject checks would not have been issued were it not for the contract
between Chiok and Nuguid. Therefore, they cannot be disassociated from
the contract and given a distinct and exclusive signification, as the
purchase thereof is part and parcel of the series of transactions necessary
to consummate the contract."41
We disagree with the above ruling.
The right to rescind invoked by the Court of Appeals is provided by
Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
The cause of action supplied by the above article, however, is clearly
predicated upon the reciprocity of the obligations of the injured party and
the guilty party. Reciprocal obligations are those which arise from the
same cause, and in which each party is a debtor and a creditor of the other,
such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously such that the performance
of one is conditioned upon the simultaneous fulfillment of the
other.42 When Nuguid failed to deliver the agreed amount to Chiok, the
latter had a cause of action against Nuguid to ask for the rescission of their
contract. On the other hand, Chiok did not have a cause of action against
Metrobank and Global Bank that would allow him to rescind the contracts
of sale of the manager’s or cashier’s checks, which would have resulted
in the crediting of the amounts thereof back to his accounts.
Otherwise stated, the right of rescission43 under Article 1191 of the Civil
Code can only be exercised in accordance with the principle of relativity
of contracts under Article 1131 of the same code, which provides:
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. x x x.
In several cases, this Court has ruled that under the civil law principle of
relativity of contracts under Article 1131, contracts can only bind the
parties who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge
thereof.44 Metrobank and Global Bank are not parties to the contract to
buy foreign currency between Chiok and Nuguid. Therefore, they are not
bound by such contract and cannot be prejudiced by the failure of Nuguid
to comply with the terms thereof.
Neither could Chiok be validly granted a writ of injunction against
Metrobank and Global Bank to enjoin said banks from honoring the
subject manager’s and cashier’s checks. It is elementary that "(a)n
injunction should never issue when an action for damages would
adequately compensate the injuries caused. The very foundation of the
jurisdiction to issue the writ of injunction rests in the fact that the damages
caused are irreparable and that damages would not adequately
compensate."45 Chiok could have and should have proceeded directly
against Nuguid to claim damages for breach of contract and to have the
very account where he deposited the subject checks garnished under
Section 7(d)46 and Section 8,47 Rule 57 of the Rules of Court. Instead,
Chiok filed an action to enjoin Metrobank and Global Bank from
complying with their primary obligation under checks in which they are
liable as both drawer and drawee.
It is undisputed that Chiok personally deposited the subject manager’s and
cashier’s checks to Nuguid’s account. If the intention of Chiok was for
1âwphi1
Nuguid to be allowed to withdraw the proceeds of the checks after
clearing, he could have easily deposited personal checks, instead of going
through the trouble of purchasing manager’s and cashier’s checks. Chiok
therefore knew, and actually intended, that Nuguid will be allowed to
immediately withdraw the proceeds of the subject checks. The deposit of
the checks which were practically as good as cash was willingly and
voluntarily made by Chiok, without any assurance that Nuguid will
comply with his end of the bargain on the same day. The explanation for
such apparently reckless action was admitted by Chiok in the Amended
Complaint itself:
That plaintiff [Chiok] due to the numberof years (five to seven years) of
business transactions with defendant [Nuguid] has reposed utmost trust
Obligations Part 2 | Page 25 of 143
and confidence on the latterthat their transactions as of June 1995 reaches
millions of pesos. x x x.48 (Emphases supplied.)
As between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the one who made it possible by his act
of confidence must bear the loss.49 Evidently, it was the utmost trust and
confidence reposed by Chiok to Nuguid that caused this entire debacle,
dragging three banks into the controversy, and having their resources
threatened because of an alleged default in a contract they were not privy
to.
Whether or not the peculiar
circumstances of this case justify the
deviation from the general principles on
causes and effects of manager’s and
cashier’s checks
The Court of Appeals, while admitting that the general principles on the
causes and effects of manager’s and cashier’s checks do not allow the
countermanding of such checks on the basis of an alleged failure of
consideration of the payee to the purchaser, nevertheless held that the
peculiar circumstances of this case justify a deviation from said general
principles, applying the aforementioned case of Mesina. The Court of
Appeals held:
At the core of the appeal interposed by the intervenor BPI, as well as the
depository banks, Global Bank and Metrobank, is the issue of whether or
not it is legally possible for a purchaser of a Manager’s Check or Cashier’s
Check to stop payment thereon through a court order on the ground of the
payee’s alleged breach of contractual obligation amounting to an absence
of consideration therefor.
In view of the peculiar circumstances of this case, and in the interest of
substantial justice, We are constrained to rule in the affirmative.
xxxx
In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its
appeal brief, the Supreme Court had the occasion to rule that general
principles on causes and effects of a cashier’s check, i.e., that it cannot be
countermanded in the hands of a holder in due course and that it is a bill
of exchange drawn by the bank against itself, cannot be applied without
considering that the bank was aware of facts (in this case, the cashier’s
check was stolen) that would not entitle the payee thereof to collect on the
check and, consequently, the bank has the right to refuse payment when
the check is presented by the payee.
While the factual milieu of the Mesinacase is different from the case at
bench, the inference drawn therein by the High Court is nevertheless
applicable. The refusal of Nuguid to deliver the dollar equivalent of the
three checks in the amount of $1,022,288.50 in the afternoon of July 5,
1995 amounted to a failure of consideration that would not entitle Nuguid
to collect on the subject checks.
xxxx
Let it be emphasized that in resolving the matter before Us, We do not
detract from well-settled concepts and principles in commercial law
regarding the nature, causes and effects of a manager’s check and
cashier’s check. Such checks are primary obligations of the issuing bank
and accepted in advance by the mere issuance thereof. They are a bank’s
order to pay drawn upon itself, committing in effect its total resources,
integrity, and honor. By their peculiar character and general use in the
commercial world, they are regarded substantially as good as the money
they represent. However, in view of the peculiar circumstances of the case
at bench, We are constrained to set aside the foregoing concepts and
principles in favor of the exercise of the right to rescind a contract upon
the failure of consideration thereof.50 (Emphases ours, citations omitted.)
In deviating from general banking principles and disposing the case on
the basis of equity, the courts a quo should have at least ensured that their
dispositions were indeed equitable. This Court observes that equity was
not served in the dispositions below wherein Nuguid, the very person
found to have violated his contract by not delivering his dollar obligation,
was absolved from his liability, leaving the banks who are not parties to
the contract to suffer the losses of millions of pesos.
The Court of Appeals’ reliance in the 1986 case of Mesina was likewise
inappropriate. In Mesina, respondent Jose Go purchased from Associated
Bank a cashier’s check for ₱800,000.00, payable to bearer.51 Jose Go
inadvertently left the check on the top desk of the bank manager
when he left the bank. The bank manager entrusted the check for
safekeeping to a certain bank official named Albert Uy, who then had a
certain Alexander Lim as visitor. Uy left his deskto answer a phone call
and to go to the men’s room. When Uy returned to his desk, Lim was
gone. Jose Go inquired for his check from Uy, but the check was
nowhereto be found. At the advice of Uy, Jose Go accomplished a Stop
Payment Order and executed an affidavit of loss. Uy reported the loss to
the police. Petitioner Marcelo Mesina tried to encash the check with
Prudential Bank, but the check was dishonored by Associated Bank by
sending it back to Prudential Bank with the words "Payment Stopped"
stamped on it. When the police asked Mesina how he came to possess the
check, he said it was paid to him by Alexander Lim in a "certain
transaction"but refused to elucidate further. Associated Bank filed an
action for Interpleader against Jose Go and Mesina to determine which of
them is entitled to the proceeds of the check. It was in the appeal on said
interpleader case that this Court allowed the deviation from the general
principles on cashier’s checks on account of the bank’s awareness of
certain facts that would prevent the payee to collect on the check.
There is no arguing that the peculiar circumstances in Mesina indeed
called for such deviation on account of the drawee bank’s awareness of
certain relevant facts. There is, however, no comparable peculiar
circumstance in the case at bar that would justify applying the Mesina
disposition. In Mesina, the cashier’s check was stolen while it was in the
possession of the drawee bank. In the case at bar, the manager’s and
cashier’s checks were personally deposited by Chiok in the account of
Nuguid. The only knowledge that can be attributed to the drawee banks
is whatever was relayed by Chiok himself when he asked for a Stop
Payment Order. Chiok testified on this matter, to wit:
Q: Now, Mr. witness, since according to you the defendant failed to
deliver [this] amount of ₱1,023,288.23 what action have you undertaken
to protect yourinterest Mr. witness?
A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in
this matter.
Q: Prior to that matter that you soughtthe advise of your lawyer, Atty.
Espiritu insofar as the issuing bank is concerned, namely, Asian Bank,
what did you do in order to protect your interest? A: I immediately call
the bank asking them if what is the procedure for stop payment and the
bank told me that you have to secure a court order as soon as possible
before the clearing of these checks.52 (Emphasis supplied.)
Asian Bank, which is now Global Bank, obeyed the TRO and denied the
clearing of the manager’s checks. As such, Global Bank may not be held
liable on account of the knowledge of whatever else Chiok told them
when he asked for the procedure to secure a Stop Payment Order. On the
other hand, there was no mention that Metrobank was ever notified of the
alleged failure of consideration. Only Asian Bank was notified of such
fact. Furthermore, the mere allegation of breach on the part of the payee
of his personal contract with the purchaser should not be considered a
sufficient cause to immediately nullify such checks, thereby eroding their
integrity and honor as being as good as cash.
In view of all the foregoing, we resolve that Chiok’s complaint should be
denied insofar as it prayed for the withdrawal of the proceeds of the
subject manager’s and cashier’s checks. Accordingly, the writ of
preliminary prohibitory injunction enjoining Metrobank and Global Bank
from honoring the subject manager’s and cashier’s checks should be
lifted.
Since we have ruled that Chiok cannot claim the amounts of the checks
from Metrobank and Global Bank, the issue concerning the setting off of
Global Bank’s judgment debt to Chiok with the outstanding obligations
of Chiok is hereby mooted. We furthermore note that Global Bank had
not presented53 such issue as a counterclaim in the case at bar, preventing
us from ruling on the same.
BPI’s right to the proceeds of the
manager’s checks from Global Bank
While our ruling in Mesinais inapplicable to the case at bar, a much more
relevant case as regards the effect of a Stop Payment Order upon a
manager’s check would be Security Bank and Trust Company v. Rizal
Commercial Banking Corporation,54 which was decided by this Court in
2009. In said case, SBTC issued a manager’s check for ₱8 million,
payable to "CASH," as proceeds of the loan granted to Guidon
Construction and Development Corporation (GCDC). On the same day,
the manager’s check was deposited by Continental Manufacturing
Corporation (CMC) in its current account with Rizal Commercial
Banking Corporation (RCBC). RCBC immediately honored the
manager’s check and allowed CMC to withdraw the same. GCDC issued
a Stop Payment Order to SBTC on the next day, claiming that the check
was released to a third party by mistake. SBTC dishonored and returned
the manager’s check to RCBC. The check was returned back and forth
between the two banks, resulting in automatic debits and credits in each
bank’s clearing balance. RCBC filed a complaint for damages against
SBTC. When the case reached this Court, we held:
Obligations Part 2 | Page 26 of 143
At the outset, it must be noted that the questioned check issued by SBTC
is not just an ordinary check but a manager’s check. A manager’s check
is one drawn by a bank’s manager upon the bank itself. It stands on the
same footing as a certified check, which is deemed to have been accepted
by the bank that certified it. As the bank’s own check, a manager’s check
becomes the primary obligation of the bank and is accepted in advance by
the act of its issuance.
In this case, RCBC, in immediately crediting the amount of ₱8 million to
CMC’s account, relied on the integrity and honor of the check as it is
regarded in commercial transactions. Where the questioned check, which
was payable to"Cash," appeared regular on its face, and the bank found
nothing unusual in the transaction, as the drawer usually issued checks in
big amounts made payable to cash, RCBC cannot be faulted in paying the
value of the questioned check.
In our considered view, SBTC cannot escape liability by invoking
Monetary Board Resolution No. 2202 dated December 21, 1979,
prohibiting drawings against uncollected deposits. For we must point out
that the Central Bank at that timeissued a Memorandum dated July 9,
1980, which interpreted said Monetary Board Resolution No. 2202. In its
pertinent portion, saidMemorandum reads:
MEMORANDUM TO ALL BANKS
July 9, 1980
For the guidance of all concerned, Monetary Board Resolution No. 2202
dated December 31, 1979 prohibiting, as a matter of policy, drawing
against uncollected deposit effective July 1, 1980, uncollected deposits
representing manager’s/cashier’s/treasurer’schecks, treasury warrants,
postal money orders and duly funded "on us" checks which may be
permitted at the discretion of each bank, covers drawings against demand
deposits as well as withdrawals from savings deposits.
Thus, it is clear from the July 9, 1980 Memorandum that banks were given
the discretion to allow immediate drawings on uncollected deposits of
manager’s checks, among others. Consequently, RCBC, in allowing the
immediate withdrawal against the subject manager’s check, only
exercised a prerogative expressly granted to it bythe Monetary Board.
Moreover, neither Monetary Board Resolution No. 2202 nor the July 9,
1980 Memorandum alters the extraordinary nature of the manager’s check
and the relativerights of the parties thereto. SBTC’s liability as drawer
remains the same— by drawing the instrument, it admits the existence of
the payee and his then capacity to indorse; and engages that on due
presentment, the instrument will be accepted, or paid, or both, according
to its tenor.55(Emphases supplied, citations omitted.)
As in SBTC, BPI in the case at bar relied on the integrity and honor of the
manager’s and cashier’s checks asthey are regarded in commercial
transactions when it immediately credited their amounts to Nuguid’s
account.
The Court of Appeals, however, sustained the dismissal of BPI’s
complaint-in-intervention to recover the amounts of the manager’s checks
from Global Bank on account of BPI’s failure to prove the supposed
withdrawal by Nuguid of the value of the checks:
BPI’s cause of action against Asian Bank (now Global Bank) is derived
from the supposed withdrawal by Nuguid of the proceeds of the two
Manager’s Checks it issued and the refusal of Asian Bank to make good
the same. That the admissions in the pleadings to the effect that Nuguid
had withdrawn the said proceeds failed to satisfy the trial court is
understandable. Such withdrawal is anessential fact that, if properly
substantiated, would have defeated Chiok’s right toan injunction. BPI
could so easily have presented withdrawal slips or, with Nuguid’s
consent, statements of account orthe passbook itself, which would
indubitably show that money actually changed hands at the crucial period
before the issuance of the TRO. But it did not.56
We disagree with this ruling. As provided for in Section 4, Rule 129 of
the Rules of Court, admissions in pleadings are judicial admissions and
do not require proof:
Section 4. Judicial admissions. – An admission, verbal or written, made
by a party in the course of the proceedings in the same case, does not
require proof. The admission may be contradicted only by showing that it
was made through palpable mistake or that no such admission was made.
Nuguid has admitted that FEBTC (now BPI) has paid him the value of the
subject checks.57 This statement by Nuguid is certainly against his own
interest as he can be held liable for said amounts. Unfortunately, Nuguid
allowed his appeal with the Court of Appeals to lapse, without taking
steps to have it reinstated. This course of action, which is highly unlikely
if Nuguid had not withdrawn the value of the manager’s and cashier’s
checks deposited into his account, likewise prevents us from ordering
Nuguid to deliver the amounts of the checks to Chiok. Parties who did not
appeal will not be affected by the decision of an appellate court rendered
to appealing parties.58
Another reason given by the Court of Appeals for sustaining the dismissal
of BPI’s complaint-in-intervention was that BPI failed to prove that it was
a holder in due course with respect to the manager’s checks.59
We agree with the finding of the Court of Appeals that BPI is not a holder
in due course with respect to manager’s checks. Said checks were never
indorsed by Nuguid to FEBTC, the predecessor-in-interest of BPI, for the
reason that they were deposited by Chiok directly to Nuguid’s account
with FEBTC. However, inview of our ruling that Nuguid has withdrawn
the value of the checks from his account, BPI has the rights of an equitable
assignee for value under Section 49 of the Negotiable Instruments Law,
which provides:
Section 49. Transfer without indorsement; effect of. – Where the holder
of an instrument payable to his order transfers it for value without
indorsing it, the transfer vests in the transferee suchtitle as the transferor
had therein, and the transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of determining whether
the transferee is a holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made.
As an equitable assignee, BPI acquires the instrument subject to defenses
and equities available among prior parties60 and, in addition, the right to
have the indorsement of Nuguid. Since the checks in question are
manager’s checks, the drawer and the drawee thereof are both Global
Bank. Respondent Chiok cannot be considered a prior party as he is not
the check’s drawer, drawee, indorser, payee or indorsee. Global Bank is
consequently primarily liable upon the instrument, and cannot hide
behind respondent Chiok’s defenses. As discussed above, manager’s
checks are pre-accepted. By issuing the manager’s check, therefore,
Global Bank committed in effect its total resources, integrity and honor
towards its payment.61
Resultantly, Global Bank should pay BPI the amount of ₱18,455,350.00,
representing the aggregate face value ofMC No. 025935 and MC No.
025939. Since Global Bank was merely following the TRO and
preliminary injunction issued by the RTC, it cannot be held liable for legal
interest during the time said amounts are in its possession. Instead, we are
adopting the formulation of the Court of Appeals that the amounts be
treated as savings deposits in Global Bank. The interest rate, however,
should not be fixed at 4% as determined by the Court of Appeals, since
said rates have fluctuated since July 7, 1995, the date Global Bank refused
to honor the subject manager’s checks. Thus, Global Bank should pay BPI
interest based on the rates it actually paid its depositors from July 7, 1995
until the finality of this Decision, in accordance with the same
compounding rules it applies to its depositors. The legal rate of6% per
annum shall apply after the finality of this Decision.62
We have to stress that respondent Chiok is not left without recourse.
Respondent Chiok’s cause of action to recover the value of the checks is
against Nuguid. Unfortunately, Nuguid allowed his appeal with the Court
of Appeals to lapse, without taking steps tohave it reinstated. As stated
above, parties who did not appeal will not be affected by the decision of
the appellate court rendered to appealing parties.63 Moreover, since
Nuguid was not impleaded as a party to the present consolidated cases, he
cannot be bound by our judgment herein. Respondent Chiok should
therefore pursue his remedy against Nuguid in a separate action to recover
the amounts of the checks.
Despite the reversal of the Court of Appeals Decision, the liability of
Nuguid therein to respondent Chiok for attorney’s fees equivalent to 5%
of the total amount due remains valid, computed from the amounts stated
in said Decision. This is a consequence of the finality of the Decision of
the Court of Appeals with respect to him.
WHEREFORE, the Court resolves to DENY the Joint Manifestation and
Motion filed with this Court on May 28, 2013.
The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED.
The Decision of the Court of Appeals in CA-G.R. CV No. 77508 dated
May 5, 2006, and the Resolution on the same case dated November 6,
2006 are hereby REVERSED AND SET ASIDE, and a new one is issued
ordering the DENIAL of the Amended Complaint in Civil Case No. Q-
95-24299 in Branch 96 of the Regional Trial Court of Quezon City for
lack of merit. The Writ of Preliminary Prohibitory Injunction enjoining
Asian Banking Corporation (now Global Business Bank, Inc.) from
honoring MC No. 025935 and MC No. 025939, and Metropolitan Bank
& Trust Company from honoring CC No. 003380, is hereby LIFTED and
SET ASIDE.
Obligations Part 2 | Page 27 of 143
Global Business Bank, Inc. is ORDERED TO PAY the Bank of the
Philippine Islands, as successor-in-interest of Far East Bank & Trust
Company, the amount of ₱18,455,350.00, representing the aggregate face
value of MC No. 025935 and MC No. 025939, with interest based on the
rates it actually paid its depositors from July 7, 1995 until the finality of
this Decision, in accordance with the same compounding rules it applies
to its depositors.
The petition in G.R. No. 175394 is hereby rendered MOOT.
The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid
under the Decision and Resolution of the Court of Appeals in CAG.R. CV
No. 77508 remain VALID and SUBSISTING, computed from the
amounts adjudged by the Court of Appeals, without prejudice to any
further action that may be filed by Wilfred N. Chiok.
SO ORDERED.
The Wellex Group, Inc. vs. U-land Airlines, Co. Ltd
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner,
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court. The Wellex Group, Inc. (Wellex) prays that the Decision2 dated
July 30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be
reversed and set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial
Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand)
and ordered the rescission of the Memorandum of Agreement5 between
Wellex and U-Land.6
Wellex is a corporation established under Philippine law and it maintains
airline operations in the Philippines.7 It owns shares of stock in several
corporations including Air Philippines International Corporation (APIC),
Philippine Estates Corporation (PEC), and Express Savings Bank
(ESB).8 Wellex alleges that it owns all shares of stock of Air Philippines
Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and
existing under the laws of Taiwan, registered to do business . . . in the
Philippines."10 It is engaged in the business of air transportation in Taiwan
and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of
Agreement12 (First Memorandum of Agreement) to expand their
respective airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation
in Taiwan, Philippines and/or in other countries in the Asian region, and
desires to expand its operation and increase its market share by, among
others, pursuing a long-term involvement in the growing Philippine
airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation
in the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the
Asian regional markets, a Memorandum of Agreement on ______, a
certified copy of which is attached hereto as Annex "A" and is hereby
made an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International
Corporation. WHEREAS, the parties recognize the opportunity to
develop a long-term profitable relationship by combining such of their
respective resources in an expanded airline operation as well as in
property development and in other allied business activities in the
Philippines, and desire to set forth herein the basic premises and their
understanding with respect to their joint cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to
develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15This long-term business relationship would be implemented
through the following transactions, stated in Section 1 of the First
Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
equivalent to at least 35% of the outstanding capital stock of APIC, but in
any case, not less than 1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at least
35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with PEC . .
. [; and]
(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB . . . under terms to be mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its
execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Land’s acquisition of the shares of stock of both
APIC (APIC shares) and PEC (PEC shares).17 In this share purchase
agreement, U-Land would purchase from Wellex its APIC shares and
PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share
of APIC and 0.65 per share of PEC. However, they likewise agreed that
the final price of the shares of stock would be reflected in the actual share
purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC
shares would be paid upon the execution of the share purchase agreement
and Wellex’s delivery of the stock certificates covering the shares of
stock. The transfer of APIC shares and PEC shares to U-Land was
conditioned on the full remittance of the final purchase price as reflected
in the share purchase agreement. Further, the transfer was conditioned on
the approval of the Securities and Exchange Commission of the issuance
of the shares of stock and the approval by the Taiwanese government of
U-Land’s acquisition of these shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the "Subject Shares"). Without prejudice to any subsequent
agreement between the parties, the purchase price for the APIC Shares to
be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per
share and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65)
per share.
The purchase price for the Subject Shares as reflected in the SHPA shall
be paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a
separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required
approval by the Taiwanese government of the acquisition by U-LAND of
the Subject Shares shall likewise have been obtained.21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of
Directors of APIC and PEC in accordance with Philippine
law."22 Operational control of APIC and APC would be exercised jointly
by Wellex and U-Land "on the basis of mutual agreement and
consultations."23 The parties intended that U-Land would gain primary
control and responsibility for the international operations of
APC.24 Wellex manifested that APC is a subsidiary of APIC in the second
preambular clause of the First Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to
a proportionate representation in the Board of Directors of APIC and PEC
in accordance with Philippine law. For this purpose, WELLEX shall
cause the resignation of its nominated Directors in APIC and PEC to
accommodate U-LAND’s pro rata number of Directors. Subject to
applicable Philippine law and regulations, operational control of APIC
and Air Philippines Corporation ("APC") shall be lodged jointly to
WELLEX and U-LAND on the basis of mutual agreement and
Obligations Part 2 | Page 28 of 143
consultations. Further, U-LAND may second technical and other
consultants into APIC and/or APC with the view to increasing service,
productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and
installing adequate safety systems and procedures. In addition, U-LAND
shall arrange for the lease by APC of at least three (3) aircrafts owned by
ULAND under such terms as the parties shall mutually agree upon. It is
the intent of the parties that U-LAND shall have primary control and
responsibility for APC’s international operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development
agreement simultaneous with the execution of the share purchase
agreement. The joint development agreement shall cover housing and
other real estate development projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22,
1998. This sum was to serve as initial funding for the development
projects that Wellex and U-Land were to undertake pursuant to the joint
development agreement. In exchange for the US$3 million, Wellex would
deliver stock certificates covering 57,000,000 PEC shares to U-Land.28
The execution of a joint development agreement was also conditioned on
the execution of a share purchase agreement.29
Section 4 of the First Memorandum of Agreement reads:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement ("JDA") to pursue property development projects
in the Philippines. The JDA shall cover specific housing and other real
estate development projects as the parties shall agree. All profits derived
from the projects covered by the JDA shall be shared equally between
ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the
sum of US$3.0 million as initial funding for the aforesaid development
projects against delivery by WELLEX of 57,000,000 shares of PEC as
security for said amount in accordance with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its
implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated otherwise
or the context of any agreement between the parties would reveal a
different intent.31 Thus, in Section 6 of the First Memorandum of
Agreement:
6. Primacy of Agreement. – It is agreed that in case of conflict between
the provisions of this Agreement and those of the SHPA and the
implementing agreements of the SHPA, the provisions of this Agreement
shall prevail, unless the parties specifically state otherwise, or the context
clearly reveal a contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on
the terms of the share purchase agreement and the joint development
agreement within 40 days from signing, then the First Memorandum of
Agreement would cease to be effective.33
In case no agreements were executed, the parties would be released from
their respective undertakings, except that Wellex would be required to
refund within three (3) days the US$3 million given as initial funding by
U-Land for the development projects. If Wellex was unable to refund the
US$3 million to U-Land, U-Land would have the right to recover on the
57,000,000 PEC shares that would be delivered to it.34 Section 9 of the
First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of
the SHPA and/or the JDA within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the
US$3.0 million provided under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover on the 57,000,000 PEC
shares delivered to U-LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman
and President William T. Gatchalian (Mr. Gatchalian) and U-Land
Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36
Annex "A" or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of
Agreement was Annex "A," as stated in the second preambular clause. It
is a document denoted as a "Memorandum of Agreement" entered into by
Wellex, APIC, and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of
______ at Makati City, by and between:
THE WELLEX GROUP, INC., a corporation duly organized and existing
under the laws of the Philippines, with offices at 22F Citibank Tower,
8741 Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly
FORUM PACIFIC, INC.), likewise a corporation duly organized and
existing under the laws of the Philippines, with offices at 8F Rufino
Towers, Ayala Avenue, Makati City (hereinafter referred to as "APIC"),
- and –
AIR PHILIPPINES CORPORATION, corporation duly organized and
existing under the laws of the Philippines, with offices at Multinational
Building, Ayala Avenue, Makati City (hereinafter referred to as "APC").
W I T N E S S E T H: That -
WHEREAS, TWGI is the registered and beneficial owner, or has
otherwise acquired _____ (illegible in rollo) rights to the entire issued and
outstanding capital stock (the "APC SHARES") of AIR PHILIPPINES
CORPORATION ("APC") and has made stockholder advances to APC
for the _____ (illegible in rollo) of aircraft, equipment and for working
capital used in the latter’s operations (the "_____ (illegible in rollo)
ADVANCES").
WHEREAS, APIC desires to obtain full ownership and control of APC,
including all of _____ (illegible in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to acquire the _____ (illegible
in rollo) 302SHARES of TWGI in APC, including the APC ADVANCES
due to TWGI from APC, with _____ (illegible in rollo) of acquiring all
the assets, franchise, goodwill and operations of APC; and TWGI has
_____ (illegible in rollo) to the same in consideration of the conveyance
by APIC to TWGI of certain investments, _____ (illegible in rollo)
issuance of TWGI of shares of stock of APIC in exchange for said APC
SHARES and the _____ (illegible in rollo) ADVANCES, as more
particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange
for the _____ (illegible in rollo) by APIC to TWGI of investment shares
of APIC in Express Bank, Petro Chemical _____ (illegible in rollo) of
Asia Pacific, Republic Resources & Development Corporation and
Philippine _____ (illegible in rollo) Corporation (the "APIC
INVESTMENTS").
2. TWGI likewise agrees to transfer the APC SHARES to APIC in
exchange solely _____ (illegible in rollo) the issuance by APIC of One
Billion Seven Hundred Ninety-Seven Million Eight Hundred Fifty Seven
Thousand Three Hundred Sixty Four (1,797,857,364) shares of its capital
stock of a _____ (illegible in rollo) value of ₱1.00 per share (the "APIC
SHARES"), taken from the currently authorized but _____ (illegible in
rollo) shares of the capital stock of APIC, as well as from the increase in
the authorized capital _____ (illegible in rollo) of APIC from ₱2.0 billion
to ₱3.5 billion.
3. It is the basic understanding of the parties hereto that the transfer of the
APC _____ (illegible in rollo) as well as the APC ADVANCES to APIC
shall be intended to enable APIC to obtain _____ (illegible in rollo) and
control of APC, including all of APC’s assets, franchise, goodwill and
_____ (illegible in rollo).
4. Unless the parties agree otherwise, the effectivity of this Agreement
and transfers _____ (illegible in rollo) APC ADVANCES in exchange for
the APIC INVESTMENTS, and the transfer of the _____ (illegible in
rollo) SHARES in exchange for the issuance of new APIC SHARES,
shall be subject to _____ (illegible in rollo) due diligence as the parties
shall see fit, and the condition subsequent that the _____ (illegible in
rollo) for increase in the authorized capital stock of the APIC from ₱2.0
billion to ₱3.5 _____ (illegible in rollo) shall have been approved by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties have caused these presents to be
signed on the date _____ (illegible in rollo) first above
written.38 (Emphasis supplied)
This Second Memorandum of Agreement was allegedly incorporated into
the First Memorandum of Agreement as a "disclosure to [U-Land] [that]
. . . [Wellex] was still in the process of acquiring and consolidating its title
to shares of stock of APIC."39 It "included the terms of a share swap
whereby [Wellex] agreed to transfer to APIC its shareholdings and
advances to APC in exchange for the issuance by APIC of shares of stock
to [Wellex]."40
Obligations Part 2 | Page 29 of 143
The Second Memorandum of Agreement was signed by Mr. Gatchalian,
APIC President Salud,41 and APC President Augustus C. Paiso.42 It was
not dated, and no place was indicated as the place of signing.43 It was not
notarized either, and no other witnesses signed the document.44
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were
not able to enter into any share purchase agreement although drafts were
exchanged between the two.
Despite the absence of a share purchase agreement, U-Land remitted to
Wellex a total of US$7,499,945.00.46These were made in varying
amounts and through the issuance of post-dated checks.47 The dates of
remittances were the following:
Date
June 30, 1998
July 2, 1998
July 30, 1998
August 1, 1998
August 3, 1998
September 25, 1998
Total
Wellex acknowledged the receipt of these remittances in a confirmation
letter addressed to U-Land dated September 30, 1998.49
According to Wellex, the parties agreed to enter into a security
arrangement. If the sale of the shares of stock failed to push through, the
partial payments or remittances U-Land made were to be secured by these
shares of stock and parcels of land.50 This meant that U-Land could
recover the amount it paid to Wellex by selling these shares of stock and
land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land
stock certificates representing 60,770,000 PEC shares and 72,601,000
APIC shares.51 These were delivered to U-Land on July 1, 1998,
September 1, 1998, and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title
(TCT) Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and
T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910,
T-120250, T-1114398, and T-120772 covering properties owned by
Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a
letter from Wellex, indicating a list of stock certificates that the latter was
giving to the former by way of "security."55
Despite these transactions, Wellex and U-Land still failed to enter into the
share purchase agreement and the joint development agreement.
In the letter56 dated July 22, 1999, 10 months57 after the last formal
communication between the two parties, U-Land, through counsel,
demanded the return of the US$7,499,945.00.58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to
enter into the. . . Share Purchase Agreement."59 As far as U-Land was
concerned, the First Memorandum of Agreement was no longer in effect,
pursuant to Section 9.60 As such, U-Land offered to return all the stock
certificates covering APIC shares and PEC shares as well as the titles to
real property given by Wellex as security for the amount remitted by U-
Land.61
Amount (in US$)
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-
Land’s claims. Counsel for Wellex stated that the two parties carried out
990,000.00
several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development agreement.
990,000.00
Wellex asserted that under the joint development agreement,
agreed to remit the sum of US$3 million by May 22,1998 as initial
U-Land
funding for the development projects.63
20,000.00
Wellex further asserted that it conducted extended discussions with U-
Land in the hope of arriving at the final terms of the agreement despite
990,000.00
the failure of the remittance of the US$3 million on May 22, 1998.64 That
remittance pursuant to the joint development agreement "would have
demonstrated [U-Land’s] good faith in finalizing the agreements."65
490,000.00
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land]
virtually agreed on the terms of both [the share purchase agreement and
the joint development agreement.]"66 Wellex believed 490,000.00
that the parties had
already "gone beyond the ‘intent’ stage of the [First Memorandum of
990,000.00
Agreement] and [had already] effected partial implementation of an over-
all agreement."67 U-Land even delivered a total of 12 post-dated checks
to Wellex as payment for the APIC shares and PEC shares.68 "[Wellex]
490,000.00
on the other hand, had [already] delivered to[U-Land] certificates of stock
of APEC [sic] and PEC as well as various land titles to cover actual
remittances."69 Wellex alleged that the agreements were not finalized
490,000.00
because U-Land was "forced to suspend operations because of financial
problems spawned by the regional economic turmoil."70
990,000.00
Thus, Wellex maintained that "the inability of the parties to execute the
[share purchase agreement] and the [joint development agreement]
principally arose from problems at [U-Land’s] side, 70,000.00
and not due to
[Wellex’s] ‘unjustified refusal to enter into [the] [share purchase
agreement][.]’"71
399,972.50
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of
the First Memorandum of Agreement and damages against Wellex and
for the issuance of a Writ of Preliminary Attachment.73 From U-Land’s
point of view, its primary reason for purchasing APIC shares from Wellex
99, 972.50
was APIC’s majority ownership of shares of stock in APC (APC
74
shares). After verification with the Securities and Exchange
Commission, U-Land discovered that US$7,499,945.0048
"APIC did not own a single share
of stock in APC."75 U-Land alleged that it repeatedly requested that the
parties enter into the share purchase agreement.76 U-Land attached the
demand letter dated July 22, 1999 to the Complaint.77 However, the 40-
day period lapsed, and no share purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still
refused to return the amount of US$7,499,945.00 while refusing to enter
into the share purchase agreement.79 U-Land stated that it was induced by
Wellex to enter into and execute the First Memorandum of Agreement, as
well as release the amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-
Land had no cause of action.82 Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement.83 Wellex alleged
that to bring the share purchase agreement to fruition, it would have to
acquire the corresponding shares in APIC.84 It claimed that U-Land was
fully aware that the former "still ha[d] to consolidate its title over these
shares."85 This was the reason for Wellex’s attachment of the Second
Memorandum of Agreement to the First Memorandum of Agreement.
Wellex attached the Second Memorandum of Agreement as evidence to
refute U-Land’s claim of misrepresentation.86
Wellex further alleged that U-Land breached the First Memorandum of
Agreement since the payment for the shares was to begin during the 40-
day period, which began on May 16, 1998.87 In addition, U-Land failed
to remit the US$3 million by May 22, 1998 that would serve as initial
funding for the development projects.88 Wellex claimed that the
remittance of the US$3 million on May 22, 1998 was a mandatory
Obligations Part 2 | Page 30 of 143
obligation on the part of U-Land.89 Wellex averred that it presented draft
versions of the share purchase agreement, which were never
finalized.90 Thus, it believed that there was an implied extension of the
40-day period within which to enter into the share purchase agreement
and the joint development agreement since U-Land began remitting sums
of money in partial payment for the purchase of the shares of stock.91
In its counterclaim against U-Land, Wellex alleged that it had already set
in motion building and development of real estate projects on four (4)
major sites in Cavite, Iloilo, and Davao. It started initial construction on
the basis of its agreement with U-Land to pursue real estate development
projects.92
Wellex claims that, had the development projects pushed through, the
parties would have shared equally in the profits of these projects.93 These
projects would have yielded an income of ₱2,404,948,000.00, as per the
study Wellex conducted, which was duly recognized by U-Land.94 Half
of that amount, ₱1,202,474,000.00, would have redounded to
Wellex.95 Wellex, thus, prayed for the rescission of the First
Memorandum of Agreement and the payment of ₱1,202,474,000 in
damages for loss of profit.96 It prayed for the payment of moral damages,
exemplary damages, attorney’s fees, and costs of suit.97
In its Reply,98 U-Land denied that there was an extension of the 40-day
period within which to enter into the share purchase agreement and the
joint development agreement. It also denied requesting for an extension
of the 40-day period. It further raised that there was no provision in the
First Memorandum of Agreement that required it to remit payments for
Wellex’s shares of stock in APIC and PEC within the 40-day period.
Rather, the remittances were supposed to begin upon the execution of the
share purchase agreement.99
As for the remittance of the US$3 million, U-Land stated that the issuance
of this amount on May 22, 1998 was supposed to be simultaneously made
with Wellex’s delivery of the stock certificates for 57,000,000 PEC
shares. These stock certificates were not delivered on that date.100
With regard to the drafting of the share purchase agreement, U-Land
denied that it was Wellex that presented versions of the agreement. U-
Land averred that it was its own counsel who drafted versions of the share
purchase agreement and the joint development agreement, which Wellex
refused to sign.101
U-Land specifically denied that it had any knowledge prior to or during
the execution of the First Memorandum of Agreement that Wellex still
had to "consolidate its title over" its shares in APIC. U-Land averred that
it relied on Wellex’s representation that it was a majority owner of APIC
shares and that APIC owned a majority of APC shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex
undertook to pursue the development projects and denied any awareness
of a study conducted by Wellex regarding the potential profit of these
projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that
"[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited
[U-Land] to join in the operation of his airline company[.]"105 U-Land did
not accept the offer at that time.106 During the first quarter of 1998, Mr.
Gatchalian "went to Taiwan and invited [U-Land] to invest in Air
Philippines[.]"107 This time, U-Land alleged that subsequent meetings
were held where Mr. Gatchalian, representing Wellex, "claimed
ownership of a majority of the shares of APIC and ownership by APIC of
a majority of the shares of [APC,] a domestic carrier in the
Philippines."108 Wellex, through Mr. Gatchalian, offered to sell to U-Land
PEC shares as well.109
According to Mr. Tseng, the parties agreed to enter into the First
Memorandum of Agreement after their second meeting.110 Mr. Tseng
testified that under this memorandum of agreement, the parties would
enter into a share purchase agreement "within forty (40) days from its
execution which [would] put into effect the sale of the shares [of stock]
of APIC and PEC[.]"111 However, the "[s]hare [p]urchase [a]greement
was not executed within the forty-day period despite the draft . . . given
[by U-Land to Wellex]."112
Mr. Tseng further testified that it was only after the lapse of the 40-day
period that U-Land discovered that Wellex needed money for the transfer
of APC shares to APIC. This allegedly shocked U-Land since under the
First Memorandum of Agreement, APIC was supposed to own a majority
of APC shares. Thus, U-Land remitted to Wellex a total of
US$7,499,945.00 because of its intent to become involved in the aviation
business in the Philippines. These remittances were confirmed by Wellex
through a confirmation letter. Despite the remittance of this amount, no
share purchase agreement was entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice
President of Wellex. She admitted her knowledge of the First
Memorandum of Agreement as she was involved in its drafting. She
testified that the First Memorandum of Agreement made reference, under
its second preambular clause, to the Second Memorandum of Agreement
entered into by Wellex, APIC, and APC. She testified that under the First
Memorandum of Agreement, U-Land’s purchase of APIC shares and PEC
shares from Wellex would take place within 40 days, with the execution
of a share purchase agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman
Mr. Wang requested sometime in June of 1998 for an extension for the
execution of the share purchase agreement and the remittance of the US$3
million. As proof that Mr. Wang made this request, Ms. Ting testified that
Mr. Wang sent several post-dated checks to cover the payment of the
APIC shares and PEC shares and the initial funding of US$3 million for
the joint development agreement. She testified that Mr. Wang presented
a draft of the share purchase agreement, which Wellex rejected. Wellex
drafted a new version of the share purchase agreement.115 However, the
share purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land "encountered
difficulties starting October of 1998."116 Ms. Ting admitted that U-Land
made the remittances to Wellex in the amount of US$7,499,945.00.117
Ms. Ting testified that U-Land was supposed to make an initial payment
of US$19 million under the First Memorandum of Agreement. However,
U-Land only paid US$7,499,945.00. The total payments should have
amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of
Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations
through the latter’s demand letter dated July 22, 1999. In response,
Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission
and caused the attachment against the properties of Wellex, causing
embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati
City held that rescission of the First Memorandum of Agreement was
proper:
The first issue must be resolved in the negative. Preponderance of
evidence leans in favor of plaintiff that it is entitled to the issuance of the
writ of preliminary attachment. Plaintiff’s evidence establishes the facts
that it is engaged in the airline business in Taiwan, was approached by
defendant, through its Chairman William Gatchalian, and was invited by
the latter to invest in an airline business in the Philippines, Air Philippines
Corporation (APC); that plaintiff became interested in the invitation of
defendant; that during the negotiations between plaintiff and defendant,
defendant induced plaintiff to buy shares in Air Philippines International
Corporation (APIC) since it owns majority of the shares of APC; that
defendant also induced plaintiff to buy shares of APIC in Philippine
Estates Corporation (PEC); that the negotiations between plaintiff and
defendant culminated into the parties executing a MOA (Exhs. "C" to "C-
3", also Exh. "1"); that in the second "Whereas" clause of the MOA,
defendant represented that it has a current airline operation through its
majority-owned subsidiary APIC, that under the MOA, the parties were
supposed to enter into a Share Purchase Agreement (SPA) within forty
(40) days from May 16, 1998, the date the MOA in order to effect the
transfer of APIC and PEC shares of defendant to plaintiff; that plaintiff
learned from defendant that APIC does not actually own a single share in
APC; that plaintiff verified with the Securities and Exchange Commission
(SEC), by obtaining a General Information Sheet therefrom (Exh. "C-
Attachment"); that APIC does not in fact own APC; that defendant
induced plaintiff to still remit its investment to defendant, which plaintiff
did as admitted by defendant per its Confirmation Letter (Exh. "D") in
order that APC shares could be transferred to APIC; that plaintiff remitted
a total of US$7,499,945.00 to defendant; and that during the forty-day
period stipulated in the MOA and even after the lapse of the said period,
defendant has not entered into the SPA, nor has defendant caused the
transfer of APC shares to APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s
misrepresentation that APIC owns APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation
in the Philippines through its majority-owned subsidiary Air Philippines
International Corporation (Exh. "C") and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its
Obligations Part 2 | Page 31 of 143
operation in the Asian regional markets; x x x" (Second Whereas of Exh.
"C")
On the other hand, defendant’s evidence failed to disprove plaintiff’s
evidence. The testimony of defendant’s sole witness Elvira Ting, that
plaintiff knew at the time of the signing of the MOA that APIC does not
own a majority of the shares of APC because another Memorandum of
Agreement was attached to the MOA (Exh "1") pertaining to the purchase
of APC shares by APIC is unavailing. The second "Whereas" clause of
the MOA leaves no room for interpretation. . . . The second MOA
purportedly attached as Annex "A" of this MOA merely enlightens the
parties on the manner by which APIC acquired the shares of APC.
Besides, . . . the second MOA was not a certified copy and did not contain
a marking that it is an Annex "A" when it was supposed to be an Annex
"A" and a certified copy per the MOA between plaintiff and defendant.
As can be also gathered from her testimony, Ms. Ting does not have
personal knowledge that plaintiff was not informed that APIC did not own
shares of APC during the negotiations as she was not present during the
negotiations between plaintiff and defendant’s William Gatchalian. Her
participation in the agreement between the parties [was] merely limited to
the preparation of the documents to be signed. Ms. Ting testified, as
follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the
intended transfer of shares from APC to APIC because of this WHEREAS
CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is
further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC
shares to APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares
of Air Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group
and certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex
Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of
Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the
owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of
plaintiff, even if no SPA was executed yet between the parties, to effect
the transfer of APC shares to APIC is admitted by its same witness also
in this wise:
"Q You said that remittances were made to the Wellex Group,
Incorporated by plaintiff for the period from June 1998 to September
1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount
of more than seven million dollars, did you ever know if plaintiff asked
for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of
AIR PHILIPPINES CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances
sometime in September 1998 you have not effected the transfer of shares
of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the
reasons why U-Land Incorporated was convinced to remit the amounts of
money totalling seven million dollars plus,
was that your company said that it needed funds to effect these transfers,
is that correct?
A Yes, sir."
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established the
fact that it had made remittances in the total amount of US$7,499,945.00
to defendant in order that defendant will make good its representation that
APC is a subsidiary of APIC. The said remittances are admitted by
defendant.
Notwithstanding the said remittances, APIC does not own a single share
of APC. On the other hand, defendant could not even satisfactorily
substantiate its claim that at least it had the intention to cause the transfer
of APC shares to APIC. [D]efendant obviously did not enter into the
stipulated SPA because it did not have the shares of APC transferred to
APIC despite its representations. Under the circumstances, it is clear that
defendant fraudulently violated the provisions of the MOA.120 (Emphasis
supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial
Court.121 In its July 30, 2004 Decision, the Court of Appeals held that the
Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter
itself asked for the rescission of the MOA. Thus, in effect, it prays for the
return of what has been given or paid under the MOA, as the law creates
said obligation to return the things which were the object of the contract,
and the same could be carried out only when he who demands rescission
can return whatever he may be obliged to restore. The law says:
"Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse
to return what has been paid to it. Further, appellant’s claim that the lower
court erred in ruling for the rescission of the MOA is absurd and
ridiculous because rescission thereof is prayed for by the former. . . . This
Court agrees with the lower court that appellee is the injured party in this
case, and therefore is entitled to rescission, because the rescission referred
to here is predicated on the breach of faith by the appellant which breach
is violative of the reciprocity between the parties. It is noted that appellee
has partly complied with its own obligation, while the appellant has not.
It is, therefore, the right of the injured party to ask for rescission because
the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendant’s misrepresentations
regarding APIC’s not owning shares in APC vitiates its consent to the
MOA. Defendant’s continued misrepresentation that it will cause the
transfer of APC shares in APIC inducing plaintiff to remit money despite
the lapse of the stipulated forty day period, further establishes plaintiff’s
right to have the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-
execution of an SPA within the 40 day period, or within the extensions
thereof, the payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms
of the SHPA and/or JDA within forty (40) days from the date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the
US$3.0 million under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover the 57,000,000 PEC
shares delivered to ULAND under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within
and even after the lapse of the stipulated 40 day period. There being no
SPA entered into by and between the plaintiff and defendant, defendant’s
return of the remittances [of] plaintiff in the total amount of
US$7,499,945 is only proper, in the same vein, plaintiff should return to
Obligations Part 2 | Page 32 of 143
defendant the titles and certificates of stock given to it by
defendant.122 (Citations omitted)
Hence, this Petition was filed.
Petitioner’s Arguments
Petitioner Wellex argues that contrary to the finding of the Court of
Appeals, respondent U-Land was not entitled to rescission because the
latter itself violated the First Memorandum of Agreement. Petitioner
Wellex states that respondent U-Land was actually bound to pay US$17.5
million for all of APIC shares and PEC shares under the First
Memorandum of Agreement and the US$3 million to pursue the
development projects under the joint development agreement. In sum,
respondent U-Land was liable to petitioner Wellex for the total amount of
US$20.5 million. Neither the Court of Appeals nor the Regional Trial
Court made any mention of the legal effect of respondent U-Land’s failure
to pay the full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its
obligation to deliver the totality of the shares of stock would become
demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock
was a suspensive condition for the execution of the share purchase
agreement and delivery of the shares of stock. Petitioner Wellex argues
that the use of the term "upon" in Section 2 of the First Memorandum of
Agreement clearly provides that the full payment of the purchase price
must be given "simultaneously" or "concurrent" with the execution of the
share purchase agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the
rescission of the First Memorandum of Agreement was proper because
petitioner Wellex itself asked for this in its Answer before the trial
court.126 It asserts that "there can be no rescission of a non-existent
obligation, such as [one] whose suspensive condition has not yet
happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor
v. Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it
argues that "the vendor. . . has no obligation to deliver the thing sold. . .
if the buyer. . . fails to fully pay the price as required by the contract."131 In
this case, petitioner Wellex maintains that respondent U-Land’s
remittance of US$7,499,945.00 constituted mere partial performance of a
reciprocal obligation.132 Thus, respondent U-Land was not entitled to
rescission. The nature of this reciprocal obligation requires both parties’
simultaneous fulfillment of the totality of their reciprocal obligations and
not only partial performance on the part of the allegedly injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a
seller may sell a thing not yet belonging to him at the time of the
transaction, provided that he will become the owner at the time of delivery
so that he can transfer ownership to the buyer. Contrary to the finding of
the lower courts, petitioner Wellex was obliged to be the owner of the
shares only when the time came to deliver these to respondent U-Land
and not during the perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have
recovered through the securities given to the latter.134 Petitioner Wellex
invokes Suria v. Intermediate Appellate Court,135 which held that an
"action for rescission is not a principal action that is retaliatory in
character [under Article 1191 of the Civil Code, but] a subsidiary one
which. . . is available only in the absence of any other legal remedy [under
Article 1384 of the Civil Code]."136Respondent’s Arguments
Respondent U-Land argues that it was the execution of the share purchase
agreement that would result in its purchase of the APIC shares and PEC
shares.137 It was not the full remittance of the purchase price of the shares
of stock as indicated in the First Memorandum of Agreement, as alleged
by petitioner Wellex.138 Respondent U-Land asserts that the First
Memorandum of Agreement provides that the exact number of APIC
shares and PEC shares to be purchased under the share purchase
agreement and the final price of these shares were not yet determined by
the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that requested
for the remittances amounting to US$7,499,945.00 to facilitate APIC’s
purchase of APC shares.140 Thus, it was petitioner Wellex’s refusal to
enter into the share purchase agreement that led to respondent U-Land
demanding rescission of the First Memorandum of Agreement and the
return of the US$7,499,945.00.141 Respondent U-Land further argues
before this court that petitioner Wellex failed to present evidence as to
how the money was spent, stating that Ms. Ting admitted that the Second
Memorandum of Agreement "was not consummated at any
time."142 Respondent U-Land raises that petitioner Wellex was guilty of
fraud by making it appear that APC was a subsidiary of APIC.143 It
reiterates that, as an airline company, its primary reason for entering into
the First Memorandum of Agreement was to acquire management of
APC, another airline company.144 Under Article 1191 of the Civil Code,
respondent U-Land, as the injured party, was entitled to rescission due to
the fatal misrepresentations committed by petitioner Wellex.145
Respondent U-Land further asserts that the "shareholdings in APIC and
APC were never in question."146 Rather, it was petitioner Wellex’s
misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable
because the pertinent provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil Code.148 The "rescission"
referred to in Article 1191 referred to "resolution" of a contract due to a
breach of a mutual obligation, while Article 1384 spoke of "rescission"
because of lesion and damage.149 Thus, the rescission that is relevant to
the present case is that of Article 1191, which involves breach in a
reciprocal obligation. It is, in fact, resolution, and not rescission as a result
of fraud or lesion, as found in Articles 1381, 1383, and 1384 of the Civil
Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred
in affirming the Decision of the Regional Trial Court that granted the
rescission of the First Memorandum of Agreement prayed for by U-Land.
The Petition must be denied.
I
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are
controlling to this case, particularly Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its
stipulations shall control.
If the words appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former.
In Norton Resources and Development Corporation v. All Asia Bank
Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first
paragraph of Article 1370 of the Civil Code: "[i]f the terms of a contract
are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control." This provision is akin
to the "plain meaning rule" applied by Pennsylvania courts, which
assumes that the intent of the parties to an instrument is "embodied in the
writing itself, and when the words are clear and unambiguous the intent
is to be discovered only from the express language of the agreement." It
also resembles the "four corners" rule, a principle which allows courts in
some cases to search beneath the semantic surface for clues to meaning.
A court's purpose in examining a contract is to interpret the intent of the
contracting parties, as objectively manifested by them. The process of
interpreting a contract requires the court to make a preliminary inquiry as
to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative
interpretations. Where the written terms of the contract are not ambiguous
and can only be read one way, the court will interpret the contract as a
matter of law. If the contract is determined to be ambiguous, then the
interpretation of the contract is left to the court, to resolve the ambiguity
in the light of the intrinsic evidence.152 (Emphasis supplied)
As held in Norton, this court must first determine whether a provision or
stipulation contained in a contract is ambiguous. Absent any ambiguity,
the provision on its face will be read as it is written and treated as the
binding law of the parties to the contract.
The parties have differing interpretations of the terms of the First
Memorandum of Agreement. Petitioner Wellex even admits that "the
facts of the case are fairly undisputed [and that] [i]t is only the parties’
respective [understanding] of these facts that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement
reads:
WHEREAS, WELLEX, on the other hand, has current airline operation
in the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the
Asian regional markets; a Memorandum of Agreement on ______, a
certified copy of which is attached hereto as Annex "A" and is hereby
made an integral part hereof, which sets forth, among others, the basis for
Obligations Part 2 | Page 33 of 143
WELLEX’s present ownership of shares in Air Philippines International
Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:
I. Basic Agreement. - The parties agree to develop a long-term business
relationship initially through the creation of joint interest in airline
operations as well as in property development projects in the Philippines
to be implemented as follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
equivalent to at least 35% of the outstanding capital stock of APIC, but in
any case, not less than 1,050,000,000 shares (the "APIC Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at least
35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with PEC to
jointly pursue property development projects in the Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB (the "ESB Shares") under terms to be
mutually agreed.155
The First Memorandum of Agreement contained the following
stipulations regarding the share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the "Subject Shares"). Without prejudice to any subsequent
agreement between the parties, the purchase price for the APIC Shares to
be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per
share and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65)
per share.
The purchase price for the Subject Shares as reflected in the SHPA shall
be paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a
separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required
approval by the Taiwanese government of the acquisition by U-LAND of
the Subject Shares shall likewise have been obtained.156 (Emphasis
supplied)
As for the joint development agreement, the First Memorandum of
Agreement contained the following stipulation:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement ("JDA") to pursue property development projects
in the Philippines. The JDA shall cover specific housing and other real
estate development projects as the parties shall agree. All profits derived
from the projects covered by the JDA shall be shared equally between
ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the
sum of US$3.0 million as initial funding for the aforesaid development
projects against delivery by WELLEX of 57,000,000 shares of PEC as
security for said amount in accordance with Section 9
below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure
to agree on the terms of the share purchase agreement or the joint
development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of
the SHPA and/or the JDA within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the
US$3.0 million provided under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover on the 57,000,000 PEC
shares delivered to U-LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that
the execution of a share purchase agreement containing mutually
agreeable terms and conditions must first be accomplished by the parties
before respondent U-Land purchases any of the shares owned by
petitioner Wellex. A perusal of the stipulation on its face allows for no
other interpretation.
The need for a share purchase agreement to be entered into before
payment of the full purchase price can further be discerned from the other
stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture,
through entering into two (2) agreements: a share purchase agreement and
a joint development agreement. However, Section 1 provides that in the
share purchase agreement, "U-LAND shall acquire from WELLEX,
shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION (‘APIC’) equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000 shares
(the ‘APIC Shares’)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex "shares of stock of PHILIPPINE
ESTATES CORPORATION (‘PEC’) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares(the ‘PEC Shares’)."160
The use of the terms "at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares" and "at least
35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares" means that the parties had yet to agree on the number
of shares of stock to be purchased.
The need to execute a share purchase agreement before payment of the
purchase price of the shares is further shown by the clause, "[w]ithout
prejudice to any subsequent agreement between the parties, the purchase
price for the APIC Shares to be reflected in the [share purchase
agreement] shall be... P0.30 per share and that for the PEC Shares at...
P0.65 per share."161 This phrase clearly shows that the final price of the
shares of stock was to be reflected in the share purchase agreement. There
being no share purchase agreement executed, respondent U-Land was
under no obligation to begin payment or remittance of the purchase price
of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2162 of the First
Memorandum of Agreement means that respondent U-Land must pay the
purchase price of the shares of stock in its entirety when they are
transferred. This argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and
the number of shares of stock to be purchased before respondent U-Land
is obligated to pay or remit the entirety of the purchase price. Thus,
petitioner Wellex’s argument cannot be sustained since the parties to the
First Memorandum of Agreement were clearly unable to agree on all the
terms concerning the share purchase agreement. It would be absurd for
petitioner Wellex to expect payment when respondent U-Land did not yet
agree to the final amount to be paid for the totality of an indeterminate
number of shares of stock.
The third paragraph of Section 2163 provides that the "transfer of the
Subject Shares" shall take place upon the fulfillment of certain conditions,
such as full payment of the purchase price "as reflected in the [share
purchase agreement]." The transfer of the shares of stock is different from
the execution of the share purchase agreement. The transfer of the shares
of stock requires full payment of the final purchase price. However, that
final purchase price must be reflected in the share purchase agreement.
The execution of the share purchase agreement will require the existence
of a final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex
argued that the payment of the shares of stock was to begin within the 40-
day period. Petitioner Wellex’s claim is not in any of the stipulations of
the contract. Its subsequent claim that respondent U-Land was actually
required to remit a total of US$20.5 million is likewise bereft of basis
since there was no final purchase price of the shares of stock that was
agreed upon, due to the failure of the parties to execute a share purchase
agreement. In addition, the parties had yet to agree on the final number of
APIC shares and PEC shares that respondent U-Land would acquire from
petitioner Wellex.
Therefore, the understanding of the parties captured in the First
Memorandum of Agreement was to continue their negotiation to
determine the price and number of the shares to be purchased. Had it been
otherwise, the specific number or percentage of shares and its price should
Obligations Part 2 | Page 34 of 143
already have been provided clearly and unambiguously. Thus, they agreed
to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides
that:
In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40)days from date hereof (or such period as
the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective
undertakings herein . . .164
The First Memorandum of Agreement was, thus, an agreement to enter
into a share purchase agreement. The share purchase agreement should
have been executed by the parties within 40 days from May 16, 1998, the
date of the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of
the First Memorandum of Agreement ceased. The parties were "released
from their respective undertakings." Thus, from June 25, 1998, the date
when the 40-day period lapsed, the parties were no longer obliged to
negotiate with each other in order to enter into a share purchase
agreement.
However, Section 9 provides for another period within which the parties
could still be required to negotiate. The clause "or such period as the
parties shall mutually agree" means that the parties should agree on a
period within which to continue negotiations for the execution of an
agreement. This means that after the 40-day period, the parties were still
allowed to negotiate, provided that they could mutually agree on a new
period of negotiation.
Based on the records and the findings of the lower courts, the parties were
never able to arrive at a specific period within which they would bind
themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and
enter into a share purchase agreement. Section 9 clearly freed them from
this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore,
independent of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
mentioned that there was an "implied partial objective or real
novation"165 of the First Memorandum of Agreement. Petititoner did not
raise this argument of novation before this court. In Gayos v.
Gayos,166 this court held that "it is a cherished rule of procedure that a
court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future
litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may
be modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of
novation:
Novation extinguishes an obligation between two parties when there is a
substitution of objects or debtors or when there is subrogation of the
creditor. It occurs only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on every point
incompatible with each other."
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it
is deeply rooted in the Roman Law jurisprudence, the principle — novatio
non praesumitur— that novation is never presumed. At bottom, for
novation to be a jural reality, its animus must be ever present, debitum
pro debito— basically extinguishing the old obligation for the new
one.169 (Emphasis from the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original
obligation.
After the 40-day period, the parties did not enter into any subsequent
written agreement that was couched in unequivocal terms. The transaction
of the First Memorandum of Agreement involved large amounts of money
from both parties. The parties sought to participate in the air travel
industry, which has always been highly regulated and subject to the
strictest commercial scrutiny. Both parties admitted that their counsels
participated in the crafting and execution of the First Memorandum of
Agreement as well as in the efforts to enter into the share purchase
agreement. Any subsequent agreement would be expected to be clearly
agreed upon with their counsels’ assistance and in writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto
v. People:170
[N]o 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.
....
. . . The test of incompatibility is whether or not the two obligations can
stand together, each one having its independent existence. If they cannot,
they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature
and not merely accidental. The incompatibility must take place in any of
the essential elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original
obligation.171 (Citations omitted)
There was no incompatibility between the original terms of the First
Memorandum of Agreement and the remittances made by respondent U-
Land for the shares of stock. These remittances were actually made with
the view that both parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent agreement inconsistent
with the provisions of the First Memorandum of Agreement.
Thus, no implied novation took place. In previous cases,172 this court has
consistently ruled that presumed novation or implied novation is not
deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central
Guaranty Corporation:173
Neither can novation be presumed in this case. As explained in Duñgo v.
Lopena:
"Novation by presumption has never been favored. To be sustained, it
need be established that the old and new contracts are incompatible in all
points, or that the will to novate appears by express agreement of the
parties or in acts of similar import."174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement,
respondent U-Land is entitled to the return of the amount it remitted to
petitioner Wellex. Petitioner Wellex is likewise entitled to the return of
the certificates of shares of stock and titles of land it delivered to
respondent U-Land. This is simply an enforcement of Section 9 of the
First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the periods
Obligations Part 2 | Page 35 of 143
contemplated by this stipulation will justify the parties’ retention of what
they received or would receive from each other.
III
Applying Article 1185 of the Civil
Code, the parties are obligated
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a
determinate time shall render the obligation effective from the moment
the time indicated has elapsed, or if it has become evident that the event
cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the nature
of the obligation.
Article 1185 provides that if an obligation is conditioned on the
nonoccurrence of a particular event at a determinate time, that obligation
arises (a) at the lapse of the indicated time, or(b) if it has become evident
that the event cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate
with each other within a 40-day period to enter into a share purchase
agreement. If no share purchase agreement was entered into, both parties
would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase agreement
that would give rise to the obligation to both parties to free each other
from their respective undertakings. This includes returning to each other
all that they received in pursuit of entering into the share purchase
agreement.
At the lapse of the 40-day period, the parties failed to enter into a share
purchase agreement. This lapse is the first circumstance provided for in
Article 1185 that gives rise to the obligation. Applying Article 1185, the
parties were then obligated to return to each other all that they had
received in order to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-
day period. They made subsequent transactions with the intention to enter
into the share purchase agreement. Despite that, they still failed to enter
into a share purchase agreement. Communication between the parties
ceased, and no further transactions took place.
It became evident that, once again, the parties would not enter into the
share purchase agreement. This is the second circumstance provided for
in Article 1185. Thus, the obligation to free each other from their
respective undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by
respondent U-Land, in the same way that respondent U-Land is obligated
to return the certificates of shares of stock and the land titles to petitioner
Wellex.
IV
Respondent U-Land is praying
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the
rescission of the First Memorandum of Agreement. This requires a
clarification of rescission under Article 1191, and rescission under Article
1381 of the Civil Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of
rescissible contracts: ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. ART. 1381. The following
contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom
to they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer
the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the litigants
or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to
rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to
obtain reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object
of the contract are legally in the possession of third persons who did not
act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss. Gotesco Properties v. Fajardo175 categorically stated
that Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not
merely terminate the contract and release the parties from further
obligations to each other, but abrogates the contract from its inception and
restores the parties to their original positions as if no contract has been
made. Consequently, mutual restitution, which entails the return of the
benefits that each party may have received as a result of the contract, is
thus required. To be sure, it has been settled that the effects of rescission
as provided for in Article 1385 of the Code are equally applicable to cases
under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article
1191. This means bringing the parties back to their original status prior to
the inception of the contract. Article 1385 of the Civil Code provides,
thus:
ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
for with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object
of the contract are legally in the possession of third persons who did not
act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.
This Court has consistently ruled that this provision applies to rescission
under Article 1191: [S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain
petitioners’ position that said Article 1385 does not apply to rescission
under Article 1191. x x x176(Emphasis from the original, citations
omitted)
Rescission, as defined by Article 1385, mandates that the parties must
return to each other everything that they may have received as a result of
the contract. This pertains to rescission or resolution under Article 1191,
as well as the provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or among
the parties. A prestation is the object of an obligation, and it is the conduct
Obligations Part 2 | Page 36 of 143
required by the parties to do or not to do, or to give.177 Parties may be
mutually obligated to each other, but the prestations of these obligations
are not necessarily reciprocal. The reciprocal prestations must necessarily
emanate from the same cause that gave rise to the existence of the
contract. This distinction is best illustrated by an established authority in
civil law, the late Arturo Tolentino:
This article applies only to reciprocal obligations. It has no application to
every case where two persons are mutually debtor and creditor of each
other. There must be reciprocity between them. Both relations must arise
from the same cause, such that one obligation is correlative to the other.
Thus, a person may be the debtor of another by reason of an agency, and
his creditor by reason of a loan. They are mutually obligated, but the
obligations are not reciprocal. Reciprocity arises from identity of cause,
and necessarily the two obligations are created at the same
time.178(Citation omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the
cause in perfecting the existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156,
Civil Code). The obligation is constituted upon the concurrence of the
essential elements thereof, viz: (a) The vinculum juris or juridical tie
which is the efficient cause established by the various sources of
obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b)
the object which is the prestation or conduct, required to be observed (to
give, to do or not to do); and (c) the subject-persons who, viewed from
the demandability of the obligation, are the active (obligee) and the
passive (obligor) subjects.180
The cause is the vinculum juris or juridical tie that essentially binds the
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to the
existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The
wronged party is entitled to rescission or resolution under Article 1191,
and even the payment of damages. It is a principal action precisely
because it is a violation of the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission
where creditors or even third persons not privy to the contract can file an
action due to lesion or damage as a result of the contract. In Ong v. Court
of Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil
Code, is a remedy granted by law to the contracting parties and even to
third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their
condition at the moment prior to the celebration of the contract. It implies
a contract, which even if initially valid, produces a lesion or a pecuniary
damage to someone.182(Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under
Article 1191 and rescission under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission
applicable to reciprocal obligations. Reciprocal obligations are those
which arise from the same cause, and in which each party is a debtor and
a creditor of the other, such that the obligation of one is dependent upon
the obligation of the other. They are to be performed simultaneously such
that the performance of one is conditioned upon the simultaneous
fulfillment of the other. Rescission of reciprocal obligations under Article
1191 of the New Civil Code should be distinguished from rescission of
contracts under Article 1383. Although both presuppose contracts validly
entered into and subsisting and both require mutual restitution when
proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term which
was used in the old Civil Code, from which the article was based, was
"resolution." Resolution is a principal action which is based on breach of
a party, while rescission under Article 1383 is a subsidiary action limited
to cases of rescissionfor lesion under Article 1381 of the New Civil Code,
which expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one fourth of the value of the
things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any
manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the litigants
or of competent judicial authority; [and]
5. All other contracts specially declared by law to be subject to
rescission.183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381,
there is no need for reciprocal prestations to exist between or among the
parties. All that is required is that the contract should be among those
enumerated in Article 1381 for the contract to be considered rescissible.
Unlike Article 1191, rescission under Article 1381 must be a subsidiary
action because of Article 1383.
Contrary to petitioner Wellex’s argument, this is not rescission under
Article 1381 of the Civil Code. This case does not involve prejudicial
transactions affecting guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent actions on the part
of the debtor who is in the process of transferring or alienating property
that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other
creditors. The actions of the parties involving the terms of the First
Memorandum of Agreement do not fall under any of the enumerated
contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under
Article 1191, which is a principal action. Justice J.B.L. Reyes’ concurring
opinion in the landmark case of Universal Food Corporation v. Court of
Appeals184gave a definitive explanation on the principal character of
resolution under Article 1191 and the subsidiary nature of actions under
Article 1381:
The rescission on account of breach of stipulations is not predicated on
injury to economic interests of the party plaintiff but on the breach of faith
by the defendant, that violates the reciprocity between the parties. It is not
a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to
anything other than the culpable breach of his obligations by the
defendant. This rescission is a principal action retaliatory in character, it
being unjust that a party be held bound to fulfill his promises when the
other violates his. As expressed in the old Latin aphorism: "Non servanti
fidem, non est fides servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison detre as well as the measure of the right
to rescind. Hence, where the defendant makes good the damages caused,
the action cannot be maintained or continued, as expressly provided in
Articles 1383 and 1384. But the operation of these two articles is limited
to the cases of rescission for lesión enumerated in Article 1381 of the Civil
Code of the Philippines, and does not apply to cases under Article 1191.185
Rescission or resolution under Article 1191, therefore, is a principal
action that is immediately available to the party at the time that the
reciprocal prestation was breached. Article 1383 mandating that
rescission be deemed a subsidiary action cannot be applicable to
rescission or resolution under Article 1191. Thus, respondent U-Land
correctly sought the principal relief of rescission or resolution under
Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which
arose from the same cause: the desire of both parties to enter into a share
purchase agreement that would allow both parties to expand their
respective airline operations in the Philippines and other neighboring
countries.
V
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against
respondent U-Land’s right to rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this
court specifically stated that the parties entered into a contract of sale, and
their reciprocal obligations had already been fulfilled:186
There is no dispute that the parties entered into a contract of sale as
distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the
ownership of and to deliver a determinate thing to the buyer, who in turn,
is obligated to pay a price certain in money or its equivalent (Art. 1458,
Civil Code). From the respondents’ own arguments, we note that they
Obligations Part 2 | Page 37 of 143
have fully complied with their part of the reciprocal obligation. As a
matter of fact, they have already parted with the title as evidenced by the
transfer certificate of title in the petitioners’ name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the
deed of mortgage. The payments on an installment basis secured by the
execution of a mortgage took the place of a cash payment. In other words,
the relationship between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and consummated. It is
already one of a mortgagor and a mortgagee. In consideration of the
petitioners’ promise to pay on installment basis the sum they owe the
respondents, the latter have accepted the mortgage as security for the
obligation.
The situation in this case is, therefore, different from that envisioned in
the cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of
obligations is not with respect to the perfected contract of sale but in the
obligations created by the mortgage contract. The remedy of rescission is
not a principal action retaliatory in character but becomes a subsidiary
one which by law is available only in the absence of any other legal
remedy. (Art. 1384, Civil Code). Foreclosure here is not only a remedy
accorded by law but, as earlier stated, is a specific provision found in the
contract between the parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not
rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It is
an agreement to negotiate with the view of entering into a share purchase
agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this
court held that non-payment of consideration of contracts only gave rise
to the right to sue for collection, but this non-payment cannot serve as
proof of a simulated contract.188 The case did not rule that the vendor has
no obligation to deliver the thing sold if the buyer fails to fully pay the
price required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts
proves their simulation. We disagree. Nonpayment, at most, gives him
only the right to sue for collection. Generally, in a contract of sale,
payment of the price is a resolutory condition and the remedy of the seller
is to exact fulfillment or, in case of a substantial breach, to rescind the
contract under Article 1191 of the Civil Code. However, failure to pay is
not even a breach, but merely an event which prevents the vendor’s
obligation to convey title from acquiring binding force.189 (Citations
omitted) This court’s statement in Villaflor regarding rescission under
Article 1191 was a mere obiter dictum. In Land Bank of the Philippines
v. Suntay,190 this court discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court
upon some question of law that is not necessary in the determination of
the case before the court. It is a remark made, or opinion expressed, by a
judge, in his decision upon a cause by the way, that is, incidentally or
collaterally, and not directly upon the question before him, or upon a point
not necessarily involved in the determination of the cause, or introduced
by way of illustration, or analogy or argument. It does not embody the
resolution or determination of the court, and is made without argument,
or full consideration of the point. It lacks the force of an adjudication,
being a mere expression of an opinion with no binding force for purposes
of res judicata.191 (Citations omitted)
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses
Agustin v. Court of Appeals is also misplaced. In these cases, this court
held that there can be no rescission for an obligation that is nonexistent,
considering that the suspensive condition that will give rise to the
obligation has not yet happened. This is based on an allegation that the
contract involved is a contract to sell. In a contract to sell, the failure of
the buyer to pay renders the contract without effect. A suspensive
condition is one whose non-fulfillment prevents the existence of the
obligation.192 Payment of the purchase price, therefore, constitutes a
suspensive condition in a contract to sell. Thus, this court held that non-
remittance of the full price allowed the seller to withhold the transfer of
the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell.
Entering into the share purchase agreement or the joint development
agreement remained a stipulation that the parties themselves agreed to
pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share
purchase agreement was necessary to put into effect respondent U-Land’s
purchase of the shares of stock. This is the stipulation indicated in this
memorandum of agreement. There was no suspensive condition of full
payment of the purchase price needed to execute either the share purchase
agreement or the joint development agreement. Upon the execution of the
share purchase, the obligation of petitioner Wellex to transfer the shares
of stock and of respondent U-Land to pay the price of these shares would
have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the
same effect as rescission or resolution under Article 1191 of the Civil
Code. The parties are obligated to return to each other all that they may
have received as a result of the breach by petitioner Wellex of the
reciprocal obligation. Therefore, the Court of Appeals did not err in
affirming the rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court
found that petitioner Wellex committed fraud by inducing respondent U-
Land to purchase APIC shares and PEC shares and by leading the latter
to believe that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for
rescission or resolution under Article 1191. The existence of fraud must
be established if the rescission prayed for is the rescission under Article
1381.
However, the existence of fraud is a question that the parties have raised
before this court. To settle this question with finality, this court will
examine the established facts and determine whether petitioner Wellex
indeed defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court
enumerated the relevant provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former’s special
knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n) The distinction between fraud as a ground for
rendering a contract voidable or as basis for an award of damages is
provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
(1270)194
Tankeh further discussed the degree of evidence needed to prove the
existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This
standard of proof is derived from American common law. It is less than
proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is
higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to be
satisfied. The imputation of fraud in a civil case requires the presentation
of clear and convincing evidence. Mere allegations will not suffice to
sustain the existence of fraud. The burden of evidence rests on the part of
the plaintiff or the party alleging fraud. The quantum of evidence is such
that fraud must be clearly and convincingly shown.195
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s
witness before the trial court, testified that Mr. Gatchalian approached
respondent U-Land on two (2) separate meetings to propose entering into
Obligations Part 2 | Page 38 of 143
an agreement for joint airline operations in the Philippines. Thus, the
parties entered into the First Memorandum of Agreement. Respondent U-
Land primarily anchors its allegation of fraud against petitioner Wellex
on the existence of the second preambular clause of the First
Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
admitted that "[t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares."196 In that brief, it argued that the
parties were already in the process of partially executing the First
Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud.
Based on the established facts, respondent U-Land was unable to clearly
convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain
whether APC was indeed a subsidiary of APIC. This is a multimillion
dollar transaction, and both parties admitted that the share purchase
agreement underwent several draft creations. Both parties admitted the
participation of their respective counsels in the drafting of the First
Memorandum of Agreement. Respondent U-Land had every opportunity
to ascertain the ownership of the shares of stock. Respondent U-Land
itself admitted that it was not contesting petitioner Wellex’s ownership of
the APIC shares or APC shares; hence, it was not contesting the existence
of the Second Memorandum of Agreement. Upon becoming aware of
petitioner Wellex’s representations concerning APIC’s ownership or
control of APC as a subsidiary, respondent U-Land continued to make
remittances totalling the amount sought to be rescinded. It had the option
to opt out of negotiations after the lapse of the 40-day period. However,
it proceeded to make the remittances to petitioner Wellex and proceed
with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to
the First Memorandum of Agreement. To constitute fraud under Article
1awp++i1
1338, the words and machinations must have been so insidious or
deceptive that the party induced to enter into the contract would not have
agreed to be bound by its terms if that party had an opportunity to be
aware of the truth.197 Respondent U-Land was already aware that APC
was not a subsidiary of APIC after the 40-day period. Still, it agreed to be
bound by the First Memorandum of Agreement by making the
remittances from June 30 to September 25, 1998.198 Thus, petitioner
Wellex’s failure to inform respondent U-Land that APC was not a
subsidiary of APIC when the First Memorandum of Agreement was being
executed did not constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is
free of culpability. By failing to inform respondent U-Land that APC was
not yet a subsidiary of APIC at the time of the execution of the First
Memorandum of Agreement, petitioner Wellex violated Article 1159 of
the Civil Code. Article 1159 reads:
ART. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning
or statutory definition, and it encompasses, among other things, an honest
belief, the absence of malice and the absence of design to defraud or to
seek an unconscionable advantage. It implies honesty of intention, and
freedom from knowledge of circumstances which ought to put the holder
upon inquiry. The essence of good faith lies in an honest belief in the
validity of one’s right, ignorance of a superior claim and absence of
intention to overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the
pending share purchase agreement in good faith. This duty included
providing a full disclosure of the nature of the ownership of APIC in APC.
Unilaterally compelling respondent U-Land to remit money to finalize the
transactions indicated in the Second Memorandum of Agreement cannot
constitute good faith.
The absence of fraud in a transaction does not mean that rescission under
Article 1191 is not proper. This case is not an action to declare the First
Memorandum of Agreement null and void due to fraud at the inception of
the contract or dolo causante. This case is not an action for fraud based
on Article 1381 of the Civil Code. Rescission or resolution under Article
1191 is predicated on the failure of one of the parties in a reciprocal
obligation to fulfill the prestation as required by that obligation. It is not
based on vitiation of consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3
million to petitioner Wellex does not justify the actions of the latter in
refusing to return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. 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.
The execution of the joint development agreement was contingent on the
execution of the share purchase agreement. This is provided for in
1âwp hi1
Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is "[s]imultaneous."201 Thus, the failure
of the share purchase agreement’s execution would necessarily mean the
failure of the joint development agreement’s execution.
Section 9 of the First Memorandum of Agreement provides that should
the parties fail to execute the agreement, they would be released from their
mutual obligations. Had respondent U-Land paid the US$3 million and
petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of
the joint development agreement, they would have been obligated to
return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be
interpreted together. Since the parties were unable to agree on a final share
purchase agreement and there was no exchange of money or shares of
stock due to the continuing negotiations, respondent U-Land was no
longer obliged to provide the money for the real estate development
projects. The payment of the US$3 million was for pursuing the real estate
development projects under the joint development agreement. There
being no joint development agreement, the obligation to deliver the US$3
million and the delivery of the PEC shares for that purpose were no longer
incumbent upon the parties.
VIII
Respondent U-Land was not
obligated to exhaust the "securities"
given by petitioner Wellex
Contrary to petitioner Wellex’s assertion, there is no obligation on the
part of respondent U-Land to exhaust the "securities" given by petitioner
Wellex. No such meeting of the minds to create a guarantee or surety or
any other form of security exists. The principal obligation is not a loan or
an obligation subject to the conditions of sureties or guarantors under the
Civil Code. Thus, there is no need to exhaust the securities given to
respondent U-Land, and there is no need for a legal condition where
respondent U-Land should pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of
stock and the land titles were not in the nature of a pledge or
mortgage.202 It received the certificates of shares of stock and the land
titles with an understanding that the parties would subsequently enter a
share purchase agreement. There being no share purchase agreement,
respondent U-Land is obligated to return the certificates of shares of stock
and the land titles to petitioner Wellex.
The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of the
First Memorandum of Agreement has the same effect as the rescission or
resolution prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be
based on the say-so of each party and is a fragile setting for good business
transactions. It will contribute to the unpredictability of the market as it
would provide courts with extraordinary expectations to determine the
business actor's intentions. The parties appear to be responsible
businessmen who know that their expectations and obligations should be
clearly articulated between them. They have the resources to engage legal
representation. Indeed, they have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot interfere
in the bargains, good or bad, entered into by the parties. Our duty is to
affirm legal expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional
Trial Court in Civil Case No. 99-1407 and the Decision of the Court of
Obligations Part 2 | Page 39 of 143
Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against
petitioner The Wellex Group, Inc.
SO ORDERED.
Swire Realty Development Corporation v. Yu
March 9,2015
G.R. No. 207133
SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner,
vs.
JAYNE YU, Respondent.
DECISION
PERALTA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the 1997
Rules of Civil Procedure which seeks to reverse and set aside the
Decision1 dated January 24, 2013 and Resolution2 dated April 30, 2013
of the Court of Appeals (CA) in CA-G.R. SP No. 121175.
The facts follow.
Respondent Jayne Yu and petitioner Swire Realty Development
Corporation entered into a Contract to Sell on July 25, 1995 covering one
residential condominium unit, specifically Unit 3007 of the Palace of
Makati, located at P. Burgos comer Caceres Sts., Makati City, with an
area of 137.30 square meters for the total contract price of P7,519,371.80,
payable in equal monthly installments until September 24, 1997.
Respondent likewise purchased a parking slot in the same condominium
building for P600,000.00.
On September 24, 1997, respondent paid the full purchase price of
P7,519,371.80 for the unit while making a down payment of P20,000.00
for the parking lot. However, notwithstanding full payment of the contract
price, petitioner failed to complete and deliver the subject unit on time.
This prompted respondent to file a Complaint for Rescission of Contract
with Damages before the Housing and Land Use Regulatory Board
(HLURB) Expanded National Capital Region Field Office (ENCRFO).
On October 19, 2004, the HLURB ENCRFO rendered a
Decision3 dismissing respondent’s complaint. It ruled that rescission is
not permitted for slight or casual breach of the contract but only for such
breaches as are substantial and fundamental as to defeat the object of the
parties in making the agreement. It disposed of the case as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered ordering [petitioner] the following:
1.To finish the subject unit as pointed out in the inspection Report
2.To pay [respondent] the following:
a.the amount of P100,000 as compensatory damages for the minor
irreversible defects in her unit [respondent], or, in the alternative, conduct
the necessary repairs on the subject unit to conform to the intended
specifications;
b.moral damages of P20,000.00
c.Attorney’s fees of P20,000.00
On the other hand, [respondent] is hereby directed to immediately update
her account insofar as the parking slot is concerned, without interest,
surcharges or penalties charged therein.
All other claims and counterclaims are hereby dismissed for lack of merit.
IT IS SO ORDERED.4
Respondent then elevated the matter to the HLURB Board of
Commissioners.
In a Decision5 dated March 30, 2006, the HLURB Board of
Commissioners reversed and set aside the ruling of the HLURB ENCRFO
and ordered the rescission of the Contract to Sell, ratiocinating:
We find merit in the appeal. The report on the ocular inspection conducted
on the subject condominium project and subject unit shows that the
amenities under the approved plan have not yet been provided as of May
3, 2002, and that the subject unit has not been delivered to [respondent]
as of August 28, 2002, which is beyond the period of development of
December 1999 under the license to sell. The delay in the completion of
the project as well as of the delay in the delivery of the unit are breaches
of statutory and contractual obligations which entitles [respondent] to
rescind the contract, demand a refund and payment of damages.
The delay in the completion of the project in accordance with the license
to sell also renders [petitioner] liable for the payment of administrative
fine.
Wherefore, the decision of the Office below is set aside and a new
decision is rendered as follows:
1.Declaring the contract to sell as rescinded and directing [petitioner] to
refund to [respondent] the amount of P7,519,371.80 at 6% per annum
from the time of extrajudicial demand on January 05, 2001: subject to
computation and payment of the correct filing fee;
2.Directing [petitioner] to pay respondent attorney’s fees in the amount
of P20,000.00;
3.Directing [petitioner] to pay an administrative fine of P10,000.00 for
violation of Section 20, in relation to Section 38 of P.D. 957:
SO ORDERED.6
Petitioner moved for reconsideration, but the same was denied by the
HLURB Board of Commissioners in a Resolution7 dated June 14, 2007.
Unfazed, petitioner appealed to the Office of the President (OP) on
August 7, 2007.
In a Decision8 dated November 21, 2007, the OP, through then Deputy
Executive Secretary Manuel Gaite, dismissed petitioner’s appeal on the
ground that it failed to promptly file its appeal before the OP. It held:
Records show that [petitioner] received its copy of the 30 March 2006
HLURB Decision on 17 April 2006 and instead of filing an appeal, it
opted first to file a Motion for Reconsideration on 28 April 2006 or eleven
(11) days thereafter. The said motion interrupted the 15-day period to
appeal.
On 23 July 2007, [petitioner] received the HLURB Resolution dated 14
June 2007 denying the Motion for Reconsideration.
Based on the ruling in United Overseas Bank Philippines, Inc. v. Ching
(486 SCRA 655), the period to appeal decisions of the HLURB Board of
Commissioners to the Office of the President is 15 days from receipt
thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of P.D. No.
1344 which are special laws that provide an exception to Section 1 of
Administrative Order No. 18.
Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, Series
of 1987 provides that:
The time during which a motion for reconsideration has been pending
with the Ministry/Agency concerned shall be deducted from the period of
appeal. But where such a motion for reconsideration has been filed during
office hours of the last day of the period herein provided, the appeal must
be made within the day following receipt of the denial of said motion by
the appealing party (Underscoring supplied)
xxxx
Accordingly, the [petitioner] had only four (4) days from receipt on 23
July 2007 of HLURB Resolution dated 14 June 2007, or until 27 July
2007 to file the Notice of Appeal before this Office. However, [petitioner]
filed its appeal only on 7 August 2007 or eleven (11) days late.
Thus, this Office need not delve on the merits of the appeal filed as the
records clearly show that the said appeal was filed out of time.
WHEREFORE, premises considered, [petitioner]’s appeal is hereby
DISMISSED, and the HLURB Decision dated 30 March 2006 and
HLURB Resolution dated 14 June 2007 are hereby AFFIRMED.
SO ORDERED.9
Immediately thereafter, petitioner filed a motion for reconsideration
against said decision.
In a Resolution10 dated February 17, 2009, the OP, through then
Executive Secretary Eduardo Ermita, granted petitioner’s motion and set
aside Deputy Executive Secretary Gaite’s decision. It held that after a
careful and thorough evaluation and study of the records of the case, the
OP was more inclined to agree with the earlier decision of the HLURB
ENCRFO as it was more in accord with facts, law and jurisprudence
relevant to the case. Thus:
WHEREFORE, premises considered, the instant Motion for
Reconsideration is hereby GRANTED. The Decision and Resolution of
the HLURB Third Division Board of Commissioners, dated March 30,
2006 and June 14, 2007, respectively, are hereby SET ASIDE, and the
Obligations Part 2 | Page 40 of 143
HLURB ENCRFO Decision dated October 19, 2004 is hereby
REINSTATED.
SO ORDERED.11
Respondent sought reconsideration of said resolution, however, the same
was denied by the OP in a Resolution12dated August 18, 2011.
Consequently, respondent filed an appeal to the CA.
In a Decision dated January 24, 2013, the CA granted respondent’s appeal
and reversed and set aside the Order of the OP. The fallo of its decision
reads:
WHEREFORE, the Petition is hereby GRANTED. The assailed
Resolution dated 17 February 2009 and Order dated 18 August 2011 of
the Office of the President, in O.P. Case No. 07-H-283, are hereby
REVERSED and SET ASIDE. Accordingly, the Decision dated 30 March
2006 and Resolution dated 14 June 2007 of the HLURB Board of
Commissioners in HLURB Case No. REM-A-050127-0014, are
REINSTATED.
SO ORDERED.13
Petitioner moved for reconsideration, however, the CA denied the same
in a Resolution dated April 30, 2013.
Hence, the present petition wherein petitioner raises the following
grounds to support its petition:
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE
LEGAL PRECEPTS THAT:
A.TECHNICAL RULES ARE NOT BINDING UPON
ADMINISTRATIVE AGENCIES; and
B.RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH
COMPLAINED OF IS SUBSTANTIAL AS TO DEFEAT THE OBJECT
OF THE PARTIES IN ENTERING INTO THE AGREEMENT.14
In essence, the issues are: (1) whether petitioner’s appeal was timely filed
before the OP; and (2) whether rescission of the contract is proper in the
instant case.
We shall resolve the issues in seriatim.
First, the period to appeal the decision of the HLURB Board of
Commissioners to the Office of the President has long been settled in the
case of SGMC Realty Corporation v. Office of the President,15 as
reiterated in the cases of Maxima Realty Management and Development
Corporation v. Parkway Real Estate Development Corporation16and
United Overseas Bank Philippines, Inc. v. Ching.17
In the aforementioned cases, we ruled that the period to appeal decisions
of the HLURB Board of Commissioners is fifteen (15) days from receipt
thereof pursuant to Section 1518 of PD No. 95719 and Section 220 of PD
No. 134421which are special laws that provide an exception to Section 1
of Administrative Order No. 18. Thus, in the SGMC Realty Corporation
v. Office of the President case, the Court explained:
As pointed out by public respondent, the aforecited administrative order
allows aggrieved party to file its appeal with the Office of the President
within thirty (30) days from receipt of the decision complained of.
Nonetheless, such thirty-day period is subject to the qualification that
there are no other statutory periods of appeal applicable. If there are
special laws governing particular cases which provide for a shorter or
longer reglementary period, the same shall prevail over the thirty-day
period provided for in the administrative order. This is in line with the
rule in statutory construction that an administrative rule or regulation, in
order to be valid, must not contradict but conform to the provisions of the
enabling law.
We note that indeed there are special laws that mandate a shorter period
of fifteen (15) days within which to appeal a case to public respondent.
First, Section 15 of Presidential Decree No. 957 provides that the
decisions of the National Housing Authority (NHA) shall become final
and executory after the lapse of fifteen (15) days from the date of receipt
of the decision. Second, Section 2 of Presidential Decree No. 1344 states
that decisions of the National Housing Authority shall become final and
executory after the lapse of fifteen (15) days from the date of its receipt.
The latter decree provides that the decisions of the NHA is appealable
only to the Office of the President. Further, we note that the regulatory
functions of NHA relating to housing and land development has been
transferred to Human Settlements Regulatory Commission, now known
as HLURB. x x x22
Records show that petitioner received a copy of the HLURB Board of
Commissioners’ decision on April 17, 2006. Correspondingly, it had
fifteen days from April 17, 2006 within which to file its appeal or until
May 2, 2006. However, on April 28, 2006, or eleven days after receipt of
the HLURB Board of Commissioner’s decision, it filed a Motion for
Reconsideration, instead of an appeal.
Concomitantly, Section 1 of Administrative Order No. 1823 provides that
the time during which a motion for reconsideration has been pending with
the ministry or agency concerned shall be deducted from the period for
appeal. Petitioner received the HLURB Board Resolution denying its
Motion for Reconsideration on July 23, 2007 and filed its appeal only on
August 7, 2007. Consequently therefore, petitioner had only four days
from July 23, 2007, or until July 27, 2007, within which to file its appeal
to the OP as the filing of the motion for reconsideration merely suspended
the running of the 15-day period. However, records reveal that petitioner
only appealed to the OP on August 7, 2007, or eleven days late. Ergo, the
HLURB Board of Commissioners’ decision had become final and
executory on account of the fact that petitioner did not promptly appeal
with the OP.
In like manner, we find no cogent reason to exempt petitioner from the
effects of its failure to comply with the rules.
In an avuncular case, we have held that while the dismissal of an appeal
on purely technical grounds is concededly frowned upon, it bears
emphasizing that the procedural requirements of the rules on appeal are
not
harmless and trivial technicalities that litigants can just discard and
disregard at will. Neither being a natural right nor a part of due process,
the rule is settled that the right to appeal is merely a statutory privilege
which may be exercised only in the manner and in accordance with the
provisions of the law.24
Time and again, we have held that rules of procedure exist for a noble
purpose, and to disregard such rules, in the guise of liberal construction,
would be to defeat such purpose. Procedural rules are not to be disdained
as mere technicalities. They may not be ignored to suit the convenience
of a party.25 The reason for the liberal application of the rules before
quasi- judicial agencies cannot be used to perpetuate injustice and hamper
the just resolution of the case. Neither is the rule on liberal construction a
license to disregard the rules of procedure.26
Thus, while there may be exceptions for the relaxation of technical rules
principally geared to attain the ends of justice, petitioner’s fatuous belief
that it had a fresh 15-day period to elevate an appeal with the OP is not
the kind of exceptional circumstance that merits relaxation.
Second, Article 1191 of the Civil Code sanctions the right to rescind the
obligation in the event that specific performance becomes impossible, to
wit:
Article 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
Basic is the rule that the right of rescission of a party to an obligation
under Article 1191 of the Civil Code is predicated on a breach of faith by
the other party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligor’s failure to comply with
an existing obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence of
any just cause for the court to determine the period of compliance, the
court shall decree the rescission.27
In the instant case, the CA aptly found that the completion date of the
condominium unit was November 1998 pursuant to License No. 97-12-
3202 dated November 2, 1997 but was extended to December 1999 as per
License to Sell No. 99-05-3401 dated May 8, 1999. However, at the time
of the ocular inspection conducted by the HLURB ENCRFO, the unit was
not yet completely finished as the kitchen cabinets and fixtures were not
yet installed and the agreed amenities were not yet available. Said
inspection report states:
Obligations Part 2 | Page 41 of 143
May 3, 2002:
1.The unit of the [respondent] is Unit 3007, which was labeled as P2-07,
at the Palace of Makati, located at the corner of P. Burgos Street and
Caceres Street, Poblacion, Makati City. Based on the approved plans, the
said unit is at the 26th Floor.
2.During the time of inspection, the said unit appears to be completed
except for the installation of kitchen cabinets and fixtures.
3.Complainant pinpointed to the undersigned the deficiencies as follows:
a.The delivered unit has high density fiber (HDF) floorings instead of
narra wood parquet.
b.The [petitioners] have also installed baseboards as borders instead of
pink porrino granite boarders.
c.Walls are newly painted by the respondent and the alleged obvious signs
of cladding could not be determined.
d.Window opening at the master bedroom conforms to the approved
plans. As a result it leaves a 3 inches (sic) gap between the glass window
and partitioning of the master’s bedroom.
e.It was verified and confirmed that a square column replaced the round
column, based on the approved plans.
f.At the time of inspection, amenities such as swimming pool and change
room are seen at the 31st floor only. These amenities are reflected on the
27th floor plan of the approved condominium plans. Health spa for men
and women, Shiatsu Massage Room, Two-Level Sky Palace Restaurant
and Hall for games and entertainments, replete with billiard tables, a bar,
indoor golf with spectacular deck and karaoke rooms were not yet
provided by the [petitioner].
g.The [master’s] bedroom door bore sign of poor quality of workmanship
as seen below.
h.The stairs have been installed in such manner acceptable to the
undersigned.
i.Bathrooms and powder room have been installed in such manner
acceptable to the undersigned.28
From the foregoing, it is evident that the report on the ocular inspection
conducted on the subject condominium project and subject unit shows
that the amenities under the approved plan have not yet been provided as
of May 3, 2002, and that the subject unit has not been delivered to
respondent as of August 28, 2002, which is beyond the period of
development of December 1999 under the license to sell.
Incontrovertibly, petitioner had incurred delay in the performance of its
obligation amounting to breach of contract as it failed to finish and deliver
the unit to respondent within the stipulated period. The delay in the
completion of the project as well as of the delay in the delivery of the unit
are breaches of statutory and contractual obligations which entitle
respondent to rescind the contract, demand a refund and payment of
damages.
WHEREFORE, premises considered, the instant petition is DENIED. The
Decision dated January 24, 2013 and Resolution dated April 30, 2013 of
the Court of Appeals in CA-G.R. SP No. 121175 are hereby AFFIRMED,
with MODIFICATION that moral damages be awarded in the amount of
P20,000.00.
SO ORDERED.
J OINT O BLIGATION
Berot v. Siapno
G.R. No. 188944 July 9, 2014
SPOUSES RODOLFO BEROT AND LILIA BEROT, Petitioners,
vs.
FELIPE C. SIAPNO, Respondent.
DECISION
SERENO, CJ:
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997
Revised Rules on Civil Procedure assailing the Court of Appeals (CA)
Decision dated 29 January 2009 in CA-G.R. CV No. 87995.1 The assailed
CA Decision affirmed with modification the Decision2 in Civil Case No.
2004-0246-D issued by the Regional Trial Court (RTC), First Judicial
Region of Dagupan City, Branch 42. The RTC Decision allowed the
foreclosure of a mortgaged property despite the objections of petitioners
claiming, among others, that its registered owner was impleaded in the
suit despite being deceased.
THE FACTS
Considering that there are no factual issues in this case, we adopt the
findings of fact of the CA, as follows:
On May 23, 2002, Macaria Berot (or "Macaria") and spouses Rodolfo A.
Berot (or "appellant") and Lilia P. Berot (or "Lilia") obtained a loan from
Felipe C. Siapno (or "appellee") in the sum of ₱250,000.00, payable
within one year together with interest thereon at the rate of 2% per annum
from that date until fully paid.
As security for the loan, Macaria, appellant and Lilia (or "mortgagors",
when collectively)mortgaged to appellee a portion, consisting of 147
square meters (or "contested property"), of that parcel of land with an area
of 718 square meters, situated in Banaoang, Calasiao, Pangasinan and
covered by Tax Declaration No. 1123 in the names of Macaria and her
husband Pedro Berot (or "Pedro"), deceased. On June 23, 2003, Macaria
died.
Because of the mortgagors’ default,appellee filed an action against them
for foreclosure of mortgageand damages on July 15, 2004 in the Regional
Trial Court of Dagupan City (Branch 42). The action was anchored on the
averment that the mortgagors failed and refused to pay the
abovementioned sum of ₱250,000.00 plus the stipulated interest of 2%
per month despite lapse of one year from May 23, 2002.
In answer, appellant and Lilia (or "Berot spouses", when collectively
[referred to]) alleged that the contested property was the inheritance of
the former from his deceased father, Pedro; that on said property is their
family home; that the mortgage is void as it was constituted over the
family home without the consent of their children, who are the
beneficiaries thereof; thattheir obligation is only joint; and that the lower
court has no jurisdiction over Macaria for the reason that no summons
was served on her as she was already dead.
With leave of court, the complaint was amended by substituting the estate
of Macaria in her stead. Thus, the defendants named in the amended
complaint are now the "ESTATE OF MACARIA BEROT, represented
by Rodolfo A. Berot, RODOLFO A. BEROT and LILIA P. BEROT".
After trial, the lower court rendered a decision dated June 30, 2006, the
decretal portion of which reads:
WHEREFORE, the Court hereby renders judgment allowing the
foreclosure of the subject mortgage. Accordingly, the defendants are
hereby ordered to pay to the plaintiff within ninety (90) days from notice
of thisDecision the amount of ₱250,000.00 representing the principal
loan, with interest at two (2%) percent monthly from February, 2004 the
month when they stopped paying the agreed interest up to satisfaction of
the claim and 30% of the amount to be collected as and for attorney’s fees.
Defendants are also assessed to pay the sum of ₱20,000.00 as litigation
expenses and another sum of ₱10,000.00 as exemplary damages for their
refusal to pay their aforestated loan obligation. If within the aforestated
90-day period the defendants fail to pay plaintiff the above-mentioned
amounts, the sale of the property subject of the mortgage shall be made
and the proceeds of the sale to be delivered to the plaintiff to cover the
debt and charges mentioned above, and after such payments the excess, if
any shall be delivered to the defendants.
SO ORDERED.
Appellant filed a motion for reconsideration of the decision but it was
denied per order dated September 8, 2006. Hence, this appeal interposed
by appellant imputing errors to the lower court in –
1. SUBSTITUTING AS DEFENDANT THE ESTATE OF MACARIA
BEROT WHICH HAS NO PERSONALITY TO SUE AND TO BE
SUED;
2. APPOINTING RODOLFO BEROT AS A REPRESENTATIVE OF
THE ESTATE OF THE DECEASED MACARIA BEROT TO THE
PREJUDICE OF THE OTHER HEIRS, GRANTING FOR THE SAKE
OF ARGUMENT THAT THE ESTATE OF MACARIA BEROT HAS A
PERSONALITY TO SUE AND BE SUED;
3. NOT FINDING THE MORTGAGE NULL AND VOID, WHICH
WAS ENTERED INTOWITHOUT THE WRITTEN CONSENT OF
THE BENEFICIARIES OF THE FAMILY HOME WHO WERE OF
LEGAL AGE;
4. MAKING DEFENDANTS LIABLE FOR THE ENTIRE
OBLIGATION OF PH250,000.00, WHEN THE OBLIGATION IS
ONLY JOINT;
Obligations Part 2 | Page 42 of 143
5. IMPOSING ATTORNEY’S FEE(S) IN THE DISPOSITIVE
PORTION WITHOUT MAKING A FINDING OF THE BASIS
THEREOF IN THE BODY; and
6. IMPOSING EXEMPLARY DAMAGES AND LITIGATION
EXPENSES.
Appellant contends that the substitution of the estate of Macaria for her is
improper as the estate has no legal personality to be sued.3
On 29 January 2009, the CA, through its Seventh Division, promulgated
a Decision that affirmed the RTC Decision but with modification where
it deleted the award of exemplary damages, attorney’s fees and expenses
of litigation. The appellate court explained in its ruling that petitioners
correctly argued that a decedent’s estate is not a legal entity and thus,
cannot sue or be sued. However,it noted that petitioners failed to object
to the trial court’s exercise of jurisdiction over the estate of Macaria when
the latter was impleaded by respondents by amending the original
complaint.4 Adopting the rationale of the trial court on this matter, the CA
held:
As aptly observed by the trial court:
It may be recalled that when the plaintiff filed his Amended Complaint
substituting the estate of Macaria Berot in place of Macaria Berot as party
defendant, defendants made no objection thereto. Not even an amended
answer was filed by the defendants questioning the substitution of the
estate of Macaria Berot. For these reasons, the defendants are deemed to
have waivedany objection on the personality of the estate of Macaria
Berot. Section 1, Rule 9 of the Rules of Court provides that, ‘Defenses
and objections not pleaded either in a motion to dismiss or in the answer
are deemed waived. (Order dated September 8, 2006)5 [Underscoring
supplied]
The CA also found the action of respondent to be procedurally correct
under Section 7, Rule 86 of the Rules ofCourt, when it decided to
foreclose on the mortgage of petitioner and prove his deficiency as an
ordinary claim.6The CA did not make a categorical finding that the nature
of the obligation was joint or solidary on the part of petitioners.7 It neither
sustained their argument that the mortgage was invalidfor having
beenconstituted over a family home without the written consent of the
beneficiaries who were of legal age.8 However, it upheld their argument
that the award of exemplary damages and attorney’s fees in favor
ofrespondent was improper for lack of basis,9 when it ruled thus:
WHEREFORE, the appealed decision is AFFIRMED with
MODIFICATION in that the award of exemplary damages, attorney’s
fees and expenses of litigation is DELETED.
SO ORDERED.10
Petitioners moved for the reconsideration of the CA Decision, but their
motion was denied through a Resolution dated 9 July 2009.11 Aggrieved
by the denial of their Motion for Reconsideration, they now come to us
through a Petition for Review on Certiorari under Rule 45, proffering
purely questions of law.
THE ISSUES
The following are the issues presented by petitioners for resolution by this
Court:
The Court of Appeals erred in:
1. Holding that the intestate estate of Macaria Berot could be a proper
party by waiver expressly or impliedly by voluntary appearance;
2. In not holding that the obligation is joint12
THE COURT’S RULING
We DENYthe Petition for lack of merit.
Petitioners were correct when they argued that upon Macaria Berot’s
death on 23 June 2003, her legal personality ceased, and she could no
longer be impleaded as respondent in the foreclosure suit. It is also true
that her death opened to her heirs the succession of her estate, which in
this case was an intestate succession. The CA, in fact, sustained
petitioners’ position that a deceased person’s estate has no legal
personality to be sued. Citing the Court’s ruling in Ventura v.
Militante,13 it correctly ruled that a decedent does not have the capacity
to be sued and may not be madea defendant in a case:
A deceased person does not have suchlegal entity asis necessary to bring
action so much so that a motion to substitute cannot lie and should be
denied by the court. An action begun by a decedent’s estate cannot be said
to have been begun by a legal person, since an estate is not a legal entity;
such an action is a nullity and a motion to amend the party plaintiff will
not, likewise, lie, there being nothing before the court to amend.
Considering that capacity to be sued isa correlative of the capacity to sue,
to the same extent, a decedent does not have the capacity to be sued and
may not be named a party defendant in a court action.
When respondent filed the foreclosure case on 15 June 2004 and
impleaded Macaria Berot as respondent, the latter had already passed
away the previous year, on 23 June 2003. In their Answer14 to the
Complaint, petitioners countered among others, that the trial court did not
have jurisdiction over Macaria, because no summons was served on her,
precisely for the reason that she had already died. Respondent then
amended his Complaint with leave of court and substituted the deceased
Macaria by impleading her intestate estate and identified Rodolfo Berot
as the estate’s representative. Thereafter, the case proceeded on the merits
at the trial, where this case originated and where the Decision was
promulgated.
It can be gleaned from the records ofthe case that petitioners did not object
when the estate of Macaria was impleaded as respondent in the
foreclosure case. Petitioner Rodolfo Berot did not object either when the
original Complaint was amended and respondent impleaded him as the
administrator of Macaria’s estate, in addition to his being impleaded as an
individual respondent in the case. Thus, the trial and appellate courts were
correct in ruling that, indeed, petitionersimpliedly waived any objection
to the trial court’s exercise of jurisdiction over their persons at the
inception of the case. In resolving the Motion for Reconsideration of
petitioners as defendants in Civil Case No. 2004-0246-D, the RTC was in
point when it ruled:
It may be recalled that when the plaintiff filed his Amended Complaint
substituting the estate of Macaria Berot in place of Macaria Berot as party
defendant, defendants made no objections thereto. Not even an amended
answer was filed by the defendants questioning the substitution of the
estate of Macaria Berot. For these reasons, the defendants are deemed to
have waivedany objection on the personality of the estate of Macaria
Berot. Section 1, Rule 9 of the Rules of Court provides that, "Defenses
and objections not pleaded either in a motion to dismiss or in the answer
are deemed waived. x x x. (Underscoring ours)15
Indeed, the defense of lack of jurisdiction over the person of the defendant
is one that may bewaived by a party to a case. In order to avail of that
defense, one must timely raise an objection before the court.16
The records of the case show that on 9 November 2004, a hearing was
held on the Motion for Leave to Filefiled by respondent to have her
amended Complaint admitted. During the said hearing, the counsel for
petitioners did not interpose an objection to the said Motion for
Leave.17 On 18 March 2005, a hearing was held on respondent’s Motion
to Admit Amended Complaint, wherein counselfor petitioners again
failed to interpose any objection.18 Thus, the trial court admitted
respondent’s Amended Complaint and ordered thata copy and a summons
be served anew on petitioners.19
In an Order20 dated 14 April 2005, the RTC noted that petitioners received
the summons and the copy of the amended Complaint on 3 February 2005
and yet they did not file an Answer. During the trial on the merits that
followed, petitioners failed to interpose any objection to the trial court’s
exercise of jurisdiction over the estate of Macaria Berot. Clearly, their full
participation in the proceedings of the case can only be construed as a
waiver of any objection to or defense of the trial court’s supposed lack of
jurisdiction over the estate.
In Gonzales v. Balikatan Kilusang Bayan sa Panlalapi, Inc.,21 we held that
a party’s appearance in a case is equivalent to a service of summons and
that objections must be timely raised:
In this regard, petitioners should be reminded of the provision in the Rules
of Court that a defendant’svoluntary appearance in an action shall be
equivalent to service of summons. Further, the lack of jurisdiction over
the person of the defendant may be waived either expressly or impliedly.
When a defendant voluntarily appears, he is deemed to have submitted
himself to the jurisdiction of the court. If he does not wish to waive this
defense, he must do so seasonably by motion, and object thereto.
It should be noted that Rodolfo Berot is the son of the deceased
Macaria22 and as such, he is a compulsory heir of his mother. His
substitution is mandated by Section 16, Rule 3 of the Revised Rules of
Court. Notably, there is no indication inthe records of the case that he had
other siblings who would have been his co-heirs. The lower and appellate
courts veered from the real issue whether the proper parties have been
impleaded. They instead focused on the issue whether there was need for
a formal substitution when the deceasedMacaria, and later its estate, was
impleaded. As the compulsory heir of the estate of Macaria, Rodolfo is
the real party in interest in accordance with Section 2, Rule 3 of the
Obligations Part 2 | Page 43 of 143
Revised Rules of Court. At the time of the filing of the complaint for
foreclosure, as well as the time it was amended to implead the estate of
Macaria, it is Rodolfo – as heir – who is the real party in interest. He
stands to be benefitted or injured by the judgment in the suit.
Rodolfo is also Macaria’s co-defendant in the foreclosure proceedings in
his own capacity as co-borrower ofthe loan. He participated in the
proceedings of the case, from the initial hearing of the case, and most
particularly when respondent filed his amended complaint impleading the
estate of Macaria. When respondent amended his complaint, Rodolfo did
not file an amended Answer nor raise any objection, even if he was also
identified therein as the representative ofthe estate of the deceased
Macaria. The lower court noted this omission by Rodolfo in its Order
dated 8 September 2006 ruling on his Motionfor Reconsideration to the
said court’s Decision dated 30 June 2006. Thus, his continued
participation in the proceedings clearly shows that the lower court
acquired jurisdiction over the heir of Macaria.
In Regional Agrarian Reform Adjudication Board v. Court of
Appeals,23 we ruled that:
[W]e have to point out that the confusion in this case was brought about
by respondents themselves when they included in their complaint two
defendants who were already dead. Instead of impleading the decedent’s
heirs and current occupants of the landholding, respondents filed their
complaint against the decedents, contrary to the following provision of
the 1994 DARAB Rules of Procedure:
RULE V
PARTIES, CAPTION AND SERVICE OF PLEADINGS
SECTION 1. Parties in Interest. Every agrarian case must be initiated and
defended inthe name of the real party in interest. x x x.
A real party in interest is defined as "the party who stands to be benefited
or injured by the judgment in the suit, or the party entitled to the avails of
a suit." The real parties in interest, at the time the complaint was filed,
were no longer the decedents Avelino and Pedro, but rather their
respective heirs who are entitled to succeed to their rights (whether as
agricultural lessees or as farmers-beneficiaries) under our agrarian laws.
They are the ones who, as heirs of the decedents and actualtillers, stand
to be removed from the landholding and made to pay back rentals to
respondents if the complaint is sustained.
Since respondents failed to correcttheir error (they did not amend the
erroneous caption of their complaint to include the real parties-ininterest),
they cannot be insulated from the confusion which it engendered in the
proceedings below. But at any rate, notwithstanding the erroneous caption
and the absence of a formal substitution of parties, jurisdiction was
acquired over the heirs of Avelino and Pedro who voluntarily participated
in the proceedings below. This Court has ruled that formal substitution of
parties is not necessary when the heirs themselves voluntarily appeared,
participated, and presented evidence during the proceedings.
As such, formal substitution of the parties in this case is not necessary.
In Vda. De Salazar v. Court of Appeals24 we ruled that a formal
substitution of the heirs in place of the deceased is no longer necessary if
the heirs continued to appear and participated in the proceedings of the
case. In the cited case, we explained the rationale of our ruling and related
it to the due process issue, to wit:
We are not unaware of several cases where we have ruled that a party
having died in an action that survives, the trial held by the court without
appearance of the deceased's legal representative or substitution of heirs
and the judgment rendered after such trial, are null and void because the
court acquired no jurisdiction over the persons of the legal representatives
or of the heirs upon whom the trial and the judgment would be binding.
This general rule notwithstanding, in denying petitioner's motion for
reconsideration, the Court of Appeals correctly ruled that formal
substitution of heirs is not necessary when the heirs themselves
voluntarily appeared, participated in the case and presented evidence in
defense of deceased defendant. Attending the case at bench, after all, are
these particular circumstances which negate petitioner's belated and
seemingly ostensible claim of violation of her rights to due process. We
should not lose sight of the principle underlying the general rule that
formal substitution of heirs must be effectuated for them to be bound by
a subsequent judgment. Such had been the general rule established not
because the rule on substitution of heirs and that on appointment of a legal
representative are jurisdictional requirements per se but because non-
compliance therewith results in the undeniable violation of the right to
due process of those who, though not duly notified of the proceedings, are
substantially affected by the decision rendered therein. Viewing the rule
on substitution of heirs in this light, the Court of Appeals,in the resolution
denying petitioner's motion for reconsideration, thus expounded:
Although the jurisprudential rule is that failure to make the substitution is
a jurisdictional defect, it should be noted that the purpose of this
procedural rule is to comply with due process requirements. The original
party having died, he could not continue, to defend himself in court
despite the fact that the action survived him. For the case to continue, the
real party in interest must be substituted for the deceased. The real party
in interest is the one who would beaffected by the judgment. It could be
the administrator or executor or the heirs. In the instant case, the heirs are
the proper substitutes. Substitution gives them the opportunity to continue
the defense for the deceased. Substitution is important because such
opportunity to defend is a requirement to comply with due process. Such
substitution consists of making the proper changes in the caption of the
case which may be called the formal aspect of it. Such substitution also
includes the process of letting the substitutes know that they shall be
bound by any judgment in the case and that they should therefore actively
participate in the defense of the deceased. This part may be called the
substantive aspect. This is the heart of the procedural rule because this
substantive aspect is the one that truly embodies and gives effect to the
purpose of the rule. It is this court's view that compliance with the
substantive aspect of the rule despite failure to comply with the formal
aspect may he considered substantial compliance.Such is the situation in
the case at bench because the only inference that could be deduced from
the following facts was that there was active participation of the heirs in
the defense ofthe deceased after his death:
1. The original lawyer did not stop representing the deceased. It would be
absurd to think that the lawyer would continue to represent somebody if
nobody is paying him his fees. The lawyer continued to represent him in
the litigation before the trial court which lasted for about two more years.
A dead party cannot pay him any fee. With or without payment of fees,
the fact remains that the said counsel was allowed by the petitioner who
was well aware of the instant litigation to continue appearing as counsel
until August 23, 1993 when the challenged decision was rendered;
2. After the death of the defendant, his wife, who is the petitioner in the
instant case, even testified in the court and declared that her husband is
already deceased. She knew therefore that there was a litigation against
her husband and that somehow her interest and those of her children were
involved;
3. This petition for annulmentof judgment was filed only after the appeal
was decided against the defendant on April 3, 1995, more than one and a
half year (sic) after the decision was rendered (even if we were to give
credence to petitioner's manifestation that she was notaware that an appeal
had been made);
4. The Supreme Court has already established that there is such a thing as
jurisdiction byestoppel. This principle was established even in cases
where jurisdiction over the subject matter was being questioned. In the
instant case, only jurisdiction over the person of the heirs is in issue.
Jurisdiction over the person may be acquired by the court more easily than
jurisdiction over the subject matter. Jurisdiction over the person may be
acquired by the simple appearance of the person in court as did herein
petitioner appear;
5. The case cited by the herein petitioner (Ferreria et al. vs. Manuela Ibarra
vda. de Gonzales, etal.) cannot be availed of to support the said
petitioner's contention relative to nonacquisition of jurisdiction by the
court. In that case, Manolita Gonzales was not served notice and, more
importantly, she never appeared in court, unlike herein petitioner who
appeared and even testified regarding the death of her husband.
In this case, Rodolfo’s continued appearance and participation in the
proceedings of the case dispensed with the formal substitution of the heirs
in place of the deceased Macaria. The failure of petitioners to timely
object to the trial court’s exercise of jurisdiction over the estate of Macaria
Berot amounted to a waiver on their part. Consequently, it would be too
late for them at this point to raise that defense to merit the reversal of the
assailed decision of the trial court. We are left with no option other than
to sustain the CA’s affirmation of the trial court’s Decision on this matter.
On the second issue of whether the nature of the loan obligation
contracted by petitioners is joint or solidary, we rule that it is joint.
Under Article 1207 of the Civil Code of the Philippines, the general rule
is that when there is a concurrence of two or more debtors under a single
obligation, the obligation is presumed to be joint:
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, orthat each one of the latter is bound to
render, entire compliance with the prestations. There is a solidary liability
Obligations Part 2 | Page 44 of 143
only when the obligation expressly so states, or when the law or the nature
of the obligation requires solidarity.
The law further provides that to consider the obligation as solidary in
nature, it must expressly be stated as such, or the law or the nature of the
obligation itself must require solidarity. In PH Credit Corporation v.
Court of Appeals,25we held that:
A solidaryobligation is one in which each of the debtors is liable for the
entire obligation, and each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. On the
other hand, a jointobligation is one in which each debtors is liable only
for a proportionate part of the debt, and the creditor is entitled to demand
only a proportionate part of the credit from each debtor. The
wellentrenched rule is that solidary obligations cannot be inferred lightly.
They must be positively and clearly expressed. A liability is solidary
"only when the obligation expressly so states, when the law so provides
or when the nature of the obligation so requires."
In the instant case, the trial court expressly ruled that the nature of
petitioners’ obligation to respondent was solidary.26 It scrutinized the real
estate mortgage and arrived at the conclusion that petitioners had bound
themselves to secure their loan obligation by way of a realestate mortgage
in the event that they failed to settle it.27But such pronouncement was not
expressly stated in its 30 June 2006 Decision. This was probably the
reason why, when the trial court Decision was appealed to it, the CA did
not squarely address the issue when the latter ruled that:
It is noteworthy that the appealed decision makes no pronouncement that
the obligation of the mortgagors is solidary; and that said decision has not
been modifiedby the trial court. Hence, it is unnecessary for US to make
a declaration on the nature of the obligation of the
mortgagors.28 However, a closer scrutiny of the records would reveal that
the RTC expressly pronounced that the obligation of petitioners to the
respondent was solidary. In resolving petitioners’ Motion for
Reconsideration to its 30 June 2006 Decision, the trial court categorically
ruled that:
Defendants [sic] obligation with plaintiff is solidary. A careful scrutiny
of the Real Estate Mortgage(Exh. "A") will show that all the defendants,
for a single loan, bind themselves to cede, transfer, and convey by way of
real estate mortgage all their rights, interest and participation in the
subject parcelof land including the improvements thereon in favor of the
plaintiff, and warrant the same to be free from liens and encumbrances,
and that should theyfail to perform their obligation the mortgage will be
foreclosed. From this it can be gleaned that each of the defendants
obligated himself/herself to perform the said solidary obligation with the
plaintiff.29 We do not agree with this finding by the trial court.
We have scoured the records of the case, but found no record of the
principal loan instrument, except an evidence that the realestate mortgage
was executed by Macaria and petitioners. When petitioner Rodolfo Berot
testified in court, he admitted that heand his mother, Macaria had
contracted the loan for their benefit:
Q: On the Real Estate Mortgage, you and your mother obtained a loan
from Mr. Siapno in the amountof ₱250,000.00, now as between you and
your mother whose loan is that?
A: It is the loan of my mother and myself, sir.30
The testimony of petitioner Rodolfo only established that there was that
existing loan to respondent, and that the subject property was mortgaged
as security for the said obligation. His admission of the existence of the
loan made him and his late mother liable to respondent. We have
examined the contents of the real estate mortgagebut found no indication
in the plain wordings of the instrument that the debtors – the late Macaria
and herein petitioners – had expressly intended to make their obligation
to respondent solidary in nature. Absent from the mortgage are the
express and indubitable terms characterizing the obligation as solidary.
Respondent was not able to prove by a preponderance of evidence that
petitioners' obligation to him was solidary. Hence, applicable to this case
is the presumption under the law that the nature of the obligation herein
can only be considered as joint. It is incumbent upon the party alleging
otherwise to prove with a preponderance of evidence that petitioners'
obligation under the loan contract is indeed solidary in character.31
The CA properly upheld respondent's course of action as an availment of
the second remedy provided under Section 7, Rule 86 of the 1997 Revised
Rules of Court.32 Under the said provision for claims against an estate, a
mortgagee has the legal option to institute a foreclosure suit and to recover
upon the security, which is the mortgaged property.
During her lifetime, Macaria was the registered owner of the mortgaged
property, subject of the assailed foreclosure. Considering that she had
validly mortgaged the property to secure a loan obligation, and given our
ruling in this case that the obligation is joint, her intestate estate is liable
to a third of the loan contracted during her lifetime. Thus, the foreclosure
of the property may proceed, but would be answerable only to the extent
of the liability of Macaria to respondent. WHEREFORE, the CA Decision
in CA-G.R. CV No. 87995 sustaining the RTC Decision in Civil Case No.
2004-0246-D is hereby AFFIRMED with the MODIFICATION that the
obligation of petitioners and the estate of Macaria Berot is declared as
joint in nature.
SO ORDERED.
A LTERNATIVE O BLIGATION
Arco Pulp and Paper Co., Inc. v. Lim
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A.
SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY
PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an
obligation. It cannot be presumed and may be implied only if the old and
new contracts are incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of
Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a
complaint3 filed in the Regional Trial Court of Valenzuela City, Branch
171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and
other raw materials, under the name Quality Paper and Plastic Products,
Enterprises, to factories engaged in the paper mill business.4 From
February 2007 to March 2007, he delivered scrap papers worth
7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and
Paper) through its Chief Executive Officer and President, Candida A.
Santos.5 The parties allegedly agreed that Arco Pulp and Paper would
either pay Dan T. Lim the value of the raw materials or deliver to him
their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp
and Paper issued a post-dated check dated April 18, 20077 in the amount
of 1,487,766.68 as partial payment, with the assurance that the check
would not bounce.8 When he deposited the check on April 18, 2007, it
was dishonored for being drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a
memorandum of agreement10 where Arco Pulp and Paper bound
themselves to deliver their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by Dan T. Lim,
through his company, Quality Paper and Plastic Products. The
memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed
between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver
600 tons Test Liner 150/175 GSM, full width 76 inches at the price of
₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account.
Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the
production of the above Test Liners will be supplied by Quality Paper &
Plastic Products Ent., total of 600 Metric Tons at ₱6.50 per kg. (price
subject to change per advance notice). Quantity of Local OCC delivery
will be based on the quantity of Test Liner delivered to Megapack
Container Corp. based on the above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper
demanding payment of the amount of 7,220,968.31, but no payment was
made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with prayer
for attachment with the Regional Trial Court, Branch 171, Valenzuela
City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed
to have its representatives attend the pre-trial hearing. Hence, the trial
court allowed Dan T. Lim to present his evidence ex parte.16
Obligations Part 2 | Page 45 of 143
On September 19, 2008, the trial court rendered a judgment in favor of
Arco Pulp and Paper and dismissed the complaint, holding that when
Arco Pulp and Paper and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished Arco Pulp and
Paper’s obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of Appeals.
According to him, novation did not take place since the memorandum of
agreement between Arco Pulp and Paper and Eric Sy was an exclusive
and private agreement between them. He argued that if his name was
mentioned in the contract, it was only for supplying the parties their
required scrap papers, where his conformity through a separate contract
was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment dated September 19,
2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan
T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from
the time of demand; ₱50,000.00 moral damages; ₱50,000.00 exemplary
damages; and ₱50,000.00 attorney’s fees.22
The appellate court ruled that the facts and circumstances in this case
clearly showed the existence of an alternative obligation.23 It also ruled
that Dan T. Lim was entitled to damages and attorney’s fees due to the
bad faith exhibited by Arco Pulp and Paper in not honoring its
undertaking.24
Its motion for reconsideration25 having been denied,26 Arco Pulp and
Paper and its President and Chief Executive Officer, Candida A. Santos,
bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of
agreement constituted a novation of the original obligation since Eric Sy
became the new debtor of respondent. They also argue that there is no
legal basis to hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with respondent. The
Court of Appeals, they allege, also erred in awarding moral and
exemplary damages and attorney’s fees to respondent who did not show
proof that he was entitled to damages.27
Respondent, on the other hand, argues that the Court of Appeals was
correct in ruling that there was no proper novation in this case. He argues
that the Court of Appeals was correct in ordering the payment of
7,220,968.31 with damages since the debt of petitioners remains
unpaid.28 He also argues that the Court of Appeals was correct in holding
petitioners solidarily liable since petitioner Candida A. Santos was "the
prime mover for such outstanding corporate liability."29 In their reply,
petitioners reiterate that novation took place since there was nothing in
the memorandum of agreement showing that the obligation was
alternative. They also argue that when respondent allowed them to deliver
the finished products to Eric Sy, the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without action
in view of A.M. No. 99-2-04-SC dated November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by
novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and
Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can
be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the
Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall
completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the
other undertaking.
"In an alternative obligation, there is more than one object, and the
fulfillment of one is sufficient, determined by the choice of the debtor
who generally has the right of election."32 The right of election is
extinguished when the party who may exercise that option categorically
and unequivocally makes his or her choice known.33
The choice of the debtor must also be communicated to the creditor who
must receive notice of it since: The object of this notice is to give the
creditor . . . opportunity to express his consent, or to impugn the election
made by the debtor, and only after said notice shall the election take legal
effect when consented by the creditor, or if impugned by the latter, when
declared proper by a competent court.34
According to the factual findings of the trial court and the appellate court,
the original contract between the parties was for respondent to deliver
scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and Paper. The
payment for this delivery became petitioner Arco Pulp and Paper’s
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor,
had the option to either (1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35
The appellate court, therefore, correctly identified the obligation between
the parties as an alternative obligation, whereby petitioner Arco Pulp and
Paper, after receiving the raw materials from respondent, would either pay
him the price of the raw materials or, in the alternative, deliver to him the
finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in
partial payment for the scrap papers, they exercised their option to pay the
price. Respondent’s receipt of the check and his subsequent act of
depositing it constituted his notice of petitioner Arco Pulp and Paper’s
option to pay.
This choice was also shown by the terms of the memorandum of
agreement, which was executed on the same day. The memorandum
declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of equivalent
value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum
of agreement constituted a novation of the contract between the parties.
When petitioner Arco Pulp and Paper opted instead to deliver the finished
products to a third person, it did not novate the original obligation
between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in Articles
1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a
substitution of objects or debtors or when there is subrogation of the
creditor. It occurs only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on every point
incompatible with each other."36
Novation was extensively discussed by this court in Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor. Article
1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in articles 1236
and 1237."
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
Obligations Part 2 | Page 46 of 143
change does not come from — and may even be made without the
knowledge of — the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require the consent
of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the
place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory
agreement. Whether extinctive or modificatory, novation is made either
by changing the object or the principal conditions, referred to as objective
or real novation; or by substituting the person of the debtor or subrogating
a third person to the rights of the creditor, an act known as subjective or
personal novation. For novation to take place, the following requisites
must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence.38 (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So
it is deeply rooted in the Roman Law jurisprudence, the principle —
novatio non praesumitur —that novation is never presumed.At bottom,
for novation tobe a jural reality, its animus must be ever present, debitum
pro debito — basically extinguishing the old obligation for the new
one.39 (Emphasis supplied) There is nothing in the memorandum of
agreement that states that with its execution, the obligation of petitioner
Arco Pulp and Paper to respondent would be extinguished. It also does
not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper
as respondent’s debtor. It merely shows that petitioner Arco Pulp and
Paper opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be
valid:
Novation must be expressly consented to. Moreover, the conflicting
intention and acts of the parties underscore the absence of any express
disclosure or circumstances with which to deduce a clear and unequivocal
intent by the parties to novate the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement,
thus, his conformity to the contract need not be secured. This is clear from
the first line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed
between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original
agreement between the parties, respondent must have first agreed to the
substitution of Eric Sy as his new debtor. The memorandum of agreement
must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent.
Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to
respondent also conflicts with their alleged intent to pass on their
obligation to Eric Sy. When respondent sent his letter of demand to
petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the
former neither acknowledged nor consented to the latter as his new
debtor. These acts, when taken together, clearly show that novation did
not take place. Since there was no novation, petitioner Arco Pulp and
Paper’s obligation to respondent remains valid and existing. Petitioner
Arco Pulp and Paper, therefore, must still pay respondent the full amount
of ₱7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages may be awarded in
case of breach of contract where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding
moral damages if the court should find that, under the circumstances, such
damages are justly due. The same rule applies to breaches of contract
where the defendant acted fraudulently or in bad faith. (Emphasis
supplied)
Moral damages are not awarded as a matter of right but only after the
party claiming it proved that the breach was due to fraud or bad faith. As
this court stated:
Moral damages are not recoverable simply because a contract has been
breached. They are recoverable only if the party from whom it is claimed
acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of moral
damages:
An award of moral damages would require certain conditions to be met,
to wit: (1)first, there must be an injury, whether physical, mental or
psychological, clearly sustained by the claimant; (2) second, there must
be culpable act or omission factually established; (3) third, the wrongful
act or omission of the defendant is the proximate cause of the injury
sustained by the claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article 2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from
his business. This has remained unpaid since 2007. This injury
undoubtedly was caused by petitioner Arco Pulp and Paper’s act of
refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp
and Paper not only issued an unfunded check but also entered into a
contract with a third person in an effort to evade its liability. This proves
the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that
moral damages may be awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and
analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
Breaches of contract done in bad faith, however, are not specified within
this enumeration. When a party breaches a contract, he or she goes against
Article 19 of the Civil Code, which states: Article 19. Every person must,
in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual relations must
exercise that right with honesty and good faith. Failure to do so results in
an abuse of that right, which may become the basis of an action for
damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human
relations. By itself, it is not the basis of an actionable tort. Article 19
describes the degree of care required so that an actionable tort may arise
when it is alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the same.
Obligations Part 2 | Page 47 of 143
Article 21.Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21
only concerns with lawful acts that are contrary to morals, good customs,
and public policy:
Article 20 concerns violations of existing law as basis for an injury. It
allows recovery should the act have been willful or negligent. Willful may
refer to the intention to do the act and the desire to achieve the outcome
which is considered by the plaintiff in tort action as injurious. Negligence
may refer to a situation where the act was consciously done but without
intending the result which the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts
which are not necessarily proscribed by law. This article requires that the
act be willful, that is, that there was an intention to do the act and a desire
to achieve the outcome. In cases under Article 21, the legal issues revolve
around whether such outcome should be considered a legal injury on the
part of the plaintiff or whether the commission of the act was done in
violation of the standards of care required in Article 19.45
When parties act in bad faith and do not faithfully comply with their
obligations under contract, they run the risk of violating Article 1159 of
the Civil Code:
Article 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.
Article 2219, therefore, is not an exhaustive list of the instances where
moral damages may be recovered since it only specifies, among others,
Article 21. When a party reneges on his or her obligations arising from
contracts in bad faith, the act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article 1159. Breaches of
contract become the basis of moral damages, not only under Article 2220,
but also under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the
contract. Article 2220 requires that the breach be done fraudulently or in
bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach of contract, the breach
must be palpably wanton, reckless and malicious, in bad faith, oppressive,
or abusive. Hence, the person claiming bad faith must prove its existence
by clear and convincing evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports
a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of known duty through some motive or interest or ill will
that partakes of the nature of fraud. It is, therefore, a question of intention,
which can be inferred from one’s conduct and/or contemporaneous
statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer,
it requires an examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment
of its obligation to respondent, it was presumably with the knowledge that
it was being drawn against a closed account. Worse, it attempted to shift
their obligations to a third person without the consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach
of known duty through some motive or interest or ill will that partakes of
the nature of fraud."48 Moral damages may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code,
exemplary damages are due in the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award
exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of
right; the court will decide whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be
proven, the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and
subsequent parties from the commission of a similar offense. The case of
People v. Ranteciting People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or
corrective damages are intended to serve as a deterrent to serious wrong
doings, and as a vindication of undue sufferings and wanton invasion of
the rights of an injured or a punishment for those guilty of outrageous
conduct. These terms are generally, but not always, used interchangeably.
In common law, there is preference in the use of exemplary damages
when the award is to account for injury to feelings and for the sense of
indignity and humiliation suffered by a person as a result of an injury that
has been maliciously and wantonly inflicted, the theory being that there
should be compensation for the hurt caused by the highly reprehensible
conduct of the defendant—associated with such circumstances as
willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the injury. The
terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him
for his outrageous conduct. In either case, these damages are intended in
good measure to deter the wrongdoer and others like him from similar
conduct in the future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory
damages, and only after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination
depending upon the amount of compensatory damages that may be
awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton,
fraudulent, oppressive or malevolent manner.51
Business owners must always be forthright in their dealings. They cannot
be allowed to renege on their obligations, considering that these
obligations were freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to those who use
fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost
of the suit may also be recovered.
Article 2208 of the Civil Code states:
Article 2208. 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[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since
no evidence was adduced to prove that the transaction was also a personal
undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity
which is vested with a legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it.
Following this principle, obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities. A
director, officer or employee of a corporation is generally not held
personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means
to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate
issues.
....
Before a director or officer of a corporation can be held personally liable
for corporate obligations, however, the following requisites must concur:
(1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.
While it is true that the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate
fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the
Obligations Part 2 | Page 48 of 143
evidence on record or are based on a misapprehension of
facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot
be held personally liable for obligations incurred by the corporation.
However, this veil of corporate fiction may be pierced if complainant is
able to prove, as in this case, that (1) the officer is guilty of negligence or
bad faith, and (2) such negligence or bad faith was clearly and
convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her
capacity as the President and Chief Executive Officer of Arco Pulp and
Paper. She also issued the check in partial payment of petitioner
corporation’s obligations to respondent on behalf of petitioner Arco Pulp
and Paper. This is clear on the face of the check bearing the account name,
"Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts
would not, ordinarily, be petitioner Santos’ personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v.
Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable doctrine developed to
address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. Under the doctrine,
the corporate existence may be disregarded where the entity is formed or
used for non-legitimate purposes, such as to evade a just and due
obligation, or to justify a wrong, to shield or perpetrate fraud or to carry
out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the
individuals composing it and the two corporations will be treated as
identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable
with petitioner Arco Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when
they unjustifiably refused to honor their undertaking in favor of the
[respondent]. After the check in the amount of 1,487,766.68 issued by
[petitioner] Santos was dishonored for being drawn against a closed
account, [petitioner] corporation denied any privity with [respondent].
These acts prompted the [respondent] to avail of the remedies provided
by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed
to hide behind the corporate veil. When petitioner Arco Pulp and Paper’s
1âwphi1
obligation to respondent became due and demandable, she not only issued
an unfunded check but also contracted with a third party in an effort to
shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused
to honor petitioner corporation’s obligations to respondent. These acts
clearly amount to bad faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held solidarily liable with petitioner
Arco Pulp and Paper.
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of the decision dated
August 13, 2013 in Nacar v. Gallery Frames,59 the rate of interest due on
the obligation must be modified from 12% per annum to 6% per annum
from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v.
Court of Appeals,60 and we have laid down the following guidelines with
regard to the rate of legal interest:
To recapitulate and for future guidance, the guidelines laid down in the
case of Eastern Shipping Linesare accordingly modified to embody BSP-
MB Circular No. 799, as follows:
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 6%
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 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 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest fixed therein.61 (Emphasis
supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of
₱7,220,968.31 should now be at 6% per annum, computed from May 5,
2007, when respondent sent his letter of demand to petitioners. This
interest shall continue to be due from the finality of this decision until its
full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R.
CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby
ordered solidarily to pay respondent Dan T. Lim the amount of
₱7,220,968.31 with interest of 6% per annum at the time of demand until
finality of judgment and its full satisfaction, with moral damages in the
amount of ₱50,000.00, exemplary damages in the amount of ₱50,000.00,
and attorney's fees in the amount of ₱50,000.00.
SO ORDERED.
S OLIDARY O BLIGATION
Olongapo City v. Subic Water and Sewerage Co., Inc.
G.R. No. 171626 August 6, 2014
OLONGAPO CITY, Petitioner,
vs.
SUBIC WATER AND SEWERAGE CO., INC., Respondent.
DECISION
BRION, J.:
We resolve in this petition for certiorari1 under Rule 65 the challenge to
the July 6, 2005 decision2 and the January 3, 2006 resolution3 (assailed
CA rulings) of the Court of Appeals (CA) in CAG.R. SP No. 80947.
These assailed CA rulings annulled and set aside: a) the July 29, 2003
order4 of the Regional Trial Court of Olongapo, Br. 75 (RTC Olongapo ),
which directed the issuance of a writ of execution in Civil Case No. 582-
0-90, against respondent Subic Water and Sewerage Co., Inc. (Subic
Water); b) the July 31, 2003 writ of execution5subsequently issued by the
same court; and c) the October 7, 2003 order6 of R TC Olongapo, denying
Subic Water's special appearance with motion to reconsider order dated
July 29, 2003 and to quash writ of execution dated July 31, 2003.7
Factual Antecedents
On May 25, 1973, Presidential Decree No. 1988 (PD 198) took effect.
This law authorized the creation of local water districts which may
acquire, install, maintain and operate water supply and distribution
systems for domestic, industrial, municipal and agricultural uses.9
Pursuant to PD 198, petitioner Olongapo City (petitioner) passed
Resolution No. 161, which transferred all itsexisting water facilities and
assets under the Olongapo City Public Utilities Department Waterworks
Division, to the jurisdiction and ownership of the Olongapo City Water
District (OCWD).10
Obligations Part 2 | Page 49 of 143
PD 198, as amended,11 allows local water districts (LWDs)which have
acquired an existing water system of a localgovernment unit (LGU) to
enter into a contract to pay the concerned LGU. In lieu of the LGU’s share
in the acquired water utility plant, it shall be paid by the LWD an amount
not exceeding three percent (3%) of the LWD’s gross receipts from water
sales in any year.12
On October 24, 1990, petitioner filed a complaint for sum of money and
damages against OCWD. Among others, petitioner alleged that OCWD
failed to pay its electricity bills to petitioner and remit its payment under
the contract to pay, pursuant to OCWD’s acquisition of petitioner’s water
system. In its complaint, petitioner prayed for the following reliefs:
"WHEREOF, it is respectfully prayed of this Honorable Court that after
due hearing and notice, judgment be rendered in favor of plaintiff
ordering the defendant to:
(a) pay the amount of ₱26,798,223.70 plus legal interests from the filing
of the Complaint to actual full payment;
(b) pay the amount of its in lieu share representing three percent of the
defendant’s gross receipts from water sales starting 1981 up to present;
(c) pay the amount of ₱1,000,000 as moral damages; and
(d) pay the cost of suit and other litigation expenses."13
In its answer,14 OCWD posed a counterclaim against petitioner for unpaid
water bills amounting to ₱3,080,357.00.15
In the interim, OCWD entered into a Joint Venture Agreement16 (JVA)
with Subic Bay Metropolitan Authority (SBMA), Biwater International
Limited (Biwater), and D.M. Consunji, Inc. (DMCI) on November 24,
1996. Pursuant to this agreement, Subic Water– a new corporate entity –
was incorporated, withthe following equity participation from its
shareholders:
SBMA 19.99% or 20%
OCWD 9.99% or 10%
Biwater 29.99% or 30%
DMCI 39.99% or 40%17
On November 24, 1996, Subic Water was granted the franchise to operate
and to carry on the businessof providing water and sewerage services in
the Subic BayFree Port Zone, as well as in Olongapo City.18 Hence, Subic
Water took over OCWD’s water operations in Olongapo City.19
To finally settle their money claims against each other, petitioner and
OCWD entered into a compromise agreement20 on June 4, 1997. In this
agreement, petitioner and OCWD offset their respective claims and
counterclaims. OCWD also undertook to pay to petitioner its net
obligation amounting to ₱135,909,467.09, to be amortized for a period of
not exceeding twenty-five (25) years at twenty-fourpercent (24%) per
annum.21
The compromise agreement also contained a provision regarding the
parties’ requestthat Subic Water, Philippines,which took over the
operations of the defendant Olongapo City Water District be made the co-
makerfor OCWD’s obligations. Mr. Noli Aldip, then chairman of Subic
Water, acted as its representative and signed the agreement on behalf of
Subic Water.
Subsequently, the parties submitted the compromise agreement to RTC
Olongapo for approval. In its decision dated June 13, 1997,22 the trial
court approved the compromiseagreement and adopted it as its judgment
in Civil Case No. 580-0-90.
Pursuant to the compromise agreement and in payment of OCWD’s
obligations to petitioner,petitioner and OCWD executed a Deed of
Assignment onNovember 24, 1997.23 OCWD assigned all of its rights in
the JVA in favor of the petitioner, including but not limited to the
assignment of its shares, lease payments, regulatory assistance fees and
other receivables arising out of or related to the Joint Venture Agreement
and the Lease Agreement.24 On December 15,1998, OCWD was
judicially dissolved.25
On May 7, 1999, to enforce the compromise agreement, the petitioner
filed a motion for the issuance of a writ of execution26 with the trial court.
In its July 23, 1999 order,27 the trial court granted the motion, but did not
issue the corresponding writ of execution.
Almost four years later, on May 30, 2003, the petitioner, through its new
counsel, filed a notice of appearance with urgent
motion/manifestation28 and prayed again for the issuance of a writ of
execution against OCWD. A certain Atty. Segundo Mangohig, claiming
to be OCWD’s former counsel, filed a manifestation alleging that OCWD
had already been dissolved and that Subic Water is now the former
OCWD.29
Because of this assertion, Subic Water also filed a manifestation
informing the trial court that as borne out by the articles of incorporation
and general information sheet of Subic Water x x x defendant OCWD is
not Subic Water.30The manifestation also indicated that OCWD was only
a ten percent (10%) shareholder of Subic Water; and that its 10% share
was already inthe process of being transferred to petitioner pursuant to the
Deed of Assignment dated November 24, 1997.31
The trial court granted the motion for execution and directed its issuance
against OCWD and/or Subic Water. Because of this unfavorable order,
Subic Water filed a special appearance with motion to: (1) reconsider
order dated July29, 2003; and (2) quash writ of execution dated July 31,
2003.32
The trial court denied Subic Water’s special appearance, motion for
reconsideration, and its motion to quash. Subic Water then filed a petition
for certiorari33 with the CA, imputing grave abuse of discretion
amounting to lack or excess of jurisdiction to RTC Olongapo for issuing
its July 29, 2003 and October 7, 2003 orders aswell as the writ of
execution dated July 31, 2003. The CA’s Ruling
In its decision dated July 6, 2005,34 the CA granted Subic Water’s petition
for certiorariand reversed the trial court’s rulings.
The CA found that the writ ofexecution dated July 31, 200335 did not
comply with Section 6, Rule 39 of the Rules of Court, to wit:
Section 6. Execution by motion orby independent action. — A final and
executory judgment or order may be executed on motion within five (5)
years from the date of its entry. After the lapse of such time, and before it
is barred by the statute of limitations, a judgment may be enforced by
action. The revived judgment may also be enforced by motion within five
(5) years from the date of its entry and thereafter by action before it is
barred by the statute of limitations. (6a)[emphasis ours]
A judgment on a compromiseagreement is immediately executory and is
considered to have been entered on the date it was approved by the trial
court.36 Since the compromise agreement was approved and adoptedby
the trial court on June 13, 1997, this should be the reckoning date for the
counting of the period for the filing of a valid motion for issuance of a
writ of execution. Petitioner thus had until June 13, 2002, to file its
motion.
The CA further remarked that whileit was true that a motion for execution
was filed by petitioner on May 7, 1999, and the same was granted by the
trial court in its July 23, 1999 order,37 no writ of execution was actually
issued.
As the CA looked at the case, petitioner, instead of following up with the
trial court the issuance ofthe writ of execution, did not do anything to
secure its prompt issuance. It waitedanother four years to file a second
motion for execution on May 30, 2003.38 By this time, the allowed period
for the filing of a motion for the issuance of the writ had already lapsed.
Hence, the trial court’s July 29, 2003 order granting the issuance of the
writ was null and void for having been issued by a court without
jurisdiction.
The CA denied petitioner’s subsequentmotion for reconsideration.
Petitioner is now before us on a petition for certiorari under Rule 65.
The Petition
The petitioner acknowledged the rule that the execution of a judgment
could no longer be made by mere motion after the prescribed five-year
period had already lapsed. However, it argued that the delay for the
issuance of the writ of execution was caused by OCWD and Subic Water.
The petitioner submitted that this Court had allowed execution by mere
motion even after the lapse ofthe five-year period, when the delay was
caused or occasioned by the actions of the judgment debtor.39
Also, the petitioner asserted that although Subic Water was not a party in
the case, it could still be subjected to a writ of execution, since it was
identified as OCWD’s co-maker and successor-in-interest in the
compromise agreement.40
Lastly, the petitioner contended that the compromise agreement was
signed by Mr. Noli R. Aldip,then Subic Water’s chairman, signifying
Subic Water’s consent to the agreement.
The Court’s Ruling
Obligations Part 2 | Page 50 of 143
We DISMISSthe petition for being the wrong remedy and, in any case,
for lack of merit; what we have before us is a final judgment that we can
no longer touch unless there is grave abuse of discretion.
A. Procedural Law Aspect
Certiorari is not a substitute for a lost appeal.
At the outset, we emphasize thatthe present petition, brought under Rule
65, merits outright dismissal for having availed an improper remedy.
The instant petition should havebeen brought under Rule 45 in a petition
for review on certiorari. Section 1 of this Rule mandates:
Section 1. Filing of petition with Supreme Court. — A party desiring to
appeal by certiorari from a judgment or final order or resolution of the
Court of Appeals, the Sandiganbayan, the Regional Trial Court or other
courts whenever authorized by law, may file with the Supreme Court a
verified petition for review on certiorari. The petition shall raise only
questions of law which must be distinctly set forth. (1a, 2a) [emphasis
supplied]
Supplementing Rule 45 are Sections 341
and 442
of Rule 56 which govern
the applicable procedure in the Supreme Court.
Appeals from judgmentsor final orders or resolutions of the CA should be
made through a verified petition for review on certiorari under Rule
45.43 In this case, petitioner questioned the July 6, 2005 decision44 and the
January 3, 2006 resolution45 of the CA which declared as null and void
the writ of execution issued by the trial court. Since the CA’s
pronouncement completely disposed of the case and the issues raised by
the parties, it was the proper subject of a Rule 45 petition. It was already
a final order that resolved the subject matter in its entirety, leaving nothing
else to be done.
A petition for certiorari under Rule 65 is appropriate only if there is no
appeal, or any plain, speedy, and adequate remedy in the ordinary course
of law available tothe aggrieved party. As we have distinctly explained in
the case of Pasiona v. Court of Appeals:46
The aggrieved party is proscribed from assailing a decision or final order
of the CA viaRule 65 because such recourse is proper only if the party has
no plain,speedy and adequate remedy in the course of law. In this case,
petitioner had an adequate remedy, namely, a petition for review on
certiorari under Rule 45 ofthe Rules of Court.A petition for review on
certiorari, not a special civil action for certiorari was, therefore, the
correct remedy.
xxxx
Settled is the rule that where appeal is available to the aggrieved party,
the special civil actionfor certiorari will not be entertained – remedies of
appealand certiorari are mutually exclusive, not alternative or successive.
Hence, certiorari is not and cannot be a substitute for a lost
appeal,especially if one's own negligence or error in one's choice of
remedy occasioned such loss or lapse.47 [emphasis ours]
The petitioner received the CA’s assailed resolution denying its motion
for reconsideration on January 9, 2006. Following Rule 45, Section 2 of
the Rules of Court,48 the petitioner had until January 24, 2006 to file its
petition for review. It could have even filed a motion for a 30-day
extension of time, a motion that this Court grants for justifiable
reasons.49 But all of these, it failed to do. Thus, the assailed CA rulings
became final and executory and could no longer be the subject of an
appeal.
Apparently, to revive its lost appeal, petitioner filed the present petition
for certiorari that – under Rule 65 – may be filed within sixty days from
the promulgation of the assailed CA resolution (on January 3, 2006). A
Rule 65 petition for certiorari, however, cannot be a substitute for a lost
appeal. With the lapse of the prescribed period for appeal without an
action from the petitioner, the present petition for certiorari– a mere
replacement –must be dismissed.
But even without the procedural infirmity, the present recourse to us has
no basis on the merits and must be denied.
Execution by motion is only available within the five-year period from
entry of judgment.
Under Rule 39, Section 6,50 a judgment creditor has two modes in
enforcing the court’s judgment. Execution may be either through motion
or an independent action.
These two modes of execution are available depending on the timing
when the judgmentcreditor invoked its right to enforce the court’s
judgment. Execution by motion is only available if the enforcement of the
judgment was sought within five (5) years from the date of its entry. On
the other hand, execution by independent action is mandatory if the five-
year prescriptive period for execution by motion had already
elapsed.51 However, for execution by independent action to prosper – the
Rules impose another limitation – the action must be filed before it is
barred by the statute of limitations which, under the Civil Code, is ten (10)
years from the finality of the judgment.52
On May 7, 1999, within the five-year period from the trial court’s
judgment, petitioner filed its motion for the issuance of a writ of
execution. However, despite the grant of the motion, the court did not
issue an actual writ. It was only onMay 30, 2003 that petitioner filed a
second motion to ask again for the writ’s issuance. By this time, the
allowed five-year period for execution by motion had already lapsed.
As will be discussed below, since the second motion was filed beyond the
five-year prescriptive period set by the Rules, then the writ of execution
issued by the trial court on July 31, 2003 was null and void for having
been issued by a court already ousted ofits jurisdiction.
In Arambulo v. Court of First Instance of Laguna,53 we explained the rule
that the jurisdiction of a court to issue a writ of execution by motion is
only effective within the five-year period from the entry of judgment.
Outside this five-year period, any writ of execution issued pursuant to a
motion filed by the judgment creditor, is null and void. If no writ of
execution was issued by the court within the five-year period, even a
motion filed within such prescriptive period would not suffice. A writ
issued by the court after the lapse of the five-year period is already null
and void.54The judgment creditor’s only recourse then is to file an
independent action, which must also be within the prescriptive period set
by law for the enforcement of judgments.
This Court subsequently reiterated its Arambuloruling in Ramos v.
Garciano,55 where we said:
There seems to be no serious dispute that the 4th alias writ of execution
was issued eight (8) daysafter the lapse of the five (5) year period from
the dateof the entry of judgment in Civil Case No. 367. As a general rule,
after the lapse of such period a judgment may be enforced only by
ordinary action, not by mere motion (Section 6, Rule 39, Rules of Court).
xxxx
The limitation that a judgment beenforced by execution within five years,
otherwise itloses efficacy, goes tothe very jurisdiction of the Court.A writ
issued after such period is void, and the failure to object thereto does
notvalidate it, for the reason that jurisdiction of courts is solely conferred
by law and not by express or implied will of the parties.56[emphasis
supplied]
To clearly restate these rulings, for execution by motion to be valid, the
judgment creditor mustensure the accomplishment of two acts within the
five-year prescriptive period. These are:a) the filing of the motion for the
issuance of the writ of execution; and b) the court’s actual issuance of the
writ.In the instanceswhen the Court allowed execution by motion even
after the lapse of five years, we only recognized one exception, i.e., when
the delay is caused or occasioned by actions of the judgment debtor and/or
is incurred for his benefit or advantage.57However, petitioner failed
toshow or cite circumstances showing how OCWD or Subic Water caused
it to belatedly file its second motion for execution.
Strictly speaking, the issuance of the writ should have been a ministerial
duty on the partof the trial court after it gave its July 23, 1999 order,
approving the first motion and directing the issuance of such writ. The
petitioner could have easily compelled the court to actually issue the writ
by filing a manifestation onthe existence of the July 23, 1999 order.
However, petitioner idly sat and waited for the five-year period to lapse
before it filed its second motion. Having slept on its rights, petitioner had
no one to blame but itself.
A writ of execution cannot affect a non- party to a case.
Strangers to a case are not bound by the judgment rendered in it. Thus, a
writ of execution can only beissued against a party and not against one
who did not have his day in court.58
Subic Water never participated in the proceedings in Civil Case No. 580-
0-90, where OCWD and petitioner were the contending parties. Subic
Water only came into the picture when one Atty. Segundo Mangohig,
claiming to beOCWD’s former counsel, manifested before the trial court
that OCWD had already been judicially dissolved and thatSubic Water
assumed OCWD’s personality.
In the present case, the compromise agreement, although signed by Mr.
Noli Aldip, did not carry the express conformity of Subic Water. Mr.
Aldip was never given any authorization to conform to or bind Subic
Obligations Part 2 | Page 51 of 143
Water in the compromiseagreement. Also, the agreement merely labeled
Subic Water as a co-maker. It did not contain any provision where Subic
Water acknowledged its solidary liability with OCWD.
Lastly, Subic Water did not voluntarily submit tothe court’s jurisdiction.
In fact, the motion it filed was only made as a special appearance,
precisely toavoid the court’s acquisition of jurisdiction over its person.
Without any participation inthe proceedings below, it cannot be made
liable on the writ ofexecution issuedby the court a quo.
B. Substantive Law Aspect
Solidary liability mustbe expressly stated.
The petitioner also argued that Subic Water could be held solidarily liable
under the writ of execution since it was identified as OCWD’s co-maker
in the compromise agreement.The petitioner’s basis for this is the
following provision of the agreement:
4. Both parties also requestthat Subic Water,Philippines which took over
the operations of the defendant Olongapo City Water District be made as
co-makerfor the obligation herein abovecited.59 [emphasis supplied]
As the rule stands, solidary liability is not presumed. This stems from Art.
1207 of the Civil Code, which provides:
Art. 1207. x x x There is a solidary liability only when the obligation
expressly so states, or when the law orthe nature of the obligation
requiressolidarity. [emphasis supplied]
In Palmares v. Court of Appeals,60 the Court did not hesitate to rule that
although a party to a promissory note was onlylabeled as a comaker, his
liability was that ofa surety, since the instrument expressly provided for
his joint and several liabilitywith the principal.
In the present case, the joint and several liability of Subic Water and
OCWD was nowhere clear in the agreement. The agreement simply and
plainly stated that petitioner and OCWD were only requestingSubic
Water to be a co-maker, in view of its assumption of OCWD’s water
operations. No evidence was presented to show that such request was ever
approved by Subic Water’s board of directors.
Under these circumstances, petitioner cannot proceed after Subic Water
for OCWD’s unpaid obligations. The law explicitly states that solidary
liability is not presumed and must be expressly provided for. Not being a
surety, Subic Water is not an insurer of OCWD’s obligations under the
compromise agreement. At best, Subic Water was merely a guarantor
against whom petitioner can claim, provided it was first shown that: a)
petitioner had already proceeded after the properties of OCWD, the
principal debtor; b) and despite this, the obligation under the compromise
agreement, remains to be not fully satisfied.61 But as will be discussed
next, Subic Water could not also be recognized as a guarantorof OCWD’s
obligations.
An officer’s actions can only bind the corporation ifhe had been
authorized to do so.
An examination of the compromise agreement reveals that it was not
accompanied by any document showing a grant of authority to Mr. Noli
Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity,
primarily acts through its board ofdirectors, which exercises its corporate
powers. In this capacity, the general rule is that, in the absence of authority
from the board ofdirectors, no person, not even its officers, can validly
bind a corporation.62 Section 23 of the Corporation Code provides:
Section 23. The board of directors or trustees.– Unless otherwise provided
in this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trusteesto be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1)
year until their successors are elected and qualified. (28a) [emphasis
supplied]
In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,63 we
held that under Section 23 of the Corporation Code, the power and
responsibility to decide whether a corporation can enter into a binding
contract is lodged with the board of directors, subject to the articles of
incorporation, by-laws, or relevant provisions of law. As we have clearly
explained in another case:
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual courseof the
particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added bycustom and usage, as usually
pertaining to the particular officer or agent,and such apparent powers as
the corporation has caused persons dealing with the officer oragent to
believe that ithas conferred.64 [emphasis ours]
Mr. Noli Aldip signedthe compromise agreement purely in his own
capacity. Moreover, the compromise agreement did not expressly provide
that Subic Water consented to become OCWD’s co-maker. As worded,
the compromise agreement merely provided that both parties
[also]requestSubic Water, Philippines, which took over the operations of
Olongapo City Water District be made asco-maker [for the obligations
above-cited].This request was never forwarded to Subic Water’s board of
directors. Even if due notification had been made (which does not
appearin the records), Subic Water’s board does not appear to have given
any approval tosuch request. Nodocument such as the minutes of Subic
Water’s board of directors’ meeting or a secretary’s certificate, purporting
to be an authorization to Mr. Aldip to conform to the compromise
agreement, was everpresented. In effect, Mr. Aldip’s act of signing the
compromise agreement was outside of his authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that
Subic Water’s articles of incorporation or by-laws granted him such
authority, then the compromise agreement he signed cannot bind Subic
Water. Subic Water cannot likewise be made a surety or even a guarantor
for OCWD’s obligations. OCWD’s debts under the compromise
agreement are its own corporate obligations to petitioner.
OCWD and Subic Water are two separate and different entities.
Petitioner practically suggests that since Subic Water took over OCWD’s
water operations in OlongapoCity, it also acquired OCWD’s juridical
personality, making the two entities one and the same.
This is an interpretation that we cannot make or adopt under the facts and
the evidence of this case. Subic Water clearly demonstrated that it was a
separate corporate entity from OCWD. OCWD is just a ten percent (10%)
shareholder of Subic Water. As a mere shareholder, OCWD’s juridical
personality cannot be equated nor confused with that ofSubic Water. It is
basic in corporation law that a corporation is a juridical entity vested with
a legal personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it.65 Under this
corporate reality, Subic Water cannot be held liable for OCWD’s
corporate obligations in the same manner that OCWD cannot be held
liable for the obligations incurred by Subic Water as a separate entity. The
corporate veilshould not and cannot be pierced unless it is clearly
established that the separate and distinct personality of the corporation
was used to justify a wrong, protect fraud, or perpetrate a deception.66
In Concept Builders, Inc. v. NLRC,67 the Court enumerated the possible
probative factors of identity which could justify the application of the
doctrine of piercing the corporate veil. These are:
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records; and
(4) Methods of conducting the business.68
The burden of proving the presence of any of these probative factors lies
with the one alleging it. Unfortunately, petitioner simply claimed that
Subic Water took over OCWD's water operations in Olongapo City. Apart
from this allegation, petitioner failed to demonstrate any link to justify the
construction that Subic Water and OCWD are one and the same.
Under this evidentiary situation, our duty is to respect the separate and
distinct personalities of these two juridical entities.
1âwphi1
We thus deny the present petition. The writ of execution issued by RTC
Olongapo, Br. 75, in favor of Olongapo City, is hereby confirmed to be
null and void. Accordingly, respondent Subic Water cannot be made
liable under this writ.
WHEREFORE, premises considered, we hereby DISMISS the petition.
The Court of Appeals' decision dated July 6, 2005 and resolution dated
January 3, 2006, annulling and setting aside the orders of the Regional
Trial Court of Olongapo, Branch 75 dated July 29, 2003 and October 7,
2003, and the writ of execution dated July 31, 2003, are hereby
AFFIRMED. Costs against the City of Olongapo.
SO ORDERED.
Estanislao and Africa Sinamban v. China Banking Corporation
G.R. No. 193890 March 11, 2015
Obligations Part 2 | Page 52 of 143
ESTANISLAO and AFRICA SINAMBAN, Petitioners, 36%
vs. PN
CHINA BANKING CORPORATION, Respondent. NUMBE PENALTY
R PRINCIPAL INTEREST FEE TOTAL
DECISION ------------ ------------------ ------------------ ------------------ -----------------
----------- ----- ----- ----- ------
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 of the OACL 325,000.00 184,679.00 258,050.00 767,729.00
Decision2 dated May 19, 2010 of the Court of Appeals (CA) in CA-G.R. 636-95
CV. No. 66274 modifying the Decision3 dated July 30, 1999 of the
Regional Trial Court (RTC) of San Fernando City, Pampanga, Branch 45 OACL 1,800,000.00 1,035,787.50 1,429,200.00 4,264,987.50
for Sum of Money in Civil Case No. 11708. 634-95

Factual Antecedents
CLF 005- 148,255.08 64,461.84 156,541.58 369,258.50
On February 19, 1990, the spouses Danilo and Magdalena Manalastas 93
(spouses Manalastas) executed a Real Estate Mortgage (REM)4 in favor ------------------ ------------------ ------------------ -----------------
----- ----- ----- ------
of respondent China Banking Corporation (Chinabank) over two real
estate properties covered by Transfer Certificate of Title Nos. 173532-R
and 173533-R, Registry of Deeds of Pampanga, to secure a loan from TOTAL P2,273,255.08 1,284,928.34 1,843,791.58 5,401,975.00
Chinabank of ₱700,000.00 intended as working capital in their rice
milling business. During the next few years, they executed several
TOTAL AMOUNT DUE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,401,975.00
amendments to the mortgage contract progressively increasing their credit --
line secured by the aforesaid mortgage. Thus, from ₱700,000.00 in 1990,
their loan limit was increased to ₱1,140,000.00 on October 31, 1990, then
to ₱1,300,000.00 on March 4, 1991, and then to2,450,000.00 on March PLUS 10% ATTORNEY’S FEE - - - - - - - - - - - - - - - - - - - - - - - - 540,197.50
--
23, 1994.5 The spouses Manalastas executed several promissory notes -----------------
(PNs) in favor of Chinabank. In two of the PNs, petitioners Estanislao and ------
Africa Sinamban (spouses Sinamban) signed as co-makers. 5,942,172.50
On November 18, 1998, Chinabank filed a Complaint6 for sum of money,
docketed as Civil Case No. 11708, against the spouses Manalastas and the ADD: OTHER EXPENSES
spouses Sinamban (collectively called the defendants) before the RTC.
The complaint alleged that they reneged on their loan obligations under
INSURANCE PREMIUM 22,618.37
the PNs which the spouses Manalastas executed in favor of Chinabank on
different dates, namely:
POSTING OF NOTICE OF SALE 700.00
1. PN No. OACL 634-95, dated April 24, 1995, for a loan principal of
₱1,800,000.00, with interest at 23% per annum; the spouses Manalastas
signed alone as makers.7 PUBLICATION FEE 17,500.00

2. PN No. OACL 636-95, dated May 23, 1995, for a loan principal of
REGISTRATION OF CERTIFICATE OF SALE 1,000.00
325,000.00, with interest at 21% per annum; the spouses Sinamban signed (MISC.)
as solidary co-makers;8
3. PN No. CLF 5-93, dated February 26, 1991, for a loan principal of REGISTRATION OF CERTIFICATE OF SALE (REGISTER OF
₱1,300,000.00, with interest at 22.5% per annum; only Estanislao DEEDS)
Sinamban signed as solidary co-maker.9
All of the three promissory notes carried an acceleration clause stating Registration 10,923.00
fee
that if the borrowers failed to pay any stipulated interest, installment or
loan amortization as they accrued, the notes shall, at the option of
Chinabank and without need of notice, immediately become due and Entry fee 30.00
demandable. A penalty clause also provides that an additional amount
shall be paid equivalent to 1/10 of 1% per day of the total amount due Legal fund 20.00
from date of default until fully paid, and the further sum of 10% of the
total amount due, inclusive of interests, charges and penalties, as and for
attorney’s fees and costs.10 BIR 60.00
certification
In Chinabank’s Statement of Account11 dated May 18, 1998, reproduced
below, the outstanding balances of the three loans are broken down, as Doc. stamps 69,000.00
follows: tax

(a) PN No. OACL 636-95 has an outstanding principal of ₱325,000.00,

cumulative interest of ₱184,679.00, and cumulative penalties of Capital Gains 276,000.00 356,033.00
tax
₱258,050.00, or a total amount due of ₱767,729.00; (b) PN No. OACL -----------------
634-95 has an outstanding principal of ₱1,800,000.00, cumulative ------
interest of ₱1,035,787.50, and cumulative penalties of 1,429,200.00, or a
total amount due of 4,264,987.50; and
EXPENSES INCURRED ON OCULAR 404.00
INSPECTION MADE ON
(c) PN No. CLF 5-93 has an outstanding principal of ₱148,255.08,
cumulative interest of ₱64,461.84, and cumulative penalties of TCT#173532-R & TCT#173533-R
₱156,541.58, or a total amount due of ₱369,258.50. Note that from the
original amount of ₱1,300,000.00, the loan principal had been reduced to
ATTORNEY’S FEE 18,000.00
only ₱148,255.08 as of May 18, 1998.12
CHINA BANKING CORPORATION
San Fernando, Pampanga 416,255.37
SPS. DANILO & MAGDALENA MANALASTAS
STATEMENT OF ACCOUNT
LESS: BID PRICE 4,600,000.00
As of May 18, 1998
----------
-

Obligations Part 2 | Page 53 of 143

 GRAND TOTAL - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
---
On the basis of the above statement of account, and pursuant to the
promissory notes, Chinabank instituted extrajudicial foreclosure
proceedings against the mortgage security. The foreclosure sale was held
on May 18, 1998, with Chinabank offering the highest bid of
₱4,600,000.00, but by then the defendants’ total obligations on the three
promissory notes had risen to ₱5,401,975.00, before attorney’s fees of
10% and auction expenses, leaving a loan deficiency of
₱1,758,427.87.14 Thus, in the complaint before the RTC, Chinabank
prayed to direct the defendants to jointly and severally settle the said
deficiency, plus 12% interest per annum after May 18, 1998,15 the date of
the auction sale.16
The spouses Sinamban, in their Answer17 dated February 26, 1999,
averred that they do not recall having executed PN No. OACL 636-95 for
₱325,000.00 on May 23, 1995, or PN No. CLF 5-93 for ₱1,300,000.00
on February 26, 1991, and had no participation in the execution of PN No.
OACL 634-95 for ₱1,800,000.00 on April 24, 1995. They however
admitted that they signed some PN forms as co-makers upon the request
of the spouses Manalastas who are their relatives; although they insisted
that they derived no money or other benefits from the loans. They denied
knowing about the mortgage security provided by the spouses
Manalastas, or that the latter defaulted on their loans. They also refused
to acknowledge the loan deficiency of ₱1,758,427.87 on the PNs,
insisting that the mortgage collateral was worth more than
₱10,000,000.00, enough to answer for all the loans, interests and
penalties. They also claimed that they were not notified of the auction
sale, and denied that they knew about the Certificate of Sale18 and the
Statement of Account dated May 18, 1998, and insisted that Chinabank
manipulated the foreclosure sale to exclude them therefrom. By way of
counterclaim, the Spouses Sinamban prayed for damages and attorney’s
fees of 25%, plus litigation expenses and costs of suit.
The spouses Manalastas were declared in default in the RTC
Order19 dated April 6, 1999, and Chinabank was allowed to present
evidence ex parte as against them, but at the pre-trial conference held on
July 5, 1999, the spouses Sinamban and their counsel also did not
appear;20 hence, in the Order21 dated July 5, 1999, the RTC allowed
Chinabank to present evidence ex parte against the defendants before the
Branch Clerk of Court. During the testimony of Rosario D. Yabut, Branch
Manager of Chinabank-San Fernando Branch, all the foregoing facts were
adduced and confirmed, particularly the identity of the pertinent loan
documents and the signatures of the defendants. On July 21, 1999, the
court admitted the exhibits of Chinabank and declared the case submitted
for decision.22
Ruling of the RTC
On July 30, 1999, the RTC rendered its Decision23 with the following
dispositive portion: WHEREFORE, premises considered, judgment is
hereby rendered in favor of plaintiff China Banking Corporation and
against defendant Sps. Danilo and Magdalena Manalastas and defendant
Sps. Estanislao and Africa Sinamban to jointly and severally pay
[Chinabank] the amount of ₱1,758,427.87, representing the deficiency
between the acquisition cost of the foreclosed real estate properties and
the outstanding obligation of defendants at the time of the foreclosure
sale; interest at the legal rate of 12% per annum from and after May 18,
1998; attorney’s fees equivalent to 10% of the aforesaid deficiency
amount and the litigation and costs of suit.
SO ORDERED.24
On Motion for Reconsideration25 of the spouses Sinamban dated August
27, 1999, to which Chinabank filed an Opposition26 dated September 14,
1999, the RTC in its Order27 dated October 22, 1999 set aside the
Decision dated July 30, 1999 with respect to the spouses Sinamban, in
this wise:
As it is undisputed that Exhibit "B" (Promissory Note dated April 24,
1995 in the amount of ₱1,800,000.00), was not signed by the Spouses
Sinamban it would not be equitable that the said defendants be made
solidarily liable for the payment of the said note as co-makers of their co-
defendants Spouses Manalastas who are the one[s] principally liable
thereto. Prescinding from this premise, the movant spouses could only be
held liable for the two (2) promissory notes they have signed, Promissory
Notes dated May 23, 1995 in the amount of ₱325,000.00 and February
26, 1991 in the amount of ₱1,300,000.00, Exhibits "A" and "C",
respectively. As the total amount of the said notes is only ₱1,625,000.00,
so even if we would add the interests due thereon, there is no way that the
said outstanding loan exceed[s] the acquisition cost of the foreclosed real
1,758,427.87 1
estate properties subject hereof in the amount of ₱4,600,000.00.It would
3 appear then that the Spouses Sinamban could not be held liable for the
deficiency in the amount of ₱1,758,427.87 which should justly be borne
alone by the defendant Spouses Manalastas. Guided by law and equity on
the matter, the court will not hesitate to amend a portion of its assailed
decision to serve the interest of justice.
WHEREFORE, premises considered, the decision dated July 30, 1999 is
hereby Reconsidered and Set Aside with respect to the Spouses Estanislao
and Africa Sinamban hereby Relieving them from any liability arising
from the said Decision which is affirmed in toto with respect to Spouses
Manalastas.
SO ORDERED.28 (Emphases ours)
The RTC ruled that the proceeds of the auction were sufficient to answer
for the two PNs co-signed by the spouses Sinamban, including interest
and penalties thereon, and therefore the spouses Manalastas should solely
assume the deficiency of ₱1,758,427.87. Chinabank moved for
reconsideration on November 11, 1999,29 to which the spouses Sinamban
filed their comment/opposition on November 23, 1999.30
On December 8, 1999, the RTC set aside its Order dated October 22, 1999
and reinstated its Decision dated July 30, 1999, with modification, as
follows:31
WHEREFORE, premises considered, the instant Motion for
Reconsideration of plaintiff is Granted.
Order dated October 22, 1999 is hereby Set Aside.
Accordingly, the dispositive portion of the Decision dated July 30, 1999
is hereby Modified to read as follows:
WHEREFORE, premises considered, judgment [is] hereby rendered in
favor of plaintiff China Banking Corporation and against the defendant
Sps. Danilo and Magdalena Manalastas and defendant Sps. Estanislao and
Africa Sinamban, ordering them to pay as follows:
1. For defendant Sps. Danilo and Magdalena Manalastas, the amount of
₱1,758,427.87, the deficiency between the acquisition cost of the
foreclosed real properties and their outstanding obligation;
2. For defendant Sps. Sinamban a percentage of ₱1,758,427.87, jointly
and severally with the defendant Sps. [Manalastas] only on two (2)
promissory notes;
3. The corresponding interests thereon at legal rate;
4. Attorney’s fees; and
5. Costs of suit.
SO ORDERED.32
This time the RTC held that the spouses Sinamban must, solidarily with
the spouses Manalastas, proportionately answer for the loan deficiency
pertaining to the two PNs they co-signed, since the mortgage security
provided by the spouses Manalastas secured all three PNs and thus also
benefited them as co-makers. But since they did not co-sign PN No.
OACL 634-95, the deficiency judgment pertaining thereto will be the sole
liability of the spouses Manalastas.
Ruling of the CA
From the Order dated December 8, 1999 of the RTC, the spouses
Sinamban appealed to the CA on January 4, 2000, docketed as CA-G.R.
CV. No. 66274, interposing the following errors of the RTC, viz:
I
THE LOWER COURT ERRED WHENIT HELD
DEFENDANTSAPPELLANTS SPS. SINAMBAN LIABLE TO PAY A
PERCENTAGE OF ₱1,758,427.87, JOINTLY AND SEVERALLY
WITH THE DEFENDANTS SPS. MANALASTAS ON THE TWO
PROMISSORY NOTES (EXHIBITS ‘C’ AND ‘A’).
II
THE LOWER COURT ERRED WHEN IT RECONSIDERED AND SET
ASIDE ITS PREVIOUS ORDER DATED 22 OCTOBER 1999
RELIEVING DEFENDANTS-APPELLANTS SPS. SINAMBAN
FROM ANY LIABILITY ARISING FROM THE DECISION DATED
30 JULY 1999.
III
THE LOWER COURT ERRED WHEN IT RENDERED THE VAGUE
ORDER OF 8 DECEMBER 1999 (ANNEX ‘B’ HEREOF).33
Obligations Part 2 | Page 54 of 143
On May 19, 2010, the CA rendered judgment denying the appeal, the fallo
of which reads: WHEREFORE, considering the foregoing disquisition,
the appeal is DENIED. The Decision dated 30 July 1999 and the Order
dated 08 December 1999 of the Regional Trial Court of San Fernando,
Pampanga, Branch 45 in Civil Case No. 11708are hereby AFFIRMED
with MODIFICATION in that:
1. Sps. Danilo and Magdalena Manalastas are solidarily liable for the
deficiency amount of Php507,741.62 (inclusive of 10% attorney’s fees)
on Promissory Note No. OACL 634-95 dated 24 April 1995;
2. Sps. Estanislao and Africa Sinamban are solidarily liable with Sps.
Danilo and Magdalena Manalastas for the amount of Php844,501.90
(inclusive of 10% attorney’s fees) on Promissory Note No. OACL00636-
95 dated 23 May 1995;
3. Estanislao Sinamban and Sps. Danilo and Magdalena Manalastas are
solidarily liable for the amount of Php406,184.35 (inclusive of 10%
attorney’s fees) on Promissory Note No. CLF 5-93 dated 26 February
1991; and
4. The foregoing amounts shall bear interest at the rate of 12% per annum
from 18 November 1998 until fully paid.
SO ORDERED.34 (Some emphasis ours)
Petition for Review to the Supreme Court
In this petition for review, the spouses Sinamban seek to be completely
relieved of any liability on the PNs, solidary or otherwise, by interposing
the following issues:
5.1 Whether or not the Honorable Court of Appeals erred in not
considering that the Sps. Sinamban’s obligations under PN# OACL 636-
95 dated May 23, 1995 in the principal sum of Php325,000.00 and PN#
CLF 5-93 dated February 26, 1991 in the principal sum of
Php1,300,000.00 are more onerous and burdensome on their part as mere
sureties (co-makers) of their co-defendants-spouses Danilo and
Magdalena Manalastas’ (hereinafter referred to as the "Sps. Manalastas")
obligations over the same, compared to the Sps. Manalastas’ sole
obligation under PN# OACL 634-95 dated 24 April 1995 in the principal
amount of Php1,800,000.00, such that the proceeds of the auction sale of
the properties securing all the three (3) promissory notes should first be
applied to satisfy the promissory notes signed by the Sps. Sinamban; and
5.2 Whether or not the Honorable Court of Appeals erred in not
considering the facts indubitably showing that it is the Sps. Sinamban, as
the debtors, and not the respondent bank, who are given the choice under
Article 1252 of the Civil Code to have the proceeds of the auction sale
applied as payments to their obligations under PN# OACL 636-95 dated
23 May 1995 and PN# CLF 5-93 dated 26 February 1991.35
Ruling of the Court
The Court modifies the CA decision.
A co-maker of a PN who binds
himself with the maker "jointly and
severally" renders himself directly
and primarily liable with the maker
on the debt, without reference to his
solvency.
"A promissory note is a solemn acknowledgment of a debt and a formal
commitment to repay it on the date and under the conditions agreed upon
by the borrower and the lender. A person who signs such an instrument is
bound to honor it as a legitimate obligation duly assumed by him through
the signature he affixes thereto as a token of his good faith. If he reneges
on his promise without cause, he forfeits the sympathy and assistance of
this Court and deserves instead its sharp repudiation."36
Employing words of common commercial usage and well-accepted legal
significance, the three subject PNs uniformly describe the solidary nature
and extent of the obligation assumed by each of the defendants in Civil
Case No. 11708, to wit:
"FOR VALUE RECEIVED, I/We jointly and severally promise to pay to
the CHINA BANKING CORPORATION or its order the sum of PESOS
x x x[.]"37 (Emphasis ours)
According to Article 2047 of the Civil Code,38 if a person binds himself
solidarily with the principal debtor, the provisions of Articles 1207 to
1222 of the Civil Code (Section 4, Chapter 3,Title I, Book IV) on joint
and solidary obligations shall be observed. Thus, where there is a
concurrence of two or more creditors or of two or more debtors in one and
the same obligation, Article 1207 provides 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." It is settled that
when the obligor or obligors undertake to be "jointly and severally" liable,
it means that the obligation is solidary.39 In this case, the spouses
Sinamban expressly bound themselves to be jointly and severally, or
solidarily, liable with the principal makers of the PNs, the spouses
Manalastas.
Moreover, as the CA pointed out, in Paragraph 5 of the PNs, the borrowers
and their co-makers expressly authorized Chinabank, as follows:
[T]o apply to the payment of this note and/or any other particular
obligation or obligations of all or any one of us to the CHINA BANKING
CORPORATION as the said Corporation may select, irrespective of the
dates of maturity, whether or not said obligations are then due, any or all
moneys, securities and things of value which are now or which may
hereafter be in its hands on deposit or otherwise to the credit of, or
belonging to, all or any one of us, and the CHINA BANKING
CORPORATION is hereby authorized to sell at public or private sale such
securities or things of value for the purpose of applying their proceeds to
such payments.40
Pursuant to Article 1216 of the Civil
Code, as well as Paragraph 5 of the
PNs, Chinabank opted to proceed
against the co-debtors
simultaneously, as implied in its
May 18, 1998 statement of
account when it applied the entire
amount of its auction bid to the
aggregate amount of the loan
obligations.
The PNs were executed to acknowledge each loan obtained from the
credit line extended by Chinabank, which the principal makers and true
beneficiaries, the spouses Manalastas, secured with a REM they executed
over their properties. As the RTC noted in its Order dated December 8,
1999, "the real estate mortgage was constituted to secure all the three (3)
promissory notes," concluding that "[j]ust as the liability of the [spouses]
Sinamban was lessened by the foreclosure proceedings, so must they also
share in the deficiency judgment, in proportion to the PNs they co-signed
with the [spouses] Manalastas, but notthe entire deficiency judgment of
₱1,758,427.87."41
Significantly, in modifying the RTC’s second amended decision, which
provides for the pro rata distribution of the loan deficiency of
₱1,758,427.87, the CA first applied the entire net proceeds of the auction
sale of ₱4,183,744.63 (after auction expenses of ₱416,255.37), to PN No.
OACL 634-95, which on May 18, 1998 had an outstanding balance of
₱4,264,987.50, inclusive of interest and penalties, plus 10% attorney’s
fees, or a total of ₱4,691,486.25. Thus, ₱4,691,486.25 less
₱4,183,744.63 leaves a deficiency on PN No. OACL 634-95 of
₱507,741.62, which is due solely from the spouses Manalastas.
As for PN No. OACL 636-95, the CA ordered the spouses Sinamban to
pay, solidarily with the spouses Manalastas, the entire amount due
thereon, ₱844,501.90, consisting of the loan principal of ₱767,729.00
plus accrued interest, penalties and 10% attorney’s fees; concerning PN
No. CLF 5-93, the CA ordered the spouses Sinamban to pay, solidarily
with the spouses Manalastas, the amount of ₱406,184.35, consisting of
the balance of the loan principal of ₱369,258.50 plus accrued interest,
penalties and 10% attorney’s fees. The CA further ordered the payment
of 12% interest per annum from November 18, 1998, the date of judicial
demand, until fully paid, on the above deficiencies.
Article 1216 of the Civil Code provides that "[t]he 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." Article 125242 of the
Civil Code does not apply, as urged by the petitioners, because in the said
article the situation contemplated is that of a debtor with several debts
due, whereas the reverse is true, with each solidary debt imputable to
several debtors.
While the CA correctly noted that the choice is given to the solidary
creditor to determine against whom he wishes to enforce payment, the CA
stated that Chinabank, in the exercise of the aforesaid option, chose to
apply the net proceeds of the extrajudicial foreclosure sale first to the PN
solely signed by spouses Manalastas.43 Thus, the net proceeds were
applied first to PN No. OACL 634-95 in the principal amount of
₱1,800,000.00, instead of pro rata to all three PNs due.
The Court finds this factual conclusion of the CA not supported by any
evidence or any previous arrangement. To the contrary, as clearly shown
1âwphi1
in its Statement of Account dated May 18, 1998, Chinabank opted to
Obligations Part 2 | Page 55 of 143
apply the entire auction proceeds to the aggregate amount of the three PNs
due, ₱5,401,975.00 (before attorney’s fees and auction expenses). Had it
chosen to enforce the debts as ruled by the CA, the Statement of Account
would have shown that the loan due on PN No. OACL 634-95 which is
₱4,691,486.25, should have been deducted first from the net auction
proceeds of ₱4,183,744.63, arriving at a deficiency of ₱507,741.62on PN
No. OACL 634-95 alone; thereby, leaving no remainder of the proceeds
available to partially settle the other two PNs. As it appears, the auction
proceeds are not even sufficient to cover just PN No. OACL 634-95 alone.
But as the Court has noted, by deducting the auction proceeds from the
aggregate amount of the three loans due, Chinabank in effect opted to
apply the entire proceeds of the auction simultaneously to all the three
loans. This implies that each PN will assume a pro rata portion of the
resulting deficiency on the total indebtedness as bears upon each PN’s
outstanding balance. Contrary to the spouses Sinamban’s insistence, none
of the three PNs is more onerous than the others to justify applying the
proceeds according to Article 1254 of the Civil Code, in relation to
Articles 1252 and 1253.44 Since each loan, represented by each PN, was
obtained under a single credit line extended by Chinabank for the working
capital requirements of the spouses Manalastas’ rice milling business,
which credit line was secured also by a single REM over their properties,
then each PN is simultaneously covered by the same mortgage security,
the foreclosure of which will also benefit them proportionately. No PN
enjoys any priority or preference in payment over the others, with the only
difference being that the spouses Sinamban are solidarily liable for the
deficiency on two of them.
Pursuant, then, to the order or manner of application of the auction
proceeds chosen by Chinabank, the solidary liability of the defendants
pertaining to each PN shall be as follows:
a) PN No. OACL 634-95, with a balance as of May 18, 1998 of
₱4,264,987.50: its share in the total deficiency is computed as the ratio of
₱4,264,987.50 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
₱1,388,320.55, (not ₱507,741.62 as found by the CA);
b) PN No. OACL 636-95, with a balance of ₱767,729.00 as of May 18,
1998: its share in the deficiency is computed as the ratio of ₱767,729.00
to ₱5,401,975.00, multiplied by ₱1,758,427.87, or ₱249,907.87, (not
₱844,501.90 as computed by the CA);
c) PN No. CLF 5-93, with an outstanding balance of ₱369,258.50 as of
May 18, 1998: its share in the deficiency is computed as the ratio of
₱369,258.50 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
₱120,199.45, (not ₱406,184.35 as found by the CA).
In short, in the CA decision, the spouses Manalastas would be solely
liable on PN No. OACL 634-95 for only ₱507,741.62(instead of the much
bigger amount of ₱1,388,320.55which this Court found), whereas the
spouses Sinamban would be solidarily liable with the spouses Manalastas
for a total deficiency of ₱1,250,686.25 on PN No. OACL 636-95 and PN
No. CLF 5-93. But under the Court’s interpretation, the spouses Sinamban
are solidarily liable with the spouses Manalastas for only ₱370,107.32on
the said two PNs, for a significant difference of ₱880,578.93.
Pursuant to Monetary Board
Circular No. 799, effective July 1,
2013, the rate of interest for the
loan or forbearance of any money,
goods or credits and the rate
allowed in judgments, in the
absence of an express contract as to
such rate of interest, has been
reduced to six percent (6%) per
annum.
The subject three PNs bear interests ranging from 21% to 23% per annum,
exclusive of penalty of 1% on the overdue amount per month of delay,
whereas in its complaint, Chinabank prayed to recover only the legal rate
of 12% on whatever judgment it could obtain. Meanwhile, the Monetary
Board of the Bangko Sentral ng Pilipinas in its Resolution No. 796 dated
May 16, 2013, and now embodied in Monetary Board Circular No. 799,
has effective July 1, 2013 reduced to 6%, from 12%, the legal rate of
interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of stipulation.45 Since
Chinabank demanded only the legal, not the stipulated, interest rate on the
deficiency and attorney’s fees due, the defendants will solidarily pay
interest on their shares in the deficiency at the rate of 12% from November
18, 1998 to June 30, 2013, and 6% from July 1, 2013 until fully paid.
WHEREFORE, the Decision of the Court of Appeals dated May 19, 2010
in CA-G.R. CV No. 66274 is MODIFIED. The Decision dated July 30,
1999 and the Order dated December 8, 1999 of the Regional Trial Court
of San Fernando City, Pampanga, Branch 45 in Civil Case No. 11708 are
hereby AFFIRMED with MODIFICATIONS as follows:
1. Spouses Danilo and Magdalena Manalastas are solidarily liable for the
deficiency amount of 1,388,320.55 (inclusive of 10% attorney’s fees) on
Promissory Note No. OACL 634-95 dated April 24, 1995;
2. Spouses Estanislao and Africa Sinamban are solidarily liable with
spouses Danilo and Magdalena Manalastas for the deficiency amount of
₱249,907.87(inclusive of 10% attorney’s fees) on Promissory Note No.
OACL 636-95 dated May 23, 1995;
3. Estanislao Sinamban and spouses Danilo and Magdalena Manalastas
are solidarily liable for the deficiency amount of ₱120,199.45 (inclusive
of 10% attorney’s fees) on Promissory Note No. CLF 5-93 dated February
26, 1991; and
4. The foregoing amounts shall bear interest at the rate of twelve percent
(12%) per annum from November 18, 1998 to June 30, 2013, and six
percent (6%) per annum from July 1, 2013 until fully paid.
SO ORDERED.
O BLIGATION WITH A PENAL CLAUSE
J Plus Asia Development Corp. v. Utility Assurance Corp.
G.R. No. 199650 June 26, 2013
J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,
vs.
UTILITY ASSURANCE CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a petition for review on certiorari under Rule 45 of the
1
1997 Rules of Civil Procedure, as amended, assailing the Decision dated
2
January 27,2011 and Resolution dated December 8, 2011 of the Court of
Appeals (CA) in CA-G.R. SP No. 112808.
The Facts
On December 24, 2007, petitioner J Plus Asia Development Corporation
represented by its Chairman, Joo Han Lee, and Martin E. Mabunay, doing
business under the name and style of Seven Shades of Blue Trading and
3
Services, entered into a Construction Agreement whereby the latter
undertook to build the former's 72-room condominium/hotel (Condotel
Building 25) located at the Fairways & Bluewaters Golf & Resort in
Boracay Island, Malay, Aklan. The project, costing ₱42,000,000.00, was
to be completed within one year or 365 days reckoned from the first
calendar day after signing of the Notice of Award and Notice to Proceed
and receipt of down payment (20% of contract price). The ₱8,400,000.00
4
down payment was fully paid on January 14, 2008. Payment of the
balance of the contract price will be based on actual work finished within
15 days from receipt of the monthly progress billings. Per the agreed work
schedule, the completion date of the project was December
5 6
2008. Mabuhay also submitted the required Performance Bond issued
by respondent Utility Assurance Corporation (UTASSCO) in the amount
equivalent to 20% down payment or ₱8.4 million.
Mabunay commenced work at the project site on January 7, 2008.
Petitioner paid up to the 7th monthly progress billing sent by Mabunay.
As of September 16, 2008, petitioner had paid the total amount of
₱15,979,472.03 inclusive of the 20% down payment. However, as of said
7
date, Mabunay had accomplished only 27.5% of the project.
8
In the Joint Construction Evaluation Result and Status Report signed by
Mabunay assisted by Arch. Elwin Olavario, and Joo Han Lee assisted by
Roy V. Movido, the following findings were accepted as true, accurate
and correct:
III STATUS OF PROJECT AS OF 14 NOVEMBER 2008
1) After conducting a joint inspection and evaluation of the project to
determine the actual percentage of accomplishment, the contracting
parties, assisted by their respective technical groups, SSB assisted by
Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and
Shiela Botardo, concluded and agreed that as of 14 November 2008, the
project is only Thirty One point Thirty Nine Percent (31.39%) complete.
2) Furthermore, the value of construction materials allocated for the
completion of the project and currently on site has been determined and
agreed to be ONE MILLION FORTY NINE THOUSAND THREE
Obligations Part 2 | Page 56 of 143
HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS
(₱1,049,364.45)
3) The additional accomplishment of SSB, reflected in its reconciled and
consolidated 8th and 9th billings, is Three point Eighty Five Percent
(3.85%) with a gross value of ₱1,563,553.34 amount creditable to SSB
after deducting the withholding tax is ₱1,538,424.84
4) The unrecouped amount of the down payment is ₱2,379,441.53 after
deducting the cost of materials on site and the net billable amount
reflected in the reconciled and consolidated 8th and 9th billings. The
uncompleted portion of the project is 68.61% with an estimated value per
9 condition in the Performance Bond did not clearly state the limitation of
construction agreement signed is ₱27,880,419.52. (Emphasis supplied.)
On November 19, 2008, petitioner terminated the contract and sent
demand letters to Mabunay and respondent surety. As its demands went
10
unheeded, petitioner filed a Request for Arbitration before the
Construction Industry Arbitration Commission (CIAC). Petitioner prayed
that Mabunay and respondent be ordered to pay the sums of
₱8,980,575.89 as liquidated damages and ₱2,379,441.53 corresponding
to the unrecouped down payment or overpayment petitioner made to
Mabunay.
11
12
In his Answer, Mabunay claimed that the delay was caused by
retrofitting and other revision works ordered by Joo Han Lee. He asserted
that he actually had until April 30, 2009 to finish the project since the 365
days period of completion started only on May 2, 2008 after clearing the
retrofitted old structure. Hence, the termination of the contract by
petitioner was premature and the filing of the complaint against him was
baseless, malicious and in bad faith.
Respondent, on the other hand, filed a motion to dismiss on the ground
that petitioner has no cause of action and the complaint states no cause of
action against it. The CIAC denied the motion to dismiss. Respondent’s
13
motion for reconsideration was likewise denied.
In its Answer Ex Abundante Ad Cautelam With Compulsory
14
Counterclaims and Cross-claims, respondent argued that the
performance bond merely guaranteed the 20% down payment and not the
entire obligation of Mabunay under the Construction Agreement. Since
the value of the project’s accomplishment already exceeded the said
amount, respondent’s obligation under the performance bond had been
fully extinguished. As to the claim for alleged overpayment to Mabunay,
respondent contended that it should not be credited against the 20% down
payment which was already exhausted and such application by petitioner
is tantamount to reviving an obligation that had been legally extinguished
by payment. Respondent also set up a cross-claim against Mabunay who
executed in its favor an Indemnity Agreement whereby Mabunay
undertook to indemnify respondent for whatever amounts it may be
adjudged liable to pay petitioner under the surety bond.
Both petitioner and respondent submitted their respective documentary
and testimonial evidence. Mabunay failed to appear in the scheduled
hearings and to present his evidence despite due notice to his counsel of
record. The CIAC thus declared that Mabunay is deemed to have waived
15
his right to present evidence.
16
On February 2, 2010, the CIAC rendered its Decision and made the
following award:
Accordingly, in view of our foregoing discussions and dispositions, the
Tribunal hereby adjudges, orders and directs:
1. Respondents Mabunay and Utassco to jointly and severally pay
claimant the following:
a) ₱4,469,969.90, as liquidated damages, plus legal interest thereon at the
rate of 6% per annum computed from the date of this decision up to the
time this decision becomes final, and 12% per annum computed from the
date this decision becomes final until fully paid, and
b) ₱2,379,441.53 as unrecouped down payment plus interest thereon at
the rate of 6% per annum computed from the date of this decision up to
the time this decision becomes final, and 12% per annum computed from
the date this decision becomes final until fully paid.
It being understood that respondent Utassco’s liability shall in no case
exceed ₱8.4 million.
2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89,
which is respondent Mabunay’s share in the arbitration cost claimant had
advanced, with legal interest thereon from January 8, 2010 until fully
paid.
3. Respondent Mabunay to indemnify respondent Utassco of the amounts
respondent Utassco will have paid to claimant under this decision, plus
interest thereon at the rate of 12% per annum computed from the date he
is notified of such payment made by respondent Utassco to claimant until
fully paid, and to pay Utassco ₱100,000.00 as attorney’s fees.
SO ORDERED.
17
Dissatisfied, respondent filed in the CA a petition for review under Rule
43 of the 1997 Rules of Civil Procedure, as amended.
In the assailed decision, the CA agreed with the CIAC that the specific
18
the surety’s liability. Pursuant to Article 1377 of the Civil Code, the CA
said that the provision should be construed in favor of petitioner
considering that the obscurely phrased provision was drawn up by
respondent and Mabunay. Further, the appellate court stated that
respondent could not possibly guarantee the down payment because it is
not Mabunay who owed the down payment to petitioner but the other way
around. Consequently, the completion by Mabunay of 31.39% of the
construction would not lead to the extinguishment of respondent’s
liability. The ₱8.4 million was a limit on the amount of respondent’s
liability and not a limitation as to the obligation or undertaking it
guaranteed.
However, the CA reversed the CIAC’s ruling that Mabunay had incurred
delay which entitled petitioner to the stipulated liquidated damages and
unrecouped down payment. Citing Aerospace Chemical Industries, Inc.
19
v. Court of Appeals, the appellate court said that not all requisites in
order to consider the obligor or debtor in default were present in this case.
It held that it is only from December 24, 2008 (completion date) that we
should reckon default because the Construction Agreement provided only
for delay in the completion of the project and not delay on a monthly basis
using the work schedule approved by petitioner as the reference point.
Hence, petitioner’s termination of the contract was premature since the
delay in this case was merely speculative; the obligation was not yet
demandable.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the instant petition for review is
GRANTED. The assailed Decision dated 13 January 2010 rendered by
the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby
REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated
24 November 2010 issued by the same tribunal is hereby ANNULLED
and SET ASIDE.
20
SO ORDERED.
Petitioner moved for reconsideration of the CA decision while respondent
filed a motion for partial reconsideration. Both motions were denied.
The Issues
Before this Court petitioner seeks to reverse the CA insofar as it denied
petitioner’s claims under the Performance Bond and to reinstate in its
entirety the February 2, 2010 CIAC Decision. Specifically, petitioner
alleged that –
A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT
HOLDING THAT THE ALTERNATIVE DISPUTE RESOLUTION
ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE
RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF
JURISDICTION TO REVIEW ARBITRAL AWARDS.
B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING
THE ARBITRAL AWARD ON AN ISSUE THAT WAS NOT RAISED
IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF
REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED
IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.
C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING
ON THE CASE OF AEROSPACE CHEMICAL INDUSTRIES, INC. v.
COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO
21
DO WITH CONSTRUCTION AGREEMENTS.
Our Ruling
On the procedural issues raised, we find no merit in petitioner’s
contention that with the institutionalization of alternative dispute
22
resolution under Republic Act (R.A.) No. 9285, otherwise known as the
Alternative Dispute Resolution Act of 2004, the CA was divested of
jurisdiction to review the decisions or awards of the CIAC. Petitioner
erroneously relied on the provision in said law allowing any party to a
Obligations Part 2 | Page 57 of 143
domestic arbitration to file in the Regional Trial Court (RTC) a petition
either to confirm, correct or vacate a domestic arbitral award.
We hold that R.A. No. 9285 did not confer on regional trial courts
jurisdiction to review awards or decisions of the CIAC in construction
disputes. On the contrary, Section 40 thereof expressly declares that
confirmation by the RTC is not required, thus:
SEC. 40. Confirmation of Award. – The confirmation of a domestic
arbitral award shall be governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same
manner as final and executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial
court in accordance with the Rules of Procedure to be promulgated by the
Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court
to be executory as provided under E.O. No. 1008. (Emphasis supplied.)
Executive Order (EO) No. 1008 vests upon the CIAC original and
exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion of
the contract, or after the abandonment or breach thereof. By express
provision of Section 19 thereof, the arbitral award of the CIAC is final
and unappealable, except on questions of law, which are appealable to the
Supreme Court. With the amendments introduced by R.A. No. 7902 and
promulgation of the 1997 Rules of Civil Procedure, as amended, the
CIAC was included in the enumeration of quasijudicial agencies whose
decisions or awards may be appealed to the CA in a petition for review
under Rule 43. Such review of the CIAC award may involve either
23
questions of fact, of law, or of fact and law.
Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR
Rules) promulgated by this Court and which took effect on October 30,
2009. Since R.A. No. 9285 explicitly excluded CIAC awards from
domestic arbitration awards that need to be confirmed to be executory,
said awards are therefore not covered by Rule 11 of the Special ADR
24
Rules, as they continue to be governed by EO No. 1008, as amended
and the rules of procedure of the CIAC. The CIAC Revised Rules of
25
Procedure Governing Construction Arbitration provide for the manner
and mode of appeal from CIAC decisions or awards in Section 18 thereof,
which reads:
SECTION 18.2 Petition for review. – A petition for review from a final
award may be taken by any of the parties within fifteen (15) days from
receipt thereof in accordance with the provisions of Rule 43 of the Rules
of Court.
As to the alleged error committed by the CA in deciding the case upon an
issue not raised or litigated before the CIAC, this assertion has no basis.
Whether or not Mabunay had incurred delay in the performance of his
obligations under the Construction Agreement was the very first issue
26
stipulated in the Terms of Reference (TOR), which is distinct from the
issue of the extent of respondent’s liability under the Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends
petitioner’s right to the liquidated damages pursuant to the Construction
Agreement. Contrary to the CIAC’s findings, the CA opined that delay
should be reckoned only after the lapse of the one-year contract period,
and consequently Mabunay’s liability for liquidated damages arises only
upon the happening of such condition.
We reverse the CA.
Default or mora on the part of the debtor is the delay in the fulfillment of
the prestation by reason of a cause imputable to the former. It is the non-
27
fulfillment of an obligation with respect to time.
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from them
the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to complete certain work within
a certain time is liable for the damage for not completing it within such
28
time, unless the delay is excused or waived.
The Construction Agreement provides in Article 10 thereof the following
conditions as to completion time for the project
1. The CONTRACTOR shall complete the works called for under this
Agreement within ONE (1) YEAR or 365 Days reckoned from the 1st
calendar day after signing of the Notice of Award and Notice to Proceed
and receipt of down payment.
2. In this regard the CONTRACTOR shall submit a detailed work
schedule for approval by OWNER within Seven (7) days after signing of
this Agreement and full payment of 20% of the agreed contract price. Said
detailed work schedule shall follow the general schedule of activities and
shall serve as basis for the evaluation of the progress of work by
29
CONTRACTOR.
In this jurisdiction, the following requisites must be present in order that
the debtor may be in default: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that the
30
creditor requires the performance judicially or extrajudicially.
In holding that Mabunay has not at all incurred delay, the CA pointed out
that the obligation to perform or complete the project was not yet
demandable as of November 19, 2008 when petitioner terminated the
contract, because the agreed completion date was still more than one
month away (December 24, 2008). Since the parties contemplated delay
in the completion of the entire project, the CA concluded that the failure
of the contractor to catch up with schedule of work activities did not
constitute delay giving rise to the contractor’s liability for damages.
We cannot sustain the appellate court’s interpretation as it is inconsistent
with the terms of the Construction Agreement. Article 1374 of the Civil
Code requires that 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. Here, the work schedule approved
by petitioner was intended, not only to serve as its basis for the payment
of monthly progress billings, but also for evaluation of the progress of
work by the contractor. Article 13.01 (g) (iii) of the Construction
Agreement provides that the contractor shall be deemed in default if,
among others, it had delayed without justifiable cause the completion of
the project "by more than thirty (30) calendar days based on official work
31
schedule duly approved by the OWNER."
Records showed that as early as April 2008, or within four months after
Mabunay commenced work activities, the project was already behind
schedule for reasons not attributable to petitioner. In the succeeding
months, Mabunay was still unable to catch up with his accomplishment
even as petitioner constantly advised him of the delays, as can be gleaned
from the following notices of delay sent by petitioner’s engineer and
construction manager, Engr. Sheila N. Botardo:
April 30, 2008
Seven Shades of Blue
Boracay Island
Malay, Aklan
1âwphi1
Attention : Mr. Martin Mabunay
General Manager
Thru : Engr. Reynaldo Gapasin
Project : Villa Beatriz
Subject : Notice of Delay
Dear Mr. Mabunay:
This is to formalize our discussion with your Engineers during our
meeting last April 23, 2008 regarding the delay in the implementation of
major activities based on your submitted construction schedule.
Substantial delay was noted in concreting works that affects your roof
framing that should have been 40% completed as of this date. This delay
will create major impact on your over-all schedule as the finishing works
will all be dependent on the enclosure of the building.
In this regard, we recommend that you prepare a catch-up schedule and
expedite the delivery of critical materials on site. We would highly
appreciate if you could attend our next regular meeting so we could
immediately address this matter. Thank you.
Obligations Part 2 | Page 58 of 143
Very truly yours,
Engr. Sheila N. Botardo
32
Construction Manager – LMI/FEPI
October 15, 2008
xxxx
Dear Mr. Mabunay,
We have noticed continuous absence of all the Engineers that you have
assigned on-site to administer and supervise your contracted work. For
the past two (2) weeks, your company does not have a Technical
Representative manning the jobsite considering the critical activities that
are in progress and the delays in schedule that you have already incurred.
In this regard, we would highly recommend the immediate replacement
of your Project Engineer within the week.
We would highly appreciate your usual attention on this matter.
33
xxxx
November 5, 2008
xxxx
Dear Mr. Mabunay,
This is in reference to your discussion during the meeting with Mr. Joohan
Lee last October 30, 2008 regarding the construction of the Field Office
and Stock Room for Materials intended for Villa Beatriz use only. We
understand that you have committed to complete it November 5, 2008 but
as of this date there is no improvement or any ongoing construction
activity on the said field office and stockroom.
We are expecting deliveries of Owner Supplied Materials very soon,
therefore, this stockroom is badly needed. We will highly appreciate if
this matter will be given your immediate attention.
Thank you.
34
xxxx
November 6, 2008
xxxx
Dear Mr. Mabunay,
We would like to call your attention regarding the decrease in your
manpower assigned on site. We have observed that for the past three (3)
weeks instead of increasing your manpower to catch up with the delay it
was reduced to only 8 workers today from an average of 35 workers in
the previous months.
Please note that based on your submitted revised schedule you are already
delayed by approximately 57% and this will worsen should you not
address this matter properly.
We are looking forward for [sic] your cooperation and continuous
commitment in delivering this project as per contract agreement.
35
xxxx
Subsequently, a joint inspection and evaluation was conducted with the
assistance of the architects and engineers of petitioner and Mabunay and
it was found that as of November 14, 2008, the project was only 31.39%
complete and that the uncompleted portion was 68.61% with an estimated
value per Construction Agreement as ₱27,880,419.52. Instead of
doubling his efforts as the scheduled completion date approached,
Mabunay did nothing to remedy the delays and even reduced the
deployment of workers at the project site. Neither did Mabunay, at
anytime, ask for an extension to complete the project. Thus, on November
19, 2008, petitioner advised Mabunay of its decision to terminate the
contract on account of the tremendous delay the latter incurred. This was
followed by the claim against the Performance Bond upon the respondent
on December 18, 2008.
Petitioner’s claim against the Performance Bond included the liquidated
damages provided in the Construction Agreement, as follows:
ARTICLE 12 – LIQUIDATED DAMAGES:
12.01 Time is of the essence in this Agreement. Should the
CONTRACTOR fail to complete the PROJECT within the period
stipulated herein or within the period of extension granted by the
OWNER, plus One (1) Week grace period, without any justifiable reason,
the CONTRACTOR hereby agrees –
a. The CONTRACTOR shall pay the OWNER liquidated damages
equivalent to One Tenth of One Percent (1/10 of 1%) of the Contract
Amount for each day of delay after any and all extensions and the One (1)
week Grace Period until completed by the CONTRACTOR.
b. The CONTRACTOR, even after paying for the liquidated damages due
to unexecuted works and/or delays shall not relieve it of the obligation to
complete and finish the construction.
Any sum which maybe payable to the OWNER for such loss may be
deducted from the amounts retained under Article 9 or retained by the
OWNER when the works called for under this Agreement have been
finished and completed.
Liquidated Damage[s] payable to the OWNER shall be automatically
deducted from the contractors collectibles without prior consent and
concurrence by the CONTRACTOR.
12.02 To give full force and effect to the foregoing, the CONTRACTOR
hereby, without necessity of any further act and deed, authorizes the
OWNER to deduct any amount that may be due under Item (a) above,
from any and all money or amounts due or which will become due to the
CONTRACTOR by virtue of this Agreement and/or to collect such
amounts from the Performance Bond filed by the CONTRACTOR in this
36
Agreement. (Emphasis supplied.)
Liability for liquidated damages is governed by Articles 2226 to 2228 of
the Civil Code, which provide:
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.
ART. 2228. When the breach of the contract committed by the defendant
is not the one contemplated by the parties in agreeing upon the liquidated
damages, the law shall determine the measure of damages, and not the
stipulation.
A stipulation for liquidated damages is attached to an obligation in order
to ensure 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
37
breach. The amount agreed upon answers for damages suffered by the
38
owner due to delays in the completion of the project. As a precondition
to such award, however, there must be proof of the fact of delay in the
39
performance of the obligation.
Concededly, Article 12.01 of the Construction Agreement mentioned
only the failure of the contractor to complete the project within the
stipulated period or the extension granted by the owner. However, this
will not defeat petitioner’s claim for damages nor respondent’s liability
under the Performance Bond. Mabunay was clearly in default considering
the dismal percentage of his accomplishment (32.38%) of the work he
contracted on account of delays in executing the scheduled work activities
and repeated failure to provide sufficient manpower to expedite
construction works. The events of default and remedies of the Owner are
set forth in Article 13, which reads:
ARTICLE 13 – DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an Event of Default on the
part of the CONTRACTOR.
xxxx
g. In case the CONTRACTOR has done any of the following:
(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or
has suspended the progress of the Project for twenty-eight days
(iii.) without justifiable cause, has delayed the completion of the Project
by more than thirty (30) calendar days based on official work schedule
duly approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing
the construction works in accordance with the Agreement or is
persistently or flagrantly neglecting to carry out its obligations under the
Agreement.
Obligations Part 2 | Page 59 of 143
(v.) has, to the detriment of good workmanship or in defiance of the
Owner’s instructions to the contrary, sublet any part of the Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons
cited in Item 13.01, the OWNER may after giving fourteen (14) calendar
days notice in writing to the CONTRACTOR, enter upon the site and
expel the CONTRACTOR therefrom without voiding this Agreement, or
releasing the CONTRACTOR from any of its obligations, and liabilities
under this Agreement. Also without diminishing or affecting the rights
and powers conferred on the OWNER by this Agreement and the
OWNER may himself complete the work or may employ any other
contractor to complete the work. If the OWNER shall enter and expel the
CONTRACTOR under this clause, the OWNER shall be entitled to
confiscate the performance bond of the CONTRACTOR to compensate
for all kinds of damages the OWNER may suffer. All expenses incurred
to finish the Project shall be charged to the CONTRACTOR and/or his
bond. Further, the OWNER shall not be liable to pay the CONTRACTOR
until the cost of execution, damages for the delay in the completion, if
any, and all; other expenses incurred by the OWNER have been
ascertained which amount shall be deducted from any money due to the
CONTRACTOR on account of this Agreement. The CONTRACTOR
will not be compensated for any loss of profit, loss of goodwill, loss of
use of any equipment or property, loss of business opportunity, additional
financing cost or overhead or opportunity losses related to the
40
unaccomplished portions of the work. (Emphasis supplied.)
As already demonstrated, the contractor’s default in this case pertains to
his failure to substantially perform the work on account of tremendous
delays in executing the scheduled work activities. Where a party to a
building construction contract fails to comply with the duty imposed by
the terms of the contract, a breach results for which an action may be
maintained to recover the damages sustained thereby, and of course, a
breach occurs where the contractor inexcusably fails to perform
41
substantially in accordance with the terms of the contract.
The plain and unambiguous terms of the Construction Agreement
authorize petitioner to confiscate the Performance Bond to answer for all
kinds of damages it may suffer as a result of the contractor’s failure to
complete the building. Having elected to terminate the contract and expel
the contractor from the project site under Article 13 of the said
Agreement, petitioner is clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to the breach committed by
Mabunay. Such stipulation allowing the confiscation of the contractor’s
performance bond partakes of the nature of a penalty clause. A penalty
clause, expressly recognized by law, is an accessory undertaking to
assume greater liability on the part of the obligor in case of breach of an
obligation. It functions to strengthen the coercive force of obligation and
to provide, in effect, for what could be the liquidated damages resulting
from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach. It is well-settled that so long
as such stipulation does not contravene law, morals, or public order, it is
42
strictly binding upon the obligor.
Respondent, however, insists that it is not liable for the breach committed
by Mabunay because by the terms of the surety bond it issued, its liability
is limited to the performance by said contractor to the extent equivalent
to 20% of the down payment. It stresses that with the 32.38% completion
of the project by Mabunay, its liability was extinguished because the
value of such accomplishment already exceeded the sum equivalent to
20% down payment (₱8.4 million).
The appellate court correctly rejected this theory of respondent when it
ruled that the Performance Bond guaranteed the full and faithful
compliance of Mabunay’s obligations under the Construction Agreement,
and that nowhere in law or jurisprudence does it state that the obligation
or undertaking by a surety may be apportioned.
The pertinent portions of the Performance Bond provide:
The conditions of this obligation are as follows:
Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF
BLUE CONSTRUCTION AND DEVELOPMENT, INC. to post a bond
of the abovestated sum to guarantee 20% down payment for the
construction of Building 25 (Villa Beatriz) 72-Room Condotel, The
Lodgings inside Fairways and Bluewater, Boracay Island, Malay, Aklan.
Whereas, said contract required said Principal to give a good and
sufficient bond in the above-stated sum to secure the full and faithful
performance on his part of said contract.
It is a special provision of this undertaking that the liability of the surety
under this bond shall in no case exceed the sum of ₱8,400,000.00
Philippine Currency.
Now, Therefore, if the Principal shall well and truly perform and fulfill
all the undertakings, covenants, terms, conditions and agreements
stipulated in said contract, then this obligation shall be null and void;
43
otherwise to remain in full force and effect. (Emphasis supplied.)
While the above condition or specific guarantee is unclear, the rest of the
recitals in the bond unequivocally declare that it secures the full and
faithful performance of Mabunay’s obligations under the Construction
Agreement with petitioner. By its nature, a performance bond guarantees
that the contractor will perform the contract, and usually provides that if
the contractor defaults and fails to complete the contract, the surety can
itself complete the contract or pay damages up to the limit of the
44
bond. Moreover, the rule is that if the language of the bond is
ambiguous or uncertain, it will be construed most strongly against a
compensated surety and in favor of the obligees or beneficiaries under the
bond, in this case petitioner as the Project Owner, for whose benefit it was
45
ostensibly executed.
The imposition of interest on the claims of petitioner is likewise in order.
As we held in Commonwealth Insurance Corporation v. Court of
46
Appeals
Petitioner argues that it should not be made to pay interest because its
issuance of the surety bonds was made on the condition that its liability
shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioner’s argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese
and Union Gurantee Co. and reiterated in Plaridel Surety & Insurance Co.,
Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic
vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we
have sustained the principle that if a surety upon demand fails to pay, he
can be held liable for interest, even if in thus paying, its liability becomes
more than the principal obligation. The increased liability is not because
of the contract but because of the default and the necessity of judicial
collection.
Petitioner’s liability under the suretyship contract is different from its
liability under the law. There is no question that as a surety, petitioner
1âwphi1
should not be made to pay more than its assumed obligation under the
surety bonds. However, it is clear from the above-cited jurisprudence that
petitioner’s liability for the payment of interest is not by reason of the
suretyship agreement itself but because of the delay in the payment of its
47
obligation under the said agreement. (Emphasis supplied; citations
omitted.)
WHEREFORE, the petition for review on certiorari is GRANTED. The
Decision dated January 27, 2011 and Resolution dated December 8, 2011
of the Court of Appeals in CA-G.R. SP No. 112808 are hereby
REVERSED and SET ASIDE.
The Award made in the Decision dated February 2, 2010 of the
Construction Industry Arbitration Commission Is hereby REINSTATED
with the following MODIFICATIONS:
"Accordingly, in view of our foregoing discussions and dispositions, the
Tribunal hereby adjudges, orders and directs:
1) Respondent Utassco to pay to petitioner J Plus Asia Development
Corporation the full amount of the Performance Bond, ₱8,400,000.00,
pursuant to Art. 13 of the Construction Agreement dated December 24,
2007, with interest at the rate of 6% per annum computed from the date
of the filing of the complaint until the finality of this decision, and 12%
per annum computed from the date this decision becomes final until fully
paid; and
2) Respondent Mabunay to indemnify respondent Utassco of the amounts
respondent Utassco will have paid to claimant under this decision, plus
interest thereon at the rate of 12% per annum computed from the date he
is notified of such payment made by respondent Utassco to claimant until
fully paid, and to pay Utassco ₱100,000.00 as attorney's fees.
SO ORDERED.
With the above modifications, the Writ of Execution dated November 24,
2010 issued by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is
hereby REINSTATED and UPHELD.
No pronouncement as to costs.
Obligations Part 2 | Page 60 of 143
SO ORDERED. xxxx
Nacar v. Gallery Frames WHEREFORE, premises considered, judgment is hereby rendered
G.R. No. 189871 August 13, 2013 finding respondents guilty of constructive dismissal and are therefore,
ordered:
DARIO NACAR, PETITIONER,
vs. To pay jointly and severally the complainant the amount of sixty-two
GALLERY FRAMES AND/OR FELIPE BORDEY, thousand nine hundred eighty-six pesos and 56/100 (₱62,986.56) Pesos
JR., RESPONDENTS. representing his separation pay;
DECISION To pay jointly and severally the complainant the amount of nine (sic) five
thousand nine hundred thirty-three and 36/100 (₱95,933.36) representing
PERALTA, J.: his backwages; and
1
This is a petition for review on certiorari assailing the Decision dated All other claims are hereby dismissed for lack of merit.
September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP No.
2 4
98591, and the Resolution dated October 9, 2009 denying petitioner’s SO ORDERED.
motion for reconsideration. Respondents appealed to the NLRC, but it was dismissed for lack of merit
5
The factual antecedents are undisputed. in the Resolution dated February 29, 2000. Accordingly, the NLRC
sustained the decision of the Labor Arbiter. Respondents filed a motion
Petitioner Dario Nacar filed a complaint for constructive dismissal before 6
the Arbitration Branch of the National Labor Relations Commission for reconsideration, but it was denied.
(NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Dissatisfied, respondents filed a Petition for Review on Certiorari before
Jr., docketed as NLRC NCR Case No. 01-00519-97. the CA. On August 24, 2000, the CA issued a Resolution dismissing the
3 petition. Respondents filed a Motion for Reconsideration, but it was
On October 15, 1998, the Labor Arbiter rendered a Decision in favor of 7
petitioner and found that he was dismissed from employment without a likewise denied in a Resolution dated May 8, 2001.
valid or just cause. Thus, petitioner was awarded backwages and Respondents then sought relief before the Supreme Court, docketed as
separation pay in lieu of reinstatement in the amount of ₱158,919.92. The G.R. No. 151332. Finding no reversible error on the part of the CA, this
dispositive portion of the decision, reads: 8
Court denied the petition in the Resolution dated April 17, 2002.
With the foregoing, we find and so rule that respondents failed to
discharge the burden of showing that complainant was dismissed from An Entry of Judgment was later issued certifying that the resolution
9
employment for a just or valid cause. All the more, it is clear from the became final and executory on May 27, 2002. The case was, thereafter,
records that complainant was never afforded due process before he was referred back to the Labor Arbiter. A pre-execution conference was
terminated. As such, we are perforce constrained to grant complainant’s 10
consequently scheduled, but respondents failed to appear.
prayer for the payments of separation pay in lieu of reinstatement to his
former position, considering the strained relationship between the parties, On November 5, 2002, petitioner filed a Motion for Correct Computation,
and his apparent reluctance to be reinstated, computed only up to praying that his backwages be computed from the date of his dismissal on
promulgation of this decision as follows: January 24, 1997 up to the finality of the Resolution of the Supreme Court
11
on May 27, 2002. Upon recomputation, the Computation and
SEPARATION PAY Examination Unit of the NLRC arrived at an updated amount in the sum
12
of ₱471,320.31.
Date Hired = August 1990
13
On December 2, 2002, a Writ of Execution was issued by the Labor
Arbiter ordering the Sheriff to collect from respondents the total amount
Rate = ₱198/day
of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution,
arguing, among other things, that since the Labor Arbiter awarded
Date of Decision = Aug. 18, 1998 separation pay of ₱62,986.56 and limited backwages of ₱95,933.36, no
more recomputation is required to be made of the said awards. They
claimed that after the decision becomes final and executory, the same
Length of Service = 8 yrs. & 1 month 14
cannot be altered or amended anymore. On January 13, 2003, the Labor
15
Arbiter issued an Order denying the motion. Thus, an Alias Writ of
₱198.00 x 26 days x 8 months = ₱41,184.00 16
Execution was issued on January 14, 2003.

BACKWAGES Respondents again appealed before the NLRC, which on June 30, 2003
17
issued a Resolution granting the appeal in favor of the respondents and
Date Dismissed = January 24, 1997 ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the
Rate per day = ₱196.00 Resolution of the NLRC to be final and executory. Consequently, another
pre-execution conference was held, but respondents failed to appear on
time. Meanwhile, petitioner moved that an Alias Writ of Execution be
Date of Decisions = Aug. 18, 1998 issued to enforce the earlier recomputed judgment award in the sum of
18
₱471,320.31.
a) 1/24/97 to 2/5/98 = 12.36 mos.
The records of the case were again forwarded to the Computation and
Examination Unit for recomputation, where the judgment award of
₱196.00/day x 12.36 mos. = ₱62,986.56 petitioner was reassessed to be in the total amount of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering
b) 2/6/98 to 8/18/98 = 6.4 months respondents to pay him the original amount as determined by the Labor
Arbiter in his Decision dated October 15, 1998, pending the final
Prevailing Rate per day = ₱62,986.00 computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20 to satisfy the judgment award that was due to petitioner in the amount of
₱147,560.19, which petitioner eventually received.
TOTAL = ₱95.933.76 Petitioner then filed a Manifestation and Motion praying for the re-
19
computation of the monetary award to include the appropriate interests.

Obligations Part 2 | Page 61 of 143

 20
On May 10, 2005, the Labor Arbiter issued an Order granting the
motion, but only up to the amount of ₱11,459.73. The Labor Arbiter
reasoned that it is the October 15, 1998 Decision that should be enforced
considering that it was the one that became final and executory. However,
the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation
of the said decision, it is the amount of ₱158,919.92 that should be
executed. Thus, since petitioner already received ₱147,560.19, he is only
entitled to the balance of ₱11,459.73.
21
Petitioner then appealed before the NLRC, which appeal was denied by
22
the NLRC in its Resolution dated September 27, 2006. Petitioner filed
a Motion for Reconsideration, but it was likewise denied in the
23
Resolution dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as
CA-G.R. SP No. 98591.
24
On September 23, 2008, the CA rendered a Decision denying the
petition. The CA opined that since petitioner no longer appealed the
October 15, 1998 Decision of the Labor Arbiter, which already became
final and executory, a belated correction thereof is no longer allowed. The
CA stated that there is nothing left to be done except to enforce the said
judgment. Consequently, it can no longer be modified in any respect,
except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the
25
Resolution dated October 9, 2009.
Hence, the petition assigning the lone error:
I That the labor arbiter's decision, at the same time that it found that an
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF
DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC
WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF
LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
26
BODY OF THE SAME DECISION.
Petitioner argues that notwithstanding the fact that there was a
computation of backwages in the Labor Arbiter’s decision, the same is
not final until reinstatement is made or until finality of the decision, in
case of an award of separation pay. Petitioner maintains that considering
that the October 15, 1998 decision of the Labor Arbiter did not become
final and executory until the April 17, 2002 Resolution of the Supreme
Court in G.R. No. 151332 was entered in the Book of Entries on May 27,
2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of
the Labor Arbiter was rendered on October 15, 1998. Further, petitioner
posits that he is also entitled to the payment of interest from the finality
of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited
backwages were awarded to petitioner by the October 15, 1998 decision
of the Labor Arbiter, no more recomputation is required to be made of
said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to [the]
promulgation of this decision," and considering that petitioner no longer
appealed the decision, petitioner is only entitled to the award as computed
by the Labor Arbiter in the total amount of ₱158,919.92. Respondents
added that it was only during the execution proceedings that the petitioner
questioned the award, long after the decision had become final and
executory. Respondents contend that to allow the further recomputation
of the backwages to be awarded to petitioner at this point of the
proceedings would substantially vary the decision of the Labor Arbiter as
it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and
27
Fast Foods v. Court of Appeals (Sixth Division), wherein the issue
submitted to the Court for resolution was the propriety of the computation
of the awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a distinct
feature of the judgment of the Labor Arbiter in the above-cited case that
the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the
computation of the monetary awards up to the time of the finality of the
judgment. Also in Session Delights, the dismissed employee failed to
appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course
of execution of the labor arbiter's original computation of the awards
made, pegged as of the time the decision was rendered and confirmed
with modification by a final CA decision, is legally proper. The question
is posed, given that the petitioner did not immediately pay the awards
stated in the original labor arbiter's decision; it delayed payment because
it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this
case proceeds from the way the original labor arbiter framed his decision.
The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because
it has been confirmed with finality. This is the finding of the illegality of
the dismissal and the awards of separation pay in lieu of reinstatement,
backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the
computation the labor arbiter made shows that it was time-bound as can
be seen from the figures used in the computation. This part, being merely
a computation of what the first part of the decision established and
declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the
computation is already in the labor arbiter's decision that the CA had
affirmed. The public and private respondents, on the other hand, posit that
a re-computation is necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if reinstatement is to be
made, or up to the finality of the decision, if separation pay is to be given
in lieu reinstatement.
illegal dismissal had taken place, also made a computation of the award,
is understandable in light of Section 3, Rule VIII of the then NLRC Rules
of Procedure which requires that a computation be made. This Section in
part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at
all events, as far as practicable, shall embody in any such decision or order
the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the
finality of the labor arbiter's decision. As we noted above, this implication
is apparent from the terms of the computation itself, and no question
would have arisen had the parties terminated the case and implemented
the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all
counts - i.e., on the finding of illegality as well as on all the consequent
awards made. Hence, the petitioner appealed the case to the NLRC which,
in turn, affirmed the labor arbiter's decision. By law, the NLRC decision
is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on
jurisdictional grounds through a timely filed Rule 65 petition for
certiorari. The CA decision, finding that NLRC exceeded its authority in
affirming the payment of 13th month pay and indemnity, lapsed to finality
and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal
dismissal portion of the original labor arbiter's decision, the implementing
labor arbiter ordered the award re-computed; he apparently read the
figures originally ordered to be paid to be the computation due had the
case been terminated and implemented at the labor arbiter's level. Thus,
the labor arbiter re-computed the award to include the separation pay and
the backwages due up to the finality of the CA decision that fully
terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July
29, 2003) and included as well the payment for awards the final CA
decision had deleted - specifically, the proportionate 13th month pay and
the indemnity awards. Hence, the CA issued the decision now questioned
in the present petition.
We see no error in the CA decision confirming that a re-computation is
necessary as it essentially considered the labor arbiter's original decision
in accordance with its basic component parts as we discussed above. To
reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time
28
of the labor arbiter's original decision.
Consequently, from the above disquisitions, under the terms of the
decision which is sought to be executed by the petitioner, no essential
Obligations Part 2 | Page 62 of 143
change is made by a recomputation as this step is a necessary consequence
that flows from the nature of the illegality of dismissal declared by the
29
Labor Arbiter in that decision. A recomputation (or an original
computation, if no previous computation has been made) is a part of the
law – specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision – that is read into the decision. By the
nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon execution of
the decision does not constitute an alteration or amendment of the final
decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and
this is not a violation of the principle of immutability of final
30
judgments.
That the amount respondents shall now pay has greatly increased is a
consequence that it cannot avoid as it is the risk that it ran when it
continued to seek recourses against the Labor Arbiter's decision. Article
279 provides for the consequences of illegal dismissal in no uncertain
terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the
finality of the illegal dismissal decision becomes the reckoning point
instead of the reinstatement that the law decrees. In allowing separation
pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be
31
computed up to that point.
Finally, anent the payment of legal interest. In the landmark case of
32
Eastern Shipping Lines, Inc. v. Court of Appeals, the Court laid down
the guidelines regarding the manner of computing legal interest, to wit:
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 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
33
then an equivalent to a forbearance of credit.
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board
(BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the
34
amendment of Section 2 of Circular No. 905, Series of 1982 and,
35
accordingly, issued Circular No. 799, Series of 2013, effective July 1,
2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
36
Section 2. In view of the above, Subsection X305.1 of the Manual of
37 38
Regulations for Banks and Sections 4305Q.1, 4305S.3 and
39
4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to
the rate of interest that would govern the parties, the rate of legal interest
for loans or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be twelve percent (12%) per annum
40
- as reflected in the case of Eastern Shipping Lines and Subsection
X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1,
4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No.
799 - but will now be six percent (6%) per annum effective July 1, 2013.
It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013. Come
July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and
41
Eduardo B. Olaguer v. Bangko Sentral Monetary Board, this Court
affirmed the authority of the BSP-MB to set interest rates and to issue and
enforce Circulars when it ruled that "the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of
low priority such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for
different types of borrowings, including deposits and deposit substitutes,
or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and
executory prior to July 1, 2013, said judgments shall not be disturbed and
shall continue to be implemented applying the rate of interest fixed
therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the
42
case of Eastern Shipping Lines are accordingly modified to embody
BSP-MB Circular No. 799, as follows:
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. 1â wph i1
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:
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 6% 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.
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 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.
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 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
Obligations Part 2 | Page 63 of 143
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23,
2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the
Resolution dated October 9, 2009 are REVERSED and SET ASIDE.
Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed
on January 24, 1997 up to May 27, 2002, when the Resolution of this
Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the
rate of one month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary
awards, computed from May 27, 2002 to June 30, 2013 and six percent
(6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation
of the total monetary benefits awarded and due to petitioner in accordance
with this Decision.
SO ORDERED.
Venzon v. Rural Bank of Buenavista, Inc.
G.R. No. 178031 August 28, 2013
VIRGINIA M. VENZON, Petitioner,
vs.
RURAL BANK OF BUENAVISTA (AGUSAN DEL NORTE), INC.,
represented by LOURDESITA E. PARAJES,Respondent.
DECISION
DEL CASTILLO, J.:
1
Before us is a Petition for Review on Certiorari questioning the
2 July 13, 2006 Resolution is a final order of dismissal. Petitioner received
December 14, 2006 Resolution of the Court of Appeals (CA) in CA-G.R.
SP No. 01341-MIN which dismissed the Petition in said case, as well as
3
its May 7, 2007 Resolution denying reconsideration thereof.
Factual Antecedents
4
On January 28, 2005, petitioner Virginia M. Venzon filed a Petition to
nullify foreclosure proceedings and Tax Declaration Nos. 96-GR-06-003-
7002-R and 96-GR-06-7003-R issued in the name of respondent Rural
5 remedies she took before the trial court which does not comply with the
Bank of Buenavista (Agusan del Norte), Inc. The case was docketed as
Civil Case No. 5535 and raffled to Branch 5 of the Regional Trial Court
(RTC) of Butuan City. Petitioner alleged that in 1983 she and her late
spouse, George F. Venzon, Sr., obtained a ₱5,000.00 loan from
respondent against a mortgage on their house and lot in Libertad, Butuan
City, covered by Tax Declaration Nos. 28289 and 42710 issued in their
names, which were later on replaced with Tax Declaration Nos. 96 GR-
06-003-2884-R and 96 GR-06-003-2885-R; that she was able to pay
₱2,300.00, thus leaving an outstanding balance of only ₱2,370.00; that
sometime in March 1987, she offered to pay the said balance in full, but
the latter refused to accept payment, and instead shoved petitioner away
from the bank premises; that in March 1987, respondent foreclosed on the
mortgage, and the property was sold at auction for ₱6,472.76 to
respondent, being the highest bidder; that the foreclosure proceedings are
null and void for lack of notice and publication of the sale, lack of sheriff’s
final deed of sale and notice of redemption period; and that she paid
respondent ₱6,000.00 on October 9, 1995, as evidenced by respondent’s
6
Official Receipt No. 410848 issued on October 9, 1995.
7 II
In its Answer with Counterclaims, respondent claimed that petitioner did
not make any payment on the loan; that petitioner never went to the bank
in March 1987 to settle her obligations in full; that petitioner was not
shoved and driven away from its premises; that the foreclosure
proceedings were regularly done and all requirements were complied
with; that a certificate of sale was issued by the sheriff and duly recorded
in the Registry of Deeds; that petitioner’s claim that she paid ₱6,000.00
on October 9, 1995 is utterly false; that petitioner’s cause of action has
long prescribed as the case was filed only in 2005 or 18 years after the
foreclosure sale; and that petitioner is guilty of laches. Respondent
interposed its counterclaim for damages and attorney’s fees as well.
8 20
In her Reply, petitioner insisted that the foreclosure proceedings were
irregular and that prescription and laches do not apply as the foreclosure
proceedings are null and void to begin with.
Ruling of the Regional Trial Court
9
On July 13, 2006, the trial court issued a Resolution dismissing Civil
Case No. 5535. It held that –
The plaintiff, however, may have erroneously relied the [sic] mandatorily
[sic] requirement of the aforestated provision of law upon failure to
consider that the other party is a Rural Bank. Under the R.A. No. 720 as
amended, (Rural Bank Act) property worth exceeding ₱100,000.00 [sic]
is exempt from the requirement of publication. This may have been the
reason why the foreclosure prosper [sic] without the observance of the
required publication. Moreover, neither in the said applicable laws
provide [sic] for the impairment of the extrajudicial foreclosure and the
subsequent sale to the public. The Court ruled in Bonnevie, et al. vs. CA,
et al. that Act No. 3135 as amended does not require personal notice to
the mortgagor. In the same view, lack of final demand or notice of
redemption are [sic] not considered indispensable requirements and
failure to observe the same does not render the extrajudicial foreclosure
10
sale a nullity.
In other words, the trial court meant that under the Rural Banks Act, the
foreclosure of mortgages covering loans granted by rural banks and
executions of judgments thereon involving real properties levied upon by
a sheriff shall be exempt from publication where the total amount of the
loan, including interests due and unpaid, does not exceed
11
₱10,000.00. Since petitioner’s outstanding obligation amounted to just
over ₱6,000.00 publication was not necessary.
12
Petitioner moved for reconsideration, but in the September 6, 2006
13
Resolution, the trial court denied the same.
Ruling of the Court of Appeals
14
Petitioner went up to the CA via an original Petition for Certiorari. On
December 14, 2006, the CA issued the first assailed
15
Resolution dismissing the Petition. It held that petitioner’s remedy
should have been an appeal under Rule 41 of the Rules of Court since the
the Resolution denying her Motion for Reconsideration on September 18,
16
2006; but she filed the Petition for Certiorari on October 25, 2006 when
she should have interposed an appeal on or before October 3, 2006.
Having done so, her Petition may not even be treated as an appeal for the
same was belatedly filed.
The CA added that the Petition does not provide a sufficient factual
background of the case as it merely alleges a chronology of the legal
17
requirement under Section 3 of Rule 46.
18
Petitioner moved for reconsideration by submitting a rewritten Petition.
However, in a Resolution dated May 7, 2007, the CA denied the same,
hence the present Petition.
Issues
Petitioner submits the following assignment of errors:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
REVERSIBLY ERRED IN DISMISSING THE PETITION FOR
CERTIORARI THEREBY PREVENTING THE COURT FROM
FINDING OUT THAT ACTUALLY NO EXTRAJUDICIAL
FORECLOSURE WAS CONDUCTED BY THE OFFICE OF THE
PROVINCIAL SHERIFF ON PETITIONER’S PROPERTY AT THE
INSTANCE OF THE PRIVATE RESPONDENT.
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
REVERSIBLY ERRED IN NOT DISREGARDING TECHNICALITIES
IN ORDER TO ADMINISTER SUBSTANTIAL JUSTICE TO THE
19
PETITIONER.
Petitioner’s Arguments
Petitioner claims that no extrajudicial foreclosure proceedings ever took
place, citing a February 2, 2005 Certification issued by the Office of the
Clerk of Court of Butuan City stating that the record pertaining to the
foreclosure proceedings covering her property "could not be found in
spite of diligent efforts to find the same." And because no foreclosure
proceedings took place, there could not have been notice and publication
of the sale, and no sheriff’s certificate of sale. For this reason, she claims
that the CA erred in dismissing her case.
Obligations Part 2 | Page 64 of 143
Petitioner adds that, technicalities aside, a Petition for Certiorari is
available to her in order to prevent the denial of her substantial rights. She
also argues that her payment to respondent of the amount of ₱6,000.00 in
1995 should be considered as a valid redemption of her property.
Respondent’s Arguments
For its part, respondent merely validates the pronouncements of the CA
by citing and echoing the same, and holding petitioner to a strict
observance of the rules for perfecting an appeal within the reglementary
period, as it claims they are necessary for the orderly administration of
21
justice, as well as that which requires that only questions of law may be
raised in a Petition for Review on Certiorari.
Our Ruling
The Court denies the Petition.
The Court finds no error in the CA’s treatment of the Petition for
Certiorari. The trial court’s July 13, 2006 Resolution dismissing the case
was indeed to be treated as a final order, disposing of the issue of
publication and notice of the foreclosure sale – which is the very core of
petitioner’s cause of action in Civil Case No. 5535 – and declaring the
same to be unnecessary pursuant to the Rural Banks Act, as petitioner’s
outstanding obligation did not exceed ₱10,000.00, and thus leaving
petitioner without basis to maintain her case. This constitutes a dismissal
with the character of finality. As such, petitioner should have availed of
the remedy under Rule 41, and not Rule 65.
The Court is not prepared to be lenient in petitioner’s case, either. Civil
Case No. 5535 was instituted only in 2005, while the questioned
foreclosure proceedings took place way back in 1987. Petitioner’s long
inaction and commission of a procedural faux pas certainly cannot earn
the sympathy of the Court.
Nor can the Court grant the Petition on the mere allegation that no
foreclosure proceedings ever took place. The February 2, 2005
Certification issued by the Office of the Clerk of Court of Butuan City to
the effect that the record of the foreclosure proceedings could not be found
is not sufficient ground to invalidate the proceedings taken. Petitioner
22
herself attached the Sheriff’s Certificate of Sale as Annex "A" of her
Petition in Civil Case No. 5535; this should belie the claim that no record
exists covering the foreclosure proceedings. Besides, if petitioner insists
that no foreclosure proceedings took place, then she should not have filed
an action to annul the same since there was no foreclosure to begin with.
She should have filed a different action.
However, petitioner is entitled to a return of the ₱6,000.00 she paid to
respondent in 1995. While this may not be validly considered as a
redemption of her property as the payment was made long after the
redemption period expired, respondent had no right to receive the amount.
In its Answer with Counterclaims in Civil Case No. 5535, respondent
simply alleged therein that –
10. Defendant DENIES the allegations under paragraph 10 of the petition
for being utterly false, highly self-serving and patently speculative, the
truth being ---
• Assumption cannot be had that there was an alleged foreclosure of the
then property of the petitioner for the truth of the matter is that a
foreclosure proceeding was duly conducted, which fact remains
undisputable for so many years now.
• Without necessarily admitting that payment of ₱6,000.00 was made, the
same however could hardly and could never be considered as redemption
price for the following reasons ---
The redemption period had long lapsed when the payment of ₱6,000.00
was allegedly made. Thus, there is no point talking about redemption
price when the redemption period had long been gone at the time the
alleged payment was made.
Even x x x granting, without conceding, that the amount of ₱6,000.00
was a redemption price, said amount, however, could not constitute as a
legal redemption price since the same was not enough to cover the entire
23
redemption price as mandated by the rules and laws. (Emphases
supplied)
Interestingly, respondent did not deny being the issuer of Official Receipt
No. 410848. Instead, it averred that petitioner’s payment to it of
₱6,000.00 was false and self-serving, but in the same breath argued that,
without necessarily admitting that payment of ₱6,000.00 was made, the
same cannot be considered as redemption price.
By making such an ambiguous allegation in its Answer with
Counterclaims, respondent is deemed to have admitted receiving the
amount of ₱6,000.00 from petitioner as evidenced by Official Receipt No.
410848, which amount under the circumstances it had no right to receive.
"If an allegation is not specifically denied or the denial is a negative
24
pregnant, the allegation is deemed admitted." "Where a fact is alleged
with some qualifying or modifying language, and the denial is
conjunctive, a ‘negative pregnant’ exists, and only the qualification or
25
modification is denied, while the fact itself is admitted." "A denial in
the form of a negative pregnant is an ambiguous pleading, since it cannot
be ascertained whether it is the fact or only the qualification that is
26
intended to be denied." "Profession of ignorance about a fact which is
patently and necessarily within the pleader's knowledge, or means of
27
knowing as ineffectual, is no denial at all." In fine, respondent failed to
refute petitioner’s claim of having paid the amount of ₱6,000.00.
Since respondent was not entitled to receive the said amount, as it is
deemed fully paid from the foreclosure of petitioner’s property since its
bid price at the auction sale covered all that petitioner owed it by way of
28
principal, interest, attorney’s fees and charges, it must return the same
to petitioner. "If something is received when there is no right to demand
it, and it was unduly delivered through mistake, the obligation to return it
29
arises." Moreover, pursuant to Circular No. 799, series of 2013 of the
Bangko Sentral ng Pilipinas which took effect July 1, 2013, the amount
of ₱6,000.00 shall earn interest at the rate of 6% per annum computed
from the filing of the Petition in Civil Case No. 5535 up to its full
satisfaction.
WHEREFORE, premises considered, the Petition is DENIED. The
December 14, 2006 and May 7, 2007 Resolutions of the Court of Appeals
in CA-G.R. SP No. 01341-MIN are AFFIRMED.
However, respondent Rural Bank of Buenavista (Agusan del Norte), Inc.
is ORDERED to return to petitioner Virginia M. Venzon or her assigns
the amount of ₱6,000.00, with interest at the rate of 6% per annum
computed from the filing of the Petition in Civil Case No. 5535 up to its
full satisfaction.
SO ORDERED.
S.C. Megaworld Construction and Development Corp. v. Parada
G.R. No. 183804 September 11, 2013
S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT
CORPORATION, Petitioner,
vs.
ENGR. LUIS U. PARADA, represented by ENGR. LEONARDO A.
PARADA of GENLITE INDUSTRIES,Respondent.
DECISION
REYES, J.:
1 2
Before us on appeal by certiorari is the Decision dated April 30, 2008
of the Court of Appeals (CA) in CA-G.R. CV No. 83811 which upheld
3
the Decision dated May 8, 2004 of the Regional Trial Court (RTC) of
Quezon City, Branch 100, in Civil Case No. Q-01-45212.
Factual Antecedents
S.C. Megaworld Construction and Development Corporation (petitioner)
bought electrical lighting materials from Gentile Industries, a sole
proprietorship owned by Engineer Luis U. Parada (respondent), for its
Read-Rite project in Canlubang, Laguna. The petitioner was unable to pay
for the above purchase on due date, but blamed it on its failure to collect
under its sub-contract with the Enviro KleenTechnologies, Inc. (Enviro
Kleen). It was however able to persuade Enviro Kleen to agree to settle
its above purchase, but after paying the respondent ₱250,000.00 on June
4
2, 1999, Enviro Kleen stopped making further payments, leaving an
outstanding balance of ₱816,627.00. It also ignored the various demands
of the respondent, who then filed a suit in the RTC, docketed as Civil Case
No.Q-01-45212, to collect from the petitioner the said balance, plus
damages, costs and expenses, as summarized in the RTC’s decision, as
follows:
The petitioner in its answer denied liability, claiming that it was released
from its indebtedness to the respondent by reason of the novation of their
contract, which, it reasoned, took place when the latter accepted the
partial payment of Enviro Kleen in its behalf, and thereby acquiesced to
the substitution of Enviro Kleen as the new debtor in the petitioner’s
6
place. After trial, the RTC rendered judgment on May 28, 2004 in favor
of the respondent, the fallo of which reads, as follows:
Obligations Part 2 | Page 65 of 143
WHEREFORE, judgment is hereby rendered for the respondent. The Petition for Review in the Supreme Court
petitioner is hereby ordered to pay the respondent the following:
In this petition, the petitioner insists, firstly, that the complaint should
A. the sum of ₱816,627.00 representing the principal obligation due; have been dismissed outright by the trial court for an invalid non-forum
shopping certification; and, secondly, that the appellate court erred in not
B. the sum equivalent to twenty percent (20%)per month of the principal declaring that there was a novation of the contract between the parties
obligation due from date of judicial demand until fully paid as and for through substitution of the debtor, which resulted in the release of the
interest; and petitioner from its obligation to pay the respondent the amount of its
13
C. the sum equivalent to twenty-five percent (25%) of the principal sum purchase.
due as and for attorney’s fees and other costs of suits. The compulsory
counterclaim interposed by the petitioner is hereby ordered dismissed for Our Ruling
lack of merit. The petition is devoid of merit.
7
SO ORDERED. (Emphasis supplied) The verification and certification of
non-forum shopping in the
On appeal to the CA, the petitioner maintained that the trial court erred in complaint is not a jurisdictional but
ruling that no novation of the contract took place through the substitution a formal requirement, and any
of Enviro Kleen as the new debtor. But for the first time, it further argued objection as to non-compliance
that the trial court should have dismissed the complaint for failure of the therewith should be raised in the
respondent to implead Genlite Industries as "a proper party in interest", proceedings below and not for the
as provided in Section 2 of Rule 3 of the 1997 Rules of Civil Procedure. first time on appeal.
The said section provides:
"It is well-settled that no question will be entertained on appeal unless it
SEC. 2. Parties in interest. — A real party in interest is the party who has been raised in the proceedings below. Points of law, theories, issues
stands to be benefited or injured by the judgment in the suit, or the party and arguments not brought to the attention of the lower court,
entitled to the avails of the suit. Unless otherwise authorized by law or administrative agency or quasi-judicial body, need not be considered by
these Rules, every action must be prosecuted or defended in the name of are viewing court, as they cannot be raised for the first time at that late
the real party in interest. stage. Basic considerations of fairness and due process impel this rule.
14
In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that Any issue raised for the first time on appeal is barred by estoppel."
the defendant may move to dismiss the suit on the ground that it was not
brought in the name of or against the real party in interest, with the effect Through a Special Power of Attorney (SPA), the respondent authorized
that the complaint is then deemed to state no cause of action. Engr. Leonardo A. Parada (Leonardo), the eldest of his three children, to
perform the following acts in his behalf: a) to file a complaint against the
In dismissing the appeal, the CA noted that the petitioner in its answer petitioner for sum of money with damages; and b) to testify in the trial
below raised only the defense of novation, and that at no stage in the thereof and sign all papers and documents related thereto, with full
proceedings did it raise the question of whether the suit was brought in 15
powers to enter into stipulation and compromise. Incidentally, the
the name of the real party in interest. Moreover, the appellate court found respondent, a widower, died of cardio-pulmonary arrest on January
from the sales invoices and receipts that the respondent is the sole 16
proprietor of Genlite Industries, and therefore the real party-plaintiff. Said 21,2009, survived by his legitimate children, namely, Leonardo, Luis,
the CA: Jr., and Lalaine, all surnamed Parada. They have since substituted him in
this petition, per the Resolution of the Supreme Court dated September 2,
Settled is the rule that litigants cannot raise an issue for the first time on 17
2009. Also, on July 23, 2009, Luis, Jr. and Lalaine Parada executed an
appeal as this would contravene the basic rules of fair play and justice. SPA authorizing their brother Leonardo to represent them in the instant
18
In any event, there is no question that respondent Engr.Luis U. Parada is petition.
the proprietor of Genlite Industries, as shown on the sales invoice and
delivery receipts. There is also no question that a special power of In the verification and certification of non-forum shopping attached to the
attorney was executed by respondent Engr.Luis U. Parada in favor of complaint in Civil Case No. Q01-45212, Leonardo as attorney-in-fact of
Engr. Leonardo A. Parada authorizingthe latter to file a complaint against his father acknowledged as follows:
8
the petitioner. (Citations omitted) xxxx
The petitioner also contended that a binding novation of the purchase That I/we am/are the Plaintiff in the above-captioned case;
contract between the parties took place when the respondent accepted the
partial payment of Enviro Kleen of ₱250,000.00 in its behalf, and thus That I/we have caused the preparation of this Complaint;
acquiesced to the substitution by Enviro Kleen of the petitioner as the new That I/we have read the same and that all the allegations therein are true
debtor. But the CA noted that there is nothing in the two (2) letters of the and correct to the best of my/our knowledge;
respondent to Enviro Kleen, dated April 14, 1999 and June 16, 1999,
which would imply that he consented to the alleged novation, and, 19
x x x x.
particularly, that he intended to release the petitioner from its primary
obligation to pay him for its purchase of lighting materials. The appellate In this petition, the petitioner reiterates its argument before the CA that
9 the above verification is invalid, since the SPA executed by the
court cited the RTC’s finding that the respondent informed Enviro Kleen
in his first letter that he had served notice to the petitioner that he would respondent did not specifically include an authority for Leonardo to sign
take legal action against it for its overdue account, and that he retained his the verification and certification of non-forum shopping, thus rendering
option to pull out the lighting materials and charge the petitioner for any the complaint defective for violation of Sections 4 and 5 of Rule 7. The
damage they might sustain during the pull-out: said sections provide, as follows:

Respondent x x x has served notice to the petitioner that unless the
overdue account is paid, the matter will be referred to its lawyers and there
may be a pull-out of the delivered lighting fixtures. It was likewise stated
therein that incidental damages that may result to the structure in the
10
course of the pull-out will be to the account of the petitioner.
The CA concurred with the RTC that by retaining his option to seek
satisfaction from the petitioner, any acquiescence which the respondent
had made was limited to merely accepting Enviro Kleen as an additional
debtor from whom he could demand payment, but without releasing the
petitioner as the principal debtor from its debt to him.
11
On motion for reconsideration, the petitioner raised for the first time
the issue of the validity of the verification and certification of non-forum
shopping attached to the complaint. On July 18, 2008, the CA denied the
12
said motion for lack of merit.
Sec. 4. Verification. — A pleading is verified by an affidavit that the
affiant has read the pleading and that the allegations therein are true and
correct of his personal knowledge or based on authentic records.
Sec. 5. Certification against forum shopping. –– The plaintiff or principal
party shall certify under oath in the complaint or other initiatory pleading
asserting a claim for relief, or in a sworn certification annexed thereto and
simultaneously filed therewith: (a) that he has not thereto fore
commenced any action or filed any claim involving the same issues in any
court, or tribunal x x x and, to the best of his knowledge, no such other
action or claim is pending therein; (b) if there is such other pending action
or claim, a complete statement of the present status thereof; and (c) if he
should thereafter learn that the same or similar action or claim has been
filed or is pending, he shall report that fact x x x to the court wherein his
aforesaid complaint or initiatory pleading has been filed.

Obligations Part 2 | Page 66 of 143

Failure to comply with the foregoing requirements shall not be curable by
mere amendment of the complaint or other initiatory pleading but shall be
cause for the dismissal of the case without prejudice, unless otherwise
provided, upon motion and after hearing.
The petitioner’s argument is untenable. The petitioner failed to reckon
that any objection as to compliance with the requirement of verification
in the complaint should have been raised in the proceedings below, and
20
not in the appellate court for the first time. In KILUSAN-OLALIA v.
21
CA, it was held that verification is a formal, not a jurisdictional
requisite:
We have emphasized, time and again, that verification is a formal, not a
jurisdictional requisite, as it is mainly intended to secure an assurance that
the allegations therein made are done in good faith or are true and correct
and not mere speculation. The Court may order the correction of the
pleading, if not verified, or act on the unverified pleading if the attending
circumstances are such that a strict compliance with the rule may be
dispensed with in order that the ends of justice may be served.
Further, in rendering justice, courts have always been, as they ought to
be, conscientiously guided by the norm that on the balance, technicalities
take a backseat vis-à-vis substantive rights, and not the other way around.
22
x x x. (Citations omitted)
23
In Young v. John Keng Seng, it was also held that the question of forum
shopping cannot be raised in the CA and in the Supreme Court, since such
an issue must be raised at the earliest opportunity in a motion to dismiss
or a similar pleading. The high court even warned that "invoking it in the
later stages of the proceedings or on appeal may result in the dismissal of
24
the action x x x."
Moreover, granting that Leonardo has no personal knowledge of the
transaction subject of the complaint below, Section 4 of Rule 7 provides
that the verification need not be based on the verifier’s personal
knowledge but even only on authentic records. Sales invoices, statements
of accounts, receipts and collection letters for the balance of the amount
still due to the respondent from the petitioner are such records. There is
clearly substantial compliance by the respondent’s attorney-in-fact with
the requirement of verification.
Lastly, it is well-settled that a strict compliance with the rules may be
dispensed with in order that the ends of substantial justice may be
25
served. It is clear that the present controversy must be resolved on its
merits, lest for a technical oversight the respondent should be deprived of
what is justly due him.
A sole proprietorship has no
juridical personality separate and
distinct from that of its owner, and
need not be impleaded as a party-
plaintiff in a civil case.
On the question of whether Genlite Industries should have been
impleaded as a party-plaintiff, Section 1 of Rule 3 of the Rules of Court
provides that only natural or juridical persons or entities authorized by
law may be parties in a civil case. Article 44 of the New Civil Code
enumerates who are juridical persons:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they have
been constituted according to law;
(3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member.
Genlite Industries is merely the DTI-registered trade name or style of the
respondent by which he conducted his business. As such, it does not exist
as a separate entity apart from its owner, and therefore it has no separate
26
juridical personality to sue or be sued. As the sole proprietor of Genlite
Industries, there is no question that the respondent is the real party in
interest who stood to be directly benefited or injured by the judgment in
the complaint below. There is then no necessity for Genlite Industries to
be impleaded as a party-plaintiff, since the complaint was already filed in
the name of its proprietor, Engr. Luis U. Parada. To heed the petitioner’s
sophistic reasoning is to permit a dubious technicality to frustrate the ends
of substantial justice.
Novation is never presumed but
must be clearly and unequivocally
shown.
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old
27
one, or by subrogating a third person to the rights of the creditor. It is
"the substitution of a new contract, debt, or obligation for an existing one
28
between the same or different parties." Article 1293 of the Civil Code
defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in Articles
1236and 1237.
Thus, in order to change the person of the debtor, the former debtor must
be expressly released from the obligation, and the third person or new
debtor must assume the former’s place in the contractual
29
relation. Article 1293 speaks of substitution of the debtor, which may
either be in the form of expromision or delegacion, as seems to be the case
here. In both cases, the old debtor must be released from the obligation,
30
otherwise, there is no valid novation. As explained in Garcia :
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from—and may even be made without the
knowledge of—the debtor, since it consists of a third person’s assumption
of the obligation. As such, it logically requires the consent of the third
person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the
31
creditor. (Citations omitted)
From the circumstances obtaining below, we can infer no clear and
unequivocal consent by the respondent to the release of the petitioner
from the obligation to pay the cost of the lighting materials. In fact, from
the letters of the respondent to Enviro Kleen, it can be said that he retained
his option to go after the petitioner if Enviro Kleen failed to settle the
petitioner’s debt. As the trial court held:
The fact that Enviro Kleen Technologies, Inc. made payments to the
respondent and the latter accepted it does not ipso facto result innovation.
Novation to be given its legal effect requires that the creditor should
consent to the substitution of a new debtor and the old debtor be released
from its obligation (Art. 1293, New Civil Code). A reading of the letters
dated 14 April 1999 (Exh. 1) and dated 16 June 1999 (Exhs. 4 &4-a) sent
by the respondent to Enviro Kleen Technologies, Inc. clearly shows that
there was nothing therein that would evince that the[respondent] has
consented to the exchange of the person of the debtor from the petitioner
to Enviro Kleen Technologies, Inc.
xxxx
Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc.,
the respondent expressly stated that it has served notice to the petitioner
that unless the overdue account is paid, the matter will be referred to its
lawyers and there may be a pull-out of the delivered lighting fixtures. It
was likewise stated therein that incident damages that may result to the
structure in the course of the pull-out will be to the account of the
petitioner.
It is evident from the two (2) aforesaid letters that there is no indication
of the respondent’s intention to release the petitioner from its obligation
to pay and to transfer it to Enviro Kleen Technologies, Inc. The
acquiescence of Enviro Kleen Technologies, Inc. to assume the obligation
of the petitioner to pay the unpaid balance of [P]816,627.00 to the
respondent when there is clearly no agreement to release the petitioner
will result merely to the addition of debtors and not novation. Hence, the
creditor can still enforce the obligation against the original debtor x x x.
A fact which points strongly to the conclusion that the respondent did not
assent to the substitution of Enviro Kleen Technologies, Inc. as the new
debtor is the present action instituted by the respondent against the
petitioner for the fulfillment of its obligation. A mere recital that the
respondent has agreed or consented to the substitution of the debtor is not
32
sufficient to establish the fact that there was a novation. x x x.
33
The settled rule is that novation is never presumed, but must be clearly
34
and unequivocally shown. In order for a new agreement to supersede
the old one, the parties to a contract must expressly agree that they are
Obligations Part 2 | Page 67 of 143
 35 It is settled that other than in the case of judgments which are void ab
abrogating their old contract in favor of a new one. Thus, the mere
36 initio for lack of jurisdiction, or which are null and void per se, and thus
substitution of debtors will not result innovation, and the fact that the may be questioned at any time, when a decision is final, even the court
creditor accepts payments from a third person, who has assumed the which issued it can no longer alter or modify it, except to correct clerical
obligation, will result merely in the addition of debtors and not novation, 46
37 errors or mistakes.
and the creditor may enforce the obligation against both debtors. If
there is no agreement as to solidarity, the first and new debtors are The foregoing notwithstanding, of more important consideration in the
38 39 case before us is the fact that it is nowhere stated in the trial court’s
considered obligated jointly. As explained in Reyes v. CA :
decision that the parties had in fact stipulated an interest on the amount
The consent of the creditor to a novation by change of debtor is as due to the respondent. Even granting that there was such an agreement,
indispensable as the creditor’s consent in conventional subrogation in there is no finding by the trial court that the parties stipulated that the
order that a novation shall legally take place. The mere circumstance of outstanding debt of the petitioner would be subject to two percent (2%)
AFP-MBAI receiving payments from respondent Eleazar who acquiesced monthly interest. The most that the decision discloses is that the
to assume the obligation of petitioner under the contract of sale of respondent demanded a monthly interest of 2% on the amount
securities, when there is clearly no agreement to release petitioner from outstanding.
her responsibility, does not constitute novation. At most, it only creates a
juridical relation of co-debtorship or surety ship on the part of respondent Article 2209 of the Civil Code provides that "if the obligation consists in
Eleazar to the contractual obligation of petitioner to AFP-MBAI and the the payment of a sum of money, and the debtor incurs in delay, the
latter can still enforce the obligation against the petitioner. In Ajax indemnity for damages, there being no stipulation to the contrary, shall be
Marketing and Development Corporation vs. Court of Appeals which is the payment of the interest agreed upon, and in the absence of stipulation,
relevant in the instant case, we stated that — the legal interest, which is six percent per annum." Pursuant to the said
provision, then, since there is no finding of a stipulation by the parties as
"In the same vein, to effect a subjective novation by a change in the person 47
to the imposition of interest, only the amount of 12% per annum may
of the debtor, it is necessary that the old debtor be released expressly from be awarded by the court by way of damages in its discretion, not two
the obligation, and the third person or new debtor assumes his place in the percent(2%) per month, following the guidelines laid down in the
relation. There is no novation without such release as the third person who 48
has assumed the debtor’s obligation becomes merely a co-debtor or landmark case of Eastern Shipping Lines v. Court of Appeals, to wit:
surety. xxx. Novation arising from a purported change in the person of II. With regard particularly to an award of interest in the concept of actual
the debtor must be clear and express xxx." and compensatory damages, the rate of interest, as well as the accrual
In the civil law setting, novatio is literally construed as to make new. So thereof, is imposed, as follows:
it is deeply rooted in the Roman Law jurisprudence, the principle – 1. When the obligation is breached, and it consists in the payment of a
novatio non praesumitur — that novation is never presumed. At bottom, sum of money, i.e., a loan or forbearance of money, the interest due should
for novation to be a jural reality, its animus must be ever present, debitum be that which may have been stipulated in writing. Furthermore, the
pro debito — basically extinguishing the old obligation for the new interest due shall itself earn legal interest from the time it is judicially
40
one. (Citation omitted) 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
The trial court found that the respondent never agreed to release the demand under and subject to the provisions of Article 1169 of the Civil
petitioner from its obligation, and this conclusion was upheld by the CA. Code.
We generally accord utmost respect and great weight to factual findings
of the trial court and the CA, unless there appears in the record some fact 2. When an obligation, not constituting a loan or forbearance of money,
or circumstance of weight and influence which has been overlooked, or is breached, an interest on the amount of damages awarded may be
the significance of which has been misinterpreted, that if considered imposed at the discretion of the court at the rate of 6% per annum. No
41 interest, however, shall be adjudged on unliquidated claims or damages
would have affected the result of the case. We find no such oversight in
the appreciation of the facts below, nor such a misinterpretation thereof, except when or until the demand can be established with reasonable
as would otherwise provide a clear and unequivocal showing that a certainty. Accordingly, where the demand is established with reasonable
novation has occurred in the contract between the parties resulting in the certainty, the interest shall begin to run from the time the claim is made
release of the petitioner. judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is
Pursuant to Article 2209 of the made, the interest shall begin to run only from the date the judgment of
Civil Code, except as provided the court is made (at which time the quantification of damages may be
under Central Bank Circular deemed to have been reasonably ascertained).The actual base for the
No. 905, and now under Bangko computation of legal interest shall, in any case, be on the amount finally
Sentral ng Pilipinas Circular adjudged.
No. 799, which took effect on
July 1, 2013, the respondent may 3. When the judgment of the court awarding a sum of money becomes
be awarded interest of six percent final and executory, the rate of legal interest, whether the case falls under
(6%) of the judgment amount by paragraph 1 or paragraph 2, above, shall be 12% per annum from such
way of actual and compensatory finality until its satisfaction, this interim period being deemed to be by
49
damages. then an equivalent to a forbearance of credit. (Citations omitted)

It appears from the recital of facts in the trial court’s decision that the
respondent demanded interest of two percent (2%) per month upon the
balance of the purchase price of ₱816,627.00, from judicial demand until
full payment. There is then an obvious clerical error committed in the fallo
of the trial court’s decision, for it incorrectly ordered the defendant there
into pay "the sum equivalent to twenty percent (20%) per month of the
principal obligation due from date of judicial demand until fully paid as
42
and for interest."
A clerical mistake is one which is visible to the eyes or obvious to the
understanding; an error made by a clerk or a transcriber; a mistake in
43
copying or writing. The Latin maxims Error placitandi aequitatem non
tollit ("A clerical error does not take away equity"), and Error scribentis
nocere non debit ("An error made by a clerk ought not to injure; a clerical
44
error may be corrected") are apt in this case. Viewed against the
45
landmark case of Medel v. CA , an award of interest of 20% per month
on the amount due is clearly excessive and iniquitous. It could not have
been the intention of the trial court, not to mention that it is way beyond
what the plaintiff had prayed for below.
50
As further clarified in the case of Sunga-Chan v. CA, a loan or
forbearance of money, goods or credit describes a contractual obligation
whereby a lender or creditor has refrained during a given period from
requiring the borrower or debtor to repay the loan or debt then due and
51
payable. Thus:
In Reformina v. Tomol, Jr., 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."

Obligations Part 2 | Page 68 of 143

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.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of
interest, if proper, and the applicable rate, as follows: The12% 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," with the
application of both rates reckoned "from the time the complaint was filed
until the adjudged amount is fully paid." 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
52
interest." (Citations omitted and emphasis ours)
Pursuant, then, to Central Bank Circular No. 416, issued on July
53
29,1974, in the absence of a written stipulation, the interest rate to be
imposed in judgments involving a forbearance of credit shall be 12% per
annum, up from 6% under Article 2209 of the Civil Code. This was
reiterated in Central Bank Circular No. 905, which suspended the
54
effectivity of the Usury Law from January 1, 1983. But if the judgment
refers to payment of interest as damages arising from a breach or delay in
general, the applicable interest rate is 6% per annum, following Article
55
2209 of the Civil Code. Both interest rates apply from judicial or
extrajudicial demand until finality of the judgment. But from the finality
of the judgment awarding a sum of money until it is satisfied, the award
shall be considered a forbearance of credit, regardless of whether the
award in fact pertained to one, and therefore during this period, the
56
interest rate of 12% per annum for forbearance of money shall apply.
But notice must be taken that in Resolution No. 796 dated May 16,2013,
the Monetary Board of the Bangko Sentral ng Pilipinas approved the
revision of the interest rate to be imposed for the loan or forbearance of
any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest. Thus, under BSP
Circular No.799, issued on June 21, 2013 and effective on July 1, 2013,
the said rate of interest is now back at six percent (6%), viz:
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of stipulation
The monetary Board, in its Resolution No. 796 dated 16 May
2013,approved the following revisions governing the rate of interest in
the absence of stipulation in loan contracts, thereby amending Section 2
of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
FOR THE MONETARY BOARD:
DIWA C. GUINIGUNDO
Officer-In-Charge
The award of attorney’s fees is not proper.
Other than to say that the petitioner "unjustifiably failed and refused to
pay the respondent," the trial court did not state in the body of its decision
the factual or legal basis for its award of attorney’s fees to the respondent,
as required under Article 2208 of the New Civil Code, for which reason
we have resolved to delete the same. The rule is settled that the trial court
must state the factual, legal or equitable justification for its award of
57
attorney’s fees. Indeed, the matter of attorney’s fees cannot be stated
only in the dispositive portion, but the reasons must be stated in the body
58
of the court’s decision. This failure or oversight of the trial court cannot
even be supplied by the CA. As concisely explained in Frias v. San Diego-
59
Sison :
Article 2208 of the New Civil Code enumerates the instances where such
may be awarded and, in all cases, it must be reasonable, just and equitable
if the same were to be granted. Attorney’s fees as part of damages are not
meant to enrich the winning party at the expense of the losing litigant.
They are not awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to litigate. The award
of attorney’s fees is the exception rather than the general rule. As such, it
is necessary for the trial court to make findings of facts and law that would
bring the case within the exception and justify the grant of such award.
The matter of attorney’s fees cannot be mentioned only in the dispositive
portion of the decision. They must be clearly explained and justified by
the trial court in the body of its decision. On appeal, the CA is precluded
from supplementing the bases for awarding attorney’s fees when the trial
court failed to discuss in its Decision the reasons for awarding the
same. Consequently, the award of attorney’s fees should be
1â wphi1
60
deleted. (Citations omitted)
WHEREFORE, premises considered, the Decision dated April 30, 2008
of the Court of Appeals in CA-G.R. CV No. 83811 is AFFIRMED with
MODIFICATION. Petitioner S.C. Megaworld Construction and
Development Corporation is ordered to pay respondent Engr. Luis A.
Parada, represented by Engr. Leonardo A. Parada, the principal amount
due of ₱816,627.00, plus interest at twelve percent (12%) per annum,
reckoned from judicial demand until June 30, 2013, and six percent (6%)
per an own from July 1, 2013 until finality hereof, by way of actual and
compensatory damages. Thereafter, the principal amount due as adjusted
by interest shall likewise earn interest at six percent (6%) per annum until
fully paid. The award of attorney's fees is DELETED.
SO ORDERED.
Secretary of the Department of Public Works and Highways v.
Tecson
G.R. No. 179334 April 21, 2015
SECRETARY OF THE DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS and DISTRICT ENGINEER CELESTINO R.
CONTRERAS, Petitioners,
vs.
SPOUSES HERACLEO and RAMONA TECSON, Respondents.
RESOLUTION
PERALTA, J.:
For resolution is the Motion for Reconsideration1 filed by respondents-
movants spouses Heracleo and Ramona Tecson imploring the Court to
take a second look at its July 1, 2013 Decision, the dispositive portion of
which reads:
WHEREFORE, premises considered, the petition is PARTIALLY
GRANTED. The Court of Appeals Decision dated July 31, 2007 in
CAG.R. CV No. 77997 is MODIFIED, in that the valuation of the subject
property owned by respondents shall be P0.70 instead of ₱1,500.00 per
square meter, with interest at six percent (6%) per annum from the date
of taking in 1940 instead of March 17, 1995, until full payment.2
In view of the contrasting opinions of the members of the Third Division
on the instant motion, and the transcendental importance of the issue
raised herein, the members of the Third Division opted to refer the issue
to the En Banc for resolution.
For a proper perspective, we briefly state the factual background of the
case.
In 1940, the Department of Public Works and Highways (DPWH) took
respondents-movants' subject property without the benefit of
expropriation proceedings for the construction of the MacArthur
Highway. In a letter dated December 15, 1994,respondents-movants
demanded the payment of the fair market value of the subject parcel of
land. Celestino R. Contreras (Contreras), then District Engineer of the
First Bulacan Engineering District of the DPWH, offered to pay for the
subject land at the rate of Seventy Centavos (P0.70) per square meter, per
Resolution of the Provincial Appraisal Committee (PAC) of Bulacan.
Unsatisfied with the offer, respondents-movants demanded the return of
their property, or the payment of compensation at the current fair market
value.3 Hence, the complaint for recovery of possession with damages
filed by respondents-movants. Respondents-movants were able to obtain
favorable decisions in the Regional Trial Court (RTC) and the Court of
Appeals (CA), with the subject property valued at One Thousand Five
Hundred Pesos (₱1,500.00) per square meter, with interest at six percent
(6%) per annum.
Obligations Part 2 | Page 69 of 143
Petitioners thus elevated the matter to this Court in a petition for review
on certiorari. The only issue resolved by the Court in the assailed decision
is the amount of just compensation which respondents-movants are
entitled to receive from the government for the taking of their property.
Both the RTC and the CA valued the property at One Thousand Five
Hundred Pesos (₱1,500.00) per square meter, plus six percent (6%)
interest from the time of the filing of the complaint until full payment.
We, however, did not agree with both courts and ruled instead that just
compensation should be based on the value of the property at the time of
taking in 1940, which is Seventy Centavos (P0.70) per square meter.4 In
addition, and by way of compensation, we likewise awarded an interest
of six percent (6%) per annum from 1940 until full payment.5
Aggrieved, respondents-movants hereby move for the reconsideration of
said decision on the following grounds:
A. THE HONORABLE COURT MAY LOOK INTO THE "JUSTNESS"
OF THE MISERABLE AMOUNT OF COMPENSATION BEING
AWARDED TO THE HEREIN RESPONDENTS; and
B. THE HONORABLE COURT MAY SETTLE FOR A HAPPY
MIDDLE GROUND IN THE NAME OF DOCTRINAL PRECISION
AND SUBSTANTIAL JUSTICE.6
Citing the views of Justices Presbitero J. Velasco, Jr. and Marvic Mario
Victor F. Leonen in their Dissenting and Concurring Opinion and
Separate Opinion, respectively, respondents-movants insist that gross
injustice will result if the amount that will be awarded today will be based
simply on the value of the property at the time of the actual taking. Hence,
as proposed by Justice Leonen, they suggest that a happy middle ground
be achieved by meeting the need for doctrinal precision and the thirst for
substantial justice.7
We maintain our conclusions in the assailed July 1, 2013 Decision with
modification on the amount of interest awarded, as well as the additional
grant of exemplary damages and attorney's fees.
At the outset, it should be stressed that the matter of the validity of the
State's exercise of the power of eminent domain has long been settled. In
fact, in our assailed decision, We have affirmed the ruling of the CA that
the pre-trial order issued on May 17, 2001 has limited the issues as
follows: (1) whether or not the respondents-movants are entitled to just
compensation; (2) whether or not the valuation would be based on the
corresponding value at the time of the taking or at the time of the filing of
the action; and (3) whether or not the respondents-movants are entitled to
damages.8 Moreover, it was held that for failure of respondents-movants
to question the lack of expropriation proceedings for a long period of time,
they are deemed to have waived and are estopped from assailing the
power of the government to expropriate or the public use for which the
power was exercised.9 What is, therefore, left for determination in the
instant Motion for Reconsideration, in accordance with our Decision
dated July 1, 2013, is the propriety of the amount awarded to respondents
as just compensation.
At this juncture, We hold that the reckoning date for property valuation
in determining the amount of just compensation had already been
addressed and squarely answered in the assailed decision. To be sure, the
justness of the award had been taken into consideration in arriving at our
earlier conclusion.
We have in the past been confronted with the same issues under similar
factual and procedural circumstances. We find no reason to depart from
the doctrines laid down in the earlier cases as we adopted in the assailed
decision. In this regard, we reiterate the doctrines laid down in the cases
of Forfom Development Corporation (Forfom) v. Philippine National
Railways (PNR),10 Eusebio v. Luis,11 Manila International Airport
Authority v. Rodriguez,12 and Republic v. Sarabia.13
In Forfom, PNR entered the property of Forfom in January 1973 for
railroad tracks, facilities and appurtenances for use of the Carmona
Commuter Service without initiating expropriation proceedings. In 1990,
Forfom filed a complaint for recovery of possession of real property
and/or damages against PNR. In Eusebio, respondent's parcel of land was
taken in 1980 by the City of Pasig and used as a municipal road without
the appropriate expropriation proceedings. In1996, respondent filed a
complaint for reconveyance and/or damages against the city government
and the mayor. In MIAA, in the early 1970s, petitioner implemented
expansion programs for its runway, necessitating the acquisition and
occupation of some of the properties surrounding its premises. As to
respondent's property, no expropriation proceedings were initiated. In
1997, respondent initiated a case for accion reivindicatoriawith damages
against petitioner. In Republic, sometime in 1956, the Air Transportation
Office (ATO) took possession and control of a portion of a lot situated in
Aklan, registered in the name of respondent, without initiating
expropriation proceedings. Several structures were erected thereon,
including the control tower, the Kalibo crash fire rescue station, the
Kalibo airport terminal, and the Headquarters of the PNP Aviation
Security Group. In 1995,several stores and restaurants were constructed
on the remaining portion of the lot. In 1997, respondent filed a complaint
for recovery of possession with damages against the storeowners wherein
ATO intervened claiming that the storeowners were its lessees.
These cases stemmed from similar background, that is, government took
control and possession of the subject properties for public use without
initiating expropriation proceedings and without payment of just
compensation; while the landowners failed for a long period of time to
question such government act and later instituted actions for recovery of
possession with damages. In these cases, the Court has uniformly ruled
that the fair market value of the property at the time of taking is
controlling for purposes of computing just compensation.
In Forfom, the payment of just compensation was reckoned from the time
of taking in 1973; in Eusebio, the Court fixed the just compensation by
determining the value of the property at the time of taking in 1980;
in MIAA, the value of the lot at the time of taking in 1972 served as basis
for the award of compensation to the owner; and, in Republic,the Court
was convinced that the taking occurred in 1956 and was thus the basis in
fixing just compensation.
As in the aforementioned cases, just compensation due respondents-
movants in this case should, therefore, be fixed not as of the time of
payment but at the time of taking in 1940 which is Seventy Centavos
(P0.70) per square meter, and not One Thousand Five Hundred Pesos
(₱1,500.00) per square meter, as valued by the RTC and CA.
While disparity in the above amounts is obvious and may appear
inequitable to respondents-movants as they would be receiving such
outdated valuation after a very long period, it should be noted that the
purpose of just compensation is not to reward the owner for the property
taken but to compensate him for the loss thereof. As such, the true
measure of the property, as upheld by a plethora of cases, is the market
value at the time of the taking, when the loss resulted. This principle was
plainly laid down in Apo Fruits Corporation and Hijo Plantation, Inc. v.
Land Bank of the Philippines,14 to wit:
x x x In Land Bank of the Philippines v. Orilla, a valuation case under our
agrarian reform law, this Court had occasion to state:
Constitutionally, "just compensation" is the sum equivalent to the market
value of the property, broadly described as the price fixed by the seller in
open market in the usual and ordinary course of legal action and
competition, or the fair value of the property as between the one who
receives and the one who desires to sell, it being fixed at the time of the
actual taking by the government. Just compensation is defined as the
full and fair equivalent of the property taken from its owner by the
expropriator. It has been repeatedly stressed by this Court that the true
measure is not the taker's gain but the owner's loss. The word "just" is
used to modify the meaning of the word "compensation" to convey the
idea that the equivalent to be given for the property to be taken shall
be real, substantial, full and ample. [Emphasis supplied.]15
Indeed, the State is not obliged to pay premium to the property owner for
appropriating the latter's property; it is only bound to make good the loss
sustained by the landowner, with due consideration of the circumstances
availing at the time the property was taken. More, the concept of just
compensation does not imply fairness to the property owner alone.
Compensation must also be just to the public, which ultimately bears the
cost of expropriation.16
Notwithstanding the foregoing, we recognize that the owner's loss is not
only his property but also its income-generating potential.17 Thus, when
property is taken, full compensation of its value must immediately be paid
to achieve a fair exchange for the property and the potential income
lost.18 Accordingly, in Apo, we held that the rationale for imposing the
interest is to compensate the petitioners for the income they would have
made had they been properly compensated for their properties at the time
of the taking.19 Thus:
We recognized in Republic v. Court of Appeals the need for prompt
payment and the necessity of the payment of interest to compensate for
any delay in the payment of compensation for property already taken. We
ruled in this case that:
The constitutional limitation of "just compensation" is considered to be
the sum equivalent to the market value of the property, broadly described
to be the price fixed by the seller in open market in the usual and ordinary
course of legal action and competition or the fair value of the property as
between one who receives, and one who desires to sell, i[f] fixed at the
time of the actual taking by the government. Thus, if property is taken for
public use before compensation is deposited with the court having
Obligations Part 2 | Page 70 of 143
jurisdiction over the case, the final compensation must include interest[s]
on its just value to be computed from the time the property is taken to the
time when compensation is actually paid or deposited with the court. In
fine, between the taking of the property and the actual payment, legal
interest[s] accrue in order to place the owner in a position as good as (but
not better than) the position he was in before the taking
occurred.[Emphasis supplied]20
In other words, the just compensation due to the landowners amounts to
an effective forbearance on the part of the State-a proper subject of
interest computed from the time the property was taken until the full
amount of just compensation is paid-in order to eradicate the issue of the
constant variability of the value of the currency over time.21 In the Court's
own words:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.

The Bulacan trial court, in its 1979 decision, was correct in imposing This Circular shall take effect on 01 July 2013.29
interests on the zonal value of the property to be computed from the time Accordingly, the prevailing interest rate for loans and forbearance of
petitioner instituted condemnation proceedings and "took" the property in money is six percent (6%) per annum, in the absence of an express
September 1969. This allowance of interest on the amount found to be the contract as to such rate of interest.
value of the property as of the time of the taking computed, being an
effective forbearance, at 12% per annum should help eliminate the issue In summary, the interest rates applicable to loans and forbearance of
of the constant fluctuation and inflation of the value of the currency over money, in the absence of an express contract as to such rate of interest,
time x x x.22 for the period of 1940 to present are as follows:
On this score, a review of the history of the pertinent laws, rules and
regulations, as well as the issuances of the Central Bank (CB)or Bangko Law, Rule and Regulations, Date of Effec
Sentral ng Pilipinas (BSP)is imperative in arriving at the proper amount BSP Issuance
of interest to be awarded herein.
On May 1, 1916, Act No. 265523 took effect prescribing an interest rate Act No. 2655 May 1, 1916
of six percent (6%) or such rate as may be prescribed by the Central Bank
Monetary Board (CB-MB)for loans or forbearance of money, in the
absence of express stipulation as to such rate of interest, to wit: CB Circular No. 416 July 29, 1974
Section 1. The rate of interest for the loan or forbearance of any money
goods, or credits and the rate allowed in judgments, in the absence of CB Circular No. 905 December 22
express contract as to such rate of interest, shall be six per centum per
annum or such rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in accordance with the CB Circular No. 799 July 1, 2013
authority hereby granted.
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
It is important to note, however, that interest shall be compounded at the
forbearance of any money, goods or credits, and to change such rate or
time judicial demand is made pursuant to Article 221230 of the Civil Code
rates whenever warranted by prevailing economic and social conditions.
of the Philippines, and sustained in Eastern Shipping Lines v. Court of
In the exercise of the authority herein granted, the Monetary Board may Appeals,31then later on in Nacar v. Gallery Frames,32 save for the
prescribe higher maximum rates for loans of low priority, such as reduction of interest rate to 6% for loans or forbearance of money, thus:
consumer loans or renewals thereof as well as such loans made by
1. When the obligation is breached, and it consists in the payment of a
pawnshops finance companies and other similar credit institutions
sum of money, i.e., a loan or forbearance of money, the interest due
although the rates prescribed for these institutions need not necessarily be
should be that which may have been stipulated in writing.
uniform. The Monetary Board is also authorized to prescribe different
Furthermore, the interest due shall itself earn legal interest from the
maximum rate or rates for different types of borrowings, including
time it is judicially demanded. In the absence of stipulation, the rate of
deposits and deposit substitutes, or loans of financial intermediaries.24
interest shall be 6% per annum to be computed from default, i.e., from
Under the aforesaid law, any amount of interest paid or stipulated to be judicial or extrajudicial demand under and subject to the provisions of
paid in excess of that fixed by law is considered usurious, therefore Article 1169 of the Civil Code.33
unlawful.25
Applying the foregoing law and jurisprudence, respondents-movants are
On July 29, 1974, the CB-MB, pursuant to the authority granted to it entitled to interest in the amount of One Million Seven Hundred Eighteen
under the aforequoted provision, issued Resolution No. 1622. On even
1âwphi1
Thousand Eight Hundred Forty-Eight Pesos and Thirty-Two Centavos
date, Circular No. 416 was issued, implementing MB Resolution No. (₱1,718,848.32) as of September 30, 2014,34 computed as follows:
1622, increasing the rate of interest for loans and forbearance of money
to twelve percent (12%) per annum, thus: January 1, 194035 to July 28, 1974
By virtue of the authority granted to it under Section 1 of Act No. 2655,
as amended, otherwise known as the "Usury Law," the Monetary Board, July 29, 1974 to March 16, 1995
in its Resolution No. 1622 dated July 29, 1974, has prescribed that the
rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as March 17, 199536to June 30, 2013
to such rate of interest, shall be twelve per cent (12%) per annum.26
The foregoing rate was sustained in CB Circular No. 90527 which took July 1, 2013 to September 30, 2014
effect on December 22, 1982, particularly Section 2 thereof, which states:
Sec. 2. The rate of interest for the loan or forbearance of any money, Market Value of the Property at the time of
goods or credits and the rate allowed in judgments, in the absence of taking including interest
express contract as to such rate of interest, shall continue to be twelve per
cent (12%) per annum.28
Market value of the property at the time of
Recently, the BSP Monetary Board (BSP-MB),in its Resolution No. 796
dated May 16, 2013, approved the amendment of Section 2 of Circular taking including interest
No. 905, Series of 1982, and accordingly, issued Circular No. 799, Series
of 2013, effective July 1, 2013, the pertinent portion of which reads:
Add: Exemplary damages

Obligations Part 2 | Page 71 of 143


Attorney's fees
Total Amount of Interest due to Respondents-
Movants as of September 30, 2014
Considering that respondents-movants only resorted to judicial demand
for the payment of the fair market value of the land on March 17, 1995, it
is only then that the interest earned shall itself earn interest.
Lastly, from finality of the Court's Resolution on reconsideration until full
payment, the total amount due to respondents-movants shall earn a
straight six percent (6%) legal interest, pursuant to Circular No. 799 and
the case of Nacar. Such interest is imposed by reason of the Court's
decision and takes the nature of a judicial debt.
Clearly, the award of interest on the value of the land at the time of taking
in 1940 until full payment is adequate compensation to respondents-
movants for the deprivation of their property without the benefit of
expropriation proceedings. Such interest, however meager or enormous it
may be, cannot be inequitable and unconscionable because it resulted
directly from the application of law and jurisprudence-standards that have
taken into account fairness and equity insetting the interest rates due for
the use or forbearance of money.41 Thus, adding the interest computed to
the market value of the property at the time of taking signifies the real,
substantial, full and ample value of the property. Verily, the same
constitutes due compliance with the constitutional mandate on eminent
domain and serves as a basic measure of fairness. In addition to the
foregoing interest, additional compensation shall be awarded to
respondents-movants by way of exemplary damages and attorney's fees
in view of the government's taking without the benefit of expropriation
proceedings. As held in Eusebio v. Luis,42 an irregularity in an
expropriation proceeding cannot ensue without consequence. Thus, the
Court held that the government agency's illegal occupation of the owner's
property for a very long period of time surely resulted in pecuniary loss
to the owner, to wit:
However, in taking respondents' property without the benefit of
expropriation proceedings and without payment of just compensation, the
City of Pasig clearly acted in utter disregard of respondents' proprietary
rights. Such conduct cannot be countenanced by the Court. For said
illegal taking, the City of Pasig should definitely be held liable for
damages to respondents. Again, in Manila International Airport
Authority v. Rodriguez, the Court held that the government agency's
illegal occupation of the owner's property for a very long period of time
surely resulted in pecuniary loss to the owner. The Court held as follows:
Such pecuniary loss entitles him to adequate compensation in the form
of actual or compensatory damages, which in this case should be the legal
interest (6%) on the value of the land at the time of taking, from said point
up to full payment by the MIAA. This is based on the principle that
interest "runs as a matter of law and follows from the right of the
landowner to be placed in as good position as money can accomplish, as
of the date of the taking."
The award of interest renders unwarranted the grant of back
rentals as extended by the courts below. In Republic v. Lara, et al., the
Court ruled that the indemnity for rentals is inconsistent with a property
owner's right to be paid legal interest on the value of the property, for if
the condemn or is to pay the compensation due to the owners from the
time of the actual taking of their property, the payment of such
compensation is deemed to retro act to the actual taking of the property;
and, hence, there is no basis for claiming rentals from the time of actual
taking. More explicitly, the Court held in Republic v. Garcellano that:
The uniform rule of this Court, however, is that this compensation must
be, not in the form of rentals, but by way of 'interest from the date that the
company [or entity] exercising the right of eminent domain take
possession of the condemned lands, and the amounts granted by the court
shall cease to earn interest only from the moment they are paid to the
owners or deposited in court x x x.
xxxx
For more than twenty (20) years, the MIAA occupied the subject lot
without the benefit of expropriation proceedings and without the MIAA
exerting efforts to ascertain ownership of the lot and negotiating with any
of the owners of the property. To our mind, these are wanton and
irresponsible acts which should be suppressed and corrected.
Hence, the award of exemplary damages and attorneys fees is in
order. However, while Rodriguez is entitled to such exemplary damages
and attorney's fees, the award granted by the courts below should be
equitably reduced. We hold that Rodriguez is entitled only
200,000.00
to ₱200,000.00 as exemplary damages, and attorney's fees equivalent to
43
one percent (1%) of the amount due.
Similarly, in Republic v. CA,44 We held that the failure of the government
₱1,718,848.16
to initiate an expropriation proceeding to the prejudice of the landowner
may be corrected with the awarding of exemplary damages, attorney's
fees and costs of litigation. Thus:
The Court will not award attorney's fees in light of respondent's choice
not to appeal the CA Decision striking down the award. However, we find
it proper to award temperate and exemplary damages in light of NIA's
misuse of its power of eminent domain. Any arm of the State that
exercises the delegated power of eminent domain must wield that power
with circumspection and utmost regard for procedural requirements. A
government instrumentality that fails to observe the constitutional
guarantees of just compensation and due process abuses the authority
delegated to it, and is liable to the property owner for damages.
Temperate or moderate damages may be recovered if pecuniary loss has
been suffered but the amount cannot be proved with certainty from the
nature of the case. Here, the trial and appellate courts found that the
1âwphi1
owners were unable to plant palay on 96,655 square meters of the
Property for an unspecified period during and after NIA's construction of
the canals in 1972. The passage of time, however, has made it impossible
to determine these losses with any certainty. NIA also deprived the
owners of the Property of possession of a substantial portion of their land
since 1972. Considering the particular circumstances of this case, an
award of ₱150,000 as temperate damages is reasonable.
NIA's irresponsible exercise of its eminent domain powers also deserves
censure. For more than three decades, NIA has been charging irrigation
fees from respondent and other landowners for the use of the canals built
on the Property, without reimbursing respondent a single cent for the loss
and damage. NIA exhibits a disturbingly cavalier attitude towards
respondent's property rights, rights to due process of law and to equal
protection of the laws. Worse, this is not the first time NIA has
disregarded the rights of private property owners by refusing to pay just
compensation promptly. To dissuade NIA from continuing this practice
and to set an example for other agencies exercising eminent domain
powers, NIA is directed to pay respondent exemplary damages of
₱250,000.45
Applying the aforequoted doctrines to the present case, considering that
respondents-movants were deprived of beneficial ownership over their
property for more than seventy (70) years without the benefit of a timely
expropriation proceedings, and to serve as a deterrent to the State from
failing to institute such proceedings within the prescribed period under
the law, a grant of exemplary damages in the amount of One Million Pesos
(₱1,000,000.00) is fair and reasonable. Moreover, an award for attorney's
fees in the amount of Two Hundred Thousand Pesos (₱200,000.00) in
favor of respondents-movants is in order.
In sum, respondents-movants shall be entitled to an aggregate amount
of One Million Seven Hundred Eighteen Thousand Eight Hundred Forty-
Eight Pesos and Thirty-Two Centavos (₱1,718,848.32) as just
compensation as of September 30, 2014, computed as follows:
Market value of the property at the time
of taking in 1940 including interest
Add: Exemplary Damages
Attorney's fees
Total Amount due to Respondents-
movants as of September 30, 2014
This Court is not unaware that at present, stringent laws and rules are put
in place to ensure that owners of real property acquired for national
government infrastructure projects are promptly paid just compensation.
Specifically, Section 4 of Republic Act No. 8974 (R.A. 8974),46 which
took effect on November 26, 2000, provides sufficient guidelines for
implementing an expropriation proceeding, to wit:
Section 4. Guidelines for Expropriation Proceedings. - Whenever it is
necessary to acquire real property for the right-of-way or location for any
national government infrastructure project through expropriation, the
Obligations Part 2 | Page 72 of 143
appropriate implementing agency shall initiate the expropriation
proceedings before the proper court under the following guidelines:
(a) Upon the filing of the complaint, and after due notice to the defendant,
the implementing agency shall immediately pay the owner of the property
the amount equivalent to the sum of (1) one hundred percent (100%) of
the value of the property based on the current relevant zonal valuation of
the Bureau of Internal Revenue (BIR); and (2) the value of the
improvements and/or structures as determined under Section 7 hereof;
(b) In provinces, cities, municipalities and other areas where there is no
zonal valuation, the BIR is hereby mandated within the period of sixty
(60) days from the date of the expropriation case, to come up with a zonal
valuation for said area; and
(c) In case the completion of a government infrastructure project is of
utmost urgency and importance, and there is no existing valuation of the
area concerned, the implementing agency shall immediately pay the
owner of the property its proffered value taking into consideration the
standards prescribed in Section 5 hereof.
Upon compliance with the guidelines abovementioned, the court shall
immediately issue to the implementing agency an order to take possession
of the property and start the implementation of the project.
Before the court can issue a Writ of Possession, the implementing agency
shall present to the court a certificate of availability of funds from the
proper official concerned.
In the event that the owner of the property contests the implementing
agency's proffered value, the court shall determine the just compensation
to be paid the owner within sixty (60) days from the date of filing of the
expropriation case. When the decision of the court becomes final and
executory, the implementing agency shall pay the owner the difference
between the amount already paid and the just compensation as determined
by the court.
Failure to comply with the foregoing directives shall subject the
government official or employee concerned to administrative, civil and/or
criminal sanctions, thus:
Section 11. Sanctions. - Violation of any provisions of this Act shall
subject the government official or employee concerned to appropriate
administrative, civil and/or criminal sanctions, including suspension
and/or dismissal from the government service and forfeiture of benefits.
While the foregoing provisions, being substantive in nature or disturbs
substantive rights, cannot be retroactively applied to the present case, We
trust that this established mechanism will surely deter hasty acquisition of
private properties in the future without the benefit of immediate payment
of the value of the property in accordance with Section 4 of R.A. 8974.
This effectively addresses J. Velasco's concerns that sustaining our earlier
rulings on the matter would be licensing the government to dispense with
constitutional requirements in taking private properties. Moreover, any
gap on the procedural aspect of the expropriation proceedings will be
remedied by the aforequoted provisions.
In effect, R.A. 8974 enshrines a new approach towards eminent domain
that reconciles the inherent unease attending expropriation proceedings
with a position of fundamental equity.47
need be resorted to where a provision of law peremptorily calls for
application.50 Equity and equitable principles only come into full play
when a gap exists in the law and jurisprudence.51 As we have shown
above, established rulings of this Court are in place for full application to
the case at bar, hence, should be upheld.
WHEREFORE, the motion for reconsideration is hereby DENIED for
lack of merit.
SO ORDERED.
E XTINGUISHMENT OF O BLIGATIONS
Metro Concast Steel Corp. v. Allied Bank Corp
G.R. No. 177921 December 4, 2013
METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S.
DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND
MERCEDES DYCHIAO, AND SPOUSES VICENTE AND
FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated
February 12, 2007 and the Resolution3dated May 10, 2007 of the Court
of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside
the Decision4 dated January 17, 2006 of the Regional Trial Court of
Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering
petitioners Metro Concast Steel Corporation (Metro Concast), Spouses
Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes
Dychiao, and Spouses Vicente and Filomena Duchiao (individual
petitioners) to solidarily pay respondent Allied Bank Corporation (Allied
Bank) the aggregate amount of ₱51,064,094.28, with applicable interests
and penalty charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation
duly organized and existing under and by virtue of Philippine laws and
engaged in the business of manufacturing steel,5 through its officers,
herein individual petitioners, obtained several loans from Allied Bank.
These loan transactions were covered by a promissory note and separate
letters of credit/trust receipts, the details of which are as follows:
Date Document
December 13, 1996 Promissory Note No. 96-213016
November 7, 1995 Trust Receipt No. 96-2023657
May 13, 1996 Trust Receipt No. 96-9605228
May 24, 1996 Trust Receipt No. 96-9605249

Despite the foregoing developments, however, We emphasize that the

government's failure, to initiate the necessary expropriation proceedings March 21, 1997 Trust Receipt No. 97-20472410
prior to actual taking cannot simply invalidate the State's exercise of its
eminent domain power, given that the property subject of expropriation June 7, 1996 Trust Receipt No. 96-20328011
is indubitably devoted for public use, and public policy imposes upon the
public utility the obligation to continue its services to the public. To
hastily nullify said expropriation in the guise of lack of due process would July 26, 1995 Trust Receipt No. 95-20194312
certainly diminish or weaken one of the State's inherent powers, the
ultimate objective of which is to serve the greater good. Thus, the non-
August 31, 1995 Trust Receipt No. 95-20205313
filing of the case for expropriation will not necessarily lead to the return
of the property to the landowner. What is left to the landowner is the right
of compensation.48 November 16, 1995 Trust Receipt No. 96-20243914
All told, We hold that putting to rest the issue on the validity of the
exercise of eminent domain is neither tantamount to condoning the acts July 3, 1996 Trust Receipt No. 96-20355215
of the DPWH in disregarding the property rights of respondents-movants
nor giving premium to the government's failure to institute an
June 20, 1995 Trust Receipt No. 95-20171016
expropriation proceeding. This Court had steadfastly adhered to the
doctrine that its first and fundamental duty is the application of the law
according to its express terms, interpretation being called for only when December 13, 1995 Trust Receipt No. 96-37908917
such literal application is impossible.49 To entertain other formula for
computing just compensation, contrary to those established by law and
jurisprudence, would open varying interpretation of economic policies - December 13, 1995 Trust Receipt No. 96/20258118
a matter which this Court has no competence to take cognizance of. Time
and again, we have held that no process of interpretation or construction

Obligations Part 2 | Page 73 of 143

The interest rate under Promissory Note No. 96-21301 was pegged at
15.25% per annum (p.a.), with penalty charge of 3% per month in case of
default; while the twelve (12) trust receipts uniformly provided for an
interest rate of 14% p.a. and 1% penalty charge. By way of security, the
individual petitioners executed several Continuing
Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank.
Petitioners failed to settle their obligations under the aforementioned
promissory note and trust receipts, hence, Allied Bank, through counsel,
sent them demand letters,20 all dated December 10, 1998, seeking
payment of the total amount of ₱51,064,093.62, but to no avail. Thus,
Allied Bank was prompted to file a complaint for collection of sum of
money21 (subject complaint) against petitioners before the RTC, docketed
as Civil Case No. 00-1563. In their second22 Amended
Answer,23petitioners admitted their indebtedness to Allied Bank but
denied liability for the interests and penalties charged, claiming to have
paid the total sum of ₱65,073,055.73 by way of interest charges for the
period covering 1992 to 1997.24
They also alleged that the economic reverses suffered by the Philippine
economy in 1998 as well as the devaluation of the peso against the US
dollar contributed greatly to the downfall of the steel industry, directly
affecting the business of Metro Concast and eventually leading to its
cessation. Hence, in order to settle their debts with Allied Bank,
petitioners offered the sale of Metro Concast’s remaining assets,
consisting of machineries and equipment, to Allied Bank, which the latter,
however, refused. Instead, Allied Bank advised them to sell the equipment
and apply the proceeds of the sale to their outstanding obligations.
Accordingly, petitioners offered the equipment for sale, but since there
were no takers, the equipment was reduced into ferro scrap or scrap metal
over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented
by one Crisanta Camiling (Camiling), expressed interest in buying the
scrap metal. During the negotiations with Peakstar, petitioners claimed
that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal
department, acted as the latter’s agent. Eventually, with the alleged
conformity of Allied Bank, through Atty. Saw, a Memorandum of
Agreement25 dated November 8, 2002 (MoA) was drawn between Metro
Concast, represented by petitioner Jose Dychiao, and Peakstar, through
Camiling, under which Peakstar obligated itself to purchase the scrap
metal for a total consideration of ₱34,000,000.00, payable as follows:
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid
in cash and the other ₱2,000,000.00 to be paid in two (2) post-dated
checks of ₱1,000,000.00 each;26 and
(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly
installments of ₱3,000,000.00, secured by bank guarantees from
Bankwise, Inc. (Bankwise) in the form of separate post-dated checks.27
Unfortunately, Peakstar reneged on all its obligations under the MoA. In
1â wphi1
this regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank
must be considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions
of payment proposed by Peakstar, petitioners must therefore be deemed
to have settled their obligations to Allied Bank. To bolster their defense,
petitioner Jose Dychiao (Jose Dychiao) testified28 during trial that it was
Atty. Saw himself who drafted the MoA and subsequently received29 the
₱2,000,000.00 cash and the two (2) Bankwise post-dated checks worth
₱1,000,000.00 each from Camiling. However, Atty. Saw turned over only
the two (2) checks and ₱1,500,000.00 in cash to the wife of Jose
Dychiao.30
Claiming that the subject complaint was falsely and maliciously filed,
petitioners prayed for the award of moral damages in the amount of
₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00
for each individual petitioner, ₱25,000,000.00 as exemplary damages,
₱1,000,000.00 as attorney’s fees, ₱500,000.00 for other litigation
expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision31 dated January 17, 2006,
dismissed the subject complaint, holding that the "causes of action sued
upon had been paid or otherwise extinguished." It ruled that since Allied
Bank was duly represented by its agent, Atty. Saw, in all the negotiations
and transactions with Peakstar – considering that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the
scrap metal – then it stands to reason that the MoA between Metro
Concast and Peakstar was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision32 dated February 12,
2007, reversed and set aside the ruling of the RTC, ratiocinating that there
was "no legal basis in fact and in law to declare that when Bankwise
reneged its guarantee under the [MoA], herein [petitioners] should be
deemed to be discharged from their obligations lawfully incurred in favor
of [Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of
the ferro scrap, and Peakstar, as the buyer thereof, and found that the same
did not indicate that Allied Bank intervened or was a party thereto. It also
pointed out the fact that the post-dated checks pursuant to the MoA were
issued in favor of Jose Dychiao. Likewise, the CA found no sufficient
evidence on record showing that Atty. Saw was duly and legally
authorized to act for and on behalf of Allied Bank, opining that the RTC
was "indulging in hypothesis and speculation"34 when it made a contrary
pronouncement. While Atty. Saw received the earnest money from
Peakstar, the receipt was signed by him on behalf of Jose Dychiao.35
It also added that "[i]n the final analysis, the aforesaid checks and receipts
were signed by [Atty.] Saw either as representative of [petitioners] or as
partner of the latter’s legal counsel, and not in anyway as representative
of [Allied Bank]."36
Consequently, the CA granted the appeal and directed petitioners to
solidarily pay Allied Bank their corresponding obligations under the
aforementioned promissory note and trust receipts, plus interests, penalty
charges and attorney’s fees. Petitioners sought reconsideration37 which
was, however, denied in a Resolution38 dated May 10, 2007. Hence, this
petition.
The Issue Before the Court
At the core of the present controversy is the sole issue of whether or not
the loan obligations incurred by the petitioners under the subject
promissory note and various trust receipts have already been
extinguished.
The Court’s Ruling
Article 1231 of the Civil Code states that obligations are extinguished
either by payment or performance, the loss of the thing due, the
condonation or remission of the debt, the confusion or merger of the rights
of creditor and debtor, compensation or novation.
In the present case, petitioners essentially argue that their loan obligations
to Allied Bank had already been extinguished due to Peakstar’s failure to
perform its own obligations to Metro Concast pursuant to the MoA.
Petitioners classify Peakstar’s default as a form of force majeure in the
sense that they have, beyond their control, lost the funds they expected to
have received from the Peakstar (due to the MoA) which they would, in
turn, use to pay their own loan obligations to Allied Bank. They further
state that Allied Bank was equally bound by Metro Concast’s MoA with
Peakstar since its agent, Atty. Saw, actively represented it during the
negotiations and execution of the said agreement. Petitioners’ arguments
are untenable. At the outset, the Court must dispel the notion that the MoA
would have any relevance to the performance of petitioners’ obligations
to Allied Bank. The MoA is a sale of assets contract, while petitioners’
obligations to Allied Bank arose from various loan transactions. Absent
any showing that the terms and conditions of the latter transactions have
been, in any way, modified or novated by the terms and conditions in the
MoA, said contracts should be treated separately and distinctly from each
other, such that the existence, performance or breach of one would not
depend on the existence, performance or breach of the other. In the
foregoing respect, the issue on whether or not Allied Bank expressed its
conformity to the assets sale transaction between Metro Concast and
Peakstar (as evidenced by the MoA) is actually irrelevant to the issues
related to petitioners’ loan obligations to the bank. Besides, as the CA
pointed out, the fact of Allied Bank’s representation has not been proven
in this case and hence, cannot be deemed as a sustainable defense to
exculpate petitioners from their loan obligations to Allied Bank. Now,
anent petitioners’ reliance on force majeure, suffice it to state that
Peakstar’s breach of its obligations to Metro Concast arising from the
MoA cannot be classified as a fortuitous event under jurisprudential
formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable
or avoidable. It is therefore, not enough that the event should not have
1âwphi1
been foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the
Obligations Part 2 | Page 74 of 143
happening is not impossibility to foresee the same. To constitute a
fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to
comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if
it can be foreseen, it must be impossible to avoid; (c) the occurrence
must be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and (d) the obligor must be free from
any participation in the aggravation of the injury or loss.40(Emphases
supplied)
While it may be argued that Peakstar’s breach of the MoA was unforseen
by petitioners, the same us clearly not "impossible"to foresee or even an
event which is independent of human will." Neither has it been shown
that said occurrence rendered it impossible for petitioners to pay their loan
obligations to Allied Bank and thus, negates the former’s force
majeure theory altogether. In any case, as earlier stated, the performance
or breach of the MoA bears no relation to the performance or breach of
the subject loan transactions, they being separate and distinct sources of
obligations. The fact of the matter is that petitioners’ loan obligations to
Allied Bank remain subsisting for the basic reason that the former has not
been able to prove that the same had already been paid41 or, in any way,
extinguished. In this regard, petitioners’ liability, as adjudged by the CA,
must perforce stand. Considering, however, that Allied Bank’s extra-
judicial demand on petitioners appears to have been made only on
December 10, 1998, the computation of the applicable interests and
penalty charges should be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12,
2007 and Resolution dated May 10, 2007 of the Court of Appeals in CA-
G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION
reckoning the applicable interests and penalty charges from the date of
the extrajudicial demand or on December 10, 1998. The rest of the
appellate court’s dispositions stand.
SO ORDERED.
P AYMENT /P ERFORMANCE
International Hotel Corp. vs Joaquin
G.R. No. 158361 April 10, 2013
INTERNATIONAL HOTEL CORPORATION, Petitioner,
vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents.
DECISION
BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out of a substantially
performed contract, the principle of quantum meruit may be used to
determine his compensation in the absence of a written agreement for that
purpose. The principle of quantum meruit justifies the payment of the
reasonable value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on
1
November 8, 2002, disposing:
WHEREFORE, premises considered, the decision dated August 26, 1993
of the Regional Trial Court, Branch 13, Manila in Civil Case No. R-82-
2434 is AFFIRMED with Modification as to the amounts awarded as
follows: defendant-appellant IHC is ordered to pay plaintiff-appellant
Joaquin ₱700,000.00 and plaintiff-appellant Suarez ₱200,000.00, both to
be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a
proposal to the Board of Directors of the International Hotel Corporation
(IHC) for him to render technical assistance in securing a foreign loan for
the construction of a hotel, to be guaranteed by the Development Bank of
2 payment for their services.
the Philippines (DBP). The proposal encompassed nine phases, namely:
(1) the preparation of a new project study; (2) the settlement of the
unregistered mortgage prior to the submission of the application for
guaranty for processing by DBP; (3) the preparation of papers necessary
to the application for guaranty; (4) the securing of a foreign financier for
the project; (5) the securing of the approval of the DBP Board of
3 19
Governors; (6) the actual follow up of the application with DBP ; (7) the
overall coordination in implementing the projections of the project study;
(8) the preparation of the staff for actual hotel operations; and (9) the
4
actual hotel operations.
The IHC Board of Directors approved phase one to phase six of the
proposal during the special board meeting on February 11, 1969, and
5
earmarked ₱2,000,000.00 for the project. Anent the financing, IHC
applied with DBP for a foreign loan guaranty. DBP processed the
6
application, and approved it on October 24, 1969 subject to several
7
conditions.
On July 11, 1969, shortly after submitting the application to DBP, Joaquin
wrote to IHC to request the payment of his fees in the amount of
₱500,000.00 for the services that he had provided and would be providing
to IHC in relation to the hotel project that were outside the scope of the
technical proposal. Joaquin intimated his amenability to receive shares of
8
stock instead of cash in view of IHC’s financial situation.
On July 11, 1969, the stockholders of IHC met and granted Joaquin’s
request, allowing the payment for both Joaquin and Rafael Suarez for
9
their services in implementing the proposal.
On June 20, 1970, Joaquin presented to the IHC Board of Directors the
results of his negotiations with potential foreign financiers. He narrowed
the financiers to Roger Dunn & Company and Materials Handling
Corporation. He recommended that the Board of Directors consider
Materials Handling Corporation based on the more beneficial terms it had
10
offered. His recommendation was accepted.
Negotiations with Materials Handling Corporation and, later on, with its
principal, Barnes International (Barnes), ensued. While the negotiations
with Barnes were ongoing, Joaquin and Jose Valero, the Executive
Director of IHC, met with another financier, the Weston International
11
Corporation (Weston), to explore possible financing. When Barnes
failed to deliver the needed loan, IHC informed DBP that it would submit
12
Weston for DBP’s consideration. As a result, DBP cancelled its
13
previous guaranty through a letter dated December 6, 1971.
On December 13, 1971, IHC entered into an agreement with Weston, and
communicated this development to DBP on June 26, 1972. However,
DBP denied the application for guaranty for failure to comply with the
14
conditions contained in its November 12, 1971 letter.
Due to Joaquin’s failure to secure the needed loan, IHC, through its
President Bautista, canceled the 17,000 shares of stock previously issued
to Joaquin and Suarez as payment for their services. The latter requested
a reconsideration of the cancellation, but their request was rejected.
Consequently, Joaquin and Suarez commenced this action for specific
performance, annulment, damages and injunction by a complaint dated
December 6, 1973 in the Regional Trial Court in Manila (RTC),
impleading IHC and the members of its Board of Directors, namely, Felix
Angelo Bautista, Sergio O. Rustia, Ephraim G. Gochangco, Mario B.
Julian, Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna and
15
Hermenegildo R. Reyes. The complaint alleged that the cancellation of
the shares had been illegal, and had deprived them of their right to
participate in the meetings and elections held by IHC; that Barnes had
been recommended by IHC President Bautista, not by Joaquin; that they
had failed to meet their obligation because President Bautista and his son
had intervened and negotiated with Barnes instead of Weston; that DBP
had canceled the guaranty because Barnes had failed to release the loan;
and that IHC had agreed to compensate their services with 17,000 shares
16
of the common stock plus cash of ₱1,000,000.00.
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B.
Julian and Benjamin J. Bautista, filed an answer claiming that the shares
issued to Joaquin and Suarez as compensation for their "past and future
services" had been issued in violation of Section 16 of the Corporation
Code; that Joaquin and Suarez had not provided a foreign financier
acceptable to DBP; and that they had already received ₱96,350.00 as
17
On their part, Lirag and Lacerna denied any knowledge of or participation
18
in the cancellation of the shares.
Similarly, Gochangco and Reyes denied any knowledge of or
participation in the cancellation of the shares, and clarified that they were
not directors of IHC. In the course of the proceedings, Reyes died and
20
was substituted by Consorcia P. Reyes, the administratrix of his estate.
Ruling of the RTC
Obligations Part 2 | Page 75 of 143
Under its decision rendered on August 26, 1993, the RTC held IHC liable
pursuant to the second paragraph of Article 1284 of the Civil Code,
disposing thusly:
WHEREFORE, in the light of the above facts, law and jurisprudence, the
Court hereby orders the defendant International Hotel Corporation to pay
plaintiff Francisco B. Joaquin, the amount of Two Hundred Thousand
Pesos (₱200,000.00) and to pay plaintiff Rafael Suarez the amount of
Fifty Thousand Pesos (₱50,000.00); that the said defendant IHC likewise
pay the co-plaintiffs, attorney’s fees of ₱20,000.00, and costs of suit.
21
IT IS SO ORDERED.
The RTC found that Joaquin and Suarez had failed to meet their
obligations when IHC had chosen to negotiate with Barnes rather than
with Weston, the financier that Joaquin had recommended; and that the
cancellation of the shares of stock had been proper under Section 68 of
the Corporation Code, which allowed such transfer of shares to
compensate only past services, not future ones.
Ruling of the CA
22
Both parties appealed.
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT
PLAINTIFFS-APPELLANTS FULLY PERFORMED ALL THAT WAS
INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN
NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE
SHARES OF STOCK PREVIOUSLY ISSUED TO PLAINTIFFS-
APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION
SEVEN HUNDRED PESOS (sic) (₱2,700,000.00), INCLUDING
INTEREST THEREON FROM 1973, REPRESENTING THE TOTAL
23
OBLIGATION DUE PLAINTIFFS-APPELLANTS.
On the other hand, IHC attributed errors to the RTC, as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-
APPELLANTS HAVE NOTBEEN COMPLETELY PAID FOR THEIR
SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT
TO PAY TWO HUNDRED THOUSAND PESOS (₱200,000.00) AND
FIFTY THOUSAND PESOS (₱50,000.00) TO PLAINTIFFS-
APPELLANTS FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ,
RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-
24
APPELLANTS ATTORNEY’S FEES AND COSTS OF SUIT.
In its questioned decision promulgated on November 8, 2002, the CA
concurred with the RTC, upholding IHC’s liability under Article 1186 of
the Civil Code. It ruled that in the context of Article 1234 of the Civil
Code, Joaquin had substantially performed his obligations and had
become entitled to be paid for his services; and that the issuance of the
shares of stock was ultra vires for having been issued as consideration for
future services.
Anent how much was due to Joaquin and Suarez, the CA explained thusly:
This Court does not subscribe to plaintiffs-appellants’ view that
defendant-appellant IHC agreed to pay them ₱2,000,000.00. Plaintiff-
appellant Joaquin’s letter to defendant-appellee F.A. Bautista, quoting
defendant-appellant IHC’s board resolutions which supposedly
authorized the payment of such amount cannot be sustained. The
resolutions are quite clear and when taken together show that said amount
was only the "estimated maximum expenses" which defendant-appellant
IHC expected to incur in accomplishing phases 1 to 6, not exclusively to
plaintiffs-appellants’ compensation.This conclusion finds support in an
unnumbered board resolution of defendant-appellant IHC dated July 11,
1969:
"Incidentally, it was also taken up the necessity of giving the Technical
Group a portion of the compensation that was authorized by this
corporation in its Resolution of February 11, 1969 considering that the
assistance so far given the corporation by said Technical Group in
continuing our project with the DBP and its request for guaranty for a
foreign loan is 70% completed leaving only some details which are now
being processed. It is estimated that ₱400,000.00 worth of Common
Stock would be reasonable for the present accomplishments and to this
effect, the President is authorized to issue the same in the name of the
Technical Group, as follows:
₱200,000.00 in common stock to Rafael Suarez, as associate in the
Technical Group, and ₱200,000.00 in common stock to Francisco G.
Joaquin, Jr., also a member of the Technical Group.
It is apparent that not all of the ₱2,000,000.00 was allocated exclusively
to compensate plaintiffs-appellants. Rather, it was intended to fund the
whole undertaking including their compensation. On the same date,
defendant-appellant IHC also authorized its president to pay-appellant
Joaquin ₱500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what
defendant-appellant IHC agreed to pay plaintiffs-appellants. While this
Court cannot decree that the cancelled shares be restored, for they are
without a doubt null and void, still and all, defendant-appellant IHC
cannot now put up its own ultra vires act as an excuse to escape obligation
to plaintiffs-appellants. Instead of shares of stock, defendant-appellant
IHC is ordered to pay plaintiff-appellant Joaquin a total of ₱700,000.00
and plaintiff-appellant Suarez ₱200,000.00, both to be paid in cash.
Although the lower court failed to explain why it was granting the
attorney’s fees, this Court nonetheless finds its award proper given
25
defendant-appellant IHC’s actions.
Issues
In this appeal, the IHC raises as issues for our consideration and resolution
the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
AWARDING COMPENSATION AND EVEN MODIFYING THE
PAYMENT TO HEREIN RESPONDENTS DESPITE NON-
FULFILLMENT OF THEIR OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
26
AWARDING ATTORNEY’S FEES TO RESPONDENTS
IHC maintains that Article 1186 of the Civil Code was erroneously
applied; that it had no intention of preventing Joaquin from complying
with his obligations when it adopted his recommendation to negotiate
with Barnes; that Article 1234 of the Civil Code applied only if there was
a merely slight deviation from the obligation, and the omission or defect
was technical and unimportant; that substantial compliance was
unacceptable because the foreign loan was material and was, in fact, the
ultimate goal of its contract with Joaquin and Suarez; that because the
obligation was indivisible and subject to a suspensive condition, Article
27
1181 of the Civil Code applied, under which a partial performance was
equivalent to non-performance; and that the award of attorney’s fees
should be deleted for lack of legal and factual bases.
28
On the part of respondents, only Joaquin filed a comment, arguing that
the petition was fatally defective for raising questions of fact; that the
obligation was divisible and capable of partial performance; and that the
29
suspensive condition was deemed fulfilled through IHC’s own actions.
Ruling
We deny the petition for review on certiorari subject to the ensuing
disquisitions.
1.
IHC raises questions of law
We first consider and resolve whether IHC’s petition improperly raised
questions of fact.
A question of law exists when there is doubt as to what the law is on a
certain state of facts, but, in contrast, a question of fact exists when the
doubt arises as to the truth or falsity of the facts alleged. A question of
law does not involve an examination of the probative value of the
evidence presented by the litigants or by any of them; the resolution of
the issue must rest solely on what the law provides on the given set of
30
circumstances. When there is no dispute as to the facts, the question of
whether or not the conclusion drawn from the facts is correct is a question
31
of law.
Obligations Part 2 | Page 76 of 143
Considering that what IHC seeks to review is the CA’s application of the
law on the facts presented therein, there is no doubt that IHC raises
questions of law. The basic issue posed here is whether the conclusions
drawn by the CA were correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot be the source of
IHC’s obligation to pay respondents IHC argues that it should not be held
liable because: (a) it was Joaquin who had recommended Barnes; and (b)
IHC’s negotiation with Barnes had been neither intentional nor willfully
intended to prevent Joaquin from complying with his obligations.
IHC’s argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive
32
condition, whose application calls for two requisites, namely: (a) the
intent of the obligor to prevent the fulfillment of the condition, and (b) the
actual prevention of the fulfillment. Mere intention of the debtor to
prevent the happening of the condition, or to place ineffective obstacles
to its compliance, without actually preventing the fulfillment, is
33
insufficient.
The error lies in the CA’s failure to determine IHC’s intent to pre-empt
Joaquin from meeting his obligations. The June 20, 1970 minutes of
IHC’s special board meeting discloses that Joaquin impressed upon the
members of the Board that Materials Handling was offering more
favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors of the
International Hotel Corporation were present with the exception of
Directors Benjamin J. Bautista and Sergio O. Rustia who asked to be
excused because of previous engagements. In that meeting, the President
called on Mr. Francisco G. Joaquin, Jr. to explain the different
negotiations he had conducted relative to obtaining the needed financing
for the hotel project in keeping with the authority given to him in a
resolution approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted several local and
foreign financiers through different brokers and after examining the
different offers he narrowed down his choice to two (2), to wit: the foreign
financier recommended by George Wright of the Roger Dunn &
Company and the offer made by the Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation of
the two (2) offers specifically with regard to the terms and repayment of
the loan and the rate of interest requested by them, he concluded that the
offer made by the Materials Handling Corporation is much more
advantageous because the terms and conditions of payment as well as the
rate of interest are much more reasonable and would be much less onerous
to our corporation. However, he explained that the corporation accepted,
in principle, the offer of Roger Dunn, per the corporation’s telegrams to
Mr. Rudolph Meir of the Private Bank of Zurich, Switzerland, and until
such time as the corporation’s negotiations with Roger Dunn is
terminated, we are committed, on one way or the other, to their financing.
It was decided by the Directors that, should the negotiations with Roger
Dunn materialize, at the same time as the offer of Materials Handling
Corporation, that the funds committed by Roger Dunn may be diverted to
other borrowers of the Development Bank of the Philippines. With this
condition, Director Joaquin showed the advantages of the offer of
Materials Handling Corporation. Mr. Joaquin also informed the
corporation that, as of this date, the bank confirmation of Roger Dunn &
Company has not been received. In view of the fact that the corporation
is racing against time in securing its financing, he recommended that the
corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and
after hearing the clarification and explanation made by Mr. C. M. Javier
who was present and who represented the Materials Handling
Corporation, the Directors present approved unanimously the
recommendation of Mr. Joaquin to entertain the offer of Materials
34
Handling Corporation.
Evidently, IHC only relied on the opinion of its consultant in deciding to
transact with Materials Handling and, later on, with Barnes. In negotiating
with Barnes, IHC had no intention, willful or otherwise, to prevent
Joaquin and Suarez from meeting their undertaking. Such absence of any
intention negated the basis for the CA’s reliance on Article 1186 of the
Civil Code.
Nor do we agree with the CA’s upholding of IHC’s liability by virtue of
Joaquin and Suarez’s substantial performance. In so ruling, the CA
applied Article 1234 of the Civil Code, which states:
Article 1234. If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits
35
breaching the contract after honestly and faithfully performing all the
material elements thereof except for some technical aspects that cause no
36
serious harm to the obligee. IHC correctly submits that the provision
refers to an omission or deviation that is slight, or technical and
unimportant, and does not affect the real purpose of the contract.
Tolentino explains the character of the obligor’s breach under Article
1234 in the following manner, to wit:
In order that there may be substantial performance of an obligation, there
must have been an attempt in good faith to perform, without any willful
or intentional departure therefrom. The deviation from the obligation
must be slight, and the omission or defect must be technical and
unimportant, and must not pervade the whole or be so material that the
object which the parties intended to accomplish in a particular manner is
not attained. The non-performance of a material part of a contract will
prevent the performance from amounting to a substantial compliance.
The party claiming substantial performance must show that he has
attempted in good faith to perform his contract, but has through oversight,
misunderstanding or any excusable neglect failed to completely perform
in certain negligible respects, for which the other party may be adequately
indemnified by an allowance and deduction from the contract price or by
an award of damages. But a party who knowingly and wilfully fails to
perform his contract in any respect, or omits to perform a material part of
it, cannot be permitted, under the protection of this rule, to compel the
other party, and the trend of the more recent decisions is to hold that the
percentage of omitted or irregular performance may in and of itself be
37
sufficient to show that there had not been a substantial performance.
By reason of the inconsequential nature of the breach or omission, the law
deems the performance as substantial, making it the obligee’s duty to
38
pay. The compulsion of payment is predicated on the substantial benefit
derived by the obligee from the partial performance. Although compelled
to pay, the obligee is nonetheless entitled to an allowance for the sum
required to remedy omissions or defects and to complete the work agreed
39
upon.
Conversely, the principle of substantial performance is inappropriate
when the incomplete performance constitutes a material breach of the
contract. A contractual breach is material if it will adversely affect the
nature of the obligation that the obligor promised to deliver, the benefits
that the obligee expects to receive after full compliance, and the extent
that the non-performance defeated the purposes of the
40
contract. Accordingly, for the principle embodied in Article 1234 to
apply, the failure of Joaquin and Suarez to comply with their commitment
should not defeat the ultimate purpose of the contract.
The primary objective of the parties in entering into the services
agreement was to obtain a foreign loan to finance the construction of
IHC’s hotel project. This objective could be inferred from IHC’s approval
of phase 1 to phase 6 of the proposal. Phase 1 and phase 2, respectively
the preparation of a new project study and the settlement of the
unregistered mortgage, would pave the way for Joaquin and Suarez to
render assistance to IHC in applying for the DBP guaranty and thereafter
to look for an able and willing foreign financial institution acceptable to
DBP. All the steps that Joaquin and Suarez undertook to accomplish had
a single objective – to secure a loan to fund the construction and eventual
operations of the hotel of IHC. In that regard, Joaquin himself admitted
that his assistance was specifically sought to seek financing for IHC’s
41
hotel project.
Needless to say, finding the foreign financier that DBP would guarantee
was the essence of the parties’ contract, so that the failure to completely
satisfy such obligation could not be characterized as slight and
unimportant as to have resulted in Joaquin and Suarez’s substantial
performance that consequentially benefitted IHC. Whatever benefits IHC
gained from their services could only be minimal, and were even probably
outweighed by whatever losses IHC suffered from the delayed
construction of its hotel. Consequently, Article 1234 did not apply.
Obligations Part 2 | Page 77 of 143
3.
IHC is nonetheless liable to pay under the rule on constructive fulfillment
of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of
the Civil Code, IHC was liable based on the nature of the obligation.
Considering that the agreement between the parties was not circumscribed
by a definite period, its termination was subject to a condition – the
42
happening of a future and uncertain event. The prevailing rule in
conditional obligations is that the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the
43
happening of the event that constitutes the condition.
To recall, both the RTC and the CA held that Joaquin and Suarez’s
obligation was subject to the suspensive condition of successfully
securing a foreign loan guaranteed by DBP. IHC agrees with both lower
courts, and even argues that the obligation with a suspensive condition
did not arise when the event or occurrence did not happen. In that
instance, partial performance of the contract subject to the suspensive
condition was tantamount to no performance at all. As such, the
respondents were not entitled to any compensation.
We have to disagree with IHC’s argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the
diligence or the sole will of the respondents because it required the action
and discretion of third persons – an able and willing foreign financial
institution to provide the needed funds, and the DBP Board of Governors
to guarantee the loan. Such third persons could not be legally compelled
to act in a manner favorable to IHC. There is no question that when the
fulfillment of a condition is dependent partly on the will of one of the
44
contracting parties, or of the obligor, and partly on chance, hazard or
45
the will of a third person, the obligation is mixed. The existing rule in
a mixed conditional obligation is that when the condition was not fulfilled
but the obligor did all in his power to comply with the obligation, the
46
condition should be deemed satisfied.
Considering that the respondents were able to secure an agreement with
Weston, and subsequently tried to reverse the prior cancellation of the
guaranty by DBP, we rule that they thereby constructively fulfilled their
obligation.
4.
Quantum meruit should apply in the absence of an express agreement on
the fees
The next issue to resolve is the amount of the fees that IHC should pay to
Joaquin and Suarez.
Joaquin claimed that aside from the approved ₱2,000,000.00 fee to
implement phase 1 to phase 6, the IHC Board of Directors had approved
an additional ₱500,000.00 as payment for his services. The RTC declared
that he and Suarez were entitled to ₱200,000.00 each, but the CA revised
the amounts to ₱700,000.00 for Joaquin and ₱200,000.00 for Suarez.
Anent the ₱2,000,000.00, the CA rightly concluded that the full amount
of ₱2,000,000.00 could not be awarded to respondents because such
amount was not allocated exclusively to compensate respondents, but was
intended to be the estimated maximum to fund the expenses in
undertaking phase 6 of the scope of services. Its conclusion was
unquestionably borne out by the minutes of the February 11, 1969
meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP including the
preparation of the application, the presentation of the mechanics of
financing, the actual follow up with the different departments of the DBP
which includes the explanation of the feasibility studies up to the approval
of the loan, conditioned on the DBP’s acceptance of the project as
feasible. The estimated expenses for this particular phase would be
contingent, i.e. upon DBP’s approval of the plan now being studied and
prepared, is somewhere around ₱2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made and
seconded, unanimously adopted a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the Reparations
allocation and the plan being negotiated with the DBP is realized the
estimated maximum expenses of ₱2,000,000.00 for this phase is hereby
authorized subject to the sound discretion of the committee composed of
Justice Felix Angelo Bautista, Jose N. Valero and Ephraim G.
47
Gochangco." (Emphasis supplied)
Joaquin’s claim for the additional sum of ₱500,000.00 was similarly
without factual and legal bases. He had requested the payment of that
amount to cover services rendered and still to be rendered to IHC
separately from those covered by the first six phases of the scope of work.
However, there is no reason to hold IHC liable for that amount due to his
failure to present sufficient proof of the services rendered towards that
end. Furthermore, his July 11, 1969 letter revealed that the additional
services that he had supposedly rendered were identical to those
enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation and action on the
fees for my services rendered and to be rendered to the hotel project and
to the corporation. These fees are separate from the fees you have
approved in your previous Board Resolution, since my fees are separate.
I realize the position of the corporation at present, in that it is not in a
financial position to pay my services in cash, therefore, I am requesting
this Body to consider payment of my fees even in the form of shares of
stock, as you have done to the other technical men and for other services
rendered to the corporation by other people.
Inasmuch as my fees are contingent on the successful implementation of
this project, I request that my fees be based on a percentage of the total
project cost. The fees which I consider reasonable for the services that I
have rendered to the project up to the completion of its construction is
₱500,000.00. I believe said amount is reasonable since this is
approximately only ¾ of 1% of the total project cost.
So far, I have accomplished Phases 1-5 of my report dated February 1,
1969 and which you authorized us to do under Board Resolution of
February 11, 1969. It is only Phase 6 which now remains to be
implemented. For my appointment as Consultant dated May 12, 1969 and
the Board Resolution dated June 23, 1969 wherein I was appointed to the
Technical Committee, it now follows that I have been also authorized to
implement part of Phases 7 & 8.
A brief summary of my accomplished work has been as follows:
1. I have revised and made the new Project Study of your hotel project,
making it bankable and feasible.
2. I have reduced the total cost of your project by approximately
₱24,735,000.00.
3. I have seen to it that a registered mortgage with the Reparations
Commission did not affect the application with the IBP for approval to
processing.
4. I have prepared the application papers acceptable to the DBP by means
of an advance analysis and the presentation of the financial mechanics,
which was accepted by the DBP.
5. I have presented the financial mechanics of the loan wherein the
requirement of the DBP for an additional ₱19,000,000.00 in equity from
the corporation became unnecessary.
6. The explanation of the financial mechanics and the justification of this
project was instrumental in changing the original recommendation of the
Investment Banking Department of the DBP, which recommended
disapproval of this application, to the present recommendation of the Real
Estate Department which is for the approval of this project for proceeding.
7. I have submitted to you several offers already of foreign financiers
which are in your files. We are presently arranging the said financiers to
confirm their funds to the DBP for our project,
8. We have secured the approval of the DBP to process the loan
application of this corporation as per its letter July 2, 1969.
9. We have performed other services for the corporation which led to the
cooperation and understanding of the different factions of this
corporation.
Obligations Part 2 | Page 78 of 143
I have rendered services to your corporation for the past 6 months with
no clear understanding as to the compensation of my services. All I have
drawn from the corporation is the amount of ₱500.00 dated May 12, 1969
and personal payment advanced by Justice Felix Angelo Bautista in the
amount of ₱1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have
shown my good faith and willingness to render services to your
corporation which is evidenced by my continued services in the past 6
months as well as the accomplishments above mentioned. I believe that
the final completion of this hotel, at least for the processing of the DBP
up to the completion of the construction, will take approximately another
2 ½ years. In view of the above, I again reiterate my request for your
approval of my fees. When the corporation is in a better financial position,
I will request for a withdrawal of a monthly allowance, said amount to be
determined by this Body.
Very truly yours,
(Sgd.)
48
Francisco G., Joaquin, Jr.
(Emphasis supplied)
Joaquin could not even rest his claim on the approval by IHC’s Board of
Directors. The approval apparently arose from the confusion between the
supposedly separate services that Joaquin had rendered and those to be
done under the technical proposal. The minutes of the July 11, 1969 board
meeting (when the Board of Directors allowed the payment for Joaquin’s
past services and for the 70% project completion by the technical group)
showed as follows:
III
The Third order of business is the compensation of Mr. Francisco G.
Joaquin, Jr. for his services in the corporation.
After a brief discussion that ensued, upon motion duly made and
seconded, the stockholders unanimously approved a resolution of the
following tenor:
RESOLUTION NO. ___
(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a
compensation in the amount of Five Hundred Thousand (₱500,000.00)
Pesos for his past services and services still to be rendered in the future to
the corporation up to the completion of the Project. The President is
1âwphi1
given full discretion to discuss with Mr. Joaquin the manner of payment
of said compensation, authorizing him to pay part in stock and part in
cash."
Incidentally, it was also taken up the necessity of giving the Technical
Group a portion of the compensation that was authorized by this
corporation in its Resolution of February 11, 1969 considering that the
assistance so far given the corporation by said Technical Group in
continuing our project with the DBP and its request for guaranty for a
foreign loan is 70% completed leaving only some details which are now
being processed. It is estimated that ₱400,000.00 worth of Common
Stock would be reasonable for the present accomplishments and to this
effect, the President is authorized to issue the same in the name of the
Technical Group, as follows:
₱200,000.00 in Common Stock to Rafael Suarez, an associate in the
Technical Group, and ₱200,000.00 in Common stock to Francisco G.
49
Joaquin, Jr., also a member of the Technical Group.
Lastly, the amount purportedly included services still to be rendered that
supposedly extended until the completion of the construction of the hotel.
It is basic, however, that in obligations to do, there can be no payment
50
unless the obligation has been completely rendered.
It is notable that the confusion on the amounts of compensation arose
from the parties’ inability to agree on the fees that respondents should
receive. Considering the absence of an agreement, and in view of
respondents’ constructive fulfillment of their obligation, the Court has to
apply the principle of quantum meruit in determining how much was still
due and owing to respondents. Under the principle of quantum meruit, a
contractor is allowed to recover the reasonable value of the services
51
rendered despite the lack of a written contract. The measure of recovery
under the principle should relate to the reasonable value of the services
52
performed. The principle prevents undue enrichment based on the
equitable postulate that it is unjust for a person to retain any benefit
without paying for it. Being predicated on equity, the principle should
only be applied if no express contract was entered into, and no specific
53
statutory provision was applicable.
Under the established circumstances, we deem the total amount of
₱200,000.00 to be reasonable compensation for respondents’ services
under the principle of quantum meruit.
Finally, we sustain IHC’s position that the grant of attorney’s fees lacked
factual or legal basis. Attorney’s fees are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed
on the right to litigate. There should be factual or legal support in the
records before the award of such fees is sustained. It is not enough
justification for the award simply because respondents were compelled to
54
protect their rights.
ACCORDINGLY, the Court DENIES the petition for review on
certiorari; and AFFIRMS the decision of the Court of Appeals
promulgated on November 8, 2002 in C.A.-G.R. No. 47094 subject to the
MODIFICATIONS that: (a) International Hotel Corporation is ordered
to. pay Francisco G. Joaquin, Jr. and Rafael Suarez ₱100,000.00 each as
compensation for their services, and (b) the award of ₱20,000.00 as
attorney's fees is deleted.
No costs of suit.
SO ORDERED.
Dela Cruz vs. Concepcion
G.R. No. 172825 October 11, 2012
SPOUSES MINIANO B. DELA CRUZ and LETA L. DELA
CRUZ, Petitioners,
vs.
ANA MARIE CONCEPCION, Respondent.
DECISION
PERALTA, J.:
Assailed in this petition for review on certiorari under Rule 45 of the
Rules of Court filed by petitioners spouses Miniano B. Dela Cruz and
Leta L. Dela Cruz against respondent Ana Marie Concepcion are the
Court of Appeals (CA) Decision1 dated March 31, 2005 and
Resolution2 dated May 24, 2006 in CA-G.R. CV No. 83030.
The facts of the case are as follows:
On March 25, 1996, petitioners (as vendors) entered into a Contract to
Sell3 with respondent (as vendee) involving a house and lot in Cypress St.,
Phase I, Town and Country Executive Village, Antipolo City for a
consideration of P2,000,000.00 subject to the following terms and
conditions:
a) That an earnest money of P100,000.00 shall be paid immediately;
b) That a full down payment of Four Hundred Thousand Pesos
(P400,000.00) shall be paid on February 29, 1996;
c) That Five Hundred Thousand Pesos (P500,000.00) shall be paid on or
before May 5, 1996; and
d) That the balance of One Million Pesos (P1,000,000.00) shall be paid
on installment with interest of Eighteen Percent (18%) per annum or One
and a half percent (1-1/2 %) interest per month, based on the diminishing
balance, compounded monthly, effective May 6, 1996. The interest shall
continue to run until the whole obligation shall have been fully paid. The
whole One Million Pesos shall be paid within three years from May 6,
1996;
e) That the agreed monthly amortization of Fifty Thousand Pesos
(P50,000.00), principal and interest included, must be paid to the
Vendors, without need of prior demand, on or before May 6, 1996, and
every month thereafter. Failure to pay the monthly amortization on time,
a penalty equal to Five Percent (5%) of the amount due shall be imposed,
until the account is updated. In addition, a penalty of One Hundred Pesos
per day shall be imposed until the account is updated;
f) That after receipt of the full payment, the Vendors shall execute the
necessary Absolute Deed of Sale covering the house and lot mentioned
above x x x4
Respondent made the following payments, to wit: (1) P500,000.00 by way
of downpayment; (2) P500,000.00 on May 30, 1996; (3) P500,000.00 paid
on January 22, 1997; and (4) P500,000.00 bounced check dated June 30,
1997 which was subsequently replaced by another check of the same
amount, dated July 7, 1997. Respondent was, therefore, able to pay a total
of P2,000,000.00.5
Obligations Part 2 | Page 79 of 143
Before respondent issued the P500,000.00 replacement check, she told
petitioners that based on the computation of her accountant as of July 6,
1997, her unpaid obligation which includes interests and penalties was
only P200,000.00.6 Petitioners agreed with respondent and said "if
P200,000.00 is the correct balance, it is okay with us."7
Meanwhile, the title to the property was transferred to respondent.
Petitioners later reminded respondent to pay P209,000.00 within three
months.8 They claimed that the said amount remained unpaid, despite the
transfer of the title to the property to respondent. Several months later,
petitioners made further demands stating the supposed correct
computation of respondent’s liabilities.9 Despite repeated demands,
petitioners failed to collect the amounts they claimed from respondent.
Hence, the Complaint for Sum of Money With Damages10 filed with the
Regional Trial Court (RTC)11 of Antipolo, Rizal. The case was docketed
as Civil Case No. 98-4716.
In her Answer with Compulsory Counterclaim,12 respondent claimed that
her unpaid obligation to petitioners is only P200,000.00 as earlier
confirmed by petitioners and not P487,384.15 as later alleged in the
complaint. Respondent thus prayed for the dismissal of the complaint. By
way of counterclaim, respondent prayed for the payment of moral
damages and attorney’s fees. During the presentation of the parties’
evidence, in addition to documents showing the statement of her paid
obligations, respondent presented a receipt purportedly indicating
payment of the remaining balance of P200,000.00 to Adoracion Losloso
(Losloso) who allegedly received the same on behalf of petitioners.13
On March 8, 2004, the RTC rendered a Decision14 in favor of respondent,
the dispositive portion of which reads:
WHEREFORE, premises considered, this case is hereby DISMISSED.
The plaintiff is hereby ordered to pay the defendant’s counterclaim,
amounting to wit:
a) P300,000 as moral damages; and
b) P100,000 plus P2,000 per court appearance as attorney’s fees.
SO ORDERED.15
The RTC noted that the evidence formally offered by petitioners have not
actually been marked as none of the markings were recorded. Thus, it
found no basis to grant their claims, especially since the amount claimed
in the complaint is different from that testified to. The court, on the other
hand, granted respondent’s counterclaim.16
On appeal, the CA affirmed the decision with modification by deleting
the award of moral damages and attorney’s fees in favor of
respondent.17 It agreed with the RTC that the evidence presented by
petitioners cannot be given credence in determining the correct liability
of respondent.18 Considering that the purchase price had been fully paid
by respondent ahead of the scheduled date agreed upon by the parties,
petitioners were not awarded the excessive penalties and interests.19 The
CA thus maintained that respondent’s liability is limited to P200,000.00
as claimed by respondent and originally admitted by petitioners.20 This
amount, however, had already been paid by respondent and received by
petitioners’ representative.21 Finally, the CA pointed out that the RTC did
not explain in its decision why moral damages and attorney’s fees were
awarded. Considering also that bad faith cannot be attributed to
petitioners when they instituted the collection suit, the CA deleted the
grant of their counterclaims.22
Aggrieved, petitioners come before the Court in this petition for review
on certiorari under Rule 45 of the Rules of Court raising the following
errors:
I.
"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT
ON THE GROUND THAT PLAINTIFF FAILED TO FORMALLY
OFFER THEIR EVIDENCE AS DEFENDANT JUDICIALLY
ADMITTED IN HER ANSWER WITH COMPULS[O]RY
COUNTERCLAIM HER OUTSTANDING OBLIGATION STILL DUE
TO PLAINTIFFS AND NEED NO PROOF.
II.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT
FOR ALLEGED FAILURE OF PLAINTIFFS TO PRESENT
COMPUTATION OF THE AMOUNT BEING CLAIMED AS
DEFENDANT JUDICIALLY ADMITTED HAVING RECEIVED THE
DEMAND LETTER DATED OCTOBER 22, 1997 WITH
COMPUTATION OF THE BALANCE DUE.
III.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON
THE GROUND THAT THE DEFENDANT FULLY PAID THE
CLAIMS OF PLAINTIFFS BASED ON THE ALLEGED RECEIPT OF
PAYMENT BY ADORACION LOSLOSO FROM ANA MARIE
CONCEPCION MAGLASANG WHICH HAS NOTHING TO DO
WITH THE JUDICIALLY ADMITTED OBLIGATION OF
APPELLEE."23
Invoking the rule on judicial admission, petitioners insist that respondent
admitted in her Answer with Compulsory Counterclaim that she had paid
only a total amount of P2 million and that her unpaid obligation amounts
to P200,000.00.24 They thus maintain that the RTC and the CA erred in
concluding that said amount had already been paid by respondent.
Petitioners add that respondent’s total liability as shown in the latter’s
statement of account was erroneously computed for failure to compound
the monthly interest agreed upon.25 Petitioners also claim that the RTC
and the CA erred in giving credence to the receipt presented by respondent
to show that her unpaid obligation had already been paid having been
allegedly given to a person who was not armed with authority to receive
payment.26
The petition is without merit.
It is undisputed that the parties entered into a contract to sell a house and
lot for a total consideration of P2 million. Considering that the property
was payable in installment, they likewise agreed on the payment of
interest as well as penalty in case of default. It is likewise settled that
respondent was able to pay the total purchase price of P2 million ahead
of the agreed term. Afterwhich, they agreed on the remaining balance by
way of interest and penalties which is P200,000.00. Considering that the
term of payment was not strictly followed and the purchase price had
already been fully paid by respondent, the latter presented to petitioners
her computation of her liabilities for interests and penalties which was
agreed to by petitioners. Petitioners also manifested their conformity to
the statement of account prepared by respondent.
In paragraph (9) of petitioners’ Complaint, they stated that:
9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is
the correct balance, it is okay with us." x x x.27
But in paragraph (17) thereof, petitioners claimed that defendant’s
outstanding liability as of November 6, 1997 was
P487,384.15.28 Different amounts, however, were claimed in their
demand letter and in their testimony in court.
With the foregoing factual antecedents, petitioners cannot be permitted to
assert a different computation of the correct amount of respondent’s
liability.
It is noteworthy that in answer to petitioners’ claim of her purported
unpaid obligation, respondent admitted in her Answer with Compulsory
Counterclaim that she paid a total amount of P2 million representing the
purchase price of the subject house and lot. She then manifested to
petitioners and conformed to by respondent that her only balance was
P200,000.00. Nowhere in her Answer did she allege the defense of
payment. However, during the presentation of her evidence, respondent
submitted a receipt to prove that she had already paid the remaining
balance. Both the RTC and the CA concluded that respondent had already
paid the remaining balance of P200,000.00. Petitioners now assail this,
insisting that the court should have maintained the judicial admissions of
respondent in her Answer with Compulsory Counterclaim, especially as
to their agreed stipulations on interests and penalties as well as the
existence of outstanding obligations.
It is, thus, necessary to discuss the effect of failure of respondent to plead
payment of its obligations.
Section 1, Rule 9 of the Rules of Court states that "defenses and objections
not pleaded either in a motion to dismiss or in the answer are deemed
waived." Hence, respondent should have been barred from raising the
defense of payment of the unpaid P200,000.00. However, Section 5, Rule
10 of the Rules of Court allows the amendment to conform to or authorize
presentation of evidence, to wit:
Section 5. Amendment to conform to or authorize presentation of
evidence. – When issues not raised by the pleadings are tried with the
express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of
the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party
at any time, even after judgment; but failure to amend does not affect the
result of the trial of these issues. If evidence is objected to at the trial on
the ground that it is not within the issues made by the pleadings, the court
may allow the pleadings to be amended and shall do so with liberality if
Obligations Part 2 | Page 80 of 143
the presentation of the merits of the action and the ends of substantial
justice will be subserved thereby. The court may grant a continuance to
enable the amendment to be made.
The foregoing provision envisions two scenarios, namely, when evidence
is introduced in an issue not alleged in the pleadings and no objection was
interjected; and when evidence is offered on an issue not alleged in the
pleadings but this time an objection was raised.29 When the issue is tried
without the objection of the parties, it should be treated in all respects as
if it had been raised in the pleadings.30 On the other hand, when there is
an objection, the evidence may be admitted where its admission will not
prejudice him.31
Thus, while respondent judicially admitted in her Answer that she only
paid P2 million and that she still owed petitioners P200,000.00,
respondent claimed later and, in fact, submitted an evidence to show that
she already paid the whole amount of her unpaid obligation. It is
noteworthy that when respondent presented the evidence of payment,
petitioners did not object thereto. When the receipt was formally offered
as evidence, petitioners did not manifest their objection to the
admissibility of said document on the ground that payment was not an
issue. Apparently, petitioners only denied receipt of said payment and
assailed the authority of Losloso to receive payment. Since there was an
implied consent on the part of petitioners to try the issue of payment, even
if no motion was filed and no amendment of the pleading has been
ordered,32 the RTC cannot be faulted for admitting respondent’s
testimonial and documentary evidence to prove payment.33
As stressed by the Court in Royal Cargo Corporation v. DFS Sports
Unlimited, Inc.,34
The failure of a party to amend a pleading to conform to the evidence
adduced during trial does not preclude adjudication by the court on the
basis of such evidence which may embody new issues not raised in the
pleadings. x x x Although, the pleading may not have been amended to
conform to the evidence submitted during trial, judgment may
nonetheless be rendered, not simply on the basis of the issues alleged but
also on the issues discussed and the assertions of fact proved in the course
of the trial. The court may treat the pleading as if it had been amended to
conform to the evidence, although it had not been actually amended. x x
x Clearly, a court may rule and render judgment on the basis of the
evidence before it even though the relevant pleading had not been
previously amended, so long as no surprise or prejudice is thereby caused
to the adverse party. Put a little differently, so long as the basic
requirements of fair play had been met, as where the litigants were given
full opportunity to support their respective contentions and to object to or
refute each other's evidence, the court may validly treat the pleadings as
if they had been amended to conform to the evidence and proceed to
adjudicate on the basis of all the evidence before it. (Emphasis supplied)35
To be sure, petitioners were given ample opportunity to refute the fact of
and present evidence to prove payment.
With the evidence presented by the contending parties, the more
important question to resolve is whether or not respondent’s obligation
had already been extinguished by payment.
We rule in the affirmative as aptly held by the RTC and the CA.
Respondent’s obligation consists of payment of a sum of money. In order
to extinguish said obligation, payment should be made to the proper
person as set forth in Article 1240 of the Civil Code, to wit:
Article 1240. Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any person
authorized to receive it. (Emphasis supplied)
The Court explained in Cambroon v. City of Butuan,36 cited in Republic
v. De Guzman,37 to whom payment should be made in order to extinguish
an obligation:
Payment made by the debtor to the person of the creditor or to one
authorized by him or by the law to receive it extinguishes the obligation.
When payment is made to the wrong party, however, the obligation is not
extinguished as to the creditor who is without fault or negligence even if
the debtor acted in utmost good faith and by mistake as to the person of
the creditor or through error induced by fraud of a third person.
In general, a payment in order to be effective to discharge an obligation,
must be made to the proper person. Thus, payment must be made to the
obligee himself or to an agent having authority, express or implied, to
receive the particular payment. Payment made to one having apparent
authority to receive the money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if payment is made to
one who by law is authorized to act for the creditor, it will work a
discharge. The receipt of money due on a judgment by an officer
authorized by law to accept it will, therefore, satisfy the debt.38
Admittedly, payment of the remaining balance of P200,000.00 was not
made to the creditors themselves. Rather, it was allegedly made to a
certain Losloso. Respondent claims that Losloso was the authorized agent
of petitioners, but the latter dispute it.
Losloso’s authority to receive payment was embodied in petitioners’
Letter39 addressed to respondent, dated August 7, 1997, where they
informed respondent of the amounts they advanced for the payment of the
1997 real estate taxes. In said letter, petitioners reminded respondent of
her remaining balance, together with the amount of taxes paid. Taking
into consideration the busy schedule of respondent, petitioners advised
the latter to leave the payment to a certain "Dori" who admittedly is
Losloso, or to her trusted helper. This is an express authority given to
Losloso to receive payment.
Moreover, as correctly held by the CA:
Furthermore, that Adoracion Losloso was indeed an agent of the appellant
spouses is borne out by the following admissions of plaintiff-appellant
Atty. Miniano dela Cruz, to wit:
Q: You would agree with me that you have authorized this Doiry Losloso
to receive payment of whatever balance is due you coming from Ana
Marie Concepcion, that is correct?
A: In one or two times but not total authority, sir.
Q: Yes, but you have authorized her to receive payment?
A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)40
Thus, as shown in the receipt signed by petitioners’ agent and pursuant to
the authority granted by petitioners to Losloso, payment made to the latter
is deemed payment to petitioners. We find no reason to depart from the
RTC and the CA conclusion that payment had already been made and that
it extinguished respondent's obligations.
WHEREFORE, premises considered, the petition is DENIED for lack of
merit. The Court of Appeals Decision dated March 31, 2005 and
Resolution dated May 24, 2006 in CA-G.R. CV No. 83030, are
AFFIRMED.
SO ORDERED.
National Power Corporation v. Ibrahim
G.R. No. 175863 February 18, 2015
NATIONAL POWER CORPORATION, Petitioner,
vs.
LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM, ELIAS G.
MARUHOM, BUCAY G. MARUHOM, MAMOD G. MARUHOM,
FAROUK G. MARUHOM, HIDJARA G. MARUHOM, ROCANIA G.
MARUHOM, POTRISAM G. MARUHOM, LUMBA G. MAR UH OM,
SIN AB G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G.
MARUHOM, MOHAMAD M. IBRAHIM, CAIRONESA M. IBRAHIM
and MACAPANTON K. MANGONDATORespondents.
DECISION
PEREZ, J.:
At bench is a petition for review on certiorari1 assailing the
Decision2 dated 24 June 2005 and Resolution3 dated 5 December 2006 of
the Court of Appeals in CA-G.R. CV No. 68061. The facts:
The Subject Land
In 1978, petitioner took possession of a 21,995 square meter parcel of
land in Marawi City (subject land) for the purpose of building thereon a
hydroelectric power plant pursuant to its Agus 1 project. The subject land,
while in truth a portion of a private estate registered under Transfer
Certificate of Title (TCT) No. 378-A4 in the name of herein respondent
Macapanton K. Mangondato (Mangondato),5 was occupied by petitioner
under the mistaken belief that such land is part of the vast tract of public
land reserved for its use by the government under Proclamation No. 1354,
s. 1974.6
Mangondato first discovered petitioner’s occupation of the subject land
in 1979—the year that petitioner started its construction of the Agus
1plant. Shortly after such discovery, Mangondato began demanding
compensation for the subject land from petitioner.
In support of his demand for compensation, Mangondato sent to petitioner
a letter7 dated 28 September 1981 wherein the former detailed the origins
Obligations Part 2 | Page 81 of 143
of his ownership over the lands covered by TCT No. 378-A, including the
subject land. The relevant portions of the letter read:
Now let me trace the basis of the title to the land adverted to for
particularity. The land titled in my name was originally consisting of
seven (7) hectares. This piece of land was particularly set aside by the
Patriarch Maruhom, a fact recognized by all royal datus of Guimba, to
belong to his eldest son, Datu Magayo-ong Maruhom. This is the very
foundation of the right and ownership over the land in question which was
titled in my name because as the son-in-law of Hadji Ali Maruhom the
eldest son of, and only lawyer among the descendants of Datu Magayo-
ong Maruhom, the authority and right to apply for the title to the land was
given to me by said heirs after mutual agreement among themselves
besides the fact that I have already bought a substantial portion of the
original seven (7) hectares.
The original title of this seven (7) hectares has been subdivided into
several TCTs for the other children of Datu Magayo-ong Maruhom with
whom I have executed a quit claim. Presently, only three (3) hectares is
left to me out of the original seven (7) hectares representing those portion
[sic] belonging to my wife and those I have bought previously from other
heirs. This is now the subject of this case.8
Petitioner, at first, rejected Mangondato’s claim of ownership over the
subject land; the former then adamant in its belief that the said land is
public land covered by Proclamation No. 1354, s. 1974. But, after more
than a decade, petitioner finally acquiesced to the fact that the subject land
is private land covered by TCT No. 378-A and consequently
acknowledged Mangondato’s right, as registered owner, to receive
compensation therefor.
Thus, during the early 1990s, petitioner and Mangondato partook in a
series of communications aimed at settling the amount of compensation
that the former ought to pay the latter in exchange for the subject land.
Ultimately, however, the communications failed to yield a genuine
consensus between petitioner and Mangondato as to the fair market value
of the subject land. Civil Case No. 605-92 and Civil Case No. 610-92
With an agreement basically out of reach, Mangondato filed a complaint
for reconveyance against petitioner before the Regional Trial Court
(RTC) of Marawi City in July 1992. In his complaint, Mangondato asked
for, among others, the recovery of the subject land and the payment by
petitioner of a monthly rental from 1978 until the return of such land.
Mangondato’s complaint was docketed as Civil Case No. 605-92.
For its part, petitioner filed an expropriation complaint9 before the RTC
on 27 July 1992. Petitioner’s complaint was docketed as Civil Case No.
610-92.
Later, Civil Case No. 605-92 and Civil Case No. 610-92 were
consolidated before Branch 8 of the Marawi City RTC.
On 21 August 1992, Branch 8 of the Marawi City RTC rendered a
Decision10 in Civil Case No. 605-92 and Civil Case No. 610-92. The
decision upheld petitioner’s right to expropriate the subject land: it denied
Mangondato’s claim for reconveyance and decreed the subject land
condemned in favor of the petitioner, effective July of 1992, subject to
payment by the latter of just compensation in the amount of
₱21,995,000.00. Anent petitioner’s occupation of the subject land from
1978to July of 1992, on the other hand, the decision required the former
to pay rentals therefor at the rate of ₱15,000.00 per month with12%
interest per annum. The decision’s fallo reads:
WHEREFORE, the prayer in the recovery case for [petitioner’s]
surrender of the property is denied but[petitioner] is ordered to pay
monthly rentals in the amount of ₱15,000.00 from 1978 up to July 1992
with 12% interest per annum xxx and the property is condemned in favor
of [petitioner] effective July 1992 upon payment of the fair market value
of the property at One Thousand (₱1,000.00) Pesos per square meter or a
total of Twenty-One Million Nine Hundred Ninety-Five Thousand
(₱21,995,000.00) [P]esos.11
Disagreeing with the amount of just compensation that it was adjudged to
pay under the said decision, petitioner filed an appeal with the Court of
Appeals. This appeal was docketed in the Court of Appeals as CA-G.R.
CV No. 39353.
Respondents Ibrahims and Maruhoms and Civil Case No. 967-93
During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993,
herein respondents the Ibrahims and Maruhoms12 filed before the RTC of
Marawi City a complaint13 against Mangondato and petitioner. This
complaint was docketed as Civil Case No. 967-93and was raffled to
Branch 10of the Marawi City RTC.
In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s
ownership of the lands covered by TCT No. 378-A, including the subject
land. The Ibrahims and Maruhoms asseverate that they are the real owners
of the lands covered by TCT No. 378-A; they being the lawful heirs of
the late Datu Magayo-ong Maruhom, who was the original proprietor of
the said lands.14 They also claimed that Mangondato actually holds no
claim or right over the lands covered by TCT No. 378-A except that of a
trustee who merely holds the said lands in trust for them.15 The Ibrahims
and Maruhoms submit that since they are the real owners of the lands
covered by TCT No. 378-A, they should be the ones entitled to any rental
fees or expropriation indemnity that may be found due for the subject
land.
Hence, the Ibrahims and Maruhoms prayed for the following reliefs in
their complaint:16
1. That Mangondato be ordered to execute a Deed of Conveyance
transferring to them the ownership of the lands covered by TCT No. 378-
A;
2. That petitioner be ordered to pay to them whatever indemnity for the
subject land it is later on adjudged to pay in Civil Case No. 605-92 and
Civil Case No. 610-92;
3. That Mangondato be ordered to pay to them any amount that the former
may have received from the petitioner by way of indemnity for the subject
land;
4. That petitioner and Mangondatobe ordered jointly and severally liable
to pay attorney’s fees in the sum of ₱200,000.00.
In the same complaint, the Ibrahims and Maruhoms also prayed for the
issuance of a temporary restraining order (TRO) and a writ of preliminary
injunction to enjoin petitioner, during the pendency of the suit, from
making any payments to Mangondato concerning expropriation
indemnity for the subject land.17
On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer
of the Ibrahims and Maruhoms for the issuance of a TRO.18 On 29 May
1993, after conducting an appropriate hearing for the purpose, the same
court likewise granted the prayer for the issuance of a writ of preliminary
injunction.19
In due course, trial then ensued in Civil Case No. 967-93.
The Decision of the Court of Appeals in CA-G.R. CV No. 39353 and the
Decision of this Court in G.R. No. 113194
On 21 December 1993, the Court of Appeals rendered a Decision in CA-
G.R. CV No. 39353 denying the appeal of petitioner and affirming in toto
the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case
No. 610-92. Undeterred, petitioner next filed a petition for review on
certiorari with this Court that was docketed herein as G.R. No. 113194.20
On 11 March 1996, we rendered our Decision in G.R. No. 113194
wherein we upheld the Court of Appeals’ denial of petitioner’s
appeal.21 In the same decision, we likewise sustained the appellate court’s
affirmance of the decision in Civil Case No. 605-92 and Civil Case No.
610-92 subject only to a reduction of the rate of interest on the monthly
rental fees from 12% to 6% per annum.22
Our decision in G.R. No. 113194 eventually became final and executory
on 13 May 1996.23
Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and
Civil Case No. 610-92, as Modified
In view of the finality of this Court’s decision in G.R. No. 113194,
Mangondato filed a motion for execution of the decision in Civil Case
No. 605-92 and Civil Case No. 610-92.24 Against this motion, however,
petitioner filed an opposition.25
In its opposition, petitioner adverted to the existence of the writ of
preliminary injunction earlier issued in Civil Case No. 967-93 that enjoins
it from making any payment of expropriation indemnity over the subject
land in favor of Mangondato.26 Petitioner, in sum, posits that such writ of
preliminary injunction constitutes a legal impediment that effectively bars
any meaningful execution of the decision in Civil Case No. 605-92 and
Civil Case No. 610-92.
Finding no merit in petitioner’s opposition, however, Branch 8 of the
Marawi City RTC rendered a Resolution27dated 4 June 1996 ordering the
issuance of a writ of execution in favor of Mangondato in Civil Case No.
605-92 and Civil Case No. 610-92. Likewise, in the same resolution, the
trial court ordered the issuance of a notice of garnishment against several
of petitioner’s bank accounts28 for the amount of ₱21,801,951.00—the
figure representing the total amount of judgment debt due from petitioner
Obligations Part 2 | Page 82 of 143
in Civil Case No. 605-92 and Civil Case No. 610-92 less the amount then
already settled by the latter. The dispositive portion of the resolution
reads:
WHEREFORE, let a Writ of Execution and the corresponding order or
notice of garnishment be immediately issued against [petitioner] and in
favor of [Mangondato] for the amount of Twenty One Million Eight
Hundred One Thousand and Nine Hundred Fifty One (₱21,801,951.00)
Pesos.
x x x.29
Pursuant to the above resolution, a notice of garnishment30 dated 5 June
1996 for the amount of ₱21,801,951.00 was promptly served upon the
Philippine National Bank (PNB)—the authorized depositary of petitioner.
Consequently, the amount thereby garnished was paid to Mangondato in
full satisfaction of petitioner’s judgment debt in Civil Case No. 605-92
and Civil Case No. 610-92.
Decision in Civil Case No. 967-93
Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City
RTC decided Civil Case No. 967-93.31 In its decision, Branch 10 of the
Marawi City RTC made the following relevant findings:32
1. The Ibrahims and Maruhoms—not Mangondato—are the true owners
of the lands covered by TCT No. 378-A, which includes the subject land.
2. The subject land, however, could no longer be reconveyed to the
Ibrahims and Maruhoms since the same was already expropriated and
paid for by the petitioner under Civil Case No. 605-92 and Civil Case No.
610-92.
3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the
subject land, are the rightful recipients of whatever rental fees and
indemnity that may be due for the subject land as a result of its
expropriation.
Consistent with the foregoing findings, Branch 10 of the Marawi City
RTC thus required payment of all the rental fees and expropriation
indemnity due for the subject land, as previously adjudged in Civil Case
No. 605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms.
Notable in the trial court’s decision, however, was that it held both
Mangondato and the petitioner solidarily liable to the Ibrahims and
Maruhoms for the rental fees and expropriation indemnity adjudged in
Civil Case No. 605-92 and Civil Case No. 610-92.33
In addition, Mangondato and petitioner were also decreed solidarily liable
to the Ibrahims and Maruhoms for attorney’s fees in the amount of
₱200,000.00.34
The pertinent dispositions in the decision read:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of [the Ibrahims and Maruhoms] and against [Mangondato and
petitioner] as follows:
1. x x x
2. Ordering [Mangondato and petitioner] to pay jointly and severally [the
Ibrahims and Maruhoms] all forms of expropriation indemnity as
adjudged for [the subject land] consisting of 21,995 square meters in the
amount of ₱21,801,051.00 plus other forms of indemnity such as rentals
and interests;
3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and
Maruhoms] jointly and severally the sum of ₱200,000.00 as attorney’s
fees;
4. x x x
5. x x x
6. x x x
SO ORDERED.35
Petitioner’s Appeal to the Court of Appeals and the Execution
Pending Appeal of the Decision in Civil Case No. 967-93
Petitioner appealed the decision in Civil Case No. 967-93 with the Court
of Appeals: contesting mainly the holding in the said decision that it ought
to be solidarily liable with Mangondato to pay to the Ibrahims and
Maruhoms the rental fees and expropriation indemnity adjudged due for
the subject land. This appeal was docketed as CA-G.R. CV No. 68061.
While the foregoing appeal was still pending decision by the Court of
Appeals, however, the Ibrahims and Maruhoms were able to secure with
the court a quo a writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led to the
garnishment of Mangondato’s moneys in the possession of the Social
Security System (SSS) in the amount of ₱2,700,000.00 on 18 September
1998.37 Eventually, the amount thereby garnished was paid to the
Ibrahims and Mangondato in partial satisfaction of the decision in Civil
Case No. 967-93.
On 24 June 2005, the Court of Appeals rendered its Decision38 in CA-
G.R. CV No. 68061 denying petitioner’s appeal. The appellate court
denied petitioner’s appeal and affirmed the decision in Civil Case No.
967-93, subject to the right of petitioner to deduct the amount of
₱2,700,000.00 from its liability as a consequence of the partial execution
of the decision in Civil Case No. 967-93.39
Hence, the present appeal by petitioner.
The Present Appeal
The present appeal poses the question of whether it is correct, in view of
the facts and circumstances in this case, to hold petitioner liable in favor
of the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged due for the subject land.
In their respective decisions, both Branch 10 of the Marawi City RTC and
the Court of Appeals had answered the foregoing question in the
affirmative. The two tribunals postulated that, notwithstanding
petitioner’s previous payment to Mangondato of the rental fees and
expropriation indemnity as a consequence of the execution of the decision
in Civil Case No. 605-92 and 610-92, petitioner may still be held liable to
the Ibrahims and Maruhoms for such fees and indemnity because its
previous payment to Mangondato was tainted with "bad faith."40 As proof
of such bad faith, both courts cite the following considerations:41
1. Petitioner "allowed" payment to Mangondato despite its prior
knowledge, which dates back as early as 28 September 1981, by virtue of
Mangondato’s letter of even date, that the subject land was owned by a
certain Datu Magayo-ong Maruhom and not by Mangondato; and
2. Petitioner "allowed" such payment despite the issuance of a TRO and
a writ of preliminary injunction in Civil Case No. 967-93 that precisely
enjoins it from doing so.
For the two tribunals, the bad faith on the part of petitioner rendered its
previous payment to Mangondato invalid insofar as the Ibrahims and
Maruhoms are concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for the rental fees
and expropriation indemnity previously paid to Mangondato.42
Petitioner, however, argues otherwise. It submits that a finding of bad
faith against it would have no basis in fact and law, given that it merely
complied with the final and executory decision in Civil Case No. 605-92
and Civil Case No. 610-92 when it paid the rental fees and expropriation
indemnity due the subject to Mangondato.43 Petitioner thus insists that it
should be absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms and prays for the
dismissal of Civil Case No. 967-93 against it.
OUR RULING
We grant the appeal.
No Bad Faith On The Part of Petitioner
Petitioner is correct. No "bad faith" may be taken against it in paying
Mangondato the rental fees and expropriation indemnity due the subject
land.
Our case law is not new to the concept of bad faith. Decisions of this
Court, both old and new, had been teeming with various pronouncements
that illuminate the concept amidst differing legal contexts. In any attempt
to understand the basics of bad faith, it is mandatory to take a look at some
of these pronouncements:
In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort
case, we defined the concept of bad faith as:
"…a breach of a known duty through some motive of interest or ill will."45
Just months after the promulgation of Lopez, however, came the case of
Air France v. Carrascoso, et al.,46 In Air France, we expounded on
Lopez’s definition by describing bad faith as:
"xxx a state of mind affirmatively operating with furtive design or with
some motive of self-interest or will or for ulterior purpose."47
Obligations Part 2 | Page 83 of 143
Air France’s articulation of the meaning of bad faith was, in turn, echoed
in a number subsequent cases,48 one of which, is the 2009 case of
Balbuena, et al. v. Sabay, et al.49
In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the
other hand, we enunciated one of the more oft-repeated formulations of
bad faith in our case law:
"xxx bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing
of wrong. It means breach of a known duty thru some motive or interest
of ill will; it partakes of the nature of fraud."51
As a testament to its enduring quality, the foregoing pronouncement in
Board of Liquidators had been reiterated in a slew of later cases,52 more
recently, in the 2009 case of Nazareno, et al. v. City of Dumaguete53 and
the 2012 case of Aliling v. Feliciano.54
Still, in 1995, the case of Far East Bank and Trust Company v. Court of
Appeals55 contributed the following description of bad faith in our
jurisprudence:
"Malice or bad faith implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity;xxx."56
The description of bad faith in Far East Bank and Trust Companythen
went on to be repeated in subsequent cases such as 1995’s Ortega v. Court
of Appeals,57 1997’s Laureano Investment and Development Corporation
v. Court of Appeals,58 2010’s Lambert Pawnbrokers v. Binamira59 and
2013’s California Clothing, Inc., v. Quiñones,60 to name a few.
Verily, the clear denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists in the deliberate
commission of a wrong. Indeed, the concept has often been equated with
malicious or fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple negligence or
oversight.61
A finding of bad faith, thus, usually assumes the presence of two (2)
elements: first, that the actor knew or should have known that a particular
course of action is wrong or illegal, and second, that despite such actual
or imputable knowledge, the actor, voluntarily, consciously and out of his
own free will, proceeds with such course of action. Only with the
concurrence of these two elements can we begin to consider that the
wrong committed had been done deliberately and, thus, in bad faith.
In this case, both Branch 10 of the Marawi City RTC and the Court of
Appeals held that petitioner was in bad faith when it paid to Mangondato
the rental fees and expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it "allowed" such payment
to take place despite the latter’s alleged knowledge of the existing claim
of the Ibrahims and Maruhoms upon the subject land and the issuance ofa
TRO in Civil Case No. 967-93. Hence, the two tribunals claim that
petitioner’s payment to Mangondato is ineffective as to the Ibrahims and
Maruhoms, whom they found to be the real owners of the subject land.
We do not agree.
Branch 10 of the Marawi City RTC and the Court of Appeals erred in
their finding of bad faith because they have overlooked the utter
significance of one important fact: that petitioner’s payment to
Mangondato of the rental fees and expropriation indemnity adjudged due
for the subject land in Civil Case No. 605-92 and Civil Case No. 610-92,
was required by the final and executory decision in the said two cases and
was compelled thru a writ of garnishment issued by the court that
rendered such decision. In other words, the payment to Mangondato was
not a product of a deliberate choice on the part of the petitioner but was
made only in compliance to the lawful orders of a court with jurisdiction.
Contrary then to the view of Branch 10 of the Marawi City RTC and of
the Court of Appeals, it was not the petitioner that "allowed" the payment
of the rental fees and expropriation indemnity to Mangondato. Indeed,
given the circumstances, the more accurate rumination would be that it
was the trial court in Civil Case No. 605-92 and Civil Case No. 610-92
that ordered or allowed the payment to Mangondato and that petitioner
merely complied with the order or allowance by the trial court. Since
petitioner was only acting under the lawful orders of a court in paying
Mangondato, we find that no bad faith can be taken against it, even
assuming that petitioner may have had prior knowledge about the claims
of the Ibrahims and Maruhoms upon the subject land and the TRO issued
in Civil Case No. 967-93.
Sans Bad Faith, Petitioner
Cannot Be Held Liable to the
Ibrahims and Maruhoms
Without the existence of bad faith, the ruling of the RTC and of the Court
of Appeals apropos petitioner’s remaining liability to the Ibrahims and
Maruhoms becomes devoid of legal basis. In fact, petitioner’s previous
payment to Mangondato of the rental fees and expropriation indemnity
due the subject land pursuant to the final judgment in Civil Case No. 605-
92 and Civil Case No. 610-92 may be considered to have extinguished the
former’s obligation regardless of who between Mangondato, on one hand,
and the Ibrahims and Maruhoms, on the other, turns out to be the real
owner of the subject land.62 Either way, petitioner cannot be made liable
to the Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the subject land, then the
obligation by petitioner to pay for the rental fees and expropriation
indemnity due the subject land is already deemed extinguished by the
latter’s previous payment under the final judgment in Civil Case No. 605-
92 and Civil Case No. 610-92. This would be a simple case of an
obligation being extinguished through payment by the debtor to its
creditor.63 Under this scenario, the Ibrahims and Maruhoms would not
even be entitled to receive anything from anyone for the subject land.
Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms.
Second. We, however, can reach the same conclusion even if the Ibrahims
and Maruhoms turn out to be the real owners of the subject land.
Should the Ibrahims and Maruhoms turn out to be the real owners of the
subject land, petitioner’s previous payment to Mangondato pursuant to
Civil Case No. 605-92 and Civil Case No. 610-92—given the absence of
bad faith on petitioner’s part as previously discussed—may nonetheless
be considered as akin to a payment made in "good faith "to a person in
"possession of credit" per Article 1242 of the Civil Code that, just the
same, extinguishes its obligation to pay for the rental fees and
expropriation indemnity due for the subject land. Article 1242 of the Civil
Code reads:
"Payment made in good faith to any person in possession of the credit
shall release the debtor." Article 1242 of the Civil Code is an exception
to the rule that a valid payment of an obligation can only be made to the
person to whom such obligation is rightfully owed.64 It contemplates a
situation where a debtor pays a "possessor of credit" i.e., someone who is
not the real creditor but appears, under the circumstances, to be the real
creditor.65 In such scenario, the law considers the payment to the
"possessor of credit" as valid even as against the real creditor taking into
account the good faith of the debtor.
Borrowing the principles behind Article 1242 of the Civil Code, we find
that Mangondato—being the judgment creditor in Civil Case No. 605-92
and Civil Case No. 610-92 as well as the registered owner of the subject
land at the time66 —may be considered as a "possessor of credit" with
respect to the rental fees and expropriation indemnity adjudged due for
the subject land in the two cases, if the Ibrahims and Maruhoms turn out
to be the real owners of the subject land. Hence, petitioner’s payment to
Mangondato of the fees and indemnity due for the subject land as a
consequence of the execution of Civil Case No. 605-92 and Civil Case
No. 610-92 could still validly extinguish its obligation to pay for the same
even as against the Ibrahims and Maruhoms.
Effect of Extinguishment of
Petitioner’s Obligation
The extinguishment of petitioner’s obligation to pay for the rental fees
and expropriation indemnity due the subject land carries with it certain
legal effects:
First. If Mangondato turns out to be the real owner of the subject land, the
Ibrahims and Maruhoms would not be entitled to recover anything from
anyone for the subject land. Consequently, the partial execution of the
1âwphi1
decision in Civil Case No. 967-93 that had led to the garnishment of
Mangondato’s moneys in the possession of the Social Security System
(SSS) in the amount of ₱2,700,000.00 in favor of the Ibrahims and
Maruhoms, becomes improper and unjustified. In this event, therefore,
the Ibrahims and Maruhoms may be ordered to return the amount so
garnished to Mangondato.
Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners
of the subject land, they may only recover the rental fees and
expropriation indemnity due the subject land against Mangondato but
only up to whatever payments the latter had previously received from
petitioner pursuant to Civil Case No. 605-92 and Civil Case No. 610-92.
Second. At any rate, the extinguishment of petitioner’s obligation to pay
for the rental fees and expropriation indemnity due the subject land
negates whatever cause of action the Ibrahims and Maruhoms might have
had against the former in Civil Case No. 967-93. Hence, regardless of
who between Mangondato, on one hand, and the Ibrahims and Maruhoms,
on the other, turns out to be the real owner of the subject land, the
Obligations Part 2 | Page 84 of 143
dismissal of Civil Case No. 967-93 insofar as petitioner isconcerned is
called for.
Re: Attorney’s Fees
The dismissal of Civil Case No. 967-93 as against petitioner necessarily
absolves the latter from paying attorney’s fees to the Ibrahims and
Maruhoms arising from that case.
WHEREFORE, premises considered, the instant petition is GRANTED.
The Decision dated 24 June2005 and Resolution dated 5 December 2006
of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET ASIDE.
The Decision dated 16 April 1998 of the Regional Trial Court in Civil
Case No. 967-93 is MODIFIED in that petitioner is absolved from any
liability in that case in favor of the respondents Lucman M. Ibrahim, Atty.
Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G.
Maruhom, Farouk G. Maruhom, Hidjara G. Maruhom, Rocania G.
Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom, Sinab G.
Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M.
Ibrahim and Caironesa M. Ibrahim. Civil Case No. 967-93 is
DISMISSED as against petitioner.
No costs.
SO ORDERED.
Netlink Computer Incorporated v. Delmo
G.R. No. 160827 June 18, 2014
NETLINK COMPUTER INCORPORATED, Petitioner,
vs.
ERIC DELMO, Respondent.
DECISION
BERSAMIN, J.:
In the absence of a written agreement between the employer and the
employee that sales commissions shall be paid in a foreign currency, the
latter has the right to be paid in such foreign currency once the same has
become an established practice of the former. The rate of exchange at the
time of payment, not the rate of exchange at the time of the sales, controls.
Antecedents
On November 3, 1991, Netlink Computer, Inc. Products and Services
(Netlink) hired Eric S. Delmo (Delmo) as account manager tasked to
canvass and source clients and convince them to purchase the products
and services of Netlink. Delmo worked in the field most of the time. He
and his fellow account managers were not required to accomplish time
cards to record their personal presence in the office of Netlink.1 He was
able to generate sales worth ₱35,000,000.00, more or less, from which he
earned commissions amounting to ₱993,558.89 and US$7,588.30. He
then requested payment of his commissions, but Netlink refused and only
gave him partial cash advances chargeable to his commissions. Later on,
Netlink began to nitpick and fault find, like stressing his supposed
absences and tardiness. In order to force him to resign, Netlink issued
several memoranda detailing his supposed infractions of the company’s
attendance policy. Despite the memoranda, Delmo continued to generate
huge sales for Netlink.2
On November 28, 1996, Delmo was shocked when he was refused entry
into the company premises by the security guard pursuant to a
memorandum to that effect. His personal belongings were still inside the
company premises and he sought their return to him. This incident
prompted Delmo to file a complaint for illegal dismissal.3
In its answer to Delmo’s complaint,Netlink countered that there were
guidelines regarding company working time and its utilization and how
the employees’ time would be recorded. Allegedly, all personnel were
required to use the bundy clock to punch in and out in the morning, and
in and out in the afternoon. Excepted from the rules were the company
officers, and the authorized personnel in the field project assignments.
Netlink claimed that it would be losing on the business transactions closed
by Delmo due to the high costs of equipment, and in fact his biggest client
had not yet paid. Netlink pointed out that Delmo had becomevery lax in
his obligations, with the other account managers eventually having
outperformed him. Netlink asserted that warning, reprimand, and
suspension memoranda were given to employees who violated company
rules and regulations, but such actions were considered as a necessary
management tool to instill discipline.4
Ruling of the Labor Arbiter
On September 23, 1998, the Labor Arbiter ruled against Netlink and in
favor of Delmo, to wit:
WHEREFORE, judgment is hereby rendered declaring complainant as
illegally and unjustly dismissed and respondents are ordered to reinstate
complainant to his former position without loss of seniority rights with
full backwages and other benefits and respondents are hereby ordered to
pay complainant as follows:
₱161,000.00 - Backwages, basic pay and allowance
15,000.00 - 13th month pay for 1996 to 1998
993,558.89 - unpaid commissions
₱1,169,558.89 - Total
plus US$7,588.30 - unpaid commissions
plus 10% attorney’s fees
The reinstatement aspect is immediately executory even pending appeal.
In case reinstatement is no longer feasible, complainant shall be paid
separation pay of one-month pay for every year of service. All other
claims are hereby dismissed.
SO ORDERED.5
Decision of the NLRC
On appeal, the National Labor Relations Commission (NLRC) modified
the decision of the Labor Arbiter by setting aside the backwages and
reinstatement decreed by the Labor Arbiter due to the existence of valid
and just causes for the termination of Delmo’s employment, to wit:
WHEREFORE, premises considered, the decision of the Labor Arbiter a
quo is hereby SET ASIDEand a new one ENTERED, ordering the
respondents-appellantsto pay the following:
1. TWO THOUSAND PESOS (₱2,000.00) as indemnity for failure to
observe procedural due process;
2. Unpaid commission in the amount of ₱993,558.89;
3. US$7,588.30 as unpaid commission;
4. ₱15,000.00 representing the 13th month pay for 1996, 1997, and 1998;
5. 10% attorney’s fees of the total amount awarded.
SO ORDERED.6
The NLRC denied the motion for reconsideration, after which Netlink
filed a petition for certiorariin the CA.
Judgment of the CA
On May 9, 2003, the CA promulgated its assailed decision upholding the
NLRC’s ruling subject to modifications,7viz:
In the present case, since the payment of the commission is made to
depend on the future and uncertain event – which is the payment of the
accounts by the persons who have transacted business with the petitioner,
without payment by the former to the latter, the obligation to pay the
commission has not yet arisen.
The evidence on record shows that the ALCATEL, private respondent’s
biggest client has not paid fully the amount it owes to the petitioner as of
March 10, 1998. (Rollo, pp. 101, 397, 398) The obligation therefore, on
the part of the petitioner to pay the private respondent for his commission
for the said unpaid account has not yet arisen. Thus it is a grave abuse of
discretion on the part of the public respondent to make petitioner liable to
the private respondent for the payment of the said commission, when it is
clear on the record, as We have discussed above, that the obligation
therefor has not yet arisen.
Perusal of the records, likewise, show that petitioner failed to refute by
evidence that the private respondent is not entitled to the ₱993, 558.89
commission. Petitioner however claimed that since the amounts out of
which the commission will be taken has not yet been paid fully, petitioner
must, likewise, not be made liable for the said commission. However,
public respondent committed grave abuse of discretion when it disregard
the evidence on record which is not disputed by the private respondent
that out of the total commissions of the private respondent, petitioner has
Obligations Part 2 | Page 85 of 143
paid the petitioner in the amount of ₱216,799.45 in the form of advance
payment. (Rollo, p. 12)
In view of the foregoing discussions, therefore, the advance payment
made by the petitioner in favorof the private respondent in the amount of
₱216, 799.45 must be deducted to the ₱993, 558.89 unpaid commission
of the private respondent. The difference amounting to ₱776, 779.44 must
likewise be deducted to the amount of ₱4, 066.19 which represents the
amount which the petitioner had admitted as the net commission payable
to private respondent. The difference thereof amounting to ₱772, 713.25
shall represent the unpaid commission which shall be payable to the
private respondent by the petitioner upon payment of the accounts out of
which such commission shall be taken.
We, likewise, agree with the petitioner that the private respondent is not
entitled to 13th month pay in the years 1997 and 1998. The order of the
public respondent making the petitioner liable to the private respondent
for the 13th month pay of the latter in the years 1997 and 1998 is contrary
to its findings that there are valid and just cause for the termination of the
private respondent from employment, although private respondent was
not given his right to due process. (Rollo, pp. 32-33) The rule applicable
in the present case is the decision of the Supreme Court in the case of
Sebuguero vs National Labor Relations Commission [248 SCRA 532,
547 (1995)] where it was ruled that "where the dismissal of an employee
is in fact for a just and valid cause and is so proven to be but he is not
accorded his right to due process,i.e., he was not furnished the twin
requirements of notice and the opportunityto be heard, the dismissal shall
be upheld but the employer must be sanctioned for non-compliance with
the requirements of or for failureto observe due process." Hence,
petitioner should not be made to pay the 13th month pay to private
respondent whose employment was terminated for cause but without due
process in 1996.
xxxx
Thus, private respondent is entitled only to a 13th month pay computed
pro-rata from January 1996 to November 1996 which as properly
computed by the petitioner amounts to ₱4, 584.00. (Rollo, p. 11)
With respect to the other arguments of the petitioner, this Court is not
persuaded. Petitioner failed to refute by evidence that private respondent
is not entitled to the commissions payable in US dollars. Neither is there
any reason for us to agree with the petitioner that the computation of these
commissions must be based on the value of [the] Peso in relation to a
Dollar at the time of sale. As properly observed by the Labor Arbiter a
quo, viz: "Likewise the devaluation of the peso cannot be used as a shield
against the complainant because that should have been the lookout of the
respondent company in providing for such a clause that in case of
devaluation, the price agreed upon should be at the exchange rate when
the contract of sale had been consummated. For the lack of foresight and
inefficiency of the respondent company and as regards its contracts or
agreements with its clientele, the complainant should not be made to
suffer." (Labor Arbiter Ricardo Olairez’ Decision, September 23, 1998,
pp. 11-12, Rollo,pp. 328-329) In this regardtherefore, We uphold the well
settled rule that "the findings of facts of the NLRC, particularly where the
NLRC and the Labor Arbiter are in agreement, are deemed binding and
conclusive upon the Court." (Permex, Inc. vs National Labor Relations
Commission, 323 SCRA 121, 126).
xxxx
WHEREFORE, premises considered, the assailed Resolutions are hereby
AFFIRMED with MODIFICATION, ordering the petitioner to pay the
private respondent the following:
1. TWO-THOUSAND PESOS (₱2,000.00) as indemnity for failure to
observe procedural due process;
2. ₱4,066.19 representing the unpaid commissions that have accrued in
favor of the private respondent;
3. ₱776,779.44 payable to the private respondent upon payment of the
accounts out of which the said amount will be taken;
4. ₱4,584.00 representing the unpaid 13th month pay of the private
respondent;
5. US$7,588.30 as unpaid commission;
6. 10% attorney’s fees of the total amount awarded excluding the amount
contained in the No.3 of this Order.
SO ORDERED.
Issues
Hence, this appeal.
Netlink submits that the CA committed a palpable and reversible error of
law in not holding that the applicable exchange rate for computing the US
dollar commissions of Delmo should be the rates prevailing at the time
when the sales were actually generated, not the rates prevailing at the time
of the payment; and in awarding attorney’s fees.
In his comment,8 Delmo counters that because he had earned in US
dollars it was only fair that his commissions be paid in US dollars; that
Netlink should not be allowed to flip-flop after it had paid commissions
in US dollar on the sales generated by its sales agents on US-dollar
denominated transactions; and that attorney’s fees were warranted
because of the unanimous finding that there was violation of procedural
due process.
In its reply,9 Netlink maintains that the commissions of Delmo should be
based on sales generated, actually paid by and collected from the
customers; that commissions must be paid on the basis of the conversion
of the US dollar to the Philippine peso at the time of sale; and that no
cogent and justifiable reason existed for the award of attorney’s fees.
To be considered for resolution are,therefore, the following, namely: (1)
whether or not the payment of the commissions should be in US dollars;
and (2) whether or not the award ofattorney’s fees was warranted.
Ruling of the Court
The appeal lacks merit.
As a general rule, all obligations shall be paid in Philippine currency.
However, the contracting parties may stipulate that foreign currencies
may be used for settling obligations. This is pursuant to Republic Act No.
8183,10 which provides as follows:
Section 1. All monetary obligations shall be settled in the Philippine
currency which is legal tender in the Philippines. However, the parties
may agree that the obligation ortransaction shall be settled in any other
currency at the time of payment.
We remarked in C.F. Sharp & Co. v. Northwest Airlines, Inc.11 that the
repeal of Republic Act No. 529 had the effect of removing the prohibition
on the stipulation of currency other than Philippine currency, such that
obligations or transactions could already be paid in the currency agreed
upon by the parties. However, both Republic Act No. 529 and Republic
Act No. 8183 did not stipulate the applicable rate of exchange for the
conversion of foreign currency-incurred obligations to their peso
equivalent. It follows, therefore, that the jurisprudence established under
Republic Act No. 529 with regard to the rate of conversion remains
applicable. In C.F. Sharp, the Court cited Asia World Recruitment,Inc. v.
NLRC,12 to the effect that the real value of the foreign exchange-incurred
obligation up to the date of itspayment should be preserved.
There was no written contract between Netlink and Delmo stipulating that
the latter’s commissions would be paid in US dollars. The absence of the
1âwphi1
contractual stipulation notwithstanding, Netlink was still liable to pay
Delmo in US dollars because the practice of paying its sales agents in US
dollars for their US dollar-denominatedsales had become a company
policy. This was impliedly admitted by Netlink when it did not refute the
allegation that the commissions earned by Delmo and its other sales
agents had been paid in US dollars. Instead of denying the allegation,
Netlink only sought a declaration that the US dollar commissions be paid
using the exchange rate at the time of sale. The principle of non-
diminution of benefits, which has been incorporated in Article 10013 of
the Labor Code, forbade Netlink from unilaterally reducing, diminishing,
discontinuing or eliminating the practice. Verily, the phrase
"supplements, or other employee benefits" in Article 100 is construed to
mean the compensation and privileges received by an employee aside
from regular salaries or wages.
With regard to the length of timethe company practice should have been
observed to constitute a voluntary employer practice that cannot be
unilaterally reduced, diminished, discontinued or eliminated by the
employer, we find that jurisprudence has not laid down any rule requiring
a specific mmimum number of years. In Davao Fruits Corporation v.
Associated Labor Unions,14 the company practice lasted for six years. In
Davao Integrated Port Stevedoring Services v. Abarquez,15 the employer,
for three years and nine months, approved the commutation to cash of the
unenjoyed portion of the sick leave with pay benefits of its intermittent
workers. In Tiangco v. Leogardo, Jr.,16 the employer carried on the
practice of giving a fixed monthly emergency allowance from November
1976 to February 1980, or three years and four months. In Sevilla Trading
Company v. Semana, 17 the employer kept the practice of including non-
basic benefits such as paid leaves for unused sick leave and vacation in
the computation of their 13th-month pay for at least two years.
Obligations Part 2 | Page 86 of 143
With the payment of US dollar commissions having ripened into a
company practice, there is no way that the commissions due to Delmo
were to be paid in US dollars or their equivalent in Philippine currency
determined at the time of the sales. To rule otherwise would be to cause
an unjust diminution of the commissions due and owing to Delmo.
Finally, we affirm the following justification of the CA in granting
attorney's fees to Delmo, viz: The award of attorney's fees must, likewise,
be upheld in line of (sic) the decision of the Supreme Court in the case of
Consolidated Rural Bank (Cagayan Valley), Inc. vs. National Labor
Relations Commission, 301 SCRA 223, 235, where it was held that "in
actions for recovery of wages or where an employee was forced to litigate
and thus incur expenses to protect her rights and interests, even if not so
claimed, an award of attorney's fees equivalent to ten percent (10%) of
the total award is legally and morally justifiable. There is no doubt that in
the present case, the private respondent has incurred expenses for the
protection and enforcement of his right to his commissions.18
WHEREFORE, the Court DENIES the petition for review on certiorari;
AFFIRMS the decision promulgated on May 9, 2003; and ORDERS the
petitioner to pay the costs of suit.
SO ORDERED
Philippine Commercial International Bank v. Franco
G.R. No. 180069 March 5, 2014
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (now BDO
UNIBANK, INC.), Petitioner,
vs.
ARTURO P. FRANCO, substituted by his heirs, namely: MAURICIA P.
FRANCO, FLORIBEL P. FRANCO, AND ALEXANDER P.
FRANC0,1 Respondents.
DECISION
PERALTA, J.:
Assailed in this petition for review on certiorari under Rule 45 of the
Rules of Court are the July 31, 2007 Decision2and October 4, 2007
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 82340,
which affirmed the October 21, 2003 Decision4 of the Makati City
Regional Trial Court (RTC), Branch 61.
The pertinent facts, as narrated by the trial court and as adopted both by
the CA, as well as petitioner Philippine Commercial International Bank
(Bank),5 are as follows:
This is an action for damages filed [on September 5, 2000] by plaintiff
Arturo P. Franco against Philippine Commercial International Bank
(PCIB), now known as Equitable-PCIBank, and Equitable Banking Corp.
The complaint essentially alleges, among others, that plaintiff secured
from defendant PCIB the following Trust Indenture Certificates:
Number Issued Maturity Amount Interest
094846 Dec. 8, 1986 Jan. 7, 1987 ₱100,000.00 8.75%
(Exh. "B") p.a.
135928 Jan. 19, 1987 Feb. 18, 1987 ₱850,594.54 7.75%
(Exh. "C") p.a.
205007 May 13, 1987 June 15, 1987 ₱500,000.00 8.50%
(Exh. "D") p.a.
205146 July 15, 1987 Aug 14, 1987 ₱502,958.90 9.25%
(Exh. "E") p.a.
that despite demands, defendants refused and still refuses to return to
plaintiff the trust amounts, plus the stipulated interest[;] that in all of the
trust transactions that defendant PCIB had entered into with the plaintiff,
defendant PCIB represented to plaintiff that[,] in making the trust
investment, plaintiff was actually providing for his future since the money
invested was going to be managed and administered by their PCIB-Trust
Services Group and will be commingled, pooled and automatically rolled-
over for better investment return; that believing the representation of the
bank, the plaintiff invested his lifetime savings in the hope that the
defendant bank will actually provide for their future by reinvesting and
rolling-over their investment automatically, without any need for the
plaintiff to take any further action; that on the few occasions that plaintiff
had visited the defendant bank to request for a status on his investments,
bank officers would normally pull out his (sic) ledger card and show
plaintiff the updated amount due him; that sometime in 1995, plaintiff
discovered that one of his children had leukemia and[,] in the ensuing
hospitalization and treatment, plaintiff spent a lot of money; that because
his funds were already exhausted, plaintiff then turned to his Trust
Indenture Certificates and started inquiring as to how he could liquidate
the trust; that in the beginning, defendant bank constantly asked for time
to look for his records, at one time [on June 18, 1998], promising to have
an answer before July 15, 1998, then writing plaintiff on May 18, 2000
saying that the bank [had] coordinated with their Branch and Trust
Department but that it might take [some time] to retrieve their records;
[and] that to plaintiff’s surprise, on June 22, 2000, he received a letter
signed by defendant’s counsel, Curato Divina & Partners, in effect
denying plaintiff’s request for payment by stating that due to the
conversion of all outstanding PCIBank trust indenture accounts into
common trust certificates, all such PCIBank trust indenture certificates
have been rendered "null and void." Plaintiff prays for the payment of the
amounts under the Trust Indenture Certificates, plus interest, moral and
exemplary damages and attorney’s fees.
In their Answer, defendants admit the issuance by defendant PCIB of the
Trust Indenture Certificates subject matter of the complaint, but deny the
allegation that the investments subject of the Trust Indenture Certificates
are automatically rolled-over as such certificates have their own fixed
term and maturity date, and that the present action had already prescribed.
As stated in the Pre-Trial Order issued by this court on 15 February 2002,
the following issues were defined and agreed upon by the parties, to wit:
1. Whether or not the plaintiff is entitled to the relief he seeks; and
2. Whether or not the cause of action as exerted (sic) by the defendant has
already prescribed.
Plaintiff presented as its witness plaintiff Arturo P. Franco himself [who]
testified, among others[:] that he is the proprietor of Fair Marketing
Freight Services[,] which is the investor named in Trust Indenture
Certificate 094846; that[,] in 1986, he decided to save up for his
retirement and to invest his hard earned money; that he was then 51 years
old and his choice was to deposit his funds with defendant PCIB which
later on merged with defendant Equitable Banking Corp. and is now
known as Equitable PCIBank; that he chose defendant PCIB for the
latter’s representation that by making such investment, he was actually
providing for his future since his investment would be commingled,
pooled and automatically rolled-over for better investment return and
which will provide for his needs upon retirement, without need for him to
take any further action; that he was a loyal client of the defendants from
1986 up to 1997; that he entered into a trust agreement with defendant
PCIB for which the latter issued subject Trust Indenture Certificates
([TICs], for brevity); that sometime in 1997, when he was then 62 years
old, he [tried] to encash the trust indenture certificates only to be given a
run-around by the defendants; that sometime in 1995, his son, Arthur, was
diagnosed to be afflicted with leukemia and eventually died on October
24, 1997; that because of his son’s illness, he was forced to go to
defendants and try to encash his trust indenture certificates but was denied
by defendant bank; that in a letter dated June 22, 2000, defendants,
through their counsel, informed plaintiff that the subject [TICs] are "null
and void"; that when he received the letter of June 22, 2000, he was at
first speechless and totally defeated and at a loss; that he and his wife
begun to experience sleepless nights, became anxious because their hope
to secure their life in their old age had fallen apart[;] that instead of just
enjoying a secured life with his wife and enjoying his grandchildren and
spending more time with the Lord, he was now in debt and burdened with
the fact that his lifetime savings just disappeared before his very eyes
without a trace; [and] that plaintiff was constrained to file this case and
[spend] ₱22,117.80 in filing fees, to engage the services of counsel for
the amount of ₱50,000.00 with appearance fee of ₱3,000.00 per hearing,
and that he suffered moral damages in the amount of ₱200,000.00.
The foregoing facts were not rebutted by defendants. The court finds the
witness and his testimony credible as the witness testified in a simple and
straightforward manner. Upon admission of plaintiff’s exhibits, plaintiff
rested his case.
The defendants presented Cecilia P. Soriano and Antonio M. Fortuno as
their witnesses.
Cecilia P. Soriano, Operations Officer of defendant Equitable-PCIBank,
testified that she came to know plaintiff in 1987 when she was assigned
at PCIB Gil Puyat Branch; that plaintiff was one of the bank’s valued
clients[;] and that plaintiff secured the [TICs] subject matter of the
complaint. On cross-examination, the witness admitted that she has seen
only the photocopies of plaintiff’s [TICs]; that she had no direct dealing
Obligations Part 2 | Page 87 of 143
with plaintiff regarding the [TICs] and she had no idea what happened to
plaintiff’s [TICs] after their respective maturity dates; [and] that valued
clients of the bank were given special privileges, such as allowing these
clients to withdraw or encash [TICs] or investments over the phone[,] but
she did not receive any call from plaintiff withdrawing or encashing the
plaintiff’s [TICs].
The testimony of their next witness, Antonio Martin S. Fortuno, was
offered to prove, among others, that [TICs] expired upon maturity and
after which, they were automatically rolled-over.
Antonio Martin S. Fortuno, Operations Officer of defendant Equitable-
PCIBank, testified that he is familiar with the Trust Indenture Certificates
issued by defendant bank; that when a client would like to secure a Trust
Indenture Certificate from the bank, they would ask the client, among
others, to sign [roll-over] agreement/rules and regulations; that when a
client would like to withdraw his proceeds from the certificate upon
maturity, they follow the following steps: (1) they retrieve the old
certificates from client, (2) they have [the] client sign on the back portion
of the certificate, (3) they prepare mode of payment – MC or credit to
other accounts, and (4) they file the paid certificate to paid/roll-over file;
that if the holder of a certificate does not withdraw the placement upon
maturity, they replace the old certificate with a new one; that if the client
is at the branch, the old certificate is replaced with a new certificate, have
the client sign at the register copy, then stamp the old certificate as Old
Certificate-Stamp rolled-over/replaced; that if the client is not at the
branch, they replace the old certificate with a new certificate and stamped
with rolled-over; that certificates have fixed maturity dates; that interest
rates stated in the certificates vary as they go either up or down depending
on the prevailing bank rates as provided by the Trust Department; that[,]
in 1992[,] all existing Trust Indenture Certificates were converted into
Common Trust Funds; [and] that he is not aware of any Trust Indenture
Certificate belonging to plaintiff which were converted into Common
Trust Funds in 1992.
On cross-examination, the witness admitted that he is familiar with Trust
Indenture Certificates; that Trust Indenture Certificates have been
converted into Common Trust Funds; that the change is only in name
because they have the same features and that the only difference is that
Common Trust Funds are classified into several product types depending
on the limit of the amount of investment; that there is nothing in the
certificate that says it has a roll-over feature; that, however, if the
certificate expires and the client does not claim or withdraw his funds or
surrender the certificate, they roll-over the funds of the client; that if a
guest comes with the original Trust Indenture Certificate without any
stamp as being taken or cancelled, the bank should verify with the
outstanding copy because the bank should have an outstanding copy of
that Trust Indenture Certificate; that he is not aware that the Trust
Indenture Certificates of the plaintiff were verified with their records; and
that he does not know whether plaintiff’s Trust Indenture Certificates
were actually paid out by the bank to plaintiff.
Defendants did not conduct any re-direct.6
On October 21, 2003, the RTC rendered a Decision, the dispositive
portion of which reads:
WHEREFORE, all the foregoing premises considered, judgment is
hereby rendered in favor of plaintiff and ordering defendant Philippine
Commercial International Bank, now known as Equitable-PCIBank, to
pay plaintiff the following:
1. On the First Cause of Action, the sum of ₱100,000.00, plus the
stipulated interest of 8.75% per annum for the period December 8, 1986
to January 7, 1987, plus interest of 6% per annum from January 8, 1987
until fully paid;
2. On the Second Cause of Action, the sum of ₱840,594.54, plus the
stipulated interest of 7.75% per annum for the period January 19, 1987 to
February 18, 1987, plus interest of 6% per annum from February 19, 1987
until fully paid;
3. On the Third Cause of Action, the sum of ₱500,000.00, plus the
stipulated interest of 8.50% per annum for the period May 13, 1987 to
June 15, 1987, plus interest of 6% per annum from June 16, 1987 until
fully paid;
4. On the Fourth Cause of Action, the sum of ₱502,958.90, plus the
stipulated interest of 9.25% per annum for the period July 15, 1987 to
August 14, 1987, plus interest of 6% per annum from August 15, 1987
until fully paid;
5. ₱50,000.00 as moral damages;
6. ₱200,000.00 as exemplary damages;
7. Attorney’s fees in the amount of ₱50,000.00, plus ₱3,000.00 for every
hearing attended; and
8. ₱22,117.80 as reimbursement for filing fees.
The case against Equitable Banking Corporation is dismissed for
insufficiency of evidence.
SO ORDERED.7
Considering that the four TICs have not been replaced or cancelled, the
RTC held that the relationship of express trust between petitioner Bank
and respondent still subsists at the time the latter demanded the
withdrawal of his funds under them. While the TICs contain a maturity
date, the court opined that the same refers only to the gross income
expectation or the applicable interest rate because the funds are
automatically rolled-over with varying interest rates depending on the
prevailing interest rates as determined by petitioner’s Trust Department.
With respect, however, to the interest rate applicable after the stipulated
maturity dates, the court deemed it fair and reasonable to impose the legal
rate of interest for want of evidence on the prevailing rate at the time of
roll-over. Finally, the court found that petitioner Bank is in bad faith in its
dealings with respondent when it unilaterally declared – despite claiming
that respondent was one of its valued clients – the TICs as null and void
by reason of their conversion to Common Trust Funds in 1991. The
absence of good faith was made more manifest when Fortuno testified
that the trust indenture certificate and common trust fund have the same
features and the only difference is in the name and classification of the
amount of investment.
On appeal, the CA affirmed the RTC ruling. According to the appellate
court, Soriano could not have possibly known if respondent indeed
withdrew any or all of his participation in the subject TICS, because by
her very own admission during the cross-examination, she did not have
any direct dealing with him with respect to the TICs at the time they
matured or even thereafter. Likewise, petitioner Bank failed to adduce any
documentary evidence to establish the alleged fact that the four TICs were
already paid or cancelled, or that respondent’s participation therein was
already withdrawn. Further, respondent’s testimony that he gave verbal
instructions to petitioner Bank to roll-over his investment upon their
maturity was bolstered by Fortuno’s admission in open court that it has
been petitioner Bank’s practice to roll-over investments which remain
unclaimed after their maturity even without instruction from their owners.
With all these findings, the CA concluded that the claim of respondent is
not yet barred by prescription, since the maturity dates of the four TICs
did not terminate the express trust created between the parties.
A motion for reconsideration was filed by petitioner, but the CA acted
unfavorably; hence, this petition.
We deny.
Upon perusal of the entire case records, the Court finds no reversible error
committed by the CA in sustaining the RTC Decision. Considering the
evidence at hand, both courts have applied the law in accordance with the
facts of the case.
A quick point, however, on the issue of alleged payment by petitioner
Bank on the subject trust certificate indentures.
Jurisprudence abounds that, in civil cases, one who pleads payment has
the burden of proving it.8 Even where the plaintiff must allege non-
payment, the general rule is that the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment.9 When the
creditor is in possession of the document of credit, he need not prove non-
payment for it is presumed.10 The creditor's possession of the evidence of
debt is proof that the debt has not been discharged by payment.11
In this case, respondent's possession of the original copies of the subject
TICs strongly supports his claim that petitioner Bank's obligation to return
the principal plus interest of the money placement has not been
extinguished. The TICs in the hands of respondent is a proof of
indebtedness and a prima facie evidence that they have not been paid.
Petitioner Bank could have easily presented documentary evidence to
dispute the claim, but it did not. In its omission, it may be reasonably
deduced that no evidence to that effect really exist. Worse, the testimonies
of petitioner Bank's own witnesses, reinforce, rather than belie,
respondent's allegations of non-payment.
WHEREFORE, premises considered, the instant Petition is DENIED.
The July 31, 2007 Decision and October 4, 2007 Resolution of the Court
of Appeals in CA-G.R. CV No. 82340, which affirmed the October 21,
2003 Decision of the Makati City Regional Trial Court, Branch 61, are
AFFIRMED.
SO ORDERED.
Obligations Part 2 | Page 88 of 143
Bognot v. RRI Lending Corporation
G.R. No. 180144 September 24, 2014
LEONARDO BOGNOT, Petitioner,
vs.
RRI LENDING CORPORATION, represented by its General Manager,
DARIO J. BERNARDEZ, Respondent.
DECISION
BRION, J.:
certiorari1
Before the Court is the petition for review on filed by Leonardo
Bognot (petitioner) assailing the March 28, 2007 decision2 and the
October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R.
CV No. 66915.
Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the
business of lending money to its borrowers within Metro Manila. It is duly
represented by its General Manager, Mr. Dario J. Bernardez (Bernardez).
Sometime in September 1996, the petitioner and his younger brother,
Rolando A. Bognot (collectively referred to as the "Bognot siblings"),
applied for and obtained a loan of Five Hundred Thousand Pesos
(₱500,000.00) from the respondent, payable on November 30, 1996.4 The
loan was evidenced by a promissory note and was secured by a post dated
check5 dated November 30, 1996.
Evidence on record shows that the petitioner renewed the loan several
times on a monthly basis. He paid a renewal fee of ₱54,600.00 for each
renewal, issued a new post-dated checkas security, and executed and/or
renewed the promissory note previouslyissued. The respondent on the
other hand, cancelled and returned to the petitioner the post-dated checks
issued prior to their renewal.
Sometime in March 1997, the petitioner applied for another loan renewal.
He again executed as principal and signed Promissory Note No. 97-
0356 payable on April 1, 1997; his co-maker was again Rolando. As
security for the loan, the petitioner also issued BPI Check No.
0595236,7 post dated to April 1, 1997.8
Subsequently, the loan was again renewed on a monthly basis (until June
30, 1997), as shown by the Official Receipt No. 7979 dated May 5, 1997,
and the Disclosure Statement dated May 30, 1997 duly signed by
Bernardez. The petitioner purportedly paid the renewal fees and issued a
post-dated check dated June 30, 1997 as security. As had been done in the
past, the respondent superimposed the date "June 30, 1997" on the upper
right portion of Promissory Note No. 97-035 to make it appear that it
would mature on the said date.
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot
(Mrs. Bognot), went to the respondent’s office and applied for another
renewal of the loan. She issued in favor of the respondent Promissory
Note No. 97-051, and International Bank Exchange (IBE) Check No.
00012522, dated July 30, 1997, in the amount of ₱54,600.00 as renewal
fee.
On the excuse that she needs to bring home the loan documents for the
Bognot siblings’ signatures and replacement, Mrs. Bognot asked the
respondent’s clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs. Bognot, however,
never returned these documents nor issued a new post-dated check.
Consequently, the respondent sent the petitioner follow-up letters
demanding payment of the loan, plus interest and penalty charges. These
demands went unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a
complaint for sum of money before the Regional Trial Court (RTC)
against the Bognot siblings. The respondent mainly alleged that the loan
renewal payable on June 30, 1997 which the Bognot siblings applied for
remained unpaid; that before June30, 1997, Mrs. Bognot applied for
another loan extension and issued IBE Check No. 00012522 as payment
for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to
release to her the promissory note and the other loan documents; that since
Mrs. Bognot never issued any replacement check, no loanextension took
place and the loan, originally payable on June 30, 1997, became due on
this date; and despite repeated demands, the Bognot siblings failed to pay
their joint and solidary obligation.
Summons were served on the Bognotsiblings. However, only the
petitioner filed his answer.
In his Answer,10 the petitioner claimed that the complaint states no cause
of action because the respondent’s claim had been paid, waived,
abandoned or otherwise extinguished. He denied being a party to any loan
application and/or renewal in May 1997. He also denied having issued the
BPI check post-dated to June 30, 1997, as well as the promissory note
dated June 30, 1997, claiming that this note had been tampered. He
claimed that the one (1) month loan contracted by Rolando and his wife
in November 1996 which was lastly renewed in March 1997 had already
been fully paid and extinguished in April 1997.11
Trial on the merits thereafter ensued.
The Regional Trial Court Ruling
In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s
favor and ordered the Bognot siblings to pay the amount of the loan, plus
interest and penalty charges. It considered the wordings of the promissory
note and found that the loan they contracted was joint and solidary. It also
noted that the petitioner signed the promissory note as a principal (and not
merely as a guarantor), while Rolando was the co-maker. It brushed the
petitioner’s defense of full payment aside, ruling that the respondent had
successfully proven, by preponderance of evidence, the nonpayment of
the loan. The trial court said:
Records likewise reveal that while he claims that the obligation had been
fully paid in his Answer, he did not, in order to protect his right filed (sic)
a cross-claim against his co-defendant Rolando Bognot despite the fact
that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the loan
of ₱500,000.00 plus 5% interest monthly as well as 10% monthly penalty
charges from the filing of the complaint on December 3, 1997 until fully
paid. As plaintiff was constrained to engage the services of counsel in
order to protect his right,defendants are directed to pay the former jointly
and severally the amount of ₱50,000.00 as and by way of attorney’s fee.
The petitioner appealed the decision to the Court of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA affirmed the RTC’s findings.
It found the petitioner’s defense of payment untenable and unsupported
by clear and convincing evidence. It observed that the petitioner did not
present any evidence showing that the check dated June 30, 1997 had, in
fact, been encashed by the respondent and the proceeds applied to the
loan, or any official receipt evidencing the payment of the loan. It further
stated that the only document relied uponby the petitioner to substantiate
his defense was the April 1, 1997 checkhe issued which was cancelled
and returned to him by the respondent.
The CA, however, noted the respondent’s established policy of cancelling
and returning the post-dated checks previously issued, as well as the
subsequent loan renewals applied for by the petitioner, as manifested by
the official receipts under his name. The CA thus ruled that the petitioner
failed to discharge the burden of proving payment.
The petitioner moved for the reconsideration of the decision, but the CA
denied his motion in its resolution of October 15, 2007, hence, the present
recourse to us pursuant toRule 45 of the Rules of Court.
The Petition
The petitioner submits that the CA erred in holding him solidarily liable
with Rolando and his wife. Heclaimed that based on the legal presumption
provided by Article 1271 of the Civil Code,13 his obligation had been
discharged by virtue of his possession of the post-dated check (stamped
"CANCELLED") that evidenced his indebtedness. He argued that it was
Mrs. Bognot who subsequently assumed the obligation by renewing the
loan, paying the fees and charges, and issuing a check. Thus, there is an
entirely new obligation whose payment is her sole responsibility.
The petitioner also argued that as a result of the alteration of the
promissory note without his consent (e.g., the superimposition of the date
"June 30, 1997" on the upper right portion of Promissory Note No. 97-
035 to make it appear that it would mature on this date), the respondent
can no longer collect on the tampered note, let alone, hold him solidarily
liable with Rolando for the payment of the loan. He maintained that even
without the proof of payment, the material alteration of the promissory
note is sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his indebtedness by
novation when Mrs. Bognot renewed the loan and assumed the
indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner raised hinge on the
appreciation of the adduced evidence and of the factual lower courts’
findings that, as a rule, are notreviewable by this Court.
Obligations Part 2 | Page 89 of 143
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in holding the petitioner
solidarily liable with Rolando;
2. Whether the petitioner is relieved from liability by reason of the
material alteration in the promissory note; and
3. Whether the parties’ obligation was extinguished by: (i) payment; and
(ii) novation by substitution of debtors.
Our Ruling
We find the petition partly meritorious.
As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the
review of pure questions of law.14 Appreciation of evidence and inquiry
on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts.15
A question of law exists when the doubt or dispute relates to the
application of the law on given facts. On the other hand, a question of fact
exists when the doubt or dispute relates to the truth or falsity of the parties’
factual allegations.16
As the respondent correctly pointedout, the petitioner’s allegations are
factual issuesthat are not proper for the petition he filed. In the absence of
compelling reasons, the Court cannot re-examine, review or re-evaluate
the evidence and the lower courts’ factual conclusions. This is especially
true when the CA affirmed the lower court’s findings, as in this case.
Since the CA’s findings of facts affirmed those of the trial court, they are
binding on this Court, rendering any further factual review unnecessary.
If only to lay the issues raised - both factual and legal – to rest, we shall
proceed to discuss their merits and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden of
proving it;17 the burden rests on the defendant to prove payment, rather
than on the plaintiff to prove non-payment.18 Indeed, once the existence
of an indebtedness is duly established by evidence, the burden of showing
with legal certainty that the obligation has been discharged by payment
rests on the debtor.19
In the present case, the petitioner failed to satisfactorily prove that his
obligation had already been extinguished by payment. As the CA
correctly noted, the petitioner failed to present any evidence that the
respondent had in fact encashed his check and applied the proceeds to the
payment of the loan. Neither did he present official receipts evidencing
payment, nor any proof that the check had been dishonored.
We note that the petitioner merely relied on the respondent’s cancellation
and return to him of the check dated April 1, 1997. The evidence shows
that this check was issued to secure the indebtedness. The acts imputed
on the respondent, standing alone, do not constitute sufficient evidence of
payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only
when they have been cashed, or when through the fault of the creditor
they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20
Settled is the rule that payment must be made in legal tender. A check is
not legal tender and, therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a substitute for money and
not money, the delivery of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not discharge the obligation
under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually
realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal presumption
of renunciation of action (in cases where a private document evidencing
a credit was voluntarily returned by the creditor to the debtor), this
presumption is merely prima facieand is not conclusive; the presumption
loses efficacy when faced with evidence to the contrary.
Moreover, the cited provision merely raises a presumption, not of
payment, but of the renunciation of the credit where more convincing
evidence would be required than what normally would be called for to
prove payment.21Thus, reliance by the petitioner on the legal presumption
to prove payment is misplaced.
To reiterate, no cash payment was proven by the petitioner. The
cancellation and return of the check dated April 1, 1997, simply
established his renewal of the loan – not the fact of payment. Furthermore,
it has been established during trial, through repeated acts, that the
respondent cancelled and surrendered the post-dated check previously
issued whenever the loan is renewed. We trace whatwould amount to a
practice under the facts of this case, to the following testimonial
exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee
is charged to the debtor which he or she must pay before a renewal is
allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3,
1997, would this be your official receipt which you issued to your client
which they make renewal of the loan?
A: Yes, sir.
xxx xxx xxx
Q: And naturally when a loan has been renewed, the old one which is
replaced by the renewal has already been cancelled, is that correct?
A: Yes, sir.
Q: It is also true to say that all promissory notes and all postdated checks
covered by the old loan which have been the subject of the renewal are
deemed cancelled and replaced is that correct?
A: Yes, sir. xxx22
Civil Case No. 97-0572
TSN November 27, 1998, Page 27.
Q: What happened to the check that Mr. Bognot issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir.
Q: Do you have a copy of the checks?
A: We returned the check upon renewing the loan.23
In light of these exchanges, wefind that the petitioner failed to discharge
his burden ofproving payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration. The petitioner raised as
defense the alleged material alteration of Promissory Note No. 97-035 as
basis to claim release from his loan. He alleged that the respondent’s
superimposition of the due date "June 30, 1997" on the promissory note
without his consent effectively relieved him of liability.
We find this defense untenable.
Although the respondent did not dispute the fact of alteration, he
nevertheless denied that the alteration was done without the petitioner’s
consent. The parties’ Pre-Trial Order dated November 3, 199824 states
that:
xxx There being no possibility of a possible compromise agreement,
stipulations, admissions, and denials were made, to wit:
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case marked as Annex "A" of
the complaint was originally dated April 1, 1997 with a superimposed
rubber stamp mark "June 30, 1997" to which the plaintiff admitted the
superimposition.
14. The superimposition was done without the knowledge, consent or
prior consultation with Leonardo Bognot which was denied by
plaintiff."25 (Emphasis supplied)
Obligations Part 2 | Page 90 of 143
Significantly, the respondent also admitted in the Pre-Trial Order that part
of its company practice is to rubber stamp, or make a superimposition
through a rubber stamp, the old promissory note which has been renewed
to make it appear that there is a new loan obligation. The petitioner did
not rebut this statement. To our mind, the failure to rebut is tantamount to
an admission of the respondent’s allegations:
"22. That it is the practice of plaintiff to just rubber stamp or make
superimposition through a rubber stamp on old promissory note which
has been renewed to make it appear that there is a new loan obligation to
which the plaintiff admitted." (Emphasis Supplied).26
Even assuming that the note had indeed been tampered without the
petitioner’s consent, the latter cannot totally avoid payment of his
obligation to the respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied for and were
granted a loan of ₱500,000.00 by the respondent. The loan was evidenced
by a promissory note and secured by a post-dated check27 dated
November 30, 1996. In fact, the petitioner himself admitted his loan
application was evidenced by the Promissory Note dated April 1,
1997.28 This loan was renewed several times by the petitioner, after
paying the renewal fees, as shown by the Official Receipt Nos. 79729 and
58730 dated May 5 and July 3, 1997, respectively. These official receipts
were issued in the name of the petitioner. Although the petitioner had
insisted that the loan had been extinguished, no other evidence was
presented to prove payment other than the cancelled and returnedpost-
dated check.
Under this evidentiary situation, the petitioner cannot validly deny his
obligation and liability to the respondent solely on the ground that the
Promissory Note in question was tampered. Notably, the existence of the
obligation, as well as its subsequent renewals, have been duly established
by: first, the petitioner’s application for the loan; second, his admission
that the loan had been obtained from the respondent; third, the post-dated
checks issued by the petitioner to secure the loan; fourth, the testimony of
Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth,
proof of non-payment of the loan; sixth, the loan renewals; and seventh,
the approval and receipt of the loan renewals.
In Guinsatao v. Court of Appeals,31 this Court pointed out that while a
promissory note is evidence of an indebtedness, it is not the only
evidence, for the existence of the obligation can be proven by other
documentary evidence such as a written memorandum signed by the
parties. In Pacheco v. Court of Appeals,32 this Court likewise expressly
recognized that a check constitutes anevidence of indebtedness and is a
veritable proof of an obligation. It canbe used in lieu of and for the same
purpose as a promissory note and can therefore be presented to establish
the existence of indebtedness.33
In the present petition, we find that the totality of the evidence on record
sufficiently established the existence of the petitioner’s indebtedness (and
liability) based on the contract ofloan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan.
The Petitioner’s BelatedClaim of Novation by Substitution May no
Longer be Entertained
It has not escaped the Court’s attention that the petitioner raised the
argument that the obligation had been extinguished by novation. The
petitioner never raised this issue before the lower courts.
It is a settled principle of law thatno issue may be raised on appeal unless
it has been brought before the lower tribunal for its
consideration.34 Matters neither alleged in the pleadingsnor raised during
the proceedings below cannot be ventilated for the first time on appeal
before the Supreme Court.35
In any event, we find no merit in the defense of novation as we discuss at
length below. Novation cannot be presumed and must be clearly and
unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor.36
Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists insubstituting a new debtor in the
place of the originalone, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in Articles 1236
and 1237."
To give novation legal effect, the original debtor must be expressly
released from the obligation, and the new debtor must assume the original
debtor’s place in the contractual relationship. Depending on who took the
initiative, novation by substitution of debtor has two forms – substitution
by expromision and substitution by delegacion. The difference between
these two was explained in Garcia v. Llamas:37
"In expromision, the initiative for the change does not come from -- and
may even be made without the knowledge of -- the debtor, since it consists
of a third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In delegacion,
the debtor offers, and the creditor accepts, a third person who consents to
the substitution and assumes the obligation; thus, the consent of these
three persons are necessary."
In both cases, the original debtor must be released from the obligation;
otherwise, there can be no valid novation.38Furthermore, novation by
substitution of debtor must alwaysbe made with the consent of the
creditor.39
The petitioner contends thatnovation took place through a substitution of
debtors when Mrs. Bognot renewed the loan and assumed the debt. He
alleged that Mrs. Bognot assumed the obligation by paying the renewal
fees and charges, and by executing a new promissory note. He further
claimed that she issued her own check40 to cover the renewal fees, which
fact, according to the petitioner, was done with the respondent’s consent.
Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the
petitioner as debtor. She merely attempted to renew the original loan by
executing a new promissory note41 and check. The purported one month
renewal of the loan, however, did not push through, as Mrs. Bognot did
not return the documents or issue a new post dated check. Since the loan
was not renewed for another month, the originaldue date, June 30,1997,
continued to stand.
More importantly, the respondent never agreed to release the petitioner
from his obligation. That the respondent initially allowed Mrs. Bognot to
bring home the promissory note, disclosure statement and the petitioner’s
previous check dated June 30, 1997, does not ipso factoresult in novation.
Neither will this acquiescence constitute an implied acceptance of the
substitution of the debtor.
In order to give novation legal effect, the creditor should consent to the
substitution of a new debtor. Novation must be clearly and unequivocally
shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the
substitution, no valid novation took place with the effect of releasing the
petitioner from his obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot and the respondent
had agreed to release the petitioner, the respondent can still enforce the
payment of the obligation against the original debtor. Mere acquiescence
to the renewal of the loan, when there is clearly no agreement to release
the petitioner from his responsibility, does not constitute novation.
The Nature of the Petitioner’s Liability
On the nature of the petitioner’s liability, we rule however, that the CA
erred in holding the petitioner solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the
entire obligation, and each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors.42 There
is solidary liability when the obligation expressly so states, when the law
so provides, or when the nature of the obligation so requires.43 Thus, when
the obligor undertakes to be "jointly and severally" liable, the obligation
is solidary,
In this case, both the RTC and the CA found the petitioner solidarily liable
with Rolando based on Promissory Note No. 97-035 dated June 30, 1997.
Under the promissory note, the Bognot Siblings defined the parameters
of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay
to READY RESOURCES INVESTORS RRI LENDING CORPO. or
Order, its office at Paranaque, M.M. the principal sum of Five Hundred
Thousand PESOS (₱500,000.00), PhilippineCurrency, with interest
thereon at the rate of Five percent (5%) per month/annum, payable in One
Installment (01) equal daily/weekly/semi-monthly/monthly of PESOS
Five Hundred Thousand Pesos (₱500,000.00), first installment to become
due on June 30, 1997. xxx"44 (Emphasis Ours).
Although the phrase "jointly and severally" in the promissory note clearly
and unmistakably provided for the solidary liability of the parties, we note
and stress that the promissory note is merely a photocopyof the original,
which was never produced.
Obligations Part 2 | Page 91 of 143
Under the best evidence rule, whenthe subject of inquiry is the contents
of a document, no evidence isadmissible other than the original document
itself except in the instances mentioned in Section 3, Rule 130 of the
Revised Rules of Court.45
The records show that the respondenthad the custody of the original
promissory note dated April 1, 1997, with a superimposed rubber stamp
mark "June 30, 1997", and that it had been given every opportunity to
present it. The respondent even admitted during pre-trial that it could not
present the original promissory note because it is in the custody of its
cashier who is stranded in Bicol.46 Since the respondent never produced
the original of the promissory note, much less offered to produce it, the
photocopy of the promissory note cannot be admitted as evidence. Other
than the promissory note in question, the respondent has not presented
any other evidence to support a finding of solidary liability. As we earlier
noted, both lower courts completely relied on the note when they found
the Bognot siblingssolidarily liable.
The well-entrenched rule is that solidary obligation cannot be inferred
lightly. It must be positively and clearly expressed and cannot be
presumed.47
In view of the inadmissibility of the promissory note, and in the absence
of evidence showing that the petitioner had bound himself solidarily with
Rolando for the payment of the loan, we cannot but conclude that the
obligation to pay is only joint.48
The 5% Monthly Interest Stipulated in the Promissory Note is
Unconscionable and Should be Equitably Reduced
Finally, on the issue of interest, while we agree with the CA that the
petitioner is liable to the respondentfor the unpaid loan, we find the
imposition of the 5% monthly interest to be excessive, iniquitous,
unconscionable and exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement have wide latitude to
stipulate on the applicable interest rate under Central Bank Circular No.
905 s. 1982 (which suspended the Usury Law ceiling on interest effective
January 1, 1983), we stress that unconscionable interest rates may still be
declared illegal.49
In several cases, we haveruled that stipulations authorizing iniquitous or
unconscionable interests are contrary to morals and are illegal. In Medel
v. Court of Appeals,50 we annulled a stipulated 5.5% per month or 66%
per annum interest on a ₱500,000.00 loan, and a 6% per month or 72%
per annum interest on a ₱60,000.00 loan, respectively, for being
excessive, iniquitous, unconscionableand exorbitant. 1âwphi1

We reiterated this ruling in Chua v. Timan,51 where we held that the

stipulated interest rates of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant, and must therefore be reduced
to 12% per annum.
Applying these cited rulings, we now accordingly hold that the stipulated
interest rate of 5% per month, (or 60% per annum) in the promissory note
is excessive, unconscionable, contrary to morals and is thus illegal. It is
void ab initiofor violating Article 130652 of the Civil Code. We 1âwphi1

accordingly find it equitable to reduce the interest rate from 5% per month
to 1% per month or 12% per annum in line with the prevailing
jurisprudence.
WHEREFORE, premises considered, the Decision dated March 28, 2007
of the Court of Appeals in CA-G.R. CV No. 66915 is hereby AFFIRMED
with MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot
are JOINTLY LIABLE to pay the sum of ₱500,000.00 plus 12% interest
per annum from December 3, 1997 until fully paid.
2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
SO ORDERED.

Obligations Part 2 | Page 92 of 143

Evangelista v. Screenex, Inc.

Obligations Part 2 | Page 93 of 143

Obligations Part 2 | Page 94 of 143
 T ENDER OF PAYMENT AND CONSIGNMENT
Cacayorin v. Armed Forces and Police Mutual Benefit
Association, Inc.
G.R. No. 171298 April 15, 2013
SPOUSES OSCAR and THELMA CACAYORIN, Petitioners,
vs.
ARMED FORCES AND POLICE MUTUAL BENEFIT
ASSOCIATION, INC., Respondent.
DECISION
DEL CASTILLO, J.:
Consignation is necessarily judicial. Article 1258 of the Civil Code
specifically provides that consignation shall be made by depositing the
thing or things due at the disposal of judicial authority. The said provision
clearly precludes consignation in venues other than the courts.
1
Assailed in this Petition for Review on Certiorari are the September 29,
2
2005 Decision of the Court of Appeals (CA) which granted the Petition
for Certiorari in CA-G.R. SP No. 84446 and its January 12, 2006
3 4
Resolution denying petitioners' Motion for Reconsideration.

Factual Antecedents
Petitioner Oscar Cacayorin (Oscar) is a member of respondent Armed
Forces and Police Mutual Benefit Association, Inc. (AFPMBAI), a
mutual benefit association duly organized and existing under Philippine
laws and engaged in the business of developing low-cost housing projects
for personnel of the Armed Forces of the Philippines, Philippine National
Police, Bureau of Fire Protection, Bureau of Jail Management and
Penology, and Philippine Coast Guard. He filed an application with
AFPMBAI to purchase a piece of property which the latter owned,
specifically Lot 5, Block 8, Phase I, Kalikasan Mutual Homes, San Pedro,
Puerto Princesa City (the property), through a loan facility.
On July 4, 1994, Oscar and his wife and co-petitioner herein, Thelma, on
one hand, and the Rural Bank of San Teodoro (the Rural Bank) on the
5
other, executed a Loan and Mortgage Agreement with the former as
borrowers and the Rural Bank as lender, under the auspices of Pag-IBIG
or Home Development Mutual Fund’s Home Financing Program.
6
The Rural Bank issued an August 22, 1994 letter of guaranty informing
AFPMBAI that the proceeds of petitioners’ approved loan in the amount
of ₱77,418.00 shall be released to AFPMBAI after title to the property is
transferred in petitioners’ name and after the registration and annotation
of the parties’ mortgage agreement.
On the basis of the Rural Bank’s letter of guaranty, AFPMBAI executed
7
in petitioners’ favor a Deed of Absolute Sale, and a new title – Transfer
8
Certificate of Title No. 37017 (TCT No. 37017) – was issued in their
name, with the corresponding annotation of their mortgage agreement
9
with the Rural Bank, under Entry No. 3364.

Unfortunately, the Pag-IBIG loan facility did not push through and the
Rural Bank closed and was placed under receivership by the Philippine
Deposit Insurance Corporation (PDIC). Meanwhile, AFPMBAI somehow
was able to take possession of petitioners’ loan documents and TCT No.
37017, while petitioners were unable to pay the loan/consideration for the
property.
AFPMBAI made oral and written demands for petitioners to pay the loan/
10
consideration for the property.
11
In July 2003, petitioners filed a Complaint for consignation of loan
payment, recovery of title and cancellation of mortgage annotation
against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa
City. The case was docketed as Civil Case No. 3812 and raffled to Branch
47 of the Regional Trial Court (RTC) of Puerto Princesa City (Puerto
Princesa RTC). Petitioners alleged in their Complaint that as a result of
the Rural Bank’s closure and PDIC’s claim that their loan papers could
not be located, they were left in a quandary as to where they should tender
full payment of the loan and how to secure cancellation of the mortgage
annotation on TCT No. 37017. Petitioners prayed, thus:
a. That after the filing of this complaint an order be made allowing the
consignation x x x of Php77,418.00.
b. For the court to compute and declare the amount of interest to be paid
by the plaintiffs and thereafter to allow the consignation of the interest
payments in order to give way for the full discharge of the loan.

Obligations Part 2 | Page 95 of 143

c. To order the AFPMBAI to turn over to the custody of the court the loan
records and title (T.C.T. No. 37017) of the plaintiffs if the same are in
their possession.
d. To declare the full payment of the principal loan and interest and
ordering the full discharge from mortgage of the property covered by
T.C.T. No. 37017.
e. To order the Register of Deeds of Puerto Princesa City to cancel the
annotation of real estate mortgage under Entry No. 3364 at the back of
T.C.T. No. 37017.
f. Thereafter, to turn over to the plaintiffs their title free from the aforesaid
12
mortgage loan.
13
AFPMBAI filed a Motion to Dismiss claiming that petitioners’
Complaint falls within the jurisdiction of the Housing and Land Use
Regulatory Board (HLURB) and not the Puerto Princesa RTC, as it was
filed by petitioners in their capacity as buyers of a subdivision lot and it
prays for specific performance of contractual and legal obligations
14
decreed under Presidential Decree No. 957 (PD 957). It added that since
no prior valid tender of payment was made by petitioners, the
consignation case was fatally defective and susceptible to dismissal.
Ruling of the Regional Trial Court
15
In an October 16, 2003 Order, the trial court denied AFPMBAI’s
Motion to Dismiss, declaring that since title has been transferred in the
name of petitioners and the action involves consignation of loan
payments, it possessed jurisdiction to continue with the case. It further
held that the only remaining unsettled transaction is between petitioners
and PDIC as the appointed receiver of the Rural Bank.
16
AFPMBAI filed a Motion for Reconsideration, which the trial court
17
denied in its March 19, 2004 Order.
Ruling of the Court of Appeals
AFPMBAI thus instituted CA-G.R. SP No. 84446, which is a Petition for
18
Certiorari raising the issue of jurisdiction. On September 29, 2005, the
CA rendered the assailed Decision decreeing as follows:
WHEREFORE, premises considered, this Petition is GRANTED. The
Assailed 16 October 2003 and 19 March 2004 Orders of the public
respondent judge are hereby ordered VACATED and SET ASIDE.
19
SO ORDERED.
The CA held that Civil Case No. 3812 is a case for specific performance
of AFPMBAI’s contractual and statutory obligations as owner/developer
of Kalikasan Mutual Homes, which makes PD 957 applicable and thus
places the case within the jurisdiction of the HLURB. It said that since
one of the remedies prayed for is the delivery to petitioners of TCT No.
37017, the case is cognizable exclusively by the HLURB.
Petitioners moved for reconsideration which was denied by the CA in its
January 12, 2006 Resolution.
Hence, the instant Petition.
Issue
The sole issue that must be resolved in this Petition is: Does the Complaint
in Civil Case No. 3812 fall within the exclusive jurisdiction of the
HLURB?
Petitioners’ Arguments
Petitioners assert that the elements which make up a valid case for
consignation are present in their Complaint. They add that since a deed of
absolute sale has been issued in their favor, and possession of the property
has been surrendered to them, not to mention that title has been placed in
their name, the HLURB lost jurisdiction over their case. And for this same
reason, petitioners argue that their case may not be said to be one for
specific performance of contractual and legal obligations under PD 957
as nothing more was left to be done in order to perfect or consolidate their
title.
Petitioners thus pray that the herein assailed Decision and Resolution of
the CA be set aside, and that the trial court be ordered to continue with
the proceedings in Civil Case No. 3812.
Respondent's Arguments
20
Respondent, on the other hand, insists in its Comment that jurisdiction
over petitioners’ case lies with the HLURB, as it springs from their
contractual relation as seller and buyer, respectively, of a subdivision lot.
The prayer in petitioners’ Complaint involves the surrender or delivery of
the title after full payment of the purchase price, which respondent claims
are reciprocal obligations in a sale transaction covered by PD 957.
Respondent adds that in effect, petitioners are exacting specific
performance from it, which places their case within the jurisdiction of the
HLURB.
Our Ruling
The Court grants the Petition.
The Complaint makes out a case for consignation.
The settled principle is that "the allegations of the Complaint determine
the nature of the action and consequently the jurisdiction of the courts.
This rule applies whether or not the plaintiff is entitled to recover upon
all or some of the claims asserted therein as this is a matter that can be
21
resolved only after and as a result of the trial."
Does the Complaint in Civil Case No. 3812 make out a case for
consignation? It alleges that:
22
6.0 – Not long after however, RBST closed shop and defendant
Philippine Deposit Insurance Corporation (PDIC) was appointed as its
receiver. The plaintiffs, through a representative, made a verbal inquiry
to the PDIC regarding the payment of their loan but were told that it has
no information or record of the said loan. This made [sic] the plaintiffs in
quandary as to where or whom they will pay their loan, which they intend
to pay in full, so as to cancel the annotation of mortgage in their title.
7.0 – It was discovered that the loan papers of the plaintiffs, including the
duplicate original of their title, were in the possession of defendant
AFPMBAI. It was unclear though why the said documents including the
title were in the possession of AFPMBAI. These papers should have been
in RBST’s possession and given to PDIC after its closure in the latter’s
capacity as receiver.
8.0 – Plaintiffs are now intending to pay in full their real estate loan but
could not decide where to pay the same because of RBST [sic] closure
and PDIC’s failure to locate the loan records and title. This court’s
intervention is now needed in order to determine to [sic] where or whom
the loan should be paid.
9.0 – Plaintiffs hereby respectfully prays [sic] for this court to allow the
deposit of the amount of Php77,418.00 as full payment of their principal
loan, excluding interest, pursuant to the Loan and Mortgage Agreement
23
on 4 July 1994.
From the above allegations, it appears that the petitioners’ debt is
outstanding; that the Rural Bank’s receiver, PDIC, informed petitioners
that it has no record of their loan even as it took over the affairs of the
Rural Bank, which on record is the petitioners’ creditor as per the July 4,
1994 Loan and Mortgage Agreement; that one way or another, AFPMBAI
came into possession of the loan documents as well as TCT No. 37017;
that petitioners are ready to pay the loan in full; however, under the
circumstances, they do not know which of the two – the Rural Bank or
AFPMBAI – should receive full payment of the purchase price, or to
whom tender of payment must validly be made.
24
Under Article 1256 of the Civil Code, the debtor shall be released from
responsibility by the consignation of the thing or sum due, without need
of prior tender of payment, when the creditor is absent or unknown, or
when he is incapacitated to receive the payment at the time it is due, or
when two or more persons claim the same right to collect, or when the
title to the obligation has been lost. Applying Article 1256 to the
petitioners’ case as shaped by the allegations in their Complaint, the Court
finds that a case for consignation has been made out, as it now appears
that there are two entities which petitioners must deal with in order to
fully secure their title to the property: 1) the Rural Bank (through PDIC),
which is the apparent creditor under the July 4, 1994 Loan and Mortgage
Agreement; and 2) AFPMBAI, which is currently in possession of the
loan documents and the certificate of title, and the one making demands
upon petitioners to pay. Clearly, the allegations in the Complaint present
a situation where the creditor is unknown, or that two or more entities
appear to possess the same right to collect from petitioners. Whatever
transpired between the Rural Bank or PDIC and AFPMBAI in respect of
petitioners’ loan account, if any, such that AFPMBAI came into
possession of the loan documents and TCT No. 37017, it appears that
petitioners were not informed thereof, nor made privy thereto.
Obligations Part 2 | Page 96 of 143
Indeed, the instant case presents a unique situation where the buyer,
through no fault of his own, was able to obtain title to real property in his
name even before he could pay the purchase price in full. There appears
to be no vitiated consent, nor is there any other impediment to the
consummation of their agreement, just as it appears that it would be to the
best interests of all parties to the sale that it be once and for all completed
and terminated. For this reason, Civil Case No. 3812 should at this
juncture be allowed to proceed.
Moreover, petitioners’ position is buttressed by AFPMBAI’s own
25
admission in its Comment that it made oral and written demands upon
the former, which naturally aggravated their confusion as to who was their
rightful creditor to whom payment should be made – the Rural Bank or
AFPMBAI. Its subsequent filing of the Motion to Dismiss runs counter
to its demands to pay. If it wanted to be paid with alacrity, then it should
not have moved to dismiss Civil Case No. 3812, which was brought
precisely by the petitioners in order to be able to finally settle their
obligation in full.
Finally, the lack of prior tender of payment by the petitioners is not fatal
to their consignation case. They filed the case for the exact reason that
they were at a loss as to which between the two – the Rural Bank or
AFPMBAI – was entitled to such a tender of payment. Besides, as earlier
stated, Article 1256 authorizes consignation alone, without need of prior
tender of payment, where the ground for consignation is that the creditor
is unknown, or does not appear at the place of payment; or is incapacitated
to receive the payment at the time it is due; or when, without just cause,
he refuses to give a receipt; or when two or more persons claim the same
right to collect; or when the title of the obligation has been lost.
Consignation is necessarily judicial; hence, jurisdiction lies with the RTC,
not with the HLURB.
On the question of jurisdiction, petitioners’ case should be tried in the
Puerto Princesa RTC, and not the HLURB. Consignation is necessarily
26
judicial, as the Civil Code itself provides that consignation shall be
made by depositing the thing or things due at the disposal of judicial
authority, thus:
Art. 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be
proved, in a proper case, and the announcement of the consignation in
other cases.
The consignation having been made, the interested parties shall also be
notified thereof. (Emphasis and underscoring supplied)
The above provision clearly precludes consignation in venues other than
the courts. Elsewhere, what may be made is a valid tender of payment,
1âwphi1
but not consignation. The two, however, are to be distinguished.
Tender of payment must be distinguished from consignation. Tender is
the antecedent of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are derived the
immediate consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private
settlement before proceeding to the solemnities of consignation. (8
27
Manresa 325).
While it may be true that petitioners’ claim relates to the terms and
conditions of the sale of AFPMBAI’s subdivision lot, this is
overshadowed by the fact that since the Complaint in Civil Case No. 3812
pleads a case for consignation, the HLURB is without jurisdiction to try
it, as such case may only be tried by the regular courts.
WHEREFORE, premises considered, the Petition is GRANTED. The
September 29, 2005 Decision and January 12, 2006 Resolution of the
Court of Appeals in CA-G.R. SP No. 84446 are ANNULLED and SET
ASIDE. The October 16, 2003 and March 19, 2004 Orders of the Regional
Trial Court of Puerto Princesa City, Branch 47, are REINSTATED, and
the case is REMANDED to the said court for continuation of the
proceedings.
SO ORDERED.
Bonrostro v. Luna
G.R. No. 172346 July 24, 2013
SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners,
vs.
SPOUSES JUAN and CONSTANCIA LUNA, Respondents.
DECISION
DEL CASTILLO, J.:
Questioned in this case is the Court of Appeals' (CA) disquisition on the
matter of interest.
Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro)
1
assail through this Petition for Review on Certiorari the April 15, 2005
2
Decision of the CA in CA-G.R. CV No. 56414 which affirmed with
3
modifications the April 4, 1997 Decision of the Regional Trial Court
(RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895. They
4
likewise question the CA April17, 2006 Resolution denying their motion
for partial reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into
5
a Contract to Sell with Bliss Development Corporation (Bliss) involving
a house and lot identified as Lot 19, Block 26 of New Capitol Estates in
Diliman, Quezon City. Barely a year after, Constancia, this time as the
6
seller, entered into another Contract to Sell with petitioner Lourdes
Bonrostro (Lourdes) concerning the same property under the following
terms and conditions:
1. The stipulated price of ₱1,250,000.00 shall be paid by the VENDEE to
the VENDOR in the following manner:
(a) ₱200,000.00 upon signing x x x the Contract To Sell,
(b) ₱300,000.00 payable on or before April 30, 1993,
(c) ₱330,000.00 payable on or before July 31, 1993,
(d) ₱417,000.00 payable to the New Capitol Estate, for 15 years at
₱6,867.12 a month,
2. x x x In the event the VENDEE fails to pay the second installment on
time, the VENDEE will pay starting May 1, 1993 a 2% interest on the
₱300,000.00 monthly. Likewise, in the event the VENDEE fails to pay
the amount of ₱630,000.00 on the stipulated time, this CONTRACT TO
SELL shall likewise be deemed cancelled and rescinded and x x x 5% of
the total contract price of ₱1,250,000.00 shall be deemed forfeited in
favor of the VENDOR. Unpaid monthly amortization shall likewise be
7
deducted from the initial down payment in favor of the VENDOR.
Immediately after the execution of the said second contract, the spouses
Bonrostro took possession of the property. However, except for the
₱200,000.00 down payment, Lourdes failed to pay any of the stipulated
subsequent amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her husband, respondent Juan Luna
8
(spouses Luna), filed before the RTC a Complaint for Rescission of
Contract and Damages against the spouses Bonrostro praying for the
rescission of the contract, delivery of possession of the subject property,
payment by the latter of their unpaid obligation, and awards of actual,
moral and exemplary damages, litigation expenses and attorney’s fees.
9
In their Answer with Compulsory Counterclaim, the spouses Bonrostro
averred that they were willing to pay their total balance of ₱630,000.00
to the spouses Luna after they sought from them a 60-day extension to
10
pay the same. However, during the time that they were ready to pay the
said amount in the last week of October 1993, Constancia and her lawyer,
Atty. Arlene Carbon (Atty. Carbon), did not show up at their rendezvous.
11
On November 24, 1993, Lourdes sent Atty. Carbon a letter expressing
her desire to pay the balance, but received no response from the latter.
Claiming that they are still willing to settle their obligation, the spouses
Bonrostro prayed that the court fix the period within which they can pay
the spouses Luna.
The spouses Bonrostro likewise belied that they were not paying the
monthly amortization to New Capitol Estates and asserted that on
November 18, 1993, they paid Bliss, the developer of New Capitol
Obligations Part 2 | Page 97 of 143
Estates, the amount of ₱46,303.44. Later during trial, Lourdes testified
that Constancia instructed Bliss not to accept amortization payments from
12
anyone as evidenced by her March 4, 1993 letter to Bliss.
13
On April 4, 1997, the RTC rendered its Decision focusing on the sole
issue of whether the spouses Bonrostro’s delay in their payment of the
installments constitutes a substantial breach of their obligation under the
contract warranting rescission. The RTC ruled that the delay could not be
considered a substantial breach considering that Lourdes (1) requested for
an extension within which to pay; (2) was willing and ready to pay as
early as the last week of October 1993 and even wrote Atty. Carbon about
this on November 24, 1993; (3) gave Constancia a down payment of
₱200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as
follows:
1.) Declaring the Contract to Sell executed by the plaintiff Constancia and
defendant Lourdes with respect to the house and lot located at Blk. 26,
Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and
effect. And that Lourdes Bonrostro must remain in the possession of the
premises.
2.) Ordering the defendants to pay plaintiffs within 60 days from receipt
of this decision the sum of ₱300,000.00 plus an interest of 2% per month
from April 1993 to November 1993.
3.) Ordering the defendants to pay plaintiffs within sixty (60) days from
receipt of this decision the sum of ₱330,000.00 plus an interest of 2% per
month from July 1993 to November 1993.
4.) Ordering the defendants to reimburse plaintiffs the sum of
₱214,492.62 which plaintiffs paid to Bliss Development Corporation.
No pronouncement as to Cost.
14
SO ORDERED.
15
As their Motion for Reconsideration was likewise denied in an
16 17
Order dated July 15, 1997, the spouses Luna appealed to the CA.
Ruling of the Court of Appeals
18
In its Decision of April 15, 2005, the CA concluded that since the
contract entered into by and between the parties is a Contract to Sell,
rescission is not the proper remedy. Moreover, the subject contract being
specifically a contract to sell a real property on installment basis, it is
19
governed by Republic Act No. 6552 or the Maceda Law, Section 4 of
which states:
Sec. 4. In case where less than two years of installment were paid, the
seller shall give the buyer a grace period of not less than sixty days from
the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace
period, the seller may cancel the contract after thirty days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act. (Emphases supplied)
The CA held that while the spouses Luna sent the spouses Bonrostro
20
letters rescinding the contract for non-payment of the sum of
₱630,000.00, the same could not be considered as valid and effective
cancellation under the Maceda Law since they were made within the 60-
day grace period and were not notarized. The CA concluded that there
being no cancellation effected in accordance with the procedure
prescribed by law, the contract therefore remains valid and subsisting.
The CA also affirmed the RTC’s finding that Lourdes was ready to pay
her obligation on November 24, 1993.
However, the CA modified the RTC Decision with respect to interest, viz:
Nevertheless, there is a need to modify the appealed decision insofar as
(i) the interest imposed on the sum of ₱300,000.00 is only for the period
April 1993 to November 1993; (ii) the interest imposed on the sum of
₱330,000.00 is 2% per month and is only for the period July 1993 to
November 1993; (iii) it does not impose interest on the amount of
₱214,492.62 which was paid by Constancia to BLISS in behalf of
Lourdes x x x
The rule is that ‘no interest shall be due unless it has been expressly
stipulated in writing’ (Art. 1956, Civil Code). However, the contract does
not provide for interest in case of default in payment of the sum of
₱330,000.00 to Constancia and the monthly amortizations to BLISS.
Considering that Lourdes had incurred x x x delay in the performance of
her obligations, she should pay (i) interest at the rate of 2% per month on
the sum of ₱300,000.00 from May 1, 1993 until fully paid and (ii) interest
at the legal rate on the amounts of ₱330,000.00 and ₱214,492.62 from
the date of default (August 1, 1993 and April 4, 1997 date of the appealed
21
decision, respectively) until the same are fully paid x x x
Hence, the dispositive portion of the said Decision:
WHEREFORE, the appealed decision is AFFIRMED with the
MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive portion
shall now read:
2.) Ordering the defendants to pay plaintiffs the sum of ₱300,000.00 plus
interest thereon at the rate of 2% per month from May 1, 1993 until fully
paid;
3.) Ordering the defendants to pay plaintiffs the sum of ₱330,000.00 plus
interest thereon at the legal rate from August 1, 1993 until fully paid; and
4.) Ordering the defendants to reimburse plaintiffs the sum of
₱214,492.62, which plaintiffs paid to Bliss Development Corporation,
plus interest thereon at the legal rate from filing of the complaint until
fully reimbursed.
22
SO ORDERED.
The spouses Luna no longer assailed the ruling. On the other hand, the
spouses Bonrostro filed a Partial Motion for
23
Reconsideration questioning the above-mentioned modifications. The
CA, however, denied for lack of merit the said motion in a
24
Resolution dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA correctly modified the RTC
Decision with respect to interests.
The Parties’ Arguments
As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive
portion of its Decision ordered the spouses Bonrostro to pay the spouses
Luna the sums of ₱300,000.00 plus interest of 2% per month from April
1993 to November 1993 and ₱330,000.00 plus interest of 2% per month
from July 1993 to November 1993, respectively. The CA modified these
by reckoning the payment of the 2% interest on the ₱300,000.00 from
May 1, 1993 until fully paid and by imposing interest at the legal rate on
the ₱330,000.00 reckoned from August 1, 1993 until fully paid.
The spouses Bonrostro harp on the factual finding of the RTC, as affirmed
by the CA, that Lourdes was willing and ready to pay her obligation as
evidenced by her November 24, 1993 letter to Atty. Carbon. They also
assert that the sending of the said letter constitutes a valid tender of
payment on their part. Hence, they argue that they should not be assessed
any interest subsequent to the date of the said letter. Neither should they
be ordered to pay interest on the amount of ₱214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss. They point out that it
was Constancia who prevented them from fulfilling their obligation to pay
the amortizations when she instructed Bliss not to accept payment from
them.
25
The spouses Luna, on the other hand, aver that the November 24, 1993
letter of Lourdes is not equivalent to tender of payment since the mere
sending of a letter expressing the intention to pay, without the
accompanying payment, cannot be considered a valid tender of payment.
Also, if the spouses Bonrostro were really willing and ready to pay at that
time and assuming that the spouses Luna indeed refused to accept
payment, the former should have resorted to consignation. Anent the
payment of amortization, the spouses Luna explain that under the parties’
Contract to Sell, Lourdes was to assume Constancia’s balance to Bliss by
paying the monthly amortization in order to avoid the cancellation of the
26
earlier Contract to Sell entered into by Constancia with Bliss. However,
since Lourdes was remiss in paying the same, the spouses Luna were
constrained to pay the amortization. They thus assert that reimbursement
to them of the said amount with interest is proper considering that by
reason of such payment, the spouses Bonrostro were spared from the
interests and penalties which would have been imposed by Bliss if the
amortizations remained unpaid.
Our Ruling
Obligations Part 2 | Page 98 of 143
The Petition lacks merit.
The spouses Bonrostro’s reliance on the RTC’s factual finding that
Lourdes was willing and ready to pay on November 24, 1993 is
misplaced.
As mentioned, the RTC in resolving the Complaint focused on the sole
issue of whether the failure of spouses Bonrostro to pay the installments
of ₱300,000.00 on April 30, 1993 and ₱330,000.00 on July 31, 1993 is a
substantial breach of their obligation under the contract as to warrant the
27
rescission of the same. The said court ratiocinated, viz:
After careful evaluation of the evidence testimonial and documentary, the
Court believes that the defendants’ delay in the payment of the two
installments is not so substantial as to warrant rescission of contract.
Although, the defendant failed to pay the two installments in due time,
she was able to communicate with the plaintiffs through letters requesting
for an extension of two months within which to pay the installments. In
fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that
she was ready to pay the installments and the money is ready for pick-up.
However, plaintiff did not bother to get or pick-up the money without any
valid reason. It would be very prejudicial on the part of the defendant if
the contract to sell be rescinded considering that she made a
downpayment of ₱200,000.00 and made partial amortization to the Bliss
Development Corporation. In fact, the defendant testified that she is
willing and ready to pay the balance including the interest on November
24, 1993.
The Court is of the opinion that the delay in the payment of the balance
of the purchase price of the house and lot is not so substantial as to warrant
the rescission of the contract to sell. The question of whether a breach of
28
contract is substantial depends upon the attendant circumstance. x x x
Clearly, the RTC arrived at the above-quoted conclusion based on its
mistaken premise that rescission is applicable to the case. Hence, its
determination of whether there was substantial breach. As may be
recalled, however, the CA, in its assailed Decision, found the contract
between the parties as a contract to sell, specifically of a real property on
installment basis, and as such categorically declared rescission to be not
the proper remedy. This is considering that in a contract to sell, payment
of the price is a positive suspensive condition, failure of which is not a
29
breach of contract warranting rescission under Article 1191 of the Civil
Code but rather just an event that prevents the supposed seller from being
30
bound to convey title to the supposed buyer. Also, and as correctly
ruled by the CA, Article 1191 cannot be applied to sales of real property
31
on installment since they are governed by the Maceda Law.
There being no breach to speak of in case of non-payment of the purchase
price in a contract to sell, as in this case, the RTC’s factual finding that
Lourdes was willing and able to pay her obligation – a conclusion arrived
at in connection with the said court’s determination of whether the non-
payment of the purchase price in accordance with the terms of the contract
was a substantial breach warranting rescission – therefore loses
significance. The spouses Bonrostro’s reliance on the said factual finding
is thus misplaced. They cannot invoke their readiness and willingness to
pay their obligation on November 24, 1993 as an excuse from being made
liable for interest beyond the said date.
The spouses Bonrostro are liable for interest on the installments due from
the date of default until fully paid.
The spouses Bonrostro assert that Lourdes’ letter of November 24, 1993
amounts to tender of payment of the remaining balance amounting to
₱630,000.00. Accordingly, thenceforth, accrual of interest should be
suspended.
Tender of payment "is the manifestation by the debtor of a desire to
comply with or pay an obligation. If refused without just cause, the tender
of payment will discharge the debtor of the obligation to pay but only after
a valid consignation of the sum due shall have been made with the proper
32
court." "Consignation is the deposit of the proper amount with a judicial
authority in accordance with rules prescribed by law, after the tender of
payment has been refused or because of circumstances which render
33
direct payment to the creditor impossible or inadvisable."
34
"Tender of payment, without more, produces no effect." "To have the
effect of payment and the consequent extinguishment of the obligation to
pay, the law requires the companion acts of tender of payment and
35
consignation."
As to the effect of tender of payment on interest, noted civilist Arturo M.
Tolentino explained as follows:
When a tender of payment is made in such a form that the creditor could
have immediately realized payment if he had accepted the tender,
followed by a prompt attempt of the debtor to deposit the means of
payment in court by way of consignation, the accrual of interest on the
obligation will be suspended from the date of such tender. But when the
tender of payment is not accompanied by the means of payment, and the
debtor did not take any immediate step to make a consignation, then
36
interest is not suspended from the time of such tender. x x x x (Emphasis
supplied)
Here, the subject letter merely states Lourdes’ willingness and readiness
to pay but it was not accompanied by payment. She claimed that she made
numerous telephone calls to Atty. Carbon reminding the latter to collect
her payment, but, neither said lawyer nor Constancia came to collect the
payment. After that, the spouses Bonrostro took no further steps to effect
payment. They did not resort to consignation of the payment with the
proper court despite knowledge that under the contract, non-payment of
the installments on the agreed date would make them liable for interest
thereon. The spouses Bonrostro erroneously assumed that their notice to
pay would excuse them from paying interest. Their claimed tender of
payment did not produce any effect whatsoever because it was not
accompanied by actual payment or followed by consignation. Hence, it
did not suspend the running of interest. The spouses Bonrostro are
therefore liable for interest on the subject installments from the date of
default until full payment of the sums of ₱300,000.00 and ₱330,000.00.
The spouses Bonrostro are likewise liable for interest on the amount paid
by the spouses Luna to Bliss as amortization.
The spouses Bonrostro want to be relieved from paying interest on the
amount of ₱214,492.62 which the spouses Luna paid to Bliss as
amortizations by asserting that they were prevented by the latter from
fulfilling such obligation. They invoke Art. 1186 of the Civil Code which
provides that "the condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment."
However, the Court finds Art. 1186 inapplicable to this case. The said
provision explicitly speaks of a situation where it is the obligor who
voluntarily prevents fulfillment of the condition. Here, Constancia is not
the obligor but the obligee. Moreover, even if this significant detail is to
be ignored, the mere intention to prevent the happening of the condition
or the mere placing of ineffective obstacles to its compliance, without
actually preventing fulfillment is not sufficient for the application of Art.
37
1186. Two requisites must concur for its application, to wit: (1) intent
to prevent fulfillment of the condition; and, (2) actual prevention of
38
compliance.
In this case, while it is undisputed that Constancia indeed instructed Bliss
on March 4, 1994 not to accept payment from anyone but her, there is
nothing on record to show that Bliss heeded the instruction of Constancia
as to actually prevent the spouses Bonrostro from making payments to
Bliss. There is no showing that subsequent to the said letter, the spouses
Bonrostro attempted to make payment to and was refused by Bliss.
Neither was there a witness presented to prove that Bliss indeed gave
effect to the instruction contained in Constancia’s letter. While Bliss’
Project Development Officer, Mr. Ariel Cordero, testified during trial,
nothing could be gathered from his testimony regarding this except for
39
the fact that Bliss received the said letter. In view of these, the spouses
Luna could not be said to have placed an effective obstacle as to actually
prevent the spouses Bonrostro from making amortization payments to
Bliss.
On the other hand, there are telling circumstances which militate against
the spouses Bonrostro’s claimed keenness to comply with their obligation
to pay the monthly amortization. After the execution of the contract in
January 1993, they immediately took possession of the property but failed
to make amortization payments. It was only after seven months or on
November 18, 1993 that they made payments to Bliss in the amount of
40
₱46,303.44. Whether the same covers previous unpaid amortizations is
41
also not clear as the receipt does not indicate the same and per
42
Statement of Account as of March 8, 1994 issued by Bliss, the unpaid
monthly amortizations for February to November 1993 in the total
amount of ₱78,271.69 remained outstanding. There was also no payment
made of the amortizations due on December 4, 1993 and January 4,
43
1994 before the filing of the Complaint on January 11, 1994.
On the part of the spouses Luna, it is understandable that they paid the
amortizations due. The assumption of payment of the monthly
1âwphi1
amortization to Bliss was made part of the obligations of the spouses
Bonrostro under their contract with the spouses Luna precisely to avoid
the cancellation of the earlier contract entered into by Constancia with
Obligations Part 2 | Page 99 of 143
Bliss. But as the spouses Bonrostro failed in this obligation, the spouses
Luna were constrained to pay Bliss to avoid the adverse effect of such
failure. This act of the spouses Luna proved to be even more beneficial to
the spouses Bonrostro as the cancellation of the Contract to Sell between
Constancia and Bliss would result in the cancellation of the subsequent
Contract to Sell between Constancia and Lourdes. Also, the spouses
Bonrostro were relieved from paying the penalties that would have been
imposed by Bliss if the monthly amortizations covered by the said
44
payment remained unpaid. The Statements of Account issued by Bliss
clearly state that each monthly amortization is due on or before the fourth
day of every month and a penalty equivalent to 1/10th of 1% per day of
delay shall be imposed for all payments made after due date. That
translates to 3% monthly or 36% per annum rate of interest, three times
higher than the 12% per annum rate of interest correctly imposed by the
CA.
Hence, the resulting situation is that the spouses Luna are constrained to
part with their money while the spouses Bonrostro, despite being remiss
in their obligation to pay the monthly amortization, are relieved from
paying higher penalties at the expense of the former. This is aside from
the fact that the spouses Bonrostro are in continued possession of the
subject property and are enjoying the beneficial use thereof. Under the
circumstances and considering that the spouses Bonrostro are obviously
in delay in complying with their obligation to pay the amortizations due
from February 1993 to January 1995 for which the spouses Luna paid
45
₱214,492.62, the CA correctly ordered the reimbursement to the latter
of the said amount with interest. "Delay in the performance of an
obligation is looked upon with disfavor because, when a party to a
contract incurs delay, the other party who performs his part of the contract
46
suffers damages thereby." As discussed, the spouses Luna obviously
suffered damages brought about by the failure of the spouses Bonrostro
to comply with their obligation on time. "And, sans elaboration of the
47
matter at hand, damages take the form of interest x x x."
Under Article 2209 of the Civil Code, "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 x x x." There being no stipulation on interest in case of delay
in the payment of amortization, the CA thus correctly imposed interest at
the legal rate which is now 12% per annum.
WHEREFORE, the Petition for Review on Certiorari is DENIED and the
assailed Decision dated April 15, 2005 and the Resolution dated April 17,
2006 of the Court of Appeals in CA-G.R. CV No. 56414 are AFFIRMED.
SO ORDERED.
Del Carmen v. Sabordo
G.R. No. 181723 August 11, 2014
ELIZABETH DEL CARMEN, Petitioner,
vs.
SPOUSES RESTITUTO SABORDO and MIMA MAHILUM-
SABORDO, Respondents.
DECISION
PERALTA, J.:
This treats of the petition for review on certiorari assailing the
Decision1 and Resolution2 of the Court of Appeals (CA), dated May 25,
2007 and January 24, 2008, respectively, in CA-G.R. CV No. 75013.
The factual and procedural antecedents of the case are as follows:
Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico
spouses), along with several business partners, entered into a business
venture by establishing a rice and com mill at Mandaue City, Cebu. As
part of their capital, they obtained a loan from the Development Bank of
the Philippines (DBP), and to secure the said loan, four parcels of land
owned by the Suico spouses, denominated as Lots 506, 512, 513 and 514,
and another lot owned by their business partner, Juliana Del Rosario, were
mortgaged. Subsequently, the Suico spouses and their business partners
failed to pay their loan obligations forcing DBP to foreclose the mortgage.
After the Suico spouses and their partners failed to redeem the foreclosed
properties, DBP consolidated its ownership over the same. Nonetheless,
DBP later allowed the Suico spouses and Reginald and Beatriz Flores
(Flores spouses), as substitutes for Juliana Del Rosario, to repurchase the
subject lots by way of a conditional sale for the sum of ₱240,571.00. The
Suico and Flores spouses were able to pay the downpayment and the first
monthly amortization, but no monthly installments were made thereafter.
Threatened with the cancellation of the conditional sale, the Suico and
Flores spouses sold their rights over the said properties to herein
respondents Restituto and Mima Sabordo, subject to the condition that the
latter shall pay the balance of the sale price. On September 3, 1974,
respondents and the Suico and Flores spouses executed a supplemental
agreement whereby they affirmed that what was actually sold to
respondents were Lots 512 and 513, while Lots 506 and 514 were given
to them as usufructuaries. DBP approved the sale of rights of the Suico
and Flores spouses in favor of herein respondents. Subsequently,
respondents were able to repurchase the foreclosed properties of the Suico
and Flores spouses.
On September 13, 1976, respondent Restituto Sabordo (Restituto) filed
with the then Court of First Instance of Negros Occidental an original
action for declaratory relief with damages and prayer for a writ of
preliminary injunction raising the issue of whether or not the Suico
spouses have the right to recover from respondents Lots 506 and 514.
In its Decision dated December 17, 1986, the Regional Trial Court (RTC)
of San Carlos City, Negros Occidental, ruled in favor of the Suico spouses
directing that the latter have until August 31, 1987 within which to redeem
or buy back from respondents Lots 506 and 514.
On appeal, the CA, in its Decision3 in CA-G.R. CV No. 13785, dated
April 24, 1990, modified the RTC decision by giving the Suico spouses
until October 31, 1990 within which to exercise their option to purchase
or redeem the subject lots from respondents by paying the sum of
₱127,500.00. The dispositive portion of the CADecision reads as follows:
xxxx
For reasons given, judgment is hereby rendered modifying the dispositive
portion of [the] decision of the lower court to read:
1) The defendants-appellees are granted up to October 31, 1990 within
which toexercise their option to purchase from the plaintiff-appellant
Restituto Sabordo and Mima Mahilum Lot No. 506, covered by Transfer
Certificate of Title No. T-102598 and Lot No. 514, covered by Transfer
Certificate of Title No. T-102599, both of Escalante Cadastre, Negros
Occidental by reimbursing or paying to the plaintiff the sum of ONE
HUNDRED TWENTY-SEVEN THOUSAND FIVE HUNDRED
PESOS (₱127,500.00);
2) Within said period, the defendants-appellees shall continue to have
usufructuary rights on the coconut trees on Lots Nos. 506 and 514,
Escalante Cadastre, Negros Occidental;
3) The Writ of Preliminary Injunction dated August 12, 1977 shall be
effective untildefendants-appellees shall have exercised their option to
purchase within said period by paying or reimbursing to the plaintiff-
appellant the aforesaid amount.
No pronouncement as to costs.
SO ORDERED.4
In a Resolution5 dated February 13, 1991, the CA granted the Suico
spouses an additional period of 90 days from notice within which to
exercise their option to purchase or redeem the disputed lots.
In the meantime, Toribio Suico (Toribio) died leaving his widow,
Eufrocina, and several others, includingherein petitioner, as legal heirs.
Later, they discovered that respondents mortgaged Lots 506 and 514 with
Republic Planters Bank (RPB) as security for a loan which, subsequently,
became delinquent.
Thereafter, claiming that theyare ready with the payment of ₱127,500.00,
but alleging that they cannot determine as to whom such payment shall be
made, petitioner and her co-heirs filed a Complaint6 with the RTC of San
Carlos City, Negros Occidental seeking to compel herein respondents and
RPB to interplead and litigate between themselves their respective
interests on the abovementioned sum of money. The Complaint also
1â wphi1
prayed that respondents be directed to substitute Lots 506 and 514 with
other real estate properties as collateral for their outstanding obligation
with RPB and that the latter be ordered toaccept the substitute collateral
and release the mortgage on Lots 506 and 514. Upon filing of their
complaint, the heirs of Toribio deposited the amount of ₱127,500.00 with
the RTC of San Carlos City, Branch 59.
Respondents filed their Answer7 with Counterclaim praying for the
dismissal of the above Complaint on the grounds that (1) the action for
interpleader was improper since RPB isnot laying any claim on the sum
of ₱127,500.00; (2) that the period withinwhich the complainants are
allowed to purchase Lots 506 and 514 had already expired; (3) that there
was no valid consignation, and (4) that the case is barred by litis
pendenciaor res judicata.
Obligations Part 2 | Page 100 of 143
On the other hand, RPB filed a Motion to Dismiss the subject Complaint
on the ground that petitioner and her co-heirs had no valid cause of action
and that they have no primary legal right which is enforceable and binding
against RPB.
On December 5, 2001, the RTC rendered judgment, dismissing the
Complaint of petitioner and her co-heirs for lack of merit.8 Respondents'
Counterclaim was likewise dismissed.
Petitioner and her co-heirs filed an appeal with the CA contending that
the judicial deposit or consignation of the amount of ₱127,500.00 was
valid and binding and produced the effect of payment of the purchase
price of the subject lots.
In its assailed Decision, the CA denied the above appeal for lack of merit
and affirmed the disputed RTC Decision.
Petitioner and her co-heirs filed a Motion for Reconsideration,9 but it was
likewise denied by the CA.
Hence, the present petition for review on certiorariwith a lone Assignment
of Error, to wit:
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION
OF THE LOWER COURT WHICH HELD THAT THE JUDICIAL
DEPOSIT OF ₱127,500.00 MADE BY THE SUICOS WITH THE
CLERK OF COURT OF THE RTC, SAN CARLOS CITY, IN
COMPLIANCE WITH THE FINAL AND EXECUTORY DECISION
OF THE COURT OF APPEALS IN CA-G.R. CV-13785 WAS NOT
VALID.10
Petitioner's main contention is that the consignation which she and her co-
heirs made was a judicial deposit based on a final judgment and, as such,
does not require compliance with the requirements of Articles 125611 and
125712of the Civil Code.
The petition lacks merit. At the outset, the Court quotes withapproval the
discussion of the CA regarding the definition and nature of consignation,
to wit: … consignation [is] the act of depositing the thing due with the
court or judicial authorities whenever the creditor cannot accept or refuses
to accept payment, and it generally requires a prior tender of payment. It
should be distinguished from tender of payment which is the
manifestation by the debtor to the creditor of his desire to comply with
his obligation, with the offer of immediate performance.Tender is the
antecedent of consignation, thatis, an act preparatory to the consignation,
which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of
payment may be extrajudicial, while consignation is necessarily judicial,
and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. Tender and
consignation, where validly made, produces the effect of payment and
extinguishes the obligation.13
In the case of Arzaga v. Rumbaoa,14 which was cited by petitioner in
support of his contention, this Court ruled that the deposit made with the
court by the plaintiff-appellee in the saidcase is considered a valid
payment of the amount adjudged, even without a prior tender of payment
thereof to the defendants-appellants,because the plaintiff-appellee, upon
making such deposit, expressly petitioned the court that the defendants-
appellees be notified to receive the tender of payment.This Court held that
while "[t]he deposit, by itself alone, may not have been sufficient, but
with the express terms of the petition, there was full and complete offer
of payment made directly to defendants-appellants."15 In the instant case,
however, petitioner and her co-heirs, upon making the deposit with the
RTC, did not ask the trial court that respondents be notified to receive the
amount that they have deposited. In fact, there was no tender of payment.
Instead, what petitioner and her co-heirs prayed for is thatrespondents and
RPB be directed to interplead with one another to determine their alleged
respective rights over the consigned amount; that respondents be likewise
directed to substitute the subject lots with other real properties as
collateral for their loan with RPB and that RPB be also directed to accept
the substitute real properties as collateral for the said loan.
Nonetheless,the trial court correctly ruled that interpleader is not the
proper remedy because RPB did notmake any claim whatsoever over the
amount consigned by petitioner and her co-heirs with the court.
In the cases of Del Rosario v. Sandico16 and Salvante v. Cruz,17 likewise
cited as authority by petitioner, this Court held that, for a consignation or
deposit with the court of an amount due on a judgment to be considered
as payment, there must beprior tender to the judgment creditor who
refuses to accept it. The same principle was reiterated in the later case of
Pabugais v. Sahijwani.18 As stated above, tender of payment involves a
positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former’s obligation and
demanding that the latter accept the same.19 In the instant case, the Court
finds no cogent reason to depart from the findings of the CA and the RTC
that petitioner and her co-heirs failed to make a prior valid tender of
payment to respondents.
It is settled that compliance with the requisites of a valid consignation is
mandatory.20 Failure to comply strictly with any of the requisites will
render the consignation void. One of these requisites is a valid prior tender
of payment.21
Under Article 1256, the only instances where prior tender of payment is
excused are: (1) when the creditor is absent or unknown, or does not
appear at the place of payment; (2) when the creditor is incapacitated to
receive the payment at the time it is due; (3) when, without just cause, the
creditor refuses to give a receipt; (4) when two or more persons claim the
same right to collect; and (5) when the title of the obligation has been lost.
None of these instances are present in the instant case. Hence, the fact that
the subject lots are in danger of being foreclosed does not excuse
petitioner and her co-heirs from tendering payment to respondents, as
directed by the court.
WHEREFORE, the instant petition is DENIED. The Decision of the
Court of Appeals, dated May 25, 2007, and its Resolution dated January
24, 2008, both in CA-G.R. CV No. 75013, are AFFIRMED.
SO ORDERED.
Philippine National Bank v. Chan
March 13, 2017
G.R. No. 206037
PHILIPPINE NATIONAL BANK, Petitioner
vs
LILIBETH S. CHAN, Respondent
DECISION
DEL CASTILLO, J.:
We resolve the Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the May 28, 2012 Decision1 and the February
21, 2013 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No.
98112.
The Antecedent Facts
Respondent Lilibeth S. Chan owns a three-story commercial building
located along A. Linao Street, Paco, Manila covered by Transfer
Certificate of Title (TCT) No. 208782.3 On May 10, 2000, she leased said
commercial building to petitioner Philippine National Bank (PNB) for a
period of five years from December 15, 1999 to December 14, 2004, with
a monthly rental of ₱76,160.00.4 When the lease expired, PNB continued
to occupy the property on a month-to-month basis with a monthly rental
of ₱116,788.44. PNB vacated the premises on March 23, 2006.5
Meanwhile, on January 22, 2002, respondent obtained a ₱l,500,000.00
loan from PNB which was secured by a Real Estate Mortgage constituted
over the leased property.6 In addition, respondent executed a Deed of
Assignment7over the rental payments in favor of PNB.
The amount of the respondent's loan was subsequently increased to
₱7,500,000.00. Consequently, PNB and the respondent executed an
"Amendment to the Real Estate Mortgage by Substitution of Collateral"
on March 31, 2004, where the mortgage over the leased property was
released and substituted by a mortgage over a parcel of land located in
Paco, Manila, covered by TCT No. 209631.8
On August 26, 2005, respondent filed a Complaint for Unlawful Detainer
before the Metropolitan Trial Court (MeTC), Branch 7, Manila against
PNB, alleging that the latter failed to pay its monthly rentals from October
2004 until August 2005:9
In its defense, PNB claimed that it applied the rental proceeds from
October 2004 to January 15, 2005 as payment for respondent's
outstanding loan which became due and demandable in October
2004.10 As for the monthly rentals from January 16, 2005 to February
2006, PNB explained that it received a demand letter11 from a certain
Lamberto Chua (Chua) who claimed to be the new owner of the leased
property and requested that the rentals be paid directly to him, reckoned
from January 15, 2005 until PNB decides to vacate the premises or a new
lease contract with Chua is executed. PNB thus deposited the rentals in a
separate non-drawing savings account for the benefit of the rightful
party.12
The MeTC held a hearing on April 25, 2006 where the parties agreed to
apply the rental proceeds from October 2004 to January 15, 2005 to the
respondent's outstanding loan.13 PNB, too, consigned the amount of
Obligations Part 2 | Page 101 of 143
₱l,348,643.92, representing ti1ie rentals due from January 16, 2005 to
February 2006, with the court on May 31, 2006.14
Ruling of the Metropolitan Trial Court
In its August 9, 2006 Decision,15 the MeTC ordered PNB to pay
respondent accrued rentals in the amount of ₱l,348,643.92,16 with interest
at 6% per annum from January 16, 2005 up to March 23, 2006, when PNB
finally vacated the leased propeity.17 The MeTC likewise directed PNB
to pay attorney's fees in the amount of ₱20,000.00 and the cost of suit.
PNB appealed the August 9, 2006 MeTC Decision to the Regional Trial
Court (RTC), Branch 14, Manila, insisting that respondent is not entitled
to the disputed rental proceeds amounting to ₱l,348,643.92. According to
PNB, the money should be applied to offset respondent's outstanding loan
pursuant to the
Deed of Assignment the latter executed in its favor. PNB also argued that
it is not liable to pay any interest on the lease rentals since it did not incur
any delay in the payment of rent.18
While the appeal was pending before the RTC, PNB initiated foreclosure
proceedings on the mortgaged property covered by TCT No.
209631.19 The property was sold on October 31, 2006 for ₱l5,311,000.00
to PNB as the highest bidder. Notably, the Certificate of Sale provides
that respondent's indebtedness amounted to ₱ll,211,283.53 as of May 15,
2005, "exclusive of penalties, expenses, charges and the ten (10) percent
attorney's fees, plus sheriff fees and other lawful expenses of foreclosure
and sale."20
In light of this development, respondent filed a Memorandum21 before the
RTC, claiming that PNB had no right to retain foe ₱l,348,643.92
consigned with the court. She insisted that her loan was fully paid when
PNB bought the mortgaged property at ₱15,3ll,000.00.22
PNB filed a Rejoinder23 and argued that respondent's outstanding
obligation as of October 31, 2006 was ₱18,016,300.71 while the bid price
was only ₱l5,31l,000.00. Thus, PNB claimed that it is entitled to a
deficiency claim amounting to ₱2,705,300.71 to which the rental
proceeds of ₱l,348,643.92 can be applied.24
Ruling of the Regional Trial Court
The RTC affirmed the MeTC ruling in its December 7, 2006 Decision.25 It
found that respondent's obligation to PNB "has already been paid,
notwithstanding the belated claim of [the latter] that there remains a
deficiency."26 The RTC noted that the ₱11,211,283.53 amount of
indebtedness stated in the Notice of Extra-Judicial Sale27 dated August 9,
2006 as of May 15, 2006 plus penalties, expenses, charges, attorney's fees
and expenses could have been easily covered by the ₱l5,31l,000.00 bid
price.28
In addition, the RTC held that PNB incurred delay "when despite demand,
it refused to pay and vacate the premises.29 " As such, the RTC ruled that
the respondent is entitled to legal interest at 6% per annum and attorney's
fees for having been compelled to litigate to protect her interests.30
The respondent then moved for the issuance of a Writ of Execution which
was granted by the HTC in its December 18, 2006 Order.31 According to
the Sheriff's Report of Execution32 dated January 2, 2007, the amount of
₱l,348,643.92, representing the monthly rentals from January 16, 2005
up to March 23, 2006, was turned over to the respondent on December
20, 2006.33
PNB filed a motion for reconsideration of the December 7, 2006 Decision
and for the quashal of the Writ of Execution, but the RTC denied the
motion in its Order dated February 6, 2007.34 Following the denial, PNB
filed a Petition for Review under Rule 42 of the Rules of Court before the
CA, challenging the RTC's December 7, 2006 Decision and February 6,
2007 Order.
Ruling of the Court of Appeals
The CA pointed out that PNB' s entitlement to the rental proceeds in the
amount of ₱1,348,643.92 is dependent on whether there is a deficiency in
payment after the foreclosure sale.35 It, however, found no sufficient
evidence on record that the amount of respondent's liability as of October
31, 2006 is indeed ₱18,016,300.71, as PNB claims.36Consequently, the
CA remanded the case the MeTC for the proper reception of evidence and
determination, if any, of the deficiency on the foreclosure sale with the
following guidelines:37
(1) From October 2004 to January 15, 2005: Principal+ Interest+
Penalties - Monthly Rentals (from October 2004 to January 15, 2005 by
virtue of the Deed of Assignment) =New Principal
(2) From January 16, 2005 to October 31, 2006: New Principal + Interest
+ Penalties - Interest Earned by PN'B from the Savings Account =
Outstanding Obligation as of October 31, 2006
(3) Outstanding Obligation as of October 31, 2006 – ₱15,311,000.00 =
Deficiency38
As regards the payment of legal interest, the CA noted that PNB merely
opened a non-drawing savings account wherein it deposited the monthly
rentals from January 16, 2005 to February 2006. Such deposit of the
rentals in a savings account, however, is not the consignation
contemplated by law. Thus, the CA found PNB liable to pay the 6% legal
interest rate prescribed under Article 2209 of the Civil Code for having
defaulted in the payment of its monthly rentals to the respondent.39
Finally, the CA deleted the award of atton1ey's fees, pursuant to the
general rule that attorney's fees cannot be recovered as part of damages
because of the public policy that no premium should be placed on the right
to litigate.40
PNB filed a partial Motion for Reconsideration, but the CA denied the
motion in its Resolution dated February 21, 2013. As a consequence, PNB
filed the present Petition for Review on Certiorari before the Court,
assailing the CA's May 28, 2012 Decision and February 21, 2013
Resolution.
Issues
In the present Petition, PNB raises the following issues for the Court's
resolution: first, whether PNB properly consigned the disputed rental
payments in the amount of ₱l,348,643.92 with the Office of the Clerk of
Court of the MeTC of Manila;41 second, whether PNB incurred delay in
the payment of rentals to the respondent, making it liable to pay legal
interest to the latter;42 and third, whether PNB is entitled to the disputed
rental proceeds in order to cover the alleged deficiency in payment of the
respondent's liability after the foreclosure proceedings.43
The Court's Ruling
We DENY the Petition for Review on Certiorari as we find no reversible
error committed by the CA in issuing its assailed Decision and
Resolution.
"Consignation is the act of depositing the thing due with the court or
judicial authorities whenever the creditor cannot accept or refuses to
accept payment. [ I]t generally requires a prior tender of payment."44
Under Article 1256 of the Civil Code, consignation alone is sufficient
even without a prior tender of payment a) when the creditor is absent or
unknown or does not appear at the place of payment; b) when he is
incapacitated to receive the payment at the time it is due; c) when, without
just cause, he refuses to give a receipt; d) when two or more persons claim
the same right to collect; and e) when the title of the obligation has been
lost.
For consignation to be valid, the debtor must comply with the following
requirements under the law:
1) there was a debt due;
2) valid prior tender of payment, unless the consignation was made
because of some legal cause provided in Article 1256;
3) previous notice of the consignation has been given to the persons
interested in the performance of the obligation;
4) the amount or thing due was placed at the disposal of the court; and,
5) after the consignation had been made, the persons interested were
notified thereof:45
"Failure in any of the requirements is enough ground to render a
consignation ineffective."46
In the present case, the records show that: first, PNB had the obligation to
pay respondent a monthly rental of ₱l16,788.44, amounting to
₱l,348,643.92, from January 16, 2005 to March 23, 2006;47 second, PNB
had the option to pay the monthly rentals to respondent or to apply the
same as payment for respondent's loan with the bank, but PNB did
neither;48 third, PNB instead opened a non-drawing savings account at its
Paco Branch under Account No. 202- 565327-3, where it deposited the
subject monthly rentals, due to the claim of Chua of the same right to
collect the rent;49 and fourth, PNB consigned the amount of
Pl,348,643.92 with the Office of the Clerk of Court of the MeTC of
Manila on
May 31, 2006.50
Obligations Part 2 | Page 102 of 143
Note that PNB's deposit of the subject monthly rentals in a non-drawing
savings account is not the consignation contemplated by law, precisely
because it does not place the same at the disposal of the
court.51 Consignation is necessarily judicial; it is not allowed in venues
other than the courts.52 Consequently, PNB's obligation to pay rent for the
period of January 16, 2005 up to March 23, 2006 remained subsisting, as
the deposit of the rentals cannot be considered to have the effect of
payment.
It is important to point out that PNB's obligation to pay the subject
monthly rentals had already fallen due and demandable before PNB
consigned the rental proceeds with the MeTC on May 31, 2006. Although
it is true that consignment has a retroactive effect, such payment is
deemed to have been made only at the time of the deposit of the thing in
court or when it was placed at the disposal of the judicial
authority.53 Based on these premises, PNB's payment of the monthly
rentals can only be considered to have been made not earlier than May
31, 2006.
Given its belated consignment of the rental proceeds in court, PNB
clearly defaulted in the payment of monthly rentals to the respondent for
the period January 16, 2005 up to March 23, 2006, when it finally vacated
the leased property, As such, it is liable to pay interest in accordance with
Article 2209 of the Civil Code. 1âwphi1
Article 2209 provides that if the debtor incurs delay in the performance
of an obligation consisting of the payment of a sum of money, he shall be
liable to pay the interest agreed upon, and in the absence of stipulation,
the legal interest at 6% per annum. There being no stipulated interest in
this case, PNB is liable to pay legal interest at 6% per annum, from
January 16, 2005 up to May 30, 2006
As for the issue on PNB' s entitlement to the subject rental proceeds to
cover the deficiency in payment after the foreclosure sale of the
mortgaged property, we agree with the CA's finding that there is no
sufficient evidence on record to show that such a deficiency
exists.54 Unfortunately, the Statement of Account55 submitted by PNB is
not enough to prove this claim, considering that it is unsupported by any
corroborating evidence. Besides, the copy of the document in our records,
both in the CA rollo and the Supreme Court rollo,56 consists of illegible
pages.
We likewise agree with the CA's conclusion that the RTC seriously erred
when it categorically stated that the loan was folly paid by virtue of the
foreclosure sale without determining the extent of the respondent's
liability as of October 1, 2006, the date of the foreclosure
sale.57 Specifically, the RTC held that:
x x x In this regard, the amount of the indebtedness was clearly stated in
the Notice of Extra-Judicial Sale dated August 9, 2006 as ₱l1,211,283.53,
as of May 15, [2006], exclusive of penalties, expenses, charges, attorney's
fees and expenses. And since the property was sold to the bank as the
winning bidder at ₱15,311,000,00, obviously, the difference could have
easily covered the said penalties, etc."58
This is clearly an error. It is settled that a mortgagee has the light to
recover the deficiency resulting from the difference between the amount
obtained in the sale at public auction and the outstanding obligation of the
mortgagor at the time of the foreclosure proceedings.59 The RTC failed to
consider that the amount of indebtedness indicated in the Notice of Extra-
Judicial Sale60 dated August 9, 2006 was computed by PNB as of May
15, 2006. Surely, the respondent's liability would have significantly
increased by the time the foreclosure sale was held on October 31, 2006.
It also appears that the RTC merely assumed that the bid price would
cover the deficiency in payment, without actually making a determination
of whether such a deficiency exists and how much it really is.
In these lights, we uphold the CA's ruling remanding the case to the MeTC
for the proper reception of evidence and computation of respondent's total
indebtedness as of October 31, 2006, in order to determine whether there
exists a deficiency in payment as PNB insists.
WHEREFORE, we DENY the Petition for Review
on Certiorari and AFFIRM the Decision dated May 28, 2012 and the
Resolution dated February 21, 2013 of the Court of Appeals in CA-G.R.
SP No. 98112.
SO ORDERED.
L OSS OF THING DUE /I MPOSSIBILITY OF PERFORMANCE
Comglasco Corporation/Aguila Glass v. Santos Car Check Center
Corporation
March 25, 2015
G.R. No. 202989
COMGLASCO CORPORATION/AGUILA GLASS, Petitioner,
vs.
SANTOS CAR CHECK CENTER CORPORATION, Respondent.
DECISION
REYES, J.:
On August 16, 2000, respondent Santos Car Check Center Corporation
(Santos), owner of a showroom located at 75 Delgado Street, in Iloilo
City, leased out the said space to petitioner Comglasco Corporation
(Comglasco), an entity engaged in the sale, replacement and repair of
automobile windshields, for a period of five years at a monthly rental of
P60,000.00 for the first year, P66,000.00 on the second year, and
P72,600.00 on the third through fifth years.1
On October 4, 2001, Comglasco advised Santos through a letter2 that it
was pre-terminating their lease contract effective December 1, 2001.
Santos refused to accede to the pre-termination, reminding Comglasco
that their contract was for five years. On January 15, 2002, Comglasco
vacated the leased premises and stopped paying any further rentals.
Santos sent several demand letters, which Comglasco completely ignored.
On September 15, 2003, Santos sent its final demand letter,3 which
Comglasco again ignored. On October 20, 2003, Santos filed suit for
breach of contract.4
Summons and a copy of the complaint, along with the annexes, were
served on Comglasco on January 21, 2004, but it moved to dismiss the
complaint for improper service. The Regional Trial Court (RTC) of Iloilo
City, Branch 37, dismissed the motion and ordered the summons served
anew. On June 28, 2004, Comglasco filed its Answer.5Santos moved for
a judgment on the pleadings, which the RTC granted. On August 18,
2004, the trial court rendered its judgment,6 the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of [Santos] and
against [Comglasco]:
1.Ordering [Comglasco] to faithfully comply with [its] obligation under
the Contract of Lease and pay its unpaid rentals starting January 16, 2002
to August 15, 2003 in the total amount of Php1,333,200.00, plus 12%
interest per annum until fully paid;
2.To pay [Santos]:
a)Php200,000.00 as attorney’s fees;
b)[Php]50,000.00 as litigation expenses;
c)[Php]400,000.00 as exemplary damages.
3.Costs of the suit.
SO ORDERED.7
On February 14, 2005, Santos moved for execution pending Comglasco’s
appeal, which the trial court granted on May 12, 2005. In its appeal,
Comglasco interposed the following issues for resolution:
1.Whether or not judgment on the pleadings was properly invoked by the
trial court as basis for rendering its decision;
2.Whether or not material issues were raised in [Comglasco’s] Answer;
3.Whether or not damages may be granted by the trial court without proof
and legal basis.8
In its Decision9 dated August 10, 2011, the Court of Appeals (CA)
affirmed the judgment of the RTC but reduced the award of attorney’s
fees to ?100,000.00 and deleted the award of litigation expenses and
exemplary damages.
Petition for Review to the Supreme Court
In this petition, Comglasco raises the following issues:
1.Whether or not judgment on the pleadings was properly invoked by the
trial court as basis for rendering its decision?
2.Whether or not material issues were raised in [Comglasco’s] answer?
3.Whether or not summary judgment or judgment on the pleadings is the
proper remedy for [Santos] under the circumstances of the present case?
4.Whether or not the amount deposited for advance rental and deposit
should be credited to [Comglasco’s] account?
Obligations Part 2 | Page 103 of 143
5.Whether or not attorney’s fees may be granted by the trial court without
proof and legal basis?10
Paragraph 15 of the parties’ lease contract11 permits pre-termination with
cause in the first three years and without cause after the third year. Citing
business reverses which it ascribed to the 1997 Asian financial crisis,
Comglasco insists that under Article 1267 of the Civil Code it is exempted
from its obligation under the contract, because its business setback is the
"cause" contemplated in their lease which authorized it to pre-terminate
the same. Article 1267 provides:
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
Comglasco argues that it cannot be said to have admitted in its Answer
the material allegations of the complaint precisely because it invoked
therein a valid cause for its decision to pre-terminate the lease before the
lapse of three years; that therefore, in view of its pleaded "cause" for
reneging on its rentals (the 1997 Asian financial crisis), the RTC should
have ordered the reception of evidence for this purpose, after which a
summary judgment would then have been proper, not a judgment on the
pleadings. After all, Santos has claimed in its Motion for Summary
Judgment that Comglasco’s cited "cause" for pre-termination was
fictitious or a sham, whereas in truth the prevailing business climate
which ensued after the 1997 currency crisis resulted in great difficulty on
its part to comply with the terms of the lease "as to be manifestly beyond
the contemplation of the parties"; thus, Comglasco should be deemed
released from the lease.
Next, Comglasco insists that its advance rentals and deposit totaling
?309,000.00 should be deducted from any sum awarded to Santos while
it also insists that there is no factual and legal basis for the award of
damages.
Ruling of the Court
The petition is denied.
The first three issues being related will be discussed together.
Comglasco maintains that the RTC was wrong to rule that its answer to
Santos’ complaint tendered no issue, or admitted the material allegations
therein; that the court should have heard it out on the reason it invoked to
justify its action to pre-terminate the parties’ lease; that therefore a
summary judgment would have been the proper recourse, after a hearing.
In Philippine National Construction Corporation v. CA12 (PNCC), which
also involves the termination of a lease of property by the lessee "due to
financial, as well as technical, difficulties,"13 the Court ruled:
The obligation to pay rentals or deliver the thing in a contract of lease
falls within the prestation "to give"; hence, it is not covered within the
scope of Article 1266. At any rate, the unforeseen event and causes
mentioned by petitioner are not the legal or physical impossibilities
contemplated in said article. Besides, petitioner failed to state specifically
the circumstances brought about by "the abrupt change in the political
climate in the country" except the alleged prevailing uncertainties in
government policies on infrastructure projects. 1âwphi1
The principle of rebus sic stantibus neither fits in with the facts of the
case. Under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist. This theory is said to be the basis of Article
1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus,
which would endanger the security of contractual relations. The parties to
the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.
In this case, petitioner wants this Court to believe that the abrupt change
in the political climate of the country after the EDSA Revolution and its
poor financial condition "rendered the performance of the lease contract
impractical and inimical to the corporate survival of the petitioner."
This Court cannot subscribe to this argument. As pointed out by private
respondents:
xxxx
Anent petitioner’s alleged poor financial condition, the same will neither
release petitioner from the binding effect of the contract of lease. As held
in Central Bank v. Court of Appeals, cited by private respondents, mere
pecuniary inability to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a defense to an action for
specific performance.14
Relying on Article 1267 of the Civil Code to justify its decision to pre-
terminate its lease with Santos, Comglasco invokes the 1997 Asian
currency crisis as causing it much difficulty in meeting its obligations.
But in PNCC,15 the Court held that the payment of lease rentals does not
involve a prestation "to do" envisaged in Articles 1266 and 1267 which
has been rendered legally or physically impossible without the fault of the
obligor-lessor. Article 1267 speaks of a prestation involving service
which has been rendered so difficult by unforeseen subsequent events as
to be manifestly beyond the contemplation of the parties. To be sure, the
Asian currency crisis befell the region from July 1997 and for sometime
thereafter, but Comglasco cannot be permitted to blame its difficulties on
the said regional economic phenomenon because it entered into the
subject lease only on August 16, 2000, more than three years after it
began, and by then Comglasco had known what business risks it assumed
when it opened a new shop in Iloilo City.
This situation is no different from the Court’s finding in PNCC wherein
PNCC cited the assassination of Senator Benigno Aquino Jr. (Senator
Aquino) on August 21, 1983 and the ensuing national political and
economic crises as putting it in such a difficult business climate that it
should be deemed released from its lease contract. The Court held that the
political upheavals, turmoils, almost daily mass demonstrations,
unprecedented inflation, and peace and order deterioration which
followed Senator Aquino’s death were a matter of judicial notice, yet
despite this business climate, PNCC knowingly entered into a lease with
therein respondents on November 18, 1985, doing so with open eyes of
the deteriorating conditions of the country. The Court rules now, as in
PNCC, that there are no "absolutely exceptional changes of circumstances
that equity demands assistance for the debtor."16
As found by the CA, Comglasco’s Answer admitted the material
allegations in the complaint, to wit: a) that Santos holds absolute title to a
showroom space; b) that Comglasco leased the said showroom from
Santos; c) that after a little over a year, Comglasco pre-terminated the
lease; d) that, disregarding Santos’ rejection of the pre-termination of their
lease, Comglasco vacated the leased premises on January 15, 2002; e) that
Comglasco never denied the existence and validity of the parties’ lease
contract. Specifically, the CA noted that Paragraph 2 of the Answer
admitted the allegations in Paragraphs 2, 3 and 4 of the complaint that the
lease was for five years, starting on August 16, 2000 and to expire on
August 15, 2005, at a monthly rental of ?60,000.00 on the first year,
?66,000.00 on the second year, and ?72,600.00 on the third up to the fifth
year.
The RTC acted correctly in resorting to Section 1 of Rule 34, on Judgment
on the Pleadings, to cut short a needless trial. This Court agrees with the
1âwphi1
CA that Comglasco cannot cite Article 1267 of the Civil Code, and that it
must be deemed to have admitted the material allegations in the
complaint. Section 1, Rule 34 reads:
Sec. 1. Judgment on the pleadings. - Where an answer fails to tender an
issue, or otherwise admits the material allegations of the adverse party’s
pleading, the court may, on motion of that party, direct judgment on such
pleading. However, in actions for declaration of nullity or annulment of
marriage or for legal separation, the material facts alleged in the
complaint shall always be proved.
A judgment on the pleadings is a judgment on the facts as pleaded,17 and
is based exclusively upon the allegations appearing in the pleadings of the
parties and the accompanying annexes.18 It is settled that the trial court
has the discretion to grant a motion for judgment on the pleadings filed
by a party if there is no controverted matter in the case after the answer is
filed.19 A genuine issue of fact is that which requires the presentation of
evidence, as distinguished from a sham, fictitious, contrived or false
issue.20 Come to think of it, under Rule 35, on Summary Judgments,
Comglasco had recourse to move for summary judgment, wherein it could
have adduced supporting evidence to justify its action on the parties' lease,
but it did not do so. Section 2 of Rule 35 provides:
Sec. 2. Summary judgment for defending party. - A party against whom a
claim, counterclaim, or cross-claim is asserted or a declaratory relief is
sought may, at any time, move with supporting affidavits, depositions or
admissions for a summary judgment in his favor as to all or any part
thereof.
Concerning, now, whether Comglasco's alleged rental deposit and
advance rentals of P309,000.00 should be credited to Comglasco's
Obligations Part 2 | Page 104 of 143
account, let it suffice to state that it never raised this matter in its answer
to the complaint, nor in its appeal to the CA. Certainly, it cannot do so
now.
Finally, as to whether attorney's fees may be recovered by Santos, Article
2208(2) of the Civil Code justifies the award thereof, in the absence of
stipulation, where the defendant's act or omission has compelled the
plaintiff to incur expenses to protect his interest. The pre-termination of
the lease by Comglasco was not due to any fault of Santos, and Comglasco
completely ignored all four demands of Santos to pay the rentals due from
January 16, 2002 to August 15, 2003, thereby compelling Santos to sue
to obtain relief. It is true that the policy of the Court is that no premium
should be placed on the right to litigate,21 but it is also true that attorney's
fees are in the nature of actual damages, the reason being that litigation
costs money.22 But the Court agrees with the CA that the lesser amount
of Pl 00,000.00 it awarded to Santos instead of P200,000.00 adjudged by
the RTC, is more reasonable.
WHEREFORE, premises considered, the petition is DENIED for lack
of merit.
SO ORDERED.
During pre-trial, the following transpired:
1. Parties admitted that on September 9, 1993, private complainant
Consolacion Alagao borrowed cash from the accused in the amount of
₱10,000, guaranteed by a titled land, owned by her daughter Evelyn
Alagao;
2. Parties also agreed that the aforesaid debt was fully paid with corn
grains by the private complainant in February, 1994;
3. Parties also agreed that subsequent to this transaction, private
complainant’s daughter Evelyn Alagao executed a Contract of Loan
secured by Real Estate Mortgage now marked Exh. "1" for the defense,
to secure the payment of ₱40,000.00 which private complainant admitted
to have received ₱51,730.00 in the form of fertilizers and cash advances
[:]
Fertilizers & Pioneer corn seeds ₱17,910.00
(Exh. "A")
110 bags chicken dung 6,600.00

C OMPENSATION (Chicken manure)

Soriano v. People
G.R. No. 181692 August 14, 2013 Hauling expense of th[e]se materials 1,570.00
ADELAIDA SORIANO, PETITIONER,
vs. Additional fertilizers 9,550.00
PEOPLE OF THE PHILIPPINES, RESPONDENT.
(As shown in Exh. "B")
DECISION
VILLARAMA, JR., J.: and several cash advances as follows:

Before this Court is a petition for review on certiorari assailing the May
1 2 2-7-94 ₱4,000.00
19, 2005 Decision and January 11, 2008 Resolution of the Court of
Appeals (CA) in CA-G.R. CR No. 23108 insofar as it ordered petitioner
to pay ₱74,807 plus interest to private complainant Consolacion R. 2-14-94 2,000.00
Alagao.
Petitioner Adelaida Soriano was charged with the crime of estafa on 3-3-94 2,000.00
January 30, 1995 under an Information which reads as follows:
That on September 9, 1994, at more or less 2:00 o'clock [sic] in the No date 100.00
afternoon, and days thereafter, at Piaping Puti, Macabalan, Cagayan de
Oro City, Philippines, and within the jurisdiction of this Honorable Court, 5-1-94 2,000.00
the above-named accused, with intent to defraud and cause damage and
prejudice by means of deceit, and false pretenses or fraudulent acts
executed prior to or simultaneously with the commission of the fraud, did 5-6-94 2,000.00
then and there wil[l]fully, unlawfully and feloniously represent and
pretend to the offended party, Consolacion Alagao y Regala, who was
7-19-94 500.00
then canvassing for buyers of her one (1) truck load of corn grits
containing 398 sacks, that she (accused Adelaida Soriano) was engaged
in the business of buying corn grits, among others from the public under 7-20-94 500.00
the business style of A & R Soriano Trading, paying it in cash, with place
of business located at Piaping Puti, Macab[a]lan, this City; that due to
(but which accused claimed [to be]
accused[’s] representation, said offended party was persuaded and
convinced to sell her own corn grits to the former, which cereals came all ₱1,500.00)
the way from Old Nungnungan, Don Carlos, Bukidnon; that after
unloading said 398 sacks of corn grains in the establishment of said
Adelaida Soriano, said accused did not pay offended party for the said 9-10-94 3,000.00 16,100.00
goods delivered, but instead she let offended party to sign a Cash
Voucher, making it appear thereat that offended party has received the Total ₱51,730.00
sum of ₱85,607.00, when in truth and in fact accused has not paid the
same; that inspite of that misrepresented entries in the Cash Voucher
above-cited, the accused further directed to collect the same amount from
a neighbor of the offended party in OId.Nungnungan, above-mentioned; 4. That private complainant claimed that x x x on August 17, 1994, she
that perplexed about the actions of Mrs. Adelaida Soriano, offended party delivered a 10-wheeler corn grains (sic) to the accused which parties
proceeded to demand payment from her but the accused failed to pay her agreed [was] worth more than ₱80,000.00. And the private complainant
monetary obligation [to] the offended party as the accused and her claimed having paid the accused partially in the amount of ₱8,060.00
business establishment disappeared from Piaping Puti, Macabalan, this which accused denied. The latter claimed that no payment was ever made
City after the incident, and transferred to an unknown location; that she because the corn grains were owned by private complainant and another
couId.not also get back the said 398 sacks of corn grits anymore because person and that private complainant and companion were paid of the
the accused had disposed of it already; thus misapplying, worth of the delivery;
misappropriating and converting the said sum of ₱85,607.00 the value of
398 sacks of corn grits, to her own gain and benefit, to the damage and 5. Parties agreed that on September 9, 1994 at 2:00 o’clock (sic) in the
prejudice of the said offended party, in the aforestated sum of ₱85,607.00, afternoon[,] there was a delivery by the private complainant with her
Philippine currency. companions, corn grains worth ₱85,607.00. Private complainant claimed
that she was only paid ₱3,000.00 and which accused claimed that she did
Contrary to and in violation to Article 315, par. 2(a), of the Revised Penal not pay her because that delivery was in payment of her account and the
Code, as amended.
3 ₱3,000.00 which she received was advanced payment of whatever
remaining after paying her previous accounts to the accused;
4
When arraigned, petitioner pleaded not guilty.

Obligations Part 2 | Page 105 of 143

6. Parties agreed that there was a Cash Voucher of the amount of corn
grains delivered to the accused on September 9, 1994, now marked [as]
5
Exh. "C." (Emphasis and underscoring supplied.)
Trial on the merits ensued.
Based on the evidence presented and what transpired during the pre-trial,
the facts are:
On February 18, 1994, Evelyn Alagao (Evelyn), daughter of private
complainant Consolacion Alagao (Alagao), as borrower-mortgagor,
executed a "Contract of Loan Secured by Real Estate Mortgage with
Special Power to Sell Mortgage Property without Judicial
6
Proceedings" in favor of petitioner as lender-mortgagee. The instrument
provides for a ₱40,000 loan secured by a parcel of land covered by
7 The Court of Appeals, in applying set-off or compensation, erroneously
Original Certificate of Title No. P-6254, located in OId.Nongnongan,
Don Carlos, Bukidnon, registered in Evelyn’s name. It likewise provides
that the loan was to be paid two years from the date of execution of the
contract, or on February 18, 1996, and that Evelyn agrees to give
petitioner ¼ of every harvest from her cornland until the full amount of
the loan has been paid, starting from the first harvest. Based on Alagao’s
8 share of the harvest (or ₱57,200.00) against petitioner’s indebtedness to
testimony, the first harvest was made only in September 1994. Petitioner
on the other hand claims that from the time the loan was obtained until
September 1994, there were already four harvests. During pre-trial, it was
admitted by Alagao that she did not only receive ₱40,000 as provided in
the contract of loan but ₱51,730 in the form of fertilizers and cash
9
advances.
On September 9, 1994, Alagao and some companions delivered 398 sacks
of corn grains to petitioner. Petitioner prepared a voucher indicating that
Alagao had received the amount of ₱85,607 as full payment for the 398
sacks of corn grains. Alagao signed said voucher even if she only received
10
₱3,000. According to Alagao, 64 of the 398 sacks will serve as partial
payment of her ₱40,000 loan with petitioner while the remaining balance
will come from the ₱85,607 cash she was supposed to receive as payment
11
for the corn grains delivered so she can redeem her daughter’s land title.
On March 16, 1999, the Regional Trial Court (RTC) of Misamis Oriental,
12
Branch 40, rendered a decision finding petitioner guilty beyond
reasonable doubt of the crime of estafa. The fallo of the RTC decision
reads:
WHEREFORE, IN VIEW OF THE FOREGOING PREMISES, accused
Adelaida Soriano is hereby found guilty beyond reasonable doubt of the
crime of Estafa as defined and penalized under Article 315, par. 2(a) of
the Revised Penal Code, and is hereby sentenced to suffer imprisonment
of Four (4) Years, Two (2) Months and One (1) day of Prision
Correccional, as minimum, to Thirteen (13) Years, Four (4) Months of
Reclusion Temporal, as maximum and, is hereby further ordered to pay
the offended party in this case the amount of ₱85,607.00 representing the
value of the 398 sacks of corn grains. Costs against the accused.
13
SO ORDERED.
Petitioner’s conviction, however, was set aside by the CA in the assailed
decision. The CA disposed as follows:
WHEREFORE, premises considered, the assailed Decision of the
Regional Trial Court of Misamis Oriental, Branch 40, dated 16 March
1999 in Criminal Case No. 95-41 is REVERSED and SET ASIDE.
Appellant ADELAIDA SORIANO is ACQUITTED of the crime charged
on the ground of reasonable doubt. However, Appellant ADELAIDA
SORIANO is hereby ordered to pay private complainant
CONSOLACION R. ALAGAO the sum of seventy-four thousand, eight
hundred seven pesos (₱74,807.00) as payment for the remaining balance
of the cash value of the 398 sacks of corn grains, plus, legal interest at the
rate of 12% per annum computed from 9 September 1994 until fully paid.
14
SO ORDERED.
The CA ruled that the prosecution failed to establish that petitioner made
false pretenses, fraudulent acts or fraudulent means to induce Alagao to
deliver to her the 398 sacks of corn grains. In fact, in Alagao’s testimony,
she admitted that she delivered the corn grains to petitioner because the
latter was demanding payment from her and she wanted to pay her
obligation of ₱40,000 to petitioner so that she couId.get back the title of
her daughter’s mortgaged property and the balance of the total cash value
of the 398 sacks of corn. Thus, the CA heId. in the absence of deceit,
petitioner’s liability is only civil.
In determining petitioner’s civil liability, the CA deducted from ₱85,607
– the total value of the 398 sacks of corn grains delivered to petitioner –
the ₱3,000 petitioner had paid Alagao and the ₱7,800 which the CA
considered as the value of the 64 sacks of corn grains which Alagao
intended as partial payment for the ₱40,000 loan, thus leaving the balance
of ₱74,807.
Unsatisfied, petitioner is now before this Court questioning her civil
liability. She assigns to the CA the following errors:
1)
The Court of Appeals committed error in the computation of petitioner’s
civil liability as it failed to apply correctly the principle of set-off or
compensation.
2)
placed private complainant’s indebtedness to petitioner at ₱40,000.00
instead of ₱51,730.00 as found by it and as stipulated during pre-trial.
3)
The Court of [A]ppeals omitted to off-set the amount equivalent to ¼
private complainant in the amount of ₱85,607.00 despite admission by
15
private complainant.
Petitioner argues that while the CA found her indebted to Alagao in the
sum of ₱85,607, it only offset ₱40,000 instead of ₱51,730 which was the
amount stipulated during pre-trial. Petitioner contends that the
compensation should be as follows:
Petitioner’s indebtedness: [Alagao
₱85,607.00 (value of 398 sacks) ₱51,73
- 3,000.00 (cash payment) - 7,800
₱82,607.00 ₱43,93
- 7,800.00 (value of 64 sacks)
₱74,807.00 (as correctly found by
the Court of Appeals)16
Thus, deducting Alagao’s indebtedness of ₱43,930 from petitioner’s
indebtedness amounting to ₱74,807, petitioner’s remaining indebtedness
shouId.only be ₱30,877.
Petitioner likewise argues that the CA also failed to consider Alagao’s
obligation to deliver to her ¼ of every harvest. Petitioner claims that her
¼ share in the harvest amounted to ₱57,200 for four harvests. Therefore,
applying the principle of set off, it is Alagao who is indebted to petitioner
in the amount of ₱26,323 (₱57,200 minus ₱30,877).
Respondent on the other hand contends that the amount of loan extended
to Alagao was ₱40,000 and not ₱51,730 as claimed by petitioner.
Moreover, the entire value of the 398 sacks of corn grains shouId.not be
set off with Alagao’s loan since (1) the loan was not yet due and
demandable at the time of delivery of the 398 sacks of corn grains in
September 1994; and (2) only 154 of the 398 sacks of corn grains belong
17
to Alagao. Respondent also claims that ₱13,765.95 should be
considered as the correct value of the 64 sacks intended by Alagao as
partial payment for the loan and not ₱7,800 as found by the CA.
The petition is partly meritorious.
Compensation is a mode of extinguishing to the concurrent amount, the
debts of persons who in their own right are creditors and debtors of each
other. The object of compensation is the prevention of unnecessary suits
and payments through the mutual extinction by operation of law of
18
concurring debts. Article 1279 of the Civil Code provides for the
requisites for compensation to take effect:
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
Obligations Part 2 | Page 106 of 143
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
This Court rules that all the above requisites for compensation are present
in the instant case.
First, petitioner and Alagao are debtors and creditors of each other. It is
undisputable that petitioner and Alagao owe each other sums of money.
Petitioner owes ₱85,607 for the value of the corn grains delivered to her
by Alagao in September 1994 while Alagao owes petitioner ₱51,730 by
virtue of a loan extended by the latter in February 1994.
Second, both debts consist in a sum of money. There is no issue as to the
₱85,607 debt by petitioner that it consists a sum of money. As to the
₱51,730 received by Alagao from petitioner, though what was extended
by petitioner consists of cash advances and fertilizers, there is no dispute
that said amount is payable in money.
Third, both debts are due. Upon delivery of the 398 sacks to petitioner,
she was under the obligation to pay for the value thereof as buyer. As to
Alagao’s debt, the contract of loan provided that it is payable in February
1996. Though it was not yet due in September 1994 when she delivered
the 398 sacks of corn grains to petitioner, it eventually became due at the
time of trial of the instant case.
Fourth, both debts are liquidated and demandable. A debt is liquidated
1âwphi1
when the amount is known or is determinable by inspection of the terms
19
and conditions of relevant documents. There is no dispute that the value
of the 398 sacks of corn grains is ₱85,607. As to Alagao’s debt, we
disagree with respondent People that the loan amount is only ₱40,000
since during pre-trial, Alagao herself admitted that she did not only
receive ₱40,000 but ₱51,730 in the form of cash advances and fertilizers
from petitioner. It is well settled that an admission made in a stipulation
of facts at pre-trial by the parties is considered a judicial admission and,
under the Rules of Court, requires no proof. Such admission may be
controverted only by a showing that it was made through a palpable
20
mistake or that no such admission was made.
And lastly, neither of the debts are subject of a controversy commenced
by a third person. There are no third-party claims with respect to Alagao’s
₱51,730 loan. As to petitioner’s ₱85,607 debt representing the 398 sacks
of corn grains, Alagao claims that she is not the sole owner of all the 398
sacks. This claim of Alagao, however, was never substantiated and a
perusal of the information for estafa shows that the subject corn grains are
all owned by her. Moreover, the alleged other owners have not
commenced any action to protect their claim over it. Thus, the ₱85, 607
debt cannot be considered subject of a controversy by a third person.
With the presence of all the requisites mentioned in Article 1279, legal
compensation took effect by operation of law as provided in Article 1290
of the Civil Code, to wit:
ART. 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are
not aware of the compensation.
Thus, the computation of petitioner's civil liability should be as follows:
Value of the 398 sacks of corn grains
Cash payment by petitioner upon delivery
Alagao's debt
Petitioner's net civil liability to Alagao
With respect to the 114 share in the harvest due to petitioner as provided
in the contract of loan, the same cannot be considered in the legal
compensation of the debts of the parties since it does not consist in a sum
of money, said share being in the form of harvests. More importantly, it
is not yet liquidated. There is still a dispute as to how many harvests were
made from the time of the execution of contract of loan up to the time the
action was commenced against petitioner and even when the principal
obligation became due in February 1996. Thus, the harvests due petitioner
is not capable of determination.
WHEREFORE, the May 19, 2005 Decision and January 11, 2008
Resolution of the Court of Appeals in CA-G.R. CR No. 23108 are hereby
AFFIRMED with MODIFICATION. Petitioner Adelaida Soriano is
hereby ordered to pay ₱30,877 as payment for the remaining balance of
the cash value of the 398 sacks of corn grains, plus legal interest at the
21
rate of 6% per annum computed from finality of this Decision until its
full satisfaction.
No pronouncement as to costs.
SO ORDERED.
Mondrago Personal Sales, Inc. v. Sola, Jr.
G.R. No. 174882 January 21, 2013
MONDRAGON PERSONAL SALES, INC., Petitioner,
vs.
VICTORIANO S. SOLA, JR., Respondent.
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to set aside the
1 2
Decision dated February 10, 2006 and the Resolution dated September
6, 2006 issued by the Court of Appeals (CA) in CA-G.R. CV No. 71690.
Petitioner Mondragon Personal Sales Inc., a company engaged in the
business of selling various consumer products through a network of sales
3
representatives, entered into a Contract of Services with respondent
Victoriano S. Sola, Jr. for a period of three years commencing on October
2, 1994 up to October 1, 1997. Under the said contract, respondent, as
service contractor, would provide service facilities, i.e., bodega cum
office, to petitioner's products, sales force and customers in General
Santos City and as such, he was entitled to commission or service fee as
follows:
MONTHLY SALES
(net of vat)
₱50,000.00 to 2,500,000.00
₱2,500,001.00 to 3,000.000.00
₱3,000,001.00 to 3,500,000.00
₱3,500,001.00 – UP
The agreement then came into effect when petitioner's goods were
delivered to respondent's bodega and were sold by petitioner's employees.
Prior to the execution of the contract, however, respondent’s wife, Lina
₱85,607
Sola, had an existing obligation with petitioner arising from her Franchise
Distributorship Agreement with the latter. On January 26, 1995,
5 -3,000G. de Leon, petitioner's
respondent wrote a letter addressed to Renato
Vice-President for Finance, wherein he acknowledged and confirmed his
wife’s indebtedness to petitioner in the amount of ₱1,973,154.73 (the
₱82,607
other accountability in the sum of ₱1,490,091.15 was still subject to
reconciliation) and, together with his wife, bound himself to pay on
installment basis the said debt. Consequently,
-51,730petitioner withheld the
payment of respondent's service fees from February to April 1995 and
applied the same as partial payments to the debt which he obligated to
pay. On April 29, 1995, respondent closed and₱30.877
suspended operation of his
office cum bodega where petitioner's products were stored and customers
========
were being dealt with.
On May 24, 1995, respondent filed with the Regional Trial Court (RTC)
6
of Davao, a Complaint for accounting and rescission against petitioner
alleging that petitioner withheld portions of his service fees covering the
Obligations Part 2 | Page 107 of 143
months from October 1994 to January 1995 and his whole service fees for
the succeeding months of February to April 1995, the total amount of
which was ₱222,202.84; that petitioner's act grossly hampered, if not
paralyzed, his business operation, thus left with no other recourse, he
suspended operations to minimize losses. He prayed for the rescission of
the contract of services and for petitioner to render an accounting of his
service fees.
7
In its Answer with Counterclaim filed on June 14, 1995, petitioner
contended that respondent’s letter dated January 26, 1995 addressed to
petitioner's Vice-President for Finance, confirmed and obligated himself
to pay on installment basis the accountability of his wife with petitioner,
thus respondent's service fees/commission earned for the period of
February to April 1995 amounting to ₱125,040.01 was applied by way of
compensation to the amounts owing to it; that all the service fees earned
by respondent prior to February 1995 were fully paid to him. By way of
counterclaim, petitioner asked for the payment of the amount of
₱1,547,892.55 which respondent obligated to pay plus interest; the
delivery of petitioner's products padlocked in respondent's office cum
bodega, the payment for the loss of income in the amount of ₱833,600.00
as well as the remaining balance of ₱45,728.30 from the ₱100,000.00
given by petitioner to respondent as advance money for the purchase of
office equipment and the renovation of the bodega cum office.
8 thereafter applying them to the obligation of his wife was unlawful,
In his Reply and Answer to petitioner's counterclaim, respondent averred
that he was made to believe that the sales commission contained in
petitioner's memorandum dated July 5, 1994 would be applicable to him;
that it was improper for petitioner to confuse respondent's transaction with
that of his wife as it was divergent in nature and terms.
Pending trial, petitioner moved for the issuance of a preliminary
attachment and replevin which the RTC granted in its Order dated June
9 separate properties for debts incurred, however, such liability is only
19, 1995 upon the filing of bonds. Respondent filed a Motion to Quash
the Writ of Attachment, which the RTC denied in an Order dated July 24,
10
1995. As respondent's motion for reconsideration was also denied, he
filed with us a petition for certiorari, docketed as G.R. No. 126427,
11
assailing the RTC orders which we dismissed in a Resolution dated
November 11, 1996 on procedural matters.
Trial thereafter ensued.
12
On July 6, 2000, the RTC rendered its Decision, the dispositive portion
of which reads:
FOR THE FOREGOING, judgment is hereby rendered in favor of
defendant and against plaintiff, ordering the latter to pay the former:
1) the sum of ₱1,543,643.96 representing the principal balance of
plaintiff's account with defendant, plus legal interest from the time of
filing of the complaint until fully paid, at the rate of 6% per annum;
2) attorney's fees in the amount of ₱25,000.00
13
3) costs of the suit.
In so ruling, the RTC found that in computing the service
fees/commissions due respondent, the rate as provided in the contract of
service dated January 27, 1995 was controlling, since respondent was a
party thereto duly affixing his signature therein; that petitioner's
computation of respondent's service fees for the months of February to
April 1995 in the total amount of ₱125,040.01 which was based on the
said contract deserved credence. The RTC ruled that while Article 1381
of the Civil Code provides for the grounds for which a contract may be
rescinded, none of these grounds existed in this case; that there was no
showing of fraud which petitioner employed when it entered into the
contract with respondent nor did respondent agree to such a contract
without knowing its content, thus the contract was not rescissible.
As regards to petitioner's counterclaim that respondent confirmed and
assumed the payment of his wife's account with petitioner, the RTC found
that respondent obligated himself to pay his wife's account as evidenced
by his letter dated January 26, 1995; that after deducting from the
confirmed amount of ₱1,668,683.97 the respondent's service commission
for the period from February 1995 to April 1995, which was in the total
amount of ₱125,040.01, the amount owing to petitioner would still be
₱1,543,643.96. The RTC dismissed the other counterclaims, since they
were not substantiated but found petitioner entitled to attorney's fees due
to the amount of money involved and the time spent in pursuing the case.
Respondent filed his appeal to the CA to which petitioner filed its
appellee's brief. On February 10, 2006, the CA rendered its assailed
decision, the dispositive portion of which reads as follows:
WHEREFORE, in the light of the foregoing premises, herein appeal is
GRANTED. Accordingly, the Contract of Services is hereby
RESCINDED. Let the case be REMANDED to the court a quo for the
proper determination of the amount of service fees unlawfully withheld
from the appellant.
Furthermore, Appellee is hereby ordered to pay the Appellant attorney’s
14
fees in the amount of twenty-five thousand pesos (₱25,000.00).
The CA found that under Article 1191 of the Civil Code, respondent was
entitled to rescind the contract of services as it was petitioner who
breached the same by withholding the service fees lawfully due to the
former; that petitioner's act of unlawfully withholding the service fees due
respondent constituted a willful and deliberate infringement on
contractual obligations which would justify rescission under Article 1191.
The CA declared that the contract of services entered into by the parties
did not fall under any of the rescissible contracts enumerated under
Article 1381 of the Civil Code but under Article 1191 which pertains to
rescission of reciprocal obligations as in the instant case.
The CA ruled that respondent did not assume his wife's obligation as he
did not substitute himself in the shoes of his wife regarding the payment
of the latter's liability; that there can be no novation as novation was never
presumed. Petitioner's act of withholding respondent's service fee and
considering that respondent never assumed his wife's obligation with
petitioner; that there could be no legal compensation, since it was
respondent's wife who was principally indebted to petitioner owing from
the franchise distributorship agreement she earlier entered into with
petitioner; that granting the debt redounded to the benefit of the family
and incurred with the consent of respondent, and the spouse, as joint
administrators of the community property are solidarily liable with their
subsidiary, when the community property is not sufficient to pay for all
liabilities, however, in this case, there was no showing that the community
property of the spouses was insufficient to pay the debt.
The CA ordered the deletion of attorney's fees as it was respondent who
was entitled to such award, since he was compelled to litigate to protect
his interest for the unjustified act of petitioner.
Petitioner's motion for reconsideration was denied in a Resolution dated
September 6, 2006.
Hence, this petition where petitioner alleges that the CA erred:
1. In finding that petitioner breached its contract with respondent and that
there is no compensation in accordance to Article 1279 of the Civil Code;
2. In finding that respondent did not assume the obligation of his wife;
3. In remanding the case to the court a quo for proper determination of
service fee withheld when the same has been determined;
4. In obliterating the award of petitioner's counterclaim when respondent
15
admitted his obligation to petitioner.
The CA found that petitioner's act of withholding respondent's service
fees and thereafter applying them as partial payment to the obligation of
respondent's wife with petitioner was unlawful, considering that
respondent never assumed his wife’s obligation, thus, there can be no
legal compensation under Article 1279 of the Civil Code.
We do not agree.
In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon,
petitioner's Vice-President for Finance, respondent wrote, and which we
quote in full:
Gentlemen:
This refers to the account of my wife, Lina (Beng) Sola, with Mondragon
Personal Sales, Inc. in the amount of ₱3,463,173.88. Of this total amount,
we are initially confirming the total amount of ₱1,973,154.73 as due from
Lina (Beng) Sola, while the remaining balance of ₱1,490,091.15 will be
subject to a reconciliation on or before February 5, 1995.
In recognition of Lina (Beng) Sola's account, we undertake to pay
₱100,000.00 on or before February 01, 1995 and the balance of
₱1,873,154.73 plus interest of 18% per annum and 2% administrative
charge per month on the diminishing balance will be covered by postdated
checks of not less than ₱100,000.00 per month starting February 28, 1995
and every end of the month thereafter but not to exceed eighteen (18)
months or July 31, 1996.
Obligations Part 2 | Page 108 of 143
With regards to the remaining balance of ₱1,490,019.15, we agree that
upon final verification of these accounts, we will issue additional
postdated checks subject to the same terms and conditions as stated above.
We further agree that all subsequent orders that will be released to us will
be covered by postdated checks.
I fully understand and voluntarily agree to the above undertaking with full
knowledge of the consequences which may arise therefrom.
Very truly yours,
(signed)
16
Victoriano S. Sola
A reading of the letter shows that respondent becomes a co-debtor of his
wife's accountabilities with petitioner. Notably, the last paragraph of his
letter which states "I fully understand and voluntarily agree to the above
undertaking with full knowledge of the consequences which may arise
therefrom" and which was signed by respondent alone, shows that he
solidarily bound himself to pay such debt. Based on the letter,
respondent's wife had an account with petitioner in the amount of
₱3,463,173.88, out of which only the amount of ₱1,973,154.73 was
confirmed while the remaining amount of ₱1,490,019.15 would still be
subject to reconciliation. As respondent bound himself to pay the amount
of ₱1,973,154.73, he becomes petitioner's principal debtor to such
amount.
On the other hand, respondent, as petitioner's service contractor, was
entitled to a payment of service fees as provided in their contract of
services dated January 26, 1995. We note that respondent never refuted
the amount of monthly sales recorded but only assailed in the RTC the
rate of the service fees which he was entitled to. However, we find that
there could be no other computation of the rate of the service fees other
than what was provided in the contract of services dated January 26, 1995
signed by respondent and petitioner. Thus, we give credence to
petitioner's computation of respondent's service fees for the months of
February to April 1995 in the total amount of ₱125,040.01. Since
respondent promised petitioner in his letter dated January 26, 1995, to
monthly pay a certain amount to cover the indebtedness to petitioner
which he failed to do, the latter withheld the payment of respondent's
service fees and applied the same as partial payments of the debt by way
of compensation.
We find that petitioner's act of withholding respondent's service
fees/commissions and applying them to the latter's outstanding obligation
with the former is merely an acknowledgment of the legal compensation
17
that occurred by operation of law between the parties. Compensation is
a mode of extinguishing to the concurrent amount the obligations of
persons who in their own right and as principals are reciprocally debtors
and creditors of each other. Legal compensation takes place by operation
of law when all the requisites are present, as opposed to conventional
compensation which takes place when the parties agree to compensate
18
their mutual obligations even in the absence of some requisites. Legal
compensation requires the concurrence of the following conditions:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
19
debtor.
We find the presence of all the requisites for legal compensation.
Petitioner and respondent are both principal obligors and creditors of each
other. Their debts to each other consist in a sum of money. Respondent
acknowledged and bound himself to pay petitioner the amount of
₱1,973,154.73 which was already due, while the service fees owing to
respondent by petitioner become due every month. Respondent's debt is
liquidated and demandable, and petitioner's payments of service fees are
liquidated and demandable every month as they fall due. Finally, there is
no retention or controversy commenced by third persons over either of
the debts. Thus, compensation is proper up to the concurrent amount
where petitioner owes respondent ₱125,040.01 for service fees, while
respondent owes petitioner ₱1,973,154.73.
As legal compensation took place in this case, there is no basis for
respondent to ask for rescission since he was the first to breach their
contract when, on April 29, 1995, he suddenly closed and padlocked his
bodega cum office in General Santos City occupied by petitioner. 1âwphi1
Petitioner claims that the CA erred in obliterating the RTC’s award of its
counterclaim which it had alleged and proved during trial and which
respondent even admitted.
We agree.
In his letter dated January 6, 1995, respondent confirmed the amount of
₱1,973,154.73 owing to petitioner. On September 29, 1997, petitioner
20
wrote another letter to petitioner's Credit and Collection Manager,
Rudy Machanco, wherein he again confirmed the indebtedness in the
amount of ₱1,973,154.73. In the same letter, he showed the payments he
had already made and after deducting the same from the confirmed
indebtedness, the total balance remained to be at ₱1,668,683.97. As we
have said earlier, respondent's service fees from February to April 1995
which was in the total amount of ₱125,040.01 was not assailed at all by
respondent in his appeal with the CA, thus he is bound by such
computation. Hence, the amount of ₱125,040.01 which petitioner owes
respondent shall be offset against the ₱1,973,154.73 which respondent
owes petitioner, and therefore leaving a balance of ₱1,543,643.96 which
respondent must pay.
WHEREFORE, the petition for review is GRANTED. The Decision dated
February 10, 2006 and the Resolution dated September 6, 2006 of the
Court of Appeals are hereby REVERSED and SET ASIDE. Respondent
is hereby ordered to pay petitioner the amount of ₱1,543,643.96 with 6%
percent per annum from June 14, 1995 until finality of this Decision and
12% percent per annum thereafter until full payment.
SO ORDERED.
Union Bank of the Philippines v. Development Bank of the
Philippines
G.R. No. 191555 January 20, 2014
UNION BANK OF THE PHILIPPINES, Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on Certiorari1 are the Decision2 dated
November 3, 2009 and Resolution3 dated February 26, 2010 of the Court
of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed the
Orders4 dated November 9, 2005 and January 30, 2006 of the Regional
Trial Court of Makati, Branch 585 (RTC) in Civil Case No. 7648 denying
the motion to affirm legal compensation6 filed by petitioner Union Bank
of the Philippines (Union Bank) against respondent Development Bank
of the Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union
Bank’s predecessor-in-interest, Bancom Development Corporation
(Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of
Cession of Property In Payment of Debt7(dacion en pago) whereby the
former ceded in favor of the latter certain properties (including a
processing plant in Marilao, Bulacan [processing plant]) in consideration
of the following: (a) the full and complete satisfaction of FI’s loan
obligations to DBP; and (b) the direct assumption by DBP of FI’s
obligations to Bancom in the amount of ₱17,000,000.00 (assumed
obligations).8
On the same day, DBP, as the new owner of the processing plant, leased
back9 for 20 years the said property to FI (Lease Agreement) which was,
in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement10 with Bancom (Assumption
Agreement) whereby the former: (a) confirmed its assumption of FI’s
obligations to Bancom; and (b) undertook to remit up to 30% of any and
all rentals due from FI to Bancom (subject rentals) which would serve as
payment of the assumed obligations, to be paid in monthly installments.
The pertinent portions of the Assumption Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of Bancom
that the above obligations to Bancom which DBP has assumed shall be
settled, paid and/or liquidated by DBP out of a portion of the lease rentals
or part of the proceeds of sale of those properties of the Assignors
Obligations Part 2 | Page 109 of 143
conveyed to DBP pursuant to the [Deed of Cession of Property in
Payment of Debt dated May 21, 1979] and which are the subject of [the
Lease Agreement] made and executed by and between DBP and [FI], the
last hereafter referred to as the "Lessee" to be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30% of
any and all rentals due from the Lessee pursuant to the Lease Agreement
shall be remitted by DBP to Bancom at the latter’s offices at Pasay Road,
Makati, Metro Manila within five (5) days from due dates thereof, and
applied in payment of the Assumed Obligations. Likewise, the amount up
to 30% of the proceeds from any sale of the Leased Properties shall within
the same period above, be remitted by DBP to Bancom and applied in
payment or prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire
rentals and or the entire sales proceeds actually received by Bancom on
the Leased Properties shall be paid by DBP to Bancom not later than
December 29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the
Lease Agreement to Foodmasters Worldwide, Inc. (FW);11 while on May
9, 1984, Bancom conveyed all its receivables, including, among others,
DBP’s assumed obligations, to Union Bank.12
Claiming that the subject rentals have not been duly remitted despite its
repeated demands, Union Bank filed, on June 20, 1984, a collection case
against DBP before the RTC, docketed as Civil Case No. 7648.13 In
opposition, DBP countered, among others, that the obligations it assumed
were payable only out of the rental payments made by FI. Thus, since FI
had yet to pay the same, DBP’s obligation to Union Bank had not
arisen.14 In addition, DBP sought to implead FW as third party-defendant
in its capacity as FI’s assignee and, thus, should be held liable to Union
Bank.15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the
ground that it had ceased to be a real-party-in-interest due to the
supervening transfer of its rights, title and interests over the subject matter
to the Asset Privatization Trust (APT). Said motion was, however, denied
by the RTC in an Order dated May 27, 1988.16
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a Decision17 dated
May 8, 1990, ordered: (a) DBP to pay Union Bank the sum of
₱4,019,033.59, representing the amount of the subject rentals (which,
again, constitutes 30% of FI’s [now FW’s] total rental debt), including
interest until fully paid; and (b) FW, as third-party defendant, to
indemnify DBP, as third- party plaintiff, for its payments of the subject
rentals to Union Bank. It ruled that there lies no evidence which would
show that DBP’s receipt of the rental payments from FW is a condition
precedent to the former’s obligation to remit the subject rentals under the
Lease Agreement. Thus, when DBP failed to remit the subject rentals to
Union Bank, it defaulted on its assumed obligations.18 DBP then elevated
the case on appeal before the CA, docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set
aside the RTC’s ruling, and consequently ordered: (a) FW to pay DBP the
amount of ₱32,441,401.85 representing the total rental debt incurred
under the Lease Agreement, including ₱10,000.00 as attorney’s fees; and
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30%
thereof (i.e., the subject rentals) to Union Bank.20
It rejected Union Bank’s claim that DBP has the direct obligation to remit
the subject rentals not only from FW’s rental payments but also out of its
own resources since said claim contravened the "plain meaning" of the
Assumption Agreement which specifies that the payment of the assumed
obligations shall be made "out of the portion of the lease rentals or part of
the proceeds of the sale of those properties of [FI] conveyed to DBP."21 It
also construed the phrase under the Assumption Agreement that DBP is
obligated to "pay any balance of the Assumed Obligations after
application of the entire rentals and/or the entire sales proceeds actually
received by [Union Bank] on the Leased Properties . . . not later than
December 29, 1998" to mean that the lease rentals must first be applied
to the payment of the assumed obligations in the amount of
₱17,000,000.00, and that DBP would have to pay out of its own money
only in case the lease rentals were insufficient, having only until
December 29, 1998 to do so. Nevertheless, the monthly installments in
satisfaction of the assumed obligations would still have to be first sourced
from said lease rentals as stipulated in the assumption agreement.22 In
view of the foregoing, the CA ruled that DBP did not default in its
obligations to remit the subject rentals to Union Bank precisely because
it had yet to receive the rental payments of FW.23
Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss
for the reason that the transfer of its rights, title and interests over the
subject matter to the APT occurred pendente lite, and, as such, the
substitution of parties is largely discretionary on the part of the court.
At odds with the CA’s ruling, Union Bank and DBP filed separate
petitions for review on certiorari before the Court, respectively docketed
as G.R. Nos. 115963 and 119112, which were thereafter consolidated.
The Court’s Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution24 dated December 13,
1995. First, it upheld the CA’s finding that while DBP directly assumed
FI’s obligations to Union Bank, DBP was only obliged to remit to the
latter 30% of the lease rentals collected from FW, from which any
deficiency was to be settled by DBP not later than December 29,
1998.25 Similarly, the Court agreed with the CA that the denial of DBP’s
motion to dismiss was proper since substitution of parties, in case of
transfers pendente lite, is merely discretionary on the part of the court,
adding further that the proposed substitution of APT will amount to a
novation of debtor which cannot be done without the consent of the
creditor.26
On August 2, 2000, the Court’s resolution became final and executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution28 before the
RTC, praying that DBP be directed to pay the amount of ₱9,732,420.555
which represents the amount of the subject rentals (i.e., 30% of the FW’s
total rental debt in the amount of ₱32,441,401.85). DBP opposed29 Union
Bank’s motion, contending that it sought to effectively vary the
dispositive portion of the CA’s May 27, 1994 Decision in CA-G.R. CV
No. 35866. Also, on September 12, 2001, DBP filed its own motion for
execution against FW, citing the same CA decision as its basis.
In a Consolidated Order30 dated October 15, 2001 (Order of Execution),
the RTC granted both motions for execution. Anent Union Bank’s
motion, the RTC opined that the CA’s ruling that DBP’s payment to
Union Bank shall be demandable only upon payment of FW must be
viewed in light of the date when the same was rendered. It noted that the
CA decision was promulgated only on May 27, 1994, which was before
the December 29, 1998 due date within which DBP had to fully pay its
obligation to Union Bank under the Assumption Agreement. Since the
latter period had already lapsed, "[i]t would, thus, be too strained to argue
that payment by DBP of its assumed obligation[s] shall be dependent on
[FW’s] ability, if not availability, to pay."31 In similar regard, the RTC
granted DBP’s motion for execution against FW since its liability to
Union Bank and DBP remained undisputed.
As a result, a writ of execution32 dated October 15, 2001 (October 15,
2001 Writ of Execution) and, thereafter, a notice of garnishment33 against
DBP were issued. Records, however, do not show that the same writ was
implemented against FW.
DBP filed a motion for reconsideration34 from the Execution Order,
averring that the latter issuance varied the import of the CA’s May 27,
1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered
DBP to pay the assumed obligations to Union Bank before FW’s
payment. The motion was, however, denied on December 5,
2001.35 Thus, DBP’s deposits were eventually garnished.36 Aggrieved,
DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R.
SP No. 68300.
The CA Ruling in CA-G.R. SP No. 68300
In a Decision38 dated July 26, 2002, the CA dismissed DBP’s petition,
finding that the RTC did not abuse its discretion when it issued the
October 15, 2001 Writ of Execution. It upheld the RTC’s observation that
there was "nothing wrong in the manner how [said writ] was
implemented," as well as "in the zealousness and promptitude exhibited
by Union Bank" in moving for the same. DBP appealed the CA’s ruling
before the Court, which was docketed as G.R. No. 155838.
The Court’s Ruling in G.R. No. 155838
In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the
Court granted DBP’s appeal, and thereby reversed and set aside the CA’s
ruling in CA-G.R. SP No. 68300. It found significant points of variance
between the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866, and
the RTC’s Order of Execution/October 15, 2001 Writ of Execution. It
ruled that both the body and the dispositive portion of the same decision
acknowledged that DBP’s obligation to Union Bank for remittance of the
Obligations Part 2 | Page 110 of 143
lease payments is contingent on FW’s prior payment to DBP, and that any
deficiency DBP had to pay by December 29, 1998 as per the Assumption
Agreement cannot be determined until after the satisfaction of FW’s own
rental obligations to DBP. Accordingly, the Court: (a) nullified the
October 15, 2001 Writ of Execution and all related issuances thereto; and
(b) ordered Union Bank to return to DBP the amounts it received pursuant
to the said writ.40 Dissatisfied, Union Bank moved for reconsideration
which was, however, denied by the Court in a Resolution dated March 24,
2004 with finality. Thus, the January 13, 2004 Decision attained finality
on April 30, 2004.41 Thereafter, DBP moved for the execution of the said
decision before the RTC. After numerous efforts on the part of Union
Bank proved futile, the RTC issued a writ of execution (September 6,
2005 Writ of Execution), ordering Union Bank to return to DBP all funds
it received pursuant to the October 15, 2001 Writ of Execution.42
Union Bank’s Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and Motion to
Affirm Legal Compensation,43 praying that the RTC apply legal
compensation between itself and DBP in order to offset the return of the
funds it previously received from DBP. Union Bank anchored its motion
on two grounds which were allegedly not in existence prior to or during
trial, namely: (a) on December 29, 1998, DBP’s assumed obligations
became due and demandable;44 and (b) considering that FWI became non-
operational and non-existent, DBP became primarily liable to the balance
of its assumed obligation, which as of Union Bank’s computation after its
claimed set-off, amounted to ₱1,849,391.87.45
On November 9, 2005, the RTC issued an Order46 denying the above-
mentioned motion for lack of merit, holding that Union Bank’s stated
grounds were already addressed by the Court in the January 13, 2004
Decision in G.R. No. 155838. With Union Bank’s motion for
reconsideration therefrom having been denied, it filed a petition for
certiorari47 with the CA, docketed as CA-G.R. SP No. 93833.
Pending resolution, Union Bank issued Manager’s Check48 No. 099-
0003192363 dated April 21, 2006 amounting to ₱52,427,250.00 in favor
of DBP, in satisfaction of the Writ of Execution dated September 6, 2005
Writ of Execution. DBP, however, averred that Union Bank still has a
balance of ₱756,372.39 representing a portion of the garnished funds of
DBP,49 which means that said obligation had not been completely
extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision50 dated November 3, 2009, the CA dismissed Union Bank’s
petition, finding no grave abuse of discretion on the RTC’s part. It
affirmed the denial of its motion to affirm legal compensation considering
that: (a) the RTC only implemented the Court’s January 13, 2004
Decision in G.R. No. 155838 which by then had already attained finality;
(b) DBP is not a debtor of Union Bank; and (c) there is neither a
demandable nor liquidated debt from DBP to Union Bank.51
Undaunted, Union Bank moved for reconsideration which was, however,
denied in a Resolution52 dated February 26, 2010; hence, the instant
petition.
The Issue Before the Court
The sole issue for the Court’s resolution is whether or not the CA correctly
upheld the denial of Union Bank’s motion to affirm legal compensation.
The Court’s Ruling
The petition is bereft of merit. Compensation is defined as a mode of
extinguishing obligations whereby two persons in their capacity as
principals are mutual debtors and creditors of each other with respect to
equally liquidated and demandable obligations to which no retention or
controversy has been timely commenced and communicated by third
parties.53 The requisites therefor are provided under Article 1279 of the
Civil Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor. (Emphases and underscoring supplied)
1awp++i1
The rule on legal54 compensation is stated in Article 1290 of the Civil
Code which provides that "[w]hen all the requisites mentioned in Article
1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal
compensation had taken place in order to effectively offset (a) its own
obligation to return the funds it previously received from DBP as directed
under the September 6, 2005 Writ of Execution with (b) DBP’s assumed
obligations under the Assumption Agreement. However, legal
compensation could not have taken place between these debts for the
apparent reason that requisites 3 and 4 under Article 1279 of the Civil
Code are not present. Since DBP’s assumed obligations to Union Bank
for remittance of the lease payments are – in the Court’s words in its
Decision dated January 13, 2004 in G.R. No. 155838 – " contingent on
the prior payment thereof by [FW] to DBP," it cannot be said that both
debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the
same ruling, the Court observed that any deficiency that DBP had to make
up (by December 29, 1998 as per the Assumption Agreement) for the full
satisfaction of the assumed obligations " cannot be determined until after
the satisfaction of Foodmasters’ obligation to DBP." In this regard, it
cannot be concluded that the same debt had already been liquidated, and
thereby became demandable (requisite 4 of Article 1279 of the Civil
Code).
The aforementioned Court decision had already attained finality on April
30, 200455 and, hence, pursuant to the doctrine of conclusiveness of
judgment, the facts and issues actually and directly resolved therein may
not be raised in any future case between the same parties, even if the latter
suit may involve a different cause of action.56 Its pertinent portions are
hereunder quoted for ready reference:57
Both the body and the dispositive portion of the [CA’s May 27, 1994
Decision in CA-G.R. CV No. 35866] correctly construed the nature of
DBP’s liability for the lease payments under the various contracts, to wit:
x x x Construing these three contracts, especially the "Agreement" x x x
between DBP and Bancom as providing for the payment of DBP’s
assumed obligation out of the rentals to be paid to it does not mean
negating DBP’s assumption "for its own account" of the ₱17.0 million
debt x x x. It only means that they provide a mechanism for discharging
[DBP’s] liability. This liability subsists, since under the "Agreement" x x
x, DBP is obligated to pay "any balance of the Assumed Obligations after
application of the entire rentals and or the entire sales proceeds actually
received by [Union Bank] on the Leased Properties … not later than
December 29, 1998." x x x It only means that the lease rentals must first
be applied to the payment of the ₱17 million debt and that [DBP] would
have to pay out of its money only in case of insufficiency of the lease
rentals having until December 29, 1998 to do so. In this sense, it is correct
to say that the means of repayment of the assumed obligation is not
limited to the lease rentals. The monthly installments, however, would
still have to come from the lease rentals since this was stipulated in the
"Agreement."
xxxx
Since, as already stated, the monthly installments for the payment of the
₱17 million debt are to be funded from the lease rentals, it follows that if
the lease rentals are not paid, there is nothing for DBP to remit to [Union
Bank], and thus [DBP] should not be considered in default. It is
noteworthy that, as stated in the appealed decision, "as regards plaintiff’s
claim for damages against defendant for its alleged negligence in failing
and refusing to enforce a lessor’s remedies against Foodmasters
Worldwide, Inc., the Court finds no competent and reliable evidence of
such claim."
xxxx
WHEREFORE, the decision appealed from is SET ASIDE and another
one is RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc.
to pay defendant and third-party plaintiff-appellant Development Bank of
the Philippines the sum of ₱32,441,401.85, representing the unpaid
rentals from August 1981 to June 30, 1987, as well as ₱10,000.00 for
attorney’s fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development
Bank of the Philippines after having been paid by third-party defendant-
Obligations Part 2 | Page 111 of 143
appellee the sum of ₱32,441,401.85, to remit 30% thereof to plaintiff-
appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the
aforequoted decision acknowledged that DBP’s obligation to Union Bank
for remittance of the lease payments is contingent on the prior payment
thereof by Foodmasters to DBP.
A careful reading of the decision shows that the Court of Appeals, which
was affirmed by the Supreme Court, found that only the balance or the
deficiency of the ₱17 million principal obligation, if any, would be due
and demandable as of December 29, 1998. Naturally, this deficiency
cannot be determined until after the satisfaction of Foodmasters
obligation to DBP, for remittance to Union Bank in the proportion set out
in the 1994 Decision. (Emphases and underscoring supplied; citations
omitted)
xxxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not
concurred in this case, no legal compensation could have taken place
between the above-stated debts pursuant to Article 1290 of the Civil
Code. Perforce, the petition must be denied, and the denial of Union Bank
s motion to affirm legal compensation sustained.
WHEREFORE, the petition is DENIED. The Decision dated November
3, 2009 and Resolution dated February 26, 2010 of the Court of Appeals
in CA-G.R. SP No. 93833 are hereby AFFIRMED.
SO ORDERED.
First United Constructors Corp. v. Bayanihan Automotive Corp.
G.R. No. 164985 January 15, 2014
FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR
CONSTRUCTION CORPORATION,Petitioners,
vs.
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the applicability of the legal principles of recoupment
and compensation.
The Case
Under review is the decision promulgated on July 26, 2004,1 whereby the
Court of Appeals CA) affirmed the judgment rendered on May 14 1996
by the Regional Trial Court, Branch 107, in Quezon City adjudging the
petitioners defendants) liable to pay to the respondent plaintiff) various
sums of money and damages.2
Antecedents
Petitioner First United Constructors Corporation (FUCC) and petitioner
Blue Star Construction Corporation (Blue Star) were associate
construction firms sharing financial resources, equipment and technical
personnel on a case-to-case basis. From May 27, 1992 to July 8, 1992,
they ordered six units of dump trucks from the respondent, a domestic
corporation engaged in the business of importing and reconditioning used
Japan-made trucks, and of selling the trucks to interested buyers who were
mostly engaged in the construction business, to wit:
TO WHOM
UNIT
DELIVERY
Isuzu Dump Truck FUCC
Isuzu Dump Truck FUCC
Isuzu Dump Truck FUCC
Isuzu Dump Truck FUCC
Isuzu Dump Truck Blue Star
Isuzu Dump Truck FUCC
The parties established a good business relationship, with the respondent
extending service and repair work to the units purchased by the
petitioners. The respondent also practiced liberality towards the
petitioners in the latter’s manner of payment by later on agreeing to
payment on terms for subsequent purchases.
On September 19, 1992, FUCC ordered from the respondent one unit of
Hino Prime Mover that the respondent delivered on the same date. On
September 29, 1992, FUCC again ordered from the respondent one unit
of Isuzu Transit Mixer that was also delivered to the petitioners. For the
two purchases, FUCC partially paid in cash, and the balance through post-
dated checks, as follows:
BANK/CHECK NO. DATE
Pilipinas Bank 18027379 23 November 19
Pilipinas Bank 18027384 1 December 199
Upon presentment of the checks for payment, the respondent learned that
FUCC had ordered the payment stopped. The respondent immediately
demanded the full settlement of their obligation from the petitioners, but
to no avail. Instead, the petitioners informed the respondent that they were
withholding payment of the checks due to the breakdown of one of the
dump trucks they had earlier purchased from respondent, specifically the
second dump truck delivered on May 27, 1992.
Due to the refusal to pay, the respondent commenced this action for
collection on April 29, 1993, seeking payment of the unpaid balance in
the amount of ₱735,000.00 represented by the two checks.
In their answer, the petitioners averred that they had stopped the payment
on the two checks worth ₱735,000.00 because of the respondent’s refusal
to repair the second dump truck; and that they had informed the
respondent of the defects in that unit but the respondent had refused to
comply with its warranty, compelling them to incur expenses for the
repair and spare parts. They prayed that the respondent return the price of
the defective dump truck worth ₱830,000.00 minus the amounts of their
two checks worth ₱735,000.00, with 12% per annum interest on the
difference of ₱90,000.00 from May 1993 until the same is fully paid; that
the respondent should also reimburse them the sum of ₱247,950.00 as
their expenses for the repair of the dump truck, with 12% per annum
interest from December 16, 1992, the date of demand, until fully paid;
and that the respondent pay exemplary damages as determined to be just
and reasonable but not less than ₱500,000, and attorney’s fees of ₱50,000
plus ₱1,000.00 per court appearance and other litigation expenses.
It was the position of the respondent that the petitioners were not legally
justified in withholding payment of the unpaid balance of the purchase
price of the Hino Prime Mover and the Isuzu Transit Mixer due the
alleged defects in second dump truck because the purchase of the two
units was an entirely different transaction from the sale of the dump
trucks, the warranties for which having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its judgment,3 finding the petitioners
liable to pay for the unpaid balance of the purchase price of the Hino
Prime Mover and the Isuzu Transit Mixer totaling ₱735,000.00 with legal
interest and attorney’s fees; and declaring the respondent liable to pay to
the petitionersDATE OFofDELIVERY
the sum ₱71,350.00 as costs of the repairs incurred by
the petitioners. The RTC held that the petitioners could not avail
themselves of legal compensation because the claims they had set up in
the counterclaim were1992
27 May not liquidated and demandable. The fallo of the
judgment states:
WHEREFORE,
27judgment
May 1992is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum of
₱360,000.00 and ₱375,000.00
10 June 1992 with interest at the legal rate of 12% per
annum computed from February 11, 1993, which is the date of the first
extrajudicial demand, until fully paid;
18 June 1992
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum
equivalent to 10% of the principal amount due, for attorney’s fees;
4 July 1992
3. On the counterclaim, ordering plaintiff to pay defendants the sum of
₱71,350.00 with interest at the legal rate of 12% per annum computed
from the date 8ofJuly
this 1992
decision until fully paid;
Obligations Part 2 | Page 112 of 143
4. Ordering plaintiff to pay the defendants attorney’s fees equivalent to
10% of the amount due;
5. No pronouncement as to costs.
SO ORDERED.4
Decision of the CA
The petitioners appealed, stating that they could justifiably stop the
payment of the checks in the exercise of their right of recoupment because
of the respondent’s refusal to settle their claim for breach of warranty as
to the purchase of the second dump truck.
In its decision promulgated on July 26, 2004,5 however, the CA affirmed
the judgment of the RTC. It held that the remedy of recoupment could not
be properly invoked by the petitioners because the transactions were
different; that the expenses incurred for the repair and spare parts of the
second dump truck were not a proper subject of recoupment because they
did not arise out of the purchase of the Hino Prime Mover and the Isuzu
Transit Mixer; and that the petitioners’ claim could not also be the subject
of legal compensation or set-off, because the debts in a set-off should be
liquidated and demandable.
Issues
The petitioners are now before the Court asserting in their petition for
review on certiorari that the CA erred in:
I
x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO
RECOUPMENT UNDER PAR. (1) OF ART. 1599 OF THE CIVIL
CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES
AVAILABLE TO A BUYER AGAINST A SELLER’S BREACH OF
WARRANTY.
II
x x x RULING THAT PETITIONERS CANNOT AVAIL OF
COMPENSATION ALLEGEDLY BECAUSE THEIR CLAIMS
AGAINST RESPONDENT ARE NOT LIQUIDATED AND
DEMANDABLE.
III
x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS
FOR LEGAL INTEREST COMPUTED FROM THE FIRST
EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY
DAMAGES.6
The petitioners submit that they were justified in stopping the payment of
the two checks due to the respondent’s breach of warranty by refusing to
repair or replace the defective second dump truck earlier purchased; that
the withholding of payments was an effective exercise of their right of
recoupment as allowed by Article 1599(1) of the Civil Code; due to the
seller’s breach of warranty that the CA’s interpretation (that recoupment
in diminution or extinction of price in case of breach of warranty by the
seller should refer to the reduction or extinction of the price of the same
item or unit sold and not to a different transaction or contract of sale) was
not supported by jurisprudence; that recoupment should not be
restrictively interpreted but should include the concept of compensation
or set-off between two parties who had claims arising from different
transactions; and that the series of purchases and the obligations arising
therefrom, being inter-related, could be considered as a single and
ongoing transaction for all intents and purposes.
The respondent counters that the petitioners could not refuse to pay the
balance of the purchase price of the Hino Prime Mover and the Isuzu
Transit Mixer on the basis of the right of recoupment under Article 1599
of the Civil Code; that the buyer’s remedy of recoupment related only to
the same transaction; and that compensation was not proper because the
claims of the petitioners as alleged in their counterclaim were not
liquidated and demandable.
There is no longer any question that the petitioners were liable to the
respondent for the unpaid balance of the purchase price of the Hino Prime
Mover and the Isuzu Transit Mixer. What remain to be resolved are
strictly legal, namely: one, whether or not the petitioners validly exercised
the right of recoupment through the withholding of payment of the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu
Transit Mixer; and, two, whether or not the costs of the repairs and spare
parts for the second dump truck delivered to FUCC on May 27, 1992
could be offset for the petitioners’ obligations to the respondent.
Ruling
We affirm the decision of the CA with modification.
1.
Petitioners could not validly resort to recoupment against respondent
Recoupment (reconvencion) is the act of rebating or recouping a part of a
claim upon which one is sued by means of a legal or equitable right
resulting from a counterclaim arising out of the same transaction.7 It is the
setting up of a demand arising from the same transaction as the plaintiff’s
claim, to abate or reduce that claim.
The legal basis for recoupment by the buyer is the first paragraph of
Article 1599 of the Civil Code, viz:
Article 1599. Where there is a breach of warranty by the seller, the buyer
may, at his election:
(1) Accept or keep the goods and set up against the seller, the breach of
warranty by way of recoupment in diminution or extinction of the price;
(2) Accept or keep the goods and maintain an action against the seller for
damages for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the seller
for damages for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if the
goods have already been received, return them or offer to return them to
the seller and recover the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these
ways, no other remedy can thereafter be granted, without prejudice to the
provisions of the second paragraph of article 1191. (Emphasis supplied)
xxxx
In its decision, the CA applied the first paragraph of Article 1599 of the
Civil Code to this case, explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the
remedy of recoupment in diminution or extinction of price in case of
breach of warranty by the seller should therefore be interpreted as
referring to the reduction or extinction of the price of the same item or
unit sold and not to a different transaction or contract of sale. This is more
logical interpretation of the said article considering that it talks of breach
of warranty with respect to a particular item sold by the seller.
Necessarily, therefore, the buyer’s remedy should relate to the same
transaction and not to another.
Defendants-appellants’ act of ordering the payment on the prime mover
and transit mixer stopped was improper considering that the said sale was
a different contract from that of the dump trucks earlier purchased by
defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the
expenses paid for the repair and spare parts of dump truck no. 2 is
therefore not a proper subject of recoupment since it does not arise out of
the contract or transaction sued on or the claim of plaintiff-appellee for
unpaid balances on the last two (2) purchases, i. e. the prime mover and
the transit mixer.8
The CA was correct. It was improper for petitioners to set up their claim
for repair expenses and other spare parts of the dump truck against their
remaining balance on the price of the prime mover and the transit mixer
they owed to respondent. Recoupment must arise out of the contract or
1avvphi1
transaction upon which the plaintiff’s claim is founded.9To be entitled to
recoupment, therefore, the claim must arise from the same transaction,
i.e., the purchase of the prime mover and the transit mixer and not to a
previous contract involving the purchase of the dump truck. That there
was a series of purchases made by petitioners could not be considered as
a single transaction, for the records show that the earlier purchase of the
six dump trucks was a separate and distinct transaction from the
subsequent purchase of the Hino Prime Mover and the Isuzu Transit
Mixer. Consequently, the breakdown of one of the dump trucks did not
grant to petitioners the right to stop and withhold payment of their
remaining balance on the last two purchases.
2.
Legal compensation was permissible
Legal compensation takes place when the requirements set forth in Article
1278 and Article 1279 of the Civil Code are present, to wit:
Article 1278. Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other."
Article 1279. In order that compensation may be proper, it is necessary:
Obligations Part 2 | Page 113 of 143
(1) That each of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
As to whether petitioners could avail themselves of compensation, both
the RTC and CA ruled that they could not because the claims of
petitioners against respondent were not liquidated and demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount of
₱71,350.00 stated in their counterclaim, and the CA concurred in the
finding, stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. "1")
defendants were charging plaintiff only for the following items of repair:
1. Cost of repair and spare parts -
2. Cost of repair and spare parts -
Said amounts may be considered to have been spent for repairs covered
by the warranty period of three (3) months. While the invoices (Exhs. "2-
B" and "3-A") dated September 26, 1992 and September 18, 1992, this
delay in repairs is attributable to the fact that when defects were brought
to the attention of the plaintiff in the letter of August 14, 1992 (Exh. "8")
which was within the warranty period, the plaintiff did not respond with
the required repairs and actual repairs were undertaken by defendants.
Thereafter, the spare parts covered by Exhibits "2-B" and "3-A" pertain
to the engine, which was covered by the warranty.
x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded
correction of defects. In their letter of August 22, 1992 (Exh. "9") they
demanded replacement. In their letter of August 27, 1992 (Exh. "10"),
they demanded ‘replacement/repair’. In September, 1992, they undertook
repairs themselves (Exhs. "2-B" and "3-A") and demanded payment for
the expenses in their letter of December 16, 1992 (Exh. "1"). All other
items of expenses connected with subsequent breakdowns are no longer
chargeable to plaintiff which granted only a 3-month warranty. x x x10
Considering that preponderant evidence showing that petitioners had
spent the amount of ₱71,350.00 for the repairs and spare parts of the
second dump truck within the warranty period of three months supported
the finding of the two lower courts, the Court accepts their finding. Verily,
factual findings of the trial court, when affirmed by the CA, are
conclusive on the Court when supported by the evidence on record.11
A debt is liquidated when its existence and amount are
determined.12 Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the plaintiff’s claim
from the moment it is liquidated by judgment.13 Article 1290 of the Civil
Code provides that when all the requisites mentioned in Article 1279 of
the Civil Code are present, compensation takes effect by operation of law,
and extinguishes both debts to the concurrent amount. With petitioners’
expenses for the repair of the dump truck being already established and
determined with certainty by the lower courts, it follows that legal
compensation could take place because all the requirements were present.
Hence, the amount of ₱71,350.00 should be set off against petitioners’
unpaid obligation of ₱735,000.00, leaving a balance of ₱663,650.00, the
amount petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial and
appellate courts. The legal interest rate to be imposed from February 11,
1âwphi1
1993, the time of the extrajudicial demand by respondent, should be 6%
per annum in the absence of any stipulation in writing in accordance with
Article 2209 of the Civil Code, which provides:
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, and in the absence of stipulation, the legal interest, which is six per
cent per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on July
26, 2004 in all respects subject to the MODIFICATION that petitioners
are ordered, jointly and severally, to pay to respondent the sum of 1
663,650.00, plus interest of 6% per annum computed from February
11, 1993, the date of the first extrajudicial demand, until fully paid; and
ORDERS the petitioners to pay the costs of suit.
SO ORDERED.
Areza v. Express Savings Bank, Inc.
G.R. No. 176697 September 10, 2014
CESAR V. AREZA and LOLITA B. AREZA, Petitioners,
vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL
POTENCIANO, Respondnets.
DECISION
PEREZ, J.:
Before this Court is a Petition for Review on Certiorari under Ruic 45 of
the Rules of Court, which seeks to reverse the Decision1 and
Resolution2 dated 29 June 2006 and 12 February 2007 of the Court of
₱46,800.00
Appeals in CAG.R. CV No. 83192. The Court of Appeals affirmed with
modification the 22 April 2004 Resolution3 of the Regional Trial Court
(RTC) of Calamba, Laguna, Branch24,550.00
92, in Civil Case No. B-5886.
The factual antecedents follow.
₱71,350.00
Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank
deposits with respondent Express Savings Bank’s Biñan branch: 1)
Savings Account No. 004-01-000185-5 and 2) Special Savings Account
No. 004-02-000092-3.
They were engaged in the business of "buy and sell" of brand new and
second-hand motor vehicles. On 2 May 2000, they received an order from
a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand
Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans
Affairs Office (PVAO) checks payable to different payees and drawn
against the Philippine Veterans Bank (drawee), each valued at Two
Hundred Thousand Pesos (₱200,000.00) for a total of One Million Eight
Hundred Thousand Pesos (₱1,800,000.00).
About this occasion, petitioners claimed that Michael Potenciano
(Potenciano), the branch manager of respondent Express Savings Bank
(the Bank) was present during the transaction and immediately offered
the services of the Bank for the processing and eventual crediting of the
said checks to petitioners’ account.4 On the other hand,Potenciano
countered that he was prevailed upon to accept the checks by way of
accommodation of petitioners who were valued clients of the Bank.5
On 3 May 2000, petitioners deposited the said checks in their savings
account with the Bank. The Bank, inturn, deposited the checks with its
depositary bank, Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI
Bank presented the checks to the drawee, the Philippine Veterans Bank,
which honored the checks.
On 6 May 2000, Potenciano informedpetitioners that the checks they
deposited with the Bank werehonored. He allegedly warned petitioners
that the clearing of the checks pertained only to the availability of funds
and did not mean that the checks were not infirmed.6 Thus, the entire
amount of ₱1,800,000.00 was credited to petitioners’ savings account.
Based on this information, petitioners released the two cars to the buyer.
Sometime in July 2000, the subjectchecks were returned by PVAO to the
drawee on the ground that the amount on the face of the checks was
altered from the original amount of ₱4,000.00 to ₱200,000.00. The
drawee returned the checks to Equitable-PCI Bank by way of Special
Clearing Receipts. In August 2000, the Bank was informed by Equitable-
PCI Bank that the drawee dishonored the checks onthe ground of material
alterations. Equitable-PCI Bank initially filed a protest with the Philippine
Clearing House. In February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the
deposit account of the Bank in the amount of ₱1,800,000.00.
The Bank insisted that they informed petitioners of said development in
August 2000 by furnishing them copies of the documents given by its
depositary bank.7 On the other hand, petitioners maintained that the Bank
never informed them of these developments.
Obligations Part 2 | Page 114 of 143
On 9 March 2001, petitioners issued a check in the amount of
₱500,000.00. Said check was dishonored by the Bank for the reason
"Deposit Under Hold." According topetitioners, the Bank unilaterally and
unlawfully put their account with the Bank on hold. On 22 March 2001,
petitioners’ counsel sent a demand letter asking the Bank to honor their
check. The Bank refused to heed their request and instead, closed the
Special Savings Account of the petitioners with a balance of
₱1,179,659.69 and transferred said amount to their savings account. The
Bank then withdrew the amount of ₱1,800,000.00representing the
returned checks from petitioners’ savings account.
Acting on the alleged arbitrary and groundless dishonoring of their checks
and the unlawful and unilateral withdrawal from their savings account,
petitioners filed a Complaint for Sum of Money with Damages against the
Bank and Potenciano with the RTC of Calamba.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in
favor of petitioners. The dispositive portion of the Decision reads:
WHEREFORE, the foregoing considered, the Court orders that judgment
be rendered in favor of plaintiffs and against the defendants jointly and
severally to pay plaintiffs as follows, to wit:
1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the
defendants from the account of plaintiffs;
2. ₱500,000.00 as moral damages; and
3. ₱300,000.00 as attorney’s fees.8
The trial court reduced the issue to whether or not the rights of petitioners
were violated by respondents when the deposits of the former were
debited by respondents without any court order and without their
knowledge and consent. According to the trial court, it is the depositary
bank which should safeguard the right ofthe depositors over their money.
Invoking Article 1977 of the Civil Code, the trial court stated that the
depositary cannot make use of the thing deposited without the express
permission of the depositor. The trial court also held that respondents
should have observed the 24-hour clearing house rule that checks should
be returned within 24-hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action. In this case,
petitioners deposited the checks in May 2000, and respondents notified
them of the problems on the check three months later or in August 2000.
In sum, the trial court characterized said acts of respondents as attended
with bad faith when they debited the amount of ₱1,800,000.00 from the
account of petitioners.
Respondents filed a motion for reconsideration while petitioners filed a
motion for execution from the Decision of the RTC on the ground that
respondents’ motion for reconsideration did not conform with Section 5,
Rule 16 of the Rules of Court; hence, it was a mere scrap of paper that did
not toll the running of the period to appeal.
On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon
granted the motion for reconsideration, set aside the Pozas Decision, and
dismissed the complaint. The trial court awarded respondents their
counterclaim of moral and exemplary damages of ₱100,000.00 each. The
trial court first applied the principle of liberality when it disregarded the
alleged absence of a notice of hearing in respondents’ motion for
reconsideration. On the merits, the trial court considered the relationship
of the Bank and petitioners with respect to their savings account deposits
as a contract of loan with the bank as the debtor and petitioners as
creditors. As such, Article 1977 of the Civil Code prohibiting the
depository from making use of the thing deposited without the express
permission of the depositor is not applicable. Instead, the trial court
applied Article 1980 which provides that fixed, savings and current
deposits ofmoney in banks and similar institutions shall be governed by
the provisions governing simple loan. The trial court then opined thatthe
Bank had all the right to set-off against petitioners’ savings deposits the
value of their nine checks that were returned.
On appeal, the Court of Appeals affirmed the ruling of the trial court but
deleted the award of damages. The appellate court made the following
ratiocination:
Any argument as to the notice of hearing has been resolved when the
pairing judge issued the order on February 24, 2004 setting the hearing
on March 26, 2004. A perusal of the notice of hearing shows that request
was addressed to the Clerk of Court and plaintiffs’ counsel for hearing to
be set on March 26, 2004.
The core issues in this case revolve on whether the appellee bank had the
right to debit the amount of ₱1,800,000.00 from the appellants’ accounts
and whether the bank’s act of debiting was done "without the plaintiffs’
knowledge."
We find that the elements of legal compensation are all present in the case
at bar. Hence, applying the case of the Bank of the Philippine Islands v.
Court of Appeals, the obligors bound principally are at the same time
creditors of each other. Appellee bank stands as a debtor of appellant, a
depositor. At the same time, said bank is the creditor of the appellant with
respect to the dishonored treasury warrant checks which amount were
already credited to the account of appellants. When the appellants had
withdrawn the amount of the checks they deposited and later on said
checks were returned, they became indebted to the appellee bank for the
corresponding amount.
It should be noted that [G]erry Mambuay was the appellants’ walkin
buyer. As sellers, appellants oughtto have exercised due diligence in
assessing his credit or personal background. The 24-hour clearing house
rule is not the one that governs in this case since the nine checks were
discovered by the drawee bank to contain material alterations.
Appellants merely allege that they were not informed of any development
on the checks returned. However, this Court believes that the bank and
appellants had opportunities to communicate about the checks
considering that several transactions occurred from the time of alleged
return of the checks to the date of the debit.
However, this Court agrees withappellants that they should not pay moral
and exemplary damages to each of the appellees for lack of basis. The
appellants were not shown to have acted in bad faith.9
Petitioners filed the present petition for review on certiorariraising both
procedural and substantive issues, to wit:
1. Whether or not the Honorable Court of Appeals committed a reversible
error of law and grave abuse of discretion in upholding the legality and/or
propriety of the Motion for Reconsideration filed in violation of Section
5, Rule 15 ofthe Rules on Civil Procedure;
2. Whether or not the Honorable Court of Appeals committed a grave
abuse of discretion in declaring that the private respondents "had the right
to debit the amount of ₱1,800,000.00 from the appellants’ accounts" and
the bank’s act of debiting was done with the plaintiff’s knowledge.10
Before proceeding to the substantive issue, we first resolve the procedural
issue raised by petitioners.
Sections 5, Rule 15 of the Rules of Court states:
Section 5. Notice of hearing. – The notice of hearing shall be addressed
to all parties concerned, and shall specify the time and date of the hearing
which must not be later than ten (10) days after the filing of the motion.
Petitioners claim that the notice of hearing was addressed to the Clerk of
Court and not to the adverse party as the rules require. Petitioners add that
the hearing on the motion for reconsideration was scheduled beyond 10
days from the date of filing.
As held in Maturan v. Araula,11 the rule requiring that the notice be
addressed to the adverse party has beensubstantially complied with when
a copy of the motion for reconsideration was furnished to the counsel of
the adverse party, coupled with the fact that the trial court acted on said
notice of hearing and, as prayed for, issued an order12 setting the hearing
of the motion on 26 March 2004.
We would reiterate later that there is substantial compliance with the
foregoing Rule if a copy of the said motion for reconsideration was
furnished to the counsel of the adverse party.13
Now to the substantive issues to which procedural imperfection must, in
this case, give way.
The central issue is whether the Bank had the right to debit ₱1,800,000.00
from petitioners’ accounts.
On 6 May 2000, the Bank informed petitioners that the subject checks had
been honored. Thus, the amountof ₱1,800,000.00 was accordingly
credited to petitioners’ accounts, prompting them to release the purchased
cars to the buyer.
Unknown to petitioners, the Bank deposited the checks in its depositary
bank, Equitable-PCI Bank. Three months had passed when the Bank was
informed by its depositary bank that the drawee had dishonored the
checks on the ground of material alterations.
The return of the checks created a chain of debiting of accounts, the last
loss eventually falling upon the savings account of petitioners with
respondent bank. The trial court inits reconsidered decision and the
appellate court were one in declaring that petitioners should bear the loss.
We reverse.
Obligations Part 2 | Page 115 of 143
The fact that material alteration caused the eventual dishonor of the
checks issued by PVAO is undisputed. In this case, before the alteration
was discovered, the checks were already cleared by the drawee bank, the
Philippine Veterans Bank. Three months had lapsed before the drawee
dishonored the checks and returned them to Equitable-PCI Bank, the
respondents’ depositary bank. And itwas not until 10 months later when
petitioners’ accounts were debited. A question thus arises: What are the
liabilities of the drawee, the intermediary banks, and the petitioners for
the altered checks?
LIABILITY OF THE DRAWEE
Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides
that the acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance. The acceptor is a drawee who
accepts the bill. In Philippine National Bank v. Court of Appeals,14 the
payment of the amount of a check implies not only acceptance but also
compliance with the drawee’s obligation.
In case the negotiable instrument isaltered before acceptance, is the
drawee liable for the original or the altered tenor of acceptance? There are
two divergent intepretations proffered by legal analysts.15 The first view
is supported by the leading case of National City Bank ofChicago v. Bank
of the Republic.16 In said case, a certain Andrew Manning stole a draft
and substituted his name for that of the original payee. He offered it as
payment to a jeweler in exchange for certain jewelry. The jeweler
deposited the draft to the defendant bank which collectedthe equivalent
amount from the drawee. Upon learning of the alteration, the drawee
sought to recover from the defendant bank the amount of the draft, as
money paid by mistake. The court denied recovery on the ground that the
drawee by accepting admitted the existence of the payee and his capacity
to endorse.17 Still, in Wells Fargo Bank & Union Trust Co. v. Bank of
Italy,18 the court echoed the court’s interpretation in National City Bank
of Chicago, in this wise:
We think the construction placed upon the section by the Illinois court is
correct and that it was not the legislative intent that the obligation of the
acceptor should be limited to the tenorof the instrument as drawn by the
maker, as was the rule at common law,but that it should be enforceable in
favor of a holder in due course against the acceptor according to its tenor
at the time of its acceptance or certification.
The foregoing opinion and the Illinois decision which it follows give
effect to the literal words of the Negotiable Instruments Law. As stated in
the Illinois case: "The court must take the act as it is written and should
give to the words their natural and common meaning . . . ifthe language
of the act conflicts with statutes or decisions in force before its enactment
the courts should not give the act a strained construction in order to make
it harmonize with earlier statutes or decisions." The wording of the act
suggests that a change in the common law was intended. A careful reading
thereof, independent of any common-law influence, requires that the
words "according to the tenor of his acceptance" be construed as referring
to the instrument as it was at the time it came into the hands of the acceptor
for acceptance, for he accepts no other instrument than the one presented
to him — the altered form — and it alone he engages to pay. This
conclusion is in harmony with the law of England and the continental
countries. It makes for the usefulness and currency of negotiable paper
without seriously endangering accepted banking practices, for banking
institutions can readily protect themselves against liability on altered
instruments either by qualifying their acceptance or certification or by
relying on forgery insurance and specialpaper which will make alterations
obvious. All of the arguments advanced against the conclusion herein
announced seem highly technical in the face of the practical facts that the
drawee bank has authenticated an instrument in a certain form, and that
commercial policy favors the protection of anyone who, in due course,
changes his position on the faith of that authentication.19
The second view is that the acceptor/drawee despite the tenor of his
acceptance is liable only to the extent of the bill prior to alteration.20 This
view appears to be in consonance with Section 124 of the Negotiable
Instruments Law which statesthat a material alteration avoids an
instrument except as against an assenting party and subsequent indorsers,
but a holder in due course may enforce payment according to its original
tenor. Thus, when the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty tocharge its client’s
account only for bona fide disbursements he had made. If the drawee did
not pay according to the original tenor of the instrument, as directed by
the drawer, then it has no right to claim reimbursement from the drawer,
much less, the right to deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with utmost
fidelity.21 The drawee, however, still has recourse to recover its loss. It
may pass the liability back to the collecting bank which is what the drawee
bank exactly did in this case. It debited the account of Equitable-PCI Bank
for the altered amount of the checks.
LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK
A depositary bank is the first bank to take an item even though it is also
the payor bank, unless the item is presented for immediate payment over
the counter.22 It is also the bank to which a check is transferred for deposit
in an account at such bank, evenif the check is physically received and
indorsed first by another bank.23 A collecting bank is defined as any bank
handling an item for collection except the bank on which the check is
drawn.24
When petitioners deposited the check with the Bank, they were
designating the latter as the collecting bank. This is in consonance with
the rule that a negotiable instrument, such as a check, whether a manager's
check or ordinary check, is not legal tender. As such, after receiving the
deposit, under its own rules, the Bank shall credit the amount in
petitioners’ account or infuse value thereon only after the drawee bank
shall have paid the amount of the check or the check has been cleared for
deposit.25
The Bank and Equitable-PCI Bank are both depositary and collecting
banks.
A depositary/collecting bank where a check is deposited, and which
endorses the check upon presentment with the drawee bank, is an
endorser. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants "that the instrument is genuine and in all respects what
it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting." It has been repeatedly held that in
check transactions, the depositary/collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the
party making the presentment has done its duty to ascertain the
genuineness of the endorsements.26 If any of the warranties made by the
depositary/collecting bank turns out to be false, then the drawee bank may
recover from it up to the amount of the check.27
The law imposes a duty of diligence on the collecting bank to scrutinize
checks deposited with it for the purpose of determining their genuineness
and regularity. The collecting bank being primarily engaged in banking
holds itself out to the public as the expert and the law holds it to a high
standard of conduct.28
As collecting banks, the Bank and Equitable-PCI Bank are both liable for
the amount of the materially altered checks. Since Equitable-PCI Bank is
not a party to this case and the Bank allowed its account with
EquitablePCI Bank to be debited, it has the option toseek recourse against
the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not following the 24-hour clearing
period because it was only in August 2000 that the drawee bank notified
Equitable-PCI that there were material alterations in the checks.
We do not subscribe to the position taken by petitioners that the drawee
bank was at fault because it did not follow the 24-hour clearing period
which provides that when a drawee bank fails to return a forged or altered
check to the collecting bank within the 24-hour clearing period, the
collecting bank is absolved from liability.
Section 21 of the Philippine Clearing House Rules and Regulations
provides: Sec. 21. Special Return Items Beyond The Reglementary
Clearing Period.- Items which have been the subject of material alteration
or items bearing forged endorsement when such endorsement is necessary
for negotiation shall be returned by direct presentation or demand to the
Presenting Bank and not through the regular clearing house facilities
within the period prescribed by law for the filing of a legal action by the
returning bank/branch, institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits, elucidated:
It is clear that the so-called "24-hour" rule has been modified. In the case
of Hongkong & Shanghai vs. People’s Bank reiterated in Metropolitan
Bank and Trust Co. vs. FNCB, the Supreme Court strictly enforced the
24-hour rule under which the drawee bank forever loses the right to claim
against presenting/collecting bank if the check is not returned at the next
clearing day orwithin 24 hours. Apparently, the commercial banks felt
strict enforcement of the 24-hour rule is too harsh and therefore made
representations and obtained modification of the rule, which modification
is now incorporated in the Manual of Regulations. Since the same
commercial banks controlled the Philippine Clearing House Corporation,
incorporating the amended rule in the PCHC Rules naturally followed.
Obligations Part 2 | Page 116 of 143
As the rule now stands, the 24-hour rule is still in force, that is, any check
which should be refused by the drawee bank in accordance with long
standing and accepted banking practices shall be returned through the
PCHC/local clearing office, as the case may be, not later than the next
regular clearing (24-hour). The modification, however, is that items
which have been the subject of material alteration or bearing forged
endorsement may be returned even beyond 24 hours so long that the same
is returned within the prescriptive period fixed by law. The consensus
among lawyers is that the prescriptiveperiod is ten (10)years because a
check or the endorsement thereon is a written contract. Moreover, the item
need not be returned through the clearing house but by direct presentation
to the presenting bank.29
In short, the 24-hour clearing ruledoes not apply to altered checks.
LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust Company v. Gold Palace
Jewellery Co.30 is in point. A foreigner purchased several pieces of
jewelry from Gold Palace Jewellery using a United Overseas Bank
(Malaysia) issued draft addressed to the Land Bank of the Philippines
(LBP). Gold Palace Jewellery deposited the draft in the company’s
account with Far East Bank. Far East Bank presented the draft for clearing
to LBP. The latter cleared the same and Gold Palace Jewellery’s account
was credited with the amount stated in the draft. Consequently, Gold
Palace Jewellery released the pieces of jewelries to the foreigner. Three
weeks later, LBP informed Far East Bank that the amount in the foreign
draft had been materially altered from ₱300,000.00 to ₱380,000.00. LBP
returnedthe check to Far East Bank. Far East Bank refunded LBP the
₱380,000.00 paid by LBP. Far East Bank initially debited ₱168,053.36
from Gold Palace Jewellery’s account and demanded the payment of the
difference between the amount in the altered draft and the amount debited
from Gold Palace Jewellery.
However, for the reasons already discussed above, our pronouncement in
the Far East Bank and Trust Companycase that "the drawee is liable on
its payment of the check according to the tenor of the check at the time of
payment, which was the raised amount"31 is inapplicable to the factual
milieu obtaining herein.
We only adopt said decision in so far as it adjudged liability on the part
of the collecting bank, thus:
Thus, considering that, in this case, Gold Palace is protected by Section
62 of the NIL, its collecting agent, Far East, should not have debited the
money paid by the drawee bank from respondent company's account.
When Gold Palace deposited the check with Far East, the latter, under the
terms of the deposit and the provisions of the NIL, became an agent of the
former for the collection of the amount in the draft. The subsequent
payment by the drawee bank and the collection of the amount by the
collecting bank closed the transaction insofar as the drawee and the holder
of the check or his agent are concerned, converted the check into a mere
voucher, and, as already discussed, foreclosed the recovery by the drawee
of the amount paid. This closure of the transaction is a matter of course;
otherwise, uncertainty in commercial transactions, delay and annoyance
will arise if a bank at some future time will call on the payee for the return
of the money paid to him on the check.
As the transaction in this case had been closed and the principalagent
relationship between the payee and the collecting bank had already
ceased, the latter in returning the amount to the drawee bank was already
acting on its own and should now be responsible for its own actions. x x
x Likewise, Far East cannot invoke the warranty of the payee/depositor
who indorsed the instrument for collection to shift the burden it brought
upon itself. This is precisely because the said indorsement is only for
purposes of collection which, under Section 36 of the NIL, is a restrictive
indorsement. It did not in any way transfer the title of the instrument to
the collecting bank. Far East did not own the draft, it merely presented it
for payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title and
are available only to holders in due course, these warranties did not attach
to the indorsement for deposit and collection made by Gold Palace to Far
East. Without any legal right to do so, the collecting bank, therefore, could
not debit respondent's account for the amount it refunded to the drawee
bank.
The foregoing considered, we affirm the ruling of the appellate court to
the extent that Far East could not debit the account of Gold Palace, and
for doing so, it must return what it had erroneously taken.32
Applying the foregoing ratiocination, the Bank cannot debit the savings
account of petitioners. A depositary/collecting bank may resist or defend
against a claim for breach of warranty if the drawer, the payee, or either
the drawee bank or depositary bank was negligent and such negligence
substantially contributed tothe loss from alteration. In the instant case, no
negligence can be attributed to petitioners. We lend credence to their
claim that at the time of the sales transaction, the Bank’s branch manager
was present and even offered the Bank’s services for the processing and
eventual crediting of the checks. True to the branch manager’s words, the
checks were cleared three days later when deposited by petitioners and
the entire amount ofthe checks was credited to their savings account.
ON LEGAL COMPENSATION
Petitioners insist that the Bank cannotbe considered a creditor of the
petitioners because it should have made a claim of the amount of
₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank and the
collecting bank in this case and not from them.
The Bank cannot set-off the amount it paid to Equitable-PCI Bank with
petitioners’ savings account. Under Art. 1278 of the New Civil Code,
compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. And the requisites for legal
compensation are:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
It is well-settled that the relationship of the depositors and the Bank or
similar institution is that of creditor-debtor. Article 1980 of the New Civil
Code provides that fixed, savings and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning
simple loans. The bank is the debtorand the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor
on demand. The savings deposit agreement between the bank and the
depositor is the contract that determines the rights and obligations of the
parties.33
But as previously discussed, petitioners are not liable for the deposit of
the altered checks. The Bank, asthe depositary and collecting bank
ultimately bears the loss. Thus, there being no indebtedness to the Bank
on the part of petitioners, legal compensation cannot take place.
DAMAGES
The Bank incurred a delay in informing petitioners of the checks’
dishonor. The Bank was informed of the dishonor by Equitable-PCI Bank
as early as August 2000 but it was only on 7 March 2001 when the Bank
informed petitioners that it will debit from their account the altered
amount. This delay is tantamount to negligence on the part of the
collecting bank which would entitle petitioners to an award for damages
under Article 1170 of the New Civil Code which reads:
Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages.
The damages in the form of actual or compensatory damages represent
the amount debited by the Bank from petitioners’ account.
We delete the award of moral damages. Contrary to the lower court’s
finding, there was no showing that the Bank acted fraudulently or in bad
faith. It may have been remiss in its duty to diligently protect the account
of its depositors but its honest but mistaken belief that petitioners’ account
should be debited is not tantamount to bad faith. We also delete the award
of attorney’s fees for it is not a sound public policy to place a premium
on the right to litigate. No damages can becharged to those who exercise
such precious right in good faith, even if done erroneously.34
To recap, the drawee bank, Philippine Veterans Bank in this case, is only
liable to the extent of the check prior to alteration. Since Philippine
1âwphi1
Veterans Bank paid the altered amount of the check, it may pass the
liability back as it did, to Equitable-PCI Bank,the collecting bank. The
collecting banks, Equitable-PCI Bank and the Bank, are ultimately liable
for the amount of the materially altered check. It cannot further pass the
liability back to the petitioners absent any showing in the negligence on
the part of the petitioners which substantially contributed to the loss from
alteration.
Obligations Part 2 | Page 117 of 143
Based on the foregoing, we affirm the Pozasdecision only insofar as it
ordered respondents to jointly and severally pay petitioners
₱1,800,000.00, representing the amount withdrawn from the latter’s
account. We do not conform with said ruling regarding the finding of bad
faith on the part of respondents, as well as its failure toobserve the 24-
hour clearing rule.
WHEREFORE, the petition is GRANTED. The Decision and Resolution
dated 29 June 2006 and 12 February 2007 respectively of the Court of
Appeals in CA-G.R. CV No. 83192 are REVERSED and SET ASIDE.
The 15 January 2004 Decision of the Regional Trial Court of Calamba
City, Branch 92 in Civil Case No. B-5886 rendered by Judge Antonio S.
Pozas is REINSTATEDonly insofar as it ordered respondents to jointly
and severally pay petitioners ₱1,800,000.00 representing the amount
withdrawn from the latter’s account. The award of moral damages and
attorney’s fees are DELETED.
SO ORDERED.
California Manufacturing Company, Inc. v. Advanced
Technology System, Inc.
G.R. No. 202454
CALIFORNIA MANUFACTURING COMPANY, INC., Petitioner,
vs.
ADVANCED TECHNOLOGY SYSTEM, INC., Respondent.
DECISION
SERENO, J.:
Before us is a Petition for Review on Certiorari assailing the
Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 94409,
which denied the appeal filed by California Manufacturing Company, Inc.
(CMCI) from the Decision2 of Regional Trial Court (RTC) of Pasig City,
Branch 268, in the Complaint for Sum of Money3 filed by Advanced
Technology Systems, Inc. (ATSI) against the former.
The RTC ordered CMCI to pay ATSI the amount of ₱443,729.39 for the
unpaid rentals for a Prodopak machine, plus legal interest from the date
of extra-judicial demand until full payment; 30% of the judgment award
as attorney's fees; and the costs of litigation. The CA affirmed the trial
court's decision, but it deleted the award of attorney's fees for lack of
factual and legal basis and ordered CMCI to pay the costs of litigation.
THE ANTECEDENT FACTS
Petitioner CMCI is a domestic corporation engaged in the food and
beverage manufacturing business. Respondent ATSI is also a domestic
corporation that fabricates and distributes food processing machinery and
equipment, spare parts, and its allied products.4
In August 200 I, CMCI leased from ATSI a Prodopak machine which was
used to pack products in 20-ml. pouches.5The parties agreed to a monthly
rental of ₱98,000 exclusive of tax. Upon receipt of an open purchase
order on 6 August 2001, ATSI delivered the machine to CMCI's plant at
Gateway Industrial Park, General Trias, Cavite on 8 August 2001.
In November 2003, ATSI filed a Complaint for Sum of Money against
CMCI to collect unpaid rentals for the months of June, July, August, and
September 2003. ATSI alleged that CMCI was consistently paying the
rents until June 2003 when the latter defaulted on its obligation without
just cause. ATSI also claimed that CMCI ignored all the billing statements
and its demand letter. Hence, in addition to the unpaid rents A TSI sought
payment for the contingent attorney's fee equivalent to 30% of the
judgment award.
CMCI moved for the dismissal of the complaint on the ground of
extinguishment of obligation through legal compensation. The RTC,
however, ruled that the conflicting claims of the parties required trial on
the merits. It therefore dismissed the motion to dismiss and directed
CMCI to file an Answer.7
In its Answer,8 CMCI averred that ATSI was one and the same with
Processing Partners and Packaging Corporation (PPPC), which was a toll
packer of CMCI products. To support its allegation, CMCI submitted
copies of the Articles of Incorporation and General Information Sheets
(GIS)9 of the two corporations. CMCI pointed out that ATSI was even a
stockholder of PPPC as shown in the latter's GIS. 10
CMCI alleged that in 2000, PPPC agreed to transfer the processing of
CMCI's product line from its factory in Meycauayan to Malolos, Bulacan.
Upon the request of PPPC, through its Executive Vice President
Felicisima Celones, CMCI advanced ₱4 million as mobilization fund.
PPPC President and Chief Executive Officer Francis Celones allegedly
committed to pay the amount in 12 equal instalments deductible from
PPPC's monthly invoice to CMCI beginning in October 2000. 11 CMCI
likewise claims that in a letter dated 30 July 2001, 12 Felicisima proposed
to set off PPPC's obligation to pay the mobilization fund with the rentals
for the Prodopak machine.
CMCI argued that the proposal was binding on both PPPC and A TSI
because Felicisima was an officer and a majority stockholder of the two
corporations. Moreover, in a letter dated 16 September 2003, 13 she
allegedly represented to the new management of CMCI that she was
authorized to request the offsetting of PPPC's obligation with ATSI's
receivable from CMCI. When ATSI filed suit in November 2003, PPPC's
debt arising from the mobilization fund allegedly amounted to
₱10,766.272.24.
Based on the above, CMCl argued that legal compensation had set in and
that ATSI was even liable for the balance of PPPC's unpaid obligation
after deducting the rentals for the Prodopak machine.
After trial, the RTC rendered a Decision in favor of ATSI with the
following dispositive portion:
WHEREFORE, foregoing premises considered, judgment is hereby
rendered in favor of plaintiff and against the defendant, ordering the latter
to pay the former, the following sums:
1. Php443,729.39 representing the unpaid rental for the prodopak
machine plus legal interest from the date of extra judicial demand
(October 13, 2003 - Exh. "E") until satisfaction of this judgment;
2. 30% of the judgment award as and by way of attorney's fees; and
3. Cost of litigation.14
The trial court ruled that legal compensation did not apply because PPPC
had a separate legal personality from its individual stockholders, the
Spouses Celones, and ATSI. Moreover, there was no board resolution or
any other proof showing that Felicisima's proposal to set-off the unpaid
mobilization fund with CMCI 's rentals to A TSI for the Prodopak
Machine had been authorized by the two corporations. Consequently, the
RTC ruled that CMCI's financial obligation to pay the rentals for the
Prodopak machine stood and that its claim against PPPC could be
properly ventilated in the proper proceeding upon payment of the required
docket fees. 15
On appeal by CMCI, the CA affirmed the trial court's ruling that legal
compensation had not set in because the element of mutuality of parties
was lacking. Likewise, the appellate court sustained the trial court's
refusal to pierce the corporate veil. It ruled that there must be clear and
convincing proof that the Spouses Celones had used the separate
personalities of ATSI or PPPC as a shield to commit fraud or any wrong
against CMCI, which was not existing in this case. 16
Aside from the absence of a board resolution issued by ATSI, the CA
observed that the letter dated 30 July 2001 clearly showed that
Felicisima's proposal to effect the offsetting of debts was limited to the
obligation of PPPC. 17The appellate court thus sustained the trial court's
finding that ATSI was not bound by Felicisima's conduct.
Moreover, the CA rejected CMCI's argument that ATSI is barred by
estoppel as it found no indication that ATSI had created any appearance
of false fact. 18 CA also held that estoppel did not apply to PPPC because
the latter was not even a party to this case.
The CA, however, deleted the trial court's award of attorney's fees and
costs of litigation in favor of ATSI as it found no discussion in the body
of the decision of the factual and legal justification for the award.
CMCI filed a Motion for Reconsideration of the CA Decision, but the
appellate court denied the motion for lack of merit. 19 Hence, this
petition.20
THE ISSUE
The assignment of errors raised by CMCI all boil down to the question of
whether the CA erred in affirming the ruling of the RTC that legal
compensation between ATSI's claim against CMCI on the one hand, and
the latter's claim against PPPC on the other hand, has not set in.
OUR RULING
We affirm the CA Decision in toto.
CMCI argues that both the RTC and the CA overlooked the circumstances
that it has proven to justify the piercing of corporate veil in this case, i.e.,
(1) the interlocking board of directors, incorporators, and majority
stockholder of PPPC and ATSI; (2) control of the two corporations by the
Spouses Celones; and (3) the two corporations were mere alter egos or
Obligations Part 2 | Page 118 of 143
business conduits of each other. CMCI now asks us to disregard the
separate corporate personalities of A TSI and PPPC based on those
circumstances and to enter judgment in favor of the application of legal
compensation.
Whether one corporation is merely an alter ego of another, a sham or
subterfuge, and whether the requisite quantum of evidence has been
adduced to warrant the puncturing of the corporate veil are questions of
fact. 21Relevant to this point is the settled rule that in a petition for review
on certiorari like this case, this Court's jurisdiction is limited to reviewing
errors of law in the absence of any showing that the factual findings
complained of are devoid of support in the records or are glaringly
erroneous. 22 This rule alone wan-ants the denial of the petition, which
essentially asks us to reevaluate the evidence adduced by the pm1ies and
the credibility of the witnesses presented.
We have reviewed the evidence on record and have found no cogent
reason to disturb the findings of the co mis a quo that A TSI is distinct
and separate from PPPC, or from the Spouses Celones.
but until now, no action has been done yet. It is on this spirit and time
tested principle of diplomacy that I write this letter.
I am the Executive Vice President of Processing Partners & Packaging
Corporation (PPPC), a duly organized domestic corporation, engaged in
the toll packing business.
Sometime in November of 1996, CMC availed of the toll packing
services of PPPC. At the outset, business relationship between the two
was going smoothly. In due time, PPPC proved its name to CMC in
delivering quality toll packing services. As a matter of fact, after the
expiration of the toll packing contract, CMC still retained the services of
PPPC. Thus, sometime in the year 2000, CMC executed another toll
packing contract with PPC.
However, the business relationship unexpectedly turned sour when CMC
changed its Management in the latter part of 2002. Since then CMC's new
management has been committing unsound business practices prejudicial
to the interests of PPPC.

Any piercing of the corporate veil must be done with caution.23 As the xxxx
CA had correctly observed, it must be ce11ain that the corporate fiction Failure of CMC to honor its
was misused to such an extent that injustice, fraud, or crime was agreement with PPC anent
committed against another, in disregard of rights. Moreover, the the pickling machinery
wrongdoing must be clearly and convincingly established. Sarona v.
NLRC24 instructs, thus: xxxx
Whether the separate personality of the corporation should be pierced Leapfrog Plant/Jasmine al)d
hinges on obtaining facts appropriately pleaded or proved. However, any Rose Plant
piercing of the corporate veil has to be done with caution, albeit the Court
will not hesitate to disregard the corporate veil when it is misused or when x x x x
necessary in the interest of justice. After all, the concept of corporate
entity was not meant to promote unfair objectives. Pre-termination of toll
The doctrine of piercing the corporate veil applies only in three (3) basic [p]acking [a]greement for
areas, namely: 1) defeat of public convenience as when the corporate KLS Spaghetti Sauce without
fiction is used as a vehicle for the evasion of an existing obligation; 2) just cause
fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where a corporation is xxxx
merely 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 are Unpaid rentals for the lease
so conducted as to make it merely an instrumentality, agency, conduit or of machinery from Advanced
adjunct of another corporation.25 Technology Systems, Inc.
CMCI 's alter ego theory rests on the alleged interlocking boards of CMC has been leasing a machinery of Advanced Technology Systems,
directors and stock ownership of the two corporations. The CA, however, Inc. (Advanced Tech), a domestic corporation of which I am also the
rejected this theory based on the settled rule that mere ownership by a majority stockholder. CMC owes Advanced Tech. unpaid rentals in
single stockholder of even all or nearly all of the capital stocks of a
corporation, by itself, is not sufficient ground to disregard the corporate the amount of P443,729.37, but despite various demands, CMC refused
veil. We can only sustain the CA's ruling. The instrumentality or control to pay Advanced Tech.
test of the alter ego doctrine requires not mere majority or complete stock
control, but complete domination of finances, policy and business practice
with respect to the transaction in question. The corporate entity must be We have already formally lodged our grievances concerning the
shown to have no separate mind, will, or existence of its own at the time foregoing with the management of CMC. However, until now, no action
of the transaction.26 has been done. We believe that before we take coercive actions available
under the law, it is wise to bring said grievances first to your attention to
Without question, the Spouses Celones are incorporators, directors, and exhaust available venues for amicable settlement.
majority stockholders of the ATSI and PPPC. But that is all that CMCI
has proven. There is no proof that PPPC controlled the financial policies Though PPPC's grievances are ripe for judicial action, we still hope that
and business practices of ATSI either in July 2001 when Felicisima we can settle [the] same amicably. However, if we run out of choices, we
proposed to set off the unpaid ₱3.2 million mobilization fund with will [be] constrained to invoke the aid of the appropriate court. (Emphases
CMCI's rental of Prodopak machines; or in August 2001 when the lease supplied)27
agreement between CMCI and ATSI commenced.
Assuming arguendo that Felicisima was sufficiently clothed with Nothing in the narration above supports CMCI's claim that it had been led
authority to propose the offsetting of obligations, her proposal cannot bind to believe that ATSI and PPPC were one and the same; or, that ATSI's
ATSI because at that time the latter had no transaction yet with CMCI. collectible was intertwined with the business transaction of PPPC with
Besides, CMCI had leased only one Prodopak machine. Felicisima's CMCI.
reference to the Prodopak machines in its letter in July 2001 could only
In all its pleadings, CMCI averred that the P4 million mobilization fund
mean that those were different from the Prodopak machine that CMCI
was in furtherance of its agreement with PPPC in 2000. Prior thereto,
1awp++i1

had leased from A TSI.
Contrary to the claim of CMCI, none of the letters from the Spouses
Celones tend to show that ATSI was even remotely involved in the
proposed offsetting of the outstanding debts of CMCI and PPPC. Even
Felicisima's letter to the new management of CMCI in 2003 contains
nothing to support CMCI's argument that Felicisima represented herself
to be clothed with authority to propose the offsetting. For clarity, we quote
below the relevant portions of her letter:
Gentlemen:
I apologize for writing this letter. But kindly spare me your time and allow
to ventilate my grievances against California Manufacturing Corporation
x x x. I had formally lodged my grievances with the management of CMC,
PPPC had been a toll packer of its products as early as 1996. Clearly,
CMCI had been dealing with PPPC as a distinct juridical person acting
through its own corporate officers from 1996 to 2003.
CMCI's dealing with ATSI began only in August 2001. It appears,
however, that CMCI now wants the Court to gloss over the separate
corporate existence ATSI and PPPC notwithstanding the dearth of
evidence showing that either PPPC or ATSI had used their corporate
cover to commit fraud or evade their respective obligations to CMCI. It
even appears that CMCI faithfully discharged its obligation to ATSI for a
good two years without raising any concern about its relationship to
PPPC.
The fraud test, which is the second of the three-prong test to determine
the application of the alter ego doctrine, requires that the parent

Obligations Part 2 | Page 119 of 143

corporation's conduct in using the subsidiary corporation be unjust,
fraudulent or wrongful. Under the third prong, or the harm test, a causal
connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage
incurred by the plaintiff has to be established.28 None of these elements
have been demonstrated in this case. Hence, we can only agree with the
CA and RTC in ruling out mutuality of parties to justify the application
of legal compensation in this case.
Article 1279 of the Civil Code provides:
ARTICLE 1279. In order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
The law, therefore, requires that the debts be liquidated and demandable.
Liquidated debts are those whose exact amounts have already been
determined. 29
CMCI has not presented any credible proof, or even just an exact
computation, of the supposed debt of PPPC. It claims that the
mobilization fund that it had advanced to PPPC was in the amount of ₱4
million. Yet, Felicisima's proposal to conduct offsetting in her letter dated
30 July 2001 pertained to a ₱3.2 million debt of PPPC to CMCI.
Meanwhile, in its Answer to ATSI's complaint, CMCI sought to set off
its unpaid rentals against the alleged ₱10 million debt of PPPC. The
uncertainty in the supposed debt of PPPC to CMCI negates the latter's
invocation of legal compensation as justification for its non-payment of
the rentals for the subject Prodopak machine.
WHEREFORE, the Decision dated 25 August 2011 and Resolution
dated 21 June 2012 issued by the Court of Appeals in CA-G.R. CV No.
94409 are AFFIRMED. The instant Petition is DENIED for lack of
merit.
SO ORDERED.
N OVATION
ACE Foods, Inc. v. Micro Pacific Technologies., Ltd.
G.R. No. 200602 December 11, 2013
ACE FOODS, INC., Petitioner,
vs.
MICRO PACIFIC TECHNOLOGIES CO., LTD.1, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2are the Decision3 dated
October 21, 2011 and Resolution4 dated February 8, 2012 of the Court of
Appeals (CA) in CA-G.R. CV No. 89426 which reversed and set aside
the Decision5 dated February 28, 2007 of the Regional Trial Court of
Makati, Branch 148 (RTC) in Civil Case No. 02-1248, holding petitioner
ACE Foods, Inc. (ACE Foods) liable to respondent Micro Pacific
Technologies Co., Ltd. (MTCL) for the payment of Cisco Routers and
Frame Relay Products (subject products) amounting to ₱646,464.00
pursuant to a perfected contract of sale.
The Facts
ACE Foods is a domestic corporation engaged in the trading and
distribution of consumer goods in wholesale and retail bases,6 while
MTCL is one engaged in the supply of computer hardware and
equipment.7
On September 26, 2001, MTCL sent a letter-proposal8 for the delivery
and sale of the subject products to be installed at various offices of ACE
Foods. Aside from the itemization of the products offered for sale, the
said proposal further provides for the following terms, viz.:9
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate and subject to changes
without prior notice.
DELIVERY : Immediate delivery for items on stock, otherwise thirty (30)
to forty-five days upon receipt of [Purchase Order]
WARRANTY : One (1) year on parts and services. Accessories not
included in warranty.
On October 29, 2001, ACE Foods accepted MTCL’s proposal and
accordingly issued Purchase Order No. 10002310(Purchase Order) for the
subject products amounting to ₱646,464.00 (purchase price). Thereafter,
or on March 4, 2002, MTCL delivered the said products to ACE Foods as
reflected in Invoice No. 7733 11 (Invoice Receipt). The fine print of the
invoice states, inter alia, that "[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of
the terms and conditions of above and payment of the price"12 (title
reservation stipulation). After delivery, the subject products were then
installed and configured in ACE Foods’s premises. MTCL’s demands
against ACE Foods to pay the purchase price, however, remained
unheeded.13 Instead of paying the purchase price, ACE Foods sent MTCL
a Letter14 dated September 19, 2002, stating that it "ha[s] been returning
the [subject products] to [MTCL] thru [its] sales representative Mr. Mark
Anteola who has agreed to pull out the said [products] but had failed to
do so up to now."
Eventually, or on October 16, 2002, ACE Foods lodged a
Complaint15 against MTCL before the RTC, praying that the latter pull
out from its premises the subject products since MTCL breached its "after
delivery services" obligations to it, particularly, to: (a) install and
configure the subject products; (b) submit a cost benefit study to justify
the purchase of the subject products; and (c) train ACE Foods’s
technicians on how to use and maintain the subject products. 16 ACE
Foods likewise claimed that the subject products MTCL delivered are
defective and not working.17
For its part, MTCL, in its Answer with Counterclaim,18 maintained that it
had duly complied with its obligations to ACE Foods and that the subject
products were in good working condition when they were delivered,
installed and configured in ACE Foods’s premises. Thereafter, MTCL
even conducted a training course for ACE Foods’s
representatives/employees; MTCL, however, alleged that there was
actually no agreement as to the purported "after delivery services."
Further, MTCL posited that ACE Foods refused and failed to pay the
purchase price for the subject products despite the latter’s use of the same
for a period of nine (9) months. As such, MTCL prayed that ACE Foods
be compelled to pay the purchase price, as well as damages related to the
transaction.19
The RTC Ruling
On February 28, 2007, the RTC rendered a Decision, 20 directing MTCL
to remove the subject products from ACE Foods’s premises and pay
actual damages and attorney fees in the amounts of ₱200,000.00 and
₱100,000.00, respectively.21
At the outset, it observed that the agreement between ACE Foods and
MTCL is in the nature of a contract to sell. Its conclusion was based on
the fine print of the Invoice Receipt which expressly indicated that "title
to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO.,
LTD. until full compliance of the terms and conditions of above and
payment of the price," noting further that in a contract to sell, the
prospective seller explicitly reserves the transfer of title to the prospective
buyer, and said transfer is conditioned upon the full payment of the
purchase price.22 Thus, notwithstanding the execution of the Purchase
Order and the delivery and installation of the subject products at the
offices of ACE Foods, by express stipulation stated in the Invoice Receipt
issued by MTCL and signed by ACE Foods, i.e., the title reservation
stipulation, it is still the former who holds title to the products until full
payment of the purchase price therefor. In this relation, it noted that the
full payment of the price is a positive suspensive condition, the non-
payment of which prevents the obligation to sell on the part of the
seller/vendor from materializing at all.23 Since title remained with MTCL,
the RTC therefore directed it to withdraw the subject products from ACE
Foods’s premises. Also, in view of the foregoing, the RTC found it
unnecessary to delve into the allegations of breach since the non-
happening of the aforesaid suspensive condition ipso jure prevented the
obligation to sell from arising.24
Dissatisfied, MTCL elevated the matter on appeal.25
The CA Ruling
In a Decision26 dated October 21, 2011, the CA reversed and set aside the
RTC’s ruling, ordering ACE Foods to pay MTCL the amount of
Obligations Part 2 | Page 120 of 143
₱646,464.00, plus legal interest at the rate of 6% per annum to be
computed from April 4, 2002, and attorney’s fees amounting to
₱50,000.00.27
It found that the agreement between the parties is in the nature of a
contract of sale, observing that the said contract had been perfected from
the time ACE Foods sent the Purchase Order to MTCL which, in turn,
delivered the subject products covered by the Invoice Receipt and
subsequently installed and configured them in ACE Foods’s
premises.28 Thus, considering that MTCL had already complied with its
obligation, ACE Foods’s corresponding obligation arose and was then
duty bound to pay the agreed purchase price within thirty (30) days from
March 5, 2002.29 In this light, the CA concluded that it was erroneous for
ACE Foods not to pay the purchase price therefor, despite its receipt of
the subject products, because its refusal to pay disregards the very essence
of reciprocity in a contract of sale.30 The CA also dismissed ACE Foods’s
claim regarding MTCL’s failure to perform its "after delivery services"
obligations since the letter-proposal, Purchase Order and Invoice Receipt
do not reflect any agreement to that effect.31
Aggrieved, ACE Foods moved for reconsideration which was, however,
denied in a Resolution 32 dated February 8, 2012, hence, this petition.
The Issue Before the Court
The essential issue in this case is whether ACE Foods should pay MTCL
the purchase price for the subject products.
The Court’s Ruling
The petition lacks merit.
A contract is what the law defines it to be, taking into consideration its
essential elements, and not what the contracting parties call it.33 The real
nature of a contract may be determined from the express terms of the
written agreement and from the contemporaneous and subsequent acts of
the contracting parties. However, in the construction or interpretation of
an instrument, the intention of the parties is primordial and is to be
pursued. The denomination or title given by the parties in their contract
is not conclusive of the nature of its contents.34
The very essence of a contract of sale is the transfer of ownership in
exchange for a price paid or promised. 35This may be gleaned from
Article 1458 of the Civil Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties obligates
himself to transfer the ownership and to deliver a determinate thing, and
the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (Emphasis supplied)
Corollary thereto, a contract of sale is classified as a consensual contract,
which means that the sale is perfected by mere consent. No particular
form is required for its validity. Upon perfection of the contract, the
parties may reciprocally demand performance, i.e., the vendee may
compel transfer of ownership of the object of the sale, and the vendor may
require the vendee to pay the thing sold.36
In contrast, a contract to sell is defined as a bilateral contract whereby
the prospective seller, while expressly reserving the ownership of the
property despite delivery thereof to the prospective buyer, binds himself
to sell the property exclusively to the prospective buyer upon fulfillment
of the condition agreed upon, i.e., the full payment of the purchase price.
A contract to sell may not even be considered as a conditional contract
of sale where the seller may likewise reserve title to the property subject
of the sale until the fulfillment of a suspensive condition, because in a
conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event which
may or may not occur.37
In this case, the Court concurs with the CA that the parties have agreed to
a contract of sale and not to a contract to sell as adjudged by the RTC.
Bearing in mind its consensual nature, a contract of sale had been
perfected at the precise moment ACE Foods, as evinced by its act of
sending MTCL the Purchase Order, accepted the latter’s proposal to sell
the subject products in consideration of the purchase price of
₱646,464.00. From that point in time, the reciprocal obligations of the
parties – i.e., on the one hand, of MTCL to deliver the said products to
ACE Foods, and, on the other hand, of ACE Foods to pay the purchase
price therefor within thirty (30) days from delivery – already arose and
consequently may be demanded. Article 1475 of the Civil Code makes
this clear:
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract and
upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
At this juncture, the Court must dispel the notion that the stipulation anent
MTCL’s reservation of ownership of the subject products as reflected in
the Invoice Receipt, i.e., the title reservation stipulation, changed the
complexion of the transaction from a contract of sale into a contract to
sell. Records are bereft of any showing that the said stipulation novated
the contract of sale between the parties which, to repeat, already existed
at the precise moment ACE Foods accepted MTCL’s proposal. To be
sure, novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. In either case, however,
novation is never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken.38
In the present case, it has not been shown that the title reservation
stipulation appearing in the Invoice Receipt had been included or had
subsequently modified or superseded the original agreement of the
parties. The fact that the Invoice Receipt was signed by a representative
of ACE Foods does not, by and of itself, prove animus novandi since: (a)
it was not shown that the signatory was authorized by ACE Foods (the
actual party to the transaction) to novate the original agreement; (b) the
signature only proves that the Invoice Receipt was received by a
representative of ACE Foods to show the fact of delivery; and (c) as
matter of judicial notice, invoices are generally issued at the
consummation stage of the contract and not its perfection, and have been
even treated as documents which are not actionable per se, although they
may prove sufficient delivery. 39 Thus, absent any clear indication that the
title reservation stipulation was actually agreed upon, the Court must
deem the same to be a mere unilateral imposition on the part of MTCL
which has no effect on the nature of the parties’ original agreement as a
contract of sale. Perforce, the obligations arising thereto, among others,
ACE Foods’s obligation to pay the purchase price as well as to accept
the delivery of the goods,40 remain enforceable and subsisting. 1âwphi1
As a final point, it may not be amiss to state that the return of the subject
products pursuant to a rescissory action41is neither warranted by ACE
Foods’s claims of breach – either with respect to MTCL’s breach of its
purported "after delivery services" obligations or the defective condition
of the products - since such claims were not adequately proven in this
case. The rule is clear: each party must prove his own affirmative
allegation; one who asserts the affirmative of the issue has the burden of
presenting at the trial such amount of evidence required by law to obtain
a favorable judgment, which in civil cases, is by preponderance of
evidence. 42 This, however, ACE Foods failed to observe as regards its
allegations of breach. Hence, the same cannot be sustained.
WHEREFORE, the petition is DENIED. Accordingly, the Decision
dated October 21, 2011 and Resolution dated February 8, 2012 of the
Court of Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.
SO ORDERED.
Philippine Reclamation Authority v. Romago, Inc.
G.R. No. 174665 September 18, 2013
PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the
PUBLIC ESTATES AUTHORITY), Petitioner,
vs.
ROMAGO, INCORPORATED, Respondent.
x-----------------------x
G.R. No. 175221
ROMAGO, INCORPORATED, Petitioner,
vs.
PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the
PUBLIC ESTATES AUTHORITY),Respondent.
DECISION
ABAD, J.:
These cases pertain to the defense of novation by virtue of the debtor’s
assignment to a third party of its contractual liability to the creditor.
The Facts and the Case
In order to convert former military reservations and installations to
productive use and raise funds out of the sale of portions of the country’s
1 2
military camps, in 1992 Congress enacted Republic Act 7227, creating
Obligations Part 2 | Page 121 of 143
the Bases Conversion and Development Authority (BCDA). Pursuant to
3 March 17, 2004 Romago filed with the Construction Industry Arbitration
this law, the President issued Executive Order 40, Series of 1992, setting
aside portions of Fort Bonifacio in Taguig, Metro Manila, for the Heritage
Park Project, aimed at converting a 105-hectare land into a world class
4 from the PRA, HPMC, and Rosehills Memorial Management (Phils.), Inc.
memorial park for the purpose of generating funds for the BCDA.
On August 9, 1993 the BCDA entered into a Memorandum of
5 17
Agreement (MOA) with the Philippine Reclamation Authority
(PRA),formerly the Public Estates Authority, designating it as the Project
Manager. On September 9, 1994 the BCDA, PRA, and the Philippine
National Bank (PNB) executed a Pool Formation Trust Agreement
6 the 105-hectare park was delivered to Romago for lighting work, reducing
(PFTA) under which BCDA, as project owner, was to issue Heritage Park
Investment Certificates that would evidence the holders’ right to the
perpetual use and care of specific interment plots. The PFTA designated
PRA as Project Manager, tasked with the physical development of the
7 21
park. The PNB was to act as trustee for the Heritage Park securitization.
After public bidding, the PRA awarded the outdoor electrical and lighting
works for the park to respondent Romago, Inc. (Romago) with which it
entered into a Construction Agreement on March 18, 1996 for the contract
8
price of ₱176,326,794.10. On receipt of the PRA’s notice to
9 10
proceed, Romago immediately began construction works. Meanwhile,
the parties to the PFTA organized the Heritage Park Management
11
Corporation (HPMC) to take over the management of the project. On
February 24, 2000 the Chairman of HPMC Board of Trustees, Mr.
Rogelio L. Singson, sent a notice of termination of management to then
PRA General Manager Carlos P. Doble with a demand for the turnover of
12
the park to HPMC. The letter reads:
Pursuant to Article 11 of the Pool Formation Trust Agreement(PFTA),
the certificate holders of the Heritage Park Management Corporation
(HPMC) duly elected its Board of Trustees at the 03 January2000 meeting
held at the BCDA Corporate Center. Attached is a copy of the Secretary’s
Certificate attesting to said election of the HPMC Board of Trustees.
Section 11.07 of the PFTA provides that upon the election of the Board
of Trustees, the PNB shall turnover to the Board all its functions and
responsibilities, and all documents in its custody, including all Heritage
Park Accounts, except the General Fund, which will go to BCDA. Upon
such turnover and upon the complete and faithful performance by PNB
and [PRA] of their respective obligations under this Agreement, the
respective obligations of [PRA] and PNB under this Agreement shall be
deemed terminated.
[PRA] shall turnover to the Board of Trustees all the documents and
equipment it has in its possession relating to the Project and the Park,
including the computer hardware and software pertaining to the
geographical information system of the Park."
Pursuant to the foregoing provision, we hereby formally advise you of the
termination of [PRA’s] obligations, duties and responsibilities as Project
Manager under the PFTA, effective upon receipt of this letter. We also
formally request for [PRA] to turn over, within fifteen (15) days from
receipt of this letter, the documents and equipment relating to the Heritage
Park Project, including the computer hardware and software in [PRA’s]
possession pertaining to the geographical information system of the
13
Park.
The PRA lost no time in informing Romago of the consequent termination
14
of its services. Thus, it wrote Romago a letter on March 13,2000:
As a consequence of the assumption of functions, duties and
responsibilities by the Heritage Park Management Corporation, as
provided for under the provisions of the Pool Formation Trust Agreement,
we are constrained to assign the Electrical Works contract entered with
you on March 18, 1996 including all supplemental agreements relative
thereto, effective March 18, 2000 in favor of the Heritage Park
Management Corporation. The formal turnover on March 17, 2000
by[PRA] to the Heritage Park Management Corporation of all its
obligations, duties and responsibilities, and all documents relating to the
Heritage Park Project, was made pursuant to the attached letter of the
Chairman of HPMC Board of Trustees, Mr. Rogelio L. Singson to the
[PRA], received by us on March 02, 2000.
By virtue of this assignment, all the contractual functions, responsibilities
and liabilities, if any, as well as any cause of action for or against [PRA]
shall hereafter accrue to and devolve upon the assignee hereof.
15
Please be guided accordingly.
Because the HPMC refused to recognize the PRA’s contract with it, on
16
Commission (CIAC) a complaint, docketed as CIAC Case 18-
2004,seeking to collect its claims totaling ₱24,467,621.64, plus interest
(RMMI). Romago claimed that it won the bidding for the construction of
the electrical and lighting facilities at the Heritage Park for
₱181,779,800.00 but PRA deducted 3% from the bid amount, reducing
18
the contract price to₱176,326,794.10.
Because of problems encountered with illegal settlers, only around 60of
19
the contract price to ₱101,083,636.16. But this amount was adjusted to
20
₱109,330,032.81 due to PRA variation orders. Although Romago
completed 96.15% of the works, it claimed that the PRA paid it
only₱82,929,577.22 instead of the ₱105,120,826.50 due it. Romago
also claimed that it should be reimbursed the ₱9,336,054.15 retention
money that it posted since its services had already been terminated and
22
since it had substantially completed the Heritage Park Project.
Romago also sought payment of the additional costs and expenses that it
incurred by reason of PRA’s delays in turning over the project area, in
delivering the owner-supplied equipment, and in solving the security
problems at the work site. These included price escalation of materials
and supplies, at ₱857,799.10; and extended overhead costs, at
23
₱10,051,870.61. And, for mobilizations costs that it spent preparing for
works on the entire105-hectare project area, Romago sought additional
payment of ₱7,524,315.79 plus interest of ₱517,923.74 from April 12,
1999 to May 31,1999 or a total of ₱8,042,239.53. It also claimed
proportionate refund of ₱2,327,107.97 out of the 3% discount applied to
24
its original bid and ₱420,944.02 in damages for the unceremonious
25
termination of its services.
Romago admitted, however, owing the PRA ₱15,475,835.42 in
unrecouped prepaid materials and ₱12,286,795.12 in unrecouped down
26
payment.
In its answer, the PRA denied liability, claiming that it entered into the
construction agreement with Romago after its approval by the Heritage
Park Executive Committee, the policy-making and governing body of the
Heritage Park Project. The PRA merely processed and recommended
payment of all the works done. The money came from the project’s
Construction and Development Fund that PRA did not control. PNB acted
as trustee of the fund under the PFTA. Since these funds had all been
turned over to the HPMC when the latter came into being, Romago should
27
not address its claims to PRA.
Rather than answer the complaint, the HPMC and RMMI moved to
dismiss it, claiming that CIAC had no jurisdiction over them since they
28
never agreed to arbitration. Additionally, the HPMC said that the
PRA’s turnover of the Heritage Park project to it did not amount to
assignment of the PRA’s liabilities under the construction agreement.
Further, its termination of the PRA’s authority over the project carried
with it the termination of any Construction Agreement that the PRA
entered into.
For its part, RMMI averred that it was merely the undertaker at the
Heritage Park, tasked with providing services for embalming, burial,
29
cremation, and other activities for the care of the dead.
On July 22, 2004 the CIAC issued an order dropping RMMI as respondent
30
but denying the HPMC’s motion to dismiss the case against it. The
HPMC elevated the CIAC order to the Court of Appeals (CA) by special
civil action of certiorari and prohibition in CA-G.R. SP 86342.
Meantime, after due proceedings, on October 22, 2004 the CIAC rendered
31
a decision, holding the PRA and the HPMC jointly and severally liable
to Romago for the following amounts:
The unpaid balance of the 96.15%
accomplishment ---------------------------------------------------------------
Interest from 15 May 2002 to 31
January 2004 at 6% per annum --------------------------------------------
Obligations Part 2 | Page 122 of 143

Plus:
1.1.1 – Retention Charges ----------------
1.1.2 – Price Escalation -------------------
1.1.3 – Damages for Closure of Area --
1.1.4 – Reimbursement for Pro-rata
discount ----------------------------
1.1.5 – Damages for Stoppage of Works
Sub-Total -------
Less:
Unrecouped prepaid materials and
unrecouped downpayment --------------------------------------------------
Actual Damages Due --------------------------
Plus:
Additional 6% interest from February 1, 2004
to August 31, 2004 on the ₱15,280,012.35 -----------------------------
Costs of Arbitration:
Filing Fee -------------------
Administrative Fee -------
Arbitrator’s Fees ----------
ADF -------------------------
Total Cost of Arbitration -----------------------
Total Award --------------------------------------
Not satisfied with the CIAC decision, the PRA filed a petition for review
of the same with the CA in CA-G.R. SP 88059.
Meantime on February 18, 2005 the CA rendered a Decision in CA-G.R.
SP 86342, dismissing Romago’s complaint before the CIAC against the
HPMC on the ground that the latter did not have an arbitration agreement
33
with Romago.
34
On December 20, 2005 the CA rendered a Decision in CA-G.R.
S₱88059, the main case, finding that the unpaid accomplishment of
Romago should be reduced from ₱22,191,249.33 to ₱18,641,208.89, and
that interests on the damages awarded to Romago arising from the
reduction in project area and on its unpaid accomplishment from May 15,
2002 to January 31, 2004 should be deleted, therefore entitling it to actual
35
damages in the amount of ₱8,935,673.86 plus interest from February
1, 2004 to August 31, 2004 and the costs of arbitration.
The CA rejected the PRA’s argument that it can no longer be held liable
to Romago after turning over and assigning the project, including all its
duties and obligations relating to it, to the HPMC. Romago was not a party
to the PFTA and it did not give consent to the PRA’s supposed assignment
of its obligations to the HPMC.
The PRA and Romago separately moved for reconsideration of the
decision but the CA denied both motions in its August 24,
36
2006Resolution. Undeterred, both parties filed separate petitions for
₱9,336,054.15
review before this Court in G.R. 174665 for the PRA and in G.R. 175221
for Romago.
The775,793.55
Issues Presented
These consolidated cases present the following issues:
8,042,239.53
1. Whether or not the CA erred in holding the PRA still liable to Romago
under the Construction Agreement despite the subsequent turnover of the
Heritage Park Project to the HPMC; and
2. Whether or not the CA erred in reducing the CIAC award for actual
(not entitled)
damages to Romago to just ₱8,935,673.86.
The Rulings of the Court
420,944.02
The PRA claims that its liability under its contract with Romago had been
extinguished by novation when it assigned all its obligations to the HPMC
₱18,575,031.25
pursuant to the provisions of the PFTA. The PRA insists that the CA
erroneously applied to the case the 2001 ruling of the Court in Public
37
Estates Authority v. Uy that also involved the Heritage Park Project.
Uy dealt only with the PRA and the HPMC came into the picture only
after the case has been filed. Here, while Romago first dealt with the PRA,
it eventually dealt with the HPMC before the construction company can
finish the contracted works, evidencing novation of parties.
27,762,642.54
In novation, a subsequent obligation extinguishes a previous one through
substitution either by changing the object or principal conditions, by
₱15,280,012.35
substituting another in place of the debtor, or by subrogating a third
38
person into the rights of the creditor. Novation requires (a) the existence
of a previous valid obligation; (b) the agreement of all parties to the new
contract; (c) the extinguishment of the old contract; and (d) the validity of
39
the new one.
There cannot be novation in this case since the proposed substituted
534,800.43
parties did not agree to the PRA’s supposed assignment of its obligations
under the contract for the electrical and light works at Heritage Park to
the HPMC. The latter definitely and clearly rejected the PRA’s
assignment of its liability under that contract to the HPMC. Romago tried
to follow up its claims with the HPMC, not because of any new contract
₱26,834.39
it entered into with the latter, but simply because the PRA told it that the
HPMC would henceforth assume the PRA’s liability under its contract
with Romago. 1âwph i1
28,164.39
Besides, Section 11.07 of the PFTA makes it clear that the termination of
the PRA’s obligations is conditioned upon the turnover of documents,
316,296.95computer hardware and software on the geographical
equipment,
information system of the Park; and the completion and faithful
performance of its respective duties and responsibilities under the PFTA.
More25,323.99
importantly, Section 11.07 did not say that the HPMC shall,
thereafter, assume the PRA’s obligations. On the contrary, Section 7.01
of the PFTA recognizes that contracts that the PRA entered into in its own
name and makes it liable for the same.₱396,608.73
Thus:
Section 7.01. Liability of BCDA and [PRA]. BCDA and [PRA]shall be
liable in accordance herewith only ₱16,211,421.51 32
to the extent of the obligations
specifically undertaken by BCDA and [PRA] herein and any other
documents or agreements relating to the Project, and in which they are
40
parties.
Romago claims that the CA award should be increased to₱13,598,139.24
based on the detailed account of expenses and cash payments as of
December 31, 2005 that it submitted. But the Court cannot agree.
Engineer J. R. Milan testified that Romago received ₱86,479,617.61 out
of ₱105,120,826.50 worth of work that it accomplished, thereby leaving
a deficiency of only ₱18,641,208.89. Thus:
ATTY. S.B. GARCIA:
Mr. Witness, from the time you became the Project Manager of Heritage
Park Project up to the time it turned over its responsibilities to HPMC,
can you recall how much [PRA] already paid to Romago? You can refer
to any documents we have now with you for recollection.
ENGR. J.R. MILLAN:
Based on progress Report No. 50, which was submitted by the Managing
Consultant of Robert Espiritu, the accomplishment as of February 29,
2000, the amount disbursed as of Billing no. 14A is₱86,479,617.61.
ATTY. S.B. GARCIA:
Obligations Part 2 | Page 123 of 143
What document again are you referring to, Mr. Witness?
ENGR. J.R. MILLAN:This is a Progress Report dated March 8, 2000
addressed to the [Philippine Reclamation Authority], Progress Report No.
50 submitted by Mr. Roberto Espiritu.
ATTY. S.B. GARCIA: And the one where the ₱86,479,617.61, the
document which reflects that amount, that is what the document?
ENGR. J.R. MILLAN:
This is the attachment to the accomplishment of Romago kasi the
Managing Consultant who made the report, they were the ones computing
the accomplishments of the contractors. All the contractors in the project,
bale ito yong report nila . For Romago, ito yong report niya as of
February29, 2000.
ATTY. S.B. GARCIA:
Your Honor, please, may I request that this accomplishment report as
February 29, 2000 for outdoor electrical and lighting works be marked as
41
our exhibit "R-2-10."
Had the above testimony been untrue, Romago should have refuted the
same considering that it had every opportunity to do so. On the contrary,
42
it even adopted the same document as its own exhibit. In effect,
Romago conceded the correctness of the PRA’s valuation of the balance
due it.
In keeping with this Court’s ruling in Eastern Shipping Lines, Inc. v.
43
Court of Appeals, the Court deems it proper to impose legal interest of
6% per annum on the amount finally adjudged, reckoned from October
22,2004, the date the CIAC rendered judgment until the same is wholly
44
satisfied.
WHEREFORE , the Court AFFIRMS the Decision dated December 20,
2005 and Resolution dated August 24, 2006 of the Court of Appeals in
CA-G.R. SP 88059 with MODIFICATION , directing the Philippine
Reclamation Authority to pay Romago in addition to the
₱8,935,673.86award of actual damages, legal interest of 6% per annum
from October 22,2004 until the judgment against it is wholly paid; and
the costs of arbitration in the amount of ₱396,608.73.
SO ORDERED.
Vector Shipping Corporation v. Amercan Home Assurance Co.
G.R. No. 159213 July 3, 2013
VECTOR SHIPPING CORPORATION and FRANCISCO
SORIANO, Petitioners,
vs.
AMERICAN HOME ASSURANCE COMPANY and SULPICIO
LINES, INC., Respondents.
DECISION
BERSAMIN, J.:
Subrogation under Article 2207 of the Civil Code gives rise to a cause of
action created by law. For purposes of the law on the prescription of
actions, the period of limitation is ten years.
The Case
Vector Shipping Corporation (Vector) and Francisco Soriano appeal the
1
decision promulgated on July 22, 2003, whereby the Court of Appeals
(CA) held them jointly and severally liable to pay ₱7 ,455,421.08 to
American Home Assurance Company (respondent) as and by way of
actual damages on the basis of respondent being the subrogee of its
insured Caltex Philippines, Inc. (Caltex).
Antecedents
Vector was the operator of the motor tanker M/T Vector, while Soriano
was the registered owner of the M/T Vector. Respondent is a domestic
2 After a careful perusal of the factual milieu and the evidence adduced by
insurance corporation.
On September 30, 1987, Caltex entered into a contract of
3 between Caltex and M/T Vector is culpa contractual based on a Contract
Affreightment with Vector for the transport of Caltex’s petroleum cargo
through the M/T Vector. Caltex insured the petroleum cargo with
respondent for ₱7,455,421.08 under Marine Open Policy No. 34-5093-
4
6. In the evening of December 20, 1987, the M/T Vector and the M/V
Doña Paz, the latter a vessel owned and operated by Sulpicio Lines, Inc.,
collided in the open sea near Dumali Point in Tablas Strait, located
between the Provinces of Marinduque and Oriental Mindoro. The
collision led to the sinking of both vessels. The entire petroleum cargo of
5
Caltex on board the M/T Vector perished. On July 12, 1988, respondent
indemnified Caltex for the loss of the petroleum cargo in the full amount
6
of ₱7,455,421.08.
On March 5, 1992, respondent filed a complaint against Vector, Soriano,
and Sulpicio Lines, Inc. to recover the full amount of ₱7,455,421.08 it
7
paid to Caltex (Civil Case No. 92-620). The case was raffled to Branch
145 of the Regional Trial Court (RTC) in Makati City.
On December 10, 1997, the RTC issued a resolution dismissing Civil
Case No. 92-620 on the following grounds:
This action is upon a quasi-delict and as such must be commenced within
four 4 years from the day they may be brought. [Art. 1145 in relation to
Art. 1150, Civil Code] "From the day [the action] may be brought" means
from the day the quasi-delict occurred. [Capuno v. Pepsi Cola, 13 SCRA
663]
The tort complained of in this case occurred on 20 December 1987. The
action arising therefrom would under the law prescribe, unless
interrupted, on 20 December 1991.
When the case was filed against defendants Vector Shipping and
Francisco Soriano on 5 March 1992, the action not having been
interrupted, had already prescribed.
Under the same situation, the cross-claim of Sulpicio Lines against Vector
Shipping and Francisco Soriano filed on 25 June 1992 had likewise
prescribed.
The letter of demand upon defendant Sulpicio Lines allegedly on 6
November 1991 did not interrupt the tolling of the prescriptive period
since there is no evidence that it was actually received by the addressee.
Under such circumstances, the action against Sulpicio Lines had likewise
prescribed.
Even assuming that such written extra-judicial demand was received and
the prescriptive period interrupted in accordance with Art. 1155, Civil
Code, it was only for the 10-day period within which Sulpicio Lines was
required to settle its obligation. After that period lapsed, the prescriptive
period started again. A new 4-year period to file action was not created
by the extra-judicial demand; it merely suspended and extended the
period for 10 days, which in this case meant that the action should be
commenced by 30 December 1991, rather than 20 December 1991.
Thus, when the complaint against Sulpicio Lines was filed on 5 March
1992, the action had prescribed.
PREMISES CONSIDERED, the complaint of American Home
Assurance Company and the cross-claim of Sulpicio Lines against Vector
Shipping Corporation and Francisco Soriano are DISMISSED.
Without costs.
8
SO ORDERED.
Respondent appealed to the CA, which promulgated its assailed decision
9
on July 22, 2003 reversing the RTC. Although thereby absolving
Sulpicio Lines, Inc. of any liability to respondent, the CA held Vector and
Soriano jointly and severally liable to respondent for the reimbursement
of the amount of ₱7,455,421.08 paid to Caltex, explaining:
xxxx
The resolution of this case is primarily anchored on the determination of
what kind of relationship existed between Caltex and M/V Dona Paz and
between Caltex and M/T Vector for purposes of applying the laws on
prescription. The Civil Code expressly provides for the number of years
before the extinctive prescription sets in depending on the relationship
that governs the parties.
xxxx
the parties, We are constrained to rule that the relationship that existed
between Caltex and M/V Dona Paz is that of a quasi-delict while that
of Affreightment or a charter party.
xxxx
On the other hand, the claim of appellant against M/T Vector is anchored
on a breach of contract of affreightment. The appellant averred that M/T
Vector committed such act for having misrepresented to the appellant that
said vessel is seaworthy when in fact it is not. The contract was executed
Obligations Part 2 | Page 124 of 143
between Caltex and M/T Vector on September 30, 1987 for the latter to
transport thousands of barrels of different petroleum products. Under
Article 1144 of the New Civil Code, actions based on written contract
must be brought within 10 years from the time the right of action accrued.
A passenger of a ship, or his heirs, can bring an action based on culpa
contractual within a period of 10 years because the ticket issued for the
transportation is by itself a complete written contract (Peralta de Guerrero
vs. Madrigal Shipping Co., L 12951, November 17, 1959).
Viewed with reference to the statute of limitations, an action against a
carrier, whether of goods or of passengers, for injury resulting from a
breach of contract for safe carriage is one on contract, and not in tort, and
is therefore, in the absence of a specific statute relating to such actions
governed by the statute fixing the period within which actions for breach
of contract must be brought (53 C.J.S. 1002 citing Southern Pac. R. Co.
of Mexico vs. Gonzales 61 P. 2d 377, 48 Ariz. 260, 106 A.L.R. 1012).
Considering that We have already concluded that the prescriptive periods
for filing action against M/V Doña Paz based on quasi delict and M/T
Vector based on breach of contract have not yet expired, are We in a
position to decide the appeal on its merit.
We say yes.
xxxx
Article 2207 of the Civil Code on subrogation is explicit that if the
plaintiff’s property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of, the insurance company should be
subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. Undoubtedly, the herein appellant has the
rights of a subrogee to recover from M/T Vector what it has paid by way
of indemnity to Caltex.
WHEREFORE, foregoing premises considered, the decision dated
December 10, 1997 of the RTC of Makati City, Branch 145 is hereby
REVERSED. Accordingly, the defendant-appellees Vector Shipping
Corporation and Francisco Soriano are held jointly and severally liable to
the plaintiff-appellant American Home Assurance Company for the
payment of ₱7,455,421.08 as and by way of actual damages.
10
SO ORDERED.
Respondent sought the partial reconsideration of the decision of the CA,
contending that Sulpicio Lines, Inc. should also be held jointly liable with
11
Vector and Soriano for the actual damages awarded. On their part,
however, Vector and Soriano immediately appealed to the Court on
12
September 12, 2003. Thus, on October 1, 2003, the CA held in
abeyance its action on respondent’s partial motion for reconsideration
13
pursuant to its internal rules until the Court has resolved this appeal.
Issues
The main issue is whether this action of respondent was already barred by
prescription for bringing it only on March 5, 1992. A related issue
concerns the proper determination of the nature of the cause of action as
arising either from a quasi-delict or a breach of contract.
The Court will not pass upon whether or not Sulpicio Lines, Inc. should
also be held jointly liable with Vector and Soriano for the actual damages
claimed.
Ruling
The petition lacks merit.
Vector and Soriano posit that the RTC correctly dismissed respondent’s
complaint on the ground of prescription. They insist that this action was
premised on a quasi-delict or upon an injury to the rights of the plaintiff,
which, pursuant to Article 1146 of the Civil Code, must be instituted
within four years from the time the cause of action accrued; that because
respondent’s cause of action accrued on December 20, 1987, the date of
the collision, respondent had only four years, or until December 20, 1991,
within which to bring its action, but its complaint was filed only on March
5, 1992, thereby rendering its action already barred for being commenced
14
beyond the four-year prescriptive period; and that there was no showing
that respondent had made extrajudicial written demands upon them for
the reimbursement of the insurance proceeds as to interrupt the running
15
of the prescriptive period.
We concur with the CA’s ruling that respondent’s action did not yet
prescribe. The legal provision governing this case was not Article 1146
16
of the Civil Code, but Article 1144 of the Civil Code, which states:
Article 1144. The following actions must be brought within ten years
from the time the cause of action accrues:
(1)Upon a written contract;
(2)Upon an obligation created by law;
(3)Upon a judgment.
We need to clarify, however, that we cannot adopt the CA’s
characterization of the cause of action as based on the contract of
affreightment between Caltex and Vector, with the breach of contract
being the failure of Vector to make the M/T Vector seaworthy, as to make
this action come under Article 1144 (1), supra. Instead, we find and hold
that that the present action was not upon a written contract, but upon an
obligation created by law. Hence, it came under Article 1144 (2) of the
Civil Code. This is because the subrogation of respondent to the rights of
Caltex as the insured was by virtue of the express provision of law
embodied in Article 2207 of the Civil Code, to wit:
Article 2207. If the plaintiff’s property has been insured, and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury. (Emphasis supplied)
The juridical situation arising under Article 2207 of the Civil Code is well
explained in Pan Malayan Insurance Corporation v. Court of
17
Appeals, as follows:
Article 2207 of the Civil Code is founded on the well-settled principle of
subrogation. If the insured property is destroyed or damaged through the
1âwphi1
fault or negligence of a party other than the assured, then the insurer, upon
payment to the assured, will be subrogated to the rights of the assured to
recover from the wrongdoer to the extent that the insurer has been
obligated to pay. Payment by the insurer to the assured operates as an
equitable assignment to the former of all remedies which the latter may
have against the third party whose negligence or wrongful act caused the
loss. The right of subrogation is not dependent upon, nor does it grow
1âwphi1
out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by the insurer
[Compania Maritima v. Insurance Company of North America, G.R. No.
L-18965, October 30, 1964, 12 SCRA 213; Fireman’s Fund Insurance
Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976,
18
70 SCRA 323].
Verily, the contract of affreightment that Caltex and Vector entered into
did not give rise to the legal obligation of Vector and Soriano to pay the
demand for reimbursement by respondent because it concerned only the
agreement for the transport of Caltex’s petroleum cargo. As the Court has
aptly put it in Pan Malayan Insurance Corporation v. Court of Appeals,
supra, respondent’s right of subrogation pursuant to Article 2207, supra,
was "not dependent upon, nor did it grow out of, any privity of contract
or upon written assignment of claim but accrued simply upon payment of
the insurance claim by the insurer."
Considering that the cause of action accrued as of the time respondent
actually indemnified Caltex in the amount of ₱7,455,421.08 on July 12,
19
1988, the action was not yet barred by the time of the filing of its
20
complaint on March 5, 1992, which was well within the 10-year period
prescribed by Article 1144 of the Civil Code.
The insistence by Vector and Soriano that the running of the prescriptive
period was not interrupted because of the failure of respondent to serve
any extrajudicial demand was rendered inconsequential by our foregoing
finding that respondent’s cause of action was not based on a quasi-delict
that prescribed in four years from the date of the collision on December
20, 1987, as the RTC misappreciated, but on an obligation created by law,
for which the law fixed a longer prescriptive period of ten years from the
accrual of the action.
Still, Vector and Soriano assert that respondent had no right of
subrogation to begin with, because the complaint did not allege that
respondent had actually paid Caltex for the loss of the cargo. They further
assert that the subrogation receipt submitted by respondent was
inadmissible for not being properly identified by Ricardo C. Ongpauco,
respondent’s witness, who, although supposed to identify the subrogation
receipt based on his affidavit, was not called to testify in court; and that
respondent presented only one witness in the person of Teresita Espiritu,
who identified Marine Open Policy No. 34-5093-6 issued by respondent
21
to Caltex.
Obligations Part 2 | Page 125 of 143
We disagree with petitioners’ assertions. It is undeniable that respondent
preponderantly established its right of subrogation. Its Exhibit C was
Marine Open Policy No. 34-5093-6 that it had issued to Caltex to insure
22
the petroleum cargo against marine peril. Its Exhibit D was the formal
written claim of Caltex for the payment of the insurance coverage of
23
₱7,455,421.08 coursed through respondent’s adjuster. Its Exhibits E to
H were marine documents relating to the perished cargo on board the M/V
Vector that were processed for the purpose of verifying the insurance
24
claim of Caltex. Its Exhibit I was the subrogation receipt dated July 12,
1988 showing that respondent paid Caltex ₱7,455,421.00 as the full
settlement of Caltex’s claim under Marine Open Policy No. 34-5093-
25
6. All these exhibits were unquestionably duly presented, marked, and
26
admitted during the trial. Specifically, Exhibit C was admitted as an
authentic copy of Marine Open Policy No. 34-5093-6, while Exhibits D,
E, F, G, H and I, inclusive, were admitted as parts of the testimony of
respondent’s witness Efren Villanueva, the manager for the adjustment
27
service of the Manila Adjusters and Surveyors Company.
Consistent with the pertinent law and jurisprudence, therefore, Exhibit I
was already enough by itself to prove the payment of ₱7,455,421.00 as
28
the full settlement of Caltex’s claim. The payment made to Caltex as
the insured being thereby duly documented, respondent became
subrogated as a matter of course pursuant to Article 2207 of the Civil
Code. In legal contemplation, subrogation is the "substitution of another
person in the place of the creditor, to whose rights he succeeds in relation
to the debt;" and is "independent of any mere contractual relations
between the parties to be affected by it, and is broad enough to cover every
instance in which one party is required to pay a debt for which another is
primarily answerable, and which in equity and conscience ought to be
29
discharged by the latter."
Lastly, Vector and Soriano argue that Caltex waived and abandoned its
claim by not setting up a cross-claim against them in Civil Case No.
18735, the suit that Sulpicio Lines, Inc. had brought to claim damages for
the loss of the M/V Doña Paz from them, Oriental Assurance Company
(as insurer of the M/T Vector), and Caltex; that such failure to set up its
cross- claim on the part of Caltex, the real party in interest who had
suffered the loss, left respondent without any better right than Caltex, its
insured, to recover anything from them, and forever barred Caltex from
asserting any claim against them for the loss of the cargo; and that
respondent was similarly barred from asserting its present claim due to its
being merely the successor-in-interest of Caltex.
The argument of Vector and Soriano would have substance and merit had
Civil Case No. 18735 and this case involved the same parties and litigated
the same rights and obligations. But the two actions were separate from
and independent of each other. Civil Case No. 18735 was instituted by
Sulpicio Lines, Inc. to recover damages for the loss of its M/V Doña Paz.
In contrast, this action was brought by respondent to recover from Vector
and Soriano whatever it had paid to Caltex under its marine insurance
policy on the basis of its right of subrogation. With the clear variance
between the two actions, the failure to set up the cross-claim against them
in Civil Case No. 18735 is no reason to bar this action.
WHEREFORE, the Court DENIES the petition for review on certiorari;
AFFIRMS the decision promulgated on July 22, 2003; and ORDERS
petitioners to pay the costs of suit.
SO ORDERED.
Asian Terminals, Inc. v. Philam Insurance Co., Inc.
G.R. No. 181163 July 24, 2013
ASIAN TERMINALS, INC., Petitioner,
vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
Inc.), Respondent.
x-----------------------x
G.R. No. 181262
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
Inc.), Petitioner,
vs.
WESTWIND SHIPPING CORPORATION and ASIAN TERMINALS,
INC., Respondents.
x-----------------------x
G.R. No. 181319
WESTWIND SHIPPING CORPORATION, Petitioner,
vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
Inc.) and ASIAN TERMINALS, INC.,Respondents.
DECISION
VILLARAMA, JR., J.:
Before us are three consolidated petitions for review on certiorari
1 2
assailing the Decision dated October 15, 2007 and the Resolution dated
January 11, 2008 of the Court of Appeals (CA) which affirmed with
3
modification the Decision of the Regional Trial Court (RTC) of Makati
City, Branch 148, in Civil Case No. 96-062. The RTC had ordered
Westwind Shipping Corporation (Westwind) and Asian Terminals, Inc.
(ATI) to pay, jointly and severally, Philam Insurance Co., Inc. (Philam)
the sum of ₱633,957.15, with interest at 12% per annum from the date of
judicial demand and ₱158,989.28 as attorney’s fees.
The facts of the case follow:
On April 15, 1995, Nichimen Corporation shipped to Universal Motors
Corporation (Universal Motors) 219 packages containing 120 units of
brand new Nissan Pickup Truck Double Cab 4x2 model, without engine,
tires and batteries, on board the vessel S/S "Calayan Iris" from Japan to
Manila. The shipment, which had a declared value of US$81,368 or
₱29,400,000, was insured with Philam against all risks under Marine
4
Policy No. 708-8006717-4.
The carrying vessel arrived at the port of Manila on April 20, 1995, and
when the shipment was unloaded by the staff of ATI, it was found that the
5
package marked as 03-245-42K/1 was in bad order. The Turn Over
6
Survey of Bad Order Cargoes dated April 21, 1995 identified two
packages, labeled 03-245-42K/1 and 03/237/7CK/2, as being dented and
broken. Thereafter, the cargoes were stored for temporary safekeeping
inside CFS Warehouse in Pier No. 5.
On May 11, 1995, the shipment was withdrawn by R.F. Revilla Customs
Brokerage, Inc., the authorized broker of Universal Motors, and delivered
7
to the latter’s warehouse in Mandaluyong City. Upon the request of
Universal Motors, a bad order survey was conducted on the cargoes and
it was found that one Frame Axle Sub without LWR was deeply dented
on the buffle plate while six Frame Assembly with Bush were deformed
8
and misaligned. Owing to the extent of the damage to said cargoes,
Universal Motors declared them a total loss.
On August 4, 1995, Universal Motors filed a formal claim for damages in
9 10
the amount of ₱643,963.84 against Westwind, ATI and R.F. Revilla
11
Customs Brokerage, Inc. When Universal Motors’ demands remained
unheeded, it sought reparation from and was compensated in the sum of
₱633,957.15 by Philam. Accordingly, Universal Motors issued a
12
Subrogation Receipt dated November 15, 1995 in favor of Philam.
On January 18, 1996, Philam, as subrogee of Universal Motors, filed a
13
Complaint for damages against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. before the RTC of Makati City, Branch 148.
On September 24, 1999, the RTC rendered judgment in favor of Philam
and ordered Westwind and ATI to pay Philam, jointly and severally, the
Obligations Part 2 | Page 126 of 143
sum of ₱633,957.15 with interest at the rate of 12% per annum,
₱158,989.28 by way of attorney’s fees and expenses of litigation.
The court a quo ruled that there was sufficient evidence to establish the
respective participation of Westwind and ATI in the discharge of and
consequent damage to the shipment. It found that the subject cargoes were
compressed while being hoisted using a cable that was too short and taut.
The trial court observed that while the staff of ATI undertook the physical
unloading of the cargoes from the carrying vessel, Westwind’s duty
officer exercised full supervision and control throughout the process. It
held Westwind vicariously liable for failing to prove that it exercised
extraordinary diligence in the supervision of the ATI stevedores who
unloaded the cargoes from the vessel. However, the court absolved R.F.
Revilla Customs Brokerage, Inc. from liability in light of its finding that
the cargoes had been damaged before delivery to the consignee.
The trial court acknowledged the subrogation between Philam and
Universal Motors on the strength of the Subrogation Receipt dated
November 15, 1995. It likewise upheld Philam’s claim for the value of
the alleged damaged vehicle parts contained in Case Nos. 03-245-42K/1
and 03-245-51K or specifically for "7 pieces of Frame Axle Sub Without
14
Lower and Frame Assembly with Bush."
15
Westwind filed a Motion for Reconsideration which was, however,
16
denied in an Order dated October 26, 2000.
On appeal, the CA affirmed with modification the ruling of the RTC. In a
Decision dated October 15, 2007, the appellate court directed Westwind
and ATI to pay Philam, jointly and severally, the amount of ₱190,684.48
with interest at the rate of 12% per annum until fully paid, attorney’s fees
of ₱47,671 and litigation expenses.
The CA stressed that Philam may not modify its allegations by claiming
17
in its Appellee’s Brief that the six pieces of Frame Assembly with Bush,
which were purportedly damaged, were also inside Case No. 03-245-
42K/1. The CA noted that in its Complaint, Philam alleged that "one (1)
pc. FRAME AXLE SUB W/O LWR from Case No. 03-245-42K/1 was
completely deformed and misaligned, and six (6) other pcs. of FRAME
ASSEMBLY WITH BUSH from Case No. 03-245-51K were likewise
18
completely deformed and misaligned."
The appellate court accordingly affirmed Westwind and ATI’s joint and
solidary liability for the damage to only one (1) unit of Frame Axle Sub
without Lower inside Case No. 03-245-42K/1. It also noted that when
said cargo sustained damage, it was not yet in the custody of the consignee
or the person who had the right to receive it. The CA pointed out that
Westwind’s duty to observe extraordinary diligence in the care of the
cargoes subsisted during unloading thereof by ATI’s personnel since the
former exercised full control and supervision over the discharging
operation.
Similarly, the appellate court held ATI liable for the negligence of its
employees who carried out the offloading of cargoes from the ship to the
pier. As regards the extent of ATI’s liability, the CA ruled that ATI cannot
limit its liability to ₱5,000 per damaged package. It explained that Section
19 20
7.01 of the Contract for Cargo Handling Services does not apply in
this case since ATI was not yet in custody and control of the cargoes when
the Frame Axle Sub without Lower suffered damage.
Citing Belgian Overseas Chartering and Shipping N.V. v. Philippine First
21
Insurance Co., Inc., the appellate court also held that Philam’s action
for damages had not prescribed notwithstanding the absence of a notice
of claim.
All the parties moved for reconsideration, but their motions were denied
in a Resolution dated January 11, 2008. Thus, they each filed a petition
for review on certiorari which were consolidated together by this Court
considering that all three petitions assail the same CA decision and
resolution and involve the same parties.
Essentially, the issues posed by petitioner ATI in G.R. No. 181163,
petitioner Philam in G.R. No. 181262 and petitioner Westwind in G.R.
No. 181319 can be summed up into and resolved by addressing three
questions: (1) Has Philam’s action for damages prescribed? (2) Who
between Westwind and ATI should be held liable for the damaged
cargoes? and (3) What is the extent of their liability?
Petitioners’ Arguments
G.R. No. 181163
Petitioner ATI disowns liability for the damage to the Frame Axle Sub
without Lower inside Case No. 03-245-42K/1. It shifts the blame to
Westwind, whom it charges with negligence in the supervision of the
stevedores who unloaded the cargoes. ATI admits that the damage could
have been averted had Westwind observed extraordinary diligence in
handling the goods. Even so, ATI suspects that Case No. 03-245-42K/1
22
is "weak and defective" considering that it alone sustained damage out
of the 219 packages.
Notwithstanding, petitioner ATI submits that, at most, it can be held liable
to pay only ₱5,000 per package pursuant to its Contract for Cargo
Handling Services. ATI maintains that it was not properly notified of the
actual value of the cargoes prior to their discharge from the vessel.
G.R. No. 181262
Petitioner Philam supports the CA in holding both Westwind and ATI
liable for the deformed and misaligned Frame Axle Sub without Lower
inside Case No. 03-245-42K/1. It, however, faults the appellate court for
disallowing its claim for the value of six Chassis Frame Assembly which
were likewise supposedly inside Case Nos. 03-245-51K and 03-245-
42K/1. As to the latter container, Philam anchors its claim on the results
23
of the Inspection/Survey Report of Chartered Adjusters, Inc., which the
court received without objection from Westwind and ATI. Petitioner
believes that with the offer and consequent admission of evidence to the
effect that Case No. 03-245-42K/1 contains six pieces of dented Chassis
Frame Assembly, Philam’s claim thereon should be treated, in all
respects, as if it has been raised in the pleadings. Thus, Philam insists on
the reinstatement of the trial court’s award in its favor for the payment of
₱633,957.15 plus legal interest, ₱158,989.28 as attorney’s fees and costs.
G.R. No. 181319
Petitioner Westwind denies joint liability with ATI for the value of the
deformed Frame Axle Sub without Lower in Case No. 03-245-42K/1.
Westwind argues that the evidence shows that ATI was already in actual
custody of said case when the Frame Axle Sub without Lower inside it
was misaligned from being compressed by the tight cable used to unload
it. Accordingly, Westwind ceased to have responsibility over the cargoes
as provided in paragraph 4 of the Bill of Lading which provides that the
responsibility of the carrier shall cease when the goods are taken into the
custody of the arrastre.
Westwind contends that sole liability for the damage rests on ATI since it
was the latter’s stevedores who operated the ship’s gear to unload the
cargoes. Westwind reasons that ATI is an independent company, over
whose employees and operations it does not exercise control. Moreover,
it was ATI’s employees who selected and used the wrong cable to lift the
box containing the cargo which was damaged.
Westwind likewise believes that ATI is bound by its acceptance of the
goods in good order despite a finding that Case No. 03-245-42K/1 was
partly torn and crumpled on one side. Westwind also notes that the
discovery that a piece of Frame Axle Sub without Lower was completely
deformed and misaligned came only on May 12, 1995 or 22 days after the
cargoes were turned over to ATI and after the same had been hauled by
R.F. Revilla Customs Brokerage, Inc.
Westwind further argues that the CA erred in holding it liable considering
that Philam’s cause of action has prescribed since the latter filed a formal
claim with it only on August 17, 1995 or four months after the cargoes
arrived on April 20, 1995. Westwind stresses that according to the
24
provisions of clause 20, paragraph 2 of the Bill of Lading as well as
25
Article 366 of the Code of Commerce, the consignee had until April 20,
1995 within which to make a claim considering the readily apparent
nature of the damage, or until April 27, 1995 at the latest, if it is assumed
that the damage is not readily apparent.
Lastly, petitioner Westwind contests the imposition of 12% interest on the
award of damages to Philam reckoned from the time of extrajudicial
demand. Westwind asserts that, at most, it can only be charged with 6%
interest since the damages claimed by Philam does not constitute a loan
or forbearance of money.
The Court’s Ruling
The three consolidated petitions before us call for a determination of who
between ATI and Westwind is liable for the damage suffered by the
subject cargo and to what extent. However, the resolution of the issues
raised by the present petitions is predicated on the appreciation of factual
issues which is beyond the scope of a petition for review on certiorari
under Rule 45 of the 1997 Rules of Civil Procedure, as amended. It is
settled that in petitions for review on certiorari, only questions of law may
26
be put in issue. Questions of fact cannot be entertained.
Obligations Part 2 | Page 127 of 143
There is a question of law if the issue raised is capable of being resolved
without need of reviewing the probative value of the evidence. The
resolution of the issue must rest solely on what the law provides on the
given set of circumstances. Once it is clear that the issue invites a review
of the evidence presented, the question posed is one of fact. If the query
requires a re-evaluation of the credibility of witnesses, or the existence or
relevance of surrounding circumstances and their relation to each other,
27
the issue in that query is factual.
In the present petitions, the resolution of the question as to who between
Westwind and ATI should be liable for the damages to the cargo and to
what extent would have this Court pass upon the evidence on record. But
while it is not our duty to review, examine and evaluate or weigh all over
28
again the probative value of the evidence presented, the Court may
nonetheless resolve questions of fact when the case falls under any of the
following exceptions:
(1) when the findings are 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 fact are conflicting; (6) when in making its findings the Court of
Appeals went beyond the issues of the case, or its findings are contrary to
the admissions of both the appellant and the appellee; (7) when the
findings are contrary to those of the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based;
(9) when 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 (10) when
the findings of fact are premised on the supposed absence of evidence and
29
contradicted by the evidence on record.
In the cases at bar, the fifth and seventh exceptions apply. While the CA
affirmed the joint liability of ATI and Westwind, it held them liable only
for the value of one unit of Frame Axle Sub without Lower inside Case
No. 03-245-42K/1. The appellate court disallowed the award of damages
for the six pieces of Frame Assembly with Bush, which petitioner Philam
alleged, for the first time in its Appellee’s Brief, to be likewise inside Case
No. 03-245-42K/1. Lastly, the CA reduced the award of attorney’s fees to
₱47,671.
Foremost, the Court holds that petitioner Philam has adequately
established the basis of its claim against petitioners ATI and Westwind.
Philam, as insurer, was subrogated to the rights of the consignee,
Universal Motors Corporation, pursuant to the Subrogation Receipt
executed by the latter in favor of the former. The right of subrogation
accrues simply upon payment by the insurance company of the insurance
30
claim. Petitioner Philam’s action finds support in Article 2207 of the
Civil Code, which provides as follows:
Art. 2207. If the plaintiff’s property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out
of the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x.
31
In their respective comments to Philam’s Formal Offer of
32
Evidence, petitioners ATI and Westwind objected to the admission of
Marine Certificate No. 708-8006717-4 and the Subrogation Receipt as
documentary exhibits "B" and "P," respectively. Petitioner Westwind
objects to the admission of both documents for being hearsay as they were
not authenticated by the persons who executed them. For the same reason,
petitioner ATI assails the admissibility of the Subrogation Receipt. As
regards Marine Certificate No. 708-8006717-4, ATI makes issue of the
fact that the same was issued only on April 27, 1995 or 12 days after the
shipment was loaded on and transported via S/S "Calayan Iris."
The nature of documents as either public or private determines how the
documents may be presented as evidence in court. Public documents, as
33
enumerated under Section 19, Rule 132 of the Rules of Court, are self-
authenticating and require no further authentication in order to be
34
presented as evidence in court.
In contrast, a private document is any other writing, deed or instrument
executed by a private person without the intervention of a notary or other
person legally authorized by which some disposition or agreement is
proved or set forth. Lacking the official or sovereign character of a public
document, or the solemnities prescribed by law, a private document
35
requires authentication in the manner prescribed under Section 20, Rule
132 of the Rules:
SEC. 20. Proof of private document. – Before any private document
offered as authentic is received in evidence, its due execution and
authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the
maker.
Any other private document need only be identified as that which it is
claimed to be.
The requirement of authentication of a private document is excused only
in four instances, specifically: (a) when the document is an ancient one
36
within the context of Section 21, Rule 132 of the Rules; (b) when the
genuineness and authenticity of the actionable document have not been
specifically denied under oath by the adverse party; (c) when the
genuineness and authenticity of the document have been admitted; or (d)
37
when the document is not being offered as genuine.
Indubitably, Marine Certificate No. 708-8006717-4 and the Subrogation
Receipt are private documents which Philam and the consignee,
respectively, issue in the pursuit of their business. Since none of the
exceptions to the requirement of authentication of a private document
obtains in these cases, said documents may not be admitted in evidence
for Philam without being properly authenticated.
Contrary to the contention of petitioners ATI and Westwind, however,
Philam presented its claims officer, Ricardo Ongchangco, Jr. to testify on
the execution of the Subrogation Receipt, as follows:
ATTY. PALACIOS
Q How were you able to get hold of this subrogation receipt?
A Because I personally delivered the claim check to consignee and have
them receive the said check.
Q I see. Therefore, what you are saying is that you personally delivered
the claim check of Universal Motors Corporation to that company and
you have the subrogation receipt signed by them personally?
A Yes, sir.
Q And it was signed in your presence?
38
A Yes, sir.
Indeed, all that the Rules require to establish the authenticity of a
document is the testimony of a person who saw the document executed or
written. Thus, the trial court did not err in admitting the Subrogation
Receipt in evidence despite petitioners ATI and Westwind’s objections
that it was not authenticated by the person who signed it.
However, the same cannot be said about Marine Certificate No. 708-
8006717-4 which Ongchangcho, Jr. merely identified in court. There is
nothing in Ongchangco, Jr.’s testimony which indicates that he saw
Philam’s authorized representative sign said document, thus:
ATTY. PALACIOS
Q Now, I am presenting to you a copy of this marine certificate 708-
8006717-4 issued by Philam Insurance Company, Inc. to Universal
Motors Corporation on April 15, 1995. Will you tell us what relation does
it have to that policy risk claim mentioned in that letter?
A This is a photocopy of the said policy issued by the consignee Universal
Motors Corporation.
ATTY. PALACIOS
I see. May I request, if Your Honor please, that this marine risk policy of
the plaintiff as submitted by claimant Universal Motors Corporation be
marked as Exhibit B.
COURT
39
Mark it.
As regards the issuance of Marine Certificate No. 708-8006717-4 after
the fact of loss occurred, suffice it to say that said document simply
certifies the existence of an open insurance policy in favor of the
consignee. Hence, the reference to an "Open Policy Number 9595093" in
said certificate. The Court finds it completely absurd to suppose that any
insurance company, of sound business practice, would assume a loss that
has already been realized, when the profitability of its business rests
precisely on the non-happening of the risk insured against.
Obligations Part 2 | Page 128 of 143
Yet, even with the exclusion of Marine Certificate No. 708-8006717-4,
the Subrogation Receipt, on its own, is adequate proof that petitioner
Philam paid the consignee’s claim on the damaged goods. Petitioners ATI
and Westwind failed to offer any evidence to controvert the same. In
40
Malayan Insurance Co., Inc. v. Alberto, the Court explained the effect
of payment by the insurer of the insurance claim in this wise:
We have held that payment by the insurer to the insured operates as an
equitable assignment to the insurer of all the remedies that the insured
may have against the third party whose negligence or wrongful act caused
the loss. The right of subrogation is not dependent upon, nor does it grow
out of, any privity of contract. It accrues simply upon payment by the
insurance company of the insurance claim. The doctrine of subrogation
has its roots in equity. It is designed to promote and accomplish justice;
and is the mode that equity adopts to compel the ultimate payment of a
41
debt by one who, in justice, equity, and good conscience, ought to pay.
Neither do we find support in petitioner Westwind’s contention that
Philam’s right of action has prescribed.
The Carriage of Goods by Sea Act (COGSA) or Public Act No. 521 of
the 74th US Congress, was accepted to be made applicable to all contracts
for the carriage of goods by sea to and from Philippine ports in foreign
42
trade by virtue of Commonwealth Act (C.A.) No. 65. Section 1 of C.A.
No. 65 states:
Section 1. That the provisions of Public Act Numbered Five hundred and
twenty-one of the Seventy-fourth Congress of the United States, approved
on April sixteenth, nineteen hundred and thirty-six, be accepted, as it is
hereby accepted to be made applicable to all contracts for the carriage of
goods by sea to and from Philippine ports in foreign trade: Provided, That
nothing in the Act shall be construed as repealing any existing provision
of the Code of Commerce which is now in force, or as limiting its
application.
The prescriptive period for filing an action for the loss or damage of the
goods under the COGSA is found in paragraph (6), Section 3, thus:
(6) Unless notice of loss or damage and the general nature of such loss or
damage be given in writing to the carrier or his agent at the port of
discharge before or at the time of the removal of the goods into the
custody of the person entitled to delivery thereof under the contract of
carriage, such removal shall be prima facie evidence of the delivery by
the carrier of the goods as described in the bill of lading. If the loss or
damage is not apparent, the notice must be given within three days of the
delivery.
Said notice of loss or damage maybe endorsed upon the receipt for the
goods given by the person taking delivery thereof.
The notice in writing need not be given if the state of the goods has at the
time of their receipt been the subject of joint survey or inspection.
In any event the carrier and the ship shall be discharged from all liability
in respect of loss or damage unless suit is brought within one year after
delivery of the goods or the date when the goods should have been
delivered: Provided, That if a notice of loss or damage, either apparent or
concealed, is not given as provided for in this section, that fact shall not
affect or prejudice the right of the shipper to bring suit within one year
after the delivery of the goods or the date when the goods should have
been delivered.
43
In the Bill of Lading dated April 15, 1995, Rizal Commercial Banking
Corporation (RCBC) is indicated as the consignee while Universal
Motors is listed as the notify party. These designations are in line with the
subject shipment being covered by Letter of Credit No. I501054, which
RCBC issued upon the request of Universal Motors.
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have
44
control of his goods before paying. However, letters of credit are
employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the
45
parties to the original transaction, in these cases, Nichimen Corporation
as the seller and Universal Motors as the buyer. Hence, the latter, as the
buyer of the Nissan CKD parts, should be regarded as the person entitled
to delivery of the goods. Accordingly, for purposes of reckoning when
notice of loss or damage should be given to the carrier or its agent, the
date of delivery to Universal Motors is controlling.
S/S "Calayan Iris" arrived at the port of Manila on April 20, 1995, and the
subject cargoes were discharged to the custody of ATI the next day. The
goods were then withdrawn from the CFS Warehouse on May 11, 1995
and the last of the packages delivered to Universal Motors on May 17,
46
1995. Prior to this, the latter filed a Request for Bad Order Survey on
May 12,1995 following a joint inspection where it was discovered that six
pieces of Chassis Frame Assembly from two bundles were deformed and
one Front Axle Sub without Lower from a steel case was dented. Yet, it
was not until August 4, 1995 that Universal Motors filed a formal claim
for damages against petitioner Westwind.
Even so, we have held in Insurance Company of North America v. Asian
Terminals, Inc. that a request for, and the result of a bad order
examination, done within the reglementary period for furnishing notice of
loss or damage to the carrier or its agent, serves the purpose of a claim. A
claim is required to be filed within the reglementary period to afford the
carrier or depositary reasonable opportunity and facilities to check the
validity of the claims while facts are still fresh in the minds of the persons
47
who took part in the transaction and documents are still available. Here,
Universal Motors filed a request for bad order survey on May 12, 1995,
even before all the packages could be unloaded to its warehouse.
Moreover, paragraph (6), Section 3 of the COGSA clearly states that
failure to comply with the notice requirement shall not affect or prejudice
the right of the shipper to bring suit within one year after delivery of the
goods. Petitioner Philam, as subrogee of Universal Motors, filed the
Complaint for damages on January 18, 1996, just eight months after all
the packages were delivered to its possession on May 17, 1995. Evidently,
petitioner Philam’s action against petitioners Westwind and ATI was
seasonably filed.
This brings us to the question that must be resolved in these consolidated
petitions. Who between Westwind and ATI should be liable for the
damage to the cargo?
It is undisputed that Steel Case No. 03-245-42K/1 was partly torn and
crumpled on one side while it was being unloaded from the carrying
vessel. The damage to said container was noted in the Bad Order Cargo
48
Receipt dated April 20, 1995 and Turn Over Survey of Bad Order
Cargoes dated April 21, 1995. The Turn Over Survey of Bad Order
Cargoes indicates that said steel case was not opened at the time of survey
and was accepted by the arrastre in good order. Meanwhile, the Bad Order
Cargo Receipt bore a notation "B.O. not yet t/over to ATI." On the basis
of these documents, petitioner ATI claims that the contents of Steel Case
No. 03-245-42K/1 were damaged while in the custody of petitioner
Westwind.
We agree.
Common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in the
vigilance over the goods transported by them. Subject to certain
49
exceptions enumerated under Article 1734 of the Civil Code, common
carriers are responsible for the loss, destruction, or deterioration of the
goods. The extraordinary responsibility of the common carrier lasts from
the time the goods are unconditionally placed in the possession of, and
received by the carrier for transportation until the same are delivered,
actually or constructively, by the carrier to the consignee, or to the person
50
who has a right to receive them.
The court a quo, however, found both petitioners Westwind and ATI,
jointly and severally, liable for the damage to the cargo. It observed that
while the staff of ATI undertook the physical unloading of the cargoes
from the carrying vessel, Westwind’s duty officer exercised full
supervision and control over the entire process. The appellate court
affirmed the solidary liability of Westwind and ATI, but only for the
damage to one Frame Axle Sub without Lower.
Upon a careful review of the records, the Court finds no reason to deviate
from the finding that petitioners Westwind and ATI are concurrently
accountable for the damage to the content of Steel Case No. 03-245-
42K/1.
51
Section 2 of the COGSA provides that under every contract of carriage
of goods by the sea, the carrier in relation to the loading, handling,
stowage, carriage, custody, care and discharge of such goods, shall be
subject to the responsibilities and liabilities and entitled to the rights and
52
immunities set forth in the Act. Section 3 (2) thereof then states that
among the carrier’s responsibilities are to properly load, handle, stow,
53
carry, keep, care for and discharge the goods carried.
At the trial, Westwind’s Operation Assistant, Menandro G. Ramirez,
testified on the presence of a ship officer to supervise the unloading of the
subject cargoes.
Obligations Part 2 | Page 129 of 143
ATTY. LLAMAS
Q Having been present during the entire discharging operation, do you
remember who else were present at that time?
A Our surveyor and our checker the foreman of ATI.
Q Were there officials of the ship present also?
54
A Yes, sir there was an officer of the vessel on duty at that time.
xxxx
Q Who selected the cable slink to be used?
A ATI Operation.
Q Are you aware of how they made that selection?
A Before the vessel arrived we issued a manifesto of the storage plan
informing the ATI of what type of cargo and equipment will be utilitized
in discharging the cargo.
55
xxxx
Q You testified that it was the ATI foremen who select the cable slink to
be used in discharging, is that correct?
A Yes sir, because they are the one who select the slink and they know
the kind of cargoes because they inspected it before the discharge of said
cargo.
Q Are you aware that the ship captain is consulted in the selection of the
cable sling?
A Because the ship captain knows for a fact the equipment being utilized
in the discharge of the cargoes because before the ship leave the port of
Japan the crew already utilized the proper equipment fitted to the
56
cargo. (Emphasis supplied.)
It is settled in maritime law jurisprudence that cargoes while being
57
unloaded generally remain under the custody of the carrier. The
58
Damage Survey Report of the survey conducted by Phil. Navtech
Services, Inc. from April 20-21, 1995 reveals that Case No. 03-245-42K/1
was damaged by ATI stevedores due to overtightening of a cable sling
hold during discharge from the vessel’s hatch to the pier. Since the
damage to the cargo was incurred during the discharge of the shipment
and while under the supervision of the carrier, the latter is liable for the
damage caused to the cargo.
This is not to say, however, that petitioner ATI is without liability for the
damaged cargo.
The functions of an arrastre operator involve the handling of cargo
deposited on the wharf or between the establishment of the consignee or
shipper and the ship’s tackle. Being the custodian of the goods discharged
from a vessel, an arrastre operator’s duty is to take good care of the goods
59
and to turn them over to the party entitled to their possession.
Handling cargo is mainly the arrastre operator’s principal work so its
drivers/operators or employees should observe the standards and
measures necessary to prevent losses and damage to shipments under its
60
custody.
While it is true that an arrastre operator and a carrier may not be held
61
solidarily liable at all times, the facts of these cases show that apart
from ATI’s stevedores being directly in charge of the physical unloading
of the cargo, its foreman picked the cable sling that was used to hoist the
packages for transfer to the dock. Moreover, the fact that 218 of the 219
packages were unloaded with the same sling unharmed is telling of the
inadequate care with which ATI’s stevedore handled and discharged Case
No. 03-245-42K/1.
With respect to petitioners ATI and Westwind’s liability, we agree with
the CA that the same should be confined to the value of the one piece
Frame Axle Sub without Lower.
62
In the Bad Order Inspection Report prepared by Universal Motors, the
latter referred to Case No. 03-245-42K/1 as the source of said Frame Axle
Sub without Lower which suffered a deep dent on its buffle plate. Yet, it
identified Case No. 03-245-51K as the container which bore the six pieces
Frame Assembly with Bush. Thus, in Philam’s Complaint, it alleged that
"the entire shipment showed one (1) pc. FRAME AXLE SUB W/O LWR
from Case No. 03-245-42K/1 was completely deformed and misaligned,
and six (6) other pcs. of FRAME ASSEMBLY WITH BUSH from Case
No. 03-245-51K were likewise completely deformed and
63
misaligned." Philam later claimed in its Appellee’s Brief that the six
pieces of Frame Assembly with Bush were also inside the damaged Case
No. 03-245-42K/1.
However, there is nothing in the records to show conclusively that the six
Frame Assembly with Bush were likewise contained in and damaged
inside Case No. 03-245-42K/1. In the Inspection Survey Report of
Chartered Adjusters, Inc., it mentioned six pieces of chassis frame
assembly with deformed body mounting bracket. However, it merely
noted the same as coming from two bundles with no identifying marks.
Lastly, we agree with petitioner Westwind that the CA erred in imposing
an interest rate of 12% on the award of damages. Under Article 2209 of
the Civil Code, when an obligation not constituting a loan or forbearance
of money is breached, an interest on the amount of damages awarded may
64
be imposed at the discretion of the court at the rate of 6% per annum. In
the similar case of Belgian Overseas Chartering and Shipping NV v.
65
Philippine First Insurance Co., lnc., the Court reduced the rate of
interest on the damages awarded to the carrier therein to 6% from the time
of the filing of the complaint until the finality of the decision.
WHEREFORE, the Court AFFIRMS with MODIFICATION the
Decision dated October 15,2007 and the Resolution dated January 11,
2008 of the Court of Appeals in CA-G.R. CV No. 69284 in that the
interest rate on the award of ₱190,684.48 is reduced to 6% per annum
from the date of extrajudicial demand, until fully paid.
With costs against the petitioners in G.R. No. 181163 and G.R. No.
181319, respectively.
SO ORDERED.
Degaños v. People of the Philippines
G.R. No. 162826 October 14, 2013
1
NARCISO DEGAÑOS, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES, Respondent.
DECISION
BERSAMIN, J.:
Novation is not a mode of extinguishing criminal liability under the penal
laws of the country. Only the. State may validly waive the criminal action
against an accused. Novation is relevant only to determine if the parties
have meanwhile altered the nature of the obligation prior to the
commencement of the criminal prosecution in order to prevent the
incipient criminal liability of the accused.
Antecedents
In an amended information dated March 23, 1994, the Office of the
Provincial Prosecutor of Bulacan charged Brigida D. Luz, alias Aida Luz,
and Narciso Degaños in the Regional Trial Court in Malolos, Bulacan
with estafa under Article 315 paragraph 1 b) of the Revised Penal Code,
allegedly committed as follows:
That on or about the 27th day of April, 1987 until July 20, 1987, in the
municipality of Meycauayan, province of Bulacan, Philippines, and
within the jurisdiction of this Honorable Court, the above-named accused
conspiring, confederating and helping one another, received from
Spouses Atty. Jose Bordador and Lydia Bordador gold and pieces of
jewelry worth ₱438,702.00, under express obligation to sell the same on
commission and remit the proceeds thereof or return the unsold gold and
pieces of jewelry, but the said accused, once in possession of the said
merchandise and far from complying with their aforesaid obligation,
inspite of repeated demands for compliance therewith, did then and there
willfully, unlawfully and feloniously, with intent of gain and grave abuse
of confidence misapply, misappropriate and convert to their own use and
benefit the said merchandise and/or the proceeds thereof, to the damage
and prejudice of said Sps. Atty. Jose Bordador and Lydia Bordador in the
said amount of ₱438,702.00.
2
Contrary to law.
The decision of the Court of Appeals (CA) summarized the evidence of
the parties as follows:
Prior to the institution of the instant case, a separate civil action for the
recovery of sum of money was filed on June 25, 1990 by the private
complainants spouses Jose and Lydia Bordador against accused Brigida
D. Luz alias Aida D. Luz and Narciso Degaños. In an amended complaint
dated November 29, 1993, Ernesto Luz, husband of Brigida Luz, was
Obligations Part 2 | Page 130 of 143
impleaded as party defendant. The case docketed as Civil Case No. 412-
M-90 was raffled to Branch 15, RTC of Malolos, Bulacan. On June 23,
1995, the said court found Narciso Degaños liable and ordered him to pay
the sum of ₱725,463,98 as actual and consequential damages plus interest
and attorney’s fees in the amount of ₱10,000.00. On the other hand,
Brigida Luz alias Aida Luz was ordered to pay the amount of ₱21,483.00,
representing interest on her personal loan. The case against Ernesto Luz
was dismissed for insufficiency of evidence. Both parties appealed to the
Court of Appeals. On July 9, 1997, this Court affirmed the aforesaid
decision. On further appeal, the Supreme Court on December 15, 1997
sustained the Court of Appeals. Sometime in 1994, while the said civil
case was pending, the private complainants instituted the present case
against the accused.
EVIDENCE FOR THE PROSECUTION
The prosecution evidence consists of the testimonies of the private
complainants-spouses, Jose and Lydia Bordador.
Private complainant Lydia Bordador, a jeweler, testified that accused
Narciso Degaños and Brigida/Aida Luz are brother and sister. She knew
them because they are the relatives of her husband and their
Kumpadre/kumadre. Brigida/Aida Luz was the one who gave instructions
to Narciso Degaños to get gold and jewelry from Lydia for them to sell.
Lydia came to know Narciso Degaños because the latter frequently visited
their house selling religious articles and books. While in their house,
Narciso Degaños saw her counting pieces of jewelry and he asked her if
he could show the said pieces of jewelry to his sister, Brigida/Aida Luz,
to which she agreed. Thereafter, Narciso Degaños returned the jewelry
and Aida/Brigida Luz called her to ask if she could trust Narciso Degaños
to get the pieces of jewelry from her for Aida/Brigida Luz to sell. Lydia
agreed on the condition that if they could not pay it in cash, they should
pay it after one month or return the unsold jewelry within the said period.
She delivered the said jewelry starting sometime in 1986 as evidenced by
several documents entitled "Katibayan at Kasunduan", the earliest of
which is dated March 16, 1986. Everytime Narciso Degaños got jewelry
from her, he signed the receipts in her presence. They were able to pay
only up to a certain point. However, receipt nos. 614 to 745 dated from
April 27, 1987 up to July 20, 1987 (Exhs. "A"-"O") were no longer paid
and the accused failed to return the jewelry covered by such receipts.
Despite oral and written demands, the accused failed and refused to pay
and return the subject jewelry. As of October 1998, the total obligation of
the accused amounted to ₱725,000.00.
Private complainant Atty. Jose Bordador corroborated the testimony of
his wife, Lydia. He confirmed that their usual business practice with the
accused was for Narciso Degaños to receive the jewelry and gold items
for and in behalf of Brigida/Aida Luz and for Narciso Degaños to sign the
"Kasunduan at Katibayan" receipts while Brigida/Aida Luz will pay for
the price later on. The subject items were usually given to Narciso
Degaños only upon instruction from Brigida/Aida Luz through telephone
calls or letters. For the last one year, the "Kasunduan at Katibayan"
receipts were signed in his presence. Said business arrangement went on
for quite sometime since Narciso Degaños and Brigida/Aida Luz had been
paying religiously. When the accused defaulted in their payment, they
sent demand letters. It was the accused’s sister, Julie dela Rosa, who
responded, seeking an extension of time for the accused to settle their
obligation.
EVIDENCE FOR THE DEFENSE
The defense presented accused Brigida/Aida Luz, who testified that she
started transacting business of selling gold bars and jewelry with the
private complainants sometime in 1986 through her brother, Narciso
Degaños. It was the usual business practice for Narciso Degaños to get
the gold bars and pieces of jewelry from the private complainants after
she placed orders through telephone calls to the private complainants,
although sometimes she personally went to the private complainants’
house to get the said items. The gold bars and pieces of jewelry delivered
to her by Narciso Degaños were usually accompanied by a pink receipt
which she would sign and after which she would make the payments to
the private complainants through Narciso Degaños, which payments are
in the form of postdated checks usually with a thirty-day period. In return,
the private complainants would give the original white receipts to Narciso
Degaños for him to sign. Thereafter, as soon as the postdated checks were
honored by the drawee bank, the said white receipts were stamped "paid"
by Lydia Bordador, after which the same would be delivered to her by
Narciso Degaños.
On September 2, 1987, she sent a letter to private complainant Lydia
Bordador requesting for an accounting of her indebtedness. Lydia
Bordador made an accounting which contained the amount of
₱122,673.00 as principal and ₱21,483.00 as interest. Thereafter, she paid
the principal amount through checks. She did not pay the interest because
the same was allegedly excessive. In 1998, private complainant Atty. Jose
Bordador brought a ledger to her and asked her to sign the same. The said
ledger contains a list of her supposed indebtedness to the private
complainants. She refused to sign the same because the contents thereof
are not her indebtedness but that of his brother, Narciso Degaños. She
even asked the private complainants why they gave so many pieces of
jewelry and gold bars to Narciso Degaños without her permission, and
told them that she has no participation in the transactions covered by the
subject "Kasunduan at Katibayan" receipts.
Co-accused Narciso Degaños testified that he came to know the private
complainants when he went to the latter’s house in 1986 to sell some Bible
books. Two days later he returned to their house and was initially given a
gold bracelet and necklace to sell. He was able to sell the same and paid
the private complainants with the proceeds thereof. Since then he started
conducting similar business transactions with the private complainants.
Said transactions are usually covered by receipts denominated as
"Kasunduan at Katibayan". All the "Kasunduan at Katibayan" receipts
were issued by the private complainants and was signed by him. The
phrase "for Brigida Luz" and for "Evely Aquino" were written on the
receipts so that in case he fails to pay for the items covered therein, the
private complainants would have someone to collect from. He
categorically admitted that he is the only one who was indebted to the
private complainants and out of his indebtedness, he already made partial
payments in the amount of ₱53,307.00. Included in the said partial
payments is the amount of ₱20,000.00 which was contributed by his
brothers and sisters who helped him and which amount was delivered by
3
Brigida Luz to the private complainants.
Ruling of the RTC
On June 23, 1999, the RTC found Degaños guilty as charged but acquitted
Luz for insufficiency of evidence, imposing on Degaños twenty years of
reclusion temporal, viz:
WHEREFORE, judgment is hereby rendered as follows:
1. finding accused Narciso Degaños GUILTY beyond reasonable doubt
of the crime of estafa penalized under Article 315, Subsection 1,
paragraph (b) of the Revised Penal code and hereby sentences him to
suffer the penalty of TWENTY YEARS (20) of reclusion temporal;
2. finding accused Brigida Luz NOT GUILTY and is hereby
ACQUITTED on the ground of insufficiency of evidence.
4
SO ORDERED.
Decision of the CA
On appeal, Degaños assailed his conviction upon the following grounds,
to wit:
I
THE HONORABLE COURT A QUO ERRED IN NOT FINDING
THAT THE AGREEMENT BETWEEN THE PRIVATE
COMPLAINANT LYDIA BORDADOR AND THE ACCUSED WAS
ONE OF SALE ON CREDIT.
II
THE HONORABLE COURT A QUO ERRED IN NOT FINDING
THAT NOVATION HAD CONVERTED THE LIABILITY OF THE
ACCUSED INTO A CIVIL ONE.
III
THE HONORABLE COURT ERRED IN NOT APPLYING THE
5
INDETERMINATE SENTENCE LAW.
On September 23, 2003, however, the CA affirmed the conviction of
6
Degaños but modified the prescribed penalty, thusly:
WHEREFORE, the appealed Decision finding the accused-appellant
Narciso Degaños guilty beyond reasonable doubt of the crime of Estafa
under Article 315 (1) par. b of the Revised Penal code is hereby
AFFIRMED with the modification that the accused-appellant is sentenced
to suffer an indeterminate penalty of imprisonment of four (4) years and
two (2) months of prision correccional in its medium period, as the
minimum, to twenty (20) years of reclusion temporal as maximum .
7
SO ORDERED.
Issues
Hence, Degaños has appealed, again submitting that:
Obligations Part 2 | Page 131 of 143
I.
THE HONORABLE COURT A QUO ERRED IN NOT FINDING
THAT THE AGREEMENT BETWEEN THE PRIVATE
COMPLAINANT LYDIA BORDADOR AND THE ACCUSED WAS
ONE OF SALE ON CREDIT;
II.
THE HONORABLE COURT A QUO ERRED IN NOT FINDING
THAT NOVATION HAD CONVERTED THE LIABILITY OF THE
8
ACCUSED INTO A CIVIL ONE.
Ruling
The appeal lacks merit.
I.
Transaction was an agency, not a sale on credit
Degaños contends that his agreement with the complainants relative to
the items of jewelry and gold subject of the amended information as
embodied in the relevant Kasunduan at Katibayan was a sale on credit,
not a consignment to sell on commission basis.
The contention of Degaños is devoid of factual and legal bases.
The text and tenor of the relevant Kasunduan at Katibayan follow:
KASUNDUAN AT KATIBAYAN
xxxx
Akong nakalagda sa ibaba nito ay nagpapatunay na tinanggap ko kay
Ginang LYDIA BORDADOR ng Calvario, Meycauayan, Bulacan ang
mga hiyas (jewelries) [sic] na natatala sa ibaba nito upang ipagbili ko sa
kapakanan ng nasabing Ginang. Ang pagbibilhan ko sa nasabing mga
hiyas ay aking ibibigay sa nasabing Ginang, sa loob ng __________ araw
at ang hindi mabili ay aking isasauli sa kanya sa loob din ng nasabing
taning na panahon sa mabuting kalagayan katulad ng aking tanggapin.
Ang bilang kabayaran o pabuya sa akin ay ano mang halaga na aking
mapalabis na mga halagang nakatala sa ibaba nito. Ako ay walang
karapatang magpautang o kaya ay magpalako sa ibang tao ng nasabing
9
mga hiyas.
xxxx
Based on the express terms and tenor of the Kasunduan at Katibayan ,
Degaños received and accepted the items under the obligation to sell them
in behalf of the complainants ("ang mga hiyas (jewelries) na natatala sa
ibaba nito upang ipagbili ko sa kapakanan ng nasabing Ginang"), and he
would be compensated with the overprice as his commission ("Ang bilang
kabayaran o pabuya sa akin ay ano mang halaga na aking mapalabis na
mga halagang nakatala sa ibaba nito."). Plainly, the transaction was a
consignment under the obligation to account for the proceeds of sale, or
to return the unsold items. As such, he was the agent of the complainants
in the sale to others of the items listed in the Kasunduan at Katibayan.
In contrast, according the first paragraph of Article 1458 of the Civil
Code, one of the contracting parties in a contract of sale obligates himself
to transfer the ownership of and to deliver a determinate thing, while the
other party obligates himself to pay therefor a price certain in money or
its equivalent. Contrary to the contention of Degaños, there was no sale
on credit to him because the ownership of the items did not pass to him.
II.
Novation did not transpire as to prevent
the incipient criminal liability from arising
Degaños claims that his partial payments to the complainants novated his
contract with them from agency to loan, thereby converting his liability
from criminal to civil. He insists that his failure to complete his payments
prior to the filing of the complaint-affidavit by the complainants
notwithstanding, the fact that the complainants later required him to make
a formal proposal before the barangay authorities on the payment of the
balance of his outstanding obligations confirmed that novation had
occurred.
The CA rejected the claim of Degaños, opining as follows:
Likewise untenable is the accused-appellant’s argument that novation
took place when the private complainants accepted his partial payments
before the criminal information was filed in court and therefore, his
criminal liability was extinguished.
Novation is not one of the grounds prescribed by the Revised Penal Code
for the extinguishment of criminal liability. It is well settled that criminal
1âwph i1
liability for estafa is not affected by compromise or novation of contract,
for it is a public offense which must be prosecuted and punished by the
Government on its own motion even though complete reparation should
have been made of the damage suffered by the offended party. A criminal
offense is committed against the People and the offended party may not
waive or extinguish the criminal liability that the law imposes for the
commission of the offense. The criminal liability for estafa already
10
committed is not affected by the subsequent novation of the contract.
We sustain the CA.
Degaños’ claim was again factually unwarranted and legally devoid of
basis, because the partial payments he made and his purported agreement
to pay the remaining obligations did not equate to a novation of the
original contractual relationship of agency to one of sale. As we see it, he
misunderstands the nature and the role of novation in a criminal
prosecution.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one that terminates the first,
either by (a) changing the object or principal conditions; or (b)
substituting the person of the debtor; or (c) subrogating a third person in
the rights of the creditor. In order that an obligation may be extinguished
by another that substitutes the former, it is imperative that the
extinguishment be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each
11
other. Obviously, in case of only slight modifications, the old
12
obligation still prevails.
13
The Court has further pointed out in Quinto v. People:
Novation is never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is necessary
element of novation which may be effected either expressly or impliedly.
The term "expressly" means that the contracting parties incontrovertibly
disclose that their object in executing the new contract is to extinguish the
old one. Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility
between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring
about novation, the touchstone for contrarity, however would be an
irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation
and thereby produce the effect of extinguishing an obligation by another
which substitutes the same. The firs t is when novation has been explicitly
stated and declared in unequivocal terms. The second is when the old and
the new obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand together,
each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily,
changes that breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory
in nature and insufficient to extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of
payment. There was really no substitution of debtors since private
1âwph i1
complainant merely acquiesced to the payment but did not give her
14
consent to enter into a new contract. x x x
The legal effects of novation on criminal liability were explained by the
15
Court, through Justice J.B.L. Reyes, in People v. Nery, viz:
The novation theory may perhaps apply prior to the filing of the criminal
information in court by the state prosecutors because up to that time the
original trust relation may be converted by the parties into an ordinary
creditor-debtor situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities have taken
cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense
against the state, only the latter can renounce it (People vs. Gervacio, 54
Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montañes, 8
Phil. 620).
Obligations Part 2 | Page 132 of 143
It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be to either prevent
the rise of criminal liability or to cast doubt on the true nature of the
original basic transaction, whether or not it was such that its breach would
not give rise to penal responsibility, as when money loaned is made to
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs.
People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
Even in Civil Law the acceptance of partial payments, without further
change in the original relation between the complainant and the accused,
can not produce novation. For the latter to exist, there must be proof of
intent to extinguish the original relationship, and such intent can not be
inferred from the mere acceptance of payments on account of what is
totally due. Much less can it be said that the acceptance of partial
satisfaction can effect the nullification of a criminal liability that is fully
matured, and already in the process of enforcement. Thus, this Court has
ruled that the offended party’s acceptance of a promissory note for all or
part of the amount misapplied does not obliterate the criminal offense
(Camus vs. Court of Appeals, 48 Off. Gaz. 3898).
Novation is not a ground under the law to extinguish criminal liability.
16
Article 89 (on total extinguishment) and Article 94 (on partial
17
extinguishrnent) of the Revised Penal Code list down the various
grounds for the extinguishment of criminal liability. Not being included
in the list, novation is limited in its effect only to the civil aspect of the
liability, and, for that reason, is not an efficient defense in estafa. This is
because only the State may validly waive the criminal action against an
18
accused. The role of novation may only be either to prevent the rise of
criminal liability, or to cast doubt on the true nature of the original basic
transaction, whether or not it was such that the breach of the obligation
would not give rise to penal responsibility, as when money loaned is made
19
to appear as a deposit, or other similar disguise is resorted to.
Although the novation of a contract of agency to make it one of sale may
relieve an offender from an incipient criminal liability, that did not happen
here, for the partial payments and the proposal to pay the balance the
accused made during the barangay proceedings were not at all
incompatible with Degafios liability under the agency that had already
attached. Rather than converting the agency to sale, therefore, he even
thereby confirmed his liability as the sales agent of the complainants.
VHEREFORE, the Court AFFIRMS the decision of the Court of Appeals
promulgated on September 23, 2003; and ORDERS petitioner to pay the
costs of suit.
SO ORDERED.
Arco Pulp and Paper Co., Inc. v. Lim
see page 45
Bognot v. RRI Lending Corporation
see page 88
The Wellex Group, INc. v. U-Land Airlines, Co. Ltd.
see page 28
Bank of the Philippine Islands v. Domingo
March 25, 2015
G.R. No. 169407
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
AMADOR DOMINGO, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of
the Rules of Court, filed by petitioner Bank of the Philippine Islands
(BPI), seeking the reversal and setting aside of the Decision1 dated July
11, 2005 and Resolution2 dated August 19, 2005 of the Court of Appeals
in CAG.R. SP No. 88836.
The Petition arose from the following facts:
On September 27, 1993, respondent Amador Domingo (Amador) and his
wife, the late Mercy Maryden Domingo (Mercy),3 (collectively referred
to as the spouses Domingo) executed a Promissory Note4 in favor of
Makati Auto Center, Inc. in the sum of ₱629,856.00, payable in 48
successive monthly installments in the amount of ₱13,122.00 each. They
simultaneously executed a Deed of Chattel Mortgage5 over a 1993 Mazda
323 (subject vehicle) to secure the payment of their Promissory Note.
Makati Auto Center, Inc. then assigned, ceded, and transferred all its
rights and interests over the said Promissory Note and chattel mortgage
to Far East Bank and Trust Company (FEBTC).
On April 7, 2000, the Securities and Exchange Commission (SEC)
approved and issued the Certificate of Filing of the Articles of Merger and
Plan-· of Merger executed on January 20, 2000 by and between BPI, the
surviving corporation, and FEBTC, the absorbed corporation. By virtue
of said merger, all the assets and liabilities of FEBTC were transferred to
and absorbed by BPI.6
The spouses Domingo defaulted when they failed to pay 21 monthly
installments that had fallen due consecutively from January 15, 1996 to
September 15, 1997. BPI, being the surviving corporation after the
merger, demanded that the spouses Domingo pay the balance of the
Promissory Note including accrued late payment charges/interests or to
return the possession of the subject vehicle for the purpose of foreclosure
in accordance with the undertaking stated in the chattel mortgage. When
the spouses Domingo still failed to comply with its demands, BPI filed on
November 14, 2000 a Complaint7 for Replevin and Damages (or in the
alternative, for the collection of sum of money, interest and other charges,
and attorney's fees) which was raffled to the Metropolitan Trial Court
(MeTC) of Manila, Branch 9, and docketed as Civil Case No. 168949-
CV. BPI included a John Doe as defendant because at the time of filing
of the Complaint, BPI was already aware that the subject vehicle was in
the possession of a third person but did not yet know the identity of said
person.
In their Answer,8 the spouses Domingo raised the following affirmative
defenses:
4. [BPI] has no cause of action against the [spouses Domingo].
5. The Honorable Court has no jurisdiction over this case,
6. As per the allegations in the complaint, JOHN DOE is an indispensable
party to this case so with his whereabouts unknown, service by
publication should first be made before proceeding with the trial of this
case;
7. Defendant Maryden Domingo once obtained a car loan from Far East
Bank and Trust Company but the car was later sold to Carmelita S.
Gonzales with the bank's conformity and the buyer subsequently assumed
payment of the balance of the mortgaged loan.
During trial, the prosecution presented as witness Vicente Magpusao, a
former employee of FEBTC and now an Account Analyst of BPI. His
testimony was summed up by the MeTC as follows:
Vicente Magpusao, [BPI's] Account Analyst and formerly connected with
Far East Bank and Trust Company testified that on September 27, 1993,
[the spouses Domingo] for consideration executed and delivered to
Makati Auto Center, Inc. a Promissory Note in the sum of ₱629,856.00
payable in monthly installments in accordance with the schedule of
payment indicated in said Promissory Note. In order to secure the
payment of the obligation, the [spouses Domingo] executed in favor of
said Makati Auto Center, Inc. on the same date a Chattel Mortgage over
one (1) unit of 1993 Mazda (323) with Motor No. B6-270146 and with
Serial No. BG1062M9100287. With notice to [the spouses Domingo],
said Makati Auto Center, Inc. assigned to Far East Bank and Trust Co.
the Chattel Mortgage as shown by the Deed of Assignment executed by
[Makati Auto Center, Inc.]. Far East Bank and Trust Co. on the other
hand, has been merged with and/or absorbed by herein plaintiff [BPI].
The [spouses Domingo] defaulted in complying with the terms and
conditions of the Promissory Note with Chattel Mortgage by failing to
pay twenty[-one] (21) successive installments which fell due on January
15, 1996 up to September 15, 1997. [BPI] sent a demand letter [to]
defendant Mercy Domingo thru registered mail demanding payment of
the whole balance of the Promissory Note plus the stipulated interest and
other charges or return to [BPI] the possession of the above-described
motor vehicle. There were some negotiations made by the [spouses
Domingo] to their In-House Legal Assistant but the same did not
materialize. Based on the Statement of Account dated October 31, 2000,
[the spouses Domingo have] an outstanding balance of ₱275,562.00
exclusive of interest and other charges.
On cross-examination, the witness explained that the first time he came
to handle [the spouses Domingo's] account was in 1997. Despite the fact
that he was not yet employed with the bank in 1993, he knew exactly what
happened in this particular transaction because of his experience in auto
financing. He also has an access [to] the Promissory Note, Chattel
Mortgage and other records of payment made by the bank. Based on the
records, the [spouses Domingo] issued several postdated checks but not
for the entire term. There were payments made from October 30, 199[3]
up to September 14, 1994. He was not the one who received payments for
Obligations Part 2 | Page 133 of 143
the auto finance. If there were receipts issued, they will only ride for the
account of Mrs. Domingo. He was not sure if these receipts are kept in
the warehouse or probably disposed of by the bank since the transaction
was made in 1997. They already have a computer records of all payments
made by their client. Based on the subsidiary ledger, there were three (3)
checks that bounced and these are payments from the new buyer. They
only have one (1) photocopy of these checks in the amount of
₱325,431.60 while the other two (2) are missing. He was not aware who
owns Cargo and Hardware Corporation but the check was issued by a
certain Miss Gonzales. The witness further testified that anyone can pay
the monthly amortization as long as the payment is for the account of
Maryden Domingo. They cannot include Carmelita Gonzales as one of
the defendants in this case because they don't have a document executed
by the latter in behalf of Far East Bank and Trust Co. The bank did not
approve the Deed of Sale with Assumption of Mortgage.
Witness further testified that he found the photocopy of the Deed of Sale
in the records of Maryden Domingo. The Promissory Note and Chattel
Mortgage were executed by the defendants Maryden and Amador
Domingo. There was no assumption of obligation of the [spouses
Domingo]. Witness however admitted that Far East Bank did not tum over
to [BPI] all the records pertaining to the account of the [spouses Domingo
].9 (Citations omitted.) Amador himself testified for the defense. The
MeTC provided the following summary of Amador's testimony:
For his defense, defendant Amador Domingo testified that his wife and
co-defendant Mercy Maryden Domingo died on November 27, 2003. He
admitted that his wife bought a car and was mortgaged to Far East Bank
and Trust Company. He identified the Chattel Mortgage and the
Promissory Note he executed together with his wife. In connection with
the execution of this Promissory Note, he recalled that his wife issued
forty-eight (48) checks. The twelve (12) checks were cleared by the bank
and his wife was able to obtain a discount for prompt payments up to
October 1994. While they were still paying for the car, Carmelita
Gonzales got interested to buy the car and is willing to assume the
mortgage. After furnishing the bank [with] the Deed of Sale duly
notarized, Carmelita Gonzales subsequently issued a check payable to Far
East Bank and Trust Company and the remaining postdated checks were
returned to them. Based on the application of payment prepared by [BPI's]
witness, Carmelita Gonzales made payments from November 14, 1995 to
December 1995. Aside from these payments on May 19, 1997, Carmelita
Gonzales issued a check to Far East Bank in the amount of ₱385,431.60.
In 1996, he received a phone call from a certain Marvin Orence asking
for their assistance to locate the car which Carmelita Gonzales bought
from them. His lawyer went to Land Transportation Office for assistance.
From the time Ms. Gonzales started to pay, they never received any
demand letter from Far East Bank. Thereafter, on February 29, 1997, they
received a demand letter from Espino Law Office [on] behalf of
[FEBTC]. His lawyer made a reply on March 31, 1997 stating therein that
the motor vehicle for which the loan was obtained had been sold to
Carmelita Gonzales as of July 5, 1994 with the knowledge and approval
of their client. After three years, they received another demand letter dated
October 31, 2000 from Labaguis Law Office. His lawyer made the same
reply on March 7, 2000 and another letter on November 24, 2000. Witness
further testified that this malicious complaint probably triggered the early
demise of his wife who has a high blood pressure. His wife died of
aneurism. As damages, he is asking for the amount of ₱200,000.00 as
moral damages, ₱75,000.00 as attorney's fees and ₱5,000.00 appearance
fee.
On cross-examination, witness elaborates that when his wife presented to
Far East Bank the Deed of Sale with Assumption of Mortgage, the bank
made no objection and returned all their postdated checks. His wife was
the one who deal[t] with Carmelita Gonzales but he always provide[d]
assistance with respect to paper works. Aside from the aforesaid Deed of
Sale, there is no other document which shows the conformity of the bank.
They were only verbally assured by Mr. Orence that their papers are in
order.10
On June 10, 2004, the Me TC rendered a Decision in favor of BPI as the
bank was able to establish by preponderance of evidence a valid cause of
action against the spouses Domingo. According to the MeTC, novation is
never presumed and must be clearly shown by express agreement or by
acts of equal import. To effect a subjective novation by a change in the
person of the debtor, it is necessary that the old debtor be released
expressly from the obligation and the third person or new debtor assumes
his place. Without such release, there is no novation and the third person
who assumes the debtor's obligation merely becomes a co-debtor or
surety. The MeTC found Amador' s bare testimony as insufficient
evidence to prove that he and his wife Mercy had been expressly released
from their obligations and that Carmelita Gonzales (Carmelita) assumed
their place as the new debtor within the context of subjective novation;
and if at all, Carmelita only became the spouses Domingo's co-debtor or
surety. While finding that BPI was entitled to the reliefs prayed for, the
MeTC made no adjudication as to the entitlement of the bank to the Writ
of Replevin, and instead awarded monetary reliefs as were just and
equitable. The dispositive portion of the MeTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of [BPI], ordering defendant Amador Domingo:
1. To pay [BPI] the sum of ₱275,562.00 plus interest thereon at the rate
of 36% per annum from November 15, 2000 until fully paid;
2. To pay [BPI] the sum equivalent to 25% of the total amount due as
attorney's fees; and
3. To pay the costs of suit.11
Acting on Amador's Motion for Reconsideration, the MeTC issued an
Order12 dated September 6, 2004 affirming its earlier judgment but
reducing the attorney's fees awarded, thus: WHEREFORE, premises
considered the Decision of this Court dated June 10, 2014 stands, subject
to the modification that the attorney's fees of twenty-five percent (25%)
is ordered reduced to ten percent (10%) of the total amount due.13
Dissatisfied, Amador appealed his case before the Regional Trial Court
(RTC) of Manila, Branch 26, wherein it was docketed as Civil Case No.
04-111100. In its Decision dated February 10, 2005, the RTC held that in
novation, consent of the creditor to the substitution of the debtor need not
be by express agreement, it can be merely implied. The consent is not
required to be in any specific or particular form; the only requirement
being that it must be given by the creditor in one way or another. To the
RTC, the following circumstances demonstrated the implied consent of
BPI to the novation: ( 1) BPI had knowledge of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita, but did
not interpose any objection to the same; and (2) BPI (through FEBTC)
returned the personal checks of the spouses Domingo and accepted the
payments made by Carmelita. The R TC also noted that BPI made a
demand for payment upon the spouses Domingo only after 30 months
from the time Carmelita assumed payments for the installments due. The
R TC reasoned that if the spouses Domingo truly remained as debtors,
BPI would not have wasted time m demanding payments from them.
Ultimately, the RTC decreed:
WHEREFORE, premises considered, the judgment appealed from is
hereby reversed. The complaint filed by [BPI] before [MeTC] Branch 9,
Manila, is hereby DISMISSED and ordering [BPI] to pay
defendant/appellant Amador Domingo the following, to wit:
a) One Hundred Thousand (₱100,000.00) Pesos as moral damages;
b) Fifty Thousand (₱50,000.00) Pesos as exemplary damages;
c) Fifty Thousand (₱50,000.00) Pesos as attorney's fees;
d) Twenty-Five Thousand (₱25,000.00) [Pesos] as litigation expenses;
e) Costs of this suit.14
Aggrieved by the foregoing RTC judgment, BPI filed a Petition for
Review with the Court of Appeals, docketed as CA-G.R. SP No. 88836.
The Court of Appeals promulgated its Decision on July 11, 2005,
affirming the finding of the R TC that novation took place. The Court of
Appeals, relying on the declaration in Babst v. Court of Appeals15 that
consent of the creditor to the substitution of debtors need not always be
express and may be inferred from the acts of the creditor, ruled that:
In this case, there is no doubt that FEBTC had the intention to release
private respondent [Amador] and his wife from the obligation when the
latter sold the subject vehicle to [Carmelita]. This intention can be
inferred from the following acts of FEBTC: 1) it returned the postdated
checks issued by private respondent [Amador's] wife in favor of FEBTC;
2) it accepted the payments made by [Carmelita]; 3) it did not interpose
any objection despite knowledge of the existence of the Deed of Sale with
Assumption of Mortgage; and 4) it did not demand payment from private
respondent [Amador] and his wife for thirty (30) long months.
xxxx
As correctly found by the R TC, the testimony of private respondent
[Amador] as regards the return of the said checks to them by FEBTC was
not rebutted by petitioner BPI.
If indeed the said checks were not returned to private respondent
[Amador' s] wife, the least thing that petitioner BPI or FEB TC could have
done was to deposit them. Should the checks thereafter bounce, then
petitioner BPI or FEBTC could have filed a separate case against private
respondent [Amador's] wife. This was never done by petitioner BPI or
Obligations Part 2 | Page 134 of 143
FEBTC. Hence, it is safe to conclude that the said checks were indeed
returned to private respondent [Amador's] wife.16
The Court of Appeals rejected the other arguments of BPI:
Petitioner BPI further argues that as regards the payment made by the
alleged new debtor, Carmelita Gonzales, it appears that the only payment
made by her was a PNB Check No. 00190322 dated May 19, 1997 which
was dishonored due to Account Closed.
Careful scrutiny of the records of the case reveals otherwise. As found by
the Me TC in its decision dated June 10, 2004, Carmelita Gonzales made
several payments on the said loan obligation, as testified to by witness
Vicente Magpusao, petitioner BPI's Account Analyst, thus:
x x x. Based on the subsidiary leger, (Exhibit "2"), there were three (3)
checks that bounced and these are payments from the new buyer. They
only have one (1) photocopy of these checks in the amount of
P.325,431.60 (Exhibit 4) while the other two are missing. He was not
aware who owns Cargo and Hardware Corporation but the check was
issued by a certain Miss Gonzales. x x x.
xxxx
Petitioner BPI further argues that it was not its obligation to interpose any
objection to the Deed of Sale with Assumption of Mortgage. Rather it
should be the vendee, [Carmelita], who should secure the approval and
consent of petitioner BPI to the Deed of Sale.
This argument is untenable.
The Deed of Sale with Assumption of Mortgage between private
respondent [Amador's] wife and [Carmelita] was executed way back on
July 5, 1994. The check that was issued by [Carmelita] was dated May
19, 1997. The position of petitioner BPI is not possible because when the
Deed of Sale with Assumption of Mortgage was executed and the said
check was issued, private respondent [Amador's] wife and [Carmelita]
were still dealing with FEBTC, considering the fact that the merger of
petitioner BPI and FEBTC was formalized on April 10, 2000.
Nevertheless, FEBTC interposed no objection to the Deed of Sale with
Assumption of Mortgage, hence, it consented to it.
From the foregoing, it is clear that novation took place so that private
respondent Domingo is no longer the debtor of petitioner BPI.17 (Citations
omitted.)
The Court of Appeals, however, deleted the damages awarded to Amador
for the following reasons:
As to the second issue, petitioner BPI argues that the RTC awarded moral
and exemplary damages and attorney's fees to respondent [Amador] only
in the dispositive portion of the assailed decision without any basis in fact
and in law.
This Court finds the argument tenable.
In the case of Solid Homes, Inc. vs. Court of Appeals, it was held that:
"It is basic that the claim for actual, moral and punitive damages as well
as exemplary damages and attorney's fees must each be independently
identified and justified."
Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987
Constitution lays down the standard in rendering decisions, to wit: it must
be express therein clearly and distinctly the facts and law on which it is
based.
Perusal of the assailed decision reveals that the award of moral and
exemplary damages as well as attorney's fees and litigation expenses were
only touched in the dispositive portion, which is in clear disregard of the
established rules laid down by the Constitution and existing
jurisprudence. Therefore, their deletion is in order.
As regards the award of litigation expenses and costs of the suit, the same
should also be deleted considering that "no premium should be placed on
the right to litigate."18 (Citations omitted.)
The Court of Appeals ultimately adjudged:
WHEREFORE, premises considered, the assailed decision dated
February 10, 2005 of the Regional Trial Court, Branch 26, Manila in Civil
Case No. 04-111100 is hereby AFFIRMED with MODIFICATION in
that the award of moral and exemplary damages as well as attorney's fees,
litigation expenses and costs of suit, is hereby deleted.19
In its Resolution dated August 19, 2005, the Court of Appeals denied the
Motion for Partial Reconsideration of BPI.
BPI comes to this Court via the present Petition for Review/ Appeal by
Certiorari raising the sole issue of whether or not there had been a
novation of the loan obligation with chattel mortgage of the spouses
Domingo to BPI so that the spouses Domingo were released from said
obligation and Carmelita was substituted as debtor.
The Court answers in the negative and grants the Petition.
In De Cortes v. Venturanza,20 the Court discussed some principles and
jurisprudence underlying the concept and nature of novation as a mode of
extinguishing obligations:
According to Manresa, novation is the extinguishment of an obligation by
the substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or by
subrogating a third person to the rights of the creditor (8 Manresa 428,
cited in IV Civil Code of the Philippines by Tolentino 1962 ed., p. 352).
Unlike other modes of extinction of obligations, novation is a juridical act
with a dual function - it extinguishes an obligation and creates a new one
in lieu of the old.
Article 1293 of the New Civil Code provides:
"N ovation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will
of the latter, but not without the consent of the creditor." (emphasis
supplied)
Under this provision, there are two forms of novation by substituting the
person of the debtor, and they are: (1) expromision and (2) delegacion. In
the former, the initiative for the change does not come from the debtor
and may even be made without his knowledge, since it consists in a third
person assuming the obligation. As such, it logically requires the consent
of the third person and the creditor. In the latter, the debtor offers and the
creditor accepts a third person who consents to the substitution and
assumes the obligation, so that the intervention and the consent of these
three persons are necessary (8 Manresa 436-437, cited in IV Civil Code
of the Philippines by Tolentino, 1962 ed., p. 360). In these two modes of
substitution, the consent of the creditor is an indispensable requirement
(Garcia vs. Khu Yek Chiong, 65 Phil. 466, 468). (Emphases supplied.)
The Court also emphasized in De Cortes the indispensability of the
creditor's consent to the novation, whether expromision or delegacion,
given that the "[s]ubstitution of one debtor for another may delay or
prevent the fulfillment of the obligation by reason of the financial inability
or insolvency of the new debtor; hence, the creditor should agree to accept
the substitution in order that it may be binding on him."21
Both the R TC and the Court of Appeals found that there was novation by
delegacion in the case at bar. The Deed of Sale with Assumption of
Mortgage was executed between Mercy (representing herself and her
husband Amador) and Carmelita, thus, their consent to the substitution as
debtors and third person, respectively, are deemed undisputed. It is the
existence of the consent of BPI (or its absorbed corporation FEB TC) as
creditor that is being challenged herein.
As a general rule, since novation implies a waiver of the right the creditor
had before the novation, such waiver must be express.22 The Court
explained the rationale for the rule in Testate Estate of Lazaro Mota v.
Serra23:
It should be noted that in order to give novation its legal effect, the law
requires that the creditor should consent to the substitution of a new
debtor. This consent must be given expressly for the reason that, since
novation extinguishes the personality of the first debtor who is to be
substituted by a new one, it implies on the part of the creditor a waiver of
the right that he had before the novation, which waiver must be express
under the principle that renuntiatio non praesumitor, recognized by the
law in declaring that a waiver of right may not be performed unless the
will to waive is indisputably shown by him who holds the right.
However, in Asia Banking Corporation v. Elser,24 the Court qualified
thus:
The aforecited article 1205 [now 1293] of the Civil Code does not state
that the creditor's consent to the substitution of the new debtor for the old
be express, or given at the time of the substitution, and the Supreme Court
of Spain, in its judgment of June 16, 1908, construing said article, laid
down the doctrine that "article 1205 of the Civil Code does not mean or
require that the creditor's consent to the change of debtors must be given
simultaneously with the debtor's consent to the substitution; its evident
purpose being to preserve the creditor's full right, it is sufficient that the
latter's consent be given at any time and in any form whatever, while the
agreement of the debtors subsists." The same rule is stated in the
Enciclopedia Juridica Espanola, volume 23, page 503, which reads: "The
Obligations Part 2 | Page 135 of 143
rule that this kind of novation, like all others, must be express, is not
absolute; for the existence of the consent may well be inferred from the
acts of the creditor, since volition may as well be expressed by deeds as
by words." The understanding between Henry W. Elser and the principal
director of Yangco, Rosenstock & Co., Inc., with respect to Luis R. Y
angco' s stock in said corporation, and the acts of the board of directors
after Henry W. Elser had acquired said shares, in substituting the latter
for Luis R. Y angco, are a clear and unmistakable expression of its
consent. When this court said in the case of Estate of Mota vs. Serra (47
Phil., 464), that the creditor's express consent is necessary in order that
there may be a novation of a contract by the substitution of debtors, it did
not wish to convey the impression that the word "express" was to be given
an unqualified meaning, as indicated in the authorities or cases, both
Spanish and American, cited in said decision.
Hence, based on the aforequoted ruling in Asia Banking, the existence of
the creditor's consent may also be inferred from the creditor's acts, but
such acts still need to be "a clear and unmistakable expression of [the
creditor's] consent. "25
In Ajax Marketing and Development Corporation v. Court of
Appeals,26 the Court further clarified that:
The well settled rule is that novation is never presumed. Novation will not
be allowed unless it is clearly shown by express agreement, or by acts of
equal import. Thus, to effect an objective novation it is imperative that
the new obligation expressly declare that the old obligation is thereby
extinguished, or that the new obligation be on every point incompatible
with the new one. In the same vein, to effect a subjective novation by a
change in the person of the debtor it is necessary that the old debtor be
released expressly from the obligation, and the third person or new debtor
assumes his place in the relation. There is no novation without such
release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety. (Citations omitted.)
The determination of the existence of the consent of BPI to the
substitution of debtors, in accordance with the standards set in the
preceding jurisprudence, is a question of fact because it requires the Court
to review the evidence on record. It is an established rule that the
jurisdiction of the Court in cases brought before it from the Court of
Appeals via a petition for review on certiorari under Rule 45 of the Rules
of Court is generally limited to reviewing errors of law as the former is
not a trier of facts. Thus, the findings of fact of the Court of Appeals are
conclusive and binding upon the Court in the latter's exercise of its power
to review for it is not the function of the Court to analyze or weigh
evidence all over again.27 However, several of the recognized
exceptions28 to this rule are present in the instant case that justify a factual
review, i.e., the inference is manifestly mistaken, the judgment is based
on misapprehension of facts, and the findings of the Court of Appeals and
the RTC are contrary to those of the MeTC.
The burden of establishing a novation is on the party who asserts its
existence.29 Contrary to the findings of the Court of Appeals and the RTC,
Amador failed to discharge such burden as he was unable to present proof
of the clear and unmistakable consent of BPI to the substitution of debtors.
Irrefragably, there is no express consent of BPI to the substitution of
debtors. The Court of Appeals and the RTC inferred the consent of BPI
from the following facts: (1) BPI had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its
file, indicating its knowledge of said agreement, and still it did not
interpose any objection to the same; (2) BPI (through FEBTC) returned
the spouses Domingo's checks and accepted Carmelita's payments; and
(3) BPI did not demand any payment from the spouses Domingo not until
3 0 months after Carmelita assumed the payment of balance on the
Promissory Note.
The Court disagrees with the inferences made by the Court of Appeals
and the RTC.
First, that BPI (or FEB TC) had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its
file does not mean that it had consented to the same. The very Deed itself
states:
That the VENDEE [Carmelita] assumes as he/she had assumed to pay the
aforecited mortgage in accordance with the original terms and conditions
of said mortgage, and the parties hereto [Mercy and Carmelita] have
agreed to seek the conformity of the MORTGAGEE [FEBTC].30 This
brings the Court back to the original question of whether there is proof of
the conformity of BPI.
The Court notes that the documents of BPI concerning the car loan and
chattel mortgage are still in the name of the spouses Domingo. No new
promissory note or chattel mortgage had been executed between BPI (or
FEBTC) and Carmelita. Even the account itself is still in the names of the
spouses Domingo.
The absence of objection on the part of BPI (or FEB TC) cannot be
presumed as consent. Jurisprudence requires presentation of proof of
consent, not mere absence of objection. Amador cannot rely on Babst
which involved a different factual milieu. Relevant portions of the Court's
ruling in Babst are reproduced below:
In the case at bar, Babst, MULTI and ELISCON all maintain that due to
the failure of BPI to register its objection to the take-over by DBP of
ELISCON's assets, at the creditors' meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for
ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that
BPI was aware of the assumption by DBP of the obligations of ELISCON.
In fact, BPI admits that –
"[T]he Development Bank of the Philippines (DBP), for a time, had
proposed a formula for the settlement of Eliscon's past obligations to its
creditors, including the plaintiff [BPI], but the formula was expressly
rejected by the plaintiff as not acceptable (long before the filing of the
complaint at bar)."
The Court of Appeals held that even if the account officer who attended
the June 1981 creditors' meeting had expressed consent to the assumption
by DBP of ELISCON's debts, such consent would not bind BPI for lack
of a specific authority therefor. In its petition, ELISCON counters that the
mere presence of the account officer at the meeting necessarily meant that
he was authorized to represent BPI in that creditors' meeting. Moreover,
BPI did not object to the substitution of debtors, although it objected to
the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the
creditors' meeting was an authority to represent the bank, such that when
he failed to object to the substitution of debtors, he did so on behalf of and
for the bank. Even granting arguendo that the said account officer was not
so empowered, BPI could have subsequently registered its objection to
the substitution, especially after it had already learned that DBP had taken
over the assets and assumed the liabilities of ELISCON. Its failure to do
so can only mean an acquiescence in the assumption by DBP of
ELISCON's obligations. As repeatedly pointed out by ELISCON and
MULTI, BPI's objection was to the proposed payment formula, not to the
substitution itself.31 In Babst, there was a clear opportunity for BPI, as
creditor therein, to object to the substitution of debtors given that its
representative attended a creditor's meeting, during which, said
representative already objected to the proposed payment formula made by
DBP, as the new debtor. Hence, the silence of BPI during the same
meeting as to the matter of substitution of debtors could already be
interpreted as its acquiescence to the same. In contrast, there was no clear
opportunity for BPI (or FEB TC) to have expressed its objection to the
substitution of debtors in the case at bar.
Second, the consent of BPI to the substitution of debtors cannot be
deduced from its acceptance of payments from Carmelita, absent proof of
its clear and unmistakable consent to release the spouses Domingo from
their obligation. Since the spouses Domingo remained as debtors of BPI,
together with Carmelita, the fact that BPI demanded payment from the
spouses Domingo 30 months after accepting payment from Carmelita is
insignificant.
The acceptance by a creditor of payments from a third person, who has
assumed the obligation, will result merely to the addition of debtors and
not novation. The creditor may therefore enforce the obligation against
both debtors.32As the Court pronounced in Magdalena Estates, Inc. v.
Rodriguez,33 "[t]he mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be
released from responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor." The
Court reiterated in Quinto v. People34 that "[n]ot too uncommon is when
a stranger to a contract agrees to assume an obligation; and while this may
have the effect of adding to the number of persons liable, it does not
necessarily imply the extinguishment of the liability of the first debtor.
Neither would the fact alone that the creditor receives guaranty or accepts
payments from a third person who has agreed to assume the obligation,
constitute an extinctive novation absent an agreement that the first debtor
shall be released from responsibility."
Absent proof that BPI gave its clear and unmistakable consent to release
the spouses Domingo from the obligation to pay the car loan, Carmelita
is simply considered an additional debtor. Consequently, BPI can still
Obligations Part 2 | Page 136 of 143
enforce the obligation against the spouses Domingo even 30 months after
it had started accepting payments from Carmelita.
And third, there is no sufficient or competent evidence to establish the
return of the checks to the spouses Domingo and the assurance made by
FEBTC that the spouses Domingo were already released from their
obligation.
During his direct examination, Amador testified as follows:
Atty. Rivera:
1. Q. Do you remember who was this person who became interested to
buy this car?
A. Carmelita S. Gonzales, Sir.
2. Q. What did you tell Mrs. Gonzales when she expressed interest in
buying this car, this Mazda vehicle?
A. We told her that the car was mortgaged and she told us that she is
willing to assume the mortgage, Sir.
3. Q. With that willingness, what happened next on the part of Mrs.
Gonzales to assume the mortgage?
A. My wife and Mrs. Gonzales went to Far East Bank and Trust Company
and she informed the bank that somebody is interested in buying the car
and assume the mortgage and the bank informed her that the bank is
agreeable and with no objection.
Atty. Ganitano: Objection, your Honor. May we object to the answer of
the witness, it would be hearsay. The witness testified that it was his wife
and the would be buyer who went to the bank.
Atty. Rivera: Then, we are just offering it as part of the narration not
necessarily to prove the truth of the statement, your Honor.
Court: The witness may continue.
Atty. Rivera: So, after that meeting with the bank occurred, what
happened next in connection with this intention of Mrs. Gonzales to
purchase the car?
Witness: After furnishing the bank with the Deed of Absolute Sale duly
notarized, [Ms.] Carmelita Gonzales subsequently issued a check payable
to Far East Bank and Trust Company, Sir.
Atty. Rivera:
1. Q. How about the postdated checks that your wife issued to Far East
Bank and Trust Company?
A. The remaining postdated checks were returned to us, Sir.
2. Q. Do you remember what were those postdated checks that were
returned by the bank?
A. Those were the checks we issued in advance, Sir.
3. Q. What were the dates of these checks?
A. October 30, 1994 to 1997, Sir.
xxxx
Atty. Rivera:
1. Q. Aside from this evidence that you have enumerated, were you able
to talk to any representative from Far East Bank relative to the approval
of the change in the personality of the debtor from your wife to ...
A. As I remember, sometime in 1996, I received a call from a certain
Marvin Orence asking for our assistance to locate the car that Mrs.
Carmelita Gonzales bought from us and informed us that we have nothing
to worry except that we provide them assistance to locate the car and I
informed our lawyer, Atty. Rivera, about this and Atty. Rivera went to the
Land Transportation Office for assistance.35
Amador continued to testify on cross-examination, thus:
CROSS EXAMINATION BY ATTY. GANITANO
1. Q. You testified that out of the 48 checks you paid to Far East Bank &
Trust Company, only 12 checks were made good. What happened to the
3 6 checks?
A. When my wife brought the transaction to Far East Bank and presented
the Deed of Absolute Sale, the bank have no objection to the sale of the
car and afterwards, the bank returned all the postdated checks prepared
by my wife that was in the possession of the bank, Sir.
1. Q. Do you have with you those 36 checks that were allegedly returned
by Far East Bank?
A. These checks have already been discarded, Sir.
2. Q. So, you cannot present those 36 checks anymore?
A. No, Sir.
3. Q. Who was the alleged buyer of the mortgaged car again?
Witness: Carmelita S. Gonzales, Sir.
Atty. Ganitano:
1. Q. To whom did this Carmelita Gonzales transacted with respect to the
sale of mortgaged vehicle?
A. To my wife, Mercy Maryden Domingo, Sir.
2. Q. Not with you, Mr. Witness?
A. Well, I always provide assistance to my wife with regards to paper
works, Sir.
3. Q. When was this Deed of Sale executed, was it before when your wife
and the buyer went to the bank or after they went to the bank?
A. I think it was simultaneous, Sir.
4. Q. When you say "simultaneous", Mr. Witness, I'm showing to you this
Deed of Sale with Assumption of Mortgage and you said it was with the
conformity of the bank. Will you please tell us in this Deed of Sale with
Assumption of Mortgage if you could find any entry which indicate that
the bank agreed to the sale with assumption of mortgage?
Witness: None, Sir.
Atty. Ganitano: Aside from this Deed of Sale with Assumption of
Mortgage, do you have any document which shows that the bank indeed
conformed to the sale of the mortgaged vehicle with assumption of
mortgage?
Witness: We were verbally assured that our papers are in order, Sir.
Atty. Ganitano: So, there is no document, Mr. Witness, it was only made
orally?
Witness: Yes, Sir, we were verbally assured that our papers are in order.
Atty. Ganitano:
1. Q. Were you present when your wife and the would-be buyer went to
the bank?
A. No, Sir.
2. Q. How did you know that there was an assurance from the bank?
A. I received a phone call from Mr. Oronce. I asked about the transaction
and he told me that there is nothing to worry because our documents or
papers were in order, Sir.
3. Q. Do I get you right, Mr. Witness, that the confirmation was only
through phone call?
A. It was Mr. Oronce who called me, Sir.
4. Q. I'm just asking what was the means of communication, was it only
thru phone call?
A. Yes, Sir, thru phone call. I think twice or three times.
Atty. Rivera: We would like to manifest, your Honor, as early as 1997,
just to stress this point, as early as March 1997, the name of Marvin
Oronce ...
Atty. Ganitano: The witness is under cross, your Honor.
Court: You just ask that in re-direct, counsel.
Atty. Rivera: Yes, you Honor.36
Amador admitted that it was his wife Mercy, together with Carmelita,
who directly transacted with FEBTC regarding the sale of the subject
vehicle to and assumption of mortgage by Carmelita. Amador had no
personal knowledge of what had happened when Mercy and Carmelita
went to the bank so his testimony on the matter was hearsay, which, if not
excluded, deserves no credence.
The Court explained in Da Jose v. Angeles37 that:
Obligations Part 2 | Page 137 of 143
Evidence is hearsay when its probative force depends on the competency
and credibility of some persons other than the witness by whom it is
sought to be produced. The exclusion of hearsay evidence is anchored on
three reasons: (1) absence of cross-examination; (2) absence of demeanor
evidence; and (3) absence of oath. Basic under the rules of evidence is
that a witness can only testify on facts within his or her personal
knowledge. This personal knowledge is a substantive prerequisite in
accepting testimonial evidence establishing the truth of a disputed fact. xx
x. (Citations omitted.)
The Court of Appeals and the RTC substantively based their finding that
BPI (or FEB TC) consented to the substitution of debtors on the return of
the checks to the spouses Domingo, but the proof of the issuance of the
checks, their delivery to the bank, and the return of the checks flimsily
consists of Amador's unsubstantiated testimony. Amador recounted that
the postdated checks which he and Mercy executed in favor of FEBTC
were returned to them, however, he failed to provide the details
surrounding the return. Amador only stated that when Mercy provided
FEBTC with a copy of the Deed of Sale and Assumption of Mortgage,
the bank returned the checks to them "subsequently" or "afterwards."
Amador did not say how the checks were returned and to whom. The
checks were not presented during the trial since according to Amador,
they were already "discarded," although once more, any other detail
surrounding the discarding of the checks is sorely lacking. Aside from
Amador's bare testimony, no other supporting evidence of the return of
the checks to the spouses Domingo was submitted during trial. For the
foregoing reasons, the Court accords little weight and credence to
Amador' s testimony on the return of the checks.
It is worthy to stress that Amador, as the party asserting novation, bears
the burden of proving its existence. Amador cannot simply rely on the
1âwp hi1
failure of BPI to produce the checks if these were not actually returned to
the spouses Domingo. There is simply not enough evidence to establish
the prima facie existence of novation to shift the burden of evidence to
BPI to controvert the same.
The verbal assurances purportedly given by a Mr. Marvin Orence or
Oronce (Orence/Oronce) of FEBTC to Amador over the telephone that
the spouses Domingo's documents were in order do not constitute the
clear and unmistakable consent of the bank to the substitution of debtors.
Once again, except for Amador's bare testimony, there is no other
evidence of such telephone conversations taking place and the subject of
such telephone conversations. In addition, Mr. Orence/Oronce's identity,
position at FEBTC, and authority to represent and bind the bank, were not
even clearly established.
The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera (Rivera),
counsel for the spouses Domingo, addressed to Atty. Cresenciano L.
Espino, counsel for FEBTC, does not serve as supporting evidence for
Amador' s testimony regarding the return of the checks and the verbal
assurances given by Mr. Orence/Oronce. The contents of such letter are
mere hearsay because the events stated therein did not personally happen
to Atty. Rivera or in his presence, and he merely relied on what his clients,
the spouses Domingo, told him.
The Court is therefore convinced that there is no novation by delegacion
in this case and Amador remains a debtor of BPI. The Court reinstates the
MeTC judgment ordering Amador to pay for the ₱275,562.00 balance on
the Promissory Note, 10% attorney's fees, and costs of suit; but modifies
the rate of interest imposed and the date when such interest began to run.
In Ruiz v. Court of Appeals,38
the Court equitably reduced the interest
rate of 3% per month or 36% per annum stipulated in the promissory notes
therein to 1% per month or 12% per annum, based on the following
ratiocination:
We affirm the ruling of the appellate court, striking down as invalid the
10% compounded monthly interest, the 10% surcharge per month
stipulated in the promissory notes dated May 23, 1995 and December 1,
1995, and the 1% compounded monthly interest stipulated in the
promissory note dated April 21, 1995. The legal rate of interest of 12%
per annum shall apply after the maturity dates of the notes until full
payment of the entire amount due. Also, the only permissible rate of
surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney's fees, the amount of which having
been reasonably reduced from the stipulated 25% (in the March 22, 1995
promissory note) and 10% (in the other three promissory notes) of the
entire amount due, to a fixed amount of ₱50,000.00. However, we
equitably reduce the 3% per month or 36% per annum interest present in
all four (4) promissory notes to 1 % per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel
vs. Court of Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar
Development Corporation, and the recent case of Spouses Solangon vs.
Salazar. This Court invalidated a stipulated 5.5% per month or 66% per
annum interest on a ₱500,000.00 loan in Medel and a 6% per month or
72% per annum interest on a ₱60,000.00 loan in Solangon for being
excessive, iniquitous, unconscionable and exorbitant. In both cases, we
reduced the interest rate to 12% per annum. We held that while the Usury
Law has been suspended by Central Bank Circular No. 905, s. 1982,
effective on January 1, 1983, and parties to a loan agreement have been
given wide latitude to agree on any interest rate, still stipulated interest
rates are illegal if they are unconscionable. 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. On the other hand, in Bautista vs. Pilar Development Corp., this
Court upheld the validity of a 21% per annum interest on a ₱142,326.43
loan, and in Garcia vs. Court of Appeals, sustained the agreement of the
parties to a 24% per annum interest on an ₱8,649,250.00 loan. It is on the
basis of these cases that we reduce the 36% per annum interest to 12%.
An interest of 12% per annum is deemed fair and reasonable. While it is
true that this Court invalidated a much higher interest rate of 66% per
annum in Medel and 72% in Solangon it has sustained the validity of a
much lower interest rate of 21 % in Bautista and 24% in Garcia. We still
find the 36% per annum interest rate in the case at bar to be substantially
greater than those upheld by this Court in the two (2) aforecited cases.
(Citations omitted.)
On the strength of the foregoing jurisprudence, the Court likewise finds
the interest rate of 3% per month or 36% per annum stipulated in the
Promissory Note herein for the balance of ₱275,562.00 as excessive,
iniquitous, unconscionable, and exorbitant. Following the guidelines set
forth in Eastern Shipping Lines, Inc. v. Court of Appeals39 and Nacar v.
Gallery Frames,40 the Court imposes instead legal interest in the following
rates: (1) legal interest of 12% per annum from date of extrajudicial
demand on January 29, 1997 until June 30, 2013; and (2) legal interest of
6o/o per annum from July 1, 2013 until fully paid.
Incidentally, Amador passed away on June 5, 2010 during the pendency
of the instant petition, and is survived by his children, namely: Joann D.
Moya, Annabelle G. Domingo, Cristina G. Domingo, Amador G.
Domingo, Jr., Gloria Maryden D. Macatangay, Dante Amador G.
Domingo, Gregory Amador A. Domingo, and Ina Joy A. Domingo.41 To
prevent future litigation in the enforcement of the award, the Court
clarifies that Amador's heirs are not personally responsible for the debts
of their predecessor. The extent of liability of Amador's heirs to BPI is
limited to the value of the estate which they inherited from Amador. In
this jurisdiction, "it is the estate or mass of the property left by the
decedent, instead of the heirs directly, that becomes vested and charged
with his rights and obligations which survive after his death."42 To rule
otherwise would unduly deprive Amador' s heirs of their properties.
WHEREFORE, in view of the foregoing, the Petition is GRANTED. The
Decision dated July 11, 2005 and Resolution dated August 19, 2005 of
the Court of Appeals in CA-G.R. SP No. 88836, affirming with
modification the Decision dated February 10, 2005 of the RTC of Manila,
Branch 26 in Civil Case No. 04-111100, is REVERSED and SET ASIDE.
The Decision dated June 10, 2004 and Order dated September 6, 2004 of
the Me TC of Manila, Branch 9 in Civil Case No. 168949-CV, is
REINSTATED with MODIFICATIONS. The heirs of respondent
Amador Domingo are ORDERED to pay petitioner Bank of the
Philippine Islands the following:
(1) the ₱275,562.00 balance on the Promissory Note, plus legal interest
of 12% from January 29, 1997 to June 30, 2013 and 6% from July 1, 2013
until fully paid; (2) attorney's fees of 10%; and (3) costs of suit. However,
the liability of Amador Domingo's heirs is limited to the value of the
inheritance they received from the deceased.
SO ORDERED.
Obligations Part 2 | Page 138 of 143

Paradigm Development Corp. of the Philippines v. Bank of the
Philippine Islands
June 7, 2017
G.R. No. 191174
PARADIGM DEVELOPMENT CORPORATION OF THE
PHILIPPINES, Petitioner
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent
DECISION
REYES, J., J.:
This is a Petition for Review on Certiorari 1 filed under Rule 45 of the
Rules of Court assailing the Decision 2 dated November 25, 2009 and
Resolution 3 dated February 2, 2010 of the Court of Appeals (CA) in CA-
G.R. CV No. 89755, which granted respondent Bank of the Philippine
Islands' (BPI) appeal and accordingly dismissed the complaint filed by
petitioner Paradigm Development Corporation of the Philippines (PDCP).
The Facts
Sometime in February 1996, Sengkon Trading (Sengkon), a sole
proprietorship owned by Anita Go, obtained a loan from Far East Bank
and Trust Company (FEBTC) under a credit facility denominated as
Omnibus Line in the amount of PlOO Million on several sub-facilities
with their particular sub-limits denominated as follows: (i) Discounting
Line for P20 Million; (ii) Letter of Credit/Trust Receipt (LC-TR) Line for
P60 Million; and (iii) Bills Purchased Line for PS Million. This was
embodied in the document denominated as "Agreement for Renewal of
Omnibus Line." 4
On April 19, 1996, FEBTC again granted Sengkon another credit facility,
denominated as Credit Line, in the amount of ₱60 Million as contained
in the "Agreement for Credit Line." Two real estate mortgage (REM)
contracts were executed by PDCP President Anthony L. Go (Go) to
partially secure Sengkon's obligations under this Credit Line. One REM,
acknowledged on April 22, 1996, was constituted over Transfer
Certificate of Title (TCT) No. RT-55259 (354583) and secured the
amount of P8 Million. The other REM, acknowledged on December 19,
1997, was constituted over TCT Nos. RT-58281, RT-54993 (348989) and
RT-55260 (352956) and secured the amount of ₱42,400,000.00. 5
In a letter dated September 18, 1997, FEB TC informed Sengkon
regarding the renewal, increase and conversion of its ₱l00 Million
Omnibus Line to ₱l50 Million LC-TR Line and P20 Million Discounting
Line, the renewal of the ₱60 Million Credit Line and P8 Million Bills
Purchased Line. 6
In the same letter, FEBTC also approved the request of Sengkon to change
the account name from SENGKON TRADING to SENGKON
TRADING, INC. (STI). 7
Eventually, Sengkon defaulted in the payment of its loan
obligations.8 Thus, in a letter dated September 8, 1999, FEBTC demanded
payment from PDCP of alleged Credit Line and Trust Receipt availments
with a principal balance of ₱244,277, 199 .68 plus interest and other
charges which Sengkon failed to pay. PDCP responded by requesting for
segregation of Sengkon's obligations under the Credit Line and for the
pertinent statement of account and supporting documents. 9
Negotiations were then held and PDCP proposed to pay approximately
₱50 Million, allegedly corresponding to the obligations secured by its
property, for the release of its properties but FEBTC pressed for a
comprehensive repayment scheme for the entirety of Sengkon's
obligations. 10
Meanwhile, the negotiations were put on hold because BPI acquired FEB
TC and assumed the rights and obligations of the latter. 11
When negotiations for the payment of Sengkon's outstanding obligations,
however, fell, FEBTC, on April 5, 2000, initiated foreclosure proceedings
against the mortgaged properties of PDCP before the Regional Trial Court
(RTC) of Quezon City. 12 In its Bid for the mortgaged properties,
FEBTC's counsel stated that:
On behalf of our client, [FEBTC], we hereby submit its Bid for the Real
Properties including all improvements existing thereon covered by [TCT]
Nos. RT - 55259 (354583), 58281, RT - 54993 (348989) and RT- 55260
(352956) which are the subject of the Auction Sale scheduled on June,
20, 2000 in the amount of:
SEVENTY[-]SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (₱76,500,000.00), Philippine Currency.
Please note that the aforesaid Bid is only in PARTIAL
SETTLEMENT of the obligation of [PDCP], x x x. 13
Upon verification with the Registry of Deeds, PDCP discovered that
FEBTC extra-judicially foreclosed on June 20, 2000 the first and second
mortgage without notice to it as mortgagor and sold the mortgaged
properties to FEBTC as the lone bidder. 14 Thereafter, on August 8, 2000,
the corresponding Certificate of Sale was registered. 15
Consequently, on July 19, 2001, PDCP filed a Complaint for Annulment
of Mortgage, Foreclosure, Certificate of Sale and Damages 16 with the
RTC of Quezon City, against BPI, successor-in-interest of FEB TC,
alleging that the REMs and their foreclosure were null and void. 17
In its Amended Complaint, 18 PDCP alleged that FEB TC assured it that
the mortgaged properties will only secure the Credit Line sub-facility of
the Omnibus Line. With this understanding, PDCP President Go allegedly
agreed to sign on two separate dates a pro-forma and blank REM, securing
the amount of ₱42.4 Million and P8 Million, respectively. PDCP,
however, claimed that it had no intent to be bound under the second REM,
which was not intended to be a separate contract, but only a means to
reduce registration expenses. 19
Moreover, PDCP averred that sometime in September 1997, FEBTC
allegedly requested it to sign a document which would effectively extend
the liability of the properties covered by the mortgage beyond the Credit
Line. Because of its refusal to sign said document, it surmised that this
must have been the reason why, as it later discovered, FEBTC registered
not only the first but also the second REM, contrary to the parties'
agreement. 20
In asking for the nullity of the REMs and the foreclosure proceeding,
PDCP alleged:
a.) THAT although the [REM] of April 22, 1996 for Php 8.0 Million was
not a separate security but was merely intended to reduce registration
expenses, FEBTC, [BPI's] predecessor-in-interest, fraudulently and in
violation of the original intent and agreement of the parties, made it
appear that said [REM] of April 22, 1996 was separate and distinct from
that of December 18, 1997 and caused the registration of both mortgages
with separate considerations totaling Php 50.4 Million;
b.) THAT the subject [REMs] were foreclosed to answer not only for
obligations incurred under SENGKON's Credit Line but also for other
obligations of SENGKON and other companies which were not secured
by said mortgages;
c.) THAT no notice was given to or received by [PDCP] of the projected
foreclosure x x x since the notice of said foreclosure was sent by
defendant SHERIFF to an address (333 EDSA, Quezon City) other than
[PDCP's] known address as stated in the [REMs] themselves (333 EDSA
Caloocan City) x x x;
d.) THAT, contrary to the then prevailing Supreme Court Circular AM
99-10-05-0 x x x, only one (1) bidder was present and participated at the
foreclosure sale[; and]
e.) THAT, without the knowledge and consent of [PDCPJ, obligation of
SENGKON has been transferred to STI [,] a juridical personality separate
and distinct from SENGKON, a single proprietorship. This substitution
of SENGKON as debtor by STI x x x effectively novated the obligation
of [PDCP] to FEBTC. x x x. 21 (Underlining ours)
Ruling of the RTC
On April 16, 2007, the R TC rendered its Decision22 nullifying the REMs
and the foreclosure proceedings. It also awarded damages to PDCP. The
dispositive portion of the decision reads:
WHEREFORE, premises considered the Court renders judgment in favor
of [PDCP] and against defendants [BPI], Sheriff and the Register of
Deeds of Quezon City in the following manner:
1) Declaring null and void and of no further force and effect the following:
(a) the [REMs] (Annexes "F" and "F-1" hereof);
(b) the foreclosure thereof;
(c) the Certificate of Sale; and
(d) the entries relating to said [REMs] and Certificate of Sale annotated
on TCT Nos. 58281, RT-54993 (348989), RT-55260 (352956) and RT-
55259 (354583) covering the mortgaged properties;
Obligations Part 2 | Page 139 of 143
2) Ordering defendant Registrar of Deeds to cancel all the annotations of
the [REMs] and the Certificate of Sale on the above stated TCTs covering
the mortgaged properties and otherwise to clear said TCTs of any liens
and encumbrances annotated thereon relating to the invalid [REMs]
aforesaid;
3) Ordering defendant [BPI] to return to [PDCP] the owner's duplicate
copies of the TCTs covering the mortgaged properties free from any and
all liens and encumbrances; and,
4) Ordering the defendant BPI to pay [PDCP] the following sums:
(a) Php 150,000.00 as attorney's fees; and,
(b) Php 50,000.00 as litigation expenses.
The Writ of Preliminary Injunction is hereby made FINAL and
PERMANENT.
Costs against defendant [BPI].
SO ORDERED. 23
The RTC observed that the availments under the Credit Line, secured by
PDCP's properties, may be made only within one year, or from April 19,
1996 to April 30, 1997. While BPI claimed that the period of said credit
line was extended up to July 31, 1997, PDCP was not notified of the
extension and thus could not have consented to the extension. Anyhow,
said the RTC, "no evidence had been adduced to show that Sengkon
availed of any loan under the credit line up to July 31, 1997." Thus, in the
absence of any monetary obligation that needed to be secured, the REM
cannot be said to subsist. 24
Further, the RTC agreed with PDCP that novation took place in this case,
which resulted in discharging the latter from its obligations as third-party
mortgagor. In addition, it also nullified the foreclosure proceedings
because the original copies of the promissory notes (PN s ), which were
the basis of FEBTC's Petition for Extrajudicial Foreclosure of Mortgage,
were not presented in court and no notice of the extrajudicial foreclosure
sale was given to PDCP. 25
Lastly, the RTC ruled that the shorter period of redemption under
Republic Act No. 8791 26 cannot apply to PDCP considering that the
REMs were executed prior to the effectivity of said law. As such, the
longer period of redemption under Act No. 3135 27 applies. 28
Aggrieved, BPI appealed to the CA. 29
Ruling of the CA
In its Decision 30 dated November 25, 2009, the CA reversed the RTC's
ruling on all points. The CA found PDCP's contentions incredible for the
following reasons: (i) the fact that PDCP surrendered the titles to the
mortgaged properties to FEBTC only shows that PDCP intended to
mortgage all of these properties; (ii) if it were true that FEBTC assured
PDCP that it would be registering only one of the two REMs in order to
reduce registration expenses, then each of the two REMs should have
covered the four properties but it was not. On the contrary, the four
properties were spread out with one REM covering one of the four
properties and the other REMs covering the remaining three properties;
and (iii) PDCP never complained to FEB TC regarding the registration of
the two REMs even after it discovered the same. 31
Also, the CA ruled that novation could not have taken place from
FEBTC's mere act of approving Sengkon's request to change account
name from Sengkon to STI. 32
Moreover, it held that the fact that FEBTC failed to submit the original
copies of the PN s that formed the basis of its Petition for Extra judicial
Foreclosure of Mortgage cannot affect the validity of foreclosure because
the validity of the obligations represented in those PNs was never denied
by Sengkon nor by PDCP. 33
The CA added that even if the obligations of Sengkon in credit facilities
(other than the Credit Line) were included, since the REMs contain a
dragnet clause, these other obligations were still covered by PDCP's
REMs. 34 Lastly, the CA ruled that the failure to send a notice of
extrajudicial foreclosure sale to PDCP did not affect the validity of the
foreclosure sale because personal notice to the mortgagor is not even
generally required. 35
Hence, this present petition,, .where PDCP presented the following
arguments:
I. THE FINDINGS IN THE CA DECISION WlllCH DEVIATED ON
ALMOST ALL POINTS FROM THOSE OF THE RTC ARE NOT IN
ACCORD WITH THE RULES ON THE ASSESSMENT OF THE
CREDIBILITY AND WEIGHT OF THE EVIDENCE;
II. THE VALIDITY OF THE REMs, AS UPHELD BY THE CA, IS
VITIATED BY THE FACT THAT BPI'S PREDECESSOR-IN-
INTEREST VIOLATED THE TRUE INTENT AND AGREEMENT OF
THE PARTIES THERETO;
III. THE CA DECISION'S REJECTION OF PDCP'S NOVATION
THEORY BASED ON THE ABSENCE OF AN EXPRESS RELEASE
OF THE OLD DEBTOR AND THE SUBSTITUTION IN ITS PLACE
OF A NEW DEBTOR IS MISPLACED AND ERRONEOUS;
IV. THE FORECLOSURE OF THE REMs WAS VITIATED NOT
ONLY BY THE INADMISSIBILITY OF THE PNs UPON WHICH IT
IS BASED BUT ALSO BECAUSE IT VIOLATED THE THERETO
APPLICABLE RULES; and
V. THE APPLICATION BY THE CA OF THE SHORTENED PERIOD
OF REDEMPTION IN THIS CASE VIOLATED THE NON-
IMPAIRMENT AND EQUAL PROTECTION CLAUSES OF THE
CONSTITUTION. 36
Ruling of the Court
The Court finds the petition meritorious. The registration of the REMs,
even if contrary to the supposed intent of the parties, did not affect the
validity of the mortgage contracts
According to PDCP, when FEBTC registered both REMs, even ifthe
intent was only to register one, the validity of both REMs was vitiated by
lack of consent. PDCP claims that said intent is supported by the fact that
the REMs were constituted merely as "partial security" for Sengkon's
obligations and therefore there was really no intent to be bound under both
- but only in one - REM.
The Court cannot see its way clear through PDCP's argument. To begin
with, the registration of the REM contract is not essential to its validity.
Article 2085 of the Civil Code provides:
Art. 2085. The following requisites are essential to the contracts of pledge
and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. In relation
thereto, Article 2125 of the Civil Code reads:
Article 2125. In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted, that
the document in which it appears be recorded in the Registry of Property.
If the instrument is not recorded, the mortgage is nevertheless binding
between the parties.
x x x x (Emphasis ours)
In Mobil Oil Philippines, Inc. v. Diocares, et al., 37 the trial court refused
to order the foreclosure of the mortgaged properties on the ground that
while an unregistered REM contract created a personal obligation
between the parties, the same did not validly establish a REM. In
reversing the trial court, the Court said:
The lower court predicated its inability to order the foreclosure in view of
the categorical nature of the opening sentence of [Article 2125] that it is
indispensable, "in order that a mortgage may be validly constituted, that
the document in which it appears be recorded in the Registry of Property."
Not[e] that it ignored the succeeding sentence: "If the instrument is not
recorded, the mortgage is nevertheless binding between the parties." Its
conclusion, however, is that what was thus created was merely "a personal
obligation but did not establish a [REM]."
Such a conclusion does not commend itself for approval. The codal
provision is clear and explicit. Even if the instrument were not recorded,
"the mortgage is nevertheless binding between the parties." The law
cannot be any clearer. Effect must be given to it as written. The mortgage
subsists; the parties are bound. As between them, the mere fact that there
is as yet no compliance with the requirement that it be recorded cannot be
a bar to foreclosure.
Obligations Part 2 | Page 140 of 143
xxxx
Moreover to rule as the lower court did would be to show less than fealty
to the purpose that animated the legislators in giving expression to their
will that the failure of the instrument to be recorded does not result in the
mortgage being any the less "binding between the parties." In the
language of the Report of the Code Commission: "In Article [2125] an
additional provision is made that if the instrument of mortgage is not
recorded, the mortgage, is nevertheless binding between the parties." We
are not free to adopt then an interpretation, even assuming that the codal
provision lacks the forthrightness and clarity that this particular norm
does and therefore requires construction, that would frustrate or nullify
such legislative objective. 38 (Citation omitted and emphasis and
underlining ours)
Hence, even assuming that the parties indeed agreed to register only one
of the two REMs, the subsequent registration of both REMs did not affect
an already validly executed REM if there was no other basis for the
declaration of its nullity. That the REMs were intended merely as "partial
security" does not make PDCP's argument more plausible because as
aptly observed by the CA, the PDCP's act of surrendering all the titles to
the properties to FEBTC clearly establishes PDCP' s intent to mortgage
all of the four properties in favor of FEBTC to secure Sengkon's
obligation under the Credit Line. The Court notes that the principal
debtor, Sengkon, has several obligations under its Omnibus Line
corresponding to the several credit sub-facilities made available to it by
FEBTC. As found by the trial court, PDCP intended to be bound only for
Sengkon' s availments under the Credit Line sub-facility and not for just
any of Sengkon's availments. Hence, it is in this sense that the phrase
"partial security" should be logically understood.
In this regard, PDCP argued that what its President signed is a pro-forma
REM whose important details were still left in blank at the time of its
execution. But notably, nowhere in PDCP's Amended Complaint did it
anchor its cause of action for the nullity of the REMs on this ground.
While it indeed alleged this circumstance, PDCP's Amended Complaint
is essentially premised on the supposed fraud employed on it by FEBTC
consisting of the latter's assurances that the REMs it already signed would
not be registered. In Solidbank Corporation v. Mindanao Ferroalloy
Corporation, 39 the Court discussed the nature of fraud that would annul
or avoid a contract, thus:
Fraud refers to all kinds of deception - whether through insidious
machination, manipulation, concealment or misrepresentation- that would
lead an ordinarily prudent person into error after taking the circumstances
into account. In contracts, a fraud known as dolo causante or causal fraud
is basically a deception used by one party prior to or simultaneous with
the contract, in order to secure the consent of the other. Needless to say,
the deceit employed must be serious. In contradistinction, only some
particular or accident of the obligation is referred to by incidental fraud
or dolo incidente, or that which is not serious in character and without
which the other party would have entered into the contract
anyway. 40 (Citations omitted)
Under Article 1344 of the Civil Code, the fraud must be serious to annul
or avoid a contract and render it voidable. This fraud or deception must
be so material that had it not been present, the defrauded party would not
have entered into the contract.
In the present case, even if FEB TC represented that it will not register
one of the REMs, PDCP cannot disown the REMs it executed after FEB
TC reneged on its alleged promise. As earlier stated, with or without the
registration of the REMs, as between the parties thereto, the same is valid
and PDCP is already bound thereby. The signature of PDCP's President
coupled with its act of surrendering the titles to the four properties to
FEBTC is proof that no fraud existed in the execution of the contract.
Arguably at most, FEBTC's act of registering the mortgage only
amounted to dolo incidente which is not the kind of fraud that avoids a
contract.
No novation took place
The Court likewise agrees with the CA that no novation took place in the
present case. Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of
the creditor. Article 1293 of the Civil Code defines novation as "consists
in substituting a new debtor in the place of the original one, [which] may
be made even without the knowledge or against the will of the latter, but
not without the consent of the creditor." However, while the consent of
the creditor need not be expressed but may be inferred from the creditor's
clear and unmistakable acts,41to change the person of the debtor, the
former debtor must be expressly released from the obligation, and the
third person or new debtor must assume the former's place in the
contractual 42 relation.
Thus, in Ajax Marketing and Development Corporation v. CA, 43 the
Court had already ruled that:
The well-settled rule is that novation is never presumed. Novation will
not be allowed unless it is clearly shown by express agreement, or by acts
of equal import. Thus, to effect an objective novation it is imperative that
the new obligation expressly declare that the old obligation is thereby
extinguished, or that the new obligation be on every point incompatible
with the new one. In the same vein, to effect a subjective novation by a
change in the person of the debtor it is necessary that the old debtor be
released expressly from the obligation, and the third person or new debtor
assumes his place in the relation. There is no novation without such
release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety. 44 (Emphasis ours)
In the present case, PDCP failed to prove by preponderance of evidence
that Sengkon was already expressly released from the obligation and that
STI assumed the former's obligation. Again, as correctly pointed out by
the CA, the Deed of Assumption of Line/Loan with Mortgage (Deed of
Assumption) which was supposed to embody STI's assumption of all the
obligations of Sengkon under the line, including but not necessarily
limited to the repayment of all the outstanding availments thereon, as well
as all applicable interests and other charges, was not signed by the parties.
Contrary to PDCP's claim, the CA's rejection of its claim ofnovation is
not based on the absence of the mortgagor's conformity to the Deed of
Assumption. The CA's rejection is based on the fact that the non-
execution of the Deed of Assumption by Sengkon, STI and FEBTC
rendered the existence of novation doubtful because of lack of clear proof
that Sengkon is being expressly released from its obligation; that STI was
already assuming Sengkon's former place in the contractual relation; and
that FEBTC is giving its conformity to this arrangement. While FEBTC
indeed approved Sengkon's request for the "change in account name"
from Sengkon to STI, such mere change in account name alone does not
meet the required degree of certainty to establish novation absent any
other circumstance to bolster said conclusion.
The trial court's finding that Sengkon did not avail under the Credit Line
taints the foreclosure of the mortgage
PDCP also claims that the foreclosure of the mortgage was invalid
because the PNs that formed the basis of FEBTC's Petition for
Extrajudicial Foreclosure of Mortgage were inadmissible in evidence.
Rejecting this argument, the CA ruled that the admissibility of the PNs is
a non-issue in this case because in questioning the validity of the REMs
and the foreclosure proceedings, PDCP did not actually assail the validity
or existence of said PNs; what it raised as an issue was whether the
foreclosure covered obligations other than Sengkon's availment under the
Credit Line. As the CA puts it:
[W]hat should have been the focal and critical question to be answered on
the issue of whether the subject [REMs] were validly foreclosed should
have been whether the [REMs] executed by [PDCP] covered the
obligations of [Sengkon] as represented in those [PNs] or, stated in
another way, were the [PNs] used by defendant BPI in its foreclosure
proceedings over [PDCP's] mortgages availments by [Sengkon] under its
Credit Line?
An examination of the subject [PNs] vis-a-vis the Agreement for Credit
Line would yield an affirmative answer.
In the case at bar, a close look at the Agreement for Credit Line would
reveal that the said credit facility for Php60 Million was granted in favor
of [Sengkon] for the purpose of "Additional Working Capital" and that it
would be "available by way of short term [PN]." In the same manner, an
examination of [PNs] PN Nos. 2-002-028618, 2-002-029436 and 2-002-
029437 would reveal that the said [PNs] were availed of by [Sengkon] for
the purpose of "Additional Working Capital." 45 (Citations omitted and
emphasis in the original)
The Court cannot agree with the CA. In order to determine whether the
obligations sought to be satisfied by the foreclosure proceedings were
only Sengkon's availments under the Credit Line, the court necessarily
needs to refer to the PNs themselves, as what the CA in fact did. Thus, it
is actually the contents of these PNs that are in issue and the trial court
did not err in applying the best evidence rule.
But even if the Court disregards the best evidence rule, the circumstances
in this case militate against the CA's conclusion. The trial court made a
factual finding that Sengkon's availment under the Credit Line, which is
the one secured by PDCP's properties, may be made only within one year,
or from April 19, 1996 to April 30, 1997. While FEBTC claimed that the
Obligations Part 2 | Page 141 of 143
period of said credit line was extended up to July 31, 1997, PDCP was not
notified of the extension. At any rate, the RTC found that "no evidence
had been adduced to show that Sengkon availed of any loan under the
credit line up to July 31, 1997," which was the period of the extension.
Notably, while PDCP demanded from FEBTC for the segregation of
Sengkon's availments under the Credit Line, FEBTC failed to heed
PDCP's valid request and instead demanded for a comprehensive payment
of Sengkon's entire obligation, unmindful of the fact of PDCP's status as
a mere third-party mortgagor and not a principal debtor. As a third-party
mortgagor, the limitation on its liability pertains not only to the properties
it mortgaged but also to the obligations specifically secured thereby. It is
well settled that while a REM may exceptionally secure future loans or
advancements, these future debts must be specifically described in the
mortgage contract. An obligation is not secured by a mortgage unless it
comes fairly within the terms of the mortgage contract. 46
In this case, there was simply no evidence to support the conclusion that
the PNs were in fact availments under the Credit Line secured by PDCP's
properties. The PNs that were used by FEBTC in its Petition for
Extrajudicial Foreclosure of Mortgage were all executed beyond the
extended duration of Sengkon's Credit Line (or until July 1997). While
FEBTC wrote a letter 47 dated September 18, 1997, which is a few days
short of the date of the earliest PN (September 23, 1997), addressed to
STI, approving the renewal of the debtor's Credit Line subject to the
condition that the Line "shall be partially secured" by the PDCP's
mortgaged properties, it is worthy to note that this letter did not bear the
conforme of the debtor, lending credence to the trial court's observation.
In this light, FEBTC's failure to heed PDCP's request for the segregation
of the amounts secured by its properties assumes critical significance. The
lack of proof that the availments subject of the foreclosure proceedings
were within the coverage of PDCP's REMs explains FEBTC's omission.
Despite the foregoing, however, particularly the variance between the
duration of Sengkon's Credit Line and the dates appearing on the face of
the PNs, the CA upheld the validity of the foreclosure based merely on
the similarity in the purpose for which the Credit Line was granted and
the purpose for which the PNs were executed.
On the implied premise that what is material is only the identity of the
debtor whose obligation the mortgagor secures, the CA cited Prudential
Bank v. Alviar 48 and applied the dragnet clause in PDCP's REMs.
According to the CA, since the REMs contain a dragnet clause, then
PDCP's properties can be made to answer even if the PNs supporting the
Petition for Extrajudicial Foreclosure of Mortgage refer to Sengkon's
obligations in its other credit facilities. 49
The CA unfortunately misapplied the ruling in Prudential Bank. In that
case, the Court's discussion on the application of the blanket mortgage
clause or dragnet clause was not as much as critically important as the
Court's novel application of the doctrine of reliance on security test.
A dragnet clause is a stipulation in a REM contract that extends the
coverage of a mortgage to advances or loans other than those already
obtained or specified in the contract. Where there are several advances,
however, 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 or unless
there are clear and supportive evidence to the contrary. 50 This is
especially true in this case where the advances were not only several but
were covered by different sub-facilities. Thus, in Prudential Bank, the
Court stated:
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 [PNs] 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."
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.
xxxx
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. 51 (Citations omitted and emphasis and
underlining ours)
In the present case, PDCP's REMs indeed contain a blanket mortgage
clause in the following language:
That, for and in consideration of credit accommodations obtained from
the [FEBTC], and to secure the payment of the same and those that may
hereafter be obtained, the principal of all of which is hereby fixed at x x
x PESOS x x x, Philippine Currency, as well as those that the [FEBTC]
may extend to the [PDCP], including interest and expenses or any other
obligation owing to the [FEBTC], whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the [FEBTC]
x x x. 52
Nonetheless, the parties do not dispute that what the REMs secured were
only Sengkon's availments under the Credit Line and not all of Sengkon's
availments under other sub-facilities which are also secured by other
collaterals.53 Since the liability of PDCP's properties was not unqualified,
the PNs, used as basis of the Petition for Extrajudicial
Foreclosure of Mortgage should sufficiently indicate that it is within the
terms of PDCP's limited liability. In this case, the PNs failed to make any
reference to PDCP's availments, if any, under its Credit Line. In fact, it
did not even mention Sengkon's securities under the Credit Line. Notably,
the Disclosure Statements, which were "certified correct" by FEBTC's
authorized representative, Ma. Luisa C. Ellescas, and which accompanied
the PNs, failed to disclose whether the loan secured thereby was actually
secured or not.
Thus, even if the Court brushes aside the Best Evidence Rule, the
foregoing observations clearly support the trial court's observation that
FEBTC's foreclosure did not actually cover the specific obligations
secured by PDCP's properties.
FEBTC's failure to send personal notice to the mortgagor is fatal to the
validity of the foreclosure proceedings
Indeed, FEBTC's failure to comply with its contractual obligation to send
notice to PDCP of the foreclosure sale is fatal to the validity of the
foreclosure proceedings. In Metropolitan Bank v. Wong,54 the Court ruled
that while as a rule, personal notice to the mortgagor is not required, such
notice may be subject of a contractual stipulation, the breach of which is
sufficient to nullify the foreclosure sale, thus:
In resolving the first query, we resort to the fundamental principle that a
contract is the law between the parties and, that absent any showing that
its provisions are wholly or in part contrary to law, morals, good customs,
public order, or public policy, it shall be enforced to the letter by the
courts. Section 3, Act No. 3135 reads:
Obligations Part 2 | Page 142 of 143
xxxx
The Act only requires (1) the posting of notices of sale in three public
places, and (2) the publication of the same in a newspaper of general
circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties to the mortgage contract are not
precluded from exacting additional requirements. In this case, petitioner
and respondent in entering into a contract of [REM], agreed inter alia:
"all correspondence relative to this mortgage, including demand letters,
summonses, subpoenas, or notifications of any judicial or extra-judicial
action shall be sent to the MORTGAGOR at 40-42 Aldeguer St. Iloilo
City, or at the address that may hereafter be given in writing by the
MORTGAGOR to the MORTGAGEE."
Precisely, the purpose of the foregoing stipulation is to apprise respondent
of any action which petitioner might take on the subject property, thus
according him the opportunity to safeguard his rights. When petitioner
failed to send the notice of foreclosure sale to respondent, he committed
a contractual breach sufficient to render the foreclosure sale on November
23, 1981 null and void. 55 (Citation omitted and italics in the original)
In trivializing FEBTC's failure to send personal notice to PDCP however,
the CA, citing Philippine National Bank v. Nepomuceno Productions,
Inc., 56 ruled that since the principal object of a notice of sale is not so
much to notify the mortgagor but to inform the public in general of the
particularities of the foreclosure, then personal notice to the mortgagor
may be disregarded.57 The cited case, however, is inapplicable because
that case did not in fact involve stipulations on personal notice to
mortgagor nor the sending of notice to a wrong address. The issue
involved in that case is whether the parties to the mortgage can validly
waive the statutory requirements of posting and publication and not
whether the bank can ignore a contractual stipulation for personal notice.
Neither is PNB v. Spouses Rabat 58 likewise cited by the CA applicable
because the trial court therein found that the mortgage contract did not in
fact require that personal service of notice of foreclosure sale be given to
the mortgagors. The CA's cavalier disregard of the mortgagor's
contractual right to notice of the foreclosure sale runs contrary to
jurisprudence. In Wong, 59 the Court already had the occasion to observe:
if the parties did not stipulate therefor. Stated differently, personal notice
is necessary if the parties so agreed in their mortgage contract. In the
present case, the parties provided in their REMs that:
12. All correspondence relative to this mortgage, including demand
letters, summonses, subpoenas, or notifications of any judicial or
extrajudicial action shall be sent to the [PDCP] at or at the address that
may hereafter be given in writing by the [PDCP] to the [FEBTC]. x x x. 65
This provision clearly establishes the agreement between the parties that
personal notice is required before FEBTC may proceed with the
foreclosure of the property and thus, FEBTC's act of proceeding with the
foreclosure despite the absence of personal notice to the mortgagor was
its own lookout.
That the portion on the mortgagor's address was left in blank cannot be
simply swept under the rug as "an expression of general intent" that
cannot prevail of the parties' specific intent not to require personal notice.
Apart from the fact that this reasoning is based on a questionable doctrine,
the CA's ruling completely ignored the fact that the mortgage contract
containing said stipulation was a standard contract prepared by FEBTC
itself. If the latter did not intend to require personal notice, on top of the
statutory requirements of posting and publication, then said provision
should not have at all been included in the mortgage contract. In other
words, the REMs in this case are contracts of adhesion, and in case of
doubt, the doubt should be resolved against the party who prepared it. 66
Accordingly, the CA should have considered the "doubt" created by the
blank space in the mortgage contract against FEBTC and not in its favor.
Nonetheless, even if the Court ignores this particular rule of
interpretation, the fact that FEBTC caused the sending of a notice, albeit
at a wrong address, to PDCP is itself a clear proof that the parties did
intend to impose a contractual requirement of personal notice, FEBTC's
undisputed breach of which sufficiently nullifies the foreclosure
proceeding.
With the foregoing, the Court finds it unnecessary to discuss PDCP's
argument based on the alleged violation of its constitutional right against
impairment of obligations and contract.

It is bad enough that the mortgagor has no choice but to yield his property WHEREFORE, premises considered, the petition is GRANTED. The
in a foreclosure proceeding. It is infinitely worse, if prior thereto, he was Decision dated November 25, 2009 and Resolution dated February 2,
denied of his basic right to be informed of the impending loss of his 2010 of the Court of Appeals in CA-G.R. CV No. 89755 are
property. x x x. 60 hereby ANNULLED and SET ASIDE. The Decision dated April 16,
2007 of the Regional Trial Court of Quezon City, Branch 222, in Civil
While the CA acknowledged that there was indeed a contractual Case No. QOl-44630 is REINSTATED and AFFIRMED.
stipulation for notice to PDCP as mortgagor, it considered the absence of
a particular address in the space provided therefor in the mortgage
contract as merely evincing an expression of "general intent" between the SO ORDERED.
parties and that this cannot prevail against their "specific intent" that Act
No. 3135 be the controlling law between them,
citing Cortes v. Intermediate Appellate Court. 61
The Court cannot agree with the CA. To begin with, the value of the
doctrine enunciated in Cortes has long been considered questionable by
this Court. Thus, in Global Holiday Ownership
Corporation v. Metropolitan Bank and Trust Company, 62 the Court held:
But what is stated in Cortes no longer applies in light of the Court's
rulings in Wong and all the subsequent cases, which have been
consistent. Cortes has never been cited in subsequent rulings of the Court,
nor has the doctrine therein ever been reiterated. Its doctrinal value has
been diminished by the policy enunciated in Wong and the subsequent
cases; that is, that in addition to Section 3 of Act 3135, the parties may
stipulate that personal notice of foreclosure proceedings may be required.
Act 3135 remains the controlling law, but the parties may agree, in
addition to posting and publication, to include personal notice to the
mortgagor, the non-observance of which renders the foreclosure
proceedings null and void, since the foreclosure proceedings become an
illegal attempt by the mortgagee to appropriate the property for itself.
Thus, we restate: the general rule is that personal notice to the mortgagor
in extrajudicial foreclosure proceedings is not necessary, and posting and
publication will suffice. Sec. 3 of Act 3135 governing extra-judicial
foreclosure of [REMs], as amended by Act 4118, requires only posting of
the notice of sale in three public places and the publication of that notice
in a newspaper of general circulation. The exception is when the parties
stipulate that personal notice is additionally required to be given the
mortgagor. Failure to abide by the general rule, or its exception, renders
the foreclosure proceedings null and void. 63 (Citation omitted, italics
ours, and emphasis and underlining in the original deleted)
In fact, the 2002 case of Nepomuceno Productions,64 cited by the CA,
already made it clear that while personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not necessary, this holds true only

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