SANTOS VS PNOC Facts: PNOC Exploration Corporation, respondent, filed a complaint for a sum of money against petitioner Pedro

Santos Jr. in the RTC of Pasig. The amount sought to be collected was the petitioners unpaid balance of the car loan advanced to him by respondent when he was still a member of its board of directors. Personal service of summons were made to petitioner but failed because the latter cannot be located in his last known address despite earnest efforts to do so. Subsequently, on respondents motion, the trial court allowed service of summons by publication. Respondent caused the publication of the summons in Remate, a newspaper of general circulation in the Philippines. Thereafter, respondent submitted the affidavit of publication and the affidavit of service of respondents employee to the effect that he sent a copy of the summons by registered mail to petitioners last known address. Petitioner still failed to answer within the prescribed period despite the publication of summons. Hence, respondent filed a motion for the reception of its evidence ex parte. Trial court granted said motion and proceeded with the ex parte presentation and formal offer of its evidence. Petitioner filed an Omnibus Motion for Reconsideration and to Admit Attached Answer, alleging that the affidavit of service submitted by respondent failed to comply with Section 19, Rule 14 of the Rules of Court as it was not executed by the clerk of court. Trial court denied the said motion and held that the rules did not require such execution with the clerk of court. It also denied the motion to admit petitioners answer because the same was filed way beyond the reglementary period. Petitioner appeals to the CA via a petition for certiorari but failed and even sustained the trial courts decision and ordered the former to pay the amount plus legal interest and cost of suit. Hence, this petition. Issues: (1) Whether or not there is lack of jurisdiction over the petitioner due to improper service of summons. (2) Whether or not the rule on service by publication under Section 14, Rule 14 of the Rules of Court applies only to actions in rem, not actions in personam. (3) Whether or not the affidavit of service of the copy of the summons should have been prepared by the clerk of court and not respondents messenger. Held:

(1) Section 14, Rule 14 provides that in any action where the defendant is designated as an unknown owner or the like or when his whereabouts are unknown and cannot be ascertained by diligentinquiry, service may, by leave of court, be effected upon him by publication in a newspaper of general circulation and in such places and for such times as the court may order. Since petitioner could not be personally served with summons despite diligent efforts to locate his whereabouts, respondent sought and was granted leave of court to effect the service of summons upon him by publication in a newspaper of general circulation. Thus, petitioner was proper served with summons by publication and that there is jurisdiction over his person. (2) The in rem/in personam distinction was significant under the old rule because it was silent as to the kind of action to which the rule was applicable but this has been changed, it now applies to any action. The present rule expressly states that it applies in any action where th e defendant is designated as an unknown owner, or the like, or whenever his whereabouts are unknown and cannot be ascertained by diligent inquiry. Hence, the petitioners contention that the complaint filed against him is not covered by the said rule because the action for recovery of sum of money is an action in personam is not applicable anymore. (3) The service of summons by publication is complemented by service of summons by registered mail to defendants last known address. This complementary service is evidenced by an affidavitshowing the deposit of a copy of the summons and order for publication in the post office, postage for prepaid, directed to the defendant by registered mail to his last known address. The rules, however, do not require that the affidavit of complementary service be executed by the clerk of court. While the trial court ordinarily does the mailing of copies of its orders and processes, the duty to make the complementary service by registered mail is imposed on the party who resorts to service by publication.

G.R. No. 128803 September 25, 1998 ASIAVEST LIMITED, petitioner, vs. THE COURT OF APPEALS and ANTONIO HERAS, respondents.

DAVIDE, JR., J.: In issue is the enforceability in the Philippines of a foreign judgment. The antecedents are summarized in 1 the 24 August 1990 Decision of Branch 107 of the Regional Trial Court of Quezon City in Civil Case No. Q-52452; thus: The plaintiff Asiavest Limited filed a complaint on December 3, 1987 against the defendant Antonio Heras praying that said defendant be ordered to pay to the plaintiff the amounts awarded by the Hong Kong Court Judgment dated December 28, 1984 and amended on April 13, 1987, to wit: 1) US$1,810,265.40 or its equivalent in Hong Kong currency at the time of payment with legal interest from December 28, 1984 until fully paid; 2) interest on the sum of US$1,500.00 at 9.875% per annum from October 31, 1984 to December 28, 1984; and 3) HK$905.00 at fixed cost in the action; and 4) at least $80,000.00 representing attorney's fees, litigation expenses and cost, with interest thereon from the date of the judgment until fully paid. On March 3, 1988, the defendant filed a Motion to Dismiss. However, before the court could resolve the said motion, a fire which partially razed the Quezon City Hall Building on June 11, 1988 totally destroyed the office of this Court, together with all its records, equipment and properties. On July 26, 1988, the plaintiff, through counsel filed a Motion for Reconstitution of Case Records. The Court, after allowing the defendant to react thereto, granted the said Motion and admitted the annexes attached thereto as the reconstituted records of this case per Order dated September 6, 1988. Thereafter, the Motion to Dismiss, the resolution of which had been deferred; was denied by the Court in its Order of October 4, 1988. On October 19, 1988, defendant filed his Answer. The case was then set for pre-trial conference. At the conference, the parties could not arrive at any settlement. However, they agreed on the following stipulations of facts: 1. The defendant admits the existence of the judgment dated December 28, 1984 as well as its amendment dated April 13, 1987, but not necessarily the authenticity or validity thereof;

2. The plaintiff is not doing business and is not licensed to do business in the Philippines; 3. The residence of defendant, Antonio Heras, is New Manila, Quezon City. The only issue for this Court to determine is, whether or not the judgment of the Hong Kong Court has been repelled by evidence of want of jurisdiction, want of notice to the party, collusion, fraud or clear mistake of law or fact, such as to overcome the presumption established in Section 50, Rule 39 of the Rules of Court in favor of foreign judgments. In view of the admission by the defendant of the existence of the aforementioned judgment (Pls. See Stipulations of Facts in the Order dated January 5, 1989 as amended by the Order of January 18, 1989), as well as the legal presumption in favor of the plaintiff as provided for in paragraph (b); Sec. 50, (Ibid.), the plaintiff presented only documentary evidence to show rendition, existence, and authentication of such judgment by the proper officials concerned (Pls. See Exhibits "A" thru "B", with their submarkings). In addition, the plaintiff presented testimonial and documentary evidence to show its entitlement to attorney's fees and other expenses of litigation. . . . . On the other hand, the defendant presented two witnesses, namely. Fortunata dela Vega and Russel Warren Lousich. The gist of Ms. dela Vega's testimony is to the effect that no writ of summons or copy of a statement of claim of Asiavest Limited was ever served in the office of the Navegante Shipping Agency Limited and/or for Mr. Antonio Heras, and that no service of the writ of summons was either served on the defendant at his residence in New Manila, Quezon City. Her knowledge is based on the fact that she was the personal secretary of Mr. Heras during his JD Transit days up to the latter part of 1972 when he shifted or diversified to shipping business in Hong Kong; that she was in-charge of all his letters and correspondence, business commitments, undertakings, conferences and appointments, until October 1984 when Mr. Heras left Hong Kong for good; that she was also the Officer-in-Charge or Office Manager of Navegante Shipping Agency LTD, a Hong Kong registered and based company acting as ships agent, up to and until the company closed shop sometime in the first quarter of 1985, when shipping business collapsed worldwide; that the said company held office at 34-35 Connaught Road, Central Hong Kong and later transferred to Carton House at Duddel Street, Hong Kong, until the company closed shop in 1985; and that she was certain of such facts because she held office at Caxton House up to the first quarter of 1985. Mr. Lousich was presented as an expert on the laws of Hong Kong, and as a representative of the law office of the defendant's counsel who made a verification of the record of the case filed by the plaintiff in Hong Kong against the defendant, as well as the procedure in serving Court processes in Hong Kong. In his affidavit (Exh. "2") which constitutes his direct testimony, the said witness stated that: The defendant was sued on the basis of his personal guarantee of the obligations of Compania Hermanos de Navegacion S.A. There is no record that a writ of summons was served on the person of the defendant in Hong Kong, or that any such attempt at service was made. Likewise, there is no record that a copy of the judgment of the High Court

was furnished or served on the defendant; anyway, it is not a legal requirement to do so under Hong Kong laws; a) The writ of summons or claim can be served by the solicitor (lawyer) of the claimant or plaintiff. In Hong Kong there are no Court personnel who serve writs of summons and/or most other processes. b) If the writ of summons or claim (or complaint) is not contested, the claimant or the plaintiff is not required to present proof of his claim or complaint nor present evidence under oath of the claim in order to obtain a Judgment. c) There is no legal requirement that such a Judgment or decision rendered by the Court in Hong Kong [to] make a recitation of the facts or the law upon which the claim is based. d) There is no necessity to furnish the defendant with a copy of the Judgment or decision rendered against him. e) In an action based on a guarantee, there is no established legal requirement or obligation under Hong Kong laws that the creditor must first bring proceedings against the principal debtor. The creditor can immediately go against the guarantor. On cross examination, Mr. Lousich stated that before he was commissioned by the law firm of the defendant's counsel as an expert witness and to verify the records of the Hong Kong case, he had been acting as counsel for the defendant in a number of commercial matters; that there was an application for service of summons upon the defendant outside the jurisdiction of Hong Kong; that there was an order of the Court authorizing service upon Heras outside of Hong Kong, particularly in Manila or any other place in the Philippines (p. 9, TSN, 2/14/90); that there must be adequate proof of service of summons, otherwise the Hong Kong Court will refuse to render judgment (p. 10, ibid); that the mere fact that the Hong Kong Court rendered judgment, it can be presumed that there was service of summons; that in this case, it is not just a presumption because there was an affidavit stating that service was effected in [sic] a particular man here in Manila; that such affidavit was filed by one Jose R. Fernandez of the firm Sycip Salazar on the 21st of December 1984, and stated in essence that "on Friday, the 23rd of November 1984 he served the 4th defendant at No. 6 First Street, Quezon City by leaving it at that address with Mr. Dionisio Lopez, the son-in-law of the 4th defendant the copy of the writ and Mr. Lopez informed me and I barely believed that he would bring the said writ to the attention of the 4th defendant" (pp. 11-12, ibid.); that upon filing of that affidavit, the Court was asked and granted judgment against the 4th defendant; and that if the summons or claim is not contested, the claimant of the plaintiff is not required to present proof of his claim or complaint or present evidence under oath of the claim in order to obtain judgment; and that such judgment can be enforced in the same manner as a judgment rendered after full hearing. The trial court held that since the Hong Kong court judgment had been duly proved, it is a presumptive evidence of a right as between the parties; hence, the party impugning it had the burden to prove want of jurisdiction over his person. HERAS failed to discharge that burden. He did not testify to state

categorically and under oath that he never received summons. Even his own witness Lousich admitted that HERAS was served with summons in his Quezon City residence. As to De la Vega's testimony regarding non-service of summons, the same was hearsay and had no probative value. As to HERAS' contention that the Hong Kong court judgment violated the Constitution and the procedural laws of the Philippines because it contained no statements of the facts and the law on which it was based, the trial court ruled that since the issue relate to procedural matters, the law of the forum, i.e., Hong Kong laws, should govern. As testified by the expert witness Lousich, such legalities were not required under Hong Kong laws. The trial Court also debunked HERAS' contention that the principle of excussion under Article 2058 of the Civil Code of the Philippines was violated. It declared that matters of substance are subject to the law of the place where the transaction occurred; in this case, Hong Kong laws must govern. The trial court concluded that the Hong Kong court judgment should be recognized and given effect in this jurisdiction for failure of HERAS to overcome the legal presumption in favor of the foreign judgment. It then decreed; thus: WHEREFORE, judgment is hereby rendered ordering defendant to pay to the plaintiff the following sums or their equivalents in Philippine currency at the time of payment: US$1,810,265.40 plus interest on the sum of US$1,500,000.00 at 9.875% per annum from October 31, 1984 to December 28, 1984, and HK$905 as fixed cost, with legal interests on the aggregate amount from December 28, 1984, and to pay attorney's fees in the sum of P80,000.00. ASIAVEST moved for the reconsideration of the decision. It sought an award of judicial costs and an increase in attorney's fees in the amount of US$19,346.45 with interest until full payment of the said obligations. On the other hand, HERAS no longer opposed the motion and instead appealed the decision to the Court of Appeals, which docketed the appeal as CA-G.R. CV No. 29513. In its order of 2 November 1990, the trial court granted ASIAVEST's motion for reconsideration by increasing the award of attorney's fees to "US$19,345.65 OR ITS EQUIVALENT IN PHILIPPINE CURRENCY, AND TO PAY THE COSTS OF THIS SUIT," provided that ASIAVEST would pay the corresponding filing fees for the increase. ASIAVEST appealed the order requiring prior payment of filing fees. However, it later withdrew its appeal and paid the additional filing fees. On 3 April 1997, the Court of Appeals rendered its decision reversing the decision of the trial court and dismissing ASIAVEST's complaint without prejudice. It underscored the fact that a foreign judgment does not of itself have any extraterritorial application. For it to be given effect, the foreign tribunal should have acquired jurisdiction over the person and the subject matter. If such tribunal has not acquired jurisdiction, its judgment is void. The Court of Appeals agreed with the trial court that matters of remedy and procedure, such as those relating to service of summons upon the defendant are governed by the lex fori, which was, in this case, the law of Hong Kong. Relative thereto, it gave weight to Lousich's testimony that under the Hong Kong law, the substituted service of summons upon HERAS effected in the Philippines by the clerk of Sycip Salazar Hernandez & Gatmaitan firm would be valid provided that it was done in accordance with Philippine laws. It then stressed that where the action is in personam and the defendant is in the Philippines, the summons should be personally served on the defendant pursuant to Section 7, Rule 14 of 4 the Rules of Court. Substituted service may only be availed of where the defendant cannot be promptly served in person, the fact of impossibility of personal service should be explained in the proof of service. It also found as persuasive HERAS' argument that instead of directly using the clerk of the Sycip Salazar Hernandez & Gatmaitan law office, who was not authorized by the judge of the court issuing the summons, ASIAVEST should have asked for leave of the local courts to have the foreign summons
3 2

served by the sheriff or other court officer of the place where service was to be made, or for special reasons by any person authorized by the judge. The Court of Appeals agreed with HERAS that "notice sent outside the state to a non-resident is unavailing to give jurisdiction in an action against him personally for money recovery." Summons should have been personally served on HERAS in Hong Kong, for, as claimed by ASIAVEST, HERAS was physically present in Hong Kong for nearly 14 years. Since there was not even an attempt to serve summons on HERAS in Hong Kong, the Hong Kong Supreme Court did not acquire jurisdiction over HERAS. Nonetheless it did not totally foreclose the claim of ASIAVEST; thus: While We are not fully convinced that [HERAS] has a meritorious defense against [ASIAVEST's] claims or that [HERAS] ought to be absolved of any liability, nevertheless, in view of the foregoing discussion, there is a need to deviate front the findings of the lower court in the interest of justice and fair play. This, however, is without prejudice to whatever action [ASIAVEST] might deem proper in order to enforce its claims against [HERAS]. Finally, the Court of Appeals also agreed with HERAS that it was necessary that evidence supporting the validity of the foreign judgment be submitted, and that our courts are not bound to give effect to foreign judgments which contravene our laws and the principle of sound morality and public policy. ASIAVEST forthwith filed the instant petition alleging that the Court of Appeals erred in ruling that I. . . . IT WAS NECESSARY FOR [ASIAVEST] TO PRESENT EVIDENCE "SUPPORTING THE VALIDITY OF THE JUDGMENT"; II. . . . THE SERVICE OF SUMMONS ON [HERAS] WAS DEFECTIVE UNDER PHILIPPINES LAW; III. . . . SUMMONS SHOULD HAVE BEEN PERSONALLY SERVED ON HERAS IN HONG KONG; IV. . . . THE HONG KONG SUMMONS SHOULD HAVE BEEN SERVED WITH LEAVE OF PHILIPPINE COURTS; V. . . . THE FOREIGN JUDGMENT "CONTRAVENES PHILIPPINE LAWS, THE PRINCIPLES OF SOUND MORALITY, AND THE PUBLIC POLICY OF THE PHILIPPINES. Being interrelated, we shall take up together the assigned errors.

Under paragraph (b) of Section 50, Rule 39 of the Rules of Court, which was the governing law at the time this case was decided by the trial court and respondent Court of Appeals, a foreign judgment against a person rendered by a court having jurisdiction to pronounce the judgment is presumptive evidence of a right as between the parties and their successors in interest by the subsequent title. However, the judgment may be repelled by evidence of want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact. Also, Section 3(n) of Rule 131 of the New Rules of Evidence provides that in the absence of proof to the contrary, a court, or judge acting as such, whether in the Philippines or elsewhere, is presumed to have acted in the lawful exercise of jurisdiction. Hence, once the authenticity of the foreign judgment is proved, the burden to repel it on grounds provided for in paragraph (b) of Section 50, Rule 39 of the Rules of Court is on the party challenging the foreign judgment HERAS in this case. At the pre-trial conference, HERAS admitted the existence of the Hong Kong judgment. On the other hand, ASIAVEST presented evidence to prove rendition, existence, and authentication of the judgment by the proper officials. The judgment is thus presumed to be valid and binding in the country from which it 6 comes, until the contrary is shown. Consequently, the first ground relied upon by ASIAVEST has merit. The presumption of validity accorded foreign judgment would be rendered meaningless were the party seeking to enforce it be required to first establish its validity. The main argument raised against the Hong Kong judgment is that the Hong Kong Supreme Court did not acquire jurisdiction over the person of HERAS. This involves the issue of whether summons was properly and validly served on HERAS. It is settled that matters of remedy and procedure such as those relating to 7 the service of process upon the defendant are governed by the lex fori or the law of the forum, i.e., the law of Hong Kong in this case. HERAS insisted that according to his witness Mr. Lousich, who was presented as an expert on Hong Kong laws, there was no valid service of summons on him. In his counter-affidavit, which served as his direct testimony per agreement of the parties, Lousich declared that the record of the Hong Kong case failed to show that a writ of summons was served upon HERAS in Hong Kong or that any such attempt was made. Neither did the record show that a copy of the judgment of the court was served on HERAS. He stated further that under Hong Kong laws (a) a writ of summons could be served by the solicitor of the claimant or plaintiff; and (b) where the said writ or claim was not contested, the claimant or plaintiff was not required to present proof under oath in order to obtain judgment. On cross-examination by counsel for ASIAVEST, Lousich' testified that the Hong Kong court authorized service of summons on HERAS outside of its jurisdiction, particularly in the Philippines. He admitted also the existence of an affidavit of one Jose R. Fernandez of the Sycip Salazar Hernandez & Gatmaitan law firm stating that he (Fernandez) served summons on HERAS on 13 November 1984 at No. 6, 1st St., 10 Quezon City, by leaving a copy with HERAS's son-in-law Dionisio Lopez. On redirect examination, Lousich declared that such service of summons would be valid under Hong Kong laws provided that it 11 was in accordance with Philippine laws. We note that there was no objection on the part of ASIAVEST on the qualification of Mr. Lousich as an expert on the Hong Kong law. Under Sections 24 and 25, Rule 132 of the New Rules of Evidence, the record of public documents of a sovereign authority, tribunal, official body, or public officer may be proved by (1) an official publication thereof or (2) a copy attested by the officer having the legal custody thereof, which must be accompanied, if the record is not kept in the Philippines, with a certificate that such officer has the custody. The certificate may be issued by a secretary of the embassy or legation, consul general, consul, vice consul, or consular agent, or any officer in the foreign service of the Philippines stationed in the foreign country in which the record is kept, and authenticated by the seal of his office. The attestation
8 9

must state, in substance, that the copy is a correct copy of the original, or a specific part thereof, as the case may be, and must be under the official seal of the attesting officer. Nevertheless, the testimony of an expert witness may be allowed to prove a foreign law. An 12 authority on private international law thus noted: Although it is desirable that foreign law be proved in accordance with the above rule, however, the Supreme Court held in the case of Willamette Iron and Steel Works v. 13 Muzzal, that Section 41, Rule 123 (Section 25, Rule 132 of the Revised Rules of Court) does not exclude the presentation of other competent evidence to prove the existence of a foreign law. In that case, the Supreme Court considered the testimony under oath of an attorney-at-law of San Francisco, California, who quoted verbatim a section of California Civil Code and who stated that the same was in force at the time the obligations were contracted, as sufficient evidence to establish the existence of said law. Accordingly, in line with this view, the Supreme Court in the Collector of Internal Revenue v. Fisher et 14 al., upheld the Tax Court in considering the pertinent law of California as proved by the respondents' witness. In that case, the counsel for respondent "testified that as an active member of the California Bar since 1951, he is familiar with the revenue and taxation laws of the State of California. When asked by the lower court to state the pertinent California law as regards exemption of intangible personal properties, the witness cited Article 4, Sec. 13851 (a) & (b) of the California Internal and Revenue Code as published in Derring's California Code, a publication of Bancroft-Whitney Co., Inc. And as part of his testimony, a full quotation of the cited section was offered in evidence by respondents." Likewise, in several naturalization cases, it was held by the Court that evidence of the law of a foreign country on reciprocity regarding the acquisition of citizenship, although not meeting the prescribed rule of practice, may be allowed and used as basis for favorable action, if, in the light of all the circumstances, the Court is "satisfied of the authenticity of 15 the written proof offered." Thus, in, a number of decisions, mere authentication of the Chinese Naturalization Law by the Chinese Consulate General of Manila was held to be 16 competent proof of that law. There is, however, nothing in the testimony of Mr. Lousich that touched on the specific law of Hong Kong in respect of service of summons either in actions in rem or in personam, and where the defendant is either a resident or nonresident of Hong Kong. In view of the absence of proof of the Hong Kong law on this particular issue, the presumption of identity or similarity or the so-called processual presumption shall come into play. It will thus be presumed that the Hong Kong law on the matter is similar to the Philippine 17 law. As stated in Valmonte vs. Court of Appeals, it will be helpful to determine first whether the action is in personam, in rem, or quasi in rem because the rules on service of summons under Rule 14 of the Rules of Court of the Philippines apply according to the nature of the action. An action in personam is an action against a person on the basis of his personal liability. An action in 19 rem is an action against the thing itself instead of against the person. An action quasi in rem is one wherein an individual is named as defendant and the purpose of the proceeding is to subject his interest 20 therein to the obligation or lien burdening the property. In an action in personam, jurisdiction over the person of the defendant is necessary for the court to validly try and decide the case. Jurisdiction over the person of a resident defendant who does not voluntarily appear in court can be acquired by personal service of summons as provided under Section 7, Rule 14 of the Rules of Court. If he cannot be personally served with summons within a reasonable time, substituted service may be made in accordance with Section 8 of said Rule. If he is temporarily out of the country, any of the following modes of service may be resorted to: (1) substituted service set forth in Section 21 8; (2) personal service outside the country, with leave of court; (3) service by publication, also with 22 23 leave of court; or (4) any other manner the court may deem sufficient.
18

However, in an action in personam wherein the defendant is a non-resident who does not voluntarily submit himself to the authority of the court, personal service of summons within the state is essential to 24 the acquisition of jurisdiction over her person. This method of service is possible if such defendant is physically present in the country. If he is not found therein, the court cannot acquire jurisdiction over his 25 person and therefore cannot validly try and decide the case against him. An exception was laid down 26 in Gemperle v. Schenker wherein a non-resident was served with summons through his wife, who was a resident of the Philippines and who was his representatives and attorney-in-fact in a prior civil case filed by him; moreover, the second case was a mere offshoot of the first case. On the other hand, in a proceeding in rem or quasi in rem, jurisdiction over the person of the defendant is not a prerequisite to confer jurisdiction on the court provided that the court acquires jurisdiction over the res. Nonetheless summons must be served upon the defendant not for the purpose of vesting the 27 court with jurisdiction but merely for satisfying the due process requirements. Thus, where the defendant is a non-resident who is not found in the Philippines and (1) the action affects the personal status of the plaintiff; (2) the action relates to, or the subject matter of which is property in the Philippines in which the defendant has or claims a lien or interest; (3) the action seeks the exclusion of the defendant from any interest in the property located in the Philippines; or (4) the property of the defendant has been attached in the Philippines service of summons may be effected by (a) personal service out of the country, with leave of court; (b) publication, also with leave of court, or (c) any other manner the court may 28 deem sufficient. In the case at bar, the action filed in Hong Kong against HERAS was in personam, since it was based on his personal guarantee of the obligation of the principal debtor. Before we can apply the foregoing rules, we must determine first whether HERAS was a resident of Hong Kong. Fortunata de la Vega, HERAS's personal secretary in Hong Kong since 1972 until 1985, testified that HERAS was the President and part owner of a shipping company in Hong Kong during all those times 30 that she served as his secretary. He had in his employ a staff of twelve. He had "business commitments, undertakings, conferences, and appointments until October 1984 when [he] left Hong Kong 31 for good," HERAS's other witness, Russel Warren Lousich, testified that he had acted as counsel for 32 HERAS "for a number of commercial matters." ASIAVEST then infers that HERAS was a resident of Hong Kong because he maintained a business there. It must be noted that in his Motion to Dismiss, as well as in his 34 Answer to ASIAVEST's complaint for the enforcement of the Hong Kong court judgment, HERAS maintained that the Hong Kong court did not have jurisdiction over him because the fundamental rule is that jurisdiction in personam over non-resident defendants, so as to sustain a money judgment, must be 35 based upon personal service of summons within the state which renders the judgment. For its part, ASIAVEST, in its Opposition to the Motion to Dismiss contended: "The question of Hong Kong court's 'want of jurisdiction' is therefore a triable issue if it is to be pleaded by the defendant to 'repel' the foreign judgment. Facts showing jurisdictional lack (e.g. that the Hong Kong suit was in personam, that defendant was not a resident of Hong Kong when the suit was filed or that he did not voluntarily 37 submit to the Hong Kong court's jurisdiction) should be alleged and proved by the defendant." In his Reply (to the Opposition to Motion to Dismiss), HERAS argued that the lack of jurisdiction over his person was corroborated by ASIAVEST's allegation in the complaint that he "has his residence at No. 6, 1st St., New Manila, Quezon City, Philippines." He then concluded that such judicial admission amounted to evidence that he was and is not a resident of Hong Kong. Significantly, in the pre-trial conference, the parties came up with stipulations of facts, among which was 39 that "the residence of defendant, Antonio Heras, is New Manila, Quezon City."
38 36 33 29

We note that the residence of HERAS insofar as the action for the enforcement of the Hong Kong court judgment is concerned, was never in issue. He never challenged the service of summons on him through a security guard in his Quezon City residence and through a lawyer in his office in that city. In his Motion to Dismiss, he did not question the jurisdiction of the Philippine court over his person on the ground of invalid service of summons. What was in issue was his residence as far as the Hong Kong suit was concerned. We therefore conclude that the stipulated fact that HERAS "is a resident of New Manila, Quezon City, Philippines" refers to his residence at the time jurisdiction over his person was being sought by the Hong Kong court. With that stipulation of fact, ASIAVEST cannot now claim that HERAS was a resident of Hong Kong at the time. Accordingly, since HERAS was not a resident of Hong Kong and the action against him was, indisputably, one in personam, summons should have been personally served on him in Hong Kong. The extraterritorial service in the Philippines was therefore invalid and did not confer on the Hong Kong court jurisdiction over his person. It follows that the Hong Kong court judgment cannot be given force and effect here in the Philippines for having been rendered without jurisdiction. Even assuming that HERAS was formerly a resident of Hong Kong, he was no longer so in November 1984 when the extraterritorial service of summons was attempted to be made on him. As declared by his secretary, which statement was not disputed by ASIAVEST, HERAS left Hong Kong in October 1984 "for 40 good." His absence in Hong Kong must have been the reason why summons was not served on him therein; thus, ASIAVEST was constrained to apply for leave to effect service in the Philippines, and upon obtaining a favorable action on the matter, it commissioned the Sycip Salazar Hernandez & Gatmaitan law firm to serve the summons here in the Philippines. In Brown v. Brown, the defendant was previously a resident of the Philippines. Several days after a criminal action for concubinage was filed against him, he abandoned the Philippines. Later, a proceeding quasi in rem was instituted against him. Summons in the latter case was served on the defendant's attorney-in-fact at the latter's address. The Court held that under the facts of the case, it could not be said that the defendant was "still a resident of the Philippines because he ha[d] escaped to his country and [was] therefore an absentee in the Philippines." As such, he should have been "summoned in the same manner as one who does not reside and is not found in the Philippines." Similarly, HERAS, who was also an absentee, should have been served with summons in the same manner as a non-resident not found in Hong Kong. Section 17, Rule 14 of the Rules of Court providing for extraterritorial service will not apply because the suit against him was in personam. Neither can we apply Section 18, which allows extraterritorial service on a resident defendant who is temporarily absent from the country, because even if HERAS be considered as a resident of Hong Kong, the undisputed fact remains that he left Hong Kong not only "temporarily" but "for good." IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered DENYING the petition in this case and AFFIRMING the assailed judgment of the Court of Appeals in CA-G.R. CV No. 29513. Perkin vs Dakila Trading The case before this Court is a Petition for Review
[1] 41

on Certiorari under Rule 45 of the 1997

[2]

Revised Rules of Civil Procedure seeking to annul and set aside the Decision,
[4]

dated 4 April 2006, of the

[3]

Court of Appeals in CA-G.R. SP No. 78981, which affirmed the Orders, dated 4 November 2002 June 2003,

and 20

of the Mandaluyong City Regional Trial Court (RTC), Branch 212, in Civil Case No. MC99-

605, which, in turn, denied the Motion to Dismiss and subsequent Motion for Reconsideration of herein petitioner Perkin Elmer Singapore Pte Ltd.

Petitioner is a corporation duly organized and existing under the laws of Singapore. It is not considered as a foreign corporation doing business in the Philippines. Herein respondent Dakila Trading Corporation is a corporation organized and existing under Philippine laws, and engaged in the business of selling and leasing out laboratory instrumentation and process control instrumentation, and trading of laboratory chemicals and supplies.

The antecedents of the present case are as follows:

[5]

Respondent entered into a Distribution Agreement

on 1 June 1990 with Perkin-Elmer

Instruments Asia Pte Ltd. (PEIA), a corporation duly organized and existing under the laws of Singapore and engaged in the business of manufacturing, producing, selling or distributing various laboratory/analytical instruments. By virtue of the said agreement, PEIA appointed the respondent as the sole distributor of its products in the Philippines. The respondent was likewise granted the right to purchase and sell the products of PEIA subject to the terms and conditions set forth in the Distribution Agreement. PEIA, on the other hand, shall give respondent a commission for the sale of its products in the Philippines.

Under the same Distribution Agreement, respondent shall order the products of PEIA, which it shall sell in the Philippines, either from PEIA itself or from Perkin-Elmer Instruments (Philippines) Corporation (PEIP), an affiliate of PEIA. PEIP is a corporation duly organized and existing under Philippine laws, and involved in the business of wholesale trading of all kinds of scientific, biotechnological, and analytical instruments and appliances. PEIA allegedly owned 99% of the shares of PEIP.

On 2 August 1997, however, PEIA unilaterally terminated the Distribution Agreement, prompting respondent to file before the RTC of Mandaluyong City, Branch 212, a Complaint
[6]

for Collection of Sum

of Money and Damages with Prayer for Issuance of a Writ of Attachment against PEIA and PEIP, docketed as Civil Case No. MC99-605.
[7]

The RTC issued an Order,

dated 26 March 1999, denying respondents prayer for the issuance

[8]

of a writ of attachment. The respondent moved for the reconsideration of the said Order but it was denied in another Order, dated 11 January 2000.

Respondent then filed Ex-Parte Motions for Issuance of Summons and for Leave of Court to Deputize Respondents General Manager, Richard A. Tee, to Serve Summons Outside of

the Philippines,

[9]

which the RTC granted in its Order, dated 27 April 2000.

[10]

Thus, an Alias Summons,

dated 4 September 2000, was issued by the RTC to PEIA. But the said Alias Summons was served on 28 September 2000 and received by Perkinelmer Asia, a Singaporean based sole proprietorship, owned by the petitioner and, allegedly, a separate and distinct entity from PEIA.
[11]

PEIP moved to dismiss

[12]

the Complaint filed by respondent on the ground that it states no cause

of action. Perkinelmer Asia, on the other hand, through its counsel, sent letters, dated 12 October 2000 and 15 November 2000,
[13]

to the respondent and to the RTC, respectively, to inform them of the

wrongful service of summons upon Perkinelmer Asia.

Accordingly, respondent filed an Ex-Parte Motion to Admit Amended Complaint, together with the Amended Complaint claiming that PEIA had become a sole proprietorship
[14]

owned by the petitioner, and

subsequently changed its name to Perkinelmer Asia. Being a sole proprietorship of the petitioner, a change in PEIAs name and juridical status did not detract from the fact that all its due and outstanding obligations Complaint
[15]

to

third
[16]

parties

were

assumed

by

the

petitioner. Hence,

in

its

Amended

respondent sought to change the name of PEIA to that of the petitioner. In an Order, the RTC admitted the Amended Complaint filed by the respondent. Respondent
[17]

dated 24 July 2001,

then filed another Motion

for the Issuance of Summons and for Leave of Court to Deputize

Respondents General Manager, Richard A. Tee, to Serve Summons Outside the Philippines. In another Order, dated 4 March 2002,
[18]

the RTC deputized respondents General Manager to serve summons on

[19]

petitioner in Singapore. The RTC thus issued summons

to the petitioner. Acting on the said Order,

respondents General Manager went to Singapore and served summons on the petitioner.

Meanwhile, in an Order, dated 10 October 2001, the RTC denied the Motion to Dismiss filed by PEIP, compelling the latter to file its Answer to the Amended Complaint.

Petitioner Dismiss
[20]

subsequently

filed

with

the

RTC

Special

Appearance

and

Motion

to

respondents Amended Complaint on 30 May 2002 based on the following grounds: (1) the

RTC did not acquire jurisdiction over the person of the petitioner; (2) the respondent failed to state a cause of action against the petitioner because it is not the real party-in-interest; (3) even assuming arguendo that the respondent correctly filed the case against the petitioner, the Distribution Agreement which was the basis of its claim grants PEIA the right to terminate the contract at any time; and (4) the venue was improperly laid. The RTC in its Order, dated 4 November 2002, denied petitioners Motion to Dismiss, ratiocinating as follows:

Prescinding from the above arguments of both parties, the [RTC] is inclined to DENY the Motion to Dismiss. A careful scrutiny on (sic) the allegation in the (Amended) Complaint would show that [herein respondent] alleges ownership by the [herein petitioner] of shares of stocks in the [PEIP]. Such allegation of ownership of shares of stocks by the [petitioner] would reveal that there is an allegation of personal property in the Philippines. Shares of stocks represent personal property of the shareholder. Thus, it follows that even though the Amended Complaint is primarily for damages, it does relate to a property of the [petitioner], to which the latter has a claim interest (sic), or an actual or contingent lien, which will make it fall under one of the requisite (sic) for extraterritorial service under Section 15, Rule 14, of the Rules of Court. Thus, it could be gainfully said that the summons had been validly served for [RTC] to acquire jurisdiction over the [petitioner]. The [petitioner] hinges its dismissal on the failure of the [respondent] to state a cause of action. The [RTC] would like to emphasize that in a Motion to Dismiss, it hypothetically admits the truth of the facts alleged in a complaint. When the ground for dismissal is that the complaint states no cause of action, such fact can be determined only from the facts alleged in the complaint x x x and from no other x x x and the Court cannot consider other matters aliunde x x x. This implies that the issue must be passed upon on the basis of the allegations and declare them to be false, otherwise it would be a procedural error and a denial of due process to the [respondent] x x x. The three (3) essential elements of a cause of action are the following: a) b) c) The plaintiffs legal rights; A correlative obligation of the defendant; The omission of the defendant in violation of the legal rights.

A cursory reading of the Amended Complaint would reveal that all of the essential elements of a cause of action are attendant in the Amended Complaint. As for the contention that venue was improperly laid, x x x, the [RTC] in its ultimate desire that the ends of justice could be served in its fullest, cannot rule that venue was improperly laid. xxxx The stipulation as to the venue of a prospective action does not preclude the filing of the suit in the residence of the [respondent] under Section 2, Rule 4, Rules of Court, especially where the venue stipulation was imposed by the [petitioner] for its own benefits. xxxx The [RTC] further believes that it is imperative that in order to ferret out the truth, a full-blown trial is necessary for parties to be able to prove or disprove their [21] allegations.

Petitioner moved for the reconsideration of the aforesaid Order but, it was denied by the RTC in its Order, dated 20 June 2003.

Consequently, petitioner filed a Petition for Certiorari under Rule 65 of the 1997 Revised Rules of Civil Procedure with application for temporary restraining order and/or preliminary injunction before the Court of Appeals alleging that the RTC committed grave abuse of discretion amounting to lack or excess of jurisdiction in refusing to dismiss the Amended Complaint. The Court of Appeals never issued any temporary restraining order or writ of injunction. On 4 April 2006, the Court of Appeals rendered a Decision affirming the RTC Orders of 4 November 2002 and 20 June 2003.

This brings us to the present Petition before this Court wherein petitioner raised the following issues. I. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT RULING THAT THE SERVICE OF SUMMONS ON PETITIONER WAS DEFECTIVE AND THAT THE TRIAL COURT THUS FAILED TO ACQUIRE JURISDICTION OVER THE PERSON OF THE PETITIONER. II. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN RULING THAT THE SOLE ISSUE IN THE PETITION FOR CERTIORARI FILED BEFORE IT IS THE QUESTION OF WHETHER THE TRIAL COURT ACQUIRED JURISDICTION OVER THE PERSON OF THE PETITIONER THROUGH THE EXTRATERRITORIAL SERVICE OF SUMMONS. A. WHETHER OR NOT THE COURT OF APPEALS SHOULD HAVE GRANTED THE PETITION FOR CERTIORARI AND REVERSED THE RTC ORDERS ON THE GROUND THAT THE AMENDED COMPLAINT FAILED TO STATE A CAUSE OF ACTION AGAINST PETITIONER. 1. BASED ON THE ALLEGATIONS IN THE EXPARTE MOTION TO ADMIT AMENDED COMPLAINT, AMENDED COMPLAINT, AND ALL DOCUMENTS ATTACHED AND/OR RELATED THERETO, PETITIONER IS NOT THE REAL PARTY-IN-INTEREST DEFENDANT IN THE CASE BELOW. 2. ASSUMING ARGUENDO THAT RESPONDENT DAKILA FILED THIS CASE AGAINST THE CORRECT [PARTY], INASMUCH AS THE DISTRIBUTION AGREEMENT DATED 1 JUNE 1990 GRANTS [PEIA] THE RIGHT TO TERMINATE THE CONTRACT AT ANY TIME, RESPONDENT DAKILA FAILS TO STATE A CAUSE OF ACTION IN THE CASE BELOW. B.

WHETHER OR NOT THE COURT OF APPEALS SHOULD HAVE GRANTED THE PETITION FOR CERTIORARI AND REVERSED THE RTC ORDERS ON THE GROUND OF IMPROPER VENUE. III. WHETHER OR NOT PETITIONER IS ENTITLED TO A TEMPORARY RESTRAINING ORDER AND/OR WRIT OF INJUNCTION.

The foregoing issues raised by petitioner essentially requires this Court to make a determination of the (1) proper service of summons and acquisition of jurisdiction by the RTC over the person of the petitioner; (2) existence of a cause of action against petitioner in respondents Amended Complaint; and (3) proper venue for respondents civil case against petitioner.

Petitioner contends that Civil Case No. MC99-605 involves an action for collection of sum of money and damages arising from the alleged breach of the Distribution Agreement. The action is one in personam, or an action against a person based on his personal liability; and for the court a quo to acquire jurisdiction over the person of the petitioner, personal service of summons, and not extraterritorial service of summons, must be made within the state even if the petitioner is a non-resident. Petitioner avers that extraterritorial service of summons stated under Section 15, Rule 14 of the 1997 Revised Rules of Civil Procedure, is only proper in in rem and quasi in rem cases; thus, resort to an extraterritorial service of summons in the case at bar was erroneous. Petitioner asseverates that the allegations in the respondents Amended Complaint that the petitioner has personal properties withi n the Philippines does not make the present case one that relates to, or the subject of which is, property within the Philippines warranting the extraterritorial service of summons under Section 15, Rule 14 of the 1997 Revised Rules of Civil Procedure. Petitioner states that for an action to be considered as one that relates to, or the subject of which is, property within the Philippines, the main subject matter of the action must be the property within the Philippines itself, and such was not the situation in this case. Likewise, the prayer in respondents Amended Complaint for the issuance of a writ of attachment over the personal property of PEIP, which is 99% owned by petitioner (as the supposed successor of PEIA), did not convert the action from one in personam to one that is quasi in rem. Also, the petitioner points out that since the respondents prayer for the issuance of a writ of attachment was denied by the RTC in its Order, dated 26 March 1999, then the nature of Civil Case No. MC99-605 remains in personam, contrary to the ruling of the Court of Appeals that by the attachment of the petitioners interest in PEIP the action in personam was converted to an action quasi in rem. Resultantly, the extraterritorial service of summons on the petitioner was not validly effected, and did not give the RTC jurisdiction over the petitioner.

Petitioner further argues that the appellate court should have granted its Petition for Certiorari on the ground that the RTC committed grave abuse of discretion amounting to lack or excess of jurisdiction in refusing to dismiss respondents Amended Complaint for failure to state a cause of action against petitioner which was not the real party-in-interest in Civil Case No. MC99-605. Petitioner claims that it had never used the name PEIA as its corporate name, and neither did it change its name from that of PEIA. Petitioner stresses that PEIA is an entirely different corporate entity that is not connected in whatever manner to the petitioner. Even assuming arguendo that petitioner is the real party-in-interest in Civil Case No. MC99-605 or that petitioner and PEIA are one and the same entity, petitioner still avows that the respondent failed to state a cause of action against it because the Distribution Agreement expressly grants PEIA the right to terminate the said contract at any time.

Lastly, it is the contention of the petitioner that the appellate court should have granted its Petition for Certiorari because the RTC committed grave abuse of discretion amounting to lack or excess of jurisdiction in refusing to dismiss Civil Case No. MC99-605 for having been filed in an improper venue. Petitioner asserts that in the Distribution Agreement entered into between the respondent and PEIA, both had mutually agreed to the exclusive jurisdiction of the courts of Singapore or of the Philippines as elected by PEIA. Absent any waiver by PEIA of its right to choose the venue of the dispute, the Complaint filed by the respondent before the RTC in the Philippines should have been dismissed on the ground of improper venue.

The Petition is meritorious.

Jurisdiction is the power with which courts are invested for administering justice; that is, for hearing and deciding cases. In order for the court to have authority to dispose of the case on the merits, it must acquire jurisdiction over the subject matter and the parties.
[22]

Jurisdiction of the court over the subject matter is conferred only by the Constitution or by law. It is determinable on the basis of allegations in the complaint.
[23]

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint, while jurisdiction over the defendants in a civil case is acquired either through the service of summons upon them in the manner required by law or through their voluntary appearance in court and their submission to its authority. If the defendants have not been summoned, unless they voluntarily appear in court, the court acquires no jurisdiction over their persons and a judgment rendered against them is null and void. To be bound by a decision, a party should first be subjected to the courts jurisdiction.
[24]

Thus, one of the modes of acquiring jurisdiction over the person of the defendant or respondent in a civil case is through service of summons. It is intended to give notice to the defendant or respondent that a civil action has been commenced against him. The defendant or respondent is thus put on guard as to the demands of the plaintiff or the petitioner.
[25]

The proper service of summons differs depending on the nature of the civil case instituted by the plaintiff or petitioner: whether it is in personam, in rem, or quasi in rem. Actions in personam, are those actions brought against a person on the basis of his personal liability; actions in rem are actions against the thing itself instead of against the person; and actions are quasi in rem, where an individual is named as defendant and the purpose of the proceeding is to subject his or her interest in a property to the obligation or loan burdening the property.
[26]

Under Section 15, Rule 14 of the 1997 Revised Rules of Civil Procedure, there are only four instances wherein a defendant who is a non-resident and is not found in the country may be served with summons by extraterritorial service, to wit: (1) when the action affects the personal status of the plaintiff; (2) when the action relates to, or the subject of which is property, within the Philippines, in which the defendant claims a lien or an interest, actual or contingent; (3) when the relief demanded in such action consists, wholly or in part, in excluding the defendant from any interest in property located in the Philippines; and (4) when the defendant non-residents property has been attached within the Philippines. In these instances, service of summons may be effected by (a) personal service out of the country, with leave of court; (b) publication, also with leave of court; or (c) any other manner the court may deem sufficient.
[27]

Undoubtedly, extraterritorial service of summons applies only where the action is in rem or quasi in rem, but not if an action is in personam.

When the case instituted is an action in rem or quasi in rem, Philippine courts already have jurisdiction to hear and decide the case because, in actions in rem and quasi in rem, jurisdiction over the person of the defendant is not a prerequisite to confer jurisdiction on the court, provided that the court acquires jurisdiction over the res.
[28]

Thus, in such instance, extraterritorial service of summons can be

made upon the defendant. The said extraterritorial service of summons is not for the purpose of vesting the court with jurisdiction, but for complying with the requirements of fair play or due process, so that the defendant will be informed of the pendency of the action against him and the possibility that property in the Philippines belonging to him or in which he has an interest may be subjected to a judgment in favor of the plaintiff, and he can thereby take steps to protect his interest if he is so minded.
[29]

On the other hand,

[30]

when the defendant or respondent does not reside and is not found in the Philippines,

and the action

involved is in personam, Philippine courts cannot try any case against him because of the impossibility of acquiring jurisdiction over his person unless he voluntarily appears in court.
[31]

In the case at bar, this Court sustains the contention of the petitioner that there can never be a valid extraterritorial service of summons upon it, because the case before the court a quo involving collection of a sum of money and damages is, indeed, an action in personam, as it deals with the personal liability of the petitioner to the respondent by reason of the alleged unilateral termination by the former of the Distribution Agreement. Even the Court of Appeals, in its Decision dated 4 April 2004, upheld the nature of the instant case as an action in personam. In the said Decision the appellate court ruled that: In the instant petition, [respondents] cause of action in Civil Case No. MC99 -605 is anchored on the claim that petitioner unilaterally terminated the Distribution Agreement. Thus, [respondent] prays in its [C]omplaint that Upon the filing of the Complaint, issue an Order fixing the amount of the bond and issue a writ of attachment requiring the sheriff to attach the properties of [Perkin-Elmer Philippines], which are not exempt from execution, and as much as may be sufficient to satisfy [respondents] demands. The action instituted by [respondent] affects the parties alone, not the whole world. Hence, it is an action in personam, i.e., any judgment therein is binding only upon the parties properly impleaded. xxxx The objective sought in [respondents] [C]omplaint was to establish a claim against petitioner for its alleged unilateral termination of [D]istribution [A]greement. Hence, to repeat, Civil Case No. MC99-605 is an action in personam because it is an action against persons, namely, herein petitioner, on the basis of its personal liability. As such, personal service of summons upon the [petitioner] is essential in order for the court to acquire of (sic) jurisdiction over [its [32] person]. (Emphasis supplied.)

Thus, being an action in personam, personal service of summons within the Philippines is necessary in order for the RTC to validly acquire jurisdiction over the person of the petitioner, and this is not possible in the present case because the petitioner is a non-resident and is not found within

the Philippines. Respondents allegation in its Amended Complaint that petitioner had personal property within the Philippines in the form of shares of stock in PEIP did not make Civil Case No. MC99-605 fall under any of the four instances mentioned in Section 15, Rule 14 of the Rules of Court, as to convert the action in personam to an action in rem or quasi in rem and, subsequently, make the extraterritorial service of summons upon the petitioner valid.

It is incorrect for the RTC to have ruled that the allegations made by the respondent in its Amended Complaint, which is primarily for collection of a sum of money and damages, that the petitioner owns shares of stock within the Philippines to which the petitioner claims interest, or an actual or contingent lien, would make the case fall under one of the aforesaid instances wherein extraterritorial service of summons under Section 15, Rule 14 of the 1997 Revised Rules of Civil Procedure, would be valid. The RTC in arriving at such conclusions relied on the second instance, mentioned under Section 15, Rule 14 of the 1997 Revised Rules of Civil Procedure ( i.e., when the action relates to, or the subject of which is property, within the Philippines, in which the defendant claims a lien or interest, actual or contingent), where extraterritorial service of summons can be properly made. However, the aforesaid second instance has no application in the case before this Court. Primarily, the Amended Complaint filed by the respondent against the petitioner was for the collection of sum of money and damages. The said case was neither related nor connected to any property of the petitioner to which it claims a lien or interest. The action for collection of a sum of money and damages was purely based on the personal liability of the petitioner towards the respondent. The petitioner is correct in saying that mere allegations of personal property within the Philippines does not necessarily make the action as one that relates to or the subject of which is, property within the Philippines as to warrant the extraterritorial service of summons. For the action to be considered one that relates to, or the subject of which, is the property within the Philippines, the main subject matter of the action must be the property itself of the petitioner in the Philippines. By analogy, an action involving title to or possession of real or personal property -- such as the foreclosure of real estate or chattel mortgage where the mortgagor does not reside or is not found in the Philippines -- can be considered as an action which relates to, or the subject of which is, property within the Philippines, in which the defendant claims a lien or interest, actual or contingent; and in such instance, judgment will be limited to theres.
[33]

Moreover, the allegations made by the respondent that the petitioner has property within the Philippines were in support of its application for the issuance of a writ of attachment, which was denied by the RTC. Hence, it is clear from the foregoing that the Complaint filed by the respondent against the petitioner does not really relate to, or the subject of which is, property within the Philippines of the petitioner.

This Court also finds error in the Decision of the Court of Appeals. It is provided for in the said Decision, thus: However, let it be emphasized that in the [C]omplaint filed before the trial court, [respondent] prayed that Upon the filing of the Complaint, issue an Order fixing the amount of the bond and issue a writ of attachment requiring the sheriff to attach the

properties of [Perkin-Elmer Philippines], which are not exempt from execution, and as much as may be sufficient to satisfy [respondents] demands. In other words, although the [C]omplaint before the trial court does not involve the personal status of the [respondent], nevertheless, the case involves property within the Philippines in which the [petitioner] has or claim an interest, or which the [respondent] has attached, which is one of the instances where extraterritorial service of summons is proper. xxxx Hence, it is submitted that one of the instances when exterritorial service of summons under Section 15, Rule 14 of the Rules of Court is proper may be considered to have been met. This is because the [C]omplaint for collection of sum of money which is an action in personam was converted into an action quasi in rem by the attachment of [34] [petitioners] interest in [Perkin-Elmer Philippines]. (Emphasis supplied.)

Respondents allegation in its Amended Complaint that petitioner had personal property within the Philippines in the form of shares of stock in PEIP does not convert Civil Case No. MC99-605 from an action in personam to one quasi in rem, so as to qualify said case under the fourth instance mentioned in Section 15, Rule 14 of the 1997 Revised Rules of Civil Procedure ( i.e., when the non-resident defendants property has been attached within the Philippines), wherein extraterritorial service of summons upon the petitioner would have been valid. It is worthy to note that what is required under the aforesaid provision of the Revised Rules of Civil Procedure is not a mere allegation of the existence of personal property belonging to the non-resident defendant within the Philippines but, more precisely, that the non-resident defendants personal property located within the Philippines must have been actually attached. This Court in the case of Venturanza v. Court of Appeals
[35]

ruled that when the attachment was void from the

beginning, the action in personam which required personal service of summons was never converted into an action in rem where service by publication would have been valid. Hence, the appellate court erred in declaring that the present case, which is an action in personam, was converted to an action quasi in rem because of respondents allegations in its Amended Complaint that petitioner had personal property within the Philippines.

Glaringly, respondents prayer in its Amended Complaint for the issuance of a writ of attachment over petitioners purported shares of stock in PEIP located within thePhilippines was denied by the court a quo in its Order dated 26 March 1999. Respondents Motion for Reconsideration of the said Order was likewise denied by the RTC in its subsequent Order, dated 11 January 2000. Evidently, petitioners alleged personal property within the Philippines, in the form of shares of stock in PEIP, had not been attached; hence, Civil Case No. MC99-605, for collection of sum of money and damages, remains an action in personam. As a result, the extraterritorial service of summons was not validly effected by the RTC against the petitioner, and the RTC thus failed to acquire jurisdiction over the person

of the petitioner. The RTC is therefore bereft of any authority to act upon the Complaint filed before it by the respondent insofar as the petitioner is concerned.

If there was no valid summons served upon petitioner, could RTC have acquired jurisdiction over the person of the petitioner by the latters voluntary appearance? As a rule, even if the service of summons upon the defendant or respondent in a civil case is defective, the court can still acquire jurisdiction over his person when he voluntary appears in court or submits himself to its authority. Nonetheless, voluntary appearance, as a mode of acquiring jurisdiction over the person of the defendant, is likewise inapplicable in this case.

It is settled that a party who makes a special appearance in court for the purpose of challenging the jurisdiction of said court, based on the invalidity of the service of summons, cannot be considered to have voluntarily submitted himself to the jurisdiction of the court.
[36]

In the present case, petitioner has

been consistent in all its pleadings in assailing the service of summons upon it and the jurisdiction of the RTC over its person. Thus, the petitioner cannot be declared in estoppel when it filed an Answer ad cautelamwith compulsory counterclaim before the RTC while the instant Petition was still pending before this Court. The petitioner was in a situation wherein it had no other choice but to file an Answer; otherwise, the RTC would have already declared that petitioner had waived its right to file responsive pleadings.
[37]

Neither can the compulsory counterclaim contained in petitioners Answer ad cautelam be

considered as voluntary appearance of petitioner before the RTC. Petitioner seeks to recover damages and attorneys fees as a consequence of the unfounded suit filed by respondent against it. Thus, petitioners compulsory counterclaim is only consistent with its position that the respondent wrongfully filed a case against it and the RTC erroneously exercised jurisdiction over its person.

Distinction must be made in Civil Case No. MC99-605 as to the jurisdiction of the RTC over respondents complaint and over petitioners counterclaim -- while it may have no jurisdiction over the former, it may exercise jurisdiction over the latter. The compulsory counterclaim attached to petitioners Answer ad cautelam can be treated as a separate action, wherein petitioner is the plaintiff while respondent is the defendant.
[39] [38]

Petitioner could have instituted a separate action for the very same

claims but, for the sake of expediency and to avoid multiplicity of suits, it chose to demand the same in Civil Case No. MC99-605. Jurisdiction of the RTC over the subject matter and the parties in the

counterclaim must thus be determined separately and independently from the jurisdiction of the same court in the same case over the subject matter and the parties in respondents complaint.

Moreover, even though the petitioner raised other grounds in its Motion to Dismiss aside from lack of jurisdiction over its person, the same is not tantamount to its voluntary appearance or submission

to the authority of the court a quo. While in De Midgely v. Ferandos,

[40]

it was held that, in a Motion to

Dismiss, the allegation of grounds other than lack of jurisdiction over the person of the defendant, including a prayer "for such other reliefs as" may be deemed "appropriate and proper" amounted to voluntary appearance, such ruling must be deemed superseded by the declaration of this Court in La Naval Drug Corporation v. Court of Appeals
[41]

that estoppel by jurisdiction must be unequivocal and

intentional. It would be absurd to hold that petitioner unequivocally and intentionally submitted itself to the jurisdiction of the court by seeking other reliefs to which it might be entitled when the only relief that it could properly ask from the trial court is the dismissal of the complaint against it.
[42]

Thus, the allegation

of grounds other than lack of jurisdiction with a pra yer for such other reliefs as may be deemed appropriate and proper cannot be considered as unequivocal and intentional estoppel. Most telling is Section 20, Rule 14 of the Rules of Court, which expressly provides: SEC. 20. Voluntary appearance. - The defendants voluntary appearance in the action shall be equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall not be [43] deemed a voluntary appearance. (Emphasis supplied.)

In sum, this Court finds that the petitioner did not submit itself voluntarily to the authority of the court a quo; and in the absence of valid service of summons, the RTC utterly failed to acquire jurisdiction over the person of the petitioner.

Anent the existence of a cause of action against petitioner and the proper venue of the case, this Court upholds the findings of the RTC on these issues.

Dismissal of a Complaint for failure to state a cause of action is provided for by the Rules of Court.
[44]

When a Motion to Dismiss is grounded on the failure to state a cause of action, a ruling thereon

should be based only on the facts alleged in the complaint. The court must pass upon this issue based solely on such allegations, assuming them to be true. For it to do otherwise would be a procedural error and a denial of plaintiffs right to due process. exceptions
[46] [47] [45]

While, truly, there are well-recognized

to the rule that the allegations are hypothetically admitted as true and inquiry is confined to none of the exceptions apply in this case. Hence, the general rule

the face of the complaint,

applies. The defense of the petitioner that it is not the real party-in-interest is evidentiary in nature which must be proven in trial. The appellate court, then, cannot be faulted for not granting petitioners Motion to Dismiss on the ground of failure to state a cause of action.

In the same way, the appellate court did not err in denying pe titioners Motion to Dismiss Civil Case No. MC99-605 on the ground of improper venue. In arriving at such conclusion, this Court quotes with approval the following ratiocination of the RTC: As for the contention that venue was improperly laid, x x x, the [trial court] in its ultimate desire that the ends of justice could be served in its fullest, cannot rule that venue was improperly laid. xxxx The stipulation as to the venue of a prospective action does not preclude the filing of the suit in the residence of the [respondent] under Section 2, Rule 4, Rules of Court, especially where the venue stipulation was imposed by the [48] [petitioner] for its own benefits. (Emphasis supplied.)

Despite the venue stipulation found in the Distribution Agreement stipulating that the exclusive jurisdiction over disputes arising from the same shall lie in the courts of Singapore or of the Territory (referring to the Philippines), whichever is elected by PEIA (or petitioner, as PEIAs alleged successor), the RTC of the Philippines cannot be considered as an improper venue. Truly, the venue stipulation used the word exclusive, however, a closer look on the Distribution Agreement would reveal that the venue stipulation was really in the alternative i.e., courts of Singapore or of the Territory, meaning, the Philippines; thus, the court a quo is not an improper venue for the present case.

Nonetheless, it bears to emphasize that despite our findings that based on the allegations in respondents Complaint in Civil Case No. MC99-605, respondent appears to have a cause of action against the petitioner and that the RTC is the proper venue for the said case, Civil Case No. MC99-605 is still dismissible, for the RTC never acquired jurisdiction over the person of the petitioner. The extraterritorial service of summons upon the petitioner produces no effect because it can only be done if the action is in rem orquasi in rem. The case for collection of sum of money and damages filed by the respondent against the petitioner being an action in personam, then personal service of summons upon the petitioner within the Philippines is essential for the RTC to validly acquire jurisdiction over the person of the petitioner. Having failed to do so, the RTC can never subject petitioner to its jurisdiction. The mere allegation made by the respondent that the petitioner had shares of stock within the Philippines was not enough to convert the action from one in personam to one that was quasi in rem, for petitioners purported personal property was never attached; thus, the extraterritorial service of summons upon the petitioner remains invalid. In light of the foregoing findings, this Court concludes that the RTC has no power to hear and decide the case against the petitioner, because the extraterritorial service of summons was not validly effected upon the petitioner and the RTC never acquired jurisdiction over its person.

Finally, as regards the petitioners counterclaim, which is purely for damages and attorneys fees by reason of the unfounded suit filed by the respondent against it, it has long been settled that the same truly falls under the classification of compulsory counterclaim and it must be pleaded in the same action, otherwise, it is barred.
[49]

In the case at bar, this Court orders the dismissal of the Complaint filed by

the respondent against the petitioner because the court a quo failed to acquire jurisdiction over the person of the latter. Since the Complaint of the respondent was dismissed, what will happen then to the counterclaim of the petitioner? Does the dismissal of the complaint carry with it the dismissal of the counterclaim?
[50]

In the cases of Metal Engineering Resources Corp. v. Court of Appeals, Terminal Services, Inc. v. Court of Appeals,
[51]

International Container
[52]

and BA Finance Corporation v. Co.,

the Court ruled that

if the court does not have jurisdiction to entertain the main action of the case and dismisses the same, then the compulsory counterclaim, being ancillary to the principal controversy, must likewise be dismissed since no jurisdiction remained for any grant of relief under the counterclaim.
[53]

If we follow the aforesaid

pronouncement of the Court in the cases mentioned above, the counterclaim of the herein petitioner being compulsory in nature must also be dismissed together with the Complaint. However, in the case of Pinga vs. Heirs of German Santiago,
[54]

the Court explicitly expressed that:

Similarly, Justice Feria notes that the present rule reaffirms the right of the defendant to move for the dismissal of the complaint and to prosecute his counterclaim, as stated in the separate opinion [of Justice Regalado in BA Finance]. Retired Court of Appeals Justice Hererra pronounces that the amendment to Section 3, Rule 17 [of the 1997 Revised Rules of Civil Procedure] settles that nagging question whether the dismissal of the complaint carries with it the dismissal of the counterclaim , and opines that by reason of the amendments, the rulings in Metals Engineering,International Container, and BA Finance may be deemed abandoned. x x x. x x x, when the Court promulgated the 1997 Rules of Civil Procedure, including the amended Rule 17, those previous jural doctrines that were inconsistent with the new rules incorporated in the 1997 Rules of Civil Procedure were implicitly abandoned insofar as incidents arising after the effectivity of the new procedural rules on 1 July 1997. BA Finance, or even the doctrine that a counterclaim may be necessarily dismissed along with the complaint, clearly conflicts with the 1997 Rules of Civil Procedure. The abandonment of BA Finance as doctrine extends as far back as 1997, when the Court adopted the new Rules of Civil Procedure. If, since then, abandonment has not been affirmed in jurisprudence, it is only because no proper case has arisen that would warrant express confirmation of the new rule. That opportunity is here and now, and we thus rule that the dismissal of a complaint due to fault of the plaintiff is without prejudice to the right of the defendant to prosecute any pending counterclaims of whatever nature in the same or separate action. We confirm that BA Finance and all previous rulings of the Court that are inconsistent with this [55] present holding are now abandoned. [Emphasis supplied].

It is true that the aforesaid declaration of the Court refers to instances covered by Section 3, Rule 17 of the 1997 Revised Rules of Civil Procedure
[56]

on dismissal of the complaint due to the fault of the

plaintiff. Nonetheless, it does not also preclude the application of the same to the instant case just because the dismissal of respondents Complaint was upon the instance of the petitioner who correctly argued lack of jurisdiction over its person.

Also in the case of Pinga v. Heirs of German Santiago, the Court discussed the situation wherein the very filing of the complaint by the plaintiff against the defendant caused the violation of the latters rights. As to whether the dismissal of such a complaint should also include the dismissal of the counterclaim, the Court acknowledged that said matter is still debatable, viz: Whatever the nature of the counterclaim, it bears the same integral characteristics as a complaint; namely a cause (or causes) of action constituting an act or omission by which a party violates the right of another. The main difference lies in that the cause of action in the counterclaim is maintained by the defendant against the plaintiff, while the converse holds true with the complaint. Yet, as with a complaint, a counterclaim without a cause of action cannot survive. x x x if the dismissal of the complaint somehow eliminates the cause(s) of the counterclaim, then the counterclaim cannot survive. Yet that hardly is the case, especially as a general rule. More often than not, the allegations that form the counterclaim are rooted in an act or omission of the plaintiff other than the plaintiffs very act of filing the complaint. Moreover, such acts or omissions imputed to the plaintiff are often claimed to have occurred prior to the filing of the complaint itself. The only apparent exception to this circumstance is if it is alleged in the counterclaim that the very act of the plaintiff in filing the complaint precisely causes the violation of the defendants rights. Yet even in such an instance, it remains debatable whether the dismissal or withdrawal of the complaint is sufficient to obviate the pending [57] cause of action maintained by the defendant against the plaintiff.

Based on the aforequoted ruling of the Court, if the dismissal of the complaint somehow eliminates the cause of the counterclaim, then the counterclaim cannot survive. Conversely, if the counterclaim itself states sufficient cause of action then it should stand independently of and survive the dismissal of the complaint. Now, having been directly confronted with the problem of whether the compulsory counterclaim by reason of the unfounded suit may prosper even if the main complaint had been dismissed, we rule in the affirmative.

It bears to emphasize that petitioners counterclaim against respondent is for damages and attorneys fees arising from the unfounded suit. While respondents Complaint against petitioner is already dismissed, petitioner may have very well already incurred damages and litigation expenses such as attorneys fees since it was forced to engage legal representation in the Philippines to protect its rights and to assert lack of jurisdiction of the courts over its person by virtue of the improper service of summons

upon it. Hence, the cause of action of petitioners counterclaim is not eliminated by the mere dismissal of respondents complaint.

It may also do well to remember that it is this Court which mandated that claims for damages and attorneys fees based on unfounded suit constitute compulsory counterclaim which must be pleaded in the same action or, otherwise, it shall be barred. It will then be iniquitous and the height of injustice to require the petitioner to make the counterclaim in the present action, under threat of losing his right to claim the same ever again in any other court, yet make his right totally dependent on the fate of the respondents complaint.

If indeed the Court dismisses petitioners counterclaim solely on the basis of the dis missal of respondents Complaint, then what remedy is left for the petitioner? It can be said that he can still file a separate action to recover the damages and attorneys fees based on the unfounded suit for he cannot be barred from doing so since he did file the compulsory counterclaim in the present action, only that it was dismissed when respondents Complaint was dismissed. However, this reasoning is highly flawed and irrational considering that petitioner, already burdened by the damages and attorne ys fees it may have incurred in the present case, must again incur more damages and attorneys fees in pursuing a separate action, when, in the first place, it should not have been involved in any case at all.

Since petitioners counterclaim is compulsory in nature and its cause of action survives that of the dismissal of respondents complaint, then it should be resolved based on its own merits and evidentiary support.

WHEREFORE, premises considered, the instant Petition is hereby GRANTED. The Decision of the Court of Appeals, dated 4 April 2006, in CA-G.R. SP No. 78981, affirming the Orders, dated 4 November 2002 and 20 June 2003, of the Regional Trial Court of Mandaluyong City, Branch 212, in Civil Case No. MC99-605, is herebyREVERSED AND SET ASIDE. Respondents Amended Complaint in Civil Case No. MC99-605 as against the petitioner is hereby ordered DISMISSED, and all the proceedings against petitioner in the court a quo by virtue thereof are hereby DECLARED NULL AND

VOID. The Regional Trial Court of Mandaluyong City, Branch 212, isDIRECTED to proceed without further delay with the resolution of respondents Complaint in Civil Case No. MC99 -605 as to defendant PEIP, as well as petitioners counterclaim. No costs. SO ORDERED.

G.R. No. 156848

October 11, 2007

PIONEER INTERNATIONAL, LTD., petitioner, vs. HON. TEOFILO GUADIZ, JR., in his capacity as Presiding Judge of Regional Trial Court, Branch 147, Makati City, and ANTONIO D. TODARO, respondents. DECISION CARPIO, J.: The Case This is a petition for review on certiorari of the Decision dated 27 September 2001 and of the 3 Resolution dated 14 January 2003 of the Court of Appeals (appellate court) in CA-G.R. SP No. 54062. 4 5 6 The Decision affirmed the Orders dated 4 January 1999 and 3 June 1999 of Branch 147 of the Regional Trial Court of Makati City (trial court) in Civil Case No. 98-124. The trial court denied the motion 7 to dismiss filed by Pioneer International, Ltd. (PIL) in its special appearance. The Facts On 16 January 1998, Antonio D. Todaro (Todaro) filed a complaint for sum of money and damages with preliminary attachment against PIL, Pioneer Concrete Philippines, Inc. (PCPI), Pioneer Philippines Holdings, Inc. (PPHI), John G. McDonald (McDonald), and Philip J. Klepzig (Klepzig). PIL and its codefendants were served copies of the summons and of the complaint at PPHI and PCPIs office in Alabang, Muntinlupa, through Cecille L. De Leon (De Leon), who was Klepzigs Executive Assistant. Todaro alleged that PIL is a corporation duly organized under Australian laws, while PCPI and PPHI are corporations duly organized under Philippine laws. PIL is engaged in the ready-mix and concrete aggregates business and has established a presence worldwide. PIL established PPHI as the holding company of the stocks of its operating company in the Philippines, PCPI. McDonald is the Chief Executive Officer of PILs Hong Kong office while Klepzig is the President and Managing Director of PPHI and PCPI. For his part, Todaro further alleged that he was the managing director of Betonval Readyconcrete, Inc. (Betonval) from June 1975 up to his resignation in February 1996. Before Todaro filed his complaint, there were several meetings and exchanges of letters between Todaro and the officers of Pioneer Concrete (Hong Kong) Limited, Pioneer Concrete Group HK, PPHI, and PIL. According to Todaro, PIL contacted him in May 1996 and asked if he could join it in establishing a premixed concrete plant and in overseeing its operations in the Philippines. Todaro confirmed his availability and expressed interest in joining PIL. Todaro met with several of PILs representatives and even gave PIL the names of three of his subordinates in Betonval whom he would like to join him in PIL. Todaro attached nine letters, marked as Annexes "A" to "I," to his complaint. Annex "A" shows that on 15 July 1996, Todaro, under the letterhead of Ital Tech Distributors, Inc., sent a letter to Max Lindsay (Lindsay) of Pioneer Concrete (Hong Kong) Limited. Todaro wrote that "[m]y aim is to run again a readymix concrete company in the Philippines and not to be a part-time consultant. Otherwise, I could have charged your company with a much higher fee." Annex "B" shows that on 4 September 1996, Lindsay, under the letterhead of Pioneer Concrete (Hong Kong) Limited, responded by fax to Todaros faxed letter to McDonald and proposed that Todaro "join Pioneer on a retainer basis for 2 to 3 months on the understanding that [Todaro] would become a permanent employee if as we expect, our entry proceeds." The faxed letter to McDonald referred to by Lindsay is not found in the rollo and was not attached to Todaros complaint.
9 8 1 2

Annex "C" shows that on the same date as that of Annex "B," Todaro, under the letterhead of Ital Tech Distributors, Inc., faxed another letter to Lindsay of Pioneer Concrete (Hong Kong) Limited. Todaro asked for a formal letter addressed to him about the proposed retainer. Todaro requested that the letter contain a statement on his remuneration package and on his permanent employment "with PIONEER once it has established itself on a permanent basis in the Philippines." Annex "D" shows that Todaro, under the letterhead of Ital Tech Distributors, Inc., sent a letter to McDonald of PIL. Todaro confirmed the following to McDonald: 1. That I am accepting the proposal of PIONEER INTL. as a consultant for three (3) months, starting October 1, 1996, with a retainer fee of U.S. $15,000.00 per month; 2. That after three (3) months consultancy, I should be employed by PIONEER INTL., on a permanent basis, as its Managing Director or CEO in the Philippines. Remuneration package will be mutually agreed upon by PIONEER and the undersigned; 3. That Gino Martinel and the Sales Manager Jun Ong, will be hired as well, on a permanent basis, by PIONEER as soon as the company is established. Salary, likewise, will be accepted by both PIONEER and the respective parties. Annex "E" is a faxed letter dated 18 November 1996 of McDonald, under the letterhead of Pioneer Concrete Group HK, to Todaro of Ital Tech Distributors, Inc. The first three paragraphs of McDonalds letter read: Further to our recent meeting in Hong Kong, I am now able to confirm my offer to engage you as a consultant to Pioneer International Ltd. Should Pioneer proceed with an investment in the Philippines, then Pioneer would offer you a position to manage the premixed concrete operations. Pioneer will probably be in a position to make a decision on proceeding with an investment by mid January 97. The basis for your consultancy would be: Monthly fee USD 15,000 per month billed on monthly basis and payable 15 days from billing date. Additional pre-approved expenses to be reimbursed. Driver and secretarial support-basis for reimbursement of this to be agreed. st Arrangement to commence from 1 November 96, reflecting your contributions so far and to continue until Pioneer makes a decision.
12 11

10

Annex "F" shows Todaros faxed reply, under the letterhead of Ital Tech Distributors, Inc., to McDonald of Pioneer Concrete Group HK dated 19 November 1996. Todaro confirmed McDonalds package concerning the consultancy and reiterated his desire to be the manager of Pioneers Philippine business venture. Annex "G" shows Todaros faxed reply, under the letterhead of Ital Tech Distributors, Inc., to McDonald of PIL dated 8 April 1997. Todaro informed McDonald that he was willing to extend assistance to the Pioneer representative from Queensland. The tenor of the letter revealed that Todaro had not yet occupied his expected position. Annex "H" shows Klepzigs letter, under the letterhead of PPHI, to Todaro dated 18 September 1997. Klepzigs message reads:
15 14

13

It has not proven possible for this company to meet with your expectations regarding the conditions of your providing Pioneer with consultancy services. This, and your refusal to consider my terms of offer of permanent employment, leave me no alternative but to withdraw these offers of employment with this company. As you provided services under your previous agreement with our Pioneer Hong Kong office during the month of August, I will see that they pay you at the previous rates until the end of August. They have authorized me on behalf of Pioneer International Ltd. to formally advise you st that the agreement will cease from August 31 as per our previous discussions. Annex "I" shows the letter dated 20 October 1997 of K.M. Folwell (Folwell), PILs Executive General Manager of Australia and Asia, to Todaro. Folwell confirmed the contents of Klepzigs 18 September 1997 letter. Folwells message reads: Thank you for your letter to Dr. Schubert dated 29 September 1997 regarding the alleged breach of contract with you. Dr. Schubert has asked me to investigate this matter. I have discussed and examined the material regarding your association with Pioneer over the period from mid 1996 through to September 1997. Clearly your consultancy services to Pioneer Hong Kong are well documented and have been appropriately rewarded. However, in regard to your request and expectation to be given permanent employment with Pioneer Philippines Holdings, Inc . I am informed that negotiations to reach agreement on appropriate terms and conditions have not been successful. The employment conditions you specified in your letter to John McDonald dated 11 September are well beyond our expectations. Mr. Todaro, I regret that we do not wish to pursue our association with you any further. Mr. Klepzig was authorized to terminate this association and the letter he sent to you dated th 18 September has my support. Thank you for your involvement with Pioneer. I wish you all the best for the future. (Emphasis added) PIL filed, by special appearance, a motion to dismiss Todaros complaint. PILs co -defendants, PCPI, 17 PPHI, and Klepzig, filed a separate motion to dismiss. PIL asserted that the trial court has no jurisdiction over PIL because PIL is a foreign corporation not doing business in the Philippines. PIL also questioned the service of summons on it. Assuming arguendo that Klepzig is PILs agent in the Philippines, it was not Klepzig but De Leon who received the summons for PIL. PIL further stated that the National Labor Relations Commission (NLRC), and not the trial court, has jurisdiction over the subject matter of the action. It claimed that assuming that the trial court has jurisdiction over the subject matter of the action, the complaint should be dismissed on the ground of forum non-conveniens. Finally, PIL maintained that the complaint does not state a cause of action because there was no perfected contract, and no personal judgment could be rendered by the trial court against PIL because PIL is a foreign corporation not doing business in the Philippines and there was improper service of summons on PIL. Todaro filed a Consolidated Opposition dated 26 August 1998 to refute PILs assertions. PIL filed, still by special appearance, a Reply on 2 October 1998. The Ruling of the Trial Court
th th 16

On 4 January 1999, the trial court issued an order which ruled in favor of Todaro. The trial court denied the motions to dismiss filed by PIL, PCPI, PPHI, and Klepzig. The trial court stated that the merits of a motion to dismiss a complaint for lack of cause of action are tested on the strength of the allegation of facts in the complaint. The trial court found that the allegations in the complaint sufficiently establish a cause of action. The trial court declared that Todaros cause of action is based on an alleged breach of a contractual obligation and an alleged violation of Articles 19 and 21 of the Civil Code. Therefore, the cause of action does not lie within the jurisdiction of the NLRC but with the trial court. The trial court also asserted its jurisdiction over PIL, holding that PIL did business in the Philippines when it entered into a contract with Todaro. Although PIL questions the service of summons on Klepzig, whom PIL claims is not its agent, the trial court ruled that PIL failed to adduce evidence to prove its contention. Finally, on the issue of forum non-conveniens, the trial court found that it is more convenient to hear and decide the case in the Philippines because Todaro resides in the Philippines and the contract allegedly breached involves employment in the Philippines. PIL filed an urgent omnibus motion for the reconsideration of the trial courts 4 January 1999 order and for the deferment of filing its answer. PCPI, PPHI, and Klepzig likewise filed an urgent omnibus motion. Todaro filed a consolidated opposition, to which PIL, PCPI, PPHI, and Klepzig filed a joint reply. The trial 19 court issued an order on 3 June 1999 denying the motions of PIL, PCPI, PPHI, and Klepzig. The trial court gave PIL, PCPI, PPHI, and Klepzig 15 days within which to file their respective answers. PIL did not file an answer before the trial court and instead filed a petition for certiorari before the appellate court. The Ruling of the Appellate Court The appellate court denied PILs petition and affirmed the trial courts ruling in toto. The dispositive portion of the appellate courts decision reads: WHEREFORE, premises considered, the present petition for certiorari is hereby DENIED DUE COURSE and accordingly DISMISSED. The assailed Orders dated January 4, 1999 and June 3, 1999 of the Regional Trial Court of Makati City, Branch 147, in Civil Case No, 98-124 are hereby AFFIRMED in toto. SO ORDERED.
20

18

On 14 January 2003, the appellate court dismissed PILs motion for reconsideration for lack of merit. The appellate court stated that PILs motion raised no new substantial or weighty arguments that could impel the appellate court from departing or overturning its previous decision. PIL then filed a petition for review on certiorari before this Court. The Issues PIL raised the following issues before this Court: A. [The trial court] did not and cannot acquire jurisdiction over the person of [PIL] considering that: A.1. [PIL] is a foreign corporation "not doing business" in the Philippines.

21

A.2. Moreover, the complaint does not contain appropriate allegations of ultimate facts showing that [PIL] is doing or transacting business in the Philippines. A.3. Assuming arguendo that jurisdiction may be acquired over the person of [PIL], [the trial court] still failed to acquire jurisdiction since summons was improperly served on [PIL]. B. [Todaro] does not have a cause of action and the complaint fails to state a cause of action. Jurisprudence is settled in that in resolving a motion to dismiss, a court can consider all the pleadings filed in the case, including annexes, motions and all evidence on record. C. [The trial court] did not and cannot acquire jurisdiction over the subject matter of the complaint since the allegations contained therein indubitably show that [Todaro] bases his claims on an alleged breach of an employment contract. Thus, exclusive jurisdiction is vested with the [NLRC]. D. Pursuant to the principle of forum non-conveniens, [the trial court] committed grave abuse of 22 discretion when it took cognizance of the case. The Ruling of the Court The petition has partial merit. We affirm with modification the rulings of the trial and appellate courts. Apart from the issue on service of summons, the rulings of the trial and appellate courts on the issues raised by PIL are correct. Cause of Action Section 2, Rule 2 of the 1997 Rules of Civil Procedure states that a cause of action is the act or omission by which a party violates a right of another. The general rule is that the allegations in a complaint are sufficient to constitute a cause of action against the defendants if, admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer therein. A cause of action exists if the following elements are present, namely: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for which 23 the latter may maintain an action for recovery of damages. In the present case, the summary of Todaros allegations states that PIL, PCPI, PPHI, McDonald, and Klepzig did not fulfill their contractual obligation to employ Todaro on a permanent basis in PILs Philippine office. Todaros allegations are thus sufficient to establish a cause of action. We quote with approval the trial courts ruling on this matter: On the issue of lack of cause of action It is well-settled that the merits of a motion to dismiss a complaint for lack of cause of action is tested on the strength of the allegations of fact contained in the complaint and no other (De Jesus, et al. vs. Belarmino, et al., 95 Phil. 366 [1954]). This Court finds that the allegations of the complaint, specifically paragraphs 13-33 thereof, paragraphs 30-33 alleging as follows: "30. All of the acts set forth in the foregoing have been done with the knowledge, consent and/or approval of the defendants who acted in concert and/or in conspiracy with one another.

31. Under the circumstances, there is a valid contract entered into between [Todaro] and the Pioneer Group, whereby, among others, the Pioneer Group would employ [Todaro], on a permanent basis, to manage and operate the ready-mix concrete operations, if the Pioneer Group decides to invest in the Philippines. 32. The Pioneer Group has decided to invest in the Philippines. The refusal of the defendants to comply with the Pioneer Groups undertaking to employ [Todaro] to manage their Philippine ready-mix operations, on a permanent basis, is a direct breach of an obligation under a valid and perfected contract. 33. Alternatively, assuming without conceding, that there was no contractual obligation on the part of the Pioneer Group to employ [Todaro] on a permanent basis, in their Philippine operations, the Pioneer Group and the other defendants did not act with justice, give [Todaro] his due and observe honesty and good faith and/or they have willfully caused injury to [Todaro] in a manner that is contrary to morals, good customs, and public policy, as mandated under Arts. 19 and 21 of the New Civil Code." sufficiently establish a cause of action for breach of contract and/or violation of Articles 19 and 21 of the New Civil Code. Whether or not these allegations are true is immaterial for the court cannot inquire into the truth thereof, the test being whether, given the allegations of fact in the complaint, 24 a valid judgment could be rendered in accordance with the prayer in the complaint. It should be emphasized that the presence of a cause of action rests on the sufficiency, and not on the veracity, of the allegations in the complaint. The veracity of the allegations will have to be examined during the trial on the merits. In resolving a motion to dismiss based on lack of cause of action, the trial court is limited to the four corners of the complaint and its annexes. It is not yet necessary for the trial court to examine the truthfulness of the allegations in the complaint. Such examination is proper during the trial on the merits. Forum Non-Conveniens The doctrine of forum non-conveniens requires an examination of the truthfulness of the allegations in the complaint. Section 1, Rule 16 of the 1997 Rules of Civil Procedure does not mention forum nonconveniens as a ground for filing a motion to dismiss. The propriety of dismissing a case based on forum non-conveniens requires a factual determination; hence, it is more properly considered a matter of defense. While it is within the discretion of the trial court to abstain from assuming jurisdiction on this ground, the trial court should do so only after vital facts are established to determine whether special 25 circumstances require the courts desistance. Jurisdiction over PIL PIL questions the trial courts exercise of jurisdiction over it on two levels. First, that PIL is a foreign corporation not doing business in the Philippines and because of this, the service of summons on PIL did not follow the mandated procedure. Second, that Todaros claims are based on an alleged breach of an employment contract so Todaro should have filed his complaint before the NLRC and not before the trial court. Transacting Business in the Philippines and Service of Summons The first level has two sub-issues: PILs transaction of business in the Philippines and the service of summons on PIL. Section 12, Rule 14 of the 1997 Rules of Civil Procedure provides the manner by which summons may be served upon a foreign juridical entity which has transacted business in the Philippines. Thus:

Service upon foreign private juridical entity. When the defendant is a foreign juridical entity which has transacted business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or any of its officers or agents within the Philippines. As to the first sub-issue, PIL insists that its sole act of "transacting" or "doing business" in the Philippines consisted of its investment in PPHI. Under Philippine law, PILs mere investment in PPHI does not constitute "doing business." However, we affirm the lower courts ruling and declare that, based on the allegations in Todaros complaint, PIL was doing business in the Philippines when it negotiated Todaros employment with PPHI. Section 3(d) of Republic Act No. 7042, Foreign Investments Act of 1991, states: The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or of the purpose and object of the business organization:Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; (Emphases added) PILs alleged acts in actively negotiating to employ Todaro to run its pre -mixed concrete operations in the Philippines, which acts are hypothetically admitted in PILs motion to dismiss, are not mere acts of a passive investor in a domestic corporation. Such are managerial and operational acts in directing and establishing commercial operations in the Philippines. The annexes that Todaro attached to his complaint give us an idea on the extent of PILs involvement in the negotiations regarding Todaros employment. In Annex "E," McDonald of Pioneer Concrete Group HK confirmed his offer to engage Todaro as a consultant of PIL. In Annex "F," Todaro accepted the consultancy. In Annex "H," Klepzig of PPHI stated that PIL authorized him to tell Todaro about the cessation of his consultancy. Finally, in Annex "I," Folwell of PIL wrote to Todaro to confirm that "Pioneer" no longer wishes to be associated with Todaro and that Klepzig is authorized to terminate this association. Folwell further referred to a Dr. Schubert and to Pioneer Hong Kong. These confirmations and references tell us that, in this instance, the various officers and companies under the Pioneer brand name do not work independently of each other. It cannot be denied that PIL had knowledge of and even authorized the non-implementation of Todaros alleged permanent employment. In fact, in the letters to Todaro, the word "Pioneer" was used to refer not just to PIL alone but also to all corporations negotiating with Todaro under the Pioneer name. As further proof of the interconnection of the various Pioneer corporations with regard to their negotiations with Todaro, McDonald of Pioneer Concrete Group HK confirmed Todaros engagement as consultant of PIL (Annex "E") while Folwell of PIL stated that Todaro rendered consultancy services to Pioneer HK (Annex "I"). In this sense, the various Pioneer corporations were not acting as separate corporations. The behavior of the various Pioneer corporations shoots down their defense that the corporations have separate and distinct personalities, managements, and operations. The various Pioneer corporations were all working in concert to negotiate an employment contract between Todaro and PPHI, a domestic corporation. Finally, the phrase "doing business in the Philippines" in the former version of Section 12, Rule 14 now reads "has transacted business in the Philippines." The scope is thus broader in that it is enough for the

application of the Rule that the foreign private juridical entity "has transacted business in the 26 Philippines." As to the second sub-issue, the purpose of summons is not only to acquire jurisdiction over the person of the defendant, but also to give notice to the defendant that an action has been commenced against it and to afford it an opportunity to be heard on the claim made against it. The requirements of the rule on summons must be strictly followed; otherwise, the trial court will not acquire jurisdiction over the defendant. When summons is to be served on a natural person, service of summons should be made in person on 27 the defendant. Substituted service is resorted to only upon the concurrence of two requisites: (1) when the defendant cannot be served personally within a reasonable time and (2) when there is impossibility of prompt service as shown by the statement in the proof of service in the efforts made to find the defendant 28 personally and that such efforts failed. The statutory requirements of substituted service must be followed strictly, faithfully, and fully, and any substituted service other than by the statute is considered ineffective. Substituted service is in derogation of the usual method of service. It is a method extraordinary in character and may be used only as 29 prescribed and in the circumstances authorized by the statute. The need for strict compliance with the requirements of the rule on summons is also exemplified in the exclusive enumeration of the agents of a domestic private juridical entity who are authorized to receive summons. At present, Section 11 of Rule 14 provides that when the defendant is a domestic private juridical entity, service may be made on the "president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel." The previous version of Section 11 allowed for the service of summons on the "president, manager, secretary, cashier, agent, or any of its directors." The present Section 11 qualified "manager" to "general manager" and "secretary" to "corporate secretary." The present Section 11 also removed "cashier, agent, or any of its directors" from the exclusive enumeration. When summons is served on a foreign juridical entity, there are three prescribed ways: (1) service on its resident agent designated in accordance with law for that purpose, (2) service on the government official designated by law to receive summons if the corporation does not have a resident agent, and (3) service 30 on any of the corporations officers or agents within the Philippines. In the present case, service of summons on PIL failed to follow any of the prescribed processes. PIL had no resident agent in the Philippines. Summons was not served on the Securities and Exchange 31 Commission (SEC), the designated government agency, since PIL is not registered with the SEC. Summons for PIL was served on De Leon, Klepzigs Executive Assistant. Klepzig is PILs "agent within the Philippines" because PIL authorized Klepzig to notify Todaro of the cessation of his consultancy 32 (Annexes "H" and "I"). The authority given by PIL to Klepzig to notify Todaro implies that Klepzig was likewise authorized to receive Todaros response to PILs notice. Todaro responded to PILs notice by filing a complaint before the trial court. However, summons was not served personally on Klepzig as agent of PIL. Instead, summons was served on De Leon, Klepzigs Executive Assistant. In this instance, De Leon was not PILs agent but a mere 33 employee of Klepzig. In effect, the sheriff resorted to substituted service. For symmetry, we apply the rule on substituted service of summons on a natural person and we find that no reason was given to justify the service of PILs summons on De Leon. Thus, we rule that PIL transacted business in the Philippines and Klepzig was its agent within the Philippines. However, there was improper service of summons on PIL since summons was not served personally on Klepzig. NLRC Jurisdiction

As to the second level, Todaro prays for payment of damages due him because of PILs non implementation of Todaros alleged employment agreement with PPHI. The appellate court stated its ruling on this matter, thus: It could not be denied that there was no existing contract yet to speak of between PIONEER INTL. and [Todaro]. Since there was an absence of an employment contract between the two parties, this Court is of the opinion and so holds that no employer-employee relationship actually exists. Record reveals that all that was agreed upon by [Todaro] and the Pioneer Concrete, acting in behalf of PIONEER INTL., was the confirmation of the offer to engage the services of the former as consultant of PIONEER INTL. (Rollo, p. 132). The failure on the part of PIONEER INTL. to abide by the said agreement, which was duly confirmed by PIONEER INTL., brought about a breach of an obligation on a valid and perfected agreement. There being no employer-employee relationship established between [PIL] and [Todaro], it could be said that the instant case falls within the jurisdiction of the regular courts of justice as the money claim of [Todaro] did not arise 34 out of or in connection with [an] employer-employee relationship. Todaros employment in the Philippines would not be with PIL but with PPHI as stated in the 20 October 1997 letter of Folwell. Assuming the existence of the employment agreement, the employer-employee relationship would be between PPHI and Todaro, not between PIL and Todaro. PILs liability for the non implementation of the alleged employment agreement is a civil dispute properly belonging to the regular courts. Todaros causes of action as stated in his complaint are, in addition to breach of contract, based on "violation of Articles 19 and 21 of the New Civil Code" for the "clear and evident bad faith and 35 malice" on the part of defendants. The NLRCs jurisdiction is limited to those enumerated under Article 36 217 of the Labor Code. WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated 27 September 2001 and the Resolution dated 14 January 2003 of the appellate court are AFFIRMED with the MODIFICATION that there was improper service of summons on Pioneer International, Ltd. The case is remanded to the trial court for proper service of summons and trial. No costs. SO ORDERED.

G.R. No. 130974 August 16, 2006 MA. IMELDA M. MANOTOC, Petitioner, vs. HONORABLE COURT OF APPEALS and AGAPITA TRAJANO on behalf of the Estate of ARCHIMEDES TRAJANO, Respondents. DECISION VELASCO, JR., J.: The courts jurisdiction over a defendant is founded on a valid service of summons. Without a valid service, the court cannot acquire jurisdiction over the defendant, unless the defendant voluntarily submits to it. The defendant must be properly apprised of a pending action against him and assured of the opportunity to present his defenses to the suit. Proper service of summons is used to protect ones right to due process. The Case This Petition for Review on Certiorari under Rule 45 presents the core issue whether there was a valid substituted service of summons on petitioner for the trial court to acquire jurisdiction. Petitioner Manotoc claims the court a quo should have annulled the proceedings in the trial court for want of jurisdiction due to irregular and ineffective service of summons. The Facts Petitioner is the defendant in Civil Case No. 63337 entitled Agapita Trajano, pro se, and on behalf of the 2 Estate of Archimedes Trajano v. Imelda Imee R. Marcos-Manotoc for Filing, Recognition and/or Enforcement of Foreign Judgment. Respondent Trajano seeks the enforcement of a foreign courts judgment rendered on May 1, 1991 by the United States District Court of Honolulu, Hawaii, United States of America, in a case entitled Agapita Trajano, et al. v. Imee Marcos-Manotoc a.k.a. Imee Marcos, Civil Case No. 86-0207 for wrongful death of deceased Archimedes Trajano committed by military intelligence officials of the Philippines allegedly under the command, direction, authority, supervision, tolerance, sufferance and/or influence of defendant Manotoc, pursuant to the provisions of Rule 39 of the then Revised Rules of Court. Based on paragraph two of the Complaint, the trial court issued a Summons on July 6, 1993 addressed to petitioner at Alexandra Condominium Corporation or Alexandra Homes, E2 Room 104, at No. 29 Meralco Avenue, Pasig City. On July 15, 1993, the Summons and a copy of the Complaint were allegedly served upon (Mr.) Macky de 4 la Cruz, an alleged caretaker of petitioner at the condominium unit mentioned earlier. When petitioner 5 failed to file her Answer, the trial court declared her in default through an Order dated October 13, 1993. On October 19, 1993, petitioner, by special appearance of counsel, filed a Motion to Dismiss on the ground of lack of jurisdiction of the trial court over her person due to an invalid substituted service of summons. The grounds to support the motion were: (1) the address of defendant indicated in the Complaint (Alexandra Homes) was not her dwelling, residence, or regular place of business as provided in Section 8, Rule 14 of the Rules of Court; (2) the party (de la Cruz), who was found in the unit, was neither a representative, employee, nor a resident of the place; (3) the procedure prescribed by the Rules on personal and substituted service of summons was ignored; (4) defendant was a resident of Singapore; and (5) whatever judgment rendered in this case would be ineffective and futile.
6 3 1

During the hearing on the Motion to Dismiss, petitioner Manotoc presented Carlos Gonzales, who testified that he saw defendant Manotoc as a visitor in Alexandra Homes only two times. He also identified the Certification of Renato A. de Leon, which stated that Unit E-2104 was owned by Queens Park Realty, Inc.; and at the time the Certification was issued, the unit was not being leased by anyone. Petitioner also 7 presented her Philippine passport and the Disembarkation/Embarkation Card issued by the Immigration Service of Singapore to show that she was a resident of Singapore. She claimed that the person referred to in plaintiffs Exhibits "A" to "EEEE" as "Mrs. Manotoc" may not even be her, but the mother of Tommy Manotoc, and granting that she was the one referred to in said exhibits, only 27 out of 109 entries referred to Mrs. Manotoc. Hence, the infrequent number of times she allegedly entered Alexandra Homes did not at all establish plaintiffs position that she was a resident of said place. On the other hand, Agapita Trajano, for plaintiffs estate, presented Robert Swift, lead counsel for plaintiffs in the Estate of Ferdinand Marcos Human Rights Litigation, who testified that he participated in the deposition taking of Ferdinand R. Marcos, Jr.; and he confirmed that Mr. Marcos, Jr. testified that 8 9 petitioners residence was at the Alexandra Apartment, Greenhills. In addition, the entries in the logbook of Alexandra Homes from August 4, 1992 to August 2, 1993, listing the name of petitioner 10 Manotoc and the Sheriffs Return, were adduced in evidence. On October 11, 1994, the trial court rejected Manotocs Motion to Dismiss on the strength of its findings that her residence, for purposes of the Complaint, was Alexandra Homes, Unit E-2104, No. 29 Meralco Avenue, Pasig, Metro Manila, based on the documentary evidence of respondent Trajano. The trial court relied on the presumption that the sheriffs substituted service was made in the regular performance of 11 official duty, and such presumption stood in the absence of proof to the contrary. On December 21, 1994, the trial court discarded Manotocs plea for reconsiderati on for lack of merit.
13 12

Undaunted, Manotoc filed a Petition for Certiorari and Prohibition before the Court of Appeals (CA) on January 20, 1995, docketed as CA-G.R. SP No. 36214 seeking the annulment of the October 11, 1994 and December 21, 1994 Orders of Judge Aurelio C. Trampe. Ruling of the Court of Appeals On March 17, 1997, the CA rendered the assailed Decision, dismissing the Petition for Certiorari and Prohibition. The court a quo adopted the findings of the trial court that petitioners residence was at Alexandra Homes, Unit E-2104, at No. 29 Meralco Avenue, Pasig, Metro Manila, which was also the residence of her husband, as shown by the testimony of Atty. Robert Swift and the Returns of the registered mails sent to petitioner. It ruled that the Disembarkation/Embarkation Card and the Certification dated September 17, 1993 issued by Renato A. De Leon, Assistant Property Administrator of Alexandra Homes, were hearsay, and that said Certification did not refer to July 1993the month when the substituted service was effected. In the same Decision, the CA also rejected petitioners Philippine passport as proof of her residency in Singapore as it merely showed the dates of her departure from and arrival in the Philippines without presenting the boilerplates last two (2) inside pages where petitioners residence was indicated. The CA considered the withholding of those pages as suppression of evidence. Thus, according to the CA, the trial court had acquired jurisdiction over petitioner as there was a valid substituted service pursuant to Section 8, Rule 14 of the old Revised Rules of Court. On April 2, 1997, petitioner filed a Motion for Reconsideration 16 Resolution dated October 8, 1997.
15 14

which was denied by the CA in its

Hence, petitioner has come before the Court for review on certiorari. The Issues

Petitioner raises the following assignment of errors for the Courts consideration: I. RESPONDENT COURT OF APPEALS COMMITTED [A] SERIOUS ERROR IN RENDERING THE DECISION AND RESOLUTION IN QUESTION (ANNEXES A AND B) IN DEFIANCE OF LAW AND JURISPRUDENCE IN RULING THAT THE TRIAL COURT ACQUIRED JURISDICTION OVER THE PERSON OF THE PETITIONER THROUGH A SUBSTITUTED SERVICE OF SUMMONS IN ACCORDANCE WITH SECTION 8, RULE 14 OF THE REVISED RULES OF COURT. II. RESPONDENT COURT OF APPEALS COMMITTED [A] SERIOUS ERROR WHEN IT RULED THAT THERE WAS A VALID SERVICE OF SUMMONS ON AN ALLEGED CARETAKER OF PETITIONERS RESIDENCE IN COMPLETE DEFIANCE OF THE RULING IN CASTILLO VS. CFI OF BULACAN, BR. IV, G.R. NO. L-55869, FEBRUARY 20, 1984, 127 SCRA 632 WHICH DEFINES THE PROPRIETY OF SUCH SERVICE UPON MERE OVERSEERS OF PREMISES WHERE A PARTY SUPPOSEDLY RESIDES. III. RESPONDENT COURT OF APPEALS COMMITTED [A] SERIOUS ERROR IN CONCLUDING THAT THE RESIDENCE OF THE HUSBAND IS ALSO THE RESIDENCE OF HIS WIFE CONTRARY TO THE RULING IN THE BANK OF THE PHILIPPINE ISLANDS VS. DE COSTER, G.R. NO. 23181, MARCH 16, 1925, 47 PHIL. 594. IV. RESPONDENT COURT OF APPEALS COMMITTED [A] SERIOUS ERROR IN FAILING TO APPLY THE RULE ON EXTRA-TERRITORIAL SERVICE OF SUMMONS UNDER SECTIONS 17 AND 18, RULE 17 14 OF THE REVISED RULES OF COURT. The assigned errors bring to the fore the crux of the disagreementthe validity of the substituted service of summons for the trial court to acquire jurisdiction over petitioner. The Courts Ruling We GRANT the petition. Acquisition of Jurisdiction Jurisdiction over the defendant is acquired either upon a valid service of summons or the defendants voluntary appearance in court. When the defendant does not voluntarily submit to the courts jurisdiction or when there is no valid service of summons, "any judgment of the court which has no jurisdiction over 18 the person of the defendant is null and void." In an action strictly in personam, personal service on the defendant is the preferred mode of service, that is, by handing a copy of the summons to the defendant in person. If defendant, for excusable reasons, cannot be served with the summons within a reasonable period, then substituted service can be resorted to. While substituted service of summons is permitted, "it 19 is extraordinary in character and in derogation of the usual method of service." Hence, it must faithfully and strictly comply with the prescribed requirements and circumstances authorized by the rules. Indeed, "compliance with the rules regarding the service of summons is as much important as the issue of due 20 process as of jurisdiction." Requirements for Substituted Service Section 8 of Rule 14 of the old Revised Rules of Court which applies to this case provides: SEC. 8. Substituted service. If the defendant cannot be served within a reasonable time as provided in the preceding section [personal service on defendant], service may be effected (a) by leaving copies of the summons at the defendants residence with some person of suitable age a nd discretion then residing
21

therein, or (b) by leaving the copies at defendants office or regular place of business with some competent person in charge thereof. We can break down this section into the following requirements to effect a valid substituted service: (1) Impossibility of Prompt Personal Service The party relying on substituted service or the sheriff must show that defendant cannot be served 22 promptly or there is impossibility of prompt service. Section 8, Rule 14 provides that the plaintiff or the sheriff is given a "reasonable time" to serve the summons to the defendant in person, but no specific time frame is mentioned. "Reasonable time" is defined as "so much time as is necessary under the circumstances for a reasonably prudent and diligent man to do, conveniently, what the contract or duty requires that should be done, having a regard for the rights and possibility of loss, if any[,] to the other 23 party." Under the Rules, the service of summons has no set period. However, when the court, clerk of court, or the plaintiff asks the sheriff to make the return of the summons and the latter submits the return of summons, then the validity of the summons lapses. The plaintiff may then ask for an alias summons if 24 the service of summons has failed. What then is a reasonable time for the sheriff to effect a personal service in order to demonstrate impossibility of prompt service? To the plaintiff, "reasonable time" means no more than seven (7) days since an expeditious processing of a complaint is what a plaintiff wants. To the sheriff, "reasonable time" means 15 to 30 days because at the end of the month, it is a practice for the branch clerk of court to require the sheriff to submit a return of the summons assigned to the sheriff for service. The Sheriffs Return provides data to the Clerk of Court, which the clerk uses in the Monthly Report of Cases to be submitted to the Office of the Court Administrator within the first ten (10) days of the succeeding month. Thus, one month from the issuance of summons can be considered "reasonable time" with regard to personal service on the defendant. Sheriffs are asked to discharge their duties on the service of summons with due care, utmost diligence, and reasonable promptness and speed so as not to prejudice the expeditious dispensation of justice. Thus, they are enjoined to try their best efforts to accomplish personal service on defendant. On the other hand, since the defendant is expected to try to avoid and evade service of summons, the sheriff must be resourceful, persevering, canny, and diligent in serving the process on the defendant. For substituted service of summons to be available, there must be several attempts by the sheriff to personally serve the summons within a reasonable period [of one month] which eventually resulted in failure to prove impossibility of prompt service. "Several attempts" means at least three (3) tries, preferably on at least two different dates. In addition, the sheriff must cite why such efforts were unsuccessful. It is only then that impossibility of service can be confirmed or accepted. (2) Specific Details in the Return The sheriff must describe in the Return of Summons the facts and circumstances surrounding the 25 attempted personal service. The efforts made to find the defendant and the reasons behind the failure must be clearly narrated in detail in the Return. The date and time of the attempts on personal service, the inquiries made to locate the defendant, the name/s of the occupants of the alleged residence or house of defendant and all other acts done, though futile, to serve the summons on defendant must be specified in the Return to justify substituted service. The form on Sheriffs Return of Summons on Substituted Service prescribed in the Handbook for Sheriffs published by the Philippine Judicial Academy 26 requires a narration of the efforts made to find the defendant personally and the fact of failure. Supreme Court Administrative Circular No. 5 dated November 9, 1989 requires that "impossibility of prompt service should be shown by stating the efforts made to find the defendant personally and the failure of such efforts," which should be made in the proof of service. (3) A Person of Suitable Age and Discretion

If the substituted service will be effected at defendants house or residence, it should be left with a person 27 of "suitable age and discretion then residing therein." A person of suitable age and discretion is one who has attained the age of full legal capacity (18 years old) and is considered to have enough discernment to understand the importance of a summons. "Discretion" is defined as "the ability to make decisions which represent a responsible choice and for which an understanding of what is lawful, right or 28 wise may be presupposed". Thus, to be of sufficient discretion, such person must know how to read and understand English to comprehend the import of the summons, and fully realize the need to deliver the summons and complaint to the defendant at the earliest possible time for the person to take appropriate action. Thus, the person must have the "relation of confidence" to the defendant, ensuring that the latter would receive or at least be notified of the receipt of the summons. The sheriff must therefore determine if the person found in the alleged dwelling or residence of defendant is of legal age, what the recipients relationship with the defendant is, and whether said person comprehends the significance of the receipt of the summons and his duty to immediately deliver it to the defendant or at least notify the defendant of said receipt of summons. These matters must be clearly and specifically described in the Return of Summons. (4) A Competent Person in Charge If the substituted service will be done at defendants office or regular place of business, then it should be served on a competent person in charge of the place. Thus, the person on whom the substituted service will be made must be the one managing the office or business of defendant, such as the president or manager; and such individual must have sufficient knowledge to understand the obligation of the defendant in the summons, its importance, and the prejudicial effects arising from inaction on the summons. Again, these details must be contained in the Return. Invalid Substituted Service in the Case at Bar Let us examine the full text of the Sheriffs Return, which reads: THIS IS TO CERTIFY that on many occasions several attempts were made to serve the summons with complaint and annexes issued by this Honorable Court in the above entitled case, personally upon the defendant IMELDA IMEE MARCOS-MANOTOC located at Alexandra Condominium Corpration [sic] or Alexandra Homes E-2 Room 104 No. 29 Merlaco [sic] Ave., Pasig, Metro-Manila at reasonable hours of the day but to no avail for the reason that said defendant is usually out of her place and/or residence or premises. That on the 15th day of July, 1993, substituted service of summons was resorted to in accordance with the Rules of Court in the Philippines leaving copy of said summons with complaint and annexes thru [sic] (Mr) Macky de la Cruz, caretaker of the said defendant, according to (Ms) Lyn Jacinto, Receptionist and Telephone Operator of the said building, a person of suitable age and discretion, living with the said defendant at the given address who acknowledged the receipt thereof of said processes but he refused to sign (emphases supplied). WHEREFORE, said summons is hereby returned to this Honorable Court of origin, duly served for its record and information. Pasig, Metro-Manila July 15, 1993.
29

A meticulous scrutiny of the aforementioned Return readily reveals the absence of material data on the serious efforts to serve the Summons on petitioner Manotoc in person. There is no clear valid reason cited in the Return why those efforts proved inadequate, to reach the conclusion that personal service has become impossible or unattainable outside the generally couched phrases of "on many occasions several attempts were made to serve the summons x x x personally," "at reasonable hours during the day," and "to no avail for the reason that the said defendant is usually out of her place and/or residence or premises." Wanting in detailed information, the Return deviates from the rulingin Domagas v. 30 31 Jensen and other related cases that the pertinent facts and circumstances on the efforts exerted to

serve the summons personally must be narrated in the Return. It cannot be determined how many times, on what specific dates, and at what hours of the day the attempts were made. Given the fact that the substituted service of summons may be assailed, as in the present case, by a Motion to Dismiss, it is imperative that the pertinent facts and circumstances surrounding the service of summons be described with more particularity in the Return or Certificate of Service. Besides, apart from the allegation of petitioners address in the Complaint, it has not been shown that respondent Trajano or Sheriff Caelas, who served such summons, exerted extraordinary efforts to locate petitioner. Certainly, the second paragraph of the Complaint only states that respondents were "informed, and so [they] allege" about the address and whereabouts of petitioner. Before resorting to substituted service, a plaintiff must demonstrate an effort in good faith to locate the defendant through more direct 32 means. More so, in the case in hand, when the alleged petitioners residence o r house is doubtful or has not been clearly ascertained, it would have been better for personal service to have been pursued persistently. In the case Umandap v. Sabio, Jr., it may be true that the Court held that a Sheriffs Return, which states that "despite efforts exerted to serve said process personally upon the defendant on several occasions the same proved futile," conforms to the requirements of valid substituted service. However, in view of the numerous claims of irregularities in substituted service which have spawned the filing of a great number of unnecessary special civil actions of certiorari and appeals to higher courts, resulting in prolonged litigation and wasteful legal expenses, the Court rules in the case at bar that the narration of the efforts made to find the defendant and the fact of failure written in broad and imprecise words will not suffice. The facts and circumstances should be stated with more particularity and detail on the number of attempts made at personal service, dates and times of the attempts, inquiries to locate defendant, names of occupants of the alleged residence, and the reasons for failure should be included in the Return to satisfactorily show the efforts undertaken. That such efforts were made to personally serve summons on defendant, and those resulted in failure, would prove impossibility of prompt personal service. Moreover, to allow sheriffs to describe the facts and circumstances in inexact terms would encourage routine performance of their precise duties relating to substituted servicefor it would be quite easy to shroud or conceal carelessness or laxity in such broad terms. Lastly, considering that monies and properties worth millions may be lost by a defendant because of an irregular or void substituted service, it is but only fair that the Sheriffs Return should clearly and convincingly show the impracticability or hopelessness of personal service. Granting that such a general description be considered adequate, there is still a serious nonconformity from the requirement that the summons must be left with a "person of suitable age and discretion" residing in defendants house or residence. Thus, there are two ( 2) requirements under the Rules: (1) recipient must be a person of suitable age and discretion; and (2) recipient must reside in the house or residence of defendant. Both requirements were not met. In this case, the Sheriffs Return lacks information as to residence, age, and discretion of Mr. Macky de la Cruz, aside from the sheriffs general assertion that de la Cruz is the "resident caretaker" of petitioner as pointed out by a certain Ms. Lyn Jacinto, alleged receptionist and telephone operator of Alexandra Homes. It is doubtful if Mr. de la Cruz is residing with petitioner Manotoc in the condominium unit considering that a married woman of her stature in society would unlikely hire a male caretaker to reside in her dwelling. With the petitioners allegat ion that Macky de la Cruz is not her employee, servant, or representative, it is necessary to have additional information in the Return of Summons. Besides, Mr. Macky de la Cruzs refusal to sign the Receipt for the summons is a strong indication that he did not have the necessary "relation of confidence" with petitioner. To protect petitioners right to due process by being accorded proper notice of a case against her, the substituted service of summons must be shown to clearly comply with the rules. It has been stated and restated that substituted service of summons must faithfully and strictly comply 34 with the prescribed requirements and in the circumstances authorized by the rules.
33

Even American case law likewise stresses the principle of strict compliance with statute or rule on substituted service, thus: The procedure prescribed by a statute or rule for substituted or constructive service must be strictly 35 pursued. There must be strict compliance with the requirements of statutes authorizing substituted or 36 constructive service. Where, by the local law, substituted or constructive service is in certain situations authorized in the place of personal service when the latter is inconvenient or impossible, a strict and literal compliance with the provisions of the law must be shown in order to support the judgment based on such substituted or 37 constructive service. Jurisdiction is not to be assumed and exercised on the general ground that the subject matter of the suit is within the power of the court. The inquiry must be as to whether the requisites 38 of the statute have been complied with, and such compliance must appear on the record. The fact that the defendant had actual knowledge of attempted service does not render the service effectual if in fact 39 the process was not served in accordance with the requirements of the statute. Based on the above principles, respondent Trajano failed to demonstrate that there was strict compliance with the requirements of the then Section 8, Rule 14 (now Section 7, Rule 14 of the 1997 Rules of Civil Procedure). Due to non-compliance with the prerequisites for valid substituted service, the proceedings held before the trial court perforce must be annulled. The court a quo heavily relied on the presumption of regularity in the performance of official duty. It reasons out that "[t]he certificate of service by the proper officer is prima facie evidence of the facts set out herein, and to overcome the presumption arising from said certificate, the evidence must be clear and 40 convincing." The Court acknowledges that this ruling is still a valid doctrine. However, for the presumption to apply, the Sheriffs Return must show that serious efforts or attempts were exerted to personally serve the summons and that said efforts failed. These facts must be specifically narrated in the Return. To reiterate, it must clearly show that the substituted service must be made on a person of suitable age and discretion living in the dwelling or residence of defendant. Otherwise, the Return is flawed and the presumption cannot be availed of. As previously explained, the Return of Sheriff Caelas did not comply with the stringent requirements of Rule 14, Section 8 on substituted service. In the case of Venturanza v. Court of Appeals, it was held that "x x x the presumption of regularity in the performance of official functions by the sheriff is not applicable in this case where it is patent that the sheriffs return is defective (emphasis supplied)." While the Sheriffs Return in the Venturanza case had no statement on the effort or attempt to personally serve the summons, the Return of Sheriff Caelas in the case at bar merely described the efforts or attempts in general terms lacking in details as required by the ruling in the case of Domagas v. Jensen and other cases. It is as if Caelas Return did not mention any effort to accomplish personal service. Thus, the substituted service is void. On the issue whether petitioner Manotoc is a resident of Alexandra Homes, Unit E-2104, at No. 29 Meralco Avenue, Pasig City, our findings that the substituted service is void has rendered the matter moot and academic. Even assuming that Alexandra Homes Room 104 is her actual residence, such fact would not make an irregular and void substituted service valid and effective. IN VIEW OF THE FOREGOING, this Petition for Review is hereby GRANTED and the assailed March 17, 1997 Decision and October 8, 1997 Resolution of the Court of Appeals and the October 11, 1994 and December 21, 1994 Orders of the Regional Trial Court, National Capital Judicial Region, Pasig City, Branch 163 are herebyREVERSED and SET ASIDE.No costs.
41

[G.R. No. 130699. May 12, 2000] SPOUSES BERNARDO MERCADER and FLORINA M. MERCADER, and DR. JUAN Y. MADERAZO, petitioners, vs. DEVELOPMENT BANK OF THE PHILIPPINES (CEBU BRANCH), GELACIO, FELIPE, OSMUNDO all surnamed MANREAL, and RUFINA MANREAL VDA. DE ABALO, respondents. DECISION DAVIDE, JR., C.J.: In this petition for review, petitioners spouses Florina Maderazo-Mercader and Bernardo Mercader (hereafter MERCADERs) and Juan Y. Mederazo impugn the Court of Appeals 5 February 1997 decision [1] in CA-GR-CV No. 21846 ordering them to deliver the possession of Lot No. 2985 to the Development Bank of the Philippines, Cebu Branch (hereafter DBP) without right of reimbursements for the improvements introduced thereon, and the 13 August 1997 resolution denying the motion for [2] reconsideration. Said decision and resolution reversed and set aside the 6 September 1988 decision of [3] the Regional Trial Court of Cebu, Branch 15, in Civil Case No. R-18521. Civil Case No. R-18521 was for specific performance filed on 28 September 1979. In their [4] complaint, the MERCADERs alleged that: Scedp (1) In 1966, Juan Maderazo applied for a loan at the DBP secured by interior Lots Nos. 2993 and 2994 (Talisay-Minglanilla estate); Calrspped (2) The DPB required Maderazo to construct a five (5) -meter wide road right of way over the adjoining Lot No. 2985; (3) The DBP approved Maderazos loan application upon his submission of a copy of the lease contract for a right of way over the adjoining Lot No. 2985; (4) The lease contract for the right of way was for a twenty-year period commencing on 20 October 1966 which Maderazo executed with the spouses Gelacio and Vicenta Manreal, then the registered owners of Lot No. 2985; (5) Maderazo expended P10,000 for the construction of the five (5) - meter right of way; (6) This lease contract was however not registered for Gelacio Manreals failure, "for one reason or another," to deliver the Certificate of Title (TCT) of Lot No. 2985 to Maderazo; (7) About nine years later or on 6 January 1976, Maderazo's children, the spouses Florina Maderazo-Mercader and Bernardo Mercader executed a contract of lease with the Manreals for a period of twenty years and four months over the remaining portion of Lot No. 2985; (8) Despite repeated requests for the delivery of the TCT of Lot No. 2985 for the purpose of annotating the lease contract, the Manreals, "for one reason or another," failed to do so; however, the Manreals assured the Mercaders "not to worry since nothing will go wrong"; (9) Believing in the Manreals assurances, Bernardo Mercader intensively cultivated Lot No. 2985, "planted in good faith 600 calamansi fruit trees, fenced the lot with barbed wires, constructed canals and drainages, spent wages for several farm workers and

introduced several improvements including a vegetable garden - all in the sum of not less thatP25,000"; (10) The MERCADERs subsequently discovered that the reason why the Manreals failed to deliver the TCT of Lot No. 2985 [now registered in the names of spouses Felipe and Florentina Manreal, children of Gelacio and Vicenta Manreal] was because they offered said lot including the improvements introduced by the former thereon as "collateral" for aP150,000 deep-sea fishing loan with the DBP; (11) That despite the lack of registration and/or annotation of the respective interests of the MERCADERs on the TCT over Lot No. 2985, the DBP knew and should know of their existence considering the several ocular inspection and investigation conducted over the property; the DBP's actual knowledge of these unregistered interests has the effect of [5] registration. Since the Manreals defaulted in the payment of their obligation to the DBP, and that the latter had taken steps to foreclose Lot No. 2985 including all the improvements thereon, the MERCADERs prayed among others, for the DBP to "respect their interests by excluding these from the foreclosure proceedings, or if the foreclosure takes place, declare the same null and void or in the alternative, order the DBP to reimburse them the cost of the improvements and loss of expected income amounting to P210,000 for the duration of the unexpired term of their respective contracts." The MERCADERs also prayed for the annotation of their interests in the TCT of Lot No. 2985. Sccalr In their answer, the Manreals only admitted the existence of the two unregistered contracts of lease and the calamansi trees planted on Lot No. 2985. They then denied any knowledge or information sufficient to form a belief on the other allegations of the MERCADERs . They then claimed that Felipe Manreal informed Juan Maderazo of the intention to offer as security Lot No. 2985 for the deep sea-fishing loan with the DBP. They also justified their inability to present to the MERCADERs the TCT over Lot No. 2985 on the fact that at the time the latter were soliciting the titles delivery, it was still in the hands of the lawyer who was preparing the Extrajudicial Settlement and Partition of the Estate left by the deceased Vicenta [6] Manreal. The Manreals then prayed for the dismissal of the complaint for being utterly groundless. In its answer, the DBP admitted: (1) the loan of spouses Juan and Juana Maderazo; and (2) the deep-sea fishing loan of spouses Felipe and Florentina Manreal which was secured among others, by a first mortgage over Lot No. 2985 evidenced by a TCT already registered in their names, free from any lien or encumbrance. It denied any knowledge or information of: (1) any flaw or infirmity in the TCT over Lot No. 2985; (2) any interest in Lot No. 2985 other than and adverse to the spouses Felipe and Florentina Manreal as registered owners and mortgagors; and (3) the existence of the lease contract for right of way over a portion of Lot No. 2985 because it was not registered and that the spouses Gelacio and Vicenta Manreal were not the ones who mortgaged said Lot No. 2985 to the DBP but their children, the spouses Felipe and Florentina Manreal. Calrsc The DBP maintained that the alleged unregistered interests of the MERCADERs did not and could not [7] [8] bind the DBP per Art. 1648 of the Civil Code and Section 64 of Act 496. It then prayed for the dismissal of the complaint for being premature and for lack of cause of action as it never dealt with [9] Gelacio Manreal and there was as yet no foreclosure. Besides, the DBP was a mortgagee in good faith. In the meantime or on 26 November 1979, Lot No. 2985 was sold, among the other mortgaged lots, on [10] public auction to the DBP as the highest bidder.

During the pre-trial stage, the trial court acknowledged the possibility of a compromise agreement, gave time to the parties to study their proposals and counterproposals and ordered the documents pertinent [11] thereto deemed parts of the record of the case. Orders were further issued "giving the parties more [12] time to continue with their negotiations and re-setting the hearing of the case." Several communications were thereafter exchanged, to wit: (1) a letter dated 24 June 1981 wherein the MERCADERs proposed that Maderazos contract of lease for right of way be registered, and respect be accorded to the contract of lease the MERCADERs executed with the Manreals, or as an alternative allow the MERCADERs to purchase Lot No. 2985 on installment basis at the price of P6.00 per [13] square meter; (2) a letter dated 22 July 1982 wherein the DBP through its Manager (Mr. Manuel Roa) offered the MERCADERs three options by which they could amicably settle subject to the [14] approval of the Board of Governors of the Bank to wit: a. First Option - Sale P96,200.00 - Purchase price 19,200.00 - Down payment 77,000.00 - Balance payable in 10 years at 15% interest per annum 1, 242.28 - Monthly amortization b. Second Option - Lease-Purchase P132,598.84 - Consideration 1,105.00 - Monthly lease-purchase for 10 years c. Third Option - Lease P14,430.00 - Equivalent to 15% annual interest of P96,200 1,202.50 - Monthly lease (3) a letter dated 18 November 1982 whereby the MERCADERs chose option 2 (lease[15] purchase); (4) a letter dated 23 November 1982 whereby the MERCADERs informed the DBPs Manager that they were "depositing P3,315.00 with the bank" pursuant to said Managers proposal that a three-month advance payment should be deposited while the [16] MERCADERs await the final decision of the bank on the proposed settlement. The DBP issued an official receipt for the payment of P3,315 as "earnest money, deposit to purchase lot [17] 2985." With this development, on 9 December 1982, the trial court directed the parties to submit "their [18] compromise agreement which required the approval of the Board of Governors."

The DBP and the MERCADERs thereafter again exchanged a series of correspondences. In his 13 January 1983 letter to the DBP (through Mr. Ruben Carpio), Bernardo Mercader requested for a grace [19] period in the payment of the amortization for the lease-purchase option. In response, the DBP wrote a letter dated 19 January 1983 informing Bernardo Mercader that it had already "prepared [its] recommendation to the head office, xxx rejected the request for a grace period but informed [him] to [20] respond soon or visit the bank for a possible conference." Bernardo Mercader replied through a letter dated 5 October 1983 reiterating his accord to the lease-purchase option but suggesting this time that the [21] amortization be paid on a quarterly basis. In its 29 February 1984 letter, the DBP "noted" Mercaders suggestion as "counter-proposals or counter-offers which [it find un]acceptable and made dimmer the realization of [their] mutual desire for an early amicable settlement." The DBP reasoned that "the original conditions packaged in [its] proposal [were] no longer applicable" considering that the market value of the [22] property increased. With this, the trial court ordered the termination of the pre-trial and set the case for hearing in its 18 September 1995 order, thus: As manifested by the plaintiffs, they have alread[y] agreed with the defendant bank that they will pay the property at P132, 598 payable in ten (10) years in quarterly basis. However, the counsel of defendant manifested that it was only a proposal. The plaintiff spouses requested for a longer period of fifteen (15) years which the bank did not agree. The only issue[s] to be resolved in this case are as follows: 1. Whether the plaintiff [are] entitled to specific performance of said agreement; 2. Whether the defendant bank can be compelled to recognize the lease contract entered into between the spouses plaintiff Bernardo Mercader and Gelacio Manreal; and 3. Whether the foreclosure proceedings of the contract between the defendant bank is null and void. The pre-trial in this case is already closed and terminated.
[23]

On 7 November 1985, the MERCADERs filed a Supplemental Pleading insisting the consummation of the [24] lease-purchase option with the payment of the earnest money. The DBP filed its Opposition to the [25] Supplemental Pleading. Trial proceeded with the parties presenting evidence tending to establish their respective allegations. On 29 May 1987, the trial court ordered the Manreals dropped from the case. The MERCADERs offered no objection. Sppedsc In its decision of 6 September 1988, the trial court reiterated the three issues ascertained in the pre-trial order and resolved all of them in favor of the MERCADERs. On the first issue, the trial court found that the "DBP had unnecessarily and unjustifiably made xxx [Bernardo] Mercader understand that his second option [lease-purchase] would be more or less approved, except that the approval will come from [26] Manila." Anent the second issue, the trial court also believed "quite firmly" that the "DBP could not have escaped having a foreknowledge of the existence of the prior unrecorded lease" as the "possession and cultivation of Bernardo Mercader xxx [was] a matter of open, notorious and public knowledge in the area." In resolving the third issue, the court first acknowledged that it is a "court of equity and not merely a court of law" and the "DBP is not authorized to keep real propert[y] longer than ten years or so;" then the court "required [the] DBP to set aside the area affected by the prior unregistered lease, known to [it], when [it] [27] accepted the mortgage." It then decreed as follows:

WHEREFORE, finding the preponderance of evidence to be in favor of plaintiffs, judgment is hereby rendered as follows: 1) ordering the defendant DBP and its successors-in-interest to respect and preserve the Contracts of Lease between the Manreals and the Mercaders until December 31, 1994; 2) ordering the DBP to exclude from the foreclosure proceedings the rights of the plaintiffs as covered by the Contract of Lease; 3) requiring the defendant DBP to cause the annotation of the Contracts of Lease of plaintiffs on TCT No. T-40396 of xxx Lot No. 2985 xxx and amend Entry No. 4980-V-14D-B, by excluding the improvements of Mercader as guarantee or collateral for defendant Felipe Manreal's deep-sea fishing loan; 4) ordering the DBP to execute the deed of sale subject to the approval of the Manila Office of the DBP as to the mode of payment, there being no agreement thereon; 5) requiring the defendant DBP to pay attorney's fees of P5,000, for making it necessary for the plaintiffs to litigate, in order to protect their rights to the Lease Contract with the Manreals and to compel DBP to act on the proposals of Mercader as promised by [28] DBP. On appeal, the Court of Appeals found that the trial court erred in treating the lease-purchase option as a controversial issue considering that it was "outside the parties' pleadings." But invoking the Supreme [29] Court's decision in Castro v. Court of Appeals in that "the improvements introduced [into the mortgaged property] are to be considered so incorporated [in the mortgage] only if so owned by the mortgagor," the Court of Appeals declared that the improvements introduced on Lot No. 2985 had been improperly included in the foreclosure sale since they were not owned by the mortgagors. But since the improvements were already included in the foreclosure sale and the MERCADERs continued the possession and collection of income from the lot, the Court of Appeals, as already earlier adverted to, reversed and set aside the appealed judgment. It entered a new one declaring that the MERCADERs were not entitled to any compensation from the DBP. It also ordered the MERCADERs to immediately [30] turn over the possession of Lot No. 2985 to the DBP. In this petition for review, the MERCADERs assert that in issuing the challenged decision, the Court of Appeals contravened Section 4, Rule 20 and Section 5, Rule 10 of the Rules of Court by holding that the trial court should not have taken cognizance of the lease-purchase option as a controversial issue since it was not raised in the pleadings. They maintain that the trial court correctly took cognizance of the leasepurchase option because it was part and parcel of the pre-trial stages, the determination of which will prevent future litigation thereon. They also pray that in the event of a favorable judgment, this Court should refer the case back to the Court of Appeals for a determination of whether the trial court erred in finding that the lease-purchase option was already consummated. Sdjad For its part, the DBP contends that the MERCADERs raise questions of facts which are not reviewable on appeal and that it had opposed and objected to in and at all stages of the trial, all attempts by the MERCADERs to introduce evidence on the lease-purchase option. This Court agrees with the MERCADERs and finds that the Court of Appeals erred in disregarding as material the lease-purchase option on the ground that it was not raised in the pleadings. If the Court of Appeals adverts to the lack of reference to the lease-purchase option in the initiatory pleadings, this can be simply explained by the fact that the trial court only took cognizance thereof when it became an integral component of the pre-trial proceedings. That is why the lease-purchase option was included firstly, in the pre-trial order as one of the issues to be resolved at trial and secondly, in the supplemental [31] pleading subsequently filed by the MERCADERs on 7 November 1985. As a supplemental pleading, it

served to aver supervening facts which were then not ripe for judicial relief when the original pleading was filed. As such, it was meant to supply deficiencies in aid of the original pleading, and not to dispense with [32] the latter. Hence, it was patently erroneous for the Court of Appeals to pronounce that the leasepurchase option was not raised in the pleadings. The DBP was even quite aware and knowledgeable of [33] the supplemental pleading because it filed an opposition thereto. The records however reveal that the trial court did not promptly rule on the motion to admit the supplemental pleading. And during trial, the trial court also failed to rule on the prompt objection interposed by the DBPs counsel to the MERCADERs introduc tion of evidence relative to said leasepurchase option. But undisputed is the trial court's eventual admission in open court of the MERCADERs supplemental pleading, thus: ATTY. GARLITOS Probably, I did not make myself quite clear, Your honor. What I mean is during the pretrial stage the parties were encourage to negotiate for a settlement. So they made an offer to DBP and DBP gave them an option. COURT Those three options and chose the second one. ATTY. GARLITOSMisact We interposed an objection on this option, Your Honor, because any evidence which will be presented or which transpired during the pre-trial is objectionable. So we interposed an objection to prevent the witness from testifying on transactions which were referred to while the parties were negotiating during the pre-trial stage. ATTY. MERCADER I wish to correct counsel. Records will show that there was no objection on what transpired during the pre-trial. As a matter of fact the pre-trial order is very material to the case. There is a pre-trial that such an offer and three options made by DBP, and that plaintiff selected the second option and that he deposited earnest money with the bank. COURT In other words there is no supplemental complaint. ATTY. GARLITOS It is good that they brought that out because we had an opposition and this is what I am referring to. COURT What is your opposition, the price agreed upon? ATTY. GARLITOS

We objected to the filing of the supplemental complaint and to all evidence presented in regard to that supplemental complaint. COURT Its too late now for you to make an objection. This supplemental pleading has been admitted by the court. That has become final. ATTY. GARLITOS. There is no showing that it has been admitted by the court. COURT It has been admitted by the court.
[34]

(Emphasis supplied)

The records also show that not only did the DBPs counsel began to rigorously cross -examine Bernardo Mercader on the lease-purchase option, he also subjected his witness Mr. Ruben Carpio, then Chief of [35] the Collection Department, DBP to an intensive direct examination covering said subject matter. He also offered as evidence the DBPs letter indicating the three options to the MERCADERs as Exhibit "1" [36] and the lease-purchase option contained therein as Exhibit "1-A." The DBP is undoubtedly estopped from questioning the trial courts inclusion of the lease -purchase option as a controversial issue. This action of the trial court finds anchor on Section 4, Rule 20 of the Rules of Court which reads: Acctmis Section 4. Record of pre-trial results. -- After the pre-trial the court shall make an order which recites the action taken at the conference, the amendments allowed to the pleadings, and the agreements made by the parties as to any of the matters considered. Such order shall limit the issues for trial to those not disposed of by admissions or agreements of counsel and when entered controls the subsequent course of the action, unless modified before trial to prevent manifest injustice. Indeed, the pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. The purpose is to obviate the element of surprise, hence, the parties are expected to disclose at the pre-trial conference all issues of law and fact which they intend to raise at the [37] trial, except such as may involve privileged or impeaching matter. In the case at bar, the pre-trial order included as integral to the complete adjudication of the case the issue of whether the MERCADERs can demand specific performance from the DBP relative to the lease-purchase option. Thus, the element of surprise that the provision on pre-trial attempts to preclude was satisfied. The surprise factor was further eliminated, as already earlier mentioned and merely to reiterate here, with the DBP's (1) motion to oppose the supplemental pleading, (2) objection to the introduction of evidence connected thereto, (3) later information from the trial court of its definitive ruling admitting the supplemental pleading, (4) own introduction of evidence related thereto, and finally, by its (5) intensive participation in the direct and cross-examination of witnesses whose testimonies included said topic. In any case, the filing and consequent admission of the supplemental pleading by the trial court validated the issues embraced in the pre-trial order. Newmiso Assuming arguendo that the MERCADERs failed to file the supplemental pleading, evidence relative to the lease-purchase option may be legitimately admitted by the trial court in conformity with Section 5, Rule 10 of the Rules of Court which states: Jjlex

Section 5. Amendment to conform to or authorize presentation of evidence. -- When issues not raised by the pleadings are tried by 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 so 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 freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence. (emphasis supplied) This provision envisions two scenarios -- first, when evidence is introduced on an issue not alleged in the pleadings and no objection was interjected and second, when evidence is offered again, on an issue not alleged in the pleadings but this time an objection was interpolated. We are concerned with the second scenario. In Co Tiamco v. Diaz, the Court held that "when evidence is offered on a matter not alleged in the pleadings, the court may admit it even against the objection of the adverse party, where the latter fails to satisfy the court that the admission of the evidence would prejudice him in maintaining his defense upon the merits, and the court may grant him a continuance to enable him to meet the new situation created by the evidence. Of course, the court, before allowing the evidence, as a matter of formality, should allow an amendment of the pleading, xxx And, furthermore, where the failure to order an amendment does not appear to have caused surprise or prejudice to the objecting party, it may be allowed as a harmless error. Well-known is the rule that departures from procedure may be forgiven [38] where they do not appear to have impaired the substantial rights of the parties." More recently, in Bank of America v. American Realty Corporation citing Talisay-Silay Milling Co., Inc. [40] v. Asociacion de Agricultores de Talisay-Silay, Inc., the Court reinforces the Co Tiamco ruling on the application of Section 5, Rule 10 of the Rules of Court in this wise: Misjuris 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. xxx 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. As already enunciated, the DBP was not and would not be prejudiced by the incorporation of the leasepurchase option as one of the controverted issues. Moreover, it had been afforded ample opportunity to refute and object to the evidence germane thereto, thus, the rudiments of fair play had been properly observed. Jurissc Since we agree with the MERCADERs contention that the Court of Appeals contravened Section 4, Rule 20 and Section 5, Rule 10 of the Rules of Court in promulgating the questioned decision, we have to grant their prayer to refer the matter back to said court for a determination of the question of whether the
[39]

lease-purchase option was already consummated and for a complete ascertainment of the rights and obligations of the parties. WHEREFORE, IN VIEW OF ALL THE FOREGOING, the instant petition is GRANTED DUE COURSE and the 5 February 1997 judgment and 13 August 1995 resolution of the Court of Appeals in CA-GR-CV No. 21846 are hereby SET ASIDE. The case is REFERRED BACK to the Court of Appeals for a determination of whether the lease-purchase option was consummated with the end view of ascertaining the rights and obligations of the parties. Scjuris SO ORDERED.

G.R. No. 138085

November 11, 2004

AZOLLA FARMS and FRANCISCO R. YUSECO, petitioners, vs. COURT OF APPEALS and SAVINGS BANK OF MANILA, respondents.

DECISION

AUSTRIA-MARTINEZ, J.: This is an appeal by certiorari under Rule 45 of the Rules of Court seeking the reversal of the Decision 1 dated February 19, 1999 rendered by the Court of Appeals in CA-G.R. CV No. 53076, which reversed and set aside the decision of the trial court in Civil Case No. 83-20514, and the Resolution dated March 31, 1999, denying petitioners' motion for reconsideration. Petitioner Francis R. Yuseco, Jr., is the Chairman, President and Chief Operating Officer of petitioner Azolla Farms International Philippines (Azolla Farms), a corporation duly organized under existing laws and engaged in the development, exploitation, production, manufacturing, promotion, marketing, and sale of natural, organic minerals, including its by-products, with the ultimate objective of utilizing said products 2 for the promotion of food production. In 1982, Azolla Farms undertook to participate in the National Azolla Production Program wherein it will purchase all the Azolla produced by the Azolla beneficiaries in the amount not exceeding the peso value of all the inputs provided to them. The project also involves the then Ministry of Agriculture, the Kilusang Kabuhayan at Kaunlaran, and the Kiwanis. To finance its participation, petitioners applied for a loan with Credit Manila, Inc., which the latter endorsed to its sister company, respondent Savings Bank of Manila (Savings Bank). The Board of Directors of Azolla Farms, meanwhile, passed a board resolution on August 31, 1982, authorizing Yuseco to borrow from Savings Bank in an amount not exceeding 3 P2,200,000.00. The loan having been approved, Yuseco executed a promissory note on September 13, 1982, promising 4 to pay Savings Bank the sum of P1,400,000.00 on or before September 13, 1983. The net proceeds of P1,225,443.31 was released to FNCB Finance, the mortgagee of a 548- square meter lot with residential 5 house owned by Yuseco. With the release of the proceeds, FNCB Finance released the mortgage, and 6 in turn, the property was mortgaged to Savings Bank as collateral for the loan. Yuseco and Francisco Bargas also executed an assignment of their shares of stock in Azolla Farms as additional 7 8 security. Yuseco then executed two other promissory notes on September 27, 1982 and January 4, 9 1983, both for the amount of P300,000.00. However, the Azolla Farms project collapsed. Blaming Savings Bank, petitioners Yuseco and Azolla Farms filed on October 3, 1983 with the Regional Trial Court of Manila (Branch 25), a complaint for damages. In essence, their complaint alleges that Savings Bank unjustifiably refused to promptly release the remaining P300,000.00 which impaired the timetable of the project and inevitably affected the viability of the project resulting in its collapse, and resulted in their failure to pay off the loan. Thus, petitioners 10 pray for P1,000,000.00 as actual damages, among others.

Respondent Savings Bank filed its Answer denying the allegations in the complaint. It contends that there was evidence that Yuseco was using the loan proceeds for expenses totally unrelated to the project and they decided to withhold the remaining amount until Yuseco gave the assurance that the diversion of the funds will be stopped. Respondent bank believed that the 90-day interval between the two tranches could not have impaired the operation of the project, and petitioners' subsequent receipt of the proceeds confirmed their agreement to the terms of the loan. Trial ensued. After respondent, as defendant, rested its case, petitioners filed a Motion to Admit Amended Complaint alleging that the testimony of defense witness Jesus Venturina raised the issue of the invalidity 11 of the promissory notes and the real estate mortgage. Petitioners sought the amendment of the complaint to conform to the issues and evidence presented. Their Amended Complaint contains the following amendments: That defendant bank acts in unilaterally reducing the agreed amount of FOUR MILLION PESOS (P4,000,000.00) to TWO MILLION PESOS (P2,000,000.00) and in unreasonably delay (sic) the release of THREE HUNDRED THOUSAND PESOS (P300,000.00) novated the promissory notes nos. 2491, 2510 and 2669 and also novated the real estate mortgage dated 6 September 1982 executed by plaintiff 12 Francis R. Yuseco, Jr.; and in their prayer, petitioners seek that the promissory notes and real estate mortgage be declared novated, invalid and unenforceable. Petitioners also amended the actual damages sought, increasing it to 13 P5,000,000.00. Respondent objected to petitioners' motion, 15 Complaint.
14

but the trial court nevertheless admitted the Amended

On June 17, 1994, the trial court rendered its decision annulling the promissory notes and real estate mortgage, and awarding damages to petitioners. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered: DECLARING -(a) the promissory notes and real estate mortgage executed by plaintiff Yuseco novated, if not unenforceable; (b) any subsequent foreclosure or sale of the real estate property, without any binding effect; ORDERING -(1) the defendants to return full, uninterrupted and complete possession and ownership of the subject real estate property to plaintiff Francis R. Yuseco, Jr.; (2) the defendant to pay plaintiffs: (a) P1,000,000.00 as actual damages; (b) P200,000.00, as moral damages for the personal sufferings, mental anguish, serious anxiety, social humiliation of plaintiff Yuseco; (c) P50,000.00, as reasonable attorney's fees; and (d) legal interest on the actual damages herein awarded from date of filing the Complaint until fully paid. The Counterclaim interposed by the defendant in its Answer is hereby dismissed, for lack of merit. Costs against the defendant.
16

Aggrieved, respondent elevated the case to the Court of Appeals.

Finding merit in respondent's appeal, the Court of Appeals reversed and set aside the trial court's decision per its Decision dated February 19, 1999, the decretal portion of which reads: WHEREFORE, premises considered, the decision of the trial court in Civil Case No. 83-20514 is hereby REVERSED and SET ASIDE and judgment is hereby entered declaring the promissory notes and real estate mortgage executed in favor of defendant-appellant, as well as the extrajudicial foreclosure and sale of the mortgaged property, as valid and binding. Defendantappellant is hereby ordered to pay plaintiff Azolla Farms International Philippines, Inc. the amount of fifty thousand pesos (P50,000.00) as nominal damages. No costs. SO ORDERED.
17

Hence, the herein petition filed before the Court, alleging that: THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT REVERSED AND 18 SET ASIDE THE DECISION OF THE COURT A QUO. Two issues are involved in this case: first, whether the trial court erred in admitting petitioners' amended complaint; and second, whether the trial court erred in nullifying the promissory notes, the real estate mortgage, and its extrajudicial foreclosure. In their motion to amend complaint, petitioners allege that: 2. During the direct examination of defendant bank's witness Jesus Venturina, he testified and identified various documents relating to the invalid and illegal foreclosure on plaintiff Francis R. Yuseco, Jr.'s real property subject of the real estate mortgage dated September 7, 1982 and marked and adopted as Exhibit N for the plaintiffs. Moreover, he testified and identified the promissory notes, marked and adopted as Exhibits L, M and Q for the plaintiffs evidencing the incomplete and invalid consideration of the said mortgage. As a result of the testimony thus given and the documents adduced during said hearing, the issue of the foreclosure on said property has been raised which, therefore, necessitates that the pleadings in this case, the complaint, be 19 amended to conform to the issues raised and the evidence presented; The trial court granted the motion and admitted the Amended Complaint. The Court of Appeals, however, ruled that the trial court should not have admitted the Amended Complaint because it altered petitioners' cause of action. Apparently, the Court of Appeals treated petitioners' amendment of the complaint as one involving amendments after the case is set for hearing under Section 3, Rule 10 of the Rules of 20 Court, which is not however applicable to the present case. The amendment of the complaint was made pursuant to Section 5, Rule 10 of the Rules of Court, governing amendment of pleadings to conform to evidence, to wit: SEC. 5. Amendment to conform to or authorize presentation of evidence .When issues not raised by the pleadings are tried by 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 so 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 freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.

In Mercader vs. Development Bank of the Phils. (Cebu Branch), the Court explained that the foregoing provision envisions two scenarios -- first, when evidence is introduced on an issue not alleged in the pleadings and no objection was interjected and second, when evidence is offered on an issue not alleged in the pleadings but this time an objection was interpolated. In cases where an objection is made, the court may nevertheless admit the evidence where the adverse party fails to satisfy the court that the admission of the evidence would prejudice him in maintaining his defense upon the merits, and the court may grant him a continuance to enable him to meet the new situation created by the evidence. As can be gleaned from the records, it was petitioners' belief that respondent's evidence justified the amendment of their complaint. The trial court agreed thereto and admitted the amended complaint. On this score, it should be noted that courts are given the discretion to allow amendments of pleadings to conform to the evidence presented during the trial. Thus, in Bank of America, NT and SA vs. American 22 Realty Corporation, the Court stated: There have been instances where the Court has held that even without the necessary amendment, the amount proved at the trial may be validly awarded, as in Tuazon v. Bolanos (95 Phil. 106), where we said that if the facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint was necessary, especially where defendant had himself raised the point on which recovery was 23 based. The appellate court could treat the pleading as amended to conform to the evidence although the pleadings were actually not amended. Amendment is also unnecessary when only clerical error or non substantial matters are involved, as we held in Bank of the Philippine Islands vs. Laguna (48 Phil. 5). In Co Tiamco vs. Diaz (75 Phil. 672), we stressed that the rule on amendment need not be applied rigidly, particularly where no surprise or prejudice is caused the objecting party. And in the recent case of National Power Corporation vs. Court of Appeals (113 SCRA 556), we held that where there is a variance in the defendant's pleadings and the evidence adduced by it at the trial, the Court may treat the pleading 24 as amended to conform with the evidence. Verily, the trial court cannot be faulted for admitting the amended complaint as it had the discretion to do so. However, whether the evidence introduced by respondent, indeed, supported the finding that the promissory notes, the real estate mortgage and the foreclosure sale, are invalid, is a different matter altogether. As alleged by petitioners, the testimony of respondent's witness, Jesus Venturina, established the novation of the promissory notes and the real estate mortgage, and the illegality of the foreclosure of 25 petitioner Yuseco's property. The trial court agreed with petitioners, ruling that there was a novation of the promissory notes and real estate mortgage, which rendered them unforceable, to wit: The promissory notes and real estate mortgage executed by plaintiff Yuseco appears to have been novated and, therefore, rendered to be unenforceable since there was a change in the parties (from Credit Manila, Inc. to Savings Bank of Manila) and, of course, in the amount of the loan applied for (from P5 Million to P2 Million) which, upon instruction of Mr. de Guzman -- was applied as follows: It would, therefore, be imporper (sic) to consider and treat the promissory notes and the real estate mortgage as relating to the separate loan of plaintiff Yuseco so made and pursued for the 26 same purpose and nature, all inuring to a specific project -- the Azolla Project! The Court of Appeals disagreed with the trial court and held that there was no novation, hence, the promissory notes and the real estate mortgage are valid and binding.

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We agree with the appellate court. 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 another in place of the debtor, or by subrogating a third person in the rights 27 of the creditor. In order for novation to take place, the concurrence of the following requisites is 28 indispensable: 1. there must be a previous valid obligation, 2. there must be an agreement of the parties concerned to a new contract, 3. there must be the extinguishment of the old contract, and 4. there must be the validity of the new contract. All these requisites are patently lacking in this case. In the first place, there is no new obligation that supposedly novated the promissory notes or the real estate mortgage, or a pre-existing obligation that was novated by the promissory notes and the real estate mortgage. In fact, there is only one agreement between the parties in this case, i.e., petitioners' P2,000,000.00 loan with respondent, as evidenced by the 3 promissory notes dated September 13 and 27, 1982, and January 4, 1983, and the real estate mortgage. As the Court of Appeals held: There was only one single loan agreement in the amount of P2 million between the parties as evidenced by the promissory notes and real estate mortgage - how can it be possibly claimed by plaintiffs that these notes and mortgage were "novated" when no previous notes or mortgage or loan agreement had been executed? What transpired was an application for loan was filed by plaintiffs with Credit Manila in an amount greater than the P2 million eventually granted. This loan application was endorsed to defendant Savings Bank of Manila, processed by the latter and eventually approved by it in the amount of P2 million. It cannot be said that the loan application of plaintiffs or their initial representations with Credit Manila's Michael de Guzman was already in itself a binding original contract that was later "novated" by defendant. Plaintiff Yuseco being himself a banker, cannot pretend to have been unaware of banking procedures that normally recognize a "loan application" as just that, a mere application. Only upon the bank's approval of the loan application in the amount and under such terms it deems viable and acceptable, that a binding and effective loan agreement comes into existence. Without any such first or original "loan agreement" as approved in the amount and under specified terms by the bank, there can be nothing whatsoever that can 29 be subsequently novated. Moreover, records show that petitioners were well aware of the conditions of the loan application. In its August 31, 1982 Board Resolution, the Board of Directors of Azolla Farms authorized Yuseco to "borrow from the SAVINGS BANK OF MANILA, Head Office, sums of money in an amount not exceeding 30 P2,200,000.00." The promissory notes signed by Yuseco were respondent Savings Bank's promissory notes, and the real estate mortgage was likewise respondent Savings Bank's standard real estate mortgage form. Obviously, this case is an attempt by petitioners to extricate themselves from their obligations; but they cannot be allowed to have their cake and eat it, too. WHEREFORE, the petition is DENIED for lack of merit. The Court of Appeals' Decision dated February 19, 1999, together with its Resolution dated March 31, 1999, in CA-G.R. CV No. 53076, is AFFIRMED. Costs against petitioners.

SO ORDERED.